OFG Bancorp (OFG) 10-Q/A 2001 Q1 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 MARCH 31, 2001

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:

13,812,835 COMMON SHARES ($1.00 PAR VALUE PER SHARE)
OUTSTANDING AS OF APRIL 30, 2001

    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 March 31, 2001 (unaudited) and June 30, 2000	1
	Unaudited consolidated statements of income for the quarter and nine-month periods ended March 31, 2001 and 2000	2
	Unaudited consolidated statements of stockholders' equity and comprehensive income for the nine-month periods ended March 31, 2001 and 2000	3
	Unaudited consolidated statements of cash flows for the nine-month Periods ended March 31, 2001 and 2000	4
	Notes to unaudited consolidated financial statements	5
Item - 2	Management's discussion and analysis of financial condition and results of operations	14-31
PART - 2
Item - 1	Legal Proceedings	32
Item - 2	Change in securities	32
Item - 3	Defaults upon senior securities	32
Item - 4	Submissions of Matters to a Vote of Security Holders	32
Item - 5	Other Information	32
Item - 6	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	32
	Signatures	33

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2001 (UNAUDITED) AND JUNE 30, 2000
(IN THOUSANDS)

			March 31, 2001			June 30, 2000
ASSETS
Cash and due from banks			$	15,691		$	10,322
Investments:
	Money market investments			66,475			23,511
	Trading securities, at fair value			53,502			64,443
	Investment securities available-for-sale, at fair value			1,189,129			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			12,697			11,146
	Equity options investments			10,216			—
		Total investments		1,332,019			1,179,484
Loans:
	Loans held-for-sale, at lower of cost or market			61,612			180,788
	Loans receivable, net of allowance for loan losses of $2,821			366,700			420,090
		Total loans, net		428,312			600,878
	Accrued interest receivable			16,278			13,485
	Foreclosed real estate, net			1,007			398
	Premises and equipment, net			21,038			21,706
	Other assets, net			24,676			23,961
Total assets			$	1,839,021		$	1,850,234
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
	Savings and demand		$	126,961		$	130,919
	Time and IRA accounts			544,926			587,931
				671,887			718,850
	Accrued interest			3,645			4,831
		Total deposits		675,532			723,681
Borrowings:
	Securities sold under agreements to repurchase			902,994			816,493
	Advances and borrowings from FHLB			27,980			70,000
	Term notes			60,000			86,500
		Total Borrowings:		990,974			972,993
Accrued expenses and other liabilities				53,934			35,691
Total liabilities				1,720,440			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 13,811,585 (June 30, 2000—13,805,135)			13,812			13,805
	Additional paid-in capital			23,824			23,786
	Legal surplus			10,684			10,578
	Retained earnings			77,615			79,809
	Treasury stock, at cost, 1,325,699 shares (June 30, 2000—1,107,799)			(29,910	)		(27,116	)
	Accumulated other comprehensive loss, net of deferred taxes credit of $151 (June 30, 2000—$1,413)			(10,944	)		(16,493	)
		Total stockholders' equity		118,581			117,869
Total liabilities and stockholders' equity			$	1,839,021		$	1,850,234

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

1

CONSOLIDATED STATEMENTS OF INCOME
QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)

			3rd Quarter						Nine-Month Period
			2001			As Restated 2000			2001			As Restated 2000
Interest income:
	Loans and leases		$	10,073		$	13,583		$	28,620		$	41,683
	Mortgage-backed securities			16,969			14,140			47,450			39,472
	Investment securities			2,007			4,157			8,828			11,797
	Money market investments			864			52			3,944			173
		Total interest income		29,913			31,932			88,842			93,125
Interest expense:
	Deposits			9,015			7,788			27,780			22,628
	Securities sold under agreements to repurchase			12,818			11,092			36,532			29,032
	Other borrowed funds			1,498			2,306			5,377			7,093
		Total interest expense		23,331			21,186			69,689			58,753
Net interest income				6,582			10,746			19,153			34,372
Provision for credit losses				506			1,500			2,406			4,750
Net credit income				6,076			9,246			16,747			29,622
Non-interest income:
	Trust, money management and brokerage fees			2,855			3,378			8,358			8,784
	Mortgage banking activities			2,681			1,293			6,585			4,670
	Banking service revenues			1,147			1,297			3,201			3,620
	Net gain (loss) on sale of securities available-for-sale			1,370			407			(1,825	)		1,066
	Derivatives activities loss			(667	)		—			(3,007	)		—
	Trading net activity			141			(59	)		234			6
	Leasing revenues			8			179			71			814
		Total non-interest income		7,535			6,495			13,617			18,960
Non-interest expenses:
	Compensation and benefits			3,703			3,862			10,502			11,386
	Occupancy and equipment, net			1,819			1,579			5,315			4,639
	Advertising and business promotion			1,157			845			2,941			2,116
	Professional and service fees			936			1,000			2,577			2,794
	Communications			387			454			1,214			1,231
	Taxes other than on income			487			477			1,463			1,432
	Insurance, including deposit insurance			124			100			351			372
	Printing, postage, stationery and supplies			165			237			469			652
	Other			663			680			1,910			1,948
		Total non-interest expense		9,441			9,234			26,742			26,570
Income before income taxes				4,170			6,507			3,622			22,012
Income tax credit (expense)				353			(406	)		1,902			(1,334	)
Net income before cumulative effect of change in accounting principle, net of taxes				4,523			6,101			5,524			20,678
Cumulative effect of change in accounting principle, net of taxes				—			—			(164	)		—
Net income				4,523			6,101			5,360			20,678
Less: Dividends on preferred stock				(597	)		(597	)		(1,790	)		(1,790	)
Net income available to common shareholders			$	3,926		$	5,504		$	3,570		$	18,888
Income per common share:
	Basic before cumulative effect of change in accounting principles		$	0.31		$	0.43		$	0.30		$	1.48
	Diluted before cumulative effect of change in accounting principles		$	0.31		$	0.42		$	0.29		$	1.45
	Basic after cumulative effect of change in accounting principles		$	0.31		$	0.43		$	0.28		$	1.48
	Diluted after cumulative effect of change in accounting principles		$	0.31		$	0.42		$	0.28		$	1.45
	Average common shares outstanding			12,514			12,794			12,572			12,806
	Average potential common share options			262			348			189			259
				12,776			13,142			12,761			13,065
	Dividends per common stock		$	0.15		$	0.15		$	0.45		$	0.45

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

2

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME
NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS)

			3rd Quarter					Nine-Month Period
NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000			2001			As Restated 2000		2001			As Restated 2000
Preferred stock:
	Balance at beginning of year							$	33,500		$	33,500
		Balance at end of year							33,500			33,500
Common stock:
	Balance at beginning of year								13,805			13,739
	Stock options exercised								7			33
		Balance at end of year							13,812			13,772
Additional paid-in capital:
	Balance at beginning of year								23,786			23,313
	Stock options exercised								38			114
		Balance at end of year							23,824			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								5,360			20,678
	Dividends declared on common stock								(5,658	)		(5,754	)
	Dividends declared on preferred stock								(1,790	)		(1,790	)
	Transfer to legal surplus								(106	)		(804	)
		Balance at end of year							77,615			84,516
Treasury stock:
	Balance at beginning of period								(27,116	)		(23,401	)
	Treasury stock purchased								(2,794	)		(2,093	)
		Balance at end of year							(29,910	)		(25,494	)
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								5,549			(7,262	)
		Balance at end of year							(10,944	)		(18,974	)
Total stockholders' equity								$	118,581		$	120,224
COMPREHENSIVE INCOME:
Net income			$	4,523		$	6,101	$	5,360		$	20,678
Other comprehensive income (loss), net of tax:
	Unrealized gain (loss) on securities arising during the period			10,844			765		51,040			(8,221	)
	Realized (loss) gains included in net income			1,370			407		(1,825	)		1,066
	Unrealized loss on derivatives designated as cash flows hedges arising during the period			(4,686	)		—		(14,876	)		—
	Amount reclassified into earnings during the period			95			—		283			—
	Income tax credit (expense) related to items of other comprehensive income			(495	)		—		(1,906	)		(107	)
				7,128			1,172		32,716			(7,262	)
	Cummulative effect of change in accounting principle, net of taxes			—			—		(27,167	)		—
Other comprehensive income (loss) for the period				7,128			1,172		5,549			(7,262	)
Comprehensive Income			$	11,651		$	7,273	$	10,909		$	13,416

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

3

CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS)

					2001			As Restated 2000
Cash flows from operating activities:
	Net income				$	5,360		$	20,678
	Adjustments to reconcile net income to net cash provided by operating activities:
		Amortization of deferred loan origination fees and costs				(418	)		256
		Amortization of premiums and accretion of discounts on investment securities				(256	)		54
		Depreciation and amortization of premises and equipment				3,240			2,377
		Provision for loan losses				2,406			4,750
		Loss (gain) on sale of securities available-for-sale				1,825			(1,066	)
		Derivatives activities				3,007			—
		Gain (loss) on loans under contract-to-sell				—			—
		Gain on sale of servicing assets				—			—
		Mortgage banking activities				(6,585	)		(4,670	)
		Proceeds from sale of loans held-for-sale				96,008			27,795
		Increase (decrease):
			Accrued expenses, other and derivatives liabilities, net			(31,632	)		(3,196	)
			Accrued interest deposits			(1,186	)		(110	)
		(Increase) decrease in:
			Trading securities			10,941			(17,233	)
			Accrued interest receivable			(2,793	)		(1,344	)
			Deferred taxes			127			—
			Other assets			(1,451	)		(765	)
				Total adjustments		73,233			6,848
		Net cash (used) provided by operating activities				78,593			27,526
Cash flows from investing activities:
	Purchases of investment securities available-for-sale					(567,169	)		(180,500	)
	Purchases of investment securities held-to-maturity					(49,750	)		(90,700	)
	Purchases of FHLB stock					(1,551	)		—
	Maturities and redemptions of investment securities available-for-sale					237,670			66,851
	Maturities and redemptions of investment securities held-to-maturity					79,784			56,262
	Redemptions of FHLB stock					—			2,500
	Proceeds from sales of investment securities available-for-sale					329,815			56,813
	Proceeds from sale of consumer loans and leases portfolios					167,900			—
	Loans production (origination and purchases), net					(185,184	)		(101,182	)
	Capital expenditures					(2,572	)		(2,817	)
		Net cash provided (used) by investing activities				8,943			(192,773	)
Cash flows from financing activities:
	Net increase (decrease) in:
		Demand, saving and time (including IRA accounts) deposits				(46,963	)		(3,166	)
		Securities sold under agreements to repurchase				86,501			158,534
		Advances and borrowings from FHLB				(42,020	)		25,975
	Repayments of term notes and other borrowings					(26,500	)		(20,000	)
	Proceeds from exercise of stock options					45			501
	Treasury stock acquired					(2,794	)		(2,093	)
	Dividends paid					(7,472	)		(7,560	)
		Net cash (used) provided by financing activities				(39,203	)		152,191
Increase (decrease) in cash and cash equivalents						48,333			(13,056	)
Cash and cash equivalents at beginning of year						33,833			35,933
Cash and cash equivalents at end of year					$	82,166		$	22,877
Cash and cash equivalents include:
	Cash and due from banks				$	15,691		$	11,663
	Money market investments					66,475			11,214
					$	82,166		$	22,877
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
	Interest paid				$	72,250		$	56,810
	Income taxes paid				$	225		$	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				$	98,440		$	57,620

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

4

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

ORIENTAL FINANCIAL GROUP INC.

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

    The accounting and reporting policies of 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 March 31, 2001 and June 30, 2000, and the results of operations and cash flows for the third quarter and nine-month period ended March 31, 2001 and 2000.

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.

5

Money Market Investments

    At March 31, 2001 and June 30, 2000 the Group's money market investments were comprised of:

	(In thousands)
	March 31,		June 30,
Time deposits with other banks		1,300		1,350
Money market accounts and other short-term investments		65,175		22,161
	$	66,475	$	23,511

Trading Securities

    A summary of trading securities owned by the Group at March 31, 2001 and June 30, 2000 is as follows:

	(In thousands)
	March 31,		June 30,
U.S. Treasury securities	$	2,587	$	42,734
P.R. Government securities		424		13,513
Mortgage-backed securities		48,335		6,058
CMO residuals, interest only		2,156		2,138
	$	53,502	$	64,443

    At March 31, 2001, the Group's trading portfolio weighted average yield was 7.31% (June 30, 2000—7.49%).

Investment securities

    With the adoption of Statement No. 133 (See Note 6), "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

6

fair value, and weighted average yield of the securities owned by the Group at March 31, 2001 and June 30, 2000, were as follows:

		March 31, 2001 (In thousands)
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Average Weighted Yield
Available-for-Sale:
US Treasury securities		$	3,634	$	129	$	—	$	3,763	7.31	%
US Government agencies securities			36,689		378		—		37,067	7.04	%
Other debt securities			9,287		—		—		9,287	8.33	%
PR Government securities			4,424		26		70		4,380	7.19	%
CMOs			224,552		1,093		1,006		224,640	6.72	%
FNMA and FHLMC certificates			622,069		5,312		455		626,926	6.60	%
GNMA certificates			277,404		5,911		249		283,066	7.17	%
	Total available for sale		1,178,059		12,849		1,780		1,189,129	6.78	%
Equity options			10,216		—		—		10,216	0.00	%
FHLB stock			12,697		—		—		12,697	7.54	%
	Total investments	$	1,200,972	$	12,849	$	7,780	$	1,212,042	6.79	%

		June 30, 2000 (In thousands)
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Average Weighted Yield
Available-for-Sale:
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	%
	Total available for sale		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	%

		June 30, 2000 (In thousands)
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Average Weighted Yield
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	%
	Total investments	$	1,100,534	$	788	$	36,425	$	1,064,897	6.82	%

7

    The amortized cost and estimated fair value of the Group's investment securities at March 31, 2001, 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	$	60,078	$	60,018	$	—	$	—	$	60,078	$	60,018
After 1 year to 5 years		4,406		4,538		—		—		4,406		4,538
After 5 years to 10 years		59,962		60,722		—		—		59,962		60,722
Due after 10 years		1,053,612		1,063,851		—		—		1,053,612		1,063,851
Equity options		—		—		—		—		10,216		10,216
FHLB stock		—		—		—		—		12,697		12,697
	$	1,178,058	$	1,189,129	$	—	$	—	$	1,200,971	$	1,212,042

    Proceeds from the sale of investment securities available-for-sale during the first nine months of fiscal 2001 totaled $329,815,000 (2000—$56,813,000). Gross realized gains and losses on those sales were $3,772,000 and $5,597,000 respectively (2000—$1,077,000 and $11,000).

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

8

mortgage loans. The composition of the Group's loan portfolio at March 31, 2001 and June 30, 2000 was as follows:

		(In thousands)
		March 31,			June 30,
Loans secured by real estate:
	Residential	$	247,312		$	331,150
	Non-residential real estate loans		4,546			4,974
	Home equity loans and personal loans collateralized by real estate		70,542			40,306
			322,400			376,430
	Less: net deferred loan fees		(3,117	)		(2,103	)
			319,283			374,327
Other loans:
	Commercial		24,647			24,117
	Personal consumer loans and credit lines		22,896			19,698
	Financing leases, net of unearned interest		2,695			8,785
			50,238			52,600
Loans receivable			369,521			426,927
Allowance for loan losses			(2,821	)		(6,837	)
Loans receivable, net			366,700			420,090
Loans held-for-sale			61,612			180,788
Total loans, net		$	428,312		$	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 loss policy provides for a detailed quarterly analysis of 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 third quarter and nine-month period ended March 31, 2001 and 2000.

    The Group evaluates all loans, some individually and other as homogeneous groups, for purposes of determining impairment. At March 31, 2001 and June 30, 2000, the Group determined that no impairment reserve was necessary.

9

NOTE 4—ACCUMULATED OTHER COMPREHENSIVE INCOME:

    Accumulated other comprehensive income (loss) as of March 31 consists of:

	2001			2000
	(In thousands)
Unrealized loss on securities derivatives, net of amount reclassified into earnings of $283,000	$	(253	)		—
Unrealized loss on derivatives designated as cash flows hedges		(14,876	)		0
Unrealized gain (loss) on securities		4,185			(18,974	)
Accumulated other comprehensive loss	$	(10,944	)	$	(18,974	)

NOTE 5—PLEDGED ASSETS:

    At March 31, 2001, residential mortgage loans and investment securities amounting to $229,925,000 (June 30, 2000—$254,312,000), and $1,175,794,000 (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.

10

NOTE 6—INTEREST RATE RISK MANAGEMENT:

    The Group uses interest rate swaps and caps as an interest rate risk hedging mechanism. Under the swaps, the Group pays a fixed annual cost and receives a floating payment based on LIBOR. Floating rate payments received from the swap counterparty correspond to the floating rate payments made on the borrowings or notes thus resulting in a net fixed rate cost to the Group. Under the caps, Oriental pays an up front premium or fee for the right to receive cash flow payments in excess of the predetermined cap rate; thus, effectively capping its interest rate cost for the duration of the agreement. The Group's swaps and caps outstanding and their terms at March 31, 2001 and June 30, 2000 are set forth in the table below:

	March 31,			June 30,
	(Dollars in thousands)
Swaps:
Pay fixed swaps notional amount	$	250,000		$	100,000
Weighted average pay rate—fixed		7.02	%		7.07	%
Weighted average receive rate—floating		5.10	%		6.76	%
Maturity in months		15 - 117			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		13			23

    The 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 percent of the average increase of the month-end value of the corresponding stock index. If such index decreases, the depositor receives the principal without any interest. The Group uses interest rate swap agreements with major money center banks to manage its exposure to the stock market. Under the terms of the agreements, the Group will receive the average increase in the month-end value of the corresponding index in exchange for a semiannual fixed interest cost. At March 31, 2001, the notional amount of these agreements totaled $155,450,000 (June 30, 2000—$132,975,000) at a weighted average rate of 5.79% (June 30, 2000—5.84%).

    The Group offers its customers certificates of deposit with high interest rates and uses interest rate swap agreements to lower the cost of these deposits. Under the terms of the agreements, the Group pays a floating rate (90 days LIBOR less a spread) and receives a fixed payment (the cost of the certificates of deposit). These swaps mature in seven years with an option to cancel after the third year. This option is at the counterparty's call. The certificates of deposit are issued with this same option, the Group has the right to call the certificates of deposit. At March 31, 2001, the notional amount of these agreements totaled $10,000,000 (June 30, 2000—$40,000,000) at a weighted average rate of 6.63% (June 30, 2000—5.82%).

11

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 value of derivatives must be adjusted to fair value through income or other comprehensive income. If derivative meet the criteria and qualify as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either 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 will be 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 hedge accounting for its interests rates swaps which are hedging a portion of the Group's borrowings.

    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 Stockholder's Equity and of Comprehensive Income. The transition adjustment in comprehensive income also includes an unrealized loss of $26,633,000 on securities transferred from the held-to-maturity category to the available for sale category on July 1, 2000. In addition, a $667,000 and $3.0 million of unrealized losses ($407,000 and $1.8 million net of tax effect) were charged to earnings for the quarter and nine-months ended March 31, 2001, respectively, and reflected as "Derivatives Activities Income (loss)" in the Consolidated Statement of Income. Unrealized losses of $4.6 million and $14.9 million were charged to other comprehensive income during the quarter and nine-months ended March 31, 2001, respectively.

    The fair value of derivatives is recognized as either assets or liabilities in the Consolidated Statement of Financial Condition as of March 31, 2001, as follows: $10.2 million in "Investments", $39.7 million in "Deposits" and $20.2 million in "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 leasing, which were discontinued on June 30, 2000, are 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

12

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 third quarter and nine-month period ended March 31:

		Nine-month period ended March 31
		Retail Banking			Financial Services		Mortgage Banking		Eliminations			Total
		(Dollars in thousands)
Fiscal 2001
Net interest income		$	18,956		$	197	$	—	$	—		$	19,153
Non-interest income(charges)			(985	)		8,488		7,959		(1,845	)		13,617
Non-interest expenses			20,427			5,386		2,774		(1,845	)		26,742
Provision for loan losses			2,406			—		—		—			2,406
	Income (loss) before taxes	$	(4,862	)	$	3,299	$	5,185	$	—		$	3,622
Total assets		$	1,834,416		$	5,223	$	2,000	$	(2,618	)	$	1,839,021
Fiscal 2000
Net interest income		$	33,884		$	488	$	—	$	—		$	34,372
Non-interest income(charges)			5,170			8,772		5,238		(220	)		18,960
Non-interest expenses			19,367			4,538		2,885		(220	)		26,570
Provision for loan losses			4,750			—		—		—			4,750
	Income before taxes	$	14,937		$	4,722	$	2,353	$	—		$	22,012
Total assets		$	1,734,139		$	5,745	$	2,000	$	(90	)	$	1,743,181

		Third quarter ended results March 31
		Retail Banking		Financial Services		Mortgage Banking		Eliminations			Total
		(Dollars in thousands)
Fiscal 2001
Net interest income		$	6,516	$	66	$	—	$	—		$	6,582
Non-interest income(charges)			2,019		2,907		3,181		(572	)		7,535
Non-interest expenses			6,985		2,223		805		(572	)		9,441
Provision for loan losses			506		—		—		—			506
	Income (loss) before taxes	$	1,044	$	750	$	2,376	$	—		$	4,170
Total assets		$	1,834,416	$	5,223	$	2,000	$	(2,618	)	$	1,839,021
Fiscal 2000
Net interest income		$	10,586	$	109	$	—	$	—		$	10,746
Non-interest income(charges)			1,619		3,410		1,504		(6	)		6,495
Non-interest expenses			6,310		1,634		592		(6	)		9,234
Provision for loan losses			1,500		—		—		—			1,500
	Income before taxes	$	3,710	$	1,885	$	912	$	—		$	6,507
Total assets		$	1,734,139	$	7,132	$	2,000	$	(90	)	$	1,743,181

13

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

FOR THE QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2001

Table of Contents

Description			Page No.
Selected Financial Data:
	Earnings, Dividends Declared and Per Share Information		15
	Period End Balances		15
	Selected Financial Ratios (in percent) and Other Information		15
	Table 1	Fiscal Year-To-Date Analysis of Interest Income and Changes due to Volume / Rate	16
	Table 1	Quarterly Analysis of Interest Income and Changes due to Volume / Rate	17
	Table 2	Non-Interest Income Summary and Composition	18
	Table 3	Non-Interest Expenses Summary and Composition	18
	Table 4	Non-operating Activities	18
	Table 5	Allowance for Loan Losses Summary	19
	Table 6	Net Credit Losses Statistics	19
	Table 7	Loan Loss Reserve Breakdowns	20
	Table 8	Non-Performing Assets	20
	Table 9	Non-Performing Loans	20
	Table 10	Bank Assets Summary and Composition	21
	Table 11	Liabilities Summary and Composition	21
	Table 12	Capital, Dividends and Stock Data	22
	Table 13	Financial Assets Summary	22
	Overview of Financial Performance		23

14

SELECTED FINANCIAL DATA
QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)

			Quarterly Results								Nine-Month Period
			As Restated								As Restated
			2001			2000			Variance %		2001			2000			Variance %
EARNINGS, PER SHARE AND DIVIDENDS DATA:
Interest income			$	29,913		$	31,932		(6.3	)%	$	88,842		$	93,125		(4.6	)%
Interest expense				23,331			21,186		10.1	%		69,689			58,753		18.6	%
	Net interest income			6,582			10,746		(38.7	)%		19,153			34,372		(44.3	)%
Provision for credit losses				506			1,500		(66.3	)%		2,406			4,750		(49.3	)%
	Net credit income			6,076			9,246		(34.3	)%		16,747			29,622		(43.5	)%
Recurrent non-interest income				6,683			5,968		12.0	%		18,144			17,074		6.3	%
	Net core revenues			12,759			15,214		(16.1	)%		34,891			46,696		(25.3	)%
Recurrent non-interest expenses				9,145			9,094		0.6	%		25,970			26,185		(0.8	)%
	Core operating activities			3,614			6,120		(40.9	)%		8,921			20,511		(56.5	)%
Non operating non-interest income (charges)				852			527		61.7	%		(4,527	)		1,886		(340.0	)%
Non operating non-interest expenses				(296	)		(140	)	111.4	%		(772	)		(385	)	100.5	%
	Total non-operating activities gain (losses)			556			387		43.7	%		(5,299	)		1,501		(453.0	)%
	Income before taxes			4,170			6,507		(35.9	)%		3,622			22,012		(83.5	)%
Income (credit) taxes				(353	)		406		(186.9	)%		(1,902	)		1,334		(242.6	)%
	Income before cumulative effect of change in accounting principle			4,523			6,101		(25.9	)%		5,524			20,678		(73.3	)%
Cumulative effect of change in accounting principle, net of taxes				—			—		0.0	%		(164	)		—		(100.0	)%
	Net income			4,523			6,101		(25.9	)%		5,360			20,678		(74.1	)%
Less: dividends on preferred stock				(597	)		(597	)	0.0	%		(1,790	)		(1,790	)	0.0	%
	Net income available to common shareholders		$	3,926		$	5,504		(28.7	)%	$	3,570		$	18,888		(81.1	)%
Earnings per share:
		Basic before cumulative effect of change in GAAP	$	0.31		$	0.43		(27.9	)%	$	0.30		$	1.48		(79.7	)%
		Basic after cumulative effect of change in GAAP	$	0.31		$	0.43		(27.9	)%	$	0.28		$	1.48		(81.1	)%
		Diluted before cumulative effect of change in GAAP	$	0.31		$	0.42		(26.2	)%	$	0.29		$	1.45		(80.0	)%
		Diluted after cumulative effect of change in GAAP	$	0.31		$	0.42		(26.2	)%	$	0.28		$	1.45		(80.7	)%
Average shares and potential shares				12,776			13,142		(2.8	)%		12,761			13,065		(2.3	)%
Book value			$	6.81		$	6.80		0.2	%	$	6.81		$	6.80		0.2	%
Market price at end of period			$	13.35		$	19.00		(29.7	)%	$	13.35		$	19.00		(29.7	)%
Dividends declared per common share			$	0.15		$	0.15		0.0	%	$	0.45		$	0.45		0.7	%
Common dividends declared			$	1,873		$	1,920		(2.4	)%	$	5,658		$	5,753		(1.7	)%
PERIOD END BALANCES (as of March 31,) AND FINANCIAL RATIOS:
Total financial assets
	Trust assets managed										$	1,398,531		$	1,387,300		0.8	%
	Broker-dealer assets gathered											881,885			925,500		(4.7	)%
		Assets managed										2,280,416			2,312,800		(1.4	)%
	Group total assets											1,839,021			1,743,181		5.5	%
											$	4,119,437		$	4,055,981		1.6	%
	Interest-earning assets
	Investments										$	1,332,019		$	1,091,643		22.0	%
	Loans and leases (including held-for-sale)											428,312			579,365		(26.1	)%
											$	1,760,331		$	1,671,008		5.3	%
Interest-bearing liabilities
	Deposits										$	675,532		$	652,687		3.5	%
	Repurchase agreements											902,994			754,760		19.6	%
	Borrowings											87,980			180,875		(51.4	)%
											$	1,666,506		$	1,588,322		4.9	%
Stockholders' equity
	Preferred equity										$	33,500		$	33,500		0.0	%
	Common equity											85,081			87,079		(2.3	)%
											$	118,581		$	120,579		(1.7	)%
Capital Ratios:
	Leverage capital											7.08	%		8.59	%
	Total risk-based capital											21.41	%		26.30	%
	Tier 1 risk-based capital											20.95	%		25.05	%
Financial ratios (in percent)
	Return on average assets (ROA)			1.03	%		1.41	%				0.39	%		1.65	%
	Return on average common equity (ROE)			19.79	%		23.76	%				6.04	%		27.78	%
	Efficiency ratio			71.13	%		54.66	%				71.56	%		50.84	%
	Expense ratio			0.66	%		0.74	%				0.69	%		0.72	%
	Interest rate margin			1.79	%		2.60	%				1.57	%		2.84	%
	Number of banking offices			19			19					19			19

15

SELECTED FINANCIAL DATA
NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
(Dollars in thousands)

TABLE 1—NINE-MONTH PERIOD ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:

			Interest							Average rate						Average balance
			2001			2000		Variance in %		2001		2000		Variance in BP		2001			2000			Variance in %
A—TAX EQUIVALENT SPREAD
Interest-earning assets			$	88,842		$	93,125	(4.60	)%	7.21	%	7.67	%	(0.46	)%	$	1,644,746		$	1,616,200		1.77	%
Tax equivalent adjustment				25,797			25,663	0.52	%	3.14	%	3.18	%	(0.04	)%		—			—		0.00	%
	Interest-earning assets—tax equivalent			114,639			118,788	(3.49	)%	10.35	%	10.85	%	(0.50	)%		1,644,746			1,616,200		1.77	%
Interest-bearing liabilities				69,689			58,753	18.61	%	5.94	%	5.12	%	0.82	%		1,562,934			1,524,450		2.52	%
		Net interest income / spread	$	44,950		$	60,035	(25.13	)%	4.41	%	5.73	%	(1.32	)%	$	81,812		$	91,750		(10.83	)%
B—NORMAL SPREAD
Interest-earning assets:
Investments:
	Investment securities		$	55,271		$	49,684	11.2	%	6.83	%	6.53	%	0.30	%	$	1,079,242		$	1,012,880		6.55	%
		Investment management fees		(704	)		—	(100.0	)%	(0.08	)%	0.00	%	(0.08	)%		—			—		0.00	%
	Total investment securities			54,567			49,684	9.8	%	6.75	%	6.53	%	0.22	%		1,079,242			1,012,880		6.55	%
	Trading securities			1,711			1,585	7.9	%	7.78	%	7.62	%	0.16	%		29,304			27,720		5.71	%
	Money market investments			3,944			173	2179.8	%	6.17	%	6.62	%	(0.45	)%		85,205			3,476		2351.24	%
				60,222			51,442	17.1	%	6.73	%	6.56	%	0.17	%		1,193,751			1,044,076		14.34	%
Loans:
	Real estate(1)			24,240			19,068	27.1	%	8.00	%	7.70	%	0.30	%		404,108			330,078		22.43	%
	Consumer			2,202			12,663	(82.6	)%	15.76	%	13.31	%	2.45	%		18,613			126,242		(85.26	)%
	Financing leases			384			8,182	(95.3	)%	8.55	%	11.35	%	(2.80	)%		5,981			95,677		(93.75	)%
	Commercial and auto loans			1,794			1,770	1.4	%	10.72	%	11.67	%	(0.95	)%		22,293			20,127		10.76	%
				28,620			41,683	(31.3	)%	8.46	%	9.69	%	(1.23	)%		450,995			572,124		(21.17	)%
				88,842			93,125	(4.6	)%	7.21	%	7.67	%	(0.46	)%		1,644,746			1,616,200		1.77	%
Interest-bearing liabilities:
Deposits:
	Savings and demand			2,312			2,212	4.5	%	2.34	%	2.12	%	0.22	%		131,450			138,449		(5.06	)%
	Time and IRA accounts			25,468			20,416	24.7	%	6.13	%	5.36	%	0.77	%		553,622			505,536		9.51	%
				27,780			22,628	22.8	%	5.40	%	4.67	%	0.74	%		685,072			643,985		6.38	%
Borrowings:
	Repurchase agreements			36,409			29,091	25.2	%	6.38	%	5.44	%	0.94	%		763,612			709,482		7.63	%
	Financing fees			123			—	100.0	%	0.02	%	0.00	%	0.02	%		—			—
	Total repurchase agreements			36,532			29,091	25.6	%	6.40	%	5.44	%	0.96	%		763,612			709,482		7.63	%
	FHLB funds, term notes and other borrowings			5,377			7,034	(23.6	)%	6.27	%	5.46	%	0.81	%		114,250			170,983		(33.18	)%
				41,909			36,125	16.0	%	6.37	%	5.44	%	0.92	%		877,862			880,465		(0.30	)%
				69,689			58,753	18.6	%	5.94	%	5.12	%	0.83	%		1,562,934			1,524,450		2.52	%
Net interest income / spread			$	19,153		$	34,372	(44.3	)%	1.26	%	2.55	%	(1.29	)%
Interest rate margin										1.57	%	2.84	%	(1.27	)%
Excess of interest-earning assets over interest-bearing liabilities																$	81,812		$	91,750		(10.83	)%
Interest-earning assets over interest-bearing liabilities ratio																	105.23	%		106.02	%

C. Changes in net interest income due to:		Volume			Rate			Total
Interest Income:
	Loans	$	(8,801	)	$	(4,261	)	$	(13,063	)
	Investments		7,365			1,414		$	8,779
			(1,436	)		(2,847	)		(4,283	)
Interest Expense:
	Deposits		1,438			3,714		$	5,152
	Borrowings		(106	)		5,890		$	5,784
			1,332			9,604			10,936
Net Interest Income		$	(2,768	)	$	(12,451	)	$	(15,219	)

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

16

SELECTED FINANCIAL DATA
QUARTER ENDED MARCH 31, 2001 AND 2000
(Dollars in thousands)

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

			Interest							Average rate						Average balance
			2001			2000		Variance in %		2001		2000		Variance in BP		2001			2000			Variance in %
A—TAX EQUIVALENT SPREAD
Interest-earning assets			$	29,913		$	31,932	(6.32	)%	7.33	%	7.64	%	(0.31	)%	$	1,669,518		$	1,667,269		0.13	%
Tax equivalent adjustment				8,797			8,851	(0.61	)%	2.11	%	2.12	%	(0.01	)%		—			—		0.00	%
	Interest-earning assets—tax equivalent			38,710			40,783	(5.08	)%	9.44	%	9.76	%	(0.32	)%		1,669,518			1,667,269		0.13	%
Interest-bearing liabilities				23,331			21,186	10.12	%	5.79	%	5.33	%	0.46	%		1,600,995			1,577,263		1.50	%
		Net interest income / spread	$	15,379		$	19,597	(21.52	)%	3.65	%	4.43	%	(0.78	)%		68,523			90,006		(23.87	)%
B—NORMAL SPREAD
Interest-earning assets:
	Investments:
		Investment securities	$	19,190		$	17,648	8.74	%	6.76	%	6.68	%	0.08	%	$	1,134,408		$	1,054,949		7.53	%
		Investment management fees		(704	)		—	(100.00	)%	(0.25	)%	0.00	%	(0.25	)%		—			—		0.00	%
				18,486			17,648	4.75	%	6.51	%	6.68	%	(0.17	)%		1,134,408			1,054,949		7.53	%
		Trading securities		490			649	(24.50	)%	7.46	%	8.06	%	(0.60	)%		26,261			32,191		(18.42	)%
		Money market investments		864			52	1561.54	%	6.61	%	7.22	%	(0.61	)%		52,226			2,852		1731.21	%
				19,840			18,349	34.0	%	6.77	%	6.72	%	0.05	%		1,212,895			1,089,992		11.28	%
	Loans:
		Real estate(1)		8,598			6,377	34.83	%	8.43	%	7.63	%	0.80	%		408,104			334,394		22.04	%
		Consumer		791			4,172	(81.04	)%	14.17	%	12.84	%	1.33	%		22,153			128,858		(82.81	)%
		Financing leases		83			2,599	(96.81	)%	9.53	%	11.08	%	(1.55	)%		3,452			93,091		(96.29	)%
		Commercial and auto loans		601			435	38.16	%	10.41	%	8.25	%	2.16	%		22,914			20,934		9.46	%
				10,073			13,583	(25.84	)%	8.82	%	9.37	%	(0.56	)%		456,623			577,277		(20.90	)%
				29,913			31,932	(6.3	)%	7.33	%	7.64	%	(0.31	)%		1,669,518			1,667,269		0.13	%
Interest-bearing liabilities:
	Deposits:
		Savings and demand		761			712	6.9	%	2.29	%	2.08	%	0.21	%		131,574			135,799		(3.11	)%
		Time and IRA accounts		8,254			7,076	16.6	%	6.00	%	5.47	%	0.53	%		546,142			512,989		6.46	%
				9,015			7,788	15.8	%	5.28	%	4.76	%	0.52	%		677,716			648,788		4.46	%
	Borrowings:
		Repurchase agreements		12,695			10,903	16.4	%	6.12	%	5.74	%	0.38	%		823,648			753,963		9.24	%
		Financing fees		123			—	100.0	%	0.06	%	0.00	%	0.06	%		—			—
		Total repurchase agreements		12,818			10,903	17.6	%	6.18	%	5.74	%	0.44	%		823,648			753,963		9.24	%
		FHLB funds, term notes and other borrowings		1,498			2,495	(40.0	)%	5.96	%	5.67	%	0.29	%		99,631			174,512		(42.91	)%
				14,316			13,398	6.9	%	6.16	%	5.73	%	0.43	%		923,279			928,475		(0.56	)%
				23,331			21,186	10.1	%	5.79	%	5.33	%	0.46	%		1,600,995			1,577,263		1.50	%
Net interest income / spread			$	6,582		$	10,746	(38.7	)%	1.54	%	2.31	%	(0.77	)%
Interest rate margin										1.79	%	2.60	%	(0.81	)%
Excess of interest-earning assets over interest-bearing liabilities																$	68,523		$	90,006		(23.87	)%
Interest-earning assets over interest-bearing liabilities ratio																	104.28	%		105.71	%

Changes in net interest income due to:		Volume			Rate			Total
Interest Income:
	Loans	$	(2,827	)	$	(683	)	$	(3,510	)
	Investments		2,064			(573	)		1,491
			(763	)		(1,256	)		(2,019	)
Interest Expense:
	Deposits		345			882			1,227
	Borrowings		(74	)		992			918
			271			1,874			2,145
Net Interest Income		$	(1,034	)	$	(3,130	)	$	(4,164	)

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

17

SELECTED FINANCIAL DATA
QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
(Dollars in thousands)

TABLE 2—NON-INTEREST INCOME SUMMARY

			3rd Quarter								Nine-Month Period
			As Restated								As Restated
			2001			2000			Variance %		2001			2000			Variance %
Trust, money management and brokerage fees			$	2,855		$	3,378		(15.5	)%	$	8,358		$	8,784		(4.8	)%
Mortgage banking activities				2,681			1,293		107.3	%		6,585			4,670		41.0	%
	Non-banking service revenues			5,536			4,671		18.5	%		14,943			13,454		11.1	%
Fees on deposit accounts				529			654		(19.1	)%		1,638			1,577		3.9	%
Bank service charges and commissions				401			636		(36.9	)%		1,244			1,851		(32.8	)%
Other operating revenues				217			7		3000.0	%		319			192		66.1	%
	Bank service revenues			1,147			1,297		(11.6	)%		3,201			3,620		(11.6	)%
		Recurrent non-interest income	$	6,683		$	5,968		12.0	%	$	18,144		$	17,074		6.3	%
Recurrent non-interest income to expenses ratio				73.08	%		65.63	%	11.4	%		69.87	%		65.21	%	7.1	%
TABLE 3—NON-INTEREST EXPENSES SUMMARY
Fixed compensation			$	2,597		$	2,944		(11.8	)%	$	7,962		$	8,500		(6.3	)%
Variable compensation				1,106			918		20.5	%		2,540			2,886		(12.0	)%
	Compensation and benefits			3,703			3,862		(4.1	)%		10,502			11,386		(7.8	)%
Occupancy and equipment				1,819			1,579		15.2	%		5,315			4,639		14.6	%
Advertising and business promotion				1,157			845		36.9	%		2,941			2,116		39.0	%
Professional and service fees (1)				640			860		(25.6	)%		1,805			2,409		(25.1	)%
Communications				387			454		(14.8	)%		1,214			1,231		(1.4	)%
Municipal and other general taxes				487			477		2.1	%		1,463			1,432		2.2	%
Insurance, including deposits insurance				124			100		24.0	%		351			372		(5.6	)%
Printing, postage, stationery and supplies				165			237		(30.4	)%		469			652		(28.1	)%
Other operating expenses				663			680		(2.5	)%		1,910			1,948		(2.0	)%
	Other non-interest expenses			5,442			5,232		4.0	%		15,468			14,799		4.5	%
Recurrent non-interest expenses			$	9,145		$	9,094		0.6	%	$	25,970		$	26,185		(0.8	)%
Relevant ratios and data:
	Efficiency ratio			71.13	%		54.66	%				71.56	%		50.84	%
	Expense ratio			0.66	%		0.74	%				0.69	%		0.72	%
	Compensation to recurrent non-interest expenses			68.0	%		73.8	%				67.9	%		76.9	%
	Variable compensation to total compensation			29.9	%		23.8	%				24.2	%		25.3	%
	Compensation to total average assets			0.84	%		0.86	%				0.77	%		0.91	%
	Average compensation per employee		$	45.2		$	42.4				$	41.7		$	42.3
	Average number of full-time employees			328			354					336			359
	Bank assets per employee										$	5,258		$	5,569
	Total work force:
		Banking operations										350			313		11.8	%
		Trust operations										27			27		0.0	%
		Brokerage operations										12			11		9.1	%
												389			351		10.8	%

(1)

Excludes non-operating charges shown on table 4.

TABLE 4—NON-OPERATING ACTIVITIES

Securities net activity			$	1,370		$	407		236.6	%	$	(1,825	)	$	1,066		(271.2	)%
Trading net activity				141			(59	)	(339.0	)%		234			6		3800.0	%
Derivatives activity				(667	)		—		(100.0	)%		(3,007	)		—		(100.0	)%
	Securities, derivatives and trading net activities			844			348		142.5	%		(4,598	)		1,072		(528.9	)%
Leasing revenues (discontinued June 2000)				8			179		(95.5	)%		71			814		(91.3	)%
Other (expenses)				(296	)		(140	)	111.4	%		(772	)		(385	)	100.5	%
	Other activities			(288	)		39		(838.5	)%		(701	)		429		(263.4	)%
		Total non-operating activities	$	556		$	387		43.7	%	$	(5,299	)	$	1,501		(453.0	)%

18

SELECTED FINANCIAL DATA
QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
(Dollars in thousands)

TABLE 5—ALLOWANCE FOR LOAN LOSSES SUMMARY

			Quarterly Results						Year-to-Date Results
			2001			2000			2001			2000
Beginning balance			$	2,998		$	7,659		$	6,837		$	9,002
Provision for loan losses				506			1,500			2,406			4,750
Net credit losses—see table 6				(683	)		(2,314	)		(6,422	)		(6,906	)
	Ending balance		$	2,821		$	6,845		$	2,821		$	6,846
Selected Data and Ratios:
	Outstanding loans		$	431,133		$	586,210		$	431,133		$	586,210
	Recoveries to net charge-off's			43.5	%		33.5	%		20.6	%		26.8	%
	Allowance coverage ratio
		Total loans		0.65	%		1.17	%		0.65	%		1.17	%
		Non-performing loans		17.74	%		41.31	%		17.74	%		41.31	%
		Non-real estate non-performing loans		121.02	%		74.92	%		121.02	%		74.92	%

TABLE 6—NET CREDIT LOSSES STATISTICS

Real estate
	Charge-offs		$	(24	)	$	(4	)	$	(60	)	$	(28	)
	Recoveries			—			—			—			—
				(24	)		(4	)		(60	)		(28	)
Consumer
	Charge-offs			(492	)		(1,796	)		(1,981	)		(5,560	)
	Recoveries			290			597			960			1,374
				(202	)		(1,199	)		(1,021	)		(4,186	)
Leasing
	Charge-offs			(328	)		(1,045	)		(4,499	)		(3,449	)
	Recoveries			184			375			554			1,023
				(144	)		(670	)		(3,945	)		(2,426	)
Commercial and others
	Charge-offs			(366	)		(229	)		(1,549	)		(396	)
	Recoveries			53			59			153			130
				(313	)		(170	)		(1,396	)		(266	)
Net credit losses
	Total charge-offs			(1,210	)		(3,074	)		(8,089	)		(9,433	)
	Total recoveries			527			1,031			1,667			2,527
			$	(683	)	$	(2,043	)	$	(6,422	)	$	(6,906	)
Net credit losses ratio:
	Real estate			0.02	%		0.00	%		0.02	%		0.01	%
	Consumer			3.65	%		3.69	%		7.31	%		4.39	%
	Leasing			16.66	%		2.67	%		87.95	%		3.14	%
	Commercial and others			4.04	%		3.10	%		17.05	%		5.06	%
		Total		0.60	%		1.38	%		1.90	%		1.56	%
Average Loans:
	Real estate		$	408,104		$	341,828		$	404,108		$	337,512
	Consumer			22,153			129,803			18,613			127,226
	Leasing			3,452			100,299			5,981			102,885
	Commercial and others			22,914			21,918			22,293			21,111
		Total	$	456,623		$	593,848		$	450,995		$	588,734

19

SELECTED FINANCIAL DATA
QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
(Dollars in thousands)

TABLE 7—LOAN LOSS RESERVE BREAKDOWN

		March 31, 2001		March 31, 2000
Consumer		$	1,324	$	1,350
Financing leases			529		744
Commercial and other			187		4,037
	Non-real estate		2,040		6,131
	Real estate		781		715
		$	2,821	$	6,846

TABLE 8—NON-PERFORMING ASSETS

Non-performing assets
	Non-performing loans	$	15,904		$	16,571
	Foreclosed real estate		1,007			548
	Repossessed autos		49			308
	Repossessed equipment		—			2
		$	16,960		$	17,429
Non-performing loans to
	Total loans		3.69	%		2.83	%
	Total assets		0.86	%		0.95	%
	Total capital		13.41	%		13.74	%

TABLE 9—NON-PERFORMING LOANS

Non-performing loans
	Consumer			$	464		$	945
	Financing leases				1,001			7,208
	Commercial				866			984
		Non-real estate			2,331			9,137
		Real estate			13,573			7,434
			Total	$	15,904		$	16,571
Non-performing loans composition
	Consumer				2.9	%		5.7	%
	Financing leases				6.3	%		43.5	%
	Commercial				5.4	%		5.9	%
		Non-real estate			14.7	%		55.1	%
		Real estate			85.3	%		44.9	%
			Total		100.0	%		100.0	%

20

SELECTED FINANCIAL DATA
AS OF MARCH 31, 2001 and 2000, and JUNE 30, 2000
(Dollars in thousands)

TABLE 10—ASSETS SUMMARY AND COMPOSITION

		As Restated
		March 31, 2001			March 31, 2000			Variance %		June 30, 2000
Investments:
	Mortgage-backed securities and CMOs	$	1,150,219		$	831,118		38.4	%	$	882,455
	U.S. and P.R. Government securities		92,412			238,343		(61.2	)%		262,372
	Equity Options Investments, net of option with broker		10,216			—		100.0	%		—
	FHLB stock and other investments		79,172			22,182		256.9	%		34,657
			1,332,019			1,091,643		22.0	%		1,179,484
Loans:
	Real estate		380,895			348,220		9.4	%		387,629
	Consumer		22,896			125,651		(81.8	)%		19,699
	Financing leases		2,695			89,469		(97.0	)%		8,785
	Commercial and auto		24,647			22,870		7.8	%		24,117
			431,133			586,210		(26.5	)%		440,230
	Consumer loans and leases under contract-to-sell		—			—		0.0	%		167,486
			431,133			586,210		(26.5	)%		607,716
	Allowance for loan losses		(2,821	)		(6,845	)	(58.8	)%		(6,837	)
			428,312			579,365		(26.1	)%		600,879
	Total interest-earning assets		1,760,331			1,671,008		5.3	%		1,780,363
Non-interest earning assets			78,690			72,173		9.0	%		69,871
	Total assets	$	1,839,021		$	1,743,181		5.5	%	$	1,850,234
Investments portfolio composition:
	Mortgage-backed securities and CMOs		86.4	%		76.1	%				74.8	%
	U.S. and P.R. Government securities		6.9	%		21.8	%				22.2	%
	Equity Options Investments		0.8	%		0.0	%				0.0	%
	FHLB stock and other investments		5.9	%		2.1	%				3.0	%
			100.0	%		100.0	%				100.0	%
Loan portfolio composition:
	Real Estate		88.3	%		59.4	%				63.8	%
	Consumer		5.3	%		21.4	%				3.2	%
	Financing leases		0.6	%		15.3	%				1.4	%
	Commercial and auto		5.8	%		3.9	%				31.6	%
			100.0	%		100.0	%				100.0	%

TABLE 11—LIABILITIES SUMMARY AND COMPOSITION

Deposits:
	Savings and demand deposits		$	126,961		$	134,916		(5.9	)%	$	130,919
	Time deposits and IRA accounts			544,926			513,082		6.2	%		587,931
				671,887			647,998		3.7	%		718,850
	Accrued interest			3,645			4,689		(22.3	)%		4,831
				675,532			652,687		3.5	%		723,681
Borrowings:
	Repurchase agreements			902,994			754,760		19.6	%		816,493
	FHLB funds			27,980			94,375		(70.4	)%		70,000
	Term notes and other sources of funds			60,000			86,500		(30.6	)%		86,500
				990,974			935,635		5.9	%		972,993
Total interest-bearing liabilities				1,666,506			1,588,322		4.9	%		1,696,674
		Non interest-bearing liabilities		53,934			34,280		57.3	%		35,691
Total liabilities			$	1,720,440		$	1,622,602		6.0	%		#REF!
Deposits portfolio composition:
	Savings and demand deposits			18.8	%		20.7	%				18.1	%
	Time deposits and IRA accounts			80.7	%		78.6	%				81.2	%
	Accrued interest and manager checks			0.5	%		0.7	%				0.7	%
				100.0	%		100.0	%				100.0	%
Borrowings portfolio composition:
	Repurchase agreements			91.1	%		80.7	%				83.9	%
	FHLB funds			2.8	%		10.1	%				7.2	%
	Term notes and other sources of funds			6.1	%		9.2	%				8.9	%
				100.0	%		100.0	%				100.0	%

21

SELECTED FINANCIAL DATA
AS OF MARCH 31, 2001 AND 2000 AND JUNE 30, 2000
(Dollars in thousands)

TABLE 12—CAPITAL, DIVIDENDS AND STOCK DATA

		As Restated
		March 31, 2001			March 31, 2000			Variance %		June 30, 2000
Capital data:
	Stockholders' equity	$	118,581		$	120,579		(1.7	)%	$	110,105
	Leverage Capital (minimum required—4.00%)		7.08	%		8.59	%	(17.6	)%		7.72	%
	Total Risk-Based Capital (minimum required—8.00%)		21.41	%		26.30	%	(18.6	)%		23.38	%
	Tier 1 Risk-Based capital (minimum required—4.00%)		20.95	%		25.05	%	(16.4	)%		22.80	%
Stock data:
	Outstanding common shares, net of treasury		12,486			12,800		(2.5	)%		12,536
	Book value	$	6.81		$	6.80		0.2	%	$	6.11
	Market Price at end of period	$	13.35		$	19.00		(29.7	)%	$	13.31
	Market capitalization	$	166,692		$	243,204		(31.5	)%	$	166,894
Common Dividend data:
	Common dividends declared ytd	$	5,658		$	5,753		(1.7	)%	$	3,785
	Common dividends declared per share ytd	$	0.453		$	0.450		0.7	%	$	0.300
	Payout ratio		158.49	%		30.46	%	420.3	%		258.71	%
	Dividend yield		4.63	%		6.25	%	(26.0	)%		4.75	%

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

		Price
						Dividend Per share
		High		Low
Fiscal 2001:
	March 31, 2001	$	14.81	$	12.75	$	0.150
	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

TABLE 13—FINANCIAL ASSETS SUMMARY

Financial assets:
	Trust assets managed		$	1,398,531	$	1,387,300	0.8	%	$	1,456,500
	Assets gathered by broker-dealer			881,885		925,500	(4.7	)%		914,900
		Managed assets		2,280,416		2,312,800	(1.4	)%		2,371,400
Group assets				1,839,021		1,743,181	5.5	%		1,850,234
			$	4,119,437	$	4,055,981	1.6	%	$	4,221,634

22

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2001

OVERVIEW OF FINANCIAL PERFORMANCE

    The Group reported net income of $4.5 million ($0.31 diluted per share) for the third quarter ended March 31, 2001, a 66-percent increase from net income of $2.7 million ($0.17 diluted per share) for the trailing quarter ended December 31, 2000. The $4.5 million figure compares with net income of $6.1 million ($0.42 diluted per share) in the quarter ended March 31, 2000.

    Operating income was $3.6 million for the third quarter, up 22 percent from $3.0 million in the quarter ended December 31, 2000 and a 41-percent decrease when compared with operating income of $6.1 million for the quarter ended March 31, 2000.

    The decline in net income compared with year-ago levels is primarily attributable to a 34-percent reduction in net credit income from $9.2 million to $6.1 million. This decrease is mainly due to a 6-percent reduction in interest income that mainly stems from the sale of almost $170 million in leases and unsecured loans on July 7, 2000, and a 10-percent surge in interest expense mainly attributable to increases in the volume of borrowings and rate increases by the Federal Reserve.

    For the quarter ended March 31, 2001, recurrent non-interest revenues (trust, money management, brokerage, insurance, mortgage-related and banking-service fees) were $6.7 million, increasing 10 percent from $6.1 million in the quarter ended December 31, 2000 and 12 percent from $6.0 million in the quarter ended March 31, 2000. These increases were largely fueled by a rise in income from trust, money management, brokerage and insurance activities, which increased almost 7 percent to $2.9 million from $2.7 million in the second quarter ended December 31, 2000. Most notably, quarterly mortgage-banking revenues increased 14 percent, from $2.4 million to $2.7 million, when compared against the quarter ended December 31, 2000.

    Non-interest expenses grew 5 percent from $8.7 million in the December 2000 quarter to $9.1 million. The increase is mainly due to advertising expenses for the Group's new corporate image as financial planners and its individual retirement accounts (IRA) marketing campaign.

    Focusing on low-risk activities has improved the Group's asset quality during the current fiscal year. The provision for loan losses for the quarter ended March 31, 2001 was $506,000, a 66-percent reduction from the $1.5 million provision made for the quarter ended March 31, 2000.

    Total financial assets (banking assets plus assets managed by the Group's trust department and broker-dealer subsidiary) increased 3.5 percent to $4.119 billion as of March 31, 2001, from $3.981 billion as of March 31, 2000. The Group's bank assets increased 5.5 percent to $1.839 billion, up from $1.743 billion a year earlier. Assets managed by the Group's trust department and broker-dealer subsidiary increased 1.9 percent to $2.280 billion as of March 31, 2001, from $2.238 billion a year earlier.

    For the quarter ended March 31, 2001, the Group recognized a $667,000 unrealized loss related to derivatives activities. In the quarters ended September 30 and December 31, 2000, the Group had also recognized unrealized losses of $1.6 million and $721,000, respectively, for derivatives activities, in addition to a $164,000 transition adjustment for the cumulative effect of a change in accounting principle following the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, effective since July 1, 2000.

23

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.

    For the third quarter of fiscal 2001, the Group's net interest income amounted to $6.6 million, down 38.7 percent from $10.7 million in the same period of fiscal 2000. For the nine-month period ended March 31, 2001, net interest income amounted to $19.2 million, down 44.3 percent from $34.4 million for the nine-month period ended March 31, 2000. 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 $3.1 million as result of a higher average cost of funds (5.79 percent in March 2001 quarter versus 5.33 percent in March 2000) in line with interest-rate increases by the Fed, combined with a negative volume variance of $1 million, which mainly stems from the previously reported sale of leases and unsecured loans. Likewise, when comparing both nine-month periods ended in March, the negative rate variance was $12.5 million, given a higher average cost of funds (5.94 percent versus 5.12 percent), combined with a negative volume variance of $2.9 million, thus considerably impacting year-to-date net interest income.

    The interest-rate spread narrowed 77-basis points during the third quarter of fiscal 2001 to 1.54 percent from 2.31 percent in the March 2000 quarter. For the nine-month period ended March 31, 2001, the interest rate spread fell 129 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 third quarter of fiscal 2001 totaled $29.9 million, down 6.3 percent from $31.9 million posted in the same period of fiscal 2000. For the nine-month periods ended March 31, interest income declined 4.6 percent from $93.1 million to $88.8 million. These decreases in interest income result from the decline in their yield performance (from 7.67 percent to 7.21 percent, for the nine-month periods), 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 123-basis points for the nine-month periods compared, reflecting the previously reported sale of almost $170 million of leases and unsecured loans.

    The 5.3 percent increase in total interest-earning assets, from $1.67 billion to $1.76 billion year-to-year, was achieved despite the aforementioned sale of leases and unsecured loans. Funds from this transaction were used to repay debt and invest in higher-quality securities. For the third quarter of fiscal 2001, the average volume of total investments grew by 11.3 percent ($1.213 billion versus $1.090 billion) when compared to the same period a year earlier. However, the average volume of total loans decreased 20.9 percent ($457 million versus $577 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 10.1 percent to $23.3 million from $21.2 million reported in the comparable period of fiscal 2000. For the nine-month period ended March 31, 2001, interest expense rose 18.6 percent from $58.8 million in the March 2000 to

24

$69.7 million. A larger base of interest-bearing liabilities ($1.563 billion versus $1.524 billion, when comparing both nine-month periods) used to fund the growth of the Group's interest-earning assets, combined with a higher average cost of funds (5.94 percent versus 5.12 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. For the nine-month period ended March 31, 2001, the cost of borrowings increased 92-basis points (6.37 percent versus 5.44 percent) when compared to the same period in fiscal 2000. The cost of short-term financing substantially increased during calendar year 2000 as a result of interest rate hikes made by the Fed, but the Group benefited from interest rate declines made during January 2001 and should continue to benefit in forthcoming periods from additional declines made after January 2001.

NON-INTEREST INCOME

    Table 2 shows 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 74-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, insurance distribution fees and service fees generated from loans and deposit accounts.

    For the quarter ended March 31, 2001, recurrent non-interest revenues increased 12 percent to $6.7 million from $6.0 million in the March 2000 quarter. For the nine-month period, the increase was 6.3 percent when compared to the same period in fiscal 2000. This growth was achieved through substantial increases in mortgage-banking activities, which offset declines in other types of fees described herein.

    Trust, money management, brokerage and insurance fees, the principal component of recurrent non-interest income, declined 15.5 percent to $2.9 million for the March 2001 quarter versus $3.4 million in the March 2000 quarter, due to a bearish U.S. securities market and public concern over the global economic outlook that influenced the volume and value of client investments managed. For the nine-month periods ended March 31st, these revenues were $8.8 million (2000) and $8.4 million.

    The second largest component of non-interest revenues is mortgage-banking activities, which increased 107 percent to reach $2.7 million in the quarter ended March 31, 2001. When comparing nine-month periods ended in March 2001 and 2000, mortgage-banking activities increased 41 percent from $4.7 million to $6.6 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 $1.1 million in the third quarter of fiscal 2001, an 11.6 percent decline from $1.3 million in the same quarter of fiscal 2000. 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 nine-month periods, these revenues dropped 11.6 percent to $3.2 million from $3.6 million.

NON-INTEREST EXPENSES

    Table 3 details non-interest expenses (excluding non-operating charges), which remained flat at $9.4 million when comparing both March quarters. Increases in advertising and occupancy and equipment were basically offset by decreases in compensation, supplies and service fees. For the nine-month period ended March 31, 2001, non-interest expenses reflect a small decline of 0.8 percent,

25

when compared with the similar period in fiscal 2000. Employee compensation and benefits (the Group's largest expense category) decreased 4.1 percent from $3.9 million to $3.7 million, when comparing both March quarters, and 7.8 percent when comparing both nine-month periods. These savings were mostly obtained from leasing operations that were discontinued in June 2000.

    Non-interest expenses other than compensation increased 4.0 percent to $5.4 million for the third quarter of fiscal 2001, compared to $5.2 million for the March 2000 quarter, and increased 4.5 percent when comparing the nine-month periods ended each March. A $300,000 increase in quarterly advertising expenses was mainly responsible for this increase. Additionally, a $240,000 increase in occupancy and equipment costs used to improve 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 6 to the Unaudited Consolidated Financial Statements). The SFAS 133 valuation, which during April 2001 was revised for the previous two quarters, resulted in a $667,000 loss for the quarter ended March 31, 2001; bringing the year-to-date total to $3 million. The Group reported a $164,000 (net of taxes) unrealized loss in the first quarter of fiscal 2001 to book the cumulative effect of the change in accounting principle.

    As reported in the quarter ended September 30, 2000, the Group also 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. Securities activities during the quarter ended March 31, 2001 show a $1.4 million gain, bringing the year-to-date total to a loss of $1.8 million.

PROVISION FOR LOAN LOSSES

    The provision for loan losses in the third quarter of fiscal 2001 totaled $506,000, down 66.3 percent from the $1.5 million reported in the same period of fiscal 2000. For the nine-month period ended March 31, 2001, the provision for loan losses declined 49.3 percent from $4.8 million in the same period for fiscal 2000 to $2.4 million. The decline reflects the composition of the Group's loan portfolio, mostly secured by real estate, following the sale of leases and unsecured loan, curtailing net credit losses and non-performing assets. 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 third quarter of fiscal 2001 reflect a credit of $353,000 compared with a $406,000 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 March 31, 2001, the Group's total assets amounted to $1.839 billion, an increase of 5.5 percent when compared to $1.743 billion a year ago. At the same date, interest-earning assets reached $1.760 billion, up 5.3 percent versus $1.671 billion a year earlier.

26

    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 March 31, 2001, the Group's investment portfolio was of high quality, generated a significant amount of tax-exempt interest income that lowered the Group's tax obligations. Note 2 to the Consolidated Financial Statements further explain the Group's investments.

    A strong growth in mortgage-backed securities drove the investment portfolio expansion, increasing 38.4 percent to $1.150 billion (86.4 percent of the total portfolio) from $831.1 million (76.1 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 $428.3 million, 26.1 percent lower than the $579.4 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 $170 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 $381 million or 88.3 percent of the loan portfolio as of March 31, 2001, which is an extremely positive increase from its 59-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 22 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 $24.6 million or 5.8 percent of the portfolio. The Group expects to increase its efforts in originating secured 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 March 31, 2001, the Group's total liabilities reached $1.720 billion, 6 percent higher than the $1.623 billion reported a year earlier. Interest-bearing liabilities, the Group's principal funding source, amounted to $1.667 billion at the end of the third quarter of fiscal 2001 versus $1.588 billion the year before, a 4.9 percent increase.

    Borrowings, the Group's largest interest-bearing liability component, consist of repurchase agreements, FHLB of New York (FHLB) advances and borrowings, term notes, notes payable and lines of credit. As of March 31, 2001, borrowings amounted to $991 million; 5.9 percent more than the $936 million reported a year before. Over 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 of New York, the Group can obtain advances from the FHLB, secured by FHLB stock owned by the Group and certain of the Group's mortgages and investment securities. As of March 31, 2001, the Group had $28 million in FHLB advances, 70 percent less than the previous year.

    As of March 31, 2001, deposits (the second largest category of the Group's interest-bearing liabilities) reached $675.5 million, up 3.5 percent versus $652.7 million a year ago. A 43.6 percent increase in IRA accounts (from $166 million last year to $238 million) plus a 14.5 increase in retail deposits (from $166 million to $191 million) helped offset a 28.9 percent decline in wholesale deposits, which went from $182 million to $130 million

27

STOCKHOLDERS' EQUITY

    Stockholders' equity data is provided in Table 12. As of March 31, 2001, total stockholders' equity was $118.6 million, declining 1.7 percent from $120.6 million at March 31, 2000. The main reasons for this decrease were the mark-to-market effect of SFAS 133 (see Note 6 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 third quarter of fiscal 2001, the Group repurchased 53,900 common shares for $730,000, bringing to 1,325,699 shares (with a cost of $29.9 million) the total number of treasury shares. As of March 31, 2001, 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 nine-month period ended March 31, 2001, the Group declared dividends amounting to $5.7 million ($0.45 per share). The dividend yield was 4.63 percent and 2.78 percent for the nine-month periods ended March 31, 2001 and 2000, respectively. Management expects to continue declaring dividends at the present rate in forthcoming quarters.

    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 broker-dealer subsidiary. As of March 31, 2001, total financial assets reached $4.119 billion—up 3.5 percent from $3.981 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 trust department, which includes various types of IRA products, 401(K) and Keogh retirement plans, custodian and corporate trust accounts. As of March 31, 2001, total assets managed by the Group's trust department amounted $1.399 billion, less than one percent above the $1.387 billion reported a year ago. The bearish market experienced the past 12 months affected the valuation of assets under management.

    The other financial asset component is assets gathered by the Group's broker-dealer, which 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 March 31, 2001, total assets gathered by the broker-dealer from its customer investment accounts reached $882 million, up 3.7 percent from $850 million a year ago.

ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS

    As of March 31, 2001, the allowance for loan losses (see Tables 5 through 7) amounted to $2.9 million, or 0.66 percent of total loans, versus $7.1 million, or 1.21 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

28

risks due to their collateral, the allowance for loan losses amounted to 121% of non-real estate non-performing loans.

    The Group maintains an allowance for loan losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. The Group's allowance for loan losses policy provides for a detailed quarterly analysis of probable losses.

    The principal factors that the Group uses to determine the level of allowance for loan losses are the Group's historical and current credit loss experience. These factors are combined with qualitative factors such as: the growth of the loan portfolio, concentrations of credit (e.g., local industries, etc.) that might affect loss experience across one or more components of the portfolio, delinquencies, effects of any changes in lending policies and procedures (including underwriting standards), collections, general economic conditions and unusual events such as hurricanes.

    The methodology that the Group uses follows a loan credit risk rating process that involves dividing loans into risk categories 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 third quarter of fiscal 2001, detailed in Table 6, totaled $646,000 or 0.57 percent of average loans, much lower than the $2 million in losses (1.38 percent of average loans) in the same period of fiscal 2000. The lower level of net credit losses experienced was primarily

29

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 $16.9 million (0.86 percent of total assets) as of March 31, 2001, versus $17.5 million (0.95 percent of total assets) at the same date of fiscal 2000. The decrease was principally due to approximately $6.8 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 March 31, 2001, the Group's non-performing real estate loans totaled $15.9 million (85.3 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 March 31, 2001, the Group's non-performing commercial business loans amounted to $866,000 (5.4 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 March 31, 2001, the Group's non-performing financing leases portfolio amounted to $1.0 million (6.3 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 March 31, 2001, the Group's non-performing consumer loans amounted to $464,000 (2.9 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 less disposal cost at the date of foreclosure, any excess of the loan balance over the estimated fair market value of the property is charged against the allowance for loan losses. Subsequently, any excess of the carrying value over the estimated fair market value less disposition cost is charged to operations. Management is actively seeking prospective buyers for these foreclosed real estate properties. As of March 31, 2001, foreclosed real estate balance was $1.0 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 March 31, 2001, 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

30

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 March 31, 2001, the Group's liquidity was deemed appropriate, as liquid assets amounted to $1.215 billion or 37 percent more than the previous year when they were $884 million. In addition, the Group has $59.4 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.

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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. Initial conference meetings have taken place during the March 2001 quarter.

    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

ITEM 5.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

A—FINANCIAL STATEMENTS SCHEDULES

    None

B—REPORTS ON FORM 8-K

    On May 4, 2001, the Group filed a Form 8-K following its announcement on May 1, 2000 that it revised its consolidated financial statements; primarily, the statement of income for the quarter ended September 30, 2000, and the statements of stockholder's equity and comprehensive income for the quarter and six-month period ended September 30 and December 31, 2000, respectively, to reflect revisions made to the application of Statement of Financial Accounting Standards No. 133.

C—EXHIBITS

    None

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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:		Date: 6/15/01
	/s/ José E. FernándezJosé E. Fernández,Chairman of the Board of Directors, President and Chief Executive Officer
By:		Date: 6/15/01
	/s/ Rafael ValladaresRafael Valladares,Senior Vice-President and Principal Financial Officer

33

QuickLinks

TABLE OF CONTENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, 2001 (UNAUDITED) AND JUNE 30, 2000 (IN THOUSANDS)
CONSOLIDATED STATEMENTS OF INCOME QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OF COMPREHENSIVE INCOME NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Table of Contents
SELECTED FINANCIAL DATA QUARTER AND NINE–MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
SELECTED FINANCIAL DATA QUARTER AND NINE–MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
SELECTED FINANCIAL DATA AS OF MARCH 31, 2001 and 2000, and JUNE 30, 2000 (Dollars in thousands)
SELECTED FINANCIAL DATA AS OF MARCH 31, 2001 AND 2000 AND JUNE 30, 2000 (Dollars in thousands)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2001
PART—2
SIGNATURES