OFG Bancorp (OFG) 10-Q 2007 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 ended March 31, 2007

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 Number001-12647

Oriental Financial Group Inc.

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

Principal Executive Offices:
997 San Roberto Street
Oriental Center 10th Floor
Professional Offices Park
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.

Yes þ                    No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o                    Accelerated Filer þ                    Non-Accelerated Filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                    No þ

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

24,500,842 common shares ($1.00 par value per share)
outstanding as of April 30, 2007

TABLE OF CONTENTS

	Page
Part I FINANCIAL INFORMATION:
Item 1 Financial Statements
Unaudited consolidated statements of financial condition at March 31, 2007 and 2006		1
Unaudited consolidated statements of income for the quarters ended March 31, 2007 and 2006		2
Unaudited consolidated statements of changes in stockholders’ equity for the quarters ended March 31, 2007 and 2006		3
Unaudited consolidated statements of comprehensive income for the quarters ended March 31, 2007 and 2006		3
Unaudited consolidated statements of cash flows for the quarters ended March 31, 2007 and 2006		4
Notes to unaudited consolidated financial statements		5
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3 Quantitative and Qualitative Disclosures About Market Risk		33
Item 4 Controls and Procedures		36
PART II OTHER INFORMATION:
Item 1 Legal Proceedings		36
Item 1A Risk Factors		37
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3 Defaults Upon Senior Securities		37
Item 4 Submissions of Matters to a Vote of Security Holders		37
Item 5 Other Information		37
Item 6 Exhibits		37
Signatures		38
Certifications		39
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 local, 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 — I FINANCIAL INFORMATION

ITEM — I FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2007 AND DECEMBER 31, 2006
(In thousands, except per share data)

	March 31,			December 31,
	2007			2006
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	14,286		$	15,341
Money market investments		50,127			18,729
Total cash and cash equivalents		64,413			34,070
Investments:
Time deposits with other banks		5,000			5,000
Trading securities, at fair value with amortized cost of $463 (December 31, 2006 — $246)		461			243
Investment securities available-for-sale, at fair value with amortized cost of $1,828,459 (December 31, 2006 — $984,060)
Securities pledged that can be repledged		1,805,124			947,880
Other investment securities		20,818			27,080
Total investment securities available-for-sale		1,825,942			974,960
Investment securities held-to-maturity, at amortized cost with fair value of $1,880,479 (December 31, 2006 — $1,931,720)
Securities pledged that can be repledged		1,810,909			1,814,746
Other investment securities		92,798			152,731
Total investment securities held-to-maturity		1,903,707			1,967,477
Other Intestments		31,578			30,949
Federal Home Loan Bank (FHLB) stock, at cost		14,197			13,607
Total investments		3,780,885			2,992,236
Securities sold but not yet delivered		74,289			6,430
Loans:
Mortgage loans held-for-sale, at lower of cost or market		42,204			10,603
Loans receivable, net of allowance for loan losses of $8,046 (December 31, 2006 — $8,016)		1,191,690			1,201,767
Total loans, net		1,233,894			1,212,370
Accrued interest receivable		30,482			27,940
Premises and equipment, net		19,853			20,153
Deferred tax asset, net		13,562			14,150
Foreclosed real estate		5,320			4,864
Other assets		69,355			61,477
Total assets	$	5,292,053		$	4,373,690
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	124,610		$	132,434
Savings accounts		307,319			266,184
Certificates of deposit		905,656			834,370
Total deposits		1,337,585			1,232,988
Borrowings:
Federal funds purchased and other short term borrowings		3,139			13,568
Securities sold under agreements to repurchase		3,321,105			2,535,923
Advances from FHLB		195,000			181,900
Term notes		—			15,000
Subordinated capital notes		36,083			36,083
Total borrowings		3,555,327			2,782,474
Securities purchased but not yet received		40,067			—
Accrued expenses and other liabilities		20,752			21,802
Total liabilities		4,953,731			4,037,264
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; 25,461,200 shares issued (December 31, 2006 — 25,430,929 shares)		25,461			25,431
Additional paid-in capital		209,226			209,033
Legal surplus		37,424			36,245
Retained earnings		31,956			26,772
Treasury stock, at cost 977,600 shares (December 31, 2006 — 989,405 shares)		(12,848	)		(12,956	)
Accumulated other comprehensive loss, net of tax of $351 (December 31, 2006 — $290)		(20,897	)		(16,099	)
Total stockholders’ equity		338,322			336,426
Total liabilities and stockholders’ equity	$	5,292,053		$	4,373,690

See notes to unaudited consolidated financial statements.

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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 31, 2007 AND 2006
(In thousands, except per share data)

	Quarter Ended March 31,
	2007			2006
Interest income:
Loans	$	21,849		$	16,253
Mortgage-backed securities		25,498			24,500
Investment securities		13,697			14,500
Short term investments		456			739
Total interest income		61,500			55,992
Interest expense:
Deposits		12,370			10,498
Securities sold under agreements to repurchase		32,789			26,363
Advances from FHLB, term notes and other borrowings		2,317			2,622
Subordinated capital notes		758			1,297
Total interest expense		48,234			40,780
Net interest income		13,266			15,212
Provision for loan losses		1,075			1,101
Net interest income after provision for loan losses		12,191			14,111
Non-interest income:
Financial service revenues		4,843			3,252
Banking service revenues		1,874			2,176
Investment banking revenues		—			1,709
Net gain on:
Mortgage banking activities		62			436
Securities available-for-sale		358			19
Derivatives		8,418			882
Trading securities		—			28
Other		(304	)		451
Total non-interest income, net		15,251			8,953
Non-interest expenses:
Compensation and employee’s benefits		6,745			6,173
Occupancy and equipment		2,994			2,889
Advertising and business promotion		793			937
Directors and investor relations		531			144
Professional and service fees		1,538			1,624
Communication		338			447
Loan servicing expenses		523			455
Taxes, other than payroll and income taxes		448			600
Electronic banking charges		458			468
Printing, postage, stationery and supplies		202			186
Insurance		216			213
Other		1,041			747
Total non-interest expenses		15,827			14,883
Income before income taxes		11,615			8,181
Income tax expense		624			131
Net income		10,991			8,050
Less: Dividends on preferred stock		(1,200	)		(1,200	)
Income available to common shareholders	$	9,791		$	6,850
Income per common share:
Basic	$	0.40		$	0.28
Diluted	$	0.40		$	0.28
Average common shares outstanding		24,472			24,613
Average potential common shares-options		93			137
		24,565			24,750
Cash dividends per share of common stock	$	0.14		$	0.14

See notes to unaudited consolidated financial statements.

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UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE QUARTERS ENDED MARCH 31, 2007 AND 2006
(In thousands)

	Quarter Ended March 31,
	2007			2006
CHANGES IN STOCKHOLDERS’ EQUITY:
Preferred stock:
Balance at beginning and end of period	$	68,000		$	68,000
Common stock:
Balance at beginning of period		25,431			25,350
Stock options exercised		30			15
Balance at end of period		25,461			25,365
Additional paid-in capital:
Balance at beginning of period		209,033			208,454
Stock-based compensation expense		4			6
Stock options exercised		189			121
Balance at end of period		209,226			208,581
Legal surplus:
Balance at beginning of period		36,245			35,863
Transfer from retained earnings		1,179			917
Balance at end of period		37,424			36,780
Retained earnings:
Balance at beginning of period		26,772			52,340
Net income		10,991			8,050
Cash dividends declared on common stock		(3,428	)		(3,448	)
Cash dividends declared on preferred stock		(1,200	)		(1,200	)
Transfer to legal surplus		(1,179	)		(917	)
Balance at end of period		31,956			54,825
Treasury stock:
Balance at beginning of period		(12,956	)		(10,332	)
Stock used to match defined contribution plan 1165(e)		108			92
Balance at end of period		(12,848	)		(10,240	)
Accumulated other comprehensive loss, net of tax:
Balance at beginning of period		(16,099	)		(37,884	)
Other comprehensive loss, net of tax		(4,798	)		(1,817	)
Balance at end of period		(20,897	)		(39,701	)
Total stockholders’ equity	$	338,322		$	343,610

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE QUARTERS ENDED MARCH 31, 2007 AND 2006
(In thousands)

	Quarter Ended
	March 31,
	2007			2006
COMPREHENSIVE INCOME
Net income	$	10,991		$	8,050
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available-for-sale		4,841			(11,543	)
Realized gain on investment securities available-for-sale included in net income		—			(19	)
Unrealized gain on derivatives designated as cash flows hedges arising during the period		—			9,916
Gains on derivatives designated as cash flow hedges included in net income		(773	)		(749	)
Gain from termination of cash flow hedging		(8,225	)		—
Income tax effect related to unrealized (gain) loss on securities available-for-sale		(641	)		578
Other comprehensive loss for the period		(4,798	)		(1,817	)
Comprehensive income	$	6,193		$	6,233

See notes to unaudited consolidated financial statements

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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2007 AND 2006
(In thousands)  

	Quarter ended March 31,
	2007			2006
Cash flows from operating activities:
Net income	$	10,991		$	8,050
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred loan origination fees, net of costs		(285	)		(401	)
Amortization of premiums, net of accretion of discounts		986			(359	)
Depreciation and amortization of premises and equipment		1,393			1,567
Deferred income tax benefit		(53	)		(1,045	)
Equity in losses (earnings) of investment in limited liability partnership		892			(304	)
Provision for loan losses		1,075			1,001
Common stock used to match defined contribution plan 1165(e)		108			92
Stock-based compensation		4			6
Gain on:
Sale of securities available-for-sale		(358	)		(19	)
Mortgage banking activities		(62	)		(436	)
Derivatives		(9,052	)		(882	)
Sale of foreclosed real estate		(37	)		(104	)
Originations of loans held-for-sale		(36,766	)		(13,243	)
Proceeds from sale of loans held-for-sale		5,227			6,656
Net decrease (increase) in:
Trading securities		(218	)		(174	)
Accrued interest receivable		(2,542	)		(472	)
Other assets		(3,239	)		152
Net decrease in:
Accrued interest on deposits and borrowings		(2,683	)		(153	)
Other liabilities		(636	)		(175	)
Net cash used in operating activities		(35,255	)		(243	)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale		(900,000	)		(101,616	)
Other Investments		(31	)		—
Equity options		(5,764	)		—
Maturities and redemptions of:
Investment securities available-for-sale		30,160			37,616
Investment securities held-to-maturity		63,663			39,371
FHLB stock		(590	)		599
Proceeds from sales of:
Investment securities available-for-sale		23,031			15,193
Foreclosed real estate		820			1,218
Loan production:
Origination and purchase of loans, excluding loans held-for-sale		(35,515	)		(79,416	)
Principal repayment of loans		43,563			44,347
Additions to premises and equipment		(1,093	)		(2,046	)
Net cash used in investing activities		(781,756	)		(44,734	)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits		104,304			(25,715	)
Securities sold under agreements to repurchase		759,788			85,391
Federal funds purchased		(10,429	)		499,593
Proceeds from:
Short term borrowings		—			(490,237	)
Advances from FHLB		1,121,320			515,195
Exercise of stock options		219			136
Repayments of advances from FHLB		(1,108,220	)		(528,495	)
Maturity of term note		(15,000	)		—
Dividend paid in common and preferred stock		(4,628	)		(4,645	)
Net cash provided by financing activities		847,354			51,223
Net change in cash and cash equivalents		30,343			6,246
Cash and cash equivalents at beginning of period		34,070			17,269
Cash and cash equivalents at end of period	$	64,413		$	23,515
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
Interest paid	$	45,828		$	40,627
Mortgage loans securitized into mortgage-backed securities	$	—		$	2,936
Securities sold but not yet delivered	$	74,289		$	1,192
Securities and loans purchased but not yet received	$	40,067		$	1,233
Transfer from loans to foreclosed real estate	$	1,239		$	624

See notes to unaudited 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 U.S. generally accepted accounting principles (“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 consolidated financial statements include all adjustments necessary, all of which are of normal recurring nature, to present fairly the consolidated financial condition as of March 31, 2007 and December 31, 2006, and the results of operations, and the cash flows for the quarters ended March 31, 2007 and 2006. 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. The results of operations and cash flows for the quarters ended March 31, 2007 and 2006 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 December 31, 2006, included in the Group’s Form 10-K.

Nature of Operations

Oriental is a diversified, publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. It has four wholly-owned subsidiaries, Oriental Bank and Trust (the “Bank”), Oriental Financial Services Corp. (“Oriental Financial Services”), Oriental Insurance, Inc. (“Oriental Insurance”), and Caribbean Pension Consultants, Inc. (located in Boca Raton, Florida). The Group also has two special purpose entities, Oriental Financial (PR) Statutory Trust I (the “Statutory Trust I”) and Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”). Through these subsidiaries and its divisions, the Group provides a wide range of financial services such as mortgage, commercial and consumer lending, financial planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual trust services. Note 9 to the unaudited consolidated financial statements present further information about the operations of the Group’s business segments.

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

The Bank operates through twenty-five 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”). The Bank offers banking services such as commercial and consumer lending, saving and time deposit products, financial planning, and corporate and individual trust services, and capitalizes on its commercial banking network to provide mortgage lending products to its clients. The Bank also operates two international banking entities (“IBEs”) pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended (the “IBE Act”): O.B.T. International Bank, which is a unit of the Bank, and Oriental International Bank Inc., which is a wholly-owned subsidiary of the Bank. On January 1, 2004, the Group transferred most of the assets and liabilities of O.B.T. International Bank to Oriental International Bank Inc. The IBE offers the Bank certain Puerto Rico tax advantages and its services are limited under Puerto Rico law to persons and assets/liabilities 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 the 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.

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Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses based on losses that are estimated to occur. Loan losses are charged against the allowance when the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Group follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses. This methodology consists of several key elements. 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 experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, 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.

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, as provided in the Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan.” 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. Loans are individually evaluated for impairment, except large groups of small balance homogeneous loans that are collectively evaluated for impairment and loans that are recorded at fair value or at the lower of cost or market. The Group measures for impairment all commercial loans over $250,000. The portfolios of mortgage and consumer loans are considered homogeneous, and are evaluated collectively for impairment.

The Group, using a 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: the overall historical loss trends and other information including underwriting standards and economic trends.

Loan loss ratios and credit risk categories are updated quarterly and are applied in the context of GAAP and the importance of depository institutions having prudent, conservative, but not excessive loan allowances that fall within an acceptable range of estimated losses. While management uses current available information in estimating possible loan losses, factors beyond the Group’s control such as those affecting general economic conditions may require future changes to the allowance.

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 fair value. For debt securities, the Group also considers, among other factors, the investors 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 estimate of current income tax expense together with an assessment of temporary differences resulting from differences

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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 laws and regulations. Changes in assumptions affecting estimates may be required in the future and estimated tax assets or 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 and emerging legislation. The Group’s effective tax rate includes the impact of unrecognized tax benefits and changes to such benefits, 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 Group maintained an effective tax rate lower than the maximum marginal statutory rate of 39% and 43.5% as of March 31, 2007 and 2006, respectively, mainly due to the interest income arising from investments exempt from Puerto Rico income taxes, net of expenses attributable to the exempt income. Exempt interest relates mostly to interest earned on obligations of the United States and Puerto Rico governments and certain mortgage-backed securities, including securities held by the Bank’s international banking entities.

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 net 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 regular 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. As of March 31, 2007, a valuation allowance of approximately $3.9 million was recorded to offset deferred tax assets from loss carry forwards that the Group considers it may not realize in future periods.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Group will realize the benefits of these deductible differences, net of the existing valuation allowances at March 31, 2007. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

Effective at the beginning of the first quarter of 2007, the Group adopted the provision of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

The total amount of gross unrecognized tax benefits as of the date of adoption that would affect the effective tax rate was $5.7 million. The Group historically classified unrecognized tax benefits in current taxes payable. No adjustments resulted by the implementation of FIN 48. These gross unrecognized tax benefits would affect the effective tax rate if realized.

The Group’s policy to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated condensed statements of income did not change as a result of implementing the provisions of FIN 48. As of the date of adoption of FIN 48, the Group had accrued $1.3 million for the payment of interest and penalties relating to unrecognized tax benefits. The Group does not anticipate significant changes in unrecognized tax benefits during 2007.

Stock Option Plans

At March 31, 2007, the Group had two stock-based employee compensation plans: the 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

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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.

Effective July 1, 2005, the Group adopted SFAS No. 123R “Share-Based Payment” (“SFAS 123R”), an amendment of SFAS 123 “Accounting for Stock-Based Compensation” using the modified prospective transition method. SFAS 123R requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award with the cost to be recognized over the service period. SFAS 123R is effective for financial statements as of the beginning of the first interim or annual reporting period of the first fiscal year that began after June 15, 2005. SFAS No. 123R applies to all awards unvested and granted after this effective date and awards modified, repurchased, or cancelled after that date.

The Group recorded approximately $4,000 during the quarter ended March 31, 2007 related to compensation expense for options issued subsequent to the adoption of SFAS 123R. The remaining unrecognized compensation cost related to unvested awards as of March 31, 2007, was approximately $303,000 and the weighted average period of time over which this cost will be recognized is approximately 7 years.

The average fair value of each option granted during the quarter ended March 31, 2007 and 2006 was $3.55 and $4.05, respectively. The average fair value of each option granted 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.

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

	Quarter Ended
	March 31,
	2007			2006
Weighted Average Assumptions:
Dividend yield		4.20	%		3.81	%
Expected volatility		33.72	%		34.26	%
Risk-free interest rate		4.33	%		4.19	%
Expected life (in years)		8.5			8.5

The expected term of share options granted represents the period of time that share options granted are expected to be outstanding. Expected volatilities are based on historical volatility of the Group’s shares over the most recent period equal to the expected term of the share option.

NOTE 2 — INVESTMENT SECURITIES:

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the investment securities as of March 31, 2007 and December 31, 2006, were as follows:

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	March 31, 2007 (In thousands)
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
Available-for-sale
Obligations of US Government sponsored agencies	$	900,000	$	3,075	$	180		902,895		5.87	%
Puerto Rico Government and agency obligations		20,273		85		492		19,866		5.68	%
Corporate bonds and other		25,548		130		—		25,678		5.80	%
Total investment securities		945,821		3,290		672		948,439
FNMA and FHLMC certificates		144,597		—		1,171		143,426		5.45	%
GNMA certificates		40,099		418		205		40,312		5.61	%
Collateralized mortgage obligations (CMO’s)		697,942		51		4,228		693,765		5.48	%
Total mortgage-backed-securities and CMO’s		882,638		469		5,604		877,503
Total securities available-for-sale		1,828,459		3,759		6,276		1,825,942		5.68	%
Held-to-maturity
US Treasury securities		15,007		—		37		14,970		2.71	%
Obligations of US Government sponsored agencies		818,470		14		9,450		809,034		3.89	%
Puerto Rico Government and agency obligations		55,260		—		3,324		51,936		5.29	%
Total investment securities		888,737		14		12,811		875,940
FNMA and FHLMC certificates		687,831		1,131		9,049		679,913		5.04	%
GNMA certificates		177,316		243		2,092		175,467		5.35	%
Collateralized mortgage obligations		149,823		326		990		149,159		5.14	%
Total mortgage-backed-securities and CMO’s		1,014,970		1,700		12,131		1,004,539
Total securities held-to-maturity		1,903,707		1,714		24,942		1,880,479		4.57	%
Total	$	3,732,166	$	5,473	$	31,218	$	3,706,421		5.11	%

	December 31, 2006 (In thousands)
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
Available-for-sale
Puerto Rico Government and agency obligations	$	20,254	$	64	$	872	$	19,446		5.68	%
Corporate bonds and other		50,598		520		2,347		48,771		6.11	%
Total investment securities		70,852		584		3,219		68,217
FNMA and FHLMC certificates		150,099		—		1,506		148,593		5.45	%
GNMA certificates		40,690		408		235		40,863		5.61	%
Collateralized mortgage obligations (CMOs)		722,419		7		5,139		717,287		5.48	%
Total mortgage-backed-securities and CMO’s		913,208		415		6,880		906,743
Total securities available-for-sale		984,060		999		10,099		974,960		5.52	%
Held-to-maturity
US Treasury securities		15,022		—		127		14,895		2.71	%
Obligations of US Government sponsored agencies		848,400		7		17,529		830,878		3.85	%
Puerto Rico Government and agency obligations		55,262		—		3,961		51,301		5.29	%
Total investment securities		918,684		7		21,617		897,074
FNMA and FHLMC certificates		713,171		628		11,529		702,270		5.04	%
GNMA certificates		182,874		215		2,176		180,913		5.35	%
Collateralized mortgage obligations		152,748		18		1,303		151,463		5.13	%
Total mortgage-backed-securities and CMO’s		1,048,793		861		15,008		1,034,646
Total securities held-to-maturity		1,967,477		868		36,625		1,931,720		4.55	%
Total	$	2,951,537	$	1,867	$	46,724	$	2,906,680		4.87	%

The amortized cost and fair value of the Group’s investment securities available-for-sale and held-to-maturity at March 31, 2007, 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.

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	(In thousands)
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities
Due within 1 year	$	2,000	$	2,005	$	164,979	$	163,916
Due after 1 to 5 years		—		—		287,390		281,098
Due after 5 to 10 years		901,343		904,283		281,261		281,271
Due after 10 years		42,478		42,151		155,107		149,655
		945,821		948,439		888,737		875,940
Mortgage-backed securities
Due within 1 year		151		158		—		—
Due after 1 to 5 years		1,015		1,057		—		—
Due after 10 years		881,472		876,288		1,014,970		1,004,539
		882,638		877,503		1,014,970		1,004,539
	$	1,828,459	$	1,825,942	$	1,903,707	$	1,880,479

Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

Proceeds from the sale of investment securities available-for-sale during the three-month period ended March 31, 2007 totaled $23.0 million (March 31, 2006, $15.2 million). Realized gains on those sales during the quarter was $358,000 (March 31, 2006, gains of $19,000). There were no losses in either periods.

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, 2007.

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Available-for-sale

(In thousands)

	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Obligations of U.S. government entities	$	150,000	$	180	$	149,820
Mortgage-backed securities and CMO’s		850,219		5,232		844,987
		1,000,219		5,412		994,807

	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Puerto Rico Government and agency obligations		14,102		492		13,610
Mortgage-backed securities and CMO’s		8,517		372		8,145
		22,619		864		21,755

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Obligations of U.S. government entities		150,000		180		149,820
Puerto Rico Government and agency obligations		14,102		492		13,610
Mortgage-backed securities and CMO’s		858,736		5,604		853,132
	$	1,022,838	$	6,276	$	1,016,562

Held-to-maturity

(In thousands)

			Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Mortgage-backed securities and CMO’s	$	176,252	$	693	$	175,559
		176,252		693		175,559

	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		15,007		37		14,970
Obligations of U.S government sponsored entities		562,208		9,450		552,758
Puerto Rico Government and agency obligations		55,260		3,324		51,936
Mortgage-backed securities and CMO’s		472,443		11,438		461,005
		1,104,918		24,249		1,080,669

			Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		15,007		37		14,970
Obligations of U.S government sponsored entities		562,208		9,450		552,758
Puerto Rico Government and agency obligations		55,260		3,324		51,936
Mortgage-backed securities and CMO’s		648,695		12,131		636,564
	$	1,281,170	$	24,942	$	1,256,228

Securities in an unrealized loss position at March 31, 2007 are mainly composed of securities issued or backed by U.S. government agencies and U.S. government sponsored agencies. The vast majority of these securities are rated the equivalent of AAA by nationally recognized rating organizations. The investment portfolio is structured primarily with highly liquid securities that have 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, 2007 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. Also, Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

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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, 2007, and December 31, 2006, was as follows:

	(In thousands)
	March 31, 2007			December 31, 2006
Residential mortgage loans	$	897,770		$	899,162
Home equity loans and secured personal loans		35,219			36,270
Commercial loans, mainly secured by real estate		236,739			241,702
Personal consumer loans and lines of credit		33,419			35,772
Loans receivable, gross		1,203,147			1,212,906
Less: deferred loan fees, net		(3,411	)		(3,123	)
Loans receivable		1,199,736			1,209,783
Allowance for loan losses		(8,046	)		(8,016	)
Loans receivable, net		1,191,690			1,201,767
Mortgage loans held-for-sale		42,204			10,603
Total loans, net	$	1,233,894		$	1,212,370

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 required 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 quarters ended March 31,2007 and 2006.

The Group evaluates all loans, some individually, and others as homogeneous groups, for purposes of determining impairment. At March 31, 2007 and December 31, 2006, the total investment in impaired loans was $1.7 million and $2.0 million, 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.

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NOTE 4 — PLEDGED ASSETS

At March 31, 2007, residential mortgage loans amounting to $580,875,000 and investment securities with fair values amounting to $6,287,000 were pledged to secure advances and borrowings from the FHLB. Investment securities with fair values totaling $3,420,301, $101,051,000, and $8,463,000 at March 31, 2007, were pledged to secure securities sold under agreements to repurchase, public fund deposits and other funds, respectively. Also, investment securities with fair value totaling $508,000 at March 31, 2007, were pledged to the Puerto Rico Treasury Department.

As of March 31, 2007, investment securities available-for-sale and held-to-maturity not pledged amounted to $69,045,000 and $100,766,000, respectively. As of March 31, 2007, mortgage loans not pledged amounted to $394,318,000.

NOTE 5 — OTHER ASSETS

Other assets at March 31, 2007 and December 31, 2006 include the following:

	(In thousands)
	March 31, 2007		December 31, 2006
Investment in equity indexed options	$	39,746	$	34,216
Investment in limited partnership		11,021		11,913
Deferred charges		977		1,037
Prepaid expenses		1,858		2,152
Accounts receivable and other assets		11,297		7,560
Investment in Statutory Trusts		1,086		1,086
Goodwill		2,006		2,006
Servicing asset		1,364		1,507
	$	69,355	$	61,477

NOTE 6 — SUBORDINATED CAPITAL NOTES

Subordinated capital notes amounted to $36,083,000 at March 31,2007 and December 31, 2006.

In October 2001 and August 2003, the Statutory Trust I and the Statutory Trust II, respectively, special purpose entities of the Group, were formed for the purpose of issuing trust redeemable preferred securities. In December 2001 and September 2003, $35.0 million of trust redeemable preferred securities were issued by each of the Statutory Trust I and 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 call provision of the subordinated capital note purchased by the Statutory Trust I was exercised by the Group in December 2006 and the Group recorded a $915,000 loss related to the write-off of unamortized issuance cost of the note. The other subordinated capital note has a par value of $36.1 million, bears interest based on 3-month LIBOR plus 295 basis points (8.30% at March 31, 2007; December 31, 2006 — 8.31%), payable quarterly, and matures on September 17, 2033. The subordinated capital note purchased by the Statutory Trust II may be called at par after five years (September 2008). 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 unaudited consolidated statements of financial condition.

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 qualifying 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.

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NOTE 7 — OTHER BORROWINGS

At March 31, 2007, 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 at March 31, 2007 mature as follows:

	(In thousands)
	Balance
Due within 30 days	$	514,323
Due after 3 to 5 years		900,428
Due after 5 to 10 years		1,906,354
	$	3,321,105

At March 31, 2007, the contractual maturities of advances from the FHLB by year are as follows:

	(In thousands)
Year ending December 31,	Advances from FHLB
2007	$	145,000
2008		50,000
	$	195,000

NOTE 8 — DERIVATIVES ACTIVITIES

The Group utilizes various derivative instruments as part of its asset and liability management. These transactions involve both credit and market risks. The notional amounts are amounts on which calculations, payments, and the value of the derivatives 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 options in managing its interest rate risk exposure. Certain swaps were entered into to convert the forecasted rollover of 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 paid a fixed monthly or quarterly cost and received a floating thirty or ninety-day payment based on LIBOR. Floating rate payments received from the swap counterparties partially offset the interest payments to be made on the forecasted rollover of short-term borrowings. The Group decided to unwind all of its outstanding interest rate swaps with aggregate notional amounts of $1.1 billion in two separate transactions in July and December 2006.

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 depositors receive a return equal to the greater of 15% of the principal in the account or 125% of the average increase in the month-end value of the index. The Group uses option agreements with 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. The changes in fair value of the option agreements used to manage the exposure in the stock market in the certificates of deposit are recorded in earnings in accordance with SFAS No. 133, as amended.

Derivative instruments are generally negotiated over-the-counter (“OTC”) contracts. Negotiated OTC derivatives are generally entered into between two counterparties that negotiate specific contractual terms, including the underlying instrument, amount, exercise price and maturity.

There were no derivatives designated as a hedge as of March 31, 2007 and December 31, 2006. Other derivatives not designated as a hedge consist of purchased options used to manage the exposure to the stock market on stock indexed deposits with notional amounts of $146,295,000 and $131,530,000 as of March 31, 2007 and December 31, 2006, respectively; embedded options on stock indexed deposits with notional amounts of $138,571,000 and $122,924,000 as of March 31, 2007 and December 31, 2006, respectively.

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During the quarters ended March 31, 2007 and 2006, gains of $8.4 million and $882,000, respectively, were recognized as earnings and reflected as “Derivatives Activities” in the unaudited consolidated statements of income, mainly due to the $8.2 million gain recognized because of the elimination of the forecasted transactions on the cash flow hedges of the swaps previously termindated, which gains were previously included in other comprehensive income. During the quarter ended March 31, 2006, unrealized gains of $9.9 million on derivatives designated as cash flow hedges were included in other comprehensive income (loss). There are no unrealized gains or losses at March 31, 2007.

At March 31, 2007 and December 31, 2006, the fair value of derivatives was recognized as either assets or liabilities in the unaudited consolidated statements of financial condition as follows: the purchased options used to manage the exposure to the stock market on stock indexed deposits represented an asset of $39.7 million and $34.2 million, respectively, presented in other assets; the options sold to customers embedded in the certificates of deposit represented a liability of $37.7 million and $32.2 million, respectively, recorded in deposits.

NOTE 9 — 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. In June 2006, management decided to reclassify and present investment banking revenues in the Treasury segment rather than in the Financial Services segment. This reclassification was retroactively presented in the table below.

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 directly into the secondary market or securitize conforming loans into mortgage-backed securities certificates. The Group outsourced the servicing of mortgages included in the resulting mortgage-backed securities pools, as well as loans maintained in portfolio.

The Treasury segment encompasses all of the Group’s asset and liability management activities such as: purchases and sales of investment securities, interest rate risk management, derivatives, and borrowings, as well as investment banking revenues on public offerings and private placements of debt and equity securities.

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 followed by the Group, which are described in the “Summary of Significant Accounting Policies” included in the Group’s Form 10-K. Following are the results of operations and the selected financial information by operating segment for the quarters ended March 31,2007 and 2006:

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Unaudited - Quarters Ended March 31, (Dollars in thousands)
							Financial			Total						Consolidated
	Banking			Treasury			Services			Segments			Eliminations			Total
March 31, 2007
Interest income	$	22,344		$	39,083		$	73		$	61,500		$	—		$	61,500
Interest expense		(7,094	)		(40,931	)		(209	)		(48,234	)		—			(48,234	)
Net interest income		15,250			(1,848	)		(136	)		13,266			—			13,266
Non-interest income		1,397			8,952			4,902			15,251			—			15,251
Non-interest expenses		(12,051	)		(731	)		(3,045	)		(15,827	)		—			(15,827	)
Intersegment revenue		948			—			—			948			948			1,896
Intersegment expense		—			(146	)		(802	)		(948	)		(948	)		(1,896	)
Provision for loan losses		(1,075	)		—			—			(1,075	)		—			(1,075	)
Income before income taxes	$	4,469		$	6,227		$	919		$	11,615		$	—		$	11,615
Total Assets as of March 31, 2007	$	1,696,048		$	3,901,554		$	12,883		$	5,610,485		$	(318,432	)	$	5,292,053
March 31, 2006
Interest income	$	16,599		$	39,357		$	36		$	55,992		$	—		$	55,992
Interest expense		(7,763	)		(33,017	)		—			(40,780	)		—			(40,780	)
Net interest income		8,836			6,340			36			15,212			—			15,212
Non-interest income		5,084			2,950			919			8,953			—			8,953
Non-interest expenses		(12,408	)		(550	)		(1,925	)		(14,883	)		—			(14,883	)
Intersegment revenue		722			—			—			722			(722	)		—
Intersegment expense		—			—			(722	)		(722	)		722			—
Provision for loan losses		(1,101	)		—			—			(1,101	)		—			(1,101	)
Income before income taxes	$	1,133		$	8,740		$	(1,692	)	$	8,181		$	—		$	8,181
Total Assets as of March 31, 2006	$	1,071,901		$	3,877,854		$	13,021		$	4,962,776		$	(398,678	)	$	4,564,098

NOTE 10 — RECENT ACCOUNTING DEVELOPMENTS:

Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements.

This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. Management is evaluating the impact that this accounting standard may have on the Group’s consolidated financial statements.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115”

On February 15, 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115”. SFAS 159 provides an alternative measurement treatment for certain financial assets and financial liabilities, under an instrument-by-instrument election, that permits fair value to be used for both initial and subsequent measurement, with changes in fair value recognized in earnings. While SFAS 159 is effective for the Group beginning January 1, 2008, earlier adoption is permitted as of January 1, 2007, provided that the entity also adopts all of the requirements of SFAS 157. Management has decided not to pursue early adoption.

-16-

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”

In July 2006, the FASB issued FIN 48. On January 1, 2007, the Group adopted FIN 48. FIN 48 establishes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Pursuant to FIN 48, the effects of a tax position are recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by the taxing authority. Conversely, previously recognized tax positions are derecognized when it is no longer more likely than not that the tax position would be sustained upon examination. FIN 48 also requires certain disclosures regarding unrecognized tax benefits and the amounts and classification of the related interest and penalties.

As of January 1, 2007, the Company’s unrecognized tax benefit totaled $7.0 million, of which $1.3 million related to interest and penalties. No adjustment resulted from the implementation of FIN 48. In accordance with the Group's policy, any tax-related interest and/or penalties are classified as a component of income taxes in the consolidated statements of financial position and results of operations. The tax periods ended June 30, 2003, 2004, 2005 and December 31, 2005 and 2006 remain subject to examination by the Puerto Rico Department of Treasury.

-17-

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

SELECTED FINANCIAL DATA
FOR THE QUARTERS ENDED MARCH 31, 2007 AND 2006
(IN THOUSANDS, EXCEPT PER SHARE DATA)

	Quarter ended March 31,
	2007			2006			Variance
EARNINGS PER SHARE AND DIVIDENDS DATA:
Interest income	$	61,500		$	55,992			9.8	%
Interest expense		48,234			40,780			18.3	%
Net interest income		13,266			15,212			-12.8	%
Provision for loan losses		1,075			1,101			-2.4	%
Net interest income after provision for loan losses		12,191			14,111			-13.6	%
Non-interest income		15,251			8,953			70.3	%
Non-interest expenses		15,827			14,883			6.3	%
Income before taxes		11,615			8,181			42.0	%
Income tax expense		624			131			376.3	%
Net Income		10,991			8,050			36.5	%
Less: dividends on preferred stock		(1,200	)		(1,200	)		0.0	%
Income available to common shareholders	$	9,791		$	6,850			42.9	%
PER SHARE DATA:
Basic	$	0.40		$	0.28			43.8	%
Diluted	$	0.40		$	0.28			44.0	%
Average common shares outstanding		24,472			24,613			-0.6	%
Average potential common share-options		93			137			-32.1	%
Total average shares outstanding and equivalents		24,565			24,750			-0.7	%
Book value per common share	$	11.04		$	11.19			-1.3	%
Market price at end of period	$	11.78		$	14.45			-18.5	%
Cash dividends declared per common share	$	0.14		$	0.14			0.0	%
Cash dividends declared on common shares	$	3,427		$	3,448			-0.6	%
Return on average assets (ROA)		1.01	%		0.70	%		44.3	%
Return on average common equity (ROE)		14.54	%		9.94	%		51.7	%
Equity-to-assets ratio		6.39	%		7.53	%		-15.1	%
Efficiency ratio		78.95	%		65.32	%		20.9	%
Expense ratio		0.86	%		0.66	%		30.3	%
Interest rate spread		0.89	%		1.08	%		9.3	%
Interest rate margin		1.18	%		1.37	%		-35.0	%
Number of financial centers		25			24			4.2	%

	March 31,			December 31,
	2007			2006			Variance
PERIOD END BALANCES AND CAPITAL RATIOS:
Investments and loans
Investments securities	$	3,780,885		$	2,992,236			26.4	%
Loans (including loans held-for-sale), net		1,233,894			1,212,370			1.8	%
Securities and loans sold but not yet delivered		74,289			6,430			1055.4	%
	$	5,089,068		$	4,211,036			20.9	%
Deposits and Borrowings
Deposits	$	1,337,585		$	1,232,988			8.5	%
Repurchase agreements		3,321,105			2,535,923			31.0	%
Other borrowings		234,222			246,551			-5.0	%
Securities and loans purchased but not yet received		40,067			—			100.0	%
	$	4,932,979		$	4,015,462			22.9	%
Stockholders’ equity
Preferred equity	$	68,000		$	68,000			0.0	%
Common equity		270,322			268,426			0.7	%
	$	338,322		$	336,426			0.6	%
Capital ratios
Leverage capital		8.21	%		8.42	%		-2.5	%
Tier 1 risk-based capital		19.15	%		21.57	%		-11.2	%
Total risk-based capital		19.56	%		22.04	%		-11.3	%
Trust assets managed	$	1,850,912		$	1,848,596			0.1	%
Broker-dealer assets gathered		1,101,542			1,143,668			-3.7	%
Assets managed		2,952,454			2,992,264			-1.3	%
Assets owned		5,292,053			4,373,690			21.0	%
Total financial assets managed and owned	$	8,244,507		$	7,365,954			11.9	%

-18-

OVERVIEW OF FINANCIAL PERFORMANCE

Introduction

The Group’s diversified mix of businesses and products generates 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 securities 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 continue producing a balanced and growing revenue stream.

During the quarter ended March 31, 2007 the Group continued targeting the personal and commercial needs of mid and high net worth individuals and families, including professionals and owners of small and mid-size businesses, primarily in Puerto Rico. The results of these efforts reflected continued growth in lending activities and tight control over non-interest expenses.

During the fourth quarter of 2006, the Group completed a review of its available-for-sale (“AFS”) investment portfolio in light of asset/liability management considerations and changing market conditions, and strategically repositioned this portfolio. The repositioning involved open market sales of approximately $865 million of securities with a weighted average yield of 4.60% at a loss of approximately $16.0 million which was included as non-interest income in the accompanying consolidated financials statements. Following the sale, $860 million of triple-A securities at a weighted average yield of 5.55% were purchased and classified as AFS. As part of this repositioning, the Group entered into a $900 million, 5-year structured repurchase agreement ($450 million non-put 1-year and $450 million non-put 2-years) with a weighted average rate paid of 4.52%. Proceeds were used to repay repurchase agreements with a weighted average rate paid of 5.25%. In February 2007, the Group continued its strategic repositioning of the repurchase agreements portfolio, restructuring an additional $1 billion of short-term borrowings, with a weighted average rate being paid of approximately 5.35%, into 10-year, non-put 2-year structured repurchased agreements, priced at 95 basis points under 90-day LIBOR (for a current rate of 4.40%). These strategic actions are expected to significantly improve the Group’s net interest income position for 2007. Separately, the Group purchased in February 2007 approximately $900 million in U.S. government agency securities for the AFS portfolio which were funded with a net spread of approximately 150 basis points, locked in for two years on $750 million and one year on $150 million. These securities are intended to replenish scheduled repayments and maturities of securities that occurred in 2006 and are expected to occur in 2007. Most of the actions we took to reposition the AFS portfolio and its funding in December 2006 did not take effect until January 2007, and the actions we took to further restructure our funding in February 2007 did not take effect until March 2007. Thus, we anticipate the full benefits of these changes should be reflected in the June 2007 quarter.

Income Available to Common Share holders

For the quarter ended March 31, 2007, the Group’s income available to common shareholders totaled $9.8 million, compared to $6.9 million in the comparable year-ago quarter. Earnings per common share fully diluted was $0.40 compared to $0.28 in the year-ago quarter.

Return on Average Assets and Common Equity

Return on average common equity (ROE) for the quarter ended March 31, 2007 was 14.54%, which represents an increase of 51.7% from 9.94% for the quarter ended March 31, 2006. Return on average assets (ROA) for the quarter ended March 31, 2007 was 1.01% representing an increase of 44.3% from 0.70% the year ago-quarter.

Net Interest Income after Provision for Loan Losses

Net interest income after provision for loan losses decreased 12.8% for the quarter ended March 31, 2007, totaling $13.3 million, compared with $15.2 million for the same period in the previous year, but significantly improved as compared to the last three quarters due to the initial favorable effects of the above mentioned repositioning. Increases of 9.8% in interest income for the quarter ended March 31, 2007, as compared to same period last year was mainly due to higher loan volume and higher average yields on interest earning assets. These increases were more than offset by higher interest rates and increased volume on borrowings. Net interest margin for the March 31, 2007 quarter was 1.18%, compared to 1.37% for the year-ago period, and 0.72% for the quarter ended December 31, 2006.

Non-Interest Income

Total non-interest income was $15.3 million for the quarter ended March 31, 2007, an increase of 70.3% over the March 31, 2006 quarter. This reflected year-over-year growth in commissions and fees from brokerage and insurance activities, trust activities, securities net gain and derivatives net gain, which more than offset declines in banking service revenues and mortgage banking activities and the absence of investment banking revenues. Commission and fees from brokerage and insurance activities increased 48.9% to $4.8 million, reflecting the success of growth strategies at work in those businesses. Derivatives net gain of $8.4 million, as compared to a small gain in the year-ago quarter, reflected the recognition of the remaining net gain, which had previously been included in other comprehensive income, from the July 2006 unwinding of interest rate swaps that had been used to hedge rising interest costs of short-term repurchase agreements.

-19-

Non-Interest Expenses

Non-interest expenses totaled $15.8 million for the quarter ended March 31, 2007, compared to $14.9 million, in the March 31, 2006 quarter, but a 16.3% decline from $18.9 million when compared to the last quarter of 2006.

Income Tax Expense

The income tax expense was $624,000 for the quarter ended March 31, 2007, compared to $131,000 for the same period ended March 31, 2006. The current income tax provision is lower than the provision based on the statutory tax rate for the Group, which is 39.0%, 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. 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 entity.

Group’s Financial Assets

The Group’s total financial assets include owned assets and the assets managed by the trust division, the securities broker-dealer subsidiary, and the private pension plan administration subsidiary. At March 31,2007, total financial assets reached $8.245 billion compared to $7.366 billion at December 31, 2006, reflecting a 11.9% increase. There was 21.0% increase in assets owned when compared to December 31, 2006. Owned assets are approximately 99% owned by the Group’s banking subsidiary.

The Group’s trust division offers various types of individual retirement accounts (“IRA”) and manages 401(K) and Keogh retirement plans and custodian and corporate trust accounts, while Caribbean Pension Consultants, Inc. (“CPC”) manages the administration of private pension plans. At March 31, 2007, total assets managed by the Group’s trust division and CPC amounted to $1.851 billion, compared to the $1.849 billion reported at December 31, 2006. 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-fee programs. At March 31, 2007, total assets gathered by the securities broker-dealer from its customer investment accounts, decreased to $1.102 billion compared to $1.144 billion as of December 31, 2006.

Interest Earning Assets

The investment portfolio amounted to $3.781 billion as of March 31, 2007, a 26.4% increase compared to $2.992 billion as of December 31, 2006, while the loan portfolio increased 1.8% to $1.234 billion as of March 31, 2007, compared to $1.212 billion as of December 31, 2006. The increase in investment securities relates to the $900 million purchase of U.S. Government agency securities for the AFS portfolio which were intended to replenish scheduled repayments and maturities during 2006 and those expected for 2007, and provide a balance to grow the investment portfolio as a result of our strategy to deal with the current market rates scenario.

Mortgage loan portfolio totaled $971.8 million as of March 31, 2007, a 3.11% increase from $942.9 million at December 31, 2006, and 41.1% increase from $688.6 million a year ago. Mortgage loan production totaled $50.9 million, a 19.4% decrease compared to the same quarter of the prior fiscal year, excluding purchases from third party originators. Mortgage loans purchased amounted to $4.6 million for the quarter ended March 31, 2007, compared to $7.7 million for the March 31, 2006 period.

Interest Bearing Liabilities

Deposits of $1.338 billion at March 31, 2007 increased 8.5% compared to December 31, 2006, due to the continued success of Oriental Money savings account products. Borrowings at March 31, 2007 totaled $3.555 billion, an increase of 27.8% from December 31, 2006, primarily due to the Group’s use of repurchase agreements.

Stockholders’ Equity

Stockholders’ equity as of March 31, 2007, was $338.3 million, compared to $336.4 million as of December 31, 2006, reflecting increased mark-to-market valuations in the available-for-sale portfolio.

The Group continues to be well-capitalized, with ratios significantly above regulatory capital adequacy guidelines. At March 31, 2007, Tier 1 Leverage Capital Ratio was 8.21% (2.1 times the minimum of 4.00%), Tier 1 Risk-Based Capital Ratio was 19.15% (4.8 times the minimum of 4.00%), and Total Risk-Based Capital Ratio was 19.56% (2.4 times the minimum of 8.00%).

-20-

Dividends

During the quarter ended March 31, 2007 and 2006, the Group declared cash dividends of $3.4 million and $1.2 million on its common and preferred stocks, respectively.

TABLE 1 — QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED MARCH 31, 2007 AND 2006
(Dollars in thousands)

	Interest									Average rate									Average balance
							Variance									Variance									Variance
	2007			2006			in %			2007			2006			in BP			2007			2006			in %
A — TAX EQUIVALENT SPREAD
Interest-earning assets	$	61,500		$	55,992			9.8	%		5.46	%		5.04	%		42		$	4,505,506		$	4,441,440			1.4	%
Tax equivalent adjustment		14,661			13,113			11.8	%		1.30	%		1.18	%		12			—			—			0.0	%
Interest-earning assets — tax equivalent		76,161			69,105			10.2	%		6.76	%		6.22	%		54			4,505,506			4,441,440			1.4	%
Interest-bearing liabilities		48,234			40,780			18.3	%		4.57	%		3.96	%		61			4,219,158			4,120,445			2.4	%
Tax equivalent net interest income / spread	$	27,927		$	28,325			-1.4	%		2.19	%		2.26	%		(7	)	$	286,348		$	320,995			-10.8	%
Tax equivalent interest rate margin											2.48	%		2.55	%		(7	)
B — NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	$	39,474		$	39,319			0.4	%		4.88	%		4.56	%		32		$	3,237,580		$	3,450,729			-6.2	%
Investment management fees		(290	)		(319	)		-9.1	%		-0.04	%		-0.04	%		0			—			—			0.0	%
Total investment securities		39,184			39,000			0.5	%		4.84	%		4.52	%		32			3,237,580			3,450,729			-6.2	%
Trading securities		11			(1	)		-1200.0	%		3.90	%		-2.74	%		664			1,127			146			671.9	%
Money market investments		456			740			-38.4	%		5.84	%		4.30	%		154			31,230			68,810			-54.6	%
		39,651			39,739			-0.2	%		4.85	%		4.52	%		33			3,269,937			3,519,685			-7.1	%
Loans:
Mortgage		16,329			11,128			46.7	%		6.75	%		7.02	%		(27	)		967,003			634,100			52.5	%
Commercial		4,601			4,165			10.5	%		7.86	%		6.63	%		123			234,105			251,421			-6.9	%
Consumer		919			960			-4.3	%		10.67	%		10.60	%		7			34,461			36,234			-4.9	%
		21,849			16,253			34.4	%		7.07	%		7.05	%		2			1,235,569			921,755			34.0	%
		61,500			55,992			9.8	%		5.46	%		5.04	%		42			4,505,506			4,441,440			1.4	%
Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—			—			0.0	%		—			—			0			36,709			42,044			-12.7	%
Now accounts		203			218			-6.9	%		1.14	%		1.02	%		12			71,445			85,186			-16.1	%
Savings		2,916			257			1035.1	%		4.09	%		1.20	%		289			285,491			85,991			232.0	%
Certificates of deposit		9,250			10,023			-7.7	%		4.52	%		3.91	%		61			819,262			1,025,795			-20.1	%
		12,370			10,498			17.8	%		4.08	%		3.39	%		69			1,212,907			1,239,016			-2.1	%
Borrowings:
Repurchase agreements		33,095			27,554			20.1	%		4.77	%		4.44	%		33			2,772,978			2,480,470			11.8	%
Interest rate risk management		(773	)		(1,319	)		-41.4	%		-0.11	%		-0.21	%		10			—			—			0.0	%
Financing fees		467			128			264.7	%		0.07	%		0.02	%		5			—			—			0.0	%
Total repurchase agreements		32,789			26,363			24.4	%		4.73	%		4.25	%		48			2,772,978			2,480,470			11.8	%
FHLB advances		1,924			2,348			-18.1	%		4.64	%		3.08	%		156			165,991			305,071			-45.6	%
Subordinated capital notes		758			1,297			-41.6	%		8.40	%		7.19	%		121			36,083			72,166			-50.0	%
Term notes		188			157			20.1	%		5.32	%		4.19	%		113			14,167			15,000			-5.6	%
Other borrowings		205			117			75.1	%		4.81	%		5.37	%		(56	)		17,032			8,722			95.3	%
		35,864			30,282			18.4	%		4.77	%		4.20	%		57			3,006,251			2,881,429			4.3	%
		48,234			40,780			18.3	%		4.57	%		3.96	%		61			4,219,158			4,120,445			2.4	%
Net interest income / spread	$	13,266		$	15,212			-12.8	%		0.89	%		1.08	%		(19	)
Interest rate margin											1.18	%		1.37	%		(19	)
Excess of average interest-earning assets over average interest-bearing liabilities																			$	286,348		$	320,995			-10.8	%
Average interest-earning assets over average interest-bearing liabilities ratio																				106.79	%		107.79	%

C. Changes in net interest income due to:	Volume			Rate			Total
Interest Income:
Investments	$	(2,920	)		2,832			(88	)
Loans		5,549			47			5,596
		2,629			2,879			5,508
Interest Expense:
Deposits	$	(225	)		2,097			1,872
Repurchase agreements		10,766			(4,341	)		6,425
Other borrowings		(1,951	)		1,108			(843	)
		8,590			(1,136	)		7,454
Net Interest Income	$	(5,961	)	$	4,015		$	(1,946	)

-21-

Net interest income is a function of 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 re-price 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 re-pricing of its assets and liabilities to maintain its net interest income at adequate levels.

For the quarter ended March 31, 2007, net interest income amounted to $13.3 million, a decrease of 12.8% from $15.2 million in the same period of the previous year. The decrease for the quarter reflects a 9.8% increase in interest income, due to a $2.6 million positive volume variance and a $2.9 million positive rate variance, more than offset by an increase on 18.3% in interest expense, caused by an increase of $8.6 from borrowings volume and $(1.1) million due to interest rate changes. Interest rate spread dropped 19 basis points, to 0.89% from 1.08% in the March 31, 2006 quarter. This decline is a result of an increase of 42 basis points, in the combined average yield of investments and loans for the quarter and an increase of 61 basis points, caused by an increase in the average cost of funds.

For the quarter ended March 31,2007, the average balance of total interest-earnings assets grew 1.4% to $4.506 billion versus $4.441 billion for the same periods of the previous year. The increase in the average balance reflects decrease of 7.1% in the investment portfolio to $3.270 billion and a growth of 34.0 % in loans, to $1.236 billion for the quarter. Most of the dollar increase in loans came from the residential mortgage loan portfolio average balance, which increased by 52.5% to $967.0 million for the quarter ended March 31, 2007 from $634.1 million for the quarter ended March 31, 2006.

For the quarter ended March 31, 2007, the average yield on interest-earning assets was 5.46%, compared to 5.04% in the comparable year-ago-period. Higher average yields were due to increases of the investment and loan portfolio yields. The investment portfolio yield increased 4.85% in the quarter ended March 31, 2007, versus 4.52% in the corresponding year ago quarter, due to additions of higher yield investments. The increase was due to the AFS repositioning done late last year and during the March 31, 2007 quarter.

For the quarter ended March 31, 2007, interest expense increased 18.3% to $48.2 million from $40.8 million for the year ago quarter, resulting from both higher volume and rate variances.

For the quarter ended March 31, 2007, the cost of deposits increased 69 basis points to 4.08% as compared to 3.39% in the year-ago quarter. The increase reflects higher average rates paid on higher balances, specifically in savings accounts. For the quarter ended March 31, 2007, the cost of borrowings increased 57 basis points to 4.77%, as compared to 4.20% in the year-ago quarter. The increase was mainly the result of higher average rates paid on increased volume of repurchase agreements. Cost of repurchase agreements increased 33 basis points to 4.77% from 4.44% for the quarter ended March 31, 2007, but lower than the 5.41% from the quarter ended December 31, 2006 due to the repurchase agreement repositioning, lowering funding cost. The cost of FHLB advances increased 156 basis points to 4.64% versus 3.08% for the quarter ended March 31, 2006.

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TABLE 2 — NON-INTEREST INCOME SUMMARY:

FOR THE QUARTERS ENDED MARCH 31, 2007 AND 2006
     (Dollars in thousands)

	Quarter ended March 31,
	2007			2006		Variance %
Mortgage banking activities	$	62		$	436		-85.8	%
Commissions and fees from brokerage and insurance activities		4,843			3,252		48.9	%
Investment banking revenues		—			1,709		-100.0	%
Non-banking service revenues		4,905			5,397		-9.1	%
Fees on deposit accounts		1,225			1,418		-13.6	%
Bank service charges and commissions		594			619		-4.0	%
Other operating revenues		55			139		-60.4	%
Bank service revenues		1,874			2,176		-13.9	%
Securities available for sale gains		358			19		1784.2	%
Trading securities net gain		—			28		-100.0	%
Derivatives net gain		8,418			882		854.4	%
Securities, derivatives and trading activities		8,776			929		844.7	%
Income (loss) from investment in limited liability partnership		(891	)		304		-393.1	%
Other income		587			147		299.3	%
Other non-interest income (loss)		(304	)		451		-167.4	%
Total non-interest income	$	15,251		$	8,953		70.4	%

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 securities broker-dealer subsidiary, the level of investment and mortgage banking activities, and the fees generated from loans, deposit accounts, and insurance.

Non-interest income totaled $15.3 million in the quarter ended March 31, 2007, an increase of 70.4% when compared to $9.0 million in the same period of the previous year. Improvement reflects increases in commissions and fees from brokerage, trust, insurance, derivatives net gain, and securities net gain, partially offset by less mortgage banking activities for the quarter ended March 31, 2007.

Non-banking service revenues, generated from trust, mortgage banking, investment banking, brokerage, and insurance activities, is one of the principal components of non-interest income. For the quarter ended March 31, 2007, these revenues decreased 9.1% to $4.9 million from $5.4 million for the year-ago period. Mortgage banking activities decreased 85.8% to $62,000 from $436,000 in the year-ago quarter. Commissions and fees from brokerage and insurance activities increased 48.9% to $4.8 million from $3.3 million in the year-ago quarter. Growth reflected the general improvement in the equity markets. Investment banking revenues decreased by $1.7 million from the year-ago quarter.

Banking service revenue, another major component of non-interest income, consists primarily of fees generated by deposit accounts, electronic banking services, and bank service commissions. For the quarter ended March 31, 2007, these revenues decreased 13.9% to $1.9 million compared to the year- ago quarter, reflecting reduced consumer banking activity. Fees on deposit accounts decreased 13.6% to $1.2 million from $1.4 million in the year-ago quarter. Bank service charges, commissions decreased 4.0% to $594,000 from $619,000 in the year-ago quarter, reflecting lower transactional volume in the Bank’s debit and credit cards.

For the quarter ended March 31, 2007 gains from securities, derivatives and trading activities was $8.8 million compared to $929,000 for the year-ago quarter. The Group previously announced a net gain of approximately $11 million from the July 2006 unwinding of interest rate swaps that had been used to hedge rising interest costs of short-term repurchase agreements. This gain was included in other comprehensive income, and was being recognized into earnings as a reduction of interest expense on remaining short-term borrowings. The recent repurchase agreements restructuring, however, significantly reduced the Group’s short-term borrowings during the March 2007 quarter, eliminating the forecasted transactions that the swaps were intended to hedge. As a result, Oriental recognized the remaining balance of $8.2 million (equal to $0.33 per diluted share) of the gain as non-interest income in the quarter ended March 31, 2007.

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TABLE 3 — NON-INTEREST EXPENSES SUMMARY
FOR THE QUARTERS ENDED MARCH 31, 2007 AND 2006
     (Dollars in thousands)

	Quarter Ended March 31,
	2007			2006			Variance %
Compensation and employee benefits	$	6,745		$	6,173			9.3	%
Occupancy and equipment		2,994			2,889			3.6	%
Advertising and business promotion		793			937			-15.4	%
Director and investors relations		531			144			311.6	%
Professional and service fees		1,538			1,624			-5.3	%
Communications		338			447			-24.4	%
Loan servicing expenses		523			455			14.9	%
Taxes, other than payroll and income taxes		448			600			-25.3	%
Electronic banking charges		458			468			-2.1	%
Printing, postage, stationery and supplies		202			186			8.6	%
Insurance		216			213			1.4	%
Other operating expenses		1,041			747			36.6	%
Total non-interest expenses	$	15,827		$	14,883			6.3	%
Relevant ratios and data:
Compensation and benefits to non-interest expenses		42.6	%		41.5	%
Compensation to total assets		0.51	%		0.54	%
Average compensation per employee (annualized)	$	50.1		$	46.8
Average number of employees		539			528
Assets owned per employee	$	9,818		$	8,644

Non-interest expenses for the quarter ended March 31, 2007, were $15.8 million, compared to $14.9 million in the year-ago quarter, with an efficiency ratio of 78.95% compared to 65.32% in the quarter ended March 31, 2006.The efficiency ratio measures how much of a company’s revenue is used to pay operating expenses. The Group computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and recurring non-interest income, but excluding gains on sale of investment securities, derivatives gains or losses and other income that may be considered volatile in nature. Management believes that the exclusion of those items would permit greater comparability for analytical purposes.

The Group has been successful in limiting expense growth to those areas that directly contribute to increase efficiency, service quality, and profitability. Non-interest expenses increased 6.3% compared to the year-ago quarter ended March 31, 2006, but declined 16.3% from $18.9 million for the quarter ended December 31, 2006.

Compensation and employee benefits, the largest non-interest expense category accounted for 42.6% of the total non-interest expense, for the quarter ended March 31, 2007. Total compensation and employee benefits amounted to $6.7 million for the quarter ended March 31, 2007, compared to $6.2 million in the comparable year-ago period.

        .

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TABLE 4 — ALLOWANCE FOR LOAN LOSSES SUMMARY
FOR THE QUARTERS ENDED MARCH 31, 2007 AND 2006
(Dollars in thousands)

	Quarter Ended March 31,						Change in
	2007			2006			%
Balance at beginning of period	$	8,016		$	6,630			20.9	%
Provision for loan losses		1,075			1,101			-2.4	%
Net credit losses — see Table 5		(1,045	)		(571	)		83.0	%
Balance at end of period	$	8,046		$	7,160			12.4	%
Selected Data and Ratios:
Outstanding gross loans at March 31,	$	1,241,941		$	948,400			31.0	%
Recoveries to net charge-offs		10.45	%		15.91	%		-34.3	%
Allowance coverage ratio
Total loans		0.65	%		0.75	%		13.3	%
Non-performing loans		18.34	%		23.91	%		-23.3	%
Non-mortgage non-performing loans		212.86	%		140.17	%		51.9	%

TABLE 5 — NET CREDIT LOSSES STATISTICS
   (Dollars in thousands)

	Quarter Ended March 31,						Change in
	2007			2006			%
Mortgage
Charge-offs	$	(546	)	$	(199	)		174.4	%
Recoveries		—			—			0.0	%
		(546	)		(199	)		175.0	%
Commercial
Charge-offs		—			(25	)		-100.0	%
Recoveries		10			7			42.9	%
		10			(18	)		155.6	%
Consumer
Charge-offs		(621	)		(455	)		36.5	%
Recoveries		112			101			10.9	%
		(509	)		(354	)		43.8	%
Net credit losses
Total charge-offs		(1,167	)		(679	)		71.9	%
Total recoveries		122			108			13.0	%
	$	(1,045	)	$	(571	)		83.1	%
Net credit losses (recoveries) to average loans outstanding (1):
Mortgage		0.23	%		0.13	%
Commercial		(0.02	%)		0.03	%
Consumer		5.91	%		3.91	%
Total		0.34	%		0.25	%
Average loans:
Mortgage	$	967,003		$	634,100			52.5	%
Commercial		234,105			251,421			-6.9	%
Consumer		34,461			36,234			-4.9	%
Total	$	1,235,569		$	921,755			34.0	%

(1) Annualized ratios

-25-

TABLE 6 — ALLOWANCE FOR LOSSES BREAKDOWN

(Dollars in thousands)

	March 31,			December 31,			Change in			March 31,
	2007			2006			%			2006
Allowance for loan losses breakdown:
Mortgage	$	4,139		$	3,721			11.2	%	$	3,312
Commercial		1,931			1,831			5.5	%		1,633
Consumer		1,877			1,944			-3.4	%		1,776
Unallocated allowance		99			520			-81.0	%		439
	$	8,046		$	8,016			0.4	%	$	7,160
Allowance composition:
Mortgage		51.4	%		46.4	%					46.3	%
Commercial		24.0	%		22.8	%					22.8	%
Consumer		23.3	%		24.3	%					24.8	%
Unallocated allowance		1.2	%		6.5	%					6.1	%
		100.0	%		100.0	%					100.0	%

The provision for loan losses for the quarter ended March 31, 2007, totaled $1,075,000, a 2.3% decrease from the $1,101,000 reported for the same quarter of the previous year. Based on an analysis of the credit quality and composition of its loan portfolio, the Group determined that the provision for the first quarter of the current year was adequate in order to maintain the allowance for loan losses at an appropriate level.

Net credit losses for the quarter increased 83.0%, from $571,000 (0.25% of average loans outstanding) in the quarter ended March 31, 2006, to $1,045,000 (0.34%) in the quarter ended March 31, 2007, but remained similar to the $1.1 million (0.36%) for the quarter ended December 31, 2006.

The increase in the quarter was primarily due to higher net credit losses for consumer loans and mortgage loans. For the first quarter of the current year, the net credit losses average ratio was 0.34% compared to 0.25% for the same quarter of the prior fiscal year. Non-performing loans of $43.9 million as of March 31, 2007 were 46.5% higher than the $29.9 million as of March 31, 2006 (Table 9). The increase in non-performing loans reflects overall residential mortgage loan growth and the effects of the current economic recession in Puerto Rico.

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 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.

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.

-26-

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, 2007, the total investment in impaired loans was $1.7 million, compared to $2.0 million at December 31, 2006. Impaired loans are measured based on the fair value of collateral. The Group determined that no specific impairment allowance was required for such loans.

The Group, using a 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 necessary, 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 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 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.

-27-

FINANCIAL CONDITION

TABLE 7 — ASSETS SUMMARY AND COMPOSITION
(Dollars in thousands)

	March 31,			December 31,			Variance			March 31,
	2007			2006			%			2006
Investments:
Mortgage-backed securities	$	1,892,473		$	1,955,566			-3.2	%	$	1,966,339
U.S. Government and agency obligations		1,733,526			863,019			100.9	%		1,249,631
P.R. Government and agency obligations		100,801			100,729			0.1	%		90,035
Other investment securities		34,889			54,315			-35.8	%		89,338
Short-term investments		5,000			5,000			0.0	%		70,288
FHLB stock		14,197			13,607			4.3	%		19,403
		3,780,886			2,992,236			26.4	%		3,485,034
Loans:
Mortgage		929,578			932,309			-0.3	%		675,553
Commercial, mainly secured by real estate		236,739			241,702			-2.1	%		221,399
Consumer		33,419			35,772			-6.6	%		38,450
Loans receivable		1,199,736			1,209,783			-0.8	%		935,402
Allowance for loan losses		(8,046	)		(8,016	)		0.4	%		(7,160	)
Loans receivable, net		1,191,690			1,201,767			-0.8	%		928,242
Mortgage loans held for sale		42,204			10,603			298.0	%		12,998
Total loans receivable, net		1,233,894			1,212,370			1.8	%		941,240
Securities sold but not yet delivered		74,289			6,430			1055.3	%		1,192
Total securities and loans		5,089,069			4,211,036			20.9	%		4,427,466
Other assets:
Cash and due from banks		64,413			34,070			89.1	%		13,227
Accrued interest receivable		30,482			27,940			9.1	%		29,539
Premises and equipment, net		19,853			20,153			-1.5	%		15,307
Deferred tax asset, net		13,562			14,150			-4.2	%		13,845
Foreclosed real estate		5,320			4,864			9.4	%		4,312
Other assets		69,354			61,477			12.8	%		60,402
Total other assets		202,984			162,654			24.8	%		136,632
Total assets	$	5,292,053		$	4,373,690			21.0	%	$	4,564,098
Investment portfolio composition:
Mortgage-backed securities		50.1	%		65.4	%					56.4	%
U.S. Government and agency obligations		45.8	%		28.8	%					35.9	%
P.R. Government and agency obligations		2.7	%		3.4	%					2.6	%
FHLB stock, short term investments and other investment securities		1.4	%		2.4	%					5.1	%
		100.0	%		100.0	%					100.0	%
Loan portfolio composition:
Mortgage		77.5	%		77.1	%					72.6	%
Commercial, mainly secured by real estate		19.7	%		20.0	%					23.3	%
Consumer		2.8	%		3.0	%					4.1	%
		100.0	%		100.0	%					100.0	%

At March 31, 2007, the Group’s total assets amounted to $5.292 billion, an increase of 21.0%, when compared to $4.374 billion at December 31, 2006. At March 31, 2007, interest-earning assets were $5.089 billion, a 20.9% increase compared to $4.211 billion at December 31, 2006.

Investments principally consist of money market instruments, U.S. government bonds, mortgage-backed securities, collateralized mortgage obligations, and Puerto Rico government bonds. At March 31, 2007, the investment portfolio increased 26.4% to $3.781 billion, from $2.992 billion as of December 31, 2006. The increase reflects securities purchased during the quarter amounting to approximately $900 million.

At March 31, 2007, the Group’s loan portfolio, increased by 1.77% to $1.234 billion when compared to $1.212 billion at December 31, 2006. Loan production and purchases for the quarter ended March 31, 2007, declined 22.0% to $72.3 million, compared to the quarter ended March 31, 2006.

-28-

	March 31,			December 31,			Change in			March 31,
	2007			2006			%			2006
Non-performing assets:
Non- Accruing Loans	$	17,106		$	17,845			-4.1	%	$	17,674
Accruing Loans		26,765			20,453			30.9	%		12,267
Total Non-performing loans		43,871			38,298			14.6	%		29,941
Foreclosed real estate		5,320			4,864			9.4	%		4,312
	$	49,191		$	43,162			14.0	%	$	34,253
Non-performing assets to total assets		0.93	%		0.99	%					0.75	%

	March 31,			December 31,			Change in			March 31,
	2007			2006			%			2006
Non-performing loans:
Mortgage	$	40,091		$	34,404			16.5	%	$	24,833
Commercial, mainly secured by real estate		3,115			3,167			-1.6	%		4,824
Consumer		665			727			-8.5	%		284
Total	$	43,871		$	38,298			14.6	%	$	29,941
Non-performing loans composition:
Mortgage		91.4	%		89.8	%					82.9	%
Commercial, mainly secured by real estate		7.1	%		8.3	%					16.1	%
Consumer		1.5	%		1.0	%					0.9	%
Total		100.00	%		100.00	%					100.00	%
Non-performing loans to:
Total loans		3.53	%		3.14	%		12.42	%		3.16	%
Total assets		0.83	%		0.88	%		-5.68	%		0.66	%
Total capital		12.97	%		11.38	%		13.97	%		8.71	%

At March 31, 2007, the Group’s non-performing assets totaled $49.2 million (0.93% of total assets) versus $43.2 million (0.99% of total assets) at December 31, 2006. Foreclosed real estate properties increased by 9.4% to $5.3 million, when compared to $4.9 million reported as of December 31, 2006.

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At March 31, 2007, the allowance for loan losses to non-performing loans coverage ratio was 18.34%. Detailed information concerning each of the items that comprise non-performing assets follows:

• Mortgage loans are 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, 2007, the Group’s non-performing mortgage loans totaled $40.1 million (91.4% of the Group’s non-performing loans), a 16.5% increase from the $34.4 million (89.8% of the Group’s non-performing loans) reported at December 31, 2006. 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 on this portfolio.

• Commercial loans are 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, 2007, the Group’s non-performing commercial loans amounted to $3.1 million (7.1% of the Group’s non-performing loans), a 1.6% decrease from $3.2 million reported at December 31, 2006 (8.3% of the Group’s non-performing loans). Most of this portfolio is collateralized by real estate and no significant losses are expected.

• Consumer loans are 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, 2007, the Group’s non-performing consumer loans amounted to $665,000 (1.5% of the Group’s total non-performing loans), which decreased from the $727,000 reported at December 31, 2006 (1.9% 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.

At March 31, 2007, the Group’s total liabilities were $4.954 billion, 22.7% higher than the $4.037 billion reported at December 31, 2006. Deposits and borrowings, the Group’s funding sources, amounted to $4.892 billion at March 31, 2007,an increase of 21.9% when compared to $4.015 billion reported at December 31, 2006. At March 31, 2007, borrowings represented 72.6% of interest-bearing liabilities and deposits represented 27.4%, versus 69.4% and 30.6%, respectively, at December 31, 2006.

Borrowings 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, 2007, borrowings amounted to $3.555 billion, 27.8% greater than the $2.782 billion at December 31, 2006, mainly due to an increase of 31.0% in repurchase agreements, reflecting the funding needed to finance the Group’s investment and loan portfolio.

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 FHLB stock owned by the Group, as well as by certain of the Group’s mortgages and investment securities. FHLB advances totaled $195.0 million at March 31, 2007, and $181.9 million at December 31, 2006. The Group has the capacity to expand FHLB funding up to a maximum of $467.2 million based on the assets pledged by the Group on the FHLB.

At March 31, 2007, deposits reached $1.338 billion, up 8.5%, compared to the $1.233 billion reported as of December 31, 2006. Deposits reflected a quarterly increase of 8.6% in certificates of deposits, to $901.2 million primarily due to an increase in brokered deposits. Savings accounts increased 15.5% to $307.3 million as of March 31, 2007 from $266.2 million as of December 31, 2006.

-30-

TABLE 10 — LIABILITIES SUMMARY AND COMPOSITION
(Dollars in thousands)

	March 31,			December 31,			Variance			March 31,
	2007			2006			%			2006
Deposits:
Non-interest bearing deposits	$	52,265		$	59,603			-12.3	%	$	58,037
Now accounts		72,345			72,810			-0.6	%		86,208
Savings accounts		307,319			266,181			15.5	%		107,867
Certificates of deposit		901,026			829,867			8.6	%		1,014,851
		1,332,955			1,228,461			8.5	%		1,266,963
Accrued interest payable		4,630			4,527			2.3	%		6,578
		1,337,585			1,232,988			8.5	%		1,273,541
Borrowings:
Repurchase agreements		3,321,105			2,535,923			31.0	%		2,513,986
Advances from FHLB		195,000			181,900			7.2	%		300,000
Subordinated capital notes		36,083			36,083			0.0	%		72,166
Term notes		—			15,000			-100.0	%		15,000
Federal funds purchased and other short term borrowings		3,139			13,568			-76.9	%		13,811
		3,555,327			2,782,474			27.8	%		2,914,963
Total deposits and borrowings		4,892,912			4,015,462			21.9	%		4,188,504
Securities purchased but not yet received		40,067			—			0.0	%		1,233
Other liabilities		20,752			21,802			-4.8	%		30,751
Total liabilities	$	4,953,731		$	4,037,264			22.7	%	$	4,220,488
Deposits portfolio composition percentages:
Non-interest bearing deposits		3.9	%		4.9	%					4.5	%
Now accounts		5.4	%		5.9	%					6.8	%
Savings accounts		23.1	%		21.7	%					8.5	%
Certificates of deposit		67.6	%		67.6	%					80.2	%
		100.0	%		100.0	%					100.0	%
Borrowings portfolio composition percentages:
Repurchase agreements		93.4	%		85.7	%					86.2	%
Advances from FHLB		5.5	%		11.1	%					10.3	%
Subordinated capital notes		1.0	%		2.5	%					2.5	%
Term notes		0.0	%		0.5	%					0.5	%
Federal funds purchased and other short term borrowings		0.1	%		0.2	%					0.5	%
		100.0	%		100.0	%					100.0	%
Repurchase agreements
Amount outstanding at quarter-end	$	3,321,105		$	2,535,923					$	2,513,986
Daily average outstanding balance	$	2,763,159		$	2,627,323					$	2,480,470
Maximum outstanding balance at any month-end	$	3,321,105		$	2,923,796					$	2,513,986

Stockholders’ Equity

Stockholders’ equity as of March 31, 2007 was $338.3 million, or $11.04 per share, compared to $336.4 million as of December 31, 2006, or $10.98 per share.

On August 30, 2005, the Board of Directors of the Group approved a new stock repurchase program pursuant to which the Group is authorized to purchase in the open market up to $12.1 million of its outstanding shares of common stock. The program superseded the program established in March 2003. On June 20, 2006, the Board of Directors approved an increase of $3.0 million to the initial amount, for the repurchase of up to $15.1 million. The shares of common stock so repurchased are to be held by the Group as treasury shares. No shares were repurchased during the quarter ended March 31, 2007.

The Group’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol OFG. At March 31,2007, the Group’s market capitalization for its outstanding common stock was $288.1 million ($11.78 per share).

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Under the regulatory framework for prompt corrective action, banks that meet or exceed a Tier I capital 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.

The following are the consolidated capital ratios of the Group at March 31, 2007 and December 31, 2006:

TABLE 11 — CAPITAL, DIVIDENDS AND STOCK DATA
(In thousands, except for per share data)

	March 31,			December 31,			Variance			March 31,
	2007			2006			%			2006
Capital data:
Stockholders’ equity	$	338,322		$	336,426			0.6	%	$	343,610
Regulatory Capital Ratios data:
Leverage Capital Ratio		8.21	%		8.42	%		-2.5	%		9.67	%
Minimum Leverage Capital Ratio Required		4.00	%		4.00	%					4.00	%
Actual Tier 1 Capital	$	379,926		$	372,558			2.0	%	$	439,461
Minimum Tier 1 Capital Required	$	185,066		$	176,987			4.6	%	$	181,856
Tier 1 Risk-Based Capital Ratio		19.15	%		21.57	%		-11.2	%		33.88	%
Minimum Tier 1 Risk-Based Capital Ratio Required		4.00	%		4.00	%					4.00	%
Actual Tier 1 Risk-Based Capital	$	379,926		$	372,558			2.0	%	$	439,461
Minimum Tier 1 Risk-Based Capital Required	$	79,357		$	67,830			17.0	%	$	51,887
Total Risk-Based Capital Ratio		19.56	%		22.04	%		-11.3	%		34.44	%
Minimum Total Risk-Based Capital Ratio Required		8.00	%		8.00	%					8.00	%
Actual Total Risk-Based Capital	$	387,972		$	380,574			1.9	%	$	446,788
Minimum Total Risk-Based Capital Required	$	158,713		$	135,677			17.0	%	$	103,774
Stock data:
Outstanding common shares, net of treasury		24,484			24,453			0.0	%		24,620
Book value	$	11.04		$	10.98			0.6	%	$	11.19
Market price at end of period	$	11.78		$	12.95			-9.0	%	$	14.45
Market capitalization	$	288,056		$	316,671			-9.0	%	$	355,759
	March 31,			March 31,			Variance
	2007			2006			%
Common dividend data:
Cash dividends declared	$	3,427		$	3,448			-0.6	%
Cash dividends declared per share	$	0.14		$	0.14			0.0	%
Payout ratio		35.00	%		50.34	%		-30.5	%
Dividend yield		4.75	%		3.88	%		22.4	%

As of March 31, 2007, December 31, 2006 and March 31, 2006, the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, and institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios set forth in the following table:

	March 31,			December 31,			Variance
	2007			2006			%
BANK RATIOS
Regulatory Capital Ratios data:
Total Tier 1 Capital to Total Assets		6.51	%		6.43	%		1.2	%
Actual Tier 1 Capital	$	268,133		$	285,323			-6.0	%
Minimum Capital Requirement (4%)	$	182,908		$	177,495			3.0	%
Minimum to be well capitalized (5%)	$	228,635		$	222,098			2.9	%
Tier 1 Capital to Risk-Weighted Average		15.31	%		17.01	%		-10.0	%
Actual Tier 1 Risk-Based Capital	$	297,695		$	285,323			4.3	%
Minimum Capital Requirement (4%)	$	77,768		$	67,095			15.9	%
Minimum to be will capitalized (6%)	$	116,652		$	100,543			16.0	%
Total Capital to Risk-Weighted Assets		15.73	%		17.49	%		-10.1	%
Actual Total Risk-Based Capital	$	305,741		$	293,339			4.2	%
Minimum Capital Requirement (8%)	$	155,537		$	134,174			15.9	%
Minimum to be well capitalized (10%)	$	194,421		$	167,651			16.0	%

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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 ALCO, which is composed of members of the Group’s senior management and board of directors. 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. In addition, ALCO oversees the Group’s sources, uses and pricing of funds.

Interest rate risk can be defined as the exposure of the Group’s operating results or financial position to adverse movements in market interest rates, which mainly 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 used 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 controlled the credit risk of its derivative financial instrument agreements through credit approvals, limits, monitoring procedures and collateral, when considered necessary. As discussed in Item 2 under Overview of financial performance during the December 2006 and March 2007 quarters, the Group restructured a significant part of its repurchase agreement portfolio into longer term structured repurchased agreements, some fixed and others variable, reducing significantly it's sensitivity to short-term interest rate repricing.

The Group generally used 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 paid a fixed monthly or quarterly cost and received 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 unaudited consolidated financial statements for more information related to the Group’s swaps, including derivatives 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.

During the quarter ended March 31, 2007 and 2006, gains of $8.4 million and $882,000, respectively, were recognized as earnings and reflected as “Derivatives” in the consolidated statements of income. For the quarter ended March 31,2006 unrealized gains of $9.9 million on derivatives designated as cash flow hedges were included in other comprehensive income. The Group previously announced a net gain of approximately $11 million from the July 2006 unwinding of interest rate swaps that had been used to hedge rising interest costs of short-term repurchase agreements. This gain was included in other comprehensive income, and was being recognized into earnings as a reduction of interest expense on remaining short-term borrowings. The recent repurchase agreement restructuring, however, significantly reduced the Group’s short-term borrowings during the December 2006 and March 2007 quarters, eliminating the forecasted transactions the swaps were intended to hedge. As a result, Oriental recognized the remaining balance of $8.2 million (equal to $0.33 per diluted share) of the gain as non-interest income in the quarter ended March 31, 2007.

At March 31, 2007 and December 31, 2006, the fair value of derivatives was recognized as either assets or liabilities in the unaudited consolidated statements of financial condition are as follows: the purchased options used to manage the exposure to the stock market on stock indexed deposits represented an asset of $39.7 million and $34.2 million, respectively, are presented as other assets and the options sold to customers embedded in the certificates of deposit represented a liability are recorded as deposits amounting $37.7 million and $32.2 million, respectively.

The Group is exposed to a reduction in the level of net interest income (“NII”) in a rising interest rate environment. NII will fluctuate with changes in the levels of interest rates, affecting interest-sensitive assets and liabilities. The hypothetical rate scenarios as of March 31, 2007 and December 31, 2006 consider gradual and parallel changes of plus and minus 200 basis points during a forecasted twelve-month period. If (1) the rates in effect at year-end remain constant, or increase or decrease on instantaneous and sustained changes in the amounts presented for each forecasted period, and (2) all scheduled repricing, reinvestments and estimated prepayments, and reissuances are constant, or increase or decrease accordingly; NII will fluctuate as shown on the following table:

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(Dollars in thousands)
Change in	Expected		Amount			Percent
Interest rate	NII		Change			Change
March 31, 2007:
Base Scenario
Flat	$	70,720	$	—			0.00	%
+ 200 Basis points	$	65,242	$	(4,959	)		-7.06	%
- 200 Basis points	$	75,858	$	5,657			8.06	%
December 31, 2006:
Base Scenario
Flat	$	47,352	$	—			0.00	%
+ 200 Basis points	$	30,999	$	(16,354	)		-34.54	%
- 100 Basis points	$	66,541	$	19,189			40.52	%

Liquidity Risk Management

The objective of the Group’s asset and 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 balance sheet 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, 2007, the Group had approximately $169.8 million in investments available to cover liquidity needs. Additional asset-driven liquidity is provided by securitizable loan assets. These sources, in addition to the Group’s 8.21% average equity capital base, provide a stable funding base.

In addition to core deposit funding, the Bank 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 counterparty and depend on the Bank’s financial condition and delivery of acceptable collateral securities. The Bank 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, through its FHLB member subsidiary, the Bank. This funding source requires the Bank to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At March 31, 2007, the Group has an additional borrowing capacity with the FHLB of $467.2 million.

In addition, the Bank utilizes the National Certificate of Deposit (“CD”) Market as a source of cost effective 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 or 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, 2007, the Bank had line of credit agreement with other financial institutions permitting the Bank to borrow a maximum aggregate amount of $15.0 million (no borrowings were made during the three-month period ended March 31, 2007 under such lines of credit). The agreements provide for unsecured advances to be used by the Group on an overnight basis. Interest rates are negotiated at the time of the transaction. The credit agreements are renewable annually.

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

The principal source of funds for the Group is dividends from the Bank. The ability of the Bank to pay dividends is restricted by regulatory authorities (see “Dividend Restrictions” under “Regulation and Supervision” in Item 1 in the Group's annual report on form 10-K for the fiscal year December 31, 2006). Primarily, through such dividends the Group meets its cash obligations and pays dividends to its common and preferred stockholders. 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 effect on the Group’s results of operations and financial condition.

Puerto Rico international banking entities, or IBEs, are currently exempt from taxation under Puerto Rico law. The IBE Act, as amended, imposes income taxes at normal statutory rates on each IBE that operates as a unit of a bank if the IBE’s net income exceeds 20 percent of the bank’s net income in taxable years 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. In November 2003, the Group organized a new 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 IBE subsidiary.

On August 1, 2005 the Puerto Rico Legislature approved Act No. 41, known as the “Act for the Educational Future of the Puerto Rican Children.” This law imposes an additional tax of 2.5% on taxable net income. This law is applicable to all corporations and partnerships with a taxable net income over $20,000, according to part (a) of Section 1015 of the Puerto Rico Internal Revenue Code of 1994, as amended. The law is effective for tax years beginning after December 31, 2004 and ending on or before December 31, 2006. Although the effectiveness of this law was subject to the final approval of the Legislature’s Joint Resolution No. 445, concerning the Commonwealth’s General Budget of the 2005-2006 fiscal year, which Joint Resolution was vetoed by the Puerto Rico Governor, the Puerto Rico Treasury Department has taken the position that the law is in effect.

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On May 13, 2006, the Puerto Rico Governor signed into law Act No. 89, which amends the Puerto Rico Internal Revenue Code of 1994, as amended, to impose an additional tax of 2% on the taxable income exceeding $20,000 of banking corporations covered under the Puerto Rico Banking Act of 1933, as amended. The law is effective for taxable years beginning after December 31, 2005 and ending on or before December 31, 2006. This additional tax imposition did not have a material effect on the Group’s consolidated operational results due to the tax exempt composition of the Group’s investments.

On May 16, 2006, the Puerto Rico Governor also signed into law Act No. 98 to impose a one-time extraordinary tax on the net available income of non-exempt corporations and partnerships for the last taxable year ended on or before December 31, 2005. This extraordinary tax constitutes, in effect, a prepayment, as the taxpayer will be allowed to credit the amount so paid against its Puerto Rico income tax liability for taxable years beginning after December 31, 2005; any “unused credit” can be claimed by the taxpayer in four equal installments, beginning on the taxable year following that in which the extraordinary tax is paid. This additional tax imposition did not have a material effect on the Group’s consolidated operational results due to the tax exempt composition of the Group’s investments.

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 were no changes in the Group’s internal control over financial reporting (as such term is defined on rules 13-a-15(e) and 15d-15(e) under the Exchange Act) during the quarter ended March 31, 2007.

PART — II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

On August 14, 1998, as a result of a review of its accounts in connection with the admission by a former Group officer of having embezzled funds and manipulated bank accounts and records, the Group became aware of certain irregularities. The Group notified the appropriate regulatory authorities and commenced an intensive investigation with the assistance of forensic accountants, fraud experts, and legal counsel. The investigation determined losses of $9.6 million, resulting from dishonest and fraudulent acts and omissions involving several former Group employees. These losses were submitted to the Group’s fidelity insurance policy (the “Policy”) issued by Federal Insurance Company, Inc. (“FIC”). In the opinion of the Group’s management, its legal counsel and experts, the losses determined by the investigation were covered by the Policy. However, FIC denied all claims for such losses. On August 11, 2000, the Group filed a lawsuit in the United States District Court for the District of Puerto Rico against FIC, a stock insurance corporation organized under the laws of the State of Indiana, for breach of insurance contract, breach of covenant of good faith and fair dealing and damages, seeking payment of the Group’s $9.6 million insurance claim loss and the payment of consequential damages of no less than $13.0 million resulting from FIC capricious, arbitrary fraudulent and without cause denial of the Group’s claim. The losses resulting from such dishonest and fraudulent acts and omissions were expensed in prior years. On October 3, 2005, a jury rendered a verdict of $7.5 million in favor of the Group and against FIC, the defendant. The jury granted the Group $453,219 for fraud and loss documentation in connection with its Accounts Receivable Returned Checks Account. However, the jury could not reach a decision on the Group’s claim for $3.4 million in connection with fraud in its Cash Accounts, thus forcing a new trial on this issue. The jury denied the Group’s claim for $5.6 million in connection with fraud in the Mortgage Loans Account, but the jury determined that FIC had acted in bad faith and with malice. It, therefore, awarded the Group $7.1 million in consequential damages. The court decided not to enter a final judgment for the aforementioned awards until a new trial on the fraud in the Cash Accounts claim is held. After a final judgment is entered, the parties would be entitled to exhaust their post-judgment and appellate rights. The Group has not recognized any income on this claim since the appellate rights have

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not been exhausted and the amount to be collected has not been determined. The Group expects to request and recover prejudgment interest, costs, fees and expenses related to its prosecution of this case. However, no specific sum can be anticipated as they are subject to the discretion of the court. The court has scheduled this new trial for June 25, 2007.

In addition, 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.

Item 1A. RISK FACTORS

There have been no material changes to the risk factors as previously disclosed under Item 1A to Part 1 of the Group’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

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

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.

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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 10, 2007
	José Rafael Fernández
	President and Chief Executive Officer
By:	/s/ Norberto González	Dated: May 10, 2007
	Norberto González
	Executive Vice President and Chief Financial Officer

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