10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2006,
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to          .

Commission file no. 001-12647

Oriental Financial Group Inc.

Incorporated in the Commonwealth of Puerto Rico

IRS Employer Identification No. 66-0538893

Principal Executive Offices:

997 San Roberto Street

Oriental Center 10th Floor

Professional Offices Park

San Juan, Puerto Rico 00926

Telephone Number: (787) 771-6800

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock

($1.00 par value per share)

7.125% Noncumulative Monthly Income Preferred Stock, Series A

($1.00 par value per share, $25.00 liquidation preference per share)

7.0% Noncumulative Monthly Income Preferred Stock, Series B

($1.00 par value per share, $25.00 liquidation preference per share)

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

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 þ      No o

Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o     Accelerated Filer þ     Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

The aggregate market value of the common stock held by non-affiliates of Oriental Financial Group Inc. (the “Group”) was $264.7 million based upon the reported closing price of $12.76 on the New York Stock Exchange as of June 30, 2006.

As of February 28, 2007, the Group had 24,402,427 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Group’s annual report to shareholders for the year 2006 are incorporated herein by reference in response to Items 5 through 9A of Part II and Item 15(a)(1) of Part IV.

Portion of the Group’s definitive proxy statement relating to the 2007 annual meeting of shareholders are incorporated herein by reference in response to Items 10 through 14 of Part III.

ORIENTAL FINANCIAL GROUP INC.

FORM 10-K

For the Year Ended December 31, 2006

TABLE OF CONTENTS

PART I
	Item 1.	Business	3-18
	Item 1A.	Risk Factors	18-21
	Item 1B.	Unresolved Staff Comments	21
	Item 2.	Properties	21-22
	Item 3.	Legal Proceedings	22
	Item 4.	Submissions of Matters to a Vote of Security Holders	22
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23-24
	Item 6.	Selected Financial Data	24
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 8.	Financial Statements and Supplementary Data	25
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	25
	Item 9A.	Controls and Procedures	25
	Item 9B.	Other Information	26
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	26
	Item 11.	Executive Compensation	26
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	26
	Item 13.	Certain Relationships, Related Transactions, and Director Independence	26
	Item 14.	Principal Accountant Fees and Services	26
PART IV
	Item 15.	Exhibits and Financial Statement Schedules	27-28
EX-10.21 INVESTMENT MANAGEMENT AGREEMENT
EX-10.22 TECHNOLOGY TRANSFER AGREEMENT
EX-10.23 TECHNOLOGY TRANSFER AGREEMENT
EX-13.0 PORTIONS OF THE 2006 ANNUAL REPORT
EX-21.0 LIST OF SUBSIDIARIES
EX-23.1 CONSENT OF DELOITTE & TOUCHE LLP
EX-23.2 CONSENT OF KPMG LLP
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO

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FORWARD-LOOKING STATEMENTS

When used in this Form 10-K or future filings by Oriental Financial Group Inc. (the “Group”) with the Securities and Exchange Commission (the “SEC”), in the Group’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “project,” “believe,” “should” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

The future results of the Group could be affected by subsequent events and could differ materially from those expressed in forward-looking statements. If future events and actual performance differ from the Group’s assumptions, the actual results could vary significantly from the performance projected in the forward-looking statements.

The Group wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are based on management’s current expectations, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities, competitive, and regulatory factors, legislative changes and accounting pronouncements, could affect the Group’s financial performance and could cause the Group’s actual results for future periods to differ materially from those anticipated or projected. The Group does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

PART I

ITEM 1.  BUSINESS

General

The Group is a diversified publicly-owned financial holding company incorporated on June 14, 1996 under the laws of the Commonwealth of Puerto Rico, providing a full range of financial services through its subsidiaries. The Group is subject to the provisions of the U.S. Bank Holding Company Act of 1956, as amended, (the “BHC Act”) and, accordingly, subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). As of December 31, 2006, the Group had, on a consolidated basis, $7.4 billion in total assets owned and under management, including total investments and loans of $4.2 billion, total deposits of $1.2 billion and stockholders’ equity of $338.0 million.

The Group provides comprehensive financial services to its clients through a complete range of banking and financial solutions, including mortgage, commercial and consumer lending; checking and savings accounts; financial planning, insurance, asset management, and investment brokerage; and corporate and individual trust and retirement services. The Group operates through three major business segments: Banking, Treasury and Financial Services, and distinguishes itself based on quality service and marketing efforts focused on mid and high net worth individuals and families, including professionals and owners of small and mid-sized businesses, primarily in Puerto Rico. The Group has 25 financial centers in Puerto Rico and a subsidiary, Caribbean Pension Consultants Inc. (“CPC”), based in Boca Raton, Florida. The Group’s long-term goal is to strengthen its banking-financial services franchise by expanding its lending businesses, increasing the level of integration in the marketing and delivery of banking and financial services, continuing to maintain effective asset-liability management, growing non-interest revenues from banking and financial services and improving operating efficiencies.

The Group’s strategy involves:

(1) Strengthening its banking-financial services franchise by expanding its ability to attract deposits and build relationships with mid net worth individual customers and professional and mid-market commercial businesses through aggressive marketing and expansion of its sales force;

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(2) Focusing on greater growth in mortgage, commercial and consumer lending; insurance products, trust and wealth management services, which traditionally have been one of the Group’s greatest strengths; and increasing the level of integration in the marketing and delivery of such banking and financial services;

(3) Opening, expanding or relocating financial centers; improving operating efficiencies; and continuing to maintain effective asset-liability management; and

(4) Implementing a broad ranging effort to instill in both employees and customers alike the Group’s determination to effectively serve its customer base in a responsive and professional manner.

Together with a highly experienced group of senior and mid level executives, this strategy has generally resulted in sustained growth in the Group’s mortgage, commercial and consumer lending activities, allowing it to distinguish itself in a highly competitive industry. The increasing interest rate environment of recent years has validated the strategy’s basic premise for greater revenue diversity, which remains an integral part of the Group’s long-term goal.

While progress is expected to continue, the Group is not immune from general and local financial and economic conditions. However, the Group remains well capitalized with one of the strongest regulatory capital positions in the Puerto Rico banking industry and it is strongly situated, along with its active, ongoing efforts to reduce non-interest expenses, to carry forward this strategy. Past experience is not necessarily indicative of future performance, especially given current market uncertainties, but based on a reasonable time horizon of three to five years, the strategy is expected to maintain its steady progress towards the Group’s long-term goal.

Banking Activities

Oriental Bank and Trust (the “Bank”), the Group’s main subsidiary, is a full-service Puerto Rico commercial bank with its main office located in San Juan, Puerto Rico. The Bank has 25 branches throughout Puerto Rico and was incorporated in 1964 as a federal mutual savings and loan association. It became a federal mutual savings bank in July 1983 and converted to a federal stock savings bank in April 1987. Its conversion from a federally-chartered savings bank to a commercial bank chartered under the banking laws of the Commonwealth of Puerto Rico, on June 30, 1994, allowed the Bank to more effectively pursue opportunities in its market and obtain more flexibility in its businesses, placing the Bank in the mainstream of financial services in Puerto Rico. As a Puerto Rico-chartered commercial bank, it is subject to examination by the Federal Deposit Insurance Corporation (the “FDIC”) and the Office of the Commissioner of Financial Institutions of Puerto Rico (the “OCFI”). The Bank offers banking services such as commercial and consumer lending, saving and time deposit products, financial planning, and corporate and individual trust services, and, through its residential mortgage lending division, Oriental Mortgage, capitalizes on its banking network to provide residential mortgage loans to its clients. The Bank also has two international banking entities pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended (the “IBE Act”), one is a unit of the Bank, named O.B.T. International Bank (the “IBE unit”), and the other is a wholly owned subsidiary of the Bank, named Oriental International Bank Inc. (the “IBE subsidiary”) organized in November 2003. The Group transferred most of the assets and liabilities of the IBE unit to the IBE subsidiary as of January 1, 2004. The international banking entities offer the Bank certain Puerto Rico tax advantages and their services are limited under Puerto Rico law to persons and assets/liabilities located outside Puerto Rico.

Banking activities include the Bank’s branches and mortgage banking activities with traditional retail banking products such as deposits and mortgage, commercial, and consumer loans. The Bank’s lending activities are primarily with consumers located in Puerto Rico. The Bank’s loan transactions include a diversified number of industries and activities, all of which are encompassed within three main categories: mortgage, commercial, and consumer.

The Group’s mortgage banking activities are conducted through Oriental Mortgage, a division of the Bank. The mortgage banking activities primarily consist of the origination and purchase of residential mortgage loans for the Group’s own portfolio and from time to time, if the conditions so warrant, the Group may engage in the sale of such loans to other financial institutions in the secondary market. The Group originates Federal Housing Administration (“FHA”)-insured and Veterans Administration (“VA”)-guaranteed mortgages that are primarily securitized for issuance of Government National Mortgage Association (“GNMA”) mortgage-backed securities which can be resold to individual or institutional investors in the secondary market. Conventional loans that meet the

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underwriting requirements for sale or exchange under standard Federal National Mortgage Association (the “FNMA”) or the Federal Home Loan Mortgage Corporation (the “FHLMC”) programs are referred to as conforming mortgage loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed securities. In 2006, and after FNMA’s approval for the Group to sell FNMA-conforming conventional mortgage loans directly in the secondary market, the Group became an approved seller of FNMA, as well as FHLMC, mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The Group is also an approved issuer of GNMA mortgage-backed securities. The Group continues to outsource the servicing of the GNMA, FNMA and FHLMC pools that it issues and its mortgage loan portfolio.

Servicing assets represent the contractual right to service loans for others. Servicing assets are included as part of other assets in the consolidated statements of condition. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected.

The total cost of loans to be sold with servicing assets retained is allocated to the servicing assets and the loans (without the servicing assets), based on their relative fair values. Servicing assets are amortized in proportion to and over the period of estimated net servicing income.

Loan Underwriting

All loan originations, regardless of whether originated through the Group’s retail banking network or purchased from third parties, must be underwritten in accordance with the Group’s underwriting criteria including loan-to-value ratios, borrower income qualifications, debt ratios and credit history, investor requirements, and title insurance and property appraisal requirements. The Group’s underwriting standards comply with the relevant guidelines set forth by the Department of Housing and Urban Development (“HUD”), VA, FNMA, FHLMC, federal and Puerto Rico banking regulatory authorities, as applicable. The Group’s underwriting personnel, while operating within the Group’s loan offices, make underwriting decisions independent of the Group’s mortgage loan origination personnel.

Sale of Loans and Securitization Activities

The Group may engage in the sale or securitization of a portion of the residential mortgage loans that it originates and purchases and utilizes various channels to sell its mortgage products. The Group is an approved issuer of GNMA-guaranteed mortgage-backed securities which involve the packaging of FHA loans, Rural Housing Service (“RHS”) loans or VA loans into pools of mortgage-backed securities for sale primarily to securities broker-dealers and other institutional investors. The Group can also act as issuer in the case of conforming conventional loans in order to group them into pools of FNMA or FHLMC-issued mortgage-backed securities which the Group then sells to securities broker-dealers. The issuance of mortgage-backed securities provides the Group with flexibility in selling the mortgage loans that it originates or purchases and also provides income by increasing the value and marketability of such loans. In the case of conforming conventional loans, the Group also has the option to sell such loans through the FNMA and FHLMC cash window program.

Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities

The Group recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.

The Group is not engaged in sales of mortgage loans and mortgage-backed securities subject to recourse provisions except for those provisions that allow for the repurchase of loans as a result of a breach of certain representations and warranties other than those related to the credit quality of the loans included in the sale transactions.

According to Statement of Financial Accounting Standards 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”), a transfer of financial assets (all or a portion of the financial asset) in which the Group surrenders control over these financial assets shall be accounted for as a sale

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to the extent that consideration, other than beneficial interests in the transferred assets, is received in exchange. The Group has surrendered control over transferred assets if and only if all of the following conditions are met:

a. The transferred assets have been isolated from the Group — put presumptively beyond the reach of the Group and its creditors even in bankruptcy or other receivership.

b. Each transferee has the right to pledge or exchange the assets it received and no condition both constrains the transferee from taking advantage of its rights to pledge or exchange and provided more than a trivial benefit to the Group.

c. The Group does not maintain effective control over the transferred assets through either (1) an agreement that both entitles and obligates the Group to repurchase or redeem them before their maturity or (2) the ability to unilaterally cause the holder to return specific assets other than through a cleanup call.

If a transfer of financial assets in exchange for cash or other consideration (other than beneficial interests in the transferred assets) does not meet the criteria for a sale as described above, the Group would account for the transfer as a secured borrowing.

Treasury Activities

Treasury activities encompass all of the Group’s treasury-related functions. The Group’s investment portfolio consists primarily of mortgage-backed securities, collateralized mortgage obligations, U.S. Treasury notes, U.S. Government agency bonds, P.R. Government obligations, and money market instruments. Mortgage-backed securities, the largest component, consist principally of pools of residential mortgage loans that are made to consumers and then resold in the form of certificates in the secondary market, the payment of interest and principal of which is guaranteed by GNMA, FNMA or FHLMC. For more information see Notes 2 and 3 to the accompanying consolidated financial statements.

The Group’s principal funding sources are securities sold under agreements to repurchase, branch deposits, Federal Home Loan Bank (“FHLB”) advances, subordinated capital notes, and term notes. Through its branch system, the Bank offers personal non-interest and interest-bearing checking accounts, savings accounts, certificates of deposit, individual retirement accounts (“IRAs”) and commercial non-interest bearing checking accounts. The FDIC insures the Bank’s deposit accounts up to applicable limits. Management makes retail deposit pricing decisions periodically through the Asset and Liability Management Committee (“ALCO”) which adjusts the rates paid on retail deposits in response to general market conditions and local competition. Pricing decisions take into account the rates being offered by other local banks, LIBOR, and mainland U.S. market interest rates.

Securities Brokerage and Investment Banking Activities

Oriental Financial Services Corp. (“OFSC”) is a Puerto Rico corporation and the Group’s subsidiary engaged in securities brokerage and investment banking activities in accordance with the Group’s strategy of providing fully integrated financial solutions to the Group’s clients. OFSC, a member of the National Association of Securities Dealers, Inc. (“NASD”) and the Securities Investor Protection Corporation, is a registered securities broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934. OFSC does not carry customer accounts and is, accordingly, exempt from the Customer Protection Rule (SEC Rule 15c3-3) pursuant to subsection (k)(2)(ii) of such rule. It clears securities transactions through National Financial Services, LLC, a clearing broker which carries the accounts of OFSC’s customers on a “fully disclosed” basis.

OFSC offers securities brokerage services covering various investment alternatives such as tax-advantaged fixed income securities, mutual funds, stocks, and bonds to retail and institutional clients. It also offers separately managed accounts and mutual fund asset allocation programs sponsored by unaffiliated professional asset managers. These services are designed to meet each client specific needs and preferences, including transaction-based pricing and asset-based fee pricing.

OFSC also manages and participates in public offerings and private placements of debt and equity securities in Puerto Rico. It has a joint venture agreement with Bear, Stearns & Co. Inc. to engage in municipal securities business with the Commonwealth of Puerto Rico and its instrumentalities, municipalities, and public corporations.

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Investment banking revenue from such activities include gains, losses, and fees, net of syndicate expenses, arising from securities offerings in which OFSC acts as an underwriter or agent. Investment banking revenue also includes fees earned from providing merger-and-acquisition, and financial restructuring advisory services. Investment banking management fees are recorded on the offering date, sales concessions on settlement date, and underwriting fees at the time the underwriting is completed and the income is reasonably determinable.

Other Activities

Oriental Financial (PR) Statutory Trust I (“Statutory Trust I”) and Oriental Financial (PR) Statutory Trust II (“Statutory Trust II”) are special purpose entities of the Group that were formed for the purpose of issuing trust redeemable preferred securities. Such entities each issued $35.0 million of trust redeemable preferred securities, which may be called at par after five years, as part of pooled underwriting transactions. Pooled underwriting involves participating with other bank holding companies in issuing securities through a special purpose pooling vehicle created by the underwriters. On December 18, 2006, the Group exercised the call provision of the $35.0 million outstanding of the Statutory Trust I.

Oriental Insurance Inc. (“Oriental Insurance”) is a Puerto Rico corporation and the Group’s subsidiary engaged in insurance agency services. It was established by the Group to take advantage of the cross-marketing opportunities provided by financial modernization legislation. Oriental Insurance currently earns commissions by acting as a licensed insurance agent in connection with the issuance of insurance policies by unaffiliated insurance companies and anticipates continued growth as it expands the products and services it provides and continues to cross market its services to the Group’s existing customer base.

CPC, a Florida corporation, is the Group’s subsidiary engaged in the administration of retirement plans in the U.S., Puerto Rico and the Caribbean.

The Group is a legal entity separate and distinct from the Bank, OFSC, the Statutory Trusts, CPC, and Oriental Insurance. There are various legal limitations governing the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to, or engage in, transactions with the Group or its other subsidiaries.

Market Area and Competition

Puerto Rico, where the banking market is highly competitive, is the main geographic business and service area of the Group. As of December 31, 2006, Puerto Rico had 10 commercial banking institutions with a total of approximately $100 billion in assets according to industry statistics published by the FDIC. The Group ranked 8th based on total assets at December 31, 2006. Puerto Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions in the United States of America.

The Group competes with brokerage firms with retail operations, credit unions, savings and loan cooperatives, small loan companies, insurance agencies, and mortgage banks in Puerto Rico. The Group encounters intense competition in attracting and retaining deposits and in its consumer and commercial lending activities. Management believes that the Group has been able to compete effectively for deposits and loans by offering a variety of transaction account products and loans with competitive terms, by emphasizing the quality of its service, by pricing its products at competitive interest rates and by offering convenient branch locations. The Group’s ability to originate loans depends primarily on the service it provides to its borrowers in making prompt credit decisions and on the rates and fees that it charges.

Segment Disclosure

The Group has three reportable segments: Banking, Treasury, and Financial Services. Management established 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 structure, nature of products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Group measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, interest spread, loan production, and fees generated.

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For detailed information regarding performance of the Group’s operating segments, please refer to Note 17 to the Group’s accompanying consolidated financial statements.

Regulation and Supervision

General

The Group is a bank holding company subject to supervision and regulation by the Federal Reserve Board under the BHC Act. Under the BHC Act, prior to the adoption of the Gramm-Leach-Bliley Act in 1999, the activities of bank holding companies and their banking and non-banking subsidiaries were limited to the business of banking and activities closely related to banking, hereunder, no bank holding company could directly or indirectly acquire ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company in the United States, including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies generally have been prohibited under the BHC Act from engaging in non-banking activities, unless they were found by the Federal Reserve Board to be closely related to banking. The Gramm-Leach-Bliley Act authorized bank holding companies that qualify as “financial holding companies” to engage in a substantially broader range of non-banking activities, subject to certain conditions. The qualification requirements and the process for a bank holding company that elects to be treated as a financial holding company requires that all of the subsidiary banks controlled by the bank holding company at the time of election must be and remain at all times “well capitalized” and “well managed.”

The Gramm-Leach-Bliley Act further requires that in the event that the bank holding company elects to become a financial holding company, the election must be made by filing a written declaration with the appropriate Federal Reserve Bank that: (i) states that the bank holding company elects to become a financial holding company; (ii) provides the name and head office address of the bank holding company and each depository institution controlled by the bank holding company; (iii) certifies that each depository institution controlled by the bank holding company is “well capitalized” as of the date the bank holding company submits its declaration; (iv) provides the capital ratios for all relevant capital measures as of the close of the previous quarter for each depository institution controlled by the bank holding company on the date the bank holding company submits its declaration; and (v) certifies that each depository institution controlled by the bank holding company is “well managed” as of the date the bank holding company submits its declaration. The bank holding company must have also achieved at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act during the institution’s most recent examination. The Group elected to be treated as a financial holding company as permitted by the Gramm-Leach-Bliley Act. Under the Gramm-Leach-Bliley Act, if the Group fails to meet the requirements for being a financial holding company and is unable to correct such deficiencies within certain prescribed time periods, the Federal Reserve Board could require the Group to divest control of its depository institution subsidiary or alternatively cease conducting activities that are not permissible for bank holding companies that are not financial holding companies.

Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary to a financial activity provided it does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act specifically provides that the following activities have been determined to be “financial in nature”: (a) lending, trust and other banking activities; (b) insurance activities; (c) financial, investment or economic advisory services; (d) securitization of assets; (e) securities underwriting and dealing; (f) existing bank holding company domestic activities; (g) existing bank holding company foreign activities; and (h) merchant banking activities.

In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand the list of financial or incidental activities but requires consultation with the U.S. Treasury Department and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system.

The Group is required to file with the Federal Reserve Board and the SEC periodic reports and other information concerning its own business operations and those of its subsidiaries. In addition, Federal Reserve Board approval

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must also be obtained before a bank holding company acquires all or substantially all of the assets of another bank or merges or consolidates with another bank holding company. The Federal Reserve Board also has the authority to issue cease and desist orders against bank holding companies and their non-bank subsidiaries.

The Bank is regulated by various agencies in the United States and the Commonwealth of Puerto Rico. Its main regulators are the OCFI and the FDIC. The FDIC insures the Bank’s deposits up to $100,000 per depositor, except for certain retirement accounts which are insured up to $250,000 per depositor. The Bank is subject to extensive regulation and examination by the OCFI and the FDIC, and is subject to certain Federal Reserve Board regulations of transactions with Bank affiliates. The federal and Puerto Rico laws and regulations which are applicable to the Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds, and the nature and amount of and collateral for certain loans. In addition to the impact of such regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to control inflation in the economy.

The Group’s mortgage banking business is subject to the rules and regulations of FHA, VA, RHS, FNMA, FHLMC, HUD and GNMA with respect to the origination, processing and selling of mortgage loans and the sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisal reports, require credit reports on prospective borrowers and fix maximum loan amounts, and, with respect to VA loans, fix maximum interest rates. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other things, prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. The Group is also subject to regulation by the OCFI with respect to, among other things, licensing requirements and maximum origination fees on certain types of mortgage loan products.

The Group and its subsidiaries are subject to the rules and regulations of certain other regulatory agencies. OFSC, as a registered broker-dealer, is subject to the supervision, examination and regulation of the NASD, the SEC, and the OCFI in matters relating to the conduct of its securities business, including record keeping and reporting requirements, supervision and licensing of employees and obligations to customers.

Oriental Insurance is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico in matters relating to insurance sales, including but not limited to, licensing of employees, sales practices, charging of commissions and reporting requirements.

Holding Company Structure

The Bank is subject to restrictions under federal laws that limit the transfer of funds to its affiliates (including the Group), whether in the form of loans, other extensions of credit, investments or asset purchases, among others. Such transfers are limited to 10% of the transferring institution’s capital stock and surplus with respect to any affiliate (including the Group), and, with respect to all affiliates, to an aggregate of 20% of the transferring institution’s capital stock and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts, carried out on an arm’s length basis, and consistent with safe and sound banking practices.

Under Federal Reserve Board policy, a bank holding company, such as the Group, is expected to act as a source of financial and managerial strength to its banking subsidiaries and to also commit resources to support them. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. The Bank is currently the only depository institution subsidiary of the Group.

Since the Group is a holding company, its right to participate in the assets of any subsidiary upon the latter’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors (including depositors in

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the case of depository institution subsidiaries) except to the extent that the Group is a creditor with recognized claims against the subsidiary.

Under the Federal Deposit Insurance Act (“FDIA”) a depository institution (which definition includes both banks and savings associations) the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution or (2) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined generally as the appointment of a conservator, receiver or other legal custodian and “in danger of default” is defined generally as the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owed by a subsidiary bank to its parent company is subordinated to the subsidiary bank’s cross-guarantee liability with respect to commonly controlled insured depository institutions.

Dividend Restrictions

The principal source of funds for the Group is the dividends from the Bank. The ability of the Bank to pay dividends on its common stock is restricted by the Puerto Rico Banking Act of 1933, as amended (the “Puerto Rico Banking Act”), the FDIA and FDIC regulations. In general terms, the Puerto Rico Banking Act provides that when the expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be charged against the undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If there is no sufficient reserve fund to cover such balance in whole or in part, the outstanding amount shall be charged against the bank’s capital account. The Puerto Rico Banking Act provides that until said capital has been restored to its original amount and the reserve fund to 20% of the original capital, the bank may not declare any dividends. In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a bank.

The payment of dividends by the Bank may also be affected by other regulatory requirements and policies, such as maintenance of adequate capital. If, in the opinion of the regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. The Federal Reserve Board has issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of operating earnings for the current and preceding two years. In addition, all insured depository institutions are subject to the capital-based limitations required by the Federal Deposit Insurance Corporation Improvement Act of 1991(“FDICIA”).

Federal Home Loan Bank System

The FHLB system, of which the Bank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board (the “FHFB”). The FHLB serves as a credit facility for member institutions within their assigned regions. They are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. They make loans (i.e., advances) to members in accordance with policies and procedures established by the FHLB and the boards of directors of each regional FHLB.

As a system member, the Bank is entitled to borrow from the FHLB of New York (the “FHLB-NY”) and is required to own capital stock in the FHLB-NY in an amount equal to the greater of $500; 1% of the Bank’s aggregate unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations; or 5% of the Bank’s aggregate amount of outstanding advances by the FHLB-NY. The Bank is in compliance with the stock ownership rules described above with respect to such advances, commitments, home mortgage loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB-NY to the Bank are secured by a portion of the Bank’s mortgage loan portfolio, certain other investments and the capital stock of the FHLB-NY held by the Bank.

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At no time may the aggregate amount of outstanding advances made by the FHLB-NY to the Bank exceed 20 times the amount paid in by the Bank for capital stock in the FHLB-NY.

Federal Deposit Insurance Corporation Improvement Act

Under FDICIA the federal banking regulators must take prompt corrective action in respect to depository institutions that do not meet minimum capital requirements. FDICIA, and the regulations issued thereunder, established five capital tiers: (i) “well capitalized,” if it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more, and is not subject to any written capital order or directive; (ii) “adequately capitalized,” if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized,” (iii) “undercapitalized,” if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based ratio that is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) “significantly undercapitalized,” if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0%, and (v) “critically undercapitalized,” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any of the first four categories. The Bank is a “well-capitalized” institution.

FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fees to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from corresponding banks. Critically undercapitalized depository institutions are subject to the appointment of a receiver or conservator.

Insurance of Accounts and FDIC Insurance Assessments

The Bank is subject to FDIC deposit insurance assessments. On February 8, 2006 the President of the United States signed the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Reform Act provides for the merger of the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) into a single Deposit Insurance Fund, and increased the maximum amount of the insurance coverage for certain retirement accounts, and possible “inflation adjustments” in the maximum amount of coverage available with respect to other insured accounts. In addition, it granted a one-time initial assessment credit (of approximately $4.7 billion) to recognize institutions’ past contributions to the fund.

The deposits of the Bank are insured up to the applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. For 2006, the FDIC utilized a risk based assessment system that imposed insurance premiums based upon a matrix that took into account a bank’s capital level and supervisory rating. Premiums under that assessment system ranged from 0 cents for each $100 of domestic deposits for well-capitalized and well managed banks to 27 cents for each $100 of domestic deposits for the weakest institutions. The Bank was not required to pay insurance premiums to the FDIC during 2006.

Under the Reform Act, the FDIC made significant changes to its risk-based assessment system so that effective January 1, 2007 the FDIC imposes insurance premiums based upon a matrix that is designed to more closely tie what banks pay for deposit insurance to the risks they pose. The new FDIC risk-based assessment system imposes premiums based upon factors that vary depending upon the size of the bank. These factors are: for banks with less

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than $10 billion in assets — capital level, supervisory rating, and certain financial ratios; for banks with $10 billion up to $30 billion in assets — capital level, supervisory rating, certain financial ratios and (if at least one is available) debt issuer ratings, and additional risk information; and for banks with over $30 billion in assets — capital level, supervisory rating, debt issuer ratings (unless none are available in which case certain financial ratios are used), and additional risk information. The FDIC has adopted a new base schedule of rates that the FDIC can adjust up or down, depending on the revenue needs of the DIF, and has set initial premiums for 2007 that range from 5 cents per $100 of domestic deposits for the banks in the lowest risk category to 43 cents per $100 of domestic deposits for banks in the highest risk category. The new assessment system is expected to result in increased annual assessments on the deposits of the Bank of 5 basis points per $100 of deposits. The Bank has available an FDIC credit of approximately $630,000 to offset future assessments. Significant increases in the insurance assessments of the Bank will increase our costs once the credit is fully utilized.

Regulatory Capital Requirements

The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. Under the guidelines, the minimum ratio of qualifying total capital to risk-weighted assets is 8%. At least half of the total capital is to be comprised of common stockholders’ equity, qualifying noncumulative perpetual preferred stock (including related surplus), minority interest related to qualifying common or noncumulative perpetual preferred stock directly issued by a consolidated U.S. depository institution or foreign bank subsidiary, and restricted core capital elements (“Tier 1 Capital”). The remainder (“Tier 2 Capital”) may consist, subject to certain limitations, of allowance for loan and lease losses; perpetual preferred stock and related surplus hybrid capital instruments, perpetual debt, and mandatory convertible debt securities; term subordinated debt and intermediate-term preferred stock, including related surplus; and unrealized holding gains on equity securities.

The Federal Reserve Board has adopted regulations with respect to risk-based and leverage capital ratios that require most intangibles, including core deposit intangibles, to be deducted from Tier 1 Capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to originated and purchased mortgage servicing rights and purchased credit card relationships and include a “grandfathered” provision permitting inclusion of certain existing intangibles.

In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 Capital to total assets) guidelines for bank holding companies and member banks. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies and member banks that meet certain specified criteria including that they have the highest regulatory rating. All other bank holding companies and member banks are required to maintain a minimum ratio of Tier 1 Capital to total assets of 4%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines state that the Federal Reserve Board shall continue to consider a “tangible Tier 1 leverage ratio” and other indicators of capital strength in evaluating proposals for expansion or new activities.

Failure to meet the capital guidelines could subject an institution to a variety of enforcement actions including the termination of deposit insurance by the FDIC and to certain restrictions on its business. At December 31, 2006, the Group was in compliance with all capital requirements. For more information, please refer to Note 13 to the accompanying consolidated financial statements.

Safety and Soundness Standards

Section 39 of the FDIA, as amended by FDICIA, requires each federal banking agency to prescribe for all insured depository institutions standards relating to internal control, information systems, and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and such other operational and managerial standards as the agency deems appropriate. In addition, each federal banking agency also is required to adopt for all insured depository institutions and their holding companies standards that specify (i) a maximum ratio of classified assets to capital, (ii) minimum earnings sufficient to absorb losses without impairing capital, (iii) to the extent feasible, a minimum ratio of market value to book value for publicly-traded shares of the institution or holding company, and (iv) such other standards relating to asset quality, earnings and

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valuation as the agency deems appropriate. Finally, each federal banking agency is required to prescribe standards for the employment contracts and other compensation arrangements of executive officers, employees, directors and principal stockholders of insured depository institutions that would prohibit compensation, benefits and other arrangements that are excessive or that could lead to a material financial loss for the institution. If an insured depository institution or its holding company fails to meet any of the standards described above, it will be required to submit to the appropriate federal banking agency a plan specifying the steps that will be taken to cure the deficiency. If an institution or holding company fails to submit an acceptable plan or fails to implement the plan, the appropriate federal banking agency will require the institution or holding company to correct the deficiency and, until it is corrected, may impose other restrictions on the institution or holding company, including any of the restrictions applicable under the prompt corrective action provisions of FDICIA.

The FDIC and the other federal banking agencies have Interagency Guidelines Establishing Standards for Safety and Soundness that, among other things, set forth standards relating to internal controls, information systems and internal audit systems, loan documentation, credit, underwriting, interest rate exposure, asset growth and employee compensation.

Activities and Investments of Insured State-Chartered Banks

Section 24 of the FDIA, as amended by FDICIA, generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under FDIC regulations of equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank, such as the Bank, is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting stock of a depository institution if certain requirements are met.

Under the FDIC regulations governing the activities and investments of insured state banks which further implemented Section 24 of the FDIA, as amended by FDICIA, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.

Transactions with Affiliates and Related Parties

Transactions between the Bank and any of its affiliates are governed by sections 23A and 23B of the Federal Reserve Act. These sections are important statutory provisions designed to protect a depository institution from transferring to its affiliates the subsidy arising from the institution’s access to the Federal safety net. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. Generally, sections 23A and 23B (1) limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the bank’s capital stock and surplus, and limit such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (2) require that all such transactions be on terms that are consistent with safe and sound banking practices. The term “covered transactions” includes the making of loans, purchase of or investment in securities issued by the affiliate, purchase of assets, issuance of guarantees and other similar types of transactions. Most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amount, depending on the nature of the collateral. In addition, any covered transaction by a bank with an affiliate and any sale of assets or provision of services to an affiliate must be on terms that are substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with nonaffiliated companies.

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Regulation W of the Federal Reserve Board comprehensively implements sections 23A and 23B. The regulation unified and updated staff interpretations issued over the years prior to its adoption, incorporated several interpretative proposals (such as to clarify when transactions with an unrelated third party will be attributed to an affiliate), and addressed issues arising as a result of the expanded scope of non-banking activities engaged in by banks and bank holding companies and authorized for financial holding companies under the Gramm-Leach-Bliley Act.

Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans by a bank to executive officers, directors, and principal shareholders. Regulation O of the Federal Reserve Board implements these provisions. Under Section 22(h) and Regulation O, loans to a director, an executive officer and to a greater than 10% shareholders of a bank and certain of their related interests (“insiders”), and insiders of its affiliates, may not exceed, together with all other outstanding loans to such person and related interests, the bank’s single borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) and Regulation O also require that loans to insiders and to insiders of affiliates be made on terms substantially the same as offered in comparable transactions to other persons, unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the bank and (ii) does not give preference to insiders over other employees of the bank. Section 22(h) and Regulation O also require prior board of directors’ approval for certain loans, and the aggregate amount of extensions of credit by a bank to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) and Regulation O place additional restrictions on loans to executive officers.

Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires federal examiners, in connection with the examination of a financial institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Group has a Compliance Department, which oversees the planning of products and services offered to the community, especially those aimed to serve low and moderate income communities.

USA Patriot Act

Under Title III of the USA Patriot Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions, including the Group, OFSC and the Bank, are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions.

The U.S. Treasury Department (“Treasury”) has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.

Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal consequences for the institution. The Group and its subsidiaries, including the Bank, have adopted appropriate policies, procedures and controls to address compliance with the USA Patriot Act under existing regulations, and will continue to revise and update their policies, procedures and controls to reflect changes required by the USA Patriot Act and Treasury’s regulations.

Privacy Policies

Under the Gramm-Leach-Bliley Act, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request, and establish procedures

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and practices to protect customer data from unauthorized access. The Group and its subsidiaries have established policies and procedures to assure the Group’s compliance with all privacy provisions of the Gramm-Leach-Bliley Act.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 (“SOX”) implemented legislative reforms intended to address corporate and accounting fraud. SOX contains reforms of various business practices and numerous aspects of corporate governance. Most of these requirements have been implemented pursuant to regulations issued by the SEC. The following is a summary of certain key provisions of SOX.

In addition to the establishment of an accounting oversight board that enforces auditing, quality control and independence standards and is funded by fees from all registered public accounting firms and publicly traded companies, SOX places restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. Any non-audit services being provided to a public company audit client requires pre-approval by the Audit Committee of the Board of Directors (“Audit Committee”). In addition, SOX makes certain changes to the requirements for partner rotation after a period of time. SOX requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. In addition, counsel is required to report evidence of a material violation of securities laws or a breach of fiduciary duties to the company’s chief legal officer or to both the company’s chief executive officer and its chief legal officer, and, if any of such officers does not appropriately respond, to report such evidence to the Audit Committee or other similar committee of the board of directors or to the board itself.

Under SOX, longer prison terms apply to corporate executives who violate federal securities laws; the period during which certain types of suits can be brought against a company or its officers is extended; and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives (other than loans by financial institutions permitted by federal rules or regulations) are restricted. In addition, the legislation accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers required to report changes in ownership in a company’s securities must now report any such change within two business days of the change.

SOX increases responsibilities and codifies certain requirements relating to audit committees of public companies and how they interact with the company’s independent registered public accounting firm. Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the company. In addition, companies are required to disclose whether at least one member of the committee is a “financial expert” (as such term is defined by the SEC) and if not, why not. A company’s independent registered public accounting firm is prohibited from performing statutorily mandated audit services for a company if the company’s chief executive officer, chief financial officer, controller, chief accounting officer or any person serving in equivalent positions had been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. SOX also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statements materially misleading.

SOX also has provisions relating to inclusion of certain internal control reports and assessments by management in the annual report to stockholders. The law also requires the company’s registered public accounting firm that issues the audit report to attest to and report on management’s assessment of the company’s internal control over financial reporting. The Group is required to include in its annual report on Form 10-K an internal control report containing management’s assertions regarding the effectiveness of the Group’s internal control structure and procedures over financial reporting. The internal control report must include a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the Group; of management’s assessment as to the effectiveness of the Group’s internal control over financial reporting based on management’s

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evaluation of it, as of the end of the Group’s most recent fiscal year, including disclosure of any material weaknesses therein; of the framework used by management as criteria for evaluating the effectiveness of the Group’s internal control over financial reporting; and a statement that the Group’s independent registered public accounting firm that audited its financial statements has issued an attestation report on management’s assessment of such internal control over financial reporting.

Puerto Rico Banking Act

As a Puerto Rico-chartered commercial bank, the Bank is subject to regulation and supervision by the OCFI under the Puerto Rico Banking Act, which contains provisions governing the incorporation and organization, rights and responsibilities of directors, officers and stockholders as well as the corporate powers, savings, lending, capital and investment requirements and other aspects of the Bank and its affairs. In addition, the OCFI is given extensive rulemaking power and administrative discretion under the Puerto Rico Banking Act. The OCFI generally examines the Bank at least once every year.

The Puerto Rico Banking Act requires that at least 10% of the yearly net income of the Bank be credited annually to a reserve fund. This apportionment shall be done every year until the reserve fund is equal to the total paid-in capital on common and preferred stock. As of December 31, 2006, the Bank’s capital reserve fund, which is presented as “Legal surplus” in the accompanying consolidated financial statements, was $36.2 million.

The Puerto Rico Banking Act also provides that when the expenditures of a bank are greater that the receipts, the excess of the former over the latter shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital.

The Puerto Rico Banking Act further requires every bank to maintain a legal reserve which shall not be less than 20% of its demand liabilities, except government deposits (federal, commonwealth and municipal), which are secured by actual collateral.

The Puerto Rico Banking Act also requires change of control filings. When any person or entity will own, directly or indirectly, upon consummation of a transfer, 5% or more of the outstanding voting capital stock of a bank, the acquiring parties must inform the OCFI of the details not less than 60 days prior to the date said transfer is to be consummated. The transfer shall require the approval of the OCFI if it results in a change of control of the bank. Under the Puerto Rico Banking Act, a change of control is presumed if an acquirer who did not own more than 5% of the voting capital stock before the transfer exceeds such percentage after the transfer.

The Puerto Rico Banking Act generally restricts the amount a bank can lend to a single borrower. The Act prohibits one or more loans to the same person, firm, partnership, corporation or related parties financially dependent, in an aggregate amount that exceeds 15% of the bank’s paid-in capital and reserve fund. The regulations issued thereunder by the OCFI expand the above limitation to include 15% of 50% of the bank’s retained earnings. This additional lending limit is only allowed to institutions with: (1) a rating of “1” on their last regulatory examination and (2) a classification of “well-capitalized” institution. The 15% limitation is not applicable to loans guaranteed by collateral having a fair value of at least 25% more than the loan amount. It is also not applicable to letters of credit or guarantees and loans guaranteed by bonds, securities and debts of the government of the United States or Puerto Rico or bonds of Puerto Rico governmental agencies, instrumentalities or municipalities. The Group has a lending concentration of $76.8 million in one mortgage originator in Puerto Rico at December 31, 2006. This mortgage-related transaction is classified as a commercial loan and is collateralized by mortgages on real estate properties, mainly one-to-four family residences, and is also guaranteed by the parent company of the mortgage originator. This mortgage-related transaction is performing in accordance with its contractual terms. On May 4, 2006, the Group obtained a waiver from the OCFI with respect to the statutory limit for loans to a single borrower (loan to one borrower limit), which allows the Group to retain this credit relationship in its portfolio until it is paid in full.

The Puerto Rico Finance Board is composed of the Commissioner of Financial Institutions of Puerto Rico; the Presidents of the Government Development Bank for Puerto Rico, the Economic Development Bank for Puerto

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Rico and the Planning Board; the Puerto Rico Secretaries of Commerce and Economic Development, Treasury and Consumer Affairs; the Commissioner of Insurance; and the President of the Public Corporation for Insurance and Supervision of Puerto Rico Cooperatives. It has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in the Commonwealth, and promulgates regulations that specify maximum rates on various types of loans to individuals.

The current regulations of the Puerto Rico Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses (including real estate development loans, but excluding certain other personal and commercial loans secured by mortgages on real estate property) is to be determined by free competition. The Puerto Rico Finance Board also has the authority to regulate maximum finance charges on retail installment sales contracts and for credit card purchases. There is presently no maximum rate for retail installment sales contracts and for credit card purchases.

International Banking Center Regulatory Act of Puerto Rico

The business and operations of O.B.T. International Bank and Oriental International are subject to supervision and regulation by the OCFI. Under the IBE Act, no sale, encumbrance, assignment, merger, exchange or transfer of shares, interest or participation in the capital of an international banking entity (an “IBE”) may be initiated without the prior approval of the OCFI, if by such transaction a person would acquire, directly or indirectly, control of 10% or more of any class of stock, interest or participation in the capital of the IBE. The IBE Act and the regulations issued thereunder by the OCFI (the “IBE Regulations”) limit the business activities that may be carried out by an IBE. Such activities are limited in part to persons and assets/liabilities located outside of Puerto Rico. The IBE Act provides further that every IBE must have not less than $300,000 of unencumbered assets or acceptable financial guarantees.

Pursuant to the IBE Act and the IBE Regulations, the Bank’s IBEs have to maintain books and records of all their transactions in the ordinary course of business. They are also required to submit quarterly and annual reports of their financial condition and results of operations to the OCFI, including annual audited financial statements.

The IBE Act empowers the OCFI to revoke or suspend, after notice and hearing, a license issued thereunder if, among other things, the IBE fails to comply with the IBE Act, the IBE Regulations or the terms of its license, or if the OCFI finds that the business or affairs of the IBE are conducted in a manner that is not consistent with the public interest.

In November 2003, the IBE Act was amended to impose income taxes at normal statutory rates on each IBE that operates as a unit of a bank, such as O.B.T. International Bank, if the IBE’s net income generated after December 31, 2003 exceeds 40 percent of the Bank’s net income in the taxable year commenced on July 1, 2003 to June 30, 2004, 30 percent of the Bank’s net income in the taxable year commencing on July 1, 2004 to June 30, 2005, 20 percent of the Bank’s net income in the taxable six-month period commencing on July 1, 2005 to December 31, 2005 and 20 percent of the Bank’s net income in the taxable year commencing on January 1, 2006 to December 31, 2006, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a bank, such as Oriental International Bank Inc.. As of January 1, 2004, most of the assets and liabilities of O.B.T. International Bank were transferred to the Bank’s IBE subsidiary.

Employees

At December 31, 2006, the Group had 535 employees. None of its employees is represented by a collective bargaining group. The Group considers its employee relations to be good.

Internet access to reports

The Group’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any and all amendments to such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on or through the Group’s internet website at www.orientalfg.com, as soon as reasonably practicable after the Group electronically files such material with, or furnishes it to, the SEC.

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The Group’s corporate governance guidelines, code of business conduct and ethics, and the charters of its audit committee, compensation committee, and corporate governance and nominating committee are available free of charge on the Group’s website at www.orientalfg.com in the investor relations section under the corporate governance link. The Group’s code of business conduct and ethic applies to its directors, officers, employees and agents, including its principal executive, financial and accounting officers.

ITEM 1A.   RISK FACTORS

In addition to the other information contained elsewhere in this report and the Group’s other filings with the SEC, the following risk factors should be carefully considered in evaluating the Group and its subsidiaries. The risks and uncertainties described below are not the only ones facing the Group and its subsidiaries. Additional risks and uncertainties, not presently known to us or otherwise, may also impair our business operations. If any of the risks described below or such other risks actually occur, our business, financial condition or results of operations could be materially and adversely affected.

Puerto Rico’s current economic condition may have an adverse effect on our loan portfolio

The economic uncertainty that currently exists in Puerto Rico, our primary market, caused in part by Puerto Rico’s structural deficit and by the disagreements between the legislative and executive branches of the Puerto Rico government, which led to a government shutdown in May 2006, has resulted in a general economic slowdown with an apparent reduction in private sector employment. Increases in the price of petroleum and other consumer goods and services, coupled with a recently approved 7% sales tax instituted as part of a government program of tax and fiscal reforms, may also adversely affect the general economic slowdown.

These economic concerns and uncertainty in the private and public sectors may also have an adverse effect in the credit quality of our loan portfolios as delinquency rates may increase in the short-term until the economy stabilizes. Also, potential reduction in consumer spending may also impact growth in our other interest and non-interest revenue sources.

A prolonged economic slowdown or a decline in the real estate market could harm the results of our operations

The residential mortgage loan origination business has historically been cyclical, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. Any decline in residential mortgage loan originations in the market could also reduce the level of mortgage loans that we may produce in the future and adversely impact its business. During periods of rising interest rates, refinancing originations for many mortgage products tend to decrease as the economic incentives for borrowers to refinance their existing mortgage loans are reduced. In addition, the residential mortgage loan origination business is impacted by home values. Over the past several years, residential real estate values have increased, which has contributed to the growth in the residential mortgage industry, particularly with respect to refinancings. If residential real estate values decline, this could lead to lower volumes and higher losses across the industry, adversely impacting our business.

Fluctuations in interest rates may hurt our business

Interest rate fluctuations are the primary market risk affecting us. Changes in interest rates affect the following areas, among others, of our business:

•  the number of mortgage loans originated;

•  the interest income earned on loans and securities;

•  the value of securities holdings;

•  gains from sales of loans and securities; and

•  deposits and borrowings.

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Our business could be adversely affected if we cannot maintain access to stable funding sources

Our business requires continuous access to various funding sources. While we are able to fund our operations through deposits as well as through borrowings from the Federal Home Loan Bank of New York and other alternative sources, our business may be significantly dependent upon other borrowings such as repurchase agreements.

While we expect to have continued access to credit from the foregoing sources of funds, there can be no assurance that such financing sources will continue to be available or will be available on favorable terms. In the event that such sources of funds are reduced or eliminated and we are not able to replace them on a cost-effective basis, we may be forced to curtail or cease our loan origination business which would have a material adverse effect on our operations and financial condition.

Increases in interest rates reduce demand for new mortgage loan originations and refinancings

Higher interest rates increase the cost of mortgage loans to consumers and reduce demand for mortgage loans which negatively impacts our profits. Reduced demand for mortgage loans results in reduced loan originations by us therefore generating lower mortgage origination income and lower gains on sale of loans. In addition, the demand for refinancing is particularly sensitive to increases in interest rates.

Increases in interest rates reduce net interest income

Increases in short-term interest rates reduce net interest income, which is an important part of our earnings. Net interest income is the difference between the interest received by us on our assets and the interest paid on our borrowings. Most of our assets, such as mortgage loans and mortgage-backed securities, are long-term assets with fixed interest rates. In contrast, most of our borrowings are short-term thus putting us in a liability sensitive position in terms of our balance sheet interest rate exposure. When interest rates rise we must pay more in interest on our borrowings while interest earned on our assets does not rise as quickly which causes profits to decrease.

Increases in interest rates may reduce the value of mortgage loans and securities holdings

Increases in interest rates may reduce the value of our financial assets and have an adverse impact on our earnings and financial condition. We own a substantial portfolio of mortgage loans, mortgage-backed securities, and other debt securities which have both fixed and adjustable interest rates. The fair value of an obligation with a fixed interest rate generally decreases when prevailing interest rates rise which may have an adverse effect on our earnings and financial condition. In addition, we may suffer losses as we sell loans to reduce future interest rate exposure. The fair value of an obligation with an adjustable interest rate can be adversely affected when interest rates increase due to a lag in the implementation of repricing terms as well as due to interest rate caps which may limit the amount of increase in the obligation’s interest rate. Earnings can be further impacted negatively by a flattening in the slope of the yield curve, which tends to increase interest expense as short-term rates increase while maintaining long-term rates, which may present favorable terms for our clients to exercise their prepayment options on their mortgage loans.

Declining interest rates could reduce interest income on cash and investments

We make loans and invest in debt generally issued by the federal and Puerto Rico governments. If interest rates decrease, the interest income derived from any new loans or investments which have fixed or variable rates will be less than interest income previously derived when rates were higher. Additionally, if interest rates decrease, our interest income will also decrease during the term of a loan or investment that bears interest at a variable rate. Furthermore, reduced interest rates will result in a decrease in income on our cash and short-term investments.

During periods of declining interest rates prepayment of debt underlying asset-backed securities can be expected to accelerate. Accordingly, our ability to maintain the yield anticipated from investments in asset-backed securities will be affected by reductions in the principal amount of such securities resulting from such prepayments and our ability to reinvest the returns of principal at comparable rates is subject to general prevailing interest rates at that time. Prepayments may also result in the realization of capital losses with respect to higher yielding securities that

19

had been bought at a premium or the loss of opportunity to realize capital gains in the future from possible appreciation.

Our decisions regarding credit risk and the allowance for loan losses may materially and adversely affect our business and results of operations

Making loans is an essential element of our business and there is a risk that our loans will not be repaid. The risk of nonpayment is affected by a number of factors, including:

•  the duration of the loan;

•  credit risks of a particular borrower;

•  changes in economic or industry conditions; and

•  in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

We strive to maintain an appropriate allowance for loan losses to provide for losses inherent in our loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors such as default frequency, internal risk ratings, expected future cash collections, loss recovery rates and general economic factors, among others, as are the size and diversity of individual credits. Our methodology for measuring the adequacy of the allowance relies on several key elements which include specific allowances for identified problem loans, allowance by formula and an unallocated allowance.

In the fiscal year ended December 31, 2006, we recorded a provision for loan losses of $4.4 million based on our overall evaluation of the risks of our loan portfolio. Although we believe that our allowance for loan losses is currently sufficient given the risk inherent in our loan portfolio, there is no precise method of predicting loan losses and therefore, we always face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. In addition, the FDIC as well as the OCFI may require us to establish additional reserves. Additions to the allowance for loan losses would result in a decrease in our net earnings and capital and hinder our ability to pay dividends.

We are subject to default and other risks in connection with our mortgage loan originations

From the time that we fund the mortgage loans we originate to the time we sell them we are generally at risk for any mortgage loan defaults. Once we sell the mortgage loans, the risk of loss from mortgage loan defaults and foreclosures passes to the purchaser or insurer of the mortgage loans. However, in the ordinary course of business, we make representations and warranties to the purchasers and insurers of mortgage loans relating to the validity of such loans. If there is a breach of any of these representations or warranties, we may be required to repurchase the mortgage loan and bear any subsequent loss on the mortgage loan. In addition, we incur higher liquidity risk with respect to the non-conventional mortgage loans originated by us, because of their longer maturities and lack of a favorable secondary market in which to sell them.

Our exposure to overall credit risk will increase as a consequence of the increase in our commercial lending activities

We have increased our emphasis on commercial lending which is likely to increase our overall credit risk. Banks generally charge higher interest rates on commercial loans than on residential mortgage loans because larger loan losses are expected in this business line. Generally commercial loans are considered to be riskier than residential mortgage loans because they have larger balances to a single borrower or group of related borrowers. In addition, the borrower’s ability to repay a commercial loan depends on the successful operation of the business or the property securing the loan. If we experience loan losses that are higher than our allowance for loan losses, our profits and financial condition would be adversely affected.

We are at risk because most of our business is conducted in Puerto Rico

Because most of our business activities are conducted in Puerto Rico, and a substantial portion of our credit exposure is in Puerto Rico, we are at risk from adverse economic, political or business developments including a

20

downturn in real estate values and natural hazards that affect Puerto Rico. If Puerto Rico’s economy experiences an overall decline as a result of these adverse developments or natural hazards, the rates of delinquencies, foreclosures, bankruptcies and losses on loan portfolios would probably increase substantially. This would cause our profitability to decrease.

Competition with other financial institutions could adversely affect our profitability

We face substantial competition in originating loans and in attracting deposits. The competition in originating loans comes principally from other U.S., Puerto Rico and foreign banks, mortgage banking companies, consumer finance companies, insurance companies, and other institutional lenders and purchasers of loans. We will encounter greater competition as we expand our operations. Increased competition may require us to increase the rates we pay on deposits or lower the rates we offer on loans which could adversely affect our profitability.

Changes in statutes and regulations could adversely affect us

We, as a Puerto Rico-chartered financial holding company, and our various subsidiaries are each subject to federal and Puerto Rico governmental supervision and regulation. There are laws and regulations which restrict transactions between us and our various subsidiaries. Any change in such regulations, whether by applicable regulators or as a result of legislation subsequently enacted by the Congress of the United States or the Legislature of Puerto Rico, could have a substantial impact on our operations.

Banking regulations may restrict our ability to pay dividends

We may not be able to pay dividends in the future if we do not earn sufficient net income. Federal and Puerto Rico banking regulations may also restrict the ability of Oriental Bank and Trust to make distributions to us. These distributions may be necessary for us to pay dividends on our common and preferred stock.

Competition in attracting talented people could adversely affect our operations

We depend on our ability to attract and retain key personnel and we rely heavily on our management team. The inability to recruit and retain key personnel or the unexpected loss of key managers may adversely affect our operations. Our success to date has been influenced strongly by our ability to attract and retain senior management experienced in banking and financial services. Retention of senior managers and appropriate succession planning will continue to be critical to the successful implementation of our strategies.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.   PROPERTIES

The Group leases its main offices located at 997 San Roberto Street, Oriental Center, Professional Offices Park, San Juan, Puerto Rico. The executive office, treasury, trust division, brokerage, investment banking, insurance services, and back-office support departments are maintained at such location.

The Bank owns seven branch premises and leases eighteen branch commercial offices throughout Puerto Rico. The Bank’s management believes that each of its facilities is well maintained and suitable for its purpose and can readily obtain appropriate additional space as may be required at competitive rates by extending expiring leases or finding alternative space.

At December 31, 2006, the aggregate future rental commitments under the terms of the leases, exclusive of taxes, insurance and maintenance expenses payable by the Group, was $23.6 million.

On June 30, 2005, the Group sold the Las Cumbres building, a two-story structure located at 1990 Las Cumbres Avenue, San Juan, Puerto Rico, for the amount of $3.4 million to a local investor and his spouse. The local investor (the “Buyer”) is the brother of the former Chairman of the Group’s Board of Directors. The building was the principal property owned by the Group for banking operations and other services. The Bank’s mortgage banking

21

division and one of the principal branches and financial services office (brokerage and insurance) are located in that building. The book value of that property at June 30, 2005, was $1.3 million. Also, on the same date, the Bank entered into a lease agreement with the new owner for a period of 10 years. In summary, the lease contract provides for an annual rent of $324,000 or a monthly rent of $27,000, for 13,200 square feet, including 42 parking spaces. During the lease term, the rental fee will increase by 6% every three years, except for the last year on which the increment will be 2%. This transaction was financed by a loan granted to the Buyer by the Bank. The loan was for $2.0 million (56% loan to value) at 6.50% fixed interest for a period of 10 years, collateralized by the Las Cumbres building and the assignment of the monthly rent. The transaction was accounted for in accordance to the provisions of SFAS 13, as amended by SFAS 98, “Accounting for Leases: Sale-leaseback Transactions Involving Real Estate,” and accordingly, the lease portion of the transaction was classified as an operating lease and the gain on the sale portion of the transaction was deferred and is being amortized to income over the lease term (10 years) in proportion to the related gross rental expense for the leaseback property each period.

The Group’s investment in premises and equipment, exclusive of leasehold improvements, at December 31, 2006, was $8.8 million.

ITEM 3.   LEGAL PROCEEDINGS

On August 14, 1998, as a result of a review of its accounts in connection with the admission by a former Group officer of having embezzled funds and manipulated bank accounts and records, the Group became aware of certain irregularities. The Group notified the appropriate regulatory authorities and commenced an intensive investigation with the assistance of forensic accountants, fraud experts, and legal counsel. The investigation determined losses of $9.6 million, resulting from dishonest and fraudulent acts and omissions involving several former Group employees. These losses were submitted to the Group’s fidelity insurance policy (the “Policy”) issued by Federal Insurance Company, Inc. (“FIC”). In the opinion of the Group’s management, its legal counsel and experts, the losses determined by the investigation were covered by the Policy. However, FIC denied all claims for such losses. On August 11, 2000, the Group filed a lawsuit in the United States District Court for the District of Puerto Rico against FIC, a stock insurance corporation organized under the laws of the State of Indiana, for breach of insurance contract, breach of covenant of good faith and fair dealing and damages, seeking payment of the Group’s $9.6 million insurance claim loss and the payment of consequential damages of no less than $13.0 million resulting from FIC capricious, arbitrary fraudulent and without cause denial of the Group’s claim. The losses resulting from such dishonest and fraudulent acts and omissions were expensed in prior years. On October 3, 2005, a jury rendered a verdict of $7.5 million in favor of the Group and against FIC, the defendant. The jury granted the Group $453,219 for fraud and loss documentation in connection with its Accounts Receivable Returned Checks Account. However, the jury could not reach a decision on the Group’s claim for $3.4 million in connection with fraud in its Cash Accounts, thus forcing a new trial on this issue. The jury denied the Group’s claim for $5.6 million in connection with fraud in the Mortgage Loans Account, but the jury determined that FIC had acted in bad faith and with malice. It, therefore, awarded the Group $7.1 million in consequential damages. The court decided not to enter a final judgment for the aforementioned awards until a new trial on the fraud in the Cash Accounts claim is held. After a final judgment is entered, the parties would be entitled to exhaust their post-judgment and appellate rights. The Group has not recognized any income on this claim since the appellate rights have not been exhausted and the amount to be collected has not been determined. The Group expects to request and recover prejudgment interest, costs, fees and expenses related to its prosecution of this case. However, no specific sum can be anticipated as they are subject to the discretion of the court. To date, the court has not scheduled this new trial.

In addition, the Group and its subsidiaries are defendants in a number of legal proceedings incidental to their business. The Group is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group’s financial condition or results of operations.

22

ITEM 4.   SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

The only matter submitted and approved at the annual meeting of shareholders held on November 1, 2006, was the election of two directors for a three-year term expiring at the 2009 annual meeting of shareholders or until their successors are duly elected and qualified. There was no solicitation in opposition to management’s nominees as listed in the Group’s proxy statement and all of the nominees were elected.

PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Group’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG”. Information concerning the range of high and low sales prices for the Group’s common stock for each quarter in the year ended December 31, 2006, the six-month period ended December 31, 2005 and fiscal year ended June 30, 2005, as well as cash dividends declared for such fiscal years are contained in Table 7 (“Capital, Dividends and Stock Data”) and under the “Stockholders’ Equity” caption in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

Information concerning legal or regulatory restrictions on the payment of dividends by the Group and the Bank is contained under the caption “Dividend Restrictions” in Item 1 of this report.

As of December 31, 2006, the Group had approximately 5,929 holders of record of its common stock, including all directors and officers of the Group, and beneficial owners whose shares are held in “street” name by securities broker-dealers or other nominees.

The Puerto Rico Internal Revenue Code of 1994, as amended, generally imposes a withholding tax on the amount of any dividends paid by Puerto Rico corporations to individuals, whether residents of Puerto Rico or not, trusts, estates, and special partnerships at a special 10% withholding tax rate. Prior to the first dividend distribution for the taxable year, such shareholders may elect to be taxed on the dividends at the regular rates, in which case the special 10% tax will not be withheld from such year’s distributions. Dividends distributed by Puerto Rico corporations to foreign corporations or partnerships not engaged in trade or business in Puerto Rico are also generally subject to withholding tax at a 10% rate.

United States citizens who are non-residents of Puerto Rico will not be subject to Puerto Rico tax on dividends if said individual’s gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married, and form AS 2732 of the Puerto Rico Treasury Department “Withholding Tax Exemption Certificate for the Purpose of Section 1147” is filed with the withholding agent. U.S. income tax law permits a credit against the U.S. income tax liability, subject to certain limitations, for certain foreign income taxes paid or deemed paid with respect to foreign source income, including that arising from dividends from foreign corporations, such as the Group.

The Group has three stock options plans: the 1996, 1998 and 2000 Incentive Stock Option Plans, all of which were approved by the Group’s stockholders. These plans offer key officers, directors and employees an opportunity to purchase shares of the Group’s common stock. The Compensation Committee of the Board of Directors has sole authority and absolute discretion as to the number of stock options to be granted, their vesting rights, and the options exercise price.

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The following table shows certain information pertaining to the plans as of December 31, 2006:

	(a)		(b)		(c)
					Number of Securities
					Remaining Available for
					Future Issuance Under
	Number of Securities to		Weighted-Average		Equity Compensation Plans
	Be Issued Upon Exercise		Exercise Price of		(excluding those reflected
Plan Category	of Outstanding Options		Outstanding Options		in column (a))
Equity compensation plans approved by shareholders:
1996 Plan		499,922	$	19.15		—
1998 Plan		274,049		10.69		106,656
2000 Plan		59,562		8.56		—
Total		833,533	$	15.61		106,656

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) published Statement 123(R) requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The Group was required to apply Statement 123(R) as of July 1, 2005. The implementation of this statement had no effect on the consolidated financial results of the Group as of July 1, 2005.

On June 30, 2005, the Compensation Committee of the Group’s Board of Directors approved the acceleration of the vesting of all unvested options to purchase shares of common stock of OFG that were held by employees, officers and directors as of June 30, 2005. As a result, options to purchase 1,219,333 shares became exercisable. The purpose of the accelerated vesting was to enable the Group to avoid recognizing in its income statement compensation expense associated with these options in future periods, upon adoption of FASB Statement No. 123(R).

Subsequent to the adoption of SFAS 123R, the Group recorded approximately $23,000 and $11,000 related to compensation expense for options issued during the year ended December 31, 2006 and the six-month transition period ended December 31, 2005, respectively.

Purchases of equity securities by the issuer and affiliated purchasers

The following table sets forth issuer purchases of equity securities made by the Group during the quarter ended December 31, 2006:

	Total Number of Shares				Approximate Dollar Value of
	Purchased as Part of				Shares that May
	Publicly Announced		Average Price Paid		Yet Be Purchased Under the
Month	Plans or Programs		per Share		Plans or Programs
October 2006		87,100	$	11.93	$	9,511,835
November 2006		400	$	11.46	$	8,473,130
December 2006		35,600	$	11.68	$	8,468,545
		123,100	$	11.88	$	8,052,590

On August 30, 2005, the Board of Directors of the Group approved a stock repurchase program for the repurchase of up to $12.1 million of the Group’s outstanding shares of common stock, which replaced the former program. On June 20, 2006, the Board of Directors approved an increase of $3.0 million to the initial amount of the current program, for the repurchase of up to $15.1 million. In the quarter ended December 31, 2006, the Group repurchased 123,100 shares of its common stock in the open market, at a total cost of approximately $1,459,000, under such program.

For more information, please refer to Notes 1 and 13 to the accompanying consolidated financial statements incorporated herein by reference.

24

ITEM 6.   SELECTED FINANCIAL DATA

The information required by this item is incorporated herein by reference from portions of the 2006 annual report to shareholders filed as Exhibit 13.0. The following ratios of the Group should be read in conjunction with the portions of such report filed as Exhibit 13.0. Selected financial data are presented for the last five fiscal years.

The ratios shown below demonstrate the Group’s ability to generate sufficient earnings to pay the fixed charges or expenses of its debt and preferred stock dividends. The Group’s consolidated ratios of earnings to combined fixed charges and preferred stock dividends were computed by dividing earnings by combined fixed charges and preferred stock dividends, as specified below, using two different assumptions, one excluding interest on deposits and the second including interest on deposits:

Consolidated Ratios of Earnings to

Year Ended

Six-Month Period

Combined Fixed Charges and

December 31,

Ended December 31,

Fiscal Year Ended June 30,

Preferred Stock Dividends:

2006

2005

2005

2004

2003

2002

Excluding Interest on Deposits

0.91x

1.27x

1.66x

2.11x

2.00x

1.61x

Including Interest on Deposits

0.93x

1.20x

1.48x

1.72x

1.60x

1.38x

For purposes of computing the consolidated ratios of earnings to combined fixed charges and preferred stock dividends, earnings consist of pre-tax income from continuing operations plus fixed charges and amortization of capitalized interest, less interest capitalized. Fixed charges consist of interest expensed and capitalized, amortization of debt issuance costs, and the Group’s estimate of the interest component of rental expense. The term “preferred stock dividends” is the amount of pre-tax earnings that is required to pay dividends on the Group’s outstanding preferred stock. As of December 31, 2006 and 2005, and June 30, 2005 and 2004, the Group had noncumulative preferred stock issued and outstanding amounting to $68.0 million as follows: (1) Series A amounting to $33.5 million or 1,340,000 shares at a $25 liquidation value; and (2) Series B amounting to $34.5 million or 1,380,000 shares at a $25 liquidation value. As of June 30, 2003 and 2002, the Group had non-cumulative preferred stock, Series A, issued and outstanding amounting to $33.5 million or 1,340,000 shares at a $25 liquidation value.

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this item is incorporated herein by reference from portions of the 2006 annual report to shareholders filed as Exhibit 13.0 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information regarding the market risk of the Group is incorporated herein by reference from portions of the 2006 annual report to shareholders filed as Exhibit 13.0, under the caption “Quantitative and Qualitative Disclosures about Market Risk”.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is incorporated herein by reference from portions of the 2006 annual report to shareholders filed as Exhibit 13.0. The consolidated financial statements of this report set forth the list of all reports required by this item and are incorporated herein by reference.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

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ITEM 9A.   CONTROLS AND PROCEDURES

(a)   Disclosure Controls and Procedures

The Group’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2006, an evaluation was carried out under the supervision and with the participation of the Group’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Group’s disclosure controls and procedures. Based upon such evaluation, management concluded that the Group’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Group in the reports that it files or submits under the Securities Exchange Act of 1934.

(b)   Management’s Report on Internal Control over Financial Reporting

The Management’s Report on Internal Control over Financial Reporting is incorporated herein by reference from portions of the 2006 annual report to shareholders filed as an Exhibit 13.0.

(c)   Changes in Internal Control over Financial Reporting

During the quarters ended June 30, 2006, September 30, 2006 and December 31, 2006, the Group enhanced its internal controls to address the material weaknesses identified in management’s report on internal control over financial reporting included in the Group’s annual report on Form 10-K for the six-month period ended December 31, 2005. Specifically, the Group has strengthened its review and documentation procedures over significant non-routine transactions in order to identify and consider all relevant terms and conditions for the proper accounting treatment. These enhanced controls have been applied to certain non-routine transactions that have taken place during and after the quarter ended June 30, 2006, and their operating effectiveness has been tested accordingly. Management concluded that the controls put into place were adequately designed and were operating for a sufficient period of time for management to conclude that the material weaknesses had been remediated as of December 31, 2006.

ITEM 9B.   OTHER INFORMATION

The Group entered into a Technology Outsourcing Agreement made as of January 26, 2007 (the “Agreement”) with Metavante Corporation, a Wisconsin corporation with offices at 4900 W. Brown Deer Road, Brown Deer, Wisconsin 53223 (“Metavante”), for certain technology related services and software licenses offered by Metavante. The Agreement provides for (i) the transfer of the Group’s data processing and other information technology services to Metavante’s systems; (ii) technology upgrades, enhancements and software modifications; and (iii) the full integration of certain interfaces between the Group and Metavante so that the Group is able to receive Metavante’s services in a live operating environment. The Agreement is for an initial term ending November 30, 2014.

The technology related services to be provided by Metavante to the Group include, but are not limited to the following: (i) software support in connection with Metavante’s licensed software; (ii) professional services, such as staff training and consulting; and (iii) services for payments between the Group’s clients and third parties, including settlement services as payment processor and debit or credit card account issuing or merchant processing services. Additional services may be provided by mutual agreement of both parties. The commencement of these services is expected to occur on or before November 5, 2007 after the completion of certain tasks necessary for their implementation.

Pursuant to the Agreement, Metavante is responsible for establishing and maintaining an information security program designed to ensure on its premises the security and confidentiality of all data and information of any kind or nature submitted by the Group to Metavante, or received by Metavante on behalf of the Group, in connection with Metavante’s services. Metavante is also responsible for maintaining a disaster recovery and continuity plan in connection with the services provided to the Group.

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PART III

Items 10 through 14 will be provided by incorporating the information required under such items by reference from the Group’s definitive proxy statement to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this report.

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) — Financial Statements

The list of financial statements required by this item is set forth in the financial data index incorporated by reference from portions of the 2006 annual report to shareholders filed as Exhibit 13.0.

(a)(2) — Financial Statement Schedules

No schedules are presented because the information is not applicable or is included in the consolidated financial statements or in the notes thereto described in (a)(1) above.

(a)(3) — Exhibits

Exhibit
No.:			Description of Document:
	3	(i)	Amended and Restated Certificate of Incorporation.(1)
	3	(ii)	By-Laws.(2)
	4	.1	Certificate of Designation creating the 7.125% Noncumulative Monthly Income Preferred Stock, Series A(3)
	4	.2	Certificate of Designation creating the 7.0% Noncumulative Monthly Income Preferred Stock, Series B (4)
	10	.1	1996 Incentive Stock Option Plan.(5)
	10	.2	1998 Incentive Stock Option Plan.(6)
	10	.3	2000 Incentive Stock Option Plan.(7)
	10	.4	Form of Stock Option Grant.(8)
	10	.5	Lease Agreement Between Oriental Financial Group Inc. and Professional Office Park V, Inc.(9)
	10	.6	First Amendment to Lease Agreement Dated May 18, 2004, Between Oriental Financial Group Inc. and Professional Office Park V, Inc.(9)
	10	.8	Employment Agreement between Oriental Financial Group Inc. and Jose Rafael Fernández(9)
	10	.11	Change in Control Compensation Agreement between Oriental Financial Group Inc. and Jose E. Fernández Richards(9)
	10	.12	Change in Control Compensation Agreement between Oriental Financial Group Inc. and Jose R. Fernández(9)
	10	.13	Change in Control Compensation Agreement between Oriental Financial Group Inc. and Norberto González(9)
	10	.14	Change in Control Compensation Agreement between Oriental Financial Group Inc. and Ganesh Kumar(9)
	10	.16	Change in Control Compensation Agreement between Oriental Financial Group Inc. and Carlos J. Nieves(9)
	10	.17	Change in Control Compensation Agreement between Oriental Financial Group Inc. and Mari Evelyn Rodríguez(10)
	10	.18	Change in Control Compensation Agreement between Oriental Financial Group Inc. and José J. Gil de Lamadrid(11)
	10	.19	Agreement between Oriental Financial Group Inc. and José J. Gil de Lamadrid(12)

27

Exhibit
No.:			Description of Document:
	10	.20	Change in Control Compensation Agreement between Oriental Financial Group Inc. and Julio R. Micheo(13)
	10	.21	Investment Management Agreement between Oriental Financial Group Inc., et al., and Bear Stearns Asset Management Inc.(14)
	10	.22	Amendment to Investment Management Agreement between Oriental Financial Group Inc. and Bear Stearns Asset Management Inc.
	10	.23	Technology Outsourcing Agreement between Oriental Financial Group Inc. and Metavante Corporation(14)
	13	.0	Portions of the 2006 annual report to shareholders
	21	.0	List of subsidiaries
	23	.1	Consent of Deloitte & Touche LLP
	23	.2	Consent of KPMG LLP
	31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated herein by reference from Exhibit No. 3 of the Group’s registration statement on Form S-3 filed with the SEC on April 2, 1999.
(2)	Incorporated herein by reference from Exhibit No. 3(ii) of the Group’s current report on Form 8-K filed with the SEC on September 1, 2005.
(3)	Incorporated herein by reference from Exhibit No. 4.1 of the Group’s registration statement on Form 8-A filed with the SEC on April 30, 1999.
(4)	Incorporated herein by reference from Exhibit No. 4.1 of the Group’s registration statement on Form 8-A filed with the SEC on September 26, 2003.
(5)	Incorporated herein by reference from the Group’s definitive proxy statement for the 1997 annual meeting of stockholders filed with the SEC on September 19, 1997.
(6)	Incorporated herein by reference from the Group’s definitive proxy statement for the 1998 annual meeting of stockholders filed with the SEC on September 29, 1998.
(7)	Incorporated herein by reference from the Group’s definitive proxy statement for the 2000 annual meeting of stockholders filed with the SEC on November 17, 2000.
(8)	Incorporated herein by reference from Exhibit No. 10.4 of the Group’s annual report on Form 10-K filed with the SEC on September 13, 2004.
(9)	Incorporated herein by reference from Exhibit 10 of the Group’s annual report on Form 10-K filed with the SEC on September 13, 2005.
(10)	Incorporated herein by reference from Exhibit 10.1 of the Group’s quarterly report on Form 10-Q filed with the SEC on October 17, 2006.
(11)	Incorporated herein by reference from Exhibit 10.2 of the Group’s current report on Form 8-K filed with the SEC on December 4, 2006.
(12)	Incorporated herein by reference from Exhibit 10.1 of the Group’s current report on Form 8-K filed with the SEC on December 4, 2006.
(13)	Incorporated herein by reference from Exhibit 10 of the Group’s current report on Form 10-K filed with the SEC on December 15, 2006.
(14)	Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ORIENTAL FINANCIAL GROUP INC.

By: /s/  José Rafael Fernández José Rafael Fernández, President and Chief Executive Officer	Dated: March 27, 2007
By: /s/  Norberto González Norberto González Executive Vice President and Chief Financial Officer	Dated: March 27, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated.

By: /s/  José J. Gil de Lamadrid José J. Gil de Lamadrid Chairman of the Board	Dated: March 27, 2007
By: /s/  José Rafael Fernández José Rafael Fernández Director	Dated: March 27, 2007
By: /s/  José E. Fernández José E. Fernández Director	Dated: March 27, 2007
By: /s/  Maricarmen Aponte Maricarmen Aponte Director	Dated: March 27, 2007
By: /s/  Francisco Arriví Francisco Arriví Director	Dated: March 27, 2007
By: /s/  Miguel Vázquez Deynes Miguel Vázquez Deynes Director	Dated: March 27, 2007
By: /s/  Dr. Pablo I. Altieri Dr. Pablo I. Altieri Director	Dated: March 27, 2007
By: /s/  Juan Carlos Aguayo Juan Carlos Aguayo Director	Dated: March 27, 2007

29

By: /s/  Nelson García Nelson García Director	Dated: March 27, 2007
By: /s/  Pedro Morazzani Pedro Morazzani Director	Dated: March 27, 2007

30

EX-10.21

Exhibit 10.21

INVESTMENT MANAGEMENT AGREEMENT

Regular Account

(Third-Party Custodian)

     THIS AGREEMENT, made this 17 day of January, 2007 by and between Bear Stearns Asset Management Inc., a New York corporation with principal offices at 383 Madison Avenue, New York, New York 10179 (the “Investment Manager”), and Oriental Financial Group Inc., Oriental Bank & Trust, and Oriental International Bank Inc., each a Puerto Rico corporation with principal offices at Oriental Center, Professional Offices Park, 997 San Roberto Street, 10^th Floor, San Juan Puerto Rico 00926 (collectively, the “Client”).

WITNESSETH:

     WHEREAS, Client desires to engage the Investment Manager on or around March 1, 2007 (the “Effective Date”) to supervise and manage certain of its assets held in custody by Mellon Bank, N.A., as custodian (the “Custodian”), in accordance with the terms and conditions hereinafter set forth and the Investment Manager desires to accept such engagement in accordance with such terms and conditions.

     NOW, THEREFORE, the parties hereto hereby agree as follows:

     1. Appointment of Investment Manager.

     (a) Client hereby appoints the Investment Manager as his attorney-in-fact to invest and reinvest the Investment Account Assets (as defined in paragraph 3 hereof) as fully as Client itself could do in accordance with the investment guidelines set forth in Exhibit A attached hereto, as the same may be amended in writing from time to time by Client (the “Investment Guidelines”).

     (b) The Investment Manager hereby accepts such appointment and agrees to supervise and direct the investment of the Investment Account Assets in accordance with the Investment Guidelines In addition, for the Investment Manager’s reference, Client’s Investment Policy, as the same may be amended from time to time (the “Investment Policy”) is set forth in Exhibit B attached hereto.

     (c) Subject to subparagraphs (a) and (b) above, the Investment Manager may, in its full discretion and without obligation on its part to give prior notice to the Custodian or Client, (i) buy, sell, exchange, convert, lender and otherwise trade in any bonds or other securities, and (ii) execute securities transactions through accounts established with such brokers or dealers as the Investment Manager may select, other than any Affiliate (as defined in paragraph (e) below) of the Investment Manager.

     (d) Client has directed the Custodian, and the Custodian has agreed, to act in accordance with the instructions of the Investment Manager. The Investment Manager shall at no time have custody of or physical control over the Investment Account Assets and the Investment Manager shall not be liable for any act or omission of the Custodian.

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     (e) For purposes of this Agreement, the term “Affiliate” of, or “Affiliated” with, a specified person means a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.

     2. Investment Guidelines. Client may amend the Investment Guidelines by written notice thereof to Investment Manager; provided, however, that the Investment Manager will not follow any such amended Investment Guidelines until it has received written notice thereof from Client. After receiving such written notice, the Investment Manager will implement the amended Investment Guidelines as soon as practicable unless Client is otherwise notified.

     3. Investment Account Assets. Client shall identify to the Investment Manager certain assets which it intends Investment Manager to manage together with any subsequent cash and investments which Client may from time to time place in its account with the Custodian (the “Investment Account”), plus all investments, reinvestments and proceeds of the sale thereof, all dividends and interest earned thereon and all appreciation thereof and additions thereto, less any withdrawals therefrom (collectively, the “Investment Account Assets”). Should there be any disparity between the Investment Account Assets identified by Client and the assets initially delivered or otherwise made available to Investment Manager by Client, Investment Manager reserves the right to postpone investment of such assets until such time as there is conformity between such assets and those identified by Client. Client shall not place any assets in its account that it does not intend Investment Manager to manage according to the Investment Guidelines. Client shall promptly notify Investment Manager of any additional assets it contributes to the Investment Account Assets and Investment Manager shall invest such additional assets according to the Investment Guidelines as soon as practicable thereafter. If Client fails to notify Investment Manager of a contribution of additional assets, such assets will not be managed by the Investment Manager: however, if the Investment Manager discovers additional assets in the Client’s account during a reconciliation with the records of the Custodian, such assets will be presumed to be Investment Account Assets and invested as soon as practicable after such discovery. Client shall also notify Investment Manager prior to withdrawing any Investment Account Assets, and should it fail to do so, it shall be responsible for all interest, account overdraft fees and other charges incurred as a result.

     4. Standard of Care.

     (a) The Investment Manager shall perform its duties and obligations hereunder with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

     (b) The Investment Manager shall diversify the Investment Account Assets so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.

     (c) The Investment Manager shall discharge its duties and obligations hereunder with respect to the Investment Account Assets solely in the interest of Client and in accordance with the Investment Guidelines.

     5. Representations and Warranties of Client. Client hereby represents and warrants to the Investment Manager that (a) it is authorized to enter into this Agreement and to appoint the Investment Manager as its Investment Manager in accordance with the terms hereof; (b) there are no restrictions or limitations on the investment of Investment Account Assets by the Investment

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Manager or any other activity contemplated by this Agreement other than as may be communicated from time to time in writing to the Investment Manager; (c) the Custodian will be the custodian of the Investment Account Assets on the Effective Date of this Agreement; (d) if another entity should be substituted for the Custodian as custodian of the Investment Account Assets, the Investment Manager shall promptly be notified of such substitution and the substituted entity will thereafter be deemed to be the Custodian for purposes of this Agreement; and (c) it shall promptly notify the Custodian of the appointment of the Investment Manager by delivering a copy of this Agreement to the Custodian. Client agrees to indemnify the Investment Manager and hold it harmless against any and all losses, costs, claims and liabilities which the Investment Manager may suffer or incur arising out of a breach by Client of its representations and warranties contained herein.

     6. Procedures. All transactions will be consummated by payment to, or delivery by, the Custodian of all cash and/or securities to or from the Investment Account. Instructions from the Investment Manager to the Custodian shall be made by such methods as may be agreed upon by the Investment Manager and the Custodian, and the Investment Manager shall instruct all brokers or dealers executing orders on behalf of the Investment Account to forward to the Custodian and Client copies of all brokerage confirmations promptly after the execution of transactions.

     7. Reports; Meetings.

     (a) Client has arranged or will arrange to receive monthly reports concerning the status of the Investment Account from the Custodian and shall cause the Custodian to provide copies of such monthly reports to the Investment Manager. Client shall also receive confirmations of all transactions from the Custodian and shall rely upon such monthly reports and trade confirmations from the Custodian for purposes of its tax reporting.

     (b) The Investment Manager, at its expense, shall provide Client with quarterly summaries of the performance of the Investment Account Assets and annual reports of such performance.

     (c) Client and the Investment Manager shall meet periodically, at such times as Client may reasonably request, concerning the Investment Account.

     (d) The Investment Manager, at its expense, shall provide Client with such other economic, statistical and investment analysis and reports as Client shall reasonably request from time to time.

     8. Confidential Relationship. All information and recommendations furnished by the Investment Manager to the Custodian and Client shall be regarded as confidential by each such party. The Investment Manager shall regard as confidential all information concerning the affairs, operations and investments of Client, including all information provided by Client to the Investment Manager pursuant to this Agreement.

     9. Services to Other Clients; Liability. It is understood that the Investment Manager performs investment advisory services for various clients. Client agrees that the Investment Manager may give advice and take action with respect to any of its other clients which may differ from the advice given to, or the timing or nature of action taken with respect to, the Investment Account Assets, provided that the policy and practice of the Investment Manager is not to favor or disfavor consistently or consciously any client or class of clients in the allocation of investment opportunities and that, to the extent practical, such opportunities are allocated among clients over a period of time on a fair and equitable basis. Nothing herein contained shall be construed so as to prevent the

3

Investment Manager or any of its directors, officers, employees or Affiliates in any way from purchasing or selling any securities for its or their own accounts prior to, simultaneously with or subsequent to any recommendation or action taken with respect to the Investment Account Assets or impose upon the Investment Manager any obligation to purchase or sell or to recommend for purchase or sale for the Investment Account any security which the Investment Manager or any of its directors, officers, employees or Affiliates may purchase or sell for its or their own accounts or for the account of any other client, advisory or otherwise; provided always, however, that the Investment Manager shall use its best efforts to maximize the gains for the Investment Account Assets and that no transaction shall violate any applicable law.

     10. Allocation of Brokerage. In selecting brokers or dealers to execute orders for the purchase or sale of securities for the Investment Account, the Investment Manager shall use its best efforts to obtain for Client the most favorable price and execution available from brokers or dealers; provided, however, that it is expressly authorized to consider the fact that a broker or dealer has furnished statistical, research or other information or services which enhance the Investment Manager’s investment research and portfolio management capability generally. Brokerage commissions charged to the Investment Account will generally be discounted from prevailing rates, but may not represent the maximum discounts obtainable at any given time.

          Investment Manager shall not be authorized to effect “agency cross transactions” (as defined in Rule 206(3)-2 promulgated by the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended (the “Advisers Act”)) with its Affiliated broker-dealers whereby they act as agent for, and receive commissions from, the Investment Account and the party on the other side of the transaction.

          If Client is a non-natural person, in accordance with Section 1l(a) of the Securities Exchange Act of 1934, as amended, and Rule 11a2-2(T) adopted by the Securities and Exchange Commission (the “SEC”) thereunder, the Investment Manager will provide to Client annually a statement showing the total amount of brokerage commissions charged by the Investment Manager to the Investment Account during the year as well as such other information as may be requested by Client to determine whether to authorize the Investment Manager’s execution of transactions for the Investment Account.

     11. Proxies. The Investment Manager will vote all proxies solicited by or with respect to the issuers of securities in which the Investment Account Assets may be invested from time to time. Proxies will be voted from and after the date on which an account is established for Client with the authorized proxy agent of the Investment Manager (the “Proxy Account”). The Proxy Account will be established as soon as practicable following the opening of the Investment Account by the Investment Manager. If Client has consented to the lending of securities in the Investment Account to third parties either by the Investment Manager or the Custodian and any such loan is outstanding upon the occurrence of a record date for the securities on loan, the borrower of such securities will have the right to vote proxies with respect to such securities and such proxies will not therefore be eligible for voting on Client’s behalf by the Investment Manager.

     12. Class Actions and Other Proceedings. The Investment Manager shall not be required to file claims, commence, render advice with respect to, or otherwise actively participate in any legal proceedings related to issuers of securities in which Client has an interest.

     13. Fees. The compensation of the Investment Manager shall be calculated and paid quarterly in arrears based on the average of the month-end market values of the Investment Account Assets during each quarter that this Agreement is in effect (with any partial months or quarters being

4

prorated). Such quarterly fees shall be computed in accordance with the Fee Schedule attached hereto as Exhibit C, which Fee Schedule will remain in effect for a period of two (2) years from the effective date of this Agreement and may thereafter be amended from time to time by the Investment Manager upon ninety (90) days’ prior written notice to Client. All fees payable to the Investment Manager pursuant to this Agreement shall be paid free and clear of all deductions or withholding.

     14. Valuation. Securities held in the Investment Account will generally be valued by independent pricing services. When an independent price for a particular security is either unavailable or deemed by the Investment Manager, in its sole discretion, to be unreliable, such security will be valued in a manner determined in good faith by the Investment Manager to reflect its fair market value. For purposes of calculating the fees due to the Investment Manager pursuant to paragraph 13 above, total market values reported by the Investment Manager shall include accrued dividends and interest.

     15. Representation and Warranty of Investment Manager. The Investment Manager represents and warrants to Client that it is registered as an investment adviser under the Advisers Act; that the Investment Manager is authorized and empowered to enter into this Agreement and perform its duties and obligations hereunder; that the execution, delivery and performance of this Agreement does not conflict with any obligation by which the Investment Manager is bound, whether arising by contract, operation of law or otherwise; and that neither the Investment Manager nor any of its advisory representatives for the Investment Account is a person subject to an SEC order issued under Section 203(e) or 203(f) of the Advisers Act. The Investment Manager shall promptly notify Client in writing of the occurrence of any event that may materially adversely affect any representation and warranty included in this paragraph.

     16. Indemnification and Hold Harmless. The Investment Manager shall indemnify and hold harmless Client, its Affiliates, and/or their respective directors, officers, employees and agents (collectively, the “Client Indemnified Parties”), from any and all claims, charges, demands, losses, damages, expenses, obligations and liabilities of any kind or nature whatsoever (including, without limitation, any and all reasonable legal expenses and costs and expenses related to investigating or defending any such claims, charges and demands) (collectively, “Losses”) incurred by such Client Indemnified Party by reason of (i) any acts, omissions or alleged acts or omissions arising out of or in connection with the Investment Account, any investment made or held by or with respect to the Investment Account or this Agreement, provided that such acts, omissions or alleged acts or omission upon which such action or threatened claim, charge, demand, action or proceeding are based were not made in bad faith by such Client Indemnified Party or did not constitute willful misconduct or gross negligence by such Client Indemnified Party, or (ii) any acts of omissions, or alleged acts or omissions, of any agent of any Client Indemnified Party, provided that such agent was selected, engaged or retained by the Client Indemnified Party in accordance with the standard above.

          The Client shall indemnify and hold harmless the Investment Manager, its Affiliates, and/or their respective directors, officers, employees and agents (collectively, the “Investment Manager indemnified Parties”), from any and all Losses incurred by such Investment Manager Indemnified Party by reason of (i) any acts, omissions or alleged acts or omissions arising out of or in connection with the Investment Account, any investment made or held by or with respect to the Investment. Account or this Agreement, provided that such acts, omissions or alleged acts or omissions upon which such actual or threatened claim, charge, demand, action or proceeding are based were not made in bad faith by such Client Indemnified Party or did not constitute willful misconduct or gross negligence by such Investment Manager Indemnified Party,

5

or (ii) any acts or omissions, or alleged acts or omissions, of any agent of any Investment Manager Indemnified Party, provided that such agent was selected, engaged or retained by the Investment Manager Indemnified Party in accordance with the standard above.

     17. Force Majeure. The Investment Manager shall not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its control, including without limitation, acts of God, earthquakes, fires, floods, wars, acts of terrorism, acts of civil or military authorities, or governmental actions.

     18. Non-Public Information. Client acknowledges and agrees that the Investment Manager or its Affiliates may acquire confidential or material non-public information in the course of its investment activities and that it will not divulge such information to Client, will not take any action regarding the Investment Account on the basis of such information, and may be precluded from acting on the basis of such information in regard to the Investment Account.

     19. Termination. Client may terminate this Agreement at any time by giving written notice thereof to the Investment Manager. The Investment Manager may terminate this Agreement upon one hundred and twenty days (120) days’ written notice of such termination to Client. Fees payable hereunder will be prorated to the date of termination as specified in the notice of termination.

     20. Non-Assignability. No assignment (as that term is defined in the Advisers Act) of this Agreement shall be made by the Investment Manager without the express written consent of Client.

     21. Acknowledgement and Consent of Use of Client’s Name. Client acknowledges and consents to permit the Investment Manager to use Client’s name in Investment Manager’s client brochures, marketing or advertising materials. Client understands that the consent to use is only for the purpose of showing other potential Clients, that Client uses the investment advisory services of the Investment Manager. The Investment Manager will not disclose any other information about Client or its account assets without the Client’s express written consent.

     22. Notices. Unless otherwise specified herein, all notices, instructions and advices with respect to securities transactions or any other matters contemplated by this Agreement shall be deemed duly given either when delivered in writing to the addresses set forth below or when deposited by first class mail addressed as follows:

(a) To Client:	Oriental Financial Group Inc.
	Oriental Center
	Professional Offices Park
	997 San Roberto Street
	10th Floor
	San Juan, Puerto Rico 00926
	Attn: President and CEO
	Oriental Bank & Trust
	Oriental Center
	Professional Offices Park
	997 San Roberto Street
	10th Floor

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	San Juan, Puerto Rico 00926
	Attn: President and CEO
	and
	Oriental International Bank Inc.
	Oriental Center
	Professional Offices Park
	997 San Roberto Street
	10th Floor
	San Juan, Puerto Rico 00926
	Attn: President and CEO
(b) To the Custodian:	Mellon Bank, N.A.
	One Mellon Center
	500 Grant Street
	18th Floor
	Pittsburgh, PA 15258-0000
	Attn: Bill Johnson
(c) To the Investment Manager:	Bear Stearns Asset Management Inc.
	383 Madison Avenue
	New York, New York 10179
	Attn: President, with a copy to
	Chief Operating Officer

     23. Disclosure Statement. The Investment Manager has delivered to Client and Client hereby acknowledges receipt of the Investment Manager’s written disclosure statement (consisting of a copy of Part II of Form ADV as currently in effect) at least 48 hours prior to Client’s entering into this Agreement with the Investment Manager.

     24. Entire Agreement; Amendment. This Agreement, together with the Exhibits annexed hereto, states the entire agreement of the parties hereto; is intended to be the complete and exclusive statement of the terms hereof; and, except as provided in paragraphs 25 and 12 hereof, may not be modified or amended except by a writing signed by the parties hereto.

     25. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York and any dispute or controversy arising out of this Agreement shall be settled by arbitration in New York, New York, in accordance with the rules and regulations of the New York Stock Exchange, Inc.

     26. Effective Date. This Agreement shall become effective on the day and year first above written.

[Intentionally left in blank, Signature page follows.]

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     IN WITNESS WHEREOF, Client and the Investment Manager have executed this Agreement on the day and year first above written.

ORIENTAL FINANCIAL GROUP INC.
By:	/s/ José R. Fernández
	Name:	José R. Fernández
	Title: President & CEO
ORIENTAL BANK & TRUST
By:	/s/ José R. Fernández
	Name:	José R. Fernández
	Title: President & CEO
ORIENTAL INTERNATIONAL BANK INC.
By:	/s/ José R. Fernández
	Name:	José R. Fernández
	Title: President & CEO

BEAR STEARNS ASSET MANAGEMENT INC.
By:	/s/ Rajan Govindan
	Name:	Rajan Govindan
	Title:  SMD

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EXHIBIT A

INVESTMENT GUIDELINES

*Portions of this exhibit are intentionally omitted because confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted information, which consist of two and a half pages, has been filed separately with the U. S. Securities and Exchange Commission.

Eligible Counterparties

Banks	Broker Dealers
Barclays Bank	Lehman Brothers	Sandtandar Securities
Citibank	Morgan Stanley	BBVA Capital Oppenheimer Capital
Banco Bilbao Vizcaya Argentaria	Credit Suisse First Boston	Doral Securities
Economic Development Bank	Popular Securities	Samuel Ramirez
Government Development Bank	UBS (Paine Webber)	Gen Re Financial
Banco de Santandar	Merrill Lynch	Cohen Bros
Canadian Imperial Bank	Wachovia (Prudential Securities)	Cantor Fitzgerald
Bank of Nova Scotia	Bear Stearns	HSBC
Royal Bank of Canada	Citigroup	Washington Mutual
JP Morgan Chase	ABN-AMRO	RBS/Greenwich Capital
Deutsche Bank	Goldman Sachs	Countrywide
Federal Home Loan Bank of New York	JP Morgan Securities
ABN-AMRO	Fannie Mae
Banco Popular	Freddie Mac
Societe Generale	FIMAT
Bank of America	Keef Bruyette & Woods
Rabobank	Sandler O’Neil

EXHIBIT B

INVESTMENT POLICY

*Portions of this exhibit are intentionally omitted because confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted information, which consists of 13 pages, has been filed separately with the U.S. Securities and Exchange Commission.

     APPENDIX: REFERENCE INFORMATION

     A. Securities Held for Investment, Sale or Trading

     Oriental’s securities are classified as held-to-maturity, available for sale, or trading:

1)	HELD TO MATURITY: An investment portfolio comprised of those securities purchased or originated to generate income by maintaining a positive spread over the cost of related funding source(s) were Oriental has the positive intent and ability to hold to maturity regardless of economic environment.
2)	AVAILABLE FOR SALE: A portfolio of securities either intended for sale or for which a claim to be held to maturity cannot be sufficiently substantiated.
3)	TRADING: A portfolio consisting of those securities purchased in order to maximize short-term gains. It also includes the mortgage banking activity to comply with FAS 115. However, Oriental is not precluded from classifying as trading a security it plans to hold for a longer period.

     B. Accounting

     GAAP (Generally Accepted Accounting Principles):

Oriental’s accounting for its investment portfolio and any possible future trading and sale portfolios will follow General Accepted Accounting Principles (GAAP). GAAP accounting (as promulgated under FAS #115) became effective for fiscal years beginning after 12/15/93 and is summarized in the following table:

Investment Types	Accounting1
Debt Securities
Held to Maturity	Amortized Cost
Available for Sale	Fair Value2
Trading	Market3
Mortgage-Backed Securities
Held to Maturity	Amortized Cost
Available for Sale	Fair Value2
Trading	Market3
Transfer of Securities
Between Trading and Held to

Investment Types	Accounting1
Maturity/Available for Sale	Market3
From Held to Maturity to
Available for Sale	Fair Value2
From Available for Sale to
Held to Maturity	Fair Value/Amortized Cost4

1.	The accounting guidance in the table does not include accounting for investments with permanent impairment, which must always be considered under GAAP. Additionally, this guidance does not address the accounting for securities acquired for hedging purposes. The Treasurer or his designee will evaluate positions that have unrealized losses to determine if these are “Other-than-temporarily impaired”, and present such results to ALCO.
2.	Net unrealized gains and losses (excluding permanent impairment and adjusted for taxes) are recognized as an adjustment to capital until final deposition or recovery. There is no interim income statement impact.
3.	Unrealized gains and losses are recognized in the income statement.
4.	When securities are transferred to a held to maturity account from an available for sale account, unrealized gains/losses remain in contra equity account, which is amortized/accreted under interest method over the transferred securities’ remaining lives.

     Regulatory:

The accounting guidelines established under SFAS #115 also effect financial reporting to the banking regulators. The various investment portfolio classifications and their current values must be identified in quarterly call reports.

However, net gains (losses) in available-for-sale debt securities are not included in regulatory capital for the purposes of computing the leverage and risk-based ratios. Equity securities with readily determinable market values are valued at the lower of cost or fair value for regulatory capital purposes.

     C. Investment Types

Listed below are available investment opportunities currently permitted by banking regulations and their current risk weight under the FDIC Risk-Based Capital Guidelines:

          FEDERAL FUNDS (OVERNIGHT)

These are very short-term (less than 7 days) sales to other banks of available balances in excess of requirements. They are defined by regulatory authorities as “sales of assets” and are therefore not subject to lending limitations other than those self-imposed by the Bank within its Limitations on Interbank Liabilities compliance statement. Current risk weight: 20%.

          FEDERAL FUNDS (TERM)

These are essentially fixed-rate advances made to other banks for terms beyond one business day. The market generally specifies maturities of one, two, three, six and twelve months. They are treated as loans (although not evidenced by notes) and are subject to lending limitations as well as those imposed by the Bank’s Limitations on Interbank Liabilities statement. Current risk weight: 20%.

          BANKER’S ACCEPTANCES

Notes, which have been accepted and discounted by a bank. The primary obligor is the accepting bank. In the event of default by the bank, recourse to the maker of the note is available. There is an organized secondary market wherein these obligations may be bought and sold. Legal lending limits apply. Current risk weight 20%.

          RESELL AGREEMENTS

These are short term investments were Oriental buys a security with an agreement to sell back. The difference between the buy and sell prices is the yield of the investment. The type of security bought with agreement to resell sets the credit risk of the transaction. When the transaction is shorter than a week, there might not be delivery of the security.

          PURCHASE/PUT BACK TRANSACTIONS

From time to time the Bank can take advantage of opportunities in the markets by purchasing securities with a put back to the broker/dealer at a guaranteed price in the future. The put eliminates the market risk from the transaction and the Bank is guaranteed the spread during the period it owns the security.

This transaction is very similar to a repurchase agreement since the broker/dealer is committed to purchasing the security at a pre-arranged price. Therefore, purchase put back transactions will be subject to the same credit limits as resell agreements, if the following conditions are met:

1.	The put price must be negotiated the same day the security is purchased.
2.	The security purchased must comply with the credit policy of these guidelines.
3.	The put must be exercised the same day the security is purchased.
4.	The broker/dealer granting the put must be in the approved list of broker/dealer.
5.	The amount at risk in the put contract must be within the pre-approved limits of the counterparty.

          U.S. TREASURY SECURITIES

These are direct obligations of the U.S. Treasury and are therefore of unquestioned credit quality. They may be purchased in maturities ranging from 1 day to 30 years and include zero coupon instruments. They have a secondary market of great depth, breadth and

resiliency, which assures ready liquidity. They may serve as collateral for repurchase agreements (temporary sales under agreement to repurchase) without the necessity of maintaining reserve requirements against the liability. Repurchase agreements will be negotiated to finance the acquisition of other assets and will be limited to the size of the portfolio and liquidity constraints. Current risk weight: 0%.

          FEDERAL AGENCY SECURITIES

These are direct obligations issued by various agencies of the Federal Government (e.g. GNMA, FNMA, FHLMC, and SLMA). While not all bear the explicit guarantee of the U.S. Treasury, it is implicitly deemed unthinkable that the U.S. Government would allow any of its agencies to default on outstanding debt. For this reason, we will treat these securities, for all practical purposes including reserve requirements and repurchase agreement acceptability, the same as U.S. Treasury securities. Current risk weight: GNMA’s - 0%, others -20%.

          CERTIFICATES OF DEPOSIT (CD’s)

For investment purposes, these should be classified into two categories: CD’s > $100,000 (i.e. Jumbo’s) and Brokered CD’s. Current risk weight: 20%.

Jumbo CD’s are obligations, which have been issued by other banks with common maturities of 1, 3 and 6 months. A secondary market exists wherein these may be purchased and sold, thus providing essential liquidity.

Brokered CD’s are obligations issued by other banks and thrifts in denominations <$100,000 and, therefore, are 100% insured by the FD1C. Since it is unthinkable that the U.S. Government would allow any of its agencies to dishonor outstanding guarantees relied upon by the depositing public, Oriental will treat these like Federal Agency Securities in terms of safety and soundness. Brokered CD’s are subject to early withdrawal penalties.

          MORTGAGE-BACKED SECURITIES (MBS)

These are cash flow bonds secured by FHA/VA mortgages in the case of MBS issued by the Governmental National Mortgage Association (GNMA) and secured by conventional loans in MBS issued by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Corporation (FNMA). The GNMA issues have the same credit quality as U.S. Governments and are backed by the U.S. Treasury as to the timely repayment of principal and interest. FNMA is a Federal Agency, FHLMC is a private corporation, but for all intents and purposes, may be viewed as comparable to FNMA in credit quality. The FHLMC mortgage-backed securities are called “participation certificates” (PC). Private label securities with AAA ratings are also readily available. They represent pools backed by non-Agency guaranteed whole loans for which various credit enhancements have been added to obtain the AAA rating. Current risk weight: GNMA’s — 0%; Other Agency — 20%; Private Issue -      %.

          COLLATERALIZED MORTGAGE OBLIGATIONS (CMO)

These are bonds collateralized by mortgage-backed securities above. While investments in MBS (a single class security) result in the investor receiving his pro rata share of all principal and interest payments, a CMO (a multiple class or tranche security) passes through cash flows depending upon the structure of the particular CMO issue. Since all issues are different, it is important that the characteristics of the specific instrument and class be understood prior to purchase. CMOs can be acquired with fixed or floating rate interest streams. Current risk weight: 20%, 50% or 100% depending on issuer/guarantee and other characteristics.

          NON MORTGAGE ASSET-BACKED SECURITIES

These are cash flow bonds secured primarily by consumer credit such as credit cards and automobile loans. These frequently carry third party insurance and/or are over-collateralized to achieve AA ratings. Current risk weight: —%

          MUNICIPAL BONDS AND NOTES

These are obligations issued by states, counties and municipalities or their agencies. Included are general obligation bonds, industrial development revenue bonds and other revenue bonds. Current risk weight: GO’s , Revenues , IRB’s —%

          CORPORATE BONDS OR NOTES AND PREFERRED STOCK ISSUES

These are obligations evidencing debts of corporations. Current risk weight: —%

          COMMERCIAL PAPER

These are high grade unsecured short-term notes issued by major corporations. Current risk weight:

          FEDERAL HOME LOAN BANK DEPOSITS (OVERNIGHT AND TERM)

Deposits for one day (overnight) at the Federal Home Loan Bank are interest-bearing at a rate comparable to Federal Funds overnight rates. The Federal Home Loan Bank also offers fixed rates on deposits of more than one day. Current risk weight: ___%

     D. Identification of Risk

Investment decisions will be based upon a thorough analysis of each security instrument to determine its quality, inherent risks, fit within the overall asset/liability management objectives of Oriental, effect on Oriental’s risk-based capital measurement and prospects

for yield and/or appreciation. Lack of adequate information increases the degree of risk. These risks include the following;

Credit (Default) Risk — The potential for failure of a debtor to make timely payments of principal and interest as they become due.

Liquidity Risk — The risk that a financial instrument cannot be sold or closed out quickly, at or close to its implicit economic value. As liquidity decreases bid/offer spreads typically widen.

Interest Rate Risk — The risk that interest rates will change, causing a decline in either the market price for the security or a decline in yield. Additionally, certain structure product may include conditions whereby a securities interest payments will depend on key, short-term rates. Changes in short-term rates will therefore affect the overall yield of such investments.

Prepayment Risk — The risk that the actual prepayment of principal is different from the expected prepayment speed assumptions, thereby affecting the actual market price and yield of the investment.

Market Risk — The risk that the market price of the security will decline substantially for reasons such as market pricing aberrations, and changes in supply and demand characteristics of a particular security market(s). Market risk is also used synonymously for Price Risk, which results from some of the previously listed sources as well as other financial variables to which a specific security may be linked for purposes of deriving its interest and principal cash flows.

Operating Risk — The potential risk ofloss because of inadequate policies, procedures, controls, error, fraud, etc.

     E. Limitations on Interbank Liabilities

Oriental recognizes the inherent credit, liquidity and operational risks inherent in dealing with other depository institutions; particularly in the fed funds market. Accordingly, to prevent excessive exposure to any single correspondent we establish the following general standards for selecting correspondents as well as internal limits for allowable exposure.

In selecting new correspondents, Oriental must gain comfort as to the adequacy of the institution’s financial condition, and therefore, its ability to make payments in full and in a timely manner. Accordingly, the most recently available financial statements will be reviewed with a focus on earnings, capital, non-performing assets and existing borrowing levels. New correspondent relationships will not be established with Banks classified as “significantly or critically undercapitalized” (i.e. risk-based capital under 6.0% and leverage under 3.0%).

Receipt and review of financial information will be documented no less than annually for all correspondents. Subject to this minimum, the Bank shall establish the level and frequency of monitoring required based on:

(1)	the extent to which exposure approaches Oriental’s internal limits;
(2)	the volatility of the exposure; and
(3)	the financial condition of the correspondent.

Classification of all correspondents (to whom the Bank has credit exposure) as to Well/ Adequately/ Under/ Significantly Under/ Critically Under Capitalized will be made quarterly since limits are established based upon these classifications. The Bank shall terminate its relationship with any correspondent the financial condition of which has significantly deteriorated below acceptable levels.

Oriental’s review of a correspondent’s financial condition will be based on one or more of the correspondent’s most recently available financial statement, Report of Condition, Regulatory Financial Report (“Call”), or bank rating report for the correspondent, as the case may be. The following general internal limits shall apply with respect to the capital level of correspondents:

Capitalization	Interday Limit			Intraday Limit
Classification	% Capital			% Capital
Well Capitalized		100	%		200	%
Adequate		100	%		200	%
Under		25	%		100	%
Significantly Under		10	%(l)		20	%
Critically Under		0	%(2)		0	%

(1)	Requires prior approval from Board of Directors on exception basis
(2)	May lend only on a secured basis; Prior approval required from Board of Directors

From time to time Oriental, when deemed necessary, may establish limits, which differ, based upon form of exposure (e.g. on- vs. off-balance sheet), nature of products, and maturity structure (e.g. overnight vs. term fed funds).

Oriental shall structure transactions or monitor exposure to a correspondent to ensure that Oriental’s exposure ordinarily does not exceed the internal limits established by this policy, (including those limits established for credit exposure) excepting, however, occasional excesses resulting from unusual market disturbances, market movements favorable to Oriental, increases in activity, operational problems, or other unusual circumstances.

If excesses over Oriental’s approved limits occur. Oriental shall promptly take action to eliminate any such excess exposure.

The specific limits on exposure set forth above shall be further subject to the reasonable standards set forth in this Investment Policy.

     F. Authorized Brokers/Dealers/Banks

     BANKS

Barclays Bank
Citibank, N.A.
Banco Bilbao Vizcaya Argentaria
Economic Development Bank
Government Development Bank ($60 million)
Banco de Santander de PR
Canadian Imperial Bank
Bank of Nova Scotia
Royal Bank of Canada
JP Morgan Chase
Deutsche Bank
Federal Home Loan Bank of New York
ABM-AMRO
Banco Popular de Puerto Rico
Societe Generale
Bank of America
Rabobank

     BROKER DEALERS

Lehman Brothers
Morgan Stanley
Credit Suisse First Boston
Popular Securities
UBS (Paine Webber)
Merrill Lynch
Wachovia (Prudential Securities)
Bear Stearns
Citigroup
ABN-AMRO
Goldman Sachs

JP Morgan Securities
Fannie Mae
Freddie Mac

FLMAT
Keef Bruyette & Woods
Sandler O’Neil
Santander Securities
BBVA Capital
Oppenheimer Capital
Gen Re Financial
Cantor Fitzgerald
RBS — Greenwich Capital
Washington Mutual
HSBC
Countrywide Securities

Other dealers, banks or issuers may be approved by ALCO on an on-going basis, provided the general dispositions of this Investment Policies are in consideration when approval by the Committee is requested.

     Definitions (See Note)

Clean CD’s are the direct deposits with the listed institutions, without Guarantees, but not exceeding the stated amounts. Tenors over 270 days require additional Credit Committee approval.

Reverse Repos can be made with PR Government or Agency Securities, or US Government and Agency Securities. The total reverse repo cannot exceed the stated amounts. All reverse repos have to be closed with a minimum of 100.5% of collateral if Treasuries are used, and 102% if MBS are used. Tenors over 180 days require additional Credit Committee approval. All transactions in excess of 14 days require delivery of securities to our custody account.

Forward Purchases or Sales refer to the buying and selling of securities from others where you can have, at any point in time, unsettled bought or sold securities. The risk exposure is from the trade date to settlement date. Once they are bought and settled, the risk of the Bank is only from the issuer. During the credit risk period the amount of risk is the market rate change that can occur. If a fail occurs, the security or loan will have to be replaced, thus the loss that could occur is limited to the change in price from trade date to replacement date of security or loan. For purposes of this policy, the risk will be as follows (the % is from the amount sold or bought):

10% for 15 days or less
12% for 16 to 30 days
15% for 31 to 60 days
20% for 61 to 90 days

Purchases of Mortgages from Mortgage Bankers require prior approval to purchase from ALCO.

Swaps have fluctuating collateral requirements. Contracts may require an up front % requirement per year plus the mark to market of the swap. Additional collateral can be required if the valuation of the collateral drops below the required percent per annum, and/or if the swap value drops.

The swaps we normally book pay long and receive short. This could create a negative cash flow, putting the credit risk on the counterparty. If we book a swap where we pay short and receive long, the credit risk is reversed. We would require a mark to market on the swap.

EXHIBIT C

ANNUAL FEE SCHEDULE

*This information is intentionally omitted because confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted information has been filed separately with the U.S. Securities and Exchange Commission.

EX-10.22

Exhibit 10.22

	BANCA INVERSIONES HIPOTECAS	Oficinas Ejecutivas PO Box 195115 San Juan PR 00919-5115
		Tel 787-771-6800 Fax 787-771-6770

March 5, 2007

Oriental International Bank Inc.
Oriental Center
Professional Offices Park
997 San Roberto Street
10^th Floor
San Juan, Puerto Rico 00926

     Re: Investment Management Agreement

Dear Sirs:

     This letter will amend the Investment Management Agreement dated January 17, 2007 (the “Agreement”) between Oriental Financial Group Inc., Oriental Bank & Trust, and Oriental International Bank Inc. (“Client”) and Bear Stearns Asset Management Inc. (the “Manager”). The Investment Management Agreement shall be amended to include the following provision:

     The Investment Manager shall not sell any security held in the Available for Sale or Held to Maturity Portfolios for a loss without the prior written consent of “Client”.

     Please indicate your agreement to this amendment by signing the enclosed copies of this letter in the space indicated and returning a fully signed copy to us.

Very truly yours, ORIENTAL FINANCIAL GROUP INC.
By:	/s/ José R. Fernández
	Name:	José R. Fernández
	Title : President & CEO

ORIENTAL BANK & TRUST
By:	/s/ José R. Fernández
	Name:	José R. Fernández
	Title : President & CEO

ORIENTAL INTERNATIONAL BANK INC.
By:	/s/ José R. Fernández
	Name:	José R. Fernández
	Title: President & CEO

Acknowledged and agreed:

BEAR STEARNS ASSET MANAGEMENT INC.
By:	/s/ Andrew Headley
	Name:	Andrew Headley
	Title: Managing Director

EX-10.23

Exhibit 10.23

TECHNOLOGY OUTSOURCING AGREEMENT

     This Master Agreement is made as of the 26 day of January, 2007 (the “Effective Date”), by and between Oriental Financial Group Inc., a Puerto Rico financial holding company (“Customer”), and Metavante Corporation, a Wisconsin corporation (“Metavante”).

     Customer desires Metavante to provide to Customer the services and licenses as set forth in this Agreement and its amendments, and Metavante desires to provide such services and licenses to Customer, all as provided in this Agreement and its amendments.

     THEREFORE, in consideration of the payments to be made and services to be performed hereunder, upon the terms and subject to the conditions set forth in this Agreement and intending to be legally bound, the parties hereto agree as follows:

     Metavante shall provide to Customer and Customer shall receive from Metavante, all upon the terms and conditions set forth in this Agreement and Amendments, the Services and licenses specified. The term of this Agreement shall commence on the Effective Date and end on November 30, 2014 (the “Initial Term”). The parties also agree to use their best efforts to perform the Conversion(s) such that the Commencement Date occurs on or before November 5, 2007.

     As of the Effective Date, the parties acknowledge that this Agreement includes the following Schedules:

Current Capabilities Schedule

Conversion Plan Schedule

Services and Charges Schedule

Planned Enhancement and Interface Schedule

Service Level Schedule

Termination Fee Schedule

Strategic Network Solution Schedule (To be added as mutually
agreed by Customer and Metavante)

MasterCard^® SecureCode™ Service Participation Schedule

     As of the Effective Date, the parties acknowledge that Services and licenses will be provided for Customer and the Affiliates of Customer that are listed in Exhibit A, attached hereto. For purposes of this Agreement, the term “Customer” includes all Affiliates listed in Exhibit A, attached hereto.

     By signing below, the parties agree to the terms and conditions of this Agreement, and Customer appoints Metavante as: (1) Customer’s attorney-in-fact to transmit files and information to the Internal Revenue Service (“IRS”) and the Department of the Treasury of the Commonwealth of Puerto Rico (the “Department”) and to take all appropriate actions in connection therewith and empowers Metavante to authorize the IRS and the Department to release information return documents supplied to the IRS and the Department by Metavante to states which participate in the “Combined Federal/State Program”; and (2) Customer’s agent to sign on Customer’s behalf the Affidavit required by the Form 4804, or any successor form or any other form or document which may be required by the Department. Customer acknowledges that Metavante’s execution of the Form 4804 Affidavit or the equivalent form with the Department on Customer’s behalf does not relieve Customer of responsibility to provide accurate TINs or liability for any penalties which may be assessed for failure to comply with TIN requirements.

     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on their behalf as of the date first above written.

METAVANTE CORPORATION		ORIENTAL FINANCIAL GROUP INC.
4900 W. Brown Deer Road		997 San Roberto Street
Brown Deer, WI 53223		Tenth Floor
		San Juan, PR 00926
By:	/s/ Paul T. Danola	By:	/s/ José Rafael Fernández
Name:	Paul T. Danola	Name:	José Rafael Fernández
Title:	Senior Executive Vice President Metavante Corporation	Title:	President and Chief Executive Officer
By:	/s/ James R. Geschke
Name:	James R. Geschke
Title:	Executive Vice President
	Financial Technology Solutions

TERMS AND CONDITIONS

1. CONSTRUCTION

     1.1. Definitions. Capitalized terms shall have the meaning ascribed to them in Article 18 of this Agreement.

     1.2. References. In this Agreement, references and mention of the word “includes” and “including” shall mean “includes, without limitation” and “including, without limitation,” as applicable, and the word “any” shall mean “any or all”. Headings in this Agreement are for reference purposes only and shall not affect the interpretation or meaning of this Agreement.

     1.3. Interpretation. The terms and conditions of this Agreement and all schedules attached hereto are incorporated herein and deemed part of this Agreement. In the event of a conflict between the general terms and conditions and the terms of any schedules or exhibits attached hereto, the terms of the schedules and exhibits shall prevail and control the interpretation of the Agreement with respect to the subject matter of the applicable schedules and/or exhibits. The schedules and exhibits together with the general terms and conditions shall be interpreted as a single document. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which together constitute one and the same agreement.

     1.4. Affiliates. Customer agrees that it is responsible for ensuring compliance with this Agreement by its Affiliates. Customer agrees to be responsible for the submission of its Affiliates’ data to Metavante for processing and for the transmission to Customer’s Affiliates of such data processed by and received from Metavante. Customer agrees to pay any and all fees owed under this Agreement for Services rendered to its Affiliates. The term Affiliates also includes other entities that become affiliates of Customer after the date of this Agreement, due to a reorganization or restructuring of Customer’s business, which do not cause an increase in the volume of Customer’s transactions.

2. TERM

     2.1. Duration. Unless this Agreement has been earlier terminated, Metavante shall provide a written renewal notice to Customer at least twelve (12) months prior to the expiration of the Initial Term (the “Renewal Notice”). Unless Customer notifies Metavante of its intent not to renew this Agreement in writing within a period of three (3) months following the Renewal Notice, this Agreement shall automatically renew at the end of the Initial Term on the same terms (including pricing terms) for one (1) twelve-month period. Upon expiration of such twelve (12) -month extension, this Agreement shall expire unless renewed in writing by the parties, provided, however, that Metavante may, but has no obligation to, continue to provide all or any portion of the Services thereafter on a month-to-month basis subject to these Terms and Conditions and Metavante’s then-current standard fees and charges.

     2.2. Termination Assistance. Following the expiration or early termination of this Agreement, Metavante shall provide to Customer the Customer Data in the format in which it exists on Metavante’s systems (the “Data Tapes”), in accordance with Metavante’s then-current standard prices for the delivery media. In addition, Metavante agrees to provide to Customer, at Customer’s expense, all necessary assistance to facilitate the orderly transition of Services to Customer or its designee (“Termination Assistance”). As part of the Termination Assistance, Metavante shall assist Customer to develop a plan for the transition of all Services then being performed by Metavante under this Agreement, from Metavante to Customer or Customer’s designee, on a reasonable schedule developed jointly by Metavante and Customer. Prior to providing any Termination Assistance, Metavante shall deliver to Customer a good-faith estimate of all such Expenses and charges, including charges for custom programming services. Customer understands and agrees that all Expenses and charges for Termination Assistance shall be computed in accordance with Metavante’s then-current standard prices for such products, materials, and services. Customer shall pay for the Customer Data and any Termination Assistance in advance of Metavante providing such data or assistance. Nothing contained herein shall obligate Customer to receive Termination Assistance from Metavante. In the event this Agreement is terminated by Customer pursuant to Section 8.2, Metavante will provide Customer with one (1) set of Data Tapes without charge.

3. LICENSES

     3.1. Customer Marks. Metavante is authorized to use Customer’s service marks and trademarks solely if necessary to perform the Services and solely for the purpose of providing the Services to Customer. Any use of Customer’s marks by Metavante shall be subject to Customer’s prior written approval, which shall not be unreasonably withheld by Customer

     3.2. Incidental Software License. Customer (a) will install and operate copies of certain Metavante-supplied software, if any, that is identified in the Services and Charges Schedule as required for Customer to access or receive certain of the Initial Services, (b) may access certain software that Metavante will make available on the internet, and (c) may be provided with copies of software for demonstration purposes (collectively, the “Incidental Software”). Metavante hereby grants to Customer a personal, nonexclusive, and nontransferable license and right, for the duration of this Agreement, to use the Incidental Software solely in accordance with the applicable Documentation and for no other purposes. Customer shall not do any of the following: (i) distribute, sell, assign, transfer, or sublicense the Incidental Software, or any part thereof, to any third party; (ii) except as specifically set forth in this Agreement, adapt, modify, translate, reverse engineer, decompile, disassemble, or create derivative works based on the Incidental Software or any part thereof; (iii) copy the Incidental Software, in whole or in part, without including appropriate copyright notices; (iv) except for providing banking services to Customer’s customers, use the Incidental Software in any manner to provide Service Bureau, time sharing, or other computer services to Third Parties; (v) export the Incidental Software outside the United States, either directly or indirectly; and/or (vi) install the Incidental Software on a different platform or interface the Incidental Software to an application written in a different computer language other than that set forth in the Documentation. Within 10 days of the Effective Date of Termination, Customer shall, at its own expense, return the Incidental Software to Metavante and/or destroy all copies thereof.

^© 2006, Metavante Corporation

2

     3.3. Licensed Software The following terms apply with respect to Customer’s use of Metavante’s proprietary Teller Insight ä software (the “Licensed Software”).

          A. Scope of License: The Licensed Software is a copyrighted software product developed and owned by Metavante. All rights are reserved worldwide. Customer is granted a nonexclusive, nontransferable (except to permitted assigns of this Agreement) limited license to use the Licensed Software during the term of this Agreement. Customer shall not sell, lease, copy, distribute, transfer, assign or sublicense the Licensed Software to any third party. Customer will make no more than two (2) copies of the Licensed Software for backup and archival purposes and may make no copies for any other purpose. Customer is responsible for maintaining backup copies of the Licensed Software. The Licensed Software is licensed for use on individual computers and individual network workstations. Customer may change the location at which the Licensed Software is used provided that Customer shall retain records of all locations at which the Licensed Software is used and provide such records to Metavante upon request. The license granted hereby shall commence upon the delivery of the Licensed Software and shall continue until terminated in accordance with the terms contained herein.

          B. Use. Metavante shall have no liability for any failure of the Licensed Software due to the failure of Customer to use the Software in accordance with the documentation provided by Metavante or if the Licensed Software is not workable because of the malfunction of Customer’s hardware or operating system or the failure of such hardware or operating system to perform as represented, or for any other cause beyond Metavante’s control.

          C. Software Support: Metavante will provide to Customer improvements or enhancements as these are developed for the Licensed Software. Program improvements or enhancements shall mean changes to the programs furnished as part of the Licensed Software which result in the correction of program errors, more efficient processing, a reduction in memory requirements, or procedural changes to allow more effective use of the Licensed Software. Metavante shall use reasonable efforts to correct any errors in the Licensed Software that are reported to Metavante in writing during the term of the Software Agreement, provided such errors can be recreated with Metavante’s then current version of the Licensed Software. Software support excludes support required to recover data following Customer’s failure to backup system and excludes support required to install or change any software or hardware, such as a new method of download. On-site services are not provided. In the event the Customer should desire any additional support services relating to the Software, such support services will be available at mutually agreeable pricing and terms. Altering, modifying, maintaining or servicing the Licensed Software by anyone other than Metavante shall relieve Metavante of any obligation under this section.

          D. Delivery and Installation: The Licensed Software will be delivered to the Customer at the time and location designated by the parties or, if the necessary computer equipment and an appropriate installation environment are not available at such time, as soon after such time as the equipment and environment are available as is reasonably practicable.

4. SERVICES

     4.1. Implementation of Services.

          A. Developing of Conversion Plan. Metavante shall, in consultation with Customer, develop a detailed, customized plan for the Conversion (the “Conversion Plan”). The Conversion Plan will include (i) a description of the tasks to be performed for the Conversion; (ii) allocation of responsibility for each of such tasks; and (iii) the estimated scheduled dates on which each task is to be performed. Each party shall designate its Conversion project leader. The Conversion project leaders for each party shall regularly communicate on the progress of the Conversion, the feasibility of the Conversion Dates specified in the Conversion Plan, and such other matters which may affect the smooth transition of the Services. Neither party shall reassign or replace its Conversion project leader during the Conversion without the consent of the other party, except if such individual voluntarily resigns, is dismissed for cause, or is unable to work due to his or her death, disability or other personal reasons. Each party agrees to provide such services and to perform such obligations as are specified as its responsibility in the Conversion Plan and as necessary for it to timely and adequately meet the scheduled dates set forth therein. Each party shall cooperate fully with all reasonable requests of the other party that are necessary to effect the Conversion in a timely and efficient manner. The preliminary Conversion Plan is attached hereto as the Conversion Plan Schedule, and shall be amended as the parties mutually agree. Metavante will be responsible for the Conversion Services defined in the Standard Conversion Services Schedule included herein.

          B. Conversion Resources. Metavante and Customer will each provide a team of qualified individuals to assist in the Conversion effort.

          C. Conversion date. The parties shall each perform their respective obligations under the Conversion Plan such that the Commencement Date occurs on or before November 5, 2007. If the Commencement Date does not occur on or before such date (the “Scheduled Conversion Date”) solely as a result of Metavante’s failure to perform any of its obligations under this Agreement or the Conversion Plan (including the satisfactory completion of the identified Enhancements) and not as a result of any failure by Customer or any Third Party, Customer shall recover liquidated damages equal to the following:

1.	Metavante shall pay Customer $10,000.00 for each month or portion thereof that Metavante fails to have the Commencement Date occur on the Scheduled Conversion Date provided that such amount shall be prorated for any partial month. Metavante will establish a new Scheduled Conversion Date if the above date is missed, subject to Customer’s approval, which shall not be unreasonably withheld.
2.	The recovery of the amounts set forth above by Customer from Metavante shall be Customer’s sole and exclusive monetary recovery from Metavante with respect to Metavante’s failure to complete the Services necessary to have the Commencement Date occur on the Schedule Conversion Date. The parties acknowledge that the foregoing payments constitute reasonable and commercial liquidated damages.

^© 2006, Metavante Corporation

3

3. If the Customer’s Conversion does not occur by June 30, 2008, either party may terminate this Agreement upon written notice provided to the other party on or before July 31, 2008.

Metavante shall pay the amounts set forth above to Customer within 15 business days after Customer’s written request.

          D. Training and Documentation.

               (i) Metavante will provide to Customer, at no charge, one CD-ROM disc, or Internet access that includes all of the User Manuals. The Customer will receive updates to the CD-ROM at no additional charge or Internet updates when available. Customers can purchase paper manuals. For manuals that are not on CD-ROM, and not accessible via the Internet, the Customer will receive one copy of the paper updates at no additional cost. Additionally, as new manuals become available, they will be included on the CD-ROM or accessible via the Internet. Except for its internal use, Customers may not modify, reproduce, or distribute the Documentation without the express consent of Metavante.

               (ii) Metavante shall provide training in accordance with the training schedule developed pursuant to the Conversion Plan. The sessions shall be held at a location mutually agreed upon by the parties. Customer shall be responsible for all Expenses incurred by the participants and Metavante’s trainers in connection with such education and training. If Customer requests that training be conducted at a non-Metavante facility, Customer shall be responsible for providing an adequate training facility.

          E. Account Representatives. Each party shall, prior to Conversion, cause an individual to be assigned (“Account Representative”) to devote time and effort to management of the Services under this Agreement following the Conversion. Neither party shall reassign or replace its Account Representative during the first six (6) months of his or her assignment without the consent of the other party, except if such individual voluntarily resigns, is dismissed for cause, or is unable to work due to his or her death or disability.

          F. Reporting and Meetings. Within sixty (60) days after the Effective Date, the parties shall mutually agree upon an appropriate set of periodic reports to be issued by Metavante to Customer during the Conversion Period and during the remainder of the Term.

          G. Metavante acknowledges that this Agreement is subject to approval by Customer’s board of directors on or before February 15, 2007, and that Customer may terminate this Agreement without payment of the Termination Fee by providing written notice to Metavante on or before that date, provided that an officer of Customer also certifies in writing that Customer’s board of directors did not approve entering into this Agreement. Notwithstanding the foregoing, Customer authorizes and directs Metavante to commence conversion efforts to meet a scheduled Conversion Date of November 5, 2007 for Customer. In the event that Customer terminates this Agreement pursuant to the foregoing, Customer shall, within 30 days of Metavante’s invoice, pay any and all costs and expenses incurred by Metavante for such conversion efforts.

          H. Initial Services. Metavante shall first commence providing the Initial Services on the Commencement Date and/or as specified in the Conversion Plan.

     4.2. Professional Services. Metavante shall perform the Professional Services for Customer as set forth in the Services and Charges Schedule and the Conversion Plan and shall perform additional Professional Services as mutually agreed upon by the parties from time to time under this Agreement, provided that either party may require execution of a separate mutually acceptable professional services agreement prior to Metavante’s performance of Professional Services other than those set forth in the Services and Charges Schedule or the Conversion Plan. Notwithstanding any other provision of this Agreement, Metavante’s maximum liability with respect to any Professional Services performed shall be limited to the value of the Professional Services engagement giving rise to the claim for Damages.

     4.3. Service Levels. Service Levels, if any, relating to a particular Service shall be as set forth in the Service Level Schedule. The parties agree that Metavante’s performance of Services at a level at or above any Service Level shall be satisfactory performance. Metavante shall cure any failure to achieve a Service Level within the period specified within the applicable schedule. Remedies, if any, for failure to achieve a Service Level shall be as set forth in the Service Level Schedule.

     4.4. Payment Services. The following additional terms shall apply with respect to Payment Services. Payment Services are those Services provided by Metavante to effect payments between Customer’s clients and third parties.

          A. Settlement. Metavante may remit or receive funds for Customer as Customer’s payment processor. Customer is exclusively responsible to reimburse Metavante for any and all funds remitted by Metavante to Networks, payees, or third parties in settlement of transactions processed by Metavante for Customer, whether or not Customer is able to collect the amount of any transaction from its customer. Customer shall designate a settlement account at Oriental Bank and Trust in accordance with Metavante’s requirements for the applicable Service. Metavante shall charge the designated settlement account(s) for amounts owed by Customer for settlement. Customer shall, upon Metavante’s demand, immediately pay to Metavante any settlement amount that Metavante is unable to collect from the settlement account for any reason. Metavante will provide Customer with daily settlement and accounting information, and Customer agrees that Customer is responsible for the daily maintenance and reconciliation of all accounting entries. Customer agrees to compensate Metavante for carrying any unfunded settlement based on the Federal Reserve Overnight borrowing rate. Upon prior written notice to Customer, Metavante may terminate this Agreement in the event that settlement remains unfunded by Customer for more than two (2) business days.

          B. Card Services. The following applies to Services provided by Metavante in support of Customer’s debit or credit card issuing or merchant processing programs.

               (i) Networks. Customer acknowledges and agrees that Customer must obtain required memberships in all applicable Networks. If Customer is not a duly licensed card issuing member of any Network, Customer shall execute applications for

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membership and shall provide Metavante with copies of its fully executed membership agreements promptly after receipt by Customer. Metavante agrees to assist Customer in obtaining sponsorship by an appropriate bank, if necessary, for MasterCard or Visa membership. Customer shall comply with the articles, bylaws, operating regulations, rules, procedures and policies of Visa, MasterCard, and/or other Networks, as applicable, and shall be solely responsible, as between Customer and Metavante, for any claims, liabilities, lawsuits and expenses arising out of or caused by Customer’s failure to comply with the same. Customer acknowledges and agrees that, because Metavante is Customer’s processor, Metavante may receive certain services from MasterCard, Visa, and/or other Networks that Customer could receive directly in the event Customer performed the processing services for itself. Customer agrees that Metavante may pass through to Customer any fees charged to Metavante for such services, and that Metavante has no responsibility or liability to Customer for any such services. Prior to the transfer of the Services to Customer or its designee upon the Effective Date of Termination, Customer shall take all actions required by the applicable Network to effect the transfer. In addition to the charges specified on the Services and Charges Schedule, Customer shall be responsible for (i) all interchange and network provider fees; (ii) all dues, fees, fines, and assessments established by and owed by Customer to any Network; and (iii) for all costs and fees associated with changes to ATM protocol caused by Customer’s conversion to the Services.

               (ii) Card Personalization Services. If Metavante is providing card personalization services for Customer, the following will apply. Delivery of cards will be deemed complete with respect to any order upon Metavante’s delivery of the supply of cards to either the United States Post Office, a common carrier or courier, or Customer’s designated employee or agent. Following delivery of the cards in accordance with the foregoing, the card production services with respect to such order shall be completed, and Metavante shall have no further responsibility whatsoever for any use, abuse, loss, damage, alteration, or theft of cards following delivery. Metavante shall be responsible to produce cards in conformance with applicable network standards and for the proper preparation of mailers (e.g., sealing and addressing). Customer shall notify Metavante in writing of any alleged breach of the foregoing by Metavante. Metavante’s sole responsibility, and Customer’s sole remedy, shall be to provide, at Metavante’s expense, a conforming replacement card to the appropriate cardholder(s).

               (iii) Settlement Account. Customer shall maintain an account at Oriental Bank and Trust for purposes of funding or receiving settlement, as applicable, and authorizes Metavante to charge the settlement account via ACH debit or otherwise for any net settlement owed by Customer to Metavante, and to deposit to the settlement account any net settlement owed by Metavante to Customer. Metavante may offset amounts payable to Customer against amounts payable by Customer for purposes of determining a net settlement amount to charge to the settlement account. For at least 120 days following the Effective Date of Termination, Customer shall maintain a settlement account which Metavante may charge to settle any trailing activity which accrues prior to the Effective Date of Termination (including any chargeback of a transaction which is authorized prior to the Effective Date of Termination). Customer shall pay to Metavante fees to settle such trailing activity in accordance with this Agreement.

               (iv) BIN Transfer. Prior to the transfer of the Services to Customer or its designee upon the expiration of the Term of this Agreement, Customer shall inform Visa and/or MasterCard and/or any other applicable Network in writing (with a copy to Metavante) (1) of the transfer of its Bank Identification Number (BIN) or Interbank Card Association Number, or other identifying number (as applicable) to the new processor, and (2) of the new ACH account number for billing purposes.

               (v) Credit Cards.

1. Customer authorizes Metavante and grants to Metavante power-of-attorney to endorse any and all checks payable to Customer which are received by Metavante in payment of credit card accounts for which Metavante provides payment processing services.

2. Customer may request that Metavante make available to Customer’s credit card cardholders checks or drafts which the cardholders may use to draw on their credit card account. Customer agrees that neither Metavante nor Metavante’s payable through bank shall have any responsibility to review or verify the signature of the drawer of any credit card check, and Customer will be responsible for the full amount of any credit card check paid by Metavante for Customer.

          C. ACH Services.

               (i) General. “ACH Services” means Services whereby Metavante will (i) initiate and/or receive automated clearing house debit and credit entries, and adjustments to debit entries and credit entries to Customer’s account, (ii) credit and/or debit the same to such account. Customer authorizes Metavante to act as Customer’s third-party processor for initiating, transmitting, and/or receiving ACH entries. If agreed to between Customer and Metavante, Metavante shall provide for the posting of ACH entries to Customer deposit accounts. Metavante shall provide reports to Customer showing errors and rejections resulting from ACH entries transmitted on behalf of Customer during a particular day. It shall be Customer’s responsibility to review such reports and correct erroneous ACH entries.

               (ii) Timing. Metavante shall make reasonable efforts to deliver ACH entries to Customer or to an ACH operator, as appropriate, prior to any applicable deadline for such delivery. Metavante shall have no liability to Customer as a result of any late delivery, except to the extent such late delivery is (i) caused by the willful misconduct of Metavante, and (ii) made more than 24 hours after its scheduled deadline

               (iii) NACHA Rules. In providing ACH Services for Customer, Metavante acts as Customer’s third-party service provider and is not itself an “Operator,” “Originator,” “ODFI,” or “RDFI” (as defined under NACHA rules). Customer shall be responsible for compliance with all applicable laws, rules, and regulations regarding Customer’s use of and/or access to the ACH Services, including applicable rules and regulations of the National Automated Clearing House Association (“NACHA”). In particular and as applicable, (i) Customer will provide its depositors with all disclosures required under state and federal law and (ii) shall enter into an agreement with each party that will initiate ACH entries to accounts (an “Originator”) prior to permitting the Originator to initiate ACH entries. Customer shall indemnify Metavante from, defend Metavante against, and hold Metavante harmless from any and all loss, claim,

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or liability to any Third Party from Customer’s breach of the foregoing obligations. Upon notification from Customer of the occurrence of an error or omission with respect to an ACH entry, Metavante shall promptly furnish corrected ACH entry(ies) to the applicable ACH operator, unless the NACHA rules prohibit the processing of the correct ACH entry(ies).

5. FEES

     5.1. Fee Structure. Customer agrees to pay fees for the Initial Services as set forth in the Services and Charges Schedule. If Customer elects to receive Services that are not specifically set forth in the Services and Charges Schedule, Customer agrees to pay fees as mutually agreed upon for such Services. Any Services not identified in the Services and Charges Schedule will be at Metavante’s standard list pricing unless the parties mutually agree to pay for those Services as provided in Section 5.7.

     5.2. Pricing and Operational Assumptions. The Initial Services shall include at least: (A) the functionality enhancements set forth in the Planned Enhancement and Interface Schedule; and (B) the current capabilities identified in the Current Capabilities Schedule.

     5.3. Excluded Costs. The fees set forth in the Services and Charges Schedule do not include Expenses, late fees or charges, or Taxes, all of which shall be the responsibility of Customer.

     5.4. Disputed Amounts. If Customer disputes any charge or amount on any invoice and such dispute cannot be resolved promptly through good-faith discussions between the parties, Customer shall pay the amounts due under this Agreement minus the disputed amount, and the parties shall diligently proceed to resolve such disputed amount. An amount will be considered disputed in good faith if (i) Customer delivers a written statement to Metavante, on or before the due date of the invoice, describing in detail the basis of the dispute and the amount being withheld by Customer, (ii) such written statement represents that the amount in dispute has been determined after due investigation of the facts and that such disputed amount has been determined in good faith, and (iii) all other amounts due from Customer that are not in dispute have been paid in accordance with the terms of this Agreement. Customer’s right to assert claims under this Agreement shall be subject to Customer’s payment in full of previously invoiced, past due amounts that have not been disputed in accordance with this Section.

     5.5. Terms of Payment. Customer shall pay the Monthly Base Fee in advance on the first day of the calendar month in which the Services are to be performed. Any and all other amounts payable under this Agreement shall be due thirty (30) days following the date of invoice, unless otherwise provided in the Services and Charges Schedule. Undisputed charges not paid by the applicable due date shall be subject to annual interest at the prevailing U.S. prime rate published by Citibank, N.A., from time to time or the highest rate permitted by law, whichever is lower. Customer shall also pay any collection fees, court costs, reasonable attorneys’ fees, and other fees, costs, and charges incurred by Metavante in collecting payment of the charges and any other amounts for which Customer is liable under the terms and conditions of this Agreement and which shall be due thirty (30) days following the date of invoice. Customer agrees to maintain a depository account with Oriental Bank and Trust for the payment of amounts payable hereunder and hereby authorizes Metavante to initiate debit entries to such account for the payment of amounts payable hereunder. Customer agrees to provide Metavante with any and all information necessary for Metavante to initiate such debit entries via the Automated Clearing House (ACH) system.

     5.6. Modification of Terms and Pricing. Charges for all Services shall be subject to adjustments on each January 1 which shall not exceed, in aggregate effect, the lesser of (i) an annual rate of five percent (5%), or (ii) the change to the Employment Cost Index (over the applicable period).

     5.7. *The information in this paragraph is intentionally ommitted because confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted information has been filed separately with the U.S. Securities and Exchange Commission.

6. PERFORMANCE WARRANTY/DISCLAIMER OF ALL OTHER WARRANTIES

     6.1. Performance Warranty. Metavante warrants that it will provide all Services in a commercially reasonable manner in material conformance with the applicable Documentation (the “Performance Warranty”). Where the parties have agreed upon Service Levels for any aspect of Metavante’s performance, such Service Levels shall apply in lieu of the Performance Warranty. THIS PERFORMANCE WARRANTY IS SUBJECT TO THE WARRANTY EXCLUSIONS SET FORTH BELOW IN SECTION 0.

     6.2. Performance Warranty Exclusions. Except as may be otherwise expressly agreed in writing by Metavante, Metavante’s Performance Warranty does not apply to:

          A. defects, problems, or failures caused by the Customer’s nonperformance of obligations essential to Metavante’s performance of its obligations; and/or

          B. defects, problems, or failures caused by an event of force majeure.

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     6.3. DISCLAIMER OF ALL OTHER WARRANTIES. THIS PERFORMANCE WARRANTY, AND THE WARRANTIES IN ARTICLE 12 HEREOF, ARE IN LIEU OF, AND METAVANTE DISCLAIMS ANY AND ALL OTHER WARRANTIES, CONDITIONS, OR REPRESENTATIONS (EXPRESS OR IMPLIED, ORAL OR WRITTEN) WITH RESPECT TO THE SERVICES PROVIDED UNDER THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS OR SUITABILITY FOR ANY PURPOSE (WHETHER OR NOT METAVANTE KNOWS, HAS REASON TO KNOW, HAS BEEN ADVISED, OR IS OTHERWISE IN FACT AWARE OF ANY SUCH PURPOSE), WHETHER ALLEGED TO ARISE BY LAW, BY REASON OF CUSTOM OR USAGE IN THE TRADE, OR BY COURSE OF DEALING. IN ADDITION, METAVANTE DISCLAIMS ANY WARRANTY OR REPRESENTATION TO ANY PERSON OTHER THAN CUSTOMER WITH RESPECT TO THE SERVICES PROVIDED UNDER THIS AGREEMENT.

7. MODIFICATION OR PARTIAL TERMINATION

     7.1. Modifications to Services. Metavante may relocate, modify, amend, enhance, update, or provide an appropriate replacement for the software used to provide the Services, or any element of its systems or processes at any time or withdraw, modify, or amend any function of the Services, provided that the functionality of the Services, any applicable Service Levels, and fees are not materially adversely affected. In no event shall this Section 7.1 require Customer to purchase any New Services from Metavante.

     7.2. Partial Termination by Metavante. Except as may be provided in any Schedule, Metavante may, at any time, withdraw any of the Services upon providing ninety (90) days’ prior written notice to Customer, provided that Metavante is withdrawing the Service(s) from its entire client base. Metavante may also terminate any function or any Services immediately upon any final regulatory, legislative, or judicial determination that providing such function or Services is inconsistent with applicable law or regulation or the rights of any Third Party. If Metavante terminates any Service pursuant to this paragraph, Metavante agrees to assist Customer, without additional charge, in identifying an alternate provider of such terminated Service, and the Customer shall not be assessed a Termination Fee for such terminated service.

     7.3. Partial Termination by Customer. Except as may be provided in any Schedule, Customer agrees that, during the Term, Metavante shall be Customer’s sole and exclusive provider of all Services included in Metavante’s Integrated Banking Solution (deposit and loan processing services provided by Metavante as of the Commencement Date). If Customer breaches the foregoing covenant, the same shall constitute a partial termination of this Agreement, and Customer shall pay Metavante the Termination Fee for the affected Service, as liquidated damages and not as a penalty.

8. TERMINATION/DEFAULT

     8.1. Early Termination. The terms and conditions set forth in this Section 8 shall govern the early termination of this Agreement (or any Service).

     8.2. For Cause. If either party fails to perform any of its material obligations (including Section 7.1 hereof) under this Agreement (a “Default”) and does not cure such Default in accordance with this Section, then the non-defaulting party may, by giving notice to the other party, terminate this Agreement as of the date specified in such notice of termination, or such later date agreed to by the parties, and/or recover Damages. Except as provided in Section 4.1 C, a party may terminate the Agreement in accordance with the foregoing if such party provides written notice to the defaulting party and either (a) the defaulting party does not cure the Default within sixty (60) days of the defaulting party’s receipt of notice of the Default, if the Default is capable of cure within sixty (60) days, or (b) if the Default is not capable of cure within sixty (60) days, the defaulting party does not both (i) implement a plan to cure the Default within sixty (60) days of receipt of notice of the Default, and (ii) diligently carry-out the plan in accordance with its terms. The parties acknowledge and agree that a failure to pay any amount when due hereunder shall be a Default that is capable of being cured within thirty (30) days. Except as provided in the Service Level Schedule, the parties acknowledge and agree that any error in processing data, preparation or filing of a report, form, or file, or the failure to perform Services as required hereunder shall be satisfactorily cured upon the completion of accurate re-processing, the preparation or filing of the accurate report, form, or file, or the re-performance of the Services in accordance with applicable requirements, respectively.

     8.3. For Insolvency. In addition to the termination rights set forth in Sections 8.1 and 8.2, subject to the provisions of Title 11, United States Code, if either party becomes or is declared insolvent or bankrupt, is the subject to any proceedings relating to its liquidation, insolvency or for the appointment of a receiver or similar officer for it, makes an assignment for the benefit of all or substantially all of its creditors, or enters into an agreement for the composition, extension, or readjustment of all or substantially all of its obligations, or is subject to regulatory sanction by any Federal Regulator, then the other party may, by giving written notice to such party, may terminate this Agreement as of a date specified in such notice of termination; provided that the foregoing shall not apply with respect to any involuntary petition in bankruptcy filed against a party unless such petition is not dismissed within sixty (60) days of such filing.

     8.4. Termination for Convenience. Customer may elect to terminate this Agreement for any reason upon six months written notice to Metavante, provided Customer shall pay Metavante the “Termination Fee” defined and computed in accordance with the table below. The “Termination Fee” shall be paid prior to the Effective Date of Termination of the Agreement, as applicable. In addition to the foregoing, Customer shall pay to Metavante any amortized but unpaid one-time set-up fees, enhancement fees or implementation fees and all reasonable costs in connection with the disposition of equipment, facilities and contracts exclusively related to Metavante’s performance of the Services under this Agreement.

The Termination Fee shall be an amount equal to a percentage of the Estimated Remaining Value as set forth below. The “Estimated Remaining Value” means the mathematical product of (a) the average monthly fee paid by Customer with respect to the Initial Services during the twelve (12) months immediately preceding the Effective Date of Termination, multiplied by (b) the number of unexpired whole months remaining between the Effective Date of Termination and the expiration of the Initial Term. The Termination Fee shall be equal to the Estimated Remaining Value

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For example, if the Customer chose to terminate for convenience on an agreement with a Commencement Date of January 01, 2007 and provided written notice on July 15, 2009 for a termination date of January 15, 2010, the Estimated Remaining Value would be the average monthly fee during 2009 multiplied by 47 and the Termination Fee would be the Estimated Remaining Value.

     8.5. *The information in this paragraph is intentionally omitted because confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted information has been filed separately with the U.S. Securities and Exchange Commission.

     8.6. Cease and Desist Order. Customer may terminate this entire Agreement without payment of the Termination Fee by providing written notice to Metavante no later than thirty (30) days following the date that Metavante is subject to a formal cease and desist order duly and properly issued by either (a) the Federal Deposit Insurance Corporation, or (b) the Office of the Financial Institutions Commissioner for the Commonwealth of Puerto Rico, for knowingly or recklessly participating in (i) any violation of any law or regulation; (ii) any breach of fiduciary duty; or (iii) any unsafe or unsound practice, which violation, breach, or practice caused or is likely to cause more than a minimal financial loss to, or a significant adverse effect on, Customer.

9. LIMITATION OF LIABILITY/MAXIMUM DAMAGES ALLOWED

     9.1. Equitable Relief. Either party may seek equitable remedies, including injunctive relief, for a breach of the other party’s obligations under Article 13 of this Agreement, prior to commencing the dispute resolution procedures set forth in Section 11.1 below.

     9.2. Exclusion of Incidental and Consequential Damages. Independent of, severable from, and to be enforced independently of any other provision of this Agreement, NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY (NOR TO ANY PERSON CLAIMING RIGHTS DERIVED FROM THE OTHER PARTY’S RIGHTS) IN CONTRACT, TORT (INCLUDING NEGLIGENCE), OR OTHERWISE, FOR INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE, OR EXEMPLARY DAMAGES OF ANY KIND—including lost profits, loss of business, or other economic damage, and further including injury to property, AS A RESULT OF BREACH OF ANY WARRANTY OR OTHER TERM OF THIS AGREEMENT, INCLUDING ANY FAILURE OF PERFORMANCE, REGARDLESS OF WHETHER THE PARTY LIABLE OR ALLEGEDLY LIABLE WAS ADVISED, HAD OTHER REASON TO KNOW, OR IN FACT KNEW OF THE POSSIBILITY THEREOF.

     9.3. *The information in this paragraph is intentionally omitted because confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted information has been filed separately with the U.S. Securities and Exchange Commission.

     9.4. Statute of Limitations. No lawsuit or other action may be brought by either party hereto, or on any claim or controversy based upon or arising in any way out of this Agreement, after two(2) years from the date on which the party knew or reasonably should have known of an event for which a cause of action arose regardless of the nature of the claim or form of action, whether in contract, tort (including negligence), or otherwise; provided, however, the foregoing limitation shall not apply to the collection of any amounts due Metavante under this Agreement.

     9.5. Tort Claim Waiver. In addition to and not in limitation of any other provision of this Article 9, each party hereby knowingly, voluntarily, and intentionally waives any right to recover from the other party, and Customer waives any right to recover from any Eligible Provider, any economic losses or damages in any action brought under tort theories, including, misrepresentation, negligence and/or strict liability, and/or relating to the quality or performance of any products or services provided by Metavante. For purposes of this waiver, economic losses and damages include monetary losses or damages caused by a defective product or service except personal injury or damage to other tangible property. Even if remedies provided under this Agreement shall be deemed to have failed of their essential purpose, neither party shall have any liability to the other party under tort theories for economic losses or damages.

     9.6. Liquidated Damages. Customer acknowledges that Metavante shall suffer a material adverse impact on its business if this Agreement is terminated prior to expiration of the Term, and that the resulting damages may not be susceptible of precise determination. Customer acknowledges that the Termination Fee is a reasonable approximation of such damages and shall be deemed to be liquidated damages and not a penalty.

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     9.7. Essential Elements. Customer and Metavante acknowledge and agree that the limitations contained in this Article 9 are essential to this Agreement, and that Metavante has expressly relied upon the inclusion of each and every provision of this Article 9 as a condition to executing this Agreement.

10. INSURANCE AND INDEMNITY.

     10.1. Insurance. Metavante currently maintains and, if available at a reasonable cost, Metavante shall continue to pay for, and maintain in full force and effect during the Term insurance as follows:

          A. Workers’ compensation and employers’ liability insurance with limits to conform with the greater of the amount required by Wisconsin applicable state statutory law or one million dollars ($1,000,000) each accident, including occupational disease coverage;

          B. Commercial general liability insurance with limits not less than three million dollars ($3,000,000) combined single limit for bodily injury, death, and property damage, including personal injury, contractual liability, independent contractors, broad-form property damage, and products and completed operations coverage;

          C. Commercial automobile liability insurance with limits not less than one million dollars ($1,000,000) each occurrence combined single limit of liability for bodily injury, death, and property damage, including owned and non-owned and hired automobile coverages, as applicable;

          D. Commercial Blanket Bond, including Electronic & Computer Crime or Unauthorized Computer Access coverage, in the amount of not less than ten million dollars ($10,000,000); and

          E. Professional liability insurance (Errors and Omissions) with limits not less than three million dollars ($3,000,000) annual aggregate for all claims each policy year for computer programming and electronic data processing services.

          F. Claims Made Coverages. To the extent any insurance coverage required under this Section is purchased on a “claims-made” basis, such insurance shall cover all prior acts of Metavante during the Term, and such insurance shall be continuously maintained until at least four (4) years beyond the expiration or termination of the Term, or Metavante shall purchase “tail” coverage, effective upon termination of any such policy or upon termination or expiration of the Term, to provide coverage for at least four (4) years from the occurrence of either such event.

          G. Certificates Of Insurance. Certificates of Insurance evidencing all coverages described in this Section shall be furnished to Customer upon request.

     10.2. Indemnity.

          A. Except as provided in 10.2B below, Customer shall indemnify Metavante from, defend Metavante against, and pay any final judgments awarded against Metavante, resulting from any claim brought by a Third Party against Metavante based on Customer’s use of the Services to support its operations, Metavante’s compliance with Customer’s specifications or instructions, or Metavante’s use of trademarks or data supplied by Customer.

          B. Metavante shall indemnify Customer from, defend Customer against, and pay any final judgment awarded against Customer, resulting from any claim brought by a Third Party against Customer based on Metavante’s alleged infringement of any patent, copyright, or trademark of such Third Party under the laws of the United States, unless and except to the extent that such infringement is caused by Metavante’s compliance with Customer’s specifications or instructions, or Metavante’s use of trademarks or data supplied by Customer.

     10.3. Indemnification Procedures. If any Third Party makes a claim covered by Section 10.2 against an indemnitee with respect to which such indemnitee intends to seek indemnification under this Section, such indemnitee shall give notice of such claim to the indemnifying party, including a brief description of the amount and basis therefor, if known. Upon giving such notice, the indemnifying party shall be obligated to defend such indemnitee against such claim, and shall be entitled to assume control of the defense of the claim with counsel chosen by the indemnifying party, reasonably satisfactory to the indemnitee. The indemnitee shall cooperate fully with and assist the indemnifying party in its defense against such claim in all reasonable respects. The indemnifying party shall keep the indemnitee fully apprised at all times as to the status of the defense. Notwithstanding the foregoing, the indemnitee shall have the right to employ its own separate counsel in any such action, but the fees and expenses of such counsel shall be at the expense of the indemnitee. Neither the indemnifying party nor any indemnitee shall be liable for any settlement of action or claim effected without its consent. Notwithstanding the foregoing, the indemnitee shall retain, assume, or reassume sole control over all expenses relating to every aspect of the defense that it believes is not the subject of the indemnification provided for in this Section. Until both (a) the indemnitee receives notice from indemnifying party that it will defend, and (b) the indemnifying party assumes such defense, the indemnitee may, at any time after ten (10) days from the date notice of claim is given to the indemnifying party by the indemnitee, resist or otherwise defend the claim or, after consultation with and consent of the indemnifying party, settle or otherwise compromise or pay the claim. The indemnifying party shall pay all costs of indemnity arising out of or relating to that defense and any such settlement, compromise, or payment. The indemnitee shall keep the indemnifying party fully apprised at all times as to the status of the defense. Following indemnification as provided in this Section, the indemnifying party shall be subrogated to all rights of the indemnitee with respect to the matters for which indemnification has been made.

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11. DISPUTE RESOLUTION

     11.1. Representatives of Parties. All disputes arising under or in connection with this Agreement shall initially be referred to the representatives of each party who customarily manages the relationship between the parties. If such representatives are unable to resolve the dispute within five (5) Business Days after referral of the matter to them, the managers of the representatives shall attempt to resolve the dispute. If, after five (5) Business Days they are unable to resolve the dispute, senior executives of the parties shall attempt to resolve the dispute. If, after five (5) Business Days they are unable to resolve the dispute, the parties shall submit the dispute to the chief executive officers of the parties for resolution. Neither party shall commence legal proceedings with regard to a dispute until completion of the dispute resolution procedures set forth in this Section 11.1, except to the extent necessary to preserve its rights or maintain a superior position against other creditors or claimants.

     11.2. Continuity of Performance. During the pendency of the dispute resolution proceedings described in this Article 11, Metavante shall continue to provide the Services so long as Customer shall continue to pay all undisputed amounts to Metavante in a timely manner.

12. AUTHORITY

     12.1. Metavante. Metavante warrants that:

          A. Metavante has the right to provide the Services hereunder, using all computer software required for that purpose.

          B. Metavante is a corporation validly existing and in active status under the laws of the State of Wisconsin. It has all the requisite corporate power and authority to execute, deliver, and perform its obligations under this Agreement. The execution, delivery, and performance of this Agreement have been duly authorized by Metavante, and this Agreement is enforceable in accordance with its terms against Metavante. No approval, authorization, or consent of any governmental or regulatory authorities is required to be obtained or made by Metavante in order for Metavante to enter into and perform its obligations under this Agreement

     12.2. Customer. Customer warrants that:

          A. Customer has all required licenses and approvals necessary to use the Services in the operation of its business.

          B. Customer is validly existing and in good standing under the laws of the state of its incorporation or charter, or if a national bank, the United States of America. It has all the requisite corporate power and authority to execute, deliver, and perform its obligations under this Agreement. The execution, delivery, and performance of this Agreement have been duly authorized by Customer, and this Agreement is enforceable in accordance with its terms against Customer. No approval, authorization, or consent of any governmental or regulatory authorities is required to be obtained or made by Customer in order for Customer to enter into and perform its obligations under this Agreement.

          C. In the event that Customer requests Metavante to disclose to any Third Party or to use any of Customer’s Confidential Information (as defined in Section 13.3), and such Confidential Information is or may be subject to the Privacy Regulations, such disclosure or use shall be permitted by the Privacy Regulations and by any initial, annual, opt-out, or other privacy notice that Customer issued with respect to such Confidential Information pursuant to the Privacy Regulations.

13. CONFIDENTIALITY AND OWNERSHIP

     13.1. Customer Data. Customer shall remain the sole and exclusive owner of all Customer Data and its Confidential Information (as defined in Section 13.3), regardless of whether such data is maintained on magnetic tape, magnetic disk, or any other storage or processing device. All such Customer Data and other Confidential Information shall, however, be subject to regulation and examination by the appropriate auditors and regulatory agencies to the same extent as if such information were on Customer’s premises.

     13.2. Metavante Systems. Customer acknowledges that it has no rights in any of Metavante’s software, systems, documentation, guidelines, procedures, and similar related materials or any modifications thereof, unless and except as expressly granted under this Agreement.

     13.3. Confidential Information. “Confidential Information” of a party shall mean all confidential or proprietary information and documentation of such party, whether or not marked as such including, with respect to Customer, all Customer Data. Confidential Information shall not include: (a) information which is or becomes publicly available (other than by the party having the obligation of confidentiality) without breach of this Agreement; (b) information independently developed by the receiving party; (c) information received from a Third Party not under a confidentiality obligation to the disclosing party; or (d) information already in the possession of the receiving party without obligation of confidence at the time first disclosed by the disclosing party. The parties acknowledge and agree that the substance of the negotiations of this Agreement, and the terms of this Agreement are considered Confidential Information subject to the restrictions contained herein.

     13.4. Obligations of the Parties. Except as permitted under this Section 13.4 and applicable law, neither party shall use, copy, sell, transfer, publish, disclose, display, or otherwise make any of the other party’s Confidential Information available to any Third Party without the prior written consent of the other party. Each party shall hold the Confidential Information of the other party in confidence and shall not disclose or use such Confidential Information other than for the purposes contemplated by this Agreement and, to the extent that Confidential Information of Customer may be subject to the Privacy Regulations, as permitted by the Privacy Regulations, and shall instruct their employees, agents, and contractors to use the same care and discretion with respect to the Confidential Information of the other party or of any Third Party utilized hereunder that Metavante and Customer each require with respect to their own most confidential information, but in no event less than a reasonable standard of care, including the utilization of security devices or procedures designed to

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prevent unauthorized access to such materials. Each party shall instruct its employees, agents, and contractors (a) of its confidentiality obligations hereunder and (b) not to attempt to circumvent any such security procedures and devices. Each party’s obligation under the preceding sentence may be satisfied by the use of its standard form of confidentiality agreement, if the same reasonably accomplishes the purposes here intended. All such Confidential Information shall be distributed only to persons having a need to know such information to perform their duties in conjunction with this Agreement. A party may disclose the other party’s Confidential Information if required to do so by subpoena, court or regulatory order, or other legal process, provided the party notifies the disclosing party of its receipt of such process, and reasonably cooperates, at the disclosing party’s expense, with efforts of the disclosing party to prevent or limit disclosure in response to such process.

     13.5. Information Security. Metavante shall be responsible for establishing and maintaining an information security program that is designed to (i) ensure the security and confidentiality of Customer Data, (ii) protect against any anticipated threats or hazards to the security or integrity of Customer Data, (iii) protect against unauthorized access to or use of Customer Data that could result in substantial harm or inconvenience to Customer or any of its customers, and (iv) ensure the proper disposal of Customer Data. Customer shall be responsible for maintaining security for its own systems, servers, and communications links as necessary to (a) protect the security and integrity of Metavante’s systems and servers on which Customer Data is stored, and (b) protect against unauthorized access to or use of Metavante’s systems and servers on which Customer Data is stored. Metavante will (1) take appropriate action to address any incident of unauthorized access to Customer Data and (2) notify Customer as soon as possible of any incident of unauthorized access to Sensitive Customer Information and any other breach in Metavante’s security that materially affects Customer or Customer’s customers If the primary federal regulator for Customer is the Office of Thrift Supervision (the “OTS”), Metavante will also notify the OTS as soon as possible of any breach in Metavante’s security that materially affects Customer or Customer’s customers. Either party may change its security procedures from time to time as commercially reasonable to address operations risks and concerns in compliance with the requirements of this section.

     13.6. Ownership and Proprietary Rights. Metavante reserves the right to determine the hardware, software, and tools to be used by Metavante in performing the Services. Metavante shall retain title and all other ownership and proprietary rights in and to the Metavante Proprietary Materials and Information, and any and all derivative works based thereon. Such ownership and proprietary rights shall include any and all rights in and to patents, trademarks, copyrights, and trade secret rights. Customer agrees that the Metavante Proprietary Materials and Information are not “work made for hire” within the meaning of U.S. Copyright Act, 17 U.S.C. Section 101.

     13.7. The Privacy Regulations. In the event that Customer requests Metavante to disclose to any Third Party or to use any of Customer’s Confidential Information, and such Confidential Information is or may be subject to the Privacy Regulations, Metavante reserves the right, prior to such disclosure or use, (a) to review any initial, annual, opt-out, or other privacy notice that Customer issued with respect to such Confidential Information pursuant to the Privacy Regulations, and if requested by Metavante, Customer shall promptly provide Metavante with any such notice, and (b) to decline to disclose to such Third Party or to use such Confidential Information if Metavante, in Metavante’s sole discretion, believes that such disclosure or use is or may be prohibited by the Privacy Regulations or by any such notice.

     13.8. Publicity. Neither party shall refer to the other party directly or indirectly in any media release, public announcement, or public disclosure relating to this Agreement or its subject matter, in any promotional or marketing materials, lists, or business presentations, without consent from the other party for each such use or release in accordance with this Section, provided that Metavante may include Customer’s name in Metavante’s customer list and may identify Customer as its customer in its sales presentations and marketing materials without obtaining Customer’s prior consent. Notwithstanding the foregoing, at Metavante’s request, Customer agrees to issue a joint press release prepared by Metavante to announce the relationship established by the parties hereunder. Customer agrees that such press release shall be deemed approved by Customer only if written approval notification has been provided by Customer to Metavante, which approval shall not be unreasonably withheld. All other media releases, public announcements, and public disclosures by either party relating to this Agreement or the subject matter of this Agreement (each, a “Disclosure”), including promotional or marketing material, but not including (a) announcements intended solely for internal distribution, or (b) disclosures to the extent required to meet legal or regulatory requirements beyond the reasonable control of the disclosing party, shall be subject to review and approval, which approval shall not be unreasonably withheld, by the other party prior to release. Such approval shall be deemed to be given if a party does not object to a proposed Disclosure within five (5) Business Days of receiving same. Disputes regarding the reasonableness of objections to the joint press release or any Disclosures shall be subject to the Dispute Resolution Procedures of Section 11.1 above.

14. REGULATORY COMPLIANCE AND ASSURANCES

     14.1. Legal Requirements.

          A. Customer shall be solely responsible for monitoring and interpreting (and for complying with, to the extent such compliance requires no action by Metavante) the Legal Requirements. Based on Customer’s instructions, Metavante shall select the processing parameter settings, features, and options (collectively, the “Parameters”) within Metavante’s system that will apply to Customer. Customer shall be responsible for determining that such selections are consistent with the Legal Requirements and with the terms and conditions of any agreements between Customer and its clients. In making such determinations, Customer may rely upon the written descriptions of such Parameters contained in the User Manuals. Metavante shall perform system processing in accordance with the Parameters.

          B. Subject to the foregoing, Metavante shall perform an on-going review of federal laws, rules, and regulations. Metavante shall maintain the features and functions set forth in the User Manuals for each of the Services in accordance with all changes in federal laws, rules, and regulations applicable to such features and functions, in a non-custom environment. For any new federal laws, rules, and regulations, Metavante will perform a business review, with input from Metavante’s customers and user groups. If Metavante elects to support a new federal law, rule, or regulation through changes to the Metavante Software, Metavante shall develop and implement modifications to the Services to enable Customer to comply with such new federal laws, rules, and regulations.

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          C. In any event, Metavante shall work with Customer in developing and implementing a suitable procedure or direction to enable Customer to comply with federal, Puerto Rico, and state laws, rules, and regulations applicable to the Services being provided by Metavante to Customer, including in those instances when Metavante has elected to, but it is not commercially practicable to, modify the Metavante Software prior to the regulatory deadline for compliance.

     14.2. Regulatory Assurances. Metavante and Customer acknowledge and agree that the performance of these Services will be subject to regulation and examination by Customer’s regulatory agencies to the same extent as if such Services were being performed by Customer. Upon request, Metavante agrees to provide any appropriate assurances to such agency and agrees to subject itself to any required examination or regulation. Customer agrees to reimburse Metavante for reasonable costs actually incurred due to any such examination or regulation that is performed solely for the purpose of examining Services used by Customer by Puerto Rico authorities.

          A. Notice Requirements. Customer shall be responsible for complying with all regulatory notice provisions to any applicable governmental agency, which shall include providing timely and adequate notice to Federal Regulators as of the Effective Date of this Agreement, identifying those records to which this Agreement shall apply and the location at which such Services are to be performed.

          B. Examination of Records. The parties agree that the records maintained and produced under this Agreement shall, at all times, be available at the Operations Center for examination and audit by governmental agencies having jurisdiction over the Customer’s business, including any Federal, State or Puerto Rico Regulator. The Director of Examinations of any Federal, State or Puerto Rico Regulator or his or her designated representative shall have the right to ask for and to receive directly from Metavante any reports, summaries, or information contained in or derived from data in the possession of Metavante related to the Customer. Metavante shall notify Customer as soon as reasonably possible of any formal request by any authorized governmental agency to examine Customer’s records maintained by Metavante, if Metavante is permitted to make such a disclosure to Customer under applicable law or regulations. Customer agrees that Metavante is authorized to provide all such described records when formally required to do so by a Federal, State or Puerto Rico Regulator.

          C. Audits. Metavante shall cause a Third Party review of its operations and related internal controls to be conducted annually by its independent auditors in accordance with SAS 70 of the AICPA for Type II audits. Metavante shall provide to Customer one copy of the audit report resulting from such review.

          D. IRS and Treasury Department Filing. Customer represents it has complied with all laws, regulations, procedures, and requirements in attempting to secure correct tax identification numbers (TINs) for Customer’s payees and customers and agrees to attest to this compliance by an affidavit provided annually.

15. DISASTER RECOVERY

     15.1. Services Continuity Plan. Throughout the Term of the Agreement, Metavante shall maintain a Services Continuity Plan (the “Plan”) in compliance with applicable regulatory requirements. Review and acceptance of the Plan, as may be required by any applicable regulatory agency, shall be the responsibility of Customer. Metavante shall cooperate with Customer in conducting such reviews as such regulatory agency may, from time to time, reasonably request. A detailed Executive Summary of the Plan has been provided to Customer. Updates to the Plan shall be provided to Customer without charge.

     15.2. Relocation. If appropriate, Metavante shall relocate all affected Services to an alternate disaster recovery site as expeditiously as possible after declaration of a Disaster, and shall coordinate with Customer all requisite telecommunications modifications necessary to achieve full connectivity to the disaster recovery site, in material compliance with all regulatory requirements. “Disaster” shall have the meaning set forth in the Plan.

     15.3. Resumption of Services. The Plan provides that, in the event of a Disaster, Metavante will be able to resume the Services in accordance therewith within the time periods specified in the Plan. In the event Metavante is unable to resume the Services to Customer within the time periods specified in the Plan, Customer shall have the right to terminate this Agreement without payment of the Termination Fee upon written notice to Metavante delivered within forty-five (45) days after declaration of such Disaster. The determination by Customer to terminate this Agreement shall be effective immediately upon written notification to Metavante. Customer shall receive any credits due and unpaid by Metavante as of the date of termination of this Agreement. During interruption of Services, the payment by Customer for interrupted Services shall be abated.

     15.4. Annual Test. Metavante shall test its Plan by conducting one (1) test annually and shall provide Customer with a description of the test results in accordance with applicable laws and regulations.

16. MISCELLANEOUS PROVISIONS

     16.1. Equipment and Network. Customer shall obtain and maintain at its own expense its own data processing and communications equipment as may be necessary or appropriate to facilitate the proper use and receipt of the Services, provided that Metavante shall procure certain equipment for Customer as set forth in the Strategic Network Solutions Schedule attached hereto. Customer shall pay all installation, monthly, and other charges relating to the installation and use of communications lines between Customer’s datacenter and the Operations Center, as set forth in the Network Schedule. Metavante maintains and will continue to maintain a network control center with diagnostic capability to monitor reliability and availability of the communication lines described in the Network Schedule, but Metavante shall not be responsible for the continued availability or reliability of such communications lines. Metavante agrees to provide services to install, configure, and support the wide-area network to interconnect Customer to the Operations Center as described in, and subject to the terms and conditions of, the Network Schedule.

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     16.2. Data Backup. Customer shall maintain adequate records for at least ten (10) Business Days, including backup on magnetic tape or other electronic media where transactions are being transmitted to Metavante, from which reconstruction of lost or damaged files or data can be made. Customer assumes all responsibility and liability for any loss or damage resulting from failure to maintain such records.

     16.3. Balancing and Controls. Customer shall (a) on a daily basis, review all input and output, controls, reports, and documentation, to ensure the integrity of data processed by Metavante; and (b) on a daily basis, check exception reports to verify that all file maintenance entries and non-dollar transactions were correctly entered. Customer shall be responsible to notify Metavante immediately in the event of any error so that Metavante may initiate timely remedial action to correct any improperly processed data which these reviews disclose. In the event of any error by Metavante in processing any data or preparing any report or file, Metavante shall correct the error by reprocessing the affected data or preparing and issuing a new file or report at no additional cost to Customer.

     16.4. Future Acquisitions. Customer acknowledges that Metavante has established the Fee Schedule(s) and enters into this Agreement on the basis of Metavante’s understanding of the Customer’s current need for Services and Customer’s anticipated future need for Services as a result of internally generated expansion of its customer base. If the Customer expands its operations by acquiring Control of additional financial institutions or if Customer experiences a Change in Control, the following provisions shall apply:

          A. Acquisition of Additional Entities. If, after the Effective Date, Customer acquires Control of one or more financial holding companies, banks, savings and loan associations, or other financial institutions that are not currently Affiliates, Metavante agrees to provide Services for such new Affiliates, and such Affiliates shall automatically be included in the definition of “Customer”; provided that (i) the conversion of each new Affiliate must be scheduled at a mutually agreeable time (taking into account, among other things, the availability of Metavante conversion resources) and must be completed before Metavante has any obligation to provide Services to such new Affiliate; (ii) the Customer will be liable for any and all Expenses in connection with the conversion of such new Affiliate; and (iii) Customer shall pay conversion fees in an amount to be mutually agreed upon with respect to each new Affiliate.

          B. Change in Control of Customer. If a Change in Control occurs with respect to Customer, Metavante agrees to continue to provide Services under this Agreement; provided that (a) Metavante’s obligation to provide Services shall be limited to the Entities comprising the Customer prior to such Change in Control and (b) Metavante’s obligation to provide Services shall be limited in any and all circumstances to the number of accounts processed in the three (3) -month period prior to such Change in Control occurring, plus twenty-five percent (25%).

     16.5. Transmission of Data. If the Services require transportation or transmission of data between Metavante and Customer, the responsibility and expense for transportation and transmission of, and the risk of loss for, data and media transmitted between Metavante and Customer shall be borne by Customer. Data lost by Metavante following receipt shall either be restored by Metavante from its backup media or shall be reprocessed from Customer’s backup media at no additional charge to Customer.

     16.6. Reliance on Data. Metavante will perform the Services described in this Agreement on the basis of information furnished by Customer. Metavante shall be entitled to rely upon any such data, information, directions, or instructions as provided by Customer (whether given by letter, memorandum, telegram, cable, telex, telecopy facsimile, computer terminal, e-mail, other “on line” system or similar means of communication, or orally over the telephone or in person), and shall not be responsible for any liability arising from Metavante’s performance of the Services in accordance with Customer’s instructions. Customer assumes exclusive responsibility for the consequences of any instructions Customer may give Metavante, for Customer’s failure to properly access the Services in the manner prescribed by Metavante, and for Customer’s failure to supply accurate input information. If any error results from incorrect input supplied by Customer, Customer shall be responsible for discovering and reporting such error and supplying the data necessary to correct such error to Metavante for processing at the earliest possible time.

     16.7. Use of Services. Customer agrees that, except as otherwise permitted in this Agreement or in writing by Metavante, Customer will use the Services only for its own internal business purposes to service its bona fide customers and clients and will not sell or otherwise provide, directly or indirectly, any of the Services or any portion thereof to any Third Party. Customer agrees that Metavante may use all suggestions, improvements, and comments regarding the Services that are furnished by Customer to Metavante in connection with this Agreement, without accounting or reservation. Unless and except to the extent that Metavante has agreed to provide customer support services for Customer, Customer shall be responsible for handling all inquiries of its customers relating to Services performed by Metavante, including inquiries regarding credits or debits to a depositor’s account. Metavante agrees to reasonably assist Customer in responding to such inquiries by providing such information to Customer as Metavante can reasonably provide.

     16.8. Financial Statements. Metavante agrees to furnish to the Customer copies of the then-current annual report for the Marshall & Ilsley Corporation, within forty-five (45) days after such document is made publicly available.

     16.9. Performance by Subcontractors. Customer understands and agrees that the actual performance of the Services may be made by Metavante, one or more Affiliates of Metavante, or subcontractors of any of the foregoing Entities (collectively, the “Eligible Providers”). For purposes of this Agreement, performance of the Services by any Eligible Provider shall be deemed performance by Metavante itself. Metavante shall remain fully responsible for the performance or non-performance of the Services by any Eligible Provider, to the same extent as if Metavante itself performed or failed to perform such services. Customer agrees to look solely to Metavante, and not to any Eligible Provider, for satisfaction of any claims Customer may have arising out of this Agreement or the performance or nonperformance of Services. However, in the event that Customer contracts directly with a Third Party for any products or services, Metavante shall have no liability to Customer for such Third Party’s products or services, even if such products or services are necessary for Customer to access or receive the Services hereunder.

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     16.10. Solicitation. Neither party shall solicit the employees of the other party for employment during the Term of this Agreement, for any reason. The foregoing shall not preclude either party from employing any such employee (a) who seeks employment with the other party in response to any general advertisement or solicitation that is not specifically directed towards employees of such party or (b) who contacts the other party on his or her own initiative without any direct or indirect solicitation by such party.

     16.11. Taxes. Customer shall be solely and exclusively responsible for the payment of Taxes arising from or relating to the services rendered or material furnished, pursuant to this Agreement. Any other tax or governmental assessment applicable as a result of the execution or performance of any service pursuant to this Agreement, or any materials furnished with respect to this Agreement, including, without limitation, any income, franchise, royalty, privilege, or similar tax on or measured by Metavante’s net income, capital stock, franchise or net worth, as well as any municipal license tax imposed on Metavante’s volume of business, as a consequence of Metavante being deemed engaged in commercial activities within a Puerto Rico municipality, shall be Metavante’s sole and exclusive responsibility. Payments made by Customer to Metavante will be subject to applicable withholding taxes. In the event any taxing authority withholds or intercepts any amount due to Licensor hereunder, which is properly payable by Customer, and after Customer has met withholding requirements, Customer shall pay to Licensor on demand the full amount of such additional withholding or intercepted payment.

17. GENERAL

     17.1. Governing Law. The validity, construction and interpretation of this Agreement and the rights and duties of the parties hereto shall be governed by the internal laws of the State of New York, excluding its principles of conflict of laws.

     17.2. Venue and Jurisdiction. Intentionally omitted.

     17.3. Entire Agreement; Amendments. This Agreement, together with the schedules hereto, constitutes the entire agreement between Metavante and the Customer with respect to the subject matter hereof. There are no restrictions, promises, warranties, covenants, or undertakings other than those expressly set forth herein and therein. This Agreement supersedes all prior negotiations, agreements, and undertakings between the parties with respect to such matter. This Agreement, including the schedules hereto, may be amended only by an instrument in writing executed by the parties or their permitted assignees.

     17.4. Relationship of Parties. The performance by Metavante of its duties and obligations under this Agreement shall be that of an independent contractor and nothing contained in this Agreement shall create or imply an agency relationship between Customer and Metavante, nor shall this Agreement be deemed to constitute a joint venture or partnership between Customer and Metavante.

     17.5. Assignment. Neither this Agreement nor the rights or obligations hereunder may be assigned by either party, by operation of law or otherwise, without the prior written consent of the other party, which consent shall not be unreasonably withheld, provided that (a) Metavante’s consent need not be obtained in connection with the assignment of this Agreement pursuant to a merger in which Customer is a party and as a result of which the surviving Entity becomes an Affiliate or Subsidiary of another bank holding company, bank, savings and loan association or other financial institution, so long as the provisions of all applicable Schedules are complied with; and (b) Metavante may freely assign this Agreement so long as it is (i) in connection with a merger, corporate reorganization, or sale of all or substantially all of its assets, stock, or securities, or (ii) to any Entity which is a successor to the assets or the business of Metavante.

     17.6. Notices. Except as otherwise specified in the Agreement, all notices, requests, approvals, consents, and other communications required or permitted under this Agreement shall be in writing and shall be personally delivered or sent by (a) first-class U.S. mail, registered or certified, return receipt requested, postage pre-paid; or (b) U.S. express mail, or other, similar overnight courier service to the address specified below. Notices shall be deemed given on the day actually received by the party to whom the notice is addressed.

In the case of Customer:	ORIENTAL FINANCIAL GROUP INC.
	997 San Roberto Street
	Tenth Floor
	San Juan, PR 00926
	Attn.:
For Billing Purposes:	SAME
In the case of Metavante:	METAVANTE CORPORATION
	4900 West Brown Deer Road
	Milwaukee WI 53223
	Attn: Senior Executive Vice President, Metavante
	Corp.
Copy to:
	Risk Management and Legal Division

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     17.7. Waiver. No delay or omission by either party to exercise any right or power it has under this Agreement shall impair or be construed as a waiver of such right or power. A waiver by any party of any breach or covenant shall not be construed to be a waiver of any succeeding breach or any other covenant. All waivers must be in writing and signed by the party waiving its rights.

     17.8. Severability. If any provision of this Agreement is held by court or arbitrator of competent jurisdiction to be contrary to law, then the remaining provisions of this Agreement will remain in full force and effect. Articles 5, 8, 9, 0, and 17 shall survive the expiration or earlier termination of this Agreement for any reason.

     17.9. Attorneys’ Fees and Costs. If any legal action is commenced in connection with the enforcement of this Agreement or any instrument or agreement required under this Agreement, the prevailing party shall be entitled to costs, attorneys’ fees actually incurred, and necessary disbursements incurred in connection with such action, as determined by the court.

     17.10. No Third Party Beneficiaries. Each party intends that this Agreement shall not benefit, or create any right or cause of action in or on behalf of, any person or entity other than the Customer and Metavante.

     17.11. Force Majeure. Notwithstanding any provision contained in this Agreement, neither party shall be liable to the other to the extent fulfillment or performance if any terms or provisions of this Agreement is delayed or prevented by revolution or other civil disorders; wars; acts of enemies; strikes; lack of available resources from persons other than parties to this Agreement; labor disputes; electrical equipment or availability failure; fires; floods; acts of God; federal, state or municipal action; statute; ordinance or regulation; or, without limiting the foregoing, any other causes not within its control, and which by the exercise of reasonable diligence it is unable to prevent, whether of the class of causes hereinbefore enumerated or not. This clause shall not apply to the payment of any sums due under this Agreement by either party to the other. Notwithstanding the foregoing, an event of force majeure shall not excuse Metavante from performing its obligations under the Plan.

     17.12. Negotiated Agreement. Metavante and Customer each acknowledge that the limitations and exclusions contained in this Agreement have been the subject of active and complete negotiation between the parties and represent the parties’ voluntary agreement based upon the level of risk to Customer and Metavante associated with their respective obligations under this Agreement and the payments to be made to Metavante and the charges to be incurred by Metavante pursuant to this Agreement. The parties agree that the terms and conditions of this Agreement shall not be construed in favor of or against any party by reason of the extent to which any party or its professional advisors participated in the preparation of this document.

     17.13. Waiver of Jury Trial. Each of Customer and Metavante hereby knowingly, voluntarily and intentionally waives any and all rights it may have to a trial by jury in respect of any litigation based on, or arising out of, under, or in connection with, this Agreement or any course of conduct, course of dealing, statements (whether verbal or written), or actions of Metavante or Customer, regardless of the nature of the claim or form of action, contract or tort, including negligence.

18. DEFINITIONS. The following terms shall have the meanings ascribed to them as follows:

A.	“ACH” shall mean automated clearing house services.
B.	“Affiliate” shall mean, with respect to Customer, those Entities listed in Exhibit A, attached hereto and any other Entity at any time Controlling, Controlled by, or under common Control of Customer to which Customer and Metavante shall agree in writing that it will receive Services under this Agreement. Metavante’s Affiliates are those Entities at any time Controlling, Controlled by, or under common Control of Metavante.
C.	“Agreement” shall mean this master agreement and all schedules and exhibits attached hereto, which are expressly incorporated, any future amendments thereto, and any future schedules and exhibits added hereto by mutual agreement.
D.	“Business Days” shall be Mondays through Fridays except holidays recognized by the Federal Reserve Bank of New York.
E.	“Change in Control” shall mean any event or series of events by which (i) any person or entity or group of persons or entities shall acquire Control of another person or entity or (ii) in the case of a corporation, during any period of twelve consecutive months commencing before or after the date hereof, individuals who, at the beginning of such twelve-month period, were directors of such corporation shall cease for any reason to constitute a majority of the board of directors of such corporation.
F.	“Commencement Date” shall mean the date on which Metavante first provides the Initial Services to Customer.
G.	“Confidential Information” shall have the meaning set forth in Section 13.3.
H.	“Consumer” shall mean an individual who obtains a financial product or service from Customer to be used primarily for personal, family, or household purposes and who has a continuing relationship with Customer.
I.	“Contract Year” shall mean successive periods of twelve months, the first of which (being slightly longer than twelve (12) months) shall commence on the Commencement Date and terminate on the last day of the month in which the first anniversary of the Commencement Date occurs.
J.	“Control” shall mean the direct or indirect ownership of over fifty percent (50%) of the capital stock (or other ownership interest, if not a corporation) of any Entity or the possession, directly or indirectly, of the power to direct the management and policies of such Entity by ownership of voting securities, by contract or otherwise. “Controlling” shall mean having Control of any Entity, and “Controlled” shall mean being the subject of Control by another Entity.
K.	“Conversion” shall mean (i) the transfer of Customer’s data processing and other information technology services to Metavante’s systems; (ii) completion of upgrades, enhancements and software modifications as set forth in this Agreement; and (iii) completion of all interfaces set forth in this Agreement and full integration thereof such that Customer is able to receive the Initial Services in a live operating environment.

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L.	“Conversion Date” shall mean the date on which Conversion for Customer or a particular Affiliate has been completed.
M.	“Customer” shall mean the Entity entering into this Agreement with Metavante and all Affiliates of such Entity for whom Metavante agrees to provide Services under this Agreement, as reflected on the first page of this Agreement or amendments executed after the Effective Date.
N.	“Customer Data” means any and all data and information of any kind or nature submitted to Metavante by Customer, or received by Metavante on behalf of Customer, necessary for Metavante to provide the Services.
O.	“Damages” shall mean actual and verifiable monetary obligations incurred, or costs paid (except overhead costs, attorneys’ fees, and court costs) which (i) would not have been incurred or paid but for a party’s action or failure to act in breach of this Agreement, and (ii) are directly and solely attributable to such breach, but excluding any and all consequential, incidental, punitive and exemplary damages, and/or other damages expressly excluded by the terms of this Agreement.
P.	“Documentation” shall mean Metavante’s standard user instructions relating to the Services, including tutorials, on-screen help, and operating procedures, as provided to Customer in written or electronic form.
Q.	“Effective Date” shall mean the date so defined on the signature page of this Agreement, or, if blank, the date executed by Metavante, as reflected in Metavante’s records.
R.	“Effective Date of Termination” shall mean the last day on which Metavante provides the Services to Customer (excluding any services relating to termination assistance).
S.	“Eligible Provider” shall have the meaning as set forth in Section 16.9.
T.	“Employment Cost Index” shall mean the Employment Cost Index—Civilian (not seasonally adjusted) as promulgated by the United States Department of Labor’s Bureau of Labor Statistics (or any successor index).
U.	“Entity” means an individual or a corporation, partnership, sole proprietorship, limited liability company, joint venture, or other form of organization, and includes the parties hereto.
V.	“Estimated Remaining Value” shall mean the number of calendar months remaining between the Effective Date of Termination and the last day of the contracted-for Term, multiplied by the average of the three (3) highest monthly fees (but in any event no less than the Monthly Base Fee or other monthly minimums) payable by Customer during the twelve (12) -month period prior to the event giving rise to termination rights under this Agreement. In the event the Effective Date of Termination occurs prior to expiration of the First Contract Year, the monthly fees used in calculating the Estimated Remaining Value shall be the greater of (i) the estimated monthly fees set forth in the Fee Schedule(s) and (ii) the average monthly fees described in the preceding sentence.
W.	“Expenses” shall mean any and all reasonable and direct expenses paid by Metavante to Third Parties in connection with Services provided to or on behalf of Customer under this Agreement, including any postage, supplies, materials, travel and lodging, and telecommunication fees, but not payments by Metavante to Eligible Providers.
X.	“Federal Regulator” shall mean the Chief Examiner of the Federal Home Loan Bank Board, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or their successors, as applicable.
Y.	“Fee Schedule” shall mean the portions of schedules containing fees and charges for services rendered to Customer under this Agreement.
Z.	“Initial Services” shall mean all Services requested by Customer from Metavante under this Agreement prior to the Commencement Date, other than the Conversion services. The Initial Services requested as of the Effective Date are set forth in the schedules attached hereto, which shall be modified to include any additional services requested by Customer prior to the Commencement Date.
AA.	“Initial Term” shall mean the period set forth on the first page of this Agreement.
BB.	“Legal Requirements” shall mean the federal, Puerto Rico, and state laws, rules, and regulations pertaining to Customer’s business.
CC.	“Metavante Proprietary Materials and Information” shall mean the Metavante Software and all source code, object code, documentation (whether electronic, printed, written, or otherwise), working papers, non-customer data, programs, diagrams, models, drawings, flow charts, and research (whether in tangible or intangible form or in written or machine-readable form), and all techniques, processes, inventions, knowledge, know-how, trade secrets (whether in tangible or intangible form or in written or machine-readable form), developed by Metavante prior to or during the Term of this Agreement, and such other information relating to Metavante or the Metavante Software that Metavante identifies to Customer as proprietary or confidential at the time of disclosure.
DD.	“Metavante Software” shall mean the software owned by Metavante and used to provide the Services.

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EE.	“Monthly Base Fee” shall mean the minimum monthly fees payable by Customer to Metavante as specifically set forth in the Services and Charges Schedule.
FF.	“Network” shall mean a shared system operating under a common name through which member financial institutions are able to authorize, route, process and settle transactions (e.g., MasterCard and Visa).
GG.	“New Services” shall mean any services that are not included in the Initial Services but which, upon mutual agreement of the parties, are added to this Agreement. Upon such addition, New Services shall be included in the term “Services.”
HH.	“Performance Warranty” shall have the meaning set forth in Section 6.1.
II.	“Plan” shall have the meaning set forth in Section 15.1.
JJ.	“Privacy Regulations” shall mean the regulations promulgated under Section 504 of the Gramm-Leach-Bliley Act, Pub. L. 106-102, as such regulations may be amended from time to time.
KK.	Professional Services” shall mean services provided by Metavante for Conversion, training, and consulting, and services provided by Metavante to review or implement New Services or enhancements to existing Services.
LL.	“Sensitive Customer Information” shall mean Customer Data with respect to a Consumer that is (a) such Consumer’s name, address or telephone number, in conjunction with such Consumer’s Social Security number, account number, credit or debit card number, or a personal identification number or password that would permit access to such Consumer’s account or (b) any combination of components of information relating to such Consumer that would allow a person to log onto or access such Consumer’s account, such as user name and password or password and account number.
MM.	“Services” shall mean the services, functions, and responsibilities described in this Agreement to be performed by Metavante during the Term and shall include New Services that are agreed to by the parties in writing.
NN.	“Service Levels” shall mean those service levels set forth in the Service Level Schedule.
OO.	“Taxes” shall mean any manufacturers, sales, use, gross receipts, excise, personal property, or similar tax or duty assessed by any governmental or quasi-governmental authority upon or as a result of the execution or performance of any service pursuant to this Agreement or materials furnished with respect to this Agreement, except any income, franchise, privilege, or similar tax on or measured by Metavante’s net income, capital stock, net worth or municipal license tax imposed on Metavante’s volume of business.
PP.	“Term” shall mean the Initial Term and any extension thereof, unless this Agreement is earlier terminated in accordance with its provisions.
QQ.	“Termination Fee” shall have the meaning set forth on the Termination Fee Schedule.
RR.	“Third Party” shall mean any Entity other than the parties or any Affiliates of the parties.
SS.	“Tier 1 Support” shall mean the provision of customer service and technical support to end users. The Metavante customer care agents provide assistance with the following, but not limited to payment verification, payee set up, opening service requests for payment research, user education on how to use the Metavante products, technical support with using and accessing the products, and technical support for some browser issues.
TT.	“Tier 2 Support” shall mean the provision of support to end users for consumer initiated payment issues such as payment not posted, stop payment, late fees, and payment posted for incorrect amount. The Metavante payment research team acts as an advocate to the payee on behalf of the end-user to research and resolve the payment issue in a timely manner.
UU.	“User Manuals” shall mean the documentation provided by Metavante to Customer which describes the features and functionalities of the Services, as modified and updated by the customer bulletins distributed by Metavante from time to time.
VV.	“Visa” shall mean VISA U.S.A., Inc.

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EXHIBIT A

LIST OF AFFILIATES OF ORIENTAL FINANCIAL GROUP INC.

1. Oriental Bank and Trust

2. Oriental International Bank Inc.

3. Oriental Mortgage Corporation

4. Oriental Financial Services Corp.

5. Oriental Insurance, Inc.

6. Caribbean Pension Consultants, Inc.

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CURRENT CAPABILITIES SCHEDULE

*The information in this schedule, which consists of 17 pages, is intentionally omitted because confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted information has been filed separately with the U.S. Securities and Exchange Commission.

19

CONVERSION PLAN SCHEDULE

The schedule listed below has been developed based on the information provided to date. Time frames and activities are subject to change as the project is further defined. As applicable, in addition to the schedule below, an issues list accompanies this Schedule to outline specific responsibilities, which are part of this Conversion project plan. The issues list documents the parties’ understandings and commitments as of the Effective Date, and shall be supplemented throughout the Conversion Period as additional information is made available and further agreements are made by the parties.

Weeks Prior
To Conversion	Event
37 Weeks	Project Organization and Administration
	Specific individuals to support this Conversion will be assigned at the Customer and at Metavante. Internal project initiation documents will be completed, and a detailed project plan will be developed at Metavante.
36 Weeks	Project Kickoff Meeting
	A kickoff meeting is held at the bank to introduce Metavante Conversion Project Management to the Customer’s project team. The overall Conversion process will be reviewed. Specific details will be discussed regarding project scope, roles and responsibilities, Conversion major events, and critical success factors.
	Equipment/Network Assessment
	Each office will be visited to record the layout of each location from a network perspective and to inventory existing equipment, including terminals, printers, ATM machines, controllers, and modems. This information will be evaluated to determine requirements for the future.
	High-Level Application and Operations Review
	A discussion of each application will be conducted at a high level to better understand services provided to existing customers. Current operational processes supported, such as item capture, statement rendering, and exception items, will be reviewed as well as interfaces to the current processor to clarify service requirements and special needs.
	Conversion Tapes Ordered
	Conversion tapes will be ordered from the appropriate service providers.
30 Weeks	Equipment/Network Plan Development
	Based on the Equipment/Network Assessment, an Equipment/Network Plan with a network design and hardware/software requirements will be developed.
	Staff Training at Metavante
	Key individuals from the Bank will attend application training at Metavante to help with Conversion analysis and to prepare to train others at the Bank.
20 Weeks	MIFIL Reports Created
	Metavante reports will be produced using the Conversion test tapes to list each field, all values found in each field, and the number of occurrences of each value.
18 Weeks	Product Mapping
	Meetings will be conducted with Metavante product support representatives to review the business processes supported by the Bank based on the product knowledge of Bank personnel, current application documentation, and Conversion file record layouts. Each field will be discussed for clarification and determination of the corresponding use on the Metavante System. All backroom support will be reviewed, a general training plan will be developed, and enhancements will be identified.
16 Weeks	Training Bank and Training Network Established
	A training Bank will be set up on the Metavante system to facilitate training of Bank staff and testing of the Conversion. The appropriate network and equipment will be installed at designated training locations.
10 Weeks	Test Report Review
	Conversion Test Reports will be reviewed by the product support representative with key contacts at the Bank to verify accuracy of the Conversion process. Issues will be identified and addressed.
	Operational Analysis
	Business processes, as planned, will be reviewed to confirm that system parameters and processes are aligned with operational procedures. Issues will be identified and addressed.

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Weeks Prior
To Conversion	Event
6 Weeks	Bank Network Installed
	The network to support all Bank locations will be installed. As a general rule, one terminal will be installed at each location in preparation for Readiness Review. The remainder of the equipment will be installed during the last few days before the Conversion.
4 Weeks	Readiness Review
	This is a three-day test of our preparedness for the live Conversion with Metavante project staff on-site for support. Test scripts will be distributed to Bank personnel at each location for data entry on the training Bank. Nightly posting will be run with item capture test files as input, reports will be produced, and the test Bank will be balanced each day. Bank personnel will be asked to support all functions of this test using operational procedures from data entry to balancing. This will give Bank staff a chance to practice using the system and gain confidence before dealing with their customers in a production environment. It also will serve to validate network configuration, interface processes, staff training, and operational procedures. Issues will be identified and addressed.
2 Weeks	Final Preparation for Conversion
	Technical setup for the Conversion will be reviewed for accuracy, and follow-up calls will be made to external firms supporting the Bank to confirm previously made arrangements (Federal Reserve, current software vendors, ATM support, etc.). A detailed Conversion Weekend Plan will be developed and distributed to all key contacts.
0 Weeks	Files Converted, “Live” on Metavante
	Files will be converted to Metavante over Conversion weekend, after posting on the old processor for Friday night.
	Conversion Support On-Site
	The Metavante project manager and product support representatives will be on-site the week following Conversion to support Bank personnel.

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STANDARD CONVERSION SERVICES

(Any Conversion Services not included in this list are subject to Metavante’s pricing as provided in Section 5.7 of the
     Agreement)

Project Management

• Overall Implementation Management

• Manage Conversion Milestones

• Issue Escalation and Resolution

• Administer Project Plan

• Facilitate Periodic Meetings

• Coordinate Receipt of Data Files

• Development of Conversion Cut-over Plan

Project Planning

• Onsite Scope Definition (products and conversion methods)

• Onsite Conversion Kickoff

• Detailed definition of Interfaces and Enhancements

• Provide Samples of Customer, Internal and Vendor Communication

• Finalize Project Timeline

• Understand Elements of Success

• Define Team Structure/Responsibilities

• Technical Review to Include Network, Equipment and Training Site

Automated Product Conversion of Existing Data

• Deposits Including Demand, Money Market, NOW, Savings, CD’s, IRA’s, Passbooks

• Combined Statements

• Customer Information System (Tape to Tape) Including Deposits, Loans, Cardbase, Safe Deposit, Internet Banking

• Integrated Funds Management (Transfers)

• Safe Box

• Account Analysis

• Loans Including Commercial, Consumer, Mortgage/Investor, Revolving Credit, Floor Plans

• On-Line Collections

• Overdraft Protection (Loan System)

• Notepad (existing system only)

• Collateral

• Tickler

• Financial Control/General Ledger

• Internet Banking

• Bill Payment

• Account Reconciliation

• ATM/Debit Cards

• Credit Cards/Merchant Services

• ATM Devices

Product Set-Ups (If contracted for)

• On-line Collections

• Letter Writer

• Remote Capture to Include Item Processing Transmission

• Printback to Include Configuration and Setup of BARR System

• IRS Government Reporting

• Currency Transaction Reporting

• Cash Management

• ACH

• Exception Desktop Standard Features

• Metavante Insight

• Enterprise Contact Management

• Credit Revue

• Shared VRU

• Information Desktop

• TellerInsight

• BankerInsight

• Star View and PC STAR

• CIS Householding with base plan for Clean CIS (Post Conversion)

• Relationship Profitability (Post Conversion)

• Relationship Packaging (Post Conversion)

• Marketing Suite (Post Conversion)

• Financial Control/GL Application Interfaces

• Holding Company Chart and Control File

• Chart of Accounts

• Internet Banking

• Bill Payment

• Custom Statement Format

• Bank Control Setups-System Parameters

• System Generated Reports

• ATM Management System

• Print setup for ATM Receipts and Deposit Envelopes (Parameters dependent on device type)

• Settlement Manager

• Debit Dispute System

• Predictive Risk Management

• Card Activation

• Card Personalization with no re-issue

• GHR Lending

• Wholesale Website

• Consumer Lending

• Mortgage Lending

• Image Solutions

• Vision Content (Reports, Deposits, Lending, COLD)

• Metavante Long Term Archive (7 years)

Product Definition

• Review of Current Processor Files and Customer Disclosure Information

• Onsite Product Review and Mapping of Some Applications

• Creation of Data Extracts from Current Processor Files

• Branch Software Customization Requirement Definition

• Automated Data Mapping Tools

• Assist with MICR Document Definition

• Assist with Output Form Definition

Testing/Verification

2 Full Test Files and Live Conversion File

• Duplicate Account Checks and Renumbering of Duplicates

• One-time Creation of File to Order New Documents for Duplicate Accounts

• Conversion Program Coding

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• Branch Software Testing

• System to System Reconciliation

• Reconcile Converted Applications to Converted GL

• Internal Verification of Converted Data

• Test “End of Day” Processing

• Testing the Item Processing Transmissions to Include POD, Bulk File and Inclearings

• Testing of Report Transmission and Print

Customer Acceptance

• Provide Test Report and Mapping Specifications for Verification

• One Set of Pre and Post Verification Reports Provided

• Provide Guidance For:

• Converted Data Verification By Customer

• System Parameter Review

• Review and Testing of All Software Customization

• Test Report Provided on CD ROM or Transmission to Optical

Monetary History Conversion

• Retirement Transactions

• No Book Transactions for Passbooks

• Year-to-Date Interest for Both Loans and Deposits

• Year-to-Date Withholding (back-up and retirement distribution)

• Year-to-Date Penalty (forfeiture)

• Retirement Contributions

• Retirement Distributions

• Investor Loan History Since Last Cut-off

• History for Current Year and 2 Prior Years on General Ledger-Balances Only

• General Ledger Current Year Budget

• Outstanding Billing Amounts

Technical Setup Coordination

• Installation of Network Circuits and Communication Equipment

• Setup Training Site

• Setup Branch Training Workstations

Training (See Conversion Training Document)

• Provide “Needs Analysis” to Assist in Determining Training Requirements

• Provide Tools to Assist in Developing a Training Plan

• Establish a Production Bank in the Conversion Process to Facilitate Training

• Train-the-Trainer Classes at a Metavante Location for Core Applications

• On-site Branch Software Training

Operational Analysis

• Joint Review of Workflow/Business Processes

• Process Documented by Job Function

Readiness Review

• A Coordinated Three Day Event Testing Daily Activities/Workflow

• Processing in a Production Environment:

• POD Capture and Posting of Test Data

• EOD Processing

• ATM Loads and Communications

• Onsite Support and Management

• Customized Application Checklists and Sample Scripts Provided

• Management Report Identifying Areas of Risk and Follow-up

• Introduction to Client Relationship Manager

Stabilization Period

• All Conversion Programs and Software Customization is Frozen to Ensure Stable Environment

• Managed Process For Changes Required During This Period

Conversion Cut-over

• Implement Conversion Cut-over Plan

• Convert Production Files From Current Processor After Friday Night Posting

• Data Conversion Verification

• Convert ATM Devices

• 1-50-converted conversion week

• >50-converted 2-4 weeks prior to conversion week

• System to System Reconciliation

• Conversion Reports on CD ROM

• Assistance in Coordinating:

• Equipment Installation

• Deployment and Certification of Final Branch Automation Software

Conversion Week

• Centralized Onsite Management and Application Support

• Conduct Daily Management Meetings

• Document and Monitor Issues

• Reconcile Converted Applications to General Ledger and Support Daily Balancing Activity Related to Converted Applications

• Monitor Daily Proof Process

Post Conversion

• Support for first Account Analysis Statement

• Support for first Investor Cutoff

• Year-end Testing

• Transition to Ongoing Support Area Two Weeks After Conversion Date

• Transition to Client Relationship Manager

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ADDITIONAL CUSTOMER CONVERSION RESPONSIBILITIES

1. Customer shall develop the MS Access based IRA companion application required to accommodate the following:

a.	YTD and Life-to-date taxable vs. non-taxable interest & principal on contributions and distributions (must allow for update of this information based upon transactions passed from Metavante)
b.	Records of early payment of taxes which also reduces total taxable base
c.	Must accept a file from BIC of all automated transactions daily (interest, ACH, automated distributions, etc) and update totals buckets
d.	Indicator must be held of accounts which need to do reporting at end of year of 1st year contributions as 480.7
e.	Any other information not stored by the Metavante Deposit system required for Puerto Rican processing of IRA’s

2.	Customer will be responsible to input account information in the above application to prepare it for live processing post conversion. This information may need to be gathered from a variety of sources including Excel spreadsheets, and historical documents. The information entered must be balanced against the information converted to the Metavante Deposit system.
3.	Customer will be responsible to scan all documents to Vision Content (Treev) associated with IRA’s, and Loans that the bank wishes to have available to support operations post conversion.
4.	Customer will be responsible to build and input all scripts in Spanish into Enterprise Contact Management used for service, sales, and call requests. Metavante will train Customer in the manner to accomplish this authoring.
5.	Customer will be responsible to create all forms for deposit new account origination using Liquid Office in both Spanish and English. Metavante will provide consulting assistance to train Customer personnel in this task.
6.	Customer is responsible to create all custom forms required for their lending programs. Should Customer wish to license any VMP forms in addition to the standard documents provided by GHR, a contract directly with VMP will be required.
7.	Customer must also create the 480.x form in Word (for data merge) that will be fed from Metavante per items a, b, and c below

a.	daily extract of new IRA’s for generation of form 480.x — fed to Word for notice print
b.	daily extract of closed IRA’s for generation of form 480.x — fed to Word for notice print
c.	end of year extract of new IRA’s fed by ACH for generation of form 480.x — fed to Word for notice print

8.	Customer will be responsible to create the Word template to receive the file for data merge and notice production of new Investor CD’s and IRA’s on a specific day of the month.
9.	Customer will be responsible to work with Bankware to accept Metavante’s standard Asset/Liability feed in order to produce the required reporting.
10.	Customer will be responsible to work with Easy Call to accept Metavante’s standard Call Report feed in order to produce the required reporting.
11.	Customer will be responsible to create the extract from the BIC that will be passed to CRA Wiz. Metavante will provide consulting to assist in the bank understanding how to accomplish this.
12.	Customer will be responsible to establish the Excel spreadsheet to accept data from Metavante used in calculating incentive compensation for deposits and loans.
13.	Customer will be responsible to work with USBA to accept Metavante’s standard Baker Hill One Point feed in order to produce the required reporting. If modifications are required assumes bank will accomplish this through a 3rd party provider and an ETL tool or by creating a special extract using the BIC.
14.	Customer to provide resources to identify language requirements for:

a.	bilingual versions of all deposit/loan statements, bills, collection letter, and notices
b.	bilingual retirement statements
c.	bilingual safebox notices
d.	bilingual retirement notices

15. Customer will be responsible to assist in testing, and provide required Symposium resources to assist with Metavante questions to develop a CTI interface for the following:

a.	real-time TAPI interface for screen pop to ECM
b.	ECM scripting to Symposium soft-phone for outbound calling

16. Customer will fund S1 development for integration and setup as follows:

a.	S1 setup required to utilize Metavante EII for presentation of e-statements and calling of check images
b.	S1 setup required to change over and test integration to Metavante through Connectware V6
c.	S1 setup required to receive batch BAI2 files from Metavante Deposits and Loans for prior day balances and activity (consulting with Metavante and version upgrade)

17.	Customer will be responsible to contract with Peoplesoft to accommodate any changes necessary to accept Metavante’s standard daily general ledger interface file.
18.	Customer will be responsible to either 1) certify their existing receipt printers for tellers meet Metavante specifications or 2) acquire printers that meet Metavante specifications.
19.	Customer will be responsible to provide data files in an acceptable format (flat files with associated copy books, each record containing appropriate key fields, e.g. account number) of all applications to be converted to Metavante from the appropriate source applications, e.g. Bankway, Onbase, CRM, and any others. If field data required for Metavante conversions is not available in the

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files provided by Customer, and appropriate default values cannot be determined, Customer will be responsible to enter the required data, or provide complementary data files of the missing information.

20.

File transmissions to/from 3rd party entities will come by way of the PC Barr located at Customer’s location, and will traverse the backbone between Metavante and Customer. Typically files sent from Metavante to a 3rd party, or from a 3rd party to Metavante will contain JCL that will be recognized by the PC Barr for automatic routing. However, if the 3rd party requires the use of special software for the transmission of the files, e.g. NDM, additional costs may be incurred by Customer f or Metavante to setup, test, certify, and perform the transmission(s) in a different fashion.

^© 2006, Metavante Corporation

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CONVERSION TRAINING AND EDUCATION

*The information in this schedule, which consists of three pages, is intentionally omitted because confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted information has been filed separately with the U.S. Securities and Exchange Commission.

26

SERVICES AND CHARGES SCHEDULE

*The information in this schedule, which consists of eight pages, is intentionally omitted because confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted information has been filed separately with the U.S. Securities and Exchange Commission.

27

PLANNED ENHANCEMENT AND INTERFACE SCHEDULE

*The information in this schedule, which consists of seven pages, is intentionally omitted because confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted information has been filed separately with the U.S. Securities and Exchange Commission.

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SERVICE LEVEL SCHEDULE

1. GENERAL PROVISIONS

     1.1      Introduction. This Service Level Schedule identifies Service Levels for the Services obtained by Customer from Metavante. These Service Levels are set forth below.

     1.2      Definitions. In addition to the terms defined in Section 18 in the Agreement, the following terms have the following meanings and shall be equally applicable to the singular and plural forms:

A.	“ACH Services” shall mean Services whereby Metavante: initiates and/or receives automated clearing house debit and credit entries, and adjustments to debit entries and credit entries to accounts of End Users; and § credits and/or debits the same to such accounts.
B.	“Availability” shall mean that the Service associated with the applicable Service Level is available to Customer and End Users, as applicable, as contemplated by this Agreement and is functioning normally in all other material respects as defined in each description of each Service Level set forth in this Service Level Schedule.
C.	“Business Case Assessment” shall have the meaning set forth in Section 2 of Attachment A to this Service Level Schedule.
D.	“Business Day” shall mean each Monday through Friday except holidays recognized by the Federal Reserve Bank of New York.
E.	“Business Intelligence Center” or “BIC” shall mean the information support system implemented by Metavante to access key business information contained in the Data Warehouse. The tools included in the BIC offering are designed to support both casual and power Customer users. The Software for the so-called client portion of the BIC offering (which includes Data Warehouse-related Software and report writing Software) will reside on equipment located at Customer facilities; all other elements of the Software for the BIC offering will reside at Metavante facilities. BIC may be operated by Customer’s or Metavante’s personnel.
F.	“Card Management System” or “CMS” is a tool accessible by Customer that provides online inquiry and maintenance, card issuance, transaction authorization and customer account management for debit, prepaid debit and ATM card programs.
G.	“CIS” means Customer Information System.
H.	“Core System” shall mean the following elements of the Metavante System: the so-called Deposit System, the so-called Loan System and CIS.
I.	“Critical Operations Reports” shall mean each of the following reports: Loan System (R6000-R7530) and Deposit System (R1000-2640 and R2669-R4998), and all enhancements and replacements therefor.
J.	“Demarcation” shall mean the measure from the router into the host, the round trip into the host, then back into the router.
K.	“Data Warehouse” shall mean Metavante’s data warehouse commonly known as “Business Intelligence Center” (which includes the tool commonly known as “Business Objects”), and any permitted successors and replacements therefor.
L.	“Lending Solutions” shall mean the following elements of the Metavante System: the so-called GHR Wholesale Web Site, the so-called GHR Consumer Lending Solution and the so-called GHR Mortgage Lending Solution.
M.	“EFD” shall mean electronic funds delivery.
N.	“Operations Center” shall mean the data center from which Metavante provides the Services.
O.	“Processing Day” shall mean any Monday through Saturday except holidays recognized by the Federal Reserve Bank of New York, other than the following holidays which shall each be deemed to be a Processing Day: Martin Luther King Day, President’s Day, Columbus Day and Veterans Day.

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P.	“Scheduled Downtime” shall mean any period of non-Availability due to scheduled maintenance as set forth in each description of each Service Level set forth in this Service Level Schedule and other maintenance periods agreed to in writing in advance by the parties.
Q.	“Scheduled Hours of Availability” shall mean the period of time during which Availability is measured for a given Service Level as set forth in each applicable description of each Service Level set forth in this Service Level Schedule.
R.	“Service Level Change” shall have the meaning set forth in Section 2 of Attachment A to this Service Level Schedule.
S.	“Service Level Credit” shall have the meaning set forth in Section 1.4 A of this Service Level Schedule.
T.	“Service Level Credit Event” shall have the meaning set forth in Section 1.5 of this Service Level Schedule.
U.	“Service Level Failure” shall have the meaning set forth in Section 1.4D of this Service Level Schedule.
V.	“Service Level Monthly Cap” shall have the meaning set forth in Section 1.4B of this Service Level Schedule.
W.	“SLA Team” shall have the meaning set forth in Section 3A of Attachment A to this Service Level Schedule.
X.	“Tandem/BASE24” shall mean the application responsible for receiving transaction authorization data from POS, ATM devices and EFT associations. The transaction authorization data is then delivered to host applications for authorization decisions via external associations or directly to the Card Management System.

     1.3      Reporting On Service Levels.

A.	Except as otherwise expressly provided in this Service Level Schedule, all Service Levels shall be measured consistently on a calendar month basis. No later than thirty (30) days following the end of each month, Metavante shall provide Customer with a monthly performance report for the Services, which report shall include its performance with respect to each of the Service Levels, including: a. Metavante’s performance against, and calculations with respect to, each Service Level during the preceding month and prior months; and b. Service Level Failures occurring during the preceding month. Such measurement, monitoring and reporting shall permit Customer to verify compliance with the Service Levels.
B.	Metavante shall promptly investigate, assemble and preserve pertinent information with respect to, report on the causes of and correct all performance related failures associated with, Service Levels, including performing and taking appropriate preventive measures to prevent recurrence. In addition, Metavante shall provide Customer with communications as soon as reasonably practicable with respect to issues that impact or could reasonably be expected to impact Customer. Metavante shall use commercially reasonable efforts to minimize recurrences of such failures for which it is responsible. Customer shall use reasonable efforts to correct and minimize the recurrence of problems for which Customer is responsible and that prevent Metavante from meeting the Service Levels. Metavante shall use commercially reasonable efforts to resolve all problems and requests within the scope of Services notwithstanding whether any Service Level has or has not been met, and shall notify Customer promptly of any such unresolved issues known to it.
C.	Metavante shall maintain reasonable supporting information for each monthly performance report for at least fifteen (15) months and shall, at Customer’s request, make such information available to Customer.
D.	Metavante shall notify Customer promptly in such form and format as the parties mutually agree if Customer becomes entitled to a Service Level Credit. The notice shall specify each Service Level Credit Event and each associated Service Level Failure and the amount of the Service Level Credit that Customer is entitled to receive.

     1.4      Service Level Credits.

A. A “Service Level Credit” shall mean a percentage credit based on the invoice to be submitted by Metavante to Customer with respect to the Services provided in the month in which a Service Level Failure occurs based on Metavante’s performance relative to the Service Levels. A Service Level Credit is a reduction in price to reflect the reduced value of the Services and is not liquidated damages for Metavante’s failure to meet any Service Level. However, a Service Level Credit shall be an exclusive remedy with respect to a Service Level Failure and shall be in lieu of other contractual remedies except as provided for in Section 8 of this Agreement. Metavante shall apply Service Level Credits to Customer’s invoice in the month following the event giving rise to the Service Level Credit. If no additional invoices are to

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	be issued by Metavante, Metavante shall pay Customer the amount of the Service Level Credit in immediately available funds.
B.	Service Level Credits applied during any month shall not exceed twenty percent (20%) of the applicable monthly invoice prior to the application of any credits (the “Service Level Monthly Cap”).
C.	Service Level Credits payable by Metavante to Customer during any calendar year shall not exceed one hundred percent (100%) of the average monthly fees payable by Customer to Metavante during the previous calendar year prior to the application of any credits.
D.	Service Level Failure. A “Service Level Failure” occurs whenever Metavante fails to meet a Service Level. Metavante shall be excused for a Service Level Failure to the extent the Service Level Failure is attributable to:

(i)	an event to the extent excused under Section 17.11 of the Agreement, or
(ii)	acts or omissions of Customer.

     1.5      Service Level Credit Event. A “Service Level Credit Event” occurs when a Service Level Failure occurs or a series of Service Level Failures occur to the extent specified in this Service Level Schedule.

     1.6      Effective Date of Applicability. Service Levels set forth in this Service Level Schedule shall be applicable the month following the month in which the Commencement Date occurs.

     1.7      Time Periods. Except as otherwise specified, all references to days are to calendar days and all references to hours/minutes are to hours/minutes during a calendar day. All references to times are to Atlantic time; all references to months and quarters are to calendar months and calendar quarters, respectively, unless otherwise specified; all references to weeks are to calendar weeks, with the first day of each week being Sunday. For clarification purposes only, it is understood that currently Atlantic time is one hour ahead of Central time during those periods in which day light savings time is observed and two hours ahead of Central time during non-daylight saving time periods.

     1.8      Periodic Review.

A.	Periodic Review. Upon either party’s request from time to time, the parties may periodically review the performance categories, metrics and Service Levels and modify, add or delete them in accordance with the change process set forth in Attachment A to this Service Level Schedule.
B.	Service Level Review. From time to time, the parties shall meet to discuss performance with respect to, and matters relating to, the Service Levels.

2. SERVICE LEVELS

     2.1      Core System Service Level.

A.

The “Core System Service Level” means that each of the Core Systems shall have ninety-nine percent (99%) Availability. “Availability” means the ability of Customer to access each of the Core Systems and perform transactions necessary to complete the function within each of such Core Systems with up to date information during the Scheduled Hours of Availability. The Scheduled Hours of Availability for the Core System Service Level shall be 7:00 a.m. to 10:00 p.m. each Processing Day. No Schedule Downtime shall exist unless otherwise agreed in writing between the parties. Metavante’s obligation under this Service Level is subject to Customer meeting its 11:00 p.m. input data commitment. However, up to 1:00 a.m., Metavante commits to the 7:00 a.m. online availability from the time Metavante receives Customer input data.

B.

A Service Level Credit Event for the Core System Service Level shall occur if Availability is ninety six and one-half percent (96.5%) or less three times in any consecutive six month period. The Service Level Credit shall be six percent (6%).

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     2.2      Lending Solutions Service Level.

A. The “Lending Solutions Service Level “ means that each of the Lending Solutions shall have availability via the Internet of 98% as measured on a 30 day running average. “Availability” means the ability of the Customer to access each of the Lending Solutions and perform transactions necessary to complete the function within each of the Lending Solutions with up to date information during the Scheduled Hours of Availability. The Scheduled Hours of Availability for the Lending Solutions Service Level shall be from 7:00 AM to 10:00 PM each Processing Day. However, (a) once per calendar quarter, the Lending Solutions may be unavailable for up to six (6) hours for maintenance or network upgrading form 1:01 a.m. to 7:00 a.m., Monday through Friday, and (b) once per calendar quarter, the Lending Solutions may be unavailable for up to twenty-four (24) hours for maintenance or network upgrading from 1:01 a.m. Sunday to 1:01 a.m. Monday .

B. A Service Level Credit Event for the Lending Solutions Service Level shall occur if Availability is ninety five percent (95%) or less three times in any consecutive six month period. The Service Level Credit shall be six percent (6%).

     2.3      Operations Center Availability Service Level.

A.	The “Operations Center Availability Service Level” means that communications between Customer’s network and the Operations Center shall have ninety-nine and nine-tenths percent (99.9%) Availability. “Availability” means that there are communications between Customer’s network and the Operations Center during Scheduled Hours of Availability. The Scheduled Hours of Availability for the Operations Center Availability Service Level shall be twenty four hours a day, seven days per week. Scheduled Downtime for the Operations Center Availability Service Level is: a. Sundays between 2:00 a.m. and 6:00 a.m.; b. other planned outages of up to one (1) hour per month in the aggregate, provided that Metavante shall notify Customer of any such planned outages using Metavante’s InfoSource notification system at least twenty four (24) hours prior to the planned outage specifying the duration of the planned outage, it being understood that if such outage exceeds the duration of the planned outage, such outage shall not be deemed to be Scheduled Downtime; c. downtime if Customer elects not to have SNS back-up capabilities; and d. equipment maintenance periods that are mutually agreed upon in writing in advance.
B.	A Service Level Credit Event for the Operations Center Availability Service Level shall occur if Availability for a month is ninety six and one-half percent (96.5%) or less three times in any consecutive six month period. The Service Level Credit shall be eight percent (8%).
C.	For the avoidance of doubt, the Operations Center Availability Service Level measures network transport and not necessarily Customer’s experience. For example, a Customer user may assume the network is the cause of an issue when in fact the actual issue is something other than the wide area network (WAN).

     2.4      Business Intelligence Center Service Level.

A.

The “Business Intelligence Center Service Level” means that the BIC shall have ninety-eight percent (98%) Availability. “Availability” means that the BIC is accessible for use by Customer to access the Data Warehouse and that the same is functioning normally in all material respects during Scheduled Hours of Availability. The Scheduled Hours of Availability for the Business Intelligence Center Service Level shall be 7:00 a.m. to 6:00 p.m. each Processing Day. Scheduled Downtime for the Business Intelligence Center Service Level is Sundays.

B.

A Service Level Credit Event for the Business Intelligence Center Service Level shall occur if Availability for a month is ninety five percent (95%) or less for the Business Intelligence Center Service Level occurs three times in any consecutive six month period. The Service Level Credit shall be four percent (4%).

     2.5      Business Intelligence Center Prior Day Data Updates Service Level.

A. The “Business Intelligence Center Prior Day Data Updates Service Level” means that each Processing Day, Metavante shall initiate and complete associated processing with respect to the BIC no later than 7:00 a.m. the following Business Day after Metavante has received all required posting input data, provided that such data is received no later than 11:00 p.m. on the Processing Day.

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B. A Service Level Credit Event for the Business Intelligence Center Processing Service Level shall occur if three or more Service Level Failures occur in any month with respect to the Business Intelligence Center Processing Service Level. The Service Level Credit shall be four percent (4%).

     2.6      Batch Report Service Level.

A.

The “Batch Report Service Level” means that each Processing Day, Metavante shall initiate batch processing with respect to all batch reports and have such processing completed and all Critical Operations Reports available for Customer to obtain from Metavante’s systems within four (4) hours after Customer’s submission to Metavante of a so-called end of day command, provided that Metavante has received from Customer all required posting input data no later than 11:00 p.m. on the Processing Day. However, up to 1:00 a.m., Metavante commits to a rolling four (4) hours from the time Metavante receives Customer input data.

B.

A Service Level Credit Event for the Daily Batch Report Service Level shall occur if a Service Level Failure occurs with respect to the Daily Batch Report Service such that associated processing is not completed and such reports are not available for Customer to obtain by 10:00 a.m. the following day three or more times in any month with respect to the Daily Batch Report Service Level. In each case, the Service Level Credit shall be four percent (4%).

     2.7      Year-End Batch Report Service Level.

A.

The “Year-End Batch Report Service Level” means that Metavante shall initiate batch processing with respect to all year-end batch reports and have such processing completed and all such reports available for Customer to obtain from Metavante’s systems within fifteen (15) hours after Customer’s submission to Metavante of a so-called end of year command, provided that such end of year command is issued no later than 1:00 a.m. the day following the last Processing Day of the applicable year.

B.

A Service Level Credit Event for the Year-End Batch Report Service Level shall occur if Metavante commits a Service Level Failure with respect to the Year-End Batch Report Service Level such that associated processing is not completed and such reports are not available for Customer to obtain by 6:00 a.m. the first Business Day following the submission to Metavante of a so-called end of year command. The Service Level Credit shall be four percent (4%).

     2.8      Tandem/Base 24 Electronic Funds Delivery Service Level.

A.

The “Tandem Electronic Funds Delivery Service Level” means that Tandem/Base 24 shall have ninety-nine and seven tenths percent (99.7%) Availability. “Availability” means Tandem/Base 24 is available and operational and is functioning normally in all material respects with respect to all functions during Scheduled Hours of Availability. The Scheduled Hours of Availability for the Tandem Electronic Funds Delivery Service Level shall be twenty four hours a day, seven days per week. Scheduled Downtime for the Tandem Electronic Funds Delivery Service Level is Sundays between 2:00 a.m. and 6:00 a.m.

B.

A Service Level Credit Event for the Tandem Electronic Funds Delivery Service Level shall occur if Availability for a month is ninety eight percent (98%) or less three times in any consecutive six month period. The Service Level Credit shall be six percent (6%).

     2.9      CMS Electronic Funds Delivery Service Level.

A.

The “CMS Electronic Funds Delivery Service Level” means that CMS shall have ninety-nine and five tenths percent (99.5%) Availability. “Availability” means CMS is available and operational and is functioning normally in all material respects with respect to all functions during Scheduled Hours of Availability. The Scheduled Hours of Availability for the CMS Electronic Funds Delivery Service Level shall be twenty four hours a day, seven days per week. Scheduled Downtime for the CMS Electronic Funds Delivery Service Level is Sundays between 2:00 a.m. and 6:00 a.m.

B.

A Service Level Credit Event for the CMS Electronic Funds Delivery Service Level shall occur if Availability for a month is ninety eight percent (98%) or less three times in any consecutive six month period. The Service Level Credit shall be six percent (6%).

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     2.10     EFD Reports Service Level.

A.	The “EFD Reports Service Level” means that each day, Metavante shall initiate processing with respect to all daily EFD reports and have all such processing completed and all such reports available for Customer to obtain from Metavante’s systems by 3:00 a.m. the following day.
B.	A Service Level Credit Event for the EFD Reports Monthly Service Level shall occur if a Service Level Failure occurs with respect to the EFD Reports Service Level such that such reports are not available for Customer to obtain by 3:00 p.m. the following day three times in a month. The Service Level Credit for each such Service Level Failure shall be six percent (6%).

     2.11     Teller Transactions Response Time Service Level.

A.

The “Teller Transactions Response Time Service Level” means that Metavante shall process so-called teller transactions in an average of 1.5 seconds or less from the time that the transaction is sent by Customer’s point of demarcation to the time the processed data is returned to Customer’s point of demarcation. The Scheduled Hours of Availability for the Teller Transactions Response Time Service Level shall be 7:00 a.m. to 10:00 p.m. each Processing Day.

B.

A Service Level Credit Event for the Teller Transactions Response Time Service Level shall occur if Metavante processes so-called teller transactions in a month in an average of 5 seconds or more from the time that the transaction is sent by Customer’s point of demarcation to the time the processed data is returned to Customer’s point of demarcation three times in any consecutive six month period. The Service Level Credit shall be six percent (6%).

     2.12     CRT Transactions Response Time Service Level.

A.

The “CRT Transactions Response Time Service Level” means that Metavante shall process so-called CRT transactions in an average of 2.5 seconds or less from the time that the transaction is sent by Customer’s point of demarcation to the time the processed data is returned to Customer’s point of demarcation. The Scheduled Hours of Availability for the CRT Transactions Response Time Service Level shall be 7:00 a.m. to 10:00 p.m. each Processing Day.

B.

A Service Level Credit Event for the CRT Transactions Response Time Service Level shall occur if Metavante processes so-called CRT transactions in a month in an average of 6 seconds or more from the time that the transaction is sent by Customer’s point of demarcation to the time the processed data is returned to Customer’s point of demarcation three times in any consecutive six month period. The Service Level Credit shall be six percent (6%).

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ATTACHMENT A

SERVICE LEVEL SCHEDULE

Service Levels may be added or modified through the process set forth in this Attachment A to the Service Level Schedule in order to achieve a fair, accurate, meaningful and consistent measurement of Metavante’s performance of the Services.

1. TRIGGER EVENTS. Events or changes that significantly affect Customer’s requirements or Metavante’s delivery of the Services may trigger a party’s desire to delete or modify existing Service Levels or add new Service Levels. Such events and changes include changes in Customer’s business, elimination or addition of Services, regulatory requirements, audit requirements, emerging technology, elimination of technology, external benchmarks and annual review processes between the parties.

2. BUSINESS CASE ASSESSMENT. Upon identifying a party’s desire to add, delete or modify a Service Level (a “Service Level Change”), the parties shall prepare a written analysis of the Service Level Change (a “Business Case Assessment”), including, as appropriate:

A.	Details of the Service Level Change (e.g., measuring tool and methodology, Service Level calculation, exclusions, associated Service Level Credit, projected implementation/effective date);
B.	Objective or expected benefit;
C.	Implementation difficulty, effort and cost, if any, and responsibility therefor;
D.	Cost, if any, and any possibility of mitigation;
E.	Risk factors (e.g., operational, regulatory, controls);
F.	Degree of change;
G.	Nature and extent of impact upon the parties;
H.	Combinational impacts (i.e., how one Service Level affects another);
I.	System implications; and
J.	Issues relating to Applicable Law.

3. SLA TEAM REVIEW.

A.

A joint Metavante-Customer team (the “SLA Team”) shall review, evaluate and potentially modify the Service Level Changes and associated Business Case Assessments.

B.

At a minimum, the SLA Team shall consist of personnel designated by the parties as necessary for an effective review of the Business Case Assessments. The SLA Team shall operate and make decisions by consensus among the parties’ representatives, but approval of proposed Service Level Changes shall not be unreasonably withheld or delayed. With respect to each Service Level Change, the SLA Team shall elect one of three results:

I.	terminate consideration of the Service Level Change without further review;
II.	remand the associated Business Case Assessment to the parties for reconsideration based upon SLA Team’s comments; or
III.	approve the Service Level Change for submission for signoff.

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4. SIGNOFFS. Before being delivered to Metavante for implementation, the Service Level Change must be reviewed for signoff by Customer and Metavante. If the Service Level Change fails to obtain a required signoff, the SLA Team shall decide whether it should be discarded or refined and resubmitted for signoff. Signoff shall not be unreasonably withheld, delayed or conditioned. Upon sign-off, the parties shall amend in writing the Service Level Schedule accordingly.

5. IMPLEMENTATION. Metavante shall develop a detailed project plan for implementation of each approved Service Level Change. Each plan shall be subject to Customer approval, which approval shall not be unreasonably withheld, delayed or conditioned, and shall include:

A.	a project schedule;
B.	required updates to this schedule and other affected policies, procedures and standards;
C.	a communication plan; and
D.	required changes to systems, reporting schedules, training and processes.

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TERMINATION FEE SCHEDULE

1. Termination for Convenience. Except as set forth in paragraph 3 of this Schedule, if Customer elects to terminate this Agreement or any Service for any reason, Customer shall pay Metavante the termination fee computed in accordance with Section 8.4 of this Agreement.

2. Termination for Cause by Metavante. If Metavante terminates this Agreement in accordance with Sections 8.2 or 8.3 of the Agreement, then Customer shall pay Metavante the termination fee computed in accordance with Section 8.4 of this Agreement.

3. Termination Fee. Shall be determined as set forth in Section 8.4 of the Agreement.

4. Rebate of Termination Fee. Subject to Metavante’ rights under Section 6 below, Customer shall receive a rebate of a portion of any Termination Fee paid by Customer hereunder in the event that Customer shall enter into a new exclusive agreement with Metavante to receive the Initial Services within six (6) months following the Effective Date of Termination. Such rebate shall be determined according to the following schedule:

Number of Months Following Termination	Rebate
1	100%
2	5/6
3	4/6
4	3/6
5	2/6
6	1/6

5. Payment of Rebate. The applicable rebate of the Termination Fee shall become payable to Customer upon execution of a new exclusive agreement for Initial Services by and between Customer and Metavante within six (6) months following the Effective Date of Termination (the “New Agreement”). The terms of such New Agreement shall be as mutually agreed by the parties and nothing herein shall obligate Metavante or Customer to accept any terms or conditions, whether or not previously acceptable to either of them. The rebate may be paid to Customer by Metavante, in its sole discretion, in the form of a discount to fees payable by Customer under the New Agreement or as a credit against implementation, conversion, training, or professional services fees payable by Customer, or in such other manner as Metavante shall decide.

6. Revocation. Customer’s right to receive the rebate of the Termination Fee as provided under Section 5 of this Schedule may not be cancelled or revoked except by a written instrument that is (a) signed by Metavante expressly revoking Customer’s right to receive such rebate; and (b) delivered to Customer by Metavante within thirty (30) days following the date of termination of this Agreement.

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MasterCard^® SecureCode™ Service
Participation Schedule

The Undersigned (“Customer”) and Metavante Corporation have executed a Services Agreement pursuant to which Metavante has agreed to perform certain services in support of Customer’s participation in the card program of MasterCard International Inc. (the “Services Agreement”). Effective November 1, 2004, MasterCard International Inc. has established the MasterCard^® SecureCode™ Program (the “SecureCode Program”) which establishes a protocol for authenticating cardholders in online transactions. Participation in the SecureCode Program is mandatory for Acquirers and Issuers. By signing below, Customer requests to participate in the SecureCode Program as an Issuer.

For good and valuable consideration, receipt of which is hereby acknowledged, Customer agrees as follows:

1.	Customer authorizes and directs Metavante to enroll Customer in the SecureCode Program as an Issuer. As Customer’s third party processor for MasterCard transactions, Metavante will provide services as described in Exhibit A for Customer in support of its participation in the SecureCode Program in accordance with the terms and subject to all terms, limitations, and conditions of the Services Agreement, but Metavante has no responsibility or obligation for the SecureCode Program itself. Customer acknowledges and agrees that this is Metavante’s sole responsibility in connection with the SecureCode Program and that Metavante will have no other obligation or liability to Customer related to the Program.
2.	Customer will pay the additional fees to Metavante as described in Exhibit A hereto and any and all fees assessed by MasterCard in connection with the SecureCode Program.
3.	Customer will be responsible for all obligations imposed by MasterCard upon Issuers participating in the SecureCode Service. In particular, and without limitation, Customer will be responsible for fraudulent transactions when the cardholder’s identity is authenticated through a password that the cardholder provides when making an online purchase under the SecureCode Program. Customer will be responsible for contracting with its cardholders to provide the service to them, and for establishing terms of its cardholders’ use of the service in accordance with MasterCard’s operating regulations. Metavante may provide Customer with samples of cardholder terms for the program that have been provided to Metavante by MasterCard or other third parties, but Customer acknowledges and agrees that these forms are provided by Metavante “AS IS” and without warranty or representation of any kind.
4.	Customer agrees to indemnify, defend, and hold Metavante harmless from any and all loss, liability, claims, costs, and expenses relating to Customer’s participation in the SecureCode Program as an Issuer.

By signing below, Customer agrees to the foregoing and indicates its desire to participate in the SecureCode Program as an Issuer.

Oriental Financial Group Inc.

(Customer)

By:

Date:

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Exhibit A
Services & Fees

The following costs apply to credit and debit card programs using MasterCard^® SecureCode™.

One-time Fees

Set-up fee: $800 per scheduled implementation.

One charge for both credit and debit card programs, if SecureCode is implemented for both programs at the same time and both programs are at Metavante. Additionally, all card programs must use the same implementation model. Each implementation model is considered a separate setup and is billed accordingly.

HTML Conversion fee: $50 per document if Metavante converts to HTML for clients. This applies to items required for the SecureCode Web site, which can include the Terms of Service and Privacy Policy information.

Change requests: $275 for each individual request. Multiple items submitted on the same request form are billed at $275 for the first item and $55 for each subsequent item. This is in reference to changes requested by the client for their SecureCode Web site.

Ongoing Monthly Expenses

Monthly Web site Hosting Fee: $38 per month, per financial institution One charge for both credit and debit card programs, if both card programs use the same Web site and both process with Metavante.

User fee: $0.075 per card, per month
The fee applies to cards that are enrolled or active on the SecureCode platform.

Authentication fee: $0.01 per SecureCode authentication attempt

Cardholder support pricing for after hours: $35 per month (optional, applies to debit card and prepaid debit card programs only)

MasterCard Expenses

MasterCard charges a fee for annual directory and program support associated with the MasterCard SecureCode program. This fee is charged only to principal members of MasterCard; it does not apply to clients with programs in ICA 5484 (debit) or 1166 (credit). Effective January 1, 2005, the fee is $1,500 per year for clients with fewer than 50,000 combined MasterCard credit and debit cards. For clients with 50,000 or more cards, the fee is $3,000 per year.

There may be additional expenses required by MasterCard that have not been determined. For complete information about charges from MasterCard for the SecureCode program, see the MasterCard International operating regulations.

39

EX-13.0

EXHIBIT 13.0

ORIENTAL FINANCIAL GROUP INC.

FORM-10K

FINANCIAL DATA INDEX

FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms	F-1
Management’s Report on Internal Control Over Financial Reporting	F-3
Attestation Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	F-4
Consolidated Statements of Financial Condition as of December 31, 2006 and 2005 and June 30, 2005	F-5
Consolidated Statements of Operations for the year ended December 31, 2006, the six-month period ended December 31, 2005, and the fiscal years ended June 30, 2005 and 2004	F-6
Consolidated Statements of Changes in Stockholders’ Equity and of Comprehensive Income for the year ended December 31, 2006, the six-month period ended December 31, 2005, and the fiscal years ended June 30, 2005 and 2004	F-7 to F-8
Consolidated Statements of Cash Flows for year ended December 31, 2006, the six-month period ended December 31, 2005, and the fiscal years ended June 30, 2005 and 2004	F-9
Notes to the Consolidated Financial Statements	F-11 to F-61
FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION
Selected Financial Data	F-62 to F-63
Management’s Discussion and Analysis of Financial Condition and Results of Operations	F-64 to F-97
Quantitative and Qualitative Disclosures About Market Risk	F-97 to F-100
Table 13 — Selected Quarterly Financial Data	F-101 to F-108

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Oriental Financial Group Inc.:

We have audited the accompanying consolidated statements of financial condition of Oriental Financial Group Inc. and subsidiaries (the Group) as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows for the year ended December 31, 2006 and the six-month period ended December 31, 2005. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Oriental Financial Group Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for the year ended December 31, 2006 and the six-month period then ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1, the Group changed its method of accounting for share-based payment in accordance with Statement of Financial Accounting Standards No. 123 (Revised 2004), Share Based Payment effective July 1, 2005, and, effective January 1, 2006 changed its method of evaluating prior year misstatements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Oriental Financial Group Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 27, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of internal control over financial reporting.

/s/  KPMG LLP

San Juan, Puerto Rico

March 27, 2007

Stamp No. 2156050 of the Puerto Rico

Society of Certified Public Accountants

was affixed to the record copy of this report.

F-1

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Oriental Financial Group Inc.

San Juan, Puerto Rico

We have audited the accompanying consolidated statement of financial condition of Oriental Financial Group Inc. and its subsidiaries (the “Group”) as of June 30, 2005, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows for each of the two years in the period ended June 30, 2005. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Oriental Financial Group Inc. and its subsidiaries as of June 30, 2005, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2005 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 20, the accompanying financial statements as of June 30, 2005 and for each of the two years in the period ended June 30, 2005 have been restated.

/s/  DELOITTE & TOUCHE LLP

San Juan, Puerto Rico

September 9, 2005 (June 9, 2006 as

to the effects of the restatement

discussed in Note 20)

Stamp No. 2194121

affixed to original.

F-2

Oriental Financial Group Inc.

Management’s Report on Internal Control Over Financial Reporting

To the Board of Directors and stockholders of Oriental Financial Group Inc.:

The management of Oriental Financial Group Inc. (the “Group”) is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and for the assessment of internal control over financial reporting. The Group’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The Group’s internal control over financial reporting includes those policies and procedures that:

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Group;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Group are being made only in accordance with authorization of management and directors of the Group; and

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Group’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As called for by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of the Group’s internal control over financial reporting as of December 31, 2006. Management made its assessment using the criteria set forth in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Criteria”).

Based on its assessment, management has concluded that the Group maintained effective internal control over financial reporting as of December 31, 2006 based on the COSO Criteria.

The Group’s management assessment of the effectiveness of its internal control over financial reporting as of December 31, 2006, has been audited by KPMG LLP, the Group’s independent registered public accounting firm, as stated in their report dated March 27, 2007.

By: /s/  José Rafael Fernández	By: /s/  Norberto González
José Rafael Fernández President and Chief Executive Officer Date: March 27, 2007	Norberto González Executive Vice President and Chief Financial Officer Date: March 27, 2007

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Oriental Financial Group Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Oriental Financial Group Inc. (the Group) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Group’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Oriental Financial Group Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion Oriental Financial Group Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Oriental Financial Group Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows for the year and the six-month period then ended, respectively, and our report dated March 27, 2007 expressed an unqualified opinion on those consolidated financial statements.

/s/  KPMG LLP

San Juan, Puerto Rico

March 27, 2007

Stamp No. 2156051 of the Puerto Rico

Society of Certified Public Accountants

was affixed to the record copy of this report.

F-4

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2005

	December 31,			December 31,			June 30,
	2006			2005			2005
							(As restated
							see note 20)
	(In thousands, except share data)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	15,341		$	13,789		$	14,892
Money market investments		18,729			3,480			9,791
Total Cash and cash equivalents		34,070			17,269			24,683
Investments:
Short term investments		5,000			60,000			30,000
Trading securities, at fair value with amortized cost of $246 (December 31, 2005 — $144, June 30, 2005 — $259)		243			146			265
Investment securities available-for-sale, at fair value with amortized cost of $984,060 (December 31, 2005 — $1,069,649, June 30, 2005 — $1,036,153)
Securities pledged that can be repledged		947,880			558,719			409,556
Other investment securities		27,080			488,165			620,164
Total investment securities available-for-sale		974,960			1,046,884			1,029,720
Investment securities held-to-maturity, at amortized cost with fair value of $1,931,720 (December 31, 2005 — $2,312,832, June 30, 2005 — $2,142,708)
Securities pledged that can be repledged		1,814,746			1,917,805			1,802,596
Other investment securities		152,731			428,450			332,150
Total investment securities held-to-maturity		1,967,477			2,346,255			2,134,746
Other investments		30,949			—			—
Federal Home Loan Bank (FHLB) stock, at cost		13,607			20,002			27,058
Total investments		2,992,236			3,473,287			3,221,789
Securities sold but not yet delivered		6,430			44,009			1,034
Loans:
Mortgage loans held-for-sale, at lower of cost or market		10,603			8,946			17,963
Loans receivable, net of allowance for loan losses of $8,016 (December 31, 2005 — $6,630, June 30, 2005 — $6,495)		1,201,767			894,362			885,641
Total loans, net		1,212,370			903,308			903,604
Accrued interest receivable		27,940			29,067			23,735
Premises and equipment, net		20,153			14,828			15,269
Deferred tax asset, net		14,150			12,222			6,191
Foreclosed real estate		4,864			4,802			4,186
Other assets		61,477			48,157			46,374
Total assets	$	4,373,690		$	4,546,949		$	4,246,865
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	132,434		$	146,623		$	152,165
Savings accounts		266,184			82,641			93,925
Certificates of deposit		834,370			1,069,304			1,006,807
Total deposits		1,232,988			1,298,568			1,252,897
Borrowings:
Federal funds purchased and other short term borrowings		13,568			4,455			12,310
Securities sold under agreements to repurchase		2,535,923			2,427,880			2,191,756
Advances from FHLB		181,900			313,300			300,000
Term notes		15,000			15,000			15,000
Subordinated capital notes		36,083			72,166			72,166
Total borrowings		2,782,474			2,832,801			2,591,232
Securities and loans purchased but not yet received		—			43,354			22,772
Accrued expenses and other liabilities		21,802			30,435			41,209
Total liabilities		4,037,264			4,205,158			3,908,110
Commitments and Contingencies
Stockholders’ equity:
Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation value; 1,340,000 shares of Series A and 1,380,000 shares of Series B issued and outstanding		68,000			68,000			68,000
Common stock, $1 par value; 40,000,000 shares authorized; 25,430,929 shares issued (December 31, 2005 — 25,350,125 shares, June 30, 2005 — 25,103,636 shares)		25,431			25,350			25,104
Additional paid-in capital		209,033			208,454			206,804
Legal surplus		36,245			35,863			33,893
Retained earnings		26,772			52,340			46,705
Treasury stock, at cost 989,405 shares (December 31, 2005 — 770,472 shares, June 30, 2005 — 228,000 shares)		(12,956	)		(10,332	)		(3,368	)
Accumulated other comprehensive loss, net of tax of $290 (December 31, 2005 — $1,810, June 30, 2005 — $311)		(16,099	)		(37,884	)		(38,383	)
Total stockholders’ equity		336,426			341,791			338,755
Total liabilities and stockholders’ equity	$	4,373,690		$	4,546,949		$	4,246,865

The accompanying notes are an integral part of these consolidated financial statements.

F-5

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2006, THE SIX-MONTH PERIOD ENDED
DECEMBER 31, 2005 AND THE FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

	Year Ended			Six-month Period
	December 31,			Ended December 31,			Fiscal Year Ended June 30,
	2006			2005			2005			2004
							(As restated			(As restated
							see note 20)			see note 20)
	(In thousands, except per share data)
Interest income:
Loans	$	76,815		$	30,901		$	54,966		$	52,130
Mortgage-backed securities		98,058			45,251			103,425			104,779
Investment securities		55,381			27,469			30,395			7,312
Short term investments		2,057			1,465			526			164
Total interest income		232,311			105,086			189,312			164,385
Interest expense:
Deposits		46,701			20,281			29,744			30,012
Securities sold under agreements to repurchase		125,714			42,909			60,524			36,018
Advances from FHLB, term notes and other borrowings		10,439			5,046			8,313			8,158
Subordinated capital notes		5,331			2,470			4,318			2,986
Total interest expense		188,185			70,706			102,899			77,174
Net interest income		44,126			34,380			86,413			87,211
Provision for loan losses		4,388			1,902			3,315			4,587
Net interest income after provision for loan losses		39,738			32,478			83,098			82,624
Non-interest income:
Financial service revenues		16,029			7,432			14,032			15,055
Banking service revenues		9,006			4,495			7,752			7,165
Investment banking revenues		2,701			74			339			2,562
Net gain (loss) on:
Mortgage banking activities		3,368			1,702			7,774			7,719
Securities available-for-sale and other than temporary impairments		(17,637	)		650			7,446			13,414
Derivatives		3,218			1,256			(2,811	)		11
Loss on early extinguishment of subordinated capital notes		(915	)		—			—			—
Trading securities		28			5			(15	)		21
Other		1,440			768			368			87
Total non-interest income, net		17,238			16,382			34,885			46,034
Non-interest expenses:
Compensation and employees’ benefits		24,630			12,714			23,606			28,511
Occupancy and equipment		11,573			5,798			10,583			9,639
Professional and service fees		6,821			3,771			6,994			5,631
Advertising and business promotion		4,466			2,862			5,720			6,850
Taxes, other than payroll and income taxes		2,405			1,195			1,836			1,754
Director and investors relations		2,323			374			883			677
Loan servicing expenses		2,017			911			1,727			1,853
Electronic banking charges		1,914			854			2,075			1,679
Communication		1,598			837			1,630			1,849
Printing, postage, stationery and supplies		995			528			891			1,121
Insurance		861			374			767			791
Other		4,110			1,596			3,251			3,009
Total non-interest expenses		63,713			31,814			59,963			63,364
Income (loss) before income taxes		(6,737	)		17,046			58,020			65,294
Income tax expense (benefit)		(1,631	)		127			(1,649	)		5,577
Net income (loss)		(5,106	)		16,919			59,669			59,717
Less: Dividends on preferred stock		(4,802	)		(2,401	)		(4,802	)		(4,198	)
Income available (loss) to common shareholders	$	(9,908	)	$	14,518		$	54,867		$	55,519
Income (loss) per common share:
Basic	$	(0.40	)	$	0.59		$	2.23		$	2.48
Diluted	$	(0.40	)	$	0.58		$	2.14		$	2.32
Average common shares outstanding		24,562			24,777			24,571			22,394
Average potential common shares — options		110			340			1,104			1,486
Average diluted common shares outstanding		24,672			25,117			25,675			23,880
Cash dividends per share of common stock	$	0.56		$	0.28		$	0.55		$	0.51

The accompanying notes are an integral part of these consolidated financial statements.

F-6

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2006,
THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2005
AND THE FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

	Year Ended			Six-Month Period
	December 31,			Ended December 31,			Fiscal Year Ended June 30,
CHANGES IN STOCKHOLDERS’ EQUITY:	2006			2005			2005			2004
							(As restated			(As restated
							see note 20)			see note 20)
	(In thousands)
Preferred stock:
Balance at beginning of period	$	68,000		$	68,000		$	68,000		$	33,500
Issuance of preferred stock		—			—			—			34,500
Balance at end of period		68,000			68,000			68,000			68,000
Common stock:
Balance at beginning of period		25,350			25,104			22,253			19,684
Issuance of common stock		—			—			—			1,955
Stock options exercised		81			246			857			614
Stock dividend and stock split effected in the form of a dividend		—			—			1,994			—
Balance at end of period		25,431			25,350			25,104			22,253
Additional paid-in capital:
Balance at beginning of period		208,454			206,804			137,156			67,813
Issuance of common stock		—			—			—			52,785
Stock-based compensation expense		15			—			7,552			1,373
Stock options exercised		564			1,650			3,650			5,282
Stock dividend and stock split effected in the form of a dividend		—			—			58,456			14,526
Common stock issuance costs		—			—			(10	)		(3,180	)
Preferred stock issuance costs		—			—			—			(1,443	)
Balance at end of period		209,033			208,454			206,804			137,156
Legal surplus:
Balance at beginning of period		35,863			33,893			27,425			21,099
Transfer from retained earnings		382			1,970			6,468			6,326
Balance at end of period		36,245			35,863			33,893			27,425
Retained earnings:
Balance at beginning of period		52,340			46,705			76,752			85,319
Cumulative effect on initial adoption of SAB 108		(1,525	)		—			—			—
Net income (loss)		(5,106	)		16,919			59,669			59,717
Cash dividends declared on common stock		(13,753	)		(6,913	)		(13,523	)		(11,425	)
Stock dividend and stock split effected in the form of a dividend		—			—			(64,923	)		(46,335	)
Cash dividends declared on preferred stock		(4,802	)		(2,401	)		(4,802	)		(4,198	)
Transfer to legal surplus		(382	)		(1,970	)		(6,468	)		(6,326	)
Balance at end of period		26,772			52,340			46,705			76,752
Treasury stock:
Balance at beginning of period		(10,332	)		(3,368	)		(4,578	)		(35,888	)
Stock purchased		(2,819	)		(7,003	)		(3,512	)		(499	)
Stock used to match defined contribution plan		195			39			249			—
Stock dividend and stock split effected in the form of a dividend		—			—			4,473			31,809
Balance at end of period		(12,956	)		(10,332	)		(3,368	)		(4,578	)
Accumulated other comprehensive income (loss), net of tax:
Balance at beginning of period		(37,884	)		(38,383	)		(45,362	)		(309	)
Other comprehensive income (loss), net of tax		21,785			499			6,979			(45,053	)
Balance at end of period		(16,099	)		(37,884	)		(38,383	)		(45,362	)
Total stockholders’ equity	$	336,426		$	341,791		$	338,755		$	281,646

F-7

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006,
THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2005
AND THE FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

	Year Ended			Six-Month Period
	December 31,			Ended December 31,			Fiscal Year Ended June 30,
COMPREHENSIVE INCOME	2006			2005			2005			2004
							(As restated			(As restated
							see note 20)			see note 20)
	(In thousands)
Net income (loss)	$	(5,106	)	$	16,919		$	59,669		$	59,717
Other comprehensive income (loss):
Unrealized gain (loss) on securities available-for-sale arising during the period		3,073			(13,056	)		10,830			(65,037	)
Realized losses (gains) on investment securities available-for-sale included in net income		15,172			(650	)		(7,446	)		(13,414	)
Unrealized gain (loss) on derivatives designated as cash flows hedges arising during the period		(720	)		13,962			(6,372	)		11,134
Realized loss (gain) on derivatives designated as cash flow hedges included in net income (loss)		(3,218	)		(1,256	)		10,131			17,744
Realized gain on termination of derivative activities, net		8,998			—			—			—
Amount reclassified into earnings during the period related to transition adjustment on derivative activities		—			—			—			372
Income tax effect related to unrealized (gain) loss on securities available-for-sale		(1,520	)		1,499			(164	)		4,148
Other comprehensive income (loss) for the period, net of tax		21,785			499			6,979			(45,053	)
Comprehensive income	$	16,679		$	17,418		$	66,648		$	14,664

The accompanying notes are an integral part of these consolidated financial statements.

F-8

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2006,
SIX-MONTH PERIOD ENDED DECEMBER 31, 2005
AND THE FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

	Year Ended			Six-Month Period
	December 31,			Ended December 31,			Fiscal Year Ended June 30,
	2006			2005			2005			2004
							(As restated			(As restated
							see note 20)			see note 20)
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	(5,106	)	$	16,919		$	59,669		$	59,717
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of deferred loan origination fees, net of costs		(1,625	)		(838	)		(2,609	)		(2,971	)
Amortization of premiums, net of accretion of discounts on investment securities		5,584			8,474			9,835			12,535
Other than temporary impairment		2,466			—			—			—
Realized gains on termination of derivative instruments		(852	)		—			—			—
Depreciation and amortization of premises and equipment		5,481			3,211			5,857			4,970
Deferred income tax expense (benefit)		(3,448	)		(4,532	)		982			397
Equity in earnings of investment in limited liability partnership		(828	)		(838	)		(247	)		—
Provision for loan losses		4,388			1,902			3,315			4,587
Stock-based compensation (benefit)		15			11			(3,057	)		3,932
Loss (gain) on:
Sale of securities available-for-sale		15,172			(650	)		(7,446	)		(13,414	)
Mortgage banking activities		(3,368	)		(1,702	)		(7,774	)		(7,719	)
Derivatives		(3,218	)		(1,256	)		2,811			(11	)
Sale of foreclosed real estate		(180	)		(32	)
Sale of premises and equipment		(253	)		(4	)		—			—
Loss on early extinguishment of subordinated capital notes		915			—			—			—
Originations of loans held-for-sale		(95,713	)		(12,097	)		(178,256	)		(227,964	)
Proceeds from sale of loans held-for-sale		41,842			21,114			102,305			124,813
Net decrease (increase) in:
Trading securities		(97	)		119			309			463
Accrued interest receivable		1,127			(5,332	)		(4,608	)		(1,411	)
Other assets		(3,559	)		(4,619	)		(11,820	)		(1,761	)
Net increase (decrease) in:
Accrued interest on deposits and borrowings		(15,096	)		1,552			5,252			2,628
Other liabilities		(2,466	)		(10,133	)		1,296			(1,314	)
Net cash provided by (used in) operating activities		(58,819	)		11,269			(24,186	)		(42,523	)
Cash flows from investing activities:
Net decrease (increase) in time deposits with other banks		55,000			(30,000	)		(30,000	)		365
Purchases of:
Investment securities available-for-sale		(1,273,841	)		(334,767	)		(1,738,613	)		(1,740,118	)
Investment securities held-to-maturity		(6,500	)		(259,904	)		(529,006	)		(288,959	)
Other investments		(30,982	)
FHLB stock		(29,520	)		—			—			(5,623	)
Purchases of equity options and put options		(3,702	)		(293	)		(1,371	)		(2,425	)
Maturities and redemptions of:
Investment securities available-for-sale		134,949			209,013			562,230			710,782
Investment securities held-to-maturity		384,594			48,671			232,290			34,709
FHLB stock		35,915			7,056			1,102			—
Proceeds from sales of:
Investment securities available-for-sale		1,252,995			139,898			1,143,501			610,566
Foreclosed real estate		2,589			1,537			3,034			885
Premises and fixed assets		—			13			3,355			—

F-9

	Year Ended			Six-Month Period
	December 31,			Ended December 31,			Fiscal Year Ended June 30,
	2006			2005			2005			2004
							(As restated			(As restated
							see note 20)			see note 20)
	(In thousands)
Loan production:
Origination and purchase of loans, excluding loans held-for-sale		(459,975	)		(170,217	)		(333,177	)		(199,262	)
Principal repayment of loans		150,704			109,804			206,112			180,138
Additions to premises and equipment		(10,553	)		(2,779	)		(4,073	)		(7,360	)
Other		—			—			—			(1,083	)
Net cash provided by (used in) investing activities		201,673			(281,968	)		(484,616	)		(707,385	)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits		(69,452	)		36,140			224,928			(25,468	)
Securities sold under agreements to repurchase		111,844			236,124			295,891			495,267
Federal funds purchased		9,113			(9,785	)		12,310			—
Proceeds from:
Short term borrowings		—			1,930			—			—
Advances from FHLB		4,703,325			837,251			2,204,272			734,200
Exercise of stock options, net		645			1,896			4,507			5,896
Repayments of advances from FHLB		(4,834,725	)		(823,951	)		(2,204,272	)		(564,200	)
Repayments of subordinated capital notes		(36,083	)		—			—			—
Termination of derivative instruments		10,459			—			—			—
Issuance of subordinated capital notes		—			—			—			35,043
Issuance of common stock, net		—			—			—			51,560
Issuance of preferred stock, net		—			—			—			33,057
Common stock purchased		(2,624	)		(6,964	)		(3,263	)		(499	)
Dividends paid		(18,555	)		(9,356	)		(17,919	)		(15,014	)
Net cash provided by (used in) financing activities		(126,053	)		263,285			516,454			749,842
Net change in cash and cash equivalents		16,801			(7,414	)		7,652			(66	)
Cash and cash equivalents at beginning of period		17,269			24,683			17,031			17,097
Cash and cash equivalents at end of period	$	34,070		$	17,269		$	24,683		$	17,031
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
Interest paid	$	203,280		$	58,844		$	97,647		$	74,546
Income taxes paid	$	82		$	—		$	554		$	1,894
Mortgage loans securitized into mortgage-backed securities	$	52,214		$	50,209		$	85,809		$	100,202
Net charge-offs	$	3,001		$	1,767		$	4,373		$	2,065
Investment securities available-for-sale transferred to held-to-maturity	$	—		$	—		$	565,191		$	1,114,424
Accrued dividend payable	$	3,423		$	3,445		$	3,487		$	3,081
Securities sold but not yet delivered	$	6,430		$	44,009		$	1,034		$	47,312
Securities and loans purchased but not yet received	$	—		$	43,354		$	22,772		$	89,068
Transfer from loans to foreclosed real estate	$	2,471		$	2,121		$	4,689		$	1,237

The accompanying notes are an integral part of these consolidated financial statements.

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2005,
AND FOR THE YEAR ENDED DECEMBER 31, 2006,
THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2005
AND THE FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Oriental Financial Group Inc. (the “Group” or “Oriental”) conform to U.S. generally accepted accounting principles (“GAAP”) and to financial services industry practices. The following is a description of the Group’s most significant accounting policies:

Nature of Operations

Oriental is a diversified, publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. It has four direct subsidiaries, Oriental Bank and Trust (the “Bank”), Oriental Financial Services Corp. (“Oriental Financial Services”), Oriental Insurance, Inc. (“Oriental Insurance”) and Caribbean Pension Consultants, Inc., which is located in Boca Raton, Florida. The Group also has two special purpose entities, Oriental Financial (PR) Statutory Trust I (the “Statutory Trust I”) and Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”). Through these subsidiaries and its divisions, the Group provides a wide range of financial services such as mortgage, commercial and consumer lending, financial planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual trust services. Note 17 to the consolidated financial statements presents further information about the operations of the Group’s business segments.

The main offices for the Group and its subsidiaries are located in San Juan, Puerto Rico. The Group is subject to examination, regulation and periodic reporting under the U.S. Bank Holding Company Act of 1956, as amended, which is administered by the Board of Governors of the Federal Reserve System.

The Bank operates through 25 financial centers located throughout Puerto Rico and is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of Puerto Rico (“OCFI”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers banking services such as commercial and consumer lending, saving and time deposit products, financial planning, and corporate and individual trust services, and capitalizes on its commercial banking network to provide mortgage lending products to its clients. The Bank also operates two international banking entities (“IBEs”) pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended (the “IBE Act”): O.B.T. International Bank, which is a unit of the Bank, and Oriental International Bank Inc., which is a wholly-owned subsidiary of the Bank. The Group transferred as of January 1, 2004 most of the assets and liabilities of O.B.T. International Bank to Oriental International Bank Inc. The IBE offers the Bank certain Puerto Rico tax advantages and its services are limited under Puerto Rico law to persons and assets/liabilities located outside of Puerto Rico.

Oriental Financial Services is subject to the supervision, examination and regulation of the National Association of Securities Dealers, Inc., the Securities and Exchange Commission (“SEC”), and the OCFI. Oriental Insurance is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate mainly to the determination of the allowance for loan losses, the valuation of derivative instruments, servicing asset and income tax.

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Year

On August 30, 2005, the Group’s Board of Directors amended Section 1 of Article IX of the Group’s Bylaws to change its fiscal year to a calendar year. The fiscal year was from July 1 of each year to June 30 of the following year. Data presented on the accompanying consolidated financial statements includes balance sheet data as of December 31, 2006 and 2005 and June 30, 2005, and operations data for the year ended December 31, 2006, the six-month period ended December 31, 2005 and the fiscal years ended June 30, 2005 and 2004. Please refer to Note 19 of the accompanying consolidated financial statements for comparative information.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Group and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The special purpose entities are exempt from the consolidation requirements, under the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.”

Significant Group Concentrations of Credit Risk

Most of the Group’s business activities are with customers located in Puerto Rico. Note 2 contains information concerning the types of securities in which the Group invests in. Note 4 contains information concerning the types of lending in which the Group engages. The Group has a lending concentration of $76.8 million in one mortgage originator in Puerto Rico at December 31, 2006. This mortgage-related transaction is classified as a commercial loan, and is collateralized by mortgages on real estate properties in Puerto Rico, mainly one-to-four family residences, and is also guaranteed by the parent company of the mortgage originator. On May 4, 2006, the Group obtained a waiver from the OCFI with respect to the statutory limit for loans to a single borrower (loan to one borrower limit), which allows the Group to retain this credit relationship in its portfolio until it is paid in full.

Cash Equivalents

The Group considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition.

Earnings per Common Share

Basic earnings per share is calculated by dividing income available to common shareholders (net income reduced by dividends on preferred stock) by the weighted average of outstanding common shares. Diluted earnings per share is similar to the computation of basic earnings per share except that the weighted average of common shares is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares (options) had been issued, assuming that proceeds from exercise are used to repurchase shares in the market (treasury stock method). Any stock splits and dividends are retroactively recognized in all periods presented in the consolidated financial statements.

Securities Purchased/Sold Under Agreements to Resell/Repurchase

The Group purchases securities under agreements to resell the same or similar securities. Amounts advanced under these agreements represent short-term loans and are reflected as assets in the statements of financial condition. It is the Group’s policy to take possession of securities purchased under resale agreements while the counterparty retains effective control over the securities. The Group monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral when deemed appropriate. The Group also sells securities under agreements to repurchase the same or similar securities. The Group retains effective control over the securities sold under these agreements; accordingly, such agreements are treated as financing arrangements, and the obligations to repurchase the securities sold are reflected as liabilities. The

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

securities underlying the financing agreements remain included in the asset accounts. The counterparty to repurchase agreements generally has the right to repledge the securities received as collateral.

Investment Securities

Securities are classified as held-to-maturity, available-for-sale or trading. Securities for which the Group has the 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 tax in other comprehensive income.

The Group classifies as trading those securities that are acquired and held principally for the purpose of selling them in the near future. These securities are carried at fair value with realized and unrealized changes in fair value included in earnings in the period in which the changes occur.

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 cost. Therefore, the carrying 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 available for sale, 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 statements of operations. The cost of securities sold is determined on the specific identification method.

Impairment of Investment Securities

The Group evaluates its securities available-for-sale and held-to-maturity for impairment. An impairment charge in the consolidated statements of operations is recognized when the decline in the fair value of investments below their cost basis is judged to be other-than-temporary. The Group considers various factors in determining whether it should recognize an impairment charge, including, but not limited to the length of time and extent to which the fair value has been less than its cost basis, and the Group’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For debt securities, the Group also considers, among other factors, the debtors repayment ability on its bond obligations and its cash and capital generation ability. For the year ended December 31, 2006, the Group charged to operations approximately $2.5 million on available-for-sale securities with other than temporary impairments. No such charges were recorded prior to this year.

Derivative Financial Instruments

As part of the Group’s asset and liability management, the Group uses option agreements and interest rate contracts, which include interest rate swaps to hedge various exposures or to modify interest rate characteristics of various statement of financial condition accounts.

The Group follows Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (refer to Note 9), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that all derivative instruments be recognized as assets and liabilities at fair value. If certain conditions are met, the derivative may qualify for hedge accounting treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”) or (c) a hedge of foreign currency exposure (“foreign currency hedge”).

In the case of a qualifying fair value hedge, changes in the value of the derivative instruments that have been highly effective are recognized in current period earnings along with the change in value of the designated hedged item. In

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the case of a qualifying cash flow hedge, changes in the value of the derivative instruments that have been highly effective are recognized in other comprehensive income, until such time as those earnings are affected by the variability of the cash flows of the underlying hedged item. In either a fair value hedge or a cash flow hedge, net earnings may be impacted to the extent the changes in the fair value of the derivative instruments do not perfectly offset changes in the fair value or cash flows of the hedged items. If the derivative is not designated as a hedging instrument, the changes in fair value of the derivative are recorded in earnings.

Certain contracts contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated and carried at fair value.

The Group uses several pricing models that consider current fair value and contractual prices for the underlying financial instruments as well as time value and yield curve or volatility factors underlying the positions to derive the fair value of certain derivatives contracts.

Off-Balance Sheet Instruments

In the ordinary course of business, the Group enters into off-balance sheet instruments consisting of commitments to extend credit and commitments under credit card arrangements, further discussed in Note 16 to the consolidated financial statements. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. The Group periodically evaluates the credit risks inherent in these commitments, and establishes allowances for such risks if and when these are deemed necessary.

Mortgage Banking Activities and Loans Held-For-Sale

The mortgages reported as loans held-for-sale are stated at the lower of cost or market in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Realized gains or losses on these loans are determined using the specific identification method. From time to time, the Group sells loans to other financial institutions or securitizes conforming mortgage loans into Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) certificates. The Group outsources the servicing of its mortgage loan portfolio, including the mortgages included in the GNMA, FNMA and FHLMC pools issued or sold by the Group.

Prior to December 31, 2005 servicing rights on mortgage loans originated and held by the Group were sold to another financial institution. Upon their sale, a portion of the accounting basis of the mortgage loans held for investment was allocated to the mortgage servicing rights (MSRs) based upon the relative fair values of the mortgage loans and the MSRs, which results in a discount to the mortgage loans held for investment. That discount is accreted as an adjustment to yield on the mortgage loans over the estimated life of the related loans. When related loans are sold or collected any unamortized discount is recognized as income. In 2006, the Group entered into a sub-servicing agreement with a local institution to service GNMA, FNMA and FHLMC pools that it issues and its mortgage loan portfolio at a fixed annual cost per loan.

Servicing assets

Servicing assets represent the contractual right to service loans for others. Servicing assets are included as part of other assets in the consolidated statements of condition. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected.

The total cost of loans to be sold with servicing assets retained is allocated to the servicing assets and the loans (without the servicing assets), based on their relative fair values. Servicing assets are amortized in proportion to and over the period of estimated net servicing income.

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Loans and Allowance for Loan Losses

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, unamortized discount related to mortgage servicing rights (“MSR”) sold and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs and premiums and discounts on loans purchased are deferred and amortized over the estimated life of the loans as an adjustment of their yield through interest income using a method that approximates the interest method.

Interest recognition is discontinued when loans are 90 days or more in arrears on principal and/or interest based on contractual terms, except for well-collateralized mortgage loans for which recognition is discontinued when they become 365 days or more past due based on contractual terms and are then written down, if necessary, based on the specific evaluation of the collateral underlying the loan. Loans for which the recognition of interest income has been discontinued are designated as non-accruing. Collections are accounted for on the cash method thereafter, until qualifying to return to accrual status. Such loans are not reinstated to accrual status until interest is received on a current basis and other factors indicative of doubtful collection cease to exist.

The allowance for loan losses is established through a provision for loan losses based on losses that are estimated to occur. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Group follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses. This methodology consists of several key elements. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Group.

Included in the review of individual loans are those that are impaired, as provided in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” A loan is considered impaired when, based on current information and events, it is probable that the Group will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of small balance homogeneous loans that are collectively evaluated for impairment and loans that are recorded at fair value or at the lower of cost or market. The Group measures for impairment all commercial loans over $250,000. The portfolios of mortgages and consumer loans are considered homogeneous, and are evaluated collectively for impairment.

The Group, using an aged-based rating system, applies an overall allowance percentage to each loan portfolio category based on historical credit losses adjusted for current 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: the overall historical loss trends and other information including underwriting standards and economic trends. Loan loss ratios and credit risk categories are updated quarterly and are applied in the context of GAAP and the importance of depository institutions having prudent, conservative, but not excessive loan 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.

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed using the straight-line method over the terms of the leases or estimated useful lives of the improvements, whichever is shorter.

Long-lived assets and identifiable intangibles, except for financial instruments, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, an estimate is made of the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized if the fair value is less than the carrying amount of the related asset. Otherwise, an impairment loss is not recognized. There were no such impairment losses in periods presented in the accompanying consolidated financial statements.

Foreclosed Real Estate

Foreclosed real estate is initially recorded at the lower of the related loan balance or the fair value of the real estate at the date of foreclosure. At the time properties are acquired in full or partial satisfaction of loans, any excess of the loan balance over the estimated fair value of the property is charged against the allowance for loan losses. After foreclosure, these properties are carried at the lower of cost or fair value less estimated costs to sell. Any excess of the carrying value over the estimated fair value, less estimated costs to sell is charged to operations. The costs and expenses associated to holding these properties in portfolio are expensed as incurred.

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

A transfer of financial assets is accounted for as a sale when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the transferor, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity. As such, the Group recognizes the financial assets and servicing assets it controls and the liabilities it has incurred. At the same time, it ceases to recognize financial assets when control has been surrendered and liabilities when they are extinguished.

Income Taxes

In preparing the consolidated financial statements, the Group is required to estimate income taxes. This involves an estimate of current income tax expense together with an assessment of temporary differences resulting from differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Group to assume certain positions based on its interpretation of current tax regulations. Changes in assumptions affecting estimates may be required in the future and estimated tax assets or liabilities may need to be increased or decreased accordingly. The accrual for tax contingencies is adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Group’s effective tax rate includes the impact of tax contingency accruals and changes to such accruals, including related interest and penalties, as considered appropriate by management. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to the Group’s effective rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective rate and may require the use of cash in the year of resolution.

The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Group’s net deferred tax assets assumes that the Group will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, the Group may be required to record valuation allowances

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

against its deferred tax assets resulting in additional income tax expense in the consolidated statements of operations.

Management evaluates the realizability of the deferred tax assets on a quarterly basis and assesses the need for a valuation allowance. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in the Group’s tax provision in the period of change.

In addition to valuation allowances, the Group establishes accruals for certain tax contingencies when, despite the belief that Group’s tax return positions are fully supported, the Group believes that certain positions are likely to be challenged. The tax contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Group’s tax contingency accruals are reflected as income tax payable as a component of accrued expenses and other liabilities.

Stock Option Plans

As of December 31, 2006, the Group had three stock-based employee compensation plans: the 1996, 1998, and 2000 Incentive Stock Option Plans, which are described in Note 13. The Group issued a total of 30,000, 56,000, 566,525 and 224,722 stock options during the year ended December 31, 2006, the six-month period ended December 31, 2005 and the fiscal years ended June 30, 2005 and 2004, respectively, with a graded vesting period from 5 to 7 years.

Up to June 30, 2005, the Group accounted for its stock compensation award plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. Compensation expense for option awards with traditional terms was generally recognized for any excess of the quoted market price of the Group’s stock at measurement date over the amount an employee must pay to acquire the stock. No stock-based employee compensation cost was reflected for the awards with traditional terms as the options had an exercise price equal to the market value of the underlying common stock on the date of grant. FASB Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans” (“FIN 28”) an interpretation of APB 25 clarifies aspects of accounting for compensation related to stock appreciation rights and other variable stock option or award plans. With regards to stock option awards with anti-dilution provisions, where the terms are such that the number of shares that the employee is entitled to receive and the purchase price depends on events occurring after the date of the grant, compensation is measured at the end of each period as the amount by which the quoted market value of the shares of the enterprise’s stock covered by a grant exceeds the option price and is accrued as a charge to expense over the periods the employee performs the related services. Changes in the quoted market value are reflected as an adjustment of accrued compensation and compensation expense in the periods in which the changes occur.

On June 30, 2005, the Compensation Committee of the Group’s Board of Directors approved the acceleration of the vesting of all outstanding options to purchase shares of common stock of the Group that were held by employees, officers and directors as of that date. As a result, options to purchase 1,219,333 shares became exercisable. The purpose of the accelerated vesting was to enable the Group to avoid recognizing in its statement of operations compensation expense associated with these options in future periods, upon adoption of FASB Statement No. 123(R).

Effective July 1, 2005, the Group adopted SFAS No. 123R “Share-Based Payment” (“SFAS 123R”), an amendment of SFAS 123 “Accounting for Stock-Based Compensation” using the modified prospective transition method. SFAS 123R requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award with the cost to be recognized over the service period. SFAS 123R is effective for financial statements as of the beginning of the first interim or annual reporting period of the first fiscal year that begins after June 15, 2005. SFAS No. 123R applies to all awards unvested and granted after this effective date and awards modified, repurchased, or cancelled after that date.

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Subsequent to the adoption of SFAS 123R, the Group recorded approximately $23,000 and $11,000 related to compensation expense for options issued during the year ended December 31, 2006 and the six-month period ended December 31, 2005, respectively. The remaining unrecognized compensation cost related to unvested awards as of December 31, 2006, was approximately $226,000 and the weighted average period of time over which this cost will be recognized is approximately 7 years.

Had the estimated fair value of the options granted been included in compensation expense for the periods indicated below, the Group’s net earnings and earnings per share would have been as follows:

	Fiscal Year Ended June 30,
	2005			2004
	(In thousands, except for per share data)
Net income, as reported	$	59,669		$	59,717
Share-based (compensation) benefit included in reported earnings		(3,057	)		3,932
Share-based employee compensation determined under fair value based method for all awards		(1,459	)		(1,394	)
Pro forma net income		55,153			62,255
Less: Dividends on preferred stock		(4,802	)		(4,198	)
Pro forma income available to common shareholders	$	50,351		$	58,057
Earnings per share:
Basic — as reported	$	2.23		$	2.48
Basic — pro forma	$	2.05		$	2.59
Diluted — as reported	$	2.14		$	2.32
Diluted — pro forma	$	1.96		$	2.43
Average common shares outstanding		24,571			22,394
Average potential common shares-options		1,104			1,486
		25,675			23,880

The average fair value of each option granted during year ended December 31, 2006 and the six-month period ended December 31, 2005 was $3.84 and $4.79, respectively, and in fiscal years ended June 30, 2005 and 2004 was $13.09 and $6.81, respectively. The average fair value of each option granted was estimated at the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in the Group’s employee options. Use of an option valuation model, as required by GAAP, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each option grant.

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following assumptions were used in estimating the fair value of the options granted, after giving retroactive effect to the 10% stock dividend of November 30, 2004:

				Six-Month
	Year Ended			Period Ended			Fiscal Year Ended
	December 31,			December 31,			June 30,
	2006			2005			2005			2004
Weighted Average Assumptions:
Dividend yield		3.97	%		2.75	%		2.75	%		2.25	%
Expected volatility		34	%		44	%		35	%		33	%
Risk-free interest rate		4.24	%		4.03	%		4.06	%		3.77	%
Expected life (in years)		8.5			8.5			7			7

Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except for those resulting from investments by owners and distributions to owners. GAAP requires that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and on derivative activities that qualify and are designated for cash flows hedge accounting, are reported as a separate component of the stockholders’ equity section of the consolidated statements of financial condition, such items, along with net income, are components of comprehensive income.

New Accounting Pronouncements

SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”

In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” This statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155:

•  Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;

•  Clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133;

•  Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;

•  Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives;

•  Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of SFAS 155 may also be applied upon adoption of this statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of SFAS No. 155. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

statements for any interim period for that fiscal year. Provisions of this statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis.

At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to beginning retained earnings. An entity should separately disclose the gross gains and losses that make up the cumulative-effect adjustment, determined on an instrument-by-instrument basis. Prior periods should not be restated.

SFAS 155 is effective for all financial instruments acquired or issued after January 1, 2007. The adoption of SFAS 155 did not have a significant impact on the consolidated financial position or earnings of the Group.

SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statements No. 133 and 140”

In March 2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment to SFAS No. 140”, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to (1) require the recognition of a servicing asset or servicing liability under specified circumstances, (2) require that, if practicable, all separately recognized servicing assets and liabilities be initially measured at fair value, (3) create a choice for subsequent measurement of each class of servicing assets or liabilities by applying either the amortization method or the fair value method, and (4) permit the one-time reclassification of securities identified as offsetting exposure to changes in fair value of servicing assets or liabilities from available-for-sale securities to trading securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In addition, SFAS No. 156 amends SFAS No. 140 to require significantly greater disclosure concerning recognized servicing assets and liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, with early adoption permitted.

The Group adopted SFAS No. 156 on January 1, 2007 and decided to continue to account for servicing assets based on the amortization method with periodic testing for impairment.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN 48 was issued to clarify the requirements of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, relating to the recognition of income tax benefits. FIN 48 provides a two-step approach to recognizing and measuring tax benefits when the benefits’ realization is uncertain. The first step is to determine whether the benefit is to be recognized; the second step is to determine the amount to be recognized:

•  Income tax benefits should be recognized when, based on the technical merits of a tax position, the entity believes that if a dispute arose with the taxing authority and were taken to a court of last resort, it is more likely than not (i.e., a probability of greater than 50 percent) that the tax position would be sustained as filed; and

•  If a position is determined to be more likely than not of being sustained, the reporting enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

FIN 48 is applicable beginning January 1, 2007. The cumulative effect of applying the provisions of FIN 48 upon adoption will be reported as an adjustment to beginning retained earnings. Management is evaluating the impact that this interpretation may have on the Group’s consolidated financial statements.

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides the SEC staff’s views regarding the process of quantifying financial statement misstatements. It requires the use of two different approaches to quantifying misstatements — (1) the “rollover approach” and (2) the “iron curtain approach” — when assessing whether such a misstatement is material to the current period financial statements. The rollover approach focuses on the impact on the income statement of a misstatement originating in the current reporting period. The iron curtain approach focuses on the cumulative effect on the balance sheet as of the end of the current reporting period of uncorrected misstatements regardless of when they originated. If a material misstatement is quantified under either approach, after considering quantitative and qualitative factors, the financial statements would require adjustment. Depending on the magnitude of the correction with respect to the current period financial statements, changes to financial statements for prior periods could result. SAB 108 is effective for the Group’s fiscal year ended December 31, 2006.

The Group had three unrecorded accounting adjustments that were considered in the SAB 108 analysis. The Group historically deferred commissions to certain employees as part of the Bank’s deposit gathering campaigns instead of charging compensation expenses in the year paid. The balance of deferred commission as of January 1, 2006 was $719,000 and was corrected as of January 1, 2006 as a credit to cumulative retained earnings at that date.

The second accounting adjustment is the reversal of a prior year over-accrual of income taxes. As of December 31, 2005, utilizing the rollover method to evaluate differences, the Group decided not to correct $589,000 of excess income taxes provision. Such difference was corrected as of January 1, 2006 as a credit to cumulative retained earnings at that date.

The third accounting adjustment is the Group’s method of recognizing interest on a structured note carried as held to maturity investment. The structured note pays interest depending on whether LIBOR is within a range or not. In the past, the Group had recorded interest on such note on a cash basis instead using the retrospective interest method required by Financial Accounting Standards Board Emerging Issues Task Force Abstracts Issue No. 96-12, “Recognition of Interest Income and Balance Sheet Classification of Structured Notes”. As a result of the adoption of SAB 108, approximately $1.4 million of interest previously recognized on a cash basis in prior periods was reversed and recorded as interest income for 2006.

After considering all of the quantitative and qualitative factors, the Group determined that these accounting adjustments had not previously been material to prior periods when measured using the rollover method. Given that the effect of correcting these misstatements during 2006 would be material to the Group’s 2006 consolidated financial statements using this dual method, the Group concluded that the cumulative effect adjustment method of initially applying the guidance in SAB 108 was appropriate, and adjusted $1.525 million as a cumulative effect on the beginning retained earnings on the current year’s Consolidated Statements of Changes in Stockholders’ Equity.

SFAS No. 157, “Fair Value Measurements”

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements.

This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. Management is evaluating the impact that this accounting standard may have on the Group’s consolidated financial statements.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115”

On February 15, 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115”. SFAS 159 provides an alternative measurement treatment for certain financial assets and financial liabilities, under an instrument-by-instrument election, that permits fair value to be used for both initial and subsequent measurement, with changes in fair value recognized in earnings. While SFAS 159 is effective for the Group beginning January 1, 2008, earlier adoption is permitted as of January 1, 2007, provided that the entity also adopts all of the requirements of SFAS 157. Management is evaluating the impact that this recently issued accounting standard may have on the Group’s consolidated financial statements.

2.   INVESTMENTS

Short Term Investments

At December 31, 2006, the Group’s short term investments were comprised of time deposits with other banks in the amount of $5.0 million (December 31, 2005 — $60.0 million; June 30, 2005 — $30.0 million).

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by the Group at December 31, 2006 and 2005 and June 30, 2005, were as follows:

	December 31, 2006
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
Puerto Rico Government and agency obligations	$	20,254	$	64	$	872	$	19,446		5.68	%
Corporate bonds and other		50,598		520		2,347		48,770		6.11	%
Total investment securities		70,852		584		3,219		68,217
FNMA and FHLMC certificates		150,099		—		1,506		148,593		5.45	%
GNMA certificates		40,690		408		235		40,863		5.61	%
Collateralized mortgage obligations (CMOs)		722,419		7		5,139		717,287		5.48	%
Total mortgage-backed-securities and CMO’s		913,208		415		6,880		906,743
Total securities available-for-sale		984,060		999		10,099		974,960		5.52	%
Held-to-maturity
US Treasury securities		15,022		—		127		14,895		2.71	%
Obligations of US Government sponsored agencies		848,400		7		17,529		830,878		3.85	%
Puerto Rico Government and agency obligations		55,262		—		3,961		51,301		5.29	%
Total investment securities		918,684		7		21,617		897,074
FNMA and FHLMC certificates		713,171		628		11,529		702,270		5.04	%
GNMA certificates		182,874		215		2,176		180,913		5.35	%
Collateralized mortgage obligations		152,748		18		1,303		151,463		5.13	%
Total mortgage-backed-securities and CMO’s		1,048,793		861		15,008		1,034,646
Total securities held-to-maturity		1,967,477		868		36,625		1,931,720		4.55	%
Total	$	2,951,537	$	1,867	$	46,724	$	2,906,680		4.87	%

F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	December 31, 2005
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
US Treasury securities	$	174,836	$	—	$	5,599	$	169,237		3.45	%
Puerto Rico Government and agency obligations		28,356		183		340		28,199		5.29	%
Corporate bonds and other		92,005		—		1,468		90,537		4.75	%
Total investment securities		295,197		183		7,407		287,973
FNMA and FHLMC certificates		488,356		—		12,193		476,163		5.17	%
GNMA certificates		36,799		630		129		37,300		5.83	%
Collateralized mortgage obligations (CMOs)		249,297		552		4,401		245,448		5.47	%
Total mortgage-backed-securities and CMO’s		774,452		1,182		16,723		758,911
Total securities available-for-sale		1,069,649		1,365		24,130		1,046,884		4.95	%
Held-to-maturity
US Treasury securities		60,168		—		818		59,350		2.84	%
Obligations of US Government sponsored agencies		1,021,634		77		19,661		1,002,050		4.09	%
Puerto Rico Government and agency obligations		62,084		—		2,987		59,097		5.32	%
Total investment securities		1,143,886		77		23,466		1,120,497
FNMA and FHLMC certificates		822,870		1,238		10,389		813,719		5.05	%
GNMA certificates		216,237		1,371		1,196		216,412		5.52	%
Collateralized mortgage obligations		163,262		129		1,187		162,204		5.42	%
Total mortgage-backed-securities and CMO’s		1,202,369		2,738		12,772		1,192,335
Total securities held-to-maturity		2,346,255		2,815		36,238		2,312,832		4.65	%
Total	$	3,415,904	$	4,180	$	60,368	$	3,359,716		4.75	%

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	June 30, 2005
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
US Treasury securities	$	174,823	$	—	$	1,807	$	173,016		3.47	%
Puerto Rico Government and agency obligations		45,744		1,138		152		46,730		5.78	%
Corporate bonds and other		69,028		4		3,098		65,934		4.45	%
Total investment securities		289,595		1,142		5,057		285,680
FNMA and FHLMC certificates		549,936		477		1,880		548,533		4.48	%
GNMA certificates		13,959		306		36		14,229		5.65	%
Collateralized mortgage obligations (CMOs)		182,663		410		1,795		181,278		4.61	%
Total mortgage-backed-securities and CMO’s		746,558		1,193		3,711		744,040
Total securities available-for-sale		1,036,153		2,335		8,768		1,029,720		4.40	%
Held-to-maturity
US Treasury securities		856,964		968		7,250		850,682		3.76	%
Puerto Rico Government and agency obligations		62,094		10		1,664		60,440		5.33	%
Total investment securities		919,058		978		8,914		911,122
FNMA and FHLMC certificates		914,174		14,226		2,184		926,216		5.11	%
GNMA certificates		250,189		4,520		473		254,236		5.33	%
Collateralized mortgage obligations		51,325		181		372		51,134		4.49	%
Total mortgage-backed-securities and CMO’s		1,215,688		18,927		3,029		1,231,586
Total securities held-to-maturity		2,134,746		19,905		11,943		2,142,708		4.59	%
Total	$	3,170,899	$	22,240	$	20,711	$	3,172,428		4.53	%

The next table shows the amortized cost and fair value of the Group’s investment securities at December 31, 2006, by contractual maturity. Maturities for mortgage-backed securities are based upon contractual terms assuming no prepayments. Expected maturities of investment securities might differ from contractual maturities because they may be subject to prepayments and/or call options.

	December 31, 2006
	Available-for-sale				Held-to-maturity
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(In thousands)
Investment Securities
Due within one year	$	26,962	$	24,676	$	169,927	$	168,378
Due after 1 to 5 years		—		—		312,392		306,271
Due after 5 to 10 years		467		415		281,255		273,831
Due after 10 years		43,423		43,126		155,110		148,593
		70,852		68,217		918,684		897,073
Mortgage-backed securities
Due after 1 to 5 years		1,241		1,294		—		—
Due after 10 years		911,967		905,449		1,048,793		1,034,647
		913,208		906,743		1,048,793		1,034,647
	$	984,060	$	974,960	$	1,967,477	$	1,931,720

Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

F-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net proceeds from the sale of investment securities available-for-sale during the year ended December 31, 2006 and the six-month period ended December 31, 2005 totaled $1.253 billion and $139.9 million, respectively (fiscal year ended June 30, 2005 — $1.1 billion; fiscal year ended June 30, 2004 — $610.6 million). Gross realized gains and losses on those sales during the year ended December 31, 2006 were $5.6 million and $20.8 million respectively (six-month period ended December 31, 2005 — $744,000 and $94,000, respectively; fiscal year ended June 30, 2005 — $12.2 million and $4.7 million, respectively; fiscal year ended June 30, 2004 — $17.3 million and $3.9 million, respectively).

During the fourth quarter of 2006, the Group completed an evaluation of its available-for-sale investment portfolio considering changing market conditions, and strategically repositioned this portfolio. The repositioning involved open market sales of approximately $865 million of securities with a weighted average yield of 4.60% at a loss of approximately $16.0 million, and the purchase of $860 million of triple-A securities with a weighted average yield of 5.55%. Proceeds were used to repay repurchase agreements with a weighted average rate paid of 5.25%.

During the fiscal year ended June 30, 2005, the Group’s management reclassified, at fair value, $565.2 million, of its available-for-sale investment portfolio to the held-to-maturity investment category as management intends to hold these securities to maturity. The unrealized loss on those securities transferred to held-to-maturity category amounted to $24.2 million at June 30, 2005, and is included as part of the accumulated other comprehensive loss in the consolidated statements of financial condition. This unrealized loss is amortized over the remaining life of the securities as a yield adjustment. No investments were reclassified from the available-for sale to the held to maturity category during the year ended December 31, 2006 and the six-month period ended December 31, 2005.

The following table shows the Group’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2006 and 2005 and June 30, 2005.

December 31, 2006
Available-for-sale

	Less Than 12 Months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Puerto Rico Government and agency obligations	$	1,996	$	172	$	1,824
Mortgage-backed-securities and CMO’s		880,687		6,641		874,046
Corporate bonds and other		87		57		30
		882,770		6,870		875,900

	12 Months or More
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Puerto Rico Government and agency obligations		14,086		700		13,386
Mortgage-backed-securities and CMO’s		9,101		239		8,862
Corporate bonds and other		24,962		2,290		22,672
		48,149		3,229		44,920

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Puerto Rico Government and agency obligations		16,082		872		15,210
Mortgage-backed-securities and CMO’s		889,788		6,880		882,908
Corporate bonds and other		25,049		2,347		22,702
	$	930,919	$	10,099	$	920,820

F-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Held-to-maturity

	Less Than 12 Months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Mortgage-backed-securities and CMO’s	$	393,983	$	1,262	$	392,721
		393,983		1,262		392,721

	12 Months or More
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		15,022		128		14,894
Obligations of US Government sponsored agencies		841,900		17,529		824,371
Puerto Rico Government and agency obligations		55,262		3,961		51,301
Mortgage-backed-securities and CMO’s		484,083		13,745		470,338
		1,396,267		35,363		1,360,904

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		15,022		127		14,895
Obligations of US Government sponsored agencies		841,900		17,529		824,371
Puerto Rico Government and agency obligations		55,262		3,961		51,301
Mortgage-backed-securities and CMO’s		878,066		15,008		863,058
	$	1,790,250	$	36,625	$	1,753,625

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2005
Available-for-sale

	Less Than 12 Months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
US Treasury securities	$	74,705	$	2,060	$	72,645
Puerto Rico Government and agency obligations		13,482		199		13,283
Mortgage-backed-securities and CMO’s		428,977		9,497		419,480
Corporate bonds and other		67,005		1,468		65,537
		584,169		13,224		570,945

	12 Months or More
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		100,131		3,539		96,592
Puerto Rico Government and agency obligations		2,690		141		2,549
Mortgage-backed-securities and CMO’s		218,674		7,226		211,448
		321,495		10,906		310,589

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		174,836		5,599		169,237
Puerto Rico Government and agency obligations		16,172		340		15,832
Mortgage-backed-securities and CMO’s		647,651		16,723		630,928
Corporate bonds and other		67,005		1,468		65,537
	$	905,664	$	24,130	$	881,534

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Held-to-maturity

	Less Than 12 Months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Obligations of US Government sponsored agencies	$	486,520	$	9,559	$	476,961
Puerto Rico Government and agency obligations		9,965		65		9,900
Mortgage-backed-securities and CMO’s		435,973		4,902		431,071
		932,458		14,526		917,932

	12 Months or More
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		60,168		818		59,350
Obligations of US Government sponsored agencies		510,113		10,102		500,011
Puerto Rico Government and agency obligations		52,119		2,922		49,197
Mortgage-backed-securities and CMO’s		269,134		7,870		261,264
		891,534		21,712		869,822

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		60,168		818		59,350
Obligations of US Government sponsored agencies		996,633		19,661		976,972
Puerto Rico Government and agency obligations		62,084		2,987		59,097
Mortgage-backed-securities and CMO’s		705,107		12,772		692,335
	$	1,823,992	$	36,238	$	1,787,754

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2005
Available-for-sale

	Less Than 12 Months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
US Treasury securities	$	174,823	$	1,807	$	173,016
Puerto Rico Government and agency obligations		14,381		152		14,229
Mortgage-backed-securities and CMO’s		426,657		1,626		425,031
Corporate bonds and other		66,993		3,098		63,895
		682,854		6,683		676,171

	12 Months or More
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Mortgage-backed-securities and CMO’s		139,387		2,085		137,302
		139,387		2,085		137,302

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		174,823		1,807		173,016
Puerto Rico Government and agency obligations		14,381		152		14,229
Mortgage-backed-securities and CMO’s		566,044		3,711		562,333
Corporate bonds and other		66,993		3,098		63,895
	$	822,241	$	8,768	$	813,473

F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Held-to-maturity

	Less Than 12 Months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
US Treasury securities	$	702,535	$	7,250	$	695,285
Mortgage-backed-securities and CMO’s		183,997		1,209		182,788
		886,532		8,459		878,073

	12 Months or More
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Puerto Rico Government and agency obligations		52,130		1,664		50,466
Mortgage-backed-securities and CMO’s		121,351		1,820		119,531
		173,481		3,484		169,997

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		702,535		7,250		695,285
Puerto Rico Government and agency obligations		52,130		1,664		50,466
Mortgage-backed-securities and CMO’s		305,348		3,029		302,319
	$	1,060,013	$	11,943	$	1,048,070

During the year ended December 31, 2006, the Group recognized through earnings approximately $2.5 million in losses in corporate securities in the available-for-sale portfolio that management considered to be other than temporarily impaired. No such charges were recorded prior to 2006. These investments were sold in January 2007.

All other securities in an unrealized loss position at December 31, 2006 are mainly composed of securities issued or backed by U.S. government agencies and U.S. government sponsored agencies. The vast majority of these securities are rated the equivalent of triple-A by nationally recognized statistical rating organizations. The investment portfolio is structured primarily with highly liquid securities that have a large and efficient secondary market. Valuations are performed on a monthly basis using a third party provider and dealer quotes. Management believes that the unrealized losses in the investment portfolio at December 31, 2006 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuer. Also, Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

3.   PLEDGED ASSETS

At December 31, 2006, residential mortgage loans amounting to $491.8 million and investment securities with fair values amounting to $6.3 million were pledged to secure advances and borrowings from the FHLB. Investment securities with fair values totaling $2.6 billion, $119.8 million, $15.5 million and $8.7 million at December 31, 2006, were pledged to secure investment securities sold under agreements to repurchase (see Note 8), public fund deposits (see Note 7), term notes (see Note 9) and other funds, respectively. Also, investment securities with fair values totaling $502,000 at December 31, 2006, were pledged to the Puerto Rico Treasury Department.

As of December 31, 2006, investment securities available-for-sale and held-to-maturity not pledged amounted to $98.5 million and $71.0 million, respectively. As of December 31, 2006, mortgage loans not pledged amounted to $453.9 million.

F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.   LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans Receivable

The composition of the Group’s loan portfolio at December 31, 2006 and 2005 and June 30, 2005 was as follows:

	December 31,						June 30,
	2006			2005			2005
	(In thousands)
Loans secured by real estate:
Residential — 1 to 4 family	$	898,809		$	599,163		$	576,335
Non-residential real estate loans		353			4,188			4,185
Home equity loans and secured personal loans		36,270			40,178			47,891
Commercial		223,563			210,101			223,685
Deferred loan fees, net		(3,147	)		(2,864	)		(2,930	)
		1,155,848			850,766			849,166
Other loans:
Commercial		18,139			14,730			12,983
Personal consumer loans and credit lines		35,772			35,482			30,027
Deferred loan cost (fees), net		24			14			(40	)
		53,935			50,226			42,970
Loans receivable		1,209,783			900,992			892,136
Allowance for loan losses		(8,016	)		(6,630	)		(6,495	)
Loans receivable, net		1,201,767			894,362			885,641
Mortgage loans held-for-sale		10,603			8,946			17,963
Total loans, net	$	1,212,370		$	903,308		$	903,604

In the year ended December 31, 2006 and the six-month period ended December 31, 2005, residential mortgage loan production, including loans purchased, amounted to $478.5 million and $135.3 million, respectively (fiscal year ended June 30, 2005 — $289.7 million; fiscal year ended June 30, 2004 — $332.5 million) and mortgage loan sales/conversions totaled $94.1 million and $71.6 million, respectively (fiscal year ended June 30, 2005 — $188.1 million; fiscal year ended June 30, 2004 — $88.1 million).

At December 31, 2006 and 2005, residential mortgage loans held-for-sale amounted to $10.6 million and $8.9 million, respectively (June 30, 2005 — $18.0 million). In the year ended December 31, 2006 and the six-month period ended December 31, 2005, the Group recognized gains of $3.4 million and $1.7 million, respectively, (fiscal year ended June 30, 2005 — $7.8 million; fiscal year ended June 30, 2004 — $7.7 million) in these sales, which are presented in the consolidated statements of operations as mortgage banking activities.

At December 31, 2006 and 2005, loans on which the accrual of interest has been discontinued amounted to $17.8 million and $19.0 million, respectively (June 30, 2005 — $21.9 million). The gross interest income that would have been recorded in the year ended December 31, 2006 and six-month period ended December 31, 2005 if non-accrual loans had performed in accordance with their original terms amounted to $3.4 million and $1.4 million, respectively (fiscal year ended June 30, 2005 — $2.2 million; fiscal year ended June 30, 2004 — $843,000). The Group’s investment in loans past due 90 days or more and still accruing amounted to $20.5 million, $9.5 million and $9.0 million at December 31, 2006 and 2005 and June 30, 2005, respectively.

On June 2, 2006, the Group entered into an agreement with a local financial institution to purchase a total of $173.2 million in residential mortgage loans. The Group purchased all rights, title and interest in such loans.

F-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Allowance for Loan Losses

The changes in the allowance for loan losses for the year ended December 31, 2006, the six-month period ended December 31, 2005 and the fiscal years ended June 30, 2005 and 2004, were as follows:

				Six-Month
	Year Ended			Period Ended			Fiscal Year Ended
	December 31,			December 31,			June 30,
	2006			2005			2005			2004
	(In thousands)
Balance at beginning of period	$	6,630		$	6,495		$	7,553		$	5,031
Provision for loan losses		4,387			1,902			3,315			4,587
Loans charged-off		(3,678	)		(2,081	)		(5,094	)		(3,207	)
Recoveries		677			314			721			1,142
Balance at end of period	$	8,016		$	6,630		$	6,495		$	7,553

As described in Note 1 under the heading “Loans and Allowance for Loan Losses,” the Group evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. At December 31, 2006, the total investment in impaired commercial loans was $2.0 million (December 31, 2005 — $3.6 million; June 30, 2005 — $3.2 million). The impaired commercial loans were measured based on the fair value of collateral. The average investment in impaired commercial loans for the year ended December 31, 2006, the six-month period ended December 31, 2005 and for the fiscal years ended June 30, 2005 and 2004, amounted to $2.2 million, $3.2 million, $2.3 million, and $2.1 million, respectively. Management determined that impaired loans did not require valuation allowance in accordance with FASB Statement 114 “Accounting by Creditors for Impairment of a Loan.”

5.   PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2006 and 2005 and June 30, 2005 are stated at cost less accumulated depreciation and amortization as follows:

	Useful Life		December 31,						June 30,
	(Years)		2006			2005			2005
	(In thousands)
Land		—	$	1,014		$	1,014		$	1,014
Buildings and improvements		40		2,777			3,507			3,224
Leasehold improvements		5 — 10		12,948			7,704			7,255
Furniture and fixtures		3 —   7		6,801			5,387			5,276
Information technology and other		3 —   7		12,368			13,162			12,555
				35,908			30,774			29,324
Less: accumulated depreciation and amortization				(15,755	)		(15,946	)		(14,055	)
			$	20,153		$	14,828		$	15,269

Depreciation and amortization of premises and equipment for the year ended December 31, 2006 and the six-month period ended December 31,2005 totaled $5.5 million and $3.2 million, respectively (fiscal year ended June 30, 2005 — $5.9 million; fiscal year ended June 30, 2004 — $5.0 million). These are included in the consolidated statements of operations as part of occupancy and equipment expenses.

On June 30, 2005, the Group sold the Las Cumbres building, a two-story structure located at 1990 Las Cumbres Avenue, San Juan, Puerto Rico, for $3.4 million. The building was the principal property owned by the Group for banking operations and other services. The Bank’s mortgage banking division and one of the principal branches and financial services office (brokerage and insurance) are located in this building. The book value of this property at June 30, 2005, was $1.3 million. Also, on the same date, the Bank entered into a lease agreement with the new owner

F-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for a period of 10 years. In summary, the lease contract provides for an annual rent of $324,000 or a monthly rent of $27,000, for 13,200 square feet, including 42 parking spaces. During the lease term, the rental fee will increase by 6% every three years, except for the last year on which the increment will be 2%. This transaction was financed by a loan granted to the Buyer by the Bank. The loan was for $2.0 million (56% loan to value) at 6.50% fixed interest for a period of 10 years, collateralized by Las Cumbres building and the assignment of the monthly rent. The transaction was accounted for under the provisions of SFAS 13, as amended by SFAS 98, “Accounting for Leases: Sale-leaseback Transactions Involving Real Estate,” and accordingly, the lease portion of the transaction was classified as an operating lease and the gain on the sale portion of the transaction was deferred and is being amortized to income over the lease term (10 years) in proportion to the related gross rental expense for the leased-back property each period.

6.   ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable at December 31, 2006 and 2005 consists of $10.1 million and $6.8 million (June 30, 2005 — $6.7 million), respectively from loans and $17.8 million and $22.3 million (June 30, 2005 — $17.0 million), respectively from investments.

Other assets at December 31, 2006 and 2005 and June 30, 2005 consist of the following:

	December 31,				June 30,
	2006		2005		2005
	(In thousands)
Investment in equity indexed options	$	34,216	$	22,054	$	18,999
Investment in limited partnership		11,913		11,085		10,247
Deferred charges		1,037		3,213		3,536
Prepaid expenses		2,152		2,681		3,764
Accounts receivable		7,547		4,932		3,590
Investment in Statutory Trusts		1,086		2,169		2,171
Goodwill		2,006		2,006		2,006
Servicing asset		1,507		—		—
Prepaid income tax		13		17		2,061
	$	61,477	$	48,157	$	46,374

On January 31, 2005, Oriental International Bank Inc. (“Oriental International”) entered into an agreement with Quiddity Earnings Diversification Fund, L.P. (the “Partnership”) to purchase partnership units for $10.0 million. The Partnership was organized under the laws of the State of Illinois and is engaged in the trading of futures and futures options contracts on a wide range of financial instruments. On April 24, 2006, Oriental International entered into a new agreement to execute and deliver a Subscription Agreement for QED Fed II, LLC. On that date Oriental International redeemed all its limited partnership units in Quiddity Earnings Diversification Fund, L.P. and invested all proceeds from redemption in QED Fed II, LLC. QED Fed II, LLC is also an Illinois limited liability company and is engaged in the speculative trading of future contracts, option of future contracts, over the counter cash and spot contracts on foreign currencies and options thereon. The General Partner is Quiddity LLC (the “General Partner”). The General Partner is an Illinois limited liability company and is the commodity pool operator of the Partnership. Investment in limited partnership is accounted under the equity method of accounting. The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to their respective interest in the Partnership. During the year ended December 31, 2006, the six-month period ended December 31, 2005 and the fiscal year ended June 30, 2005, profits of $828,100, $837,700 and $246,834, respectively, were credited to earnings.

F-34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.   DEPOSITS AND RELATED INTEREST

At December 31, 2006 and 2005, the weighted average interest rate of the Group’s deposits was 3.78% and 3.17%, respectively (June 30, 2005 — 2.73%), considering non-interest bearing deposits of $59.6 million and $61.5 million, respectively (June 30, 2005 — $62.2 million). Interest expense for the year ended December 31, 2006 and the six-month period ended December 31, 2005 and the fiscal years ended June 30, 2005 and 2004, is set forth below:

			Six-Month
	Year Ended		Period Ended		Fiscal Year Ended
	December 31,		December 31,		June 30,
	2006		2005		2005		2004
	(In thousands)
Demand deposits	$	857	$	445	$	900	$	818
Savings deposits		5,366		440		941		1,081
Certificates of deposit		40,479		19,396		27,903		28,113
	$	46,701	$	20,281	$	29,744	$	30,012

At December 31, 2006 and 2005, time deposits in denominations of $100,000 or higher amounted to $439.5 million and $610.0 million (June 30, 2005 — $582.1 million) including: (i) brokered certificates of deposit of $179.1 and $283.6 million (June 30, 2005 $255.8 million) at a weighted average rate of 5.00% and 3.70% (June 30, 2005 — 3.04%); and (ii) public fund deposits from various local government agencies of $57.9 and $140.5 million (June 30, 2005 — $134.1 million) at a weighted average rate of 5.3% and 3.91% (June 30, 2005 — 3.20%), which were collateralized with investment securities with fair value of $119.8 and $166.9 million (June 30, 2005 — $195.0 million).

Excluding accrued interest of $4.5 million and equity indexed options in the amount of $24.7 million which are used by the Group to manage its exposure to the Standard & Poor’s 500 stock market index, the scheduled maturities of certificates of deposit at December 31, 2006 are as follows:

	(In thousands)
Within one year:
Three (3) months or less	$	324,153
Over 3 months through 1 year		288,230
		612,383
Over 1 through 2 years		94,311
Over 2 through 3 years		56,755
Over 3 through 4 years		15,613
Over 4 through 5 years		24,690
Over 5 years		1,448
	$	805,200

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans amounted to $1,322,000 as of December 31, 2006 (December 31, 2005 — $934,000).

8.   BORROWINGS

     Short Term Borrowings

At December 31, 2006, short term borrowings amounted to $13,568,000 (December 31, 2005 — $4,455,000) which mainly consist of federal funds purchased with a weighted average rate of 4.92%. (December 31, 2005 — 3.76%)

F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Securities Sold under Agreements to Repurchase

At December 31, 2006, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties with whom the repurchase agreements were transacted. The counterparties have agreed to resell to the Group the same or similar securities at the maturity of the agreements.

At December 31, 2006, securities sold under agreements to repurchase (classified by counterparty) were as follows:

			Fair Value of
	Borrowing		Underlying
	Balance		Collateral
	(In thousands)
Lehman Brothers Inc.	$	263,908	$	267,929
Credit Suisse First Boston Corporation		10,427		10,779
Banc of America Securities		385,677		390,589
JP Morgan Chase		99,650		99,499
Citigroup		900,428		938,824
Cantor Fitzgerald		875,833		893,939
Total	$	2,535,923	$	2,601,559

The Group entered into a $900 million, 5-year structured repurchase agreements ($450 million non-put 1 year and $450 million non-put 2-year) with a weighted average rate paid of 4.52%. Also, in February 2007, the Group restructured an additional $1 billion of short-term repurchase agreements, with a weighted average rate being paid of approximately 5.35%, into 10-year, non-put 2-year structured repurchased agreements, priced at 95 basis points under 90-day LIBOR (for a current rate of 4.40%).

F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents the borrowings under repurchase agreements (including accrued interest) at December 31, 2006 and 2005 and June 30, 2005, their maturities and approximate fair values of their collateral as follows:

	December 31,								June 30,
	2006				2005				2005
			Fair Value of				Fair Value of				Fair Value of
	Borrowing		Underlying		Borrowing		Underlying		Borrowing		Underlying
	Balance		Collateral		Balance		Collateral		Balance		Collateral
	(In thousands)
GNMA certificates
Within 30 days	$	96,498	$	99,235	$	83,242	$	87,120	$	104,161	$	105,652
After 30 to 90 days		26,985		27,316		46,069		47,527		50,401		51,122
After 90 days to 120 days		—		—		—		—		13,440		13,633
		123,483		126,551		129,311		134,647		168,002		170,407
FNMA certificates
Within 30 days		287,403		291,871		400,807		408,425		484,861		495,330
After 30 to 90 days		137,371		139,280		310,316		317,992		234,610		239,676
After 90 days to 120 days		—		—		—		—		62,563		63,914
3 to 5 years		117,039		127,625		—		—		—		—
		541,813		558,776		711,123		726,417		782,034		798,920
FHLMC certificates
Within 30 days		158,002		164,610		260,383		267,310		603,021		608,794
After 30 to 90 days		90,518		91,426		173,643		178,956		291,784		294,578
After 120 days to 1 year		—		—		—		—		77,809		78,554
		248,520		256,036		434,026		446,266		972,614		981,926
CMOs
Within 30 days		147,886		152,149		23,176		23,506		—		—
After 30 to 90 days		—		—		24,828		25,972		—		—
3 to 5 years		683,341		713,141		—		—		—		—
		831,227		865,290		48,004		49,478		—		—
US Agency securities
Within 30 days		404,338		408,687		342,322		343,129		—		—
After 30 to 90 days		281,308		279,487		621,004		630,096		—		—
3 to 5 years		100,048		98,058		—		—		—		—
		785,694		786,232		963,326		973,225		—		—
US Treasury Bonds
Within 30 days		5,186		8,674		72,893		73,156		166,846		167,195
After 30 to 90 days		—		—		69,197		70,545		80,732		80,901
After 90 days to 120 days		—		—		—		—		21,528		21,574
		5,186		8,674		142,090		143,701		269,106		269,670
Total	$	2,535,923	$	2,601,559	$	2,427,880	$	2,473,734	$	2,191,756	$	2,220,923

F-37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 31, 2006 and 2005, the weighted average interest rate of the Group’s repurchase agreements was 4.94% and 4.29%, respectively (June 30, 2005 — 3.07%) and included agreements with interest ranging from 4.17% to 5.33% and 3.88% to 4.48%, respectively (June 30, 2005 — from 1.90% to 3.47%). The following summarizes significant data on securities sold under agreements to repurchase as of December 31, 2006 and 2005 and June 30, 2005:

	December 31,						June 30,
	2006			2005			2005
	(In thousands)
Average daily aggregate balance outstanding	$	2,627,323		$	2,270,145		$	2,174,312
Maximum amount outstanding at any month-end	$	2,923,796		$	2,427,880		$	2,398,861
Weighted average interest rate during the year		5.09	%		3.78	%		2.78	%
Weighted average interest rate at year end		4.94	%		4.29	%		3.07	%

Advances from the Federal Home Loan Bank

At December 31, 2006 and 2005 and June 30, 2005, advances from the FHLB consisted of the following:

				December 31,				June 30,
Maturity Date	Fixed Interest Rate			2006		2005		2005
	(In thousands)
July-2005		1.57	%	$	—	$	—	$	50,000
January-2006		3.82	%		—		50,000		—
January-2006		4.17	%		—		10,000		—
January-2006		4.30	%		—		3,300		—
April-2006		2.48	%		—		25,000		25,000
July-2006		2.01	%		—		50,000		50,000
July-2006		2.13	%		—		50,000		50,000
August-2006		2.96	%		—		50,000		50,000
January-2007		5.33	%		6,900		—		—
January-2007		5.41	%		30,000		—		—
January-2007		5.44	%		30,000		—		—
January-2007		5.45	%		40,000		—		—
April-2007		3.09	%		25,000		25,000		25,000
August-2008		4.07	%		50,000		50,000		50,000
				$	181,900	$	313,300	$	300,000

Advances are received from the FHLB under an agreement whereby the Group is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At December 31, 2006, these advances were secured by mortgage loans amounting to $491.8 million. Also, at December 31, 2006, the Group has an additional borrowing capacity with the FHLB of $186.9 million. At December 31, 2006, the weighted average maturity of FHLB’s advances was 5.8 months (December 31, 2005 — 9.7 months; June 30, 2005 — 15.4 months).

Term Notes

At December 31, 2006, 2005 and June 30, 2005, there were term notes outstanding in the amount of $15.0 million, with a floating rate due quarterly (December 31, 2006 — 4.98%; December 31, 2005 — 3.61%; June 30, 2005 — 2.83%), a maturity date of March 27, 2007, and secured by investment securities with fair value amounting to $15.5 million (December 31, 2005 — $16.4; June 30, 2005 — $16.8 million; June 30, 2004 — $16.7 million).

F-38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Subordinated Capital Notes

Subordinated capital notes amounted to $36.1 million at December 31, 2006 and $72.2 million at December 31, 2005 and June 30, 2005.

In October 2001 and August 2003, the Statutory Trust I and the Statutory Trust II, respectively, special purpose entities of the Group, were formed for the purpose of issuing trust redeemable preferred securities. In December 2001 and September 2003, $35.0 million of trust redeemable preferred securities were each issued by the Statutory Trust I and the Statutory Trust II, respectively, as part of pooled underwriting transactions. Pooled underwriting involves participating with other bank holding companies in issuing the securities through a special purpose pooling vehicle created by the underwriters.

The proceeds from these issuances were used by the Statutory Trust I and the Statutory Trust II to purchase a like amount of floating rate junior subordinated deferrable interest debentures (“subordinated capital notes”) issued by the Group. The call provision of the subordinated capital notes purchased by the Statutory Trust I was exercised by the Group in December 2006 and the Group recorded a $915,000 loss related to the write-off of unamortized issuance costs of the notes. The second one, has a par value of $36.1 million, bears interest based on 3 months LIBOR plus 295 basis points (December 31, 2006 and 2005 — 8.31% and 7.45%, respectively; June 30, 2005 — 6.47%), payable quarterly, and matures on September 17, 2033. Statutory Trust II may be called at par after five years. The trust redeemable preferred security has the same maturity and call provisions as the subordinated capital notes. The subordinated deferrable interest debenture issued by the Group are accounted for as a liability denominated as subordinated capital notes on the consolidated statements of financial condition.

The subordinated capital note is treated as Tier 1 capital for regulatory purposes. On March 4, 2005, the Federal Reserve Board issued a final rule that continues to allow trust preferred securities to be included in Tier I regulatory capital, subject to stricter quantitative and qualitative limits. Under this rule, restricted core capital elements, which are qualifying trust preferred securities, qualifying cumulative perpetual preferred stock (and related surplus) and certain minority interests in consolidated subsidiaries, are limited in the aggregate to no more than 25% of a bank holding company’s core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability.

Unused Lines of Credit

The Group maintains a line of credit with a financial institution from which funds are drawn as needed. At December 31, 2006, the Group’s total available funds under this line of credit totaled $15.0 million with no balance outstanding as of this date.

9.   DERIVATIVE ACTIVITIES

The Group utilizes various derivative instruments for hedging purposes, as part of its asset and liability management. These transactions involve both credit and market risks. The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. The actual risk of loss is the cost of replacing, at market, these contracts in the event of default by the counterparties. The Group controls the credit risk of its derivative financial instrument agreements through credit approvals, limits, monitoring procedures and collateral, when considered necessary.

The Group generally uses interest rate swaps and options in managing its interest rate risk exposure. Certain swaps were entered into to convert the forecasted rollover of short-term borrowings into fixed rate liabilities for longer periods and provide protection against increases in short-term interest rates. Under these swaps, the Group pays a fixed monthly or quarterly cost and receives a floating thirty or ninety-day payment based on LIBOR. Floating rate payments received from the swap counterparties partially offset the interest payments to be made on the forecasted rollover of short-term borrowings. The Group decided to unwind all its outstanding interest rate swaps with aggregate notional amounts of $1.1 billion in two separate transactions in July and December 2006. The net gain on

F-39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

these transactions were approximately $10.5 million and will continue to be included in other comprehensive income and reclassified into earnings on the originally remaining term of the swaps (from January 2007 through September 2010).

In August 2004, the Group entered into a $35.0 million notional amount interest swap to fix the cost of the subordinated capital notes of the Statutory Trust I. This swap was fixed at a rate of 2.98% and matured on December 18, 2006.

Derivatives designated as a hedge consisted of interest rate swaps primarily used to hedge securities sold under agreements to repurchase with notional amounts of $1.240 billion and $885.0 million as of December 31, 2005 and June 30, 2005, respectively. There were no derivatives designated as a hedge as of December 31, 2006. Derivatives not designated as a hedge consist of purchased options used to manage the exposure to the stock market on stock indexed deposits with notional amounts of $131,530,000, $173,280,000 and $186,010,000 as of December 31, 2006 and 2005 and June 30 2005, respectively; embedded options on stock indexed deposits with notional amounts of $122,924,000, $164,651,000 and $178,478,000, as of December 31, 2006 and 2005 and June 30 2005, respectively; and interest rate swaps with notional amounts of $35 million as of December 31, 2005 (none at December 31, 2006).

The Group’s swaps, including those not designated as a hedge, and their terms at December 31, 2005 and June 30, 2005 (none at December 31, 2006) are set forth in the table below:

	December 31,			June 30,
	2005			2005
	(Dollars in thousands)
Swaps:
Pay fixed swaps notional amount	$	1,275,000		$	885,000
Weighted average pay rate — fixed		3.90	%		3.44	%
Weighted average receive rate — floating		4.39	%		3.27	%
Maturity in months		1 to 60			4 to 64
Floating rate as a percent of LIBOR		100	%		100	%

During the fiscal year ended June 30, 2005, the Group bought several put and call option contracts for the purpose of economically hedging $100 million in US Treasury Notes. The objective of the hedge was to protect the fair value of the US Treasury Notes classified as available-for-sale. The net effect of these transactions was to reduce earnings by $719,000 in the fiscal year 2005. There were no put or call options at December 31, 2006 and 2005.

The Group offers its customers certificates of deposit with an option tied to the performance of the Standard & Poor’s 500 stock market index. At the end of five years depositors receive a return equal to the greater of 15% of the principal in the account or 125% of the average increase in the month-end value of the index. The Group uses swap and option agreements with major money center banks and major broker-dealer companies to manage its exposure to changes in this index. Under the terms of the option agreements, the Group receives the average increase in the month-end value of the index in exchange for a fixed premium. Under the term of the swap agreements, the Group receives the average increase in the month-end value of the index in exchange for a quarterly fixed interest cost. The changes in fair value of the option agreements used to manage the exposure in the stock market in the certificates of deposit are recorded in earnings in accordance with SFAS No. 133, as amended.

Derivative instruments are generally negotiated over-the-counter (“OTC”) contracts. Negotiated OTC derivatives are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise price and maturity.

F-40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 31, 2006, the yearly contractual maturities of derivative instruments were as follows:

Year Ending	Equity Indexed		Equity Indexed
December 31,	Options Purchased		Options Written		Total
	(In thousands)
2007	$	43,285	$	38,511	$	81,796
2008		35,700		34,072		69,772
2009		22,085		21,055		43,140
2010		9,045		8,706		17,751
2011		21,415		20,580		41,995
	$	131,530	$	122,924	$	254,454

For the year ended December 31, 2006 the six-month period ended December 31, 2005 and for fiscal years ended June 30, 2005 and 2004, net interest (income) expense on interest rate swaps amounted to ($8.5 million), ($1.3 million), $10.1 million and $17.7 million, respectively, which represent -4.5%, -2%, 10% and 23%, respectively, of the total interest expense recorded for such periods. The average net interest rate of the interest rate swaps during the year ended December 31, 2006, the six-month period ended December 31, 2005 and for the fiscal years ended June 30, 2005 and 2004, was −0.32%, −0.11%, 1.14% and 1.15%, respectively.

Gains (losses) credited (charged) to earnings and reflected as “Derivatives” in the consolidated statements of operations for the year ended December 31, 2006 and the six-month period ended December 31, 2005 and for the fiscal years ended June 30, 2005 and 2004 amounted to $3.2 million, $1.3 million, ($2.8 million) and $11,000, respectively.

An unrealized gain of $14.0 million on derivatives designated as cash flow hedges was included in other comprehensive income at December 31, 2005 (June 30, 2005 — unrealized loss of $6.4 million).

At December 31, 2006 and 2005 and June 30, 2005, the fair value of derivatives was recognized as either assets or liabilities in the consolidated statements of financial condition as follows: the fair value of the interest rate swaps to fix the cost of the forecasted rollover of short-term borrowings represented a liability of $11.1 million, as of June 30, 2005, presented in accrued expenses and other liabilities, while there was no such liability as of December 31, 2006 and 2005; the purchased options used to manage the exposure to the stock market on stock indexed deposits represented an other asset of $34.2 million, $22.1 million and $19.0 million, respectively; the options sold to customers embedded in the certificates of deposit represented a liability of $32.2 million, $21.1 million and $18.2 million, respectively, recorded in deposits.

10.   EMPLOYEE BENEFIT PLAN

The Group has a cash or deferred arrangement profit sharing plan qualified under Section 1165(e) of the Puerto Rico Internal Revenue Code of 1994, as amended (the “Puerto Rico Code”) and the Section 401(a) and (e) of the United States Revenue Code of 1986, as amended (the “U.S. Code”), covering all full-time employees of the Group who have six months of service and are age twenty-one or older. Under this plan, participants may contribute each year from 2% to 10% of their compensation, as defined in the Puerto Rico Code and U.S. Code, up to a specified amount. The Group contributes 80 cents for each dollar contributed by an employee, up to $832 per employee. The Group’s matching contribution is invested in shares of its common stock. The plan is entitled to acquire and hold qualified employer securities as part of its investment of the trust assets pursuant to ERISA Section 407. For year ended December 31, 2006 and the six-month period ended December 31, 2005, the Group contributed 12,787 and 2,700, respectively, (fiscal year ended June 30, 2005 — 8,807; fiscal year ended June 30, 2004 — 7,195) shares of its common stock with a fair value of approximately $168,200 and $39,000, respectively (fiscal year ended June 30, 2005 — $196,800; fiscal year ended June 30, 2004 — $194,800) at the time of contribution. The Group’s contribution becomes 100% vested once the employee completes three years of service.

F-41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Also, the Group offers to its senior management a non-qualified deferred compensation plan, where executives can defer taxable income. Both the employer and the employee have flexibility because non-qualified plans are not subject to ERISA contribution limits nor are they subject to discrimination tests in terms of who must be included in the plan. Under this plan, the employee’s current taxable income is reduced by the amount being deferred. Funds deposited in a deferred compensation plan can accumulate without current income tax to the individual. Taxes are due when the funds are withdrawn, at the current income tax rate which may be lower than the individual’s current tax bracket.

11.   RELATED PARTY TRANSACTIONS

The Bank grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. These loans are offered at the same terms as loans to non-related parties. The activity and balance of these loans were as follows:

	December 31,						June 30,
	2006			2005			2005
	(In thousands)
Balance at the beginning of period	$	4,467		$	5,603		$	3,559
New loans		736			550			2,233
Repayments		(1,170	)		(1,686	)		(189	)
Balance at the end of period	$	4,033		$	4,467		$	5,603

As stated in Note 5, on June 30, 2005 the Group sold the Las Cumbres building, which the principal property was owned by the Group, to a local investor and his spouse for $3.4 million. The local investor is the brother of the former Chairman of the Group’s Board of Directors. Also, on the same date, the Bank entered into a lease agreement with the new owner of the building for a term of 10 years. Refer to Note 5 for more information about this transaction.

12.   INCOME TAX

Under the Puerto Rico Code, all companies are treated as separate taxable entities and are not entitled to file consolidated returns. The Group and its subsidiaries are subject to Puerto Rico regular income tax or alternative minimum tax (“AMT”) on income earned from all sources. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any one year may be used to offset regular income tax in future years, subject to certain limitations.

The components of income tax expense (benefit) for the year ended December 31, 2006, the six-month period ended December 31, 2005 and for the fiscal years ended June 30, 2005 and 2004, are as follows:

				Six-Month
	Year Ended			Period Ended			Fiscal Year Ended
	December 31,			December 31,			June 30,
	2006			2005			2005			2004
	(In thousands)
Current income tax expense (benefit)	$	1,817		$	4,659		$	(2,631	)	$	5,180
Deferred income tax expense (benefit)		(3,448	)		(4,532	)		982			397
Income tax expense (benefit)	$	(1,631	)	$	127		$	(1,649	)	$	5,577

The Group maintained an effective tax rate lower than the statutory rate of 43.5% as of December 31, 2006 and 41.5% as of December 31, 2005, and of 39% for the previous periods presented, mainly due to the interest income arising from certain mortgage loans, investments and mortgage-backed securities exempt for P.R. income tax purposes, net of expenses attributable to the exempt income. In addition, the Puerto Rico Code provides a dividend received deduction of 100% on dividends received from wholly-owned subsidiaries subject to income taxation in Puerto Rico. For the year ended December 31, 2006 and the six-month period ended December 31, 2005, the Group

F-42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

generated tax-exempt interest income of $146.7 million and $71.4 million, respectively (fiscal year ended June 30, 2005 — $127.9 million). Exempt interest relates mostly to interest earned on obligations of the United States and Puerto Rico governments and certain mortgage-backed securities, including securities held by the Bank’s international banking entities.

The reconciliation between the Puerto Rico income tax statutory rate and the effective tax rate as reported for the year ended December 31, 2006, the six-month period ended December 31, 2005 and for each of the last two fiscal years in the period ended June 30, 2005, are as follows:

							Six-Month
							Period Ended
	Year Ended December 31,						December 31,						Year Ended June 30,
	2006						2005						2005						2004
	Amount			Rate			Amount			Rate			Amount			Rate			Amount			Rate
	(Dollars in thousands)
Statutory rate	$	(2,931	)		43.5	%	$	7,074			41.5	%	$	22,628			39.0	%	$	25,465			39.0	%
Increase (decrease) in rate resulting from:
Exempt interest income, net		(3,527	)		−52.3	%		(9,625	)		−56.5	%		(23,090	)		−39.8	%		(23,991	)		−36.7	%
Non-deductible charge		37			0.5	%		28			0.2	%		746			1.3	%		1,378			2.1	%
Change in valuation allowance		1,928			28.6	%		1,991			11.7	%		—			0.0	%		—			0.0	%
Provision/(credit) for income tax contingencies		(465	)		−6.9	%		4,300			25.2	%		(2,800	)		−4.8	%		—			0.0	%
Effect of SAB 108 initial adoption		589			8.7	%		—			—			—			—			—			—
Other items, net		2,738			40.6	%		(3,641	)		−21.4	%		867			1.5	%		2,725			4.8	%
Income tax expense (benefit)	$	(1,631	)		−24.2	%	$	127			0.8	%	$	(1,649	)		−2.8	%	$	5,577			8.5	%

F-43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred income tax reflects the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. The components of the Group’s deferred tax asset, net at December 31, 2006 and 2005 and June 30, 2005, are as follows:

	December 31,						June 30,
	2006			2005			2005
	(In thousands)
Allowance for loan losses	$	3,142		$	2,601		$	2,533
Unamortized discount related to mortgage servicing rights sold		1,745			2,377			2,119
Deferred gain on sale of assets		312			268			130
Deferred loan origination fees		3,043			3,327			3,044
Unrealized net gains included in other comprehensive income		290			1,810			112
Charitable contributions		66			58			46
S&P option contracts		4,331			4,300			—
Net operating loss carryforwards		6,911			1,991			—
Other		518			152			180
Total gross deferred tax asset		20,358			16,884			8,164
Less: Valuation allowance		(3,919	)		(1,991	)		—
Net deferred tax asset		16,439			14,893			8,164
Unrealized gains on derivative activities, net		—			(15	)		(86	)
Deferred loan origination costs		(2,289	)		(2,656	)		(1,887	)
Total deferred tax liabilities		(2,289	)		(2,671	)		(1,973	)
Deferred tax asset, net	$	14,150		$	12,222		$	6,191

In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax asset is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax asset are deductible, management believes it is more likely than not that the Group will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2006. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

At December 31, 2006, the Group has net operating loss carryforwards for income tax purposes of approximately $23.0 million, which are available to offset future taxable income, if any, through December 2011.

The Group benefits from favorable tax treatment under regulations relating to the activities of the Bank’s IBEs. Any change in such tax regulations, whether by applicable regulators or as a result of legislation subsequently enacted by the Legislature of Puerto Rico, could adversely affect the Group’s profits and financial condition.

Puerto Rico international banking entities, or IBEs, are currently exempt from taxation under Puerto Rico law. In November 2003, the Puerto Rico’s Legislature enacted a law amending the IBE Act. This law imposes income taxes at normal statutory rates on each IBE that operates as a unit of a bank, if the IBE’s net income generated after December 31, 2003 exceeds 40 percent of the Bank’s net income in the taxable year commenced on July 1, 2003 to June 30, 2004, 30 percent of the Bank’s net income in the taxable year commenced on July 1, 2004 to June 30, 2005, 20 percent of the Bank’s net income in the taxable six-month period commencing on July 1, 2005 to December 31,

F-44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2005, and 20 percent of the Bank’s net income in the taxable year commencing on January 1, 2006 to December 31, 2006, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a bank.

The Group has an IBE that operates as a unit of the Bank. In November 2003, the Group organized a new IBE that operates as a subsidiary of the Bank. The Group transferred as of January 1, 2004 most of the assets and liabilities of the IBE unit to the IBE subsidiary of the Bank, to maintain the income tax exemption of such activities. Although this transfer of IBE assets allows the Group to continue enjoying tax benefits, there cannot be any assurance that the IBE Act will not be modified in the future in a manner to reduce the tax benefits available to the new IBE subsidiary.

On August 1, 2005 the Puerto Rico Legislature approved Act No. 41 that imposes an additional tax of 2.5% on taxable income exceeding $20,000. The law is effective for tax years beginning after December 31, 2004 and ending on or before December 31, 2006. This additional tax imposition did not have a material effect on the Group’s consolidated operational results for the year ended December 31, 2006 due to the tax exempt composition of the Group’s investments.

On May 13, 2006, the Puerto Rico Governor signed into law Act No. 89 to (i) increase the recapture tax that is imposed on corporations and partnerships generating taxable income in excess of $500,000 with the purpose of increasing the maximum marginal corporate income tax rate for these entities from 39% to 41.5%, and (ii) to impose an additional tax of 2% on the taxable income of banking corporations covered under the Puerto Rico the Group’s investments.

On May 16, 2006, the Puerto Rico Governor also signed into law Act No. 98 to impose a one-time 5% extraordinary tax that is imposed on an amount equal to the net taxable income of non-exempt corporations and partnerships for the last taxable year ended on or before December 31, 2005. On July 31, 2006 Act No. 137 was signed into law to amend various provisions of Act No. 98. The payment of this extraordinary tax constitutes, in effect, a prepayment, as the taxpayer will be allowed to credit the amount so paid against its Puerto Rico income tax liability for taxable years beginning after July 31, 2006 provided the credit claimed in any taxable year does not exceed 25% of the extraordinary tax paid. Since the Group and its subsidiaries did not generate net taxable income for the year 2005, this additional tax imposition did not apply and, therefore, it did not affect on the Group’s consolidated operational results.

13.   STOCKHOLDERS’ EQUITY

Stock Dividend and Stock Split

On November 30, 2004, the Group declared a ten percent (10%) stock dividend on common stock held by shareholders of record as of December 31, 2004. As a result, a total of 2,236,152 shares of common stock were distributed on January 17, 2005 (1,993,711 shares of common stock were issued and 242,441 were distributed from the Group’s treasury stock account.) For purposes of the computation of income (loss) per common share, cash dividends and stock price, the stock dividend was retroactively recognized for all periods presented in the accompanying consolidated financial statements.

Treasury Stock

On August 30, 2005, the Group’s Board of Directors approved a stock repurchase program for the repurchase of up to $12.1 million of its outstanding shares of common stock, which replaced the former program. On June 20, 2006, the Board of Directors approved an increase of $3.0 million to the initial amount of the program, for the repurchase of up to $15.1 million. Pursuant to this program, the Group repurchased 232,600 shares of its common stock at an average price of $12.11 each, for a total $2.8 million, during the year ended December 31, 2006.

F-45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The activity in connection with common shares held in treasury by the Group for the year ended December 31, 2006, the six-month period ended December 31, 2005 and the fiscal years ended June 30, 2005 and 2004 is set forth below:

							Six-Month
	Fiscal Year Ended						Period Ended						Fiscal Year Ended
	December 31,						December 31,						June 30,
	2006						2005						2005						2004
				Dollar						Dollar						Dollar						Dollar
	Shares			Amount			Shares			Amount			Shares			Amount			Shares			Amount
	(In thousands)
Beginning of period		770		$	10,332			228		$	3,368			246		$	4,578			2,025		$	35,888
Common shares repurchased under repurchase program		233			2,817			545			7,003			200			3,014			20			499
Common shares repurchased/used to match defined contribution plan, net		(14	)		(193	)		(3	)		(39	)		24			249			—			—
Stock dividend		—			—			—			—			(242	)		(4,473	)		(1,799	)		(31,809	)
End of period		989		$	12,956			770		$	10,332			228		$	3,368			246		$	4,578

Stock Option Plans

At December 31, 2006, the Group had three stock-based employee compensation plans: the 1996, 1998, and 2000 Incentive Stock Option Plans. These plans offer key officers, directors and employees an opportunity to purchase shares of the Group’s common stock. The Compensation Committee of the Board of Directors has sole authority and absolute discretion as to the number of stock options to be granted to any officer, director or employee, their vesting rights, and the options’ exercise prices. The plans provide for a proportionate adjustment in the exercise price and the number of shares that can be purchased in case of merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split in which the number of shares of common stock of the Group as a whole are increased, decreased, changed into or exchanged for a different number or kind of shares or securities. Stock options become vested upon completion of specified years of service.

On July 1, 2005, the Group adopted SFAS 123R. This Statement requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. SFAS 123R requires measurement of fair value of employee stock options using an option pricing model that takes into account the awarded options’ unique characteristics. Subsequent to the adoption of SFAS 123R, the Group recorded approximately $23,000 and $11,000 related to compensation expense for options issued for the year ended December 31, 2006 and the six-month period ended December 31, 2005, respectively. The remaining unrecognized compensation cost related to unvested awards as of December 31, 2006, was approximately $226,000 and the weighted average period of time over which this cost will be recognized is approximately 7 years.

F-46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The activity in outstanding options for the year ended December 31, 2006, the six-month period ended December 31, 2005 and the fiscal years ended June 30, 2005 and 2004, is set forth below:

	Fiscal Year					Six-Month Period					Fiscal Year
	Ended December 31,					Ended December 31,					Ended June 30,
	2006					2005					2005					2004
				Weighted					Weighted					Weighted					Weighted
	Number			Average		Number			Average		Number			Average		Number			Average
	of			Exercise		of			Exercise		of			Exercise		of			Exercise
	Options			Price		Options			Price		Options			Price		Options			Price
Beginning of period		946,855		$	15.51		1,219,333		$	13.23		1,674,351		$	12.36		2,270,014		$	11.44
Options granted		30,000			12.20		56,000			15.02		566,525			24.36		224,722			23.92
Options exercised		(72,486	)		8.04		(246,489	)		3.44		(871,162	)		8.15		(713,198	)		8.89
Options forfeited		(70,836	)		19.60		(81,989	)		17.12		(150,381	)		11.95		(107,187	)		12.93
End of period		833,533		$	15.61		946,855		$	15.51		1,219,333		$	13.23		1,674,351		$	12.55

The following table summarizes the range of exercise prices and the weighted average remaining contractual life of the options outstanding at December 31, 2006:

	Outstanding						Exercisable
			Weighted		Weighted Average				Weighted
	Number of		Average		Contract Life		Number of		Average
Range of Exercise Prices	Options		Exercise Price		(Years)		Options		Exercise Price
$ 5.63 to $ 8.45		148,316	$	7.13		7.1		148,316	$	7.13
8.45 to 11.27		62,083		10.71		5.8		62,083		10.71
11.27 to 14.09		254,277		12.70		2.7		218,277		12.70
14.09 to 16.90		81,622		15.51		3.8		41,622		15.51
19.73 to 22.55		88,935		19.90		3.4		88,935		19.90
22.55 to 25.37		125,700		24.08		2.3		125,700		24.08
25.37 to 28.19		72,600		27.53		2.1		72,600		27.53
		833,533	$	15.61		3.6		757,533	$	15.79
Aggregate Intrinsic Value	$	13,013,000					$	11,964,000

F-47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Earnings (loss) per Common Share

The calculation of earnings (loss) per common share for the year ended December 31, 2006, the six-month period ended December 31, 2005 and the fiscal years ended June 30, 2005 and 2004 is as follows:

	Year Ended			Six-Month Period			Fiscal Year
	December 31,			Ended December 31,			Ended June 30,
	2006			2005			2005			2004
	(In thousands, except per share data)
Net income (loss)	$	(5,106	)	$	16,919		$	59,669		$	59,717
Less: Dividends on preferred stock		(4,802	)		(2,401	)		(4,802	)		(4,198	)
Income (loss) available to common shareholders’	$	(9,908	)	$	14,518		$	54,867		$	55,519
Weighted average common shares and share equivalents:
Average common shares outstanding		24,562			24,777			24,571			22,394
Average potential common shares-options		110			340			1,104			1,486
Total		24,672			25,117			25,675			23,880
Earnings (loss) per common share — basic	$	(0.40	)	$	0.59		$	2.23		$	2.48
Earnings (loss) per common share — diluted	$	(0.40	)	$	0.58		$	2.14		$	2.32

For the year ended December 31, 2006, the six-month period ended December 31, 2005 and the fiscal years ended June 30, 2005 and 2004, stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 497,179, 557,406, 207,545 and 31,560, respectively.

Legal Surplus

The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At December 31, 2006, legal surplus amounted to $36.2 million (December 31, 2005 — $35.9 million; June 30, 2005 — $33.9 million). The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders. In addition, the Federal Reserve Board has issued a policy statement that bank holding companies should generally pay dividends only from operating earnings of the current and preceding two years.

Preferred Stock

On May 28, 1999, the Group issued 1,340,000 shares of 7.125% Noncumulative Monthly Income Preferred Stock, Series A, at $25 per share. Proceeds from issuance of the Series A Preferred Stock, were $32.4 million, net of $1.1 million of issuance costs. The Series A Preferred Stock has the following characteristics: (1) annual dividends of $1.78 per share, payable monthly, if declared by the Board of Directors; missed dividends are not cumulative, (2) redeemable at the Group’s option beginning on May 30, 2004, (3) no mandatory redemption or stated maturity date and (4) liquidation value of $25 per share.

On September 30, 2003, the Group issued 1,380,000 shares of 7.0% Noncumulative Monthly Income Preferred Stock, Series B, at $25 per share. Proceeds from issuance of the Series B Preferred Stock, were $33.1 million, net of $1.4 million of issuance costs. The Series B Preferred Stock has the following characteristics: (1) annual dividends of $1.75 per share, payable monthly, if declared by the Board of Directors; missed dividends are not cumulative, (2) redeemable at the Group’s option beginning on October 31, 2008, (3) no mandatory redemption or stated maturity date, and (4) liquidation value of $25 per share.

F-48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accumulated Other Comprehensive Income

Accumulated other comprehensive income (loss), net of income tax, as of December 31, 2006 and 2005 and June 30, 2005 consisted of:

	December 31,						June 30,
	2006			2005			2005
	(In thousands)
Realized gain on termination of derivative activities	$	8,998		$	—		$	—
Unrealized gain (loss) on derivatives designated as cash flow hedges		—			3,938			(8,768	)
Unrealized loss on securities available-for-sale transferred to held to maturity		(18,721	)		(21,585	)		(24,211	)
Unrealized loss on securities available-for-sale		(6,376	)		(20,237	)		(5,404	)
	$	(16,099	)	$	(37,884	)	$	(38,383	)

Minimum Regulatory Capital Requirements

The Group (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Group’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Group and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Group and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average assets (as defined in the regulations). As of December 31, 2006 and 2005 and June 30, 2005, the Group and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2006 and 2005 and June 30, 2005, the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables.

F-49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

There are no conditions or events since the notification that have changed the Bank’s category. The Group’s and the Bank’s actual capital amounts and ratios as of December 31, 2006 and 2005 and June 30, 2005 are as follows:

	Actual				Minimum Capital Requirement
Group Ratios	Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of December 31, 2006
Total Capital to Risk-Weighted Assets	$	380,574		22.04%	$	135,677		8.00%
Tier I Capital to Risk-Weighted Assets	$	372,558		21.57%	$	67,830		4.00%
Tier I Capital to Total Assets	$	372,558		8.42%	$	176,987		4.00%
As of December 31, 2005
Total Capital to Risk-Weighted Assets	$	454,299		35.22%	$	103,204		8.00%
Tier I Capital to Risk-Weighted Assets	$	447,669		34.70%	$	51,602		4.00%
Tier I Capital to Total Assets	$	447,669		10.13%	$	176,790		4.00%
As of June 30, 2005
Total Capital to Risk-Weighted Assets	$	451,626		37.51%	$	96,327		8.00%
Tier I Capital to Risk-Weighted Assets	$	445,131		36.97%	$	48,163		4.00%
Tier I Capital to Total Assets	$	445,131		10.59%	$	168,080		4.00%

									Minimum to be Well
					Minimum Capital				Capitalized Under Prompt Corrective
	Actual				Requirement				Action Provisions
Bank Ratios	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of December 31, 2006
Total Capital to Risk-Weighted Assets	$	293,339		17.49%	$	134,174		8.00%	$	167,651		10.00%
Tier I Capital to Risk-Weighted Assets	$	285,323		17.01%	$	67,095		4.00%	$	100,543		6.00%
Tier I Capital to Total Assets	$	285,323		6.43%	$	177,495		4.00%	$	222,098		5.00%
As of December 31, 2005
Total Capital to Risk-Weighted Assets	$	312,617		24.37%	$	102,607		8.00%	$	128,259		10.00%
Tier I Capital to Risk-Weighted Assets	$	305,987		23.86%	$	51,304		4.00%	$	76,956		6.00%
Tier I Capital to Total Assets	$	305,987		6.90%	$	177,272		4.00%	$	221,591		5.00%
As of June 30, 2005
Total Capital to Risk-Weighted Assets	$	292,784		25.71%	$	91,112		8.00%	$	113,890		10.00%
Tier I Capital to Risk-Weighted Assets	$	286,289		25.14%	$	45,556		4.00%	$	68,334		6.00%
Tier I Capital to Total Assets	$	286,289		6.87%	$	166,789		4.00%	$	208,487		5.00%

The Group’s ability to pay dividends to its stockholders and other activities can be restricted if its capital falls below levels established by the Federal Reserve Board’s guidelines. In addition, any bank holding company whose capital falls below levels specified in the guidelines can be required to implement a plan to increase capital.

14.   COMMITMENTS

Loan Commitments

At December 31, 2006, there were $42.7 million in loan commitments, which represent unused lines of credit provided to customers. Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates, bear variable interest and may require payment of a fee. Since the commitments may expire unexercised, the

F-50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

total commitment amounts do not necessarily represent future cash requirements. The Group evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Group upon extension of credit, is based on management’s credit evaluation of the customer.

Lease Commitments

The Group has entered into various operating lease agreements for branch facilities and administrative offices. Rent expense for the year ended December 31, 2006 and the six-month period ended December 31, 2005 amounted to $3.9 million and $1.7 million, respectively (fiscal year ended June 30, 2005 — $3.0 million). Future rental commitments under terms of leases in effect at December 31, 2006, exclusive of taxes, insurance and maintenance expenses payable by the Group, are summarized as follows:

Year Ending December 31,	Minimum Rent
	(In thousands)
2007	$	3,091
2008		2,949
2009		2,942
2010		2,801
2011		2,731
Thereafter		9,060
	$	23,574

In May 2006, the Group moved to its new headquarters, Oriental Center, which consolidates all corporate offices and support facilities into a new building at Professional Offices Park in San Juan, Puerto Rico. The Group is the anchor tenant by leasing more than 50,000 square feet office space.

15.   LITIGATION

On August 14, 1998, as a result of a review of its accounts in connection with the admission by a former Group officer of having embezzled funds and manipulated bank accounts and records, the Group became aware of certain irregularities. The Group notified the appropriate regulatory authorities and commenced an intensive investigation with the assistance of forensic accountants, fraud experts and legal counsel. The investigation determined losses of $9.6 million resulting from dishonest and fraudulent acts and omissions involving several former Group employees, which were submitted to the Group’s fidelity insurance policy (the “Policy”) issued by Federal Insurance Company, Inc. (“FIC”). In the opinion of the Group’s management, its legal counsel and experts, the losses determined by the investigation were covered by the Policy. However, FIC denied all claims for such losses. On August 11, 2000, the Group filed a lawsuit in the United States District Court for the District of Puerto Rico against FIC, a stock insurance corporation organized under the laws of the State of Indiana, for breach of insurance contract, breach of covenant of good faith and fair dealing and damages, seeking payment of the Group’s $9.6 million insurance claim loss and the payment of consequential damages of no less than $13.0 million resulting from FIC capricious, arbitrary, fraudulent and without cause denial of the Group’s claim. The losses resulting from such dishonest and fraudulent acts and omissions were expensed in prior years. On October 3, 2005, a jury rendered a verdict of $7.5 million in favor of the Group and against FIC, the defendant. The jury granted the Group $453,219 for fraud and loss documentation in connection with its Accounts Receivable Returned Checks Account. However, the jury could not reach a decision on the Group’s claim for $3.4 million in connection with fraud in its Cash Accounts, thus forcing a new trial on this issue. The jury denied the Group’s claim for $5.6 million in connection with fraud in the Mortgage Loans Account, but the jury determined that FIC had acted in bad faith and with malice. It, therefore, awarded the Group $7.1 million in consequential damages. The court decided not to enter a final judgment for the aforementioned awards until a new trial on the fraud in the Cash Accounts claim is held. After a final judgment is entered, the parties would be entitled to exhaust their post-judgment and appellate rights. The Group has not recognized any income on this claim since the appellate rights have not been exhausted and the amount to be collected has not been determined. The

F-51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Group expects to request and recover prejudgment interest, costs, fees and expenses related to its prosecution of this case. However, no specified sum can be anticipated as these claims are subject to the discretion of the court. To date, the court has not scheduled this new trial.

In addition, the Group and its subsidiaries are defendants in a number of legal proceedings incidental to their business. The Group is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group’s financial condition or results of operations.

16.   FAIR VALUE OF FINANCIAL INSTRUMENTS

The reported fair values of financial instruments are based on either quoted market prices for identical or comparable instruments or estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Accordingly, the fair values may not represent the actual values of the financial instruments that could have been realized as of year-end or that will be realized in the future.

The fair value estimates are made at a point in time based on the type of financial instruments and related relevant market information. Quoted market prices are used for financial instruments in which an active market exists. However, because no market exists for a portion of the Group’s financial instruments, fair value estimates are based on judgments regarding the amount and timing of estimated future cash flows, assumed discount rates reflecting varying degrees of risk, and other factors. Because of the uncertainty inherent in estimating fair values, these estimates may vary from the values that would have been used had a ready market for these financial instruments existed.

These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant tangible and intangible assets that are not considered financial instruments are the value of long-term customer relationships of the retail deposits, and premises and equipment.

F-52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The estimated fair value and carrying value of the Group’s financial instruments at December 31, 2006 and 2005 and June 30, 2005 is as follows:

	December 31,								June 30,
	2006				2005				2005
	Fair		Carrying		Fair		Carrying		Fair		Carrying
	Value		Value		Value		Value		Value		Value
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	34,070	$	34,070	$	17,269	$	17,269	$	24,683	$	24,683
Time deposits with other banks		5,000		5,000		60,000		60,000		30,000		30,000
Trading securities		243		243		146		146		265		265
Investment securities available-for-sale		974,960		974,960		1,046,884		1,046,884		1,029,720		1,029,720
Investment securities held-to-maturity		1,931,720		1,967,477		2,312,832		2,346,255		2,142,708		2,134,746
FHLB stock		13,607		13,607		20,002		20,002		27,058		27,058
Securities sold but yet not delivered		6,430		6,430		44,009		44,009		1,034		1,034
Total loans (including loans held-for-sale)		1,209,177		1,212,370		911,477		903,308		917,721		903,604
Equity options purchased		34,216		34,216		22,054		22,054		18,999		18,999
Accrued interest receivable		27,940		27,940		29,067		29,067		23,735		23,735
Interest rate swaps		—		—		2,509		2,509		—		—
Financial Liabilities:
Deposits		1,220,601		1,232,988		1,288,254		1,298,568		1,247,805		1,252,897
Securities sold under agreements to repurchase		2,523,152		2,535,923		2,470,463		2,427,880		2,191,507		2,191,756
Advances from FHLB		180,876		181,900		309,942		313,300		297,123		300,000
Subordinated capital notes		36,083		36,083		72,166		72,166		72,166		72,166
Term notes		15,000		15,000		15,000		15,000		15,000		15,000
Federal funds purchased and other short term borrowings		13,568		13,568		4,455		4,455		12,310		12,310
Securities and loans purchased but not yet received		—		—		43,354		43,354		22,772		22,772
Accrued expenses and other liabilities		21,321		21,321		30,435		30,435		41,209		41,209
Interest rate swaps		—		—		—		—		11,581		11,581

	December 31,										June 30,
	2006					2005					2005
	Contract or					Contract or					Contract or
	Notional		Fair			Notional		Fair			Notional		Fair
	Amount		Value			Amount		Value			Amount		Value
	(In thousands)
Off-Balance Sheet Items:
Liabilities:
Unused lines of credit	$	13,137	$	(263	)	$	16,386	$	(328	)	$	18,191	$	(364	)

F-53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31, 2006 and 2005 and June 30, 2005:

•  Cash and cash equivalents, money market investments, time deposits with other banks, securities sold but not yet delivered, accrued interest receivable and payable, securities and loans purchased but not yet received, federal funds purchased, accrued expenses, other liabilities, term notes and subordinated capital notes have been valued at the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.

•  The fair value of trading securities and investment securities available for sale and held to maturity is estimated based on bid quotations from securities dealers. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Investments in FHLB stock are valued at their redemption value.

•  The estimated fair value of loans held-for-sale is based on secondary market prices. The fair value of the loan portfolio has been estimated for loan portfolios with similar financial characteristics. Loans are segregated by type, such as mortgage, commercial and consumer. Each loan category is further segmented into fixed and adjustable interest rates and by performing and non-performing categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for prepayment estimates, if any, using estimated current market discount rates that reflect the credit and interest rate risk inherent in the loan. The fair value for significant non-performing loans is based on specific evaluations of discounted expected future cash flows from the loans or its collateral using current appraisals and market rates.

•  The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market discount rates for deposits of similar remaining maturities.

•  For short-term borrowings, the carrying amount is considered a reasonable estimate of fair value. The fair value of long-term borrowings is based on the discounted value of the contractual cash flows, using current estimated market discount rates for borrowings with similar terms and remaining maturities.

•  The fair value of interest rate swaps and equity index option contracts were estimated by management based on the present value of expected future cash flows using discount rates of the swap yield curve. These fair values represent the estimated amount the Group would receive or pay to terminate the contracts taking into account the current interest rates and the current creditworthiness of the counterparties.

•  The fair value of commitments to extend credit and unused lines of credit is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings.

17.   SEGMENT REPORTING

The Group segregates its businesses into the following major reportable segments of business: Banking, Treasury and Financial Services. Management established 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 organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Group measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. In June 2006, management decided to reclassify and present Investment Banking revenues in the Treasury segment rather than in the Financial Service segment. This reclassification was retroactively presented in the tables below.

Banking includes the Bank’s branches and mortgage banking, with traditional banking products such as deposits and mortgage, commercial and consumer loans. The mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate and purchase mortgage loans for the Group’s own portfolio. The Group originates Federal Housing Administration (“FHA”)-insured and Veterans

F-54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Administration (“VA”)-guaranteed mortgages that are primarily securitized for issuance of Government National Mortgage Association (“GNMA”) mortgage-backed securities which can be resold to individual or institutional investors in the secondary market. Conventional loans that meet the underwriting requirements for sale or exchange under standard Federal National Mortgage Association (the “FNMA”) or the Federal Home Loan Mortgage Corporation (the “FHLMC”) programs are referred to as conforming mortgage loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed securities. Through December 2005, the Group outsourced the securitization of GNMA, FNMA and FHLMC mortgage-backed securities. In 2006 and after FNMA’s approval for the Group to sell FNMA-conforming conventional mortgage loans directly in the secondary market, the Group became an approved seller of FNMA, as well as FHLMC, mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The Group is also an approved issuer of GNMA mortgage-backed securities. The Group will continue to outsource to a third party the servicing of the GNMA, FNMA and FHLMC pools that it issues and its mortgage loan portfolio.

Treasury activities encompass all of the Group’s treasury-related functions. The Group’s investment portfolio primarily consists of mortgage-backed securities, U.S. Treasury notes, U.S. Government agency bonds, P.R. Government obligations, and money market instruments. Mortgage-backed securities, the largest component, consist principally of pools of residential mortgage loans that are made to consumers and then resold in the form of certificates in the secondary market, the payment of interest and principal of which is guaranteed by GNMA, FNMA or FHLMC.

Financial services are comprised of the Bank’s trust division (Oriental Trust), the securities brokerage and investment banking subsidiary (Oriental Financial Services), the insurance agency subsidiary (Oriental Insurance), and the pension plan administration subsidiary (CPC). The core operations of this segment are financial planning, money management, brokerage services, insurance sales activity, corporate and individual trust services, as well as pension plan administration services.

Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices. The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies.” Following are the results of operations and the selected financial information by operating segment as of and for the year ended December 31, 2006, the six-month period ended December 31, 2005 and for each of the two fiscal years in the period ended June 30, 2005:

	Year Ended December 31,
							Financial			Total Major						Consolidated
December 31, 2006	Banking			Treasury			Services			Segments			Eliminations			Total
	(In thousands)
Interest income	$	79,267		$	152,830		$	214		$	232,311		$	—		$	232,311
Interest expense		(25,683	)		(161,529	)		(973	)		(188,185	)		—			(188,185	)
Net interest income (expense)		53,584			(8,699	)		(759	)		44,126			—			44,126
Non-interest income (loss)		9,452			(8,430	)		16,216			17,238			—			17,238
Non-interest expenses		(50,177	)		(2,573	)		(10,963	)		(63,713	)		—			(63,713	)
Intersegment revenue		3,952			—			—			3,952			(3,952	)		—
Intersegment expense		—			(806	)		(3,146	)		(3,952	)		3,952			—
Provision for loan losses		(4,388	)		—			—			(4,388	)					(4,388	)
Income (loss) before income taxes	$	12,423		$	(20,508	)	$	1,348		$	(6,737	)	$	—		$	(6,737	)
Total assets as of December 31, 2006	$	1,679,150		$	2,995,634		$	12,014		$	4,686,798		$	(313,108	)	$	4,373,690

F-55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Six Month Period Ended December 31,
							Financial			Total Major
December 31, 2005	Banking			Treasury			Services			Segments			Eliminations			Total
	(In thousands)
Interest income	$	46,754		$	58,267		$	65		$	105,086		$	—		$	105,086
Interest expense		(31,304	)		(39,402	)		—			(70,706	)		—			(70,706	)
Net interest income		15,450			18,865			65			34,380			—			34,380
Non-interest income		5,158			3,737			7,487			16,382			—			16,382
Non-interest expenses		(24,904	)		(1,571	)		(5,339	)		(31,814	)		—			(31,814	)
Intersegment revenue		1,699			—			—			1,699			(1,699	)		—
Intersegment expense		—			(6	)		(1,693	)		(1,699	)		1,699			—
Provision for loan losses		(1,902	)		—			—			(1,902	)					(1,902	)
Income before income taxes	$	(4,499	)	$	21,025		$	520		$	17,046		$	—		$	17,046
Total assets as of December 31, 2005	$	969,186		$	3,963,013		$	8,513		$	4,940,712		$	(393,763	)	$	4,546,949

	Fiscal Year Ended June 30,
							Financial			Total Major
June 30, 2005	Banking			Treasury			Services			Segments			Eliminations			Total
	(In thousands)
Interest income	$	79,220		$	110,033		$	59		$	189,312		$	—		$	189,312
Interest expense		(44,676	)		(58,223	)		—			(102,899	)		—			(102,899	)
Net interest income		34,544			51,810			59			86,413			—			86,413
Non-interest income		14,234			6,480			14,171			34,885			—			34,885
Non-interest expenses		(48,267	)		(1,524	)		(10,172	)		(59,963	)		—			(59,963	)
Intersegment revenue		3,684			—			—			3,684			(3,684	)		—
Intersegment expense		—			(593	)		(3,091	)		(3,684	)		3,684			—
Provision for loan losses		(3,315	)		—			—			(3,315	)					(3,315	)
Income (loss) before income taxes	$	880		$	56,173		$	967		$	58,020		$	—		$	58,020
Total assets as of June 30, 2005	$	973,296		$	3,655,649		$	9,582		$	4,638,527		$	(391,662	)	$	4,246,865
June 30, 2004
Interest income	$	52,126		$	112,174		$	85		$	164,385		$	—		$	164,385
Interest expense		(17,109	)		(60,065	)		—			(77,174	)		—			(77,174	)
Net interest income		35,017			52,109			85			87,211			—			87,211
Non-interest income		14,748			13,914			17,372			46,034			—			46,034
Non-interest expenses		(42,524	)		(7,653	)		(13,187	)		(63,364	)		—			(63,364	)
Intersegment revenue		2,964			—			1,028			3,992			(3,992	)		—
Intersegment expense		—			(392	)		(3,600	)		(3,992	)		3,992			—
Provision for loan losses		(4,587	)		—			—			(4,587	)		—			(4,587	)
Income before income taxes	$	5,618		$	57,978		$	1,698		$	65,294		$	—		$	65,294
Total assets as of June 30, 2004	$	771,483		$	3,096,459		$	12,332		$	3,880,274		$	(154,579	)	$	3,725,695

F-56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

18.   ORIENTAL FINANCIAL GROUP INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION

The principal source of income for the Group consists of dividends from the Bank. As a bank holding company subject to the regulations of the Federal Reserve Board, the Group must obtain approval from the Federal Reserve Board for any dividend if the total of all dividends declared by it in any calendar year would exceed the total of its consolidated net profits for the year, as defined by the Federal Reserve Board, combined with its retained net profits for the two preceding years. The payment of dividends by the Bank to the Group may also be affected by other regulatory requirements and policies, such as the maintenance of certain regulatory capital levels. For the year ended December 31, 2006, the Bank paid $10.0 million in dividends to the Group. There were no cash dividends paid by the Bank to the Group for the six-month period ended December 31, 2005, while the dividends paid for the fiscal years ended June 30, 2005 and 2004 amounted to $5.0 million and $23.0 million, respectively.

The following condensed financial information presents the financial position of the parent company only as of December 31, 2006 and 2005 and June 30, 2005 and the results of its operations and its cash flows for the year ended December 31, 2006, the six-month period ended December 31, 2005 and for each of the fiscal years in the two year period ended June 30, 2005:

ORIENTAL FINANCIAL GROUP INC.

CONDENSED STATEMENTS OF FINANCIAL POSITION INFORMATION

(Parent Company Only)

	December 31,				June 30,
	2006		2005		2005
	(In thousands)
ASSETS
Cash and cash equivalents	$	29,082	$	15,531	$	15,489
Investment securities available-for-sale, fair value		1,700		1,988		11,734
Other investment securities		30,949		—		—
Investment securities held-to-maturity, at amortized cost		21,895		22,219		11,130
Investment in bank subsidiary, equity method		281,772		268,191		247,000
Investment in nonbank subsidiaries, equity method		10,623		8,621		10,054
Due from bank subsidiary, net		—		100,804		119,954
Other assets		4,307		2,767		2,221
Total assets	$	380,328	$	420,121	$	417,582
LIABILITIES AND STOCKHOLDERS’ EQUITY
Dividend payable	$	3,423	$	3,445	$	3,487
Due to nonbank subsidiaries, net		—		200		175
Due to bank subsidiary		4,184		—		—
Subordinated capital notes		36,083		72,166		72,166
Deferred tax liability, net		12		—		152
Accrued expenses and other liabilities		200		2,519		2,847
Total liabilities		43,902		78,330		78,827
Stockholders’ equity		336,426		341,791		338,755
Total liabilities and stockholders’ equity	$	380,328	$	420,121	$	417,582

F-57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME INFORMATION
(Parent Company Only)

				Six-Month
	Year Ended			Period Ended			Fiscal Year
	December 31,			December 31,			Ended June 30,
	2006			2005			2005			2004
	(In thousands)
Income:
Dividends from bank subsidiary	$	10,000		$	—		$	5,000		$	23,000
Dividends from nonbank subsidiary		—			77			121			143
Interest income		2,468			648			1,287			1,744
Investment and trading activities, net and other		(1,127	)		802			—			1,952
Total income		11,341			1,527			6,408			26,839
Expenses:
Interest expense		5,337			2,474			4,325			3,005
Operating expenses		5,408			551			(401	)		5,442
Total expenses		10,745			3,025			3,924			8,447
Income (loss) before income taxes		596			(1,498	)		2,484			18,392
Income tax (expense) benefit		(5	)		4			—			—
Income (loss) before changes in undistributed earnings of subsidiaries		591			(1,494	)		2,484			18,392
Equity in undistributed earnings (losses) from:
Bank subsidiary		(6,631	)		19,846			59,679			40,255
Nonbank subsidiaries		934			(1,433	)		(2,494	)		1,070
Net income (loss)		(5,106	)		16,919			59,669			59,717
Other comprehensive income (loss), net of taxes		21,785			499			6,979			(45,053	)
Comprehensive income	$	16,679		$	17,418		$	66,648		$	14,664

F-58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED STATEMENTS OF CASH FLOWS INFORMATION
(Parent Company Only)

				Six-Month
	Year Ended			Period Ended			Fiscal Year Ended
	December 31,			December 31,			June 30,
	2006			2005			2005			2004
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	(5,106	)	$	16,919		$	59,669		$	59,717
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in losses (earnings) from banking subsidiary		6,631			(19,846	)		(59,679	)		(40,300	)
Equity in losses (earnings) from non-banking subsidiaries		(934	)		1,433			2,494			(1,026	)
Amortization of premiums, net of accretion discounts on investment securities		(8	)		26			9			61
Realized gain (loss) on sale of investments		1,515			(228	)		—			(1,952	)
Deferred income tax expense (benefit)		1			(4	)		—			—
Decrease (increase) in other assets		737			(694	)		62			(74	)
Increase (decrease) in accrued expenses and liabilities		(2,341	)		(722	)		(2,267	)		4,445
Net cash provided by (used in) operating activities		495			(3,116	)		288			20,871
Cash flows from investing activities:
Purchase of investment securities available for sale		(2,844	)		—			—			—
Redemptions and sales of investment securities available-for-sale		275			9,507			507			26,676
Purchase of investment securities held-to-maturity		(6,500	)		(11,100	)		—			—
Redemptions of investment securities held-to-maturity		6,745			—			4			4
Purchase of other investment securities		(30,982	)		—			—			—
Net decrease (increase) in due from bank subsidiary, net		100,804			19,150			20,648			(140,602	)
Acquisition of and capital contribution in non-banking subsidiary		(909	)		—			—			(1,083	)
Net cash provided by (used in) investing activities		66,589			17,557			21,159			(115,005	)
Cash flows from financing activities:
Net increase (decrease) in securities sold under agreements to repurchase		—			—			—			(7,599	)
Proceeds from exercise of stock options		855			1,896			4,507			5,896
Net (decrease) increase in due to nonbank subsidiaries, net		(200	)		25			49			65
Net increase (decrease) in due to bank subsidiaries, net		4,184			—			—			(2,005	)
Net proceeds from issuance of preferred stock		—			—			—			33,057
Net proceeds from issuance of common stock		—			—			(10	)		51,560
Net proceeds from issuance (redemptions) of subordinated notes payable to nonbank subsidiary		(36,998	)		—			—			35,043
Purchase of treasury stock		(2,819	)		(6,964	)		(3,512	)		(499	)
Dividends paid		(18,555	)		(9,356	)		(17,918	)		(15,014	)
Net cash provided by (used in) financing activities		(53,533	)		(14,399	)		(16,884	)		100,504
Increase in cash and cash equivalents		13,551			42			4,563			6,370
Cash and cash equivalents at beginning of period		15,531			15,489			10,926			4,556
Cash and cash equivalents at end of period	$	29,082		$	15,531		$	15,489		$	10,926

19.   CHANGE IN THE FISCAL YEAR END

On August 20, 2005, the Group changed its fiscal year from a twelve-month period ending June 30th to a twelve-month period ending December 31st. The Group’s consolidated financial statements include the six-month period from July 1, 2005 to December 31, 2005.

F-59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents certain financial information for the year ended December 31, 2006 and the comparative unaudited year ended December 31, 2005, as well as information for the six-month period ended December 31, 2005 and the comparative unaudited six-month period ended December 31, 2004.

	Year Ended						Six Months Ended
	December 31,						December 31,
	2006			2005			2005			2004
				(Unaudited)						(Unaudited)
Total interest income	$	232,311		$	201,534		$	105,086		$	92,864
Total interest expense		188,185			127,456			70,706			46,149
Net interest income		44,126			74,078			34,380			46,715
Provision for loan losses		4,388			3,412			1,902			1,805
Total non-interest income		17,238			28,920			16,382			22,347
Total non-interest expense		63,713			57,856			31,814			33,921
Income (loss) before income taxes		(6,737	)		41,730			17,046			33,336
Income tax expense (benefit)		(1,631	)		(2,168	)		127			645
Net income (loss)		(5,106	)		43,898			16,919			32,691
Less: Dividends on preferred stocks		(4,802	)		(4,802	)		(2,401	)		(2,401	)
Income available (loss) to common shareholders		(9,908	)		39,096			14,518			30,290
Earnings per Share:
Basic	$	(0.40	)	$	1.58		$	0.59		$	1.24
Diluted	$	(0.40	)	$	1.56		$	0.58		$	1.17
Weighted average basic shares outstanding		24,562			24,750			24,777			24,407
Weighted average diluted shares outstanding		24,672			25,083			25,117			25,953
Dividends declared per common share	$	0.56		$	0.56		$	0.28		$	0.27

20.   RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Subsequent to the issuance of the Group’s June 30, 2005 consolidated financial statements, the Group’s management determined that the accounting treatment for certain mortgage-related transactions previously treated as purchases under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, and the treatment of certain employee stock option awards as fixed awards as opposed to variable awards did not conform to GAAP, as discussed below. As a result, the accompanying consolidated financial statements as of June 30, 2005, and for each of the two years in the period ended June 30, 2005 were restated to correct the accounting for these transactions.

The Group determined that certain transactions involving the transfer of real estate mortgage loans (“mortgage-related transactions”), secured mainly by one-to-four family residential properties did not constitute purchases under SFAS No. 140 and should have been presented as originations of commercial loans. As a result: (1) such mortgage-related transactions are now presented as commercial loans secured by real estate mortgage loans instead of loan purchases; (2) the associated balance guarantee swap derivative was reversed resulting in a decrease in loans receivable-net and other liabilities; and (3) for regulatory capital requirement purposes the risk weighting factor on the outstanding balance of such loans increased from 50% to 100%.

The Group has also determined that certain employee stock option awards with anti-dilution provisions should have been accounted for as variable awards under APB Opinion No. 25, “Accounting for Stock Issued to Employees”, given that the terms of these awards are such that the number of shares that the employees are entitled to receive, and the purchase price, depend on events occurring after the date of grant. As a result, compensation expense has been determined taking into account the appropriate measurement dates and market prices of the stock.

F-60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the significant effects of the restatement as of June 30, 2005 and for the fiscal years ended June 30, 2005 and 2004, is as follows:

	June 30, 2005
	As Previously
	Reported		As Restated
ASSETS:
Total loans, net	$	907,391	$	903,604
Total assets		4,250,652		4,246,865
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Accrued expenses and other liabilities		42,584		41,209
Total liabilities		3,909,485		3,908,110
Additional paid-in capital		187,301		206,804
Retained earnings		68,620		46,705
Total stockholders’ equity		341,167		338,755

	Fiscal Year Ended June 30,
	2005				2004
	As Previously				As Previously
	Reported		As Restated		Reported		As Restated
Non-interest expenses:
Compensation and employees’ benefits	$	26,663	$	23,606	$	24,579	$	28,511
Total non-interest expenses		63,020		59,963		59,432		63,364
Income before income taxes		54,963		58,020		69,226		65,294
Net income		56,612		59,669		63,649		59,717
Income per common share:
Basic	$	2.11	$	2.23	$	2.65	$	2.48
Diluted	$	2.05	$	2.14	$	2.49	$	2.32

F-61

ORIENTAL FINANCIAL GROUP INC.

SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 2006 AND 2005, SIX-MONTH PERIODS ENDED
DECEMBER 31, 2005 AND 2004
AND EACH OF THE FISCAL YEARS IN THE THREE YEAR PERIOD ENDED JUNE 30, 2005

	Year Ended December 31,						Six-Month Period Ended December 31,						Fiscal Year Ended June 30,
	2006			2005			2005			2004			2005			2004			2003
	(In thousands, except per share data)
				(Unaudited)						(Unaudited)
EARNINGS:
Interest income	$	232,311		$	201,534		$	105,086		$	92,864		$	189,312		$	164,385		$	151,746
Interest expense		188,185			127,456			70,706			46,149			102,899			77,174			77,335
Net interest income		44,126			74,078			34,380			46,715			86,413			87,211			74,411
Provision for loan losses		4,388			3,412			1,902			1,805			3,315			4,587			4,190
Net interest income after provision for loan losses		39,738			70,666			32,478			44,910			83,098			82,624			70,221
Non-interest income		17,238			28,920			16,382			22,347			34,885			46,034			39,039
Non-interest expenses		63,713			57,856			31,814			33,921			59,963			63,364			57,405
Income (loss) before taxes		(6,737	)		41,730			17,046			33,336			58,020			65,294			51,855
Income tax benefit (expense)		1,631			2,168			(127	)		(645	)		1,649			(5,577	)		(4,284	)
Net Income (loss)		(5,106	)		43,898			16,919			32,691			59,669			59,717			47,571
Less: dividends on preferred stock		(4,802	)		(4,802	)		(2,401	)		(2,401	)		(4,802	)		(4,198	)		(2,387	)
Income available (loss) to common shareholders	$	(9,908	)	$	39,096		$	14,518		$	30,290		$	54,867		$	55,519		$	45,184
PER SHARE AND DIVIDENDS DATA(1):
Earnings (loss) per common shares (basic)	$	(0.40	)	$	1.58		$	0.59		$	1.24		$	2.23		$	2.48		$	2.15
Earnings (loss) per common shares (diluted)	$	(0.40	)	$	1.56		$	0.58		$	1.17		$	2.14		$	2.32		$	1.99
Average common shares outstanding		24,562			24,750			24,777			24,407			24,571			22,394			21,049
Average potential common share-options		110			333			340			1,546			1,104			1,486			1,643
Average shares and shares equivalents		24,672			25,083			25,117			25,953			25,675			23,880			22,692
Book value per common share	$	10.98		$	11.13		$	11.14		$	10.17		$	10.88		$	8.82		$	7.38
Market price at end of period	$	12.95		$	12.36		$	12.36		$	28.31		$	15.26		$	27.07		$	25.69
Cash dividends declared per common share	$	0.56		$	0.56		$	0.28		$	0.27		$	0.55		$	0.51		$	0.45
Cash dividends declared on common shares	$	13,753		$	13,583		$	6,913		$	6,582		$	13,522		$	11,425		$	9,415

F-62

	December 31,						June 30,
	2006			2005			2005			2004			2003
PERIOD END BALANCES:
Investments and loans
Investments	$	2,992,236		$	3,473,287		$	3,221,789		$	2,839,003		$	2,231,543
Loans and leases (including loans held-for-sale), net		1,212,370			903,308			903,604			743,456			728,462
Securities sold but not yet delivered		6,430			44,009			1,034			47,312			1,894
	$	4,211,036		$	4,420,604		$	4,126,427		$	3,629,771		$	2,961,899
Deposits and Borrowings
Deposits	$	1,232,988		$	1,298,568		$	1,252,897		$	1,024,349		$	1,044,265
Repurchase agreements		2,535,923			2,427,880			2,191,756			1,895,865			1,400,598
Other borrowings		246,551			404,921			399,476			387,166			181,083
Securities and loans purchased but not yet received		—			43,354			22,772			89,068			152,219
	$	4,015,462		$	4,174,723		$	3,866,901		$	3,396,448		$	2,778,165
Stockholders’ equity
Preferred equity	$	68,000		$	68,000		$	68,000		$	68,000		$	33,500
Common equity		268,426			273,791			270,755			213,646			157,716
	$	336,426		$	341,791		$	338,755		$	281,646		$	191,216
Capital ratios
Leverage capital		8.42	%		10.13	%		10.59	%		10.88	%		7.83	%
Tier 1 risk-based capital		21.57	%		34.70	%		36.97	%		36.77	%		23.36	%
Total risk-based capital		22.04	%		35.22	%		37.51	%		37.48	%		23.88	%
SELECTED FINANCIAL RATIOS AND OTHER INFORMATION:
Return on average assets (ROA)		−0.11	%		1.02	%		1.46	%		1.79	%		1.75	%
Return on average common equity (ROE)		−3.59	%		15.00	%		21.34	%		32.35	%		28.93	%
Equity-to-assets ratio		7.69	%		7.52	%		7.98	%		7.56	%		6.29	%
Efficiency ratio		84.69	%		57.51	%		51.39	%		52.92	%		55.77	%
Expense ratio		0.73	%		0.75	%		0.75	%		0.97	%		1.13	%
Interest rate spread		0.70	%		1.53	%		2.00	%		2.64	%		2.91	%
Number of financial centers		25			24			24			23			23
Trust assets managed	$	1,848,596		$	1,875,300		$	1,823,292		$	1,670,651		$	1,670,437
Broker-dealer assets gathered		1,143,668			1,132,286			1,135,115			1,051,812			962,919
Assets managed		2,992,264			3,007,586			2,958,407			2,722,463			2,633,356
Assets owned		4,373,690			4,546,949			4,246,865			3,725,695			3,040,551
Total financial assets managed and owned	$	7,365,954		$	7,554,535		$	7,205,272		$	6,448,158		$	5,673,907

(1) Per share related information has been retroactively adjusted to reflect stock splits and stock dividends, when applicable.

F-63

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2006

OVERVIEW OF FINANCIAL PERFORMANCE

The following discussion of our financial condition and results of operations should be read in conjunction with Item 6, “Selected Financial Data,” and our consolidated financial statements and related notes in Item 8. This discussion and analysis contains forward-looking statements. Please see “Forward Looking Statements” and “Risk Factors” for discussions of the uncertainties, risks and assumptions associated with these statements.

On August 30, 2005, the Group’s Board of Directors amended Section 1 of Article IX of the Group’s bylaws to change its fiscal year-end from June 30 to December 31. As a result of the change in fiscal year end, the following comparative periods are presented for purposes of discussion of results of operations:

•  Year ended December 31, 2006 compared to year ended December 31, 2005 (unaudited);

•  Six-month period ended December 31, 2005 compared to six-month period ended December 31, 2004 (unaudited); and

•  Fiscal year ended June 30, 2005 compared to fiscal year ended June 30, 2004.

Comparison of the years ended December 31, 2006 and 2005:

The Group’s diversified mix of businesses and products generates both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as securities brokerage, fiduciary services, investment banking, insurance and pension administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial markets fluctuations and other external factors, the Group’s commitment is to continue producing a balanced and growing revenue stream.

During 2006, the Group continued targeting the personal and commercial needs of mid and high net worth individuals and families, including professionals and owners of small and mid-size businesses, primarily in Puerto Rico. The results of these efforts reflected continued growth in lending activities and tight control over non-interest expenses.

During the fourth quarter of 2006, the Group completed a review of its available-for-sale (“AFS”) investment portfolio in light of asset/liability management considerations and changing market conditions, and has strategically repositioned this portfolio. The repositioning involved open market sales of approximately $865 million of securities with a weighted average yield of 4.60% at a loss of approximately $16.0 million which is included as non-interest income in the accompanying consolidated financials statements. Following the sale, $860 million of triple-A securities at a weighted average yield of 5.55% were purchased and classified as AFS. As part of this repositioning, the Group entered into a $900 million, 5-year structured repurchase agreement ($450 million non-put 1-year and $450 million non-put 2-years) with a weighted average rate paid of 4.52%. Proceeds were used to repay repurchase agreements with a weighted average rate paid of 5.25%. In February 2007, the Group continued its strategic repositioning of the repurchase agreements portfolio, restructuring an additional $1 billion of short-term borrowings, with a weighted average rate being paid of approximately 5.35%, into 10-year, non-put 2-year structured repurchased agreements, priced at 95 basis points under 90-day LIBOR (for a current rate of 4.40%). These strategic actions are expected to significantly improve the Group’s net interest income position for 2007.

For the year ended December 31, 2006, net loss was $9.9 million, compared with net income of $39.1 million reported in the same period of 2005. Loss per diluted share was $0.40, compared to earnings per diluted share of $1.56 reported for the same period of 2005. Net loss for the quarter ended December 31, 2006, was $19.3 million, compared with net income of $7.3 million reported in the quarter ended December 31, 2005. Loss per diluted share was $0.78, compared to earning per diluted share of $0.29 for the same quarter of 2005.

F-64

Return on common equity (ROE) and return on assets (ROA) for the year ended December 31, 2006 were (3.59%) and (0.11%), respectively, which represent a decrease of 123.9% in ROE, from 15.00% in the same period of 2005, and a decrease of 110.8% in ROA, from 1.02% in the same period of 2005.

Net interest income represented 71.9% of the Group’s total revenues (defined as net interest income plus non interest income) in the year ended December 31, 2006. During the year ended December 31, 2006, net interest income was $44.1 million, a decrease of 40.4% from the $74.1 million recorded for the same period of 2005. For the quarter ended December 31, 2006, net interest income decreased 45.7% to $9.3 million, compared with $17.1 million recorded in the quarter ended December 31, 2005. Higher interest income on increased investment securities and loan volume and average yields was offset by higher volume and interest rates on borrowings. Interest rate spread for the year ended December 31, 2006 was 0.70% compared to 1.53% in the same period of 2005. At December 31, 2006 average interest earning assets increased 7.32% to $4.481 billion, compared to $4.175 billion at December 31, 2005, reflecting a 4.12% increase in investments from $3.290 billion to $3.426 billion, which consisted mainly of AAA-rated mortgage-backed securities and U.S. government and agency obligations.

The provision for loan losses for the year ended December 31, 2006 increased 28.6% to $4.4 million from $3.4 million for the same period of 2005, reflecting higher allowance requirements related to increased mortgage and commercial loan business in the period. For the quarters ended December 31, 2006 and 2005, the provision for loan losses was $1.5 million and $1.0 million, respectively, an increase of 54.6%. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for loan losses for the year ended December 31, 2006 was adequate in order to maintain the allowance for loan losses at an appropriate level.

Non-interest income for 2006 reflects increases in revenues from financial and banking services and investment banking activities, despite the challenging economic environment in Puerto Rico.

Non-interest expenses for the year ended December 31, 2006 increased 10.0% to $63.7 million, compared to $57.9 million for the same period of 2005. Non-interest expenses in the fourth quarter of 2006 included approximately $1.8 million primarily for a supplemental pension payment and charitable contributions made in recognition of the Group’s former Chairman, President, and CEO enhancing the value of Oriental over the course of his 19 years of leadership. Excluding this amount, non-interest expenses for 2006 would have been $61.9 million. The 2005 expenses of $57.9 million reflected a $6.3 million reduction in non-cash compensation related to the variable accounting for certain employee stock options. Excluding this non-cash adjustment, total non-interest expenses for the year ended December 31, 2005 would have been $64.2 million. For the quarter ended December 31, 2006 and 2005, non-interest expense was $18.9 million and $16.4 million, respectively, a, increase of 15.1%, mainly due to the $1.8 million payment. Excluding this amount, non-interest expenses for the quarter ended December 31, 2006 would have been $17.1 million.

Total Group financial assets (including assets managed by the trust department, the retirement plan administration subsidiary, and securities broker-dealer subsidiary) decreased 2.5% to $7.366 billion as of December 31, 2006, compared to $7.555 billion as of December 31, 2005. Assets managed by the Group’s trust department, the retirement plan administration subsidiary, and the securities broker-dealer subsidiary decreased to $2.992 billion from $3.008 billion as of December 31, 2005, a decrease of 0.5%. The Group’s assets owned totaled $4.374 billion as of December 31, 2006, a decrease of 3.8%, compared from $4.547 billion as of December 31, 2005, mainly as a result of a decrease in the investment securities portfolio, which decreased by 13.9% or $481.1 million.

On the liability side, total deposits decreased by 5.1%, from $1.299 billion at December 31, 2005, to $1.233 billion at December 31, 2006, mainly from decreases in certificates of deposit, partially offset by increased savings accounts. Total borrowings decreased 1.8%, from $2.833 billion at December 31, 2005, to $2.782 billion at December 31, 2006, mainly from repayments of repurchase agreements and the redemption of the Statutory Trust I subordinated capital notes in December 2006.

Stockholders’ equity as of December 31, 2006 was $336.4 million, a slight decrease of 1.6% from $341.8 million as of December 31, 2005. As discussed in Note 1 of the accompanying consolidated financial statements, the Group adopted SAB108. As part of the initial implementation, the Group adjusted $1.525 million as an accumulated effect on the beginning retained earnings. The net effect of these adjustments in the consolidated statement of operations

F-65

for the year ended December 31, 2006 was to increase the previously reported net loss by $93,000 with no effect on per share data. The Group’s capital ratios remain significantly above regulatory capital requirements. At December 31, 2006, the Tier 1 Leverage Capital Ratio was 8.42%, Tier 1 Risk-Based Capital Ratio was 21.57%, and Total Risk-Based Capital Ratio was 22.04%.

Comparison of the six-month periods ended December 31, 2005 and December 31, 2004:

For the six-month period ended December 31, 2005, net income was $14.5 million, a decrease of 52.1% compared with $30.3 million reported in the same period of 2004. Earnings per diluted share decreased 50.4% to $0.58, compared to $1.17 per share reported for the same period of 2004. Net income for the quarter ended December 31, 2005, was $7.3 million, a decrease of 49.2% compared with net income of $14.4 million reported in the quarter ended December 31, 2004. Earnings per diluted share decreased 47.3% to $0.29, compared to $0.55 for the same quarter of 2004.

Return on common equity (ROE) and return on assets (ROA) for the six-month period ended December 31, 2005 were 11.54% and 0.77%, respectively, which represent a decrease of 53.4% in ROE, from 24.78% in the same period of 2004, and a decrease of 53.4% in ROA, from 1.65% in the same period of 2004.

Net interest income represented approximately 68% of the Group’s total revenues in the six-month period ended December 31, 2005. During such six-month period, net interest income was $34.4 million, a decrease of 26.4% from the $46.7 million recorded for the same period of 2004. For the quarter ended December 31, 2005, net interest income decreased 26.1% to $17.1 million, compared with $23.1 million recorded in the quarter ended December 31, 2004. Higher interest income on increased investment securities volume was offset by lower average yields on such investments and higher interest rates on borrowings. Interest rate spread for the six-month period ended December 31, 2005 was 1.33% compared to 2.27% in the same period of 2004. At December 31, 2005, average interest earning assets increased 12.7% to $4.277 billion, compared to $3.796 at December 31, 2004, reflecting a 12.5% increase in investments from $2.984 to $3.358 billion, which consisted mainly of AAA-rated mortgage-backed securities and U.S. government and agency obligations.

The provision for loan losses for the six-month period ended December 31, 2005 increased 5.4% to $1.9 million from $1.8 million for the same period of 2004, reflecting higher allowance requirements related to the increase of commercial and consumer loan business in that period. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for loan losses was adequate in order to maintain the allowance for loan losses at an appropriate level.

Non-interest income represented approximately 32.3% of the Group’s total revenues in the six-month period ended December 31, 2005. For such six-month period, non-interest income decreased 26.7% to $16.4 million from $22.3 million for the same period of 2004. Performance in such period of 2005 reflects increases in banking service revenues, partially offset by decreases in revenues from financial services, investment banking activities, as well as mortgage banking and securities activities.

Total non-interest banking and financial services revenues decreased 19.4% to $13.7 million in the six-month period ended December 31, 2005, compared to $17.0 million for the same period of 2004. Banking service revenues increased 16.5% to $4.5 million compared to $3.9 million for the comparable period of 2004. Financial service revenues decreased 1.4% to $7.5 million compared to $7.6 million for the same period of 2004.

For the six-month period ended December 31, 2005, mortgage-banking revenues were $1.7 million, reflecting a decrease of 69.2% when compared with $5.5 million for the same period of 2004. Such decrease in mortgage revenues resulted from reduced sales of whole-loans in the open market, which resulted in lower gains on such transactions.

Non-interest expenses for the six-month period ended December 31, 2005 decreased 6.2% to $31.8 million, compared to $33.9 million for the same period of 2004, reflecting tight cost controls. The decrease was mainly due to reductions in compensation and employee benefits, as well as in advertising and business promotion and electronic banking charges. Professional and service fees increased 11.6% for such period of 2005, compared to the corresponding 2004 period, in part due to the impact of the compliance requirements of the Sarbanes-Oxley Act of 2002. The Group’s efficiency ratio in the six-month period ended December 31, 2005 was 66.12%, compared to

F-66

53.24% for the same six-month period of 2004. The Group computes its efficiency ratio by dividing operating expenses by the sum of net interest income and recurring non-interest income, but excluding gains on sale of investment securities.

Total Group financial assets (including assets managed by the trust department, the retirement plan administration subsidiary, and securities broker-dealer subsidiary) increased 5.3% to $7.554 billion as of December 31, 2005, compared to $7.173 billion as of December 31, 2004. Assets managed by the Group’s trust department, the retirement plan administration subsidiary, and the securities broker-dealer subsidiary decreased to $3.008 billion from $3.009 billion as of December 31, 2004. The Group’s assets owned reached $4.547 billion as of December 31, 2005, an increase of 9.2%, compared to $4.164 billion as of December 31, 2004. Major contributors to this increase were the investment securities portfolio, which increased by 5.4% or $176.7 million, along with the loan portfolio, which increased by $135.4 million or 17.6%.

On the liability side, total deposits increased by 21.8%, from $1.066 billion at December 31, 2004, to $1.299 billion at December 31, 2005. Total borrowings increased 3.8%, from $2.729 billion at December 31, 2004, to $2.833 billion at December 31, 2005.

The Group continued strengthening its capital base during 2005. Stockholders’ equity as of December 31, 2005 was $341.8 million, an increase of 7.4% from $318.1 million as of December 31, 2004. This increase reflects the impact of earnings retention.

Comparison of the fiscal years ended June 30, 2005 and 2004:

For fiscal 2005, net income was $54.9 million, a decrease of 1.2% compared with $55.5 million reported for fiscal 2004. Earnings per diluted share decreased 7.8% to $2.14 for fiscal 2005, compared to $2.32 per diluted share for the same fiscal period of 2004.

ROE and ROA for the fiscal year ended June 30, 2005 were 21.34% and 1.46%, respectively, which represent a decrease of 34.0% in ROE, from 32.35% in the same fiscal period of 2004, and a decrease of 18.4% in ROA, from 1.79% in the fiscal year ended June 30, 2004.

Net interest income represented approximately 71% of the Group’s total revenues during the fiscal year ended June 30, 2005 and amounted to $86.4 million, a decrease of 0.9% from the $87.2 million recorded for the fiscal year ended June 30, 2004. Higher interest income on increased investment securities volume was offset by lower average yields on such investments and higher interest rates on borrowings. Interest rate spread for the fiscal year ended June 30, 2005 was 2.00% compared to 2.64% in the corresponding 2004 period, reflecting the margin reduction provoked by increases in market interest rates combined with the Group’s liability sensitive position in its balance sheet.. As of June 30, 2005, average interest earning assets increased 24.1% to $3.933 billion compared to June 30, 2004, primarily driven by a 27.6% increase in investments to $3.102 billion, which consisted mainly of AAA-rated mortgage-backed securities and U.S. government and agency obligations.

The provision for loan losses for the fiscal year ended June 30, 2005 decreased 27.7% to $3.3 million from $4.6 million for the same period of 2004, reflecting lower allowance requirements related to the stabilization of commercial and consumer loan business in the fiscal year ended June 30, 2005. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for the fiscal year ended June 30, 2005 was adequate in order to maintain the allowance for loan losses at an appropriate level, even though the loan portfolio increased from $743.5 million as of June 30, 2004 to $903.6 million as of June 30, 2005 (a 21.5% increase) and there was an increase in the net credit losses from $2.1 million for the fiscal year ended June 30, 2004 to $4.4 million for the fiscal year ended June 30, 2005 (an increase of 111.8%). The main reason for the decrease in the provision is that during the fiscal year ended June 30. 2004, management charged against earnings the provision for the possible losses on certain nonperforming loans which were in the process of evaluation. During the fiscal year ended June 30, 2005, these loans or portions thereof were charged-off against the allowance established in the previous fiscal year since such loans or the portions thereof were determined to be uncollectible. The increase in the loan portfolio is mainly related to new high quality and well collateralized loans which do not require large amounts of allowance for loan losses.

F-67

Non-interest income represented approximately 28.8% of the Group’s total revenues in the fiscal year ended June 30, 2005. For such fiscal period, non-interest income decreased 24.2% to $34.9 million from $46.0 million from the fiscal year ended June 30, 2004. Performance in the fiscal year ended June 30, 2005 reflects increases in banking service revenues, offset by decreases in revenues from financial services, investment banking activities, and securities, derivatives and trading activities.

Total non-interest banking and financial services revenues decreased 8.0% to $29.9 million in the fiscal year ended June 30, 2005, compared to $32.5 million in the corresponding fiscal period of 2004. Banking service revenues increased 8.2% to $7.8 million, compared to $7.2 million in the fiscal year ended June 30, 2004. Financial service revenues decreased 18.4% to $14.4 million compared to $17.6 million in the fiscal year ended June 30, 2004.

For the fiscal year ended June 30, 2005, mortgage-banking revenues were $7.8 million, reflecting an increase of 0.7% when compared with $7.7 million for the previous fiscal year. Such increase in mortgage revenues resulted from higher gains on the sale of whole-loans in the open market.

Non-interest expenses for the fiscal year ended June 30, 2005 decreased 5.4% to $60.0 million, compared to $63.4 million in the previous fiscal year. The reduction was mainly due to lower compensation and employee benefits for the fiscal year ended June 30, 2005 in the amount of $4.9 million, compared to the fiscal year ended June 30, 2004. This $4.9 million decrease was mainly due to a decrease in fair value of the Group’s common stock from one period to the other which resulted in a credit to compensation expense of $3.1 million as a result of the application of the variable accounting to outstanding options granted to certain employees. With respect to the other categories of non-interest expenses, the Group reflected increases in professional and service fees, in part due to the impact of the compliance requirements of the Sarbanes-Oxley Act, and in electronic banking charges. The Group’s efficiency ratio in the fiscal year ended June 30, 2005 was 51.39%, compared to 52.92% a year earlier.

Total Group financial assets (including assets managed by the trust department, the retirement plan administration subsidiary, and the securities broker-dealer subsidiary) increased 11.7% to $7.205 billion as of June 30, 2005, compared to $6.448 billion as of June 30, 2004. Assets managed by the Group’s trust department, the retirement plan administration subsidiary, and the securities broker-dealer subsidiary increased 8.7%, year-over-year, to $2.958 billion from $2.722 billion as of June 30, 2004. This increase was primarily due to the equity market recovery impact on assets gathered by the Group’s securities broker-dealer subsidiary as well as the development of new business and trust relationships throughout the year. The Group’s assets owned reached $4.247 billion as of June 30, 2005, an increase of 14.0%, compared to $3.726 billion as of June 30, 2004. Major contributors to this increase were the investment securities portfolio, which increased by 13.5% or $382.8 million, along with the loan portfolio, which increased by $160.1 million or 21.5%.

On the liability side, total deposits increased by 22.3% from $1.024 billion at June 30, 2004, to $1.253 billion at June 30, 2005. Total borrowings increased 13.5% from $2.283 billion at June 30, 2004, to $2.591 billion at June 30, 2005.

The Group strengthened its capital base during the fiscal year ended June 30, 2005. Stockholders’ equity as of June 30, 2005 was $338.8 million, an increase of 20.3% from $281.6 million as of June 30, 2004. This increase reflects the impact of earnings retention.

F-68

TABLE 1A — ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE: For the Years Ended December 31, 2006 and 2005

	Interest						Average Rate						Average Balance
	December 31,			December 31,			December 31,			December 31,			December 31,			December 31,
	2006			2005			2006			2005			2006			2005
	(Dollars in thousands)
A — TAX EQUIVALENT SPREAD
Interest-earning assets	$	232,311		$	201,534			5.18	%		4.83	%	$	4,480,729		$	4,175,143
Tax equivalent adjustment		57,657			45,156			1.27	%		1.08	%		—			—
Interest-earning assets — tax equivalent		289,968			246,690			6.47	%		5.91	%		4,480,729			4,175,143
Interest-bearing liabilities		188,185			127,456			4.48	%		3.30	%		4,198,401			3,857,666
Tax equivalent net interest income/spread	$	101,783		$	119,234			1.99	%		2.61	%	$	282,328		$	317,477
Tax equivalent interest rate margin								2.27	%		2.86	%
B — NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	$	154,942		$	142,211			4.57	%		4.38	%	$	3,386,999		$	3,245,440
Investment management fees		(1,522	)		(1,764	)		−0.04	%		−0.05	%		—			—
Total investment securities		153,420			140,447			4.53	%		4.33	%		3,386,999			3,245,440
Trading securities		19			9			5.01	%		3.08	%		379			292
Money market investments		2,057			1,820			5.36	%		4.10	%		38,360			44,341
		155,496			142,276			4.54	%		4.32	%		3,425,738			3,290,073
Loans:
Mortgage		55,278			43,482			6.86	%		5.95	%		805,285			730,614
Commercial		17,417			12,790			8.20	%		10.20	%		212,294			125,395
Consumer		4,120			2,986			11.01	%		10.27	%		37,412			29,061
		76,815			59,258			7.28	%		6.70	%		1,054,991			885,070
		232,311			201,534			5.18	%		4.83	%		4,480,729			4,175,143
Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—			—			—			—			39,177			42,508
Now accounts		857			908			1.09	%		1.05	%		78,826			86,703
Savings		5,366			909			3.25	%		1.01	%		165,249			89,948
Certificates of deposit		40,478			34,784			4.26	%		3.54	%		950,695			983,582
		46,701			36,601			3.78	%		3.04	%		1,233,947			1,202,741
Borrowings:
Repurchase agreements		133,646			74,696			5.09	%		3.31	%		2,627,484			2,255,199
Interest rate risk management		(8,494	)		1,486			−0.32	%		0.07	%		—			—
Financing fees		562			695			0.02	%		0.03	%		—			—
Total repurchase agreements		125,714			76,877			4.78	%		3.41	%		2,627,484			2,255,199
FHLB advances		8,968			8,553			3.74	%		2.79	%		239,590			306,398
Subordinated capital notes		5,331			4,743			7.54	%		6.57	%		70,732			72,166
Term notes		846			456			5.64	%		3.04	%		15,000			15,000
Other borrowings		625			226			5.37	%		3.67	%		11,648			6,162
		141,484			90,855			4.77	%		3.42	%		2,964,454			2,654,925
		188,185			127,456			4.48	%		3.30	%		4,198,401			3,857,666
Net interest income/spread	$	44,126		$	74,078			0.70	%		1.53	%
Interest rate margin								0.98	%		1.78	%
Excess of interest-earning assets over interest-bearing liabilities													$	282,328		$	317,477
Interest-earning assets over interest-bearing liabilities ratio														106.72	%		108.23	%

F-69

C.   CHANGES IN NET INTEREST INCOME DUE TO:

	December 31, 2006 versus
	December 31, 2005
	Volume			Rate			Total
Interest Income:
Loans	$	4,351		$	8,868		$	13,219
Investments		13,206			4,352			17,558
		17,557			13,220			30,777
Interest Expense:
Deposits		922			9,178			10,100
Repurchase agreements		9,146			39,692			48,838
Other borrowings		(2,387	)		4,178			1,791
		7,681			53,048			60,729
	$	9,876		$	(39,828	)	$	(29,952	)

F-70

TABLE 1A — ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE: For the Six-Month Periods Ended December 31, 2005 and 2004

	Interest						Average Rate						Average Balance
	Six-Month Period						Six-Month Period						Six-Month Period
	Ended						Ended						Ended
	December 31,						December 31,						December 31,
	2005			2004			2005			2004			2005			2004
	(Dollars in thousands)
A — TAX EQUIVALENT SPREAD
Interest-earning assets	$	105,086		$	92,864			4.91	%		4.89	%	$	4,276,515		$	3,795,805
Tax equivalent adjustment		23,912			21,167			1.12	%		1.12	%		—			—
Interest-earning assets — tax equivalent		128,998			114,031			6.03	%		6.01	%		4,276,515			3,795,805
Interest-bearing liabilities		70,706			46,149			3.58	%		2.62	%		3,953,452			3,526,701
Tax equivalent net interest income/spread	$	58,292		$	67,882			2.45	%		3.39	%	$	323,063		$	269,104
Tax equivalent interest rate margin								2.72	%		3.58	%
B — NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	$	73,540		$	67,039			4.46	%		4.53	%	$	3,300,864		$	2,962,126
Investment management fees		(824	)		(958	)		−0.05	%		−0.06	%		—			—
Total investment securities		72,716			66,081			4.41	%		4.47	%		3,300,864			2,962,126
Trading securities		4			2			3.31	%		0.41	%		242			975
Money market investments		1,465			171			5.17	%		1.65	%		56,691			20,788
		74,185			66,254			4.42	%		4.44	%		3,357,797			2,983,889
Loans:
Mortgage		24,617			22,558			6.50	%		6.50	%		757,207			694,529
Commercial		4,602			3,002			7.11	%		6.24	%		129,506			96,264
Consumer		1,682			1,050			10.51	%		9.94	%		32,005			21,123
		30,901			26,610			6.73	%		6.55	%		918,718			811,916
		105,086			92,864			4.91	%		4.89	%		4,276,515			3,795,805
Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—			—			—			—			60,334			50,728
Now accounts		445			438			1.05	%		1.06	%		84,809			82,931
Savings		440			472			1.02	%		1.02	%		86,135			92,623
Certificates of deposit		19,396			12,513			3.70	%		3.16	%		1,049,495			793,112
		20,281			13,423			3.17	%		2.63	%		1,280,773			1,019,394
Borrowings:
Repurchase agreements		43,807			18,856			3.86	%		1.79	%		2,270,145			2,109,690
Interest rate risk management		(1,255	)		7,388			−0.11	%		0.70	%		—			—
Financing fees		357			311			0.03	%		0.03	%		—			—
Total repurchase agreements		42,909			26,555			3.78	%		2.52	%		2,270,145			2,109,690
FHLB advances		4,595			4,002			3.01	%		2.58	%		305,430			310,451
Subordinated capital notes		2,470			2,046			6.85	%		5.67	%		72,166			72,166
Term notes		261			123			3.48	%		1.64	%		15,000			15,000
Other borrowings		190			—			3.82	%		—			9,938			—
		50,425			32,726			3.77	%		2.61	%		2,672,679			2,507,307
		70,706			46,149			3.58	%		2.62	%		3,953,452			2,526,701
Net interest income/spread	$	34,380		$	46,715			1.33	%		2.27	%
Interest rate margin								1.61	%		2.46	%
Excess of interest-earning assets over interest-bearing liabilities													$	323,063		$	269,104
Interest-earning assets over interest-bearing liabilities ratio														108.17	%		107.63	%

F-71

C.   CHANGES IN NET INTEREST INCOME DUE TO:

	December 31, 2005 versus December 31, 2004
	Volume		Rate			Total
Interest Income:
Loans	$	3,615	$	676		$	4,291
Investments		8,262		(331	)		7,931
		11,877		345			12,222
Interest Expense:
Deposits		6,762		96			6,858
Repurchase agreements		1,838		14,515			16,354
Other borrowings		75		1,271			1,345
		8,675		15,882			24,557
	$	3,202	$	(15,537	)	$	(12,335	)

F-72

TABLE 1B — ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE: For the Fiscal Years Ended June 30, 2005 and 2004

	Interest						Average rate						Average balance
	June 30,			June 30,			June 30,			June 30,			June 30,			June 30,
	2005			2004			2005			2004			2005			2004
	(Dollars in thousands)
A — TAX EQUIVALENT SPREAD
Interest-earning assets	$	189,312		$	164,385			4.81	%		5.19	%	$	3,932,822		$	3,168,832
Tax equivalent adjustment		42,411			35,223			1.08	%		1.11	%		—			—
Interest-earning assets — tax equivalent		231,723			199,608			5.89	%		6.30	%		3,932,822			3,168,832
Interest-bearing liabilities		102,899			77,174			2.81	%		2.55	%		3,659,858			3,026,876
Tax equivalent net interest income/spread	$	128,824		$	122,434			3.08	%		3.75	%	$	272,964		$	141,956
Tax equivalent interest rate margin								3.27	%		3.86	%
B — NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	$	135,710		$	113,732			4.41	%		4.70	%	$	3,074,679		$	2,419,264
Investment management fees		(1,898	)		(1,685	)		−0.06	%		−0.07	%		—			—
Total investment securities		133,812			112,047			4.35	%		4.63	%		3,074,679			2,419,264
Trading securities		8			44			1.21	%		3.26	%		662			1,350
Money market investments		526			164			2.00	%		1.53	%		26,242			10,714
		134,346			112,255			4.33	%		4.62	%		3,101,583			2,431,328
Loans:
Mortgage		45,943			46,467			6.57	%		7.01	%		699,027			662,590
Commercial		6,674			3,336			6.14	%		5.85	%		108,636			57,047
Consumer		2,349			2,327			9.96	%		13.02	%		23,576			17,867
		54,966			52,130			6.61	%		7.07	%		831,239			737,504
		189,312			164,385			4.81	%		5.19	%		3,932,822			3,168,832
Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—			—			—			—			54,986			51,906
Now accounts		900			818			1.05	%		1.08	%		85,756			75,495
Savings		941			1,079			1.01	%		1.22	%		93,218			88,568
Certificates of deposit		27,903			28,115			3.27	%		3.38	%		854,337			831,167
		29,744			30,012			2.73	%		2.87	%		1,088,297			1,047,136
Borrowings:
Repurchase agreements		49,746			17,805			2.29	%		1.12	%		2,174,312			1,595,717
Interest rate risk management		10,131			17,744			0.47	%		1.11	%		—			—
Financing fees		647			469			0.03	%		0.03	%		—			—
Total repurchase agreements		60,524			36,018			2.78	%		2.26	%		2,174,312			1,595,717
FHLB advances		7,962			8,011			2.58	%		2.63	%		308,930			304,547
Subordinated capital notes		4,318			2,986			5.98	%		4.63	%		72,166			64,476
Term notes		317			147			2.11	%		0.98	%		15,000			15,000
Other borrowings		34			—			2.95	%		—			1,153			—
		73,155			47,162			2.84	%		2.38	%		2,571,561			1,979,740
		102,899			77,174			2.81	%		2.55	%		3,659,858			3,026,876
Net interest income/spread	$	86,413		$	87,211			2.00	%		2.64	%
Interest rate margin								2.19	%		2.75	%
Excess of interest-earning assets over interest-bearing liabilities													$	272,964		$	141,956
Interest-earning assets over interest-bearing liabilities ratio														107.46	%		104.69	%

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C.   CHANGES IN NET INTEREST INCOME DUE TO:

	Fiscal 2005					Fiscal 2004
	versus 2004					versus 2003
	Volume		Rate			Volume		Rate
Interest Income:
Loans	$	6,342	$	(3,506	)	$	5,089	$	(4,445	)
Investments		29,383		(7,292	)		29,710		(17,715	)
		35,725		(10,798	)		34,799		(22,160	)
Interest Expense:
Deposits		1,154		(1,422	)		883		(4,528	)
Repurchase agreements		21,598		2,908			14,581		(12,397	)
Other borrowings		363		1,124			4,250		(2,950	)
		23,115		2,610			19,714		(19,875	)
	$	12,610	$	(13,408	)	$	15,085	$	(2,285	)

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Net Interest Income

Comparison of the year ended December 31, 2006 and 2005:

Net interest income is affected by the difference between rates earned on the Group’s interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest-earning assets and interest-bearing liabilities (interest rate margin). As further discussed in the Risk Management section of this report, the Group monitors the composition and repricing of its assets and liabilities to maintain its net interest income at adequate levels. Table 1A shows 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 for the years ended December 31, 2006 and 2005.

Net interest income decreased 40.4% to $44.1 million in the year ended December 31, 2006, from $74.1 million in the same period of 2005. This decrease was due to a positive volume variance of $9.9 million, offset by a negative rate variance of $39.8 million, as average interest earning assets increased 7.32% to $4.481 billion as of December 31, 2006, from $4.175 billion as of December 31, 2005, while the interest rate margin declined 80 basis points to 0.98% for the year ended December 31, 2006, from 1.78% for the same period of 2005. The interest rate spread declined 83 basis points to 0.70% for the year ended December 31, 2006, from 1.53% for the same period of 2005, due to a 35 basis point increase in the average yield of interest earning assets to 5.18% from 4.83%, offset by a 118 basis point increase in the average cost of funds to 4.48% from 3.30%. The increase in the average yield of interest earning assets was primarily due to the purchase of securities with higher rates, reflecting market conditions, prepayments of lower rate mortgage loans and mortgage-backed securities, and the repricing of adjustable and floating interest rate commercial loans. The increase in the average cost of funds was primarily due to higher rates paid on repurchase agreements and other borrowings due to the impact of the increases in short-term borrowing rates.

Interest income increased 15.3% to $232.3 million for the year ended December 31, 2006, as compared to $201.5 million for the period of 2005, reflecting the increase in the average balance of interest earning assets and in yields. Interest income is generated by investment securities, which accounted for 66.7% of total interest income, and from loans, which accounted for 33.3% of total interest income. Interest income from investments increased 9.3% to $155.5 million, due to a 4.1% increase in the average balance of investments, which grew to $3.426 billion from $3.290 billion, and by an 22 basis point increase in yield from 4.32% to 4.54%. Interest income from loans increased 29.6% to $76.8 million, mainly due to a 19.2% increase in the average balance of loans, which grew to $1.055 billion from $885 million, and a 58 basis point increase in yield from 6.70% to 7.28%.

Interest expense increased 47.6%, to $188.2 million for year ended December 31, 2006, from $127.5 million for the same period of 2005, due to a 118 basis point increase in the average cost of retail and wholesale funds, to 4.48% for 2006, from 3.30% for the same period of 2005. The increase is due to higher average interest-bearing liabilities which grew to $4.198 billion, from $3.858 billion, year over year, in order to fund the growth of the Group’s investment and loan portfolios. The average cost of retail deposits increased 74 basis points, to 3.78% for the year ended December 31, 2006, from 3.04% for the same period of 2005, and the average cost of wholesale funding sources increased 135 basis points, to 4.77%, from 3.42%, substantially reflected in repurchase agreements, which increased 137 basis points, to 4.78% from 3.41%.

Comparison of the six-month periods ended December 31, 2005 and 2004:

Table 1A shows 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 for the six-month periods ended December 31, 2005 and 2004.

Net interest income decreased 26.4% to $34.4 million in the six-month period ended December 31, 2005, from $46.7 million in the same six-month period of 2004. This decrease was due to a positive volume variance of $3.2 million, offset by a negative rate variance of $15.5 million, as average interest earning assets increased 12.7% to $4.277 billion as of December 31, 2005, from $3.796 billion as of December 31, 2004, while the interest rate margin declined 85 basis points to 1.61% for the same period of 2005, from 2.46% for the same period of 2004. The interest rate spread declined 94 basis points to 1.33% for the six-month period ended December 31, 2005, from

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2.27% for the same period of 2004, due to a 2 basis point increase in the average yield of interest earning assets to 4.91% from 4.89%, in addition to a 96 basis point increase in the average cost of funds to 3.58% from 2.62%. The increase in the average yield of interest earning assets was primarily due to the purchase of securities with lower rates, reflecting market conditions, prepayments of higher rate mortgage loans and mortgage-backed securities, and the repricing of adjustable and floating interest rate commercial loans. The increase in the average cost of funds was primarily due to higher rates paid on repurchase agreements and other borrowings due to the impact of the increases in short-term borrowing rates.

Interest income increased 13.2% to $105.1 million for the six-month period ended December 31, 2005, as compared to $92.9 million for the same six-month period of 2004, reflecting a 12.7% increase in the average balance of interest earning assets, which grew to $4.277 billion in the six-month period ended December 31, 2005, from $3.796 billion for the same period of 2004, with an increase in yield to 4.91% from 4.89%. Interest income is generated by investment securities, which accounted for 70.6% of total interest income, and from loans, which accounted for 29.4% of total interest income. Interest income from investments increased 12.0% to $74.2 million, due to a 12.5% increase in the average balance of investments, which grew to $3.358 billion, partially offset by a 2 basis point decline in yield from 4.44% to 4.42%. The increase in investments reflects a 21.5% increase in U.S. government and agency obligations, which grew to $1.251 billion as of December 31, 2005, from $819.0 million as of December 31, 2004. Interest income from loans increased 16.1% to $30.9 million, mainly due to a 13.2% increase in the average balance of loans, which grew to $918.7 million, in addition to an 18 basis point increase in yield from 6.55% to 6.73%. Total loans remained approximately at the same level comparing December 31, 2005 to June 30, 2005 at $903 million.

Interest expense increased 53.2%, to $70.7 million for the six-month period ended December 31, 2005, from $46.1 million for the same period of 2004, due to a 96 basis point increase in the average cost of retail and wholesale funds, to 3.58% for the 2005 six-month period, from 2.62% for the same period of 2004. The increase is also due to the expansion of the average interest-bearing liabilities to $3.953 billion, from $3.527 billion, in order to fund the growth of the Group’s investment and loan portfolios. The average cost of retail deposits increased 54 basis points, to 3.17% for the six-month period ended December 31, 2005, from 2.63% for the same period of 2004, and the average cost of wholesale funding sources increased 116 basis points, to 3.77%, from 2.61%, substantially reflected in repurchase agreements, which increased 126 basis points, to 3.78%, and subordinated capital notes which increased 118 basis points.

Comparison of the fiscal years ended June 30, 2005 and 2004:

Net interest income decreased 0.9%, to $86.4 million in the fiscal year ended June 30, 2005, from $87.2 million in the corresponding fiscal period of 2004. This decrease was due to a positive volume variance of $12.6 million, offset by a negative rate variance of $13.4 million, as average interest earning assets increased 24.1%, to $3.933 billion as of June 30, 2005, from $3.169 billion as of June 30, 2004, while the interest rate margin declined 56 basis points, to 2.19% for the fiscal year ended June 30, 2005, from 2.75% for fiscal period of 2004. The interest rate spread declined 64 basis points, to 2.00% in the fiscal year ended June 30, 2005, from 2.64% in the prior fiscal period of 2004, due to a 38 basis point decline in the average yield of interest earning assets to 4.81%, from 5.19%, in addition to a 26 basis point increase in the average cost of funds to 2.81%, from 2.55%. The decline in the average yield of interest earning assets was primarily due to the purchase of securities with lower rates, reflecting market conditions, prepayments of higher rate mortgage loans, and the repricing of adjustable and floating interest rate commercial loans. The increase in the average cost of funds was primarily due to higher rates paid on repurchase agreements and other borrowings due to the impact of the increases in short-term borrowing rates.

Interest income increased 15.2%, to $189.3 million for the fiscal year ended June 30, 2005, as compared to $164.4 million for fiscal 2004, reflecting a 24.1% increase in the average balance of interest earning assets, to $3.933 billion in the fiscal year ended June 30, 2005, from $3.169 billion in the fiscal period of 2004, partially offset by the decline in yield to 4.81%, from 5.19%. Interest income is generated by investment securities, which accounted for 70.9% of total interest income, and from loans, which accounted for 29.1% of total interest income. Interest income from investments increased 19.7%, to $134.3 million, due to a 27.6% increase in the average balance of investments, to $3.102 billion, partially offset by a 29 basis point decline in yield, to 4.33%, from 4.62%. The increase in investments reflects a 397.6% increase in U.S. government and agency obligations, to $1.030 billion

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as of June 30, 2005, from $207.0 million as of June 30, 2004, partially offset by a 20.6% decrease in mortgage-backed securities, to $1.960 billion as of June 30, 2005, from $2.467 billion as of June 30, 2004. Interest income from loans increased 5.4%, to $55.0 million, due to a 12.7% increase in the average balance of loans, to $831.2 million, partially offset by a 46 basis points decline in yield, to 6.61%, from 7.07%. The increase in loans reflects a 1.1% decrease in residential, non residential and home equity mortgage loans, to $643.4 million in the fiscal period of 2005, from $650.8 million in the same fiscal period of 2004, and a 189.8% increase in commercial loans, reflecting the continued expansion of that business, to $236.4 million in the fiscal year ended June 30, 2005, from $81.6 million in the fiscal period of 2004. Also, the increase is due to the purchase of real estate mortgage loans classified as commercial loans with an outstanding balance of $106.7 million as of June 30, 2005.

Interest expense increased 33.3%, to $102.9 million in the fiscal year ended June 30, 2005, from $77.2 million in the same fiscal period of 2004, due to a 26 basis point increase in the average cost of retail and wholesale funds, to 2.81% in the fiscal year ended June 30, 2005, from 2.55% in the fiscal year ended June 30, 2004. The increase is also due to the expansion of the average interest-bearing liabilities to $3.660 billion, from $3.027 billion, in order to fund the growth of the Group’s investment and loan portfolios. The average cost of retail deposits declined 14 basis points, to 2.73% in the fiscal period of 2005, from 2.87% in the same fiscal period of 2004, and the average cost of wholesale funding sources increased 46 basis points, to 2.84%, from 2.38%, substantially reflected in repurchase agreements, which increased 52 basis points, to 2.78% and subordinated capital notes which increased 135 basis points.

TABLE 2 — NON-INTEREST INCOME SUMMARY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005,
FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 2005 AND 2004
AND FISCAL YEARS ENDED JUNE 30, 2005, 2004 AND 2003

	Fiscal Year Ended									Six-Month Period Ended					Fiscal Year Ended
	December 31,									December 31,					June 30,
	2006			2005			Variance %			2005		2004			2005			2004		2003
	(Unaudited)											(Unaudited)
	(Dollars in thousands)
Mortgage banking activities	$	3,368		$	3,944			−14.6	%	$	1,702	$	5,532		$	7,774		$	7,719	$	8,026
Financial services revenues		16,029			14,029			14.3	%		7,432		7,435			14,032			17,617		14,472
Investment banking revenues		2,701			236			1044.5	%		74		177			339
Non-banking service revenues		22,098			18,209			23.9	%		9,208		13,144			22,145			25,336		22,498
Fees on deposit accounts		5,382			5,417			−0.6	%		3,025		2,466			4,858			4,887		4,075
Bank service charges and commissions		2,438			2,253			8.2	%		1,324		1,150			2,079			2,037		1,625
Other operating revenues		1,186			645			83.9	%		146		105			604			241		268
Banking service revenues		9,006			8,315			8.3	%		4,495		3,721			7,541			7,165		5,968
Securities net activity		(17,637	)		3,173			−655.8	%		650		5,642			8,165			13,414		14,223
Derivatives net gain (loss)		3,218			(2,060	)		−256.2	%		1,077		(393	)		(3,530	)		11		(4,061	)
Trading net gain (loss)		28			(48	)		−158.3	%		5		38			(15	)		21		571
Loss on early extinguishment of subordinated capital notes		(915	)		—			−100.0	%		—		—			—			—		—
Securities, derivatives and trading activities		(15,306	)		1,065			−1537.2	%		1,732		5,287			4,620			13,446		10,733
Investment in limited liability partnership		828			1,083			−23.5	%		838		—			246			—		—
Other income		612			248			146.8	%		109		195			333			87		(160	)
Other non-interest income		1,440			1,331			8.2	%		947		195			579			87		(160	)
Total non-interest income	$	17,238		$	28,920			−40.4	%	$	16,382	$	22,347		$	34,885		$	46,034	$	39,039

Non-Interest Income

Comparison of the year ended December 31, 2006 and 2005:

Non-interest income is affected by the amount of securities and trading transactions, the level of trust assets under management, transactions generated by the gathering of financial assets and investment activities by the securities

F-77

broker-dealer subsidiary, the level of mortgage banking activities, and fees from deposit accounts and insurance products. As shown in Table 2, non-interest income for the year ended December 31, 2006 decreased 40.4%, from $28.9 million to $17.2 million, when compared to the same period in 2005.

Income generated from mortgage banking activities decreased 14.6% in the year ended December 31, 2006, from $3.9 million in the year ended December 31, 2005, to $3.4 million in the same period of 2006. Financial services revenues, which consist of commissions and fees from fiduciary activities, and commissions and fees from securities brokerage, and insurance activities, increased 14.3%, to $16.0 million in the year ended December 31, 2006, from $14.0 million in the same period of 2005. Banking service revenues, which consist primarily of fees generated by deposit accounts, electronic banking and customer services, continued with an increase of 8.3% to $9.0 million in the year ended December 31, 2006, from $8.3 million in the same period of 2005, mainly driven by the strategy of strengthening the Group’s banking franchise by expanding our ability to attract deposits and build relationships with individual, professional and commercial customers through aggressive marketing and the expansion of the Group’s sales force.

Revenues from securities, derivatives and trading activities in the year ended December 31, 2006 reflects the $16.0 million loss incurred with respect to the repositioning of the investment securities portfolio partially offset by increased gains on derivatives instruments due to a positive variance in the mark — to-market of such positions.

Comparison of the six-month periods ended December 31, 2005 and 2004:

As shown in Table 2, non-interest income for the six-month period ended December 31, 2005 decreased 26.7%, from $22.3 million to $16.4 million, when compared to the same period in 2004. Income generated from mortgage banking activities decreased 69.2% in the six-month period ended December 31, 2005, from $5.5 million in the six-month period ended December 31, 2004, to $1.7 million in the same period of 2005.

Financial services revenues decreased 0.3% and 2.7%, respectively, to $4.1 million and $3.4 million in the six-month period ended December 31, 2005, from $4.1 million and $3.5 million in the same period of 2004. Decrease for the period reflected temporarily reduced market for public finance activities in Puerto Rico which affects revenues from brokerage and investment banking activities in the local retail public finance market.

Banking service revenues increased 16.5% to $4.5 million in the six-month period ended December 31, 2005, from $3.9 million in the same period of 2004.

Revenues from securities, derivatives and trading activities decreased 63.9% in the six-month period ended December 31, 2005 due to a net gain of $1.9 million in the 2005 six-month period from a net gain of $5.3 in the same period of 2004. The reduction in securities net activity, which was principally due to the Group’s strategy of retaining a higher amount of profitable investment securities to obtain recurring interest income, offset the positive results in derivatives activity, which reflected a net gain of $5,000 during the six-month period ended December 31, 2005, compared to a $322,000 net loss in the same period of 2004.

Comparison of the fiscal years ended June 30, 2005 and 2004:

Income from mortgage banking activities increased 0.7% in the fiscal year ended June 30, 2005, from $7.7 million in the fiscal year ended June 30, 2004 to $7.8 million in the fiscal period of 2005. This source of revenues showed relative stability, despite a reduction of 12.9% in residential mortgage loan production, from $332.5 million in the fiscal year ended June 30, 2004 to $289.7 million in the fiscal year ended June 30, 2005.

Financial services revenues decreased 11.5% and 25.1%, respectively, to $7.7 million and $6.7 million in the fiscal year ended June 30, 2005, from $8.6 million and $9.0 million in the corresponding fiscal period of 2004.

Banking service revenues increased 8.2% to $7.8 million in the fiscal year ended June 30, 2005, from $7.2 million in the fiscal year ended June 30, 2004.

Securities, derivatives and trading activities decreased 65.6% in the fiscal year ended June 30, 2005, to a net gain of $4.6 million in the 2005 fiscal period from a net gain of $13.4 in the fiscal year ended June 30, 2004, mainly affected by negative results in derivative activity which reflected a loss during the fiscal year ended June 30, 2005 of

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$2.8 million, compared to $11,000 net gain in the corresponding fiscal period of 2004. The fluctuations are related to the mark-to-market of derivative.

TABLE 3 — NON-INTEREST EXPENSES SUMMARY

FOR THE YEARS ENDED ENDED DECEMBER 31, 2006 AND 2005,
FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 2005 AND 2004

AND FISCAL YEARS ENDED JUNE 30, 2005, 2004 AND 2003

	Year Ended December 31,									Six-Month Period Ended December 31,						Fiscal Year Ended June 30,
	2006			2005			Variance %			2005			2004			2005			2004			2003
	(Dollars in thousands)
Compensation and employees’ benefits	$	24,630		$	20,410			20.7	%	$	12,714		$	15,910		$	23,606		$	28,511		$	24,312
Occupancy and equipment		11,573			11,331			2.1	%		5,798			5,050			10,583			9,639			9,079
Professional and service fees		6,821			7,385			−7.6	%		3,771			3,380			6,994			5,631			6,467
Advertising and business promotion		4,466			5,276			−15.4	%		2,862			3,306			5,720			6,850			6,654
Taxes, other than payroll and income taxes		2,405			2,129			13.0	%		1,195			902			1,836			1,754			1,556
Director and investors relations		2,323			918			153.6	%		374			339			883			677			447
Loan servicing expenses		2,017			1,742			15.8	%		911			896			1,727			1,853			1,775
Electronic banking charges		1,914			1,914			0.0	%		854			1,015			2,075			1,679			1,244
Communication		1,598			1,624			−1.5	%		837			843			1,630			1,849			1,671
Printing, postage, stationery and supplies		995			945			5.4	%		528			474			891			1,121			1,038
Insurance		861			749			15.0	%		374			392			767			791			736
Other operating expenses		4,110			3,433			19.7	%		1,596			1,414			3,251			3,009			2,426
Total non-interest expenses	$	63,713		$	57,856			10.1	%	$	31,814		$	33,921		$	59,963		$	63,364		$	57,405
Relevant ratios and data:
Non-interest income to Non-interest expenses ratio		28.35	%		49.99	%					51.49	%		65.88	%		58.18	%		72.65	%		68.01	%
Efficiency ratio		86.33	%		57.51	%					66.17	%		53.24	%		51.39	%		52.92	%		55.77	%
Expense ratio		0.73	%		0.75	%					0.85	%		0.89	%		0.75	%		0.97	%		1.13	%
Compensation and benefits to non-interest expenses		38.7	%		35.3	%					40.0	%		46.9	%		39.4	%		45.0	%		42.4	%
Compensation to total assets		0.56	%		0.45	%					0.56	%		0.76	%		0.56	%		0.77	%		0.80	%
Average compensation per employee (annualized)	$	46.4		$	38.7					$	48.8		$	60.6		$	44.6		$	52.3		$	48.0
Average number of employees		530			527						521			525			529			545			506
Assets per employee	$	8,552		$	8,624					$	8,723		$	7,932		$	8,028		$	6,836		$	6,009
Total workforce		535			520						520			554			520			526			513

Non-Interest Expenses

Comparison of the year ended December 31, 2006 and 2005:

Non-interest expenses for the year ended December 31, 2006 increased 10.1% to $63.7 million, compared to $57.9 million for the same period of 2005. Non-interest expenses in the fourth quarter of 2006 included approximately $1.8 million primarily for a supplemental pension payment and charitable contributions made in recognition of the Group’s former Chairman, President, and CEO enhancing the value of Oriental over the course of his 19 years of leadership. Excluding this amount, non-interest expenses for 2006 would have been $61.5 million. The 2005 expenses of $57.9 million reflected a $6.3 million reduction in non-cash compensation related to the variable accounting for certain employee stock options. Excluding this non-cash adjustment, total non-interest expenses for the year ended December 31, 2005 would have been $64.1 million.

During the year ended December 31, 2006, the cost of advertising and business promotions decreased 15.4% to $4.4 million from $5.3 million in the year ended December 31, 2005. Such reduction was mainly due to the Group’s continued use of more selective promotional campaigns to enhance the market recognition of new and existing products, to increase fee-based revenues, and to strengthen the banking and financial services franchise.

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In the year ended December 31, 2006, professional and service fees decreased 7.6%, from $7.4 million in 2005 to $6.8 million in 2006. The decrease was due to the effect of reviews performed by advisors in specific operational areas to improve financial and operational performance and expenses associated with SOX implementation and additional audit fees related to the change in the Group’s fiscal year incurred during 2005.

Comparison of the six-month periods ended December 31, 2005 and 2004:

Non-interest expenses in the six-month period ended December 31, 2005 decreased 6.2%, from $33.9 million in the six-month period ended December 31, 2004 to $31.8 million in the same period of 2005. The decrease in non-interest expenses was mainly the result of a 20.1% reduction in compensation and employee benefits expense from the six-month period ended December 31, 2004 to the comparative 2005 period, from $15.9 million to $12.7 million, respectively. The reduction was mainly due to the recording of compensation expense for the six-month period ended December 31, 2004 of $3.2 million as a result of the application of the variable accounting to outstanding options granted to certain employees. No such expense was required for the six-month period ended December 31, 2005.

The increment in non-interest expenses, other than in compensation and employees’ benefits, during the comparative six-month periods reflects the Group’s expansion and improvement of the Group’s sales capabilities, including additional experienced lenders, marketing, enhancing branch distribution and support risk management processes. Also, these results include expenses for new technology for the implementation of PeopleSoft enterprise software to increase efficiencies, and cost of documentation and testing required by SOX regarding management’s assessment of internal control over financial reporting. Consequently, expenses have been pared in other areas, consistent with management’s goal of limiting expense growth to those areas that directly contribute to increase the efficiency, service quality and profitability of the Group.

Occupancy and equipment expenses increased 14.8%, from $5.1 million in the six-month period ended December 31, 2004 to $5.8 million in the six-month period ended December 31, 2005, due to higher depreciation resulting from upgrading technology, infrastructure in our financial centers in order to improve efficiency and the acceleration of leasehold improvements amortization due to the move to new facilities in May 2006.

During the six-month period ended December 31, 2005, the cost of advertising and business promotions decreased 20.5% to $2.9 million versus $3.3 million in the six-month period ended December 31, 2004. Such activity was mainly due to management’s strategy of redistributing the marketing expenses for the 2005 six-month period ended December 31, as the Group continued its selective promotional campaign.

In the six-month period ended December 31, 2005, professional and service fees increased 11.6%, from $3.4 million in the six-month period ended December 31 2004 to $3.8 million in the 2005 six-month period. The increase in the period was due to the effect of reviews performed by advisors in specific operational areas to improve financial and operational performance and expenses associated with SOX implementation.

The aggregate decrease in communication, electronic banking charges and insurance is principally due to effective cost controls without affecting the general growth in the Group’s business activities, products and services.

The rise in taxes other than payroll and income taxes, and other operating expenses is principally due to the general growth in the Group’s business activities, products and services offered.

Comparison of the fiscal years ended June 30, 2005 and 2004:

Non-interest expenses in the fiscal year ended June 30, 2005 decreased 5.4%, from $63.4 million in the fiscal year ended June 30, 2004 to $60.0 million in the fiscal year ended June 30, 2005. The reduction was mainly due to lower compensation and employee benefits for the fiscal year ended June 30, 2005 in the amount of $4.9 million, compared to the fiscal year ended June 30, 2004. This $4.9 million decrease was mainly due to a decrease in fair value of the Group’s common stock from one period to the other which resulted in a credit to compensation expense of $3.1 million as a result of the application of the variable accounting to outstanding options granted to certain employees. Increases in other non-interest expense categories in the year reflect the Group’s expansion and improvement of the Group’s sales capabilities, including additional experienced lenders, marketing, enhancing branch distribution and support risk management processes. Also, these results include expenses for new

F-80

technology for the implementation of PeopleSoft enterprise software to increase efficiencies, and also include the cost of documentation and testing required by SOX regarding management’s assessment of internal control over financial reporting. Consequently, expenses have been pared in other areas, consistent with management’s goal of limiting expense growth to those areas that directly contribute to increase the efficiency, service quality and profitability of the Group.

Occupancy and equipment expenses increased 9.8%, from $9.6 million in the fiscal year ended June 30, 2004 to $10.6 million in the fiscal year ended June 30, 2005, due to higher depreciation resulting from upgrading technology, infrastructure in our financial centers in order to improve efficiency and the acceleration of leasehold improvements amortization due to the move to new facilities during the second quarter of 2006.

During the fiscal year ended June 30, 2005, the cost of advertising and business promotions decreased 16.5% to $5.2 million versus $6.9 million in the fiscal year ended June 30, 2004. Such activity was mainly due to management’s strategy of redistributing the marketing expenses for the 2005 fiscal year as the Group continued its selective promotional campaign.

In the fiscal year ended June 30, 2005, professional and service fees increased 24.2%, from $5.6 million in the fiscal year ended June 30, 2004 to $7.0 million in the corresponding fiscal period of 2005. The increase in the period was due to the effect of reviews performed by advisors in specific operational areas to improve financial and operational performance and expenses associated with the implementation of SOX.

The aggregate decrease in communication, insurance and printing, postage, stationery and supplies expenses is principally due to effective cost controls without affecting the general growth in the Group’s business activities, products and services.

The rise in electronic banking charges, taxes other than payroll and income taxes, and other operating expenses is principally due to the general growth in the Group’s business activities, products and services offered.

Provision for Loan Losses

Comparison of the year ended December 31, 2006 and 2005:

The provision for loan losses for the year ended December 31, 2006 totaled $4.4 million, a 28.6% increase from the $3.4 million reported for 2005, which is in line with the Group’s 34.3% growth in loans during 2006. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for 2006 was adequate in order to maintain the allowance for loan losses at an adequate level.

The 30.9% reduction in net credit losses during 2006 was primarily due to a $1.4 million decrease in net credit losses from mortgage loans. Recoveries increased from $597,000 for 2005 to $677,000 for 2006. As result, the recoveries to charge-offs ratio increased from 15.1% in 2005 to 18.4% in 2006.

Mortgage loan charge-offs in 2006 were $896,000 as compared to $2.4 million in 2005. Commercial loans net credit losses decreased to $161,000 in 2006, when compared from $646,000 in 2005..The commercial lending that the Group originates is mainly collateralized by mortgages.

Net credit losses on consumer loans increased when compared to 2005. In 2006, net credit losses on consumer loans were $2.0 million, an increase of 40.9% when compared to 2005 in which the Group had net credit losses of $1.4 million, reflecting the deterioration in consumer lending due to adverse economic conditions in Puerto Rico.

The Group evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. At December 31, 2006, the total investment in impaired commercial loans was $2.0 million. Impaired commercial loans are measured based on the fair value of collateral. The Group determined that no specific impairment allowance was required for such loans. The average investment in impaired commercial loans for the year ended December 31, 2006 amounted to $2.2 million compared to $3.2 million for the six-month period ended December 31, 2005.

Please refer to the Allowance for Loan Losses and Non-Performing Assets section on Table 8 through Table 12 for a more detailed analysis of the allowances for loan losses, net credit losses and credit quality statistics.

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Comparison of the six-month periods ended December 31, 2005 and 2004:

The provision for loan losses for the six-month period ended December 31, 2005 totaled $1.9 million, a 5.4% increase from the $1.8 million reported for the six-month period ended December 31, 2004. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision was adequate in order to maintain the allowance for loan losses at an appropriate level.

The reduction in net credit losses of 1.5% during the six-month period ended December 31, 2005 was primarily due to a $568,000 decrease in net credit losses from mortgage loans. Recoveries decreased from $438,000 for the six-month period ended December 31, 2004 to $314,000 for the corresponding 2005 six-month period. As result, the recoveries to charge-offs ratio decreased from 19.6% in the six-month period ended December 31, 2004 to 15.1% in the corresponding 2005 six-month period.

Mortgage loan charge-offs in the six-month period ended December 31, 2005 were $774,000 as compared to $1.2 million in the same period of 2004. Commercial loans net credit losses increased to $164,000 in the 2005 six-month period, when compared to $25,000 in the same period of 2004.

Net credit losses on consumer loans increased when compared with the 2004 period. In the six-month period ended December 31, 2005, net credit losses on consumer loans were $974,000, an increase of 70.4% when compared with the same period of 2004 in which the Group had net credit losses of $571,000.

At December 31, 2005, the total investment in impaired commercial loans was $3.6 million. The Group determined that no specific impairment allowance was required for such loans. The average investment in impaired commercial loans for the year ended December 31, 2005 amounted to $3.2 million compared to $2.3 million for the year ended June 30, 2005.     .

Comparison of the fiscal years ended June 30, 2005 and 2004:

The provision for loan losses for the year ended June 30, 2005 totaled $3.3 million, a 27.7% decrease from the $4.6 million reported for the year ended June 30, 2004. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for the year ended June 30, 2005 was adequate in order to maintain the allowance for loan losses at an appropriate level, even though the loan portfolio increased from $745.2 million as of June 30, 2004 to $892.1 million as of June 30, 2005 (a 19.7% increase) and there was an increase in the net credit losses from $2.1 million for the year ended June 30, 2004 to $4.4 million for the year ended June 30, 2005 (an increase of 111.8%). The main reason for the decrease in the provision is that during the year ended June 30, 2004 Management charged against earnings the provision for the possible losses on certain nonperforming loans which were in the process of evaluation. During the year ended June 30, 2005, these loans or portions thereof were charged-off against the allowance established in the previous fiscal year since such loans or the portions thereof were determined to be uncollectible. The increase in the loan portfolio is mainly related to new high quality and well collateralized loans which do not require large amounts of allowance for loan losses.

Net credit losses increased 111.8%, from $2.1 million in the fiscal year ended June 30, 2004 to $4.4 million in the fiscal year ended June 30, 2005. The increase was primarily due to $2.5 million increment in net credit losses from mortgage loans. Total loss recoveries decreased from $1.1 million to $721,000.. As result, the recoveries to charge-offs ratio decreased from 19.6% in the fiscal year ended June 30, 2004 to 15.1% for the corresponding fiscal period of 2005.

Residential mortgage loans net credit losses in the fiscal year ended June 30, 2005 were $2.9 million as compared to $378,000 in the prior fiscal year. Commercial loans net credit losses increased to $495,000 in the fiscal year ended June 30, 2005, when compared to $110,000 in the previous fiscal year.

Net credit losses on consumer loans decreased when compared with the prior fiscal year. In the fiscal year ended June 30, 2005, net credit losses on consumer loans were $1.0 million, a decrease of 35.5% when compared with the fiscal year ended June 30, 2004 in which the Group had net credit losses of $1.6 million.

At June 30, 2005, the total investment in impaired commercial loans was $3.2 million. The Group determined that no specific impairment allowance was required for such loans. The average investment in impaired commercial

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loans for the fiscal year ended June 30, 2005 amounted to $2.3 million compared to $2.1 million for the fiscal year ended June 30, 2004.

Income Taxes

The income tax benefit was $1.6 million for the year ended December 31, 2006, as compared with the benefit of $2.2 million for 2005. For both periods, the tax benefit takes into account, among other things, the expiration of certain tax contingencies. Also, the effective income tax rate in 2006 was lower than the 43.5% statutory tax rate for the Group, due to the high level of tax-advantaged interest income earned on certain investments and loans, net of the disallowance of related expenses attributable to exempt income. Exempt interest relates principally to interest earned on obligations of the United States and Puerto Rico governments and certain mortgage-backed securities, including securities held by the Group’s international banking entities.

The Group recorded income tax expense of $127,000 for the six-month period ended December 31, 2005 compared to $645,000 for the comparable period in 2004, and an income tax benefit of $1.6 million for the fiscal year ended June 30, 2005, as compared with an income tax expense of $5.6 million for the fiscal year ended June 30, 2004.

FINANCIAL CONDITION

Assets Owned

At December 31, 2006, the Group’s total assets amounted to $4.374 billion, a decrease of 3.8% when compared to $4.547 billion at December 31, 2005, and interest-earning assets, excluding securities sold but not yet delivered, reached $4.205 billion, down 3.9%, versus $4.377 billion at December 31, 2005.

As detailed in Table 4, investments are the Group’s largest interest-earning assets component. Investments principally consist of money market instruments, U.S. government and agency bonds, mortgage-backed securities and Puerto Rico government and agency bonds. At December 31, 2006, the investment portfolio decreased 13.9% to $2.992 billion, from $3.473 billion as of December 31, 2005, principally as a result of the scheduled repayments and maturities in the held-to-maturity investment portfolio, which decreased $378.8 million from December 31, 2005.

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TABLE 4 — ASSETS SUMMARY AND COMPOSITION

AS OF DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2005

	December 31,			December 31,			Variance			June 30,
	2006			2005			%			2005
	(Dollars in thousands)
Investments:
Mortgage-backed securities	$	1,955,566		$	1,961,285			−0.3	%	$	1,959,760
U.S. Government and agency obligations		863,019			1,251,058			−31.0	%		1,029,980
P.R. Government and agency obligations		100,729			90,333			11.5	%		108,968
Other investment securities		23,366			90,609			−74.2	%		66,023
Short-term investments		5,000			60,000			−91.7	%		30,000
FHLB stock		13,607			20,002			−32.0	%		27,058
Other investments		30,949			—			100.0	%		—
		2,992,236			3,473,287			−13.9	%		3,221,789
Loans:
Loans receivable		1,209,783			900,992			34.3	%		892,136
Allowance for loan losses		(8,016	)		(6,630	)		20.9	%		(6,495	)
Loans receivable, net		1,201,767			894,362			34.4	%		885,641
Mortgage loans held for sale		10,603			8,946			18.5	%		17,963
Total loans		1,212,370			903,308			34.2	%		903,604
Securities sold but not yet delivered		6,430			44,009			−85.4	%		1,034
Total securities and loans		4,211,036			4,420,604			−4.7	%		4,126,427
Other assets:
Cash and due from banks		15,341			13,789			11.3	%		14,892
Money market investments		18,729			3,480			438.2	%		9,791
Accrued interest receivable		27,940			29,067			−3.9	%		23,735
Premises and equipment, net		20,153			14,828			35.9	%		15,269
Deferred tax asset, net		14,150			12,222			15.8	%		6,191
Foreclosed real estate		4,864			4,802			1.3	%		4,186
Other assets		61,477			48,157			27.7	%		46,374
Total other assets		162,909			126,345			28.9	%		120,438
Total assets	$	4,373,690		$	4,546,949			−3.8	%	$	4,246,865
Investments portfolio composition:
Mortgage-backed securities		65.4	%		56.5	%					60.8	%
U.S. Government and agency obligations		28.8	%		36.0	%					32.0	%
P.R. Government and agency obligations		3.4	%		2.6	%					3.4	%
FHLB stock, short term investments and other investment securities		2.4	%		4.9	%					3.8	%
		100.0	%		100.0	%					100.0	%

Refer to Note 2 of the accompanying consolidated financial statements for information related to the carrying amount of available-for-sale and held-to-maturity investment securities at December 31, 2006, by contractual maturity.

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At December 31, 2006, the Group’s loan portfolio, the second largest category of the Group’s interest-earning assets, amounted to $1.212 billion, an increase of 34.2% when compared to the $903.3 million at December 31, 2005. The Group’s loan portfolio is mainly comprised of residential loans, home equity loans, and commercial loans collateralized by mortgages on real estate in Puerto Rico. As shown in Table 5, the mortgage loan portfolio amounted to $932.3 million or 77.1% of the loan portfolio as of December 31, 2006, compared to $637.3 million or 71.0% of the loan portfolio at December 31, 2005. Mortgage production and purchases of $478.5 million for the year ended December 31, 2006 increased 52.6%, from $313.6 million, when compared to the year ended December 31, 2005.

The second largest component of the Group’s loan portfolio is commercial loans. At December 31, 2006, the commercial loan portfolio totaled $241.7 million (19.9% of the Group’s total loan portfolio), in comparison to $227.8 million at December 31, 2005 (25.0% of the Group’s total loan portfolio).

The consumer loan portfolio totaled $35.8 million (2.9% of total loan portfolio at December 31, 2006), a decrease of 0.2% when compared to the December 31, 2005 portfolio of $35.8 million (4.0% total loan portfolio at such date). Consumer loan production decreased 34.1% for the year ended December 31, 2006 from $25.3 million in 2005 to $16.6 million in 2006.

The following table summarizes the remaining contractual maturities of the Group’s total loans segmented to reflect cash flows as of December 31, 2006. Contractual maturities do not necessarily reflect the actual term of a loan, considering prepayments.

			Maturities
					After One Year to
					Five Years				After Five Years
	Balance				Fixed		Variable		Fixed		Variable
	Outstanding at		One Year		Interest		Interest		Interest		Interest
	December 31, 2006		or Less		Rates		Rates		Rates		Rates
	(In thousands)
Mortgage, mainly residential	$	1,020,094	$	3,093	$	6,963	$	—	$	1,010,038	$	—
Commercial, mainly real estate		164,157		37,894		74,853		42,330		6,158		2,922
Consumer		36,565		8,861		20,163		—		7,541		—
Total	$	1,220,816	$	49,848	$	101,979	$	42,330	$	1,023,737	$	2,922

At June 30, 2005, the Group’s total assets amounted to $4.247 billion, an increase of 14.0% when compared to $3.726 billion at June 30, 2004. Interest-earning assets, excluding securities sold but not yet delivered, reached $4.135 billion at June 30, 2005, an increase of 15.2%, versus $3.590 billion at June 30, 2004.

At June 30, 2005, the investment portfolio increased 13.5%, to $3.232 billion, from $2.847 billion as of June 30, 2004. At June 30, 2005, the Group’s loan portfolio, the second largest category of the Group’s interest-earning assets, amounted to $903.6 million, 21.5% higher than the $743.5 million at June 30, 2004. As shown in Table 5, the mortgage loan portfolio amounted to $625.5 million or 70.7% of the loan portfolio as of June 30, 2005, compared to $645.0 million or 86.8% of the loan portfolio at June 30, 2004. Mortgage production of $250.8 million for the fiscal year ended June 30, 2005, declined 24.3% when compared to the prior fiscal year. Commercial loan portfolio totaled $236.4 million (26.0% of the Group’s total loan portfolio), a substantial growth of 189.8% when compared to $81.6 million at June 30, 2004 (10.9% of the Group’s total loan portfolio). The consumer loan portfolio totaled $30.3 million (3.3% of total loan portfolio at June 30, 2005), a 62.3% increase when compared to the June 30, 2004 portfolio of $18.7 million, or 2.4% of the total loan portfolio as of such date.

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TABLE 5 — LOANS RECEIVABLE COMPOSITION:

Selected Financial Data
As of December 31, 2006 and 2005 and June 30, 2005

	December 31,						June 30,
	2006			2005			2005
	(Dollars in thousands)
Mortgage, mainly residential	$	932,285		$	637,318		$	625,481
Commercial, mainly real estate		241,433			227,846			236,373
Consumer		36,065			35,828			30,282
Loans receivable		1,209,783			900,992			892,136
Allowance for loan losses		(8,016	)		(6,630	)		(6,495	)
Loans receivable, net		1,201,767			894,362			885,641
Mortgage loans held for sale		10,603			8,946			17,963
Total loans, net	$	1,212,370		$	903,308		$	903,604
Loans portfolio composition percentages:
Mortgage, mainly residential		77.1	%		71.0	%		70.7	%
Commercial, mainly real estate		19.9	%		25.0	%		26.0	%
Consumer		3.0	%		4.0	%		3.3	%
Total loans		100.0	%		100.0	%		100.0	%

Liabilities and Funding Sources

As shown in Table 6, at December 31, 2006, the Group’s total liabilities reached $4.037 billion, 4.0% lower than the $4.205 billion reported at December 31, 2005. Interest-bearing liabilities (excluding securities and loans purchased not yet received), the Group’s funding sources, amounted to $4.015 billion at December 31, 2006 versus $4.131 billion at December 31, 2005, a 2.8% decrease, mainly driven by the decrease in advances from the FHLB and the Group’s exercise of the call provision in the Statutory Trust I $35 million subordinated capital notes.

Borrowings are the Group’s largest interest-bearing liability component. Borrowings consist mainly of diversified funding sources through the use of FHLB advances and borrowings, repurchase agreements, term notes, subordinated capital notes, other borrowings and lines of credit. At December 31, 2006, borrowings amounted to $2.782 billion, 1.8% lower than the $2.833 billion recorded at December 31, 2005. Repurchase agreements as of December 31, 2006 amounted to $2.536 billion, a 4.5% increase when compared to $2.428 billion as of December 31, 2005.

The FHLB system functions as a source of credit for financial institutions that are members of a regional Federal Home Loan Bank. As a member of the FHLB, the Group can obtain advances from the FHLB, secured by the FHLB stock owned by the Group, as well as by certain of the Group’s mortgage loans and investment securities. FHLB funding amounted to $181.9 million at December 31, 2006, versus $313.3 million at December 31, 2005. All of these advances mature between January 2007 and August 2008.

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TABLE 6 — LIABILITIES SUMMARY AND COMPOSITION
AS OF DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2005

	December 31,			December 31,			Variance			June 30,
	2006			2005			%			2005
	(Dollars in thousands)
Deposits:
Non-interest bearing deposits	$	59,603		$	61,473			−3.0	%	$	62,205
Now accounts		72,810			85,119			−14.5	%		89,930
Savings accounts		266,181			82,640			222.1	%		93,920
Certificates of deposit		829,867			1,061,401			−21.8	%		1,002,908
		1,228,461			1,290,633			−4.8	%		1,248,963
Accrued interest payable		4,527			7,935			−42.9	%		3,934
		1,232,988			1,298,568			−5.1	%		1,252,897
Borrowings:
Short term borrowings		1,340			1,930			100.0	%		—
Repurchase agreements		2,535,923			2,427,880			4.5	%		2,197,926
Advances from FHLB		181,900			313,300			−41.9	%		300,000
Subordinated capital notes		36,083			72,166			−50.0	%		72,166
Term notes		15,000			15,000			0.0	%		15,000
Federal funds purchased		12,228			2,525			384.3	%		12,310
		2,782,474			2,832,801			−1.8	%		2,597,402
Securities and loans purchased but not yet received		—			43,354			−100.0	%		22,772
Total deposits and borrowings		4,015,462			4,174,723			−3.8	%		3,873,071
Other liabilities		21,802			30,435			−28.4	%		35,039
Total liabilities	$	4,037,264		$	4,205,158			−4.0	%	$	3,908,110
Deposits portfolio composition percentages:
Non-interest bearing deposits		4.9	%		4.8	%					5.0	%
Now accounts		5.9	%		6.6	%					7.2	%
Savings accounts		21.7	%		6.4	%					7.5	%
Certificates of deposit		67.6	%		82.2	%					80.3	%
		100.0	%		100.0	%					100.0	%
Borrowings portfolio composition percentages:
Short term borrowings		0.0	%		0.1	%					—
Repurchase agreements		91.1	%		85.7	%					84.6	%
Advances from FHLB		6.5	%		11.1	%					11.6	%
Subordinated capital notes		1.3	%		2.5	%					2.8	%
Term notes		0.5	%		0.5	%					0.6	%
Federal funds purchased		0.4	%		0.1	%					0.4	%
		100.0	%		100.0	%					100.0	%
Securities sold under agreements to repurchase
Amount outstanding at year-end	$	2,535,923		$	2,427,880					$	2,197,926
Daily average outstanding balance	$	2,627,323		$	2,270,145					$	2,174,312
Maximum outstanding balance at any month-end	$	2,923,796		$	2,427,880					$	2,398,861
Weighted average interest rate:
For the period		5.09	%		3.41	%					2.78	%
At period end		4.94	%		4.01	%					3.07	%

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At December 31, 2006, deposits, the second largest category of the Group’s interest-bearing liabilities reached $1.233 billion, down 5.1% from $1.299 billion at December 31, 2005. Deposits reflected a 21.8% decrease in certificates of deposit, to $829.9 million, primarily due to a decrease of $249.9 million in brokered CD, and individual retirement account withdrawals because of a Puerto Rico law that temporarily decreased taxes on early withdrawals from such accounts, thereby inducing some customers to seek early withdrawals. This decrease was partially offset by increase in savings accounts, reflecting the continued success of the Oriental Money accounts.

At December 31, 2006, the scheduled maturities of time deposits and individual retirement accounts (IRA) of $100,000 or more were as follows:

	(In thousands)
3 months or less	$	253,919
Over 3 months through 6 months		104,091
Over 6 months through 12 months		38,944
Over 12 months		42,506
Total	$	439,460

Stockholders’ Equity

At December 31, 2006, the Group’s total stockholders’ equity was $336.4 million, a slight 1.6% decrease, when compared to $341.8 million at December 31, 2005. The Group’s capital ratios remain significantly above regulatory capital requirements. At December 31, 2006, the Tier 1 Leverage Capital Ratio was 8.42%, the Tier 1 Risk-Based Capital Ratio was 21.57%, and the Total Risk-Based Capital Ratio was 22.04%.

The Bank is considered “well-capitalized” under the regulatory framework for prompt corrective action if it meets or exceeds a Tier I risk-based capital ratio of 6%, a total risk-based capital ratio of 10% and a leverage capital ratio of 5%. In addition, the Group and the Bank meet the following minimum capital requirements: a Tier I risk-based capital ratio of 4%, a total risk-based capital ratio of 8% and a Tier 1 leverage capital ratio of 4%. As shown in Table 7 and in Note 13 to the consolidated financial statements, the Group and the Bank comfortably exceed these benchmarks due to the high level of capital and the quality and conservative nature of its assets.

The Group’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol OFG. At December 31, 2006, the Group’s market capitalization for its outstanding common stock was $329.3 million ($12.95 per share).

On November 30, 2004, the Group declared $3.5 million in cash dividends, a 25.0% increase when compared to the $2.8 million declared for the same period a year earlier. The Group also declared a 10% stock dividend paid to holders of record as of December 31, 2004. During each quarterly period of the year ended December 31, 2006, the Group declared regular quarterly cash dividends of $0.14 per common share.

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TABLE 7 — CAPITAL, DIVIDENDS AND STOCK DATA
AS OF DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2005

	December 31,			December 31,			Variance			June 30,
	2006			2005			%			2005
	(In thousands, except for per share data)
Capital data:
Stockholders’ equity	$	336,426		$	341,791			−1.6	%	$	338,755
Regulatory Capital Ratios data:
Leverage Capital Ratio		8.42	%		10.13	%		−16.4	%		10.59	%
Minimum Leverage Capital Ratio Required		4.00	%		4.00	%					4.00	%
Actual Tier 1 Capital	$	372,558		$	447,669			−16.3	%	$	445,131
Minimum Tier 1 Capital Required	$	176,987		$	176,790			0.1	%	$	168,080
Tier 1 Risk-Based Capital Ratio		21.57	%		34.70	%		−37.4	%		36.97	%
Minimum Tier 1 Risk-Based Capital Ratio Required		4.00	%		4.00	%					4.00	%
Actual Tier 1 Risk-Based Capital	$	372,558		$	447,669			−16.3	%	$	445,131
Minimum Tier 1 Risk-Based Capital Required	$	67,830		$	51,602			33.8	%	$	48,163
Total Risk-Based Capital Ratio		22.04	%		35.22	%		−37.0	%		37.51	%
Minimum Total Risk-Based Capital Ratio Required		8.00	%		8.00	%					8.00	%
Actual Total Risk-Based Capital	$	380,574		$	454,299			−15.7	%	$	451,626
Minimum Total Risk-Based Capital Required	$	135,677		$	103,204			33.8	%	$	96,327
Stock data:
Outstanding common shares, net of treasury(1)		24,453			24,580			−0.5	%		24,876
Book value(1)	$	10.98		$	11.13			−0.9	%	$	10.88
Market Price at end of period	$	12.95		$	12.36			4.8	%	$	15.26
Market capitalization	$	316,671		$	303,809			4.2	%	$	379,608
Common dividend data:
Cash dividends declared	$	13,753		$	6,913			98.9	%	$	13,522
Cash dividends declared per share(1)	$	0.56		$	0.56			0.0	%	$	0.55
Payout ratio		−140.12	%		47.61	%		−394.3	%		24.65	%
Dividend yield		4.39	%		4.34	%		1.2	%		2.46	%

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The following provides the high and low prices and dividend per share of the Group’s stock for each quarter of the last three periods. Common stock prices and cash dividend per share were adjusted to give retroactive effect to the stock dividend declared on the Group’s common stock.

					Cash
	Price				Dividend
	High		Low		Per share
December 31, 2006
December 31, 2006	$	13.57	$	11.47	$	0.14
September 30, 2006	$	12.86	$	11.82	$	0.14
June 30, 2006	$	13.99	$	11.96	$	0.14
March 31, 2006	$	14.46	$	12.41	$	0.14
December 31, 2005
December 31, 2005	$	13.12	$	10.16	$	0.14
September 30, 2005	$	15.98	$	11.91	$	0.14
June 30, 2005
June 30, 2005	$	23.47	$	13.66	$	0.14
March 31, 2005	$	28.94	$	22.97	$	0.14
December 31, 2004	$	28.41	$	24.37	$	0.14
September 30, 2004(1)	$	26.64	$	22.76	$	0.13

(1) Adjusted to give retroactive effect to the 10% stock dividends declared on the Group’s common stock on November 30, 2004.

Group’s Financial Assets

The Group’s total financial assets include the Group’s assets and the assets managed by the Group’s trust division, the retirement plan administration subsidiary, and the securities broker-dealer subsidiary. At December 31, 2006, such assets totaled $7.366 billion, a decline of 2.5% from $7.555 billion at December 31, 2005. This was mainly due to a decrease of 3.8% in the Group’s assets owned, when compared to December 31, 2005. The principal component of the Group’s financial assets is the assets owned by the Group, of which about 98% are owned by the Group’s banking subsidiary. At June 30, 2005, the Group’s total financial assets reached $7.205 billion, up 11.8% from $6.448 billion at June 30, 2004.

Another component of financial assets is the assets managed by the Group’s trust division and the retirement plan administration subsidiary. The Group’s trust division offers various types of IRA products and manages 401(K) and Keogh retirement plans, custodian and corporate trust accounts, while the retirement plan administration subsidiary manages private pension plans. As of December 31, 2006, total assets managed by the Group’s trust division amounted to $1.849 billion, a decrease of 1.4% over the $1.875 billion at December 31, 2005. At June 30, 2005, total assets managed by the Group’s trust division reached $1.823 billion, up 9.2% from $1.670 million at June 30, 2004.

The other financial asset component is the assets gathered by the Group’s securities broker-dealer subsidiary. The Group’s broker-dealer subsidiary offers a wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks and bonds. At December 31, 2006, total assets gathered by the broker-dealer from its customer investment accounts increased 1.0%, to $1.144 billion as of December 31, 2006, from $1.132 billion as of December 31, 2005. At June 30, 2005, total assets gathered by the broker-dealer from its customer investment accounts reached $1.135 billion, up 7.9% from $1.052 million at June 30, 2004.

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Allowance for Loan Losses and Non-Performing Assets

The Group maintains an allowance for loan losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. The Group’s allowance for loan losses policy provides for a detailed quarterly analysis of probable losses. Refer to details of the methodology in this section for more information. Tables 8 through 12 set forth an analysis of activity in the allowance for loan losses and present selected loan loss statistics. In addition, refer to Table 5 for the composition (“mix”) of the loan portfolio.

At December 31, 2006, the Group’s allowance for loan losses amounted to $8.0 million or 0.66% of total loans versus $6.6 million or 0.73% of total loans at December 31, 2005, which is in line with the 34.3% growth in loans for the year ended December 31, 2006. The allowance for commercial loans increased by 6.3% or $108,000 while the allowance for residential mortgage loans increased by 16.8% or $536,000, when compared with balances recorded at December 31, 2005. The allowance for consumer loans increased by 37.2% or $527,000, when compared to $1.4 million recorded at December 30, 2005.

The provision for loan losses for 2006 totaled $4.4 million, a 28.6% increase from the $3.4 million reported for 2005. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for 2006 was adequate in order to maintain the allowance for loan losses at an appropriate level.

The Group follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses. This methodology consists of several key elements. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

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TABLE 8 — ALLOWANCE FOR LOAN LOSSES SUMMARY

YEARS ENDED DECEMBER 31, 2006 AND 2005,

SIX-MONTH PERIODS ENDED DECEMBER 31, 2005 AND 2004

AND FISCAL YEARS ENDED JUNE 30, 2005, 2004 AND 2003

	Year Ended						Six-Month Period
	December 31,						Ended December 31,						Fiscal Year Ended June 30,
	2006			2005			2005			2004			2005			2004			2003
	(Dollars in thousands)
Balance at beginning of period	$	6,630		$	7,565		$	6,495		$	7,553		$	7,553		$	5,031		$	3,039
Provision for loan losses		4,387			3,412			1,902			1,805			3,315			4,587			4,190
Net credit losses — see Table 10		(3,001	)		(4,347	)		(1,767	)		(1,793	)		(4,373	)		(2,065	)		(2,198	)
Balance at end of period	$	8,016		$	6,630		$	6,630		$	7,565		$	6,495		$	7,553		$	5,031

TABLE 9 — ALLOWANCE FOR LOAN LOSSES BREAKDOWN

YEARS ENDED DECEMBER 31, 2006 AND 2005

AND FISCAL YEARS ENDED JUNE 30, 2005, 2004 AND 2003

	Year Ended December 31,						Fiscal Year Ended June 30,
	2006			2005			2005			2004			2003
	(Dollars in thousands)
Mortgage	$	3,721		$	3,185		$	3,167		$	3,861		$	1,749
Commercial		1,831			1,723			1,714			1,317			433
Consumer		1,944			1,417			1,335			1,462			1,299
Unallocated allowance		520			305			279			913			1,550
	$	8,016		$	6,630		$	6,495		$	7,553		$	5,031
Allowance composition:
Mortgage		46.4	%		48.0	%		48.8	%		51.1	%		34.8	%
Commercial		22.8	%		26.0	%		26.4	%		17.4	%		8.6	%
Consumer		24.3	%		21.4	%		20.6	%		19.4	%		25.8	%
Unallocated allowance		6.5	%		4.6	%		4.3	%		12.1	%		30.8	%
		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Allowance coverage ratio at end of period
Applicable to:
Mortgage		0.39	%		0.50	%		0.51	%		0.60	%		0.26	%
Commercial		0.76	%		0.76	%		0.73	%		1.61	%		0.99	%
Consumer		5.36	%		3.96	%		4.41	%		7.84	%		30.31	%
Unallocated allowance to total loans		0.04	%		0.03	%		0.03	%		0.12	%		0.21	%
Total allowance to total loans		0.66	%		0.73	%		0.71	%		1.01	%		0.69	%
Other selected data and ratios:
Recoveries to charge-off’s		18.4	%		15.1	%		15.1	%		19.6	%		14.2	%
Allowance coverage ratio to:
Non-performing loans		20.9	%		23.3	%		23.3	%		25.1	%		21.1	%
Non-real estate non-performing loans		205.9	%		135.4	%		135.4	%		184.7	%		139.0	%

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TABLE 10 — NET CREDIT LOSSES STATISTICS:

YEARS ENDED DECEMBER 31, 2006 AND 2005,

SIX-MONTH PERIODS ENDED DECEMBER 31, 2005 AND 2004

AND FISCAL YEARS ENDED JUNE 30, 2005, 2004 AND 2003

							Six-Month Period Ended
	Year Ended December 31,						December 31,						Fiscal Year Ended June 30,
	2006			2005			2005			2004			2005			2004			2003
Mortgage
Charge-offs	$	(896	)	$	(2,437	)	$	(774	)	$	(1,198	)	$	(2,861	)	$	(378	)	$	(5	)
Recoveries		41			145			145			—			—			—			—
		(855	)		(2,292	)		(629	)		(1,198	)		(2,861	)		(378	)		(5	)
Commercial
Charge-offs		(277	)		(665	)		(180	)		(129	)		(614	)		(249	)		(24	)
Recoveries		116			19			16			105			119			139			63
		(161	)		(646	)		(164	)		(24	)		(495	)		(110	)		39
Consumer
Charge-offs		(2,505	)		(1,842	)		(1,127	)		(904	)		(1,619	)		(2,580	)		(3,066	)
Recoveries		520			433			153			333			602			1,003			834
		(1,985	)		(1,409	)		(974	)		(571	)		(1,017	)		(1,577	)		(2,232	)
Net credit losses
Total charge-offs		(3,678	)		(4,944	)		(2,081	)		(2,231	)		(5,094	)		(3,207	)		(3,095	)
Total recoveries		677			597			314			438			721			1,142			897
	$	(3,001	)	$	(4,347	)	$	(1,767	)	$	(1,793	)	$	(4,373	)	$	(2,065	)	$	(2,198	)
Net credit losses (recoveries) to average loans:
Mortgage		0.11	%		0.31	%		0.17	%		0.34	%		0.41	%		0.06	%		0.00	%
Commercial		0.08	%		0.52	%		0.25	%		0.05	%		0.46	%		0.19	%		−0.10	%
Consumer		5.31	%		4.85	%		6.08	%		5.41	%		4.31	%		8.83	%		11.40	%
Total		0.28	%		0.49	%		0.38	%		0.44	%		0.53	%		0.28	%		0.33	%
Average loans:
Mortgage	$	805,285		$	730,614		$	757,207		$	694,529		$	699,027		$	662,590		$	608,189
Commercial		212,294			125,395			129,506			96,264			108,636			57,047			40,477
Consumer		37,412			29,061			32,005			21,123			23,576			17,867			19,581
Total	$	1,054,991		$	885,070		$	918,718		$	811,916		$	831,239		$	737,504		$	668,247

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TABLE 11 — NON-PERFORMING ASSETS

	December 31,						June 30,
	2006			2005			2005			2004			2003
	(Dollars in thousands)
Non-performing assets:
Non-performing loans
Non-accruing loans	$	17,845		$	18,986		$	21,859		$	23,714		$	10,350
Accruing loans over 90 days past due		20,453			9,447			8,997			7,224			18,532
Total non-performing loans (see Table 12 below)		38,298			28,433			30,856			30,938			28,882
Foreclosed real estate		4,864			4,802			4,186			888			536
Total non-performing assets	$	43,162		$	33,235		$	35,042		$	31,826		$	29,418
Non-performing assets to total assets		0.99	%		0.73	%		0.83	%		0.85	%		0.97	%

			Six-Month
	Year Ended		Period Ended
	December 31,		December 31,		Fiscal Year Ended June 30,
	2006		2005		2005		2004		2003
	(Dollars in thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	3,433	$	1,403	$	2,164	$	843	$	648

TABLE 12 — NON-PERFORMING LOANS:

AS OF DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2005

	December 31,						June 30,
	2006			2005			2005
	(Dollars in thousands)
Non-performing loans:
Mortgage	$	34,404		$	23,535		$	26,184
Commercial, mainly real estate		3,167			4,600			4,549
Consumer		727			298			123
Total	$	38,298		$	28,433		$	30,856
Non-performing loans composition percentages:
Mortgage		89.8	%		82.8	%		84.9	%
Commercial, mainly real estate		8.3	%		16.2	%		14.7	%
Consumer		1.9	%		1.0	%		0.4	%
Total		100.0	%		100.0	%		100.0	%
Non-performing loans to:
Total loans		3.14	%		3.12	%		3.39	%
Total assets		0.88	%		0.63	%		0.73	%
Total capital		11.38	%		8.32	%		9.11	%

Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Group.

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Included in the review of individual loans are those that are impaired. A loan is considered impaired when, based on current information and events, it is probable that the Group will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of small balance, homogeneous loans that are collectively evaluated for impairment and for loans that are recorded at fair value or at the lower of cost or market. The Group measures for impairment all commercial loans over $250,000. The portfolios of residential mortgages and consumer loans are considered homogeneous and are evaluated collectively for impairment.

For loans that are not individually graded, the Group uses a methodology that follows a loan credit risk rating process that involves dividing loans into risk categories. The Group, using an aged-based rating system, applies an overall allowance percentage to each loan portfolio category based on historical credit losses adjusted for current 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. Overall historical loss trends; and

2. Other information, including underwriting standards, economic trends and unusual events.

Loan loss ratios and credit risk categories, are updated quarterly and are applied in the context of GAAP and the Joint Interagency Guidance on the importance of depository institutions having prudent, conservative, but not excessive loan 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.

An unallocated allowance is established recognizing the estimation risk associated with the aged-based rating system and with the specific allowances. It is based upon management’s evaluation of various conditions, the effects of which are not directly measured in determining the aged-based rating system and the specific allowances. These conditions include then-existing general economic and business conditions affecting our key lending areas; credit quality trends, including trends in non-performing loans expected to result from existing conditions, collateral values, loan volumes and concentrations, seasoning of the loans portfolio, recent loss experience in particular segments of the portfolio, regulatory examination results, and findings by the Group’s management. The evaluation of the inherent loss regarding these conditions involves a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.

During the year ended December 31, 2006, net credit losses amounted to $3.0 million, a 30.9% decrease when compared to $4.3 million reported for the same period of 2005. The decrease was primarily due to a $1.4 million reduction in net credit losses for mortgage loans. Total recoveries increased from $597,000 in 2005 to $677,000 in 2006. As result, recoveries to charge-offs ratio increased from 15.1% in 2005 to 18.4% in 2006.

The Group’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At December 31 2006, the Group’s non-performing assets totaled $43.2 million (0.99% of total assets) versus $33.2 million (0.73% of total assets) at December 31, 2005.

At December 31, 2005, the allowance for loan losses to non-performing loans coverage ratio was 20.9% (23.3% at December 31, 2005. Excluding the lesser-risk mortgage loans, the ratio is much higher, 205.9% (135.4% at December 31, 2005).

Detailed information concerning each of the items that comprise non-performing assets follows:

•  Mortgage loans — well collateralized residential mortgage loans are placed in non-accrual status when they become 365 days or more past due, or earlier if other factors indicate that the collection of principal an interest is doubtful, and are written down, if necessary, based on the specific evaluation of the collateral underlying the loan. At December 31, 2006, the Group’s non-performing mortgage loans totaled $34.4 million or 89.8% of the Group’s non-performing loans, compared to $23.5 million or 82.8% at December 31, 2005, and to $26.2 million or 84.9% at June 30, 2005. Non-performing loans in this category are primarily residential mortgage loans. Based

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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 in non-accrual status when they become 90 days or more past due and are charged-off based on the specific evaluation of the underlying collateral. At December 31, 2006, the Group’s non-performing commercial business loans amounted to $3.2 million or 8.3% of the Group’s non-performing loans, compared to $4.6 million or 16.2% at December 31, 2005, and $4.5 million or 14.7% at June 30, 2005. Most of this portfolio is also collateralized by real estate and no significant losses are expected.

•  Consumer loans — are placed in non-accrual status when they become 90 days past due and charged-off when payments are delinquent 120 days. At December 31, 2006, the Group’s non-performing consumer loans amounted to $727,000 or 1.9% of the Group’s total non-performing loans, compared to $298,000 or 1.0% at December 31, 2005, and $123,000 or 0.4% at June 30, 2005.

•  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 fair value of the property is charged against the allowance for loan losses. Subsequently, any excess of the carrying value over the estimated fair value less selling costs is charged to operations. Management is actively seeking prospective buyers for these foreclosed properties. Foreclosed real estate amounted to $4.9 million at December 31, 2006, $4.8 million at December 31, 2005 and $4.2 million at June 30, 2005.

Contractual Obligations and Commercial Commitments

As disclosed in the notes to the Group’s consolidated financial statements, the Group has certain obligations and commitments to make future payments under contracts. At December 31, 2006, the aggregate contractual obligations and commercial commitments are:

	Payments Due by Period
	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		After 5 Years
	(Dollars in thousands)
CONTRACTUAL OBLIGATIONS:
Federal funds purchased and other short term borrowings	$	13,568	$	13,568	$	—	$	—	$	—
Securities sold under agreements to repurchase		2,535,923		1,635,495		—		900,428		—
Advances from FHLB		181,900		131,900		50,000		—		—
Term notes		15,000		15,000		—		—		—
Subordinated capital notes		36,083		—		—		—		36,083
Annual rental commitments under noncancelable operating leases		23,574		3,091		5,891		5,532		9,060
Total	$	2,806,048	$	1,799,054	$	55,891	$	905,960	$	45,143
OTHER COMMERCIAL COMMITMENTS:
Lines of credit	$	13,137	$	13,137	$	—	$	—	$	—

Such commitments will be funded in the normal course of business from the Bank’s principal sources of funds. At December 31, 2006 the Bank had $612.4 million in certificates of deposit that mature during the following twelve months.

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Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature.

As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services since such prices are affected by inflation.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk and Asset/Liability Management

The Group’s interest rate risk and asset and liability management is the responsibility of the ALCO, which reports to the Board of Directors. The principal objective of ALCO is to enhance profitability while maintaining appropriate levels 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. It 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 utilizes various derivative instruments for hedging purposes, such as interest rate swap agreements. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations and payments are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. The actual risk of loss is the cost of replacing, at market, these contracts in the event of default by the counterparties. The Group controls the credit risk of its derivative financial instrument agreements through credit approvals, limits, monitoring procedures and collateral, when considered necessary.

The Group generally uses interest rate swaps and options, in managing its interest rate risk exposure. Certain swaps were executed to convert the forecasted rollover of short-term borrowings into fixed rate liabilities for longer periods and provide protection against increases in short-term interest rates. Under these swaps, the Group pays a fixed monthly or quarterly cost and receives a floating monthly or quarterly payment based on LIBOR. Floating rate payments received from the swap counterparties offset to the interest payments to be made on the forecasted rollover of short-term borrowings thus resulting in a net fixed rate cost to the Group.

Derivatives designated as a hedge consist of interest rate swaps primarily used to hedge securities sold under agreements to repurchase with notional amounts of $1.240 billion, $885.0 million and $900.0 million as of December 31, 2005 and June 30, 2005 and 2004, respectively. There were no derivatives designated as hedge as of December 31, 2006. Derivatives not designated as a hedge consist of purchased options used to manage the exposure to the stock market on stock indexed deposits with notional amounts of $131,530,000, $173,280,000 and $186,010,000 as of December 31, 2006 and 2005 and June 30 2005, respectively; embedded options on stock indexed deposits with notional amounts of $122,924,000, $164,651,000 and $178,478,000, as of December 31, 2006 and 2005 and June 30 2005, respectively; and interest rate swaps with notional amounts of $35.0 million as of December 31, 2005.

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The Group’s swaps at December 31, 2005 and June 30, 2005 and 2004 are set forth in the table below (none at December 31, 2006):

	December 31,			June 30,
	2005			2005			2004
	(Dollars in thousands)
Swaps:
Pay fixed swaps notional amount	$	1,275,000		$	885,000		$	900,000
Weighted average pay rate — fixed		3.90	%		3.44	%		3.47	%
Weighted average receive rate — floating		4.39	%		3.27	%		1.25	%
Maturity in months		1 to 60			4 to 64			3 to 76
Floating rate as a percent of LIBOR		100	%		100	%		100	%

The Group offers its customers certificates of deposit with an option tied to the performance of the Standard & Poor’s 500 stock market index. At the end of five years, the depositor receives a minimum return or a specified percentage of the average increase of the month-end value of the stock index. If the index decreases, the depositor receives the principal without any interest. The Group uses option agreements with major money center banks and major broker-dealer companies to manage its exposure to changes in those indexes. Under the terms of the option agreements, the Group receives the average increase in the month-end value of the corresponding index in exchange for a fixed premium. The changes in fair value of the options purchased and the options embedded in the certificates of deposit are recorded in earnings.

Derivatives instruments are generally negotiated over-the-counter (“OTC”) contracts. Negotiated OTC derivatives are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise price and maturity.

During fiscal year ended June 30, 2005, the Group bought put and call option contracts for the purpose of economically hedging $100 million in US Treasury Notes. The objective of the hedges was to protect the fair value of the US Treasury Notes classified as available-for-sale. The net effect of these transactions reduced earnings by $719,000. There were no put or call options during the year ended December 31, 2006 or the six-month period ended December 31, 2005.

At December 31, 2006, the contractual maturities of the equity indexed options, by fiscal year were as follows:

			Equity Indexed
			Options Sold
	Equity Indexed		(Embedded in
Year Ending December 31,	Options Purchased		Deposits)		Total
	(In thousands)
2007	$	43,285	$	38,511	$	81,796
2008		35,700		34,072		69,772
2009		22,085		21,055		43,140
2010		9,045		8,706		17,751
2011		21,415		20,580		41,995
	$	131,530	$	122,924	$	254,454

Gains (losses) credited (charged) to earnings and reflected as “Derivatives” in the consolidated statements of operations for the year ended December 31, 2006, the six-month period ended December 31, 2005 and for the fiscal years ended June 30, 2005 and 2004 amounted to $3.2 million, ($1.3 million) ($2.8 million) and $11,000, respectively.

At December 31, 2006 and 2005 and June 30, 2005, the fair value of derivatives was recognized as either assets or liabilities in the consolidated statements of financial condition as follows: (i) the fair value of the interest rate swaps used to manage the exposure to the stock market on stock indexed deposits and fix the cost of short-term borrowings represented a liability of $11.1 million as of June 30, 2005, presented in accrued expenses and other liabilities; (ii) the purchased options used to manage the exposure to the stock market on stock indexed deposits represented an

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asset of $34.2 million, $22.1 million and $19.0 million, respectively; and (iii) the options sold to customers embedded in the certificates of deposit represented a liability of $32.2 million, $21.1 million and $18.2 million, respectively, recorded in deposits.

The Group is exposed to a reduction in the level of net interest income (“NII”) in a rising interest rate environment. NII will fluctuate with changes in the levels of interest rates, affecting interest-sensitive assets and liabilities. The hypothetical rate scenarios as of December 31, 2006 consider a gradual change of plus 200 and minus 200 basis points during a forecasted twelve-month period. The hypothetical rate scenarios as of December 31, 2005 consider a gradual change of plus 200 and minus 100 basis points during a forecasted twelve-month period. If (1) the rates in effect at year-end remain constant, or increase or decrease on instantaneous and sustained changes in the amounts presented for each forecasted period, and (2) all scheduled repricing, reinvestments and estimated prepayments, and re-issuances are constant, or increase or decrease accordingly; NII will fluctuate as shown on the following table:

	Expected		Amount			Percent
Change in Interest Rate	NII		Change			Change
	(Dollars in thousands)
December 31, 2006:
Base Scenario
Flat	$	47,352	$	—			0.00	%
+ 200 Basis points	$	30,999	$	(16,354	)		−34.54	%
−200 Basis points	$	66,541	$	19,189			40.52	%
December 31, 2005:
Base Scenario
Flat	$	56,798	$	—			0.00	%
+ 200 Basis points	$	38,043	$	(18,755	)		−33.02	%
−100 Basis points	$	65,168	$	8,370			14.74	%

Liquidity Risk Management

The objective of the Group’s asset and liability management function is to maintain consistent growth in net interest income within the Group’s policy limits. This objective is accomplished through management of the Group’s balance sheet composition, liquidity, and interest rate risk exposure arising from changing economic conditions, interest rates and customer preferences.

The goal of liquidity management is to provide adequate funds to meet changes in loan demand or unexpected deposit withdrawals. This is accomplished by maintaining liquid assets in the form of investment securities, maintaining sufficient unused borrowing capacity in the national money markets and delivering consistent growth in core deposits. As of December 31, 2006, the Group had approximately $170.0 million in investments available to cover liquidity needs. Additional asset-driven liquidity is provided by securitizable loan assets. These sources, in addition to the Group’s 8.47% average equity capital base, provide a stable funding base.

In addition to core deposit funding, the Group also accesses a variety of other short-term and long-term funding sources. Short-term funding sources mainly include securities sold under agreements to repurchase. Borrowing funding source limits are determined annually by each counterparty and depend on the Group’s financial condition and delivery of acceptable collateral securities. The Group may be required to provide additional collateral based on the fair value of the underlying securities. The Group also uses the FHLB as a funding source, issuing notes payable, such as advances, through its FHLB member subsidiary, the Bank. This funding source requires the Bank to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances.

In addition, the Bank utilizes the National Certificate of Deposit (“CD”) Market as a source of cost effective deposit funding in addition to local market deposit inflows. Depositors in this market consist of credit unions, banking institutions, CD brokers and some private corporations or non-profit organizations. The Bank’s ability to acquire brokered deposits can be restricted if it becomes in the future less than well-capitalized. A bank that is not well-

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capitalized, by regulation, may not accept deposits from brokers unless it applies for and receives a waiver from the FDIC.

As of December 31, 2006, the Group had a line of credit agreement with a financial institution permitting the Group to borrow a maximum aggregate amount of $15.0 million (no borrowings were made during 2006 under such line of credit). The agreement provides for unsecured advances to be used by the Group on an overnight basis. Interest rates are negotiated at the time of the transaction. The credit agreement is renewable annually.

The principal source of funds for the Group is dividends from the Bank. The ability of the Bank to pay dividends is restricted by regulatory authorities (see “Dividend Restrictions” under “Regulation and Supervision” in Item 1). Primarily, through such dividends the Group meets its cash obligations and pays dividends to its common and preferred stockholders. Management believes that the Group will continue to meet its cash obligations as they become due and pay dividends as they are declared.

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QUARTERLY FINANCIAL DATA (Unaudited)

The following is a summary of the unaudited quarterly results of operations:

TABLE 13A — SELECTED QUARTERLY FINANCIAL DATA:

	Quarter			Quarter			Quarter			Quarter
	Ended			Ended			Ended			Ended
	March 31,			June 30,			September 30,			December 31,
Year Ended December 31, 2006	2006			2006			2006			2006
	(In thousands, except for per share data)
Interest income	$	55,992		$	56,894		$	60,865		$	58,560
Interest expense		40,780			46,186			51,912			49,307
Net interest income		15,212			10,708			8,953			9,253
Provision for loan losses		(1,101	)		(947	)		(870	)		(1,470	)
Net interest income after provision for loan losses		14,111			9,761			8,083			7,783
Total non-interest income		8,953			7,521			9,885			(9,121	)
Total non-interest expenses		14,883			14,784			15,145			18,901
Income before taxes		8,181			2,498			2,823			(20,239	)
Income tax expense		131			(21	)		446			(2,187	)
Net income		8,050			2,519			2,377			(18,052	)
Less: Dividends on preferred stock		(1,200	)		(1,201	)		(1,200	)		(1,201	)
Income available to common shareholders	$	6,850		$	1,318		$	1,177		$	(19,253	)
Per share data:
Basic	$	0.28		$	0.05		$	0.05		$	(0.78	)
Diluted	$	0.28		$	0.05		$	0.05		$	(0.78	)
COMPREHENSIVE INCOME
Net income (loss)	$	8,050		$	2,519		$	2,377		$	(18,052	)
Other comprehensive income (loss):
Unrealized (loss) gain on securities available-for-sale arising during the period		(11,543	)		(9,788	)		25,039			(635	)
Realized (gain) loss on investment securities available-for-sale included in net income (loss)		(19	)		(19	)		(2,174	)		17,384
Unrealized gain (loss) on derivatives designated as cash flows hedges arising during the period		9,916			8,106			(18,454	)		(288	)
Realized gain on termination of derivatives activities, net		—			—			10,455	(1)		(1,457	)
Realized loss (gain) on derivatives designated as cash flow hedges included in net income		(749	)		—			1,571			(4,040	)
Income tax effect related to unrealized loss (gain) on securities available-for-sale		578			992			(2,067	)		(1,023	)
Other comprehensive income (loss) for the period, net of tax		(1,817	)		(709	)		14,370			9,941
Comprehensive income (loss)	$	6,233		$	1,810		$	16,747	(1)	$	(8,111	)

(1) This quarterly comprehensive income financial table is being filed to correct a clerical error in the Group’s previously filed Form 10-Q for the quarterly period ended September 30, 2006 on page 4,“Unaudited Consolidated Statements of Comprehensive Income for the Quarters and nine-month periods Ended

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September 30, 2006 and 2005,” as a result of which the Group understated by approximately $10.5 million the amount of comprehensive income for that quarter. However, the amount of comprehensive income for the nine-month period presented therein was correctly stated. There are no other changes to our Form 10-Q, as filed on November 14, 2006.

As disclosed in the Group’s current report on Form 8-K filed on September 28, 2006, we unwound several interest rate swaps with an aggregate notional amount of $640 million, which resulted in a net gain for us of approximately $10.5 million. Pursuant to Statement of Financial Accounting Standards No. 133 (Accounting for Derivative Instruments and Hedging), we concluded that such net gain would be deferred in other comprehensive income and that it would be reclassified into earnings over the originally remaining terms of the swaps, starting in the September 30, 2006 quarter and ending in the December 31, 2010 quarter.

Due to a clerical error, we did not include a new line item for presenting the aforementioned net gain in the unaudited consolidated statements of comprehensive income that was filed with the Form 10-Q. As a result and even though the transaction was correctly accounted by the Group, the total amount of comprehensive income for the quarter ended September 30, 2006, was incorrectly presented as $6.292 million. However, the correct amount is $16.747 million as presented in Table 13A included herein.

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TABLE 13B — SELECTED QUARTERLY FINANCIAL DATA:

	Quarter Ended			Quarter Ended
	September 30,			December 31,
Year Ended December 31, 2005	2005			2005
	(In thousands, except for
	per share data)
Interest income	$	50,813		$	54,273
Interest expense		33,485			37,221
Net interest income		17,328			17,052
Provision for loan losses		951			951
Net interest income after provision for loan losses		16,377			16,101
Total non-interest income		7,825			8,557
Total non-interest expenses		15,390			16,424
Income before taxes		8,812			8,234
Income tax expense		(391	)		264
Net income		8,421			8,498
Less: Dividends on preferred stock		(1,200	)		(1,201	)
Income available to common shareholders	$	7,221		$	7,297
Per share data:
Basic	$	0.29		$	0.30
Diluted	$	0.29		$	0.29
COMPREHENSIVE INCOME
Net income	$	8,421		$	8,498
Other comprehensive income (loss):
Unrealized (loss) gain on securities available-for-sale arising during the period		(8,978	)		(4,078	)
Realized (gain) loss on investment securities available-for-sale included in net income		(341	)		(309	)
Unrealized gain (loss) on derivatives designated as cash flows hedges arising during the period		11,006			2,956
Realized loss (gain) on derivatives designated as cash flow hedges included in net income		50			(1,306	)
Income tax effect related to unrealized loss (gain) on securities available-for-sale		744			755
Other comprehensive income (loss) for the period, net of tax		2,481			(1,982	)
Comprehensive income	$	10,902		$	6,516

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TABLE 13B — SELECTED QUARTERLY FINANCIAL DATA:

	Quarter Ended			Quarter Ended			Quarter Ended			Quarter Ended
	September 30,			December 31,			March 31,			June 30,
Year Ended June 30, 2005	2004			2004			2005			2005
	(In thousands, except for per share data)
Interest income	$	44,947		$	47,917		$	47,572		$	48,876
Interest expense		21,294			24,855			27,162			29,588
Net interest income		23,653			23,062			20,410			19,288
Provision for loan losses		700			1,105			660			850
Net interest income after provision for loan losses		22,953			21,957			19,750			18,438
Total non-interest income		10,404			11,943			6,101			6,437
Total non-interest expenses		15,461			18,460			12,148			13,894
Income before taxes		17,896			15,440			13,703			10,981
Income tax expense		(768	)		123			2,671			(377	)
Net income		17,128			15,563			16,374			10,604
Less: Dividends on preferred stock		(1,200	)		(1,201	)		(1,200	)		(1,201	)
Income available to common shareholders	$	15,928		$	14,362		$	15,174		$	9,403
Per share data:
Basic	$	0.66		$	0.59		$	0.62		$	0.38
Diluted	$	0.61		$	0.55		$	0.58		$	0.37
COMPREHENSIVE INCOME
Net income	$	17,128		$	15,563		$	16,374		$	10,604
Other comprehensive income (loss):
Unrealized (loss) gain on securities available-for-sale arising during the period		20,773			(952	)		(15,708	)		6,717
Realized (gain) loss on investment securities available-for-sale included in net income		(3,244	)		(2,398	)		(2,636	)		832
Unrealized gain (loss) on derivatives designated as cash flows hedges arising during the period		(16,886	)		3,496			13,583			(6,565	)
Realized loss (gain) on derivatives designated as cash flow hedges included in net income		4,401			2,987			1,923			820
Income tax effect related to unrealized loss (gain) on securities available-for-sale		(197	)		359			79			(405	)
Other comprehensive income (loss) for the period, net of tax		4,847			3,492			(2,759	)		1,399
Comprehensive income (loss)	$	21,975		$	19,055		$	13,615		$	12,003

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Critical Accounting Policies

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

A transfer of financial assets is accounted for as a sale when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the transferor, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity. As such, the Group recognizes the financial assets and servicing assets it controls and the liabilities it has incurred. At the same time, it ceases to recognize financial assets when control has been surrendered and liabilities when they are extinguished.

Derivative Financial Instruments

As part of the Group’s asset and liability management, the Group uses interest-rate contracts, which include interest-rate swaps to hedge various exposures or to modify interest rate characteristics of various statement of financial condition accounts.

The Group follows Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that all derivative instruments be recognized as assets and liabilities at fair value. If certain conditions are met, the derivative may qualify for hedge accounting treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”) or (c) a hedge of foreign currency exposure (“foreign currency hedge”).

In the case of a qualifying fair value hedge, changes in the value of the derivative instruments that have been highly effective are recognized in current period earnings along with the change in value of the designated hedged item. In the case of a qualifying cash flow hedge, changes in the value of the derivative instruments that have been highly effective are recognized in other comprehensive income, until such time as those earnings are affected by the variability of the cash flows of the underlying hedged item. In either a fair value hedge or a cash flow hedge, net earnings may be impacted to the extent the changes in the fair value of the derivative instruments do not perfectly offset changes in the fair value or cash flows of the hedged items. If the derivative is not designated as a hedging instrument, the changes in fair value of the derivative are recorded in earnings.

Certain contracts contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated and carried at fair value.

The Group uses several pricing models that consider current market and contractual prices for the underlying financial instruments as well as time value and yield curve or volatility factors underlying the positions to derive the fair value of certain derivatives contracts.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Group follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses. This methodology consists of several key elements. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is

F-105

inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Group.

Income Taxes

In preparing the consolidated financial statements, the Group is required to estimate income taxes. This involves an estimate of current income tax expense together with an assessment of temporary differences resulting from differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Group to assume certain positions based on its interpretation of current tax regulations. Changes in assumptions affecting estimates may be required in the future and estimated tax assets or liabilities may need to be increased or decreased accordingly. The accrual for tax contingencies is adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Group’s effective tax rate includes the impact of tax contingency accruals and changes to such accruals, including related interest and penalties, as considered appropriate by management. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to the Group’s effective rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective rate and may require the use of cash in the year of resolution.

New Accounting Pronouncements

SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”

In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” This statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155:

•  Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;

•  Clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133;

•  Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;

•  Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives;

•  Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of SFAS 155 may also be applied upon adoption of this statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of SFAS No. 155. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis.

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At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to beginning retained earnings. An entity should separately disclose the gross gains and losses that make up the cumulative-effect adjustment, determined on an instrument-by-instrument basis. Prior periods should not be restated.

SFAS 155 is effective for all financial instruments acquired or issued after January 1, 2007. The adoption of SFAS 155 did not have a significant impact on the consolidated financial position or earnings of the Group.

SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statements No. 133 and 140”

In March 2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment to SFAS No. 140”, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to (1) require the recognition of a servicing asset or servicing liability under specified circumstances, (2) require that, if practicable, all separately recognized servicing assets and liabilities be initially measured at fair value, (3) create a choice for subsequent measurement of each class of servicing assets or liabilities by applying either the amortization method or the fair value method, and (4) permit the one-time reclassification of securities identified as offsetting exposure to changes in fair value of servicing assets or liabilities from available-for-sale securities to trading securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In addition, SFAS No. 156 amends SFAS No. 140 to require significantly greater disclosure concerning recognized servicing assets and liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, with early adoption permitted.

The Group adopted SFAS No. 156 on January 1, 2007 and decided to continue to account for servicing assets based on the amortization method with periodic testing for impairment, which did not have a material effect on the Group’s consolidated financial position or results of operations.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN 48 was issued to clarify the requirements of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, relating to the recognition of income tax benefits. FIN 48 provides a two-step approach to recognizing and measuring tax benefits when the benefits’ realization is uncertain. The first step is to determine whether the benefit is to be recognized; the second step is to determine the amount to be recognized:

•  Income tax benefits should be recognized when, based on the technical merits of a tax position, the entity believes that if a dispute arose with the taxing authority and were taken to a court of last resort, it is more likely than not (i.e., a probability of greater than 50 percent) that the tax position would be sustained as filed; and

•  If a position is determined to be more likely than not of being sustained, the reporting enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

FIN 48 is applicable beginning January 1, 2007. The cumulative effect of applying the provisions of FIN 48 upon adoption will be reported as an adjustment to beginning retained earnings. Management is evaluating the impact that this interpretation may have on the Group’s consolidated financial statements.

Securities and Exchange Commission Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides the SEC staff’s views regarding the process of quantifying financial statement misstatements. It requires the use of two different approaches to quantifying misstatements — (1) the “rollover approach” and (2) the “iron curtain approach” — when assessing whether such a misstatement is material

F-107

to the current period financial statements. The rollover approach focuses on the impact on the income statement of a misstatement originating in the current reporting period. The iron curtain approach focuses on the cumulative effect on the balance sheet as of the end of the current reporting period of uncorrected misstatements regardless of when they originated. If a material misstatement is quantified under either approach, after considering quantitative and qualitative factors, the financial statements would require adjustment. Depending on the magnitude of the correction with respect to the current period financial statements, changes to financial statements for prior periods could result. SAB 108 is effective for the Group’s fiscal year ended December 31, 2006. Refer to Note 1 of the accompanying consolidated financial statements for effect of adoption of SAB 108.

SFAS No. 157, “Fair Value Measurements”

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements.

This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. Management is evaluating the impact that this accounting standard may have on the Group’s consolidated financial statements.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115”

On February 15, 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115. SFAS 159 provides an alternative measurement treatment for certain financial assets and financial liabilities, under an instrument-by-instrument election, that permits fair value to be used for both initial and subsequent measurement, with changes in fair value recognized in earnings. While FAS S159 is effective beginning January 1, 2008, earlier adoption is permitted as of January 1, 2007, provided that the entity also adopts all of the requirements of SFAS 157. Management is evaluating the impact that this accounting standard may have on the Group’s consolidated financial statements.

F-108

EX-21.0

EXHIBIT 21.0

LIST OF SUBSIDIARIES

A)  ORIENTAL BANK AND TRUST — an insured non-member commercial bank organized and existing under the laws of the Commonwealth of Puerto Rico.

SUBSIDIARIES OF ORIENTAL BANK AND TRUST:

1.	Oriental International Bank Inc. — an international banking entity organized and existing under the laws of the Commonwealth of Puerto Rico.
2.	Oriental Mortgage Corporation — a mortgage bank organized and existing under the laws of the Commonwealth of Puerto Rico. This corporation is currently not in operation.

B)	ORIENTAL FINANCIAL SERVICES CORP. — a registered securities broker-dealer organized and existing under the laws of the Commonwealth of Puerto Rico.
C)	ORIENTAL INSURANCE, INC. — a registered insurance agency organized and existing under the laws of the Commonwealth of Puerto Rico.
D)	CARIBBEAN PENSION CONSULTANTS, INC — a corporation organized and existing under the laws of the State of Florida that offers third party pension plan administration in the continental U.S., Puerto Rico and the Caribbean.
E)	ORIENTAL FINANCIAL (PR) STATUTORY TRUST I — a special purpose statutory trust organized under the laws of the State of Connecticut.
F)	ORIENTAL FINANCIAL (PR) STATUTORY TRUST II — a special purpose statutory trust organized under the laws of the State of Connecticut.

EX-23.1

EXHIBIT 23.1

I.  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-102696, No. 333-57052 and No. 333-84473 on Form S-8 of our report dated September 9, 2005, June 9, 2006 as to the effects of the restatement discussed in Note 20 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement discussed in Note 20), relating to the financial statements of Oriental Financial Group, Inc. appearing in this annual report on Form 10-K of Oriental Financial Group Inc. for the year ended December 31, 2006.

/s/  DELOITTE & TOUCHE LLP

San Juan, Puerto Rico

March 27, 2007

Stamp No. 2194120

affixed to original.

EX-23.2

EXHIBIT 23.2

I.  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Oriental Financial Group Inc.:

We consent to the incorporation by reference in the registration statements (No. 333-102696, No. 333-57052 and No. 333-84473) on Forms S-8 of Oriental Financial Group Inc. of our reports dated March 15, 2007, with respect to the consolidated statements of financial condition of Oriental Financial Group Inc. as of December 31, 2006 and 2005 and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income and cash flows for the year and the six-month period then ended, respectively, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, and the effectiveness of internal control over financial reporting as of December 31, 2006, which reports appear in the December 31, 2006 annual report on Form 10-K of Oriental Financial Group Inc.

Our report refers to the Group’s changes in accounting for share based payments in 2005, and evaluating prior year misstatements in 2006.

/s/  KPMG LLP

San Juan, Puerto Rico

March 27, 2007

Stamp No. 2156052 of the Puerto Rico Society

of Certified Public Accountants

was affixed to the record copy

of this report.

EX-31.1

EXHIBIT 31.1

MANAGEMENT CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, José Rafael Fernández, certify that:

1. I have reviewed this annual report on Form 10-K of Oriental Financial Group Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 27, 2007

By:  /s/  José Rafael Fernández

José Rafael Fernández

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

MANAGEMENT CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Norberto González, certify that:

1. I have reviewed this annual report on Form 10-K of Oriental Financial Group Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 27, 2007

By:  /s/  Norberto González

Norberto González

Executive Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. §1350)

In connection with Oriental Financial Group Inc.’s (“Oriental”) annual report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, José Rafael Fernández, President and Chief Executive Officer of Oriental, hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Oriental.

In witness whereof, I execute this certification in San Juan, Puerto Rico, this 27th day of March, 2007.

By:  /s/  José Rafael Fernández

José Rafael Fernández

President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. §1350)

In connection with Oriental Financial Group Inc.’s (“Oriental”) annual report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Norberto González, Executive Vice President and Chief Financial Officer of Oriental, hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Oriental.

In witness whereof, I execute this certification in San Juan, Puerto Rico, this 27th day of March, 2007.

By:  /s/  Norberto González

Norberto González

Executive Vice President and Chief Financial Officer