OFG Bancorp (OFG) 10-Q 2001 Q3 Quarterly report

QuickLinks -- Click here to rapidly navigate through this document

Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the Quarter Ended September 30, 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
Río Piedras, Puerto Rico 00926
Telephone Number: (787) 771-6800

Number of shares outstanding of the registrant's common stock, as of the latest practicable date:

12,452,117 common shares ($1.00 par value per share)
outstanding as of September 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	FINANCIAL INFORMATION:
Item-1	Financial Statements
	Unaudited consolidated statements of financial condition at September 30, 2001 and June 30, 2001.	1
	Unaudited consolidated statements of income for the quarters ended September 30, 2001 and 2000.	2
	Unaudited consolidated statements of changes in stockholders' equity and of comprehensive income for the quarters ended September 30, 2001 and 2000.	3
	Unaudited consolidated statements of cash flows for the quarters ended September 30, 2001 and 2000.	4
	Notes to unaudited consolidated financial statements	5 - 11
Item-2	Management's discussion and analysis of financial condition and results of operations	12 - 29
Item-3	Quantitative and qualitative disclosures about market risk	32 - 34
PART—2	OTHER INFORMATION:
Item-1	Legal Proceedings	34
Item-2	Change in securities	34
Item-3	Defaults upon senior securities	34
Item-4	Submissions of Matters to a Vote of Security Holders	34
Item-5	Other Information	34
Item-6	Exhibits and Reports on Form 8-K	34
	Signatures	35

PART 1 — FINANCIAL INFORMATION

Item 1 — Financial Statements

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
SEPTEMBER 30, 2001 AND JUNE 30, 2001
(In thousands, except share information)

				September 30, 2001			June 30, 2001
ASSETS
Cash and due from banks				$	16,001		$	8,220
Investments:
	Money market investments				270			21,667
	Time deposits with other banks				33,525			42,124
			Total money market investments and time deposits with other banks		33,795			63,791
	Trading securities that can not be repledged, at fair value				26,695			76,760
	Investment securities available-for-sale, at fair value:
		Securities pledged that can be repledged			963,054			920,320
		Other investment securities			510,526			396,565
			Total investment securities available-for-sale		1,473,580			1,316,885
	Federal Home Loan Bank (FHLB) stock, at cost				17,208			15,272
	Investments in equity options				17,847			26,973
			Total investments		1,569,125			1,499,681
Loans:
	Loans held-for-sale, at lower of cost or market				11,210			23,570
	Loans receivable, net of allowance for loan losses of $2,920, September 30, 2001 and $2,856, June 30, 2001				504,513			442,912
			Total loans, net		515,723			466,482
Accrued interest receivable					17,870			16,646
Foreclosed real estate, net					750			847
Premises and equipment, net					21,536			20,936
Other assets, net					27,328			26,128
Total assets				$	2,168,333		$	2,038,940
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
	Savings and demand			$	143,937		$	133,980
	Time and IRA accounts				706,062			661,701
					849,999			795,681
	Accrued interest				2,571			2,284
			Total deposits		852,570			797,965
Borrowings:
	Securities sold under agreements to repurchase				925,619			915,471
	Advances from FHLB				157,150			105,000
	Term notes				30,000			60,000
			Total borrowings		1,112,769			1,080,471
Accrued expenses and other liabilities					65,990			47,014
Total liabilities					2,031,329			1,925,450
Stockholders' equity:
	Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation value; 1,340,000 shares issued and outstanding				33,500			33,500
	Common stock, $1 par value; 20,000,000 shares authorized; 13,897,283 shares issued (June 30, 2001—13,885,468)				13,897			13,885
	Additional paid-in capital				27,175			26,004
	Legal surplus				12,346			12,118
	Retained earnings				80,733			76,818
	Treasury stock, at cost, 1,445,166 shares (June 30, 2001—1,378,699)				(31,934	)		(30,651	)
	Accumulated other comprehensive income (loss), net of tax of $1,424 (June 30, 2001—$280 tax benefit)				1,287			(18,184	)
			Total stockholders' equity		137,004			113,490
Total liabilities and stockholders' equity				$	2,168,333		$	2,038,940

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

1

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands, except per share information)

			THREE-MONTH PERIOD
			2001			2000
Interest income:
	Loans and leases		$	10,294		$	9,148
	Mortgage-backed securities			21,443			15,107
	Investment securities			753			3,640
	Short term investments			455			2,474
		Total interest income		32,945			30,369
Interest expense:
	Deposits			9,242			9,610
	Securities sold under agreements to repurchase			10,473			12,224
	Other borrowed funds			2,225			2,050
		Total interest expense		21,940			23,884
Net interest income				11,005			6,485
Provision for loan losses				642			1,400
Net interest income after provision for loan losses				10,363			5,085
Non-interest income (losses):
	Trust, money management, brokerage and insurance fees			3,175			2,827
	Mortgage banking activities			1,370			1,551
	Banking service revenues			947			1,016
	Net gain (loss) on sale of securities available-for-sale			329			(3,705	)
	Derivatives activities, net			(163	)		(1,619	)
	Trading activity, net			1,106			(12	)
	Leasing revenues			—			49
		Total non-interest income		6,764			107
Non-interest expenses:
	Compensation and benefits			4,471			3,375
	Occupancy and equipment, net			1,963			1,718
	Advertising and business promotion			1,088			781
	Professional and service fees			1,289			505
	Communications			394			420
	Taxes other than on income			434			488
	Insurance, including deposit insurance			123			95
	Printing, postage, stationery and supplies			208			163
	Other			509			643
		Total non-interest expense		10,479			8,188
Income (loss) before income taxes				6,648			(2,996	)
	Income tax (expense) benefit			(39	)		1,280
Income (loss) before cumulative effect of change in accounting principles, net of tax				6,609			(1,716	)
	Cumulative effect of change in accounting principle, net of tax			—			(164	)
Net income (loss)				6,609			(1,880	)
	Less: Dividends on preferred stock			(597	)		(597	)
Net income (loss) available to common shareholders			$	6,012		$	(2,477	)
Income (loss) per common share:
	Basic before cumulative effect of change in accounting principle		$	0.48		$	(0.18	)
	Basic after cumulative effect of change in accounting principle		$	0.48		$	(0.20	)
	Diluted before cumulative effect of change in accounting principle		$	0.46		$	(0.18	)
	Diluted after cumulative effect of change in accounting principle		$	0.46		$	(0.20	)
	Average common shares outstanding			12,467			12,639
	Average potential common share options			570			—
				13,037			12,639
Dividends per share of common stock			$	0.15		$	0.15

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

2

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands)

			THREE-MONTH PERIOD
			2001			2000
CHANGES IN STOCKHOLDERS' EQUITY:
Preferred stock:
	Balance at beginning of period		$	33,500		$	33,500
		Balance at end of period		33,500			33,500
Common stock:
	Balance at beginning of period			13,885			13,805
	Stock options exercised			12			—
		Balance at end of period		13,897			13,805
Additional paid-in capital:
	Balance at beginning of period			26,004			23,786
	Stock options exercised			117			—
	Stock options cancelled			1,054			—
		Balance at end of period		27,175			23,786
Legal surplus:
	Balance at beginning of period			12,118			10,578
	Transfer from retained earnings			228			106
		Balance at end of period		12,346			10,684
Retained earnings:
	Balance at beginning of period			76,818			79,809
	Net income (loss)			6,609			(1,880	)
	Dividends declared on common stock			(1,869	)		(1,904	)
	Dividends declared on preferred stock			(597	)		(597	)
	Transfer to legal surplus			(228	)		(106	)
		Balance at end of period		80,733			75,322
Treasury stock:
	Balance at beginning of period			(30,651	)		(27,116	)
	Stock purchased			(1,283	)		(1,625	)
		Balance at end of period		(31,934	)		(28,741	)
Accumulated other comprehensive income (loss), net of deferred tax:
	Balance at beginning of period			(18,184	)		(16,493	)
	Other comprehensive income (loss), net of taxes			19,471			(7,596	)
		Balance at end of period		1,287			(24,089	)
Total stockholders' equity			$	137,004		$	104,267
COMPREHENSIVE INCOME (LOSS):
Net income (loss):			$	6,609		$	(1,880	)
Other comprehensive income (loss), net of tax:
	Unrealized gains on securities arising during the period			37,291			14,741
	Realized (gains) losses included in net income			(329	)		3,705
	Unrealized loss on derivatives designated as cash flows hedges arising during the period			(15,880	)		—
	Amount reclassified into earnings during the period related to transition adjustment			93			94
	Income tax credit (expense) related to items of other comprehensive income (loss)			(1,704	)		1,031
				19,471			19,571
	Cumulative effect of change in accounting principle, net of tax			—			(27,167	)
Other comprehensive income (loss) for the period				19,471			(7,596	)
Comprehensive income (loss)			$	26,080		$	(9,476	)

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

3

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands)

					2001			2000
Cash flows from operating activities:
	Net income (loss)				$	6,609		$	(1,880	)
		Adjustments to reconcile net income (loss) to net cash provided by operating activities:
			Amortization of deferred loan origination fees and costs			(295	)		(151	)
			Amortization of premiums and accretion of discounts on investment securities			(45	)		463
			Depreciation and amortization of premises and equipment			1,130			1,049
			Deferred tax provision (credit)			657			(241	)
			Provision for loan losses			642			1,400
			Loss (gain) on sale of securities available-for-sale			(329	)		3,705
			Derivatives activities			163			11,146
			Mortgage banking activities			(1,370	)		(1,551	)
			Originations of loans held-for-sale			(19,849	)		(18,800	)
			Proceeds from sale of loans held-for-sale			5,373			14,800
			Cancellation of stock options			1,054			—
		Net decrease (increase) in:
			Trading securities			50,065			32,225
			Accrued interest receivable			(1,224	)		529
			Other assets			(170	)		606
		Net increase (decrease) in:
			Accrued interest on deposits and borrowings			287			(1,927	)
			Other liabilities			18,116			15,436
				Total adjustments		54,205			58,689
	Net cash provided by operating activities					60,814			56,809
Cash flows from investing activities:
	Net decrease in other short term investments					8,599			—
	Purchases of investment securities available-for-sale					(279,542	)		(50,208	)
	Purchases of FHLB stock					(2,892	)		—
	Purchases of equity options					(20,499	)		(52,918	)
	Maturities and redemptions of investment securities available-for-sale					110,362			17,151
	Maturities and redemptions of investment securities held-to-maturity					—			30,492
	Redemption of FHLB stock					956			—
	Proceeds from sales of investment securities available-for-sale					78,027			92,706
	Proceeds from sales of consumer loans and leases portfolio					—			167,900
	Loans production:
		Origination and purchase of loans				(88,998	)		(58,867	)
		Principal repayment of loans				26,851			12,747
		Other decrease (increase)				199			(928	)
	Capital expenditures					(1,730	)		(847	)
		Net cash (used in) provided by investing activities				(168,667	)		157,228
Cash flows from financing activities:
	Net increase (decrease) in:
		Demand, saving and time (including IRA accounts) deposits				65,559			10,357
		Securities sold under agreements to repurchase				10,148			(86,830	)
		Advances and borrowings from FHLB				52,150			(50,000	)
	Repayments of term notes					(30,000	)		—
	Proceeds from exercise of stock options					129			—
	Stock acquired					(1,283	)		(1,625	)
	Dividends paid					(2,466	)		(2,501	)
		Net cash provided by (used in) financing activities				94,237			(130,599	)
Net change in cash and cash equivalents						(13,616	)		83,438
	Cash and cash equivalents at beginning of period					29,887			33,833
Cash and cash equivalents at end of period					$	16,271		$	117,271
Cash and cash equivalents include:
	Cash and due from banks				$	16,001		$	7,687
	Money market investments					270			109,584
					$	16,271		$	117,271
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
	Interest paid				$	20,107		$	25,280
	Income taxes paid				$	—		$	—
	Real estate loans securitized into mortgage-backed securities				$	28,206		$	18,800

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

4

ORIENTAL FINANCIAL GROUP INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

    The accounting and reporting policies of Oriental Financial Group Inc. (the "Group" or "Oriental") conform with accounting principles generally accepted in the United States of America ("GAAP") and to financial services industry practices.

    In the opinion of management, the unaudited Consolidated Financial Statements include all adjustments (which consist of normal recurring accruals) necessary, to present fairly the consolidated financial condition as of September 30, 2001and June 30, 2001, and the results of operations and cash flows for the quarters ended September 30, 2001 and 2000. All significant intercompany balances and transactions have been eliminated in the accompanying unadited condensed financial statements. In accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information, these statements do not include certain information and footnote disclosures required by GAAP for complete annual financial statements. Financial information as of June 30, 2001 has been derived from the Group's audited Consolidated Financial Statements. The results of operations and cash flows for the quarters ended September 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the Consolidated Financial Statements and footnotes thereto for the year ended June 30, 2001, included in the Groups Annual Report on Form 10-K.

    The following is a description of the Group's most significant accounting policies:

Nature of Operations

    Oriental is a bank holding company incorporated under the laws of the Commonwealth of Puerto Rico. It has three subsidiaries, Oriental Bank and Trust (the "Bank"), Oriental Financial Services Corp. ("Oriental Financial Services") and FISA Insurance Agency, Inc. Through these subsidiaries, the Group provides a wide range of financial services such as mortgage, commercial and consumer lending, financial planning, insurance sales, money management and investment brokerage services, as well as corporate and individual trust services. Note 6 to the consolidated financial statements presents further information about the operations of the Group's business segments.

    Main offices for the Group and its subsidiaries are located in San Juan, Puerto Rico. The Bank operates through twenty branches located throughout the island and is subject to the supervision, examination and regulation of the Federal Reserve Bank, Office of the Commissioner of Financial Institutions of Puerto Rico and the Federal Deposit Insurance Corporation (FDIC), which insures its deposits through the Savings Association Insurance Fund (SAIF). Oriental Financial Services is subject to the supervision, examination and regulation of the National Association of Securities Dealer, the Securities and Exchange Commission, and the Office of the Commissioner of Financial Institutions of Puerto Rico.

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. There were no held to maturity securities as of September 30, 2001 and June 30, 2001. 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.

5

    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 fair value with realized and unrealized changes in fair value included in earnings in the period in which the changes occur. Interest revenue arising from trading instruments is included in the statements 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.

Trading Securities

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

	(In thousands)
	September 30,		June 30,
U.S. Treasury securities	$	2,623	$	2,579
P.R. Government securities		206		339
Mortgage-backed securities		23,815		73,791
CMO residuals, interest only		51		51
	$	26,695	$	76,760

    At September 30, 2001, the Group's trading portfolio weighted average yield was 7.18% (June 30, 2001—7.92%).

6

Investment securities available for sale

    The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the investment securities available for sale owned by the Group at September 30, 2001 and June 30, 2001, were as follows:

	September 30, 2001 (In thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Average Weighted Yield
US Treasury securities	$	3,322	$	230	$	—	$	3,552	7.53	%
US Government agencies securities		9,949		210		—		10,159	6.31	%
Other debt securities		9,290		—		—		9,290	7.74	%
PR Government securities		9,279		209		37		9,451	5.87	%
CMOs		239,926		3,999		1		243,924	6.68	%
FNMA and FHLMC certificates		951,694		22,992		—		974,686	6.39	%
GNMA certificates		215,699		6,985		166		222,518	7.09	%
	$	1,439,159	$	34,625	$	204	$	1,473,580	6.55	%

	June 30, 2001 (In thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Average Weighted Yield
US Treasury securities	$	3,623	$	103	$	—	$	3,726	7.56	%
US Government agencies securities		30,159		193		—		30,352	7.16	%
Other debt securities		9,288		—		—		9,288	7.73	%
PR Government securities		8,189		11		58		8,142	6.33	%
CMOs		218,833		935		1,912		217,856	6.72	%
FNMA and FHLMC certificates		811,892		3,097		6,620		808,368	6.59	%
GNMA certificates		237,528		2,478		854		239,153	7.13	%
	$	1,319,512	$	6,817	$	9,444	$	1,316,885	6.73	%

    The amortized cost and fair value of the Group's investment securities available for sale at September 30, 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)
	Amortized Cost		Fair Value
Within 1 year	$	1,157	$	1,156
After 1 to 5 years		3,372		3,602
After 5 to 10 years		29,386		30,041
After 10 years		1,405,244		1,438,781
	$	1,439,159	$	1,473,580

    Proceeds from the sale of investment securities available-for-sale during the first three months of fiscal 2002 totaled $78,027,000 (2001—$92,706,000). Gross realized gains and losses on those sales

7

during first quarter of fiscal 2002 were $754,000 and $425,000, respectively, (2001—$11,362 and $3,716,000, respectively).

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 are encompassed within three main categories: mortgage, commercial, and consumer. Oriental's loan portfolio has a higher concentration of loans to consumers such as residential mortgage loans and personal loans. The composition of the Group's loan portfolio at September 30, 2001 and June 30, 2001 was as follows:

		(In thousands)
		September 30,			June 30,
Loans secured by real estate:
	Residential	$	369,383		$	321,689
	Non-residential real estate loans		4,089			3,827
	Home equity loans and secured personal loans		88,741			74,759
			462,213			400,275
	Less: net deferred loan fees		(4,660	)		(3,880	)
			457,553			396,395
Other loans:
	Commercial		26,691			25,828
	Personal consumer loans and credit lines		22,582			22,718
	Financing leases, net of unearned interest		607			827
			49,880			49,373
Loans receivable			507,433			445,768
Allowance for loan losses			(2,920	)		(2,856	)
Loans receivable, net			504,513			442,912
Loans held-for-sale			11,210			23,570
Total loans, net		$	515,723		$	466,482

Allowance for Loan Losses

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

    While management uses available information in estimating probable loan losses, future additions to the allowance may be necessary based on factors beyond Oriental's control, such as factors affecting Puerto Rico economic conditions. Refer to Table 5 of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the changes in the allowance for loan losses for the quarters ended September 30, 2001 and 2000.

8

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

NOTE 4—PLEDGED ASSETS:

    At September 30, 2001, residential mortgage loans and investment securities available for sale amounting to $224,367,000 (June 30, 2001—$211,699,000), and $1,535,043,000 (June 30, 2001—$1,306,272,000), respectively, were pledged to secure public fund deposits, investment securities sold under agreements to repurchase, letters of credit, advances and borrowings from the Federal Home Loan Bank of New York, term notes and interest rate swap agreements.

NOTE 5—Derivatives and hedging actiivities

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

	(Dollars in thousands)
	September 30,			June 30,
Swaps:
Pay fixed swaps notional amount	$	450,000		$	300,000
Weighted average pay rate—fixed		5.77	%		6.65	%
Weighted average receive rate—floating		3.37	%		3.95	%
Maturity in months		9 to 108			12 to 112
Floating rate as a percent of LIBOR		100	%		100	%
Caps:
Cap agreements notional amount	$	250,000		$	250,000
Cap rate		7.00	%		7.00	%
Current 90 day LIBOR		2.59			3.84
Maturity in months		7			10

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

    The Bank offers its customers certificates of deposit tied to the performance of one of the following stock market indexes, Standard & Poor's 500 Composite Stock Index, Dow Jones Industrial Average and Russell 2000 Small Stock Index. At the end of five years, the depositor will receive a specified percent of the average increase of the month-end value of the corresponding stock index. If such index decreases, the depositor receives the principal without any interest. The Group uses option agreements with major money center banks to manage its exposure to the stock market. Under the

9

terms of the agreements, the Group will receive the average increase in the month-end value of the corresponding index in exchange for a fixed premium. At September 30, 2001, the notional amount of these agreements totaled $192,665,000 (June 30, 2001—$180,950,000). Changes in fair value of options purchased and options embedded in certificates of deposit are recorded in earnings.

    At September 30, and June 30, 2001, the fair value of derivatives was recognized as either assets or liabilities in the Consolidated Statements of Financial Condition as follows: the fair value of the equity indexed options represented as investment of $17.8 million ($27.0 million, June 2001) and the options sold to customers embeded in the certificates of deposits represented a liability of $23.3 million ($34.2 million, June 2001) recorded in deposits. The interest rate swaps represented a liability of $26.1 million ($10.3 million, June 2001) presented in "Accrued Expenses and Other Liabilities". The Caps did not have a carrying value as of September 30, and June 30, 2001.

NOTE 6—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 measures the performance of these reportable segments, based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated.

    The Group's largest business segment is retail banking. The Bank's branches and treasury functions are its main components, with traditional banking products such as deposits, and electronic banking.

    Oriental's second largest business segment is the financial services, which is comprised of the Bank's trust division (Oriental Trust), the brokerage subsidiary (Oriental Financial Services) and the insurance subsidiary (FISA Insurance Agency, Inc.). The core operations of this segment are financial planning, money management and investment brokerage services, insurance sales activity, as well as corporate and individual trust services.

    The Group's smallest business segment is mortgage banking. It consists of Oriental Mortgage, whose principal activity is to originate and purchase mortgage loans for the Group's own portfolio.

    The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies" included in the Group Annual Report on Form 10-K.Following are the

10

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

	(Dollars in thousands)
	Retail Banking			Financial Services			Mortgage Banking			Eliminations			Total
Fiscal 2002
Net interest income	$	10,499		$	129		$	377		$	—		$	11,005
Non-interest income (charges)		3,885			3,135			823			(1,079	)		6,764
Non-interest expenses		(7,361	)		(2,952	)		(1,245	)		1,079			(10,479	)
Provision for loan losses		(642	)		—			—			—			(642	)
Income (loss) before income taxes	$	6,381		$	312		$	(45	)	$	—		$	6,648
Total assets	$	2,163,243		$	5,317		$	2,000		$	(2,227	)	$	2,168,333
Fiscal 2001
Net interest income	$	6,277		$	60		$	148		$	—		$	6,485
Non-interest income (charges)		(3,040	)		2,837			995			(685	)		107
Non-interest expenses		(5,706	)		(1,850	)		(1,317	)		685			(8,188	)
Provision for loan losses		(1,400	)		—			—			—			(1,400	)
Income (loss) before income taxes	$	(3,869	)	$	1,047		$	(174	)	$	—		$	(2,996	)
Total assets	$	1,700,236		$	5,635		$	2,000		$	(2,383	)	$	1,705,488

11

ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Table of Contents

Description			Page No.
Selected Financial Data:
	Earnings, Dividends Declared and Per Share Information		13
	Period End Balances		14
	Selected Financial Ratios (in percent) and Other Information		14
Table 1		Fiscal Year-To-Date Analysis of Interest Income and Changes due to Volume/Rate	15
Table 2		Non-Interest Income Summary and Composition	17
Table 3		Non-Interest Expenses Summary and Composition	17
Table 4		Non-0perating 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	22
Table 12		Capital, Dividends and Stock Data	23
Table 13		Financial Assets Summary	24
Overview of Financial Performance			25

12

SELECTED FINANCIAL DATA
FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands, except for per share information)

EARNINGS, PER SHARE AND DIVIDENDS DATA:		2001			2000			Variance %
Interest income		$	32,945		$	30,369		8.5	%
Interest expense			21,940			23,884		-8.1	%
	Net interest income		11,005			6,485		69.7	%
Provision for credit losses			642			1,400		-54.1	%
	Net credit income		10,363			5,085		103.8	%
Recurrent non-interest income			5,492			5,394		1.8	%
	Net core revenues		15,855			10,479		51.3	%
Recurrent non-interest expenses			9,401			8,135		15.6	%
	Core operating income		6,454			2,344		175.4	%
Non recurrent non-interest (loss) income			473			(5,287	)	-108.9	%
Non recurrent non-interest expenses			(279	)		(53	)	426.4	%
	Total non-operating activities gain (losses)		194			(5,340	)	103.6	%
Income (loss) before taxes			6,648			(2,996	)	321.9	%
Income tax (expense) benefit			(39	)		1,280		103.0	%
	Income (loss) before cumulative effect of change in accounting principle		6,609			(1,716	)	485.2	%
Cumulative effect of change in accounting principle, net of tax			—			(164	)	100.0	%
	Net income (loss)		6,609			(1,880	)	451.6	%
Less: dividends on preferred stock			(597	)		(597	)	0.0	%
	Net income (loss) available to common shareholders	$	6,012		$	(2,477	)	342.7	%
Basic EPS before cumulative effect of change in accounting principle		$	0.48		$	(0.18	)	366.7	%
Basic EPS after cumulative effect of change in accounting principle		$	0.48		$	(0.20	)	340.0	%
Diluted EPS before cummulative effect of change in accounting principle		$	0.46		$	(0.18	)	355.6	%
Diluted EPS after cumulative effect of change in accounting principle		$	0.46		$	(0.20	)	330.0	%
Average shares and potential shares			13,037			12,639		3.1	%
Book value per common share		$	8.31		$	5.63		47.6	%
Market price at end of period		$	20.15		$	15.50		30.0	%
Dividends declared per share		$	0.15		$	0.15		0.0	%
Dividends declared		$	1,868		$	1,905		-1.9	%

13

PERIOD END BALANCES (as of September 30,) AND FINANCIAL RATIOS:			2001		2000		Variance %
Total financial assets
	Trust assets managed		$	1,437,681	$	1,444,056	-0.4	%
	Broker-dealer assets gathered			1,007,375		939,000	7.3	%
		Assets managed		2,445,056		2,383,056	2.6	%
	Group total assets			2,168,333		1,705,163	27.2	%
			$	4,613,389	$	4,088,219	12.8	%
Interest-earning assets
	Investments and securities			1,569,125		1,175,436	33.5	%
	Loans and leases (including loans held-for-sale), net			515,723		465,529	10.8	%
			$	2,084,848	$	1,640,965	27.1	%
Interest-bearing liabilities
	Deposits		$	852,570	$	732,111	16.5	%
	Repurchase agreements			925,619		729,663	26.9	%
	Borrowings			187,150		106,500	75.7	%
			$	1,965,339	$	1,568,274	25.3	%
Stockholders' equity
	Preferred equity		$	33,500	$	33,500	0.0	%
	Common equity			103,504		70,767	46.3	%
			$	137,004	$	104,267	31.4	%
Capital Ratios:
	Leverage capital			6.53%		7.34%
	Total risk-based capital			18.47%		26.93%
	Tier 1 risk-based capital			18.08%		25.68%
SELECTED FINANCIAL RATIOS AND OTHER INFORMATION:
Return on average assets (ROA)				1.26%		-0.39%
Return on average common equity (ROE)				26.21%		-12.80%
Efficiency ratio				59.29%		77.64%
Expense ratio				1.03%		0.65%
Interest rate margin				2.31%		1.57%
Number of financial centers				20		19

14

SELECTED FINANCIAL DATA
FOR THE THREE-MONTHS PERIOD ENDED SEPTEMBER 30, 2001 AND 2000
(Dollars in thousands)

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

			Interest								Average rate						Average balance
			2001			2000			Variance in %		2001		2000		Variance in BP		2001			2000			Variance in %
A—TAX EQUIVALENT SPREAD
Interest-earning assets			$	32,945		$	30,369		8.48	%	6.80	%	7.19	%	-0.39	%	$	1,936,930		$	1,687,472		14.78	%
		Tax equivalent adjustment		9,445			6,442		46.62	%	1.93	%	1.53	%	0.40	%		—			—		0.00	%
Interest-earning assets—tax equivalent				42,390			36,811		15.16	%	8.74	%	8.72	%	0.02	%		1,936,930			1,687,472		14.78	%
		Interest-bearing liabilities		21,940			23,884		-8.14	%	4.56	%	5.92	%	-1.37	%		1,912,026			1,598,907		19.58	%
Net interest income / spread			$	20,450		$	12,927		58.20	%	4.18	%	2.80	%	1.38	%	$	24,904		$	88,565		-71.88	%
B—NORMAL SPREAD
Interest-earning assets:
Investments:
	Investment securities		$	21,219		$	18,214		16.5	%	6.33	%	6.81	%	-0.48	%	$	1,339,993		$	1,068,268		25.44	%
	Investment management fees			(314	)		—		-100.0	%	-0.09	%	0.00	%	-0.09	%		—			—		0.00	%
		Total investment securities		20,905			18,214		14.8	%	6.24	%	6.81	%	-0.57	%		1,339,993			1,068,268		25.44	%
	Trading securities			1,291			533		142.2	%	6.92	%	7.83	%	-0.91	%		74,640			27,254		173.87	%
		Money market investments		455			2,474		-81.6	%	4.16	%	6.84	%	-2.67	%		43,639			144,672		-69.84	%
				22,651			21,221		6.7	%	6.21	%	6.84	%	-0.63	%		1,458,272			1,240,194		17.58	%
Loans:
	Real estate(1)			8,908			7,670		16.1	%	8.29	%	7.79	%	0.50	%		429,907			393,723		9.19	%
	Consumer			807			671		20.3	%	14.63	%	13.51	%	1.12	%		21,898			19,698		11.17	%
	Financing leases(2)			4			176		-97.7	%	1.89	%	7.45	%	-5.56	%		777			9,394		-91.73	%
	Commercial			575			631		-8.9	%	8.83	%	10.31	%	-1.48	%		26,076			24,463		6.59	%
				10,294			9,148		12.5	%	8.60	%	8.17	%	0.43	%		478,658			447,278		7.02	%
				32,945			30,369		8.5	%	6.80	%	7.19	%	-0.39	%		1,936,930			1,687,472		14.78	%
Interest-bearing liabilities:
Deposits:
	Savings and demand			868			786		10.4	%	2.43	%	2.36	%	0.06	%		141,947			131,942		7.58	%
	Time and IRA accounts			8,374			8,824		-5.1	%	4.95	%	6.09	%	-1.14	%		671,058			574,898		16.73	%
				9,242			9,610		-3.8	%	4.51	%	5.40	%	-0.88	%		813,005			706,840		15.02	%
Borrowings:
	Repurchase agreements			8,180			12,795		-36.1	%	3.64	%	6.64	%	-3.00	%		892,729			764,280		16.81	%
	Interest rate risk management			2,238			(571	)	-491.9	%	0.99	%	-0.30	%	1.29	%		—			—
	Financing fees			55			—		100.0	%	0.03	%	0.00	%	0.03	%		—			—
		Total repurchase agreements		10,473			12,224		-14.3	%	4.66	%	6.34	%	-1.68	%		892,729			764,280		16.81	%
	FHLB funds and term notes			2,225			2,050		8.5	%	4.28	%	6.37	%	-2.09	%		206,292			127,787		61.43	%
				12,698			14,274		-11.0	%	4.59	%	6.34	%	-1.76	%		1,099,021			892,067		23.20	%
				21,940			23,884		-8.1	%	4.56	%	5.92	%	-1.37	%		1,912,026			1,598,907		19.58	%
Net interest income / spread			$	11,005		$	6,485		69.7	%	2.25	%	1.27	%	0.98	%
Interest rate margin											2.31	%	1.57	%	0.74	%
Excess of interest-earning assets over interest-bearing liabilities																	$	24,904		$	88,565		-71.88	%
Interest-earning assets over interest-bearing liabilities ratio																		101.30	%		105.54	%

15

C. Changes in net interest income due to:		Volume			Rate			Total
Interest Income:
	Loans(1)	$	640		$	505		$	1,145
	Investments		3,728			(2,297	)		1,431
			4,368			(1,792	)		2,576
Interest Expense:
	Deposits		1,523			(1,892	)	$	(369	)
	Borrowings		3,285			(4,860	)	$	(1,575	)
			4,808			(6,752	)		(1,944	)
Net Interest Income		$	(440	)	$	4,960		$	4,520

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

(2)—Discontinued on June 2000

16

SELECTED FINANCIAL DATA
FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
(Dollars in thousands)

		2001		2000		Variance %
TABLE 2—NON-INTEREST INCOME SUMMARY
Trust, money management, brokerage and insurance fees		$	3,175	$	2,827	12.3%
Mortgage banking activities			1,370		1,551	-11.7%
	Non-banking service revenues		4,545		4,378	3.8%
Fees on deposit accounts			533		548	-2.7%
Bank service charges and commissions			408		434	-6.0%
Other operating revenues			6		34	-82.4%
	Bank service revenues		947		1,016	-6.8%
	Recurrent non-interest income	$	5,492	$	5,394	1.8%
	Recurrent non-interest income to recurrent expenses ratio		58.42%		66.31%	-7.89%
TABLE 3—NON-INTEREST EXPENSES SUMMARY
Fixed compensation		$	2,444	$	2,695	-9.3%
Variable compensation			1,228		680	80.6%
	Compensation and benefits(1)		3,672		3,375	8.8%
Occupancy and equipment			1,963		1,718	14.3%
Advertising and business promotion			1,088		781	39.3%
Professional and service fees			1,032		505	104.4%
Communications			394		420	-6.2%
Municipal and other general taxes			434		488	-11.1%
Insurance, including deposits insurance			123		95	29.5%
Printing, postage, stationery and supplies			208		163	27.6%
Other operating expenses(1)			487		590	-17.5%
	Other non-interest expenses		5,729		4,760	20.4%
Recurrent non-interest expenses		$	9,401	$	8,135	15.6%
Relevant ratios and data:
	Efficiency ratio		59.29%		77.64%
	Expense ratio		1.03%		0.65%
	Compensation to recurrent non-interest expenses		39.1%		41.2%
	Variable compensation to total compensation		33.4%		20.1%
	Compensation to total average assets (1)		0.86%		0.77%
	Average compensation per employee	$	43.0	$	39.8
	Average number of full time employees		416		339
	Bank assets per employee	$	6,755	$	5,727
Total work force:
	Banking operations		341		298
	Trust operations		28		26
	Brokerage operations		13		13
	Insurance operations		44		—
			426		337

(1)

Excludes non-recurring charges shown on table 4 below.

17

			2001			2000			Variance %
TABLE 4—NON-OPERATING ACTIVITIES
Securities net activity			$	329		$	(3,705	)	108.9	%
Trading net activity				1,106			(12	)	9316.7	%
Derivatives activity				(163	)		(1,619	)	-89.9	%
	Securities, derivatives and trading activities			1,272			(5,336	)	123.8	%
Leasing revenues (discontinued June 2000)				—			49		-100.0	%
Other non-recurrent expenses				(279	)		(52	)	436.5	%
Stock option cancellation				(799	)		—		-100.0	%
	Other activities			(1,078	)		(3	)	35833.3	%
		Total non-recurrent activities	$	194		$	(5,339	)	103.6	%

18

SELECTED FINANCIAL DATA
FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
(Dollars in thousands)

			2001			2000			Change in %
TABLE 5—ALLOWANCE FOR LOAN LOSSES SUMMARY
Beginning balance			$	2,856		$	6,837		-58.2	%
	Provision for loan losses			642			1,400		-54.1	%
	Net credit losses—see table 6			(578	)		(1,265	)	-54.3	%
		Ending balance	$	2,920		$	6,972		-58.1	%
Selected Data and Ratios:
	Outstanding loans at June 30,		$	518,643		$	472,500		9.8	%
	Recoveries to net charge-offs			26.0	%		30.2	%	-14.0	%
	Allowance coverage ratio
		Total loans		0.56	%		1.48	%	-61.8	%
		Non-performing loans		16.58	%		41.98	%	-60.5	%
		Non-real estate non-performing loans		144.99	%		96.47	%	50.3	%
TABLE 6—NET CREDIT LOSSES STATISTICS
Real estate
	Charge-offs		$	(14	)	$	—		-100.0	%
	Recoveries			—			—		0.0	%
				(14	)		—		-100.0	%
Consumer
	Charge-offs			(515	)		(1,074	)	-52.0	%
	Recoveries			114			307		-62.9	%
				(401	)		(767	)	-47.7	%
Leasing
	Charge-offs			(108	)		(487	)	-77.8	%
	Recoveries			91			200		-54.5	%
				(17	)		(287	)	-94.1	%
Commercial
	Charge-offs			(104	)		(11	)	845.5	%
	Recoveries			10			12		-16.7	%
				(94	)		1		-9500.0	%
Other
	Charge-offs			(40	)		(241	)	-83.4	%
	Recoveries			(12	)		29		-141.4	%
				(52	)		(212	)	-75.5	%
Net credit losses
	Total charge-offs			(781	)		(1,813	)	-56.9	%
	Total recoveries			203			548		-63.0	%
			$	(578	)	$	(1,265	)	-54.3	%
Net credit losses to average:
	Real estate			0.01	%		0.00	%
	Consumer			7.32	%		15.58	%
	Leasing			8.75	%		12.22	%
	Commercial			1.44	%		-0.02	%
	Other (1)			0.04	%		0.19	%
		Total		0.48	%		1.13	%
Average loans:
	Real estate		$	429,907		$	393,723		9.2	%
	Consumer			21,898			19,698		11.2	%
	Leasing			777			9,394		-91.7	%
	Commercial			26,076			24,463		6.6	%
		Total	$	478,658		$	447,278		7.0	%

(1)

other credit losses to total average loans

19

SELECTED FINANCIAL DATA
FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
(Dollars in thousands)

			2001			2000			Change in %
TABLE 7—LOAN LOSS RESERVE BREAKDOWN:
	Consumer		$	1,405		$	1,263		11.2	%
	Financing leases			250			4,170		-94.0	%
	Commercial			359			921		-61.0	%
	Non-real estate			2,014			6,354		-68.3	%
	Real estate			906			618		46.6	%
			$	2,920		$	6,972		-58.1	%
TABLE 8—NON-PERFORMING ASSETS:
	Non-performing assets
	Non-performing loans		$	17,611		$	16,609		6.0	%
	Foreclosed real estate			750			535		40.2	%
	Repossessed autos			15			171		-91.2	%
	Repossessed equipment			—			—		0.0	%
			$	18,376		$	17,315		6.1	%
Non-performing loans to
	Total loans			3.40	%		3.52	%	-3.4	%
	Total assets			0.81	%		0.97	%	-12.4	%
	Total capital			12.85	%		15.93	%	-19.3	%
TABLE 9—NON-PERFORMING LOANS:
Non-performing loans
	Consumer		$	568		$	889		-36.1	%
	Financing leases			509			5,129		-90.1	%
	Commercial			525			1,209		-56.6	%
	Non-real estate			1,602			7,227		-77.8	%
	Real estate			16,009			9,382		70.6	%
		Total	$	17,611		$	16,609		6.0	%
Non-performing loans composition
	Consumer			3.2	%		5.4	%	-39.7	%
	Financing leases			2.9	%		30.9	%	-90.6	%
	Commercial			3.0	%		7.3	%	-59.0	%
	Non-real estate			9.1	%		43.5	%	-79.1	%
	Real estate			90.9	%		56.5	%	60.9	%
		Total		100.0	%		100.0	%	0.0	%

20

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

		September 30, 2001			September 30, 2000			Variance %		June 30, 2001
TABLE 10—BANK ASSETS SUMMARY AND COMPOSITION
Investments:
	Mortgage-backed securities and CMOs	$	1,465,152		$	895,177		63.7	%	$	1,337,200
	U.S. and P.R. Government securities		25,785			125,036		-79.4	%		54,344
	Investments in equity options		17,847			25,211		-29.2	%		26,973
	FHLB stock and other investments		60,341			130,014		-53.6	%		81,164
			1,569,125			1,175,438		33.5	%		1,499,681
Loans:
	Real estate		468,763			416,833		12.5	%		419,966
	Consumer		22,582			21,574		4.7	%		22,717
	Financing leases		607			8,215		-92.6	%		827
	Commercial		26,691			25,878		3.1	%		25,828
			518,643			472,500		9.8	%		469,338
	Allowance for loan losses		(2,920	)		(6,972	)	-58.1	%		(2,856	)
			515,723			465,528		10.8	%		466,482
Total interest-earning assets			2,084,848			1,640,966		27.0	%		1,966,163
	Non-interest earning assets		83,485			64,197		30.0	%		72,777
Total assets		$	2,168,333		$	1,705,163		27.2	%	$	2,038,940
Investments portfolio composition:
	Mortgage-backed securities and CMOs		93.4	%		76.2	%				89.2	%
	U.S. and P.R. Government securities		1.6	%		10.6	%				3.6	%
	Investments in equity options		1.1	%		2.1	%				1.8	%
	FHLB stock and other investments		3.9	%		11.1	%				5.4	%
			100.0	%		100.0	%				100.0	%
Loan portfolio composition:
	Real Estate		90.4	%		63.8	%				89.5	%
	Consumer		4.4	%		3.2	%				4.8	%
	Financing leases		0.1	%		1.4	%				0.2	%
	Commercial		5.1	%		31.6	%				5.5	%
			100.0	%		100.0	%				100.0	%

21

			September 30, 2001			September 30, 2000			Variance %		June 30, 2001
TABLE 11—LIABILITIES SUMMARY AND COMPOSITION
Deposits:
	Savings and demand deposits		$	143,937		$	126,991		13.3	%	$	133,980
	Time deposits and IRA accounts			706,062			602,216		17.2	%		661,701
				849,999			729,207		16.6	%		795,681
	Accrued interest			2,571			2,904		-11.5	%		2,284
				852,570			732,111		16.5	%		797,965
Borrowings:
	Repurchase agreements			925,619			729,663		26.9	%		915,471
	FHLB funds			157,150			20,000		685.8	%		105,000
	Term notes and other sources of funds			30,000			86,500		-65.3	%		60,000
				1,112,769			836,163		33.1	%		1,080,471
Total interest-bearing liabilities				1,965,339			1,568,274		25.3	%		1,878,436
		Non interest-bearing liabilities		65,990			32,947		100.3	%		47,014
Total liabilities			$	2,031,329		$	1,601,221		26.9	%	$	1,925,450
Deposits portfolio composition:
	Savings and demand deposits			16.9	%		18.1	%				16.8	%
	Time deposits and IRA accounts			82.8	%		81.2	%				82.9	%
	Accrued Interest			0.3	%		0.7	%				0.3	%
				100.0	%		100.0	%				100.0	%
Borrowings portfolio composition:
	Repurchase agreements			83.2	%		83.9	%				84.7	%
	FHLB funds			14.1	%		7.2	%				9.7	%
	Term notes and other sources of funds			2.7	%		8.9	%				5.6	%
				100.0	%		100.0	%				100.0	%

22

		September 30, 2001			September 30, 2000			Variance %		June 30, 2001
TABLE 12—CAPITAL, DIVIDENDS AND STOCK DATA
Capital data:
	Stockholders' equity	$	137,004		$	104,267		31.4	%	$	113,490
	Leverage Capital (minimum required—4.00%)		6.53	%		7.34	%	-11.1	%		6.68	%
	Total Risk-Based Capital (minimum required—8.00%)		18.47	%		26.93	%	-31.4	%		19.96	%
	Tier 1 Risk-Based capital (minimum required—4.00%)		18.08	%		25.68	%	-29.6	%		19.53	%
Stock data:
	Outstanding common shares, net of treasury		12,452			12,569		-0.9	%		12,506
	Book value	$	8.31		$	5.63		47.6	%	$	6.40
	Market Price at end of period	$	20.15		$	15.50		30.0	%	$	19.00
	Market capitalization	$	250,904		$	194,826		28.8	%	$	237,620
Common dividend data:
	Dividends declared	$	1,868		$	1,905		-1.9	%	$	7,534
	Dividends declared per share	$	0.15		$	0.15		0.0	%	$	0.60
	Payout ratio		31.07	%		-76.94	%	140.4	%		123.87	%
	Dividend yield		3.15	%		4.60	%	-31.5	%		5.92	%

23

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

		Price
						Dividend Per share
		High		Low
Fiscal 2002:
	September 30, 2001	$	21.85	$	16.80	$	0.150
Fiscal 2001:
	June 30, 2001	$	19.00	$	12.85	$	0.150
	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 30, 1999	$	23.87	$	19.69	$	0.150
	September 30, 1999	$	28.00	$	21.50	$	0.150

			September 30, 2001		September 30, 2000		Variance %		June 30, 2001
TABLE 13—FINANCIAL ASSETS SUMMARY
Financial assets:
	Trust assets managed		$	1,437,681	$	1,444,056	-0.4	%	$	1,444,534
	Assets gathered by broker-dealer			1,007,375		939,000	7.3	%		1,002,253
		Managed assets		2,445,056		2,383,056	2.6	%		2,446,787
	Group assets			2,168,333		1,705,163	27.2	%		2,038,940
			$	4,613,389	$	4,088,219	12.8	%	$	4,485,727

24

OVERVIEW OF FINANCIAL PERFORMANCE

    Net income for the quarter ended September 30, 2001, was $6.6 million ($0.46 diluted per share), a substantial turnaround from the loss $1.9 million ($ - 0.20 diluted per share) reported in the quarter ended September 30, 2000.

    Core operating income, defined by management as net credit income (net interest income after provision for loan losses) plus recurrent non-interest income less recurrent non-interest expenses, categories representing the Group's day-to-day operations, was $6.5 million for the September 2001 quarter, which is a 175.4-percent increase over core operating income of $2.3 million for the September 2000 quarter. See selected financial data.

    Return on common equity (ROE) was 26.21 percent for the quarter ended September 30, 2001, from the negative ROE (-12.80 percent) registered in the quarter ended September 30, 2000. Return on assets (ROA) was 1.26 percent for the September 2001 quarter versus negative 0.39 percent for the September 2000 quarter.

    Interest rate cuts made by the Federal Reserve during calendar year 2001, plus management's emphasis on secured lending, facilitated improvements in the Group's performance and earnings forecast. Quarterly net credit income increased 103.8-percent to reach a record $10.4 million, compared to $5.1 million in the quarter ended September 30, 2000.

    Interest income increased 8.5 percent, from $30.4 million in the quarter ended September 30, 2000, to $32.9 million in the quarter ended September 30, 2001. On the other hand, interest expense declined 8.1 percent, from $23.9 million for the quarter ended September 30, 2000, to $21.9 million for the quarter ended September 30, 2001, as a result of interest rate reductions. The quarterly provision for loan losses declined 54.1 percent, from $1.4 million for the September 2000 quarter to $642,000 for the September 2001 quarter, reflecting the benefits of management's strategy to focus on secured lending.

    Management's emphasis on operations that generate fees continued to strengthen the Group's earnings outlook, as brokerage, trust and insurance revenues grew 12.3 percent, from $2.8 million in the September 2000 quarter to $3.2 million this past September quarter, despite the halt in activity caused by the September 11^th attacks on New York.

    Revenues from mortgage-banking activities decreased 11.7 percent, from $1.6 million for the September 2000 quarter to $1.4 million for the September 2001 quarter. Although mortgage production increased 44 percent, from $71.3 million for the quarter ended September 30, 2000 to $102.8 million for the quarter ended September 30, 2001, revenues decreased because of management's current strategy to maintain a larger portion of its production in portfolio instead of selling it on the secondary market, consequently deferring the amount of fees derived from the sale of loans.

    Non-interest expenses (excluding non-operating charges) increased 15.6 percent from $8.1 million for the quarter ended September 30, 2000 to $9.4 million for the quarter ended September 30, 2001. The increase is attributable to the Group's new strategic positioning during the past year, which has included the opening of new and the remodeling of financial centers, aggressive advertising, investments in technology, professional fees for consulting engagements related to new services, and increased variable compensation for increased insurance and mortgage services.

    During the quarter ended September 30, 2001, the Group recognized a non-cash, non-operating expense of $799,000, with a corresponding offsetting charge against additional paid-in capital, related to the cancellation by the Board of Directors of approximately 211,500 non-vested stock options granted to its directors, officers and employees during calendar years 1999 and 1998.

    Total financial assets (including assets managed by the trust department and broker-dealer subsidiary) increased 12.8 percent to a record $4.613 billion as of September 30, 2001, compared to $4.088 billion as of September 30, 2000. Assets managed by the Group's trust department and broker-

25

dealer subsidiary increased 2.6 percent year-to-year to $2.445 billion from $2.383 billion. The Group's bank assets increased a robust 27.2 percent, reaching $2.168 billion as of September 30, 2001 versus $1.705 billion as of September 30, 2000.

    On the liability side, deposits increased 16.5 percent from $732 million at September 30, 2000 to $853 million at September 30, 2001, as the Group aggressively continues to expand its banking business within its ongoing strategy to position itself as a financial planning service provider.

    Finally, the Group continued its program for repurchasing its common stock, reacquiring 66,467 shares during the September 2001 quarter for an approximated cost of $1.3 million. Stockholders' equity as of September 30, 2001 was $137 million, increasing 31.4 percent from $104.3 million as of September 30, 2000. This increase largely reflect the impact of mark-to-market valuation required by Statement of Financial Accounting Standards No. 115 related to investments availabe for sale.

Net Interest Income

    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 first quarter of fiscal 2002, the Group's net interest income amounted to $11.0 million, up 69.7% from $6.5 million in the same period of fiscal 2001. This increase in net interest income was primarily due to a positive rate variance of $5.0 million that stems from the impact of the Federal Reserve interest rate drop resulting in a lower average cost of funds (4.56% in fiscal 2002 versus 5.92% in fiscal 2001), combined with a positive growth of the investments and loans portfolios.

    Interest rate spread rose 98 basis points during the first quarter of fiscal 2002, to 2.25% from 1.27% in the first quarter of fiscal 2001. This was mainly due to: (1) a decrease in the average cost of funds; and (2) a change in the mix of interest-earning assets toward a higher volume of securities and higher yield on secured mortgage loans. Table 1 analyzes the major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates.

    The Group's interest income for the first quarter of fiscal 2002 totaled $32.9 million, up 8.5% from $30.4 million posted in the same period of fiscal 2001. The increase in interest income results from a larger volume of average interest-earning assets ($1.937 billion in fiscal 2002 versus $1.687 billion in fiscal 2001) tempered by a decline in their yield performance (6.80% in fiscal 2002 versus 7.19% in fiscal 2001).

    Most of the increase in interest-earning assets was mainly on the investment portfolio. For the first quarter of fiscal 2002, the average volume of total investments grew by 17.6% ($1.458 billion in fiscal 2002 versus $1.240 million in fiscal 2001) when compared to the same period a year earlier. This increase was concentrated in mortgage-backed securities as Oriental continued converting residential real estate loans sold in the secondary market into tax-advantaged mortgage-backed securities.

    For the first quarter of fiscal 2002, the average yield on interest-earning assets was 6.80%, 39 basis points lower than the 7.19% reported a year ago. The yield dilution experienced was mainly related to: (i) the strong expansion of Group's investment portfolio, which carries a lower yield than the loan portfolio but provides less risk and generates a significant amount of tax-exempt interest; and (ii) partially offset by an increase on the yield of the loan portfolio (8.60% in fiscal 2002 versus 8.17% in fiscal 2001) mainly fueled by a higher yield mortgage loan portfolio, 8.29% for first quarter of fiscal 2002 versus 7.79% for same period of fiscal 2001.

26

    Interest expense for the first quarter of fiscal 2002 narrowed 8.1% to $21.9 million from $23.9 million reported in the comparable period of fiscal 2001. A larger base of average interest-bearing liabilities ($1.912 billion in 2002 versus $1.599 billion in 2001) used to fund the growth of the Group's interest-earning assets, combined with a lower average cost of funds (4.56% in fiscal 2002 versus 5.92% in fiscal 2001) due to Fed interest rates drops, drove the decrease. Larger volumes of repurchase agreements and deposits, which were necessary to fund the growth of the Group's investment portfolio, drove this increase in interest-bearing liabilities. See Table 1 for the impact in interest expense due to changes in volume and rates.

    The cost of short-term financing has substantially decreased since early fiscal 2001. For the first quarter ended September 30, 2001, the cost of borrowings decreased 176 basis points (4.59% in fiscal 2002 versus 6.34% in fiscal 2001).

Non-Interest Income

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

    Recurrent non-interest income slightly rose to $5.5 million in the first quarter of fiscal 2002, compared to $5.4 million in the first quarter of fiscal 2001.

    Trust, money management and brokerage fees, the principal component of recurrent non-interest income, continued an excellent growth pattern during the first quarter of fiscal 2002, rising 12.3% to $3.2 million from $2.8 million in the first quarter of fiscal 2001. The larger volume of accounts and assets managed by both the Group's trust department and the broker-dealer subsidiary triggered this growth (see "Financial Condition" section).

    For the first quarter of fiscal 2002, gains generated by mortgage banking activities amounted to $1.4 million, an 11.7% lower than the $1.6 million for the first quarter of fiscal 2001. This decrease reflects a lower volume of loans sold. Although mortgage production increase 44%, from $71.3 million for the quarter ended September 30, 2000 to $102.8 million for the quarter ended September 30, 2001, mortgage banking revenues decrease because of management's current strategy to retain a larger portion of its production in the loan portfolio instead of selling it on the secondary market, consequently deferring the amount of fees derived from the sale.

    Bank services fees and other operating revenues consist primarily of fees generated by deposit accounts, electronic banking and customer services. These revenues totaled $947,000 in the first quarter of fiscal 2002, a 6.8% decrease versus $1.0 million reported in the same period of fiscal 2001. This decrease is mainly due to fewer revenues from late fees, $121,000 for current quarter versus $158,000 for same period of fiscal 2001 combined with a decrease on credit life insurance income commission of $32,000. These decreases stem from the sale of the unsecured personal loans and leases portfolio previously reported.

Non-Interest Expenses

    As shown in Table 3, recurrent non-interest expenses for the first quarter of fiscal 2002 increased 15.6% to $9.4 million from $8.1 million in the comparable period of fiscal 2001. The increase on non-interest expenses reflects the impact of the Group's restructuring strategy in advertising and business promotion which includes the opening of new and the remodeling of financial centers, and the cost of outsourcing of certain internal procedures to provide new and better services to our customers.

27

In addition, professional expenses have surpassed normal trends due to additional charges relating to an evaluation of the Group's operations.

    Employee compensation and benefits is the Group's largest non-interest expense category. For the first quarter of fiscal 2002, it increased 8.8% to $3.7 million versus $3.4 million in the same period of fiscal 2001. Refer to Table 3 for more selected data regarding employee compensation and benefits reflecting an expansion of the work force (see table 3) and increasing variable compensation (Commisions) due to higher volume of business.

Non-Operating Activities

    The first quarter of fiscal 2002, reflect a gain of $329,000 on sale of securities available for sale compared to a loss of $3.7 million in the first quarter of fiscal 2001 (see Table 4). In addition, the first quarter of fiscal 2002, reflect a charge of $163,000 on derivatives activities. Finally, fiscal 2002 quarter reflects a non-cash non-operating expense of $799,000; see "Overview of Financial Performance" for more information.

Provision for Loan Losses

    The provision for loan losses in the first quarter of fiscal 2002 totaled $642,000 down 54.1% from the $1.4 million reported in the same period of fiscal 2001. The decline was in response to the lower level of net credit losses. The reduction in credit losses reflects the sale of the unsecured personal loans and lease portfolios on June 30, 2000, as previously reported. Please refer to the allowance for loan losses and non-performing assets section on table 5 to table 9 for a more detailed analysis of the allowances for loan losses, net credit losses and credit quality statistics.

Provision (Credit) for Income Taxes

    The Group recognized a provision for income tax of $39,000 in the first quarter of 2002 compared with a income tax benefit (credit) in the fiscal 2001 quarter. The current income tax provision is lower than the provision based on the statutory tax rate for the Group, wich is 39%, due to the high level of tax-advantage interest income earned on certain investments and loans, net of the disallowance of related expenses attributable to the exempt income. The tax benefit recognized in the fiscal 2001 quarter resulted from the $3.0 loss before income tax that stems from non-operating activities (see table 4).

FINANCIAL CONDITION

Group's Assets

    At September 30, 2001, the Group's total assets amounted to $2.168 billion, an increase of 27.2% when compared to $1.705 billion a year ago. At the same date, interest-earning assets reached $2.085 billion, up 27.0% versus $1.641 billion a year earlier.

    Investments are Oriental's largest interest-earning assets component. It mainly consists of money market investments, U.S. Treasury notes, U.S. Government agencies bonds, mortgage-backed securities, CMO's and P. R. Government municipal bonds. At September 30, 2001, the Group's investment portfolio was of high quality. Approximately 98% was rated AAA and it generated a significant amount of tax-exempt interest, which substantially lowered the Group's effective tax rate (see Table 10 and Note 2 to the Consolidated Financial Statements).

    A strong growth in mortgage-backed securities and CMO's drove the investment portfolio expansion. They increased 63.7% to $1.465 billion (93.4% of the total portfolio) from $895.2 million (76.2% of the total portfolio) the year before, as Oriental continued its strategy of pooling residential real estate loans into mortgage-backed securities.

28

    At September 30, 2001, Oriental's loan portfolio, the second largest category of the Group's interest-earning assets, amounted to $515.7 million, 10.8% higher than the $465.5 million a year ago. Late in the second quarter of fiscal 2000, the Group's loan originations changed toward collateralized loans, primarily mortgage loans and personal loans with mortgage collateral, while de-emphasizing unsecured personal loans. In addition, on June 30, 2000, Oriental sold over $160 million of leases and unsecured personal loans. These strategies significantly reduced credit losses and enhanced the portfolio quality. Table 10 and Note 3 to the Consolidated Financial Statements presents the Group's loan portfolio composition and mix at the end of the periods analyzed.

    The Group's real estate loans portfolio is mainly comprised of residential loans, home equity loans and personal loans collateralized by real estate. At September 30, 2001, the real estate loans portfolio amounted to $468.8 million (90.4% of the portfolio).

    The second largest component of the Group's loan portfolio is commercial loans, most of which collateralized by real estate. At September 30, 2001, the commercial loan portfolio totaled $26.7 million (5.1% of the Group's loan portfolio). The consumer loan portfolio totaled $22.6 million (4.4% of the portfolio). The Group discontinued lease originations on June 30, 2000 and sold its portfolio as previously reported.

Liabilities and Funding Sources

    As shown in Table 11, at September 30, 2001, Oriental's total liabilities reached $2.031 billion, 26.9% higher than the $1.601 billion reported a year earlier. Interest-bearing liabilities, the Group's funding sources, amounted to $1.965 billion at the end of the first quarter of fiscal 2002 versus $1.568 billion the year before, a 25.3% increase. The rise in repurchase agreements and FHLB funds to fund the expansion of the investment portfolio, drove this growth along with an increase in time and IRA accounts.

    At September 30, 2001, deposits, the second largest category of the Group's interest-bearing liabilities and a cost-effective source of funding, reached $852.6 million, up 16.5% versus the $732.1 million a year ago. A $103.8 million increase or 17.2% in time deposits and IRA accounts realized most of the growth. In addition, a $16.9 million or 13.3% increase in demand and savings deposits contributed to this growth. Table 11 presents the composition of the Group's deposits at the end of the periods analyzed.

    Borrowings are Oriental's largest interest-bearing liability component. It consists mainly of diversified funding sources through the use of Federal Home Loan Bank of New York (FHLB) advances and borrowings, repurchase agreements, term notes, and lines of credit. At September 30, 2001, they amounted to $1.112 billion, 33.1% higher than the $836.2 million a year ago, mainly in repurchase agreements and FHLB funds. This increase reflects the funding required to keep our investment portfolio growth as previously mentioned.

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

Stockholders' Equity

    At September 30, 2001, Oriental's total stockholders' equity was $137.0 million, an 31.4% increase from $104.3 million a year ago. In addition to earnings from operations, this rise reflects an increase on the unrealized gain of investment securities available for sale partially offset for the impact of FAS 133 derivatives activities. For more of the Group's stockholders' equity activity, refer to the Unaudited

29

Consolidated Statement of Changes in Stockholders' Equity and of Comprehensive Income (loss) included in Table 12 and as part of the Consolidated Financial Statements.

    During the first quarter of fiscal year, the Group repurchased 66,467 common shares bringing to 1,445,166 shares (with a cost of $32.0 million) the number of shares held by the Group's treasury. The Group's common stock is traded in the New York Stock Exchange (NYSE) under the symbol OFG. At September 30, 2001, the Group's market value for its outstanding stock was $250.9 million ($20.15 per share).

    During the first quarter of fiscal year 2002 and 2001, the Group declared dividends, on its common stock amounting to $1.9 million ($0.15 per share). Dividend yield was 3.15% and 4.60%, for the first quarter of fiscal year 2002 and 2001 respectively.

    Under the regulatory framework for prompt corrective action, for banks which meet or exceed a Tier I risk-based ratio of 6%, a total capital risk-based ratio of 10% and a leverage ratio of 5% are considered well capitalized. The Bank exceeds those regulatory risk-based capital requirements, due to the high level of capital and the conservative nature of the Bank's assets. See table 12 for the Group's regulatory capital ratios.

Group's Financial Assets

    As shown on Table 13, the Group's total financial assets include the Group's assets and assets managed by the trust and brokerage business. At September 30, 2001, they reached $4.613 billion—up 12.8% from $4.088 billion a year ago. The Group's financial assets main component is the assets owned by the Group, of which about 99% are owned by the Group's banking subsidiary. For more on this financial asset component, refer to Group's Assets under Financial Condition.

    Oriental's second largest financial assets component is assets managed by the trust. The Group's trust offers various different types of IRA products and manages 401(K) and Keogh retirement plans, custodian and corporate trust accounts. At September 30, 2001, total assets managed by the Group's trust amounted $1.438 billion, 0.4% lower than the $1.444 billion a year ago. This decrease was mainly fueled by the market value decline after September 11, 2001 market disruption caused by the terrorist attack.

    The other financial asset component is assets gathered by the broker-dealer. The Group's broker-dealer subsidiary offers a wide array of investment alternatives to its client's base such as fixed and variable annuities, tax-advantaged fixed income securities, mutual funds, stocks and bonds. At September 30, 2001, total assets gathered by the broker-dealer from its customer investment accounts reached $1.007 billion, up 7.3% from $939.0 million a year ago.

ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS:

    At September 30, 2001, the Group's allowance for loan losses amounted to $2.9 million (0.56% of total loans) versus $6.9 million (1.48% of total loans) a year earlier. The Group maintains an allowance for loan losses at a level that management considers adequate to provide for potential losses based upon an evaluation of known and inherent risks. Oriental's allowance for loan losses policy provides for a detailed quarterly analysis of possible losses.

    The principal factors that the Group uses to determine the level of allowance for loan losses are the Group's historical and current credit loss experience. These factors are combined with qualitative factors such as: the growth of the loan portfolio, 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 and general economic conditions.

30

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

1.

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

2.

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

3.

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

4.

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

5.

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

    The Group, using an aged-based rating system, applies an overall allowance percentage to each loan portfolio category based on historical credit losses adjusted for current conditions and trends. This delinquency-based calculation is the starting point for management's determination of the required level of the allowance for loan losses. Other data considered in this determination includes:

1.

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



2.

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

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

    Net credit losses for the first quarter of fiscal 2001, totaled $578,000 (0.48% of average loans), a decrease of 54.3% when compared to $1.3 million (1.13% of average loans) for the same period of fiscal 2001. The lower level of net credit losses experienced was primarily associated to a reduction in consumer loans and financing leases net credit losses as a result of the sale of both portfolios, as previously discussed. Tables 5 through 7 set forth an analysis of activity in the allowance for loan losses and presents selected loan loss statistics.

    The Group's non-performing assets include non-performing loans, foreclosed real estate owned and other repossessed assets (see Table 8). At September 30, 2001, the Group's non-performing assets totaled $18.4 million (0.81% of total assets) versus $17.3 million (0.97% of total assets) at the same date of fiscal 2000. The increase was principally due to a higher level of non-performing loans; mainly low credit risk non-performing mortgage loans.

31

    At September 30, 2001, the allowance for loan losses to non-performing loans coverage ratio was 16.58%. Excluding the lesser-risk real estate loans, the ratio is much higher, 144.99%. Detailed information concerning each of the items that comprise non-performing assets follows:

•

Real estate loans—are placed on a non-accrual basis when they become 90 days or more past due, except for well-secured residential loans, and are charged-off based on the specific evaluation of the collateral underlying the loan. At September 30, 2001, the Group's non-performing real estate loans totaled $16.0 million (90.9% of the Group's non-performing loans). Non-performing loans in this category are primarily residential mortgage loans. Based on the value of the underlying collateral and the loan-to-value ratios, management considers that no significant losses will be incurred on this portfolio.



•

Commercial business loans—are placed on non-accrual basis when they become 90 days or more past due and are charged-off based on the specific evaluation of the underlying collateral. At September 30, 2001, the Group's non-performing commercial business loans amounted to $525,000 (3.0% of the Group's 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. At September 30, 2001, the Group's non-performing financing leases portfolio amounted to $509,000 (2.9% 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. At September 30, 2001, the Group's non-performing consumer loans amounted to $568,000 (3.2% of the Group's total non-performing loans).



•

Foreclosed real estate—is initially recorded at the lower of the related loan balance or fair value at the date of foreclosure, any excess of the loan balance over the fair market value of the property is charged against the allowance for loan losses. Subsequently, any excess of the carrying value over the estimated fair market value less disposition cost is charged to operations. Management is actively seeking prospective buyers for these foreclosed real estate properties. At September 30, 2001, foreclosed real estate balance was $750,000.



•

Other repossessed assets—are initially recorded at estimated net realizable value. At the time of disposition, any additional losses incurred are charged against the allowance for loan losses. At September 30, 2001, the inventory of repossessed automobiles consisted of two units amounting to $15,000.

Item—3

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

32

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 hedging 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 counterparty 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.

    The Group is exposed to a reduction in the level of Net Interest Income ("NII") in a rising interest rate environment. NII will fluctuate with changes in the levels of interest rate affecting interest-sensitive assets and liabilities. If (1) the rates in effect at September 30, 2001 remained constant, or increase or decrease on an instantaneous and sustained change of plus or minus 200 basis points, and (2) all scheduled repricing, reinvestments and estimated prepayments, and reissuances are constant, or increase or decrease accordingly; NII will fluctuate as shown on the table below:

Change in Interest rate		Expected NII (1)		Amount Change			Percent Change
Base Scenario
	Flat	$	66,002	$	—		0.00	%
	+ 200 Basis points	$	58,482	$	(7,520	)	-11.39	%
	- 200 Basis points	$	69,809	$	3,807		5.77	%
Growth Scenario
	Flat	$	71,811	$	—		0.00	%
	+ 200 Basis points	$	67,826	$	(3,985	)	-5.55	%
	- 200 Basis points	$	74,689	$	2,878		4.01	%

Note:

1.

The NII figures exclude the effect of the amortization of loan fees.

Liquidity Risk Management

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

    At September 30, 2001, the Group's liquidity was deemed appropriate. At such date the Group's liquid assets amounted to $1.263 billion, this includes $24 million available from unused lines of credit with other financial institutions and $34 million of borrowing potential with the FHLB. The Group's liquidity position is reviewed and monitored by the ALCO Committee on a regular basis. Management believes that the Group will continue to maintain adequate liquidity levels in the future.

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

33

origination and purchase of loans, the purchase of mortgage-backed and investment securities, the repayment of maturing deposits and borrowings.

PART—2  OTHER INFORMATION

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 such claim for recovery of losses resulting from dishonest and fraudulent acts and omission by a group of former employees. The case is currently on the discovery phase.

    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 their 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—EXHIBITS

    None

B—REPORTS ON FORM 8-K

    The Group filed two reports on Form 8-K related to a change in the Group's independent accountants:

(1)

Date of report: September 25, 2001; filed on September 28, 2001, disclosing a change in the Group's independent accountants.



(2)

Date of report: September 25, 2001; filed on October 9, 2001, amending the report filed on September 28, 2001, to include the former accountant's letter to the Group in connection with the foregoing.

34

Signatures

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

ORIENTAL FINANCIAL GROUP INC.
(Registrant)

By:	/S/ JOSE E. FERNANDEZ   José E. Fernández Chairman of the Board, President and Chief Executive Officer	Dated: November 9, 2001
By:	/S/ RAFAEL VALLADARES   Rafael Valladares Senior Vice President—Principal Financial Officer	Dated: November 9, 2001

35

QuickLinks

TABLE OF CONTENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) SEPTEMBER 30, 2001 AND JUNE 30, 2001 (In thousands, except share information)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000 (In thousands, except per share information)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000 (In thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000 (In thousands)
ORIENTAL FINANCIAL GROUP INC. Notes to Unaudited Consolidated Financial Statements
Table of Contents
ORIENTAL FINANCIAL GROUP INC. (Registrant)