OFG Bancorp 10Q/A 2000 Q4 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 DECEMBER 31, 2000

COMMISSION FILE NO. 001-12647

ORIENTAL FINANCIAL GROUP INC.

INCORPORATED IN THE COMMONWEALTH OF PUERTO RICO

IRS EMPLOYER IDENTIFICATION NO. 66-0538893

PRINCIPAL EXECUTIVE OFFICES:

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

NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, AS OF THE LAST PRACTICABLE DATE:

13,808,252 COMMON SHARES ($1.00 PAR VALUE PER SHARE) OUTSTANDING AS OF DECEMBER 31, 2000

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 December 31, 2000 (unaudited) and June 30, 2000	1
	Unaudited consolidated statements of income for the quarter and six-month periods ended December 31, 2000 and 1999	2
	Unaudited consolidated statements of stockholders' equity and comprehensive income for the six-month periods ended December 31, 2000 and 1999	3
	Unaudited consolidated statements of cash flows for the six-month periods ended December 31, 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	14-36
PART - 2

Item - 1	Legal Proceedings	36
Item - 2	Change in securities	36
Item - 3	Defaults upon senior securities	36
Item - 4	Submissions of Matters to a Vote of Security Holders	36
Item - 5	Other Information	36
Item - 6	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	36
	Signatures	37
Exhibit E-1	Financial Data Schedule	E-1

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2000 (UNAUDITED) AND JUNE 30, 2000
(IN THOUSANDS)

			December 31, 2000			June 30, 2000
ASSETS
Cash and due from banks			$	5,422		$	10,322

Investments:
	Money market investments			54,480			23,511
	Trading securities, at fair value			27,488			64,443
	Investment securities available-for-sale, at fair value			1,139,304			282,900
	Investment securities held-to-maturity, at amortized cost (fair value June 30, 2000—$770,851)			—			797,484
	Federal Home Loan Bank (FHLB) stock, at cost			11,146			11,146
	Equity options investments			9,113			—

		Total investments		1,241,531			1,179,484

Loans:
	Loans held-for-sale, at lower of cost or market			45,786			180,788
	Loans receivable, net of allowance for loan losses of $2,998			404,845			420,090

		Total loans, net		450,631			600,878

	Accrued interest receivable			15,995			13,485
	Foreclosed real estate, net			1,079			398
	Premises and equipment, net			21,436			21,706
	Other assets, net			21,618			23,961

Total assets			$	1,757,712		$	1,850,234

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
	Savings and demand		$	124,400		$	130,919
	Time and IRA accounts			550,054			587,931

				674,454			718,850
	Accrued interest			2,645			4,831

		Total deposits		677,099			723,681

Borrowings and other liabilities:
	Securities sold under agreements to repurchase			826,299			816,493
	Advances and borrowings from FHLB			20,000			70,000
	Term notes and other borrowings			80,000			86,500

		Total borrowings		926,299			972,993

Accrued expenses and other liabilities				44,209			35,691

Total liabilities				1,647,607			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 13,808,252 (June 30, 2000—13,805,135)			13,808			13,805
	Additional paid-in capital			23,802			23,786
	Legal surplus			10,684			10,578
	Retained earnings			75,563			79,809
	Treasury stock, at cost, 1,271,799 shares (June 30, 2000—1,107,799)			(29,180	)		(27,116	)
	Accumulated other comprehensive loss, net of deferred taxes of $344 (June 30, 2000—$1,413)			(18,072	)		(16,493	)

		Total stockholders' equity		110,105			117,869

Total liabilities and stockholders' equity			$	1,757,712		$	1,850,234

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

CONSOLIDATED STATEMENTS OF INCOME
QUARTER AND SIX-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)

			2nd Quarter						SIX-MONTH PERIOD
						As Restated						As Restated
			2000			1999			2000			1999
Interest income:
	Loans and leases		$	9,482		$	14,195		$	18,629		$	28,100
	Mortgage-backed securities			15,375			13,254			30,481			25,332
	Investment securities			3,181			3,940			6,821			7,640
	Money market investments			523			66			2,998			121

		Total interest income		28,561			31,455			58,929			61,193

Interest expense:
	Deposits			9,155			7,606			18,765			14,840
	Securities sold under agreements to repurchase			11,794			9,811			24,589			17,940
	Other borrowed funds			1,525			2,329			3,004			4,787

		Total interest expense		22,474			19,746			46,358			37,567

Net interest income				6,087			11,709			12,571			23,626
Provision for credit losses				500			1,500			1,900			3,250

Net credit income				5,587			10,209			10,671			20,376

Non-interest income:
	Trust, money management and brokerage fees			2,676			2,779			5,503			5,406
	Mortgage banking activities			2,353			1,419			3,904			3,377
	Banking service revenues			1,038			1,398			2,054			2,324
	Net gain (loss) on sale of securities available-for-sale			510			60			(3,195	)		659
	Derivatives activities income (loss)			(721	)		—			(2,341	)		—
	Trading net activity			105			198			92			65
	Leasing revenues			13			367			63			635

		Total non-interest income		5,974			6,221			6,080			12,466

Non-interest expenses:
	Compensation and benefits			3,423			3,702			6,798			7,523
	Occupancy and equipment, net			1,778			1,568			3,496			3,060
	Advertising and business promotion			1,003			549			1,784			1,272
	Professional and service fees			1,083			1,129			1,641			1,794
	Communications			407			374			827			778
	Taxes other than on income			488			477			976			955
	Insurance, including deposit insurance			132			138			227			272
	Printing, postage, stationery and supplies			141			218			304			415
	Other			657			642			1,245			1,267

		Total non-interest expense		9,112			8,797			17,298			17,336

Income (loss) before income taxes				2,449			7,633			(547	)		15,506
Income taxes (credit)				(269	)		298			(1,549	)		929

Net income before cumulative effect of change in accounting principle, net of taxes				2,718			7,335			1,002			14,577
Cumulative effect of change in accounting principle, net of taxes				—			—			(164	)		—

Net income				2,718			7,335			838			14,577
Less: Dividends on preferred stock				(597	)		(597	)		(1,193	)		(1,193	)

Net income available to common shareholders			$	2,121		$	6,738		$	(355	)	$	13,384

Income (loss) per common share:
	Basic before cumulative effect of change in accounting principles		$	0.17		$	0.53		$	(0.02	)	$	1.05

	Diluted before cumulative effect of change in accounting principles		$	0.17		$	0.51		$	(0.01	)	$	1.01

	Basic after cumulative effect of change in accounting principles		$	0.17		$	0.53		$	(0.03	)	$	1.05

	Diluted after cumulative effect of change in accounting principles		$	0.17		$	0.51		$	(0.03	)	$	1.01

	Average common shares outstanding			12,551			12,777			12,600			12,806
	Average potential common share options			148			443			153			499

				12,699			13,220			12,753			13,305

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

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME
SIX-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
(IN THOUSANDS)

			2nd Quarter						SIX-MONTH PERIOD
			2000			As Restated 1999			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									13,805			13,739
	Stock options exercised									3			25

		Balance at end of year								13,808			13,764

Additional paid-in capital:
	Balance at beginning of year									23,786			23,313
	Stock options exercised									16			114

		Balance at end of year								23,802			23,427

Legal surplus:
	Balance at beginning of year									10,578			8,673
	Transfer from retained earnings									106			804

		Balance at end of year								10,684			9,477

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									838			14,577
	Dividends declared on common stock									(3,785	)		(3,834	)
	Dividends declared on preferred stock									(1,193	)		(1,193	)
	Transfer to legal surplus									(106	)		(804	)

		Balance at end of year								75,563			80,932

Treasury stock:
	Balance at beginning of year									(27,116	)		(23,401	)
	Treasury stock purchased									(2,064	)		(1,900	)

		Balance at end of year								(29,180	)		(25,301	)

Accumulated other comprehensive loss, net of deferred taxes:
	Balance at beginning of year									(16,493	)		(11,712	)
	Other comprehensive gain (loss) for the period ended, net of taxes									(1,579	)		(8,434	)

		Balance at end of year								(18,072	)		(20,146	)

Total stockholders' equity									$	110,105		$	115,653
COMPREHENSIVE INCOME:
Net income			$	2,718		$	7,335		$	838		$	14,577
Other comprehensive income (loss), net of tax:
	Unrealized loss on securities arising during the period			18,045			(8,387	)		40,196			(8,986	)
	Realized loss included in net income			510			60			(3,195	)		659
	Unrealized gain (loss) on derivatives designated as cash flows hedges arising during the period			(10,190	)		—			(10,190	)		—
	Amount reclassified into earnings during the period			94			—			188			—
	Income tax (expense) related to items of other comprehensive income			(2,442	)		—			(1,411	)		(107	)

				6,017			(8,327	)		25,588			(8,434	)
	Cummulative effect of change in accounting principle, net of taxes			—						(27,167	)		—

	Other Comprehensive gain (loss) for the period			6,017			(8,327	)		(1,579	)		(8,434	)

Comprehensive Income (loss)			$	8,735		$	(992	)	$	(741	)	$	6,143

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
(IN THOUSANDS)

					2000			As Restated 1999
Cash flows from operating activities:
	Net income				$	838		$	14,577

	Adjustments to reconcile net income to net cash provided by operating activities:
		Amortization of deferred loan origination fees and costs				(283	)		186
		Amortization of premiums and accretion of discounts on investment securities				266			(91	)
		Depreciation and amortization of premises and equipment				2,160			1,668
		Provision for loan losses				1,900			3,250
		Loss (gain) on sale of securities available-for-sale				3,195			(659	)
		Derivatives activities				48,123			—
		Mortgage banking activities				(3,904	)		(3,377	)
		Proceeds from sale of loans held-for-sale				37,556			27,795
		Net increase (decrease) in:
			Accrued expenses and other liabilities			(48,074	)		(18,950	)
			Accrued interest deposits			(2,186	)		560
		Net (increase) decrease in:
			Trading securities			36,955			(3,567	)
			Accrued interest receivable			(2,510	)		(2,179	)
			Deferred taxes			(298	)		—
			Other assets			1,960			(1,579	)

				Total adjustments		74,860			3,057

		Net cash provided by operating activities				75,698			17,634

Cash flows from investing activities:
	Purchases of investment securities available-for-sale					(290,875	)		(124,100	)
		Maturities and redemptions of investment securities available-for-sale				17,564			38,329
		Maturities and redemptions of investment securities held-to-maturity				30,303			40,741
		Proceeds from sales of investment securities available-for-sale				249,759			34,383
		Proceeds from sale of consumer loans and leases portfolios				167,900			—
		Loans production (origination and purchases), net				(112,703	)		(66,291	)
		Capital expenditures				(1,890	)		(2,357	)

			Net cash provided (used) by investing activities			60,058			(169,995	)

Cash flows from financing activities:
	Net increase (decrease) in:
		Demand, saving and time (including IRA accounts) deposits				(55,946	)		(11,478	)
		Securities sold under agreements to repurchase				9,806			143,123
		Advances and borrowings from FHLB				(50,000	)		12,800
	Repayments of term notes and other borrowings					(6,500	)		(10,000	)
	Proceeds from exercise of stock options					19			139
	Treasury stock acquired					(2,064	)		(1,900	)
	Dividends paid					(5,002	)		(5,047	)

		Net cash (used) provided by financing activities				(109,687	)		127,637

Increase (decrease) in cash and cash equivalents						26,069			(24,724	)
Cash and cash equivalents at beginning of year						33,833			36,051

Cash and cash equivalents at end of year					$	59,902		$	11,327

Cash and cash equivalents include:
	Cash and due from banks				$	5,422		$	9,349
	Interest Bearing Receivable					9,593		$	—
	Money market investments					44,887			1,978

					$	59,902		$	11,327

Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
	Interest paid				$	49,150		$	36,920

	Income taxes paid				$	—		$	1,050

	Investment securities available-for-sale transferred to held-to-maturity				$	—		$	263,793

	Investment securities held-to-maturity transferred to available-for-sale				$	766,848		$	—

	Real estate loans securitized into mortgage-backed securities				$	59,780		$	47,600

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

ORIENTAL FINANCIAL GROUP INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accounting and reporting policies of 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 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, offers mortgage, commercial and consumer lending, 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 December 31, 2000 and June 30, 2000, and the results of operations and cash flows for the second quarter and six-month period ended December 31, 2000 and 1999.

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 has no readily determinable fair value and can only be sold 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. The cost of securities is determined using the specific identification method.

Money Market Investments

At December 31, 2000 and June 30, 2000 the Group's money market investments were comprised of:

	(In thousands)
	December 31,		June 30,
Securities purchased under agreements to resell	$	—	$	—
Time deposits with other banks		13,887		1,350
Money market accounts and other short-term investments		40,593		22,161

	$	54,480	$	23,511

Trading Securities

A summary of trading securities owned by the Group at December 31, 2000 and June 30, 2000 is as follows:

	(In thousands)
	December 31,		June 30,
U.S. Treasury securities	$	2,555	$	42,734
P.R. Government securities		11,651		13,513
Mortgage-backed securities		11,284		6,058
CMO residuals, interest only		1,996		2,138

	$	27,486	$	64,443

At December 31, 2000, the Group's trading portfolio weighted average yield was 7.88% (June 30, 2000—7.49%).

Investment securities

With the adoption of Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities", management reclassified the portfolio of investments Held-to-Maturity to the Available-for-Sale investment category.

The amortized cost, gross unrealized gains and losses, estimated fair value, and weighted average yield of the securities owned by the Group at December 31, 2000 and June 30, 2000, were as follows:

	December 31, 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	$	24,385	$	73	$	150	$	24,308	6.44	%
US Government agencies securities		95,495		389		317		95,567	6.83	%
Other debt securities		9,285		—		—		9,285	8.33	%
PR Government securities		4,466		25		91		4,400	7.52	%
CMOs		125,385		8		2,883		122,510	6.72	%
FNMA and FHLMC certificates		531,306		3,894		1,683		533,517	6.89	%
GNMA certificates		348,113		2,708		1,102		349,719	7.21	%

		1,138,435		7,097		6,226		1,139,306	6.97	%
Equity options		9,113		—		—		9,113	0.00	%
FHLB stock		11,146		—		—		11,146	7.55	%
	$	1,158,694	$	7,097	$	6,226	$	1,159,565	6.98	%

	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	6.68	%
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 December 31, 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	$	71,055	$	70,832	$	—	$	—	$	71,055	$	70,832
After 1 year to 5 years		4,420		4,497		—		—		4,420		4,497
After 5 years to 10 years		119,888		120,103		—		—		119,888		120,103
Due after 10 years		943,072		943,874		—		—		943,072		943,874
Equity options		—		—		—		—		9,113		9,113
FHLB stock		—		—		—		—		11,146		11,146

	$	1,138,435	$	1,139,306	$	—	$	—	$	1,158,694	$	1,159,565

Proceeds from the sale of investment securities available-for-sale during the first six months of fiscal 2001 totaled $249,759,000 (2000—$34,383,000). Gross realized gains and losses on those sales were $547,143 and $3,732,000 respectively (2000—$690,000 and $31,000).

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. The composition of the Group's loan portfolio at December 31, 2000 and June 30, 2000 was as follows:

		(In thousands)
		December 31,			June 30,
Loans secured by real estate:
	Residential	$	299,180		$	331,150
	Non-residential real estate loans		4,584			4,974
	Home equity loans and personal loans collateralized by real estate		63,395			40,306

			367,159			376,430
	Less: net deferred loan fees		(2,825	)		(2,103	)

			364,334			374,327

Other loans:
	Commercial		16,735			24,117
	Personal consumer loans and credit lines		22,909			19,698
	Financing leases, net of unearned interest		3,865			8,785

			43,509			52,600

Loans receivable			407,843			426,927
Allowance for loan losses			(2,998	)		(6,837	)

Loans receivable, net			404,845			420,090
Loans held-for-sale			45,786			180,788

Total loans, net		$	450,631		$	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 5 of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the changes in the allowance for loan losses for the second quarter and six-month period ended December 31, 2000 and 1999.

The Group evaluates all loans, some individually and other as homogeneous groups, for purposes of determining impairment. At December 31, 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 December 31 consists of:

	(In thousands)
	2000			1999
Unrealized loss on derivatives from transition adjustment, net of amount reclassified into earnings of $188,000	($	346	)	$	0
Unrealized loss on derivatives designated as cash flows hedges	($	10,190	)
Unrealized loss on securities		(7,536	)		(20,146	)

	($	18,072	)	($	20,146	)

NOTE 5—PLEDGED ASSETS:

At December 31, 2000, residential mortgage loans and investment securities amounting to $252,666,000 (June 30, 2000—$254,312,000), and $975,877,000 (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 primarily as an interest rate risk hedging mechanism. Under the swaps, the Group pays a fixed annual cost and receives a floating 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. 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 December 31, 2000 and June 30, 2000 are set forth in the table below:

		(Dollars in thousands)
		December 31,			June 30,
Swaps:
	Pay fixed swaps notional amount	$	250,000		$	100,000
	Weighted average pay rate—fixed		7.02	%		7.07	%
	Weighted average receive rate—floating		6.65	%		6.76	%
	Maturity in months		17-118			24
	Floating rate as a percent of LIBOR		100	%		100	%
Caps:
	Cap agreements notional amount	$	250,000		$	250,000
	Cap rate		7.00	%		7.00	%
	Maturity in months		19			23

The swap agreements were signed to convert a roll-over program of short-term borrowings into fixed rate liabilities for longer periods 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 percentage of the average increase of the

month-end value of the corresponding stock index. If such index decreases, the depositor receives the principal without any interest. The Group uses interest rate swap agreements with major money center banks to manage its exposure to the stock market. Under the terms of the agreements, the Group will receive the average increase in the month-end value of the corresponding index in exchange for a semiannual fixed interest cost. At December 31, 2000, the notional amount of these agreements totaled $147,975,000 (June 30, 2000—$132,975,000) at a weighted average rate of 5.85% (June 30, 2000 - 5.84%).

The Group offers its customers certificates of deposit with high interest rates and therefore uses interest rate swap agreements to lower the cost of these deposits. Under the terms of the agreements the Group pays a floating rate (90 days LIBOR less a spread) and receives a fixed payment (the cost of the certificates of deposit). These swaps mature in seven years with an option to cancel after the third year. This option is at the counterparty's call. The certificates of deposit are issued with this same option, the Group has the right to call and consequently cancel the certificates of deposit. At December 31, 2000, the notional amount of these agreements totaled $30,000,000 (June 30, 2000—$40,000,000) at a weighted average rate of 6.14% (June 30, 2000- 5.82%).

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 the value of derivatives must be adjusted to fair value through income or other comprehensive income. If derivatives meet the criteria and qualify as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either charged to earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value 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. However, during the quarter ended December 31, 2000, the Group designated certain interest rate swaps as hedging of its short-term borrowing roll-over program.

On May 1, 2001, the Group announced that it revised the statement of stockholders' equity and comprehensive income for the quarter and six-month period ended December 31, 2000, to reflect revisions made to the application of Statement No. 133. The Group explained that certain differences were recently found 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 should have been reported in the statement of comprehensive income instead of the statement of income.

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 of $270,000 unrealized loss ($164,000 net of tax effect) charged to earnings and reflected in the Consolidated Statement of Income and $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 classified as 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, unrealized losses for $721,000 and $2.3 million ($440,000 and $1.4 million net of tax effect) were charged to earnings for the quarter and six months ended December 31, 2000, respectively, and reflected as "Derivatives Activities" in the Consolidated Statement of Income. An unrealized loss of $10.2 million was charged to other comprehensive income during the quarter ended December 31, 2000.

The effect of the revisions on the consolidated statements of stockholder's equity and comprehensive income for the six-month period ended December 31, 2000 is as follows (please note that net income changed to reflect revisions made to the statement of income for September 30, 2000):

(In thousands, except per share data)			As Reported			As Revised
Comprehensive Income:
Net loss			$	2,656		$	838

Other comprehensive loss, net of tax:
	Unrealized gain on securities arising during the period			13,563			40,196
	Realized loss on securities included in net income			(3,195	)		(3,195	)
	Unrealized loss on derivatives designated as cash flow hedges arising during period			(12,428	)		(10,190	)
	Amount reclassified into earnings during the period						188
	Income tax (expense) related to items of other comprehensive income			(1,337	)		(1,411	)

		Subtotal		(3,397	)		25,588
	Cumulative effect of change in accounting principle, net of taxes			0			(27,167	)

		Other comprehensive loss for the period		(3,397	)		(1,579	)

	Comprehensive loss		$	(741	)	$	(741	)

	Stockholders' equity (at end of period)		$	110,105		$	110,105

The fair value of derivatives was recognized as either asset or liability in the Consolidated Statement of Financial Condition as of December 31, 2000, as follows: $9.1 million "Investments", $36.9 million "Deposits" and $12.6 million "Accrued Expenses and Other Liabilities".

NOTE 7—SEGMENT REPORTING:

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 is 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 business segment is mortgage banking. It consists of Oriental Mortgage, whose principal activity is to originate and purchase mortgage loans and subsequently sell them in the secondary market.

Following are the results of operations and the selected financial information by operating segment for each of the second quarter and six-month period ended December 31:

		Unaudited-Six-month period ended December 31, 2000 (Dollars in thousands)
		Retail Banking			Financial Services		Mortgage Banking		Eliminations			Total
Fiscal 2001
Net interest income		$	12,440		$	131	$	—	$	—		$	12,571
Non-interest income (charges)			(2,691	)		5,581		3,904		(714	)		6,080
Non-interest expenses			12,291			3,162		2,559		(714	)		17,298
Provision for loan losses			1,900			—		—		—			1,900

	Income (loss) before taxes	$	(4,442	)	$	2,550	$	1,345	$	—		$	(547	)

Total assets		$	1,753,422		$	5,458	$	2,000	$	(3,168	)	$	1,757,712

Fiscal 2000
Net interest income			23,356		$	270	$	—	$	—		$	23,626
Non-interest income (charges)			3,977			5,361		3,377		(249	)		12,466
Non-interest expenses			12,251			2,905		2,429		(249	)		17,336
Provision for loan losses			3,250			—		—		—			3,250

Income before taxes		$	11,832		$	2,726	$	948	$	—		$	15,506

Total assets		$	1,706,703		$	10,945	$	2,000	$	(2,148	)	$	1,717,500

	Unaudited-Second quarter ended results December 31, 2000 (Dollars in thousands)
	Retail Banking		Financial Services		Mortgage Banking		Eliminations			Total
Fiscal 2001
Net interest income	$	6,021	$	66	$	—	$	—		$	6,087
Non-interest income (charges)		1,226		2,748		2,353		(353	)		5,974
Non-interest expenses		6,534		1,615		1,316		(353	)		9,112
Provision for loan losses		500		—		—		—			500

Income (loss) before taxes	$	213	$	1,199	$	1,037	$	—		$	2,449

Total assets	$	1,753,422	$	5,458	$	2,000	$	(3,168	)	$	1,757,712
Fiscal 2000
Net interest income		11,562	$	147	$	—	$	—		$	11,709
Non-interest income (charges)		2,160		2,746		1,419		(104	)		6,221
Non-interest expenses		6,318		1,372		1,211		(104	)		8,797
Provision for loan losses		1,500		—		—		—			1,500

Income before taxes	$	5,904	$	1,521	$	208	$	—		$	7,633

Total assets	$	1,706,703	$	10,945	$	2,000	$	(2,148	)	$	1,717,500

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER AND SIX-MONTH PERIOD ENDED DECEMBER 31, 2000

Table of Contents

Description			Page No.
Selected Financial Data:
		Earnings, Dividends Declared and Per Share Information	15
		Period End Balances	16
		Selected Financial Ratios (in percent) and Other Information	16
	Table 1	Fiscal Year-To-Date Analysis of Interest Income and Changes due to Volume / Rate	17
	Table 1A	Quarterly Analysis of Interest Income and Changes due to Volume / Rate	18
	Table 2	Non-Interest Income Summary and Composition	20
	Table 3	Non-Interest Expenses Summary and Composition	20
	Table 4	Non-0perating Activities	21
	Table 5	Allowance for Loan Losses Summary	22
	Table 6	Net Credit Losses Statistics	22
	Table 7	Loan Loss Reserve Breakdowns	23
	Table 8	Non-Performing Assets	23
	Table 9	Non-Performing Loans	23
	Table 10	Bank Assets Summary and Composition	24
	Table 11	Liabilities Summary and Composition	25
	Table 12	Capital, Dividends and Stock Data	25
	Table 13	Financial Assets Summary	26
Overview of Financial Performance			27

SELECTED FINANCIAL DATA
QUARTER AND SIX-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)

		Quarterly Results						Year-to-Date Results
		As Restated						As Restated
		2000		1999		Variance %		2000		1999		Variance %
EARNINGS, PER SHARE AND DIVIDENDS DATA:
Interest income		$	28,561	$	31,455	-9.2	%	$	58,929	$	61,193	-3.7	%
Interest expense			22,474		19,746	13.8	%		46,358		37,567	23.4	%

	Net interest income		6,087		11,709	-48.0	%		12,571		23,626	-46.8	%
Provision for loan losses			500		1,500	-66.7	%		1,900		3,250	-41.5	%

	Net credit income		5,587		10,209	-45.3	%		10,671		20,376	-47.6	%
Recurrent non-interest income			6,067		5,596	8.4	%		11,461		11,107	3.2	%

	Net core revenues		11,654		15,805	-26.3	%		22,132		31,483	-29.7	%
Recurrent non-interest expenses			8,689		8,342	4.2	%		16,822		17,091	-1.6	%

	Core operating activities		2,965		7,463	-60.3	%		5,310		14,392	-63.1	%

Non operating non-interest income (charges)			-93		625	-114.9	%		-5,380		1,359	-495.9	%
Non operating non-interest expenses			-423		-455	-7.0	%		-477		-245	94.7	%

Total operating activities			-516		170	-403.5	%		-5,857		1,114	-625.8	%

	Income before taxes		2,449		7,633	-67.9	%		-547		15,506	-103.5	%
Income taxes (credit)			-269		298	-190.3	%		-1,549		929	-266.7	%

	Net income before cumulative effect of change in accounting principle		2,718		7,335	-62.9	%		1,002		14,577	-93.1	%
Cumulative effect of change in accounting principle, net of taxes			—		—	0.0	%		-164		—	-100.0	%

	Net income		2,718		7,335	-62.9	%		838		14,577	-94.3	%
Less: dividends on preferred stock			-597		-597	0.0	%		-1,193		-1,193	0.0	%

	Net income available to common shareholders	$	2,121	$	6,738	-68.5	%	$	-355	$	13,384	-102.7	%

Earnings (loss) per share:
	Basic before cumulative effect of change in accounting principles	$	0.17	$	0.53	-67.9	%	$	-0.02	$	1.05	-101.9	%

	Basic after cumulative effect of change in accounting principles	$	0.17	$	0.53	-67.9	%	$	-0.03	$	1.05	-102.9	%

	Diluted before cumulative effect of change in accounting principles	$	0.17	$	0.51	-66.7	%	$	-0.01	$	1.01	-101.0	%

	Diluted after cumulative effect of change in accounting principles	$	0.17	$	0.51	-66.7	%	$	-0.03	$	1.01	-103.0	%

Average shares and potential shares			12,699		13,219	-3.9	%		12,753		13,305	-4.1	%

Book value		$	6.11	$	6.43	-5.0	%	$	6.11	$	6.43	-5.0	%

Market price at end of period		$	13.31	$	22.75	-41.5	%	$	13.31	$	22.75	-41.5	%

Dividends declared per share		$	0.15	$	0.15	0.0	%	$	0.30	$	0.30	0.0	%

Dividends declared		$	3,785	$	3,833	-1.3	%	$	3,785	$	3,833	-1.3	%

		Quarterly Results					Year-to-Date Results
		As Restated					As Restated
		2000		1999		Variance %	2000			1999			Variance %
PERIOD END BALANCES (as of December 31,)
Total financial assets
	Trust assets managed						$	1,405,775		$	1,394,800		0.8	%
	Broker-dealer assets gathered							925,377			864,700		7.0	%

	Assets managed							2,331,152			2,259,500		3.2	%
Group total assets								1,757,712			1,702,652		3.2	%

							$	4,088,864		$	3,962,152		3.2	%

Interest-earning assets
	Investments						$	1,232,418		$	1,069,823		15.2	%
	Equity Options Investments							9,113			—		100.0	%
	Loans and leases (including held-for-sale)							450,631			561,777		-19.8	%

							$	1,692,162		$	1,631,600		3.7	%

Interest-bearing liabilities
	Deposits						$	677,099		$	644,375		5.1	%
	Repurchase agreements							826,299			739,349		11.8	%
	Borrowings							100,000			177,700		-43.7	%

							$	1,603,398		$	1,561,424		2.7	%

Stockholders' equity
	Preferred equity						$	33,500		$	33,498		0.0	%
	Common equity							76,605			82,155		-6.8	%

							$	110,105		$	115,653		-4.8	%

FINANCIAL RATIOS:
Capital ratios
	Leverage capital							7.56	%		7.34	%
	Total risk-based capital							25.27	%		26.95	%
	Tier 1 risk-based capital							24.69	%		25.70	%
Financial ratios (in percent)
	Return on average assets (ROA)	0.64	%	1.83	%			0.10	%		1.78	%

	Return on average common equity (ROE)	11.80	%	30.80	%			-0.89	%		29.86	%

	Efficiency ratio	74.89	%	49.78	%			71.81	%		49.02	%

	Expense ratio	0.78	%	0.70	%			0.71	%		0.71	%

	Interest rate margin	1.60	%	2.93	%			1.58	%		3.03	%

	Number of banking offices	19		19				19			19

SELECTED FINANCIAL DATA
SIX-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
(Dollars in thousands)

TABLE 1—FISCAL YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:

			Interest						Average rate						Average balance
			2000		1999		Variance in %		2000		1999		Variance in BP		2000			1999			Variance in %
A—TAX EQUIVALENT SPREAD
Interest-earning assets			$	58,929	$	61,193	-3.70	%	7.22	%	7.77	%	-0.55	%	$	1,630,428		$	1,570,723		3.80	%
Tax equivalent adjustment				17,000		16,804	1.17	%	2.09	%	2.14	%	-0.05	%		—			—		0.00	%

Interest-earning assets — tax equivalent				75,929		77,997	-2.65	%	9.31	%	9.91	%	-0.60	%		1,630,428			1,570,723		3.80	%
Interest-bearing liabilities				46,358		37,567	23.40	%	5.89	%	5.04	%	0.85	%		1,562,363			1,479,910		5.57	%

		Net interest income / spread	$	29,571	$	40,430	-26.86	%	3.42	%	4.87	%	-1.45	%	$	68,065		$	90,813		-25.05	%

B—NORMAL SPREAD
Interest-earning assets:
Investments:
	Investment securities		$	36,081	$	32,036	12.6	%	6.85	%	6.56	%	0.29	%	$	1,052,259		$	974,901		7.93	%
	Trading securities			1,228		936	31.2	%	7.98	%	8.36	%	-0.38	%		30,793			22,406		37.43	%
	Money market investments			2,991		121	2371.9	%	6.03	%	5.21	%	0.82	%		99,133			4,650		2031.89	%

				40,300		33,093	21.8	%	6.81	%	6.60	%	0.21	%		1,182,185			1,001,957		17.99	%

Loans:
	Real estate (1)			15,724		12,691	23.9	%	7.82	%	7.88	%	-0.06	%		402,153			322,260		24.79	%
	Consumer			1,411		8,491	-83.4	%	16.58	%	13.43	%	3.15	%		16,882			125,455		-86.54	%
	Financing leases			1,193		1,335	-10.6	%	10.76	%	13.28	%	-2.52	%		7,218			101,102		-92.86	%
	Commercial and auto loans			301		5,583	-94.6	%	8.27	%	10.95	%	-2.68	%		21,990			19,950		10.23	%

				18,629		28,100	-33.7	%	8.30	%	9.84	%	-1.54	%		448,243			568,767		-21.19	%

				58,929		61,193	-3.7	%	7.22	%	7.77	%	-0.55	%		1,630,428			1,570,724		3.80	%

Interest-bearing liabilities:
Deposits:
	Savings and demand			1,551		1,500	3.4	%	2.34	%	2.04	%	0.30	%		131,390			145,726		-9.84	%
	Time and IRA accounts			17,214		13,340	29.0	%	6.13	%	5.30	%	0.83	%		557,280			499,670		11.53	%

				18,765		14,840	26.4	%	5.41	%	4.56	%	0.85	%		688,670			645,396		6.71	%

Borrowings:
	Repurchase agreements			23,714		18,188	30.4	%	6.25	%	5.43	%	0.82	%		752,292			664,024		13.29	%
	FHLB funds, term notes and other borrowings			3,879		4,539	-14.5	%	6.34	%	5.28	%	1.06	%		121,400			170,489		-28.79	%

				27,593		22,727	21.4	%	6.26	%	5.40	%	0.86	%		873,692			834,513		4.69	%

				46,358		37,567	23.4	%	5.89	%	5.04	%	0.85	%		1,562,362			1,479,909		5.57	%

Net interest income / spread			$	12,571	$	23,626	-46.8	%	1.33	%	2.73	%	-1.40	%

Interest rate margin									1.58	%	3.03	%	-1.45	%

Excess of interest-earning assets over interest-bearing liabilities															$	68,066		$	90,815		-25.05	%

Interest-earning assets over interest-bearing liabilities ratio																104.36	%		106.14	%

Changes in net interest income due to:		Volume			Rate			Total
Interest Income:
	Loans (1)	$	(9,148	)	$	(323	)	$	(9,471	)
	Investments		5,766			1,441			7,207

			(3,382	)		1,118			(2,264	)

Interest Expense:
	Deposits		1,501			2,424		$	3,925
	Borrowings		1,017			3,849			4,866

			2,518			6,273			8,791

Net Interest Income		$	(5,900	)	$	(5,155	)	$	(11,055	)

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

SELECTED FINANCIAL DATA
THREE-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
(Dollars in thousands)

TABLE 1A—QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:

			Interest						Average rate						Average balance
			2000		1999		Variance in %		2000		1999		Variance in BP		2000		1999		Variance in %
A—TAX EQUIVALENT SPREAD
Interest-earning assets			$	28,561	$	31,455	-9.20	%	7.32	%	7.80	%	-0.48	%	$	1,558,906	$	1,608,701	-3.10	%
Tax equivalent adjustment				8,289		8,679	-4.49	%	2.13	%	2.16	%	-0.03	%		—		—	0.00	%

	Interest-earning assets—tax equivalent			36,850		40,134	-8.18	%	9.45	%	9.96	%	-0.51	%		1,558,906		1,608,701	-3.10	%
Interest-bearing liabilities				22,474		19,746	13.82	%	5.84	%	5.15	%	0.69	%	$	1,525,818	$	1,523,276	0.17	%

		Net interest income / spread	$	14,376	$	20,388	-29.49	%	3.61	%	4.81	%	-1.20	%	$	33,088	$	85,425	-61.27	%

B—NORMAL SPREAD
Interest-earning assets:
Investments:
	Investment securities		$	17,867	$	16,653	7.3	%	6.89	%	6.59	%	0.30	%	$	1,036,250	$	1,009,135	2.69	%
	Trading securities			695		541	28.5	%	8.09	%	8.45	%	-0.36	%		34,331		25,635	33.92	%
	Money market investments			517		66	683.3	%	6.19	%	5.83	%	0.36	%		33,377		4,550	633.56	%

				19,079		17,260	34.0	%	6.91	%	6.63	%	0.28	%		1,103,958		1,039,320	6.22	%

Loans:
	Real estate (1)			8,054		6,577	22.5	%	7.89	%	8.24	%	-0.35	%		408,226		319,393	27.81	%
	Consumer			740		4,275	-82.7	%	13.52	%	13.20	%	0.32	%		21,714		128,469	-83.10	%
	Financing leases			563		576	-2.3	%	11.44	%	10.81	%	0.63	%		5,492		100,371	-94.53	%
	Commercial and auto loans			125		2,767	-95.5	%	9.01	%	10.94	%	-1.93	%		19,516		21,148	-7.72	%

				9,482		14,195	-33.2	%	8.32	%	9.93	%	-1.61	%		454,948		569,381	-20.10	%

				28,561		31,455	-9.2	%	7.32	%	7.80	%	-0.48	%		1,558,906		1,608,701	-3.10	%

Interest-bearing liabilities:
Deposits:
	Savings and demand			765		736	3.9	%	2.32	%	2.00	%	0.32	%		130,838		146,257	-10.54	%
	Time and IRA accounts			8,390		6,870	22.1	%	6.17	%	5.42	%	0.75	%		539,662		503,051	7.28	%

				9,155		7,606	20.4	%	5.42	%	4.65	%	0.77	%		670,500		649,308	3.26	%

		Interest						Average rate						Average balance
		2000		1999		Variance in %		2000		1999		Variance in BP		2000			1999			Variance in %
Borrowings:
	Repurchase agreements		11,489		9,723	18.2	%	6.16	%	5.52	%	0.64	%		740,304			698,850		5.93	%
	FHLB funds, term notes and other borrowings		1,830		2,417	-24.3	%	6.36	%	5.52	%	0.84	%		115,014			175,118		-34.32	%

			13,319		12,140	9.7	%	6.18	%	5.52	%	0.66	%		855,318			873,968		-2.13	%

			22,474		19,746	13.8	%	5.84	%	5.15	%	0.69	%		1,525,818			1,523,276		0.17	%

Net interest income / spread		$	6,087	$	11,709	-48.0	%	1.48	%	2.65	%	-1.17	%

Interest rate margin								1.60	%	2.93	%	-1.33	%

Excess of interest-earning assets over interest-bearing liabilities														$	33,088		$	85,425		-61.27	%

Interest-earning assets over interest-bearing liabilities ratio															102.17	%		105.61	%

Changes in net interest income due to:		Volume			Rate			Total
Interest Income:
	Loans (1)	$	(4,332	)	$	(381	)	$	(4,713	)
	Investments		1,398			421		$	1,819

			(2,934	)		40			(2,894	)

Interest Expense:
	Deposits		473			1,076		$	1,549
	Borrowings		(250	)		1,429		$	1,179

			223			2,505			2,728

Net Interest Income		$	(3,157	)	$	(2,465	)	$	(5,622	)

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

SELECTED FINANCIAL DATA
QUARTER AND SIX-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
(Dollars in thousands)

			2nd Quarter								SIX-MONTH PERIOD
			As Restated								As Restated
			2000			1999			variance %		2000			1999			variance %
TABLE 2—NON-INTEREST INCOME SUMMARY
Trust, money management and brokerage fees			$	2,676		$	2,779		-3.7	%	$	5,503		$	5,406		1.8	%
Mortgage banking activities				2,353			1,419		65.8	%		3,904			3,377		15.6	%

	Non-banking service revenues			5,029			4,198		19.8	%		9,407			8,783		7.1	%

Fees on deposit accounts				561			561		0.0	%		1,109			924		20.0	%
Bank service charges and commissions				409			656		-37.7	%		843			1,215		-30.6	%
Other operating revenues				68			181		-62.4	%		102			185		-44.9	%

	Bank service revenues			1,038			1,398		-25.8	%		2,054			2,324		-11.6	%

		Recurrent non-interest income	$	6,067		$	5,596		8.4	%	$	11,461		$	11,107		3.2	%

Recurrent non-interest income to expenses ratio				69.82	%		67.08	%	4.1	%		68.13	%		64.99	%	4.8	%

TABLE 3—NON-INTEREST EXPENSES SUMMARY
Fixed compensation			$	2,669		$	2,812		-5.1	%	$	5,364		$	5,556		-3.5	%
Variable compensation				754			890		-15.3	%		1,434			1,967		-27.1	%

	Compensation and benefits			3,423			3,702		-7.5	%		6,798			7,523		-9.6	%

Occupancy and equipment				1,778			1,568		13.4	%		3,496			3,060		14.2	%
Advertising and business promotion				1,003			549		82.7	%		1,784			1,272		40.3	%
Professional and service fees (1)				660			674		-2.1	%		1,165			1,549		-24.8	%
Communications				407			374		8.8	%		827			778		6.3	%
Municipal and other general taxes				488			477		2.3	%		976			955		2.2	%
Insurance, including deposits insurance				132			138		-4.3	%		227			272		-16.5	%
Printing, postage, stationery and supplies				141			218		-35.3	%		304			415		-26.7	%
Other operating expenses				657			642		2.3	%		1,245			1,267		-1.7	%

	Other non-interest expenses			5,266			4,640		13.5	%		10,024			9,568		4.8	%

Recurrent non-interest expenses			$	8,689		$	8,342		4.2	%	$	16,822		$	17,091		-1.6	%

Relevant ratios and data:
	Efficiency ratio			74.89	%		49.78	%				71.81	%		49.02	%

	Expense ratio			0.78	%		0.70	%				0.71	%		0.71	%

	Compensation to recurrent non-interest expenses			65.0	%		79.8	%				67.8	%		78.6	%

	Variable compensation to total compensation			22.0	%		24.0	%				21.1	%		26.1	%

	Compensation to total average assets			0.81	%		0.94	%				0.79	%		0.90	%

	Average compensation per employee		$	40.4		$	44.0				$	40.0		$	40.8

	Average number of full-time employees			339			340					340			362

	Bank assets per employee			6,103			5,175				$	6,103		$	5,175

Total work force:
	Banking operations											288			329		-12.5	%
	Trust operations											27			28		-3.6	%
	Brokerage operations											14			12		16.7	%

												329			369		-10.8	%

			2nd Quarter								SIX-MONTH PERIOD
			As Restated								As Restated
			2000			1999			variance %		2000			1999			variance %
(1) Excludes non-operating charges shown on table 4.
TABLE 4 — NON-OPERATING ACTIVITIES
Securities net activity			$	510		$	60		750.0	%	$	(3,195	)	$	659		-584.8	%
Trading net activity				105			198		-47.0	%		92			65		41.5	%
Derivatives activity				(721	)		—		-100.0	%		(2,341	)		—		-100.0	%

	Securities, derivatives and trading net activities			(106	)		258		-141.1	%		(5,444	)		724		-851.9	%

Leasing revenues (discontinued June 2000)				13			367		-96.5	%		63			635		-90.1	%
Other (expenses)				(423	)		(455	)	-7.0	%		(476	)		(245	)	94.3	%

	Other activities			(410	)		(88	)	365.9	%		(413	)		390		-205.9	%

		Total non-operating activities	$	(516	)	$	170		-403.5	%	$	(5,857	)	$	1,114		-625.8	%

SELECTED FINANCIAL DATA
QUARTER AND SIX-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
(Dollars in thousands)

			Quarterly Results						Year-to-Date Results
			2000			1999			2000			1999
TABLE 5—ALLOWANCE FOR LOAN LOSSES SUMMARY
Beginning balance			$	6,972		$	8,731		$	6,837		$	9,002
Provision for loan losses				500			1,500			1,900			3,250
Net credit losses — see table 6				(4,474	)		(2,572	)		(5,739	)		(4,593	)

	Ending balance		$	2,998		$	7,659		$	2,998		$	7,659

Selected Data and Ratios:
	Outstanding loans		$	453,629		$	569,436		$	453,629		$	569,436

	Recoveries to net charge-off's			11.7	%		28.6	%		16.6	%		27.8	%

	Allowance coverage ratio
		Total loans		0.66	%		1.35	%		0.66	%		1.35	%

	Non-performing loans			20.07	%		48.73	%		20.07	%		42.75	%

	Non-real estate non-performing loans			99.11	%		85.79	%		99.11	%		85.79	%

TABLE 6—NET CREDIT LOSSES STATISTICS
Real estate
	Charge-offs		$	(35	)	$	(24	)	$	(35	)	$	(24	)
	Recoveries			—			—			—			—

				(35	)		(24	)		(35	)		(24	)

Consumer
	Charge-offs			(416	)		(2,015	)		(1,490	)		(3,766	)
	Recoveries			364			597			671			979

				(52	)		(1,418	)		(819	)		(2,787	)

Leasing
	Charge-offs			(3,684	)		(1,429	)		(4,171	)		(2,403	)
	Recoveries			170			375			370			662

				(3,514	)		(1,054	)		(3,801	)		(1,741	)

Commercial and others
	Charge-offs			(932	)		(134	)		(1,183	)		(168	)
	Recoveries			59			59			99			127

				(873	)		(75	)		(1,084	)		(41	)

Net credit losses
	Total charge-offs			(5,067	)		(3,602	)		(6,879	)		(6,361	)
	Total recoveries			593			1,031			1,140			1,768

			$	(4,474	)	$	(2,571	)	$	(5,739	)	$	(4,593	)

Net credit losses ratio:
	Real estate			0.03	%		0.03	%		0.02	%		0.01	%

	Consumer			0.95	%		4.38	%		9.70	%		4.40	%

	Leasing			255.96	%		3.94	%		105.32	%		0.00	%

	Commercial and others			10.09	%		1.34	%		13.08	%		0.77	%

	Total			3.93	%		1.75	%		2.56	%		1.57	%

Average Loans:
	Real estate		$	408,226		$	328,382		$	402,153		$	331,249
	Consumer			21,714			129,541			16,882			126,676
	Leasing			5,492			107,006			7,218			107,737
	Commercial and others			19,516			22,369			21,990			21,171

		Total	$	454,948		$	587,298		$	448,243		$	586,833

SELECTED FINANCIAL DATA
QUARTER AND SIX-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
(Dollars in thousands)

				Quarterly Results		Year-to-Date Results
				2000	1999	2000			1999
TABLE 7—LOAN LOSS RESERVE BREAKDOWN (as of December 31,):
Consumer						$	1,337		$	2,468
Financing leases							731			4,241
Commercial and other							215			570

	Non-real estate						2,283			7,279
	Real estate						715			380

						$	2,998		$	7,659

TABLE 8—NON-PERFORMING ASSETS (as of December 31,):
Non-performing assets
	Non-performing loans					$	14,936		$	17,917
	Foreclosed real estate						1,079			383
	Repossessed autos						50			347
	Repossessed equipment						—			26

						$	16,065		$	18,673

Non-performing loans to
		Total loans					3.29	%		3.15	%

		Total assets					0.85	%		1.05	%

		Total capital					13.57	%		15.49	%

TABLE 9—NON-PERFORMING LOANS (as of December 31,):
Non-performing loans
	Consumer					$	723		$	1,072
	Financing leases						1,269			6,635
	Commercial						1,033			1,221
		Non-real estate					3,025			8,928
		Real estate					11,911			8,989

			Total			$	14,936		$	17,917

Non-performing loans composition
	Consumer						4.8	%		6.0	%
	Financing leases						8.5	%		37.0	%
	Commercial						6.9	%		6.8	%

		Non-real estate					20.3	%		49.8	%
		Real estate					79.7	%		50.2	%

			Total				100.0	%		100.0	%

SELECTED FINANCIAL DATA
AS OF DECEMBER 31, 2000 and 1999 and JUNE 30, 2000
(Dollars in thousands)

			As Restated
			December 31, 2000			December 31, 1999			Variance %		June 30, 2000
TABLE 10—ASSETS SUMMARY AND COMPOSITION
Investments:
	Mortgage-backed securities and CMOs		$	994,117		$	831,819		19.5	%	$	882,455
	U.S. and P.R. Government securities			172,675			222,886		-22.5	%		262,372
	Equity Options Investments			9,113			—		100.0	%		—
	FHLB stock and other investments			65,626			15,118		334.1	%		34,657

				1,241,531			1,069,823		16.1	%		1,179,484

Loans:
	Real estate			410,119			319,528		28.4	%		387,629
	Consumer			22,909			132,599		-82.7	%		19,699
	Financing leases			3,866			96,707		-96.0	%		8,785
	Commercial and auto			16,735			20,602		-18.8	%		24,117

				453,629			569,436		-20.3	%		440,230
Consumer loans and leases under contract-to-sell				—			—		0.0	%		167,486

				453,629			569,436		-20.3	%		607,716
	Allowance for loan losses			(2,998	)		(7,659	)	-60.9	%		(6,837	)

				450,631			561,777		-19.8	%		600,879

		Total interest-earning assets		1,692,162			1,631,600		3.7	%		1,780,363
	Non-interest earning assets			65,550			71,052		-7.7	%		69,871

		Total assets	$	1,757,712		$	1,702,652		3.2	%	$	1,850,234

Investments portfolio composition:
	Mortgage-backed securities and CMOs			80.1	%		77.8	%				74.8	%
	U.S. and P.R. Government securities			13.9	%		20.8	%				22.2	%
	Equity Options Investments			0.7	%		0.0	%				0.0	%
	FHLB stock and other investments			5.3	%		1.4	%				3.0	%

				100.0	%		100.0	%				100.0	%

Loan portfolio composition:
	Real Estate			90.4	%		56.1	%				63.8	%
	Consumer			5.1	%		23.3	%				3.2	%
	Financing leases			0.9	%		17.0	%				1.4	%
	Commercial and auto			3.6	%		3.6	%				31.6	%

				100.0	%		100.0	%				100.0	%

			As Restated
			December 31, 2000			December 31, 1999			Variance %		June 30, 2000
TABLE 11—LIABILITIES SUMMARY AND COMPOSITION
Deposits:
	Savings and demand deposits		$	124,400		$	143,263		-13.2	%	$	130,919
	Time deposits and IRA accounts			550,054			497,200		10.6	%		587,931

				674,454			640,463					718,850
	Accrued interest			2,645			3,912		-32.4	%		4,831

				677,099			644,375		5.1	%		723,681

Borrowings:
	Repurchase agreements			826,299			739,349		11.8	%		816,493
	FHLB funds			20,000			81,200		-75.4	%		70,000
	Term notes and other sources of funds			80,000			96,500		-17.1	%		86,500

				926,299			917,049		1.0	%		972,993

Total interest-bearing liabilities				1,603,398			1,561,424		2.7	%		1,696,674
		Non interest-bearing liabilities		44,209			25,575		72.9	%		35,691

	Total liabilities		$	1,647,607		$	1,586,999		3.8	%	$	1,732,365

Deposits portfolio composition:
	Savings and demand deposits			18.4	%		22.2	%				18.1	%
	Time deposits and IRA accounts			81.2	%		77.2	%				81.2	%
	Accrued interest and manager checks			0.4	%		0.6	%				0.7	%

				100.0	%		100.0	%				100.0	%

Borrowings portfolio composition:
	Repurchase agreements			89.2	%		80.6	%				83.9	%
	FHLB funds			2.2	%		8.9	%				7.2	%
	Term notes and other sources of funds			8.6	%		10.5	%				8.9	%

				100.0	%		100.0	%				100.0	%

TABLE 12—CAPITAL, DIVIDENDS AND STOCK DATA
Capital data:
	Stockholders' equity		$	110,105		$	115,653		-4.8	%	$	103,611

	Leverage Capital (minimum required—4.00%)			7.56	%		7.34	%	3.0	%		7.30	%

	Total Risk-Based Capital (minimum required—8.00%)			25.27	%		26.95	%	-6.2	%		25.03	%

	Tier 1 Risk-Based capital (minimum required—4.00%)			24.69	%		25.70	%	-3.9	%		23.78	%

Stock data:
	Outstanding common shares, net of treasury			12,536			12,569		-0.3	%		12,569

	Book value		$	6.11		$	5.60		9.0	%	$	5.58

	Market Price at end of period		$	13.31		$	15.50		-14.1	%	$	15.50

	Market capitalization		$	166,894		$	194,826		-14.3	%	$	194,826

Common Dividend data:
	Common dividends declared ytd		$	3,785		$	1,905		98.7	%	$	1,905

	Common dividends declared per share ytd		$	0.300		$	0.150		100.0	%	$	0.150

	Payout ratio			-1066.20	%		-76.94	%	1285.8	%		-57.99	%

	Dividend yield			4.75	%		4.60	%	3.3	%		4.60	%

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
	Price				Dividend Per share
	High		Low		Dividend Per share
Fiscal 2001:
December 31, 2000	$	15.06	$	11.00	$	0.150

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

			As Restated
			December 31, 2000		December 31, 1999		Variance %		June 30, 2000
TABLE 13—FINANCIAL ASSETS SUMMARY
Financial assets:
	Trust assets managed		$	1,405,775	$	1,394,800	0.8	%	$	1,456,500
	Assets gathered by broker-dealer			925,377		864,700	7.0	%		914,900

		Managed assets		2,331,152		2,259,500	3.2	%		2,371,400
Group assets				1,757,712		1,702,652	3.2	%		1,850,234

			$	4,088,864	$	3,962,152	3.2	%	$	4,221,634

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER AND SIX-MONTH PERIOD ENDED DECEMBER 31, 2000

OVERVIEW OF FINANCIAL PERFORMANCE

Reflecting a rapid return to profitability, the Group posted net income of $2.7 million ($0.17 per share) in the second fiscal quarter ended December 31, 2000, compared with a $1.9 million loss ($0.20 per share) in the previous quarter ended September 30, 2000.

Management's focus on fee-based income and asset quality has been instrumental in overcoming the pressure on earnings created by increases in the cost of funds and various non-recurring events. Quarterly revenues from mortgage-banking activities increased almost 52 percent during the December quarter and the provision for loan losses was significantly reduced, helping counter a six-percent decline in interest income. The Group continues to be one of the best-capitalized institutions among its peers.

Specifically, the provision for loan losses in the quarter ended December 31^st was $500,000, a reduction of 64 percent from the $1.4 million provision in the first quarter ended September 30, 2000, and 85 percent below the $3.4 million provision for the quarter ended June 30, 2000. Management worked diligently in recent quarters to reduce the Company's exposure to credit risks. The reduction in loan losses is gratifying as it runs counter to recent industry trends.

Net credit income increased nearly 10 percent during the quarter despite the decline in interest income, which fell from $30.4 million in the quarter ended September 30, 2000 to $28.6 million in the second fiscal quarter. Interest expenses declined six percent to $22.5 million in the quarter compared with $23.9 million for the September 2000 quarter.

Recurrent non-interest income—trust, money management, brokerage, banking service and mortgage-related fees—for the December 2000 quarter was $6.1 million, increasing nearly 13 percent from $5.4 million in the September 2000 quarter. This increase was fueled by the 52-percent rise in income from mortgage-banking activities, which garnered $2.4 million in the quarter versus $1.6 million in the September 2000 quarter. Overall, recurrent non-interest revenues have steadily increased their contribution to results throughout the past quarters, reaching 52 percent of core revenues versus 35 percent for the quarter ended December 31, 1999.

For the quarter ended December 31, 2000, the Group booked a $721,000 loss related to Statement of Financial Accounting Standards (SFAS) No. 133. This is in addition to a $1.6 million recorded in the quarter ended September 30, 2000 for derivative activities and the $164,000 unrealized loss (net of tax) for the cumulative effect of a change in accounting principle that were recorded when SFAS 133 was adopted on July 1, 2000.

The December 2000 quarterly net income of $2.7 million ($0.17 per share) compares with net income of $7.3 million ($0.51 per share) in the quarter ended December 31, 1999. This 58-percent decline is mainly caused by a 45-percent decrease in net credit income from $10.2 million to $5.6 million. This drop results from increases in the cost of funds and the previously reported sale of approximately $170 million in leases and unsecured loans. On the other hand, when comparing both December quarters, recurring non-interest income increased 8.4 percent, helped by mortgage-banking revenues, which increased 66 percent.

For the six-month period ended December 31, 2000, net income was $838,000 (including the $1.9 million loss posted in the September quarter) or a 94-percent decline from the $14.6 million net income reported in the six-month period ended December 31, 1999. Interest expense increased 23 percent from $37.6 million to $46.4 million and interest income decreased four percent from $61.2 million to $58.9 million this past semester. The effects of these variances were partially mitigated

by a 42-percent reduction in the provision for loan losses and a 16-percent increase in mortgage-banking revenues.

The Company's total financial assets (banking assets plus assets managed by the trust and broker-dealer divisions) increased three percent to $4.089 billion as of December 31, 2000, from $3.962 billion as of December 31, 1999. The Company's bank assets increased three percent to $1.758 billion, up from $1.703 billion the year before. Assets managed by the Group's trust department and broker-dealer subsidiary increased two percent to $2.331 billion as of December 31, 2000, from $2.285 billion a year earlier.

NET INTEREST INCOME

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.

Net interest income is affected by the difference between rates earned on the Group's interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest-earning assets and interest-bearing liabilities (interest rate margin). As further discussed in the Risk Management section of this report, the Group 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 second quarter of fiscal 2001, the Group's net interest income amounted to $6.1 million, down 48 percent from $11.7 million in the same period of fiscal 2000. For the six-month period ended December 31, 2000, net interest income amounted to $12.6 million, down 46.8 percent from $23.6 million for the six-month period ended December 31, 1999. As reflected in Table 1, the impact of the reduction of net interest income was substantially lower on a tax-equivalent basis.

The reduction in quarterly net interest income was mainly due to a negative rate variance of $2.5 million as result of a higher average cost of funds (5.84 percent in December 2000 quarter versus 5.15 percent in December 1999) in line with interest-rate hikes by the Fed, combined with a negative volume variance of $3.2 million in interest income, which stems from the previously reported sale of leases and unsecured loans. Likewise, when comparing both six-month periods ended in December, the negative rate variance was $5.2 million, given a higher average cost of funds (5.89 percent versus 5.04 percent), combined with a negative volume variance of $5.9 million, thus considerably impacting year-to-date net interest income.

The interest-rate spread narrowed 117-basis points during the second quarter of fiscal 2001 to 1.48 percent from 2.65 percent in the December 1999 quarter. For the six-month period ended December 31, 2000, the interest rate spread fell 140 basis points when compared with the same period of fiscal 2000. This was mainly due to an increase in the average cost of funds and a change in the mix of interest-earning assets to focus on lower-risk loans and tax-free investments.

The Group's interest income for the second quarter of fiscal 2001 totaled $28.6 million, down 9.2 percent from $31.5 million posted in the same period of fiscal 2000. For the six-month periods ended December 31, interest income declined 3.7 percent from $61.2 million to $58.9 million. These decreases in interest income result from a lower volume of average interest-earning assets ($1.559 billion versus $1.609 billion when comparing quarters) compounded by a decline in their yield performance (7.32 percent versus 7.80 percent, for the December quarters).

The yield reduction was mainly related to: (i) the expansion of the 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 reduction in the loan portfolio yield, which decreased

161-basis points (8.32 percent versus 9.93 percent) when comparing both December quarters, reflecting the previously reported sale of almost $180 million of leases and unsecured loans.

Most of the decrease in interest-earning assets was due to the aforementioned sale of leases and unsecured loans. The funds from this transaction were used to repay debt and invest in higher-quality securities. For the second quarter of fiscal 2001, the average volume of total investments grew by 6.22 percent ($1.104 billion versus $1.039 billion) when compared to the same period a year earlier. However, the average volume of total loans decreased 20.1 percent ($455 million versus $569 million) when comparing both quarters, as a result of the previously mentioned sale of loans.

Interest expense for the second quarter of fiscal 2001 rose 13.8 percent to $22.5 million from $19.7 million reported in the comparable period of fiscal 2000. For the six-month period ended December 31, 2000, interest expense rose 23.4 percent from $37.6 million in the December 1999 to $46.4 million. A larger base of interest-bearing liabilities ($1.562 billion versus $1.480 billion, when comparing both six-month periods) used to fund the growth of the Group's interest-earning assets, combined with a higher average cost of funds (5.89 percent versus 5.04 percent) 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. The cost of short-term financing substantially increased during calendar year 2000 as a result of interest rate hikes made by the Fed. For the six-month period ended December 31, 2000, the cost of borrowings increased 86-basis points (6.26 percent versus 5.40 percent) when compared to the same period in fiscal 2000.

NON-INTEREST INCOME

Table 2 sets forth recurrent revenues derived from non-interest income activities. As a diversified financial services provider, the Group's earnings now enjoy a recurrent inflow of significant fees and other non-interest income, which for the first time represents approximately half of the recurrent revenue mix. In addition, the Group enjoys a 70-percent coverage ratio when comparing recurrent non-interest income with non-interest expenses. Non-interest income is affected by the activity of trust assets under management, transactions generated by the broker-dealer subsidiary, the level of mortgage-banking activities, and service fees generated from loans and deposit accounts.

For the quarter ended December 31, 2000, recurrent non-interest revenues increased 8.4 percent to $6.1 million from $5.6 million in the December 1999. For the six-month period, the increase was 3.2 percent when compared to the same period in fiscal 2000. This growth was achieved through increases in mortgage-banking activities, which offset marginal declines in brokerage and bank service fees.

Trust, money management and brokerage fees, the principal component of recurrent non-interest income, remained stable at $2.7 million for the December 2000 quarter versus $2.8 million in the December 1999 quarter, notwithstanding a bearish U.S. securities market and public concern over the global economic outlook that influenced the volume of investments managed. For the six-month periods ended December 31st, these revenues were $5.5 million (2000) and $5.4 million.

The second largest component of non-interest revenues is mortgage-banking activities, which increased 65.8 percent to reach $2.4 million in the quarter ended December 31, 2000. When comparing six-month periods ended in December 2000 and 1999, mortgage-banking activities increased 15.6 percent from $3.3 million to $3.9 million. The increases are mostly a result of management's previously reported strategy of focusing resources on secured lending operations that provide an attractive source of fees and lower credit risks. The strategy has improved the origination of fees and servicing rights.

Bank services fees and other operating revenues consist primarily of fees generated by depository accounts, electronic banking and customer services. These revenues totaled $1.0 million in the second

quarter of fiscal 2001, a 25.8 percent decline from $1.4 million in the same quarter of fiscal 2000. However, this decline is mostly related to fewer late payment fees following the discontinuation of leasing and unsecured lending activities and the sale of related receivables. When comparing both six-month periods, these revenues dropped 11.6 percent to $2.1 million.

NON-INTEREST EXPENSES

Table 3 details non-interest expenses (excluding non-operating charges), which increased just 4.2 percent from $8.3 million in the quarter ended December 31, 1999 to $8.7 million in the December 2000. This increase is mostly due to the launching of a local media campaign in October 2000, created by the Group's new advertising agency, which seeks to reposition the Group as a diversified financial services provider by leveraging its leadership in retirement planning services.

Non-interest expenses (excluding non-operating charges) for the six-month period ended December 31, 2000 reflect a decline of 1.6 percent, from $17.1 million to $16.8 million, when compared with the similar period in fiscal 2000. Employee compensation and benefits (the Group's largest expense category) decreased 7.5 percent from $3.7 million to $3.4 million, when comparing both December quarters, and 9.6 percent when comparing both six-month periods. The decrease reflects savings from leasing operations discontinued in June 2000.

Non-interest expenses other than compensation increased 13.5 percent to $5.3 million for the second quarter of fiscal 2001, compared to $4.6 million for the December 1999 quarter, and increased 4.8 percent when comparing the six-month periods ended each December. A $450,000 increase in quarterly advertising expense, from implementing the new marketing strategy, was mainly responsible for this increase. Additionally, a $210,000 increase in occupancy and equipment costs for improving the Group's service capabilities and long-term performance was also part of the increase in non-interest expenses.

NON-OPERATING ACTIVITIES

As seen in Table 4, the Group reported derivative activities related to Statement of Financial Accounting Standards 133 (please see Note 1 to the Unaudited Consolidated Financial Statements). This new accounting principle requires the recognition of derivatives on the balance sheet at fair value, while derivatives that are not hedges must be recognized in the statement of income based upon the difference between fair value and the carrying amount. The SFAS 133 valuation resulted in a $721,000 loss for the quarter ended December 31, 2000; added to the $1.6 million loss in the September 2000 quarter brings the year-to-date total to $2.3 million. The Group had reported a transition adjustment for an unrealized loss of $164,000 (net of tax) to book the cumulative effect of the change in accounting principle made in the first quarter ended September 30, 2000.

As reported in the quarter ended September 30, 2000, The Group incurred a $3.7 million loss in the sale of treasury securities following the recommendation of its external consultants to place these funds in higher-yielding securities to improve their long-term performance.

PROVISION FOR LOAN LOSSES

The provision for loan losses in the second quarter of fiscal 2001 totaled $500,000, down 66.7 percent from the $1.5 million reported in the same period of fiscal 2000. For the six-month period ended December 31, 2000, the provision for loan losses declined 41.5 percent from $3.3 million in the same period for fiscal 2000 to $1.9 million. A lower level of net credit losses and non-performing assets made this decline possible, which is attributable to the sale of unsecured personal loans and finance leases in July 2000. 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 second quarter of fiscal 2001 reflect a credit of $23,000 compared with a $298,000 provision made in the same quarter of fiscal 2000. The credit resulted from losses related to the aforementioned non-operating activities. In addition, the difference between the tax credit and the maximum statutory tax rate for the Group, which is 39 percent, is primarily due to tax-exempt interest income earned on certain investments and loans, net of the disallowance of related expenses attributable to the exempt income.

FINANCIAL CONDITION

GROUP'S ASSETS

As of December 31, 2000, the Group's total assets amounted to $1.758 billion, an increase of 3.2 percent when compared to $1.703 billion a year ago. At the same date, interest-earning assets reached $1.692 billion, up 3.7 percent versus $1.632 billion a year earlier.

As detailed in Table 10, investments are the Group's largest interest-earning assets component. They mainly consist of money market investments, mortgage-related securities, U.S. and Puerto Rico governmental bonds. As of December 31, 2000, the Group's investment portfolio was of high quality, generated significant amount of tax-exempt interest income and lowered the Group's tax obligations. Note 2 to the Consolidated Financial Statements further explains the Group's investments.

A strong growth in mortgage-backed securities drove the investment portfolio expansion, increasing 19.5 percent to $994 million (79.0 percent of the total portfolio) from $831.9 million (77.8 percent of the total portfolio) the year before, in part reflecting the Group's strategy of pooling residential real estate loans to create mortgage-backed securities.

Also detailed in Table 10, the Group's loan portfolio, the second largest category of the Bank's interest-earning assets, amounted to $450.6 million, 19.8 percent lower than the $562.8 million a year ago. As previously reported, the Group refocused its lending strategy during fiscal year 2000 to concentrate on collateralized originations (primarily, mortgage loans and personal loans with mortgage collateral) and eventually discontinued leasing operations on June 30, 2000. On July 7, 2000, the Group sold almost $180 million of leases and unsecured loans in its portfolio.

The Group's real estate loan portfolio is mainly comprised of residential loans, home equity loans and personal loans collateralized by real estate. As shown in Table 10, the real estate loans portfolio amounted to $410 million or 90.4 percent of the loan portfolio as of December 31, 2000, which is an extremely positive increase from its 56-percent share of a year ago.

The second largest component of the Group's loan portfolio is consumer loans, representing just above five percent of the portfolio versus 23.3 percent a year before—an amount expected to remain at a minimum. Commercial loans, mostly collateralized by real estate, are the Group's third largest category with $16.7 million or 3.6 percent of the portfolio. The Group expects to increase its efforts in originating low-risk commercial loans. On the other hand, the Group discontinued originating leases on June 30, 2000; finance leases remaining in the portfolio represent less than one percent of the total portfolio.

LIABILITIES AND FUNDING SOURCES

As shown in Table 11, as of December 31, 2000, the Group's total liabilities reached $1.648 billion, 3.8 percent higher than the $1.587 billion reported a year earlier. Interest-bearing liabilities, the Group's principal funding source, amounted to $1.603 billion at the end of the second quarter of fiscal 2001 versus $1.561 billion the year before, a 2.7 percent increase. The rise in deposits, mainly time deposits and IRA accounts, helped drive this growth.

Borrowings, the Group's largest interest-bearing liability component, consist mainly of diversified funding sources, such as FHLB of New York (FHLB) advances and borrowings, repurchase agreements, term notes, notes payable and lines of credit. As of December 31, 2000, borrowings amounted to $926.3 million; one percent more than the $917 million reported a year before. Almost 90 percent of these borrowings are repurchase agreements.

The Group also uses the FHLB system, an alternative source of funding for financial institutions that are members of a regional Federal Home Loan Bank. As a member of the FHLB, the Group can obtain advances from the FHLB, secured by FHLB stock owned by the Group plus certain of the Group's mortgages and investment securities. As of December 31, 2000, the Group had $20 million in FHLB advances, 75 percent less than the previous year.

As of December 31, 2000, deposits (the second largest category of the Group's interest-bearing liabilities) reached $677.1 million, up 3.8 percent versus $644.4 million a year ago. A 36.5 percent increase in IRA accounts (from $158 million last year to $216 million) plus a 17.1 increase in retail deposits (from $164 million to $192 million) helped offset a 25.2 percent decline in wholesale deposits, which went from $175.7 million to $131.5 million.

STOCKHOLDERS' EQUITY

Stockholders' equity data is provided in Table 12. As of December 31, 2000, total stockholders' equity was $110.5 million from $115.7 million at December 1999. The main reasons for this decrease were the mark-to-market effect of SFAS 133 (see Note 1 to the Unaudited Consolidated Financial Statements) combined with dividends paid and the repurchase of over 280,000 common shares. The effects of these items were partially offset by earnings posted during the quarter and a positive change in the market value of securities available-for-sale. Please see the Group's "Consolidated Statements of Changes in Stockholder's Equity and of Comprehensive Income" for more details.

During the second quarter of fiscal 2001, the Group repurchased 35,300 common shares bringing to 1,271,799 shares (with a cost of $29.2 million) the number of treasury shares. As of December 31, 2000, the Group's market value for its outstanding common stock, traded in the New York Stock Exchange ("NYSE") under the symbol OFG, was $166.9 million or $13.31 per share.

During the six-month period ended December 31, 2000, the Group declared dividends amounting to $3.8 million ($0.30 per share). The dividend yield was 4.75 percent and 2.55 percent for the six-month periods ended December 31, 2000 and 1999, respectively. Despite the loss posted in the quarter ended September 30, 2000, management and the Board of Directors did not consider necessary to reduce or cease declaring dividends, given the solid capitalization of the Group and the non-operational nature of the loss.

Financial holding companies are considered well capitalized under the regulatory framework for prompt corrective action if they meet or exceed a Tier I risk-based capital ratio of 6 percent, a total risk-based capital ratio of 10 percent and a leverage capital ratio of 5 percent. As shown in Table 12, the Group comfortably exceeds these benchmarks due to the high level of capital and the quality and conservative nature of its assets.

GROUP'S FINANCIAL ASSETS

Table 13 shows the Group's total financial assets, which include the Group's assets plus client assets managed by the Group's trust department and brokerage subsidiary. As of December 31, 2000, total financial assets reached $4.089 billion—up 3.2 percent from $3.962 billion a year ago. Assets owned by the Group (of which 99 percent are owned by the Group's banking subsidiary) are the main component of the Group's financial assets. These assets are explained in a previous section entitled Group's Assets.

The Group's second largest financial asset component is managed by the Group's trust department, which includes various types of IRA products, 401(K) and Keogh retirement plans, custodian and corporate trust accounts. As of December 31, 2000, total assets managed by the Group's trust amounted $1.406 billion, less than one percent below $1.413 billion a year ago. The bearish market experienced in calendar year 2000 affected the valuation of assets under management. This decrease in valuation was partially offset by the Groups' extremely successful IRA campaign, as IRAS managed by the trust increased from $548 million to $576 million in during the year.

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 clients, such as fixed and variable annuities, tax-advantaged fixed income securities, mutual funds, stocks and bonds. As of December 31, 2000, total assets gathered by the broker-dealer from its customer investment accounts reached $925 million, up 5.7 percent from $872.5 million a year ago.

ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS

As of December 31, 2000, the allowance for loan losses (see Tables 5 through 7) amounted to $3.0 million, or 0.66 percent of total loans, versus $7.7 million, or 1.33 percent of total loans a year earlier. The reduction is directly related to the significant decline in credit risk achieved through management's previously reported strategy of focusing on collateralized lending and the aforementioned sale of leases and unsecured loans. Excluding real estate loans, which carry minimum risks due to their collateral, the allowance for loan losses amounted to 99.11% of non-real estate loans.

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. The Group'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 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 and is based on aging. The following are credit-risk categories used and established by the FDIC Interagency Policy Statement of 1993:

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.

The Group, using an aging-based rating system, applies an overall reserve percentage to each loan portfolio 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 include:

1.: Vintage analysis generated from the credit scoring system, which provides historical credit losses by credit-score strata, plus loss projections for the remaining portfolio,
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 and credit risk categories are updated on an annual basis and applied in the context of GAAP and following 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 probable 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.

Net credit losses for the second quarter of fiscal 2001, detailed in Table 6, totaled $4.5 million or 3.93 percent of average loans, which is 74-percent higher than $2.6 million or 1.75 percent of average loans for the same period of fiscal 2000. However, excluding $3.5 million in net credit losses during the quarter related to the write-off of certain leases that were in portfolio, net credit losses have actually decreased considerably, representing less than one percent of the quarterly average of loans other than leases. The lower level of net credit losses experienced was primarily associated to a reduction in consumer loans and financing leases as a result of the sale of the related portfolios.

As shown in Table 8, the Group's non-performing assets include non-performing loans, foreclosed real estate owned and other repossessed assets. As mentioned, the Group's asset quality improved as non-performing assets totaled just $16.1 million (0.85 percent of total assets) as of December 31, 2000, versus $18.7 million (1.05 percent of total assets) at the same date of fiscal 2000. The decrease was principally due to approximately $5.9 million less in non-performing loans other than real estate.

REAL ESTATE LOANS—are placed on non-accrual basis when they become 90 days or more past due, except well-secured residential loans, and are charged-off based on the specific evaluation of the underlying collateral. As of December 31, 2000, the Group's non-performing real estate loans totaled $11.9 million (79.7 percent of non-performing 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 underlying collateral. As of December 31, 2000, the Group's non-performing commercial business loans amounted to $1 million (6.9 percent of non-performing loans). Most of this portfolio is also collateralized by real estate and no significant losses are expected.

FINANCE LEASES—are placed on non-accrual status when they become 90 days past due. As of December 31, 2000, the Group's non-performing financing leases portfolio amounted to $1.3 million (8.5 percent of the Group's total non-performing loans). The underlying collateral secures these financing leases. As reported, the Group discontinued leasing operations on June 30, 2000.

CONSUMER LOANS—are placed on non-accrual status when they become 90 days past due and charged-off when payments are delinquent 120 days. As of December 31, 2000, the Group's non-performing consumer loans amounted to $723,000 (4.8 percent of the Group's total non-performing loans).

FORECLOSED REAL ESTATE—initially recorded at the lower of the related loan balance or fair value at the date of foreclosure, any excess of the loan balance over the estimated fair market value of the property is charged against the allowance for loan losses. Subsequently, any excess of the carrying value over the estimated fair market value less disposition cost is charged to operations. Management is actively seeking prospective buyers for these foreclosed real estate properties. As of December 31, 2000, foreclosed real estate balance was $1.1 million.

OTHER REPOSSESSED ASSETS—initially recorded at estimated net realizable value. At the time of disposition, any additional losses incurred are charged against the allowance for loan losses. As of December 31, 2000, the repossessed assets amounted to $50,000.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT

The Group's interest-rate risk and asset/liability management is the responsibility of the Asset and Liability Management Committee ("ALCO"), which reports to the Board of Directors and is composed of members of the Group's senior management. The principal objective of ALCO is to enhance profitability while maintaining an appropriate level of interest rate and liquidity risks. ALCO is also involved in formulating economic projections and strategies used by the Group in its planning and budgeting process, and oversees the Group's sources, uses and pricing of funds.

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

The Group is liability sensitive due to its fixed rate and medium to long-term asset composition being funded with shorter-term repricing liabilities. As a result, the Group uses interest rate swaps and caps as a mechanism to offset said mismatch and control exposures of interest rate risk. Under the swaps, the Group pays a fixed annual cost and receives a floating ninety-day payment based on LIBOR. Floating rate payments received from the swap 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. Additional information on this subject can be found in Note 5 to the Unaudited Consolidated Financial Statements.

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.

As of December 31, 2000, the Group's liquidity was deemed appropriate, as liquid assets amounted to $1.314 billion or 44 percent more than the previous year when they were $914 million. In addition, the Group has $63 million available from unused lines of credit with other financial institutions and $174 million of borrowing potential with the FHLB of New York. 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 of New York 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.

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 of no less than $13 million resulting from the denial of the claim. The Court has set an Initial Scheduling Conference for the month of February.

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 results 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

Three matters were submitted and approved at the annual meeting of stockholders held on December 15, 2000 in San Juan, Puerto Rico, where 12,556,135 shares were entitled to vote. The first proposal, approved by 86 percent of voting shares, was the nomination of three directors, Jose E. Fernandez, Efrain Archilla and Julian S. Inclán, for three-year terms expiring in 2003. The other members of the Board of Directors are: Pablo I. Altieri, Diego Perdomo, Francisco Arriví, Emilio Rodríguez, Jr., and Alberto Richa. The second matter considered was the Group's 2000 Incentive Stock Option Plan, approved by approximately 80 percent of voting shares. The third matter, approved by 86 percent of voting shares, was the appointment of the Group's external auditors, PricewaterhouseCoopers LLP.

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.

B—REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the quarter ended December 31, 2000.

C—EXHIBITS

None

SIGNATURES

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

ORIENTAL FINANCIAL GROUP INC. (REGISTRANT)

By: /s/ Jose E. Fernandez
Jose E. Fernandez,
Chairman of the Board of Directors, President and Chief Executive Officer
Date: February 14, 2001

By: /s/ Rafael Valladares
Rafael Valladares,
Senior Vice-President and Principal Financial Officer
Date: February 14, 2001

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TABLE OF CONTENTS
ORIENTAL FINANCIAL GROUP INC. Notes to Unaudited Consolidated Financial Statements

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2—INVESTMENTS AND SECURITIES

NOTE 3—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

NOTE 4—ACCUMULATED OTHER COMPREHENSIVE INCOME

NOTE 5—PLEDGED ASSETS

NOTE 6—INTEREST RATE RISK MANAGEMENT

NOTE 7—SEGMENT REPORTING