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.

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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	%

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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	)

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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	%

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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	)

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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

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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.

F-86

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	%

F-87

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.

F-88

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	%

F-89

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.

F-91

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.

F-94

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

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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

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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.

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