Refer to the table of contents on page 2 for items subject to a Form 12b-25
and are included herein.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File No.
June 30, 2000 001-12647
ORIENTAL FINANCIAL GROUP INC.
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0259436
PRINCIPAL EXECUTIVE OFFICES:
Monacillos 1000
San Roberto Street
Rio Piedras, Puerto Rico 00926
Telephone (787) 771-6800
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock ($1.00 par value)
7.125% Non-cumulative Monthly Income Preferred Stock, Series A (Liquidation
value of $25.00 per share)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of August 31, 2000, Oriental Financial Group Inc. (the "Group") had
13,805,135 shares of common stock outstanding, including 4,430,540 shares held
by its directors and officers and by the Group as treasury stock. The aggregate
market value of the common stock held by non-affiliates of the Group was $123.0
million based upon the reported closing price of $13.125 on the New York Stock
Exchange on that date.
DOCUMENTS INCORPORATED BY REFERENCE
None
- 1 -
ORIENTAL FINANCIAL GROUP INC.
AMENDMENT
NO. 1
FORM 10-K
TABLE OF CONTENTS
PAGE
=====================================================================================================================
PART - II
- ---------------------------------------------------------------------------------------------------------------------
Item - 5 Market for Registrant's Common Stock and Related Stockholder Matters 3
Item - 6 Selected Financial Data 4
Item - 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 4
Item - 7A Quantitative and Qualitative Disclosures About Market Risk 5
Item - 8 Financial Statements and Supplementary Data 5
Item - 9 Submissions of Matters to Vote of Security Holders 5
PART - IV
- ---------------------------------------------------------------------------------------------------------------------
ITEM - 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 5
- 2 -
PART - II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Group's common stock is traded in the New York Stock Exchange (NYSE) under
the symbol OFG. Information concerning the range of high and low sales prices
for the Group's common shares for each quarter during fiscal 2000 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
common stock held by registered shareholders as of September 30, 1998. As a
result, approximately 3,385,000 shares of common stock were distributed on
October 15, 1998. In addition, on August 11, 1997, the Group declared a
five-for-four (25%) stock split on common stock held by registered shareholders
as of September 30, 1997. As a result, approximately 2,012,000 shares of common
stock were distributed on October 15, 1997.
-3-
As of August 31, 2000 the Group had over 2,000 stockholders of record of its
Common Stock, including all directors and officers of the Registrant, excluding
beneficial owners whose shares are held in record names of brokers or other
nominees. The last sales price for the Group's Common Stock on such date, as
quoted on the NYSE was $13.125 per share.
In May 1999, the Group issued 1,340,000 shares of its 7.125% Non-cumulative
Monthly Income Preferred Stock, Series A at $25 per share. As a result of this
issuance, the Group generated $32,300,000 in net proceeds for general corporate
purposes. The Series A Preferred Stock has the following characteristics: (1)
Annual dividends of $1.78125 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) 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 corporations to
individuals, whether residents of Puerto Rico or not, trusts, estates, and
special partnerships at a special 10% withholding tax rate. If the recipient
is foreign corporation or partnership not engaged in trade or business in
Puerto Rico the rate of withholding is also 10%. Prior to the first dividend
distribution for the taxable year, individuals who are residents of Puerto
Rico may elect to be taxed on the dividends at the regular rates, in which
case the special 10% tax will not be withheld from such year's distributions.
United States citizens who are non-residents of Puerto Rico will not be
subject to Puerto Rico tax on dividends if said individual's gross income
from sources within Puerto Rico during the taxable year does not exceed
$1,300 if single, or $3,000 if married, and form AS 2732 of the Puerto Rico
Treasury Department "Withholding Tax Exemption Certificate for the Purpose of
Section 1147" is filed with the withholding agent. U.S. income tax law
permits a credit against 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 on page F-2 of the MD&A (see
Financial Data Index herein) and is incorporated herein by reference. The
following selected financial data of Oriental should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the audited consolidated financial statements
appearing on pages F-21 through F-48. Selected financial data are presented
for five fiscal years. The Group's financial statements for the fiscal years
ending June 30, 1999 and 1998 have been 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 fiscal years 1999 and
1998. It was not able, however, to determine how to allocate an additional
amount of $5.8 million (after tax) which relates to periods prior to fiscal
year 1998. Accordingly, that amount has been recognized as an adjustment to
beginning retained earnings for 1998. Oriental believes that it would require
an unreasonable effort and expense to determine how to restate the financial
statements for periods prior to 1998, if such allocations could be determined
at all. Therefore, financial data for fiscal years 1997 and 1996 have not
been restated and should not be relied upon. For a further discussion of the
restatement see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Restatement" and Note 2 to the consolidated
financial statements.
The ratios shown below demonstrate the Group's ability to generate sufficient
earnings to pay the fixed charges of its debt and preferred stock dividends.
The Group's ratio of earnings to fixed charges on a consolidated basis for
each of the last five years is as follows:
YEAR ENDED JUNE 30,
--------------------------
RATIO OF EARNINGS TO FIXED CHARGES: 2000 1999 1998 1997 1996
- ----------------------------------- ---------------------------------------------
Excluding Interest on Deposits 1.39 1.74 1.72 1.81 1.89
---------------------------------------------
Including Interest on Deposits 1.24 1.41 1.39 1.43 1.48
---------------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
- --------------------------------------
Excluding Interest on Deposits 1.31 1.60 1.56 1.60 1.64
---------------------------------------------
Including Interest on Deposits 1.19 1.35 1.32 1.34 1.37
---------------------------------------------
For purposes of computing these consolidated ratios, earnings represent income
before taxes, plus fixed charges. Fixed charges represent all interest expense
(ratios are presented both excluding and including interest in deposits),
amortization of debt costs, and the portion of net rental expense which is
deemed representative of interest factor.
In fiscal years 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 on pages F - 1 through 18 in the
MD&A (see Financial Data Index herein), and is incorporated herein by reference.
-4-
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information regarding the market risk of the Group appears on page F - 17 in
the MD&A (see Financial Data Index herein), under caption "Quantitative and
Qualitative Disclosures about Market Risk" and is incorporated herein by
reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages F - 21 through F - 48 in
the consolidated financial statements, and is incorporated herein by reference.
The financial data index in page F - 2 of this report sets forth the listing of
all reports required by this item and included herein.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART - IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
A1 - FINANCIAL STATEMENTS
The listing of financial statements required by this item is set forth in the
Financial Data Index in page 6 of this report.
A2 - FINANCIAL STATEMENTS SCHEDULES
All schedules are omitted, as the required information is either not applicable
or presented in the Consolidated Financial Statements or in the notes thereto
described in A1 above.
-5-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ORIENTAL FINANCIAL GROUP INC.
By: /S/ JOSE E. FERNANDEZ
----------------------------
Jose E. Fernandez
Chairman of the Board, President and Chief
Executive Officer Dated: October 13, 2000
------------------
By: /S/ RAFAEL VALLADARES
----------------------------
Rafael Valladares
Comptroller and Principal Financial Officer Dated: October 13, 2000
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dated indicated.
BY: /S/ JOSE E. FERNANDEZ
----------------------------
Jose E. Fernandez
Chairman of the Board, President and Chief
Executive Officer Dated: October 13, 2000
------------------
BY: /S/ PABLO I. ALTIERI
----------------------------
Dr. Pablo I. Altieri
Director Dated: October 13, 2000
------------------
BY: /S/ DIEGO PERDOMO
----------------------------
Diego Perdomo
Director Dated: October 13, 2000
------------------
BY: /S/ EFRAIN ARCHILLA
----------------------------
Efrain Archilla
Director Dated: October 13, 2000
------------------
BY: /S/ JULIAN INCLAN
----------------------------
Julian Inclan
Director Dated: October 13, 2000
------------------
BY: /S/ EMILIO RODRIGUEZ, JR.
----------------------------
Emilio Rodriguez, Jr.
Director Dated: October 13, 2000
------------------
BY: /S/ ALBERTO RICHA
----------------------------
Alberto Richa
Director Dated: October 13, 2000
------------------
BY: /S/ FRANCISCO ARRIVI
----------------------------
Francisco Arrivi
Director Dated: October 13, 2000
------------------
BY: /S/ MARI CARMEN APONTE
----------------------------
Mari Carmen Aponte
Director Dated: October 13, 2000
------------------
-6-
ORIENTAL FINANCIAL GROUP, INC.
AMENDMENT
TO
FORM-10K
FINANCIAL DATA INDEX
PAGE
----
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of Operations F - 1 to F - 18
Selected Financial Data F - 2
Quantitative and Qualitative Disclosures About Market Risk F - 15
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------
Report of Independent Accountants F - 19
Consolidated Statements of Financial Condition as of June 30, 2000 and 1999 F - 20
Consolidated Statements of Income for each of the years in the three-year period ended June 30, 2000 F - 21
Consolidated Statements of Changes in Stockholders' Equity and of Comprehensive Income for each of the
years in the three-year period ended June 30, 2000 F - 22
Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 2000 F - 23
Notes to the Consolidated Financial Statements F - 24 to F - 45
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
OVERVIEW OF FINANCIAL PERFORMANCE
Oriental's net income available to common shareholders for its fiscal year
ended June 30, 2000 totaled $17.2 million ($1.31 per share) and total capital
amounted $117.9 million at June 30, 2000. Net income available to common
shareholders for fiscal years 1999 and 1998 (these years have been restated
as discussed below), was $26.4 million ($1.93 per share) and $19.4 million
($1.39 per share), respectively. Unless otherwise noted, all references to
financial results reflect restated numbers.
The Group has taken decisive measures to address the issues discussed in the
announcement released on August 22, 2000 (see Restatement section below).
Despite the restatement amounts and restructuring charges discussed below,
the Group achieved solid growth in core revenue and total financial assets
this past year. The Group is well capitalized, with a leverage ratio of
7.49%, a Tier-1 risk-based ratio of 29.29% and a total risk-based ratio of
30.54%. The Group strategy remains firmly on track with improved business
momentum, a lower risk profile and excellent prospects. The Group continues
its evolution into an increasingly agile, more diversified financial services
provider with significant earnings potential.
Net income for fiscal 2000 was positively impacted by the Group's ability to
grow net credit income (net interest income after provision for loan
losses), despite the adverse effect on the cost of funds from interest rate
hikes. Net credit income for fiscal year 2000 was $36.3 million, a 27.3%
increase from fiscal year 1999, which tallied $28.6 million. Income from
trust, money management and brokerage fees grew 18% to $12 million in fiscal
2000. However, there was a 35.4% decline in mortgage-banking revenues as a
result of the interest rate hikes. The Group expects mortgage-banking
revenues to improve in fiscal year 2001 as a result of focusing on
collateralized lending. Overall, recurrent revenues grew 15% to reach $58.9
million in fiscal 2000 from $51.2 million in fiscal 1999.
The provision for loan losses decreased 43.5% to $8.2 million, from $14.5
million in fiscal 1999, reflecting reduced risk in the loan portfolio
(presently, it is virtually 100% collateralized with real estate) through the
previously announced sale of leases and unsecured personal loans. The
provision for fiscal year 2000 includes a $1.4 million charge to liquidate
the remaining lease portfolio. The Group expects the provision for loan
losses to be substantially less during fiscal year 2001.
Non-interest expenses grew 11.9% from $35.6 million (fiscal 1999)
to $39.9 million in fiscal 2000, as a result of some of the charges described
below.
The following restructuring and other accounting charges in the
aggregate amount of $6.2 million ($4.8 million net of taxes), affected fiscal
2000 results:
- - Loss related to certain uncollected principal and interest -- $1.8 million
- - Provision to liquidate the remaining consumer loans and leases -- $1.4
million ($856,000 net of taxes)
- - Loss on the contract to sell the consumer loans and lease portfolios -- $1.2
million ($900,000 net of taxes)
- - Other losses and charges (primarily closing charges) -- $1.8 million
($1.2 million net of taxes)
For more on this matter, please refer to the restatement section at page F-7
and to Note 2 at the financial statements included herein.
The Group's total financial assets (banking assets plus assets managed by the
trust and broker-dealer divisions) increased 10%, to $4.222 billion as of
June 30, 2000, from $3.840 billion as of June 30, 1999. The Group's bank
assets increased 17.0% to $1.850 billion, up from $1.581 billion a year
before. Assets managed by the trust and broker-dealer increased 4.7% to
$2.371 billion in fiscal 2000 from $2.266 billion a year earlier.
EARNINGS ANALYSIS
NET INTEREST INCOME
Net interest income, the Group's main source of earnings, 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). During
the past fiscal year, the Fed raised interest rates six times in an effort to
slowdown the booming US economy and related inflation concerns. As a result,
fed funds and discount rates reached their highest levels in nine years (6.5%
and 6.0% respectively at June 30, 2000). As further discussed in the Risk
Management section, the Group constantly monitors the composition and
repricing of its assets and liabilities to maintain its net interest income
at adequate levels and manage the effect on its earnings capacity in a
volatile interest rate environment.
F - 1
SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30,
(IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)
AS RESTATED
-----------------------------------------------
2000 1999 1998
---------------------- --------------------- ----------------------
EARNINGS, PER SHARE AND DIVIDENDS:
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 126,226 $ 107,809 $ 96,940
Interest expense 81,728 64,775 58,046
---------------------- --------------------- ----------------------
NET INTEREST INCOME 44,498 43,034 38,894
Provision for loan losses 8,150 14,473 9,545
---------------------- --------------------- ----------------------
NET CREDIT INCOME 36,348 28,561 29,349
Recurrent non-interest income 22,600 22,683 20,102
---------------------- --------------------- ----------------------
NET CORE REVENUES 58,948 51,244 49,451
Recurrent non-interest expenses 36,035 32,732 30,328
---------------------- --------------------- ----------------------
CORE OPERATING ACTIVITIES 22,913 18,512 19,123
====================== ===================== ======================
Non recurrent non-interest income 578 11,270 7,142
Non recurrent non-interest expenses (3,817) (2,878) (4,306)
---------------------- --------------------- ----------------------
TOTAL NON-RECURRENT ACTIVITIES (3,239) 8,392 2,836
====================== ===================== ======================
INCOME BEFORE TAXES 19,674 26,904 21,959
Income taxes 108 200 2,563
---------------------- --------------------- ----------------------
NET INCOME 19,566 26,704 19,396
Less: dividends on preferred stock (2,387) (350) -
---------------------- --------------------- ----------------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 17,179 $ 26,354 $ 19,396
====================== ===================== ======================
Basic EPS $ 1.34 $ 2.02 $ 1.46
---------------------- --------------------- ----------------------
Diluted EPS $ 1.31 $ 1.93 $ 1.39
---------------------- --------------------- ----------------------
Average shares and potential shares 13,162 13,633 13,948
---------------------- --------------------- ----------------------
Book value $ 6.64 $ 6.45 $ 7.50
---------------------- --------------------- ----------------------
Market price at end of period $ 14.44 $ 24.13 $ 27.66
---------------------- --------------------- ----------------------
Dividends declared per share $ 0.600 $ 0.563 $ 0.413
---------------------- --------------------- ----------------------
Dividends declared $ 7,651 $ 7,369 $ 5,442
---------------------- --------------------- ----------------------
1997 1996
---------------------- ---------------------
EARNINGS, PER SHARE AND DIVIDENDS:
- ---------------------------------------------------------------------------------------------------------
Interest income $ 79,384 $ 67,668
Interest expense 45,098 37,694
---------------------- ---------------------
NET INTEREST INCOME 34,286 29,974
Provision for loan losses 4,900 4,600
---------------------- ---------------------
NET CREDIT INCOME 29,386 25,374
Recurrent non-interest income 15,164 12,873
---------------------- ---------------------
NET CORE REVENUES 44,550 38,247
Recurrent non-interest expenses 28,138 24,608
---------------------- ---------------------
CORE OPERATING ACTIVITIES 16,412 13,639
====================== =====================
Non recurrent non-interest income 5,080 4,668
Non recurrent non-interest expenses (1,340) --
---------------------- ---------------------
TOTAL NON-RECURRENT ACTIVITIES 3,740 4,668
---------------------- ---------------------
INCOME BEFORE TAXES 20,152 18,307
Income taxes 3,590 3,571
---------------------- ---------------------
NET INCOME 16,562 14,736
Less: dividends on preferred stock -- --
---------------------- ---------------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 16,562 $ 14,736
---------------------- ---------------------
Basic EPS $ 1.25 $ 1.11
---------------------- ---------------------
Diluted EPS $ 1.21 $ 1.06
---------------------- ---------------------
Average shares and potential shares 13,676 13,912
---------------------- ---------------------
Book value $ 6.72 $ 6.03
---------------------- ---------------------
Market price at end of period $ 16.95 $ 9.50
---------------------- ---------------------
Dividends declared per share $ 0.330 $ 0.225
---------------------- ---------------------
Dividends declared $ 4,369 $ 3,184
---------------------- ---------------------
Note : Per share related information has been retroactively adjusted to reflect
stock splits in the periods above.
Note 2: Fiscal years 1997 and 1996 were not restated, therefore data should not
be relied upon.
AS RESTATED
-----------------------------------------------
2000 1999 1998
---------------------- --------------------- ----------------------
PERIOD END BALANCES ( AS OF JUNE 30,):
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS
Trust assets managed $1,456,500 $1,380,200 $1,310,000
Broker-dealer assets gathered 914,900 885,800 741,400
---------------------- --------------------- ----------------------
ASSETS MANAGED 2,371,400 2,266,000 2,051,400
Bank total assets 1,850,200 1,580,800 1,301,400
---------------------- --------------------- ----------------------
$4,221,600 $3,846,800 $3,352,800
====================== ===================== ======================
INTEREST-EARNING ASSETS
Investments and securities $1,179,484 $ 946,411 $ 706,535
Loans and leases (including held-for-sale) 600,878 568,711 541,750
---------------------- --------------------- ----------------------
$1,780,362 $1,515,122 $1,248,285
====================== ===================== ======================
INTEREST-BEARING LIABILITIES
Deposits $ 723,681 $ 655,853 $ 570,297
Repurchase agreements 816,493 596,226 416,171
Borrowings 156,500 174,900 189,388
---------------------- --------------------- ----------------------
$1,696,674 $1,426,979 $1,175,856
====================== ===================== ======================
STOCKHOLDERS' EQUITY
Preferred equity $ 33,500 $ 33,500 $ -
Common equity 84,369 82,798 99,240
---------------------- --------------------- ----------------------
$ 117,869 $ 116,298 $ 99,240
====================== ===================== ======================
CAPITAL RATIOS
Leverage capital 7.49% 8.30% 7.70%
---------------------- --------------------- ----------------------
Total risk-based capital 29.29% 24.21% 20.45%
---------------------- --------------------- ----------------------
Tier 1 risk-based capital 30.54% 22.95% 21.68%
---------------------- --------------------- ----------------------
1997 1996
---------------------- ---------------------
PERIOD END BALANCES ( AS OF JUNE 30,):
- ------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS
Trust assets managed $ 1,088,600 $ 874,500
Broker-dealer assets gathered 524,900 293,100
---------------------- ---------------------
ASSETS MANAGED 1,613,500 1,167,600
Group total assets 1,068,600 877,400
---------------------- ---------------------
$ 2,682,100 $2,045,000
====================== =====================
INTEREST-EARNING ASSETS
Investments $ 468,594 $ 350,736
Loans and leases (including held-for-sale) 532,970 476,110
---------------------- ---------------------
$ 1,001,564 $ 826,846
---------------------- ---------------------
INTEREST-BEARING LIABILITIES
Deposits $ 497,542 $ 382,557
Repurchase agreements 247,915 242,335
Borrowings 204,816 145,466
---------------------- ---------------------
$ 950,273 $ 770,358
---------------------- ---------------------
STOCKHOLDERS' EQUITY
Preferred equity $ -- $ --
Common equity 89,394 79,903
---------------------- ---------------------
$ 89,394 $ 79,903
---------------------- ---------------------
CAPITAL RATIOS
Leverage capital 8.17% 8.71%
---------------------- ---------------------
Total risk-based capital 17.53% 18.07%
---------------------- ---------------------
Tier 1 risk-based capital 18.66% 19.14%
---------------------- ---------------------
AS RESTATED
-----------------------------------------------
2000 1999 1998
---------------------- --------------------- ----------------------
SELECTED FINANCIAL RATIOS (IN PERCENT) AND OTHER INFORMATION:
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets (ROA) 1.15% 1.84% 1.59%
---------------------- --------------------- ----------------------
Return on average common equity (ROE) 18.73% 24.41% 20.41%
---------------------- --------------------- ----------------------
Efficiency ratio 58.56% 53.38% 57.75%
---------------------- --------------------- ----------------------
Expense ratio 1.00% 0.88% 1.19%
---------------------- --------------------- ----------------------
Interest rate spread 2.43% 2.94% 3.17%
---------------------- --------------------- ----------------------
Number of banking offices 19 19 17
---------------------- --------------------- ----------------------
1997 1996
---------------------- ---------------------
SELECTED FINANCIAL RATIOS (IN PERCENT) AND OTHER INFORMATION:
- ----------------------------------------------------------------------------------------------------------
Return on average assets (ROA) 1.84% 1.82%
---------------------- ---------------------
Return on average common equity (ROE) 21.17% 19.30%
---------------------- ---------------------
Efficiency ratio 52.76% 53.43%
---------------------- ---------------------
Expense ratio 1.34% 1.52%
---------------------- ---------------------
Interest rate spread 3.89% 4.03%
---------------------- ---------------------
Number of banking offices 16 16
---------------------- ---------------------
F - 2
Net interest income for fiscal 2000 totaled $44.5 million, up 3.4% from $43
million in fiscal 1999. This rise was the net effect of a positive variance
of $5.4 million linked to a greater volume of interest-earning assets, and a
negative rate variance of $3.9 million due to a lower average yield on loans
(9.60% versus 10.05% in fiscal 1999) and a higher average cost of funds
(5.29% versus 4.99% in fiscal 1999).
On the other hand, the interest rate spread for fiscal 2000 narrowed 51 basis
points to 2.43% from 2.94% in fiscal 1999. The higher average cost of funds
combined with a change in the mix of interest-earning assets toward a higher
volume of lower risk and tax-free investment securities was responsible for
the spread compression. Table 1 analyzes the major categories of
interest-earning assets and interest-bearing liabilities, their respective
interest income, expenses, yields and costs, and their impact on net interest
income due to changes in volume and rates.
The Group's interest income for fiscal 2000 totaled $126.2 million, up 17.1%
from the $107.8 million posted in fiscal 1999. The increase results from a
larger volume of interest-earning assets ($1.635 billion versus $1.359
billion in fiscal 1999) tempered by a decline in their yield performance
(7.72% in 2000 versus 7.93% in 1999). See Table 1 for the impact on interest
expense due to changes in volume and rates including information on a tax
equivalent basis.
Average interest-earning assets for fiscal 2000 reached $1.635 billion, an
increase of 20.3% compared with $1.359 billion in fiscal 1999. The investment
portfolio experienced most of this growth, as its average volume advanced by
31.4% ($1.058 billion in 2000 versus $805.7 million in 1999) during fiscal
2000. This rise was concentrated in mortgage-backed securities, which
expanded by 26.7% ($882.5 million in 2000 versus $696.3 million in 1999), as
Oriental converted residential real estate loans into tax-advantaged
mortgage-backed securities.
The average yield on interest-earning assets was 7.72%, a decrease of 21
basis points compared to the 7.93% attained in the previous year. This
reduction relates primarily to the dilution caused by the strong growth 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). Another factor was the lower yield attained by the loan
portfolio, as previously mentioned, which decreased by 45 basis points (9.60%
versus 10.05% in 1999) due to the gradual change of the loan portfolio's mix
toward low-risk residential mortgage loans.
Interest expense for fiscal 2000 rose to $81.7 million, an increase of 26.2%
from the $64.7 million reported in fiscal 1999. A larger base of
interest-bearing liabilities drove this increase, coupled with a higher average
cost of funds (5.29% versus 4.99% in 1999). See Table 1 for the impact in
interest expense due to changes in volume and rates.
Average interest-bearing liabilities experienced a 19% growth ($1.543 billion
versus $1.297 in fiscal 1999) during fiscal 2000. This rise was mostly
related to increases in Time and IRA deposits (mostly IRA accounts) and
repurchase agreements. The increase in IRA accounts reflects a successful
IRA campaign launched by the Group in this year's tax season, which captured
over $60 million in new IRA accounts. The 39.8% climb in repurchase
agreements ($713 million versus $510 million in 1999) is linked to the
substantial growth experienced in the investment portfolio.
The cost of interest-bearing liabilities totaled 5.29% in fiscal 2000, 30
basis points higher than the 4.99% attained a year earlier. A constant rising
interest rate scenario due to the tightening policy adopted by the Federal
Reserve (as previously discussed) triggered this overall rise. The interest
rate hikes had an adverse effect on the Group's cost of funds, primarily over
the last two quarters. As a result, the Group's borrowing cost (comprised
mainly of short-term repurchase agreements and long-term floating term notes)
rose 39 basis points to 5.68% from 5.29% in fiscal 1999, which represented an
unfavorable rate variance of $3.8 million.
NON-INTEREST INCOME
As a diversified financial services provider (See table 2), the Group's
earnings depend not only on the net interest income generated from its
banking activity, but also from fees and other non-interest income generated
from the wide array of financial services offered. Non-interest income, the
second largest source of earnings, is affected by the level of trust assets
under management, transactions generated by the gathering of financial assets
by the broker-dealer operation, the level of mortgage banking activities, and
fees generated from loans and deposit accounts.
For fiscal year 2000, recurrent non-interest revenues remained stable at
$26.6 million compared with the $26.7 million reported for the preceding
year. Additional income generated by an increase in fees from financial
services (trust and brokerage operations) and retail banking operations was
tempered by a reduction in mortgage banking activities (see Table 2).
Trust, money management and brokerage fees (the principal component of
recurrent non-interest income) continued their excellent upward trend during
fiscal 2000 totaling $12 million, up 18% from the $10.2 million in the
preceding year. The larger volume of accounts and assets managed by both the
Group's trust department and the broker-dealer subsidiary substantiate this
growth (see "Financial Assets" section).
F - 3
SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Dollars in thousands)
TABLE 1 - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------- --------------------------------------------------------------
INTEREST AVERAGE RATE
-------------------------------- ----------------------------
FISCAL 2000 VERSUS 1999 FISCAL FISCAL VARIANCE FISCAL FISCAL VARIANCE
2000 1999 IN % 2000 1999 IN BP
- ------------------------------------------------------------------- --------- ---------- --------- -------- ------- ----------
- -------------------------------------------------------------------
A -- TAX EQUIVALENT SPREAD
- -------------------------------------------------------------------
Interest-earning assets $ 126,226 $ 107,809 17.1% 7.72% 7.93% -0.21%
Tax equivalent adjustment 24,786 17,207 44.0% 1.52% 1.27% 0.25%
---------- ---------- --------- ------ ------- ----------
INTEREST-EARNING ASSETS -- TAX EQUIVALENT 151,012 125,016 20.8% 9.24% 9.20% 0.04%
Interest-bearing liabilities 81,728 64,775 26.2% 5.29% 4.99% 0.30%
---------- ---------- --------- ------ ------- ----------
NET INTEREST INCOME / SPREAD $ 69,284 $ 60,241 15.0% 3.95% 4.21% -0.26%
========== ========== ========= ====== ======= ==========
- -------------------------------------------------------------------
B - NORMAL SPREAD
- -------------------------------------------------------------------
INTEREST-EARNING ASSETS:
INVESTMENTS:
Investment securities $ 68,070 $ 49,685 37.0% 6.66% 6.45% 0.21%
Trading securities 2,269 2,097 8.2% 8.08% 8.18% -0.10%
Money market investments 510 431 18.3% 6.29% 4.41% 1.88%
---------- ---------- --------- ------ ------- ----------
70,849 52,213 35.7% 6.69% 6.48% 0.21%
========== ========== ========= ====== ======= ==========
LOANS:
Real estate (1) 25,986 25,012 3.9% 7.75% 8.33% -0.58%
Consumer 16,612 15,460 7.5% 13.27% 12.44% 0.83%
Financing leases 10,579 13,800 -23.3% 11.13% 11.91% -0.78%
Commercial and auto loans 2,200 1,324 66.2% 10.45% 10.34% 0.11%
---------- ---------- --------- ------ ------- ----------
55,377 55,596 -0.4% 9.60% 10.05% -0.45%
========== ========== ========= ====== ======= ==========
126,226 107,809 17.1% 7.72% 7.93% -0.21%
========== ========== ========= ====== ======= ==========
INTEREST-BEARING LIABILITIES:
DEPOSITS:
Savings and demand 3,059 2,920 4.8% 2.17% 2.22% -0.05%
Time and IRA accounts 28,364 25,865 9.7% 5.48% 5.33% 0.15%
---------- ---------- --------- ------ ------- ----------
31,423 28,785 9.2% 4.77% 4.66% 0.11%
========== ========== ========= ====== ======= ==========
BORROWINGS:
Repurchase agreements 41,116 25,923 58.6% 5.77% 5.08% 0.69%
FHLB funds 4,466 3,555 25.6% 5.92% 5.69% 0.23%
Term notes and other sources of funds 5,201 5,314 -2.1% 5.37% 4.88% 0.49%
Interest rate risk management (478) 1,198 -139.9% -0.05% 0.18% -0.23%
---------- ---------- --------- ------ ------- ----------
50,305 35,990 39.8% 5.68% 5.29% 0.39%
========== ========== ========= ====== ======= ==========
81,728 64,775 26.2% 5.29% 4.99% 0.30%
========== ========== ========= ====== ======= ==========
NET INTEREST INCOME / SPREAD $ 44,498 $ 43,034 3.4% 2.43% 2.94% -0.51%
========== ========== ========= ====== ======= ==========
INTEREST RATE MARGIN - - 2.72% 3.16% -0.44%
====== ======= ==========
EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES
INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO
-----------------------------------
AVERAGE BALANCE
-----------------------------------
FISCAL FISCAL VARIANCE
2000 1999 IN %
----------- ----------- ---------
- -------------------------------------------------------------------
A -- TAX EQUIVALENT SPREAD
- -------------------------------------------------------------------
Interest-earning assets $ 1,635,098 $ 1,358,852 20.3%
Tax equivalent adjustment - - 0.0%
----------- ----------- -------
INTEREST-EARNING ASSETS -- TAX EQUIVALENT 1,635,098 1,358,852 20.3%
Interest-bearing liabilities 1,543,557 1,297,398 19.0%
----------- ----------- -------
NET INTEREST INCOME / SPREAD $ 91,541 $ 61,454 49.0%
=========== =========== =======
- -------------------------------------------------------------------
B - NORMAL SPREAD
- -------------------------------------------------------------------
INTEREST-EARNING ASSETS:
INVESTMENTS:
Investment securities $ 1,022,261 $ 770,329 32.7%
Trading securities 28,098 25,620 9.7%
Money market investments 8,109 9,781 -17.1%
----------- ----------- -------
1,058,468 805,730 31.4%
=========== =========== =======
LOANS:
Real estate (1) 335,353 300,127 11.7%
Consumer 125,199 124,316 0.7%
Financing leases 95,012 115,867 -18.0%
Commercial and auto loans 21,066 12,812 64.4%
----------- ----------- -------
576,630 553,122 4.3%
=========== =========== =======
1,635,098 1,358,852 20.3%
=========== =========== =======
INTEREST-BEARING LIABILITIES:
DEPOSITS:
Savings and demand 140,900 131,791 6.9%
Time and IRA accounts 517,289 484,154 6.8%
----------- ----------- -------
658,189 615,945 6.9%
=========== =========== =======
BORROWINGS:
Repurchase agreements 713,061 510,049 39.8%
FHLB funds 75,404 62,463 20.7%
Term notes and other sources of funds 96,903 108,941 -11.1%
Interest rate risk management - - 0.0%
----------- ----------- -------
885,368 681,453 29.9%
=========== =========== =======
1,543,557 1,297,398 19.0%
NET INTEREST INCOME / SPREAD
INTEREST RATE MARGIN
EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES $ 91,541 $ 61,454 49.0%
=========== =========== =======
INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO 105.93% 104.74% 1.19%
=========== =========== =======
- ------------------------------------------------------------------- -------------------------------- -------------------------
INTEREST AVERAGE RATE
-------------------------------- -------------------------
FISCAL 1999 VERSUS 1998 FISCAL FISCAL VARIANCE FISCAL FISCAL VARIANCE
1999 1998 IN % 1999 1998 IN BP
- ------------------------------------------------------------------- --------- ---------- --------- -------- ------- --------
INTEREST INCOME:
Loans (1) $ 55,596 $ 56,138 -1.0% 10.05% 10.31% -0.26%
Investments 52,213 40,802 28.0% 6.48% 6.82% -0.34%
---------- ---------- --------- ------ ------- ----------
107,809 96,940 11.2% 7.93% 8.49% -0.56%
========== ========== ========= ======= ======= =========
INTEREST EXPENSE:
Deposits 28,785 25,968 10.8% 4.66% 4.92% -0.26%
Borrowings 35,990 32,078 12.2% 5.29% 5.70% -0.41%
---------- ---------- --------- ------ ------- ----------
64,775 58,046 11.6% 4.99% 5.32% -0.33%
========== ========== ========= ======= ======= =========
NET INTEREST INCOME AND SPREAD $43,034 $ 38,894 10.6% 2.94% 3.17% -0.23%
========== ========== ========= ======= ======= =========
- ------------------------------------------------------------------- ---------------------------------
AVERAGE BALANCE
---------------------------------
FISCAL 1999 VERSUS 1998 FISCAL FISCAL VARIANCE
1999 1998 IN %
- ------------------------------------------------------------------- ---------- ---------- ---------
INTEREST INCOME:
Loans (1) $ 553,122 $ 544,382 1.6%
Investments 805,730 598,233 34.7%
---------- ---------- --------
1,358,852 1,142,615 18.9%
========== ========== ========
INTEREST EXPENSE:
Deposits 615,945 528,204 16.6%
Borrowings 681,453 563,140 21.0%
---------- ---------- --------
1,297,398 1,091,344 18.9%
========== ========== ========
NET INTEREST INCOME AND SPREAD $ 61,454 $ 51,271 19.9%
========== ========== ========
- ------------------------------------------------------------------- -------------------------------
CHANGES IN NET INTEREST INCOME DUE TO: FISCAL 2000 VERSUS 1999
- ------------------------------------------------------------------- -------------------------------
VOLUME RATE TOTAL
---------- -------- --------
INTEREST INCOME:
Loans (1) $ 1,413 $(1,632) $ (219)
Investments 16,379 2,257 18,636
---------- -------- --------
17,792 625 18,417
========== ======== ========
INTEREST EXPENSE:
Deposits 1,908 730 2,638
Borrowings 10,503 3,812 14,315
---------- -------- --------
12,411 4,542 16,953
========== ======== ========
NET INTEREST INCOME $ 5,381 $(3,917) $ 1,464
========== ======== =========
- ------------------------------------------------------------------- ---------------------------------
CHANGES IN NET INTEREST INCOME DUE TO: FISCAL 1999 VERSUS 1998
- ------------------------------------------------------------------- ---------------------------------
VOLUME RATE TOTAL
---------- ---------- ---------
INTEREST INCOME:
Loans (1) $ 1,267 $ (1,809) $ (542)
Investments 14,616 (3,205) 11,411
---------- ---------- --------
15,883 (5,014) 10,869
========== ========== ========
INTEREST EXPENSE:
Deposits 3,795 (978) 2,817
Borrowings 5,998 (2,086) 3,912
---------- ---------- --------
9,793 (3,064) 6,729
========== ========== ========
NET INTEREST INCOME $ 6,090 $ (1,950) $ 4,140
========== ========== ========
(1) - Real estate averages include loans held-for-sale.
F - 4
The Group's mortgage banking operations are highly dependent on market and
economic conditions, including interest rate levels. These conditions affect
the volume of origination or purchase of single-family residential loans and
the subsequent securitization and sale of such loans. Revenues from mortgage
banking activities totaled $5.9 million in fiscal 2000, down 35.4% from $9.1
million achieved in fiscal 1999. A smaller volume of loan sales ($89.1
million versus $160.3 million in fiscal 1999) was the main cause for this
reduction. This was primarily the result of unfavorable market conditions
(due to higher interest rates) during the latter stage of fiscal 2000 that
resulted in a lower loan origination production ($128.5 million versus $229.4
million in fiscal 1999).
Bank services revenues consist primarily of fees generated by electronic
banking, deposit accounts and branch customer services. These revenues
totaled $2.3 million in fiscal 2000, a 23% hike versus the $1.9 million
reported for fiscal 1999. This increase reflects higher revenues from bank
services and deposit accounts, mainly driven by a new structure in banking
fees and the expansion of the electronic banking business.
NON-INTEREST EXPENSES
Non-interest expenses increased 11.9% from $35.6 million in fiscal 1999 to
$39.9 million in fiscal 2000, primarily as a result of certain charges
described on the "Overview of Financial Performance" and "Non-Recurring
Activities" sections. Excluding these charges, recurrent non-interest
expenses for fiscal 2000 increased to $36.0 million (10.1%) from $32.7
million reported for fiscal 1999 (shown in Table 3). The efficiency and
expense ratios for fiscal 2000 were 58.56% (up from 53.38%) and 1.00% (down
from 0.88% in 1999), respectively. The increase in non-interest expenses was
tempered by the Group's strict cost control policy.
Employee compensation and benefits is the Group's largest expense category.
For fiscal 2000, total compensation increased 3.6% to $15.7 million (0.90% of
total average assets) from $15.1 million (1.04% of total average assets) in
fiscal 1999. This increase was primarily associated with a 17.7% rise in
fixed compensation ($11.5 million versus $9.7 million in 1999) due to an
overall staff merit increase in July 1999. This was partially offset by a
22.1% reduction in variable compensation ($4.2 million versus $5.4 million in
1999) mainly due to the lower amount of mortgage production incentives
(directly tied to mortgage originations) paid in fiscal 2000. The average
compensation by employee increased slightly ($43,000 versus $41,300 in 1999),
reflecting the tight control over the Group's staff levels. Full-time
equivalent employees decreased to 352 at June 30, 2000 from 373 at the end of
1999. The ratio of assets per employee expanded to $5.894 million in fiscal
2000 from $4.740 million in fiscal 1999.
Other non-interest expenses for fiscal 2000 increased 15.7% to $20.3 million
as compared to $17.6 million reported in fiscal 1999. Increased occupancy and
equipment costs (mainly technology) were primarily responsible for this rise.
The increase in occupancy and equipment costs was mainly associated with the
heavy investment in technology and general infrastructure to enhance and
expand the Group's communication and electronic data processing systems,
including the conversion to a new core banking system in September 1999. It
also reflects a remodeling made to the main facilities housing the brokerage,
trust and mortgage lending operations as well as the rent for the new
headquarters. Management expects these expenses to strengthen the Group's
image and customer service quality as well as to aid its future business
expansion and product diversification.
In addition, higher professional fees and municipal and general taxes (which
are directly tied to the volume of business) were responsible for this
growth. The rise in municipal and general taxes was primarily associated with
the general growth in the Group's business activities, products and services.
The larger amount of professional and service fees includes consulting and
technical support expenditures associated with upgrading banking operations
and the recent conversion of the Group's electronic core system, in addition
to costs necessary to prepare for the year 2000 (Y2K) computer bug and costs
associated with the investigation discussed below.
NON RECURRING ACTIVITIES
Non-recurring activities (see Tables) reflected a net loss of $3.2 million
versus a net gain of $8.4 million reported for fiscal year 1999. This was
mainly due to a 92% decrease in gains from trading and securities activities
($820,000 versus $10.3 million in fiscal 1999). This decline was mainly
associated to the adverse market conditions that prevailed during the last
two quarters of fiscal year 2000.
Fiscal 2000 includes a $1.2 million loss in loans under contract-to-sell
which stems from the market valuation of the leases ($70.3 million) and
unsecured consumer loan portfolios ($98.5 million) that were sold in July
2000 to another financial institution.
As previously reported, a review of the Group's accounts initiated during
August 1998 detected certain irregularities in connection with a former
officer's admission of having embezzled funds. After notifying the
appropriate regulatory authorities, the Group conducted an intensive
investigation assisted by its legal counsel and independent accountants which
concluded during October 2000, and determined losses and other matters
resulting from dishonest and fraudulent acts and omissions by former
employees. These losses were allocated through different fiscal periods and
are included within other non-recurrent expenses in Table 5. For more on this
matter, refer to the Restatement section below.
F - 5
SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Dollars in thousands)
As Restated
------------------------------------------------------------
June 30,
-------------------------------------------- ------------
2000 1999 VARIANCE % 1998
------------ ------------ ------------ ------------
TABLE 2 - NON-INTEREST INCOME SUMMARY
- ---------------------------------------------------------------------------------------------------------------
Fees on deposit accounts $ 2,131 $ 1,324 61.0% $ 1,500
Bank service charges and commissions 2,387 1,940 23.0% 1,562
Other operating revenues 145 84 72.6% 61
------------ ------------ ------------ ------------
Bank service revenues 4,663 3,348 39.3% 3,123
Trust, money management and brokerage fees 12,046 10,211 18.0% 8,416
Mortgage banking activities 5,891 9,124 -35.4% 8,563
------------ ------------ ------------ ------------
RECURRENT NON-INTEREST INCOME 22,600 22,683 -0.4% 20,102
------------ ------------ ------------ ------------
RECURRENT NON-INTEREST INCOME TO EXPENSES RATIO 62.72% 69.30% -9.5% 66.28%
------------ ------------ ------------ ------------
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
- ---------------------------------------------------------------------------------------------------------------
Fixed compensation $ 11,504 $ 9,771 17.7% $ 15,071
Variable compensation 4,194 5,387 -22.1% 5,162
------------ ------------ ------------ ------------
COMPENSATION AND BENEFITS 15,698 15,158 3.6% 20,233
------------ ------------ ------------ ------------
Occupancy and equipment 6,417 5,345 20.1% 4,151
Advertising and business promotion 3,094 3,045 1.6% 2,602
Professional and service fees 3,216 2,144 50.0% 1,393
Communications 1,681 1,496 12.4% 1,427
Municipal and other general taxes 1,920 1,711 12.2% 1,633
Insurance, including deposits insurance 469 458 2.4% 733
Printing, postage, stationery and supplies 826 738 11.9% 724
Other operating expenses 2,714 2,637 2.9% 2,594
------------ ------------ ------------ ------------
OTHER NON-INTEREST EXPENSES 20,337 17,574 15.7% 15,257
------------ ------------ ------------ ------------
RECURRENT NON-INTEREST EXPENSES 36,035 32,732 10.1% 35,440
------------ ------------ ------------ ------------
RELEVANT RATIOS AND DATA:
Efficiency ratio 58.56% 53.38% 51.41%
------------ ------------ ------------
Expense ratio 1.00% 0.88% 1.34%
------------ ------------ ------------
Compensation to recurrent non-interest expenses 43.6% 46.3% 49.7%
------------ ------------ ------------
Variable compensation to total compensation 26.7% 35.5% 34.3%
------------ ------------ ------------
Compensation to total average assets 0.92% 1.04% 1.22%
------------ ------------ ------------
Average compensation per employee $ 43.9 $ 41.3 $ 38.8
------------ ------------ ------------
Average number of full-time employees 357 365 400
------------ ------------ ------------
Bank assets per employee $ 5,896 $ 4,761 $ 3,750
------------ ------------ ------------
TOTAL WORK FORCE:
Banking operations 314 332 347
Trust operations 27 29 23
Brokerage operations 11 12 10
------------ ------------ ------------
352 373 380
------------ ------------ ------------
TABLE 5 - NON-RECURRING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------
Securities net activity 1,202 10,460 -88.5% 1,030
Trading net activity (382) (184) 107.6% 915
------------ ------------ ------------ ------------
820 10,276 -92.0% 1,945
Leasing revenues (discontinued June 2000) 956 994 -3.8% 981
Servicing income -- -- 0.0% 713
Loss on loans under contract-to-sell (1,198) -- -100.0% --
Net gain on sale of servicing assets -- -- 0.0% 3,503
Other non-recurrent expenses (3,817) (2,878) 32.6% (4,306)
------------ ------------ ------------ ------------
TOTAL NON-RECURRENT ACTIVITIES $ (3,239) $ 8,392 -138.6% $ 2,836
------------ ------------ ------------ ------------
-- -- - --
F - 6
Other non-recurrent expenses mainly stem from the losses and costs related to
the investigation of irregularities explained above. This item reflects an
increase of 32.7%, to $3.8 million in fiscal 2000 versus $2.9 million
reported in fiscal 1999.
INCOME TAXES
Income taxes for fiscal 2000 decreased to $108,000, a 46.0% decrease compared
with the $200,000 reported for fiscal year 1999. This decrease is directly
associated to the lower amount of earnings as well as to the higher amount of
exempt income the Group earned during fiscal 2000. The Group's effective tax
rate is much lower than the maximum statutory income tax rate, which is 39%.
This is largely due to the significant amount of interest income derived from
certain investments and loans that are exempt (net of the disallowance of
related expenses attributable to the exempt income) under Puerto Rico income
tax law. Refer to Note 12 of the consolidated financial statements for the
reconciliation between the maximum statutory tax rate and the effective tax
rate as well as for other relevant income tax information
PROVISION FOR LOAN LOSSES
Provision for loan losses in fiscal 2000 totaled $8.2 million, 43.7% lower
than the $14.5 million posted during fiscal 1999. The decline was responds to
the lower level of net credit losses (down 7.3%) and non-performing loans
(down 24.1%), and to the subsequent divestiture of the high-risk loan
portfolios (leasing and personal unsecured). This reduction is also
associated with the adoption of more stringent underwriting standards, as
well as to the new emphasis on secured personal lending instead of unsecured.
Please refer to the allowance for loan losses and non-performing assets
section below for a more detailed analysis of the allowances for loan losses,
net credit losses and credit quality statistics.
RESTATEMENT
In August 1998 an employee of Oriental admitted that he had been involved in
a scheme to embezzle funds belonging to Oriental for the previous three (3)
years. He admitted that he had been manipulating and altering various books
and records of the company and intentionally failing to perform reliable
account analyses and reconciliations. After firing the employee, the company
began an internal investigation assisted by its legal counsel and reported
the activity to appropriate regulatory authorities and its fidelity insurance
carrier.
During the course of the investigation in fiscal 1999, Oriental discovered
that certain other employees had altered various books and records of the
company and failed to perform appropriate reconciliations. It also reported
those items to the regulatory authorities and to the fidelity insurance
carrier. As a result of this discovery, the company broadened the scope of
its internal investigation and, in May 1999, engaged its independent
accountants to assist it.
Based upon the additional information discovered in the investigation,
Oriental filed initial claims with its fidelity insurance carrier for losses
in the aggregate amount of $488,194 during the second quarter of fiscal 2000.
During the third quarter of fiscal 2000, Oriental reported its
discovery of additional alterations of records and deletions of
reconciliation items to the regulatory authorities and its fidelity insurance
carrier and then filed with the fidelity insurance carrier claims for
recovery of losses relating to these irregularities in the amount of
approximately $9.0 million.
In its interim report on Form 10-Q for the third quarter of 2000, Oriental
reported that it had discovered those $9.5 million ($5.8 million net of tax)
of losses resulting from the dishonest and fraudulent acts and omissions of
several former employees. In addition, it stated that, in consultation with
legal counsel, it had concluded that the losses were covered by Oriental's
fidelity insurance policy and recovery was considered highly probable.
In July 2000, Oriental's fidelity insurance carrier notified Oriental that it
was denying all of the filed claims. This denial triggered Oriental's
decision to restate its financial statements. Thereafter, Oriental continued
its investigation primarily to determine how the losses should be allocated
to prior financial statements. Oriental filed a legal action against the
insurance carrier as explained on Note 15 to the consolidated financial
statements.
In October 2000, Oriental announced that it had completed the investigation
and identified total charges of $12.7 million, net of tax effect. This amount
includes the $900 thousand (net of tax) loss relating to the contract to sell
the consumer loans and lease portfolios. With the assistance of its
independent accountants, Oriental determined that $9.6 million (net of tax)
of the $12.7 million charges was related to events in prior fiscal years and
thus would require restatement of previous financial statements. The
remaining $3.1 million ($12.7 million less the $9.6 million restatement, both
net of tax) was charged in the fourth quarter of fiscal year 2000. A
significant portion ($5.8 million, net of taxes) of the $9.6 million
requiring restatement is related to the previously disclosed losses arising
from the former employees' actions and affects fiscal year 1998 and prior
periods.
The $9.6 million charges are recognized as follows, net of tax:
- - $5.6 million against beginning retained earnings for fiscal 1998.
- - $2.1 million against earnings of fiscal 1998.
- - $1.9 million against earnings of fiscal 1999.
- - $31,000 and $159,000 against the first and second quarters of fiscal 2000,
respectively.
- - A favorable $30,000 increase to the third quarter of fiscal year 2000.
Furthermore, it was determined that additional closing adjustments of $2.1
million (net of tax) were necessary, though not related to the matter
discussed above. Approximately $1.8 million, net of tax, of these additional
items affects fiscal year 2000 -- $673,000 in the first quarter, $504,000 in
the second quarter and $588,000 in the third quarter, respectively. Fiscal
1999 earnings were affected by $224,000, a credit of $53,000 was made to 1998
earnings, and a charge of $178,000 was made against the beginning retained
earnings of fiscal year 1998 (all items net of tax).
Additionally, a $2.2 million favorable tax adjustment related to fiscal year
1999 was also identified.
Therefore, the restatement (net of tax) to previously issued financial
statements will be:
- - $5.8 million against beginning retained earnings for fiscal 1998.
- - $2 million against earnings of fiscal 1998.
- - A favorable $58,000 increase to fiscal year 1999 earnings.
- - $704,000, $663,000 and $558,000 against the first, second and third
quarter earnings of fiscal year 2000, respectively.
The effect of the restatement on the Consolidated Statement of Income for
fiscal years 1999 and 1998 is as follows:
1999 1998
------------------------------- --------------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
TOTAL INTEREST INCOME - (1) $113,775 $107,809 $101,307 $96,940
TOTAL INTEREST EXPENSE $ 64,840 64,775 58,139 58,046
-------- -------- -------- -------
NET INTEREST INCOME 48,935 43,034 43,168 38,894
Provision for loan losses 15,095 14,473 9,545 9,545
-------- -------- -------- -------
NET INTEREST INCOME AFTER
PROVISION LOAN LOSSES 33,840 28,561 33,623 29,349
-------- -------- -------- -------
NON-INTEREST INCOME:
Mortgage banking activities - (1) 5,891 9,124 4,485 8,563
Gain on sale of servicing assets -- -- 2,707 3,503
All other non-interest income 23,308 24,829 15,178 15,178
-------- -------- -------- -------
TOTAL NON-INTEREST INCOME 29,199 33,953 22,370 27,244
-------- -------- -------- -------
NON-INTEREST EXPENSES:
Compensation and benefits 15,057 15,158 15,071 15,071
Other non-interest expenses 2,979 5,515 2,999 6,900
All other non-interest expenses 14,937 14,937 12,663 12,663
-------- -------- -------- -------
TOTAL NON-INTEREST EXPENSE 32,973 35,610 30,733 34,634
-------- -------- -------- -------
INCOME BEFORE INCOME TAXES 30,066 26,904 25,260 21,959
-------- -------- -------- -------
Income taxes 3,418 200 3,850 2,563
-------- -------- -------- -------
NET INCOME $ 26,648 $ 26,704 $ 21,410 $19,396
-------- -------- -------- -------
INCOME PER COMMON SHARE:(1)
Basic $ 2.02 $ 2.02 $ 1.62 $ 1.46
Diluted $ 1.97 $ 1.93 $ 1.57 $ 1.39
(1) Amounts include reclassification of revenues from interest income to
mortgage banking activities which management believes better reflects the
nature of the revenues. Amounts reclassified in 1999 and 1998 amounted to
$5.0 million and $4.1 million, respectively.
Additionally, the calculation of income per common share for 1999 and 1998
was restated to reflect the inclusion of dilutive potential common shares.
F - 7
SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Dollars in thousands)
2000 1999 % 1998
------------ ------------ ------------ ------------
TABLE 5 - ALLOWANCE FOR LOAN LOSSES SUMMARY
- -----------------------------------------------------------------------------------------------------------
BEGINNING BALANCE $ 9,002 $ 5,658 59.1% $ 5,408
Provision for loan losses 8,150 14,473 -43.7% 9,545
Net credit losses -- see table 6 (10,315) (11,129) -7.3% (9,295)
------------ ------------ ------------ ------------
ENDING BALANCE $ 6,837 $ 9,002 -24.1% $ 5,658
------------ ------------ ------------ ------------
SELECTED DATA AND RATIOS:
Outstanding at June 30, $ 608,174 $ 577,713 5.3% $ 547,408
------------ ------------ ------------ ------------
Recoveries to net charge-off's 23.1% 17.6% 31.8% 19.1%
------------ ------------ ------------ ------------
Allowance coverage ratio
Total loans 1.12% 1.56% -27.9% 1.03%
------------ ------------ ------------ ------------
Non-performing loans 40.52% 46.06% -12.0% 35.60%
------------ ------------ ------------ ------------
Non-real estate non-performing loans 82.15% 92.23% -10.9% 61.29%
------------ ------------ ------------ ------------
TABLE 6 - NET CREDIT LOSSES STATISTICS
- ------------------------------------------------------------------------------------------------------------
REAL ESTATE
Charge-offs $ (28) $ (2) 1300.0% $ (187)
Recoveries -- 16 -100.0% 12
------------ ------------ ------------ ------------
(28) 14 -300.0% (175)
------------ ------------ ------------ ------------
CONSUMER
Charge-offs (7,415) (6,020) 23.2% (5,197)
Recoveries 1,606 932 72.3% 417
------------ ------------ ------------ ------------
(5,809) (5,088) 14.2% (4,780)
------------ ------------ ------------ ------------
LEASING
Charge-offs (4,692) (7,059) -33.5% (5,442)
Recoveries 1,268 1,093 16.0% 1,545
------------ ------------ ------------ ------------
(3,424) (5,966) -42.6% (3,897)
------------ ------------ ------------ ------------
COMMERCIAL AND OTHERS
Charge-offs (1,287) (419) 207.2% (658)
Recoveries 233 330 -29.4% 215
------------ ------------ ------------ ------------
(1,054) (89) 1,084.3% (443)
------------ ------------ ------------ ------------
NET CREDIT LOSSES
Total charge-offs (13,422) (13,500) -0.6% (11,484)
Total recoveries 3,107 2,371 31.0% 2,189
------------ ------------ ------------ ------------
$ (10,315) $ (11,129) -7.3% $ (9,295)
------------ ------------ ------------ ------------
NET CREDIT LOSSES TO AVERAGE:
Real estate 0.01% 0.00% 0.06%
------------ ------------ ------------
Consumer 4.64% 4.05% 4.97%
------------ ------------ ------------
Leasing 3.60% 4.83% 2.59%
------------ ------------ ------------
Commercial and others 8.68% -0.03% 0.45%
------------ ------------ ------------
TOTAL 1.79% 1.94% 1.66%
------------ ------------ ------------
AVERAGE:
Real estate 335,353 309,909 286,823
Consumer 125,199 125,482 96,223
Leasing 95,012 123,519 26,486
Commercial and others 21,066 13,978 150,652
------------ ------------ ------------
TOTAL $ 576,630 $ 572,888 $ 560,184
------------ ------------ ------------
F - 8
ALLOWANCE FOR LOAN LOSSES
As discussed above, 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.
The principal factors that the Group uses to determine the level of allowance
for loan losses are the Group's historical and current credit loss
experience. These factors are 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,
general economic conditions and unusual events such as hurricanes.
This methodology that the Group uses follows a loan credit risk rating
process that involves dividing loans into risk categories. The following are
the credit risk categories (established by the FDIC Interagency Policy
Statement of 1993) used:
1. PASS - loans considered highly collectible due to their repayment history
or current status (to be in this category a loan cannot be 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.
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.
Based on this loan credit risk rating (primarily based on aging), the Group
applies an overall reserve percentage to each of the portfolio's aging
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 includes:
1. vintage analysis generated from the credit scoring system, which
provides a history of credit losses by credit score strata and loss
projections for the remaining portfolio based on that history;
2. overall historical loss trends (one year and three years); and
3. other information including underwriting standards, economic trends
and unusual events such as hurricanes.
Loan loss ratios applied and credit risk categories, are updated on an annual
basis and are applied in the context of accounting principles generally
accepted in the United States ("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
possible 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.
At June 30, 2000, the Group's allowance for loan losses amounted to $6.8
million (1.12% of total loans) versus $9.0 million (1.56% of total loans) a
year earlier. The decrease in the allowance and its loan coverage ratio was
directly related to the divestiture of higher-risk loan portfolios (leasing
and personal unsecured). As a result of this sale (completed on July 7, 2000;
see notes to the consolidated financial statements), most of the Group's
remaining loan portfolio is now comprised of well-secured real estate loans
(which have almost no credit loss experience). This improves the Group's
asset quality, which reduces both the credit loss exposure and amount of
allowance necessary to absorb inherent losses in the loan portfolio.
Net credit losses for fiscal year 2000 totaled $10.3 million (1.79% of
average loans). This represents a 7.3% improvement versus $11.1 million
(1.94% of average loans) in fiscal year 1999. The lower level of net credit
losses experienced during fiscal 2000 was primarily associated with a
significant improvement in net credit losses from leases. Tables 5
and 6 set forth an analysis of activity in the allowance for loan losses and
presents selected loan loss statistics.
In fiscal 2000, net credit losses from consumer loans totaled $5.8 million
(4.64% of average consumer loans), 14.2% higher than $5 million (4.05% of
average consumer loans) in fiscal 1999. The increase was primarily due to the
high level of personal bankruptcies in Puerto Rico combined with the growth
of the personal unsecured portfolio.
Personal bankruptcies rose again in Puerto Rico during fiscal 2000, after
slightly dropping in fiscal 1999, which is better described as a
stabilization of new cases from the explosive rise experienced in 1998. As a
response, during the second quarter of fiscal 2000 management changed its
lending strategy toward loans collaterized by real estate. In addition, in
June 2000 management agreed to sell the personal unsecured and leasing
portfolios. A contract to sell these loans was signed with another
institution during the month of June 2000 and the transaction was completed
on July 7, 2000. This sale is expected to improve the Group's asset quality
and to protect its future earnings capacity. It also enables the Group to
concentrate on trust, money management, brokerage, mortgage originations,
secured personal lending and deposit accounts with the highest earnings
potential.
Net credit losses from leases totaled $3.4 million (3.60% of average leases)
in fiscal 2000, 42.6% lower than $6 million (4.83% of average leases) a year
earlier. This significant improvement was the positive result from tighter
underwriting standards and collection procedures implemented last year in the
leasing area. In addition, it demonstrates the purging of the lease portfolio
throughout fiscal 1999 due to unprecedented levels of personal bankruptcies
and Hurricane Georges (which hit Puerto Rico in September 1998) adversely
affecting the island's consumer economy.
Commercial and other (mainly overdrafts) net credit losses increased to $1.1
million in fiscal 2000, from $89,000 in fiscal 1999. Real estate loans net
credit losses totaled $28,000 versus a $14,000 net credit gain in fiscal 1999.
NON-PERFORMING ASSETS
The Group's non-performing assets include non-performing loans, foreclosed real
estate owned and other repossessed assets (see Table 8). At June 30, 2000, the
Group's asset quality improved as non-performing assets totaled $17.8 million
(0.96% of total assets) versus $20.4 million (1.30% of total assets) at the end
of fiscal 1999. The decrease was principally due to a lower level of
non-performing loans, mainly non-performing real estate loans and financing
leases. This improvement stems from tighter underwriting standards and
collection procedures implemented, as previously explained.
At June 30, 2000, the allowance for loan losses to non-performing loans
coverage ratio was 40.52% (46.06% in 1999). However, excluding the lower-risk
real estate mortgage loans, the ratio comes to a much more comfortable 82.15%
(92.23% in 1999). Detailed information concerning each of the items that
comprise non-performing assets follows:
F - 9
SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 % 1998
------------ ------------ ------------ ------------
TABLE 7 - LOAN LOSS RESERVE BREAKDOWN ( AS OF JUNE 30,):
------------------------------------------------------------------------------------------------------
Consumer $ 1,354 $ 4,186 -67.7% $ 1,494
Financing leases 4,519 4,282 5.5% 3,838
Commercial and other 376 461 -18.4% 207
------------ ------------ ------------ ------------
Non-real estate 6,249 8,929 -30.0% 5,539
Real estate 588 73 705.5% 119
------------ ------------ ------------ ------------
$ 6,837 $ 9,002 -24.1% $ 5,658
============ ============ ============ ============
TABLE 8 - NON-PERFORMING ASSETS ( AS OF JUNE 30,):
------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS
Non-performing loans 16,875 19,542 -13.6% 15,895
Foreclosed real estate 398 383 3.9% 413
Repossessed autos 552 438 26.0% 951
Repossessed equipment 2 46 -95.7% 344
------------ ------------ ------------ ------------
$ 17,827 $ 20,409 -12.7% $ 17,603
============ ============ ============ ============
NON-PERFORMING LOANS TO
Total loans 2.78% 3.38% -17.9% 2.90%
------------ ------------ ------------ ------------
Total assets 0.96% 1.29% -25.4% 1.35%
------------ ------------ ------------ ------------
Total capital 15.12% 17.55% -13.8% 17.74%
------------ ------------ ------------ ------------
TABLE 9 - NON-PERFORMING LOANS ( AS OF JUNE 30,):
------------------------------------------------------------------------------------------------------------
NON-PERFORMING LOANS
Consumer $ 1,544 $ 942 63.9% $ 713
Financing leases 5,878 7,652 -23.2% 7,879
Commercial 901 1,166 -22.7% 640
------------ ------------ ------------ ------------
Non-real estate 8,323 9,760 -14.7% 9,232
Real estate 8,552 9,782 -12.6% 6,663
------------ ------------ ------------ ------------
$ 16,875 $ 19,542 -13.6% $ 15,895
============ ============ ============ ============
NON-PERFORMING LOANS COMPOSITION
Consumer 9.1% 4.8% 89.8% 4.5%
Financing leases 34.8% 39.2% -11.0% 49.6%
Commercial 5.3% 6.0% -10.5% 4.0%
------------ ------------ ------------ ------------
Non-real estate 49.3% 49.9% -1.2% 58.1%
Real estate 50.7% 50.1% 1.2% 41.9%
------------ ------------ ------------ ------------
100.0% 100.0% 0.0% 100.0%
============ ============ ============ ============
F - 10
Real estate loans are placed on a non-accrual basis when they become 90 days
or more past due, except for well-secured residential loans which are in
process of collection, and are charged-off based on the specific evaluation
of the underlying collateral. At June 30, 2000, the Group's non-performing
real estate loans totaled $8.6 million (50.7% of the Group's non-performing
loans). Non-performing loans in this category are primarily residential
mortgage loans. Based on the value of the underlying collateral and the
loan-to-value ratios, management believes 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 collateral underlying the loan. At June 30, 2000, the Group's non-performing
commercial business loans amounted to $901,000 (9.1% of the Group's
non-performing loans). Of the total balance, $836,000 (8 loans) is guaranteed by
real estate.
Finance leases are placed on non-accrual status when they become 90 days past
due unless well secured by collateral. At June 30, 2000, the Group's
non-performing auto and equipment leases portfolio amounted to $5.9 million
(34.8% of the Group's total non-performing loans). The underlying collateral
secures these financing leases, mainly consist of vehicles.
Consumer loans are placed on non-accrual status when they become 90 days past
due and charged-off when payments are delinquent by 120 days. This write-off
policy (which follows the guidelines established by the Federal Deposit
Insurance Corporation's Uniform Retail Credit Classification and Account
Management Policies), was adopted in fiscal 1998. Consumer net credit losses for
fiscal 1999 included $1.7 million as a result of this change. At June 30, 2000,
the Group's non-performing consumer loans amounted to $1.5 million (9.1% of the
Group's total non-performing loans).
Foreclosed real estate is initially recorded at the lower of the related loan
balance or fair value at the date of foreclosure and 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 disposal cost is
charged to operations. Management actively seeks prospective buyers for these
foreclosed real estate properties.
Other repossessed assets are initially recorded at estimated net realizable
value. At June 30, 2000, the inventory of repossessed automobiles consisted
of 32 units amounting to $551,638 ($17,240 average per unit).
FINANCIAL CONDITION
GROUP'S ASSETS
At June 30, 2000, the Group's total assets totaled $1.851 billion, up 17.6%
when compared to $1.574 billion a year ago. At the same date,
interest-earning assets reached $1.781 billion (96.2% of total assets), up
17.5% versus $1.515 billion (96.3% of total assets) a year earlier. An
expansion in the Group's investment portfolio, particularly mortgage-backed
securities, made both increases possible. (see Table 10).
Investments (Oriental's largest interest-earning assets component) mainly
consists of money market investments, U.S. Treasury notes, U.S. Government
agencies bonds, mortgage-backed securities, CMO's and P. R. Government municipal
bonds. At June 30, 2000, the Group's investment portfolio is of high quality.
Approximately 98% is rated AAA and it generates a significant amount of
tax-exempt interest which lowers the Group's effective tax rate (see Table 10
and Note 3 of the attached Consolidated Financial Statements).
The Group continued to experience a significant growth in investments during
fiscal 2000, which grew to $1.179 billion, up 24.6% from $946.4 million a year
earlier. This growth was concentrated in mortgage-backed securities, followed by
increases in U.S. and P.R. Government securities. Mortgage-backed securities
rose 26.7% to $882.5 million (74.8% of the total portfolio) from $696.3 million
(73.6% of the total portfolio) the year before, as Oriental continued its
strategy of pooling residential real estate loans into mortgage-backed
securities. U.S. and P.R. Government securities increased 25.5% to $262.4
million (22.2% of the total portfolio) from $209.1 million (22.1% of the total
portfolio) reported for fiscal year 1999.
At June 30, 2000, Oriental's loan portfolio, the second largest category of
the Group's interest-earning assets, amounted to $607.7 million, up 5.2% from
the $577.7 million reported a year ago. Expansions of the real estate and
commercial loans portfolios led this increase. Table 10 presents the Group's
loan portfolio composition and mix at the end of the periods analyzed. See
also note 6 of the attached Consolidated Financial Statements.
The Group's real estate loan portfolio is mainly comprised of residential
loans, home equity loans and personal loans collateralized by real estate. At
June 30, 2000, the real estate loan portfolio amounted to $387.6 million
(63.8% of the loan total portfolio), a 15.8% increase when compared to $334.6
million (57.9% of the loan's portfolio) a year earlier. This growth was
achieved despite the sale of over $85 million in residential loans as
management took advantage of market conditions to convert mortgage loans into
mortgage-backed securities.
F - 11
SELECTED FINANCIAL DATA
AS OF JUNE 30, 2000, 1999 and 1998
(Dollars in thousands)
---------------------------------------------- ------------
JUNE 30, JUNE 30, VARIANCE JUNE 30,
2000 1999 % 1998
------------ ------------ ------------ ------------
TABLE 10 - BANK ASSETS SUMMARY AND COMPOSITION
- --------------------------------------------------------------------------------------------------------------------
INVESTMENTS:
Mortgage-backed securities and CMOs $ 882,455 $ 696,252 26.7% $ 402,703
U.S. and P.R. Government securities 262,372 209,090 25.5% 283,248
FHLB stock and other investments 34,657 41,069 -15.6% 20,584
------------ ------------ ------------ ------------
1,179,484 946,411 24.6% 706,535
============ ============ ============ ============
LOANS:
Real estate 387,629 334,649 15.8% 287,859
Consumer 19,698 122,212 -83.9% 102,515
Financing leases 8,785 110,297 -92.0% 141,113
Commercial and auto 24,117 10,555 128.5% 15,921
------------ ------------ ------------ ------------
440,229 577,713 -23.8% 547,408
Consumer loans and leases under contract-to-sell 167,486 -- 100.0% --
------------ ------------ ------------ ------------
607,715 577,713 5.2% 547,408
Allowance for loan losses (6,837) (9,002) -24.1% (5,658)
------------ ------------ ------------ ------------
600,878 568,711 5.7% 541,750
============ ============ ============ ============
TOTAL INTEREST-EARNING ASSETS 1,780,362 1,515,122 17.5% 1,248,285
Non-interest earning assets 69,872 65,631 6.5% 53,074
------------ ------------ ------------ ------------
TOTAL ASSETS $ 1,850,234 $ 1,580,753 17.0% $ 1,301,359
============ ============ ============ ============
INVESTMENTS PORTFOLIO COMPOSITION:
Mortgage-backed securities and CMOs 74.8% 73.6% 57.0%
U.S. and P.R. Government securities 22.2% 22.1% 40.1%
FHLB stock and other investments 3.0% 4.3% 2.9%
------------ ------------ ------------
100.0% 100.0% 100.0%
============ ============ ============
LOAN PORTFOLIO COMPOSITION:
Real Estate 63.8% 57.9% 52.6%
Consumer 3.2% 21.2% 18.7%
Financing leases 1.4% 19.1% 25.8%
Commercial and auto 31.6% 1.8% 2.9%
------------ ------------ ------------
100.0% 100.0% 100.0%
============ ============ ============
TABLE 11 - LIABILITIES SUMMARY AND COMPOSITION
- ---------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand deposits $ 130,919 $ 141,544 -7.5% $ 111,397
Time deposits and IRA accounts 587,931 508,648 15.6% 455,061
------------ ------------ ------------ ------------
718,850 650,192 10.6% 566,458
Accrued interest and manager checks 4,831 5,661 14.7% 12,894
------------ ------------ ------------ ------------
723,681 655,853 10.3% 579,352
============ ============ ============ ============
BORROWINGS:
Repurchase agreements 816,493 596,226 36.9% 416,171
FHLB funds 70,000 68,400 2.3% 74,800
Term notes and other sources of funds 86,500 106,500 -18.8% 114,588
------------ ------------ ------------ ------------
972,993 771,126 26.2% 605,559
============ ============ ============ ============
TOTAL INTEREST-BEARING LIABILITIES 1,696,674 1,424,621 19.1% 1,184,911
Non interest-bearing liabilities 35,691 39,834 (10.4)% 17,208
------------ ------------ ------------ ------------
TOTAL LIABILITIES $ 1,732,365 $ 1,464,455 18.3% $ 1,202,119
============ ============ ============ ============
DEPOSITS PORTFOLIO COMPOSITION:
Savings and demand deposits 18.1% 21.7% 19.2%
Time deposits and IRA accounts 81.2% 77.8% 78.5%
Accrued Interest and manager checks 0.7% 0.5% 2.3%
------------ ------------ ------------
100.0% 100.0% 100.0%
============ ============ ============
BORROWINGS PORTFOLIO COMPOSITION:
Repurchase agreements 83.9% 77.3% 68.7%
FHLB funds 7.2% 8.9% 12.4%
Term notes and other sources of funds 8.9% 13.8% 18.9%
------------ ------------ ------------
100.0% 100.0% 100.0%
============ ============ ============
F - 12
The growth was primarily associated with the Group's new emphasis on personal
secured lending (in December 1999, Oriental changed its loans origination
strategy towards well-secured loans, primarily residential loans and personal
loans with mortgage collateral).
During fiscal 2000, the Group reinforced its commercial banking department
to offer collaterized loans to its business customers. This has already
started to show positive results as the commercial loans portfolio at June
30, 2000 totaled $24.1 million (4% of the loan portfolio), an increase of
128.5% compared to the $10.5 million reported a year ago.
At June 30, 2000, the consumer loans portfolio (excluding loans held-for-sale
(see Note 5 to the Consolidated Financial Statements), which mainly
includes margin loans, cash collateral loans and credit lines, totaled $19.7
million (3.2% of the Group's loan portfolio). This represents a 83.9%
decrease when compared to the $122.2 million (21% of the Group's loan
portfolio) a year ago. The divestiture of the unsecured personal loans
portfolio was the main reason for this decline. During the last quarter of
fiscal year 2000 the management decided to sell the unsecured personal
portfolio to improve its asset quality and focus available resources in more
profitable business lines as explained above. These loans were included in
other loans under a contract to sell (loans held-for-sale) as the final
divestiture was settled during the first week of July 2000.
LIABILITIES AND FUNDING SOURCES
At June 30, 2000, Oriental's total liabilities reached $1.733 billion, 18.3%
higher than the $1.464 billion reported a year earlier. Interest-bearing
liabilities, the Group's funding sources, amounted to $1.696 billion at the
end of fiscal 2000 versus $1.425 billion the year before, a 19.1% increase. A
rise in deposit accounts, (mainly IRA deposit accounts) and in borrowed funds
(mainly repurchase agreements) drove this growth. Please refer to Table 11
for Liabilities summary and composition.
Borrowings are Oriental's largest interest-bearing liability component. It
consists mainly of diversified funding sources through the use of Federal Home
Loan Bank of New York (FHLB) advances and borrowings, repurchase agreements,
term notes, notes payable and lines of credit. At June 30, 2000, they amounted
to $973 million, 26.2% higher than the $771.1 million a year ago. This increase
reflects a strong growth of 36.9% in repurchase agreements, which reached $816.5
million compared to $596.2 million reported a year ago. This was necessary to
fund the increase in interest-earning assets experienced during the period,
particularly investment securities. The FHLB system functions as a source of
credit to financial institutions that are members of a regional Federal Home
Loan Bank. As a member of the FHLB, the Group can obtain advances from the FHLB,
secured by the FHLB stock owned by the Group as well as by certain of the
Group's mortgages and investment securities. Table 11 presents the composition
of the Group's other borrowings at the end of the periods analyzed.
At June 30, 2000, deposits, the second largest category of the Group's
interest-bearing liabilities and a cost-effective source of funding, reached
$723.6 million, up 10.3% versus the $655.8 million a year ago. A $79.3
million increase (15.6%) on time deposits and IRA accounts ($63.3 million
solely on IRA Accounts) is responsible for most of the growth. This was
partially offset by a decrease of $10.7 million (7.5%) in demand and savings
deposits. Table 11 presents the composition of the Group's deposits at the
end of the fiscal year 2000.
STOCKHOLDERS' EQUITY AND DIVIDENDS
At June 30, 2000, Oriental's total stockholders' equity reached $117.9
million, an increase of 1.4% compared to $116.3 million a year ago. The book
value per share increased to $6.84 versus $6.45 a year ago, despite the
repurchases of $3.7 million in treasury stock over the last 12 months, and a
$4.8 million unfavorable turnaround in the fair value of securities
available-for-sale (included as part of accumulated other comprehensive
loss). For more on the changes in the Group's stockholders'equity, refer to
the Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income included in the attached Consolidated Financial
Statements.
During fiscal year 2000, the Group repurchased 204,000 common shares bringing
to 1.108 million shares (with a cost of $27.1 million) the number of shares
held by the Group's treasury. The Group's common stock is traded in the New
York Stock Exchange (NYSE) under the symbol OFG. At June 30, 2000, the
Group's market value for its outstanding stock was $183.3 million ($14.44 per
share) versus $309.6 million ($24.13 per share) a year earlier. During fiscal
2000, the Group declared dividends amounting to $7.7 million ($0.600 per
share) compared to $7.4 million ($0.563 per share) in fiscal 1999, up 3.9%.
For fiscal 2000, the dividend payout ratio and dividend yield were 50.36% and
2.99%, respectively, compared to 28.02% and 1.94%, respectively, in the
preceding fiscal year.
Under the regulatory framework for prompt corrective action, banks and bank
holding companies which meet or exceed a Tier I risk-based ratio of 6%, a total
capital risk-based ratio of 10% and a leverage ratio of 5% are considered well
capitalized. As shown on Table 12, the Group significantly exceeds those
regulatory risk-based capital requirements, due to the high level of capital and
the conservative nature of the Group's assets.
F - 13
SELECTED FINANCIAL DATA
AS OF JUNE 30, 2000, 1999 and 1998
(Dollars in thousands)
---------------------------------------------- ------------
JUNE 30, JUNE 30, VARIANCE JUNE 30,
2000 1999 % 1998
------------ ------------ ------------ ------------
TABLE 12 - CAPITAL, DIVIDENDS AND STOCK DATA
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL DATA:
Stockholders' equity $ 117,869 $ 116,298 1.4% $ 99,240
------------- ------------ ------- ---------
Leverage Capital ( minimum required - 4.00%) 7.49% 8.30% -9.7% 7.70%
------------- ------------ ------- ---------
Total Risk-Based Capital (minimum required - 8.00%) 29.29% 24.21% 21.0% 21.68%
------------- ------------ ------- ---------
Tier 1 Risk-Based capital (minimum required - 4.00%) 30.54% 22.95% 33.1% 20.45%
------------- ------------ ------- ---------
STOCK DATA:
Outstanding common shares, net of treasury 12,697 12,835 -1.1% 13,235
------------- ------------ ------- ---------
Book value $ 6.64 $ 6.45 3.0% $ 7.50
------------- ------------ ------- ---------
Market Price at end of period $ 14.44 $ 24.13 -40.2% $ 27.66
------------- ------------ ------- ---------
Market capitalization $ 183,316 $ 309,644 -40.8% $ 362,255
------------- ------------ ------- ---------
DIVIDEND DATA:
Dividends declared $ 7,657 $ 7,369 3.9% $ 5,442
------------- ------------ ------- ---------
Dividends declared per share $ 0.600 $ 0.563 6.6% $ 0.413
------------- ------------ ------- ---------
Payout ratio 50.36% 28.02% 79.7% 25.42%
------------- ------------ ------- ---------
Dividend yield 2.99% 1.94% 54.1% 1.69%
------------- ------------ ------- ---------
The following provides the high and low prices and dividend per share of the
Group's stock for each quarter of the last three fiscal periods. Common stock
prices were adjusted to give retroactive effect to the stock splits declared on
the Group's common stock.
---------------------------------
PRICE ----------
--------------------------------- DIVIDEND
HIGH LOW PER SHARE
--------------- ---------------- ----------
FISCAL 2000:
June 30, 2000 $ 19.31 $ 13.18 $ 0.150
----------- ----------- ----------
March 31, 2000 $ 26.00 $ 17.75 $ 0.150
----------- ----------- ----------
December 31, 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 31, 1998 $ 32.00 $ 28.00 $ 0.150
----------- ----------- ----------
September 30, 1998 $ 32.26 $ 28.84 $ 0.113
----------- ----------- ----------
FISCAL 1998:
June 30, 1998 $ 34.60 $ 27.66 $ 0.113
----------- ----------- ----------
March 31, 1998 $ 29.35 $ 24.85 $ 0.113
----------- ----------- ----------
December 31, 1997 $ 23.63 $ 18.38 $ 0.094
----------- ----------- ----------
September 30, 1997 $ 22.28 $ 16.95 $ 0.094
----------- ----------- ----------
TABLE 13 - FINANCIAL ASSETS SUMMARY
- -----------------------------------------------------------------------------------------------------------------------
Financial assets:
Trust assets managed $ 1,456,500 $ 1,380,200 5.5% $ 1,310,000
Assets gathered by broker-dealer 914,900 885,800 3.3% 741,400
--------------- ---------------- ------ ------------
MANAGED ASSETS 2,371,400 2,266,000 4.7% 2,051,400
Group assets 1,850,200 1,580,800 17.0% 1,301,400
--------------- ---------------- ------ ------------
$ 4,221,600 $ 3,846,800 9.7% $ 3,352,800
=============== ================ ====== ============
F - 14
GROUP'S FINANCIAL ASSETS
As shown on Table 13, the Group`s total financial assets include both the
Group's assets and client assets managed by the trust and brokerage business. As
of June 30, 2000, they reached $4.222 billion - up 10% from $3.840 billion a
year ago. The Group's financial assets main component are assets owned by the
Group, of which about 99% are owned by the Group's banking subsidiary. For more
on this financial asset component, refer to Group's Assets under Financial
Condition.
Oriental's second largest financial assets component are assets managed by the
trust. The Group's trust division offers various different types of IRA products
and manages 401(K) and Keogh retirement plans, custodian and corporate trust
accounts. At June 30, 2000, total assets managed by the Group's trust division
amounted $1.456 billion, 5.5% higher than the $1.380 billion a year ago. This
increase was fueled by a solid growth in individual retirement accounts (IRA),
the most significant asset managed, which totaled $585 million (up 11%) versus
the $527.1 million a year ago.
The other financial asset component are assets gathered by the broker-dealer.
The Group's broker-dealer subsidiary offers a wide array of investment
alternatives to its client's base such as fixed and variable annuities,
tax-advantaged fixed income securities, mutual funds, stocks and bonds. At June
30, 2000, total assets gathered by the broker-dealer from its customer
investment accounts reached $914.9 million, up 3.3% from $885.8 million a year
ago.
YEAR 2000 READINESS DISCLOSURE
The millennium date change did not cause any critical problems to the Group's
computers and management information systems, which already had been tested and
fully certified as being Y2K compliant under regulatory guidelines.
SELECTED QUARTERLY FINANCIAL DATA
The Table 14 sets forth selected unaudited quarterly information. In
management's opinion, all adjustments necessary to fairly present the results
of operations of such periods are reflected therein. As disclosed in the
restatement section at page F-7 and Note 2 to the Consolidated Financial
Statements, the financial information for each of the quarters of fiscal 1999
and the first 3 quarters of fiscal 2000 reported in the respective Form
10-Q's were restated.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is defined as the risk of losses arising from adverse changes in
market valuations which arise from interest rate risk, foreign currency exchange
rate risk, commodity price risk, and equity price risk. The Group's primary
market risk is interest rate risk.
ASSET/LIABILITY MANAGEMENT
The Group's 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.
In addition, the Group uses an external consultant to evaluate and monitor its
asset/liability position.
The Group has a formal system for interest rate risk management, one that
monitors the Group's interest rate risk position primarily through computer
simulations of the effect of rising and falling interest rates on net interest
income. Two sets of simulations are carried out, both of which cover a two year
time horizon: one assuming a flat balance sheet with a constant asset/liability
mix and another assuming a balance sheet which grows according to expected loan
originations and funding. These simulations also incorporate expected changes in
prepayment rates as interest rates rise or fall, repricing characteristics of
variable rate assets and liabilities, current and expected lending rates,
funding sources and costs. Other factors, which may be potentially important in
determining the future growth of net interest income (i.e., planned
securitizations and liquidity requirements), are considered in these
simulations. The Group also uses one-year GAP analysis as a secondary technique
for evaluating interest rate risk.
The Group's interest rate risk position is measured on a quarterly basis and is
evaluated by ALCO, which is in charge, among other things, of informing both the
Group's management and Board of Directors as to the current levels of interest
rate risk and, when necessary, managing the repricing of the Group's assets,
liabilities and off-balance sheet contracts to maintain that risk at reasonable
and prudent levels.
F - 15
SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Dollars in thousands)
TABLE 14 - SELECTED QUARTERLY FINANCIAL DATA (AS RESTATED)
- -------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, YTD
------------- ------------ --------- --------- ----------
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 6,244 6,222 6,495 4,217 23,178
Non-interest expenses 8,538 8,799 9,233 13,282 39,852
Provision for income taxes 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 STOCKHOLDERS $ 6,646 $ 6,737 $ 5,504 $ (1,708) $ 17,179
======== ======== ======== ======== =========
PER SHARE DATA:
Basic $ 0.52 $ 0.53 $ 0.43 $ (0.13) $ 1.34
-------- -------- -------- -------- ---------
Diluted $ 0.50 $ 0.51 $ 0.42 $ (0.13) 1.31
-------- -------- -------- -------- ---------
Average shares and potential shares 13,305 13,219 13,142 12,981 13,162
-------- -------- -------- -------- ---------
FISCAL 1999
Interest income $ 25,470 $ 26,032 $ 27,754 $ 28,553 $ 107,809
Interest expense 15,912 16,043 16,301 16,519 64,775
-------- -------- -------- -------- ---------
NET INTEREST INCOME 9,558 9,989 11,453 12,034 43,034
Provision for loan losses 2,600 7,217 2,890 1,766 14,473
-------- -------- -------- -------- ---------
Net credit income 6,958 2,772 8,563 10,268 28,561
Non-interest income 6,836 12,656 7,704 6,757 33,953
Non-interest expenses 7,746 8,349 9,502 10,013 35,610
Provision for income taxes 588 (1,025) 736 (99) 200
-------- -------- -------- -------- ---------
NET INCOME 5,460 8,104 6,029 7,111 26,704
Less: Dividends on preferred stock -- -- -- (350) (350)
-------- -------- -------- -------- ---------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 5,460 $ 8,104 $ 6,029 $ 6,761 $ 26,354
======== ======== ======== ======== =========
PER SHARE DATA:
Basic $ 0.42 $ 0.62 $ 0.46 $ 0.52 $ 2.02
-------- -------- -------- -------- ---------
Diluted $ 0.41 $ 0.59 $ 0.44 $ 0.50 $ 1.93
-------- -------- -------- -------- ---------
Average shares and potential shares 13,473 13,810 13,695 13,418 13,633
-------- -------- -------- -------- ---------
RECONCILIATION OF RESTATEMENT AMOUNTS
Net income - as previously reported $ 6,059 $ 6,367 $ 6,623 $ 7,599 $ 26,648
Net income - restatement effect (599) 1,737 (594) (488) 56
-------- -------- -------- -------- ---------
Net income - as restated above $ 5,460 $ 8,104 $ 6,029 $ 7,111 $ 26,704
-------- -------- -------- -------- ---------
Basic EPS - as previously reported $ 0.46 $ 0.49 $ 0.51 $ 0.56 $ 2.02
Basic EPS - restatement effect (0.04) 0.13 (0.05) (0.04) (0.00)
-------- -------- -------- -------- ---------
Basic EPS - as restated above $ 0.42 $ 0.62 $ 0.46 $ 0.52 $ 2.02
-------- -------- -------- -------- ---------
Diluted EPS - as previously reported $ 0.45 $ 0.47 $ 0.50 $ 0.55 $ 1.97
Diluted EPS - restatement effect (0.04) 0.12 (0.06) (0.05) (0.03)
-------- -------- -------- -------- ---------
Diluted EPS - as restated above $ 0.41 $ 0.59 $ 0.44 $ 0.50 $ 1.93
-------- -------- -------- -------- ---------
TABLE 15 - INTEREST RATE RISK EXPOSURE
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN EXPECTED AMOUNT PERCENT
INTEREST RATE NII (1) CHANGE CHANGE
------------- -------- ------ --------
BASE SCENARIO
Flat $24,905 $ -- $ 0.00%
+ 200 Basis points 19,180 (5,725) (22.99)%
-------- ------- --------
- 200 Basis points $30,099 5,194 20.86 %
-------- ------- --------
-------- ------- --------
GROWTH SCENARIO
Flat $32,084 $ -- $ 0.00%
+ 200 Basis points 26,358 (5,726) (17.85)%
-------- ------- --------
- 200 Basis points $41,186 $ 9,102 28.37 %
-------- ------- --------
-------- ------- --------
TABLE 16 - CASH FLOW DATA
- -------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED JUNE 30,
--------------------------------- -----------
2000 1999 1998 CUMMULATIVE
------ ------- ----- -----------
Net cash provided (used)
Operating activities 38,736 144,296 57,944 240,976
Investing activities (297,296) (384,268) (296,545) (978,109)
Financing activities 256,460 259,761 217,152 733,373
-------- -------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,100) 19,789 (21,449) (3,760)
Cash and cash equivalents at beginning of year 35,933 16,144 37,593 37,593
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR 33,833 35,933 16,144 33,833
======== ======== ======== ========
F - 16
The Group's interest rate risk policy has been approved by the Board of
Directors and establishes guidelines for tolerance levels for net portfolio
value changes based on interest rate volatility. Management has maintained the
portfolio within these established tolerances.
INTEREST RATE RISK AND SENSITIVITY
The Group's profitability depends largely on its net interest income, which is
the difference between its interest income on its interest-earning assets and
its interest expense on its interest-bearing liabilities. Like most financial
institutions, changes in general interest rate levels and other economic factors
affect the Group's profitability. If there is a mismatch between the dollar
amount of repricing or maturing assets (such as loans) and liabilities (such as
time deposits), a financial institution is said to have an "interest rate
sensitivity gap." A financial institution's interest rate risk arises from an
interest rate sensitivity gap. Financial institutions measure this interest rate
risk in terms of the ratio of the interest rate sensitivity gap to the
institution's total assets. If more assets reprice or mature over a given time
frame than liabilities, the financial institution is considered
"asset-sensitive." This risk is reflected as a positive gap. Conversely, if more
liabilities reprice or mature over a given time frame than assets, the financial
institution will be considered "liability-sensitive." This risk is reflected as
a negative gap.
An asset-sensitive position (a positive gap) will generally enhance earnings in
a rising interest rate environment (because more interest-earning assets will be
repriced or replaced at higher interest rates than interest-paying liabilities).
In a falling interest rate environment, an asset-sensitive position will
generally negatively affect earnings (since more interest-earning assets will be
repriced or replaced at lower interest rates than interest-bearing liabilities).
Conversely, a liability-sensitive position (a negative gap) will generally
enhance earnings in a falling interest rate environment (more interest-bearing
liabilities are replaced or repriced at lower rates than interest-earning
assets) and negatively impact earnings in a rising interest rate environment
(more interest-bearing liabilities will be replaced or repriced at higher rates
than interest-earning assets).
The Group has liability-sensitive position, due to its fixed rate and
medium-term asset composition (mainly real estate loans and mortgage-backed
securities) being funded with shorter-term repricing liabilities (mainly
repurchase agreements). To mitigate this mismatch and related inherent risks,
the Group has continued its efforts to expand its core deposit base by bidding
aggressively for IRA accounts (long-term time deposits). In addition, the Group
uses interest rate swaps and caps as a hedging mechanism to offset said mismatch
and control interest rate risk exposures with 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.
At June 30, 2000, the Group had a one-year negative cumulative gap of $275.1
million or 12%. This negative one year gap position, as noted in the table
below, has a negative impact on the Group's earnings in a rising interest rate
environment. As discussed in the asset/liability section above, the Group uses
simulations to measure the effects of changing interest rates on net interest
income. Presented below is the Group's interest rate risk exposure at June 30,
2000 based on the aforementioned analysis. Table 15 measures changes in net
interest income in 200 basis point increments up or down.
These simulations assume gradual upward or downward movements of interest rates
over one year, with the change totaling 200 basis points at the end of the
twelve-month period. The balance sheet is divided into groups of similar assets
and liabilities in order to simplify the process of carrying out these
projections. As interest rates rise or fall, these simulations incorporate
expected future lending rates, current and expected future funding sources and
cost, the possible exercise of options, liquidity requirements, and other
factors which may be important in determining the future growth of net interest
income. Only interest income is included in these projections; profits on the
sale of assets are excluded.
These simulations are highly complex, and they use many simplifying assumptions
which are intended to reflect the general behavior of the Group over the period
in question, but there can be no assurance that actual events will parallel
these assumptions in all cases. For this reason, the results of these
simulations are only approximations of the true sensitivity of net interest
income to changes in market interest rates.
In addition, the Group's management may take anticipatory or reactive measures
in response to changes in interest rates that are not reflected in the interest
rate sensitivity calculation. While the Group has attempted to structure its
asset and liability management strategies to mitigate the impact on net interest
income of changes in market interest rates, there is no assurance that these
strategies will be successful.
F - 17
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 the sources of financing used by the Group to avoid undue reliance on
any particular source.
The Group's principal sources of funds are net deposit inflows, loan repayments,
mortgage-backed and investment securities principal and interest payments,
reverse repurchase agreements, FHLB advances and other borrowings. The Group has
obtained long-term funding through the issuance of notes and long-term reverse
repurchase agreements. The Group's principal uses of funds are the origination
and purchase of loans, the purchase of mortgage-backed and investment
securities, the repayment of maturing deposits and borrowings. A summary of the
Group's consolidated cash flows is set forth in Table 16.
Cash flows from operations provided inflows in each of the years in the
three-year period ending June 30, 2000. Cash flows from operations during fiscal
2000 decreased versus fiscal 1999 due to the smaller volume of loans
held-for-sale sales ($27.8 million versus $92.9 million), enhanced by an
increase in trading securities purchases. Cash flows from operations rose during
fiscal 1999 compared to fiscal 1998. This was primarily associated to proceeds
generated from the higher activity of held-for-sale mortgage loans ($92 million
versus $57.9 million) and trading securities (positive inflow of $25.1 million
versus a negative effect of $14.2 million in fiscal 1998).
Cash used by investing activities decreased during 2000 when compared to 1999.
This was mainly due to the lower purchases of securities ($385.7 million versus
$518.4 million in fiscal 1999). During fiscal 1998, they grew compared to 1997.
The increase primarily resulted from higher loan funding and greater amount of
securities purchases.
Cash provided by financing activities decreased during fiscal 2000 compared to
fiscal 1999. The decrease primarily resulted from higher amount of dividends
paid in fiscal 2000 ($10.1 million versus $7.3 million, compounded by the $32.3
million in proceeds in May 1999 from the issuance of the preferred stock. These
were partially offset by increased securities sold under agreements to
repurchase borrowings. Cash provided by financing activities increased in fiscal
1999 versus fiscal 1998. The increase primarily resulted from the net proceeds
of the issuance of preferred shares and the larger amount funds captured by
securities sold under agreements to repurchase.
At June 30, 2000, the Group's liquidity was deemed appropriate. At such date the
Group's liquid assets amounted to $1.273 billion, this includes $63 million
available from unused lines of credit with other financial institutions and
$102.3 million of borrowing potential with the FHLB. The Group's liquidity
position is reviewed and monitored by the ALCO Committee on a regular basis.
Management believes that the Group will continue to maintain adequate liquidity
levels in the future.
IMPACT OF INFLATION AND CHANGES IN PRICES
The financial statements and related financial data and notes presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
the Group are monetary in nature. As a result, interest rates have a more
significant impact on the Group's performance than the effects of general price
levels. Although interest rates generally move in the same direction as
inflation, the magnitude of such changes varies. The possible effect of
fluctuating interest rates is discussed more fully under the previous section
entitled "Interest Risk and Asset Liability Management".
F - 18
ORIENTAL FINANCIAL GROUP INC.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Oriental Financial Group Inc.
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, of changes in
stockholders' equity and 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years
in the period ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial
statements are the responsibility of the Company'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 2 to the accompanying consolidated financial statements,
the Company has restated its financial statements for the years ended June
30, 1999 and 1998, as well as the beginning balance of retained earnings for
fiscal year 1998.
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
September 29, 2000
F - 19
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2000 and 1999
(IN THOUSANDS), EXCEPT FOR SHARE INFORMATION
(as restated)
2000 1999
--------- --------
ASSETS
- ---------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 10,322 $ 8,060
---------- -----------
Investments:
Money market investments 23,511 27,873
Trading securities, at fair value 64,443 17,307
Investment securities available-for-sale, at fair value 282,900 379,894
Investment securities held-to-maturity, at amortized cost
(fair value of $770,851; 1999 - $499,234) 797,484 508,080
Federal Home Loan Bank (FHLB) stock, at cost 11,146 13,257
---------- -----------
TOTAL INVESTMENTS 1,179,484 946,411
---------- -----------
LOANS:
Loans held-for-sale, at lower of cost or market 180,788 55,206
Loans receivable, net 420,090 513,505
---------- -----------
TOTAL LOANS, NET 600,878 568,711
---------- -----------
Accrued interest receivable 13,485 15,502
Foreclosed real estate, net 398 220
Premises and equipment, net 21,706 21,809
Other assets, net 23,961 20,040
---------- -----------
TOTAL ASSETS $1,850,234 $ 1,580,753
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand $ 130,919 $ 141,544
Time and IRA accounts 587,931 508,648
---------- -----------
718,850 650,192
Accrued interest 4,831 5,661
---------- -----------
TOTAL DEPOSITS 723,681 655,853
---------- -----------
BORROWINGS:
Securities sold under agreements to repurchase 816,493 596,226
Advances and borrowings from FHLB 70,000 68,400
Term notes and other borrowings 86,500 106,500
---------- -----------
TOTAL BORROWINGS 972,993 771,126
---------- -----------
Accrued expenses and other liabilities 35,691 37,476
---------- -----------
TOTAL LIABILITIES 1,732,365 1,464,455
---------- -----------
COMMITMENTS AND CONTINGENCIES
---------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation 33,500 33,500
value; shares issued and outstanding 1,340,000
Common stock, $1 par value; 20,000,000 shares authorized; shares
issued 13,805,135 (1999 - 13,738,814) 13,805 13,739
Additional paid-in capital 23,786 23,313
Legal surplus 10,578 8,673
Retained earnings 79,809 72,186
Treasury stock, at cost, 1,107,799 shares (1999 - 903,786) (27,116) (23,401)
Accumulated other comprehensive loss, net of deferred
taxes of $1,413 (1999 - $107) (16,493) (11,712)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 117,869 116,298
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,850,234 $ 1,580,753
---------- -----------
---------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
F - 20
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
As Restated
-------------------------------
2000 1999 1998
---------- -------- ---------
INTEREST INCOME:
Loans and leases $ 55,377 $ 55,596 $ 56,138
Mortgage-backed securities 54,583 36,970 23,874
Investment securities 15,756 14,812 16,575
Money market investments 510 431 353
---------- -------- ---------
TOTAL INTEREST INCOME 126,226 107,809 96,940
---------- -------- ---------
INTEREST EXPENSE:
Deposits 31,423 28,785 25,968
Securities sold under agreements to repurchase 41,116 25,923 19,216
Other borrowed funds and interest rate risk management 9,189 10,067 12,862
---------- -------- ---------
TOTAL INTEREST EXPENSE 81,728 64,775 58,046
---------- -------- ---------
NET INTEREST INCOME 44,498 43,034 38,894
Provision for loan losses 8,150 14,473 9,545
---------- -------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 36,348 28,561 29,349
---------- -------- ---------
NON-INTEREST INCOME:
Trust, money management and brokerage fees 12,046 10,211 8,416
Mortgage banking activities 5,891 9,124 8,563
Banking service revenues 4,663 3,348 3,123
Net gain on sale of securities available-for-sale 1,202 10,460 1,030
Trading net activity (382) (184) 915
Leasing revenues 956 994 981
Loss on loans under contract-to-sell (1,198) - -
Mortgage servicing revenues - - 713
Gain on sale of servicing assets - - 3,503
---------- -------- ---------
TOTAL NON-INTEREST INCOME 23,178 33,953 27,244
---------- -------- ---------
NON-INTEREST EXPENSES:
Compensation and benefits 15,698 15,158 15,071
Occupancy and equipment, net 6,417 5,345 4,151
Advertising and business promotion 3,094 3,045 2,602
Professional and service fees 3,216 2,144 1,393
Communications 1,681 1,496 1,427
Taxes other than on income 1,920 1,711 1,633
Insurance, including deposit insurance 469 458 733
Printing, postage, stationery and supplies 826 738 724
Other 6,531 5,515 6,900
---------- -------- ---------
TOTAL NON-INTEREST EXPENSE 39,852 35,610 34,634
---------- -------- ---------
INCOME BEFORE INCOME TAXES 19,674 26,904 21,959
Income taxes 108 200 2,563
---------- -------- ---------
NET INCOME 19,566 26,704 19,396
Less: Dividends on preferred stock (2,387) (350) -
---------- -------- ---------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 17,179 $ 26,354 $ 19,396
---------- -------- ---------
INCOME PER COMMON SHARE:
Basic $ 1.34 $ 2.02 $ 1.46
---------- -------- ---------
Diluted $ 1.31 $ 1.93 $ 1.39
---------- -------- ---------
Average common shares outstanding 12,787 13,051 13,257
Average potential common share options 375 582 691
---------- -------- ---------
13,162 13,633 13,948
---------- -------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
F - 21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS)
As Restated
------------------
2000 1999 1998
--------- --------- -------
CHANGES IN STOCKHOLDERS' EQUITY:
- --------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK:
Balance at beginning of year $ 33,500 $ -- $ --
Issuance of preferred stock -- 33,500 --
--------- --------- ---------
BALANCE AT END OF YEAR 33,500 33,500 --
--------- --------- ---------
COMMON STOCK:
Balance at beginning of year 13,739 13,534 13,387
Stock options exercised 66 205 147
--------- --------- ---------
BALANCE AT END OF YEAR 13,805 13,739 13,534
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 23,313 23,876 23,234
Stock options exercised 473 637 642
Preferred stock issuance costs -- (1,200) --
--------- --------- ---------
BALANCE AT END OF YEAR 23,786 23,313 23,876
--------- --------- ---------
LEGAL SURPLUS:
Balance at beginning of year 8,673 5,908 4,002
Transfer from retained earnings 1,905 2,765 1,906
--------- --------- ---------
BALANCE AT END OF YEAR 10,578 8,673 5,908
--------- --------- ---------
RETAINED EARNINGS:
Balance at beginning of year - as previously reported (see Note 2) 79,920 63,756 49,694
Amount of restatement, net of taxes (7,734) (7,790) (5,776)
Beginning balance - as restated 72,186 55,966 43,918
Net Income 19,566 26,704 19,396
Dividends declared on common stock (7,651) (7,369) (5,442)
Dividends declared on preferred stock (2,387) (350) --
Transfer to legal surplus (1,905) (2,765) (1,906)
--------- --------- ---------
BALANCE AT END OF YEAR 79,809 72,186 55,966
--------- --------- ---------
TREASURY STOCK:
Balance at beginning of year (23,401) (6,199) (1,836)
Treasury stock purchased (3,715) (17,202) (4,363)
--------- --------- ---------
BALANCE AT END OF YEAR (27,116) (23,401) (6,199)
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF DEFERRED TAXES:
Balance at beginning of year (11,712) 6,155 913
Other comprehensive loss for the year ended, net of taxes (4,781) (17,867) 5,242
--------- --------- ---------
BALANCE AT END OF YEAR (16,493) (11,712) 6,155
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 117,869 $ 116,298 $ 99,240
--------- --------- ---------
--------- --------- ---------
COMPREHENSIVE INCOME:
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 19,566 $ 26,704 $ 19,396
--------- --------- ---------
OTHER COMPREHENSIVE LOSS, NET OF TAX:
Unrealized loss on securities arising during the period (5,875) (27,918) 4,449
Realized gains included in net income 1,202 10,460 1,030
Income tax expense related to items of other comprehensive income (108) (409) (237)
--------- --------- ---------
NET CHANGE IN FAIR VALUE OF SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES (4,781) (17,867) 5,242
--------- --------- ---------
COMPREHENSIVE INCOME $ 14,785 $ 8,837 $ 24,638
--------- --------- ---------
--------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
F - 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS)
As Restated
----------------------
2000 1999 1998
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,566 $ 26,704 $ 19,396
---------- --------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred loan origination fees and costs 346 282 135
Amortization of premiums and accretion of discounts on investment securities 275 1,818 1,157
Depreciation and amortization of premises and equipment 3,767 2,894 2,498
Provision for loan losses 8,150 14,473 9,545
Gain on sale of securities (1,202) (10,460) (1,030)
Loss on loans under contract-to-sell 1,198 -- --
Gain on sale of servicing assets -- -- (3,503)
Mortgage banking activities (5,891) (9,124) (8,563)
Proceeds from sale of loans held-for-sale 27,795 92,871 57,904
Increase (decrease) in accrued expenses and other liabilities (1,785) 11,215 (1,759)
Net (increase) decrease in:
Trading securities (11,422) 25,133 (14,200)
Accrued interest receivable 2,017 (2,175) (976)
Other assets (2,614) (9,335) (2,660)
---------- --------- ---------
TOTAL ADJUSTMENTS 20,634 117,592 38,548
---------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 40,200 144,296 57,944
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale (285,033) (513,546) (296,115)
Purchases of investment securities held-to-maturity (100,700) (4,863) (914)
Purchases of FHLB stock (389) -- --
Maturities and redemptions of investment securities available-for-sale 35,958 21,884 23,580
Maturities and redemptions of investment securities held-to-maturity 74,737 70,725 37,297
Redemption of FHLB stock 2,500 -- --
Proceeds from sales of investment securities available-for-sale 104,402 242,121 103,864
Proceeds from sale of servicing assets -- -- 11,855
Net origination of loans (126,571) (195,599) (173,437)
Capital expenditures (3,664) (4,990) (2,675)
---------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (298,760) (384,268) (296,545)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits 67,828 85,554 73,093
Securities sold under agreements to repurchase 220,267 180,055 168,256
Advances and borrowings from FHLB 1,600 (6,400) (15,000)
Repayments of term notes and other borrowings (20,000) (8,088) (428)
Net proceeds from issuance of preferred stock -- 32,300 --
Proceeds from exercise of stock options 539 842 789
Treasury stock acquired (3,715) (17,202) (4,363)
Dividends paid (10,059) (7,300) (5,195)
---------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 256,460 259,761 217,152
---------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,100) 19,789 (21,449)
Cash and cash equivalents at beginning of year 35,933 16,144 37,593
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33,833 $35,933 $ 16,144
---------- --------- ---------
CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 10,322 $ 8,060 $ 5,603
Money market investments 23,511 27,873 10,541
---------- --------- ---------
$ 33,833 $ 35,933 $ 16,144
---------- --------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES:
Interest paid $ 79,080 $ 62,190 $ 55,806
---------- --------- ---------
Income taxes paid $ 1,050 $ 3,946 $ 2,860
---------- --------- ---------
Investment securities available-for-sale transferred to held-to-maturity $ 263,793 $ 405,526 $ --
---------- --------- ---------
Real estate loans securitized into mortgage-backed securities $ 61,340 $ 67,500 $ 102,300
---------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
F - 23
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------------
The accounting and reporting policies of the Oriental Financial Group Inc.
(the "Group" or, "Oriental") conform with accounting principles generally
accepted in the U.S.A. ("GAAP") and with financial services industry
practices. The following is a description of the Group's most significant
accounting policies:
NATURE OF OPERATIONS
The Group is a bank holding company incorporated under the laws of the
Commonwealth of Puerto Rico. It has two subsidiaries, Oriental Bank and Trust
(the "Bank"), and Oriental Financial Services Corp. (the "Oriental Financial
Services"). Through these subsidiaries, the Group provides a wide range of
financial services such as mortgage, commercial and consumer lending, financial
planning, money management and investment brokerage services, as well as
corporate and individual trust services. Note 17 to the consolidated financial
statements present further information as to the nature of operations of the
Group's business segments.
Both the Group and Bank main offices are located in San Juan, Puerto Rico. The
Bank operates through nineteen branches located throughout the island and is
subject to the supervision, examination and regulation of the 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).
RESTATEMENT
Financial data for 1999 and prior years have been restated, as applicable,
as discussed in Note 2.
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 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 with maturities of three months or less
at the date of acquisition.
INCOME PER COMMON SHARE
Basic earnings per share excludes potential dilution and is calculated by
dividing net income available to common shares (net income reduced by
dividends on preferred stock) by the weighted average number of outstanding
common shares. Diluted earnings per share is similar to the computation of
basic earnings per share except that the weighted average common shares are
increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued. 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 counterparty 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. Also, the Group
sells securities under agreements to repurchase the same or similar
securities. The Group retains 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 a
liability. The securities underlying the financing agreements remain included
in the asset accounts.
F - 24
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 term. These securities
are carried at estimated fair value with realized and unrealized changes in
fair value included in earnings on 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.
INTEREST RATE RISK MANAGEMENT
The Group enters into interest rate exchange agreements in the form of swaps
and caps to manage its interest rate risk exposure. Interest rate swaps and
caps are not recognized in the consolidated statement of financial condition
and are not marked-to-market. The net effect of amounts to be paid or
received under interest rate swaps is recorded as an adjustment to interest
expense in the period in which realized. Premiums on caps are amortized over
the term of the contract. Income or expenses arising from the instruments are
recorded in the category appropriate to the related asset or liability.
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 borrowing, as well as from certain floating rate advances
and notes payable. The floating rate side of the swap and cap agreements is
generally 90 days LIBOR-based, which directly correlates with the repricing
basis of the 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.
In the event that the criteria for hedge accounting (risk reduction,
designation, correlation and effectiveness) are not met or if the hedged item
matures or is sold, the derivative contract would be marked to market and any
gain or loss would be recognized in the period it occurs. In the event of a
termination of a derivative contract designated as a hedge, any gain or loss
would be deferred and amortized over the remaining term of the original
derivative contract or the item hedged.
MORTGAGE BANKING ACTIVITIES AND LOANS HELD-FOR-SALE
From time to time, if conditions so warrant, the Group may sell loans to
other financial institutions or securitize conforming mortgage loans into
GNMA, FNMA and FHLMC certificates. Mortgages included in the resulting GNMA,
FNMA and FHLMC pools are serviced by another institution. These mortgage and
other loans intended for sale are stated at the lower of cost or market and
are reported as loans held-for-sale. When these loans are sold or securitized
into mortgage-backed securities, a gain or loss is recognized to the extent
that the fair value of the securities or cash received exceeds, or 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.
F - 25
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at their outstanding principal balance, less undisbursed
portion, unearned interest and allowance for loan losses. Loan origination fees
and costs are deferred and amortized over the estimated life of the loans as an
adjustment of yield using the interest method. Unearned interest on installment
loans is recognized as income under a method which approximates the interest
method. Interest on loans not made on a discounted basis is credited to income
based on the loan principal outstanding at stated interest rates.
Recognition of interest is discontinued when loans are 90 days or more in
arrears on principal and interest, except for well collaterized real estate
loans where 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.
The Group provides allowances for estimated loan losses based on an evaluation
of the risk characteristics of the loan portfolio, loss experience, economic
conditions and other pertinent factors. Loan losses are charged and recoveries
are credited to the allowance for loan losses.
The Group measures the impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
as a practical expedient, at the observable market price of the loan or the fair
value of the collateral, if the loan is collateral dependent. 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 mortgage and consumer loans and auto loans and leases are considered
homogeneous and are evaluated collectively for impairment.
SALE OF THE MORTGAGE SERVICING PORTFOLIO
In early fiscal 1998, the Group sold its mortgage servicing portfolio to a
local mortgage banking institution. At the date of this transaction, the
underlying principal balance of the mortgages in the servicing portfolio and
related servicing rights amounted to approximately $550,000,000 and
$6,121,000, respectively. The Group recorded a net gain of $3.5 million
(after restatment) on this transaction. The mortgage servicing portfolio had
generated servicing fees of $713,000 before its was sold.
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 2000, 1999 and
1998.
FORECLOSED REAL ESTATE
Foreclosed real estate is initially recorded at the lower of the related loan
balance or its fair value at the date of foreclosure. At the time properties are
acquired in full or partial satisfaction of loans, any excess of the loan
balance over the estimated fair market value of the property is charged against
the allowance for loan losses. The carrying value of these properties
approximates the lower of cost or fair value less estimated cost to sell. Any
excess of the carrying value over the estimated fair market value is charged to
operations.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
The Group follows the specific criteria established by Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment 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 its has incurred. At the same time, it derecognizes financial
assets when control has been surrendered and liabilities when they are
extinguished.
F - 26
INCOME TAXES
The Group follows an asset and liability approach to the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Group's financial statements or tax returns.
Deferred income tax assets and liabilities are determined for differences
between financial statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future. The computation is based
on enacted laws and rates applicable to periods in which the temporary
differences are expected to be recovered or settled. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
STOCK OPTION PLAN
As further discussed in Note 3 to the consolidated financial statements, the
Group has three 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
Oriental's case, in addition to net income, other comprehensive income results
from the changes in the unrealized gains and losses on securities that are
classified as available-for-sale. 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:
ACCOUNTING FOR DERIVATIVE AND SIMILAR FINANCIAL INSTRUMENTS AND FOR HEDGING
ACTIVITIES
This SFAS 133, "Accounting for Derivative and Similar Financial Instruments and
for Hedging Activities" becomes effective for all fiscal quarters beginning
after June 15, 2000. In June 2000, the Board issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities", this
statement amends the accounting and reporting standards of SFAS 133 for certain
derivatives instruments and certain hedging activities.
SFAS 133 establishes accounting and reporting standards for derivative financial
instruments and for hedging activities and requires all derivatives to be
measured at fair value and to be recognized as either assets or liabilities in
the statement of financial position. Under this Standard, derivatives used in
hedging activities are to be designated into one of the following categories:
(a) fair value hedge; (b) cash flow hedge; and (c) foreign currency exposure
hedge. The changes in fair value (that is, gains and losses) will be either
recognized as part of earnings in the period when the change occurs or as a
component of other comprehensive income (outside earnings) depending on their
intended use and resulting designation. Management is in the process of
determining the impact of SFAS 133 on the Group.
TRASNSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
The FASB recently issued SFAS 140 "Accounting for transfers and servicing of
Financial Assets and Extinguishments of liabilities, a replacement of SFAS
125." SFAS 140 revises the standards for accounting for security transactions
and other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS 125's provisions without
reconsideration. SFAS 140 is effective on transactions ocurring after March
31, 2000. Management has not yet determined the impact, if any, of this
statement in the Group's financial statements.
RECLASSIFICATIONS
Certain minor reclassifications have been made to the 1999 and 1998 consolidated
financial statements to conform with the presentation of the 2000 consolidated
financial statements.
F - 27
NOTE 2 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
- --------------------------------------------------------------
In August 1998 an employee of Oriental admitted that he had been involved in
a scheme to embezzle funds belonging to Oriental for the previous three (3)
years. He admitted that he had been manipulating and altering various books
and records of the company and intentionally failing to perform reliable
account analysis and reconciliations. After firing the employee, the company
began an internal investigation assisted by its legal counsel and reported
the activity to appropriate regulatory authorities and its fidelity insurance
carrier.
During the course of the investigation in fiscal 1999, Oriental discovered
that certain other employees had altered various books and records of the
company and failed to perform appropriate reconciliations. It also reported
those items to the regulatory authorities and to the fidelity insurance
carrier. As a result of this discovery, the company broadened the scope of
its internal investigation and, in May 1999, engaged its independent
accountants to assist it.
Based upon the additional information discovered in the investigation,
Oriental filed initial claims with its fidelity insurance carrier for losses
in the aggregate amount of $488,194 during the second quarter of fiscal 2000.
During the third quarter of fiscal 2000, Oriental reported its discovery of
additional alterations of records and deletions of reconciliation items to
regulatory authorities and its fidelity insurance carrier and then filed with
the fidelity insurance carrier claims for recovery of losses relating to
these irregularities in the amount of approximately $9.0 million.
In its interim report on Form 10-Q for the third quarter of 2000, Oriental
reported that it had discovered those $9.5 million ($5.8 million net of tax)
of losses resulting from the dishonest and fraudulent acts and omissions of
several former employees. In addition, it stated that, in consultation with
legal counsel, it had concluded that the losses were covered by Oriental's
fidelity insurance policy and recovery was considered highly probable.
In July 2000, Oriental's fidelity insurance carrier notified Oriental that it
was denying all the the filed claims. This denial triggered Oriental's
decision to restate its financial statements. Thereafter, Oriental continued
its investigation primarily to determine how the losses should be allocated
to prior financial statements. Oriental filed a legal action against the
insurance carrier as explained on Note 15 to the consolidated financial
statements.
In October 2000, Oriental announced that it had completed the investigation
and identified total charges of $12.7 million, net of tax effect. This amount
includes $900,000 (net of tax) loss relating to the contract to sell the
consumer loans and lease portfolio. With the assistance of its independent
accountants, Oriental determined that $9.6 million (net of tax) of the $12.7
million charges was related to events in prior fiscal years and thus would
require restatement of previous financial statements. The remaining $3.1
million ($12.7 million less the $9.6 million restatement, both net of tax)
was charged in fiscal year 2000. A significant portion ($5.8 million, net of
taxes) of the $9.6 million requiring restatement is related to the previously
disclosed losses arising from the former employees' actions, and affects
fiscal year 1998 and prior periods.
The $9.6 million charges are recognized as follows, net of tax:
- - $5.6 million against beginning retained earnings for fiscal 1998.
- - $2.1 million against earnings of fiscal 1998.
- - $1.9 million against earnings of fiscal 1999.
Furthermore, it was determined that additional closing adjustments of $2.1
million (net of tax) were necessary, though not related to the matter
discussed above. Approximately $1.8 million, net of tax, of these additional
items affects fiscal year 2000. Fiscal 1999 earnings were affected by
$224,000, a credit of $53,000 was made to 1998 earnings, and a charge of
$178,000 was made against the beginning retained earnings of fiscal year 1998
(all items net of tax).
Additionally, a $2.2 million favorable tax adjustment related to fiscal year
1999 was also identified.
Therefore, the restatement (net of tax) to previously issued financial
statements will be:
- - $5.8 million against beginning retained earnings for fiscal 1998.
- - $2 million against earnings of fiscal 1998.
- - A favorable $58,000 increase to fiscal year 1999 earnings.
The effect of the restatement on the Consolidated Statement of Income for
fiscal years 1999 and 1998 is as follows:
1999 1998
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- ------------
TOTAL INTEREST INCOME - (1) $113,775 $107,809 $101,307 $96,940
TOTAL INTEREST EXPENSE 64,840 64,775 58,139 58,046
------------- ----------- ------------- -----------
NET INTEREST INCOME 48,935 43,034 43,168 38,894
Provision for loan losses 15,095 14,473 9,545 9,545
------------- ----------- ------------- -----------
NET INTEREST INCOME AFTER
PROVISION LOAN LOSSES 33,840 28,561 33,623 29,349
------------- ----------- ------------- -----------
NON-INTEREST INCOME:
Mortgage banking activities - (1) 5,891 9,124 4,485 8,563
Gain on sale of servicing assets -- -- 2,707 3,503
All other non-interest income 23,308 24,829 15,178 15,178
------------- ----------- ------------- -----------
TOTAL NON-INTEREST INCOME 29,199 33,953 22,370 27,244
------------- ----------- ------------- -----------
NON-INTEREST EXPENSES:
Compensation and benefits 15,057 15,158 15,071 15,071
Other non-interest expenses 2,979 5,515 2,999 6,900
All other non-interest expenses 14,937 14,937 12,663 12,663
------------- ----------- ------------- -----------
TOTAL NON-INTEREST EXPENSE 32,973 35,610 30,733 34,634
------------- ----------- ------------- -----------
INCOME BEFORE INCOME TAXES 30,066 26,904 25,260 21,959
Income Taxes 3,418 200 3,850 2,563
------------- ----------- ------------- -----------
NET INCOME $26,648 $26,704 $21,410 $19,396
------------- ----------- ------------- -----------
INCOME PER COMMON SHARE:
Basic $2.02 $2.02 $1.62 $1.46
Diluted $1.97 $1.93 $1.57 $1.39
(1) - Amounts include reclassification of revenues from interest income to
mortgage banking activities which management believes better reflects the
nature of the revenues. Amounts reclassified in 1999 and 1998 amounted to
$5.0 million and $4.1 million, respectively.
Additionally, the calculation of income per common share for 1999 and 1998
was restated to reflect the inclusion of dilutive potential common shares.
F - 28
NOTE 3 - STOCKHOLDERS' EQUITY:
STOCK SPLITS
Stock splits were retroactively reflected for all periods presented in the
accompanying Consolidated Statement 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. In addition, on August 11, 1997, the Group declared a
five-for-four (25%) stock split on common stock held by registered shareholders
as of September 30, 1997. Approximately 2,012,000 shares of common stock were
distributed on October 15, 1997 as result of this stock split.
TREASURY STOCK
As of June 30, 2000, the Board of Directors (the "Board") had 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, 2000 and 1999 is set forth
below.
(IN THOUSANDS)
-----------------------------------------------------------------------
2000 1999
--------------------------------- ----------------------------------
DOLLAR DOLLAR
SHARES AMOUNT SHARES AMOUNT
------------- ---------------- --------------- --------------
Beginning of period 903.8 $23,401 295.3 $6,199
Common shares repurchased 203.9 3,715 608.5 17,202
------------- ---------------- --------------- --------------
END OF PERIOD 1,107.7 $27,116 903.8 $23,401
============= ================ =============== ==============
STOCK OPTIONS
The Group has three stock options plans, the 1988, 1996 and the 1998
Incentive Stock Option Plans ("The Plans"). These plans offer key officers
and employees an opportunity to purchase shares of the Group's common stock.
The Compensation Committee of the Board of Directors has sole authority and
absolute discretion as to the number 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 or reorganization. Stock options vest upon completion of specified
years of service. In the case of the stock options granted under the 1996 and
1998 Plan, the contracts include provisions that would accelerate the vesting
of the options upon the attainment of certain financial performance goals.
The activity in outstanding options for the year ended June 30, 2000 and
1999, is set forth below:
2000 1999
------------------------------------- ------------------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------------- ------------------ ---------------- --------------
Beginning of period 1,290,815 $ 15.97 1,150,253 $10.34
Options granted 446,834 19.13 396,000 26.17
Options exercised (66,321) 8.37 (204,782) 4.24
Options forfeited (148,571) 16.26 (50,656) 15.72
--------------- ------------------ ---------------- --------------
END OF PERIOD 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, 2000:
OUTSTANDING EXERCISABLE
---------------------------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE CONTRACT EXERCISE
STOCK OPTION PLAN OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
- ----------------------------- ------------------ ---------------- ----------------- -------------------- ---------------
1988 PLAN 236,036 $5.78 1.0 116,304 $5.35
1996 PLAN 949,887 19.35 7.5 35,839 11.10
1998 PLAN 336,834 19.13 9.1 - -
------------------ ------------- --------------- ------------------ ---------------
1,522,757 $17.20 6.90 152,143 $6.71
================== ============= =============== ================== ===============
As described in Note 1, the Group uses the intrinsic value based method to
account for stock options. Under this method, the stock options compensation
recorded in fiscal 2000 amounted $289,000 (1999- $100,000; 1998- $0). The
following table presents 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:
2000 1999 1998
--------------- ---------------- ----------------
COMPENSATION AND BENEFITS:
Reported $15,698 $15,158 $15,071
--------------- ---------------- ----------------
Pro forma $16,534 $15,845 $15,436
--------------- ---------------- ----------------
NET INCOME:
Reported $19,566 $26,704 $19,396
--------------- ---------------- ----------------
Pro forma $18,730 $26,017 $19,031
--------------- ---------------- ----------------
BASIC EARNINGS PER SHARE:
Reported $1.34 $ 2.02 $1.46
---------------- ---------------- ---------------
Pro forma $1.28 $ 1.97 $1.44
--------------- ---------------- ----------------
DILUTED EARNINGS PER SHARE:
Reported $1.31 $1.93 $1.39
---------------- ---------------- ---------------
Pro forma $1.24 $1.88 $1.36
--------------- ---------------- ----------------
The fair value of each option granted in fiscal years 2000, 1999 and 1998 was
estimated using the Black-Scholes option pricing model with the following
assumptions: (1) - The market price of the stock at the date of fiscal 2000,
1999 and 1998 grants was $22.75, $30.38 and $16.99. The weighted average
exercise price of the option was $19.13, $26.17 and $16.99. In the case of
fiscal 1999 and 1998 grants, the price of the options granted equaled the
quoted market price of the stock. (2) - The expected option term is 7 years.
(3) - The expected volatility is 32% for options granted in fiscal 2000 (1999
- -31%, 1998 -30%). (4) - The expected Dividend Yield - 2.64% for options
granted in fiscal 2000 (1999 - 1.98%, 1998 - 3.32%). (5) The risk-free
interest rate is 5.79% for options granted in fiscal 2000 (1999 - 4.93%, 1998
- - 6.12%). (6) - The weighted average fair value of the options granted in
2000 was $8.80 (1999 - $12.04, 1998 - $5.92).
LEGAL SURPLUS
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of
10% of the Bank's net income for the year be transferred to capital surplus
until such surplus equals the greater of 10% of total deposits or paid-in
capital. At June 30, 2000, legal surplus amounted to $10,578,000 (1999 -
$8,673,000). 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 current operating earnings.
F - 29
PREFERRED STOCK
In May 1999, the Group issued 1,340,000 shares of its 7.125% Noncumulative
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 $1.78125 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.
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, 2000, Oriental
meets all capital adequacy requirements to which it is subject.
As of March 31, 2000, the most recent notification from the FDIC, dated August
2000, 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. 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:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- --------------------------- ---------------------------
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- ----------- ----------- ----------- ----------------- ---------
GROUP RATIOS
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%
AS OF JUNE 30, 1999
Tier I Capital ( to Average Assets) $127,986 8.30% $61,710 4.00% $77,138 5.00%
Tier I Risk-Based ( to Risk-Weighted Assets) $127,986 22.95% $22,308 4.00% $33,461 6.00%
Total Capital ( to Risk-Weighted Assets) $134,979 24.21% $44,595 8.00% $55,744 10.00%
BANK RATIOS
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%
AS OF JUNE 30, 1999
Tier I Capital ( to Average Assets) $127,986 8.29% $61,729 4.00% $77,161 5.00%
Tier I Risk-Based ( to Risk-Weighted Assets) $127,986 22.93% $22,330 4.00% $33,495 6.00%
Total Capital ( to Risk-Weighted Assets) $134,986 24.19% $44,640 8.00% $55,800 10.00%
F - 30
NOTE 4 - INVESTMENTS
INVESTMENT SECURITIES:
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, 2000 and
1999, were as follows:
JUNE 30, 2000 ( IN THOUSANDS)
------------------------------------------------------------------------------------------
GROSS GROSS AVERAGE
AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED
COST GAINS LOSSES VALUE YIELD
------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE AND FHLB STOCK
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%
FHLB stock 11,146 - - 11,146 6.27%
----------------- ------------- --------------- --------------- ------------
$303,050 $262 $9,266 $294,046 6.66%
================= ============= =============== =============== ============
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%
================= ============= =============== =============== ============
$1,100,534 $788 $36,425 $1,064,897 6.82%
================= ============= =============== =============== ============
JUNE 30, 1999 ( IN THOUSANDS)
-------------------------------------------------------------------------------------------
GROSS GROSS AVERAGE
AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED
COST GAINS LOSSES VALUE YIELD
-------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE AND FHLB STOCK
US Treasury securities $105,343 $ 130 $ 3,875 $101,598 5.33%
US Government agencies securities 75,820 - 1,321 74,499 6.79%
PR Government securities 20,160 423 11 20,572 8.71%
FNMA and FHLMC certificates 125,584 40 2,653 122,971 6.67%
GNMA certificates 60,128 871 745 60,254 6.93%
----------------- -------------- --------------- ------------- --------------
387,035 1,464 8,605 379,894 6.47%
--------------
FHLB stock 13,257 - - 13,257 6.74%
----------------- -------------- --------------- ------------- --------------
400,292 1,464 8,605 393,151 6.48%
================= ============== =============== ============= ==============
HELD-TO-MATURITY
PR Government securities 3,563 - 33 3,530 7.40%
CMOs 119,497 - 2,365 117,132 6.67%
Other debt securities 4,863 - - 4,863 8.58%
FNMA and FHLMC certificates 200,708 321 4,404 196,625 6.70%
GNMA certificates 179,449 796 3,161 177,084 6.59%
----------------- -------------- --------------- ------------- --------------
508,080 1,117 9,963 499,234 6.68%
================= ============== =============== ============= ==============
$908,372 $2,581 $18,568 $892,385 6.59%
================= ============== =============== ============= ==============
F - 31
The amortized cost and estimated fair value of the Group's investment securities
at June 30, 2000, by contractual maturity, are shown in the next table. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL
-------------------------------- --------------------------------- ---------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
-------------------------------- --------------------------------- ---------------------------------
Within 1 year $ 49 $ 50 $ 9,993 $ 9,536 $ 10,042 $9,586
After 1 to 5 years 3,915 3,860 1,063 1,068 4,978 4,928
After 5 to 10 years 188,852 180,111 20,621 20,599 209,473 200,710
After 10 years 99,088 98,879 765,807 739,648 864,895 838,527
FHLB stock - - - - 11,146 11,146
-------------- ------------- --------------- -------------- ---------------- ----------------
$291,904 $282,900 $797,484 $770,851 $1,100,534 $1,064,897
============== ============= =============== ============== ================ ================
The category of securities held-to-maturity due after ten years includes
$49,826,000 (1999 - $52,610,000), of certain Puerto Rico GNMA serial
certificates with an average expected life of 4 to 6 years.
Proceeds from the sale of investment securities available-for-sale during fiscal
2000 totaled $104,402,000 (1999 - $242,121,000; 1998 - $103,864,000). Gross
realized gains and losses on those sales during fiscal 2000 were $1,249,000 and
$47,000, respectively (1999 -$10,515,000 and $55,000; 1998 - $1,180,000 and
$150,000).
The Government of Puerto Rico was the only issuer, other than the U.S.
Government, of instruments that are payable and secured by the same source of
revenue or taxing authority that exceeded 10% of stockholders' equity at June
30, 2000 and 1999. For the years ended on June 30, 2000 and 1999, the fair value
of these investments represented 15% and 19% of stockholders' equity,
respectively. At June 30, 2000, the amortized cost and fair value of investments
from the Government of Puerto Rico were approximately $17,686,000 (1999 -
$23,723,000) and $17,652,000 (1999 - $24,102,000), respectively. At June 30,
2000, $13,670,000 (1999 -$18,456,000) of these investments was an AAA-rated
Puerto Rico municipal bond collateralized with mortgage-backed securities.
After a thorough evaluation of the Group's investment portfolio, the Group
transferred available-for-sale securities (at fair value) of $263,793,000 (1999
- - $405,526,000) to the held-to-maturity portfolio. The unrealized net holding
loss on these securities at the date of the transfer of $4,858,000 (1999 -
$4,571,000) remained as part of accumulated other comprehensive income within
stockholders' equity and is being amortized over the remaining life of the
securities as an adjustment to yield.
MONEY MARKET INVESTMENTS:
At June 30, the Group's money market investments were comprised of:
( IN THOUSANDS)
-----------------------------------------
2000 1999
------------------ -------------------
Securities purchased under agreements to resell $ - $24,350
Time deposits with other banks 1,350 -
Money market accounts and other short-term investments 22,161 3,523
------------------ -------------------
$23,511 $27,873
================== ===================
At June 30, 1999, the securities purchased under agreements to resell included
in money market investments were collateralized by FNMA certificates with an
estimated market value of $24,836,000. These securities were in the Group's
possession and the counterparty retained effective control over the collateral.
F - 32
TRADING SECURITIES:
A summary of trading securities owned by the Group at June 30, is as follows:
( IN THOUSANDS)
-----------------------------------------
2000 1999
------------------ -------------------
US Treasury securities $42,734 $ 3,527
PR Government securities 13,513 -
Mortgage-backed securities 6,058 11,278
CMO residuals, interest only 2,138 2,502
------------------ -------------------
$64,443 $17,307
================== ===================
At June 30, 2000, the Group's trading portfolio weighted average yield was 7.49%
(1999 - 7.79%).
NOTE 5 - PLEDGED ASSETS:
At June 30, 2000, residential mortgage loans amounting to $254,312,000 (1999
- - $100,509,000), and investments securities totaling $1,062,000,000 (1999 -
$737,448,000) 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 6 - 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 include a diversified number of industries and
activities such as individuals, sole proprietorships, partnerships,
manufacturing, tourism, government, insurance and not-for-profit
organizations, all of which are encompassed within four main categories:
mortgage, commercial, consumer and leasing. Oriental's loan portfolio has a
higher concentration of loans to consumers such as residential mortgage loans
and personal loans. The composition of the Group's loan portfolio at June 30,
was as follows:
( IN THOUSANDS)
----------------------------------------
2000 1999
--------------------- ------------------
LOANS SECURED BY REAL ESTATE:
Residential $331,150 $257,936
Non-residential real estate loans 4,974 6,531
Home equity loans and secured personal loans 40,306 16,278
--------------------- ------------------
376,430 280,745
Less: Deferred loan fees, net (2,103) (1,302)
--------------------- ------------------
374,327 279,443
===================== ==================
OTHER LOANS:
Commercial and auto loans 24,117 10,554
Personal consumer loans and credit lines 19,698 122,213
Financing leases, net of unearned interest 8,785 110,297
--------------------- ------------------
52,600 243,064
===================== ==================
LOANS RECEIVABLE 426,927 522,007
Allowance for loan losses (6,837) (9,002)
-------------------- ------------------
LOANS RECEIVABLE, NET 420,090 513,505
Loans held-for-sale 180,788 55,206
-------------------- ------------------
TOTAL LOANS, NET $600,878 $568,711
==================== ==================
F - 33
At June 30, 2000, residential mortgage loans held-for-sale amounted to
$13,302,000 (1999 - $55,206,000). All mortgage residential loans originated
and sold during fiscal 2000 were sold based on pre-established commitments or
at market values. In fiscal 2000, the Group recognized gains of $5,891,000,
(1999 -$9,124,000; 1998 - $8,563,000) in these sales which are included in
the statement of income as part of mortgage banking activities.
On July 7, 2000, the Group sold its non-delinquent unsecured personal loans
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.
At June 30, 2000, loans on which the accrual of interest has been
discontinued amounted to approximately $16,875,000 (1999 -$19,542,000). The
gross interest income that would have been recorded in fiscal 2000 if
non-accrual loans had performed in accordance with their original terms
amounted to approximately $1,692,000 (1999 - $2,041,000; 1998 - $2,138,000).
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 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 in the market. 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. Such
agencies may require the Group to recognize changes to the allowance based on
their judgment of information available at the time of their examinations.
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 possible 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:
(IN THOUSANDS)
--------------------------------------------------------------
2000 1999 1998
--------------------- -------------------- ------------------
BALANCE AT BEGINNING OF PERIOD $ 9,002 $ 5,658 $ 5,408
Provision for loan losses 8,150 14,473 9,545
Loans charged-off (13,422) (13,499) (11,484)
Recoveries 3,107 2,370 2,189
--------------------- -------------------- ------------------
BALANCE AT END OF PERIOD $ 6,837 $ 9,002 $ 5,658
===================== ==================== ==================
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, 2000 and 1999, the Group determined that no specific impairment reserve
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.
F - 34
NOTE 7 - NON-INTEREST EARNING ASSETS
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization as follows:
USEFUL LIFE (IN THOUSANDS)
---------------------------------------
(YEARS) 2000 1999
----------------- ------------------- ----------------
Land - $1,348 $ 1,348
Buildings and improvements 40 12,150 12,239
Leasehold improvements 5 - 10 3,903 2,921
Furniture and fixtures 3 - 7 5,395 4,222
EDP and other equipment 3 - 7 13,503 12,139
------------------- ----------------
36,299 32,869
Less: Accumulated depreciation and amortization (14,593) (11,060)
------------------- ----------------
$21,706 $21,809
=================== ================
Depreciation and amortization of premises and equipment for the year ended
June 30, 2000 totaled $3,767,000 (1999 - $2,894,000; 1998 - $2,498,000).
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 $4,367,000 from loans
(1999 - $4,096,000) and $9,118,000 (1999 - $11,406,000) from investments.
Other assets at June 30, include the following:
(IN THOUSANDS)
--------------------------------------
2000 1999
---------------- ---------------
Prepaid expenses and other assets $4,844 $5,622
Tax refund claim 7,188 7,057
Deferred tax asset 7,369 4,251
Accounts receivable and insurance claims, net 4,042 2,625
Other repossessed property 518 485
---------------- ---------------
$23,961 $ 20,040
================ ===============
NOTE 8 - DEPOSITS AND RELATED INTEREST:
At June 30, 2000, the weighted average interest rate of the Group's deposits
was 4.75% (1999 - 4.68%) considering non-interest bearing deposits of
$31,568,000 (1999 - $40,133,000). Refer to the Consolidated Statement of
Financial Condition for the composition of deposits at June 30, 2000 and
1999. Interest expense for the last three fiscal years ending June 30, is set
forth below:
(IN THOUSANDS)
-------------------------------------------------------------
2000 1999 1998
-------------------- ----------------- ----------------
NOW accounts and saving deposits $3,059 $ 2,920 $ 2,781
Certificates of deposit and IRA accounts 28,364 25,865 23,187
-------------------- ----------------- ----------------
$31,423 $28,785 $ 25,968
==================== ================= ================
At June 30, 2000 time deposits in denominations of $100,000 or higher
amounted to $258,848,000, (1999 - $242,680,000) including brokered
certificates of deposit of $101,129,000, (1999 - $92,821,000) at a weighted
average rate of 6.61%, (1999 - 5.25%) and public funds certificates of
deposit from various local government agencies, collateralized with
investment securities, of $65,547,000, (1999 - $72,254,000) at a weighted
average rate of 6.22% (1999 - 5.00%).
F - 35
Scheduled maturities of certificates of deposit and IRA accounts at June 30,
2000 are as follow:
(IN THOUSANDS)
-------------------------------------------------------------
BELOW $100,000 OVER $100,000 TOTAL
-------------------- ----------------- ----------------
Within one year:
Three (3) months or less $58,944 $177,771 $236,715
Over 3 months through 1 year 90,711 72,911 163,622
-------------------- ----------------- ----------------
149,655 250,682 400,337
Over 1 through 3 years 78,906 4,259 83,165
Over 3 years 92,229 12,200 104,429
-------------------- ----------------- ----------------
$320,790 $267,141 $587,931
==================== ================= ================
NOTE 9 - BORROWINGS:
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At June 30, 2000, securities underlying agreements to repurchase were
delivered to, and are being held by, the counterparties with whom the
repurchase agreements were transacted. The counterparties have agreed to
resell to the Group the same or similar securities at the maturity of the
agreements. At June 30, 2000, substantially all securities sold under
agreements to repurchase mature within 180 days. The following securities
were sold under agreements to repurchase at June 30:
(IN THOUSANDS)
------------------------------------------------------------------------
2000 1999
------------------------------------ -----------------------------------
REPURCHASE MARKET VALUE REPURCHASE MARKET VALUE
LIABILITY OF COLLATERAL LIABILITY OF COLLATERAL
---------------------------------- ----------------------------------
US Treasury securities $85,695 $85,141 $65,268 $65,181
US Government agencies securities 25,911 27,138 21,337 21,309
GNMA certificates 328,967 331,709 126,864 126,695
FNMA certificates 169,126 174,370 173,315 173,084
FHLMC certificates 108,642 112,862 99,664 99,531
Collateralized mortgage obligations 98,152 102,320 107,752 107,608
CMO residuals, interest only - - 2,026 2,024
--------------- --------------- ---------------- --------------
$816,493 $833,540 $596,226 $595,432
=============== =============== ================ ==============
At June 30, 2000, the weighted average interest rate of the Group's
repurchase agreements was 6.39% (1999 - 4.89%) and included agreements with
interest ranging from 5.75% to 7.15%. The following summarizes significant
data on securities sold under agreements to repurchase for fiscals 2000 and
1999:
(IN THOUSANDS)
--------------------------------------------
2000 1999
-------------------- -----------------
Average daily aggregate balance outstanding $802,556 $510,049
-------------------- -----------------
Maximum amount outstanding at any month-end $816,493 $596,226
-------------------- -----------------
Weighted average interest rate during the year 5.77% 5.08%
-------------------- -----------------
F - 36
ADVANCES AND BORROWINGS FROM THE FEDERAL HOME LOAN BANK
At June 30, advances and borrowings from the Federal Home Loan Bank of New York
(FHLB) consist of the following:
(IN THOUSANDS)
----------------------------
TYPE 2000 1999 MATURITY DATE INTEREST RATE DESCRIPTION
- ------------------ ------------- -------------- ----------------------------- -------------------------------------------------
ADVANCE $5,000 $ - July 2000 Fixed - 6.16%
ADVANCE 10,000 - July 2000 Fixed - 6.19%
ADVANCE 20,000 - August 2000 Fixed - 6.24%
ADVANCE 15,000 - August 2000 Fixed - 6.29%
ADVANCE 15,000 - April 2001 Floating due quarterly - 6.19%
ADVANCE 5,000 - November 2001 Fixed - 7.18%
ADVANCE - 8,400 Demand Floating due daily - 5.98%
ADVANCE - 10,000 September 1999 Fixed - 5.71%
ADVANCE - 10,000 September 1999 Fixed - 5.85%
ADVANCE - 10,000 July 1999 Fixed - 5.07%
ADVANCE - 20,000 October 2002 Fixed - 5.42%
BORROWING - 10,000 September 1999 Fixed - 6.03%
------------- --------------
$70,000 $68,400
============= ==============
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, 2000 and
1999, these advances and borrowings were secured by mortgage loans and
investment securities. Also, at June 30, 2000, the Group has an additional
borrowing capacity with the FHLB of $102 million (1999 - $149 million).
TERM NOTES AND BONDS PAYABLE
At June 30, term notes and bonds payable consist of the following:
(IN THOUSANDS)
-----------------------------
TYPE 2000 1999 MATURITY DATE INTEREST RATE DESCRIPTION
- ----------------- -------------- -------------- ----------------------- -----------------------------------------------------------
TERM NOTE $ - $10,000 December 1999 Floating due quarterly - 4.10% in 1999 (a) (c)
TERM NOTE - 10,000 January 2000 Floating due quarterly - 4.10% in 1999 (a) (c)
TERM NOTE 6,500 6,500 December 2000 Floating due quarterly - 5.75% (1999 - 4.30%) (b) (c)
TERM NOTE 20,000 20,000 March 2001 Floating due quarterly - 5.69% (1999 - 4.48%) (b) (c)
TERM NOTE 10,000 10,000 September 2001 Floating due quarterly - 6.06% (1999 - 4.78%) (b) (c)
TERM NOTE 30,000 30,000 September 2001 Floating due quarterly - 5.82% (1999 - 4.58%) (b) (c)
TERM NOTE 5,000 5,000 December 2001 Floating due quarterly - 5.68% (1999 - 4.28%) (b) (c)
TERM NOTE 15,000 15,000 March 2007 Floating due quarterly - 5.88% (1999 - 4.63%) (b) (c)
-------------- --------------
$86,500 $106,500
============== ==============
(a) - Guaranteed by letters of credit from the FHLB.
(b) - Collateralized with investment securities.
(c) - The interest rate risk exposure on floating notes was hedged through
the interest rate risk management process discussed in Note 9.
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, 2000, the Group's total
available funds under these lines of credit totaled $62,960,000 (1999
- -$53,000,000). At June 30, 2000 and 1999, there was no balance outstanding
under these lines of credit.
F - 37
CONTRACTUAL MATURITIES
At June 30, 2000, the contractual maturities of securities sold under agreements
to repurchase, advances and borrowings from the FHLB, and bond payable and term
notes by fiscal year are as follows:
( IN THOUSANDS)
-----------------------------------------------------------
ADVANCES & TERM NOTES
REPURCHASE BORROWINGS AND BONDS
YEAR ENDING JUNE 30, AGREEMENTS FROM FHLB PAYABLE
------------------- ----------------- ---------------- ------------------
2001 $766,493 $65,000 $26,500
2002 50,000 5,000 45,000
2007 - 15,000
----------------- ---------------- ------------------
$816,493 $70,000 $86,500
================= ================ ==================
NOTE 10 - INTEREST RATE RISK MANAGEMENT
The Group uses interest rate swaps and caps as an interest rate risk hedging
mechanism. Under the swaps, the Group pays a fixed annual cost and receives a
floating ninety-day payment based on LIBOR. Floating rate payments received from
the swap counterparty correspond to the floating rate payments made on the
borrowings or notes thus resulting in a net fixed rate cost to the Group. 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:
(DOLLARS IN THOUSANDS)
---------------------------------------
2000 1999
----------------- -----------------
SWAPS:
Pay fixed swaps notional amount $100,000 $245,000
Weighted average pay rate - fixed 7.07% 5.66%
Weighted average receive rate - floating 6.76% 5.09%
Maturity in months 24 2 to 26
Floating rate as a percent of LIBOR 100% 85 to 100%
CAPS:
Cap agreements notional amount $250,000 $100,000
Cap rate 7.00% 6.50%
Current 90 day LIBOR 6.82% 5.29%
Maturity in months 23 4 to 15
The agreements were entered into to convert short-term borrowings into fixed
rate liabilities for longer periods and provide protection against increases
in interest rates. The amounts potentially subject to credit loss are the net
streams of payments under the agreements and not the notional principal
amounts. The Group controls the credit risk of its interest rate swap
agreements through approvals, limits, monitoring procedures and collateral,
where considered necessary. The Group does not anticipate nonperformance by
the counterparties. All interest rate swap and caps at June 30, 2000 mature
during fiscal year 2002.
As part of its interest rate risk management, during fiscal 2000 the Group
closed certain interest rate swaps and caps agreements with notional value of
approximately $390,000,000. This transaction generated gains of approximately
$1,720,000 which are being amortized as an adjustment to yield over the
remaining original terms of the agreements.
F - 38
The Group offers its customers certificates of deposit 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 percent 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 interest rate swap
agreements with major money center banks to manage its exposure to the stock
market. 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
semiannual fixed interest cost. At June 30, 2000, the notional amount of these
agreements totaled $132,975,000 (1999 - $79,815,000) at a weighted average rate
of 5.84% (1999- 5.81%).
The Group offers its customers certificates of deposit with high interest rates
and therefore uses interest rate swap agreements to lower the cost of these
deposits. Under the terms of the agreements the Group pays a floating rate (90
days LIBOR less a spread) and receives a fixed payment (the cost of the
certificates of deposit). These swaps mature in seven years with an option to
cancel after the third year. This option is at the counterparty's call. The
certificates of deposit are issued with this same option, the Group has the
right to call and consequently to cancel the certificates of deposit. At June
30, 2000, the notional amount of these agreements totaled $40,000,000 (1999 -
$0) at a weighted average rate of 5.82% (1999- 0%). Of this amount, swaps
with notional amount of $16.2 million did not meet the criteria for hedge
accounting. As of June 30, 2000 the fair value of these swaps was ($173,000).
This amount was recorded in income in fiscal year 2000.
At June 30, 2000, the contractual maturities of interest rate swaps and caps by
fiscal year were as follows:
( IN THOUSANDS)
-------------------------------------------------------------------------------
INTEREST EQUITY CERTIFICATES OF
YEAR ENDING JUNE 30, RATE INDEXED DEPOSIT TOTAL
------------------- ---------------- --------------- ------------------ -----------------
2001 $- $6,175 $- $6,175
2002 350,000 13,300 - 363,300
2003 - 21,750 - 21,750
2004 - 40,750 - 40,750
2005 - 51,000 - 51,000
2007 - - 40,000 40,000
---------------- --------------- ------------------ -----------------
$350,000 $132,975 $40,000 $522,975
================ =============== ================== =================
NOTE 11 - 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 2000 the Group contributed 6,519,
(1999 - 4,916; 1998 - 4,186), shares of its common stock with a market value of
approximately $124,269, (1999 - $119,000; 1998 - $153,000) at the time of
contribution. The Group's contribution becomes 100% vested once the employee
attains five years of participation in the plan.
NOTE 12 - 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:
( IN THOUSANDS)
---------------------------------------
2000 1999
---------------- -----------------
Balance at the beginning of period $2,835 $2,675
New loans 215 880
Payments (343) (720)
---------------- -----------------
BALANCE AT THE END OF PERIOD $2,707 $2,835
================ =================
F - 39
NOTE 13 - INCOME TAXES:
Under the Puerto Rico Internal Revenue Code, all companies are treated as
separate taxable entities and are not entitled to file consolidated returns. The
Group is subject to Puerto Rico income tax on all its income. The components of
income tax expense for the years ended June 30, are summarized below:
( IN THOUSANDS)
-----------------------------------------------------------
2000 1999 1998
----------------- ---------------- ------------------
Current income tax expense $1,920 $2,011 $4,558
Deferred income tax benefit (1,812) (1,811) (1,995)
----------------- ---------------- ------------------
PROVISION FOR INCOME TAXES $108 $200 $2,563
================= ================ ==================
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
2000, the Group generated tax-exempt interest income of $71,881,000 (1999 -
$49,458,000; 1998 - $38,971,000). Exempt interest relates mostly to interest
earned on obligations of the United 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:
( DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- ---------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------ ------------ ------------ --------- -------------- ----------
Statutory rate $7,673 39.0% $10,493 39.0% $ 8,564 39.0%
Decrease in rate resulting from:
Exempt interest income, net (8,588) (43.7) (7,867) (29.3) (5,786) (26.3)
Charges disallowed 1,023 5.2 - - - -
Other non-taxable items, net - - (2,426) (9.0) (215) (1.0)
------------ ------------ ------------ --------- -------------- ----------
PROVISION FOR INCOME TAXES $108 0.5% $200 0.7% $ 2,563 11.7%
============ ============ ============ ========= ============== ==========
Deferred income taxes 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:
(IN THOUSANDS)
--------------------------------------
2000 1999
---------------- ------------------
DEFERRED TAX ASSET:
Allowance for loan losses, net $2,666 $3,511
Deferred income 1,424 1,302
Net deferred loan origination fee 780 -
Other temporary differences 1,086 -
Unrealized loss on securities available-for-sale 1,413 107
---------------- ------------------
GROSS DEFERRED TAX ASSET 7,369 4,920
================ ==================
DEFERRED TAX LIABILITY:
Net deferred loan origination costs - (154)
Other temporary differences - (515)
---------------- ------------------
GROSS DEFERRED TAX LIABILITY - (669)
---------------- ------------------
NET DEFERRED TAX ASSET $7,369 $4,251
================ ==================
F - 40
NOTE 14 - COMMITMENTS:
LOAN COMMITMENTS
At June 30, 2000, there was $12,555,000, (1999 - $9,923,000) of unused lines of
credit provided to individual customers and $1,250,000 in commitments to
originate loans (1999 - $10,000,000). 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.
LEASE COMMITMENTS
The Group has entered into various operating lease agreements for branch
facilities and administrative offices. Rent expense for fiscal 2000 amounted to
$1,499,000 (1999 - $1,013,000; 1998 - $847,000). As of June 30, 2000, 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)
---------------------------- ----------------------
2001 $1,047
2002 1,018
2003 740
2004 611
2005 587
Thereafter 1,915
----------------------
$5,918
======================
NOTE 15 - 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
recently completed 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, claims for such losses have been
denied by the Group's fidelity insurance carrier. On August 11, 2000, the
Group filed a lawsuit in the United States District Court for the district of
Puerto Rico against Federal Insurance Company, Inc., a stock insurance
corporation organized under the laws of the state of Indiana, seeking payment
of its $9.5 million insurance claim and the payment of consequential damages
resulting from the denial of the claim.
In addition, the Group and its subsidiaries are defendants in a number of legal
proceedings incidental to its business. The Group is vigorously contesting such
claims. Based upon a review by legal counsel and the development of these
matters to date, management is of the opinion that the ultimate aggregate
liability, if any, resulting from these claims will not have a material adverse
effect on the Group's financial position or the results of operations.
NOTE 16 - 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 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.
F - 41
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:
(IN THOUSANDS)
------------------------------------------------------------------------
2000 1999
--------------------------------- ------------------------------
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
-------------- --------------- -------------- ------------
ASSETS:
Cash and due from banks $11,145 $11,145 $ 8, 060 $ 8, 060
Money market investments 23,511 23,511 27,873 27,873
Trading securities 64,443 64,443 17,307 17,307
Investment securities available-for-sale 282,900 282,900 379,894 379,894
Investment securities held-to-maturity 770,851 797,484 499,234 508,080
Federal Home Loan Bank (FHLB) stock 11,146 11,146 13,257 13,257
Loans, net (including loans held-for-sale) 580,927 601,337 578,717 568,711
Accrued interest receivable 13,485 13,485 15,502 15,502
LIABILITIES:
Deposits 734,376 661,721 671,395
Repurshase agreements 816,493 816,493 596,226 596,226
Advances and borrowings from FHLB 70,000 70,000 68,400 68,400
Term notes and bonds payable 86,500 86,500 106,500 106,500
Accrued expenses and other liabilities 35,691 35,691 14,801 14,801
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate swaps and caps:
Equity index 33,544 - 1,358 -
Interest rate (1,991) - (60) -
The following methods and assumptions were used to estimate the fair values
of significant financial instruments at June 30, 2000 and 1999.
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.
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.
F - 42
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 discounted value
analysis. The values represent the estimated amount the Group would receive or
pay to terminate the contracts or agreements at the reporting date, considering
current interest rates and the credit-worthiness of the counterparties.
NOTE 17 - 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,
interest spread, loan production, fees generated, and increase in market share.
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) and of the Bank's
brokerage subsidiary (Oriental Financial Services). The core operations of this
segment are financial planning, money management and investment brokerage
services, as well as corporate and individual trust services.
The Group's smallest business segment is mortgage banking. It consists of
Oriental Mortgage, whose principal activity is to originate and purchase
mortgage loans for the Group's own portfolio. From time to time, if conditions
so warrant, it may sell loans to other financial institutions or securitize
conforming loans into GNMA, FNMA and FHLMC certificates. Mortgages included in
the resulting GNMA, FNMA, and FHLMC pools are serviced by another institution.
The Group also sells the rights to service mortgage loans for others.
F - 43
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:
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------------------
RETAIL FINANCIAL MORTGAGE
BANKING SERVICES BANKING ELIMINATIONS TOTAL
---------------- ---------------- ---------------- ------------------ --------------------
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 TAXES $11,413 $5,964 $2,297 $ - $19,674
================ ================ ================ ================== ====================
Total assets $1,845,343 $6,016 $2,000 $ (3,125) $1,850,234
---------------- ---------------- ---------------- ------------------ --------------------
FISCAL 1999 (as restated)
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 TAXES $ 19,341 $ 3,410 $ 4,153 $ - $ 26,904
================ ================ ================ ================== ====================
Total assets $ 1,570,675 $ 10,512 $ 2,000 $ (2,434) $ 1,580,753
---------------- ---------------- ---------------- ------------------ --------------------
FISCAL 1998 (as restated)
Net interest income $ 38,223 $ 536 $ 135 $ - $ 38,894
Non-interest income 9,700 9,351 8,417 (224) 27,244
Non-interest expenses 25,043 5,357 4,458 (224) 34,634
Provision for loan losses 9,545 - - - 9,545
---------------- ---------------- ---------------- ------------------ --------------------
NET INCOME BEFORE TAXES $ 13,335 $ 4,530 $4,094 $ - $ 21,959
================ ================ ================ ================== ====================
Total assets $ 1,292,850 $ 8,664 $ - $ (157) $ 1,301,357
---------------- ---------------- ---------------- ------------------ --------------------
NOTE 18 - ORIENTAL FINANCIAL GROUP, INC. ( HOLDING COMPANY ONLY) FINANCIAL
INFORMATION:
The principal source of income for the Group consists of dividends from the
Bank. As a member subject to the regulations of the Federal Reserve Board, the
Group must obtain approval from the Federal Reserve Board for any dividend if
the total of all dividends declared by it in any calendar year would exceed the
total of its consolidated net profits for the year, as defined by the Federal
Reserve Board, combined with its retained net profits for the two preceding
years. The payment of dividends by the Bank to the Group may also be affected by
other regulatory requirements and policies, such as the maintenance of certain
regulatory capital levels.
The following condensed financial information presents the financial position of
the Holding Company only as of June 30, 2000 and 1999 and the results of its
operations and its cash flows for the years ended June 30, 2000 and 1999 and
1998.
F - 44
(as restated)
STATEMENTS OF FINANCIAL POSITION AS JUNE 30, 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 25 $ 35,440
Investment securities available-for-sale, at fair value 16,265 7,827
Investment in Oriental Bank and Trust (OBT), at equity 109,193 98,557
Investment in Oriental Financial Services (OFSC), at equity 4,472 -
Other assets 452 355
---------- ----------
Total assets $ 130,407 $ 142,179
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase $ - $ 7,499
Dividend payable 1,715 1,746
Advances from subsidiaries 10,635 16,579
Accrued expenses and other liabilities 195 57
Stockholders' equity 117,862 116,298
---------- ----------
Total liabilities and stockholders' equity $ 130,407 $ 142,179
---------- ----------
---------- ----------
As Restated
---------------------------
STATEMENTS OF INCOME AND OF COMPREHENSIVE INCOME FOR PERIODS ENDED JUNE 30, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
INCOME:
Interest income $ 796 $ 571 $ 103
Dividends from Bank - 14,680 5,442
Equity in undistributed earnings from banking subsidiary 19,055 12,346 14,195
Equity in undistributed earnings from non-banking subsidiary 472 - -
-------- ------- --------
Total income 20,323 27,597 19,740
-------- ------- --------
EXPENSES:
Interest expenses 115 463 98
Operating expenses 642 430 245
-------- ------- --------
Total expenses 757 893 343
-------- ------- --------
Income before income taxes 19,566 26,704 19,397
Income taxes - - -
-------- ------- --------
Net income 19,566 26,704 19,397
Other comprehensive income, net of taxes (4,781) (17,867) 5,242
-------- ------- --------
Comprehensive income $ 14,785 $ 8,837 $ 24,639
-------- ------- --------
-------- ------- --------
As Restated
---------------------------
STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED JUNE 30, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 19,566 $ 26,704 $ 19,397
-------- ------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in earnings from banking subsidiary (19,055) (12,346) (14,195)
Equity in earnings from non-banking subsidiary (472) - -
Decrease (increase) in other assets (97) 62 124
Increase (decrease) in accrued expenses and liabilities 138 (172) 117
-------- ------- --------
Total adjustments (19,486) (12,456) (13,954)
-------- ------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 80 14,248 5,443
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale (9,326) - (9,438)
Acquisition of non-banking subsidiary (4,000) - -
Redemptions and sales of investment securities available-for-sale 897 1,772 -
-------- ------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (12,429) 1,772 (9,438)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in securities sold under agreements to repurchase (7,499) (1,601) 9,100
Proceeds from exercise of stock options 539 842 789
Net advances from subsidiaries (2,347) 12,157 2,569
Net proceeds from issuance of preferred stock - 32,300 -
Purchases of treasury stock (3,715) (17,202) (4,363)
Dividends paid (10,044) (7,300) (5,195)
-------- ------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (23,066) 19,196 2,900
-------- ------- --------
Increase (decrease) in cash and cash equivalents (35,415) 35,216 (1,095)
Cash and cash equivalents at beginning of period 35,440 224 1,319
-------- ------- --------
Cash and cash equivalents at end of period $ 25 $35,440 $ 224
-------- ------- --------
-------- ------- --------
F - 45