OFG Bancorp (OFG) 10-Q/A 2000 Q3 Quarterly report (amended)

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO.1
TO
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2000

COMMISSION FILE NO. 001-12647

ORIENTAL FINANCIAL GROUP INC.

INCORPORATED IN THE COMMONWEALTH OF PUERTO RICO

IRS EMPLOYER IDENTIFICATION NO. 66-0259436

PRINCIPAL EXECUTIVE OFFICES:

Monacillos Ward
1000 San Roberto Street
Rio Piedras, Puerto Rico 00926
Telephone Number: (787) 771-6800

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

COMMON STOCK ($1.00 PAR VALUE)

13,805,135 SHARES OUTSTANDING AS OF SEPTEMBER 30, 2000

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  NONE

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

TABLE OF CONTENTS

		Page
PART—1
Item—1	Financial Statements
	Consolidated statements of financial condition at September 30, 2000 (unaudited) and June 30, 1999.	1
	Unaudited consolidated statements of income for the quarter ended September 30, 2000 and 1999.	2
	Unaudited consolidated statements of stockholders' equity and comprehensive income for the quarter ended September 30, 2000 and 1999.	3
	Unaudited consolidated statements of cash flows for the quarter ended September 30, 2000 and 1999.	4
	Notes to unaudited consolidated financial statements	5
Item—2	Management's discussion and analysis of financial condition and results of operations	25-32
Part—2
Item—1	Legal Proceedings	34
Item—2	Change in securities	34
Item—3	Defaults upon senior securities	34
Item—4	Submissions of Matters to a Vote of Security Holders	34
Item—5	Other Information	34
Item—6	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	34
	Signatures	35

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

SEPTEMBER 30, 2000 (UNAUDITED) AND JUNE 30, 2000

(IN THOUSANDS)

			September 30, 2000			June 30, 2000
ASSETS
Cash and due from banks			$	7,687		$	10,322
Investments and loans:
Money market investments				109,584			23,511
Trading securities, at fair value				32,218			64,443
Investment securities available-for-sale, at fair value				997,279			282,900
Investment securities held-to-maturity, at amortized cost (fair value of $0; June 30, 2000—$770,851)				—			797,484
Federal Home Loan Bank (FHLB) stock, at cost				11,146			11,146
Equity Options Investments				25,211			—
		Total investments		1,175,438			1,179,484
Loans:
Loans held-for-sale, at lower of cost or market				49,084			180,788
Loans receivable, net of allowance for loan losses of $6,972				416,444			420,090
		Total investments and loans, net		465,528			600,878
Accrued interest receivable				12,956			13,485
Foreclosed real estate, net				535			398
Premises and equipment, net				21,504			21,706
Other assets, net				21,840			23,961
Total assets			$	1,705,488		$	1,850,234
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Savings and demand			$	126,991		$	130,919
Time and IRA accounts				602,216			587,931
				729,207			718,850
Accrued interest				2,904			4,831
		Total deposits		732,111			723,681
Borrowings:
Securities sold under agreements to repurchase				729,663			816,493
Advances and borrowings from FHLB				20,000			70,000
Term notes and other borrowings				86,500			86,500
		Total borrowings		836,163			972,993
Accrued expenses and other liabilities				32,947			35,691
Total liabilities				1,601,221			1,732,365
Commitments and contingencies				—			—
Stockholders' equity:
	Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation value; shares issued and outstanding 1,340,000			33,500			33,500
	Common stock, $1 par value; 20,000,000 shares authorized; shares issued 13,805,135 (June 30, 2000—13,805,135)			13,805			13,805
	Additional paid-in capital			23,786			23,786
	Legal surplus			10,684			10,578
	Retained earnings			75,322			79,809
	Treasury stock, at cost, 1,235,599 shares (June 30, 2000—1,107,799)			(28,741	)		(27,116	)
	Accumulated other comprehensive loss, net of deferred taxes of $1,486 (June 30, 2000—$1,413)			(24,089	)		(16,493	)
		Total stockholders' equity		104,267			117,869
Total liabilities and stockholders' equity			$	1,705,488		$	1,850,234

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

1

CONSOLIDATED STATEMENTS OF INCOME

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999

(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)

			Three-Month Period
			2000			As Restated 1999
Interest income:
	Loans and leases		$	9,148		$	13,905
	Mortgage-backed securities			15,107			12,079
	Investment securities			3,640			3,700
	Money market investments			2,474			55
		Total interest income		30,369			29,739
Interest expense:
	Deposits			9,610			7,234
	Securities sold under agreements to repurchase			12,795			8,129
	Other borrowed funds			1,479			2,458
		Total interest expense		23,884			17,821
Net interest income				6,485			11,918
Provision for credit losses				1,400			1,750
Net credit income				5,085			10,168
Non-interest income:
	Trust, money management and brokerage fees			2,827			2,627
	Mortgage banking activities			1,551			1,958
	Banking service revenues			1,016			925
	Net (loss) gain on sale of securities available-for-sale			(3,705	)		599
	Derivatives activities			(1,619	)		—
	Trading net activity			(12	)		(133	)
	Leasing and other miscellaneous revenues			49			268
		Total non-interest income		107			6,244
Non-interest expenses:
	Compensation and benefits			3,375			3,821
	Occupancy and equipment, net			1,718			1,493
	Advertising and business promotion			781			723
	Professional and service fees			505			874
	Communications			420			404
	Taxes other than on income			488			479
	Insurance, including deposit insurance			95			133
	Printing, postage, stationery and supplies			163			197
	Other			643			414
		Total non-interest expense		8,188			8,538
(Loss) income before income taxes				(2,996	)		7,874
Income taxes				(1,280	)		631
Net (loss) income before cumulative effect of change in accounting principle, net of taxes				(1,716	)		7,243
Cumulative effect of change in accounting principle, net of taxes				(164	)		—
Net (loss) income				(1,880	)		7,243
Less: Dividends on preferred stock				(597	)		(597	)
Net (loss) income available to common shareholders			$	(2,477	)	$	6,646
Income per common share:
	Basic before cumulative effect of change in accounting principle		$	(0.18	)	$	0.52
	Diluted before cumulative effect of change in accounting principle		$	(0.18	)	$	0.50
	Basic after cumulative effect of change in accounting principle		$	(0.20	)	$	0.52
	Diluted after cumulative effect of change in accounting principle		$	(0.20	)	$	0.50
Average common shares outstanding				12,639			12,806
Average potential common share options				158			499
				12,797			13,305

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

2

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999

(IN THOUSANDS)

			2000			As Restated 1999
CHANGES IN STOCKHOLDERS' EQUITY:
Preferred stock:
	Balance at beginning of year		$	33,500		$	33,500
	Issuance of preferred stock			—			—
		Balance at end of year		33,500			33,500
Common stock:
	Balance at beginning of year			11,146			13,739
	Stock options exercised			—			16
		Balance at end of year		11,146			13,755
Additional paid-in capital:
	Balance at beginning of year			23,786			23,313
	Stock options exercised			—			71
		Balance at end of year		23,786			23,384
Legal surplus:
	Balance at beginning of year			10,578			8,673
	Transfer from retained earnings			106			863
		Balance at end of year		10,684			9,536
Retained earnings:
	Balance at beginning of year—as previously reported			—			79,920
	Amount of restatement, net of taxes			—			(7,734	)
	Beginning balance—as restated			79,809			72,186
	Net income			(1,880	)		7,243
	Dividends declared on common stock			(1,905	)		(1,905	)
	Dividends declared on preferred stock			(596	)		(597	)
	Transfer to legal surplus			(106	)		(863	)
		Balance at end of year		75,322			76,064
Treasury stock:
	Balance at beginning of year			(27,116	)		(23,401	)
	Treasury stock purchased			(1,625	)		(1,732	)
		Balance at end of year		(28,741	)		(25,133	)
Accumulated other comprehensive loss, net of deferred taxes:
	Balance at beginning of year			(16,493	)		(11,712	)
	Other comprehensive loss for the year ended, net of taxes			(7,596	)		(3,450	)
		Balance at end of year		(24,089	)		(15,162	)
Total stockholders' equity			$	101,608		$	115,944
COMPREHENSIVE INCOME:
Net (loss) income			$	(1,880	)	$	7,243
Other comprehensive loss, net of tax:
	Unrealized loss on securities arising during the period			22,151			(599	)
	Realized (loss) gains included in net income			(3,705	)		599
	Unrealized loss on derivatives designated as cash flows hedges arising during the period			—			—
	Amount reclassified into earnings during the period			94
	Income tax credit (expense) related to items of other comprehensive income			1,031			(107	)
				19,571			(107	)
	Cummulative effect of change in accounting principle, net of taxes			(27,167	)		—
Other Comprehensive loss for the period				(7,596	)		(107	)
Comprehensive loss			$	(9,476	)	$	7,136

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

3

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999

(IN THOUSANDS)

					2000			As Restated 1999
Cash flows from operating activities:
	Net (loss) income				$	(1,880	)	$	7,243
	Adjustments to reconcile net income to net cash provided by operating activities:
		Amortization of deferred loan origination fees and costs				(151	)		(13	)
		Amortization of premiums and accretion of discounts on investment securities				463			129
		Depreciation and amortization of premises and equipment				1,049			818
		Provision for loan losses				1,400			1,750
		Loss on sale of securities available-for-sale				3,705			(599	)
		Derivates activities				11,146			—
		Mortgage banking activities				(1,551	)		(1,958	)
		Proceeds from sale of loans held-for-sale				14,800			21,715
		Net increase (decrease) in:
			Accrued expenses and other liabilities			(9,322	)		(2,721	)
			Accrued interest deposits			(1,927	)		(560	)
		Net (increase) decrease in:
			Trading securities			32,225			(20,878	)
			Accrued interest receivable			529			(3,401	)
			Deferred tax asset			(241	)		—
			Other assets			606			5,391
				Total adjustments		52,731			(327	)
		Net cash provided by operating activities				50,851			6,916
Cash flows from investing activities:
	Purchases of investment securities available-for-sale					(50,208	)		(86,110	)
	Maturities and redemptions of investment securities available-for-sale					17,151			7,797
	Maturities and redemptions of investment securities held-to-maturity					30,492			13,003
	Proceeds from sales of investment securities available-for-sale					92,706			11,920
	Proceeds from sale of consumer loans and leases portfolios					167,900			—
	Net origination of loans					(65,848	)		(42,859	)
	Capital expenditures					(847	)		(831	)
		Net cash provided (used) in investing activities				191,346			(97,080	)
Cash flows from financing activities:
	Net increase (decrease) in:
		Demand, savings and time (including IRA accounts) deposits				(17,803	)		(14,342	)
		Securities sold under agreements to repurchase				(86,830	)		105,096
		Advances and borrowings from FHLB				(50,000	)		(21,700	)
	Repayments of term notes and other borrowings					—			—
	Proceeds from exercise of stock options					—			87
	Treasury stock acquired					(1,625	)		(1,732	)
	Dividends paid					(2,501	)		(2,535	)
		Net cash (used) provided by financing activities				(158,759	)		64,874
Increase (decrease) in cash and cash equivalents						83,438			(25,290	)
Cash and cash equivalents at beginning of year						33,833			35,933
Cash and cash equivalents at end of year					$	117,271		$	10,643
Cash and cash equivalents include:
	Cash and due from banks				$	7,687		$	10,360
	Money market investments					109,584			283
					$	117,271		$	10,643
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
	Interest paid				$	25,280		$	17,210
	Investment securities available-for-sale transferred to held-to-maturity				$	—		$	263,793
	Investment held-to-maturity transferred to available-for-sale				$	766,848		$	—
	Real estate loans securitized into mortgage-backed securities				$	18,800		$	38,000

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

4

ORIENTAL FINANCIAL GROUP INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

    The accounting and reporting policies of the Oriental Financial Group Inc. (the "Group" or, "Oriental") conform with generally accepted accounting principles ("GAAP") and financial services industry practices. The following is a description of the Group's most significant accounting policies:

Nature of Operations and Use of Estimates in the Preparation of Financial Statements

    The Group is a financial bank holding company incorporated under the laws of the Commonwealth of Puerto Rico, which provides a variety of financial services through its subsidiaries. The Group is subject to the regulation and supervision of the Federal Reserve Board. Oriental Bank and Trust (the "Bank"), the Group's banking subsidiary, is a full-service commercial bank with its main office located in San Juan, Puerto Rico and with nineteen branches located throughout the island. The Group through its banking and broker-dealer subsidiaries, Oriental Financial Services Corp., offers mortgage, commercial and consumer lending, auto lease financing, financial planning, money management and investment brokerage services, as well as corporate and individual trust services. The Bank is subject to the regulations of certain federal and local agencies.

    The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q. Complete information regarding the financial statements can be found in the notes to the financial statements for the year ended June 30, 2000 contained in Oriental's 2000 Annual Report and Form 10-K.

    In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position of the Group at September 30, 2000 and June 30, 2000, and the results of operations and cash flows for the three-month period ended September 30, 2000 and 1999.

Derivatives and Hedging Activities

    In June 1998, the Financial Accounting Standard Board issued Statement No. 133, "Accounting for Derivatives Instruments and Hedging Activities". The Statement requires the Group to recognize all derivatives on the balance sheet at fair value. The changes in fair value of derivatives must be adjusted to fair value through income or other comprehensive income. If a derivative meets the criteria and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either charged or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings.

    Prior to the adoption of Statement No. 133 on July 1, 2000, substantially all of the Group derivatives were accounted for as off-balance sheet hedging contracts not marked-to-market. The Group designated no hedge accounting during the quarter ended on September 30, 2000. (See Note 6 for additional information on the Group's derivatives activities).

    On May 1, 2001, the Group announced that it revised its consolidated financial statements; primarily, the statement of income for the quarter ended September 30, 2000 and the statement of stockholders' equity and comprehensive income for the quarter ended September 30, 2000, to reflect revisions made to the application of Statement No. 133. The Group found certain differences in the classification of data used and methodology applied to calculate the fair value of derivatives tied to stock indexes; therefore, requiring a revision of the transition adjustment recognized upon adoption of the new standard on July 1, 2000. In addition, the transition adjustment for certain hedging strategies

5

should have been reported in the statement of comprehensive income instead of the statement of income.

    Therefore, the adoption of Statement No. 133 on July 1, 2000 resulted in a transition adjustment for the cumulative effect of a change in accounting principle (a $270,000 unrealized loss or $164,000 net of tax effect) charged to earnings and reflected in the Consolidated Statement of Income, and an $875,000 unrealized loss ($534,000 net of tax effect) charged to other comprehensive income and reflected in the Consolidated Statement of Changes in Stockholders' Equity and of Comprehensive Income. The transition adjustment consisted of an unrealized loss on derivatives used for cash flows hedges prior to SFAS 133 amounting to $534,000 (net of taxes) and $26,633,000 representing an unrealized loss on securities transferred from held-to-maturity to available-for-sale. In addition, a $1.6 million unrealized loss ($988,000 net of tax effect) was charged to earnings for the quarter ended September 30, 2000 and reflected as "Derivatives Activities" in the Consolidated Statement of Income. The fair value of derivatives was recognized as either asset or liability in the Consolidated Statement of Financial Condition, as of September 30, 2000, as follows: $25.2 million "Investments", $53.5 million "Deposits" and $582,000 "Accrued Expenses and Other Liabilities".

    The effect of the revisions on the consolidated statements of income, comprehensive income and stockholder's equity follows:

(In thousands, except per share data)			As Reported			As Revised
Statement of Income:
Total interest income			$	30,369		$	30,369
Total interest expenses				23,884			23,884
Net interest income				6,485			6,485
Provision for loan losses				1,400			1,400
Net credit income				5,085			5,085
Non-interest income (charges):
	Trust, brokerage, mortgage, banking and other fees			5,443			5,443
	Net loss on sale of securities			(3,705	)		(3,705	)
	Trading activities			(12	)		(12	)
	Derivatives activities			(2,072	)		(1,619	)
		Total non-interest income (charges)		(346	)		107
Non-interest expenses				8,188			8,188
Loss before income taxes (credit)				(3,448	)		(2,996	)
Income taxes (credit)				(1,457	)		(1,280	)
Loss before cumulative effect of a change in accounting principle				(1,991	)		(1,716	)
Cumulative effect of a change in accounting principle, net of taxes				1,930			(164	)
Net loss				(61	)		(1,880	)
Less: dividends on preferred stock				(597	)		(597	)
Net loss for common shareholders				(658	)		(2,477	)
Loss per common share:
	Basic before cumulative effect of change in GAAP		$	(0.20	)	$	(0.18	)
	Diluted before cumulative effect of change in GAAP		$	(0.20	)	$	(0.18	)
	Basic after cumulative effect of change in GAAP		$	(0.05	)	$	(0.20	)
	Diluted after cumulative effect of change in GAAP		$	(0.05	)	$	(0.20	)

6

Comprehensive Income:
Net loss			$	(61	)	$	(1,880	)
Other comprehensive loss, net of tax:
	Unrealized gain on securities arising during the period			22,151			22,151
	Realized loss on securities included in net income			(3,705	)		(3,705	)
	Amount reclassified into earnings during the period						94
	Income tax credit (expense) related to items of other comprehensive income			1,068			1,031
				(7,119	)		19,571
	Cumulative effect of change in accounting principle, net of taxes			0			(27,167	)
		Other comprehensive loss for the period		(7,119	)		(7,596	)
Comprehensive loss			$	(7,180	)	$	(9,476	)
Stockholders' equity (at end of period)			$	106,561		$	104,267

    With the adoption of Statement No. 133, the Group also reclassified the portfolio of investment securities held-to-maturity to the available-for-sale category (see Note 2).

NOTE 2—INVESTMENTS AND SECURITIES:

    The Group's securities are classified as held-to-maturity, available-for-sale or trading. Securities for which the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Securities that might be sold prior to maturity because of interest rate changes, to meet liquidity needs, or to better match the repricing characteristics of funding sources are classified as available-for-sale. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes in other comprehensive income. The Group classifies as trading those securities that are acquired and held principally for the purpose of selling them in the near term. These securities are carried at estimated fair value with realized and unrealized changes in market value included in earnings in the period in which the changes occur. Interest revenue arising from trading instruments is included in the statement of income as part of net interest income rather than in the trading profit or loss account.

    The Group's investment in the Federal Home Loan Bank (FHLB) of New York stock has no readily determinable fair value and can only be sold back to the FHLB at par value. Therefore, this investment is carried at cost and its redemption value represents its fair value. Premiums and discounts are amortized to interest income over the life of the related securities using the interest method. Net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any, on securities classified as either available-for-sale or held-to-maturity are reported separately in the statement of income. Cost of securities is determined on the specific identification method.

7

Money Market Investments

    At September 30, 2000 and June 30, 2000 the Group's money market investments were comprised of:

	(In thousands)
	September 30,		June 30,
Securities purchased under agreements to resell	$	48,600	$	—
Time deposits with other banks		1,000		1,350
Money market accounts and other short-term investments		59,984		22,161
	$	109,584		23,511

Trading Securities

    A summary of trading securities owned by the Group at September 30, 2000 and June 30, 2000 is as follows:

	(In thousands)
	September 30,		June 30,
U.S. Treasury securities	$	2,503	$	42,734
P.R. Government securities		12,646		13,513
Mortgage-backed securities		14,835		6,058
CMO residuals, interest only		2,234		2,138
	$	32,218	$	64,443

    At September 30, 2000, the Group's trading portfolio weighted average yield was 8.77% (June 30, 2000—7.49%).

Investment securities

    Upon the adoption of Statement No. 133 (See Note 1), "Accounting for Derivative Instruments and Hedging Activities", management reclassified the entire portfolio of investments Held-to-Maturity to the Available-for-Sale investment category. Hedging of the Held-to-Maturity securities is not allowed by Statement No. 133. The amortized cost, gross unrealized gains and losses, estimated fair value, and

8

weighted average yield of the securities owned by the Group at September 30, 2000 and June 30, 2000, were as follows:

	September 30, 2000 (In thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Average Weighted Yield
Available-for-Sale and FHLB stock
US Treasury securities	$	3,656	$	19	$	32	$	3,643	7.31	%
US Government agencies securities		104,505		3		2,214		102,294	6.81	%
Other debt securities		9,283		—		—		9,283	8.33	%
PR Government securities		4,014		12		23		4,003	7.65	%
CMOs		108,079		—		5,029		103,050	6.52	%
FNMA and FHLMC certificates		352,771		1,082		5,654		348,198	6.86	%
GNMA certificates		430,262		874		4,327		426,808	7.28	%
		1,012,570		1,990		17,279		997,279	7.02	%
Equity options		25,210						25,210	0.00	%
FHLB stock		11,146		—		—		11,146	7.23	%
	$	1,048,926	$	1,990	$	17,279	$	1,033,635	7.03	%
Held-to-Maturity
PR Government securities		—		—		—		—	0.00	%
US Government agencies securities		—		—		—		—	0.00	%
CMOs		—		—		—		—	0.00	%
Other debt securities		—		—		—		—	0.00	%
FNMA and FHLMC certificates		—		—		—		—	0.00	%
GNMA certificates		—		—		—		—	0.00	%
		—		—		—		—	0.00	%
	$	1,048,926	$	1,990	$	17,279	$	1,033,635	7.03	%

9

	June 30, 2000 (In thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Average Weighted Yield
Available-for-Sale and FHLB stock
US Treasury securities	$	87,710	$	3	$	4,979	$	82,734	5.18	%
US Government agencies securities		104,482		—		3,842		100,640	6.81	%
Other debt securities		4,417		—		66		4,351	8.32	%
PR Government securities		465		5		19		451	6.19	%
CMOs		212		—		—		212	5.78	%
FNMA and FHLMC certificates		56,743		100		99		56,744	8.00	%
GNMA certificates		37,875		154		261		37,768	7.62	%
		291,904		262		9,266		282,900	6.65	%
FHLB stock		11,146		—		—		11,146	6.27	%
	$	303,050	$	262	$	9,266	$	294,046	6.66	%
Held-to-Maturity
PR Government securities		3,551		3		24		3,530	7.89	%
US Government agencies securities		9,993		—		457		9,536	6.46	%
CMOs		110,967		—		6,316		104,651	6.52	%
Other debt securities		4,864		—		—		4,864	8.32	%
FNMA and FHLMC certificates		295,039		54		11,601		283,492	6.61	%
GNMA certificates		373,070		469		8,761		364,778	7.19	%
		797,484		526		27,159		770,851	6.88	%
	$	1,100,534	$	788	$	36,425	$	1,064,897	6.82	%

    The amortized cost and estimated fair value of the Group's investment securities at September 30, 2000, by contractual maturity, are shown in the next table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	(In thousands)
	Available-for-sale				Held-to-maturity				Total
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within 1 year	$	345	$	343	$	—	$	—	$	345	$	343
After 1 year to 5 years		4,441		4,435		—		—		4,441		4,435
After 5 years to 10 years		126,719		124,587		—		—		126,719		124,587
Due after 10 years		881,066		867,916		—		—		881,066		867,916
Equity options		—		—						25,210		25,210
FHLB stock		—		—		—		—		11,146		11,146
	$	1,012,570	$	997,279	$	—	$	—	$	1,048,926	$	1,033,635

    Proceeds from the sale of investment securities available-for-sale during the first three months of fiscal 2001 totaled $92,557,000 (2000—$11,920,000). Gross realized gains and losses on those sales during first quarter of fiscal 2001 were $11,362 and $3,714,000 respectively (2000—$599,000 and $0).

    Of Oriental's investments at September 30, 2000 and June 30, 2000 the Government of Puerto Rico was the only issuer, other than the U.S. Government, of instruments that are payable and secured by the same source of revenue or taxing authority that exceeded 10% of stockholders' equity. The fair value of these investments represented 14% and 15% of stockholders' equity, respectively. At

10

September 30, 2000, the amortized cost and fair value of investments from the Government of Puerto Rico were approximately $16,660,000 (June 30, 2000—$17,686,000) and $16,649,000 (June 30, 2000—$17,652,000), respectively. At September 30, 2000, $13,080,000 (June 30, 2000—$13,670,000) of these investments were an AAA-rated Puerto Rico municipal bond collateralized with mortgage-backed securities.

NOTE 3—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:

Loans Receivable

    The Group's business activity is with consumers located in Puerto Rico. Oriental's loan transactions include a diversified number of industries and activities such as individuals, sole proprietorships, partnerships, manufacturing, tourism, government, insurance and not-for-profit organizations, all of which are encompassed within three main categories: mortgage, commercial and consumer. Oriental's loan portfolio has a higher concentration of loans to consumers such as residential mortgage loans, personal loans, and auto leases. The composition of the Group's loan portfolio at September 30, 2000 and June 30, 2000 was as follows:

		(In thousands)
		September 30,			June 30,
Loans secured by real estate:
	Residential	$	319,234		$	331,150
	Non-residential real estate loans		4,699			4,974
	Home equity loans and personal loans collateralized by real estate		46,249			40,306
			370,182			376,430
	Less: net deferred loan fees		(2,458	)		(2,103	)
			367,724			374,327
Other loans:
	Commercial		25,878			24,117
	Personal consumer loans and credit lines		21,597			19,698
	Financing leases, net of unearned interest		8,217			8,785
			55,692			52,600
Loans receivable			423,416			426,927
Allowance for loan losses			(6,972	)		(6,837	)
Loans receivable, net			416,444			420,090
Loans held-for-sale			49,084			180,788
Total loans, net		$	465,528		$	600,878

Allowance for Loan Losses

    The Group maintains an allowance for loan losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. Oriental's allowance for loan losses policy provides for a detailed quarterly analysis of probable losses. The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial condition of borrowers and other pertinent factors.

    While management uses available information in estimating probable loan losses, future additions to the allowance may be necessary based on factors beyond Oriental's control, such as factors affecting Puerto Rico economic conditions. Refer to Table 9 of the "Management's Discussion and Analysis of

11

Financial Condition and Results of Operations" for the changes in the allowance for loan losses for the first quarter and three-months period ended September 30, 2000 and 1999.

    The Group evaluates all loans, some individually and other as homogeneous groups, for purposes of determining impairment. At September 30, 2000 and June 30, 2000, the Group determined that no impairment reserve was necessary.

NOTE 4—ACCUMULATED OTHER COMPREHENSIVE INCOME:

    Accumulated other comprehensive income (loss) as of September 30, 2000 consists of:

	(In thousands)
	2000			1999
Unrealized loss on derivatives, net of amount reclassified into earnings of $94,000	$	(440	)	$	0
Unrealized loss on securities		(23,649	)		(15,162	)
	$	(24,089	)	$	(15,162	)

NOTE 5—PLEDGED ASSETS:

    At September 30, 2000, residential mortgage loans and investment securities amounting to $213,363,000 (June 30, 2000—$254,312,000), and $889,903,000 (June 30, 2000—$1,062,000,000), respectively, were pledged to secure public fund deposits, investment securities sold under agreements to repurchase, letters of credit, advances and borrowings from the Federal Home Loan Bank of New York, term notes and interest rate swap agreements.

NOTE 6—INTEREST RATE RISK MANAGEMENT

    The Group uses interest rate swaps and caps as an interest rate risk hedging mechanism. Under the swaps, the Group pays a fixed annual cost and receives a floating ninety-day payment based on LIBOR. Floating rate payments received from the swap counterparty correspond to the floating rate payments made on the borrowings or notes thus resulting in a net fixed rate cost to the Group. Under the caps, Oriental pays an up front premium or fee for the right to receive cash flow payments in excess of the predetermined cap rate; thus, effectively capping its interest rate cost for the duration of the agreement. The Group's swaps and caps outstanding and their terms at September 30, 2000 and June 30, 2000 are set forth in the table below:

		(Dollars in thousands)
		September 30,			June 30,
Swaps:
	Pay fixed swaps notional amount	$	100,000		$	100,000
	Weighted average pay rate—fixed		7.07	%		7.07	%
	Weighted average receive rate—floating		6.66	%		6.76	%
	Maturity in months		21			24
	Floating rate as a percent of LIBOR		100	%		100	%
Caps:
	Cap agreements notional amount	$	250,000		$	250,000
	Cap rate		7.00	%		7.00	%
	Maturity in months		19			23

12

    The agreements were signed to convert short-term borrowings into fixed rate liabilities for longer periods of time and provide protection against increases in interest rates. The amounts potentially subject to credit loss are the net streams of payments under the agreements and not the notional principal amounts used to express the volume of the swaps. The Group controls the credit risk of its interest rate swap agreements through approvals, limits, monitoring procedures and collateral, where considered necessary. The Group does not anticipate nonperformance by the counterparties.

    The Bank offers its customers certificates of deposit tied to the performance of one of the following stock market indexes, Standard & Poor's 500 Composite Stock Index, Dow Jones Industrial Average and Russell 2000 Small Stock Index. At the end of five years, the depositor will receive a specified percent of the average increase of the month-end value of the corresponding stock index. If such index decreases, the depositor receives the principal without any interest. The Group uses swap agreements with major money center banks to manage its exposure to the stock market. Under the terms of the agreements, the Group will receive the average increase in the month-end value of the corresponding index in exchange for a semiannual fixed interest cost. At September 30, 2000, the notional amount of these agreements totaled $142,975,000 (June 30, 2000—$132,975,000) at a weighted average rate of 5.87% (June 30, 2000 - 5.84%).

    The Group offers its customers certificates of deposit with high interest rates and uses interest rate swap agreements to lower the cost of these deposits. Under the terms of the agreements, the Group pays a floating rate (90 days LIBOR less a spread) and receives a fixed payment (the cost of the certificates of deposit). These swaps mature in seven years with an option to cancel after the third year. This option is at the counterparty's call. The certificates of deposit are issued with this same option, the Group has the right to call and consequently cancel the certificates of deposit. At September 30, 2000, the notional amount of these agreements totaled $40,000,000 (June 30, 2000—$40,000,000) at a weighted average rate of 6.02% (June 30, 2000- 5.82%).

    On July 1, 2000, the Group adopted Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement requires the recognition of derivatives in the balance sheet at fair value (See Note 1).

NOTE 7—SEGMENT REPORTING (UNAUDITED):

    The Group operates three major reportable segments: Financial Services, Mortgage Banking and Retail Banking. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Group's organizational chart, nature of products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Group monitors the performance of these reportable segments, based on pre-established goals of different financial parameters such as net income, interest spread, loan production, fees generated, and increase in market share.

    The Group's largest business segment is retail banking, which is mainly comprised of the Bank's branches and loan centers with such retail products as deposits and consumer loans. Commercial and finance leases are also considered in the retail business. This segment s also responsible for the Bank's mortgage loans portfolio, and the Group's investment portfolios and treasury functions.

    The Group's second largest business segment is the financial services, which is comprised of the Bank's trust division (Oriental Trust) and the registered broker-dealer subsidiary (Oriental Financial Services). The core operations of this segment are financial planning, money management and investment brokerage services, as well as corporate and individual trust services. The last and smallest business segment is mortgage banking. It consists of Oriental Mortgage, whose principal activity is to originate and purchase mortgage loans and subsequently sell them in the secondary market. Following

13

are the results of operations and the selected financial information by operating segment for each of the first quarter ended September 30:

	Unaudited—Three-Month Period Ended (Dollars in thousands)
	Retail Banking			Financial Services		Mortgage Banking		Eliminations			Total
Fiscal 2001
Net interest income	$	6,419		$	66	$	—	$	—		$	6,485
Non-interest income (charges)		(4,458	)		2,832		1,895		(162	)		107
Non-interest expenses		5,787			1,547		1,016		(162	)		8,188
Provision for loan losses		1,400			—		—		—			1,400
Income (loss) before taxes	$	(5,226	)	$	1,351	$	879	$	—		$	(2,996	)
Total assets	$	1,300,236		$	5,635	$	2,000	$	(2,383	)	$	1,705,488
Fiscal 2000
Net interest income	$	11,795		$	123	$	—	$	—		$	11,918
Non-interest income (charges)		1,540			2,616		2,233		(145	)		6,244
Non-interest expenses		6,224			1,532		927		(145	)		8,538
Provision for loan losses		1,750			—		—		—			1,750
Income before taxes	$	5,361		$	1,207	$	1,306	$	—		$	7,874
Total assets	$	1,648,012		$	12,636	$	2,000	$	(2,148	)	$	1,660,500

14

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE QUARTER AND SIX-MONTH PERIOD ENDED SEPTEMBER 30, 2000

Table of Contents

Description			Page #
Selected Financial Data:
	Earnings, Dividends Declared and Per Share Information		16
	Period End Balances		16
	Selected Financial Ratios (in percent) and Other Information		16
	Table 1	Analysis of Interest Income and Changes due to Volume / Rate	17
	Table 2	Non-Interest Income Summary and Composition	19
	Table 3	Non-Interest Expenses Summary and Composition	19
	Table 4	Non-Operating Activities	19
	Table 5	Allowance for Loan Losses Summary	20
	Table 6	Net Credit Losses Statistics	20
	Table 7	Loan Loss Reserve Breakdowns	21
	Table 8	Non-Performing Assets	21
	Table 9	Non-Performing Loans	21
	Table 10	Bank Assets Summary and Composition	22
	Table 11	Liabilities Summary and Composition	22
	Table 12	Capital, Dividends and Stock Data	23
	Table 13	Financial Assets Summary	24
	Overview of Financial Performance		25

15

SELECTED FINANCIAL DATA

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999

(IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)

		Year-to-Date Results
		As Restated
		2000			1999			Variance %
EARNINGS, PER SHARE AND DIVIDENDS:
Interest income		$	30,369		$	29,739		2.1	%
Interest expense			23,884			17,821		34.0	%
	Net interest income		6,485			11,918		(45.6	)%
Provision for loan losses			1,400			1,750		(20.0	)%
	Net credit income		5,085			10,168		(50.0	)%
Recurrent non-interest income			5,394			5,510		(2.1	)%
	Net core revenues		10,479			15,678		(33.2	)%
Recurrent non-interest expenses			8,135			8,538		(4.7	)%
	Core operating activities		2,344			7,140		(67.2	)%
	Non-operating activities		(5,340	)		734		(827.5	)%
	Income before taxes		(2,996	)		7,874		(138.0	)%
Income taxes			(1,280	)		631		(302.9	)%
	Net (loss) income		(1,716	)		7,243		(123.7	)%
Cumulative effect of change in accounting principle, net of taxes			(164	)		—		(100.0	)%
			(1,880	)		7,243		(126.0	)%
Less: dividends on preferred stock			(597	)		(597	)	(0.2	)%
	Net income available to common shareholders	$	(2,477	)	$	6,646		(137.3	)%
	Basic before cumulative effect of change in accounting principle	$	(0.18	)	$	0.52		(134.6	)%
	Basic after cumulative effect of change in accounting principle	$	(0.20	)	$	0.52		(138.5	)%
	Diluted before cumulative effect of change in accounting principle	$	(0.18	)	$	0.50		(136.0	)%
	Diluted after cumulative effect of change in accounting principle	$	(0.20	)	$	0.50		(140.0	)%
Average shares and potential shares			12,797			13,305		(3.8	)%
Book value		$	5.63		$	6.45		(12.7	)%
Market price at end of period		$	15.50		$	22.75		(31.9	)%
Dividends declared per share		$	0.15		$	0.15		0.0	%
Dividends declared		$	1,905		$	1,905		0.0	%
PERIOD END BALANCES (as of September 30,) AND FINANCIAL RATIOS:
Total financial assets
	Trust assets managed	$	1,444,056		$	1,394,800		3.5	%
	Broker-dealer assets gathered		939,000			864,700		8.6	%
	Assets managed		2,383,056			2,259,500		5.5	%
	Group total assets		1,705,488			1,646,138		3.6	%
		$	4,088,544		$	3,905,638		4.7	%
Interest-earning assets
	Investments	$	1,150,227		$	1,028,099		11.9	%
	Equity Options Investments		25,211		$	—		100.0	%
	Loans and leases (including held-for-sale)		465,528			552,086		(15.7	)%
		$	1,640,966		$	1,580,185		3.8	%
Interest-bearing liabilities
	Deposits	$	732,111		$	641,511		14.1	%
	Repurchase agreements		729,663			701,322		4.0	%
	Borrowings		106,500			153,200		(30.5	)%
		$	1,568,274		$	1,496,033		4.8	%
Stockholders' equity
	Preferred equity	$	33,500		$	33,500		0.0	%
	Common equity		70,767			82,433		(14.2	)%
		$	104,267		$	115,933		(10.1	)%
Capital ratios
	Leverage capital		7.34	%		8.72	%
	Total risk-based capital		26.93	%		24.74	%
	Tier 1 risk-based capital		25.68	%		23.48	%
Financial ratios (in percent)
	Return on average assets (ROA)		(0.39	)%		1.81	%
	Return on average common equity (ROE)		(10.59	)%		30.38	%
	Efficiency ratio		68.65	%		48.25	%
	Expense ratio		0.65	%		0.72	%
	Interest rate spread		1.26	%		2.81	%
	Number of banking offices		19			19

16

SELECTED FINANCIAL DATA
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
(Dollars in thousands)

			Interest						Average rate						Average balance
			Fiscal 2000		Fiscal 1999		Variance in %		Fiscal 2000		Fiscal 1999		Variance in BP		Fiscal 2000			Fiscal 1999			Variance in %
TABLE 1—YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:
A—TAX EQUIVALENT SPREAD
Interest-earning assets			$	30,369	$	29,739	2.1	%	7.19	%	7.73	%	(0.54	)%	$	1,687,472		$	1,532,748		10.1	%
Tax equivalent adjustment				6,442		5,225	23.3	%	1.53	%	1.36	%	0.17	%		—			—		0.0	%
Interest-earning assets—tax equivalent				36,811		34,964	5.3	%	8.72	%	9.09	%	(0.37	)%		1,687,472			1,532,748		10.1	%
Interest-bearing liabilities				11,146		17,821	(37.5	)%	5.93	%	4.92	%	1.01	%		1,598,907			1,436,542		11.3	%
		Net interest income / spread	$	25,665	$	17,143	49.7	%	2.79	%	4.17	%	(1.38	)%	$	88,565		$	96,206		(7.9	)%
B—NORMAL SPREAD
Interest-earning assets:
Investments:
	Investment securities		$	18,214	$	15,384	18.4	%	6.81	%	6.53	%	0.28	%	$	1,068,268		$	940,667		13.6	%
	Trading securities			533		395	34.9	%	7.83	%	8.24	%	(0.41	)%		27,254			19,177		42.1	%
	Money market investments			2,474		55	4398.2	%	6.84	%	4.62	%	2.22	%		144,672			4,750		2945.7	%
				21,221		15,834	34.0	%	6.84	%	6.55	%	0.29	%		1,240,194			964,594		28.6	%
Loans:
	Real estate (1)			7,670		6,210	23.5	%	7.79	%	7.64	%	0.15	%		393,723			325,128		21.1	%
	Consumer			671		4,216	(84.1	)%	13.51	%	13.66	%	(0.15	)%		19,698			122,441		(83.9	)%
	Financing leases			176		2,720	(93.5	)%	7.45	%	10.60	%	(3.15	)%		9,394			101,834		(90.8	)%
	Commercial and auto loans			631		759	(16.9	)%	10.22	%	16.06	%	(5.84	)%		24,463			18,751		30.5	%
				9,148		13,905	(34.2	)%	8.17	%	9.75	%	(1.58	)%		447,278			568,154		(21.3	)%
				30,369		29,739	2.1	%	7.19	%	7.73	%	(0.54	)%		1,687,472			1,532,748		10.1	%
Interest-bearing liabilities:
Deposits:
	Savings and demand			786		764	2.9	%	2.36	%	2.09	%	0.27	%		131,942			145,196		(9.1	)%
	Time and IRA accounts			8,824		6,470	36.4	%	6.09	%	5.17	%	0.92	%		574,898			496,288		15.8	%
				9,610		7,234	32.8	%	5.39	%	4.47	%	0.92	%		706,840			641,484		10.2	%
Borrowings:
	Repurchase agreements			12,224		8,465	44.4	%	6.35	%	5.34	%	1.01	%		764,280			629,197		21.5	%
	FHLB funds, term notes and other borrowings			2,050		2,122	(3.4	)%	6.36	%	5.08	%	1.28	%		127,787			165,861		(23.0	)%
				14,274		10,587	34.8	%	6.35	%	5.28	%	1.07	%		892,067			795,058		12.2	%
				23,884		17,821	34.0	%	5.93	%	4.92	%	1.01	%		1,598,907			1,436,542		11.3	%
Net interest income / spread			$	6,485	$	11,918	(45.6	)%	1.26	%	2.81	%	(1.55	)%
Interest rate margin				—		—			1.57	%	3.12	%	(1.55	)%
Excess of interest-earning assets over interest-bearing liabilities															$	88,565		$	96,206		(7.9	)%
Interest-earning assets over interest-bearing liabilities ratio																105.54	%		106.70	%

17

Changes in net interest income due to:		Volume			Rate			Total
Interest Income:
	Loans (1)	$	(4,420	)	$	(337	)	$	(4,757	)
	Investments		3,865			1,522			5,387
			(555	)		1,185			630
Interest Expense:
	Deposits		1,004			1,372			2,376
	Borrowings		1,319			2,368			3,687
			2,323			3,740			6,063
Net Interest Income		$	(2,878	)	$	(2,555	)	$	(5,433	)

(1)—Real estate averages include loans held-for-sale.

18

SELECTED FINANCIAL DATA

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999

(Dollars in thousands)

			Three-Month Period
			2000			1999			variance %
TABLE 2—NON-INTEREST INCOME SUMMARY
Trust, money management and brokerage fees				2,827			2,627		7.6	%
Mortgage banking activities				1,551			1,958		(20.8	)%
	Non-banking service revenues			4,378			4,585		(4.5	)%
Fees on deposit accounts			$	548		$	362		51.4	%
Bank service charges and commissions				434			559		(22.4	)%
Other operating revenues				34			4		750.0	%
	Bank service revenues			1,016			925		9.8	%
		Recurrent non-interest income		5,394			5,510		(2.1	)%
Recurrent non-interest income to expenses ratio				65.88	%		64.54	%	2.1	%
TABLE 3—NON-INTEREST EXPENSES SUMMARY
Fixed compensation			$	2,695		$	2,744		(1.8	)%
Variable compensation				680			1,077		(36.9	)%
	Compensation and benefits			3,375			3,821		(11.7	)%
Occupancy and equipment				1,718			1,493		15.1	%
Advertising and business promotion				781			723		8.0	%
Professional and service fees				505			874		(42.2	)%
Communications				420			404		4.0	%
Municipal and other general taxes				488			479		1.9	%
Insurance, including deposits insurance				95			133		(28.6	)%
Printing, postage, stationery and supplies				163			197		(17.3	)%
Other operating expenses				643			414		55.3	%
	Other non-interest expenses			4,813			4,717		2.0	%
Recurrent non-interest expenses				8,188			8,538		(4.1	)%
Relevant ratios and data:
	Efficiency ratio			68.65	%		48.25	%
	Expense ratio			0.65	%		0.72	%
	Compensation to recurrent non-interest expenses			41.2	%		44.8	%
	Variable compensation to total compensation			20.1	%		28.2	%
	Compensation to total average assets			0.77	%		0.96	%
	Average compensation per employee		$	39.8		$	41.7
	Average number of full-time employees			339			367
	Bank assets per employee		$	5,727		$	5,003
	Total work force:
		Banking operations		298			329		(9.4	)%
		Trust operations		26			28		(7.1	)%
		Brokerage operations		13			12		8.3	%
				337			369		(8.7	)%
TABLE 4—NON-RECURRING ACTIVITIES
Securities net activity				(3,705)			599		(718.5	)%
Trading net activity				(12)			(133)		(91.0	)%
Derivatives activity				(1,619)			—		(100.0	)%
	Securities, derivaties and trading net activities			(5,336)			466		(1245.1	)%
Leasing revenues (discontinued June 2000)				49			268		(81.7	)%
Other non-recurrent activities				(52)			209		(124.9	)%
	Other non-operating activities			(3)			477		(100.6	)%
		Total non-operating activities	$	(5,339)		$	943		(666.2	)%

19

SELECTED FINANCIAL DATA

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999

(Dollars in thousands)

			Year-to-Date Results
			2000			1999
TABLE 5—ALLOWANCE FOR LOAN LOSSES SUMMARY
Beginning balance			$	6,837		$	9,002
Provision for loan losses				1,400			1,750
Net credit losses—see table 6				(1,265	)		(2,021	)
		Ending balance	$	6,972		$	8,731
Selected Data and Ratios:
	Outstanding at June 30,		$	472,500		$	560,817
	Recoveries to net charge-off's			30.2%			26.7%
	Allowance coverage ratio
		Total loans		1.48%			1.56%
		Non-performing loans		41.98%			48.73%
		Non-real estate non-performing loans		96.47%			97.79%
TABLE 6—NET CREDIT LOSSES STATISTICS
Real estate
	Charge-offs		$	—		$	—
	Recoveries			—			—
				—			—
Consumer
	Charge-offs			(1,074	)		(1,749	)
	Recoveries			307			382
				(767	)		(1,367	)
Leasing
	Charge-offs			(487	)		(974	)
	Recoveries			200			295
				(287	)		(679	)
Commercial and others
	Charge-offs			(252	)		(35	)
	Recoveries			41			60
				(211	)		25
Net credit losses
	Total charge-offs			(1,813	)		(2,758	)
	Total recoveries			548			737
			$	(1,265	)	$	(2,021	)
Net credit losses to average:
	Real estate			0.00%			0.00%
	Consumer			15.58%			4.42%
	Leasing			12.22%			2.50%
	Commercial and others			3.71%			(0.48	)%
		Total		1.13%			1.38%
Average:
	Real estate			393,723			334,117
	Consumer			19,698			123,662
	Leasing			9,394			108,469
	Commercial and others			24,463			19,972
		Total	$	447,278		$	586,220

20

SELECTED FINANCIAL DATA
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
(Dollars in thousands)

TABLE 7—LOAN LOSS RESERVE BREAKDOWN (as of September 30,):
Consumer			$	1,263		$	1,353
Financing leases				4,170			4,501
Commercial and other				921			2,298
	Non-real estate			6,354			8,152
	Real estate			618			579
			$	6,972		$	8,731
TABLE 8—NON-PERFORMING ASSETS (as of September 30,):
Non-performing assets
	Non-performing loans			16,609			17,917
	Foreclosed real estate			535			383
	Repossessed autos			171			347
	Repossessed equipment			—			26
			$	17,315		$	18,673
Non-performing loans to
	Total loans			3.52	%		3.19	%
	Total assets			0.97	%		1.09	%
	Total capital			15.93	%		15.45	%
TABLE 9—NON-PERFORMING LOANS (as of September 30,):
Non-performing loans
	Consumer		$	889		$	1,072
	Financing leases			5,129			6,635
	Commercial			1,209			1,221
		Non-real estate		7,227			8,928
		Real estate		9,382			8,989
			$	16,609		$	17,917
Non-performing loans composition
	Consumer			5.4	%		6.0	%
	Financing leases			30.9	%		37.0	%
	Commercial			7.3	%		6.8	%
		Non-real estate		43.5	%		49.8	%
		Real estate		56.5	%		50.2	%
				100.0	%		100.0	%

21

SELECTED FINANCIAL DATA

AS OF SEPTEMBER 30, 2000 and 1999 and JUNE 30, 2000

(Dollars in thousands)

		As Restated
		September 30, 2000			September 30, 1999			Variance %		June 30, 2000
TABLE 10—ASSETS SUMMARY AND COMPOSITION
Investments:
	Mortgage-backed securities and CMOs	$	895,177		$	784,170		14.2	%	$	882,455
	U.S. and P.R. government securities		125,036			230,389		(45.7	)%		262,372
	Equity options investments		25,211			—		100.0	%		—
	FHLB stock and other investments		130,014			13,540		860.2	%		34,657
			1,175,438			1,028,099		14.3	%		1,179,484
Loans:
	Real estate		416,833			309,299		34.8	%		387,629
	Consumer		21,574			126,620		(83.0	)%		19,698
	Financing leases		8,215			103,640		(92.1	)%		8,785
	Commercial and auto		25,878			21,258		21.7	%		24,117
			472,500			560,817		(15.7	)%		440,229
	Consumer loans and leases under contract-to-sell		—			—		0.0	%		167,486
			472,500			560,817		(15.7	)%		607,715
	Allowance for loan losses		(6,972)			(8,731)		(20.1	)%		(6,837)
			465,528			552,086		(15.7	)%		600,878
	Total interest-earning assets		1,640,966			1,580,185		3.8	%	��	1,780,362
Non-interest earning assets			64,522			65,952		(2.2	)%		69,872
	Total assets	$	1,705,488		$	1,646,137		3.6	%	$	1,850,234
Investments portfolio composition:
	Mortgage-backed securities and CMOs		76.2	%		76.3	%				74.8	%
	U.S. and P.R. government securities		10.6	%		22.4	%				22.2	%
	Equity options investments		2.1	%		0.0	%				0.0	%
	FHLB stock and other investments		11.1	%		1.3	%				3.0	%
			100.0	%		100.0	%				100.0	%
Loan portfolio composition:
	Real Estate		88.2	%		55.2	%				63.8	%
	Consumer		4.6	%		22.6	%				3.2	%
	Financing leases		1.7	%		18.5	%				1.4	%
	Commercial and auto		5.5	%		3.7	%				31.6	%
			100.0	%		100.0	%				100.0	%
TABLE 11—LIABILITIES SUMMARY AND COMPOSITION
Deposits:
	Savings and demand deposits	$	126,991		$	137,828		(7.9	)%	$	130,919
	Time deposits and IRA accounts		602,216			499,493		20.6	%		587,931
			729,207			637,321		14.4	%		718,850
	Accrued interest		2,904			4,190		(30.7	)%		4,831
			732,111			641,511		14.1	%		723,681
Borrowings:
	Repurchase agreements		729,663			701,322		4.0	%		816,493
	FHLB funds		20,000			46,700		(57.2	)%		70,000
	Term notes and other sources of funds		86,500			106,500		(18.8	)%		86,500
			836,163			854,522		(2.1	)%		972,993
	Total interest-bearing liabilities		1,568,274			1,496,033		4.8	%		1,696,674
Other non interest-bearing liabilities			32,947			34,173		(3.6	)%		35,691
	Total liabilities	$	1,601,221		$	1,530,206		4.6	%	$	1,732,365
Deposits portfolio composition:
	Savings and demand deposits		17.3	%		21.5	%				18.1	%
	Time deposits and IRA accounts		82.3	%		77.9	%				81.2	%
	Accrued Interest and manager checks		0.4	%		0.6	%				0.7	%
			100.0	%		100.0	%				100.0	%
Borrowings portfolio composition:
	Repurchase agreements		87.3	%		82.1	%				83.9	%
	FHLB funds		2.4	%		5.5	%				7.2	%
	Term notes and other sources of funds		10.3	%		12.4	%				8.9	%
			100.0	%		100.0	%				100.0	%

22

SELECTED FINANCIAL DATA
AS OF SEPTEMBER 30, 2000 and 1999 and JUNE 30, 2000
(Dollars in thousands)

		As Restated
		September 30, 2000			September 30, 1999			Variance %		June 30, 2000
TABLE 12—CAPITAL, DIVIDENDS AND STOCK DATA
Capital data:
	Stockholders' equity	$	104,267		$	115,933		(10.1	)%	$	117,869
	Leverage Capital (minimum required—4.00%)		7.34	%		8.72	%	(15.9	)%		7.49	%
	Total Risk-Based Capital (minimum required—8.00%)		26.93	%		24.74	%	8.9	%		29.29	%
	Tier 1 Risk-Based capital (minimum required—4.00%)		25.68	%		23.48	%	9.4	%		30.54	%
Stock data:
	Outstanding common shares, net of treasury		12,569			12,776		(1.6	)%		12,697
	Book value	$	5.63		$	6.45		(12.7	)%	$	6.64
	Market Price at end of period	$	15.50		$	22.75		(31.9	)%	$	14.44
	Market capitalization	$	194,826		$	290,657		(33.0	)%	$	183,345
Common Dividend data:
	Common dividends declared	$	1,905		$	1,916		(0.6	)%	$	7,657
	Common dividends declared per share	$	0.150		$	0.150		0.0	%	$	0.600
	Payout ratio		(76.94	)%		28.83	%	(366.9	)%		50.36	%
	Dividend yield		4.60	%		2.55	%	80.4	%		2.99	%

23

    The following provides the high and low prices and dividend per share of the Group's stock for each quarter of the last three fiscal periods. Common stock prices were adjusted to give retroactive effect to the stock splits declared on the Group's common stock.

			Price
							Dividend Per share
			High		Low
Fiscal 2001:
September 30, 2000			$	15.50	$	11.68	$	0.150
Fiscal 2000:
June 30, 2000			$	19.31	$	13.18	$	0.150
March 31, 2000			$	26.00	$	17.75	$	0.150
December 31, 1999			$	23.87	$	19.69	$	0.150
September 30, 1999			$	28.00	$	21.50	$	0.150
Fiscal 1999:
June 30, 1999			$	29.87	$	24.13	$	0.150
March 31, 1999			$	29.63	$	27.50	$	0.150
December 31, 1998			$	32.00	$	28.00	$	0.150
September 30, 1998			$	32.26	$	28.84	$	0.113
TABLE 13—FINANCIAL ASSETS SUMMARY
Financial assets:
	Trust assets managed		$	1,444,056	$	1,394,800		3.5	%	$	1,456,500
	Assets gathered by broker-dealer			939,000		864,700		8.6	%		914,900
		Managed assets		2,383,056		2,259,500		5.5	%		2,371,400
	Group assets			1,705,488		1,646,138		3.6	%		1,850,608
			$	4,088,544	$	3,905,638		4.7	%	$	4,222,008

24

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000

OVERVIEW OF FINANCIAL PERFORMANCE

    The Group posted a net loss of $1.9 million ($0.20 per share) for the first quarter of fiscal 2001, as compared to a net income of $7.2 million ($0.50 per share) reported for the first quarter of fiscal 2000. This loss reflects a non-operating loss of $3.7 million ($3.1 million net of tax) incurred on the sale of treasury securities combined with the effects in the net credit spread of the increase in the cost of funds resulting from federal interest rate hikes made during the past year. The Group also reported a $164,000 unrealized loss (net of tax) for the cumulative effect of the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" (refer to Note 1 to the consolidated financial statements: Summary of Significant Accounting Policies).

    The aforementioned $3.7 million loss in the sale of treasury securities was taken following recommendations made by the Group's asset/liability consultants. Proceeds from the sale of these low-yielding investments are being used to reduce higher-cost borrowings and to reinvest in higher-yielding securities, thus further strengthening future earnings.

    Due to the Group's reporting calendar, and months before most other institutions in Puerto Rico and throughout the United States, the Group was required to adopt SFAS No. 133 on July 1, 2000. Other institutions will also be required to apply this new accounting standard in the first quarter of fiscal years beginning after June 15, 2000. Some of the best-capitalized institutions in the world have already reported the impact of SFAS No. 133 on their earnings, mostly with negative effects.

    SFAS No. 133 requires the recognition of derivatives on the balance sheet at fair value. Derivatives that are not hedges must be recognized in the statement of income based upon the difference between fair value and the carrying amount. If the derivative meets specified criteria and qualifies as a hedge, changes in fair value are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in the statement of income. The ineffective portion of a derivative's change in fair value will be recognized in the statement of income.

    The adoption of SFAS No. 133 resulted in the $164.000 unrealized loss (net of tax) from the cumulative effect of a change in accounting principle in addition to a $1.6 million unrealized loss for the first quarter ended September 30, 2000.

    Net credit income (net interest income minus the provision for loan losses) decreased 50 percent from $10.2 million in the first quarter of fiscal year 1999 to $5.1 million for the quarter ended September 30, 2000. Interest income grew 2.1 percent despite a 34.2 percent reduction in interest revenues from loans, as a result of the previously disclosed sale of over $165 million of leases and unsecured personal loans. Interest expenses rose 34 percent to $23.9 million, as compared to $17.8 million for the same quarter in September 1999, mainly as a result of the aforementioned interest rate hikes.

    Recurrent non-interest income remained stable at $5.4 million in the quarter ended September 30, 2000. Trust, money management and brokerage fees increased 7.6 percent from $2.6 million to $2.8 million. Banking fees also increased 8.4 percent from $925,000 to $1 million. Mortgage-banking revenues decreased 20.8 percent to $1.6 million. However, as expected by management, these revenues have begun to show an improvement evident in the 26.9 percent increase from the $1.2 million earned in the quarter ended June 30, 2000. This improvement is a result of management's focus of concentrating on secured lending, which also has had a positive effect on Oriental's risk exposure and capital requirements. In line with the Group's strategy of expanding fee-based income, recurrent non-interest revenues now constitute 53 percent of total core recurrent revenues.

25

    Financial assets, which include the Group's assets and assets managed by the Group's trust department and brokerage subsidiary, reached $4.089 billion at the end of the first quarter of fiscal 2001—up 4.7% from $3.906 billion at the end of the same period of fiscal 2000. The Group's assets grew 3.6% to $1.705 billion at September 30, 2000, up from $1.646 billion a year ago. Assets managed by the Group's trust department and broker-dealer subsidiary increased 5.5% to $2.383 billion from $2.260 billion the year before.

    The following pages discuss in detail the different components that influenced the Group's performance. Tables 1 to 13 on pages 13 to 19 provide relevant operational ratios and information for the periods analyzed as follows:

NET INTEREST INCOME

    Net interest income is the Group's main source of earnings. It is affected by the difference between rates of interest earned on the Group's interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest-earning assets and interest-bearing liabilities (interest rate margin). As further discussed in the Risk Management section, the Group constantly monitors the composition and repricing of its assets and liabilities to maintain its net interest income at adequate levels and to avoid undertaking highly sensitive positions that could affect its earnings capacity in a volatile interest rate environment.

    For the first quarter of fiscal 2001, the Group's net interest income amounted to $6.5 million, down 45.6% from $11.9 million in the same period of fiscal 2000. The reduction in net interest income was mainly due to a negative rate variance of $2.6 million as result of a higher average cost of funds (5.93% in 2001 versus 4.92% in 2000) in line with the interest rates hikes posted by the Fed during the past year combined with a negative volume variance of $2.8 million that stems from the sale of unsecured personal loans and leases portfolios, previously reposted.

    Interest rate spread narrowed 155 basis points during the first quarter of fiscal 2001, to 1.26% from 2.81% the year before. This was mainly due to: (1) an increase in the average cost of funds; and (2) a change in the mix of interest-earning assets toward a higher volume of lower risk and tax-free investment securities, including the sale of almost $170 million of leases and unsecured personal loans. Table 1 analyzes the major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates.

    The Group's interest income for the first quarter of fiscal 2001 totaled $30.4 million, up 2.1% from $29.7 million posted in the same period of fiscal 2000. The increase in interest income results from a larger volume of average interest-earning assets ($1.687 billion in 2001 versus $1.533 billion in 2000) tempered by a decline in their yield performance (7.19% in 2001 versus 7.73% in 2000).

    Most of the increase in interest-earning assets was mainly on the investment portfolio. For the first quarter of fiscal 2001, the average volume of total investments grew by 28.6% ($1.240 billion in 2001 versus $964.6 million in 2000) when compared to the same period a year earlier. This increase was concentrated in mortgage-backed securities.

    For the first quarter period of fiscal 2001 the average yield on interest-earning assets was 7.19%, 54 basis points lower than the 7.73% reported a year ago. The yield dilution experienced was mainly related to: (i) the strong expansion of Group's investment portfolio, which carries a lower yield than the loan portfolio but provides less risk and generates a significant amount of tax-exempt interest; and (ii) the dilution of the loan portfolio yield, which decreased by 158 basis points (8.17% versus 9.75%) reflecting the sale of almost $170 million of leases and unsecured personal loans, previously reported.

    Interest expense for the first quarter of fiscal 2001 rose 34% to $23.9 million from $17.8 million reported in the comparable period of fiscal 2000. A larger base of interest-bearing liabilities

26

($1.599 billion in 2001 versus $1.437 billion in 2000) used to fund the growth of the Group's interest-earning assets, combined with a higher average cost of funds (5.93% versus 4.92%) due to Fed interest rates hikes, drove the increase. Larger volumes of repurchase agreements and deposits, which were necessary to fund the growth of the Group's investment portfolio, drove this increase in interest-bearing liabilities. See Table 1 for the impact in interest expense due to changes in volume and rates.

    The cost of short-term financing has substantially increased since early fiscal 2000. For the first quarter ended September 30, 2000, the cost of borrowings increased 107 basis points (6.35% versus 5.28%).

NON-INTEREST INCOME

    As a diversified financial services provider (see table 2), the Group's earnings depend not only on the net interest income generated from its banking activity, but also from fees and other non-interest income generated from the wide array of financial services offered. Non-interest income is affected by the level of trust assets under management, transactions generated by gathering of financial assets by the broker-dealer subsidiary, the level of mortgage banking activities, and fees generated from loans and deposit accounts.

    Recurrent non-interest remained stable at $5.4 million in the first quarter of fiscal 2001, compared to $5.5 million in the first quarter of fiscal 2000.

    Trust, money management and brokerage fees, the principal component of recurrent non-interest income, continued an excellent growth pattern during the first quarter of fiscal 2001, rising 7.6% to $2.8 million from $2.6 million in the first quarter of fiscal 2000. The larger volume of accounts and assets managed by both the Group's trust department and the broker-dealer subsidiary triggered this growth (see "Financial Condition" section).

    For the first quarter of fiscal 2001, gains generated by mortgage banking activities amounted to $1.6 million, a 20.8% lower than the $2.0 million for the first quarter of fiscal 2000. This decrease reflects a lower volume of loans sold. However, as expected by management, these revenues have begun to show an improvement evident in the 26.9% increase from the $1.2 million earned in the quarter ended June 30, 2000; in line with the strategy of concentrating on secured lending, previously reported.

    Bank services fees and other operating revenues consist primarily of fees generated by deposit accounts, leasing, electronic banking and customer services. These revenues totaled $1.0 million in the first quarter of fiscal 2001, a 9.8% hike versus $925,000 reported in the same period of fiscal 2000. This increase reflect higher revenues from bank services and deposit accounts, which were driven by a new banking fees structure, expansion of the electronic banking business and a growth in its core deposit base.

NON-INTEREST EXPENSES

    As shown in Table 3, non-interest expenses for the first quarter of fiscal 2001 decreased 4.1% to $8.2 million from $8.5 million in the comparable period of fiscal 2000. The decrease on non-interest expenses reflects the Group's restructuring strategy, previously reported.

    Employee compensation and benefits is the Group's largest expense category. For the first quarter of fiscal 2001, it decreased 11.7% to $3.4 million versus $3.8 million in the same period of fiscal 2000. Refer to Table 3 for more selected data regarding employee compensation and benefits.

    Other non-interest expenses for the first quarter of fiscal 2001 increased 2.1% to $4.8 million as compared to $4.7 million in the same period of fiscal 2000. Increased communication and occupancy and equipment costs of $225,000 or 15.1% (mainly technology) led this rise. These increases reflect the

27

additional investment required supporting the growth of the Group's business activity and the enhancements made to the Group's systems to enable the expansion of its electronic delivery capability and improvement of customers' service.

    Professional fees decreased $369,000 or 42.2%, mainly related to legal expenses associated to the investigation previously reported.

NON-OPERATING ACTIVITIES GAINS (LOSSES)

    The first quarter of fiscal 2001 reflects a loss of $3.7 million on the sale of securities and trading compared to a gain of $466,000 in the first quarter of fiscal 2000 (see Table 4). In addition, the first quarter of fiscal 2001, reflect a charge of $164,000 on derivatives activities as a result of the adoption of a new accounting standard. See "Overview of Financial Performance" for more information on the aforementioned items.

    Fees and other charges from leasing activities decreased from $268,000 to $49,000 in the first quarter of fiscal 2000 and 2001, respectively. Leasing operations were discontinued in June 30, 2000, as previously reported.

PROVISION FOR LOAN LOSSES

    The provision for loan losses in the first quarter of fiscal 2001 totaled $1.4 million, down 20.0% from the $1.8 million reported in the same period of fiscal 2000. The decline was in response to the lower level of net credit losses and non-performing assets, and current and expected economic conditions. The reduction in credit losses reflects the sale of the unsecured personal loans and lease portfolios on June 30, 2000, as previously reported. Please refer to the allowance for loan losses and non-performing assets section for a more detailed analysis of the allowances for loan losses, net credit losses and credit quality statistics.

PROVISION (CREDIT) FOR INCOME TAXES

    Income taxes for the first quarter of fiscal 2001 reflect a credit of $1.3 million compared with a provision of $631,000 a year ago. The credit in the 2001 period resulted from the losses that stem from non-operating activities discussed herein. Differences between the effective tax rate and the maximum statutory tax rate for the Group, which is 39%, are primarily due to the interest income earned on certain investments and loans which is exempt from income tax, net of the disallowance of related expenses attributable to the exempt income.

FINANCIAL CONDITION

GROUP'S ASSETS

    At September 30, 2000, the Group's total assets amounted to $1.705 billion, an increase of 3.6% when compared to $1.646 billion a year ago. At the same date, interest-earning assets reached $1.641 billion, up 3.8% versus $1.580 billion a year earlier.

    Investments are Oriental's largest interest-earning assets component. It mainly consists of money market investments, U.S. Treasury notes, U.S. Government agencies bonds, mortgage-backed securities, CMO's and P. R. Government municipal bonds. At September 30, 2000, the Group's investment portfolio was of high quality. Approximately 98% was rated AAA and it generated a significant amount of tax-exempt interest that substantially lowered the Group's effective tax rate (see Table 10 and Note 2 to the Consolidated Financial Statements).

    A strong growth in mortgage-backed securities and CMO's drove the investment portfolio expansion. They increased 14.2 to $895.2 million (76.2% of the total portfolio) from $784.2 million

28

(76.3% of the total portfolio) the year before, as Oriental continued its strategy of pooling residential real estate loans into mortgage-backed securities.

    At September 30, 2000, Oriental's loan portfolio, the second largest category of the Bank's interest-earning assets, amounted to $465.5 million, 15.7% lower than the $552.1 million a year ago. Late in the second quarter of fiscal 2000, the Group's loans origination changed toward collateralized loans, primarily mortgage loans and personal loans with mortgage collateral, while de-emphasizing unsecured personal loans. In addition, on July 7, 2000, Oriental sold over $165 million of leases and unsecured personal loans. These strategies reduced the size of the loan portfolio but significantly reduced credit losses and enhanced the portfolio quality. Table 10 and Note 3 to the Consolidated Financial Statements presents the Group's loan portfolio composition and mix at the end of the periods analyzed.

    The Group's real estate loans portfolio is mainly comprised of residential loans, home equity loans and personal loans collateralized by real estate. At September 30, 2000, the real estate loans portfolio amounted to $416.8 million (88.2% of the portfolio).

    The second largest component of the Group's loan portfolio is commercial loans, most of which collateralized by real estate. At September 30, 2000, the commercial loans portfolio totaled $25.9 million (5.5% of the Group's loan portfolio), the consumer loan portfolio totaled $21.6 million (4.6% of the portfolio). The Group's leasing portfolio consists of auto and equipment leases. At September 30, 2000, it amounted to $8.2 million (1.7% of the portfolio). The Group discontinued lease originations in June 30, 2000.

LIABILITIES AND FUNDING SOURCES

    As shown in Table 11, at September 30, 2000, Oriental's total liabilities reached $1.601 billion, 6.5% higher than the $1.530 billion reported a year earlier. Interest-bearing liabilities, the Group's main funding source, amounted to $1.568 billion at the end of the first quarter of fiscal 2001 versus $1.496 billion the year before, a 4.8% increase. A rise in deposits, mainly on time deposits and IRA accounts, drove these growths.

    At September 30, 2000, deposits, the second largest category of the Group's interest-bearing liabilities and source of funding, reached $732.1 million, up 14.1% versus the $641.5 million a year ago. A $74.6 million increase or 14.9% in time deposits and IRA accounts represented most of the growth. This was partially offset by a $10.8 million or 7.9% decrease in demand and savings deposits. Table 11 presents the composition of the Group's deposits at the end of the periods analyzed.

    Borrowings are Oriental's largest interest-bearing liability component. It consists mainly of diversified funding sources through the use of Federal Home Loan Bank of New York (FHLB) advances and borrowings, repurchase agreements, term notes, notes payable and lines of credit. At September 30, 2000, they amounted to $836.2 million, 2.1% lower than the $854.5 million a year ago, mainly in repurchase agreements. This decrease reflects the repayment of high cost volatile funds, mainly from the proceeds of the sale of the unsecured personal loans and lease portfolios.

    The FHLB system functions as a source of credit to financial institutions that are members of a regional Federal Home Loan Bank. As a member of the of the FHLB the Group can obtain advances from the FHLB, secured by the FHLB stock owned by the Group, as well as by certain of the Group's mortgages and investment securities. Table 11 presents the composition of the Group's other borrowings at the end of the periods analyzed.

STOCKHOLDERS' EQUITY

    At September 30, 2000, Oriental's total stockholders' equity was $104.3 million, a 10.1% decrease from $115.9 million a year ago. The reasons for this decrease were the unrealized losses of investment

29

securities available for sale combined with the repurchase of common shares at a cost of $3.4 million. For more on the Group's stockholders' equity activity, refer to the Unaudited Consolidated Statement of Changes in Stockholders' Equity and of Comprehensive Income included as part of the Consolidated Financial Statements.

    During the first quarter of fiscal 2001, the Group repurchased 127,800 common shares bringing to 1,235,599 shares (with a cost of $27.5 million) the number of shares held by the Group's treasury. The Group's common stock is traded in the New York Stock Exchange (NYSE) under the symbol OFG. At September 30, 2000, the Group's market value for its outstanding stock was $194.8 million ($15.50 per share).

    During the first quarter of fiscal 2001 and 2000, the Group declared dividends amounting to $1.9 million ($0.15 per share). Dividend yield was 3.87% and 2.55%, for the first quarter of fiscal year 2001 and 2000 respectively.

    Under the regulatory framework for prompt corrective action, banks and bank holding companies that meet or exceed a Tier I risk-based ratio of 6%, a total capital risk-based ratio of 10% and a leverage ratio of 5% are considered well capitalized. As shown in Table 12, the Group exceeds those regulatory risk-based capital requirements, due to the high level of capital and the conservative nature of the Group's assets.

GROUP'S FINANCIAL ASSETS

    As shown on Table 13, the Group's total financial assets include the Group's assets and assets managed by the trust and brokerage business. At September 30, 2000, they reached $4.089 billion—up 4.7% from $3.906 billion a year ago. The Group's financial assets main component is assets owned by the Group, of which about 99% are owned by the Group's banking subsidiary. For more on this financial asset component, refer to Group's Assets under Financial Condition.

    Oriental's second largest financial assets component is assets managed by the Group's trust, which offers various different types of IRA products and manages 401(K) and Keogh retirement plans, custodian and corporate trust accounts. At September 30, 2000, total assets managed by the Group's trust amounted $1.446 billion, 3.7% higher than the $1.395 billion a year ago. This increase was fueled by a solid 13.6% growth in individual retirement accounts (IRA), the most significant asset managed, which totaled $583.7 million versus the $514 million a year ago.

    The other financial asset component is assets gathered by the broker-dealer. The Group's broker-dealer subsidiary offers a wide array of investment alternatives to its client's base such as fixed and variable annuities, tax-advantaged fixed income securities, mutual funds, stocks and bonds. At September 30, 2000, total assets gathered by the broker-dealer from its customer investment accounts reached $939.0 million, up 8.6% from $864.7 million a year ago.

ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS

    At September 30, 2000, the Group's allowance for loan losses amounted to $7.0 million (1.48% of total loans) versus $8.7 million (1.56% of total loans) a year earlier. The Group maintains an allowance for loan losses at a level that management considers adequate to provide for potential losses based upon an evaluation of known and inherent risks. Oriental's allowance for loan losses policy provides for a detailed quarterly analysis of possible losses.

    The principal factors that the Group uses to determine the level of allowance for loan losses are the Group's historical and current credit loss experience. These factors are combined with qualitative factors such as: the growth of the loan portfolio, credit concentrations (e.g., local industries. etc.) that might affect loss experience across one or more components of the portfolio, delinquencies, effects of

30

any changes in lending policies and procedures (including underwriting standards), collections, general economic conditions and unusual events such as hurricanes.

    The methodology that the Group uses follows a loan credit risk rating process that involves dividing loans into risk categories. The following are the credit risk categories (established by the FDIC Interagency Policy Statement of 1993) used:

1.

PASS—loans considered highly collectible due to their repayment history or current status (to be in this category a loan cannot be more than 90 days past due).



2.

SPECIAL MENTION—loans with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the loan.



3.

SUBSTANDARD—loans inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.



4.

DOUBTFUL—loans that have all the weaknesses inherent in substandard, with the added characteristic that collection or liquidation in full is highly questionable and improbable.



5.

LOSS—loans considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

    Based on this loan credit risk rating (primarily based on aging), the Group applies an overall reserve percentage to each of the portfolio's aging category based on historical credit losses adjusted for current or expected conditions and trends. This delinquency-based calculation is the starting point for management's determination of the required level of the allowance for loan losses. Other data considered in this determination includes:

1.

Vintage analysis generated from the credit scoring system that provides a history of credit losses by credit score strata and loss projections for the remaining portfolio based on that history;



2.

Overall historical loss trends (one year and three years); and



3.

Other information including underwriting standards, economic trends and unusual events such as hurricanes.

    Loan loss ratios applied and credit risk categories, are updated on an annual basis and are applied in the context of accounting principles generally accepted in the United States ("GAAP") and the Joint Interagency Guidance on the importance of depository institutions having prudent, conservative, but not excessive loan loss allowances that fall within an acceptable range of estimated losses. While management uses available information in estimating possible loan losses, future changes to the allowance may be necessary based on factors beyond the Group's control, such as factors affecting general economic conditions in Puerto Rico.

    Net credit losses for the first quarter of fiscal 2001, totaled $1.3 million (1.13% of average loans), a decrease of 37.41% when compared to $2.0 million (1.38% of average loans) for the same period of fiscal 2000. The lower level of net credit losses experienced was primarily associated to a reduction in consumer loans and financing leases net credit losses as a result of the sale of both portfolios, as previously discussed. Tables 5 through 7 set forth an analysis of activity in the allowance for loan losses and present selected loan loss statistics.

    The Group's non-performing assets include non-performing loans, foreclosed real estate owned and other repossessed assets (see Table 8). At September 30, 2000, the Group's asset quality improved as non-performing assets totaled $17.3 million (0.99% of total assets) versus $18.7 million (1.09% of

31

total assets) at the same date of fiscal 2000. The decrease was principally due to a lower level of non-performing loans; mainly non-performing consumer loans and financing leases.

    At September 30, 2000, the allowance for loan losses to non-performing loans coverage ratio was 41.98%. Excluding the lesser-risk real estate loans, the ratio is much higher, 96.47%. Detailed information concerning each of the items that comprise non-performing assets follows:

•

REAL ESTATE LOANS—are placed on a non-accrual basis when they become 90 days or more past due, except for well-secured residential loans, and are charged-off based on the specific evaluation of the collateral underlying the loan. At September 30, 2000, the Group's non-performing real estate loans totaled $9.4 million (56.5% of the Group's non-performing loans). Non-performing loans in this category are primarily residential mortgage loans. Based on the value of the underlying collateral and the loan-to-value ratios, management considers that no significant losses will be incurred on this portfolio.



•

COMMERCIAL BUSINESS LOANS—are placed on non-accrual basis when they become 90 days or more past due and are charged-off based on the specific evaluation of the collateral underlying the loan. At September 30, 2000, the Group's non-performing commercial business loans amounted to $1.2 million (7.3% of the Group's non-performing loans). Of the total balance, $835,000 (8 loans) is guaranteed by real estate.



•

FINANCE LEASES—are placed on non-accrual status when they become 90 days past due unless well secured by its collateral. At September 30, 2000, the Group's non-performing auto and equipment leases portfolio amounted to $5.1 million (30.9% of the Group's total non-performing loans). The underlying collateral secures these financing leases.



•

CONSUMER LOANS—are placed on non-accrual status when they become 90 days past due and charged-off when payments are delinquent 120 days. At September 30, 2000, the Group's non-performing consumer loans amounted to $889,000 (5.4% of the Group's total non-performing loans).



•

FORECLOSED REAL ESTATE—is initially recorded at the lower of the related loan balance or fair value less disposal cost at the date of foreclosure, any excess of the loan balance over the estimated fair market value of the property is charged against the allowance for loan losses. Subsequently, any excess of the carrying value over the estimated fair market value less disposition cost is charged to operations. Management is actively seeking prospective buyers for these foreclosed real estate properties. At September 30, 2000, foreclosed real estate balance was $535,000.



•

OTHER REPOSSESSED ASSETS—are initially recorded at estimated net realizable value. At the time of disposition, any additional losses incurred are charged against the allowance for loan losses. At September 30, 2000, the inventory of repossessed automobiles consisted of 24 units amounting to $171,000 ($7,125 average cost per unit).

YEAR 2000 READINESS DISCLOSURE

    The millennium date change did not cause any critical problems to the Group's computers and management information systems, which already had been tested and fully certified as being Y2K compliant under regulatory guidelines.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT

    The Group's interest rate risk and asset/liability management is the responsibility of the Asset and Liability Management Committee ("ALCO"), which reports to the Board of Directors and is composed

32

of members of the Group's senior management. The principal objective of ALCO is to enhance profitability while maintaining an appropriate level of interest rate and liquidity risks. ALCO is also involved in formulating economic projections and strategies used by the Group in its planning and budgeting process; and oversees the Group's sources, uses and pricing of funds.

    Interest rate risk can be defined as the exposure of the Group's operating results or financial position to adverse movements in market interest rates that mainly occurs when assets and liabilities reprice at different times and at different rates. This difference is commonly referred to as a "maturity mismatch" or "gap". The Group employs various techniques to assess the degree of interest rate risk.

    The Group is liability sensitive due to its fixed rate and medium to long-term asset composition being funded with shorter-term repricing liabilities. As a result, the Group uses interest rate swaps and caps as a mechanism to offset said mismatch and control exposures of interest rate risk. Under the swaps, the Group pays a fixed annual cost and receives a floating ninety-day payment based on LIBOR. Floating rate payments received from the swap counterpart correspond to the floating rate payments made on the borrowings or notes thus resulting in a net fixed rate cost to the Group. Interest rate caps provide protection against increases in interest rates above cap rates.

LIQUIDITY RISK MANAGEMENT

    Liquidity refers to the level of cash, eligible investments easily converted into cash and lines of credit available to meet unanticipated requirements. The objective of the Group's liquidity management is to meet operating expenses and ensure sufficient cash flow to fund the origination and acquisition of assets, the repayment of deposit withdrawals and the maturities of borrowings. Other objectives pursued in the Group's liquidity management are the diversification of funding sources and the control of interest rate risk. Management tries to diversify the sources of financing used by the Group to avoid undue reliance on any particular source.

    At September 30, 2000, the Group's liquidity was deemed appropriate. At such date the Group's liquid assets amounted to $1.305 billion, this includes $63 million available from unused lines of credit with other financial institutions and $175 million of borrowing potential with the FHLB. The Group's liquidity position is reviewed and monitored by the ALCO Committee on a regular basis. Management believes that the Group will continue to maintain adequate liquidity levels in the future.

    The Group's principal sources of funds are net deposit inflows, loan repayments, mortgage-backed and investment securities principal and interest payments, reverse repurchase agreements, FHLB advances and other borrowings. The Group has obtained long-term funding through the issuance of notes and long-term repurchase agreements. The Group's principal uses of funds are the origination and purchase of loans, the purchase of mortgage-backed and investment securities, the repayment of maturing deposits and borrowings.

33

PART—2

ITEM 1.  LEGAL PROCEEDINGS

    On August 11, 2000, the Group filed a lawsuit in the United States District Court for the District of Puerto Rico against Federal Insurance Company, Inc., a stock insurance corporation organized under the laws of the state of Indiana, seeking payment of its $9.5 million insurance claim and the payment of consequential damages resulting from the denial of the claim.

    In addition, the Group and its subsidiaries are defendants in a number of legal claims under various theories of damages arising out of, and incidental to its business. The Group is vigorously contesting those claims. Based upon a review with legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group's financial position or the result of operations.

ITEM 2.  CHANGES IN SECURITIES—NONE

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES—NONE

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS—NONE

ITEM 5.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

A—FINANCIAL STATEMENTS SCHEDULES

    No schedules are presented because the information is not applicable or is included in the Consolidated Financial Statements or in the notes thereto described in 6(c) below.

B—REPORTS ON FORM 8-K

    During the first quarter of fiscal 2001 three reports on Form 8-K (the "Reports") related to fiscal 2000 were filed with Securities and Exchange Commission and are incorporated herein by reference.

1.

September 9, 2000—The Group filed a Form 8-K to disclose the fact that on August 29, 2000, the Board of Directors of the Group amended Section 2, Article I, of the By-laws of the Group to provide that the annual meeting of shareholders may be held after 120 days after the end of the Group's fiscal year in the event of extraordinary or special circumstances out of the control of the Group. A copy of the By-laws, as amended, was included as an exhibit to this Form 8-K.



2.

August 24, 2000—The Group filed a Form 8-K to disclose the fact that on August 22, 2000, the Group reported that the release of its financial results for the fiscal year ended June 30, 2000 would be delayed until the Group determines the appropriate accounting treatment for a previously disclosed loss resulting from dishonest and fraudulent acts and omissions by a group of former employees of the Group. The Group further reported that Federal Insurance Company, Inc., a stock insurance corporation organized under the laws of the State of Indiana, has denied the Group's claim for recovery of the losses resulting from the former employees' conduct, and that the Group has filed a lawsuit in the United States District Court for the District of Puerto Rico against Federal Insurance Group seeking payment of its $9.5 million insurance claim and the payment of consequential damages resulting from the denial of the claim. A copy of the press release was attached as an exhibit to this Form 8-K.



3.

July 27, 2000—The Group filed a Form 8-K to disclose the fact that on July 14, 2000, the Bank finalized the sale of its unsecured personal loan portfolio to Banco Popular de Puerto

34

Rico, a Puerto Rico banking corporation, at a price of $99,043,101 in cash. The unsecured personal loan portfolio was sold at a premium based on a formula that equals 100.75% of the principal outstanding balance of the loans, including the total amount of accrued interest and late charges receivable there under. On July 14, 2000, the Bank also finalized the sale of its portfolio of finance leases on vehicles and equipment to Popular Leasing & Rental, Inc., a Puerto Rico corporation, at a price of $68,620,896 in cash. The lease portfolio was sold at a discount based on a formula that equals 97.72% of the outstanding balance of the leases.

C—EXHIBITS

    Exhibits filed as part of this Form 10-Q

27.0 Financial Data Schedule E-1

SIGNATURES

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

ORIENTAL FINANCIAL GROUP INC. (REGISTRANT)
By:	/s/ JOSE E. FERNANDEZJose E. Fernandez Chairman of the Board, President and Chief Executive Officer Dated: November 13, 2000
By:	/s/ RAFAEL VALLADARESRafael Valladares Senior Vice President—Principal Financial Officer Dated: November 13, 2000

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QuickLinks

TABLE OF CONTENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes to Unaudited Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Table of Contents
SELECTED FINANCIAL DATA THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999 (IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)
SELECTED FINANCIAL DATA THREE–MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
SELECTED FINANCIAL DATA THREE–MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
SELECTED FINANCIAL DATA AS OF SEPTEMBER 30, 2000 and 1999 and JUNE 30, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2000

PART—2
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES— NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES— NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS— NONE
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES