10-Q 1 a2030814z10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2000 COMMISSION FILE NO. 001-12647 ORIENTAL FINANCIAL GROUP INC. INCORPORATED IN THE COMMONWEALTH OF PUERTO RICO IRS EMPLOYER IDENTIFICATION NO. 66-0259436 PRINCIPAL EXECUTIVE OFFICES: Monacillos Ward 1000 San Roberto Street Rio Piedras, Puerto Rico 00926 Telephone Number: (787) 771-6800 -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK ($1.00 PAR VALUE) 13,805,135 SHARES OUTSTANDING AS OF SEPTEMBER 30, 2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes x No -------- --------- TABLE OF CONTENTS
PAGE ------------------------------------------------------------------------------------------------------------------ PART - 1 ------------------------------------------------------------------------------------------------------------------ Item - 1 FINANCIAL STATEMENTS Consolidated statements of financial condition at September 30, 2000 (unaudited) and June 30, 1999. 1 Unaudited consolidated statements of income for the quarter ended September 30, 2000 and 1999. 2 Unaudited consolidated statements of stockholders' equity and comprehensive income for the quarter ended September 30, 2000 and 1999. 3 Unaudited consolidated statements of cash flows for the quarter ended September 30, 2000 and 1999. 4 Notes to unaudited consolidated financial statements 5 Item - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-25 PART - 2 ------------------------------------------------------------------------------------------------------------------------------------ Item - 1 Legal Proceedings 28 Item - 2 Change in securities 28 Item - 3 Defaults upon senior securities 28 Item - 4 Submissions of Matters to a Vote of Security Holders 28 Item - 5 Other Information 28 Item - 6 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28 Signatures 29
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 2000 (UNAUDITED) AND JUNE 30, 2000 (IN THOUSANDS)
SEPTEMBER 30, JUNE 30, 2000 2000 ------------------ -------------------- ASSETS -------------------------------------------------------------------------------------------------------------------------- Cash and due from banks $ 7,687 $ 10,322 ------------------ -------------------- INVESTMENTS: Money market investments 109,584 23,511 Trading securities, at fair value 32,218 64,443 Investment securities available-for-sale, at fair value 997,279 282,900 Investment securities held-to-maturity, at amortized cost (fair value $770,851) -- 797,484 Federal Home Loan Bank (FHLB) stock, at cost 11,146 11,146 ------------------ -------------------- TOTAL INVESTMENTS 1,150,227 1,179,484 ------------------ -------------------- LOANS: Loans held-for-sale, at lower of cost or market 49,084 180,788 Loans receivable, net 416,444 420,090 ------------------ -------------------- TOTAL LOANS, NET 465,528 600,878 ------------------ -------------------- Accrued interest receivable 13,178 13,485 Foreclosed real estate, net 535 398 Premises and equipment, net 21,504 21,706 Other assets, net 20,808 23,961 ------------------ -------------------- TOTAL ASSETS $ 1,679,467 $ 1,850,234 ================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY -------------------------------------------------------------------------------------------------------------------------- DEPOSITS: Savings and demand $ 126,991 $ 130,919 Time and IRA accounts 574,056 587,931 ------------------ -------------------- 701,047 718,850 Accrued interest 5,580 4,831 ------------------ -------------------- TOTAL DEPOSITS 706,627 723,681 ------------------ -------------------- BORROWINGS: Securities sold under agreements to repurchase 729,663 816,493 Advances and borrowings from FHLB 20,000 70,000 Term notes and other borrowings 86,500 86,500 ------------------ -------------------- TOTAL BORROWINGS 836,163 972,993 ================== ==================== Accrued expenses and other liabilities 30,116 35,691 ------------------ -------------------- TOTAL LIABILITIES 1,572,906 1,732,365 ------------------ -------------------- COMMITMENTS AND CONTINGENCIES ------------------ -------------------- STOCKHOLDERS' EQUITY: Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation value; shares issued and outstanding 1,340,000 33,500 33,500 Common stock, $1 par value; 20,000,000 shares authorized; shares issued 13,805,135 13,805 13,805 Additional paid-in capital 23,786 23,786 Legal surplus 10,684 10,578 Retained earnings 77,139 79,809 Treasury stock, at cost, 1,235,599 shares (June 30, 2000 - 1,107,799) (28,741) (27,116) Accumulated other comprehensive loss, net of deferred taxes of $345 (June 30, 2000 - $1,413) (23,612) (16,493) ------------------ -------------------- TOTAL STOCKHOLDERS' EQUITY 106,561 117,869 ------------------ -------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,679,467 $ 1,850,234 ================== ====================
The accompanying notes are an integral part of these consolidated financial statements -1- CONSOLIDATED STATEMENTS OF INCOME THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999 (IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
----------------------------- AS RESTATED ----------- 2000 1999 --------------- ------------- INTEREST INCOME: Loans and leases $ 9,148 $ 13,905 Mortgage-backed securities 15,107 12,079 Investment securities 3,640 3,700 Money market investments 2,474 55 --------------- ------------- TOTAL INTEREST INCOME 30,369 29,739 --------------- ------------- INTEREST EXPENSE: Deposits 9,610 7,234 Securities sold under agreements to repurchase 12,795 8,129 Other borrowed funds 1,479 2,458 --------------- ------------- TOTAL INTEREST EXPENSE 23,884 17,821 --------------- ------------- NET INTEREST INCOME 6,485 11,918 Provision for loan losses 1,400 1,750 --------------- ------------- NET CREDIT INCOME 5,085 10,168 --------------- ------------- NON-INTEREST INCOME (CHARGES): Trust, money management and brokerage fees 2,827 2,627 Mortgage banking activities 1,551 1,958 Banking service revenues 1,016 925 Net gain (loss) on sale of securities available-for-sale (3,705) 599 Derivatives activities (2,072) -- Trading net activity (12) (133) Leasing revenues 49 268 --------------- ------------- TOTAL NON-INTEREST INCOME (Charges) (346) 6,244 --------------- ------------- NON-INTEREST EXPENSES: Compensation and benefits 3,375 3,821 Occupancy and equipment, net 1,718 1,493 Advertising and business promotion 781 723 Professional and service fees 505 874 Communications 420 404 Taxes other than on income 488 479 Insurance, including deposit insurance 95 133 Printing, postage, stationery and supplies 163 197 Other 642 414 --------------- ------------- TOTAL NON-INTEREST EXPENSE 8,187 8,538 =============== ============= INCOME (LOSS) BEFORE INCOME TAXES (3,448) 7,874 Income taxes provision (credit) (1,457) 631 --------------- ------------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,991) 7,243 Cumulative effect of change in accounting principle 1,930 -- --------------- ------------- NET INCOME (LOSS) (61) 7,243 Less: Dividends on preferred stock (597) (597) --------------- ------------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (658) $ 6,646 --------------- ------------- INCOME (LOSS) PER COMMON SHARE: Basic before cumulative effect of change in GAAP $ (0.20) $ 0.52 --------------- ------------- Diluted before cumulative effect of change in GAAP $ (0.20) $ 0.50 --------------- ------------- Basic after cumulative effect of change in GAAP $ (0.05) $ 0.52 --------------- ------------- Diluted after cumulative effect of change in GAAP $ (0.05) $ 0.50 --------------- ------------- Average common shares outstanding 12,639 12,806 Average potential common share options -- 499 --------------- ------------- 12,639 13,305 =============== =============
The accompanying notes are an integral part of these consolidated financial statements -2- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OF COMPREHENSIVE INCOME THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999 (IN THOUSANDS)
AS RESTATED 2000 1999 ----------------- ----------------- CHANGES IN STOCKHOLDERS' EQUITY: ----------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK: Balance at beginning of year $ 33,500 $ 33,500 Issuance of preferred stock -- -- ----------------- ----------------- BALANCE AT END OF YEAR 33,500 33,500 ----------------- ----------------- COMMON STOCK: Balance at beginning of year 13,805 13,739 Stock options exercised -- 16 ----------------- ----------------- BALANCE AT END OF YEAR 13,805 13,755 ----------------- ----------------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year 23,786 23,313 Stock options exercised -- 71 ----------------- ----------------- BALANCE AT END OF YEAR 23,786 23,384 ----------------- ----------------- LEGAL SURPLUS: Balance at beginning of year 10,578 8,673 Transfer from retained earnings 106 863 ----------------- ----------------- BALANCE AT END OF YEAR 10,684 9,536 ----------------- ----------------- RETAINED EARNINGS: Balance at beginning of year - as previously reported (see Note 2) -- 79,920 Amount of restatement, net of taxes -- (7,734) Beginning balance - as restated 79,809 72,186 Net income (loss) (61) 7,243 Dividends declared on common stock (1,905) (1,916) Dividends declared on preferred stock (597) (597) Transfer to legal surplus (107) (863) ----------------- ----------------- BALANCE AT END OF YEAR 77,139 76,053 ----------------- ----------------- TREASURY STOCK: Balance at beginning of year (27,116) (23,401) Treasury stock purchased (1,625) (1,732) ----------------- ----------------- BALANCE AT END OF YEAR (28,741) (25,133) ----------------- ----------------- ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF DEFERRED TAXES: Balance at beginning of year (16,493) (11,712) Other comprehensive loss for the year ended, net of taxes (7,119) (3,450) ----------------- ----------------- BALANCE AT END OF YEAR (23,612) (15,162) ----------------- ----------------- TOTAL STOCKHOLDERS' EQUITY $ 106,561 $ 115,933 ================= ================= COMPREHENSIVE INCOME: ----------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (61) $ 7,243 ----------------- ----------------- OTHER COMPREHENSIVE LOSS, NET OF TAX: Unrealized loss on securities transferred from held-to-maturity to available-for-sale (26,633) - Unrealized gain (losses) on securities arising during the period 22,151 (3,942) Realized (loss) gains included in net income (3,705) 599 Income Credit (expense) related to items of other comprehensive income 1,068 (107) ----------------- ----------------- NET CHANGE IN FAIR VALUE OF SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES (7,119) (3,450) ----------------- ----------------- COMPREHENSIVE INCOME (LOSS) $ (7,180) $ 3,793 ================= =================
The accompanying notes are an integral part of these consolidated financial statements -3- CONSOLIDATED STATEMENTS OF CASH FLOWS THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999 (IN THOUSANDS)
AS RESTATED 2001 2000 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (61) $ 7,243 -------------- -------------- Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred loan origination fees and costs (151) (13) Amortization of premiums and accretion of discounts on investment securities 140 129 Depreciation and amortization of premises and equipment 1,049 818 Provision for loan losses 1,400 1,750 Loss (gain) on sale of securities 3,705 (599) Derivatives Activities (1,092) -- Mortgage banking activities (1,551) (1,958) Proceeds from sale of mortgage loans held-for-sale 14,800 21,715 Decrease in accrued expenses and other liabilities (5,575) (3,281) Net (increase) decrease in: Trading securities 32,225 (20,878) Accrued interest receivable 307 (3,401) Deferred tax asset - net (223) -- Other assets 4,670 5,391 -------------- -------------- TOTAL ADJUSTMENTS 49,704 (327) -------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 49,643 6,916 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities available-for-sale (50,208) (86,110) Maturities and redemptions of investment securities available-for-sale 17,606 7,797 Maturities and redemptions of investment securities held-to-maturity 30,492 13,003 Proceeds from sales of investment securities available-for-sale 92,706 11,920 Proceeds from sale of consumer loans and leases portfolios 167,900 -- Net origination (repayments) of loans (65,843) (42,859) Capital expenditures (847) (831) -------------- -------------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 191,806 (97,080) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in: Deposits (17,054) (14,342) Securities sold under agreements to repurchase (86,830) 105,096 Advances and borrowings from FHLB (50,000) (21,700) Proceeds from exercise of stock options -- 87 Treasury stock acquired (1,625) (1,732) Dividends paid (2,502) (2,535) -------------- -------------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (158,011) 64,874 -------------- -------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 83,438 (25,290) Cash and cash equivalents at beginning of period 33,833 35,933 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 117,271 $ 10,643 ============== ============== CASH AND CASH EQUIVALENTS INCLUDE: Cash and due from banks $ 7,687 $ 10,360 Money market investments 109,584 283 ------------ ------------ $ 117,271 $ 10,643 ============ =========== SUPPLEMENTAL CASH FLOW DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES: Interest paid $ 22,600 $ 17,210 ------------ ------------ Investment securities available-for-sale transferred to held-to-maturity $ -- $ 263,793 ------------ ------------ Investment securities held-to-maturity transferred to available-for-sale 770,851 -- ------------ ------------ Real estate loans securitized into mortgage-backed securities $ 18,800 $ 38,000 ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS -4- NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC. -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting policies of the Oriental Financial Group Inc. (the "Group" or, "Oriental") conform with generally accepted accounting principles ("GAAP") and financial services industry practices. The following is a description of the Group's most significant accounting policies: NATURE OF OPERATIONS AND USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The Group is a financial bank holding company incorporated under the laws of the Commonwealth of Puerto Rico, which provides a variety of financial services through its subsidiaries. The Group is subject to the regulation and supervision of the Federal Reserve Board. Oriental Bank and Trust (the "Bank"), the Group's banking subsidiary, is a full-service commercial bank with its main office located in San Juan, Puerto Rico and with nineteen branches located throughout the island. The Group through its banking and broker-dealer subsidiaries, Oriental Financial Services Corp., offers mortgage, commercial and consumer lending, auto lease financing, financial planning, money management and investment brokerage services, as well as corporate and individual trust services. The Bank is subject to the regulations of certain federal and local agencies. 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, 2000 contained in Oriental's 2000 Annual Report and Form 10-K. In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting mainly of normal recurring adjustments) necessary to present fairly, in all material respects, the financial position of the Group at September 30, 2000 and June 30, 2000, and the results of operations and cash flows for the three-month period ended September 30, 2000 and 1999, in conformity with generally accepted accounting principles. DERIVATIVES AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standard Board issued Statement No. 133, "Accounting for Derivatives Instruments and Hedging Activities". The Statement requires the Group to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedge must be adjusted to fair value through income. If derivative meet the criteria and qualify as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of Statement No. 133 on July 1, 2000 resulted in the cumulative effect of an accounting change of $3.2 million ($1.9 million net of tax effect) being recognized as income in the statement of net income and a charge of $2.1 million ($1.3 net of tax effect) against operations. PRIOR TO THE ADOPTION OF STATEMENT NO. 133 ON JULY 1RST, 2000, SUBSTANTIALLY ALL OF THE GROUP DERIVATIVES WERE ACCOUNTED FOR AS HEDGING CONTRACTS NOT RECOGNIZED ON THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND WERE NOT MARK-TO-MARKET. The Group designated no hedge accounting during the quarter ended September 30, 2000. The adoption of Statement No. 133 resulted in the cumulative effect of an accounting change of $3.2 million ($1.9 million net of tax effect) THAT WAS recognized as income in THE CONSOLIDATED STATEMENT OF INCOME. In addition, a charge of $2.1 million ($1.3 million net of tax effect) was recognized against operations for the quarter ended September 30, 2000. The fair value of the Group's derivatives as of September 30, 2000 was $2.9 million and is included as part of "Other assets, net" in the Consolidated Statement of Financial Condition. With the adoption of Statement No. 133, the Group also reclassified the portfolio of investment securities held-to-maturity to the available-for-sale category (see Note 2). NOTE 2 - INVESTMENTS AND SECURITIES: The Group's securities are classified as held-to-maturity, available-for-sale or trading. Securities for which the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Securities that might be sold prior to maturity because of interest rate changes, to meet liquidity needs, or to better match the repricing characteristics of funding sources are classified as available-for-sale. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes in other comprehensive income. The Group classifies as trading those securities that are acquired and held principally for the purpose of selling them in the near term. These securities are carried at estimated fair value with realized and unrealized changes in market value included in earnings in the period in which the changes occur. Interest revenue arising from trading instruments is included in the statement of income as part of net interest income rather than in the trading profit or loss account. The Group's investment in the Federal Home Loan Bank (FHLB) of New York stock has no readily determinable fair value and can only be sold back to the FHLB at par value. Therefore, this investment is carried at cost and its redemption value represents its fair value. Premiums and discounts are amortized to interest income over the life of the related securities using the interest method. Net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any, on securities classified as either available-for-sale or held-to-maturity are reported separately in the statement of income. Cost of securities is determined on the specific identification method. -5- MONEY MARKET INVESTMENTS At September 30, 2000 and June 30, 2000 the Group's money market investments were comprised of:
(IN THOUSANDS) ------------------------------------------- SEPTEMBER 30, JUNE 30, -------------------- ------------------- Securities purchased under agreements to resell $ 48,600 $ -- Time deposits with other banks 1,000 1,350 Money market accounts and other short-term investments 59,984 22,161 -------------------- ------------------- $ 109,584 $23,511 ==================== ===================
TRADING SECURITIES A summary of trading securities owned by the Group at September 30, 2000 and June 30, 2000 is as follows:
(IN THOUSANDS) ------------------------------------------- SEPTEMBER 30, JUNE 30, -------------------- ------------------- U.S. Treasury securities $2,503 $42,734 P.R. Government securities 12,646 13,513 Mortgage-backed securities 14,835 6,058 CMO residuals, interest only 2,234 2,138 -------------------- ------------------- $32,218 $64,443 ==================== ===================
At September 30, 2000, the Group's trading portfolio weighted average yield was 8.77% (June 30, 2000 - 7.49%). INVESTMENT SECURITIES With the adoption of Statement No. 133 (See Note 1), "Accounting for Derivative Instruments and Hedging Activities", management reclassified the entire portfolio of investments Held-to-Maturity to the Available-for-Sale investment category. Hedging of the Held-to-Maturity securities is not allowed by Statement No. 133. The unrealized loss of $26.6 million of the held-to-maturity portfolio at the date of adoption of Statement No. 133 was charged against "Other Comprehensive Income" (see the Consolidated Statements of Changes in Stockholders' Equity and of Comprehensive Income). The amortized cost, gross unrealized gains and losses, estimated fair value, and weighted average yield of the securities owned by the Group at September 30, 2000 and June 30, 2000, were as follows:
SEPTEMBER 30, 2000 (IN THOUSANDS) ----------------- ----------------- --------------- ---------------- --------------- GROSS GROSS AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED COST GAINS LOSSES VALUE YIELD ----------------- ----------------- --------------- ---------------- --------------- AVAILABLE-FOR-SALE AND FHLB STOCK US Treasury securities $3,656 $19 $32 $3,643 7.31% US Government agencies securities 104,505 3 2,214 102,294 6.81% Other debt securities 9,283 -- -- 9,283 8.33% PR Government securities 4,014 12 23 4,003 7.65% CMOs 108,079 -- 5,029 103,050 6.52% FNMA and FHLMC certificates 352,771 1,082 5,654 348,198 6.86% GNMA certificates 430,262 874 4,327 426,808 7.28% ----------------- ----------------- --------------- ---------------- --------------- 1,012,570 1,990 17,279 997,279 7.02% FHLB stock 11,146 -- -- 11,146 7.23% ----------------- ----------------- --------------- ---------------- --------------- $1,023,716 $1,990 $17,279 $1,008,425 7.03% ----------------- ----------------- --------------- ---------------- --------------- HELD-TO-MATURITY PR Government securities -- -- -- -- 0.00% US Government agencies securities -- -- -- -- 0.00% CMOs -- -- -- -- 0.00% Other debt securities -- -- -- -- 0.00% FNMA and FHLMC certificates -- -- -- -- 0.00% GNMA certificates -- -- -- -- 0.00% ----------------- ----------------- --------------- ---------------- --------------- -- -- -- -- 0.00% ----------------- ----------------- --------------- ---------------- --------------- $1,023,716 $1,990 $17,279 $1,008,425 7.03% ================= ================= =============== ================ ===============
-6-
JUNE 30, 2000 ( IN THOUSANDS) ----------------- ----------------- --------------- ---------------- --------------- GROSS GROSS AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED COST GAINS LOSSES VALUE YIELD ----------------- ----------------- --------------- ---------------- --------------- AVAILABLE-FOR-SALE AND FHLB STOCK US Treasury securities $87,710 $3 $4,979 $82,734 5.18% US Government agencies securities 104,482 -- 3,842 100,640 6.81% Other debt securities 4,417 -- 66 4,351 8.32% PR Government securities 465 5 19 451 6.19% CMOs 212 -- -- 212 5.78% FNMA and FHLMC certificates 56,743 100 99 56,744 8.00% GNMA certificates 37,875 154 261 37,768 7.62% ----------------- ----------------- --------------- ---------------- --------------- 291,904 262 9,266 282,900 6.65% FHLB stock 11,146 -- -- 11,146 6.27% ----------------- ----------------- --------------- ---------------- --------------- $303,050 $262 $9,266 $294,046 6.66% ----------------- ----------------- --------------- ---------------- --------------- HELD-TO-MATURITY PR Government securities 3,551 3 24 3,530 7.89% US Government agencies securities 9,993 -- 457 9,536 6.46% CMOs 110,967 -- 6,316 104,651 6.52% Other debt securities 4,864 -- -- 4,864 8.32% FNMA and FHLMC certificates 295,039 54 11,601 283,492 6.61% GNMA certificates 373,070 469 8,761 364,778 7.19% ----------------- ----------------- --------------- ---------------- --------------- 797,484 526 27,159 770,851 6.88% ----------------- ----------------- --------------- ---------------- --------------- $1,100,534 $788 $36,425 $1,064,897 6.82% ================= ================= =============== ================ ===============
The amortized cost and estimated fair value of the Group's investment securities at September 30, 2000, by contractual maturity, are shown in the next table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
(IN THOUSANDS) -------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL -------------------------------------------------------------------------------------------------- AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE COST VALUE -------------------------------------------------------------------------------------------------- Due within 1 year $345 $343 $ -- $ -- $345 $343 After 1 year to 5 years 4,441 4,435 -- -- 4,441 4,435 After 5 years to 10 years 126,719 124,587 -- -- 126,719 124,587 Due after 10 years 881,066 867,916 -- -- 881,066 867,916 FHLB stock - - -- -- 11,146 11,146 -------------- ------------ ------------- -------------- ------------- -------------- $1,012,570 $997,279 $ -- $ -- $1,023,616 $1,008,425 -------------- ------------ ------------- -------------- ------------- --------------
Proceeds from the sale of investment securities available-for-sale during the first three months of fiscal 2001 totaled $92,557,000 (2000 - $11,920,000). Gross realized gains and losses on those sales during first quarter of fiscal 2001 were $11,362 and $3,714,000 respectively (2000 - $599,000 and $0). Of Oriental's investments at September 30, 2000 and June 30, 2000 the Government of Puerto Rico was the only issuer, other than the U.S. Government, of instruments that are payable and secured by the same source of revenue or taxing authority that exceeded 10% of stockholders' equity. The fair value of these investments represented 14% and 15% of stockholders' equity, respectively. At September 30, 2000, the amortized cost and fair value of investments from the Government of Puerto Rico were approximately $16,660,000 (June 30, 2000 - $17,686,000) and $16,649,000 (June 30, 2000 - $17,652,000), respectively. At September 30, 2000, $13,080,000 (June 30, 2000 - $13,670,000) of these investments were an AAA-rated Puerto Rico municipal bond collateralized with mortgage-backed securities. -7- NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES: LOANS RECEIVABLE The Group's business activity is with consumers located in Puerto Rico. Oriental's loan transactions include a diversified number of industries and activities such as individuals, sole proprietorships, partnerships, manufacturing, tourism, government, insurance and not-for-profit organizations, all of which are encompassed within three main categories: mortgage, commercial and consumer. Oriental's loan portfolio has a higher concentration of loans to consumers such as residential mortgage loans, personal loans, and auto leases. The composition of the Group's loan portfolio at September 30, 2000 and June 30, 2000 was as follows:
(IN THOUSANDS) ---------------------------------------- SEPTEMBER 30, JUNE 30, --------------------- ------------------ LOANS SECURED BY REAL ESTATE: Residential $319,234 $331,150 Non-residential real estate loans 4,699 4,974 Home equity loans and personal loans collateralized by real estate 46,249 40,306 --------------------- ------------------ 370,182 376,430 Less: net deferred loan fees (2,458) (2,103) --------------------- ------------------ 367,724 374,327 ===================== ================== OTHER LOANS: Commercial 25,878 24,117 Personal consumer loans and credit lines 21,597 19,698 Financing leases, net of unearned interest 8,217 8,785 --------------------- ------------------ 55,692 52,600 ===================== ================== LOANS RECEIVABLE 423,416 426,927 Allowance for loan losses (6,972) (6,837) -------------------- ------------------ LOANS RECEIVABLE, NET 416,444 420,090 Loans held-for-sale 49,084 180,788 -------------------- ------------------ TOTAL LOANS, NET $465,528 $600,878 ==================== ==================
ALLOWANCE FOR LOAN LOSSES The Group maintains an allowance for loan losses at a level that management considers adequate to provide for potential losses based upon an evaluation of known and inherent risks. Oriental's allowance for loan losses policy provides for a detailed quarterly analysis of possible losses. The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available information in estimating possible loan losses, future additions to the allowance may be necessary based on factors beyond Oriental's control, such as factors affecting Puerto Rico economic conditions. Refer to Table 9 of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the changes in the allowance for loan losses for the first quarter and three-months period ended September 30, 2000 and 1999. The Group evaluates all loans, some individually and other as homogeneous groups, for purposes of determining impairment. At September 30, 2000 and June 30, 2000, the Group determined that no impairment reserve was necessary. NOTE 4 - PLEDGED ASSETS: At September 30, 2000, residential mortgage loans and investment securities amounting to $213,363,000 (June 30, 2000 - $254,312,000), and $889,903,000 (June 30, 2000 - $1,062,000,000), respectively, were pledged to secure public fund deposits, investment securities sold under agreements to repurchase, letters of credit, advances and borrowings from the Federal Home Loan Bank of New York, term notes and interest rate swap agreements. -8- NOTE 5 - INTEREST RATE RISK MANAGEMENT The Group uses interest rate swaps and caps as an interest rate risk hedging mechanism. Under the swaps, the Group pays a fixed annual cost and receives a floating ninety-day payment based on LIBOR. Floating rate payments received from the swap counterparty correspond to the floating rate payments made on the borrowings or notes thus resulting in a net fixed rate cost to the Group. Under the caps, Oriental pays an up front premium or fee for the right to receive cash flow payments in excess of the predetermined cap rate; thus, effectively capping its interest rate cost for the duration of the agreement. The Group's swaps and caps outstanding and their terms at September 30, 2000 and June 30, 2000 are set forth in the table below:
(DOLLARS IN THOUSANDS) --------------------------------------- SEPTEMBER 30, JUNE 30, ----------------- ----------------- SWAPS: Pay fixed swaps notional amount $100,000 $100,000 Weighted average pay rate - fixed 7.07% 7.07% Weighted average receive rate - floating 6.66% 6.76% Maturity in months 21 24 Floating rate as a percent of LIBOR 100% 100% CAPS: Cap agreements notional amount $250,000 $250,000 Cap rate 7.00% 7.00% Maturity in months 19 23
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. The Bank offers its customers certificates of deposit which contain an embedded derivative tied to the performance of one of the following stock market indexes, Standard & Poor's 500 Composite Stock Index, Dow Jones Industrial Average and Russell 2000 Small Stock Index. At the end of five years, the depositor will receive a specified percent of the average increase of the month-end value of the corresponding stock index. If such index decreases, the depositor receives the principal without any interest. The Group uses interest rate swap agreements with major money center banks to manage its exposure to the stock market. Under the terms of the agreements, the Group will receive the average increase in the month-end value of the corresponding index in exchange for a semiannual fixed interest cost. At September 30, 2000, the notional amount of these agreements totaled $142,975,000 (June 30, 2000 -$132,975,000) at a weighted average rate of 5.87% (June 30, 2000 - 5.84%). The Group offers its customers certificates of deposit with high interest rates and therefore uses interest rate swap agreements to lower the cost of these deposits. Under the terms of the agreements the Group pays a floating rate (90 days LIBOR less a spread) and receives a fixed payment (the cost of the certificates of deposit). These swaps mature in seven years with an option to cancel after the third year. This option is at the counterparty's call. The certificates of deposit are issued with this same option, the Group has the right to call and consequently cancel the certificates of deposit. At September 30, 2000, the notional amount of these agreements totaled $40,000,000 (June 30, 2000 - $40,000,000) at a weighted average rate of 6.02% (June 30, 2000- 5.82%). On July 1, 2000, the Group adopted Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement requires the recognition of derivatives in the balance sheet at fair value (See Note 1). NOTE 6 - SEGMENT REPORTING ( UNAUDITED): The Group operates three major reportable segments: Financial Services, Mortgage Banking and Retail Banking. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Group's organizational chart, nature of products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Group monitors the performance of these reportable segments, based on pre-established goals of different financial parameters such as net income, interest spread, loan production, fees generated, and increase in market share. -9- The Group's largest business segment is retail banking, which is mainly comprised of the Bank's branches and loan centers with such retail products as deposits and consumer loans. Commercial and finance leases are also considered in the retail business. This segment s also responsible for the Bank's mortgage loans portfolio, and the Group's investment portfolios and treasury functions. The Group's second largest business segment is the financial services, which is comprised of the Bank's trust division (Oriental Trust) and the registered broker-dealer subsidiary (Oriental Financial Services). The core operations of this segment are financial planning, money management and investment brokerage services, as well as corporate and individual trust services. The last and smallest business segment is mortgage banking. It consists of Oriental Mortgage, whose principal activity is to originate and purchase mortgage loans and subsequently sell them in the secondary market. Following are the results of operations and the selected financial information by operating segment for each of the first quarter ended September 30:
UNAUDITED -THREE-MONTH PERIOD ENDED (DOLLARS IN THOUSANDS) ----------------------------------------------------------------------------------- RETAIL FINANCIAL MORTGAGE BANKING SERVICES BANKING ELIMINATIONS TOTAL --------------- -------------- --------------- --------------- -------------- FISCAL 2001 Net interest income $6,425 $60 $ -- $ -- $6,485 Non-interest income(charges) (3,035) 956 1,895 (162) (346) Non-interest expenses 6,726 607 1,016 (162) 8,187 Provision for loan losses 1,400 -- -- -- 1,400 --------------- -------------- --------------- --------------- -------------- INCOME (LOSS) BEFORE TAXES $(4,736) $409 $ 879 $ -- $(3,448) =============== ============== =============== =============== ============== --------------- -------------- --------------- --------------- -------------- Total assets $1,674,215 $5,635 $2,000 $(2,383) $1,679,467 =============== ============== =============== =============== ============== FISCAL 2000 Net interest income 11,806 $112 $ -- $ -- $11,918 Non-interest income(charges) 3,334 822 2,233 (145) 6,244 Non-interest expenses 7,230 526 927 (145) 8,538 Provision for loan losses 1,750 -- -- -- 1,750 --------------- -------------- --------------- --------------- -------------- INCOME BEFORE TAXES $6,160 $408 $1,306 $ -- $7,874 =============== ============== =============== =============== ============== --------------- -------------- --------------- --------------- -------------- Total assets $1,648,012 $12,636 $2,000 $(2,148) $1,660,500 =============== ============== =============== =============== ==============
-10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------- OVERVIEW OF FINANCIAL PERFORMANCE The Group posted a net loss of $62,000 for the first quarter of fiscal 2001, as compared to a net income of $7.2 million reported for the first quarter of fiscal 2000. This loss reflects a non-operating loss of $3.7 million ($3.1 million net of tax effect) incurred on the sale of treasury securities combined with the effects in the net credit spread of the increase in the cost of funds resulting from federal interest rate hikes made during the past year. This was partially offset by a $1.1 million ($666,000 net of tax effect) favorable adjustment related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" (refer to Note 1 to the consolidated financial statements: Summary of Significant Accounting Policies). The aforementioned $3.7 million loss in the sale of treasury securities was taken following recommendations made by the Group's asset/liability consultants. Proceeds from the sale of these low-yielding investments are being used to reduce higher-cost borrowings and to reinvest in higher-yielding securities, thus further strengthening future earnings. Due to the Group's reporting calendar, and months before most other institutions in Puerto Rico and throughout the United States, the Group was required to adopt SFAS No. 133 on July 1, 2000. Other institutions will also be required to apply this new accounting standard in the first quarter of fiscal years beginning after June 15, 2000. Some of the best-capitalized institutions in the world have already reported the impact of SFAS No. 133 on their earnings, mostly with negative effects. SFAS No. 133 requires the recognition of derivatives on the balance sheet at fair value. Derivatives that are not hedges must be recognized in the statement of income based upon the difference between fair value and the carrying amount. If the derivative meets specified criteria and qualifies as a hedge, changes in fair value are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be recognized in earnings. The $1.1 million ($666,000 net of tax effect) adjustment to net income from the adoption of SFAS No. 133 resulted from the cumulative effect of a change in accounting principle of $3.2 million ($1.9 million net of tax effect), recognized as a separate income item in the statement of income, and a charge of $2.1 million ($1.3 million net of tax effect) against operations for the first quarter ended September 30, 2000. Net credit income (net interest income minus the provision for loan losses) decreased 50 percent from $10.2 million in the first quarter of fiscal year 1999 to $5.1 million for the quarter ended September 30, 2000. Interest income grew 2.1 percent despite a 34.2 percent reduction in interest revenues from loans, as a result of the previously disclosed sale of over $180 million of leases and unsecured personal loans. Interest expenses rose 34 percent to $23.9 million, as compared to $17.8 million for the same quarter in September 1999, mainly as a result of the aforementioned interest rate hikes. Recurrent non-interest income remained stable at $5.4 million in the quarter ended September 30, 2000. Trust, money management and brokerage fees increased 7.6 percent from $2.6 million to $2.8 million. Banking fees also increased 8.4 percent from $925,000 to $1 million. Mortgage-banking revenues decreased 20.8 percent to $1.6 million. However, as expected by management, these revenues have begun to show an improvement evident in the 26.9 percent increase from the $1.2 million earned in the quarter ended June 30, 2000. This improvement is a result of management's focus of concentrating on secured lending, which also has had a positive effect on Oriental's risk exposure and capital requirements. In line with the Group's strategy of expanding fee-based income, recurrent non-interest revenues now constitute 53 percent of total core recurrent revenues. Financial assets, which include the Group's assets and assets managed by the trust and brokerage business, reached $4.064 billion at the end of the first quarter of fiscal 2001 -- up 3.7% from $3.906 billion at the end of the same period of fiscal 2000. The Group's assets grew 1.1% to $1.680 billion at September 30, 2000, up from $1.662 billion a year ago. Assets managed by the trust and broker-dealer increased 5.5% to $2.384 billion from $2.260 billion the year before. -11- The following pages discuss in detail the different components that influenced the Group's performance. Tables 1 to 13 on pages 13 to 19 provide relevant operational ratios and information for the periods analyzed as follows:
TABLE DESCRIPTION: PAGE NO.: ------------------ --------- Selected Financial Data: Earnings, Dividends Declared and Per Share Information -13- Period End Balances -13- Selected Financial Ratios (in percent) and Other Information -13- Table 1 Quarterly Analysis of Net Interest Income and Changes due to Volume / Rate -14- Table 2 Non-Interest Income Summary and Composition -15- Table 3 Non-Interest Expenses Summary and Composition -15- Table 4 Non-0perating Activities -15- Table 5 Allowance for Loan Losses Summary -16- Table 6 Net Credit Losses Statistics -16- Table 7 Loan Loss Reserve Breakdown -17- Table 8 Non-Performing Assets -17- Table 9 Non-Performing Loans -17- Table 10 Bank Assets Summary and Composition -18- Table 11 Liabilities Summary and Composition -18- Table 12 Capital, Dividends and Stock Data -19- Table 13 Financial Assets Summary -19-
-12- SELECTED FINANCIAL DATA THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999 (IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)
AS RESTATED ------------------------------------------------- 2000 1999 VARIANCE % ----------------- ---------------- ------------ EARNINGS, PER SHARE AND DIVIDENDS: -------------------------------------------------------------------------------------------------------------------- Interest income $ 30,369 $ 29,739 2.1% Interest expense 23,884 17,821 34.0% ----------------- ---------------- ------------ NET INTEREST INCOME 6,485 11,918 -45.6% Provision for loan losses 1,400 1,750 -20.0% ----------------- ---------------- ------------ NET CREDIT INCOME 5,085 10,168 -50.0% Recurrent non-interest income 5,394 5,510 -2.1% ----------------- ---------------- ------------ NET CORE REVENUES 10,479 15,678 -33.2% Recurrent non-interest expenses 8,188 6,538 -4.1% ----------------- ---------------- ------------ CORE OPERATING ACTIVITIES 2,291 7,140 -67.9% ----------------- ---------------- ------------ NON-OPERATING ACTIVITIES (5,740) 734 -882.0% ----------------- ---------------- ------------ INCOME (LOSS) BEFORE TAXES (3,448) 7,874 -143.8% Income taxes (credit) (1,457) 631 -330.9% ----------------- ---------------- ------------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,991) 7,243 -127.5% Cumulative effect of change in accounting principle, net of taxes 1,930 - 100.0% ----------------- ---------------- ------------ (61) 7,243 -100.9% Less: dividends on preferred stock (597) (597) 0.0% ----------------- ---------------- ------------ NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (658) $ 6,646 -109.9% ================= ================ ============ Basic before cumulative effect of change in GAAP $ (0.20) $ 0.52 -138.5% ----------------- ---------------- ------------ Basic after cumulative effect of change in GAAP $ (0.05) $ 0.52 -109.6% ----------------- ---------------- ------------ Diluted before cumulative effect of change in GAAP $ (0.20) $ 0.50 -140.0% ----------------- ---------------- ------------ Diluted after cumulative effect of change in GAAP $ (0.05) $ 0.50 -110.0% ----------------- ---------------- ------------ AVERAGE SHARES AND POTENTIAL SHARES 12,639 13,305 -3.8% ----------------- ---------------- ------------ Book value $ 5.81 $ 6.45 -9.9% ----------------- ---------------- ------------ Market price at end of period $ 15.50 $ 22.75 -31.9% ----------------- ---------------- ------------ Dividends declared per commmon share $ 0.15 $ 0.15 1.3% ----------------- ---------------- ------------ Dividends declared on common shares $ 1,905 $ 1,916 -0.6% ----------------- ---------------- ------------ PERIOD END BALANCES (as of September 30,) AND FINANCIAL RATIOS: -------------------------------------------------------------------------------------------------------------------- TOTAL FINANCIAL ASSETS Trust assets managed $ 1,445,800 $ 1,394,800 3.7% Broker-dealer assets gathered 939,000 864,700 8.6% ----------------- ---------------- ------------ ASSETS MANAGED 2,384,800 2,259,500 5.5% Group total assets 1,679,466 1,646,138 2.0% ----------------- ---------------- ------------ $ 4,064,268 $ 3,905,638 4.1% ================= ================ ============ INTEREST-EARNING ASSETS Investments $ 1,150,227 $ 1,028,099 11.9% Loans and leases (including held-for-sale) 465,528 552,086 -15.7% ----------------- ---------------- ------------ $ 1,615,755 $ 1,580,185 2.3% ----------------- ---------------- ------------ INTEREST-BEARING LIABILITIES Deposits $ 706,627 $ 641,511 10.2% Repurchase agreements 729,663 701,322 4.0% Borrowings 106,500 153,200 -30.5% ----------------- ---------------- ------------ $ 1,542,790 $ 1,496,033 3.1% ----------------- ---------------- ------------ STOCKHOLDERS' EQUITY Preferred equity $ 33,500 $ 33,500 0.0% Common equity 73,061 82,433 -11.4% ----------------- ---------------- ------------ $ 106,561 $ 115,933 -8.1% ----------------- ---------------- ------------ CAPITAL RATIOS Leverage capital 7.32% 8.72% ----------------- ---------------- Total risk-based capital 29.85% 24.74% ----------------- ---------------- Tier 1 risk-based capital 28.60% 23.48% ----------------- ---------------- FINANCIAL RATIOS (IN PERCENT) Return on average assets (ROA) -0.45% 1.81% ----------------- ---------------- Return on average common equity (ROE) -12.45% 30.38% ----------------- ---------------- Efficiency ratio 68.67% 48.25% ----------------- ---------------- Expense ratio 0.65% 0.72% ----------------- ---------------- Interest rate spread 1.26% 2.82% ----------------- ---------------- Number of banking offices 19 19 ----------------- ----------------
-13- SELECTED FINANCIAL DATA THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999 (DOLLARS IN THOUSANDS) TABLE 1 - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE: --------------------------------------------------------------------------------
--------------------------- ----------------------- ------------------------------ INTEREST AVERAGE RATE AVERAGE BALANCE --------------------------- ----------------------- ------------------------------ FISCAL FISCAL VARIANCE FISCAL FISCAL VARIANCE FISCAL FISCAL VARIANCE 2000 1999 IN % 2000 1999 IN BP 2000 1999 IN % --------------------------- ----------------------- ------------------------------ --------------------------------------- A - TAX EQUIVALENT SPREAD --------------------------------------- Interest-earning assets $ 30,369 $ 29,739 2.1% 7.19% 7.73% -0.54% $1,687,472 $ 1,532,748 10.1% Tax equivalent adjustment 6,442 5,225 23.3% 1.53% 1.36% 0.17% -- -- 0.0% --------------------------- ----------------------- ------------------------------ INTEREST-EARNING ASSETS -- TAX EQUIVALENT 36,811 34,964 5.3% 8.72% 9.09% -0.37% 1,687,472 1,532,748 10.1% Interest-bearing liabilities 23,884 17,821 34.0% 5.93% 4.92% 1.01% 1,598,907 1,436,542 11.3% --------------------------- ----------------------- ------------------------------ NET INTEREST INCOME / SPREAD $ 12,927 $ 17,143 -24.6% 2.79% 4.17% -1.38% $88,565 $96,206 -7.9% --------------------------- ----------------------- ------------------------------ --------------------------------------- B - NORMAL SPREAD --------------------------------------- INTEREST-EARNING ASSETS: INVESTMENTS: Investment securities $ 18,214 $ 15,384 18.4% 6.81% 6.53% 0.28% $ 1,068,26 $ 940,667 13.6% Trading securities 533 395 34.9% 7.83% 8.24% -0.41% 27,254 19,177 42.1% Money market investments 2,474 55 4398.2% 6.84% 4.62% 2.22% 144,672 4,750 2946.7% --------------------------- ----------------------- ------------------------------ 21,221 15,834 34.0% 6.84% 6.55% 0.29% 1,240,194 964,594 28.6% --------------------------- ----------------------- ------------------------------ LOANS: Real estate (1) 7,670 6,210 23.5% 7.79% 7.64% 0.16% 393,723 325,128 21.1% Consumer 671 4,216 -84.1% 13.51% 13.66% -0.15% 19,698 122,441 -83.9% Financing leases 176 2,720 -93.5% 7.45% 10.60% -3.15% 9,394 101,834 -90.8% Commercial and auto loans 631 759 -16.9% 10.22% 16.06% -5.84% 24,463 18,751 30.5% --------------------------- ----------------------- ------------------------------ 9,148 13,905 -34.2% 8.17% 9.75% -1.58% 447,278 568,154 -21.3% --------------------------- ----------------------- ------------------------------ 30,369 29,739 2.1% 7.19% 7.73% -0.54% 1,687,472 1,532,748 10.1% --------------------------- ----------------------- ------------------------------ INTEREST-BEARING LIABILITIES: DEPOSITS: Savings and demand 786 764 2.9% 2.36% 2.09% 0.27% 131,942 145,196 -9.1% Time and IRA accounts 8,824 6,470 96.4% 6.09% 5.17% 0.92% 574,898 496,288 15.8% --------------------------- ----------------------- ------------------------------ 9,610 7,234 2.8% 5.39% 4.47% 0.92% 706,840 641,484 10.2% --------------------------- ----------------------- ------------------------------ BORROWINGS: Repurchase agreements 12,224 8,465 44.4% 6.35% 5.34% 1.01% 764,280 629,197 21.5% FHLB funds, term notes and other borrowings 2,050 2,122 -3.4% 6.36% 5.08% 1.28% 127,787 165,861 -23.0% --------------------------- ----------------------- ------------------------------ 14,274 10,587 34.8% 6.35% 5.28% 1.07% 892,067 795,058 12.2% --------------------------- ----------------------- ------------------------------ 23,884 17,821 34.0% 5.93% 4.92% 1.01% 1,598,907 1,436,542 11.3% --------------------------- ----------------------- ------------------------------ NET INTEREST INCOME / SPREAD $ 6,485 $ 11,918 -45.6% 1.26% 2.81% -1.55% =========================== ======================= INTEREST RATE MARGIN -- -- 1.57% 3.12% -1.55% ======================= EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES $ 88,565 $ 96,206 -7.9% ============================== INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO 105.54% 106.70% ==================== ---------------------------------------- ------------------------- CHANGES IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL ---------------------------------------- ------------------------- INTEREST INCOME: Loans (1) $ (4,420) $ (337) $(4,757) Investments 3,865 1,522 5,387 ----------------- ------- (555) 1,185 630 ----------------- ------- INTEREST EXPENSE: Deposits 1,004 1,372 2,376 Borrowings 1,319 2,368 3,687 ----------------- ------- 2,323 3,740 6,063 ----------------- ------- NET INTEREST INCOME $(2,878)$(2,555) $(5,439) ================= =======
(1) - Real estate averages include loans held-for-sale. -14- SELECTED FINANCIAL DATA THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999 (Dollars in thousands)
------------------------------------------ THREE-MONTH PERIOD ------------------------------------------ 2000 1999 VARIANCE % ------------------------------------------ TABLE 2 - NON-INTEREST INCOME SUMMARY ------------------------------------------------------------------------------------------------- Trust, money management and brokerage fees $ 2,827 $ 2,627 7.6% Mortgage banking activities 1,551 1,958 -20.8% -------------- ------------- ------------- NON-BANKING SERVICE REVENUES 4,378 4,585 -4.5% ============== ============= ============= Fees on deposit accounts 548 362 51.4% Bank service charges and commissions 434 559 -22.4% Other operating revenues 34 4 750.0% -------------- ------------- ------------- BANK SERVICE REVENUES 1,016 925 9.8% -------------- ------------- ------------- RECURRENT NON-INTEREST INCOME $ 5,394 $ 5,510 -2.1% ============== ============= ============= RECURRENT NON-INTEREST INCOME TO EXPENSES RATIO 66.31% 62.99% 5.3% -------------- ------------- ------------- TABLE 3 - NON-INTEREST EXPENSES SUMMARY ------------------------------------------------------------------------------------------------- Fixed compensation $ 2,695 $ 2,744 -1.8% Variable compensation 680 1,077 -36.9% -------------- ------------- ------------- COMPENSATION AND BENEFITS 3,375 3,821 -11.7% ============== ============= ============= Occupancy and equipment 1,718 1,493 15.1% Advertising and business promotion 781 723 8.0% Professional and service fees 505 874 -42.2% Communications 420 404 4.0% Municipal and other general taxes 488 479 1.9% Insurance, including deposits insurance 95 133 -28.6% Printing, postage, stationery and supplies 163 197 -17.3% Other operating expenses 642 414 55.1% -------------- ------------- ------------- OTHER NON-INTEREST EXPENSES 4,812 4,717 2.0% -------------- ------------- ------------- RECURRENT NON-INTEREST EXPENSES $ 8,187 $ 8,538 -4.1% ============== ============= ============= RELEVANT RATIOS AND DATA: Efficiency ratio 68.67% 48.25% -------------- ------------- Expense ratio 0.65% 0.72% -------------- ------------- Compensation to recurrent non-interest expenses 41.5% 43.7% -------------- ------------- Variable compensation to total compensation 20.1% 28.2% -------------- ------------- Compensation to total average assets 0.92% 1.04% -------------- ------------- Average compensation per employee $ 37.8 $ 41.9 -------------- ------------- Average number of full-time employees 357 365 -------------- ------------- Bank assets per employee $ 5,353 $ 4,958 -------------- ------------- TOTAL WORK FORCE: Banking operations 314 332 -5.4% Trust operations 27 29 -6.9% Brokerage operations 11 12 -8.3% -------------- ------------- ------------- 352 373 -5.6% ============== ============= ============= TABLE 4 - NON-OPERATING ACTIVITIES GAINS (LOSSES) ------------------------------------------------------------------------------------------------- Securities net activity $ (3,705) $ 599 -718.5% Trading net activity (12) (133) -91.0% Derivatives activity (2,072) -- -100.0% -------------- ------------- ------------- SECURITIES, DERIVATIVES AND TRADING NET ACTIVITIES (5,789) 466 -1142.3% -------------- ------------- ------------- Leasing revenues (discontinued June 2000) 49 268 -83.6% -------------- ------------- ------------- OTHER NON-OPERATING ACTIVITIES 49 268 -83.6% -------------- ------------- ------------- TOTAL NON-OPERATING ACTIVITIES $ (5,740) $ 734 -682.0% ============== ============= =============
-15- SELECTED FINANCIAL DATA THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999 (Dollars in thousands)
QUARTER ACTIVITY ----------------------------------------- 2000 1999 ------------------- ------------------- TABLE 5 - ALLOWANCE FOR LOAN LOSSES SUMMARY ---------------------------------------------------------------------------------------------------------- BEGINNING BALANCE $ 6,837 $ 9,002 Provision for loan losses 1,400 1,750 Net credit losses -- see table 6 (1,265) (2,021) ------------------- ------------------- ENDING BALANCE - SEE TABLE 7 $ 6,972 $ 8,731 ------------------- ------------------- SELECTED DATA AND RATIOS: Loans outstanding at September 30, $ 472,500 $ 560,817 ------------------- ------------------- Recoveries to net charge-offs 30.2% 26.7% ------------------- ------------------- Allowance coverage ratio Total loans 1.48% 1.56% ------------------- ------------------- Non-performing loans 41.98% 48.73% ------------------- ------------------- Non-real estate non-performing loans 96.47% 97.79% ------------------- ------------------- TABLE 6 - NET CREDIT LOSSES STATISTICS ---------------------------------------------------------------------------------------------------------- REAL ESTATE Charge-offs $ -- $ -- Recoveries -- -- ------------------- ------------------- -- -- ------------------- ------------------- CONSUMER Charge-offs (1,074) (1,749) Recoveries 307 382 ------------------- ------------------- (767) (1,367) ------------------- ------------------- LEASING Charge-offs (487) (974) Recoveries 200 295 ------------------- ------------------- (287) (679) ------------------- ------------------- COMMERCIAL AND OTHERS Charge-offs (252) (35) Recoveries 41 60 ------------------- ------------------- (211) 25 ------------------- ------------------- NET CREDIT LOSSES Total charge-offs (1,813) (2,758) Total recoveries 548 737 ------------------- ------------------- $ (1,265) $ (2,021) ------------------- ------------------- NET CREDIT LOSSES TO AVERAGE: Real estate 0.00% 0.00% ------------------- ------------------- Consumer 15.58% 4.42% ------------------- ------------------- Leasing 12.22% 2.50% ------------------- ------------------- Commercial and others 3.71% -0.48% ------------------- ------------------- TOTAL 1.13% 1.38% ------------------- ------------------- AVERAGE: Real estate $ 393,723 $ 334,117 Consumer 19,698 123,662 Leasing 9,394 108,469 Commercial and others 24,463 19,972 ------------------- ------------------- TOTAL $ 447,278 $ 586,220 =================== ===================
-16- SELECTED FINANCIAL DATA THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999 (Dollars in thousands)
----------------------------------------- 2000 1999 ------------------- ------------------- TABLE 7 - LOAN LOSS RESERVE BREAKDOWN ( as of September 30,): ---------------------------------------------------------------------------------------------------------- Consumer $ 1,263 $ 3,047 Financing leases 4,170 4,707 Commercial and other 921 615 ------------------- ------------------- Non-real estate 6,354 8,369 Real estate 618 362 ------------------- ------------------- $ 6,972 $ 8,731 ------------------- ------------------- TABLE 8 - NON-PERFORMING ASSETS ( as of September 30,): ---------------------------------------------------------------------------------------------------------- NON-PERFORMING ASSETS Non-performing loans $ 16,609 $ 17,917 Foreclosed real estate 535 383 Repossessed autos 171 347 Repossessed equipment -- 26 ------------------- ------------------- $ 17,315 $ 18,673 ------------------- ------------------- NON-PERFORMING LOANS TO Total loans 3.52% 3.19% ------------------- ------------------- Total assets 0.99% 1.09% ------------------- ------------------- Total capital 15.59% 15.45% ------------------- ------------------- TABLE 9 - NON-PERFORMING LOANS (AS OF SEPTEMBER 30,): ---------------------------------------------------------------------------------------------------------- NON-PERFORMING LOANS Consumer $ 889 $ 1,072 Financing leases 5,129 6,635 Commercial 1,209 1,221 ------------------- ------------------- Non-real estate 7,227 8,928 Real estate 9,382 8,989 ------------------- ------------------- $ 16,609 $ 17,917 =================== =================== NON-PERFORMING LOANS COMPOSITION Consumer 5.4% 6.0% Financing leases 30.9% 37.0% Commercial 7.3% 6.8% ------------------- ------------------- Non-real estate 43.5% 49.8% Real estate 56.5% 50.2% ------------------- ------------------- 100.0% 100.0% =================== ===================
-17- SELECTED FINANCIAL DATA AS OF SEPTEMBER 30, 2000 and 1999 and JUNE 30, 2000 (Dollars in thousands)
AS RESTATED -------------------------------------------------- ---------------- SEPTEMBER 30, SEPTEMBER 30, VARIANCE JUNE 30, 2000 1999 % 2000 ------------------ ------------------- ----------- ---------------- TABLE 10 - BANK ASSETS SUMMARY AND COMPOSITION ----------------------------------------------------------------------------------------------------------------------------- INVESTMENTS: Mortgage-backed securities and CMOs $ 895,110 $ 784,170 14.1% $ 882,455 U.S. and P.R. Government securities 134,387 230,389 -41.7% 262,372 FHLB stock and other investments 120,730 13,540 791.7% 34,657 ------------------ ------------------- ----------- ---------------- 1,150,227 1,028,099 11.9% 1,179,484 ------------------ ------------------- ----------- ---------------- LOANS: Real estate 416,833 309,299 34.8% 387,629 Consumer 21,574 126,620 -83.0% 19,698 Financing leases 8,215 103,640 -92.1% 8,785 Commercial and auto 25,878 21,258 21.7% 24,117 ------------------ ------------------- ----------- ---------------- 472,500 560,817 -15.7% 440,229 Consumer loans and leases under contract-to-sell -- -- 0.0% 167,486 ------------------ ------------------- ----------- ---------------- 472,500 560,817 -15.7% 607,715 Allowance for loan losses (6,972) (8,731) -20.1% (6,837) ------------------ ------------------- ----------- ---------------- 465,528 552,086 -15.7% 600,878 ------------------ ------------------- ----------- ---------------- TOTAL INTEREST-EARNING ASSETS 1,615,755 1,580,185 2.3% 1,780,362 Non-interest earning assets 63,712 65,952 -3.4% 69,872 ------------------ ------------------- ----------- ---------------- TOTAL ASSETS $ 1,679,467 $ 1,646,137 2.0% $ 1,850,234 ================== =================== =========== ================ INVESTMENTS PORTFOLIO COMPOSITION: Mortgage-backed securities and CMOs 77.8% 76.3% 74.8% U.S. and P.R. Government securities 11.7% 22.4% 22.2% FHLB stock and other investments 10.5% 1.3% 3.0% ------------------ ------------------- ---------------- 100.0% 100.0% 100.0% ================== =================== =============== LOAN PORTFOLIO COMPOSITION: Real Estate 88.2% 55.2% 63.8% Consumer 4.6% 22.6% 3.2% Financing leases 1.7% 18.5% 1.4% Commercial and auto 5.5% 3.7% 31.6% ------------------ ------------------- ---------------- 100.0% 100.0% 100.0% ================== =================== ===============
TABLE 11 - LIABILITIES SUMMARY AND COMPOSITION ----------------------------------------------------------------------------------------------------------------------------- DEPOSITS: Savings and demand deposits $ 126,991 $ 137,828 -7.9% $ 130,919 Time deposits and IRA accounts 574,056 499,493 14.9% 587,931 ------------------ ------------------- ----------- ---------------- 701,047 637,321 10.0% 718,850 Accrued interest 5,580 4,190 33.2% 4,831 ------------------ ------------------- ----------- ---------------- 706,627 641,511 10.2% 723,681 ------------------ ------------------- ----------- ---------------- BORROWINGS: Repurchase agreements 729,663 701,322 4.0% 816,493 FHLB funds 20,000 46,700 -57.2% 70,000 Term notes and other sources of funds 86,500 106,500 -18.8% 86,500 ------------------ ------------------- ----------- ---------------- 836,163 854,522 -2.1% 972,993 ================== =================== =========== =============== TOTAL INTEREST-BEARING LIABILITIES 1,542,790 1,496,033 3.1% 1,696,674 Non interest-bearing liabilities 30,116 34,173 -11.9% 35,691 ------------------ ------------------- ----------- ---------------- TOTAL LIABILITIES $ 1,572,906 $ 1,530,206 2.8% $ 1,732,365 ================== =================== =========== =============== DEPOSITS PORTFOLIO COMPOSITION: Savings and demand deposits 18.0% 21.5% 18.1% Time deposits and IRA accounts 81.2% 77.9% 81.2% Accrued Interest and manager checks 0.8% 0.6% 0.7% ------------------ ------------------- ---------------- 100.0% 100.0% 100.0% ================== =================== =============== BORROWINGS PORTFOLIO COMPOSITION: Repurchase agreements 87.3% 82.1% 83.9% FHLB funds 2.4% 5.5% 7.2% Term notes and other sources of funds 10.3% 12.4% 8.9% ------------------ ------------------- ---------------- 100.0% 100.0% 100.0% ================== =================== ===============
-18- SELECTED FINANCIAL DATA AS OF SEPTEMBER 30, 2000 and 1999 and JUNE 30, 2000 (Dollars in thousands)
AS RESTATED -------------------------------------------------- ---------------- SEPTEMBER 30, SEPTEMBER 30, VARIANCE JUNE 30, 2000 1999 % 2000 ------------------ ------------------- ----------- ---------------- TABLE 12 - CAPITAL, DIVIDENDS AND STOCK DATA ----------------------------------------------------------------------------------------------------------------------------- CAPITAL DATA: Stockholders' equity $ 106,561 $ 115,933 -8.1% $ 117,869 ------------------ ------------------- ----------- ---------------- Leverage Capital (minimum required - 4.00%) 7.32% 8.72% -16.1% 7.49% ------------------ ------------------- ----------- ---------------- Total Risk-Based Capital (minimum required - 8.00%) 29.85% 24.74% 20.7% 29.29% ------------------ ------------------- ----------- ---------------- Tier 1 Risk-Based capital (minimum required - 4.00%) 28.60% 23.48% 21.8% 30.54% ------------------ ------------------- ----------- ---------------- STOCK DATA: Outstanding common shares, net of treasury 12,569 12,776 -1.6% 12,697 ------------------ ------------------- ----------- ---------------- Book value $ 5.81 $ 6.45 -10.0% $ 6.64 ------------------ ------------------- ----------- ---------------- Market Price at end of period $ 15.50 $ 22.75 -31.9% $ 14.44 ------------------ ------------------- ----------- ---------------- Market capitalization $ 194,826 $ 290,657 -33.0% $ 183,345 ------------------ ------------------- ----------- ---------------- COMMON DIVIDEND DATA: Common dividends declared $ 1,905 $ 1,916 -0.6% $ 7,657 ------------------ ------------------- ----------- ---------------- Common dividends declared per share $ 0.150 $ 0.150 0.0% $ 0.450 ------------------ ------------------- ----------- ---------------- Payout ratio -85.08% 28.83% -395.1% 50.36% ------------------ ------------------- ----------- ---------------- Dividend yield 3.87% 2.55% 51.8% 2.99% ------------------ ------------------- ----------- ----------------
The following provides the high and low prices and dividend per share of the Group's stock for each quarter of the last three fiscal periods. Common stock prices were adjusted to give retroactive effect to the stock splits declared on the Group's common stock.
-------------------------------------- ----------- PRICE -------------------------------------- DIVIDEND HIGH LOW PER SHARE ------------------ ------------------- ----------- FISCAL 2001: September 30, 2000 $ 15.50 $ 11.68 $ 0.150 ------------------ ------------------- ----------- FISCAL 2000: June 30, 2000 $ 19.31 $ 13.18 $ 0.150 ------------------ ------------------- ----------- March 31, 2000 $ 26.00 $ 17.75 $ 0.150 ------------------ ------------------- ----------- December 31, 1999 $ 23.87 $ 19.69 $ 0.150 ------------------ ------------------- ----------- September 30, 1999 $ 28.00 $ 21.50 $ 0.150 ------------------ ------------------- ----------- FISCAL 1999: June 30, 1999 $ 29.87 $ 24.13 $ 0.150 ------------------ ------------------- ----------- March 31, 1999 $ 29.63 $ 27.50 $ 0.150 ------------------ ------------------- ----------- December 31, 1998 $ 32.00 $ 28.00 $ 0.150 ------------------ ------------------- ----------- September 30, 1998 $ 32.26 $ 28.84 $ 0.113 ------------------ ------------------- -----------
TABLE 13 - FINANCIAL ASSETS SUMMARY ---------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Trust assets managed $ 1,445,800 $ 1,394,800 3.7% $ 1,456,500 Assets gathered by broker-dealer 939,000 864,700 8.6% 914,900 ================== =================== =========== ================ MANAGED ASSETS 2,384,800 2,259,500 5.5% 2,371,400 Group assets 1,679,468 1,646,138 2.0% 1,850,608 ------------------ ------------------- ----------- ---------------- $ 4,064,268 $ 3,905,638 4.1% $ 4,222,008 ================== =================== =========== ================
-19- NET INTEREST INCOME Net interest income is the Group's main source of earnings. It is affected by the difference between rates of interest earned on the Group's interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest-earning assets and interest-bearing liabilities (interest rate margin). As further discussed in the Risk Management section, the Group constantly monitors the composition and repricing of its assets and liabilities to maintain its net interest income at adequate levels and to avoid undertaking highly sensitive positions that could affect its earnings capacity in a volatile interest rate environment. For the first quarter of fiscal 2001, the Group's net interest income amounted to $6.5 million, down 45.6% from $11.9 million in the same period of fiscal 2000. The reduction in net interest income was mainly due to a negative rate variance of $2.6 million as result of a higher average cost of funds (5.93% in 2001 versus 4.92% in 2000) in line with the interest rates hikes posted by the Fed during the past year combined with a negative volume variance of $2.8 million that stems from the sale of unsecured personal loans and leases portfolios, previously reposted. Interest rate spread narrowed 155 basis points during the first quarter of fiscal 2001, to 1.26% from 2.81% the year before. This was mainly due to: (1) an increase in the average cost of funds; and (2) a change in the mix of interest-earning assets toward a higher volume of lower risk and tax-free investment securities, including the sale of over $180 million of leases and unsecured personal loans. Table 1 analyzes the major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates. The Group's interest income for the first quarter of fiscal 2001 totaled $30.4 million, up 2.1% from $29.7 million posted in the same period of fiscal 2000. The increase in interest income results from a larger volume of average interest-earning assets ($1.687 billion in 2001 versus $1.533 billion in 2000) tempered by a decline in their yield performance (7.19% in 2001 versus 7.73% in 2000). Most of the increase in interest-earning assets was mainly on the investment portfolio. For the first quarter of fiscal 2001, the average volume of total investments grew by 28.6% ($1.240 billion in 2001 versus $964.6 million in 2000) when compared to the same period a year earlier. This increase was concentrated in mortgage-backed securities. For the first quarter period of fiscal 2001 the average yield on interest-earning assets was 7.19%, 54 basis points lower than the 7.73% reported a year ago. The yield dilution experienced was mainly related to: (i) the strong expansion of Group's investment portfolio, which carries a lower yield than the loan portfolio but provides less risk and generates a significant amount of tax-exempt interest; and (ii) the dilution of the loan portfolio yield, which decreased by 158 basis points (8.17% versus 9.75%) reflecting the sale of over $160 million of leases and unsecured personal loans, previously reported. Interest expense for the first quarter of fiscal 2001 rose 34% to $23.9 million from $17.8 million reported in the comparable period of fiscal 2000. A larger base of interest-bearing liabilities ($1.599 billion in 2001 versus $1.437 billion in 2000) used to fund the growth of the Group's interest-earning assets, combined with a higher average cost of funds (5.93% versus 4.92%) due to Fed interest rates hikes, drove the increase. Larger volumes of repurchase agreements and deposits, which were necessary to fund the growth of the Group's investment portfolio, drove this increase in interest-bearing liabilities. See Table 1 for the impact in interest expense due to changes in volume and rates. The cost of short-term financing has substantially increased since early fiscal 2000. For the first quarter ended September 30, 2000, the cost of borrowings increased 107 basis points (6.35% versus 5.28%). NON-INTEREST INCOME As a diversified financial services provider (see table 2), the Group's earnings depend not only on the net interest income generated from its banking activity, but also from fees and other non-interest income generated from the wide array of financial services offered. Non-interest income, is affected by the level of trust assets under management, transactions generated by gathering of financial assets by the broker-dealer subsidiary, the level of mortgage banking activities, and fees generated from loans and deposit accounts. -20- Recurrent non-interest remained stable at $5.4 million in the first quarter of fiscal 2001, compared to $5.5 million in the first quarter of fiscal 2000. Trust, money management and brokerage fees, the principal component of recurrent non-interest income, continued an excellent growth pattern during the first quarter of fiscal 2001, rising 7.6% to $2.8 million from $2.6 million in the first quarter of fiscal 2000. The larger volume of accounts and assets managed by both the Group's trust department and the broker-dealer subsidiary triggered this growth (see "Financial Condition" section). For the first quarter of fiscal 2001, gains generated by mortgage banking activities amounted to $1.6 million, a 20.8% lower than the $2.0 million for the first quarter of fiscal 2000. This decrease reflects a lower volume of loans sold. However, as expected by management, these revenues have begun to show an improvement evident in the 26.9% increase from the $1.2 million earned in the quarter ended June 30, 2000; in line with the strategy of concentrating on secured lending, previously reported. Bank services fees and other operating revenues consist primarily of fees generated by deposit accounts, leasing, electronic banking and customer services. These revenues totaled $1.0 million in the first quarter of fiscal 2001, a 9.8% hike versus $925,000 reported in the same period of fiscal 2000. This increase reflect higher revenues from bank services and deposit accounts, which were driven by a new banking fees structure, expansion of the electronic banking business and a growth in its core deposit base. NON-INTEREST EXPENSES As shown in Table 3, non-interest expenses for the first quarter of fiscal 2001 decreased 4.1% to $8.2 million from $8.5 million in the comparable period of fiscal 2000. The decrease on non-interest expenses reflects the Group's restructuring strategy, previously reported. Employee compensation and benefits is the Group's largest expense category. For the first quarter of fiscal 2001, it decreased 11.7% to $3.4 million versus $3.8 million in the same period of fiscal 2000. Refer to Table 3 for more selected data regarding employee compensation and benefits. Other non-interest expenses for the first quarter of fiscal 2001 increased 2.1% to $4.8 million as compared to $4.7 million in the same period of fiscal 2000. Increased communication and occupancy and equipment costs of $225,000 or 15.1% (mainly technology) led this rise. These increases reflect the additional investment required supporting the growth of the Group's business activity and the enhancements made to the Group's systems to enable the expansion of its electronic delivery capability and improvement of customers' service. Professional fees decreased $369,000 or 42.2%, mainly related to legal expenses associated to the investigation previously reported. NON-OPERATING ACTIVITIES GAINS (LOSSES) The first quarter of fiscal 2001 reflect a loss of $3.7 million on sale of securities and trading compared to a gain of $466,000 in the first quarter of fiscal 2000 (see Table 4). In addition, the first quarter of fiscal 2001, reflect a charge of $2.1 million on derivatives activities as a result of the adoption of a new accounting standard. See "Overview of Financial Performance" for more information on the aforementioned items. Fees and other charges from leasing activities decreased from $268,000 to $49,000 in the first quarter of fiscal 2000 and 2001, respectively. Leasing operations were discontinued in June 30, 2000, as previously reported. PROVISION FOR LOAN LOSSES The provision for loan losses in the first quarter of fiscal 2001 totaled $1.4 million, down 20.0% from the $1.8 million reported in the same period of fiscal 2000. The decline was in response to the lower level of net credit losses and non-performing assets, and current and expected economic conditions. The reduction in credit losses reflects the sale of the unsecured personal loans and lease portfolios on June 30, 2000, as previously reported. Please refer to the allowance for loan losses and non-performing assets section for a more detailed analysis of the allowances for loan losses, net credit losses and credit quality statistics. PROVISION (CREDIT) FOR INCOME TAXES Income taxes for the first quarter of fiscal 2001 reflects a credit of $1.5 million compared with a provision of $631,000 a year ago. The Credit in 2001 period resulted from the losses that stems from non-operating activities discussed above. In the first quarter of fiscal 2000, the difference between the effective tax rates 8.01% and the maximum statutory tax rate for the Group, which is 39%, is primarily due to the interest income earned on certain investments and loans which is exempt from income tax, net of the disallowance of related expenses attributable to the exempt income. -21- FINANCIAL CONDITION GROUP'S ASSETS At September 30, 2000, the Group's total assets amounted to $1.680 billion, an increase of 2.0% when compared to $1.646 billion a year ago. At the same date, interest-earning assets reached $1.616 billion, up 2.3% versus $1.580 billion a year earlier. Investments are Oriental's largest interest-earning assets component. It mainly consists of money market investments, U.S. Treasury notes, U.S. Government agencies bonds, mortgage-backed securities, CMO's and P. R. Government municipal bonds. At September 30, 2000, the Group's investment portfolio was of high quality. Approximately 98% was rated AAA and it generated a significant amount of tax-exempt interest which substantially lowered the Group's effective tax rate (see Table 10 and Note 2 to the Consolidated Financial Statements). A strong growth in mortgage-backed securities and CMO's drove the investment portfolio expansion. They increased 14.1% to $895.1 million (77.8% of the total portfolio) from $784.2 million (76.3% of the total portfolio) the year before, as Oriental continued its strategy of pooling residential real estate loans into mortgage-backed securities. At September 30, 2000, Oriental's loan portfolio, the second largest category of the Bank's interest-earning assets, amounted to $465.5 million, 15.7% lower than the $552.1 million a year ago. Late in the second quarter of fiscal 2000, the Group's loans origination changed toward collateralized loans, primarily mortgage loans and personal loans with mortgage collateral, while de-emphasizing unsecured personal loans. In addition, on July 7, 2000, Oriental sold over $160 million of leases and unsecured personal loans. These strategies reduced the size of the loan portfolio but significantly reduced credit losses and enhanced the portfolio quality. Table 10 and Note 3 to the Consolidated Financial Statements presents the Group's loan portfolio composition and mix at the end of the periods analyzed. The Group's real estate loans portfolio is mainly comprised of residential loans, home equity loans and personal loans collateralized by real estate. At September 30, 2000, the real estate loans portfolio amounted to $416.8 million (88.2% of the portfolio). The second largest component of the Group's loan portfolio is commercial loans, most of which collateralized by real estate. At September 30, 2000, the commercial loans portfolio totaled $21.6 million (5.5% of the Group's loan portfolio), the consumer loan portfolio totalled 21.6 million (4.6% of the portfolio). The Group's leasing portfolio consists of auto and equipment leases. At September 30, 2000, it amounted to $8.2 million (1.7% of the portfolio). The Group discontinued lease originations in June 30, 2000. LIABILITIES AND FUNDING SOURCES As shown in Table 11, at September 30, 2000, Oriental's total liabilities reached $1.573 billion, 2.8% higher than the $1.530 billion reported a year earlier. Interest-bearing liabilities, the Group's funding sources, amounted to $1.543 billion at the end of the first quarter of fiscal 2001 versus $1.496 billion the year before, a 3.1% increase. A rise in deposits, mainly on time deposits and IRA accounts, drove these growths. At September 30, 2000, deposits, the second largest category of the Group's interest-bearing liabilities and a cost-effective source of funding, reached $706.6 million, up 10.2% versus the $641.5 million a year ago. A $74.6 million increase or 14.9% in time deposits and IRA accounts realized most of the growth. This was partially offset by a $10.8 million or 7.9% decrease in demand and savings deposits. Table 11 presents the composition of the Group's deposits at the end of the periods analyzed. Borrowings are Oriental's largest interest-bearing liability component. It consists mainly of diversified funding sources through the use of Federal Home Loan Bank of New York (FHLB) advances and borrowings, repurchase agreements, term notes, notes payable and lines of credit. At September 30, 2000, they amounted to $836.2 million, 2.1% lower than the $854.5 million a year ago, mainly in repurchase agreements. This decrease reflects the repayment of high cost volatile funds, mainly from the proceeds of the sale of the unsecured personal loans and lease portfolios. The FHLB system functions as a source of credit to financial institutions that are members of a regional Federal Home Loan Bank. As a member of the of the FHLB the Group can obtain advances from the FHLB, secured by the FHLB stock owned by the Group, as well as by certain of the Group's mortgages and investment securities. Table 11 presents the composition of the Group's other borrowings at the end of the periods analyzed. -22- STOCKHOLDERS' EQUITY At September 30, 2000, Oriental's total stockholders' equity was $106.6 million, an 8.1% decrease from $115.9 million a year ago. The main reasons for this decrease were an increase of $8.4 million on the unrealized loss of investment securities available for sale combined with the repurchase of common shares at a cost of $3.4 million. For more in the Groups of stockholders' equity activity, refer to the Unaudited Consolidated Statement of Changes in Stockholders' Equity and of Comprehensive Income included in Table 12 and as part of the Consolidated Financial Statements. During the first quarter of fiscal 2001, the Group repurchased 127,800 common shares bringing to 1,235,599 shares (with a cost of $27.5 million) the number of shares held by the Group's treasury. The Group's common stock is traded in the New York Stock Exchange (NYSE) under the symbol OFG. At September 30, 2000, the Group's market value for its outstanding stock was $194.8 million ($15.50 per share). During the first quarter of fiscal 2001 and 2000, the Group declared dividends amounting to $1.9 million ($0.15 per share). Dividend yield was 3.87% and 2.55%, for the first quarter of fiscal year 2001 and 2000 respectively. Under the regulatory framework for prompt corrective action, for banks and bank holding companies which meet or exceed a Tier I risk-based ratio of 6%, a total capital risk-based ratio of 10% and a leverage ratio of 5% are considered well capitalized. As shown in Table 12, the Group exceeds those regulatory risk-based capital requirements, due to the high level of capital and the conservative nature of the Group's assets. GROUP'S FINANCIAL ASSETS As shown on Table 13, the Group`s total financial assets include the Group's assets and assets managed by the trust and brokerage business. At September 30, 2000, they reached $4.064 billion - up 4.1% from $3.906 billion a year ago. The Group's financial assets main component is the assets owned by the Group, of which about 99% are owned by the Group's banking subsidiary. For more on this financial asset component, refer to Group's Assets under Financial Condition. Oriental's second largest financial assets component is assets managed by the trust. The Group's trust offers various different types of IRA products and manages 401(K) and Keough retirement plans, custodian and corporate trust accounts. At September 30, 2000, total assets managed by the Group's trust amounted $1.446 billion, 3.7% higher than the $1.395 billion a year ago. This increase was fueled by a solid 13.6% growth in individual retirement accounts (IRA), the most significant asset managed, which totaled $583.7 million versus the $514 million a year ago. The other financial asset component is assets gathered by the broker-dealer. The Group's broker-dealer subsidiary offers a wide array of investment alternatives to its client's base such as fixed and variable annuities, tax-advantaged fixed income securities, mutual funds, stocks and bonds. At September 30, 2000, total assets gathered by the broker-dealer from its customer investment accounts reached $939.0 million, up 8.6% from $864.7 million a year ago. ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS At September 30, 2000, the Group's allowance for loan losses amounted to $7.0 million (1.48% of total loans) versus $8.7 million (1.56% of total loans) a year earlier. The Group maintains an allowance for loan losses at a level that management considers adequate to provide for potential losses based upon an evaluation of known and inherent risks. Oriental's allowance for loan losses policy provides for a detailed quarterly analysis of possible losses. The principal factors that the Group uses to determine the level of allowance for loan losses are the Group's historical and current credit loss experience. These factors are combined with qualitative factors such as: the growth of the loan portfolio, concentrations of credit (e.g., local industries. etc.) that might affect loss experience across one or more components of the portfolio, delinquencies, effects of any changes in lending policies and procedures (including underwriting standards), collections, general economic conditions and unusual events such as hurricanes. The methodology that the Group uses follows a loan credit risk rating process that involves dividing loans into risk categories. The following are the credit risk categories (established by the FDIC Interagency Policy Statement of 1993) used: 1. PASS - loans considered highly collectible due to their repayment history or current status (to be in this category a loan cannot be more than 90 days past due). 2. SPECIAL MENTION - loans with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the loan. -23- 3. SUBSTANDARD - loans inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. 4. DOUBTFUL - loans that have all the weaknesses inherent in substandard, with the added characteristic that collection or liquidation in full is highly questionable and improbable. 5. LOSS - loans considered uncollectible and of such little value that their continuance as bankable assets is not warranted. Based on this loan credit risk rating (primarily based on aging), the Group applies an overall reserve percentage to each of the portfolio's aging category based on historical credit losses adjusted for current or expected conditions and trends. This delinquency-based calculation is the starting point for management's determination of the required level of the allowance for loan losses. Other data considered in this determination includes: 1. vintage analysis generated from the credit scoring system, which provides a history of credit losses by credit score strata and loss projections for the remaining portfolio based on that history; 2. overall historical loss trends (one year and three years); and 3. other information including underwriting standards, economic trends and unusual events such as hurricanes. Loan loss ratios applied and credit risk categories, are updated on an annual basis and are applied in the context of accounting principles generally accepted in the United States ("GAAP") and the Joint Interagency Guidance on the importance of depository institutions having prudent, conservative, but not excessive loan loss allowances that fall within an acceptable range of estimated losses. While management uses available information in estimating possible loan losses, future changes to the allowance may be necessary based on factors beyond the Group's control, such as factors affecting general economic conditions in Puerto Rico. Net credit losses for the first quarter of fiscal 2001, totaled $1.3 million (1.13% of average loans), a decrease of 37.41% when compared to $2.0 million (1.38% of average loans) for the same period of fiscal 2000. The lower level of net credit losses experienced was primarily associated to a reduction in consumer loans and financing leases net credit losses as a result of the sale of both portfolios, as previously discussed. Tables 5 through 7 set forth an analysis of activity in the allowance for loan losses and present selected loan loss statistics. The Group's non-performing assets include non-performing loans, foreclosed real estate owned and other repossessed assets (see Table 8). At September 30, 2000, the Group's asset quality improved as non-performing assets totaled $17.3 million (0.99% of total assets) versus $18.7 million (1.09% of total assets) at the same date of fiscal 2000. The decrease was principally due to a lower level of non-performing loans; mainly non-performing consumer loans and financing leases. At September 30, 2000, the allowance for loan losses to non-performing loans coverage ratio was 41.98%. Excluding the lesser-risk real estate loans, the ratio is much higher, 96.47%. Detailed information concerning each of the items that comprise non-performing assets follows: - REAL ESTATE LOANS - are placed on a non-accrual basis when they become 90 days or more past due, except for well-secured residential loans, and are charged-off based on the specific evaluation of the collateral underlying the loan. At September 30, 2000, the Group's non-performing real estate loans totaled $9.4 million (56.5% of the Group's non-performing loans). Non-performing loans in this category are primarily residential mortgage loans. Based on the value of the underlying collateral and the loan-to-value ratios, management considers that no significant losses will be incurred on this portfolio. - COMMERCIAL BUSINESS LOANS - are placed on non-accrual basis when they become 90 days or more past due and are charged-off based on the specific evaluation of the collateral underlying the loan. At September 30, 2000, the Group's non-performing commercial business loans amounted to $1.2 million (7.3% of the Group's non-performing loans). Of the total balance, $835,000 (8 loans) is guaranteed by real estate. - FINANCE LEASES - are placed on non-accrual status when they become 90 days past due unless well secured by its collateral. At September 30, 2000, the Group's non-performing auto and equipment leases portfolio amounted to $5.1 million (30.9% of the Group's total non-performing loans). The underlying collateral secures these financing leases. - CONSUMER LOANS - are placed on non-accrual status when they become 90 days past due and charged-off when payments are delinquent 120 days. At September 30, 2000, the Group's non-performing consumer loans amounted to $889,000 (5.4% of the Group's total non-performing loans). -24- - FORECLOSED REAL ESTATE - is initially recorded at the lower of the related loan balance or fair value at the date of foreclosure, any excess of the loan balance over the estimated fair market value of the property is charged against the allowance for loan losses. Subsequently, any excess of the carrying value over the estimated fair market value less disposition cost is charged to operations. Management is actively seeking prospective buyers for these foreclosed real estate properties. At September 30, 2000, foreclosed real estate balance was $535,000. - OTHER REPOSSESSED ASSETS - are initially recorded at estimated net realizable value. At the time of disposition, any additional losses incurred are charged against the allowance for loan losses. At September 30, 2000, the inventory of repossessed automobiles consisted of 24 units amounting to $171,000 ($7,125 average cost per unit). YEAR 2000 READINESS DISCLOSURE The millennium date change did not cause any critical problems to the Group's computers and management information systems, which already had been tested and fully certified as being Y2K compliant under regulatory guidelines. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT The Group's interest rate risk and asset/liability management is the responsibility of the Asset and Liability Management Committee ("ALCO"), which reports to the Board of Directors and is composed of members of the Group's senior management. The principal objective of ALCO is to enhance profitability while maintaining an appropriate level of interest rate and liquidity risks. ALCO is also involved in formulating economic projections and strategies used by the Group in its planning and budgeting process; and oversees the Group's sources, uses and pricing of funds. Interest rate risk can be defined as the exposure of the Group's operating results or financial position to adverse movements in market interest rates which mainly occurs when assets and liabilities reprice at different times and at different rates. This difference is commonly referred to as a "maturity mismatch" or "gap". The Group employs various techniques to assess the degree of interest rate risk. The Group is liability sensitive due to its fixed rate and medium to long-term asset composition being funded with shorter-term repricing liabilities. As a result, the Group uses interest rate swaps and caps as a mechanism to offset said mismatch and control exposures of interest rate risk. Under the swaps, the Group pays a fixed annual cost and receives a floating ninety-day payment based on LIBOR. Floating rate payments received from the swap counterparty correspond to the floating rate payments made on the borrowings or notes thus resulting in a net fixed rate cost to the Group. Interest rate caps provide protection against increases in interest rates above cap rates. LIQUIDITY RISK MANAGEMENT Liquidity refers to the level of cash, eligible investments easily converted into cash and lines of credit available to meet unanticipated requirements. The objective of the Group's liquidity management is to meet operating expenses and ensure sufficient cash flow to fund the origination and acquisition of assets, the repayment of deposit withdrawals and the maturities of borrowings. Other objectives pursued in the Group's liquidity management are the diversification of funding sources and the control of interest rate risk. Management tries to diversify the sources of financing used by the Group to avoid undue reliance on any particular source. At September 30, 2000, the Group's liquidity was deemed appropriate. At such date the Group's liquid assets amounted to $1.305 billion, this includes $63 million available from unused lines of credit with other financial institutions and $175 million of borrowing potential with the FHLB. The Group's liquidity position is reviewed and monitored by the ALCO Committee on a regular basis. Management believes that the Group will continue to maintain adequate liquidity levels in the future. The Group's principal sources of funds are net deposit inflows, loan repayments, mortgage-backed and investment securities principal and interest payments, reverse repurchase agreements, FHLB advances and other borrowings. The Group has obtained long-term funding through the issuance of notes and long-term repurchase agreements. The Group's principal uses of funds are the origination and purchase of loans, the purchase of mortgage-backed and investment securities, the repayment of maturing deposits and borrowings. -25- PART - 2 ITEM 1. LEGAL PROCEEDINGS On August 11, 2000, the Group filed a lawsuit in the United States District Court for the District of Puerto Rico against Federal Insurance Company, Inc., a stock insurance corporation organized under the laws of the state of Indiana, seeking payment of its $9.5 million insurance claim and the payment of consequential damages resulting from the denial of the claim. In addition, the Group and its subsidiaries are defendants in a number of legal claims under various theories of damages arising out of, and incidental to its business. The Group is vigorously contesting those claims. Based upon a review with legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group's financial position or the result of operations. ITEM 2. CHANGES IN SECURITIES - NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - NONE ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A- FINANCIAL STATEMENTS SCHEDULES No schedules are presented because the information is not applicable or is included in the Consolidated Financial Statements or in the notes thereto described in 6(c) below. B - REPORTS ON FORM 8-K During the first quarter of fiscal 2001 three reports on Form 8-K (the "Reports") related to fiscal 2000 were filed with Securities and Exchange Commission and are incorporated herein by reference. 1. September 9, 2000 - The Group filed a Form 8-K to disclose the fact that on August 29, 2000, the Board of Directors of the Group amended Section 2, Article I, of the By-laws of the Group to provide that the annual meeting of shareholders may be held after 120 days after the end of the Group's fiscal year in the event of extraordinary or special circumstances out of the control of the Group. A copy of the By-laws, as amended, were included as an exhibit to this Form 8-K. 2. August 24, 2000 - The Group filed a Form 8-K to disclose the fact that on August 22, 2000, the Group reported that the release of its financial results for the fiscal year ended June 30, 2000 would be delayed until the Group determines the appropriate accounting treatment for a previously disclosed loss resulting from dishonest and fraudulent acts and omissions by a group of former employees of the Group. The Group further reported that Federal Insurance Company, Inc., a stock insurance corporation organized under the laws of the State of Indiana, has denied the Group's claim for recovery of the losses resulting from the former employees' conduct, and that the Group has filed a lawsuit in the United States District Court for the District of Puerto Rico against Federal Insurance Group seeking payment of its $9.5 million insurance claim and the payment of consequential damages resulting from the denial of the claim. A copy of the press release was attached as an exhibit to this Form 8-K. 3. July 27, 2000 - The Group filed a Form 8-K to disclose the fact that on July 14, 2000, the Bank finalized the sale of its unsecured personal loan portfolio to Banco Popular de Puerto Rico, a Puerto Rico banking corporation, at a price of $99,043,101 in cash. The unsecured personal loan portfolio was sold at a premium based on a formula that equals 100.75% of the principal outstanding balance of the loans, including the total amount of accrued interest and late charges receivable thereunder. On July 14, 2000, the Bank also finalized the sale of its portfolio of finance leases on vehicles and equipment to Popular Leasing & Rental, Inc., a Puerto Rico corporation, at a price of $68,620,896 in cash. The lease portfolio was sold at a discount based on a formula that equals 97.72% of the outstanding balance of the leases. C - EXHIBITS -26- Exhibits filed as part of this Form 10-Q 27.0 Financial Data Schedule E-1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORIENTAL FINANCIAL GROUP INC. (REGISTRANT) By: /s/ JOSE E. FERNANDEZ ---------------------- Jose E. Fernandez Chairman of the Board, President and Chief Executive Officer Dated: November 13, 2000 ----------------- By: /s/ RAFAEL VALLADARES ---------------------- Rafael Valladares Senior Vice President - Principal Financial Officer Dated: November 13, 2000 -----------------
-27-