OFG Bancorp (OFG) 10-Q 2005 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period endedMarch 31, 2005

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANG ACT OF 1934

For the transition period from                                          to                                          

Commission File Number 001-12647

Oriental Financial Group Inc.

Incorporated in the Commonwealth of Puerto Rico, IRS Employer Identification No. 66-0538893

Principal Executive Offices:
998 San Roberto Street
Professional Offices Park, S.E.
San Juan, Puerto Rico 00926
Telephone Number: (787) 771-6800

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.

Yesþ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yesþ Noo

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

25,050,825_common shares ($1.00 par value per share)
outstanding as of April 30, 2005

TABLE OF CONTENTS

PAGE
PART — I	FINANCIAL INFORMATION:
Item 1	Financial Statements
Unaudited consolidated statements of financial condition at March 31, 2005 and June 30, 2004
Unaudited consolidated statements of income for the quarters and nine-month periods ended March 31, 2005 and 2004
Unaudited consolidated statements of changes in stockholders’ equity for the nine-month periods ended March 31, 2005 and 2004
Unaudited consolidated statements of comprehensive income for the quarter and nine-month periods ended March 31, 2005 and 2004
Unaudited consolidated statements of cash flows for the nine-month periods ended March 31, 2005 and 2004
Notes to unaudited consolidated financial statements
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3	Quantitative and Qualitative Disclosures About Market Risk
Item 4	Controls and Procedures
PART — II	OTHER INFORMATION:
Item 1	Legal Proceedings
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3	Defaults Upon Senior Securities
Item 4	Submissions of Matters to a Vote of Security Holders
Item 5	Other Information
Item 6	Exhibits
	Signatures
	Certifications
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32.1 SECTION 906, CERTIFICATION OF THE CEO
EX-32.2 SECTION 906, CERTIFICATION OF THE CFO

FORWARD-LOOKING STATEMENTS

When used in this Form 10-Q or future filings by Oriental Financial Group Inc. (the “Group”) with the Securities and Exchange Commission (the “SEC”), in the Group’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “project,” “believe,” “should” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

The future results of the Group could be affected by subsequent events and could differ materially from those expressed in forward-looking statements. If future events and actual performance differ from the Group’s assumptions, the actual results could vary significantly from the performance projected in the forward-looking statements.

The Group wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are based on management’s current expectations, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities, competitive, and regulatory factors, legislative changes and accounting pronouncements, could affect the Group’s financial performance and could cause the Group’s actual results for future periods to differ materially from those anticipated or projected. The Group does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

PART 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2005 AND JUNE 30, 2004
(In thousands, except share data)

	March 31,			June 30,
	2005			2004
ASSETS
Cash and due from banks	$	15,214		$	9,284
Investments:
Short term investments		5,231			7,747
Trading securities, at fair value with amortized cost of $264 (June 30, 2004 - $561)		267			574
Investment securities available-for-sale, at fair value with amortized cost of $1,200,799 (June 30, 2004 - $1,533,145):
Securities pledged that can be repledged		573,585			986,165
Other investment securities		612,845			541,242
Total investment securities available-for-sale		1,186,430			1,527,407
Investment securities held-to-maturity, at amortized cost with fair value of $2,013,926 (June 30, 2004 - $1,275,534):
Securities pledged that can be repledged		1,650,349			1,002,041
Other investment securities		382,170			280,821
Total investment securities held-to-maturity		2,032,519			1,282,862
Federal Home Loan Bank (FHLB) stock, at cost		28,160			28,160
Total investments		3,252,607			2,846,750
Securities sold but not yet delivered		179			47,312
Loans:
Mortgage loans held-for-sale, at lower of cost or market		15,489			5,814
Loans receivable, net of allowance for loan losses of $6,980 (June 30, 2004 - $7,553)		843,408			737,642
Total loans, net		858,897			743,456
Accrued interest receivable		23,175			19,127
Premises and equipment, net		16,933			18,552
Deferred tax asset, net		6,347			7,337
Foreclosed real estate, net		4,182			888
Other assets		37,751			32,989
Total assets	$	4,215,285		$	3,725,695
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	151,731		$	126,296
Savings accounts		93,947			88,463
Certificates of deposit		950,886			809,590
Total deposits		1,196,564			1,024,349
Borrowings:
Securities sold under agreements to repurchase		2,256,295			1,895,865
Advances from FHLB		301,500			300,000
Term notes		15,000			15,000
Subordinated capital notes		72,166			72,166
Total borrowings		2,644,961			2,283,031
Securities purchased but not yet received		56			89,068
Accrued expenses and other liabilities		35,014			34,580
Total liabilities		3,876,595			3,431,028
Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation value; 1,340,000 shares of Series A and 1,380,000 shares of Series B issued and outstanding		68,000			68,000
Common stock, $1 par value; 40,000,000 shares authorized; 24,676,148 shares issued (June 30, 2004 - 22,253,084 shares)		24,676			22,253
Additional paid-in capital		186,247			125,206
Legal surplus		32,979			27,425
Retained earnings		66,581			101,723
Treasury stock, at cost, 11,461 shares (June 30, 2004 - 246,441 shares)		(11	)		(4,578	)
Accumulated other comprehensive loss, net of tax effect of $243 (June 30, 2004 - $4,148)		(39,782	)		(45,362	)
Total stockholders’ equity		338,690			294,667
Total liabilities and stockholders’ equity	$	4,215,285		$	3,725,695

See notes to unaudited consolidated financial statements.

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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
   (In thousands, except per share data)

	Quarter Period						Nine-month period
	2005			2004			2005			2004
Interest income:
Loans	$	13,422		$	12,538		$	40,030		$	39,572
Mortgage-backed securities		24,775			28,243			80,799			76,976
Investment securities		9,299			1,650			19,359			5,241
Short term investments		76			16			247			108
Total interest income		47,572			42,447			140,435			121,897
Interest expense:
Deposits		7,624			7,755			21,047			23,058
Securities sold under agreements to repurchase		16,386			9,083			42,941			26,023
Advances from FHLB and term notes		2,045			2,026			6,170			6,060
Subordinated capital notes		1,107			827			3,152			2,155
Total interest expense		27,162			19,691			73,310			57,296
Net interest income		20,410			22,756			67,125			64,601
Provision for loan losses		660			1,050			2,465			3,404
Net interest income after provision for loan losses		19,750			21,706			64,660			61,197
Non-interest income (losses):
Commissions and fees from brokerage, investment banking, insurance and fiduciary activities		3,348			4,357			10,960			13,215
Banking service revenues		1,828			1,820			5,688			5,225
Net gain (loss) on sale and valuation of:
Mortgage banking activities		1,073			1,946			6,606			6,400
Securities available-for-sale		455			3,298			6,026			9,509
Derivatives activities		(623	)		(275	)		(945	)		(935	)
Trading securities		(11	)		29			26			20
Other		31			24			87			63
Total non-interest income, net		6,101			11,199			28,448			33,497
Non-interest expenses:
Compensation and employees’ benefits		6,618			6,381			19,297			18,155
Occupancy and equipment		2,466			2,465			7,516			7,083
Advertising and business promotion		1,487			1,919			5,086			6,087
Professional and service fees		1,837			1,382			5,216			4,457
Communication		377			463			1,220			1,386
Loan servicing expenses		401			461			1,298			1,387
Taxes, other than payroll and income taxes		463			455			1,365			1,320
Electronic banking charges		517			418			1,532			1,199
Printing, postage, stationery and supplies		210			270			684			859
Insurance, including deposit insurance		187			197			579			591
Other		909			586			2,368			2,456
Total non-interest expenses		15,472			14,997			46,161			44,980
Income before income taxes		10,379			17,908			46,947			49,714
Income tax benefit (expense)		2,671			(1,585	)		2,026			(4,143	)
Net income		13,050			16,323			48,973			45,571
Less: Dividends on preferred stock		(1,200	)		(1,200	)		(3,601	)		(2,998	)
Net income available to common shareholders	$	11,850		$	15,123		$	45,372		$	42,573
Income per common share:
Basic	$	0.48		$	0.68		$	1.86		$	1.95
Diluted	$	0.46		$	0.64		$	1.78		$	1.84
Average common shares outstanding		24,628			22,317			24,481			21,799
Average potential common share-options		862			1,305			948			1,355
		25,490			23,622			25,429			23,154
Cash dividends per share of common stock	$	0.14		$	0.13		$	0.41		$	0.38

See notes to unaudited consolidated financial statements.

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UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
NINE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
   (In thousands)

CHANGES IN STOCKHOLDERS’ EQUITY:	2005			2004
Preferred stock:
Balance at beginning of period	$	68,000		$	33,500
Issuance of preferred stock		—			34,500
Balance at end of period		68,000			68,000
Common stock:
Balance at beginning of period		22,253			19,684
Issuance of common stock		—			1,955
Stock options exercised		429			525
Stock dividend		1,994			—
Balance at end of period		24,676			22,164
Additional paid-in capital:
Balance at beginning of period		125,206			57,236
Issuance of common stock		—			52,785
Stock options exercised		3,475			4,270
Stock options implied value		(879	)		—
Stock dividend		58,455			14,526
Common stock issuance costs		(10	)		(3,206	)
Preferred stock issuance costs		—			(1,443	)
Balance at end of period		186,247			124,168
Legal surplus:
Balance at beginning of period		27,425			21,099
Transfer from retained earnings		5,554			4,420
Balance at end of period		32,979			25,519
Retained earnings:
Balance at beginning of period		101,723			106,358
Net income		48,973			45,571
Cash dividends declared on common stock		(10,037	)		(8,344	)
Stock dividend		(64,923	)		(46,335	)
Cash dividends declared on preferred stock		(3,601	)		(2,998	)
Transfer to legal surplus		(5,554	)		(4,420	)
Balance at end of period		66,581			89,832
Treasury stock:
Balance at beginning of period		(4,578	)		(35,888	)
Stock used (purchased)		94			(394	)
Stock dividend		4,473			31,809
Balance at end of period		(11	)		(4,473	)
Accumulated other comprehensive income (loss), net of deferred tax:
Balance at beginning of period		(45,362	)		(309	)
Other comprehensive income (loss), net of tax		5,580			(38,225	)
Balance at end of period		(39,782	)		(38,534	)
Total stockholders’ equity	$	338,690		$	286,676

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
QUARTERS AND NINE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
   (In thousands)

	Quarter period						Nine-Month Period
COMPREHENSIVE INCOME	2005			2004			2005			2004
Net income	$	13,050		$	16,323		$	48,973		$	45,571
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available-for-sale arising during the period		(17,889	)		9,362			1,860			(38,359	)
Realized gains on investment securities available-for-sale included in net income		(455	)		(3,298	)		(6,026	)		(9,509	)
Unrealized gain (loss) on derivatives designated as cash flows hedges arising during the period		13,583			(13,208	)		192			(7,739	)
Realized loss on derivatives designated as cash flow hedges included in net income		1,923			4,791			9,311			13,620
Amount reclassified into earnings during the period related to transition adjustment on derivative activities		—			93			—			260
Income tax effect related to unrealized (gain) loss on securities available-for-sale		79			95			243			3,502
Other comprehensive income (loss) for the period		(2,759	)		(2,165	)		5,580			(38,225	)
Comprehensive income	$	10,291		$	14,158		$	54,553		$	7,346

See notes to unaudited consolidated financial statements.

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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(In thousands)

	2005			2004
Cash flows from operating activities:
Net income	$	48,973		$	45,571
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred loan origination fees and costs, net		(2,206	)		(2,265	)
Amortization of premiums and accretion of discounts on investment securities, net		7,240			8,959
Depreciation and amortization of premises and equipment		4,045			3,627
Deferred income tax expense		1,232			303
Provision for loan losses		2,465			3,404
Loss (gain) on:
Sale of securities available-for-sale		(8,279	)		(9,509	)
Mortgage banking activities		(6,606	)		(6,400	)
Derivatives activities		945			935
Hedged securities available-for-sale		2,253			—
Originations of loans held-for-sale		(151,776	)		(197,432	)
Proceeds from sale of loans		87,762			119,553
Net decrease (increase) in:
Trading securities		307			(1,783	)
Accrued interest receivable		(4,048	)		(1,576	)
Other assets		(1,641	)		(1,533	)
Net increase in:
Accrued interest on deposits and borrowings		6,466			4,255
Other liabilities		1,206			3,422
Total adjustments		(60,635	)		(76,040	)
Net cash used in operating activities		(11,662	)		(30,469	)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale		(1,378,659	)		(1,417,157	)
Investment securities held-to-maturity		(370,868	)		(263,360	)
Net purchases of derivatives instruments		(2,794	)		(1,866	)
Maturities and redemptions of:
Investment securities available-for-sale		233,035			545,917
Investment securities held-to-maturity		186,090			61,422
Proceeds from sale of:
Investment securities available-for-sale		933,403			549,311
Foreclosure real estate		1,997			797
Loan production:
Origination and purchase of loans, excluding loans held-for-sale, net		(248,086	)		(123,418	)
Principal repayment of loans		139,531			134,112
Contribution to Statutory Trust II		—			(1,083	)
Additions to premises and equipment		(2,426	)		(6,118	)
Net cash used in investing activities		(508,777	)		(521,443	)
Cash flows from financing activities:
Net increase in:
Deposits		171,459			8,256
Securities sold under agreements to repurchase		360,430			247,741
Proceeds from:
Advances from FHLB		1,669,202			684,200
Exercise of stock options		3,904			4,795
Repayments of advances from FHLB		(1,667,702	)		(503,400	)
Issuance of subordinated capital notes		—			35,043
Issuance of common stock, net		(10	)		51,534
Issuance of preferred stock, net		—			33,057
Common stock purchased		(165	)		(394	)
Dividends paid		(13,265	)		(8,273	)
Net cash provided by financing activities		523,853			552,559
Net increase in cash and cash equivalents		3,414			647
Cash and cash equivalents at beginning of period		17,031			17,097
Cash and cash equivalents at end of period	$	20,445		$	17,744
Cash and cash equivalents include:
Cash and due from banks	$	15,214		$	11,651
Short term investments		5,231			6,093
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:	$	20,445		$	17,744
Interest paid	$	66,844		$	50,017
Income taxes paid	$	554		$	1,880
Mortgage loans securitized into mortgage-backed securities	$	71,494		$	80,071
Investment securities available-for-sale transferred to held-to-maturtity	$	565,191		$	1,030,436
Accrued dividend payable	$	3,454		$	3,069
Other comprehensive income (loss) for the period	$	5,580		$	(38,225	)
Securities and loans sold but not yet delivered	$	179		$	12,188
Securities purchased but not yet received	$	56		$	14,419
Transfer from loans to foreclosed real estate	$	3,244		$	708
Stock dividend paid	$	64,923		$	46,335

See notes to consolidated financial statements.

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ORIENTAL FINANCIAL GROUP INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – BASIS OF PRESENTATION:

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.

The unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these financial statements include all adjustments necessary, to present fairly the consolidated financial condition as of March 31, 2005 and June 30, 2004, and the results of operations for the quarters and nine-month periods ended March 31, 2005 and 2004, and the cash flows for the nine-month periods ended March 31, 2005 and 2004. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. Financial information as of June 30, 2004 has been derived from the Group’s audited Consolidated Financial Statements. The results of operations and cash flows for the nine-month periods ended March 31, 2005 and 2004 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, 2004, included in the Group’s Annual Report on Form 10-K.

Nature of Operations

Oriental is a financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. 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 and retirement services through the following subsidiaries: Oriental Bank and Trust (the “Bank”), Oriental Financial Services Corp. (“Oriental Financial Services”), Oriental Insurance, Inc. (“Oriental Insurance”) and Caribbean Pension Consultants, Inc. (“CPC”).

The main offices for the Group and its subsidiaries are located in San Juan, Puerto Rico. The Group is subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as amended, which is administered by the Board of Governors of the Federal Reserve System.

The Bank operates twenty-three branches located throughout Puerto Rico and is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of Puerto Rico and the Federal Deposit Insurance Corporation (“FDIC”), which insures its deposits through the Savings Association Insurance Fund (SAIF), up to $100,000 per depositor. The Bank has an international banking entity (“IBE”), which is a unit of the Bank, named O.B.T. International Bank, pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended (the “IBE Act”). In November 2003, the Group organized a new IBE, named Oriental International Bank Inc., as a wholly owned subsidiary of the Bank. The Group transferred as of January 1, 2004 substantially all of the assets and liabilities of O.B.T. International Bank to the new IBE subsidiary. The IBE offers the Bank certain Puerto Rico tax advantages and its services are limited under Puerto Rico law to persons and assets located outside of Puerto Rico.

Oriental Financial Services is subject to the supervision, examination and regulation of the National Association of Securities Dealers, Inc., the SEC, and the Office of the Commissioner of Financial Institutions of Puerto Rico. Oriental Insurance is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico.

Significant Accounting Policies

The unaudited consolidated financial statements of the Group are prepared in accordance with GAAP and with general practices within the financial services industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Group believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.

•	Allowance for Loan Losses
	The Group assesses the overall risks in its loan portfolio and establishes and maintains an allowance for probable losses thereon. The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses

-5-

	based on the evaluation of known and inherent risks in the Group’s loan portfolio. The Group’s management evaluates the adequacy of the allowance for loan losses on a quarterly basis. Based on current and expected economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses, management considers that the allowance for loan losses is adequate to absorb probable losses on its loan portfolio. Any significant changes in these considerations would have an impact on the allowance for loan losses. See Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Loan Losses and Non-Performing Assets” for a detailed description of the Group’s estimation process and methodology related to the allowance for loan losses.
•	Financial Instruments
	Certain financial instruments including derivatives, hedged items, trading securities and investment securities available-for-sale are recorded at fair value and unrealized gains and losses are recorded in other comprehensive income or other gains and losses as appropriate. Fair values are based on listed market prices, if available. If listed market prices are not available, fair value is determined based on other relevant factors including price quotations for similar instruments. The fair values of certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments as well as time value and yield curve or volatility factors underlying the positions.
•	Impairment of Investment Securities
	The Group evaluates its securities available-for-sale and held-to-maturity for impairment. An impairment charge in the consolidated statements of income is recognized when the decline in the fair value of investments below their cost basis is judged to be other-than-temporary. The Group considers various factors in determining whether it should recognize an impairment charge, including, but not limited to the length of time and extent to which the fair value has been less than its cost basis, and the Group’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. For debt securities, the Group also considers, among other factors, the investees repayment ability on its debt obligations and its cash and capital generation ability.
•	Income Taxes
	In preparing the consolidated financial statements, the Group is required to estimate income taxes. This involves an estimation of current income tax expense together with an assessment of temporary differences resulting from differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Group to assume certain positions based on its interpretation of current tax regulations. Changes in assumptions affecting estimates may be required in the future and estimated tax liabilities may need to be increased or decreased accordingly. The accrual for tax contingencies is adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law, including statute of limitations and emerging legislation. The Group’s effective tax rate includes the impact of tax contingency accruals and changes to such accruals, including related interest and penalties, as considered appropriate by management. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to the Group’s effective rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective rate and may require the use of cash in the year of resolution.
	The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Group’s deferred tax assets assumes that the Group will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, the Group may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of income.
	Management evaluates the realizability of the deferred tax assets on a quarterly basis and assesses the need for a valuation allowance. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in the Group’s tax provision in the period of change. During the period ended March 31, 2005 and 2004, the Group did not record valuation allowances related to its deferred tax assets.
	On February 2005, the Governor of Puerto Rico announced during his budget speech, the proposal of a new legislation to impose a special income tax on the financial industry for two years as a transitory measure to a tax reform. The tax is believed to be between 2.5% and 5% on the net interest income. The proposal of this new legislation is still on a very preliminary stage; therefore, the final effect of the proposed special tax for the financial sector on the industry is still not defined.

-6-

Stock Option Plans

At March 31, 2005, the Group had three stock-based employee compensation plans: the 1996, 1998, and 2000 Incentive Stock Option Plans. These plans offer key officers, directors and employees an opportunity to purchase shares of the Group’s common stock. The Compensation Committee of the Board of Directors has sole authority and absolute discretion as to the number of stock options to be granted to any officer, director or employee, their vesting rights, and the options’ exercise prices. The plans provide for a proportionate adjustment in the exercise price and the number of shares that can be purchased in case of merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split in which the number of shares of common stock of the Group as a whole are increased, decreased, changed into or exchanged for a different number or kind of shares or securities. Stock options vest upon completion of specified years of service.

The Group follows the intrinsic value-based method of accounting for measuring compensation expense, if any. Compensation expense is generally recognized for any excess of the quoted market price of the Group’s stock at measurement date over the amount an employee must pay to acquire the stock. No stock-based employee compensation cost is reflected in net income, as all options outstanding during the quarters and nine-month periods ended March 31, 2005 and 2004 under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Group had applied the fair value recognition provisions:

							Nine-month period
	Quarter Ended						ended
	March 31,						March 31,
	2005			2004			2005			2004
(In thousands, except for per share data)
Net income, as reported	$	13,050		$	16,323		$	48,973		$	45,571
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		413			356			1,156			1,099
Pro forma net income		12,637			15,967			47,817			44,472
Less: Dividends on preferred stock		(1,200	)		(1,200	)		(3,601	)		(2,998	)
Pro forma net income available to common shareholders	$	11,437		$	14,767		$	44,216		$	41,474
Earning per share:
Basic – as reported	$	0.48		$	0.68		$	1.86		$	1.95
Basic – pro forma	$	0.46		$	0.66		$	1.81		$	1.90
Diluted – as reported	$	0.46		$	0.64		$	1.78		$	1.84
Diluted – pro forma	$	0.45		$	0.63		$	1.74		$	1.79
Average common shares outstanding		24,628			22,317			24,481			21,799
Average potential common share-options		862			1,305			948			1,355
		25,490			23,622			25,429			23,154

The fair value of each option granted during the nine-month periods ended March 31, 2005 and 2004 was $7.56 and $6.90 per option, respectively, as adjusted for the stock dividend effected on December 30, 2004. The fair value of each option granted during the nine-month periods ended March 31, 2005 and 2004 was estimated at the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in the Group’s employee options. Use of an option valuation model, as required by GAAP, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each option grant. Because the Group’s employee options have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect the Group’s estimate of the fair value of those options, in the Group’s opinion, the existing valuation models, including Black-Scholes, are not reliable single measures and the use of other option pricing models may result in different fair values of the Group’s employee options.

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The following assumptions were used in estimating the fair value of the options granted:

(1)	The expected option term is 7 years.
(2)	The expected weighted average volatility was 29% for options granted in the nine-months ended March 31, 2005 (2004 – 33%).
(3)	The expected weighted average dividend yield was 2.23% for options granted in the nine-months ended March 31, 2005 (2004 – 2.28%), after giving retroactive effect to the 10% stock dividend effected on December 30, 2004.
(4)	The weighted average risk-free interest rate was 3.98% for options granted in the six-months ended March 31, 2005 (2004 – 3.81%).

The diluted per share calculations for the three months and nine months ended March 31, 2005 and 2004 have been adjusted from previous reported results to take into account additional incentive stock options required by an anti-dilutive provision in employment agreements with certain executives. This provision requires the Group to adjust stock options granted to avoid any form of dilution, including dilution resulting from stock dividends, cash dividends, and additional offerings of common stock by the Group. Although all stock options granted to these executives pursuant to the Group’s incentive stock option plans had been adjusted to account for stock dividends, no additional adjustments were made to reflect the Group’s issuances of common stock in 1994 and 2004, and the quarterly cash dividends declared on its common stock. On April 5, 2005, in response to a claim presented in 2004 by the Group’s Chairman, the Compensation Committee of the Group’s Board of Directors (the “Compensation Committee”) made a final determination on this matter. It agreed to compensate these executives for the implied value of their exercised options by crediting them the full amount of such implied value upon future exercises of stock options granted under the Group’s incentive stock options plans and by issuing to each executive the number of additional stock options that are required to account for the events of dilution with respect to unexercised options and expired options. Subsequently, the Group has increased the number of options used in the calculation of fully diluted shares by 224,011 for the quarters and nine-month periods ended March 31, 2005 and 2004, which represents the Group’s calculation of the additional options affecting these periods. The effect is to reduce per diluted share results by approximately one cent per share for each quarter beginning with the three-month period ended March 31, 2004.

Also, on April 5, 2005, the Group’s Chairman submitted a claim through the Compensation Committee, related to the implied value of exercised options under the Group’s incentive stock option plans and as part of his employment agreement, claiming the difference between the exercised value and the price which the officer would have paid for each share of common stock, if the options had been adjusted for events of dilution as required. In order to account for the Chairman’s claim and the contingency related to claims from the other executives on the same matter, a liability was established as of March 31, 2005 for $879,000, with a charge to additional paid-in capital. The Chairman’s claim related to the implied value of exercised options was settled on April 13, 2005.

On April 15, 2005, the Group’s Chairman submitted another claim related to the number of additional stock options that in his view he is entitled to account for the dilutive effect of stock options exercised, from time to time, by other participants in the Group’s incentive stock option plans. The Chairman claims that he is entitled to such adjustment under the anti-dilution provision of his employment agreement. This second claim is still under the preliminary stage of consideration by the Compensation Committee and the Group’s legal counsel, and the effect, if any, of the ultimate resolution of this matter can not presently be determined.

NOTE 2 – INVESTMENT SECURITIES:

Short Term Investments

At March 31, 2005 and June 30, 2004, the Group’s short term investments were comprised of money market accounts in the amount of $5,231,000 and $7,747,000, respectively.

Trading Securities

A summary of trading securities owned by the Group at March 31, 2005 and June 30, 2004 is as follows:

	(In thousands)
	March 31,		June 30,
	2005		2004
P.R. Government and agency obligations	$	235	$	538
Mortgage-backed securities		32		36
Total trading securities	$	267	$	574

As of March 31, 2005, the Group’s trading portfolio weighted average yield was 5.73% (June 30, 2004 - - 5.81%).

-8-

Investment securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the investment securities as of March 31, 2005 and June 30, 2004, were as follows:

	March 31, 2005 (In thousands)
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
Available-for-sale
US Treasury securities	$	248,697	$	—	$	5,136	$	243,561		3.56	%
Puerto Rico Government and agency obligations		45,726		1,275		157		46,844		5.77	%
Other debt securities		53,990		217		236		53,971		3.05	%
Total investment securities		348,413		1,492		5,529		344,376		3.77	%
FNMA and FHLMC certificates		589,947		23		6,874		583,096		4.45	%
GNMA certificates		90,467		263		1,081		89,649		3.51	%
Collateralized mortgage obligations		171,972		269		2,932		169,309		4.37	%
Total mortgage-backed securities		852,386		555		10,887		842,054		4.33	%
Total securities available-for-sale	$	1,200,799	$	2,047	$	16,416	$	1,186,430		4.17	%
Held-to-maturity
US Treasury securities	$	798,209	$	—	$	16,289	$	781,920		3.69	%
Puerto Rico Government and agency obligations		62,095		11		1,920		60,186		5.33	%
Total investment securities		860,304		11		18,209		842,106		3.81	%
FNMA and FHLMC certificates		877,376		5,397		6,384		876,389		5.15	%
GNMA certificates		269,170		2,176		1,012		270,334		5.29	%
Collateralized mortgage obligations		25,669		—		572		25,097		4.22	%
Total mortgage-backed securities		1,172,215		7,573		7,968		1,171,820		5.16	%
Total securities held-to-maturity	$	2,032,519	$	7,584	$	26,177	$	2,013,926		4.59	%
Total	$	3,233,318	$	9,631	$	42,593	$	3,200,356		4.44	%

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	June 30, 2004 (In thousands)
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
Available-for-sale
US Treasury securities	$	208,485	$	406	$	1,914	$	206,977		3.43	%
Puerto Rico Government and agency obligations		51,990		1,418		197		53,211		5.79	%
Other debt securities		19,350		1,286		—		20,636		6.83	%
Total investment securities		279,825		3,110		2,111		280,824		5.35	%
FNMA and FHLMC certificates		936,710		3,330		6,736		933,304		4.39	%
GNMA certificates		88,409		247		2,059		86,597		3.82	%
Collateralized mortgage obligations		228,201		976		2,495		226,682		5.09	%
Total mortgage-backed securities		1,253,320		4,553		11,290		1,246,583		4.43	%
Total securities available-for-sale	$	1,533,145	$	7,663	$	13,401	$	1,527,407		4.39	%
Held-to-maturity
Puerto Rico Government and agency obligations	$	62,097	$	—	$	1,437	$	60,660		5.33	%
Total investment securities		62,097		—		1,437		60,660		5.33	%
FNMA and FHLMC certificates		897,119		725		5,406		892,438		5.07	%
GNMA certificates		323,646		483		1,693		322,436		5.10	%
Total mortgage-backed securities		1,220,765		1,208		7,099		1,214,874		5.08	%
Total securities held-to-maturity	$	1,282,862	$	1,208	$	8,536	$	1,275,534		5.09	%
Total	$	2,816,007	$	8,871	$	21,937	$	2,802,941		4.74	%

The amortized cost and fair value of the Group’s investment securities available-for-sale and held-to-maturity at March 31, 2005, 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
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities
Due within one year	$	10,000	$	10,090	$	—	$	—
Due after 1 to 5 years		299,097		293,971		598,518		588,101
Due after 5 to 10 years		4,987		5,250		199,691		193,820
Due after 10 years		34,329		35,065		62,095		60,185
		348,413		344,376		860,304		842,106
Mortgage-backed securties
Due after 1 to 5 years		300		318		—		—
Due after 5 to 10 years		14,463		14,328		—		—
Due after 10 years		837,623		827,408		1,172,215		1,171,820
		852,386		842,054		1,172,215		1,171,820
	$	1,200,799	$	1,186,430	$	2,032,519	$	2,013,926

Proceeds from the sale of investment securities available-for-sale during the nine-month period ended March 31, 2005 totaled $885,662,000 (2004 — $561,499,000). Gross realized gains and losses on those sales during the nine-month period ended March 31, 2005 were $10,278,000 and $4,252,000 respectively, (2004 – $11,932,000 and $2,423,000, respectively). During the nine-month periods ended March 31, 2005 and the fiscal year ended June 30, 2004, the Group’s management reclassified, at fair value, $565,191,000 and $1,114,424,000, respectively, of its available-for-sale investment portfolio to the held-to-maturity investment category as management intends to hold these securities to maturity.Unrealized losses on those securities transferred to the held-to-maturity category amounted to $25.3 million at March 31, 2005, and are included as part of the accumulated other comprehensive loss in the unaudited consolidated statement of financial condition. These unrealized losses are amortized over the remaining life of the securities as a yield adjustment.

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The following table shows the Group’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2005.

Available-for-sale

(In thousands)

	Less than 12 months
	Amortized		Unrealized			Fair
	Cost		Loss			Value
US Treasury securities	$	248,697	$	(5,136	)	$	243,561
Puerto Rico Government and agency obligations		3,221		(125	)		3,096
Other debt securities		41,955		(236	)		41,719
Mortgage-backed-securities		792,592		(10,569	)		782,023
		1,086,465		(16,066	)		1,070,399

	12 months or more
	Amortized		Unrealized			Fair
	Cost		Loss			Value
Puerto Rico Government and agency obligations		1,269		(32	)		1,237
Mortgage-backed-securities		16,158		(318	)		15,840
		17,427		(350	)		17,077

	Total
	Amortized		Unrealized			Fair
	Cost		Loss			Value
US Treasury securities		248,697		(5,136	)		243,561
Puerto Rico Government and agency obligations		4,490		(157	)		4,333
Other debt securities		41,955		(236	)		41,719
Mortgage-backed-securities		808,750		(10,887	)		797,863
	$	1,103,892	$	(16,416	)	$	1,087,476

Held-to-maturity

(In thousands)

	Less than 12 months
	Amortized		Unrealized			Fair
	Cost		Loss			Value
US Treasury securities	$	798,209	$	(16,289	)	$	781,920
Puerto Rico Government and agency obligations		41,000		(1,762	)		39,238
Mortgage-backed securities		516,474		(7,913	)		508,561
		1,355,683		(25,964	)		1,329,719

	12 months or more
	Amortized		Unrealized			Fair
	Cost		Loss			Value
Puerto Rico Government and agency obligations		11,131		(158	)		10,973
Mortgage-backed securities		2,727		(55	)		2,672
		13,858		(213	)		13,645

	Total
	Amortized		Unrealized			Fair
	Cost		Loss			Value
US Treasury securities		798,209		(16,289	)		781,920
Puerto Rico Government and agency obligations		52,131		(1,920	)		50,211
Mortgage-backed securities		519,201		(7,968	)		511,233
	$	1,369,541	$	(26,177	)	$	1,343,364

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Securities in an unrealized loss position at March 31, 2005 are mainly composed of securities issued or backed by U.S. government agencies. The vast majority of them are rated the equivalent of AAA by nationally recognized rating organizations. The investment portfolio is structured primarily with highly liquid securities which posses a large and efficient secondary market. Valuations are performed on a monthly basis using a third party provider and dealer quotes. Management believes that the unrealized losses in the investment portfolio at March 31, 2005 are mainly related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuer. The Group is a well capitalized financial institution which has the ability to hold the investment securities with unrealized losses until maturity or until the unrealized losses are recovered, and expects to continue its pattern of holding the securities until the forecasted recovery of fair value.

NOTE 3 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:

Loans Receivable

The Group’s credit activities are mainly with customers located in Puerto Rico. The Group’s loan transactions are encompassed within three main categories: mortgage, commercial and consumer. The composition of the Group’s loan portfolio at March 31, 2005 and June 30, 2004 was as follows:

	(In thousands)
	March 31, 2005			June 30, 2004
Residential mortgage loans	$	650,532		$	586,498
Home equity loans and secured personal loans		57,536			70,183
Commercial loans, mainly secured by real estate		124,531			81,846
Consumer loans		26,107			18,510
Loans receivable, gross		858,706			757,037
Less: deferred loan fees, net		(8,318	)		(11,842	)
Loans receivable		850,388			745,195
Allowance for loan losses		(6,980	)		(7,553	)
Loans receivable, net		843,408			737,642
Mortgage loans held-for-sale		15,489			5,814
Total loans, net	$	858,897		$	743,456

The Group has entered into three agreements to purchase a total $114.9 million of residential mortgage loans from a mortgage banker in Puerto Rico. As part of the contracts, the mortgage banker guarantees the scheduled timely payments of principal as well as interest on the aggregate outstanding principal balance of the mortgage loans, resulting in a net variable yield to the Group equal to 150 basis points plus the offer quotation of 90 days LIBOR (4.62% at March 31, 2005). Thus, the Group agreed to pay the interest flows from loans in exchange for floating rate flows on an identical notional amount. These fixed rate mortgage loans have exposure to variability in fair value. A swap has been separately accounted for in the Group’s unaudited consolidated financial statements to give effect to the exchange of the fixed rate received loans for the variable rates received from the seller swaps counterparty. Please refer to Note 8, Derivatives Activities.

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. The Group’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 necessarily based on factors beyond the Group’s control. Refer to Table 4 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 nine-month periods ended March 31, 2005 and 2004.

The Group evaluates all loans, some individually and other as homogeneous groups, for purposes of determining impairment. At March 31, 2005 and June 30, 2004, the total investment in impaired loans was $2.4 million and $715,000 respectively. The impaired loans were measured based on the fair value of collateral. The Group determined that no specific impairment allowance was required for such loans. The average investment in impaired loans for the three-month period ended March 31, 2005 amounted to $2.2 million.

- 12 -

NOTE 4 — PLEDGED ASSETS

At March 31, 2005, residential mortgage loans amounting to $376,217,000 and investment securities amounting to $47,392,000 were pledged to secure advances and borrowings from the FHLB. Investment securities with carrying values totaling $2,223,934,000, $202,142,000, $16,482,000 and $17,443,000 at March 31, 2005, were pledged to secure securities sold under agreements to repurchase, public fund deposits, term notes and interest rate swap agreements, respectively. Also, investment securities with carrying values totaling $201,000 and $1,912,000 at March 31, 2005, were pledged to the Federal Reserve Bank of New York and to the Puerto Rico Treasury Department (for the Oriental Bank and Trust’s IBE unit and Oriental International Bank), respectively.

As of March 31, 2005, investment securities available-for-sale and held-to-maturity not pledged amounted to $610,878,000 and $125,258,000 respectively. As of March 31, 2005, mortgage loans not pledged amounted to $289,804,000.

NOTE 5 – OTHER ASSETS

Other assets at March 31, 2005 and June 30, 2004 include the following:

	(In thousands)
	March 31, 2005		June 30, 2004
Investment in equity options	$	18,315	$	16,536
Deferred charges		3,891		4,786
Prepaid expenses		3,776		2,507
Income tax receivable		2,687		17
Investment in Statutory Trusts		2,171		2,170
Goodwill		2,006		2,021
Accounts receivable and other assets, net		4,905		4,952
	$	37,751	$	32,989

NOTE 6 – SUBORDINATED CAPITAL NOTES

Subordinated capital notes amounted to $72,166,000 at March 31, 2005 and June 30, 2004.

In October 2001 and August 2003, the Statutory Trust I and the Statutory Trust II, respectively, subsidiaries of the Group, were formed for the purpose of issuing trust redeemable preferred securities. In December 2001 and September 2003, $35 million of trust redeemable preferred securities were issued by the Statutory Trust I and by the Statutory Trust II, respectively, as part of pooled underwriting transactions. Pooled underwriting involves participating with other bank holding companies in issuing the securities through a special purpose pooling vehicle created by the underwriters.

The proceeds from these issuances were used by the Statutory Trust I and the Statutory Trust II to purchase a like amount of floating rate junior subordinated deferrable interest debentures (“subordinated capital notes”) issued by the Group. The first of these subordinated capital notes has a par value of $36.1 million, bears interest based on 3 month LIBOR plus 360 basis points (6.72% at March 31, 2005 and 5.20% at June 30, 2004) provided, however, that prior to December 18, 2006, this interest rate shall not exceed 12.5%, payable quarterly, and matures on December 23, 2031. In August 2004, the Group entered into a $35 million notional amount interest rate swap to fix the cost of the subordinated capital notes of the Statutory Trust I. This swap was fixed at a rate of 6.57%. This contract matures on December 18, 2006. The second of these subordinated capital notes has a par value of $36.1 million, bears interest based on 3 month LIBOR plus 295 basis points (6.07% at March 31, 2005 and 4.55% at June 30, 2004), payable quarterly, and matures on September 17, 2033. Both subordinated capital notes may be called at par after five years. The trust redeemable preferred securities have the same maturity and call provisions as the subordinated capital notes.

The subordinated deferrable interest debentures issued by the Group are accounted for as a liability denominated as subordinated capital notes on the consolidated statements of financial condition. Interest on these subordinated capital notes and the amortization of related issuance costs are accounted for as interest expense on an accrual basis.

The subordinated capital notes are treated as Tier-1 capital for regulatory purposes. On March 4, 2005, the Federal Reserve Board issued a final rule that continues to allow trust preferred securities to be included in Tier I regulatory capital, subject to stricter quantitative and qualitative limits. Under this rule, restricted core capital elements, which are trust preferred securities, qualifying cumulative perpetual preferred stock (and related surplus) and certain minority interests in consolidated subsidiaries, are limited in the aggregate to no more than 25% of a bank holding company’s core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. In addition, the amount of restricted core capital elements (other than qualifying mandatory convertible preferred securities) that an internationally active bank

-13-

holding company may include in Tier 1 capital must not exceed 15% of the sum of core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. An internationally active bank holding company is a bank holding company that (i) as of its most recent year-end FR Y-9C reports has total consolidated assets equal to $250 billion or more, or (ii) on a consolidated basis, reports total on-balance sheet foreign exposure of $10 billion or more on its filings of the most recent year-end FFIEC 009 Country Exposure Report.

NOTE 7 – OTHER BORROWINGS

At March 31, 2005, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties with whom the repurchase agreements were transacted. The counterparties have agreed to resell to the Group the same or similar securities at the maturity of the agreements.

Securities sold under agreements to repurchase (“reverse repurchase agreements”) at March 31, 2005 mature as follows:

	Balance
Due within 30 days	$	901,119
Due after 30 to 90 days		1,182,951
Due after 90 to 120 days		172,225
	$	2,256,295

At March 31, 2005, the contractual maturities of advances from the FHLB and term notes by fiscal year are as follows:

	(In thousands)
Year Ending	Advances from
June 30,	FHLB		Term Notes
2005	$	1,500
2006		75,000	$	—
2007		175,000		15,000
2009		50,000		—
	$	301,500	$	15,000

NOTE 8 – DERIVATIVES ACTIVITIES

The Group utilizes various derivative instruments for hedging purposes. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations and payments are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. The actual risk of loss is the cost of replacing, at market, these contracts in the event of default by the counterparties. The Group controls the credit risk of its derivative financial instrument agreements through credit approvals, limits, monitoring procedures and collateral, when considered necessary.

The Group generally uses interest rate swaps and interest rate options in managing its interest rate risk exposure. The swaps were entered into to fix the cost of short-term borrowings that the Group expects to renew for longer periods and provide protection against increases in short-term interest rates. Under these swaps, the Group pays a fixed monthly or quarterly cost and receives a floating thirty or ninety-day payment based on LIBOR. Floating rate payments received from the swap counterparties correspond to the floating rate payments made on the short-term borrowings thus resulting in a net fixed rate cost to the Group.

Derivatives instruments are generally negotiated over-the-counter (“OTC”) contracts. Negotiated OTC derivatives are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise price and maturity. As required by the SFAS No. 133, as amended by SFAS No. 138, Accounting for Derivative Instruments and Hedging Activities, derivative instruments are recognized as assets and liabilities at fair value. If certain conditions are met, the derivative may qualify for hedge accounting treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”) or (c) a hedge of foreign currency exposure (“foreign currency hedge”).

In the case of a qualifying fair value hedge, changes in the value of the derivative instruments that have been highly effective are recognized in current period earnings along with the change in value of the designated hedged item. In the

-14-

case of a qualifying cash flow hedge, changes in the value of the derivative instruments that have been highly effective are recognized in other comprehensive income, until such time as those earnings are affected by the variability of the cash flows of the underlying hedged item. In either a fair value hedge or a cash flow hedge, net earnings may be impacted to the extent the changes in the value of the derivative instruments do not perfectly offset changes in the value of the hedged items. If the derivative is not designated as a hedging instrument, the changes in fair value of the derivative are recorded in earnings.

Certain contracts contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.

The Group has entered into three agreements to purchase a total $114.9 million of residential mortgage loans from a mortgage banker in Puerto Rico. As part of the contracts, the mortgage banker guarantees the scheduled timely payments of principal as well as interest on the aggregate outstanding principal balance of the mortgage loans, resulting in a net variable yield to the Group equal to 150 basis points plus the offer quotation of 90 days LIBOR. Thus, the Group agreed to pay the interest flows from loans in exchange for floating rate flows on an identical notional amount. These fixed rate mortgage loans have exposure to variability in fair value. A swap has been separately accounted for in the Group’s unaudited consolidated financial statements to give effect to the exchange of the fixed rate received loans for the variable rates received from the seller swaps counterparty.

In December 2004, and during the quarter ended March 31, 2005, the Group bought several put options and futures contracts, as hedging instruments. The purpose of these transactions is to protect the fair value of $100 million U.S. Treasury notes which are currently classified as available-for-sale securities. This strategy is part of the Group’s hedge program for managing the available-for-sale portfolio in a rising interest rate environment.

The Group offers its customers certificates of deposit with an option tied to the performance of the Standard & Poor’s 500 stock market index. At the end of five years, the depositor receives a specified percentage of the average increase of the month-end value of the index. If the index decreases, the depositor receives the principal invested without any interest. The Group uses swap and option agreements with major money center banks and major broker-dealer companies to manage its exposure to changes in this index. Under the terms of the option agreements, the Group receives the average increase in the month-end value of the index in exchange for a fixed premium. Under the term of the swap agreements, the Group receives the average increase in the month-end value of the index in exchange for a quarterly fixed interest cost.

The changes in fair value of the swap agreements used to hedge securities sold under agreement to repurchase, the subordinated capital notes of the Statutory Trust I and the mortgage loans purchased, the put options and futures contracts purchased to hedge the fair value of the $100 million U.S. Treasury notes, the interest rate swap agreements and the options embedded in the certificates of deposit are recorded in earnings and in other comprehensive income in accordance with SFAS No. 133, as amended.

The Group’s swaps (excluding those used to manage exposure to the stock market outstanding and those described above used to hedge the mortgage loans purchased) and their terms at March 31, 2005 and June 30, 2004 are set forth in the table below:

	(Dollars in thousands)
	March 31,			June 30,
	2005			2004
Swaps:
Pay fixed swaps notional amount	$	885,000		$	900,000
Weighted average pay rate – fixed		3.44	%		3.47	%
Weighted average receive rate – floating		2.83	%		1.25	%
Maturity in months		8 to 67			3 to 76
Floating rate as a percent of LIBOR		100	%		100	%

-15-

Information pertaining to the notional amounts of the Group’s derivative financial instruments as of March 31, 2005 and June 30, 2004 is as follows:

	Notional Amount
	(In thousands)
	March 31,		June 30,
Type of Contract:	2005		2004
Cash Flows Hedging Activities:
Interest rate swaps used to hedge:
Securities sold under agreements to repurchase	$	850,000	$	900,000
Subordinated Capital Notes		35,000		—
Purchased mortgage loans linked swaps		109,641		—
	$	994,641	$	900,000
Derivatives Not Designated as Hedge:
Purchased options used to manage exposure to the stock market on stock indexed deposits	$	226,935	$	227,260
Embedded options on stock indexed deposits		210,831		218,884
Other contracts used to manage exposure to change in fair value of Treasury Notes:
Put options		1,305		—
Futures contracts		100		—
	$	439,071	$	446,144

During the nine-month periods ended March 31, 2005 and 2004, losses of $945,000 and $935,000, respectively, were charged to earnings and reflected as “Derivatives Activities” in the unaudited consolidated statements of income. During the nine-month periods ended March 31, 2005 and 2004, unrealized gains of $192,000 and unrealized losses of $7.7 million, respectively, on derivatives designated as cash flow hedges were included in other comprehensive income (loss). Ineffectiveness of $791,000 and $811,000 were charged to earnings during the nine-month periods ended March 31, 2005 and 2004, respectively.

At March 31, 2005 and June 30, 2004, the fair value of derivatives was recognized as either assets or liabilities in the consolidated statements of financial condition as follows: the fair value of the interest rate swaps used to manage the exposure to the stock market on stock indexed deposits, to fix the cost of short-term borrowings and hedge the mortgage loan purchased represented a liability of $6.8 million and $13.8 million, respectively, is presented in accrued expenses and other liabilities; the purchased options used to manage the exposure to the stock market on stock indexed deposits represented an other asset of $18.3 million and $16.5 million, respectively; the options sold to customers embedded in the certificates of deposit represented a liability of $17.6 million and $16.2 million, respectively, recorded in deposits; and the US 10-year notes put options and the futures contracts represented an other asset of $1,305,000 and $37,500, respectively, as of March 31, 2005.

NOTE 9 – STOCKHOLDERS’ EQUITY TRANSACTIONS:

Common Stock

In February 2004, the Group filed a registration statement with the SEC for an offering of 2,565,000 shares of common stock. The offering consisted of 1,700,000 shares offered by the Group, and an aggregate of 865,000 shares offered by three stockholders of the Group. The offering also included an additional 384,750 shares subject to over-allotment options granted by the Group and the selling stockholders to the underwriters. The registration statement was declared effective by the SEC on March 3, 2004.

On March 20, 2004, the underwriters exercised their options to purchase from the Group and the selling stockholders an aggregate of 384,750 shares of the Group’s common stock to cover over-allotments (255,000 of these shares were purchased from the Group and 129,750 from the three selling stockholders of the Group). Following such exercise, the total offering was for 2,949,750 shares at a public offering price of $28.00 per share, consisting of 1,955,000 shares offered by the Group and an aggregate of 994,750 shares by the three selling stockholders of the Group. Proceeds to the Group from the issuance of common stock were approximately $51,560,000, net of $3,180,000 of issuance costs.

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Stock Dividend

On November 30, 2004, the Group declared a ten percent (10%) stock dividend on common stock held by shareholders of record as of December 31, 2004. As a result, a total of 2,260,396 shares of common stock were distributed on January 17, 2005 (1,993,711 shares of common stock were issued and 266,685 were distributed from the Group’s treasury stock account.) For purposes of the computation of income per common share, cash dividend and stock price, the stock dividend was retroactively recognized for all periods presented in the accompanying unaudited consolidated financial statements.

Treasury Stock

Pursuant to the Group’s stock repurchase program, the Group repurchased 15,800 shares of its common stock, for $394,000, during the nine-month period ended March 31, 2004. No repurchases were made during the nine-month period ended March 31, 2005. This program does not require the Group to repurchase any shares. The Group makes such repurchases from time to time, in the open market at such times and prices as market conditions shall warrant, and in compliance with the terms of applicable federal and Puerto Rico laws and regulations.

NOTE 10 – SEGMENT REPORTING:

The Group segregates its businesses into the following major reportable segments: Banking, Treasury and Financial Services. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Group’s organization, nature of 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.

Banking includes the Bank’s branches and mortgage banking, with traditional banking products such as deposits and mortgage, commercial and consumer loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate mortgage loans for the Group’s own portfolio. From time to time, if conditions so warrant, the Group may sell loans to other financial institutions or securitize conforming loans into GNMA, FNMA and FHLMC certificates using another institution as issuer. The other institution services mortgages included in the resulting GNMA, FNMA, and FHLMC pools. The Group also sells the rights to service mortgage loans for others.

The Treasury segment encompasses all of the Group’s assets and liability management activities such as: purchases and sales of investment securities, interest rate risk management, derivatives and borrowings.

Financial services is comprised of the Bank’s trust division (Oriental Trust), the brokerage subsidiary (Oriental Financial Services Corp.), the insurance agency subsidiary (Oriental Insurance, Inc.), and the pension plan administration subsidiary (Caribbean Pension Consultants, Inc.). The core operations of this segment are financial planning, money management and investment brokerage services, insurance sales, corporate and individual trust and retirement services, as well as pension plan administration services.

Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices. The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” included in the Group’s annual report on Form 10-K. Following are the results of operations and the selected financial information by operating segment for the quarters and nine-month periods ended March 31, 2005 and 2004:

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Unaudited — quarters ended March 31, (Dollars in thousands)

							Financial			Total						Consolidated
	Banking			Treasury			Services			Segments			Eliminations			Total
March 31, 2005
Interest income	$	13,255		$	34,292		$	25		$	47,572			—		$	47,572
Interest expense		(5,206	)		(21,956	)		—			(27,162	)		—			(27,162	)
Net interest income		8,049			12,336			25			20,410			—			20,410
Non-interest income		2,909			(168	)		3,360			6,101			—			6,101
Non-interest expenses		(11,803	)		(767	)		(2,902	)		(15,472	)		—			(15,472	)
Intersegment revenue		406			—			—			406			(406	)		—
Intersegment expense		—			306			(712	)		(406	)		406			—
Provision for loan losses		(660	)		—			—			(660	)		—			(660	)
Income before income taxes	$	(1,099	)	$	11,707		$	(229	)	$	10,379		$	—		$	10,379
March 31, 2004
Interest income	$	12,537		$	29,895		$	15		$	42,447		$	—		$	42,447
Interest expense		(4,427	)		(15,264	)		—			(19,691	)		—			(19,691	)
Net interest income		8,110			14,631			15			22,756			—			22,756
Non-interest income		2,094			4,938			4,167			11,199			—			11,199
Non-interest expenses		(11,043	)		(843	)		(3,111	)		(14,997	)		—			(14,997	)
Intersegment revenue		398			—			—			398			(398	)		—
Intersegment expense		—			(105	)		(293	)		(398	)		398			—
Provision for loan losses		(1,050	)		—			—			(1,050	)		—			(1,050	)
Income before income taxes	$	(1,491	)	$	18,621		$	778		$	17,908		$	—		$	17,908

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Unaudited — nine-month periods ended March 31, (Dollars in thousands)

							Financial			Total						Consolidated
	Banking			Treasury			Services			Segments			Eliminations			Total
March 31, 2005
Interest income	$	39,860		$	100,529		$	46		$	140,435			—		$	140,435
Interest expense		(12,470	)		(60,840	)		—			(73,310	)		—			(73,310	)
Net interest income		27,390			39,689			46			67,125			—			67,125
Non-interest income		12,288			5,105			11,055			28,448			—			28,448
Non-interest expenses		(35,458	)		(2,070	)		(8,633	)		(46,161	)		—			(46,161	)
Intersegment revenue		2,323			—			—			2,323			(2,323	)		—
Intersegment expense		—			(211	)		(2,112	)		(2,323	)		2,323			—
Provision for loan losses		(2,465	)		—			—			(2,465	)					(2,465	)
Income before income taxes	$	4,078		$	42,513		$	356		$	46,947		$	—		$	46,947
Total assets as of March 31, 2005	$	941,935		$	3,653,124		$	10,681		$	4,605,740		$	(390,455	)	$	4,215,285
March 31, 2004
Interest income	$	39,570		$	82,270		$	57		$	121,897		$	—		$	121,897
Interest expense		(13,223	)		(44,073	)		—			(57,296	)		—			(57,296	)
Net interest income		26,347			38,197			57			64,601			—			64,601
Non-interest income		11,632			8,574			13,291			33,497			—			33,497
Non-interest expenses		(32,718	)		(2,389	)		(9,873	)		(44,980	)		—			(44,980	)
Intersegment revenue		1,872			—			—			1,872			(1,872	)		—
Intersegment expense		—			(297	)		(1,575	)		(1,872	)		1,872			—
Provision for loan losses		(3,404	)		—			—			(3,404	)		—			(3,404	)
Income before income taxes	$	3,729		$	44,085		$	1,900		$	49,714		$	—		$	49,714
Total assets as of March 31, 2004	$	757,889		$	2,900,792		$	14,183		$	3,672,864		$	(206,649	)	$	3,466,215

NOTE 11 – RECENT ACCOUNTING DEVELOPMENTS:

EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments

In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“Issue 03-1”). The Task Force reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope of Issue 03-1 is other-than-temporarily impaired must be applied on a security-by-security basis as follows: Step 1: Determine whether an investment is impaired. An investment is considered impaired if its fair value is less than its cost. Step 2: Evaluate whether an impairment is other-than-temporary. For equity securities and debt securities that can contractually be prepaid or otherwise settled in such a way that the investor would not recover substantially all of its cost, an impairment is presumed to be other-than-temporary unless: the investor has the ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted market price recovery of the investment, and evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. For other debt securities, an impairment is deemed other-than-temporary if: the investor does not have the ability and intent to hold the investment until a forecasted market price recovery (may mean until maturity), or it is probable that the investor will be unable to collect all amounts due according to the contractual terms of the debt security. Step 3: If the impairment is other-than-temporary, recognize in earnings an impairment loss equal to the difference between the investment’s cost and its fair value. The fair value of the investment then becomes the new cost basis of the investment and cannot be adjusted for subsequent recoveries in fair value, unless required by other authoritative literature.

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EITF 03-1 was effective for all relevant current and future investments in reporting periods beginning after June 15, 2004. On September 8, 2004, the FASB decided to issue two new proposed FASB Staff Positions (“FSP”) related to the application of paragraph 16 of the EITF 03-1.The first FSP would provide the implementation guidance for securities subject to paragraph 16 of EITF 03-1 and the second one which would delay the effective date for the application guidance of such paragraph indefinitely until the first FSP is finalized and approved. On December 31, 2004, the FASB voted unanimously to expand the scope of the deferral to include paragraphs 10 through 20 of the EITF 03-1(i.e., steps 2 and 3 of the impairment model). The FASB emphasized that the guidance in paragraphs 6 through 9 of EITF 03-1 (step 1 of the impairment model), as well as the disclosure requirements in paragraphs 21 and 22, have not been deferred and should be applied based on the transition provisions provided in EITF 03-01. The implementation of EITF 03-1 is not expected to have a significant effect on the Group’s financial condition.

FASB Statement No. 123 (revised 2004) — Accounting for Stock-Based Compensation

On December 16, 2004 the Financial Accounting Standard Board (“FASB”) published Statement 123(R) requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. The Group will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Group currently estimates that as a result of implementing FASB 123 (revised), fiscal 2006 earnings would negatively be impacted by $1.4 million, as per an analysis based on the number of options currently outstanding and the historical trend of forfeited options for the last two years.

At March 31, 2005, the Group had four stock-based employee compensation plans, which are described more fully in Note 1. At present, the Group accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted during previous fiscal periods under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Please refer to the Table included in Note 1 for an illustration of the effect in net income and earnings per share if the Group had applied the fair value recognition provisions.

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Item 2 -Management’s Discussion and Analysis of

Financial Condition and Results of Operations

SELECTED FINANCIAL DATA
FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
    (In thousands, except for per share information)

	Quarter Period									Nine-Month Period
	2005			2004			Variance %			2005			2004			Variance %
EARNINGS, PER SHARE AND DIVIDENDS DATA:
Interest income	$	47,572		$	42,447			12.1	%	$	140,435		$	121,897			15.2	%
Interest expense		(27,162	)		(19,691	)		37.9	%		(73,310	)		(57,296	)		28.0	%
Net interest income		20,410			22,756			-10.3	%		67,125			64,601			3.9	%
Provision for loan losses		(660	)		(1,050	)		-37.1	%		(2,465	)		(3,404	)		-27.6	%
Net interest income after provision for loan losses		19,750			21,706			-9.0	%		64,660			61,197			5.7	%
Non-interest income		6,101			11,199			-45.5	%		28,448			33,497			-15.1	%
Non-interest expenses		(15,472	)		(14,997	)		3.2	%		(46,161	)		(44,980	)		2.6	%
Income before income taxes		10,379			17,908			-42.0	%		46,947			49,714			-5.6	%
Income tax benefit (expense)		2,671			(1,585	)		268.5	%		2,026			(4,143	)		148.9	%
Net income		13,050			16,323			-20.1	%		48,973			45,571			7.5	%
Less: dividends on preferred stock		(1,200	)		(1,200	)		0.0	%		(3,601	)		(2,998	)		20.1	%
Net income available to common shareholders	$	11,850		$	15,123			-21.6	%	$	45,372		$	42,573			6.6	%
Income per common share (1):
Basic	$	0.48		$	0.68			-29.4	%	$	1.86		$	1.95			-4.6	%
Diluted	$	0.46		$	0.64			-28.1	%	$	1.78		$	1.84			-3.3	%
Average shares and potential shares (1)		25,490			23,622			7.9	%		25,429			23,154			9.8	%
Book value per common share (1)										$	10.97		$	9.07			21.0	%
Market price at end of period (1)										$	23.42		$	28.95			-19.1	%
Cash dividends declared per common share (1)	$	0.14		$	0.13			7.7	%	$	0.41		$	0.38			7.9	%
Cash dividends declared on common shares	$	6,919		$	3,069			125.5	%	$	10,037		$	8,344			20.3	%
SELECTED FINANCIAL RATIOS AND OTHER INFORMATION:
Return on average assets (ROA)		1.25	%		1.93	%					1.62	%		1.87	%
Return on average common equity (ROE)		17.67	%		36.35	%					23.97	%		35.65	%
Efficiency ratio		57.97	%		48.53	%					51.03	%		50.25	%
Expense ratio		0.91	%		0.85	%					0.78	%		0.87	%
Interest rate spread		1.82	%		2.68	%					2.12	%		2.70	%
Interest rate margin		2.02	%		2.81	%					2.31	%		2.80	%
Number of financial centers											23			23

(1) Data adjusted to give retroactive effect to stock dividends declared on the Group’s common stock.

PERIOD END BALANCES AND CAPITAL RATIOS:
AS OF MARCH 31, 2005 and JUNE 30, 2004

	March 31,			June 30,
	2005			2004			Variance %
Total financial assets
Trust assets managed	$	1,744,642		$	1,670,651			4.4	%
Broker-dealer assets gathered		1,098,291			1,051,812			4.4	%
Assets managed		2,842,933			2,722,463			4.4	%
Assets owned		4,215,285			3,725,695			13.1	%
Total financial assets managed and owned	$	7,058,218		$	6,448,158			9.5	%
Investments and loans
Investments securities	$	3,252,607		$	2,846,750			14.3	%
Loans (including loans held-for-sale), net		858,897			743,456			15.5	%
Securities sold but not yet delivered		179			47,312			-99.6	%
	$	4,111,683		$	3,637,518			13.0	%
Deposits and borrowings
Deposits	$	1,196,564		$	1,024,349			16.8	%
Securities sold under agreements to repurchase		2,256,295			1,895,865			19.0	%
Other borrowings		388,666			387,166			0.4	%
Securities purchased but not yet delivered		56			89,068			-99.9	%
	$	3,841,581		$	3,396,448			13.1	%
Stockholders’ equity
Preferred equity	$	68,000		$	68,000			0.0	%
Common equity		270,690			226,667			19.4	%
	$	338,690		$	294,667			14.9	%
Capital Ratios:
Leverage capital		10.67	%		11.24	%		-5.0	%
Tier 1 risk-based capital		40.94	%		37.91	%		8.0	%
Total risk-based capital		41.58	%		38.61	%		7.7	%

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OVERVIEW OF FINANCIAL PERFORMANCE

Introduction

The Group’s diversified mix of businesses produces both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as brokerage, fiduciary services, investment banking, insurance and pension administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial markets fluctuations and other external factors, the Group’s commitment is to produce a balanced and growing revenue stream.

On April 27, 2005, Oriental announced a strategy intended to expedite the Group’s transition to becoming more asset-sensitive bank. This strategy is based on (1) continuing to increase loan volume, with an emphasis on variable rate loans, versus investment securities; (2) continuing to expand the Group’s commercial and consumer lending business and to revitalize its mortgage lending business; (3) retaining more mortgage loans and investment securities for their recurring interest income; (4) increasing the use of longer-term, fixed rate deposits versus short-term repurchase agreements, which reprice more frequently, to fund interest earning assets; (5) expanding the Group’s branch network to 33 financial centers from 23 to support the growth of loans, deposits and non-interest income; and (6) further limiting the growth of non-interest expenses.

Net Income

For the quarter ended March 31, 2005, the Group’s net income was $13.1 million, a decrease of 20.1%, from the $16.3 million reported in the third quarter ended March 31, 2004. Earnings per diluted share decreased to $0.46 for the quarter ended March 31, 2005, down 28.1% from $0.64 for the corresponding period last year. Earnings per share for the quarter ended March 31, 2005 reflected 7.9% more average shares outstanding reflecting the year ago secondary offering, which raised $51.5 million.

For the first nine months of fiscal 2005, Group’s net income was $49.0 million, 7.5% increase when compared with $45.6 million reported for the first nine months of fiscal 2004. Earnings per diluted share were $1.78 for the nine months ended March 31, 2005, down 3.3% from $1.84 for the corresponding period last year, primarily due to 9.9% more average shares as a result of the aforementioned secondary offering.

The diluted per share calculations for the three months and nine months ended March 31, 2005 and March 31, 2004 take into account additional incentive stock options required by an anti-dilutive provision in compensation agreements with certain executives. This provision requires the Group to adjust stock options granted to avoid any form of dilution, including dilution resulting from stock dividends, cash dividends, and additional offerings of common stock by the Group. Although all stock options granted to these executives pursuant to the Group’s incentive stock option plans have been adjusted to account for stock dividends, no additional adjustments were made to reflect the Group’s issuances of common stock in 1994 and 2004, and the quarterly cash dividends declared on its common stock.

On April 5, 2005, the Compensation Committee of the Group’s Board of Directors (“the Committee”) made a final determination on this matter. They agreed to compensate these executives for the implied value of their exercised options by crediting them the full amount of such implied value upon future exercises of stock options granted under the Group’s incentive stock options plan and by issuing to each executive the number of additional stock options that are required to account for the events of dilution with respect to unexercised options and expired options. Subsequently, the Group has increased the number of options used in the calculation of fully diluted shares by 224,011 for the quarters and nine-month periods ended March 31, 2005 and 2004, which represents the Group’s estimate of the additional options affecting these periods. Based on the increase in the number of shares previously reported per diluted share results are reduced by approximately one cent per quarter beginning with the three-month period ended March 31, 2005.

Return on Assets & Common Equity

The return on average assets (ROA) for the quarter ended March 31, 2005 was 1.25% compared to 1.93% in the prior year quarter. ROA for the nine months ended March 31, 2005 was 1.62% compared to 1.87% in the prior year period. Return on average equity (ROE) for the quarter ended March 31, 2005 was 17.67% compared to 36.35% in the prior year quarter. ROE for the nine months ended March 31, 2005 was 23.97% compared to 35.65% in the prior year period. The year over year change in ROE reflects the ratios after adjusted by the capital increase in the Group’s equity base.

Net Interest Income after Provision for Loan Losses

For the quarter ended March 31, 2005, net interest income after provision for loan losses was $19.8 million, a 9.8% decrease from $21.7 million for the same period in the previous fiscal year. The decline primarily reflects increases in the Federal funds rate on borrowing costs combined with the flattening yield curve on interest income. This resulted in net interest margin of 2.02% compared to 2.80% in the prior year quarter. For the nine-month period ended March 31, 2005, net interest income after provision for loan losses was $64.7 million, a 5.7% increase from $61.2 million for the same period in the previous fiscal year.

-22-

Non-Interest Income

Non-interest income totaled $6.1 million for the quarter ended March 31, 2005, compared with $11.2 million in the same fiscal 2004 quarter, a decrease of 45.5%. Performance in the quarter primarily reflects the absence of gains on the sale of securities and mortgage loans as compared to the year ago quarter and the lack this year of public finance investment banking business and related commissions. For the nine-month period ended March 31, 2005, total non-interest income decreased 15.1%, to $28.4 million when compared to the previous year nine-month period of $33.5 million.

Non-Interest Expenses

For the quarter ended March 31, 2005, non-interest expenses increased 3.2%, to $15.5 million as compared to $15.0 million in the quarter ended March 31, 2004. The increase was mainly due to increases in professional service fees, in part due to the impact of the requirements of the Sarbanes Oxley Act. For the nine-month period ended March 31, 2005, non-interest expenses were only up by 2.6%, reflecting tight cost controls. For the quarter ended March 31, 2005, the efficiency ratio was 57.97% compared to 48.53% in the year ago quarter. For the nine-month periods ended March 31, 2005, the efficiency ratio was 51.03% compared to 50.25% for the same period of fiscal 2004. The Group computes its efficiency ratio dividing operating expenses by the sum of net interest income and recurring non-interest income, but excluding gains on sale of investment securities.

Income Tax Expense

The income tax benefit was $2.7 million for the quarter ended March 31, 2005, which included a decrease in the amount of required tax reserves, compared to an income tax provision of $1.6 million for the quarter ended March 31, 2004. The tax benefit for 2005 takes into account, among other things, the expiration of certain tax contingencies, and the reassessment of the related tax reserve. Also, the current income tax provision is lower than the provision based on the statutory tax rate for the Group, which is 39%, due to the high level of tax-advantaged interest income earned on certain investments and loans, net of the disallowance of related expenses attributable to the exempt income. In addition, the Puerto Rico Internal Revenue Code of 1994, as amended, provides a dividend received deduction of 100% on dividends received from wholly-owned subsidiaries subject to income taxation in Puerto Rico. Exempt interest relates principally to interest earned on obligations of the United States and Puerto Rico governments and certain mortgage-backed securities, including securities held by the Group’s international banking entities.

On February 2005, the Governor of Puerto Rico announced the proposal of a new legislation to impose a special income tax on the financial industry for two years as a transitory measure to a tax reform. The tax is believed to be between 2.5% and 5% on the net interest income. The proposal of this new legislation is still on a very preliminary stage; therefore, the final effect of the proposed special tax for the Group and the financial industry is still not defined.

Group’s Financial Assets

The Group’s total financial assets include owned assets and the assets managed by the trust division, the broker-dealer subsidiary and the private pension plan administration subsidiary. At March 31, 2005, total financial assets reached $7.058 billion, an increase of 9.5% compared to $6.448 billion at June 30, 2004. The increase was largely due to an increase of 13.1% in owned assets, when compared to June 30, 2004, along with an increase of 4.4% in assets managed by the trust and broker-dealer when compared to June 30, 2004. Owned assets, the Group’s largest financial assets component, are approximately 98% owned by the Group’s banking subsidiary.

The Group’s second largest financial assets component is assets managed by the trust division and the retirement plan administration subsidiary. The Group’s trust division offers various types of Individual Retirement Accounts (“IRA”) products and manages 401(K) and Keogh retirement plans, custodian and corporate trust accounts, while Caribbean Pension Consultants, Inc. (“CPC”) manages the administration of private pension plans. At March 31, 2005, total assets managed by the Group’s trust division and CPC amounted to $1.745 billion, 4.4% more than the $1.671 billion reported at June 30, 2004. The other financial asset component is assets gathered by the securities broker-dealer. The Group’s securities broker-dealer subsidiary offers a wide array of investment alternatives to its client base such as tax-advantaged fixed income securities, mutual funds, stocks, bonds and money management wrap programs. At March 31, 2005, total assets gathered by the securities broker-dealer from its customer investment accounts, increased to $1.098 billion compared to $1.052 billion as of June 30, 2004. Both financial asset components reflect the Group’s success attracting financial assets as well as improved equity market conditions.

-23-

Interest Earning Assets

The investment portfolio amounted to $3.253 billion as of March 31, 2005, a 14.3% increase, compared to $2.847 billion as of June 30, 2004, while the loan portfolio increased 15.5% to $858.9 million as of March 31, 2005, compared to $743.5 million as of June 30, 2004. The increase in the size of the investment portfolio reflects purchases of shorter-term triple-A government agency paper and general obligation bonds, as opposed to mortgage-backed securities, for both available-for-sale and held-to-maturity accounts.

Growth of the loan portfolio reflects increased production of commercial and consumer loans, partially offset by recent sales of conventional conforming mortgages. Commercial loan production totaled $30.3 million for the third quarter of fiscal 2005, 111.4% higher than the production of $14.3 million during the third quarter of fiscal 2004, and 14.8% higher than the production for the quarter ended December 31, 2004, which totaled $26.4 million. Consumer loan production totaled $4.5 million, a $3.5 million or 363.8% increase, compared to $972,000 for the same quarter of prior fiscal year. Mortgage loans totaled $715.2 million, 8.5% higher than the balance of $650.7 million at June 30, 2004, and 10.0% higher than the balance of $643.6 million a year ago, reflecting the purchases of conventional mortgages during the second and third quarters of fiscal year 2005.

Interest Bearing Liabilities

Deposits increased 16.8% from $1.024 billion as of June 30, 2004, to $1.197 billion as of March 31, 2005. This performance reflects the Group’s strategy of attracting longer-term checking and savings deposits from consumer, professional and commercial customers, based on the Group’s total capabilities to service their needs, and also the issuance of $84.6 million of brokered CDs. Total borrowings as of March 31, 2005 reached $2.645 billion, a 15.9% increase when compared to $2.283 billion as of June 30, 2004. This increase reflects the Group’s use of repurchase agreements, coupled with interest rate swaps, to finance asset growth and fix funding costs over multi-year periods.

Stockholders’ Equity

Stockholders’ equity as of March 31, 2005, was $338.7 million, a 14.9% increase from $294.7 million as of June 30, 2004. This increase reflects the impact of earnings retention and the improvement in derivatives valuation from the fourth quarter of fiscal 2004 to the third quarter of fiscal 2005.

Dividends

During the quarter ended March 31, 2005, the Group declared $3.5 million in cash dividends, a 13.0% increase when compared to $3.1 million declared for the same period a year ago.

-24-

TABLE 1 - QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED MARCH 31, 2005 AND 2004
(Dollars in thousands)

	Interest									Average rate									Average balance
							Variance									Variance									Variance
	2005			2004*			in %			2005			2004*			in BP			2005			2004*			in %
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	47,572		$	42,447			12.1	%		4.70	%		5.24	%		(54	)	$	4,052,465		$	3,239,861			25.1	%
Tax equivalent adjustment		10,720			15,109			-29.1	%		1.06	%		1.87	%		(81	)		—			—			0.0	%
Interest-earning assets — tax equivalent		58,292			57,556			1.3	%		5.76	%		7.11	%		(135	)		4,052,465			3,239,861			25.1	%
Interest-bearing liabilities		27,162			19,691			37.9	%		2.88	%		2.56	%		32			3,775,817			3,071,230			22.9	%
Tax equivalent net interest income / spread	$	31,130		$	37,865			-17.8	%		2.88	%		4.55	%		(167	)	$	276,648		$	168,631			64.1	%
Tax equivalent interest rate margin											3.08	%		4.68	%		(160	)
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	$	34,519		$	30,322			13.8	%		4.30	%		4.85	%		(55	)	$	3,212,553		$	2,500,357			28.5	%
Investment management fees		(446	)		(435	)		2.5	%		-0.06	%		-0.07	%		(1	)		—			—			0.0	%
Total investment securities		34,073			29,887			14.0	%		4.24	%		4.78	%		(54	)		3,212,553			2,500,357			28.5	%
Trading securities		1			6			-83.3	%		1.14	%		2.85	%		(171	)		352			842			-58.2	%
Money market investments		76			16			375.0	%		1.17	%		3.23	%		(206	)		25,926			1,982			1208.1	%
		34,150			29,909			14.2	%		4.22	%		4.78	%		(56	)		3,238,831			2,503,181			29.4	%
Loans:
Real estate (1)		11,104			11,117			-0.1	%		6.62	%		6.75	%		(13	)		671,381			658,556			1.9	%
Commercial		1,728			851			103.1	%		5.89	%		5.55	%		34			117,275			61,356			91.1	%
Consumer		590			570			3.5	%		9.45	%		13.60	%		(415	)		24,978			16,768			49.0	%
		13,422			12,538			7.1	%		6.60	%		6.81	%		(21	)		813,634			736,680			10.4	%
		47,572			42,447			12.1	%		4.70	%		5.24	%		(54	)		4,052,465			3,239,861			25.1	%
Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—			—			—			—			—			—			53,997			46,388			16.4	%
Now Accounts		231			220			5.0	%		1.04	%		1.14	%		(10	)		88,901			77,352			14.9	%
Savings		233			299			-22.1	%		0.99	%		1.33	%		(34	)		93,943			89,657			4.8	%
Certificates of Deposit		7,160			7,236			-1.1	%		3.30	%		3.39	%		(9	)		867,779			852,657			1.8	%
		7,624			7,755			-1.7	%		2.76	%		2.91	%		(15	)		1,104,620			1,066,054			3.6	%
Borrowings:
Repurchase agreements		14,292			4,425			223.0	%		2.51	%		1.10	%		141			2,277,665			1,608,855			41.6	%
Interest rate risk management		1,923			4,537			-57.6	%		0.34	%		1.13	%		(79	)		—			—			0.0	%
Financing fees		171			121			41.3	%		0.03	%		0.03	%		0			—			—			0.0	%
Total repurchase agreements		16,386			9,083			80.4	%		2.88	%		2.26	%		62			2,277,665			1,608,855			41.6	%
FHLB advances		1,958			1,989			-1.6	%		2.56	%		2.57	%		(1	)		306,366			309,155			-0.9	%
Subordinated capital notes		1,107			827			33.9	%		6.14	%		4.58	%		156			72,166			72,166			0.0	%
Term notes		87			37			135.1	%		2.32	%		0.99	%		133			15,000			15,000			0.0	%
		19,538			11,936			63.7	%		2.93	%		2.38	%		55			2,671,197			2,005,176			33.2	%
		27,162			19,691			37.9	%		2.88	%		2.56	%		32		$	3,775,817		$	3,071,230			22.9	%
Net interest income / spread	$	20,410		$	22,756			-10.3	%		1.82	%		2.68	%		(86	)
Interest rate margin											2.02	%		2.81	%		(79	)
Excess of average interest-earning assets over average interest-bearing liabilities																			$	276,648		$	168,631			64.1	%
Average interest-earning assets over average interest-bearing liabilities ratio																				107.33	%		105.49	%

C. Changes in net interest income due to:	Volume			Rate			Total
Interest Income:
Investments	$	8,055		$	(3,814	)	$	4,241
Loans (1)		1,279			(395	)		884
		9,334			(4,209	)		5,125
Interest Expense:
Deposits		275			(406	)		(131	)
Repurchase agreements		6,827			476			7,303
Other borrowings		(20	)		319			299
		7,082			389			7,471
Net Interest Income	$	2,252		$	(4,598	)	$	(2,346	)

*	Certain adjustments were made to conform figures to current period presentation.
(1)	- Real estate averages include loans held-for-sale.

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TABLE 1A — FISCAL YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE NINE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(Dollars in thousands)

	Interest									Average rate									Average balance
							Variance									Variance									Variance
	2005			2004*			in %			2005			2004*			in BP			2005			2004*			in %
A — TAX EQUIVALENT SPREAD
Interest-earning assets	$	140,435		$	121,897			15.2	%		4.83	%		5.28	%		(45	)	$	3,880,109		$	3,077,877			26.1	%
Tax equivalent adjustment		31,888			42,776			-25.5	%		1.10	%		1.85	%		(75	)		—			—			0.0	%
Interest-earning assets — tax equivalent		172,323			164,673			4.6	%		5.93	%		7.13	%		(120	)		3,880,109			3,077,877			26.1	%
Interest-bearing liabilities		73,310			57,296			27.9	%		2.71	%		2.58	%		13			3,608,529			2,959,687			21.9	%
Tax equivalent net interest income / spread	$	99,013		$	107,377			-7.8	%		3.22	%		4.55	%		(133	)	$	271,580		$	118,190			129.8	%
Tax equivalent interest rate margin											3.41	%		4.65	%		(124	)
B — NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	$	101,558		$	83,437			21.7	%		4.45	%		4.76	%		(31	)	$	3,044,383		$	2,337,786			30.2	%
Investment management fees		(1,403	)		(1,239	)		13.2	%		-0.06	%		-0.07	%		1			—			—			0.0	%
Total investment securities		100,155			82,198			21.8	%		4.46	%		4.63	%		(17	)		3,044,383			2,337,786			30.2	%
Trading securities		3			19			-84.2	%		0.52	%		2.10	%		(158	)		771			1,205			-36.0	%
Money market investments		247			108			128.7	%		1.47	%		1.98	%		(51	)		22,476			7,267			209.3	%
		100,405			82,325			22.0	%		4.44	%		4.62	%		(18	)		3,067,630			2,346,258			30.7	%
Loans:
Real estate (1)		33,659			35,430			-5.0	%		6.53	%		7.14	%		(61	)		686,925			661,874			3.8	%
Commercial		4,731			2,329			103.1	%		6.11	%		6.01	%		10			103,165			51,676			99.6	%
Consumer		1,640			1,813			-9.5	%		9.77	%		13.38	%		(361	)		22,389			18,069			23.9	%
		40,030			39,572			1.2	%		6.57	%		7.21	%		(64	)		812,479			731,619			11.1	%
		140,435			121,897			15.2	%		4.83	%		5.28	%		(45	)		3,880,109			3,077,877			26.1	%
Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—			—			0.0	%		—			—			0			51,802			52,023			-0.4	%
Now Accounts		669			601			11.3	%		1.05	%		1.09	%		(4	)		84,892			73,368			15.7	%
Savings		705			836			-15.7	%		1.01	%		1.27	%		(26	)		93,057			87,894			5.9	%
Certificates of Deposit		19,673			21,621			-9.0	%		3.21	%		3.48	%		(27	)		817,638			829,084			-1.4	%
		21,047			23,058			-8.7	%		2.68	%		2.95	%		(27	)		1,047,389			1,042,369			0.5	%
Borrowings:
Repurchase agreements		33,148			12,873			157.5	%		2.04	%		1.11	%		93			2,164,865			1,539,531			40.6	%
Interest rate risk management		9,311			12,809			-27.3	%		0.57	%		1.11	%		(54	)		—			—			0.0	%
Financing fees		482			341			41.3	%		0.03	%		0.03	%		0			—			—			0.0	%
Total repurchase agreements		42,941			26,023			65.0	%		2.64	%		2.25	%		39			2,164,865			1,539,531			40.6	%
FHLB advances		5,960			5,949			0.2	%		2.57	%		2.64	%		(7	)		309,109			300,855			2.7	%
Subordinated capital notes		3,152			2,155			46.3	%		5.82	%		4.64	%		118			72,166			61,932			16.5	%
Term notes		210			111			89.2	%		1.87	%		0.99	%		88			15,000			15,000			0.0	%
		52,263			34,238			52.6	%		2.72	%		2.38	%		34			2,561,140			1,917,318			33.6	%
		73,310			57,296			27.9	%		2.71	%		2.58	%		13		$	3,608,529		$	2,959,687			21.9	%
Net interest income / spread	$	67,125		$	64,601			3.9	%		2.12	%		2.70	%		(58	)
Interest rate margin											2.31	%		2.80	%		(49	)
Excess of average interest-earning assets over average interest-bearing liabilities																			$	271,580		$	118,190			129.8	%
Average interest-earning assets over average interest-bearing liabilities ratio																				107.53	%		103.99	%

C. Changes in net interest income due to:	Volume		Rate			Total
Interest Income:
Investments	$	23,916	$	(5,836	)	$	18,080
Loans (1)		4,158		(3,700	)		458
		28,074		(9,536	)		18,538
Interest Expense:
Deposits		111		(2,122	)		(2,011	)
Repurchase agreements		13,770		3,148			16,918
Other borrowings		353		754			1,107
		14,234		1,780			16,014
Net Interest Income	$	13,840	$	(11,316	)	$	2,524

*	Certain adjustments were made to conform figures to current period presentation.
(1)	- Real estate averages include loans held-for-sale.

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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). Typically, bank liabilities reprice in line with changes in short-term rates, while many asset positions are affected by longer-term rates. The Group constantly monitors the composition and repricing of its assets and liabilities to maintain its net interest income at adequate levels.

For the quarter ended March 31, 2005, net interest income amounted to $20.4 million, a 10.3% decrease from $22.8 million in the same period of the previous fiscal year. The decrease was due to a positive volume variance of $2.3 million, totally offset by a negative rate variance of $4.6 million. Interest rate spread dropped 86 basis points, to 1.82% from 2.68% in the third quarter of fiscal 2004. This was due principally to a decrease of 54 basis points in the combined average yield of investments and loans (to 4.70% from 5.24%), with an increase of 32 basis points in the average cost of funds (to 2.88% from 2.56%).

For the nine-month period ended March 31, 2005, net interest income amounted to $67.1 million, up 3.9% from $64.6 million for the nine-month period ended March 31, 2004, while the interest rate spread declined 58 basis points to 2.12%. The increase in net interest income was mainly due to a positive volume variance of $13.8 million, partially offset by a negative rate variance of $11.3 million.

For the quarter ended March 31, 2005, interest income totaled $47.6 million, a 12.1% increase from $42.4 million in the same period of the previous fiscal year. The increase resulted from a larger volume of average interest earning assets partially offset by a decline in their yield performance. For the quarter ended March 31, 2005, the average balance of total interest-earning assets grew 25.1%, to $4.052 billion versus $3.240 billion for the same period of the previous fiscal year, reflecting a 29.4% increase in the investment portfolio, to $3,238.8 million, and a 10.4% increase in loans, to $813.6 million. Most of the increase in loans comes from the commercial loans portfolio average balance, which increased by 91.1%, to $117.3 million for the quarter ended March 31, 2005 from $61.4 million for the quarter ended March 31, 2004. Most of the Group’s commercial loans are secured by real estate.

On a year-to-date basis, interest income increased 15.2% to $140.4 million from $121.9 million reported for the first nine months of fiscal 2004. The increase resulted from a larger volume of average interest earning assets partially offset by a decline in their yield performance. Investments average balances for the nine-month period ended March 31, 2005 reached $3.068 billion, 30.7% higher than the $2.346 billion for the same period of previous fiscal year. Total average loans for the nine-month period ended March 31, 2005 were $812.5 million, an increase of 11.1% when compared to $731.6 million reported for the comparable previous fiscal year period.

For the quarter ended March 31, 2005, the average yield on interest-earning assets was 4.70%, 54 basis points lower than the 5.24% reported in the same period a year ago. The decline in the average yield was primarily due to a decrease of 56 basis points on the yield of the investment portfolio, 4.22% for the third quarter ended March 31, 2005, versus 4.78% for the corresponding period of the previous fiscal year. Most of this decrease was in mortgage-backed securities which declined 24 basis points on a quarter to quarter comparison. Investment yields also declined as the Group continued to reposition the portfolio, shifting away from longer-term into shorter-term government and mortgage-backed securities. The decrease of 21 basis points in the yield of the loan portfolio is due to: the sale of $87.8 million of fixed rate mortgage loans and the purchases of $69.1 million and $46.8 million in mortgage loans yielding a rate based on libor plus a spread of 150 basis points during the first and third quarter, respectively, which have lower yields than the fixed rate mortgage loans; and to the expected initial effect of consumer loans promotional campaigns.

For the nine-month period ended March 31, 2005 the average yield on interest-earning assets was 4.83%, 45 basis points lower than the 5.28% reported in the same period a year ago, mainly composed of a decrease in the average yield of the loan portfolio of 64 basis points, to 6.57%, when compared to the average yield of 7.21% of the loan portfolio for the same period of the previous fiscal year.

For the quarter ended March 31, 2005, interest expense increased 37.9%, to $27.2 million from $19.7 million for the year ago quarter. A volume variance of $7.1 million accounted for this increase as average borrowing balances increased 33.2% to $2.671 billion when compared to $2.005 billion for the same period of the previous fiscal year. For the nine-month period ended March 31, 2005, interest expense amounted to $73.3 million, 27.9% higher than the $57.3 million reported for the same period of previous fiscal year. This increase was driven by a volume variance of $14.2 million as the average balance of borrowings increased in a similar trend as to the one experienced during the quarter.

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For the quarter ended March 31, 2005, the cost of deposits decreased 15 basis points to 2.76% as compared to 2.91% in the year ago quarter. The decline reflects lower average rates paid on higher balances of now accounts, savings accounts and CDs. For the quarter ended March 31, 2005, the cost of borrowings increased 55 basis points to 2.93% as compared to 2.38% in the year ago quarter. The increase reflects higher average rates paid on repurchase agreements, and subordinated and term capital notes. While the cost of FHLB advances decreased 1 basis point (to 2.56% versus 2.57% for the quarter ended March 31, 2004), term notes and subordinated capital notes increased 133 and 156 basis points, respectively (to 2.32% and 6.14%, versus 0.99% and 4.58% for the quarter ended March 31, 2004, respectively), and repurchase agreements increased 62 basis points (to 2.88% from 2.26% for the quarter ended March 31, 2004), reflecting the effect of rate increases by the Board of Governors of the Federal Reserve System. The cost of repurchase agreements was partially offset by a 79 basis points reduction in the Group’s hedging costs for the quarter ended March 31, 2005, as the Group’s use of interest rate swaps in a rising interest rate environment partially offset rising borrowing costs.

For the nine-month period ended March 31, 2005 the cost of borrowings was 2.71%, a 13 basis points increase from 2.58% reported for the previous fiscal year to date. As in the quarter, the interest bearing liabilities components that experienced the higher increase in costs were the repurchase agreements (2.64%, versus 2.25% reported for the comparable period of fiscal 2004), the term notes (1.87%, versus 0.99%) and the subordinated capital notes (5.82%, versus 4.64%). The cost of FHLB advances declined (to 2.57%, from 2.64%).

TABLE 2 — NON-INTEREST INCOME SUMMARY
FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
  (Dollars in thousands)

	Quarter Period									Nine-Month Period
	2005			2004			Variance %			2005			2004			Variance %
Mortgage banking activities	$	1,073		$	1,946			-44.9	%	$	6,606		$	6,400			3.2	%
Commissions and fees from fiduciary activities		1,873			2,114			-11.4	%		6,003			6,418			-6.5	%
Commissions and fees from brokerage, investment banking and insurance activities		1,475			2,243			-34.2	%		4,957			6,797			-27.1	%
Non-banking service revenues		4,421			6,303			-29.9	%		17,566			19,615			-10.5	%
Fees on deposit accounts		1,159			1,261			-8.1	%		3,625			3,636			-0.3	%
Bank service charges and commissions		561			506			10.9	%		1,712			1,450			18.1	%
Other operating revenues		108			53			103.8	%		351			139			152.5	%
Banking service revenues		1,828			1,820			0.4	%		5,688			5,225			8.9	%
Securities net activity		455			3,298			-86.2	%		6,026			9,509			-36.6	%
Derivatives net activity		(623	)		(275	)		-126.6	%		(945	)		(935	)		-1.1	%
Trading net activity		(11	)		29			-137.9	%		26			20			30.0	%
Securities, derivatives and trading activities		(179	)		3,052			-105.9	%		5,107			8,594			-40.6	%
Other non-interest income		31			24			29.2	%		87			63			38.1	%
Total non-interest income	$	6,101		$	11,199			-45.5	%	$	28,448		$	33,497			-15.1	%

Non-interest income, the second largest source of earnings, is affected by the amount of securities and trading transactions, the level of trust assets under management, transactions generated by the gathering of financial assets by the broker-dealer subsidiary, investment banking, the level of mortgage banking activities, and fees generated from loans, deposit accounts and insurance.

Non-interest income totaled $6.1 million in the quarter ended March 31, 2005, a 45.5% decrease when compared to $11.2 million in the same quarter of the previous fiscal year. Performance in the quarter reflects decreases in non-banking service revenues and securities, derivatives and trading activities. For the nine-month period ended March 31, 2005, non-interest income decreased 15.1%, to $28.4 million. Performance in the nine-month period reflects increased banking service revenues and trading activities, decreased year over year income levels from non-banking service revenues and derivatives and securities activities, mainly due to the absence of gains on the sale of securities as compared to the year ago period and the lack of public finance investment banking activity and related commissions.

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Non-banking service revenues, generated from trust, mortgage banking, brokerage and insurance activities, is one of the principal components of non-interest income. For the quarter ended March 31, 2005, these revenues decreased 29.9% to $4.4 million, from $6.3 million for the year ago quarter. Commissions and fees from brokerage and insurance activities and commissions and fees from fiduciary activities declined 34.2% and 11.4%, respectively, to $1.5 million and $1.9 million, from $2.2 million and $2.1 respectively in the year-ago quarter. Mortgage banking activities decreased 44.9%, when comparing the $1.0 million current quarter activity to $1.9 million in the year ago quarter. On a year-to-date basis, non-banking service revenues totaled $17.6 million compared to $19.6 million a year ago.

Banking service revenues, another major component of non-interest income, consist primarily of fees generated by deposit accounts, electronic banking services and bank service commissions. For the quarter ended March 31, 2005, these revenues increased 0.4% to $1.8 million as well as in the year ago quarter. Fees on deposit accounts decreased 8.1% to $1.159 million from $1.261 million in the year ago quarter. Bank service charges and commissions increased 10.9% to $561,000 from $506,000 in the year ago quarter. Such increase was mainly driven by the strategy of strengthening the Group’s banking franchise by expanding its ability to attract deposits and build relationships with consumer, professional and commercial customers through aggressive marketing and the expansion of our sales force. For the nine-month period ended March 31, 2005, bank service revenues increased 8.9% to $5.7 million, from $5.2 million reported for the same period of fiscal 2004.

For the quarter ended March 31, 2005, the net loss from securities, derivatives and trading activities was $179,000 compared to income of $3.0 million for the year ago quarter. For the quarter, derivatives net loss was $623,000 compared to a loss of $275,000 for the same quarter of last year, and securities net activity decreased 86.2%, to $455,000 compared to $3.3 million. On a year-to-date basis, net gain on securities, derivatives and trading activities amounted to $5.1 million or 40.6% less than previous year’s activity of $8.6 million. For the period, derivatives activities resulted in a loss of $945,000 compared to a loss of $935,000, and securities net activity declined 36.6%, to $6.0 million compared to $9.5 million.

TABLE 3 — NON-INTEREST EXPENSES SUMMARY
FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
  (Dollars in thousands)

	Quarter Period									Nine-Month Period
	2005			2004			Variance %			2005			2004			Variance %
Compensation and employees’ benefits	$	6,618		$	6,381			3.7	%	$	19,297		$	18,155			6.3	%
Occupancy and equipment		2,466			2,465			0.0	%		7,516			7,083			6.1	%
Advertising and business promotion		1,487			1,919			-22.5	%		5,086			6,087			-16.4	%
Professional and service fees		1,837			1,382			32.9	%		5,216			4,457			17.0	%
Communication		377			463			-18.6	%		1,220			1,386			-12.0	%
Loan servicing expenses		401			461			-13.0	%		1,298			1,387			-6.4	%
Taxes, other than payroll and income taxes		463			455			1.8	%		1,365			1,320			3.4	%
Electronic banking charges		517			418			23.7	%		1,532			1,199			27.8	%
Printing, postage, stationery and supplies		210			270			-22.2	%		684			859			-20.4	%
Insurance, including deposits insurance		187			197			-5.1	%		579			591			-2.0	%
Other operating expenses		909			586			55.1	%		2,368			2,456			-3.6	%
Total non-interest expenses	$	15,472		$	14,997			3.2	%	$	46,161		$	44,980			2.6	%
Relevant ratios and data:
Compensation and benefits to non-interest expenses		42.8	%		42.6	%					41.8	%		40.4	%
Compensation to total assets		0.63	%		0.74	%					0.61	%		0.70	%
Average compensation per employee (annualized)	$	48.7		$	46.8					$	48.4		$	44.2
Average number of employees		544			545						532			547
Bank assets per employee	$	7,749		$	6,360					$	7,923		$	6,335
Total work force (1):
Banking operations											439			459
Trust operations											56			58
Brokerage and Insurance operations											41			29
Total work force											536			546

Non-interest expenses for the quarter ended March 31, 2005, increased 3.2% to $15.5 million from $15.0 million in the comparable period of the previous fiscal year, with the efficiency ratio of 57.97% compared to 48.53% in the quarter ended March 31, 2004.The efficiency ratio measures how much of a company’s revenue is used to pay operating expenses. The Group computes its efficiency ratio dividing operating expenses by the sum of net interest income and recurring non-interest income, but excluding gains on sale of investments securities. For the nine-month period ended March 31, 2005, non-interest expenses amounted to $46.2 million, a 2.6% increase over the $45.0 million recorded for the same period of fiscal 2004.

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The increment in non-interest expenses in the quarter reflects the Group’s spending on “The Oriental Way” program, specifically for the expansion and improvement of the Group’s sales capabilities, including additional experienced lenders, marketing, enhancing branch distribution and support risk management processes as well as recent and future growth. Also, these results include one-time expenses for new technology for the implementation of PeopleSoft enterprise software to increase efficiencies and also include the cost of documentation and testing of Sarbanes-Oxley Act Section 404 compliance regarding management’s assessment of internal controls over financial reporting. Consequently, expenses have been pared in other areas, consistent with management’s goal of limiting expense growth to those areas that directly contribute to increase the efficiency, service quality and profitability of the Group.

Compensation and benefits is the largest non-interest expense category. For the quarter ended March 31, 2005, total compensation and benefits amounted to $6.6 million, a 3.7% increase compared to $6.4 million for the same period in the previous fiscal. For the first nine months of fiscal 2005, employee compensation and benefits increased 6.3% to $19.3 million. Increases in the quarter and in the year to date period reflect the expansion of the sales force, salary increases and the recruitment of experienced high-level management in order to generate a higher volume of business and improve operations.

Other non-interest expenses, which include occupancy and equipment, advertising and business promotion, professional and service fees, among other costs, for the quarter ended March 31, 2005, amounted to $8.8 million, a 2.8% increase compared to $8.6 million for the same period in the previous fiscal year. For the first nine months of fiscal 2005, other non-interest expenses amounted to $26.9 million, an increase of 0.3% when compared to $26.8 million reported for the same period of fiscal 2004.

Occupancy and equipment expenses amounts to $2.5 million for both quarters ended March 31 of fiscal 2004 and 2005. For the first nine months of fiscal 2005, these expenses increased 6.1% from the $7.0 million recorded during the first nine months of fiscal 2004. This increase was mainly due to the upgrading of financial center technology and infrastructure which commenced during fiscal 2004 in line with the Group’s growth strategy.

Advertising and business promotion for the quarter ended March 31, 2005, decreased 22.5% to $1.5 million versus $1.9 million in the year ago quarter. For the first nine months of fiscal 2005, advertising and business promotion decreased to $5.1 million or 16.4% from the $6.1 million reported for the first nine months of fiscal 2004. Such activity was mainly due to management’s strategy of re-distributing the marketing expenses for the first nine months of this fiscal year as the Group continues its selective promotional campaign to enhance the market recognition of new and existing products to increase fee-based revenues and to strengthen the banking and financial services franchise.

Professional and service fees for the quarter ended March 31, 2005, increased 32.9% to $1.8 million from $1.4 million in the year ago quarter. For the first nine months of fiscal 2005, professional and service fees increased 17.0% to $5.2 million, from $4.5 million reported for the same period of fiscal 2004. The increase in the period was due to the effect of reviews performed by advisors in specific operational areas to improve financial and operational performances and one-time expenses associated with Sarbanes-Oxley Act Section 404 compliance.

The aggregated decrease in communication, municipal and other general taxes, insurance, printing, postage, stationery and supplies, and other operating expenses is principally due to effective cost controls without affecting the general growth in the Group’s business activities, products and services.

- 30 -

TABLE 4 - ALLOWANCE FOR LOAN LOSSES SUMMARY
FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(Dollars in thousands)

	Quarter Period						Change in			Nine-Month Period						Change in
	2005			2004			%			2005			2004			%
Beginning balance	$	7,564		$	6,020			25.6	%	$	7,553		$	5,031			50.1	%
Provision for loan losses		660			1,050			-37.1	%		2,465			3,404			-27.6	%
Net credit losses — see Table 5		(1,244	)		(438	)		184.0	%		(3,038	)		(1,803	)		68.4	%
Ending balance	$	6,980		$	6,632			5.2	%	$	6,980		$	6,632			5.2	%
Selected Data and Ratios:
Outstanding gross loans at March 31,	$	865,877		$	724,744			19.5	%	$	865,877		$	724,744			19.5	%
Recoveries to charge-off’s		11.4	%		44.4	%		-74.3	%		16.4	%		34.0	%		-51.7	%
Allowance coverage ratio
Total loans											0.81	%		0.92	%		-11.9	%
Non-performing loans											21.78	%		19.55	%		11.4	%
Non-real estate non-performing loans											144.99	%		127.78	%		13.5	%

TABLE 5 - NET CREDIT LOSSES STATISTICS
FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(Dollars in thousands)

	Quarter Period						Change in			Nine-Month Period						Change in
	2005			2004			%			2005			2004			%
Mortgage
Charge-offs	$	(752	)	$	(40	)		1780.0	%	$	(1,949	)	$	(290	)		572.1	%
Recoveries		—			—			0.0	%		—			—			0.0	%
		(752	)		(40	)		1780.0	%		(1,949	)		(290	)		572.1	%
Commercial
Charge-offs		(315	)		(83	)		279.5	%		(444	)		(605	)		-26.6	%
Recoveries		3			164			-98.2	%		107			202			-47.0	%
		(312	)		81			-485.2	%		(337	)		(403	)		-16.4	%
Consumer
Charge-offs		(337	)		(665	)		-49.3	%		(1,241	)		(1,838	)		-32.5	%
Recoveries		157			186			-15.6	%		490			728			-32.7	%
		(180	)		(479	)		-62.4	%		(751	)		(1,110	)		-32.3	%
Net credit losses
Total charge-offs		(1,404	)		(788	)		78.2	%		(3,634	)		(2,733	)		33.0	%
Total recoveries		160			350			-54.3	%		596			930			-35.8	%
	$	(1,244	)	$	(438	)		184.0	%	$	(3,038	)	$	(1,803	)		68.4	%
Net credit losses to average loans outstanding:
Mortgage		0.45	%		0.02	%					0.38	%		0.06	%
Commercial		1.06	%		-0.53	%					0.44	%		1.04	%
Consumer		2.88	%		11.42	%					4.47	%		8.18	%
Total		0.61	%		0.24	%					0.50	%		0.33	%
Average loans:
Mortgage	$	671,381		$	658,556			1.9	%	$	686,925		$	661,874			3.8	%
Commercial		117,275			61,344			91.2	%		103,165			51,659			99.7	%
Consumer		24,978			16,780			48.9	%		22,389			18,086			23.8	%
Total	$	813,634		$	736,680			10.4	%	$	812,479		$	731,619			11.1	%

TABLE 6 - ALLOWANCE FOR LOSSES BREAKDOWN
AS OF MARCH 31, 2005, 2004 and JUNE 30, 2004
(Dollars in thousands)

	March 31,			June 30,			Change in			March 31,
	2005			2004			%			2004
Allowance for loan losses breakdown:
Mortgage	$	3,355		$	3,861			-13.1	%	$	3,139
Consumer		1,481			1,462			1.3	%		1,568
Commercial		1,901			1,317			44.3	%		885
Unallocated allowance		243			913			-73.4	%		1,040
	$	6,980		$	7,553			-7.6	%	$	6,632
Allowance composition:
Mortgage		48.1	%		51.1	%					47.3	%
Consumer		21.2	%		19.4	%					23.6	%
Commercial		27.2	%		17.4	%					13.3	%
Unallocated allowance		3.5	%		12.1	%					15.8	%
		100.0	%		100.0	%					100.0	%

- 31 -

The provision for loan losses for the quarter ended March 31, 2005, totaled $660,000, a 37.1% decrease from the $1.1 million reported for the same period of the previous fiscal year. For the first nine months of fiscal 2005, the provision amounted to $2.5 million, a 27.6% decrease, when compared to $3.4 million reported a year earlier. Based on an analysis of the credit quality and composition of its loan portfolio, the Group determined that the provision for the first nine months of fiscal of 2005 was adequate in order to maintain the allowance for loan losses at an appropriate level. During the third quarter, the Group continued its effort to accelerate foreclosure on certain, older non-performing real estate loans in order to increase recoveries and reduce loan loss provisions. This resulted in a year over year increase in net loans charged off, and an increase in foreclosed properties.

Net credit losses for the quarter increased 184.0%, from $438,000 in the quarter ended March 31, 2004, to $1.2 million in the quarter ended March 31, 2005. The increase was primarily due to $712,000 increment in net credit losses for real estate loans when compared to the same period in the previous fiscal year. For the first nine months of fiscal 2005, net credit losses average ratio was 0.50%, an increase of .17% over than the 0.33% reported for the same period of prior fiscal year. The allowance for loan losses to total loans ratio decreased to 0.81%, compared to 0.92% on a year to year basis. Net charge-offs to average loans outstanding ratio increased to 0.61%, compared to 0.24% in the year-ago quarter, while non-performing loans of $32.0 million as of March 31, 2005 were 5.5% lower than the $33.9 million as of March 31, 2004, but 3.6% higher than the $30.9 million as of June 30, 2004 (Table 8).

Mortgage loans net credit losses for the quarter and nine-month periods ended March 31, 2005, were $752,000 and $1.949 million, respectively, and were the main reason for the increases in net credit losses. During the quarter ended March 31, 2005, the increase in mortgage loans net charge-offs was due to charge-offs of four mortgage loans and partial charge offs on eight mortgage loans.

Commercial loans net credit losses amounted to $312,000 and $337,000 for the quarter and nine-month periods ended March 31, 2005, which represent an increase of 485.2% and a decrease of 16.4%, respectively, when compared to the same periods of the previous fiscal year. Almost all the commercial lending that the Group is originating is collateralized by real estate.

For the quarter ended March 31, 2005, net credit losses on consumer loans were $180,000, a decrease of 62.4%, when compared with the quarter ended March 31, 2004, when the Group had net credit losses of $479,000. Likewise, for the nine-month period ended March 31, 2005, net charge-offs on consumer loans were $751,000, which represents a decrease of 32.3%, when compared with the nine-month period ended March 31, 2004, in which the Group had net credit losses of $1.110 million.

At March 31, 2005, the Group’s allowance for loan losses amounted to $6.9 million (0.81% of total loans) which is below the $7.6 million (1.01% of total loans) reported at June 30, 2004. Consumer and commercial loan allowances represent increases of 1.3% and 44.3%, or $19,000 and $584,000, respectively, when compared with balances recorded at June 30, 2004. The mortgage loans allowance decreased 13.1%, or $506,000, when compared to $3.9 million recorded at June 30, 2004. Unallocated reserve decreased 73.4%, or $670,000 when compared to $913,000 recorded at June 30, 2004.

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

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The Group uses a methodology that follows a loan credit risk rating process that involves dividing loans into risk categories. The following are the credit risk categories used:

1.	Pass - loans considered highly collectible due to their repayment history or current status.
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.

- 32 -

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

Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Group.

Included in the review of individual loans are those that are impaired. A loan is considered impaired when, based on current information and events, it is probable that the Group will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent.

The Group evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. The portfolios of mortgages and consumer loans are considered homogeneous and are evaluated collectively for impairment. For the commercial loans portfolio, all loans over $250,000 are evaluated for impairment. At March 31, 2005, the total investment in impaired commercial loans was $2.407 million which is comprised of three commercial loans. Impaired commercial loans are measured based on the fair value of collateral. The Group determined that no specific impairment allowance was required for such loans. Impaired commercial loans at June 30, 2004 were $714,912.

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

1.	Overall historical loss trends; and
2.	Other information including underwriting standards, economic trends and unusual events.

Loan loss ratios and credit risk categories are updated quarterly and are applied in the context of GAAP and the Joint Interagency Guidance on the importance of depository institutions having prudent, conservative, but not excessive loan 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 necessarily based on factors beyond the Group’s control, such as factors affecting general economic conditions.

An unallocated allowance is established recognizing the estimation risk associated with the aged-based rating system and with the specific allowances. It is based upon management’s evaluation of various conditions, the effects of which are not directly measured in determining the aged-based rating system and the specific allowances. These conditions include then-existing general economic and business conditions affecting our key lending areas; credit quality trends, including trends in non-performing loans expected to result from existing conditions, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, regulatory examination results, and findings by the Group’s management. The evaluation of the inherent loss regarding these conditions involves a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.

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TABLE 7 - BANK ASSETS SUMMARY AND COMPOSITION
AS OF MARCH 31, 2005, 2004 and JUNE 30, 2004

	March 31,			June 30,			Variance			March 31,
(Dollars in thousands)	2005			2004			%			2004
Investments:
Mortgage-backed securities	$	2,014,301		$	2,467,384			-18.4	%	$	2,436,879
U.S. Government and agency obligations		1,041,770			206,977			403.3	%		52,958
P.R. Government and agency obligations		109,174			115,846			-5.8	%		116,443
Other investment securities		53,971			20,636			161.5	%		10,988
Short-term investments		5,231			7,747			-32.5	%		6,093
FHLB stock		28,160			28,160			—			22,537
		3,252,607			2,846,750			14.3	%		2,645,898
Loans:
Mortgage		699,735			644,964			8.5	%		636,009
Commercial, mainly secured by real estate		124,315			81,572			52.4	%		64,165
Consumer		26,338			18,659			41.2	%		16,970
Loans receivable		850,388			745,195			14.1	%		717,144
Allowance for loan losses		(6,980	)		(7,553	)		-7.6	%		(6,632	)
Loans receivable, net		843,408			737,642			14.3	%		710,512
Mortgage loans held for sale		15,489			5,814			166.4	%		7,600
Total loans receivable, net		858,897			743,456			15.5	%		718,112
Securities sold but not yet delivered		179			47,312			-99.60	%		12,188
Total securities and loans		4,111,683			3,637,518			13.0	%		3,376,198
Other assets:
Cash and due from banks		15,214			9,284			63.9	%		11,651
Accrued interest receivable		23,175			19,127			21.2	%		19,292
Premises and equipment, net		16,933			18,552			-8.7	%		18,653
Deferred tax asset, net		6,347			7,337			-13.5	%		6,821
Foreclosed real estate, net		4,182			888			370.9	%		447
Other assets		37,751			32,989			14.4	%		33,153
Total other assets		103,602			88,177			17.5	%		90,017
Total assets	$	4,215,285		$	3,725,695			13.1	%	$	3,466,215
Investments portfolio composition:
Mortgage-backed securities		61.9	%		86.7	%					92.1	%
U.S. Government and agency obligations		32.0	%		7.3	%					2.0	%
P.R. Government and agency obligations		3.4	%		4.1	%					4.4	%
FHLB stock, short term investments and debt securities		2.7	%		1.9	%					1.5	%
		100.0	%		100.0	%					100.0	%
Loan portfolio composition:
Mortgage (1)		82.6	%		86.6	%					88.8	%
Commercial, mainly secured by real estate		14.4	%		10.9	%					8.9	%
Consumer		3.0	%		2.5	%					2.3	%
		100.0	%		100.0	%					100.0	%

(1) Includes loans held for sale.

At March 31, 2005, the Group’s total assets amounted to $4.215 billion, an increase of 13.1%, when compared to $3.726 billion at June 30, 2004. At March 31, 2005, interest-earning assets were $4.112 billion, a 13.0% increase compared to $3.638 billion at June 30, 2004.

Investments are the Group’s largest interest-earning assets component. Investments principally consist of money market investments, U.S. government bonds, mortgage-backed securities, CMO’s and Puerto Rico Government Municipal Bonds. At March 31, 2005, the investment portfolio increased 14.3%, to $3.253 billion, from $2.847 billion as of June 30, 2004. The increase reflects the purchases of US and Puerto Rico Government securities net of sales in the second quarter of fiscal 2005, sales of 30-year maturity mortgage backed securities and collateralized mortgage obligations. These activities are in line with the Group’s strategy in a rising rate environment of investing in fixed and variable rate, short-term and medium-term government securities, and the sale of longer-term mortgage backed securities.

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At March 31, 2005, the Group’s loan portfolio, the second largest category of the Group’s interest-earning assets, increased by 15.5%, to $858.9 million when compared to $743.5 million at June 30, 2004. This was principally due to an increase in commercial and consumer loans, which increased by 52.4% and 41.2%, respectively, to $124.3 million and $26.3 million, when compared to $81.6 million and $18.7 million at June 30, 2004. Such increases reflect the Group’s strategy to expand the commercial and consumer loan portfolios. During the third quarter of fiscal 2005, commercial loan production amounted to $30.3 million, an increase of 111.4% over a year ago quarter and 14.8% sequentially, while consumer loan production expanded 318.2% over the prior year quarter, to $4.6 million. Mortgage production of $62.1 million declined 19.2% compared to the prior year quarter, but with new management appointed in the business in December 2004, production increased 11.7% from the December 2004 quarter and is expected to continue to increase going forward.

TABLE 8 - NON-PERFORMING ASSETS
AS OF MARCH 31, 2005, 2004 and JUNE 30, 2004

	March 31,			June 30,			Change in			March 31,
(Dollars in thousands)	2005			2004			%			2004
Non-performing assets:
Non accruing loans	$	22,705		$	23,714			-4.3	%	$	26,354
Accruing loans		9,340			7,224			29.3	%		7,574
Total Non-performing loans		32,045			30,938			3.6	%		33,928
Foreclosed real estate		4,182			888			370.9	%		447
	$	36,227		$	31,826			13.8	%	$	34,375
Non-performing assets to total assets		0.86	%		0.85	%		0.6	%		0.99	%

TABLE 9 - NON-PERFORMING LOANS
AS OF MARCH 31, 2005, 2004 and JUNE 30, 2004

	March 31,			June 30,			Change in			March 31,
(Dollars in thousands)	2005			2004			%			2004
Non-performing loans:
Mortgage	$	27,231		$	27,651			-1.5	%	$	28,738
Commercial, mainly secured by real estate		4,582			2,954			55.1	%		4,870
Consumer		232			333			-30.3	%		320
Total	$	32,045		$	30,938			3.6	%	$	33,928
Non-performing loans composition:
Mortgage		85.0	%		89.4	%					84.7	%
Commercial, mainly secured by real estate		14.3	%		9.5	%					14.4	%
Consumer		0.7	%		1.1	%					0.9	%
Total		100.0	%		100.0	%					100.0	%
Non-performing loans to:
Total loans		3.70	%		4.12	%		-10.2	%		4.68	%
Total assets		0.76	%		0.83	%		-8.4	%		0.98	%
Total capital		9.46	%		10.50	%		-9.9	%		11.83	%

At March 31, 2005, the Group’s non-performing assets totaled $36.2 million (0.86% of total assets) versus $31.8 million (0.85% of total assets) at June 30, 2004. Foreclosed real estate properties increased 370.9%, to $4.1 million, when compared to $888,000 reported as of June 30, 2004.

Non-performing commercial loans, mainly collateralized by real estate, increased 55.1%, from $3.0 million as of June 30, 2004, to $4.6 million as of March 31, 2005. This increase was mainly due to the inclusion of two commercial loans with balances of $400,000 and $670,770, respectively, both secured by real estate. Non-performing mortgage loans decreased 1.5%, to $27.2 million as of March 31, 2005, when compared to the June 30, 2004 non-performing levels of $27.7 million. Such decrease is mainly due to a more aggressive effort made by management to foreclose the properties held as collateral. The commercial and residential real estate loan portfolios are well collateralized.

At March 31, 2005, the allowance for loan losses to non-performing loans coverage ratio was 21.78%. Detailed information concerning each of the items that comprise non-performing assets follows:

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•   Mortgage loansare placed on a non-accrual basis when they become 365 days or more past due and are written-down, if necessary, based on the specific evaluation of the collateral underlying the loan. At March 31, 2005, the Group’s non-performing mortgage loans totaled $27.2 million (85.0% of the Group’s non-performing loans) a 1.5% decrease from the $27.7 million (89.4% of the Group’s non-performing loans) reported at June 30, 2004. Non-performing loans in this category are primarily residential mortgage loans. Based on the value of the underlying collateral, the loan-to-value ratios and credit loss experience, management considers that no significant losses will be incurred in this portfolio.

•   Commercial loansare placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the underlying collateral, if any. At March 31, 2005, the Group’s non-performing commercial loans amounted to $4.6 million (14.3% of the Group’s non-performing loans), a 55.1% increase from $3.0 million reported at June 30, 2004 (9.5% of the Group’s non-performing loans). Most of this portfolio is collateralized by real estate and no significant losses are expected.

•   Consumer loansare placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit. At March 31, 2005, the Group’s non-performing consumer loans amounted to $232,000 (0.7% of the Group’s total non-performing loans), a 30.3% decrease from the $333,000 reported at June 30, 2004 (1.1% of total non-performing loans).

•   Foreclosed real estateis 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.

TABLE 10 - LIABILITIES SUMMARY AND COMPOSITION
AS OF MARCH 31, 2005, 2004 and JUNE 30, 2004

	March 31,			June 30,			Variance			March 31,
(Dollars in thousands)	2005			2004			%			2004
Deposits:
Non-interest bearing deposits	$	58,979		$	44,622			32.2	%	$	51,656
Now accounts		92,718			81,644			13.6	%		81,595
Savings accounts		93,944			88,459			6.2	%		90,610
Certificates of deposit		948,485			807,783			17.4	%		832,338
		1,194,126			1,022,508			16.8	%		1,056,199
Accrued interest payable		2,438			1,841			32.4	%		1,523
		1,196,564			1,024,349			16.8	%		1,057,722
Borrowings:
Securities sold under agreements to repurchase		2,256,295			1,895,865			19.0	%		1,648,339
Advances from FHLB		301,500			300,000			0.5	%		310,800
Term notes		15,000			15,000			0.0	%		15,000
Subordinated capital notes		72,166			72,166			0.0	%		72,166
		2,644,961			2,283,031			15.9	%		2,046,305
Securities purchased but not yet received		56			89,068			-99.9	%		14,419
Total deposits and borrowings		3,841,581			3,396,448			13.1	%		3,118,446
Other liabilities		35,014			34,580			1.3	%		61,093
Total liabilities	$	3,876,595		$	3,431,028			13.0	%	$	3,179,539
Deposits portfolio composition percentages:
Non-interest bearing deposits		4.9	%		4.4	%					4.9	%
Now accounts		7.8	%		8.0	%					7.7	%
Savings accounts		7.9	%		8.7	%					8.6	%
Certificates of deposit		79.4	%		78.9	%					78.8	%
		100.0	%		100.0	%					100.0	%
Borrowings portfolio composition percentages:
Securities sold under agreements to repurchase		85.3	%		83.0	%					80.6	%
Advances from FHLB		11.4	%		13.1	%					15.2	%
Subordinated capital notes		2.7	%		3.2	%					3.5	%
Term notes		0.6	%		0.7	%					0.7	%
		100.0	%		100.0	%					100.0	%
Securities sold under agreements to repurchase
Amount outstanding at quarter-end	$	2,256,295		$	1,895,865					$	1,648,339
Daily average outstanding balance	$	2,164,865		$	1,597,720					$	1,539,531
Maximum outstanding balance at any month-end	$	2,331,091		$	1,895,865					$	1,648,339

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At March 31, 2005, the Group’s total liabilities reached $3.877 billion, 13.0% higher than the $3.431 billion reported at June 30, 2004. Deposits and borrowings, the Group’s funding sources, amounted to $3.842 billion at March 31, 2005, an increase of 13.1% when compared to $3.396 billion reported at June 30, 2004. At March 31, 2005, borrowings represented 69% of interest-bearing liabilities and deposits 31%, versus 72% and 28%, respectively, at December 31, 2004. The Group’s medium term objective is a 55%-45% ratio, as it grows up the loan portfolio to 45% of total earning assets.

Borrowings are the Group’s largest interest-bearing liability component. They consist mainly of diversified funding sources through the use of repurchase agreements, FHLB advances, subordinated capital notes, term notes and lines of credit. At March 31, 2005, borrowings amounted to $2.645 billion, 15.9% greater than the $2.283 billion at June 30, 2004. The increase is due to an increase of 19.0% in repurchase agreements, reflecting the funding needed to maintain the Group’s investment and loan portfolio growth. Also, it reflects the Group’s strategy in fiscals 2004 and 2005 to use low cost repurchase agreements, coupled with interest rate swaps, to fix these costs over multi-year periods.

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 FHLB, the Group can obtain advances from the FHLB, secured by the certain of the Group’s mortgages and investment securities. FHLB advances totaled $301.5 million as of March 31, 2005, and $300 million at June 30, 2004. However, the Group has the capacity to expand such source of funding up to a maximum of $560 million based on the $28.0 million of capital contribution that the Group has allocated with FHLB.

At March 31, 2005, deposits, the second largest category of the Group’s interest-bearing liabilities, reached $1.197 billion, up 16.8%, compared to the $1.024 billion reported as of June 30, 2004. Deposits reflected 17.2% sequential quarterly growth in certificates of deposits, to $950.9 million primarily due to increase in one year CDs. Such increases are due in part to the Company’s success opening accounts as part of its expanded commercial and consumer lending businesses and of the Oriental Preferred program of bank services and accounts, and an increase in brokered deposits.

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TABLE 11 — CAPITAL, DIVIDENDS AND STOCK DATA
AS OF MARCH 31, 2005, 2004 and JUNE 30, 2004
(In thousands, except for per share data)

	March 31,			June 30,			Variance			March 31,
	2005			2004			%			2004
Capital data:
Stockholders’ equity	$	338,690		$	294,667			14.9	%	$	286,676
Regulatory Capital Ratios data:
Leverage Capital Ratio		10.67	%		11.24	%		-5.1	%		11.58	%
Minimum Leverage Capital Ratio Required		4.00	%		4.00	%					4.00	%
Actual Tier 1 Capital	$	446,465		$	408,007			9.4	%	$	393,189
Minimum Tier 1 Capital Required	$	167,317		$	145,209			15.2	%	$	101,860
Tier 1 Risk-Based Capital Ratio		40.94	%		37.98	%		7.8	%		38.43	%
Minimum Tier 1 Risk-Based Capital Ratio Required		4.00	%		4.00	%					4.00	%
Actual Tier 1 Risk-Based Capital	$	446,465		$	408,007			9.4	%	$	393,189
Minimum Tier 1 Risk-Based Capital Required	$	43,618		$	42,966			1.5	%	$	40,924
Total Risk-Based Capital Ratio		41.58	%		38.69	%		7.5	%		39.08	%
Minimum Total Risk-Based Capital Ratio Required		8.00	%		8.00	%					8.00	%
Actual Total Risk-Based Capital	$	453,445		$	415,560			9.1	%	$	399,821
Minimum Total Risk-Based Capital Required	$	87,237		$	85,932			1.5	%	$	81,848
Stock data:
Outstanding common shares, net of treasury (1)		24,676			24,208			1.9	%		24,114
Book value (1)	$	10.97		$	9.36			17.2	%	$	9.07
Market Price at end of period	$	23.42		$	24.61			-4.8	%	$	28.95
Market capitalization	$	577,912		$	595,729			-3.0	%	$	698,216

	March 31,			March 31,			Variance
	2005			2004			%
Common dividend data:
Cash dividends declared	$	10,037		$	8,344			20.3	%
Cash dividends declared per share (1)	$	0.41		$	0.38			7.9	%
Payout ratio		22.12	%		19.60	%		12.9	%
Dividend yield		2.11	%		2.25	%		-6.2	%

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 and cash dividend per share were adjusted to give retroactive effect to the stock dividend declared on the Group’s common stock.

					Cash
	Price				Dividend
	High		Low		Per share
Fiscal 2005
March 31, 2005	$	28.94	$	22.97	$	0.14
December 31, 2004	$	28.41	$	24.37	$	0.14
September 30, 2004 (1)	$	26.64	$	22.76	$	0.13
Fiscal 2004 (1)
June 30, 2004	$	29.77	$	23.26	$	0.13
March 31, 2004	$	29.55	$	22.45	$	0.13
December 31, 2003	$	23.77	$	19.88	$	0.13
September 30, 2003	$	22.30	$	19.28	$	0.12
Fiscal 2003 (1)
June 30, 2003	$	21.77	$	17.90	$	0.12
March 31, 2003	$	17.96	$	16.58	$	0.12
December 31, 2002	$	17.03	$	13.12	$	0.12
September 30, 2002	$	16.69	$	13.72	$	0.10

(1) Adjusted to give retroactive effect to the 10% stock dividends declared on the Group’s common stock on November 30, 2004.

At March 31, 2005, the Group’s total stockholders’ equity was $338.7 million, a 14.9% increase, when compared to $294.7 million at June 30, 2004. This increment was due to the net effect of earnings retention from operations and to a reduction in accumulated other comprehensive loss. As of March 31, 2005, accumulated comprehensive loss amounted to $39.8 million, a decrease of $5.6 million, when compared to the $45.4 million loss recorded as of June 30, 2004. Net accumulated other comprehensive loss consists of the unrealized loss on derivatives designated as cash flow hedges and the unrealized gain or loss on investment securities available-for-sale, net of deferred tax.

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At March 31, 2005, accumulated unrealized loss, net of tax on derivatives designated as cash flow hedges was $3.0 million, a $14.1 million decrease, when compared to an accumulated unrealized loss of $17.1 million at June 30, 2004. Accumulated unrealized loss, net of tax, on investment securities available-for-sale amounted to $36.8 million at March 31, 2005, after $8.5 million negative change, when compared with an accumulated unrealized loss of $28.3 million at June 30, 2004. Accumulated unrealized loss, net of tax, on investment securities available-for-sale at March 31, 2005 includes an unrealized loss amounting to $25.4 million related to securities transferred to the held-to-maturity category, most of which occurred during the first quarter of fiscal 2004. This unrealized loss is amortized over the remaining life of the securities as a yield adjustment.

On November 30, 2004, the Group declared $3.5 million in cash dividends, a 25.0% increase when compared to $2.8 million declared for the same period a year ago. The Group also declared a 10% stock dividend paid to holders of record as of December 31, 2004.

The Group’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol OFG. At March 31, 2005, the Group’s market capitalization for its outstanding common stock was $577.9 million ($23.42 per share).

Under the regulatory framework for prompt corrective action, banks that meet or exceed a Tier I risk-based ratio of 6%, a total capital risk-based ratio of 10% and a leverage ratio of 5% are considered well capitalized. The Bank exceeds those regulatory capital requirements.

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 also, oversee 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 occur when assets and liabilities reprice at different times and at different rates. This difference is commonly referred to as a “maturity mismatch” or “gap”. The Group employs various techniques to assess its degree of interest rate risk.

The Group is liability sensitive due to its fixed rate and medium to long-term asset composition being funded with shorter-term repricing liabilities. As a result, the Group utilizes various derivative instruments for hedging credit and market risk. The notional amounts are amounts from which calculations and payments are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amount to be received and paid, if any. The actual risk of loss is the cost of replacing, at market, these contracts in the event of default by the counterparties. The Group controls the credit risk of its derivative financial instrument agreements through credit approvals, limits, monitoring procedures and collateral, when considered necessary.

The Group generally uses interest rate swaps and interest rate options in managing its interest rate risk exposure. The swaps were entered into to convert short-term borrowings into fixed rate liabilities for longer periods and provide protection against increases in short-term interest rates. Under these swaps, the Group pays a fixed monthly or quarterly cost and receives a floating monthly or quarterly payment based on LIBOR. Floating rate payments received from the swap counterparties correspond to the floating rate payments made on the short-term borrowings thus resulting in a net fixed rate cost to the Group. Please refer to Note 8- Derivatives Activities of the accompanying financial statements for more information related to the Group’s swaps, including those used to manage exposure to the stock market on the certificates of deposit with an option tied to the performance of the Standard & Poor’s 500 stock market index, and other derivatives instruments used by the Group for hedging credit and market risk.

During the quarters ended March 31, 2005 and 2004, losses of $623,000 and of $275,000 respectively, were charged to earnings and reflected as “Derivatives Activities” in the consolidated statements of income. For the first nine months of fiscal 2005 and 2004, these losses amounted to $945,000 and $935,000, respectively. For the quarter ended March 31, 2005, unrealized gains of $13.6 million on derivatives designated as cash flow hedges were included in other comprehensive income. For the first nine months of fiscal 2005, unrealized gains of $192,000 on derivatives designated as cash flow hedges were included in other comprehensive income. Ineffectiveness of $791,000 and $811,000 was charged to earnings during the nine-month period ended March 31, 2005 and 2004, respectively.

At March 31, 2005 and June 30, 2004, the fair value of derivatives was recognized as either assets or liabilities in the

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consolidated statements of financial condition as follows: the fair value of the interest rate swaps used to manage the exposure to the stock market on stock indexed deposits, to fix the cost of short-term borrowings and hedge the mortgage loan purchased represented a liability of $6.8 million and $13.8 million, respectively, presented in accrued expenses and other liabilities; the US 10 year notes put options represent an other asset of $1.3 million as of March 31, 2005; the purchased options used to manage the exposure to the stock market on stock indexed deposits represented an other assets of $18.3 million and $16.5 million, respectively; and the options sold to customers embedded in the certificates of deposit represented a liability of $17.6 million and $16.2 million, respectively, recorded in deposits.

Rate changes expose the Group to changes in net interest income. The result of the sensitivity analysis on net interest income on a hypothetical 200 basis points rate increase as of March 31, 2005 for the next twelve months would be a decrease of $17.5 million or 20.62% of net interest income. The change for the same period, utilizing a hypothetical declining rate scenario of 50 basis points, is an increase of $8.8 million or 10.44%. Both hypothetical rate scenarios consider a gradual change of +200 and -50 basis points during the twelve-month period. The decreasing rate scenario has a floor of .25%. This estimated change is slightly above the policy guidelines established by the Board of Directors of 15%.

Liquidity Risk Management

The objective of the Group’s asset/liability management function is to maintain consistent growth in net interest income within the Group’s policy limits. This objective is accomplished through management of the Group’s Statement of Financial Condition composition, liquidity, and interest rate risk exposure arising from changing economic conditions, interest rates and customer preferences.

The goal of liquidity management is to provide adequate funds to meet changes in loan demand or unexpected deposit withdrawals. This is accomplished by maintaining liquid assets in the form of investment securities, maintaining sufficient unused borrowing capacity in the national money markets and delivering consistent growth in core deposits. As of March 31, 2005, the Group had approximately $3.246 billion in securities and other investments available to cover liquidity needs. Securitizable loans provide additional asset-driven liquidity. These sources, in addition to the Group’s 10.67% leverage capital ratio, provide a stable funding base.

In addition to core deposit funding, the Group also accesses a variety of other short-term and long-term funding sources. Short-term funding sources mainly include securities sold under agreements to repurchase. Borrowing funding source limits are determined annually by each counter-party and depend on the Group’s financial condition and delivery of acceptable collateral securities. The Group may be required to provide additional collateral based on the fair value of the underlying securities. The Group also uses the FHLB as a funding source, issuing notes payable, such as advances. The FHLB requires the Group to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At March 31, 2005, the Group has an additional borrowing capacity with the FHLB of $37.7 million based on the collateral already pledge with the FHLB. However, the Group’s total borrowing capacity with the FHLB based on the Bank’s capital contribution is up to $560 million.

The Bank also utilizes the National Certificate of Deposit (“CD”) Market as a source of cost effective brokered deposit funding in addition to local market deposit inflows. Depositors in this market consist of credit unions, banking institutions, CD brokers and some private corporations and non-profit organizations. The Bank’s ability to acquire brokered deposits can be restricted if it becomes in the future less than well-capitalized. An adequately-capitalized bank, by regulation, may not accept deposits from brokers unless it applies for and receives a waiver from the FDIC.

As of March 31, 2005, the Bank had line of credit agreements with other financial institutions permitting the Bank to borrow a maximum aggregate amount of $25.0 million. No borrowings were made during the quarter ended March 31, 2005 under such lines of credit. The agreements provide for unsecured advances to be used by the Bank on an overnight basis. Interest rates are negotiated at the time of the transactions. The credit agreements are renewable annually.

The Group’s liquidity targets are reviewed monthly by the ALCO Committee and are based on the Group’s commitments to make loans and purchase investments and its ability to generate funds.

The principal source of funding for the Group is the dividends from the Bank. The ability of the Bank to pay dividends is restricted by regulatory authorities. The Group meets its cash obligations and pays dividends to its common and preferred stockholders primarily through such dividends. Management believes that the Group will continue to meet its cash obligations as they become due and pay dividends as they are declared.

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Changes in statutes and regulations, including tax laws and rules

The Group, as a Puerto Rico-chartered financial holding company, and its subsidiaries, are each subject to extensive federal and local governmental supervision and regulation relating to its banking, securities and insurance business. The Group also benefits from favorable tax treatment under regulations relating to the activities of its international banking entities. In addition, there are laws and other regulations that restrict transactions between the Group and its subsidiaries. Any change in such tax or other regulations, whether by applicable regulators or as a result of legislation subsequently enacted by the Congress of the United States or the Legislature of Puerto Rico, could have an affect on the Group’s results of operations and financial condition.

Puerto Rico international banking entities, or IBE’s, are currently exempt from taxation under Puerto Rico law, except for certain IBEs that operate as units of banks. The IBE Act imposes income taxes at normal statutory rates on each IBE that operates as a unit of a bank, if the IBE’s net income generated after March 31, 2004 exceeds 40 percent of the bank’s net income in the taxable year commenced on July 1, 2003, 30 percent of the bank’s net income in the taxable year commencing on July 1, 2004, and 20 percent of the bank’s net income in the taxable year commencing on July 1, 2005, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a bank.

The Group has an IBE that operates as a unit of the Bank. It also has an IBE that operates as a subsidiary of the Bank. The Bank transferred as of January 1, 2004, substantially all of the Bank’s IBE assets to the new IBE subsidiary. Although this transfer of IBE assets allows the Group to continue enjoying tax benefits, there cannot be any assurance that the IBE Act will not be modified in the future in a manner to reduce the tax benefits available to the new IBE subsidiary.

On February 2005, during his budget speech the Governor of Puerto Rico announced the proposal of a new legislation to impose a special income tax on the financial industry for two years as a transitory measure to a tax reform. The tax is believed to be between 2.5% and 5% on the net interest income. The proposal of this new legislation is still on a very preliminary stage; therefore, the final effect of the proposed special tax for the financial sector on the industry is still not defined.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Group’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Group’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation, the CEO and the CFO have concluded that, as of the end of such period, the Group’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Group in the reports that it files or submits under the Exchange Act.

Internal Control over Financial Reporting

There have not been any significant changes in the Group’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Group’s internal control over financial reporting.

PART – II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The Group and its subsidiaries are defendants in a number of legal proceedings incidental to their business. The Group is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group’s financial condition or results of operations.

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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

a)	None
b)	Not applicable
c)	None

Item 3. DEFAULTS UPON SENIOR SECURITIES

              None

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

              None

Item 5. OTHER INFORMATION

a)	None
b)	None

Item 6. EXHIBITS:

3(i)	Amended and Restated Certificate of Incorporation.(1)
3(ii)	By-Laws.(2)
4.1	Certificate of Designation creating the 7.125% Noncumulative Monthly Income Preferred Stock, Series A(3)
4.2	Certificate of Designation creating the 7.0% Noncumulative Monthly Income Preferred Stock, Series B(4)
10.1	1996 Incentive Stock Option Plan.(5)
10.2	1998 Incentive Stock Option Plan.(6)
10.3	2000 Incentive Stock Option Plan.(7)
10.4	Form of Stock Option Grant.(8)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

1. Incorporated herein by reference from Exhibit No. 3 of the Group’s registration statement on Form S-3 filed with the SEC on April 2, 1999.

2. Incorporated herein by reference from Exhibit No. 3(ii) of the Group’s current report on Form 8-K dated August 31, 2004.

3. Incorporated herein by reference from Exhibit No. 4.1 of the Group’s registration statement on Form 8-A filed with the SEC on April 30, 1999.

4. Incorporated herein by reference from Exhibit No. 4.1 of the Group’s registration statement on Form 8-A filed with the SEC on September 26, 2003.

5. Incorporated herein by reference from the Group’s definitive proxy statement for the 1997 annual meeting of stockholders filed with the SEC on September 19, 1997.

6. Incorporated herein by reference from the Group’s definitive proxy statement for the 1998 annual meeting of stockholders filed with the SEC on September 29, 1998.

7. Incorporated herein by reference from the Group’s definitive proxy statement for the 2000 annual meeting of stockholders filed with the SEC on November 17, 2000.

8. Incorporated herein by reference from Exhibit No. 10.4 of the Group’s annual report on Form 10-K filed with the SEC on September 13, 2004.

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Signatures

Pursuant to the requirements 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/José Rafael Fernández	Dated: May 9, 2005
José Rafael Fernández
President and Chief Executive Officer
By:	/s/ Hector Mendez	Dated: May 9, 2005
Hector Mendez
Senior Executive Vice President, Treasury and Asset Management and Chief Financial Officer

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