FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED: MARCH 31, 1997 Commission File NUMBER: 001-12647
ORIENTAL FINANCIAL GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PUERTO RICO 66-0538893
______________________ __________________
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
ORIENTAL FINANCIAL GROUP INC
AVE. MUNOZ RIVERA 268
HATO REY TOWER, 5TH FLOOR
HATO REY P.R. 00918
REGISTRANT'S TELEPHONE NUMBER: (809) 766-1986
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 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:
X YES NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Common Stock, $1.00 Par Value 7,938,007
_____________________________ ______________________
TITLE OF CLASS (SHARES OUTSTANDING AS OF
MARCH 31,1997)
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
MARCH 31, 1997 AND JUNE 30, 1996
(IN THOUSANDS)
ASSETS
- ------------------------------------------------------------------------------------
(UNAUDITED)
MARCH 31, JUNE 30,
1997 1996
----------- --------
Cash and due from banks $ 15,552 $ 7,089
----------- --------
MONEY MARKET INVESTMENTS:
Securities purchased under agreements to resell 10,000 7,129
Time deposits with other banks 13,000 7,500
Other short-term investments, at cost 43 2,366
----------- -------
TOTAL MONEY MARKET INVESTMENTS 23,043 16,995
----------- --------
INVESTMENT SECURITIES AND OTHER INVESTMENTS:
Trading securities, at market 20,629 331
Investment securities available for sale, at market 187,087 154,990
Investment securities held to maturity, at cost 193,626 171,008
Federal Home Loan Bank (FHLB) stock 9,804 7,412
----------- --------
TOTAL INVESTMENT SECURITIES AND OTHER INVESTMENTS 411,146 333,741
----------- --------
LOANS:
Loans held for sale 39,900 29,624
Loans receivable 486,352 450,982
----------- --------
TOTAL LOANS 526,253 480,606
Allowance for loan losses (4,813) (4,496)
----------- --------
TOTAL NET LOANS 521,439 476,110
Accrued interest receivable 12,445 10,069
Foreclosed real estate, net 1,144 842
Premises and equipment, net 18,942 17,935
Other assets, net 18,649 14,644
----------- --------
TOTAL ASSETS $1,022,361 $877,424
----------- --------
----------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------
Deposits $ 467,470 $382,557
Securities sold under agreements to repurchase 226,197 242,335
Borrowings under lines of credit - 10,000
Advances and borrowings from Federal Home Loan Bank
of New York 78,100 46,000
Term notes and bonds payable 136,117 89,466
Accrued expenses and other liabilities 28,832 27,163
----------- --------
TOTAL LIABILITIES 936,716 797,521
----------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 5,000,000 shares
authorized; none issued - -
Common stock, $1 par value; 10,000,000 shares
authorized; 7,947,349 issued at
March 31, 1997 and 6,633,349 at June 30,1996 7,947 6,633
Additional paid in capital 28,462 31,234
Legal surplus 3,581 2,498
Retained earnings 46,607 39,005
Treasury stock, at cost, 31,858 shares at
March 31, 1997 (907) -
Unrealized gain (loss) on securities available
for sale, net of taxes (45) 533
----------- --------
TOTAL STOCKHOLDERS' EQUITY 85,645 79,903
----------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,022,361 $877,424
----------- --------
----------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
1
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE AND NINE MONTHS ENDED ON MARCH 31, 1997 AND 1996
(UNAUDITED)
THIRD QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ------------------
1997 1996 1997 1996
--------- --------- ------ ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
INTEREST INCOME:
Loans $ 14,035 $ 12,422 40,387 $ 36,094
Mortgage-backed securities 4,387 3,638 12,478 8,693
Investment securities 2,505 1,477 6,993 5,762
Other interest-earning assets 237 316 781 1,146
--------- --------- ------- ---------
TOTAL INTEREST INCOME 21,164 17,853 60,639 51,695
--------- --------- ------- ---------
INTEREST EXPENSE:
Deposits 5,523 4,448 15,218 12,848
Securities sold under agreements
to repurchase 2,770 2,456 8,273 7,391
Other borrowed funds 3,191 2,604 9,404 7,618
--------- --------- ------- --------
TOTAL INTEREST EXPENSE 11,484 9,508 32,895 27,857
--------- --------- ------- ---------
Net interest income 9,680 8,345 27,744 23,838
PROVISION FOR LOAN LOSSES 1,300 850 3,400 3,550
--------- --------- ------- ---------
Net interest income after
provision for loan losses 8,380 7,495 24,344 20,288
--------- --------- ------- ---------
NON-INTEREST INCOME:
Bank service charges and fees 1,159 873 3,725 2,564
Trust, money management and
brokerage fees 1,809 1,538 4,875 4,150
Mortgage banking activities 1,265 851 2,711 2,321
Gain on sale of investment securities 71 113 384 1,522
Trading account income 9 (42) 12 0
Rent and other operating income 229 154 621 393
--------- --------- ------- ---------
TOTAL NON-INTEREST INCOME 4,542 3,487 12,328 10,950
--------- --------- ------- ---------
NON-INTEREST EXPENSE:
Compensation and benefits 3,782 3,026 10,630 8,980
Occupancy and equipment 1,083 1,040 3,139 2,941
Professional fees 485 311 1,150 880
Advertising and promotion 676 444 1,379 1,137
Insurance 17 79 116 141
Real Estate owned expenses 121 254 670 765
Other 1,192 1,054 3,590 3,071
SAIF one time capitalization assessment - - 1,823 -
--------- --------- ------- ---------
TOTAL NON-INTEREST EXPENSE 7,356 6,208 22,497 17,915
--------- --------- ------- ---------
INCOME BEFORE INCOME TAXES 5,566 4,773 14,175 13,323
Provision for income taxes 961 963 2,321 2,611
--------- --------- ------- ---------
NET INCOME $ 4,605 $ 3,810 $11,854 $ 10,712
--------- --------- ------- ---------
--------- --------- ------- ---------
INCOME PER COMMON SHARE $ 0.56 $ 0.46 $ 1.44 $ 1.28
--------- --------- ------- ---------
--------- --------- ------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
2
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED ON MARCH 31, 1997 AND 1996
(UNAUDITED)
MARCH 31,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
COMMON STOCK:
Balance at beginning of period $ 6,633 $ 5,334
Six for five stock split 1,318 -
Five for four stock split - 1,341
Stock options exercised 78 80
Common stock repurchased and retired (89) -
Directors' qualifying shares 7 -
-------- --------
BALANCE AT END OF PERIOD 7,947 6,755
-------- --------
ADDITIONAL PAID - IN CAPITAL:
Balance at beginning of period 31,234 34,528
Six for five stock split (1,318) -
Five for four stock split - (1,341)
Stock options exercised 164 266
Common stock repurchased and retired (1,618) -
-------- --------
BALANCE AT END OF PERIOD 28,462 33,453
-------- --------
LEGAL SURPLUS:
Balance at beginning of period 2,498 1,211
Transfer from retained earnings 1,083 1,071
-------- --------
BALANCE AT END OF PERIOD 3,581 2,282
-------- --------
RETAINED EARNINGS:
Balance at beginning of period 39,005 28,740
Net income 11,854 10,712
Dividends declared and cash paid on
fractional shares (3,169) (2,356)
Transfer to legal surplus (1,083) (1,071)
-------- --------
BALANCE AT END OF PERIOD 46,607 36,025
-------- --------
TREASURY STOCK:
Balance at beginning of period - -
Treasury stock purchased (907) -
-------- --------
BALANCE AT END OF PERIOD (907) -
-------- --------
UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE FOR SALE, NET OF TAXES:
Balance at beginning of period 533 (108)
Net change in fair value of securities
available for sale, net of taxes (578) 912
-------- --------
BALANCE AT END OF PERIOD (45) 804
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 85,645 $ 79,319
-------- --------
-------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
3
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED ON MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
--------- --------
(IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 11,854 $ 10,712
--------- --------
Adjustments to reconcile net income to net cash
(used in) operating activities:
Amortization of deferred loan origination fees and
costs (2,498) (1,926)
Amortization of premiums and accretion of discounts
mortgage-backed and investment securities 307 323
Depreciation and amortization of premises and equipment 1,629 1,628
Provision for loan losses 3,400 3,550
Gain on sale of available for sale securities (384) (1,522)
Proceeds from sale of securitized loans 90,512 94,514
Mortgage banking activities (2,711) (2,321)
Origination and purchases of loans held for sale (98,078) (117,740)
(Increase) decrease in trading securities (20,298) (2,086)
Increase in accrued interest receivable (2,377) (590)
Increase in other assets (4,005) (1,439)
Increase (decrease) increase in accrued expenses
and liabilities 1,863 (710)
--------- --------
Total adjustments (32,640) (28,319)
--------- --------
NET CASH (USED IN) OPERATING ACTIVITIES (20,786) (17,607)
--------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Net decrease in securities purchased under agreements
to resell (2,871) 9,000
Purchases of investment securities available for sale (140,020) (145,036)
Purchases of investment securities held to maturity (30,544) (4,005)
Purchases of Federal Home Loan Bank stock (2,392) (624)
Net increase in loans (36,256) (36,845)
Capital expenditures (2,638) (2,387)
Maturities of investment securities available for sale 430 -
Sales of investment securities available for sale 108,957 45,977
Maturities of investment securities held to maturity 5,768 51,305
--------- --------
NET CASH USED IN INVESTING ACTIVITIES $ (99,566) $(82,615)
--------- --------
CONTINUED
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
4
ORIENTAL FINANCIAL GRUOP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED ON MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
---------- ----------
(IN THOUSANDS)
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits $ 84,913 $ 54,919
Securities sold under agreements to repurchase (16,138) 18,003
Borrowings under lines of credit (10,000) 2,500
Advances and borrowings from FHLB 32,100 (6,700)
Issuance of term notes 60,000 26,500
Payment of term notes (13,000) -
Principal payments of bonds payable (349) (282)
Proceeds from issuance of directors' qualifying stock 7 -
Proceeds from exercise of stock options 242 346
Repurchase of common stock (1,707) -
Purchase of treasury stock (907) -
Dividends and cash paid on fractional shares (3,169) (2,356)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 131,992 92,930
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,640 (7,292)
Cash and cash equivalents at beginning of period 16,955 27,674
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,595 $ 20,382
---------- ----------
---------- ----------
CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 15,552 $ 9,839
Time deposits with other banks 13,000 8,500
Other short-term investments 43 2,043
---------- ----------
$ 28,595 $ 20,382
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 31,400 $ 23,100
---------- ----------
---------- ----------
Income taxes $ 3,800 $ 2,900
---------- ----------
---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
5
ORIENTAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accounting and reporting policies of Oriental Financial Group (The "Group",
"Oriental") and its subsidiaries conform with generally accepted accounting
principles and with general practices within the banking industry.
The preparation of financial statements with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period and, as such, these statements include amounts based on judgments and
estimates made by Management. Actual results could differ from those estimates.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions for Form 10-Q. Complete information regarding
the financial statements can be found in the notes to the financial statements
for the year ended June 30, 1996 contained in Oriental's annual report.
In the opinion of management, such unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position at March 31, 1997 and June
30, 1996, as well as the results of operations and cash flows for the nine
months ended March 31, 1997 and March 31, 1996. The results of operations for
the nine months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the entire year.
2. NATURE OF OPERATIONS
Oriental Financial Group has been incorporated under the laws of the
Commonwealth of Puerto Rico under the auspices of Oriental Bank and Trust (the
"Bank"), to serve as the bank holding company for the Bank effective January
24,1997. The Group provides a wide variety of financial services through its
subsidiaries. Oriental Bank and Trust, the Group's bank subsidiary, is a full-
service commercial bank with its main office located in San Juan, Puerto Rico
and sixteen branches located throughout Puerto Rico. The Bank offers commercial
and consumer leasing, consumer lending, investment, money management and
brokerage services, corporate and individual trust services and traditional
mortgage lending.
3. INCOME PER COMMON SHARE
Income per common share is calculated by dividing net income by the weighted
average of common shares outstanding and common stock equivalent shares after
giving retroactive effect to common stock dividends and splits. Common stock
equivalents are computed using the Treasury Stock Method. Stock options
outstanding under Oriental's stock option plan for officers and employees are
common stock equivalents and therefore, considered in the computation of
earnings per common share.
On August 26, 1996, Oriental declared a six for five (20%) stock split on common
stock held by registered shareholders as of September 30, 1996. As a result, a
total of 1,308,712 shares of common stock were issued on October 17, 1996. In
addition, on August 14, 1995, Oriental declared a five for four (25%) stock
split of its common stock held by registered shareholders as of September 8,
1995. As a result 1,341,316 shares of common stock were distributed on October
2, 1995. For purposes of the computation of income per common share, the
stock splits were retroactively recognized for the periods presented in the
accompanying consolidated financial statements.
6
The calculation of earnings per common share for the three and nine months ended
March 31, 1996 and 1997 are as follows (in thousands):
THIRD QUARTER ENDED
MARCH 31
---------------------
1997 1996
-------- --------
Net income attributable to common stockholders $ 4,605 $ 3,811
-------- --------
Weighted average common shares and stock equivalents
Average common shares outstanding 7,907 8,074
Common stock equivalents-options 300 287
-------- --------
TOTAL 8,207 8,361
-------- --------
Net income per share $ 0.56 $ 0.46
-------- --------
-------- --------
NINE MONTHS PERIOD ENDED
MARCH 31
------------------------
1997 1996
--------- ---------
Net income attributable to common stockholders $ 11,854 $ 10,712
--------- ---------
Weighted average common shares and stock equivalents
Average common shares outstanding 7,916 8,046
Common stock equivalents-options 306 329
--------- ---------
TOTAL 8,222 8,375
--------- ---------
Net income per share $ 1.44 $ 1.28
--------- ---------
--------- ---------
On October 23, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This statement covers employee compensation plans including all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. The statement defines a
fair value based method of accounting for an employee stock option or similar
equity instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by the Accounting Principle Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." However, entities electing to
remain with the accounting defined in APB No. 25 must make pro forma disclosures
of net income and earnings per share, as if the fair value based method of
accounting defined in SFAS No. 123 had been applied.
Under the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at grant date or other measurement date over the amount an employee must pay to
acquire the stock. SFAS No. 123 is effective for transactions entered into in
fiscal years beginning after December 15, 1995. Management has decided to
remain using the intrinsic value based method of accounting prescribed by APB
NO. 25.
7
4. INVESTMENT SECURITIES
AVAILABLE FOR SALE SECURITIES
Securities classified as "available for sale" are carried at estimated fair
value with net unrealized holding gains or losses, net of estimated income
taxes, excluded from earnings and reported as a separate component of
stockholders' equity. The estimated fair value of investment securities is based
on quoted market prices or dealer quotes. Expected maturities of mortgage-
backed securities may differ from contractual maturities because of prepayments
and other market factors. The amortized cost and estimated fair value of debt
and equity securities available for sale by category, are shown below (in
thousands):
MARCH 31, 1997 JUNE 30, 1996
---------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------- -------- --------- ---------
UNITED STATES GOVERNMENT OBLIGATIONS:
Due within one year $ 2,999 $ 3,003 $ 10,989 $ 11,060
Due from one to five years 61,029 61,002 28,424 28,718
Due from five to ten years 38,452 37,660 30,197 30,479
-------- -------- --------- ---------
102,480 101,665 69,610 70,257
-------- -------- --------- ---------
PUERTO RICO GOVERNMENT OBLIGATIONS:
Due from one to five years 5,235 5,170 5,320 5,190
Due from five to ten years - - 8 8
Due over ten years 30,095 30,324 33,870 34,259
-------- -------- --------- ---------
35,330 35,494 39,198 39,457
-------- -------- --------- ---------
MORTGAGE - BACKED SECURITIES:
Due from one to five years 495 498 520 500
Due from five to ten years 175 178 207 212
Due over ten years 48,667 49,252 44,744 44,564
-------- -------- --------- ---------
49,337 49,928 45,471 45,276
-------- -------- --------- ---------
$187,147 $187,087 $154,279 $154,990
-------- -------- --------- ---------
-------- -------- --------- ---------
Mortgage-backed securities available for sale were comprised of (in thousands):
MARCH 31, 1997 JUNE 30, 1996
---------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------- -----------------------
MORTGAGE - BACKED SECURITIES:
GNMA $ 48,924 $ 49,499 $ 45,019 $ 44,810
FHLMC 359 363 394 400
Mortgage Pass Through Certificates 54 66 58 66
--------- --------- --------- ---------
$ 49,337 $ 49,928 $ 45,471 $ 45,276
--------- --------- --------- ---------
--------- --------- --------- ---------
The Puerto Rico government obligations due over ten years category includes a
AAA rated mortgage-backed Puerto Rico municipal bond of $29,438,773 which
commenced paying down principal on August 1, 1994, and is expected to be fully
paid by 1998.
8
Gross and net unrealized gains and losses from securities available for sale at
March 31, 1997, and June 30, 1996, are summarized below (in thousands):
MARCH 31, 1997 JUNE 30, 1996
-------------- -------------
Gross unrealized gains $ 1,347 $ 1,523
Gross unrealized losses (1,407) (812)
--------- ---------
Net unrealized gain (loss) (60) 711
Deferred income taxes 15 178
--------- ---------
Net unrealized gain (loss) reported in
stockholders' equity $ (45) $ 533
--------- ---------
--------- ---------
The aggregate proceeds from sales of securities during the three and nine months
period ended on March 31, 1997, and gross realized gains and losses on such
sales follows (in thousands):
THREE MONTHS NINE MONTHS
PERIOD PERIOD
------------ -----------
Proceeds from sales $ 26,467 $ 108,957
------------ -----------
------------ -----------
Gross realized gains $ 71 $ 480
Gross realized losses - (96)
------------ -----------
Net realized gains $ 71 $ 384
------------ -----------
------------ -----------
HELD TO MATURITY SECURITIES
Debt securities classified as "held to maturity " are carried at amortized cost.
The estimated fair value of investment securities is based on quoted market
prices or dealer quotes. Expected maturities of mortgage-backed securities may
differ from contractual maturities because of prepayments and other market
factors. The carrying value and estimated fair value of debt securities held to
maturity, by category, are shown below (in thousands):
MARCH 31, 1997 JUNE 30, 1996
-------------------- -----------------
CARRYING FAIR AMORTIZED FAIR
VALUE VALUE VALUE VALUE
-------- -------- --------- --------
UNITED STATES GOVERNMENT OBLIGATIONS:
Due from one to five years $ - $ - $ - $ -
-------- -------- --------- --------
- - - -
-------- -------- --------- --------
PUERTO RICO GOVERNMENT OBLIGATIONS:
Due from one to five years - - - -
Due from five to ten years 3,589 3,608 1,013 1,020
Due over ten years - - 2,583 2,588
--------- -------- --------- --------
3,589 3,608 3,596 3,608
--------- -------- --------- --------
MORTGAGE - BACKED SECURITIES:
Due from one to five years 119 119 355 353
Due from five to ten years 2,441 2,485 621 632
Due over ten years 187,477 186,399 166,436 165,499
--------- -------- --------- --------
190,037 189,003 167,412 166,484
--------- -------- --------- --------
$193,626 $192,611 $171,008 $170,092
--------- -------- --------- --------
--------- -------- --------- --------
9
The mortgage-backed securities due over ten years category includes
approximately $79.7 million of the short end of certain Puerto Rico GNMA Tax
exempt serial certificates with an average expected life of 4 to 6 years.
Mortgage-backed securities held to maturity were comprised of the following (in
thousands):
MARCH 31, 1997 JUNE 30, 1996
--------------------- ---------------------
CARRYING FAIR AMORTIZED FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
MORTGAGE - BACKED SECURITIES:
GNMA $ 149,746 $ 148,659 $ 129,608 $ 128,399
FNMA 29,279 28,879 26,876 26,700
FHLMC 7,546 7,628 6,848 6,915
Mortgage Pass Through Certificates 3,466 3,838 4,080 4,470
---------- ---------- ---------- ----------
$ 190,037 $ 189,003 $ 167,412 $ 166,484
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Gross and net unrealized gains and losses from securities held to maturity at
March 31, 1997, and June 30, 1996, are summarized below (in thousands):
MARCH 31, 1997 JUNE 30, 1996
-------------- -------------
Gross unrealized gains $ 1,110 $ 879
Gross unrealized losses (2,125) (1,795)
------- --------
NET UNREALIZED (LOSS) $(1,015) $ (916)
------- --------
------- --------
TRADING SECURITIES
At March 31, 1997 and June 30, 1996, the amortized cost and fair market value of
securities held for trading were $20,567,000 and $20,629,000 and $322,000 and
$331,000, respectively.
Securities classified as "trading" are carried at estimated fair value with
realized and unrealized changes in market value recorded separately in the
trading profit or loss account in the period in which the changes occur.
Interest revenue arising from trading instruments are included in the statement
of income as part of net interest income rather than in the trading profit or
loss account.
NEW YORK FHLB STOCK
At March 31, 1997, and June 30, 1996 there was an investment in FHLB stock with
a book and estimated market value of $9,804,000 and $7,412,000, respectively.
The fair value of such investment is at its redemption value.
5. LOANS RECEIVABLE
Loans are stated at their outstanding principal balance, less undisbursed
portion, unearned interest and an allowance for loan losses. Oriental includes
in current income loan origination and commitment fees to the extent they
represent reimbursement of underwriting costs incurred in the origination of the
loans. Loan fees and costs in excess of currently recognized amounts are
deferred and amortized over the estimated life of the loans as an adjustment of
the yield using the interest method. Unearned interest on installment loans is
recognized as income under a method which approximates the interest method.
Interest on loans not made on a discounted basis is credited to income based on
the loan principal outstanding at stated interest rates.
10
The composition of the loan portfolio was as follows (in thousands):
MARCH 31, JUNE 30,
1997 1996
---------- -----------
LOANS SECURED BY REAL ESTATE:
Residential $ 208,797 $ 190,903
Commercial 9,643 9,235
Home equity loans 5,252 4,508
Construction, land acquisition and land improvements 3,551 4,024
---------- -----------
Less: undisbursed portion of loans in process (2,148) (1,336)
---------- -----------
LOANS SECURED BY REAL ESTATE, NET 225,095 207,334
---------- -----------
OTHER LOANS:
Commercial loans 9,120 7,177
Auto loans 17,261 28,234
Personal loans 65,478 51,529
Personal lines of credit 4,647 3,481
Cash collateral 2,638 3,685
Financing leases 203,588 188,511
---------- -----------
Less: unearned interest (41,475) (38,969)
---------- -----------
OTHER LOANS, NET 261,257 243,648
---------- -----------
LOANS RECEIVABLE 486,352 450,982
ALLOWANCE FOR LOAN LOSSES (4,813) (4,496)
---------- -----------
TOTAL LOANS, NET 481,539 446,486
LOANS HELD FOR SALE 39,900 29,624
---------- -----------
TOTAL LOANS $ 521,439 $ 476,110
---------- -----------
---------- -----------
The following table reflects the allowance account activity during the three
and nine months ended on March 31, 1997 (in thousands):
THREE MONTHS NINE MONTHS
PERIOD PERIOD
------------ -----------
BALANCE AT BEGINNING OF PERIOD $ 4,653 $ 4,496
Provision for loan losses 1,300 3,400
Loans charged-off (1,581) (3,973)
Recoveries 441 890
------------ -----------
BALANCE AT END OF PERIOD $ 4,813 $ 4,813
------------ -----------
------------ -----------
11
The adequacy of the allowance for loan losses is reviewed on a quarterly basis
as part of the continuing evaluation of Oriental's assets. The evaluation is
based upon a number of factors including among others; historical loan loss
experience, current economic conditions, value of the underlying collateral,
financial condition of the borrowers and other pertinent factors. The allowance
for loan losses covers the total amount of any asset classified as loss, the
potential loss exposure of other classified assets, and a percentage of all
current loans.
The Group's business activity is with consumers located in Puerto Rico.
Oriental's loan transactions include a diversified number of industries and
activities such as individuals, sole proprietorships, partnerships,
manufacturing, tourism, government, insurance and not-for-profit organizations,
all of which are encompassed within four main categories: mortgage, commercial,
consumer and leasing. Oriental's loan portfolio has a higher concentration of
loans to consumers such as auto leases and residential mortgage loans.
MORTGAGE BANKING ACTIVITIES
Loans held for securitization into mortgage-backed securities are carried at the
lower of cost or estimated market value. These loans are reported as loans held
for sale. When mortgage-backed securities are sold, a gain or loss is
recognized to the extent that sales proceeds exceed, or are less than, the
carrying value of the security sold. Generally, mortgage-backed securities are
sold with servicing retained. Ordinarily, the contract servicing fee does not
materially differ from normal servicing fee rates. Loan servicing fees are
recognized as income when earned. During the three and nine months period ended
on March 31, 1997, loans held for securitization totaling $33.7 million and
$97.3 million, respectively, were converted into mortgage-backed securities.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights, an intangible asset, represents the cost of
originating or purchasing the contractual right to service the loans. The cost
of mortgage servicing rights is deferred and amortized in proportion to and over
the period of the estimated servicing income.
Effective April 1, 1995, Oriental adopted SFAS No. 122 - "Accounting for
Mortgage Servicing Rights." Prior to the implementation of this standard,
Oriental treated originated mortgage servicing rights in accordance with SFAS
No. 65. SFAS No. 122 amends SFAS 65 and requires capitalization of servicing
rights generated through loan origination activities prospectively from the date
of implementation, and that impairment of mortgage servicing rights be
recognized, to the extent that their book value exceeds fair value. During the
three and nine months period ended on March 31,1997, originated mortgage
servicing rights totaling $467,000 and $1,157,000, respectively, were
capitalized.
IMPAIRED LOANS
In July 1995, Oriental adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" as amended by SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures". SFAS No. 114, as
amended by SFAS No. 118, requires a creditor to measure 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 method, at the observable
market price of the loan or the fair value of collateral if the loan is
collateral dependent. This statement is applicable to all loans, except large
groups of smaller balance homogeneous loans that are collectively evaluated for
impairment, leases, and loans that are evaluated at fair value or at the lower
of cost or fair value.
Oriental applies SFAS 114 to all commercial loans and leases over $250,000. The
portfolios of mortgage and consumer loans and auto loans and leases are
considered homogenous and are evaluated collectively for impairment.
12
The balance of impaired commercial loans and leases at March 31, 1997 and their
average for the quarter is not significant. Since Oriental's existing practices
for the evaluation of impaired loans are not significantly different from the
requirements of SFAS No. 114, no impact resulted on Oriental's operations. In
addition, the Group continues with the existing practices for income recognition
as permitted by SFAS No. 118.
6. REGULATORY CAPITAL REQUIREMENTS
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 March 31, 1997, Oriental
meets all capital adequacy requirements to which it is subject and exceeds
all of the requirements to be considered a well capitalized institution under
the applicable regulations.
The Group's actual capital amounts and ratios and the minimum required amounts
and ratios are presented in the table below (in thousands):
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ------ --------- ----- --------- ------
AS OF MARCH 31, 1997
Total Capital $ 86,842 18.81% $ 36,936 8.0% $ 46,170 10.0%
Tier I Based $ 82,029 17.77% $ 18,468 4.0% $ 27,702 6.0%
Tier I Capital $ 82,029 8.23% $ 39,858 4.0% $ 49,823 5.0%
AS OF JUNE 30, 1996
Total Capital $ 80,658 19.14% $ 33,710 8.0% $ 42,138 10.0%
Tier I Based $ 76,162 18.07% $ 16,855 4.0% $ 25,283 6.0%
Tier I Capital $ 76,162 8.71% $ 34,969 4.0% $ 43,711 5.0%
The Group is a U.S. Department of Housing and Urban Development (HUD) approved
and supervised mortgagor and must maintain an excess of current assets over
current liabilities and a minimum net worth, as defined by HUD, GNMA, FNMA and
FHLMC. The Group is also required to maintain fidelity bond and errors and
omissions insurance coverage's based on the balance of its servicing portfolio.
13
7. TERM NOTES AND BONDS PAYABLE
At March 31, 1997 and June 30, 1996, Term Notes and Bonds Payable consist of:
TYPE MAR. 31, JUNE 30, MATURITY DATE INTEREST RATE DESCRIPTION
- ----------------------------------------------------------------------------
TERM NOTE $ -- $ 8,000 SEPTEMBER 1996 Fixed 7.23% (a)
TERM NOTE -- 5,000 OCTOBER 1996 Fixed 7.30% (a)
TERM NOTE 5,500 5,500 APRIL 1997 Fixed 6.50% (a)
TERM NOTE 5,500 5,500 MAY 1997 Fixed 6.50% (a)
TERM NOTE 8,000 8,000 OCTOBER 1998 Fixed 4.81% (b)
TERM NOTE 10,000 10,000 NOVEMBER 1999 Rate at 3/31/97: 4.57% (A) (C)
TERM NOTE 10,000 10,000 DECEMBER 1999 Rate at 3/31/97: 4.41% (A) (C)
TERM NOTE 10,000 10,000 JANUARY 2000 Rate at 3/31/97: 4.41% (A) (C)
TERM NOTE 6,500 6,500 DECEMBER 2000 Rate at 3/31/97: 4.68% (B) (C)
TERM NOTE 20,000 20,000 MARCH 2001 Rate at 3/31/97: 5.00% (B) (C)
TERM NOTE 10,000 -- SEPTEMBER 2001 Rate at 3/31/97: 5.39% (B) (C)
TERM NOTE 30,000 -- SEPTEMBER 2001 Rate at 3/31/97: 5.11% (B) (C)
TERM NOTE 5,000 -- DECEMBER 2001 Rate at 3/31/97: 4.62% (B) (C)
TERM NOTE 15,000 -- MARCH 2007 Rate at 3/31/97: 5.17% (B) (C)
BOND 617 966 APRIL 2008 Fixed rate of 8.38% collateralized
----------------- by FHLMC certificates.
$136,117 $ 89,466
-----------------
-----------------
(A) Guaranteed by letters of credit from the FLHB of NY.
(B) Collateralized with U.S. Treasury Notes and/or mortgage-backed
securities.
(C) The floating rate notes are considered generally hedged through the
overall interest rate risk management process discussed in note 8.
8. INTEREST RATE RISK MANAGEMENT
INTEREST RATE SWAP AGREEMENTS
The following table indicates the types of swaps used and their terms (in
thousands):
MARCH 31, 1997
Pay fixed swaps - notional amount $340,000
Weighted average pay rate - fixed 5.69%
Weighted average receive rate - floating 5.15%
Maturity (in months) 4 to 38
Floating rate - percent of LIBOR 84 to 100%
The agreements were signed to convert short term borrowings into fixed rate
liabilities for longer periods of time and provide protection against increases
in interest rates. The amounts potentially subject to credit loss are the net
streams of payments under the agreements and not the notional principal amounts
used to express the volume of the swaps. The Group controls the credit risk of
its interest rate swap agreements through approvals, limits, monitoring
procedures and collateral, where considered necessary. The Group does not
anticipate nonperformance by the counterparties.
14
Interest rate swap maturities by fiscal year are as follows (in thousands):
YEARS ENDING
JUNE 30,
------------
1997 $ 25,000
1998 180,000
1999 125,000
2000 10,000
--------
$340,000
--------
--------
The following table summarizes the changes in notional amounts of swaps
outstanding during the nine months period ended on March 31, 1997 (in
thousands):
Balance at June 30, 1996 $ 300,000
New swaps 150,000
Maturities (110,000)
----------
Balance at March 31, 1997 $ 340,000
----------
----------
INTEREST RATE PROTECTION AGREEMENTS (CAPS)
The Group also uses interest rate protection agreements (Caps) to limit its
exposure to rising interest rates. Under these agreements, Oriental pays an up
front premium or fee for the right to receive cash flow payments in excess of
the predetermined cap rate; thus, effectively capping its interest rate cost for
the duration of the agreement.
The following table indicates the agreements outstanding (in thousands):
March 31, 1997
--------------
Cap agreements - notional amount $50,000
Cap rate 6% to 7%
Current 90 day LIBOR 5.75%
Maturity (in months) 2 to 23
S&P INTEREST RATE SWAP
The Group has entered into interest rate swap/hedge agreements with a notional
amount of $17,282,100 with major money center banks to manage the Investors CD
and IRA exposure to the stock market. Under the terms of the agreements,
Oriental will receive the average increase of the month-end value of the
Standard and Poor's index in exchange for a semiannual fixed interest cost.
Thus, the Group has exchanged the variable interest payment for a known fixed
rate semiannual interest payment.
9. RECLASSIFICATIONS
Certain reclassifications have been made to the March 31, 1996 and June 30,
1996, financial statements to conform with the current period financial
statements.
15
ORIENTAL FINANCIAL GROUP, INC.
SELECTED FINANCIAL DATA
AS OF MARCH 31,1997
CONDENSED EARNINGS REPORT (IN THOUSANDS):
THIRD QUARTER ENDED NINE MONTH PERIOD ENDED
MARCH 31, MARCH 31,
------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Interest income . . . . . . . . . . . . . . . . . . . . . . $ 21,164 $ 17,853 $ 60,639 $ 51,695
Interest expense . . . . . . . . . . . . . . . . . . . . . . 11,484 9,508 32,895 27,857
--------- --------- --------- ---------
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . 9,680 8,345 27,744 23,838
--------- --------- --------- ---------
Provision for loan losses . . . . . . . . . . . . . . . . . 1,300 850 3,400 2,250
Additional loan loss provision . . . . . . . . . . . . . . . . - - - 1,300
--------- --------- --------- ---------
TOTAL LOAN LOSS PROVISION . . . . . . . . . . . . . . . . . 1,300 850 3,400 3,550
--------- --------- --------- ---------
NET INTEREST INCOME AFTER TOTAL PROVISION FOR LOAN LOSSES . 8,380 7,495 24,344 20,288
--------- --------- --------- ---------
Service charges, fees and other income . . . . . . . . . . . . 3,197 2,564 9,222 7,106
Mortgage banking activities. . . . . . . . . . . . . . . . . . 1,265 851 2,711 2,321
Net gain on sale of investment securities. . . . . . . . . . . 80 71 396 1,523
Non - interest expenses . . . . . . . . . . . . . . . . . . 7,356 6,208 20,675 17,915
Special SAIF one-time capitalization assessment. . . . . . . . - - 1,823 -
--------- --------- --------- ---------
NET INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . 5,566 4,773 14,175 13,323
Provision for income taxes . . . . . . . . . . . . . . . . . . 961 963 2,321 2,611
--------- --------- --------- ----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 4,605 3,810 11,854 10,712
--------- --------- --------- ----------
SAIF adjustment, net of income tax effect . . . . . . . . . - - 1,333 -
--------- --------- --------- ----------
NET INCOME EXCLUDING SAIF . . . . . . . . . . . . . . . . . $ 4,605 $ 3,810 $ 13,187 $ 10,712
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME PER SHARE INCLUDING SAIF. . . . . . . . . . . . . . $ 0.56 $ 0.46 $ 1.44 $ 1.28
Per share effect of net SAIF adjustment. . . . . . . . . . . . - - 0.16 -
--------- --------- --------- ---------
PER SHARE EXCUDING SAIF ADJUSTMENT ( OPERATING PROFITS). . . . $ 0.56 $ 0.46 $ 1.60 $ 1.28
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares and stock equivalents . . . . . 8,207,226 8,360,784 8,221,622 8,376,479
--------- --------- --------- ---------
--------- --------- --------- ---------
PER SHARE FIGURES CONSIST OF COMMON SHARES OUTSTANDING AND STOCK OPTION EQUIVALENTS WHICH WERE RETROACTIVELY ADJUSTED FOR THE
EFFECT OF THE SIX TO FIVE (20%) STOCK SPLIT DISTRIBUTED ON OCTOBER 17, 1996.
FINANCIAL HIGHLIGHTS (IN THOUSANDS):
Total bank assets . . . . . . . . . . . . . . . . $ 1,022,000 $ 849,000
------------ ----------
Trust assets managed. . . . . . . . . . . . . . . 970,000 841,000
------------ ----------
Assets gathered by broker and dealer. . . . . . . 430,000 267,000
------------ ----------
Loans serviced for third parties. . . . . . . . . $ 473,000 $ 363,000
------------ ----------
Investment and trading securities . . . . . . . . $ 434,000 $ 330,000
------------ ----------
Loans receivable ,net . . . . . . . . . . . . . . 521,000 470,000
------------ ----------
Deposits. . . . . . . . . . . . . . . . . . . . . 468,000 368,000
------------ ----------
Capital . . . . . . . . . . . . . . . . . . . . . $ 85,600 $ 79,300
------------ ----------
SELECTED FINANCIAL RATIOS (IN PERCENT):
Return on average assets. . . . . . . . . . . . . 1.85% 1.81%
Return on average capital . . . . . . . . . . . . 21.10% 18.96%
Efficiency ratio. . . . . . . . . . . . . . . . . 52.59% 53.44%
Expense ratio . . . . . . . . . . . . . . . . . . 1.29% 1.47%
Average yield in interest - earning assets. . . . 9.23% 9.45%
Cost of interest - bearing liabilities. . . . . . 5.31% 5.43%
Interest rate spread. . . . . . . . . . . . . . . 3.92% 4.02%
Net interest margin . . . . . . . . . . . . . . . 4.23% 4.38%
16
ORIENTAL FINANCIAL GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW SUMMARY
Oriental realized a substantial increase of 21% in net operating profits for the
third quarter ended on March 31, 1997. Net operating profits amounted to
$4,605,032 compared to $3,810,571 reported for the same quarter last year. The
Group's net operating profits for the nine month period ended March 31, 1997
before the one-time industry wide SAIF assessment of $1.3 million (net of tax)
increased 23% to $13,186,558 compared to $10,712,326 reported for the same
period last year. Annualized return on assets and return on equity for the
first nine months of the fiscal year were 1.85% and 21.10% respectively,
compared to 1.81% and 18.96% for the first nine months last year.
On a per share basis Oriental Financial Group reported $.56 per share for the
third quarter of fiscal 1997 compared to $.46 per share reported for the same
period last year, an increase of 22%. The operating income per share for the
nine month period ended March 31, 1997 increased to $1.60 versus $1.28 reported
for the same period last year, an increase of 25%. (All per share figures have
been retroactively adjusted for the six for five stock split distributed on
October 17, 1996).
Total assets increased by 20% at March 31, 1997 amounting to $1.02 billion,
up from $848.5 million at March 31, 1996. Total assets under management by
the Trust department increased by 15% to $970 million from $841 million,
mortgage loans serviced to third parties increased 30% to $473 million from
$363 million, and assets gathered by Oriental's broker dealer subsidiary
increased by 61% to $430 million from $267 million. Total financial assets
owned or managed increased 26% to $2.9 billion from $2.3 billion at March 31,
1996.
Stockholders' equity at March 31, 1997 was $85.6 million compared to $79.3
million at March 31, 1996. The Group continues to be a "well capitalized"
institution in conformity with regulatory standards. Total risk based and
leverage capital ratios as of March 31, 1997 were 18.81% and 8.23%,
respectively which are well above the minimum capital ratios required by
regulatory agencies. During the quarter, Oriental repurchased 41,200 shares
of common stock under its approved repurchase program.
Net interest before provision for loan losses increased 16% to $9.7 million
for the third quarter of fiscal year 1997 compared to $8.4 million reported
during the same period last year. The nine month period reflects an increase
of 16% in net interest income which amounted to $27.7 million for the current
fiscal year, compared to $23.8 million for the same period last fiscal year.
The increase in net interest income resulted from the growth in the loan
portfolio and other interest earning assets. Average interest earning assets
increased 20% during the first nine months of fiscal year 1997 amounting to
$875.4 million, compared to $728.2 million last year.
Non-interest income, excluding gain on sales of securities, increased 32% to
$4.5 million for the quarter ended March 31, 1997, compared to $3.4 million for
the quarter ended March 31, 1996. Service charges, fees and other income
increased 23% to $3.2 million for the quarter, compared to $2.6 million reported
for the same quarter last year. Mortgage banking activities increased 49% to
$1.3 million compared to $851,000 reported last year. Net gain on sale of
securities amounted to $80,000, compared to $71,000 reported last year.
17
For the nine month period, service charges, fees and other income increased 30%
to $9.2 million, compared to $7.1 million reported for the same period last
fiscal year. Income from mortgage banking activities amounted to $2.7 million
compared to $2.3 million realized last year. Net gains on sale of investment
securities amounted to $400,000 compared to $1.5 million realized last year.
Total non-interest expense increased 19% to $7.4 million during the third
quarter ending on March 31, 1997 compared to $6.2 million incurred last year.
For the nine month period these expenses increased 16% to $20.7 million
excluding the one-time SAIF assessment, compared to $17.9 million incurred
during the same period last year. The increase in expenses results from on-
going efforts to improve Oriental's managerial and operational support as well
as the expenses related to the Group's expanded branches and services.
Oriental's efficiency ratio maintained its continued improvement, reaching
52.59% at the end of the quarter, down from 53.44% a year ago.
The provision for loan losses for the third quarter of fiscal 1997 amounted to
$1.3 million versus $850,000 for the same quarter last year. For the nine month
period ended March 31, 1997 the total provision for loan losses amounted to $3.4
million compared to $3.6 million reported last year.
Management is pleased with the improved earnings performance during the first
nine months of fiscal 1997 compared to the earnings level of the previous year.
The results strongly indicate that the decisive steps undertaken to improve
credit quality, increase fee income, generate higher loan volumes and contain
operating costs are working. Management will continue to push these initiatives
in the final quarter of 1997 and beyond.
18
RESULT OF OPERATIONS
As a diversified financial services provider, Oriental'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 provided. Net interest income is affected by the difference
between rates of interest earned on the Group's interest-earning assets and
rates paid on its interest-bearing liabilities (interest rate spread) and the
relative amounts of its interest-earning assets and interest-bearing liabilities
(interest rate margin). Non-interest income is affected by the level of trust
assets under management, transactions generated by gathering of financial assets
by the broker dealer subsidiary, the level of mortgage banking activities, and
fees generated from bank accounts.
NET INTEREST INCOME
Net interest income for the third quarter ended on March 31, 1997 was up by $1.3
million or 16% to $9.7 million from $8.4 million posted in the same period of
the earlier fiscal year. For the nine months period ended net interest income
was up by $3.9 million or 16% to $27.7 million from $23.8 million in the prior
fiscal year. The improvement in net interest income during the periods analyzed
above was the result of an increase of $1.0 million and $3.7 million,
respectively, due to a higher volume of net interest earning assets enhanced by
a favorable effect in rate of $303,000 and $196,000, respectively, due to a
lower average cost of funds.
The interest rate spread and net interest margin fell to 3.84% and 4.14%,
respectively, for the third quarter of 1997 as compared to 3.96% and 4.33%
respectively, for the third quarter of 1996. The interest rate spread and net
interest margin decreased to 3.92% and 4.23%, respectively, for the nine months
ended on March 31, 1997 as compared to 4.02% and 4.38% attained during the same
period of the preceding fiscal year. The interest-earning assets to interest-
bearing liabilities ratio for the third quarter ended on March 31, 1997 amounted
to 105.99% versus 107.52%. Total average interest earning assets exceeded total
average interest bearing liabilities by $52.1 million. For the nine month
periods ended the ratio amounted to 106.17% versus 107.68% and total average
interest earning assets exceeded total average interest bearing liabilities by
$50.9 million.
The following table sets forth a detailed analysis of net interest income. Part
one presents the dollar amount of and average rates on Oriental's interest-
earning assets and liabilities, the ratio of net interest-earning assets over
interest-bearing liabilities, the average interest rate spread and the net yield
on average interest-earning assets. Part two describes the respective extent to
which changes in interest rates and changes in volume of interest-related assets
and liabilities have affected the Oriental's interest income and interest
expense during the periods indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume (changes in volume multiplied by old
rates) and (2) changes in rate (changes in rate multiplied by old volume).
Rate-volume variances (changes in rates multiplied by the changes in volume)
have been proportionally allocated to the changes in volume and changes in rate
based upon their respective percentage of the combined total.
19
THIRD QUARTER ENDED THIRD QUARTER ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
AVERAGE AVERAGE AVERAGE AVERAGE
INTEREST BALANCE RATE INTEREST BALANCE RATE
--------- ---------- ------- -------- ---------- -------
INTEREST - EARNING ASSETS:
Real estate loans. . . . . . . . . . . . $ 6,325 $ 255,664 9.90% $ 5,532 $ 227,127 9.74%
Consumer loans . . . . . . . . . . . . . 2,608 84,267 12.55% 2,405 78,303 12.32%
Commercial loans . . . . . . . . . . . . 292 9,999 11.67% 194 7,630 10.19%
Financing leases . . . . . . . . . . . . 4,810 161,811 11.89% 4,290 149,045 11.51%
--------- ---------- ------- -------- ---------- -------
TOTAL LOANS. . . . . . . . . . . . . . . 14,035 511,741 11.00% 12,422 462,105 10.76%
--------- ---------- ------- -------- ---------- -------
Mortgage-backed securities . . . . . . . 4,387 249,312 7.04% 3,638 199,253 7.30%
Investment securities. . . . . . . . . . 2,505 139,906 7.16% 1,477 82,769 7.13%
Other interest - earning assets. . . . . 237 22,161 4.29% 316 25,008 5.07%
--------- ---------- ------- -------- ---------- -------
TOTAL INVESTMENTS. . . . . . . . . . . . 7,129 411,379 6.93% 5,431 307,030 7.07%
--------- ---------- ------- -------- ---------- -------
TOTAL INTEREST - EARNING ASSETS. . . . . $ 21,164 $ 923,120 9.19% 17,853 $ 769,135 9.29%
--------- ---------- ------- -------- ---------- -------
INTEREST - BEARING LIABILITIES:
Deposits . . . . . . . . . . . . . . . . $ 5,523 $ 459,132 4.88% $ 4,448 $ 359,889 4.96%
Repurchase agreements. . . . . . . . . . 2,770 216,523 5.19% 2,456 210,650 4.68%
Lines of credit. . . . . . . . . . . . . 42 1,505 11.07% 186 9,523 7.75%
FHLB advances. . . . . . . . . . . . . . 439 31,617 5.63% 510 35,352 5.78%
FHLB borrowings. . . . . . . . . . . . . 394 26,000 6.15% 400 26,000 6.17%
Bonds payable. . . . . . . . . . . . . . 15 669 8.74% 25 1,147 8.71%
Term notes . . . . . . . . . . . . . . . 1,743 135,500 5.22% 1,036 72,801 5.71%
Interest rate risk management. . . . . . 558 YIELD AJE. 0.55% 447 YIELD AJE. 0.50%
--------- ---------- ------- --------- ---------- -------
TOTAL INTEREST - BEARING LIABILITIES . . $ 11,484 $ 870,947 5.34% $ 9,508 $ 715,361 5.33%
--------- ---------- ------- --------- ---------- -------
NET INTEREST -EARNING ASSETS . . . . . . $ 9,680 $ 52,173 $ 8,345 $ 53,774
--------- ---------- --------- ----------
--------- ---------- --------- ----------
INTEREST RATE SPREAD . . . . . . . . . . 3.84% 3.96%
-------- -------
-------- -------
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS . . . . . . 4.14% 4.33%
-------- -------
-------- -------
INTEREST -EARNING ASSETS TO INTEREST-BEARING
LIABILITIES RATIO. . . . . . . . . . . . . . . . . . 105.99% 107.52%
-------- --------
-------- --------
1997 COMPARED TO 1996
---------------------
INCREASE / (DECREASE) DUE TO:
VOLUME RATE TOTAL
-------- --------- -----
INTEREST - EARNING ASSETS:
Real estate loans. . . . . . . . . . . . . . . $ 404 $ 389 $ 792
Consumer loans . . . . . . . . . . . . . . . . 7 196 203
Commercial loans . . . . . . . . . . . . . . . (50) 148 97
Financing leases . . . . . . . . . . . . . . . (92) 612 521
-------- --------- -----
TOTAL LOANS. . . . . . . . . . . . . . . . . . 268 1,345 1,613
-------- --------- -----
Mortgage-backed securities . . . . . . . . . . 1,402 (653) 749
Investment securities. . . . . . . . . . . . . 981 46 1,028
Other interest - earning assets. . . . . . . . 94 (173) (79)
-------- --------- -----
TOTAL INVESTMENTS. . . . . . . . . . . . . . . 2,477 (779) 1,698
-------- --------- -----
TOTAL INTEREST - EARNING ASSETS. . . . . . . . $ 2,745 $ 566 $ 3,311
-------- --------- -----
INTEREST - BEARING LIABILITIES:
Deposits . . . . . . . . . . . . . . . . . . . $ 1,436 $ (361) $ 1,075
Repurchase agreements. . . . . . . . . . . . . (794) 1,108 314
Lines of credit. . . . . . . . . . . . . . . . (195) 50 (145)
FHLB advances. . . . . . . . . . . . . . . . . (21) (50) (71)
FHLB borrowings. . . . . . . . . . . . . . . . (1) (4) (5)
Bonds payable. . . . . . . . . . . . . . . . . (10) 0 (10)
Term notes . . . . . . . . . . . . . . . . . . 1,372 (665) 707
Interest Rate Risk Management. . . . . . . . . (74) 185 111
-------- -------- -------
TOTAL INTEREST - BEARING LIABILITIES . . . . . $ 1,713 $ 263 $ 1,976
-------- -------- -------
NET INTEREST INCOME . . . . . . . . . . . . . $ 1,032 $ 303 $ 1,335
-------- -------- -------
-------- -------- -------
20
NINE MONTHS PERIOD ENDED NINE MONTHS PERIOD ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
AVERAGE AVERAGE AVERAGE AVERAGE
INTEREST BALANCE RATE INTEREST BALANCE RATE
--------- ---------- ------- -------- ---------- -------
INTEREST - EARNING ASSETS: . . . . . . .
Real estate loans . . . . . . . . . . $ 18,145 $ 244,764 9.88% $ 15,282 209,081 9.75%
Consumer loans. . . . . . . . . . . . 7,663 82,065 12.44% 6,649 71,383 12.36%
Commercial loans. . . . . . . . . . . 711 8,648 10.96% 713 8,860 10.73%
Financing leases. . . . . . . . . . . 13,868 155,439 11.90% 13,450 148,369 12.09%
--------- ---------- ------- -------- ---------- -------
TOTAL LOANS . . . . . . . . . . . . . 40,387 490,916 10.96% 36,094 437,694 10.98%
--------- ---------- ------- -------- ---------- -------
Mortgage-backed securities. . . . . . 12,478 233,270 7.13% 8,693 156,102 7.42%
Investment securities . . . . . . . . 6,993 129,082 7.22% 5,762 107,062 7.17%
Other interest - earning assets . . . 781 22,135 4.63% 1,146 27,386 5.50%
--------- ---------- ------- -------- ---------- -------
TOTAL INVESTMENTS . . . . . . . . . . 20,252 384,487 7.02% 15,601 290,550 7.15%
--------- ---------- ------- -------- ---------- -------
TOTAL INTEREST - EARNING ASSETS . . . $ 60,639 $ 875,403 9.23% 51,695 $ 728,244 9.45%
--------- ---------- ------- -------- ---------- -------
INTEREST - BEARING LIABILITIES:. . . . .
Deposits. . . . . . . . . . . . . . . $ 15,218 $ 416,416 4.87% $ 12,848 $ 339,445 5.02%
Repurchase agreements . . . . . . . . 8,273 224,907 4.90% 7,391 199,475 4.92%
Lines of credit . . . . . . . . . . . 277 4,681 7.76% 580 9,577 7.93%
FHLB advances . . . . . . . . . . . . 1,305 31,126 5.59% 1,963 41,716 6.25%
FHLB borrowings . . . . . . . . . . . 1,202 26,000 6.16% 1,067 22,726 6.23%
Bonds payable . . . . . . . . . . . . 50 765 8.74% 81 1,250 8.69%
Term notes. . . . . . . . . . . . . . 4,755 120,611 5.25% 2,953 66,020 5.94%
Interest Rate Risk Management . . . . 1,815 YIELD AJE. 0.59% 973 YIELD AJE. 0.38%
--------- ---------- ------- -------- ---------- -------
TOTAL INTEREST - BEARING LIABILITIES. $ 32,895 $ 824,507 5.31% $ 27,857 $ 680,208 5.43%
--------- ---------- ------- -------- ---------- -------
NET INTEREST -EARNING ASSETS. . . . . $ 27,744 $ 50,896 $ 23,838 $ 48,036
--------- ---------- -------- ----------
--------- ---------- -------- ----------
INTEREST RATE SPREAD. . . . . . . . . 3.92% 4.02%
------- -------
------- -------
NET YIELD ON AVERAGE INTEREST-EARNING
ASSETS. . . . . . . . . . . . . . . 4.23% 4.38%
------- -------
------- -------
INTEREST -EARNING ASSETS TO INTEREST-
BEARING LIABILITIES RATIO . . . . . 106.17% 107.06%
------- -------
------- -------
1997 COMPARED TO 1996
---------------------
INCREASE / (DECREASE) DUE TO:
VOLUME RATE TOTAL
------ ---- -----
INTEREST - EARNING ASSETS: . . . . . . . . . .
Real estate loans . . . . . . . . . . . . $ 2,523 $ 340 $ 2,863
Consumer loans. . . . . . . . . . . . . . 951 63 1,015
Commercial loans. . . . . . . . . . . . . (22) 20 (2)
Financing leases. . . . . . . . . . . . . 716 (298) 418
-------- ------- ---------
TOTAL LOANS . . . . . . . . . . . . . . . 4,168 125 4,293
-------- ------- ---------
Mortgage-backed securities. . . . . . . . 4,462 (678) 3,785
Investment securities . . . . . . . . . . 1,167 65 1,231
Other interest - earning assets . . . . . (173) (192) (365)
-------- ------- ---------
TOTAL INVESTMENTS . . . . . . . . . . . . 5,456 (805) 4,651
-------- ------- ---------
TOTAL INTEREST - EARNING ASSETS . . . . . $ 9,624 $ (680) $ 8,944
-------- ------- ---------
INTEREST - BEARING LIABILITIES:. . . . . . . .
Deposits. . . . . . . . . . . . . . . . . $ 3,019 $ (649) $ 2,370
Repurchase agreements . . . . . . . . . . 922 (40) 882
Lines of credit . . . . . . . . . . . . . (296) (8) (304)
FHLB advances . . . . . . . . . . . . . . (452) (206) (658)
FHLB borrowings . . . . . . . . . . . . . 154 (19) 135
Bonds payable . . . . . . . . . . . . . . (31) 0 (31)
Term notes. . . . . . . . . . . . . . . . 2,628 (826) 1,802
Interest Rate Risk Management . . . . . . (29) 872 842
-------- ------ ---------
TOTAL INTEREST - BEARING LIABILITIES. . . $ 5,915 $ (876) $ 5,038
-------- ------ ---------
NET INTEREST INCOME. . . . . . . . . . . . . . $ 3,709 $ 196 $ 3,906
-------- ------ ---------
-------- ------ ---------
21
INTEREST INCOME
Interest income for the third quarter ended on March 31, 1997 was up by $3.3
million or 19% to $21.2 million from $17.9 million posted in the earlier
fiscal year. For the nine months ended interest income grew by $8.9 million
or 17% to $60.6 million from $51.7 million reported in the previous fiscal
year.
The growth in interest income for the three and nine months ended on March
31,1997 was attributed to a rise of $2.7 million and $9.6 million,
respectively, due to a higher volume of interest-earning assets. Average
interest earning assets reached $923.1 million and $875.4 million for the
quarter and nine months ended March 31, 1997, compared with $769.1 million
and $728.2 million for the same periods of fiscal year 1996. To a lesser
extent, interest income was negatively affected, by lower yields attained on
interest earning assets. The yield on interest-earning assets for the third
quarter ended decreased 10 basis points to 9.19% from 9.29% attained in the
same period of fiscal 1996 and for the nine months ended fell 22 basis points
to 9.23% from 9.45%.
The increase in the average volume of interest earning assets for the periods
analyzed was mostly attained through a growth in investment and mortgage
backed securities of $57 million or 37% and $50 million or 32%,
respectively, for the quarter. The rise in investments is principally in
U.S. Government Obligations. The income derived from these securities is
exempt for income tax purposes in Puerto Rico. For the nine months ended
March 31, 1997, the growth was attained mostly in mortgage backed securities
and real estate loans of $77 million or 52% and $36 million or 24%. The rise
in mortgage backed securities was due to Oriental's greater use of
securitization as a funding vehicle, packaging most of its loan production
into GNMA, FNMA and FHLMC certificates.
INTEREST EXPENSE
Interest expense for the three months and nine months ended on March 31, 1997
increased to $11.5 million and $32.9 million, from $9.5 and $27.9 million,
reported in the same periods of fiscal year 1996, an increase of $2.0 million or
21% and $5.0 million or 18%, respectively.
The interest expense increase for the periods analyzed was the result of a
higher volume of interest bearing liabilities used to fund the increase on
interest earning assets. This increase in volume contributed to a rise in total
interest expense of $1.7 million and $5.9 million, respectively, for the quarter
and nine months ended on March 31, 1997. Average interest bearing liabilities
of the Group rose to $870.9 and $824.5 for the three and nine months period
ended on March 31, 1997 from $715.4 million and $680.2 million for the same
periods of fiscal year 1996, increases of $155 million or 21% and $144 million
or 21%, respectively.
The growth in average volume for the periods analyzed was mainly due to the
significant increase in the average volume of deposits and term notes. For
the third quarter and nine months ended on March 31, 1997 the average volume
of deposits grew by $99.2 million or 27% and $77.0 million or 22%,
respectively, while the average volume of term notes increased by $62.7
million or 86% and $54.6 million or 82%, respectively. The increase in
deposits was concentrated in certificate of deposits, mostly broker and 936
CD's, notwithstanding the repeal of Section 936 by the U.S. Congress in
October 1996, and IRA accounts. The rise in average term notes was attributed
to four new term notes issued during the first half of the fiscal year.
The effect of higher average volume in interest expense was partially offset by
a lower average cost of bearing liabilities. The average cost of funds
decreased from 5.33% and 5.43% for the three and nine months ended on March 31,
1996 to 5.34% and 5.31% in fiscal year 1997.
22
PROVISION FOR LOAN LOSSES
The following table sets forth an analysis of activity in the allowance for loan
losses during the periods indicated:
THIRD QUARTER ENDED NINE MONTHS PERIOD ENDED
MARCH 31 MARCH 31
--------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- -----------
BALANCE AT BEGINNING OF PERIOD $ 4,653 $ 3,856 $ 4,496 $ 3,127
---------- --------- --------- -----------
Provision for loan losses 1,300 850 3,400 3,550
Loans Charged-off (1,582) (879) (3,974) (3,162)
Recoveries 442 209 891 521
---------- ---------- ---------- -----------
Net Charge-off (1,140) (670) (3,083) (2,641)
---------- ---------- ---------- -----------
BALANCE AT END OF PERIOD $ 4,813 $ 4,036 $ 4,813 $ 4,036
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
LOANS CHARGED-OFF
Consumer $ 686 $ 238 $ 1,658 $ 956
Real Estate 3 87 22 172
Finance Leases 879 531 2,226 1,804
Commercial and other 14 23 68 230
---------- ---------- ---------- -----------
TOTAL $ 1,582 $ 879 $ 3,974 $ 3,162
---------- ---------- ---------- -----------
RECOVERIES:
Consumer $ 109 $ 40 $ 182 $ 164
Real Estate 15 - 15 -
Finance Leases 316 168 692 329
Commercial and other 2 1 2 28
---------- ---------- ---------- -----------
TOTAL $ 442 $ 209 $ 891 $ 521
---------- ---------- ---------- -----------
LOANS:
Outstanding $ 526,253 $ 473,683 $ 526,253 $ 473,683
Average $ 522,844 $ 471,008 $ 504,888 $ 448,021
RATIOS:
Recoveries to charge-offs 27.9% 23.7% 22.4% 16.5%
Net charge-off to average loans 0.22% 0.14% 0.61% 0.59%
Allowance for loan losses to net
charge-offs 4.22 6.02 1.56 1.53
Allowance for loan losses to
total loans 0.91% 0.85% 0.91% 0.85%
The provision for loan losses for the third quarter of 1997 was $1.3 million,
compared with $850,000 for the same quarter of 1996. For the nine-month
period ended March 31, 1997, the provision amounted to $3.4 million versus $3.6
million reported for the same period last year. Last year Oriental provided an
additional $1.3 million during December 1995 to increase the loan loss reserve
allocated to non-real estate loans (consisting of finance leases, commercial and
consumer loans) in response to the growth experienced in these portfolios after
Oriental Bank and Trust conversion to a commercial Bank during 1994.
23
The Group maintains an allowance for loan losses on its portfolio at a level
that management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risk. Oriental's allowance for loan losses
policy provides for a detailed quarterly analysis of possible losses. The
analysis includes a review of historical experience, value of underlying
collateral and current economic conditions, among others. Based upon the
results of this quarterly analysis, loan loss reserves are computed for each
area.
NON-INTEREST INCOME
The following table shows the fees and other non-interest income generated by
the Group for the three months ended and nine months ended on March 31, 1997 and
1996 (in thousands):
THIRD QUARTER ENDED NINE MONTHS PERIOD ENDED
MARCH 31 MARCH 31
------------------- ------------------------
1997 1996 1997 1996
--------- ------ ---------- ---------
NON-INTEREST INCOME:
Bank Service Fees & Charges $ 1,159 $ 873 $ 3,725 $ 2,564
Trust, money management and brokerage 1,809 1,538 4,875 4,150
fees
Mortgage banking activities 1,265 851 2,710 2,321
Rent and other operating income 229 154 621 393
--------- ------ ---------- ---------
TOTAL OPERATING NON-INTEREST INCOME 4,462 3,416 11,932 9,428
Trading account profit 9 (42) 12 --
Net gain in sale of securities 71 113 384 1,522
--------- ------ ---------- ---------
TOTAL NON-INTEREST INCOME $ 4,542 $3,487 $ 12,328 $ 10,950
--------- ------ ---------- ---------
--------- ------ ---------- ---------
Recurring non-interest income for the quarter and nine months ended on March 31,
1997 climbed to $4.5 million and $11.9 million, respectively, from $3.4 million
and $9.4 million reported in the same periods of the earlier fiscal year, an
increase of $1.1 million or 31% and $2.5 million or 27%, respectively. Bank
services fees and charges, which consist primarily of service charges on deposit
accounts, leasing fees and late charges collected on loans, grew to $1.1 million
and $3.7 million for the quarter and nine month ended on March 31, 1997 as
compared to $873,000 and $2.6 million for same periods of fiscal year 1996 due
to solid contributions from fees on deposit accounts and lease handling fees as
a result of a larger volume of loans and deposit accounts.
Trust, money management and brokerage fees, which represented 40% of recurring
non-interest income for the periods analyzed for the fiscal year 1997 expanded
to $1.8 million and $4.9 million, respectively, from $1.5 million and $4.1
million, respectively, in fiscal year 1996. This increase was possible to a
larger volume of accounts and assets managed by the trust department and the
assets gathered by the broker dealer subsidiary.
Non-operating interest income, which consists mainly of securities and trading
gains and losses, for the quarter and nine months ended on March 31, 1997
remained flat at $80,000 and decreased to $396,000 as compared to $71,000 and
$1.5 million in the same periods of the earlier fiscal year. This decline was
principally due to a gain on sales of $1.4 million realized during the second
quarter of fiscal 1996 to offset the additional $1.3 million increase in the
provision for loan losses allocated to non-real estate loans, consisting of
finance leases, commercial and consumer loans during that same period.
24
NON-INTEREST EXPENSES
Total non-interest expenses for the second quarter and nine months ended on
March 31, 1997 and 1996, were as follows (in thousands):
THIRD QUARTER ENDED NINE MONTHS PERIOD ENDED
MARCH 31 MARCH 31
---------------------- ------------------------
1997 1996 1997 1996
--------- -------- --------- ----------
NON-INTEREST EXPENSES:
Compensation and benefits $ 3,782 $ 3,026 $ 10,630 $ 8,980
Occupancy and equipment 1,083 1,040 3,139 2,941
Professional fees 485 311 1,150 880
Advertising and promotion 676 444 1,379 1,137
Insurance 121 254 670 765
Real estate owned expenses 17 79 116 141
Other 1,192 1,054 3,590 3,071
--------- -------- ---------- --------
TOTAL RECURRING NON-INTEREST EXPENSES 7,356 6,208 20,674 17,915
SAIF capitalization assessment - - 1,823 -
--------- -------- ---------- --------
TOTAL NON-INTEREST EXPENSES $ 7,356 $ 6,208 $ 22,497 $ 17,915
--------- -------- ---------- --------
--------- -------- ---------- --------
Recurring non-interest expenses for the quarter and nine months ended on
March 31, 1997 increased by $1.2 million or 19% to $7.4 million and $2.8
million or 15% to $20.7 million, respectively, as compared to $6.2 million
and $17.9 million for the same periods of fiscal 1996. The increase results
mainly from the ongoing efforts to improve the Group's managerial and
operational support as well as the expenses related to the Group's expanded
branches and services network.
Employee compensation and benefits increased $756,000 or 25% to $3.8 million and
$1.6 million or 18% to $10.6 million from $3.0 million and $9.0 million in the
same period of the last fiscal year. The growth in personnel cost was due to
increased headcount as a result of the continuos expansion, greater use of
incentive pay to compensate sales effort, and an increase in salary expense, due
largely to annual merit increases. Full-time equivalent employees, including
temporary employees, amounted to 449 at March 31, 1997, up 52 from 397 at March
31, 1996.
All other recurring non-interest expenses for the third quarter and nine months
ended on March 31, 1997 grew by $392,000 or 12% to $3.6 million and by $1.1
million or 12% to $10.0 million, respectively, from $3.2 million and $8.9
million, respectively in the same periods of year 1996. This increase is
attributed to increases in marketing and business development and general
operating costs.
The Group's efficiency ratio, which is the ratio of non-interest expense to the
sum of net interest income and recurring non-interest income, improved to 52.59
%, for the first nine months of fiscal 1997, from 53.44% for the same period of
fiscal 1996. The expense ratio, which is the ratio of net recurring operating
expenses to average interest earning assets, improved to 1.29% for the nine
months ended fiscal 1997 compared to 1.56% for the same period of fiscal 1996.
On September 30, 1996 the United States Congress approved and President Clinton
signed into law a bill to recapitalize the Savings Association Insurance Fund
and as such during the first quarter of 1997, Oriental recorded a special
reserve of $1.8 million with an estimated income tax benefit of $470,000 to
account for the one-time payment of FDIC insurance premium. This bill called for
a special one-time charge on institutions holding SAIF deposits on March 31,
1995 of approximately 66 basis point. Beginning in January 1997 institutions
currently insured under SAIF will pay lower premiums as result of this special
assessment. In Oriental's case, this represents an annual decrease in insurance
premiums expense of approximately $650,000 or $162,500 per quarter.
25
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $2.3 million (or 16% of pretax
earnings ) for the nine months ended March 31, 1997 compared to $2.6 million (or
19% of pretax earnings) provision recorded the same period of last year. The
Group has maintained an effective tax rate lower than the statutory rate of 39%
mainly due to interest income earned on certain investments and loans which is
exempt from income taxes, net of the disallowance of expenses attributable to
the exempt income.
The Group uses an asset and liability approach in accounting for income taxes,
as required by SFAS 109. At March 31, 1997, the Group net deferred tax assets
amounted to $123,000. Components of gross deferred tax assets are related to
the repeal of the reserve method of accounting for losses on loans, alternative
minimum tax and other credits, and other temporary differences mainly arising
from the deferral of loan origination costs.
The major component of deferred tax liabilities is mainly related with
unrealized gains on investment securities available-for sale. The Group had an
unrealized loss in the valuation account for investments securities available
for sale at March 31, 1997, accordingly, there were no gross deferred tax
liabilities at March 31, 1997.
26
FINANCIAL CONDITION
ASSETS
Following is a brief summary of the institution's financial assets (in
thousands):
MARCH 31, MARCH 31, JUNE 30
1997 1996 1996
----------- ----------- -----------
Investments and trading securities $ 434,189 $ 330,419 $ 350,736
Loans receivable and loans held for
sale, net 521,439 469,647 476,110
----------- ----------- -----------
INTEREST EARNING ASSETS 955,628 800,066 826,846
Non-interest earning assets 66,733 48,443 50,578
----------- ----------- -----------
TOTAL ASSETS $ 1,021,361 $ 848,509 $ 877,424
----------- ----------- -----------
----------- ----------- -----------
Total bank assets $ 1,021,361 $ 848,509 $ 877,424
Trust assets managed 970,008 841,300 874,500
Assets gathered by broker and
dealer 430,730 267,100 293,100
Loans serviced for third parties 472,599 362,900 401,300
----------- ----------- -----------
TOTAL FINANCIAL ASSETS $ 2,894,698 $ 2,319,809 $ 2,446,324
----------- ----------- -----------
----------- ----------- -----------
At March 31, 1997 Oriental's total assets reached $1.02 billion, an increase of
20% when compared to $848.5 million at March 31, 1996. Total assets at June 30,
1996 were $877 million. Average assets for the first nine months of fiscal 1997
were $949 million compared to $791 million for the same period in fiscal 1996,
an increase of $158 million or 20%. Average assets for the year ended June 30,
1996 were $809 million.
Interest earning assets at March 31, 1997 amounted to $955 million compared to
$800 million at March 31, 1996. This increase was the combination of a growth
in investment and trading securities of $104 million, or 31%, from $330.4
million at March 31, 1996 to $434.2 million at March 31, 1997, assisted by
higher volumes in loans receivable and loans held for sale, net of the allowance
for loan losses, of $51.8 million, or 11%, from $469.7 million at March 31, 1996
to $521.4 million at March 31, 1997. Interest earning assets amounted to $826.8
million at June 30, 1996.
The increase of $56 million in investments securities, the second largest
component of earning assets, is driven by an increase in tax exempt U.S.
government obligations of $58.5 millions. These U.S. government Obligations,
which are exempt from Puerto Rico taxes, in addition have no prepayment or
credit risk, are an attractive investment for Oriental.
Mortgage-backed securities increased by $37.0 million to $260.6 million at March
31, 1997 from $223.6 the previous year, as Oriental continues its strategy of
pooling guaranteed real estate loans into mortgage-backed securities. During
the twelve month period ended March 31, 1997, Oriental converted $138 million of
loans held for sale into mortgage-backed securities.
Loans are the largest category of the Group's earning assets and the most
profitable. At March 31, 1997, total loans were $521.4 million compared with
$469.6 million at March 31, 1996. Real estate loans represented 50.2% of the
total portfolio, lease financing 31.5%, consumer loans 16.5%, and commercial
loans comprised 1.8%. This compares with 48.5%, 32.5%, 17.2% and 1.8% in 1996
for the same categories, respectively. The growth in loan portfolio was mainly
attained due to strong marketing efforts coupled with the launch of new
products.
27
TRUST ASSETS MANAGED
Total assets managed by the trust department increased 18% growing to $970.0
million as of March 31, 1997, up from $841.3 million at March 31, 1996. The
most significant assets managed are individual retirement accounts (IRA) which
increased to $326.9 million at March 31, 1997 from $292.1 million at March 31,
1996. Oriental Trust offers three IRA products: (1) IRA-Exenta, a tax exempt
unit investment trust, (2) Multi-IRA, a taxable fixed income account and (3)
Investors IRA, an account who's income is tied to the performance of the stock
market. Other assets managed include 401 (K) and Keogh retirement plans,
custodian and corporate trust accounts.
ORIENTAL FINANCIAL GATHERED ASSETS
Since its inception in April 1993, Oriental's broker dealer subsidiary has
offered a wide range of investment products to its client base. Total assets
gathered by the broker dealer from its customer investment accounts increased
61% to $430.7 million at March 31, 1997 from $267.1 million at March 31, 1996.
LOANS SERVICED FOR THIRD PARTIES
The Group's loan administration division services mortgage loans for third
parties which include federal agencies such as GNMA, FNMA and FHLMC, as well as
local issuers such as the P.R. Housing Bank. Total loans serviced for third
parties increased 30% to $472.6 million at March 31, 1997 from $362.9 million at
March 31, 1996.
NON -PERFORMING ASSETS
The Group's non-performing assets consist of the sum of non-performing loans,
real estate owned and repossessed assets. The following table shows the balance
of non-performing assets, as of the dates indicated (in thousands):
MARCH 31, MARCH 31, JUNE 30,
1997 1996 1996
--------- --------- ---------
Real estate loans $ 5,284 $ 3,423 $ 4,069
Financing leases 3,806 3,925 3,641
Commercial loans 454 268 301
Consumer loans 1,755 977 1,228
Construction 211 926 211
--------- --------- ---------
TOTAL NON - ACCRUING LOANS $ 11,510 $ 9,519 $ 9,450
--------- --------- ---------
Foreclosed real estate $ 1,144 $ 1,223 $ 842
Repo vehicles 1,174 1,081 831
Repo equipment 391 697 486
--------- --------- ---------
TOTAL REPOSSESSED ASSETS $ 2,709 $ 3,001 $ 2,159
--------- --------- ---------
TOTAL NON -PERFORMING ASSETS $ 14,219 $ 12,520 $ 11,609
--------- --------- ---------
--------- --------- ---------
Non - accruing loans to total loans 2.19 % 2.00% 1.97%
--------- --------- ---------
--------- --------- ---------
NON -PERFORMING ASSETS AS A PERCENTAGE (%) OF:
Total assets 1.39 % 1.48% 1.32%
--------- --------- ---------
--------- --------- ---------
Total capital 16.60 % 15.78% 14.53%
--------- --------- ---------
--------- --------- ---------
28
Detailed information concerning each of the items that comprise non-performing
assets follows:
DELINQUENT REAL ESTATE LOANS
Oriental classifies real estate loans delinquent 90 days or more in non-accruing
status. Due to the limited supply of land in Puerto Rico, real estate market
values have not shown any decline. Even though these loans are in non-accruing
status, based on the value of the underlying collateral and the loan to value
ratios, management considers that no material losses will be incurred on this
portfolio. The estimated losses have been considered in the determination of the
level of allowances for loan losses as of March 31, 1997, and June 30, 1996.
Real estate loans are charged-off based on the specific evaluation of the
collateral underlying the loan.
DELINQUENT COMMERCIAL BUSINESS LOANS
Commercial business loans are placed on non-accrual basis when they become 90
days past due. The Bank's non-accrual commercial business loans at March 31,
1997 consisted of nine loans amounting to $454,000 (average of $50,418), with
two loans having balances exceeding $100,000. Of the total balance, $376,000 are
guaranteed by real estate. Commercial loans are charged-off based on the
specific evaluation of the collateral underlying the loan.
DELINQUENT FINANCE LEASES
Leases are placed on non-accrual status when they become 90 days past due.
Oriental's non-accrual leases at March 31, 1997 consisted of two hundred and
sixty nine auto leases amounting to $2,607,000 (average of $9,700), and one
hundred eighty four equipment leases amounting to $1,199,000 (average of
$6,500). At March 31, 1997, there were two non-accrual equipment leases over
$100,000.
DELINQUENT CONSUMER LOANS
Consumer loans are placed on non-accrual status when they become 90 days past
due. The Group's non-accrual consumer loans consisted of one hundred and
eighty-three loans amounting to $1,755,000 (average of $ 9,576 ).
REPOSSESSED ASSETS AND FORECLOSED REAL ESTATE (OREO)
As of March 31, 1997 the inventory of repossessed automobiles consisted of sixty
three units amounting to $1.2 million (average of $18,637), and the inventory of
repossessed equipment consisted of thirty three units amounting to $386,000
(average of $11,705).
Repossessed assets are initially recorded at estimated net realizable value.
Any additional losses on the disposition of such assets are charged against the
allowance for loans losses at the time of disposition. The estimated loss on
disposition of such assets has been considered in the determination of the
allowance for loan losses.
Foreclosed real estate are initially recorded at the lower of the related loan
balance or fair value at the date of foreclosure. At the time of acquisition of
properties 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 is
estimated to approximate 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. Therefore, no material losses are expected on the final
disposition. Management is actively seeking prospective buyers for these
foreclosed real estate properties.
29
LIABILITIES AND CAPITAL
LIABILITIES
Following is a brief summary of the institution's liabilities (in thousands):
MARCH 31, MARCH 31, JUNE 30,
1997 1996 1996
---------- ---------- ----------
Deposits $ 467,470 $ 368,461 $ 382,557
Repurchase agreements 226,197 213,340 242,335
Other borrowed funds 214,217 159,490 145,466
---------- ---------- ----------
INTEREST BEARING LIABILITIES 907,884 741,291 770,358
Non-interest bearing liabilities 28,832 27,899 27,164
---------- ---------- ----------
TOTAL LIABILITIES $ 936,716 $ 769,190 $ 797,522
---------- ---------- ----------
---------- ---------- ----------
At March 31, 1997 Oriental's total liabilities reached $937 million,
reflecting an increase of $168 million or 22% when compared to $769 million at
March 31, 1996. Total liabilities at June 30, 1996 were $798 million. Average
total liabilities for the first nine months of fiscal 1997 were $866 million
compared with $710 million for the same period in fiscal 1996, and increase of
$156 million or 22%. Average total liabilities for the year ended June 30,
1996 were $732 million.
Interest bearing liabilities at March 31, 1997 amounted to $908 million, an
increase of $167 million or 22% as compared to $741 million at March 31,
1996. This significant increase was mainly attributable to a growth in
deposits of $99 million or 27% and in borrowings of $65 million or 43%.
Total deposits showed growth in all areas as they increased to $467 million at
March 31, 1997, from $368 million at March 31, 1996. Demand and saving deposits
were up by $18 million, or 21%, to $104 million at March 31, 1997, from $86
million at March 31, 1996, while at the same time consumer and retail time
deposits rose by $80 million, or 28%, to $361 million at March 31, 1997, from
$281 million at March 31, 1996.
The increase in demand and saving deposits was mainly triggered by two factors.
First, the addition of new branches during the last fiscal year provided
Oriental a stronger penetration in the island's most populated areas. Last, but
more important, was the wider spectrum of consumer banking products available at
Oriental during the last twelve months. This new array of services which cater
the consumer's most pressing financial and service requirements have improved
the Oriental's ability to provide a total financial relationship to regular
customers and attract new clients. The increase in time deposits was mainly
attained through the rise of broker certificate of deposits and IRA accounts, of
$22 million and $21 million, or 78% and 52%, respectively.
As of March 31, 1997 total borrowings amounted to $440 million compared to $373
million at March 31, 1996. Oriental has a diversified source of funding through
the use of FHLB advances and borrowings, repurchase agreements, term notes,
notes payable and lines of credit. The increase in borrowing was mainly due to
the issuance of $50 million term notes during the first half of this fiscal
year.
30
The increase in total borrowings was necessary to fund the increase in interest
earning assets experienced during the period. A substantial amount of these
term notes have floating rates that are generally hedged through the Group's
overall interest rate risk management process discussed in note 8 of the
attached unaudited financial statements.
CAPITAL
The following table sets forth Oriental's capital adequacy data and common stock
performance for the periods analyzed:
MARCH 31, MARCH 31, JUNE 30,
1997 1996 1996
--------- --------- ---------
Total Capital $ 85,645 $ 79,319 $ 79,903
--------- --------- ---------
--------- --------- ---------
Dividends declared $ 3,169 $ 2,356 $ 3,186
--------- --------- ---------
--------- --------- ---------
REGULATORY RATIOS:
Core Capital (Leverage) Ratio 8.23% 8.91% 8.71%
--------- --------- ---------
--------- --------- ---------
Tier 1 Risk Based Capital Ratio 17.77% 18.20% 18.07%
--------- --------- ---------
--------- --------- ---------
Total Risk Based Capital Ratio 18.81% 19.17% 19.14%
--------- --------- ---------
--------- --------- ---------
Book Value $ 10.79 $ 9.79 $ 10.04
--------- --------- ---------
--------- --------- ---------
Dividend Payout Ratio 26.73% 21.99% 21.62%
--------- --------- ---------
--------- --------- ---------
Dividend Yield 3.02% 3.09% 2.86%
--------- --------- ---------
--------- --------- ---------
At March 31, 1997 Oriental's total capital increased by $6.3 million or 8% to
$85.6 million, from $79.3 million at March 31, 1996. This increase was the
result of earnings of $15.7 million recorded during the last twelve months, net
of $4.0 million dividends paid, increased by $516 thousand from stock options
exercised and reduced by $5.0 million used to buy in the open market Oriental
shares and a $849,000 negative change in the valuation account for investment
securities available for sale.
DIVIDENDS
On August 26, 1996, Oriental declared a six-for-five (20%) stock split on its
6,597,563 shares of common stock outstanding at September 30, 1996. As a
result, 1,308,712 shares of common stock were issued on October 17, 1996 thus
increasing shares to 7,906,275.
During the third quarter and nine months ended on March 31, 1997, Oriental
declared cash dividends of $0.15 per common share and $.40 per common share,
respectively. The dividends declared for the periods above amounted to $1.2
million and $3.2 million, respectively, for an annualized dividend payout ratio
of 26.73% and dividend yield of 3.02%.
31
MARKET PRICES AND STOCKDATA
The Group's common stock is traded in the New York stock Exchange (NYSE) under
the symbol OFG. The following table provides the high and low prices of the
Group's stock during the third quarter of fiscal 1997 and for the preceding
fiscal year as reported by the NYSE. Common stock prices were adjusted to give
retroactive effect to the stock splits declared on the Group's common stock.
DIVIDEND
QUARTER ENDED HIGH LOW PER SHARE
-----------------------------------------------------
FISCAL 1996
September 1995 $ 12.13 $ 10.13 $ 0.08
December 1995 14.50 11.57 0.10
March 1996 14.58 13.33 0.10
June 1996 16.15 13.75 0.10
FISCAL 1997
September 1996 $ 16.35 $ 16.25 $ 0.125
December 1996 22.00 18.25 0.125
March 1997 27.00 20.88 0.15
The price per share on the reported last sale price on the NYSE on March 31,
1997 was $25.13. This represents an increase of 58% from the last sale price at
March 31, 1996 of $15.83, already adjusted for the six for five (20%) stock
split. The book value at March 31, 1997 rose to $10.79 from $9.79 reported at
the same period of the prior fiscal year.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Group and its subsidiaries are defendants in a number of legal claims under
various theories of damages arising out of, and incidental to its business. The
Group is vigorously contesting those claims. Based upon a review with legal
counsel and the development of these matters to date, management is of the
opinion that the ultimate aggregate liability, if any, resulting from these
claims will not have a material adverse effect on the financial position of the
Group.
ITEM 2. CHANGES IN SECURITIES
On January 24, 1997 (the "Effective Date"), the bank holding company
reorganization, pursuant to which the Group acquired all of the issued and
outstanding shares of Oriental Bank and Trust (except for directors' qualifying
shares) was completed. The holding company reorganization was carried out
pursuant to an Agreement and Plan of Merger by and between the Group, Oriental
Bank and Trust and Oriental Interim Bank. On the Effective Date, each share of
issued and outstanding common stock of Oriental Bank and Trust, par value $1.00
per share, was exchanged for one share of common stock of the Group, par value
$1.00 per share, and the Group thereby became the holding company of Oriental
Bank and Trust. The shares of common stock of the Group issued to the former
shareholders of Oriental Bank and Trust were not registered under the Securities
Act of 1933, pursuant to the exemption contained in section 3 (a) (12) of such
Act.
32
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS-NONE
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Group filed one report on Form 8-K during the quarter ended March 31, 1997.
Said report was dated January 30, 1997 and was filed with the Securities and
Exchange Commission on January 31, 1997.
Items Reported:
Item 5 - Other Events
A. Holding Company Reorganization ;
B. Share Repurchase Program ; and
C. Bank's 1996 Stock Option Plan
Item 7- Financial Statements, Pro Forma Financial Statements and Exhibits
(c) Exhibits.
33
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ORIENTAL BANK AND TRUST
DATE: By: /s/ Ricardo N. Ramos
------------------ ---------------------------------
Ricardo Ramos
Senior Vice President
DATE: By: /s/ Roberto A. Fernandez
------------------ ---------------------------------
Roberto A. Fernandez
Senior Vice President
34