OFG Bancorp (OFG) 10-K 2007 FY Annual report

EXHIBIT 13.0

ORIENTAL FINANCIAL GROUP INC.

FORM-10K

FINANCIAL DATA INDEX

FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms	F-1 to F-2
Management’s Report on Internal Control Over Financial Reporting	F-3
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	F-4
Consolidated Statements of Financial Condition as of December 31, 2007 and 2006	F-5
Consolidated Statements of Operations for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and the fiscal year ended June 30, 2005	F-6
Consolidated Statements of Changes in Stockholders’ Equity and of Comprehensive Income for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and the fiscal year ended June 30, 2005	F-7 to F-8
Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and the fiscal year ended June 30, 2005	F-9 to F-10
Notes to the Consolidated Financial Statements	F-11 to F-56
FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION
Selected Financial Data	F-57 to F-58
Management’s Discussion and Analysis of Financial Condition and Results of Operations	F-59 to F-91
Risk Management	F-91 to F-95
Quarterly Financial Data	F-96 to F-99
Critical Accounting Policies	F-100 to F-102

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Oriental Financial Group Inc:

We have audited the accompanying consolidated statements of financial condition of Oriental Financial Group Inc. and subsidiaries (the “Group”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows for the years ended December 31, 2007 and 2006 and the six-month period ended December 31, 2005. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Oriental Financial Group Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years ended December 31, 2007 and 2006 and the six month period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, the Group changed its method of evaluating prior year misstatements and, effective July 1, 2005, also changed its method of accounting for share-based payment in accordance with Statement of Financial Accounting Standards No. 123 (Revised 2004),Shared Based Payment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Oriental Financial Group Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/  KPMG LLP

San Juan, Puerto Rico

March 13, 2008

Stamp No. 2222084 of the Puerto Rico

Society of Certified Public Accountants

was affixed to the record copy of this report.

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Oriental Financial Group Inc.

San Juan, Puerto Rico

We have audited the accompanying consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows of Oriental Financial Group Inc. and its subsidiaries (the “Group”) for the year ended June 30, 2005. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and the cash flows of Oriental Financial Group Inc. and its subsidiaries for the year ended June 30, 2005 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 20, the accompanying financial statements for the year ended June 30, 2005 have been restated.

/s/  DELOITTE & TOUCHE LLP

San Juan, Puerto Rico

September 9, 2005 (June 9, 2006 as

to the effects of the restatement

discussed in Note 20)

Stamp No. 2293190

affixed to original.

F-2

ORIENTAL FINANCIAL GROUP INC.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and stockholders of Oriental Financial Group Inc.:

The management of Oriental Financial Group Inc. (the “Group”) is responsible for establishing and maintaining effective internal control over financial reporting, as defined inRules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, and for the assessment of internal control over financial reporting. The Group’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The Group’s internal control over financial reporting includes those policies and procedures that:

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Group;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Group are being made only in accordance with authorization of management and directors of the Group; and

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Group’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As called for by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of the Group’s internal control over financial reporting as of December 31, 2007. Management made its assessment using the criteria set forth in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Criteria”).

Based on its assessment, management has concluded that the Group maintained effective internal control over financial reporting as of December 31, 2007 based on the COSO Criteria. The effectiveness of the Group’s internal control over financial reporting as of December 31, 2007, has been audited by KPMG LLP, the Group’s independent registered public accounting firm, as stated in their report dated March13, 2008.

By:  /s/  José Rafael Fernández	By:  /s/  Norberto González
José Rafael Fernández President and Chief Executive Officer Date: March 13, 2008	Norberto González Executive Vice President and Chief Financial Officer Date: March 13, 2008

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Oriental Financial Group Inc:

We have audited Oriental Financial Group Inc.’s (the “Group’s”) internal control over financial reporting as of December 31, 2007, based inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Oriental Financial Group Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Oriental Financial Group Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, comprehensive income, and cash flows for the years ended December 31, 2007 and 2006, and the six-month period ended December 31, 2005, and our report dated March 13, 2008, expressed an unqualified opinion on those consolidated financial statements.

/s/  KPMG LLP

San Juan, Puerto Rico

March 13, 2008

Stamp No. 2222073 of the Puerto Rico

Society of Certified Public Accountants

was affixed to the record copy of this report.

F-4

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31, 2007 AND 2006

	December 31,			December 31,
	2007			2006
	(In thousands, except share data)
ASSETS
Cash and cash equivalents
Cash and due from banks	$	22,858		$	15,341
Money market investments		66,125			23,729
Total cash and cash equivalents		88,983			39,070
Investments:
Trading securities, at fair value with amortized cost of $1,103 (December 31, 2006 — $246)		1,122			243
Investment securitiesavailable-for-sale, at fair value with amortized cost of $3,063,763 (December 31, 2006 — $984,060)
Securities pledged that can be repledged		2,903,078			947,880
Other investment securities		166,204			27,080
Total investment securitiesavailable-for-sale		3,069,282			974,960
Investment securitiesheld-to-maturity, at amortized cost with fair value of $1,478,112 (December 31, 2006 — $1,931,720)
Securities pledged that can be repledged		1,348,159			1,814,746
Other investment securities		144,728			152,731
Total investment securitiesheld-to-maturity		1,492,887			1,967,477
Other investments		1,662			30,949
Federal Home Loan Bank (FHLB) stock, at cost		20,658			13,607
Total investments		4,585,610			2,987,236
Securities sold but not yet delivered		—			6,430
Loans:
Mortgage loansheld-for-sale, at lower of cost or fair value		16,672			10,603
Loans receivable, net of allowance for loan losses of $10,161 (December 31, 2006 — $8,016)		1,162,894			1,201,767
Total loans, net		1,179,566			1,212,370
Accrued interest receivable		52,315			27,940
Premises and equipment, net		21,779			20,153
Deferred tax asset, net		10,362			14,150
Foreclosed real estate		4,207			4,864
Investment in equity indexed options		40,709			34,216
Other assets		16,324			25,557
Total assets	$	5,999,855		$	4,371,986
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	119,152		$	132,434
Savings accounts		387,790			266,184
Certificates of deposit		739,478			834,370
Total deposits		1,246,420			1,232,988
Borrowings:
Federal funds purchased and other short-term borrowings		27,460			13,568
Securities sold under agreements to repurchase		3,861,411			2,535,923
Advances from FHLB		331,898			182,489
Term notes		—			15,000
Subordinated capital notes		36,083			36,083
Total borrowings		4,256,852			2,783,063
Securities purchased but not yet received		111,431			—
Accrued expenses and other liabilities		25,691			19,509
Total liabilities		5,640,394			4,035,560
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; 25,557,197 shares issued; 24,120,771 shares outstanding (December 31, 2006 — 25,430,929; 24,441,524)		25,557			25,431
Additional paid-in capital		210,073			209,033
Legal surplus		40,573			36,245
Retained earnings		45,296			26,772
Treasury stock, at cost 1,436,426 shares (December 31, 2006 — 989,405 shares)		(17,023	)		(12,956	)
Accumulated other comprehensive loss, net of tax of $2,166 (December 31, 2006 — $290)		(13,015	)		(16,099	)
Total stockholders’ equity		359,461			336,426
Commitments and Contingencies
Total liabilities and stockholders’ equity	$	5,999,855		$	4,371,986

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

F-5

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006, THE SIX-MONTH PERIOD ENDED
DECEMBER 31, 2005, AND THE FISCAL YEAR ENDED JUNE 30, 2005

							Six-Month
	Year Ended						Period Ended			Fiscal Year
	December 31,						December 31,			Ended June 30,
	2007			2006			2005			2005
										(As restated
										See note 20)
	(In thousands, except per share data)
Interest income:
Loans	$	85,802		$	76,815		$	30,901		$	54,966
Mortgage-backed securities		111,006			98,058			45,251			103,425
Investment securities		88,868			55,381			27,469			30,395
Short term investments		3,688			2,057			1,465			526
Total interest income		289,364			232,311			105,086			189,312
Interest expense:
Deposits		52,794			46,701			20,281			29,744
Securities sold under agreements to repurchase		147,690			125,714			42,909			60,524
Advances from FHLB, term notes and other borrowings		12,042			10,439			5,046			8,313
Subordinated capital notes		3,108			5,331			2,470			4,318
Total interest expense		215,634			188,185			70,706			102,899
Net interest income		73,730			44,126			34,380			86,413
Provision for loan losses		6,550			4,388			1,902			3,315
Net interest income after provision for loan losses		67,180			39,738			32,478			83,098
Non-interest income:
Financial service revenues		17,295			16,029			7,432			14,032
Banking service revenues		7,862			9,006			4,495			7,752
Investment banking revenues		126			2,701			74			339
Net gain (loss) on:
Mortgage banking activities		2,401			3,368			1,702			7,774
Securitiesavailable-for-sale, including other than temporary impairments		3,799			(17,637	)		650			7,446
Derivatives		10,997			3,218			1,256			(2,811	)
Early extinguishment of subordinated capital notes		—			(915	)		—			—
Trading securities		23			28			5			(15	)
Other		(1	)		1,440			768			368
Total non-interest income, net		42,502			17,238			16,382			34,885
Non-interest expenses:
Compensation and employees’ benefits		28,376			24,630			12,714			23,606
Occupancy and equipment		12,624			11,573			5,798			10,583
Professional and service fees		7,161			6,821			3,771			6,994
Advertising and business promotion		4,472			4,466			2,862			5,720
Taxes, other than payroll and income taxes		2,151			2,405			1,195			1,836
Director and investors relations		2,103			2,323			374			883
Loan servicing expenses		1,740			2,017			911			1,727
Electronic banking charges		1,826			1,914			854			2,075
Communication		1,302			1,598			837			1,630
Printing, postage, stationery and supplies		842			995			528			891
Insurance		848			861			374			767
Other		3,414			4,110			1,596			3,251
Total non-interest expenses		66,859			63,713			31,814			59,963
Income (loss) before income taxes		42,823			(6,737	)		17,046			58,020
Income tax expense (benefit)		1,558			(1,631	)		127			(1,649	)
Net income (loss)		41,265			(5,106	)		16,919			59,669
Less: Dividends on preferred stock		(4,802	)		(4,802	)		(2,401	)		(4,802	)
Income (loss) available to common shareholders	$	36,463		$	(9,908	)	$	14,518		$	54,867
Income (loss) per common share:
Basic	$	1.50		$	(0.40	)	$	0.59		$	2.23
Diluted	$	1.50		$	(0.40	)	$	0.58		$	2.14
Average common shares outstanding		24,326			24,562			24,777			24,571
Average potential common shares-options		41			101			154			1,104
Average diluted common shares outstanding		24,367			24,663			24,931			25,675
Cash dividends per share of common stock	$	0.56		$	0.56		$	0.28		$	0.55

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

F-6

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006,
THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2005,
AND THE FISCAL YEAR ENDED JUNE 30, 2005

							Six-Month
	Year Ended						Period Ended			Fiscal Year
	December 31,						December 31,			Ended June 30,
CHANGES IN STOCKHOLDERS’ EQUITY:	2007			2006			2005			2005
										(As restated
										See note 20)
	(In thousands)
Preferred stock:
Balance at beginning and end of period	$	68,000		$	68,000		$	68,000		$	68,000
Common stock:
Balance at beginning of period		25,431			25,350			25,104			22,253
Stock options exercised		126			81			246			857
Stock dividend and stock split effected in the form of a dividend		—			—			—			1,994
Balance at end of period		25,557			25,431			25,350			25,104
Additional paid-in capital:
Balance at beginning of period		209,033			208,454			206,804			137,156
Stock-based compensation expense		86			15			—			7,552
Stock options exercised		954			564			1,650			3,650
Stock dividend and stock split effected in the form of a dividend		—			—			—			58,456
Common stock issuance costs		—			—			—			(10	)
Balance at end of period		210,073			209,033			208,454			206,804
Legal surplus:
Balance at beginning of period		36,245			35,863			33,893			27,425
Transfer from retained earnings		4,328			382			1,970			6,468
Balance at end of period		40,573			36,245			35,863			33,893
Retained earnings:
Balance at beginning of period		26,772			52,340			46,705			76,752
Cumulative effect on initial adoption of SAB 108		—			(1,525	)		—			—
Net income (loss)		41,265			(5,106	)		16,919			59,669
Cash dividends declared on common stock		(13,611	)		(13,753	)		(6,913	)		(13,523	)
Stock dividend and stock split effected in the form of a dividend		—			—			—			(64,923	)
Cash dividends declared on preferred stock		(4,802	)		(4,802	)		(2,401	)		(4,802	)
Transfer to legal surplus		(4,328	)		(382	)		(1,970	)		(6,468	)
Balance at end of period		45,296			26,772			52,340			46,705
Treasury stock:
Balance at beginning of period		(12,956	)		(10,332	)		(3,368	)		(4,578	)
Stock purchased		(4,297	)		(2,819	)		(7,003	)		(3,512	)
Stock used to match defined contribution plan		230			195			39			249
Stock dividend and stock split effected in the form of a dividend		—			—			—			4,473
Balance at end of period		(17,023	)		(12,956	)		(10,332	)		(3,368	)
Accumulated other comprehensive income (loss), net of tax:
Balance at beginning of period		(16,099	)		(37,884	)		(38,383	)		(45,362	)
Other comprehensive income, net of tax		3,084			21,785			499			6,979
Balance at end of period		(13,015	)		(16,099	)		(37,884	)		(38,383	)
Total stockholders’ equity	$	359,461		$	336,426		$	341,791		$	338,755

F-7

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006,
THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2005,
AND THE FISCAL YEAR ENDED JUNE 30, 2005

										Fiscal
	Year Ended						Six-Month Period			Year Ended
	December 31,						Ended December 31,			June 30,
COMPREHENSIVE INCOME	2007			2006			2005			2005
										(As restated,
										See note 20)
	(In thousands)
Net income (loss)	$	41,265		$	(5,106	)	$	16,919		$	59,669
Other comprehensive income (loss):
Unrealized gain (loss) on securitiesavailable-for-sale arising during the period		18,338			3,073			(13,056	)		10,830
Realized (gain) loss on investment securitiesavailable-for-sale included in net income		(3,799	)		15,172			(650	)		(7,446	)
Unrealized (loss) gain on derivatives designated as cash flows hedges arising during the period		—			(720	)		13,962			(6,372	)
Realized (gain) loss on derivatives designated as cash flow hedges included in net income (loss)		(773	)		(3,218	)		(1,256	)		10,131
Realized gain on termination of derivative activities, net		—			8,998			—			—
Gain from termination of cash flow hedging		(8,225	)		—			—			—
Income tax effect related to unrealized (gain) loss on securitiesavailable-for-sale		(2,457	)		(1,520	)		1,499			(164	)
Other comprehensive income for the period, net of tax		3,084			21,785			499			6,979
Comprehensive income	$	44,349		$	16,679		$	17,418		$	66,648

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

F-8

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006,
THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2005,
AND THE FISCAL YEAR ENDED JUNE 30, 2005

							Six-Month			Fiscal
	Year Ended						Period Ended			Year Ended
	December 31,						December 31,			June 30,
	2007			2006			2005			2005
										(As restated,
										See note 20)
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	41,265		$	(5,106	)	$	16,919		$	59,669
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of deferred loan origination fees, net of costs		(721	)		(1,625	)		(838	)		(2,609	)
Amortization of premiums, net of accretion of discounts on investment securities		792			5,584			8,474			9,835
Other than temporary impairment		—			2,466			—			—
Realized gains on termination of derivative instruments		—			(852	)		—			—
Depreciation and amortization of premises and equipment		5,419			5,481			3,211			5,857
Deferred income tax expense (benefit)		1,332			(3,448	)		(4,532	)		982
Equity in losses (earnings), of investment in limited liability partnership		279			(828	)		(838	)		(247	)
Provision for loan losses		6,550			4,388			1,902			3,315
Stock-based compensation (benefit)		86			15			11			(3,057	)
(Gain) loss on:
Sale of securitiesavailable-for-sale		(3,799	)		15,172			(650	)		(7,446	)
Mortgage banking activities		(2,401	)		(3,368	)		(1,702	)		(7,774	)
Derivatives		(10,997	)		(3,218	)		(1,256	)		2,811
Sale of foreclosed real estate		349			(180	)		(32	)		—
Sale of premises and equipment		(20	)		(253	)		(4	)		—
Early extinguishment of subordinated capital notes		—			915			—			—
Originations of loansheld-for-sale		(114,722	)		(95,713	)		(12,097	)		(178,256	)
Proceeds from sale of loansheld-for-sale		54,510			41,842			21,114			102,305
Net (increase) decrease in:
Trading securities		(879	)		(97	)		119			309
Accrued interest receivable		(24,375	)		1,127			(5,332	)		(4,608	)
Other assets		(2,680	)		(3,559	)		(4,619	)		(11,820	)
Net increase (decrease) in:
Accrued interest on deposits and borrowings		4,787			(15,096	)		1,552			5,252
Other liabilities		6,358			(2,466	)		(10,133	)		1,296
Net cash provided by (used in) operating activities		(38,867	)		(58,819	)		11,269			(24,186	)
Cash flows from investing activities:
Net decrease (increase) in time deposits with other banks		—			60,000			(30,000	)		(30,000	)
Purchases of:
Investment securitiesavailable-for-sale		(3,434,208	)		(1,273,841	)		(334,767	)		(1,738,613	)
Investment securitiesheld-to-maturity		(158,842	)		(6,500	)		(259,904	)		(529,006	)
Other investments		—			(30,982	)		—			—
FHLB stock		(43,390	)		(29,520	)		—			—
Purchases of equity options		(10,474	)		(3,702	)		(293	)		(1,371	)
Maturities and redemptions of:
Investment securitiesavailable-for-sale		744,976			134,949			209,013			562,230
Investment securitiesheld-to-maturity		633,052			384,594			48,671			232,290
FHLB stock		36,339			35,915			7,056			1,102
Other investments		29,274			—			—			—
Investment in limited liability partnership		11,634			—			—			—
Proceeds from sales of:
Investment securitiesavailable-for-sale		787,255			1,252,995			139,898			1,143,501
Foreclosed real estate		4,017			2,589			1,537			3,034
Premises and fixed assets		—			—			13			3,355
Loan production:
Origination and purchase of loans, excluding loansheld-for-sale		(189,773	)		(459,975	)		(170,217	)		(333,177	)
Principal repayment of loans		219,108			150,704			109,804			206,112
Additions to premises and equipment		(7,025	)		(10,553	)		(2,779	)		(4,073	)
Net cash provided by (used in) investing activities		(1,378,057	)		206,673			(281,968	)		(484,616	)

F-9

							Six-Month			Fiscal
	Year Ended						Period Ended			Year Ended
	December 31,						December 31,			June 30,
	2007			2006			2005			2005
										(As restated,
										See note 20)
	(In thousands)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits		19,016			(69,452	)		36,140			224,928
Securities sold under agreements to repurchase		1,320,609			111,844			236,124			295,891
Federal funds purchased		13,892			9,113			(9,785	)		12,310
Term Notes		(15,000	)		—			—			—
Proceeds from:
Short term borrowings		—			—			1,930			—
Advances from FHLB		5,279,620			4,703,325			837,251			2,204,272
Exercise of stock options, net		1,080			645			1,896			4,507
Repayments of advances from FHLB		(5,131,520	)		(4,834,725	)		(823,951	)		(2,204,272	)
Repayments of subordinated capital notes		—			(36,083	)		—			—
Termination of derivative instruments		1,620			10,459			—			—
Common stock purchased		(4,067	)		(2,624	)		(6,964	)		(3,263	)
Dividends paid		(18,413	)		(18,555	)		(9,356	)		(17,919	)
Net cash provided by (used in) financing activities		1,466,837			(126,053	)		263,285			516,454
Net change in cash and cash equivalents		49,913			21,801			(7,414	)		7,652
Cash and cash equivalents at beginning of period		39,070			17,269			24,683			17,031
Cash and cash equivalents at end of period	$	88,983		$	39,070		$	17,269		$	24,683
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
Interest paid	$	213,764		$	203,280		$	58,844		$	97,647
Income taxes paid	$	—		$	82		$	—		$	554
Mortgage loans securitized into mortgage-backed securities	$	56,544		$	52,214		$	50,209		$	85,809
Net charge-offs	$	4,405		$	3,001		$	1,767		$	4,373
Investment securitiesavailable-for-sale transferred toheld-to-maturity	$	3,377		$	—		$	—		$	565,191
Accrued dividend payable	$	3,084		$	3,423		$	3,445		$	3,487
Securities sold but not yet delivered	$	—		$	6,430		$	44,009		$	1,034
Securities and loans purchased but not yet received	$	111,431		$	—		$	43,354		$	22,772
Transfer from loans to foreclosed real estate	$	3,709		$	2,471		$	2,121		$	4,689

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

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007 AND 2006
AND FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006,
THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2005,
AND THE FISCAL YEAR ENDED JUNE 30, 2005

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Oriental Financial Group Inc. (the “Group” or “Oriental”) conform to U.S. generally accepted accounting principles (“GAAP”) and to financial services industry practices. The following is a description of the Group’s most significant accounting policies:

Nature of Operations

Oriental is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. It has four direct subsidiaries, Oriental Bank and Trust (the “Bank”), Oriental Financial Services Corp. (“Oriental Financial Services”), Oriental Insurance, Inc. (“Oriental Insurance”) and Caribbean Pension Consultants, Inc., which is located in Boca Raton, Florida. The Group also has two special purpose entities, Oriental Financial (PR) Statutory Trust I (the “Statutory Trust I”, presently inactive) 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 17 to the consolidated financial statements presents further information about the operations of the Group’s business segments.

The main offices for the Group and its subsidiaries are located in San Juan, Puerto Rico. The Group is subject to examination, regulation and periodic reporting under the 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 24 financial centers 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 (“OCFI”) 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, which it also provides through its wholly-owned mortgage lending subsidiary, Oriental Mortgage Corporation. The Bank also operates an IBE pursuant to the IBE Act, Oriental International Bank Inc., which is a wholly-owned subsidiary of the Bank. The IBE subsidiary 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. Another IBE, which operated as a division of the Bank, was liquidated on May 31, 2007, after obtaining the required regulatory approvals.

Oriental Financial Services is subject to the supervision, examination and regulation of the Financial Industry Regulatory Authority (“FINRA”), the Securities and Exchange Commission (“SEC”), and the OCFI. Oriental Insurance is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate mainly to the determination of the allowance for loan losses, the valuation of derivative instruments, and the determination of income taxes.

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Year

On August 30, 2005, the Group’s Board of Directors amended Section 1 of Article IX of the Group’s Bylaws to change its fiscal year to a calendar year. The fiscal year was from July 1 of each year to June 30 of the following year. Data presented on the accompanying consolidated financial statements includes balance sheet data as of December 31, 2007 and 2006, and operations data for the years ended December 31, 2007 and 2006, thesix-month period ended December 31, 2005 and the fiscal year ended June 30, 2005. Please refer to Note 19 of the accompanying consolidated financial statements for comparative information.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Group and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The special purpose entities are exempt from the consolidation requirements, under the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised),“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.”

Cash Equivalents

The Group considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition.

Earnings per Common Share

Basic earnings per share is calculated by dividing income available to common shareholders (net income reduced by dividends on preferred stock) by the weighted average of outstanding common shares. Diluted earnings per share is similar to the computation of basic earnings per share except that the weighted average of common shares is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares (options) had been issued, assuming that proceeds from exercise are used to repurchase shares in the market (treasury stock method). Any stock splits and dividends are retroactively recognized in all periods presented in the consolidated financial statements.

Securities Purchased/Sold Under Agreements to Resell/Repurchase

The Group purchases securities under agreements to resell the same or similar securities. Amounts advanced under these agreements represent short-term loans and are reflected as assets in the consolidated statements of financial condition. It is the Group’s policy to take possession of securities purchased under resale agreements while the counterparty retains effective control over the securities. The Group monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral when deemed appropriate. The Group also sells securities under agreements to repurchase the same or similar securities. The Group retains effective control over the securities sold under these agreements; accordingly, such agreements are treated as financing arrangements, and the obligations to repurchase the securities sold are reflected as liabilities. The securities underlying the financing agreements remain included in the asset accounts. The counterparty to repurchase agreements generally has the right to repledge the securities received as collateral.

Investment Securities

Securities are classified asheld-to-maturity,available-for-sale or trading. Securities for which the Group has the intent and ability to hold to maturity are classified asheld-to-maturity and are carried at amortized cost. Securities that might be sold prior to maturity because of interest rate changes, to meet liquidity needs, or to better match the repricing characteristics of funding sources are classified asavailable-for-sale. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of tax in other comprehensive income.

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Group classifies as trading those securities that are acquired and held principally for the purpose of selling them in the near future. These securities are carried at fair value with realized and unrealized changes in fair value included in earnings in the period in which the changes occur.

The Group’s investment in the Federal Home Loan Bank (FHLB) of New York stock has no readily determinable fair value and can only be sold back to the FHLB at cost. Therefore, the carrying value represents its fair value.

Premiums and discounts are amortized to interest income over the life of the related securities using the interest method. Net realized gains or losses on sales of investment securitiesavailable-for-sale, and unrealized loss valuation adjustments considered other than temporary, if any, on securities classified as eitheravailable-for-sale orheld-to-maturity are reported separately in the statements of operations. The cost of securities sold is determined on the specific identification method.

Impairment of Investment Securities

The Group evaluates its securitiesavailable-for-sale andheld-to-maturity for impairment. An impairment charge in the consolidated statements of operations is recognized when the decline in the fair value of investments below their cost basis is judged to beother-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 intent and ability 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 debtors repayment ability on its bond obligations and its cash and capital generation ability. For the year ended December 31, 2006, the Group charged to operations approximately $2.5 million onavailable-for-sale securities with other than temporary impairments. No such charges were recorded during 2007 or for periods prior to 2006 presented in these financial statements.

Derivative Financial Instruments

As part of the Group’s asset and liability management, the Group may use option agreements and interest rate contracts, which include interest rate swaps to hedge various exposures or to modify interest rate characteristics of various statement of financial condition accounts.

The Group follows Statement of Financial Accounting Standards (“SFAS”) No. 133,“Accounting for Derivative Instruments and Hedging Activities,” as amended (refer to Note 9), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that all derivative instruments be recognized as assets and liabilities at fair value. If certain conditions are met, the derivative may qualify for hedge accounting treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”) or (c) a hedge of foreign currency exposure (“foreign currency hedge”).

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

Certain contracts contain embedded derivatives.  When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated and carried at fair value.

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Group uses several pricing models that consider current fair value and contractual prices for the underlying financial instruments as well as time value and yield curve or volatility factors underlying the positions to derive the fair value of certain derivatives contracts.

Off-Balance Sheet Instruments

In the ordinary course of business, the Group enters into off-balance sheet instruments consisting of commitments to extend credit and commitments under credit card arrangements, further discussed in Note 14 to the consolidated financial statements. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. The Group periodically evaluates the credit risks inherent in these commitments, and establishes allowances for such risks if and when these are deemed necessary.

Mortgage Banking Activities and LoansHeld-For-Sale

The residential mortgage loans reported asheld-for-sale are stated at thelower-of-cost-or-market, cost being determined on the outstanding loan balance less unearned income, and fair value determined in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Realized gains or losses on these loans are determined using the specific identification method. Loansheld-for-sale include all conforming mortgage loans originated and purchased, which from time to time the Group sells to other financial institutions or securitizes conforming mortgage loans into Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) pass-through certificates.

Prior to December 31, 2005, servicing rights on mortgage loans originated and held by the Group were sold to another financial institution. Upon their sale, a portion of the accounting basis of the mortgage loansheld-for-investment was allocated to the mortgage servicing rights (“MSRs”) based upon the relative fair values of the mortgage loans and the MSRs, which results in a discount to the mortgage loans held for investment. That discount is accreted using the interest method as an adjustment to yield on the mortgage loans over the estimated life of the related loans. When related loans are sold or collected any unamortized discount is recognized as income. In 2006, the Group entered into asub-servicing agreement with a local institution to service GNMA, FNMA and FHLMC pools that it issues and its mortgage loan portfolio at a fixed annual cost per loan.

Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities

The Group recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.

The Group is not engaged in sales of mortgage loans and mortgage-backed securities subject to recourse provisions except for those provisions that allow for the repurchase of loans as a result of a breach of certain representations and warranties other than those related to the credit quality of the loans included in the sale transactions.

According to SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”), a transfer of financial assets (all or a portion of the financial asset) in which the Group surrenders control over these financial assets shall be accounted for as a sale to the extent that consideration, other than beneficial interests in the transferred assets, is received in exchange. The Group has surrendered control over transferred assets if and only if all of the following conditions are met:

a.	The transferred assets have been isolated from the Group — put presumptively beyond the reach of the Group and its creditors even in bankruptcy or other receivership.
b.	Each transferee has the right to pledge or exchange the assets it received and no condition both constrains the transferee from taking advantage of its rights to pledge or exchange and provided more than a trivial benefit to the Group.

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

c.  The Group does not maintain effective control over the transferred assets through either (1) an agreement that both entitles and obligates the Group to repurchase or redeem them before their maturity or (2) the ability to unilaterally cause the holder to return specific assets other than through a cleanup call.

If a transfer of financial assets in exchange for cash or other consideration (other than beneficial interests in the transferred assets) does not meet the criteria for a sale as described above, the Group would account for the transfer as a secured borrowing.

Servicing assets

The Group periodically sells or securitizes loans while retaining the obligation to perform the servicing of such loans. In addition, the Group may purchase or assume the right to service loans originated by others. Whenever the Group undertakes an obligation to service a loan, management assesses whether a servicing assetand/or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to more than adequately compensate the servicer for performing the servicing. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate the Group for its expected cost. Servicing assets are presented on as other assets in the consolidated statements of condition.

Upon adoption of SFAS No. 156“Accounting for Servicing of Financial Assets — an Amendment of FASB Statements No. 133 and 140” in January 2007, all separately recognized servicing assets are initially recognized at fair value. For subsequent measurement of servicing rights, the Group has elected the amortization method with periodic testing for impairment. Under the amortization method, servicing assets are amortized in proportion to, and over the period of, estimated servicing income and assessed for impairment based on fair value at each reporting period. Contractual servicing fees, as well as fair value adjustments, and impairment losses, if any, are reported in banking service revenues in the consolidated statements of operations. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected.

The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. For purposes of evaluating and measuring impairment of capitalized servicing assets that are accounted under the amortization method, the amount of impairment recognized, if any, is the amount by which the capitalized servicing assets per stratum exceed their estimated fair value.

Prior to 2006, the total cost of loans to be sold with servicing assets retained was allocated to the servicing assets and the loans (without servicing assets), based on their relative fair values. Servicing assets were amortized in proportion to, and over the period of, estimated net servicing income.

Loans and Allowance for Loan Losses

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, unamortized discount related to MSR sold and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs and premiums and discounts on loans purchased are deferred and amortized over the estimated life of the loans as an adjustment of their yield through interest income using a method that approximates the interest method.

Interest recognition is discontinued when loans are 90 days or more in arrears on principaland/or interest based on contractual terms, except for collateralized residential mortgage loans for which recognition is discontinued when they become 365 days or more past due based on contractual terms and are then written down, if necessary, based on the specific evaluation of the collateral underlying the loan. Loans for which the recognition of interest income has been discontinued are designated as non-accruing. Collections are accounted for on the cash method thereafter, until qualifying to return to accrual status. Such loans are not reinstated to accrual status until interest is received on a current basis and other factors indicative of doubtful collection cease to exist.

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Group follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as economic conditions, portfolio risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on such methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses.

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 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 under the provisions of SFAS No. 5,“Accounting for Contingencies”, as amended, 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 and over90-days past due. The portfolios of mortgages 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 systematic 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 probable loan losses, factors beyond the Group’s control, such as factors affecting general economic conditions may require future changes to the allowance.

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed using the straight-line method over the terms of the leases or estimated useful lives of the improvements, whichever is shorter.

Long-lived assets and identifiable intangibles, except for financial instruments, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, an estimate is made of the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized if the fair value is less than the carrying amount of the related asset. Otherwise, an impairment loss is not recognized. There were no such impairment losses in periods presented in the accompanying consolidated financial statements.

Foreclosed Real Estate

Foreclosed real estate is initially recorded at the lower of the related loan balance or the fair value of the real estate at the date of foreclosure. At the time properties are acquired in full or partial satisfaction of loans, any excess of the

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

loan balance over the estimated fair value of the property is charged against the allowance for loan losses. After foreclosure, these properties are carried at the lower of cost or fair value less estimated costs to sell based on recent appraised values or options to purchase the foreclosed property. Any excess of the carrying value over the estimated fair value, less estimated costs to sell, is charged to operations. The costs and expenses associated to holding these properties in portfolio are expensed as incurred.

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 between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Group to assume certain positions based on its interpretation of current tax regulations. Changes in assumptions affecting estimates may be required in the future and estimated tax 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. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to the Group’s effective rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective rate and may require the use of cash in the year of resolution.

The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Group’s 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 operations.

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.

In addition to valuation allowances, the Group establishes accruals for certain tax contingencies when, despite the belief that Group’s tax return positions are fully supported, the Group believes that certain positions are likely to be challenged. The tax contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Group’s tax contingency accruals are reflected as income tax payable as a component of accrued expenses and other liabilities.

Effective at the beginning of the first quarter of 2007, the Group adopted the provisions of Financial Accounting Standard 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 Group’s policy to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated statements of operations did not change as a result of implementing the provisions of FIN 48. No adjustments resulted from the implementation of FIN 48.

Equity-Based Compensation Plans

On April 25, 2007, the Board of Directors (the “Board”) formally adopted the Oriental Financial Group Inc. 2007 Omnibus Performance Incentive Plan (the “Omnibus Plan”), which was subsequently approved at the annual

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

meeting of stockholders held on June 27, 2007. The Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and dividend equivalents, as well as equity-based performance awards.

The purpose of the Omnibus Plan is to provide flexibility to the Group to attract, retain and motivate directors, officers, and key employees through the grant of awards based on performance and to adjust its compensation practices to the best compensation practice and corporate governance trends as they develop from time to time. The Omnibus Plan is further intended to motivate high levels of individual performance coupled with increased shareholder returns. Therefore, awards under the Omnibus Plan (each, an “Award”) are intended to be based upon the recipient’s individual performance, level of responsibility and potential to make significant contributions to the Group. Generally, the Omnibus Plan will terminate as of (a) the date when no more of the Group’s shares of common stock are available for issuance under the Omnibus Plan, or, if earlier, (b) the date the Omnibus Plan is terminated by the Group’s Board.

The Compensation Committee of the Group’s Board, or such other committee as the Board may designate (the “Committee”), has full authority to interpret and administer the Omnibus Plan in order to carry out its provisions and purposes. The Committee has the authority to determine those persons eligible to receive an Award and to establish the terms and conditions of any Award. The Committee may delegate, subject to such terms or conditions or guidelines as it shall determine, to any employee or group of employees any portion of its authority and powers under the Omnibus Plan with respect to participants who are not directors or executive officers subject to the reporting requirements under Section 16(a) of the Securities Exchange Act of 1934. Only the Committee may exercise authority in respect of Awards granted to such participants.

The Omnibus Plan replaced and superseded the Oriental Financial Group Inc. 1996, 1998 and 2000 Incentive Stock Option Plans (the “Stock Option Plans”). All outstanding stock options under the Stock Option Plans continue in full force and effect, subject to their original terms and conditions.

Effective July 1, 2005, the Group adopted SFAS No. 123R“Share-Based Payment” (“SFAS 123R”), an amendment of SFAS No. 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 No. 123R applies to all awards unvested and granted after this effective date and awards modified, repurchased, or cancelled after that date.

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Had the estimated fair value of the options granted been included in compensation expense for the periods indicated below, the Group’s net earnings and earnings per share would have been as follows:

	Fiscal Year Ended
	June 30,
	2005
	(In thousands, except for per share data)
Net income, as reported	$	59,669
Share-based (compensation) benefit included in reported earnings		(3,057	)
Share-based employee compensation determined under fair value based method for all awards		(1,459	)
Pro forma net income		55,153
Less: Dividends on preferred stock		(4,802	)
Pro forma income available to common shareholders	$	50,351
Earnings per share:
Basic — as reported	$	2.23
Basic — pro forma	$	2.05
Diluted — as reported	$	2.14
Diluted — pro forma	$	1.96
Average common shares outstanding		24,571
Average potential common shares-options		1,104
		25,675

Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except for those resulting from investments by owners and distributions to owners. GAAP requires that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses onavailable-for-sale securities and on derivative activities that qualify and are designated for cash flows hedge accounting, are reported as a separate component of the stockholders’ equity section of the consolidated statements of financial condition, such items, along with net income, are components of comprehensive income.

Evaluation of Prior Year Misstatements

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”),“Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 provides the SEC staff’s views regarding the process of quantifying financial statement misstatements. It requires the use of two different approaches to quantifying misstatements — (1) the “rollover approach” and (2) the “iron curtain approach ‘‘— when assessing whether such a misstatement is material to the current period financial statements. The rollover approach focuses on the impact on the income statement of a misstatement originating in the current reporting period. The iron curtain approach focuses on the cumulative effect on the balance sheet as of the end of the current reporting period of uncorrected misstatements regardless of when they originated. If a material misstatement is quantified under either approach, after considering quantitative and qualitative factors, the financial statements would require adjustment. Depending on the magnitude of the correction with respect to the

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

current period financial statements, changes to financial statements for prior periods could result. SAB 108 was effective for the Group on January 1, 2006.

The Group had three unrecorded accounting adjustments that were considered in the SAB 108 analysis. The Group historically deferred commissions to certain employees as part of the Bank’s deposit-gathering campaigns, instead of charging compensation expenses in the year paid. The balance of deferred commission as of January 1, 2006, was $719,000 and was corrected as of January 1, 2006, as a credit to cumulative retained earnings at that date.

The second accounting adjustment was the reversal of a prior year over-accrual of income taxes. As of December 31, 2005, utilizing the rollover method to evaluate differences, the Group decided not to correct $589,000 of excess income taxes provision. Such difference was corrected as of January 1, 2006, against cumulative retained earnings at that date.

The third accounting adjustment was the Group’s method of recognizing interest on a structured note carried asheld-to-maturity investment. The structured note pays interest depending on whether LIBOR is within a range or not. In the past, the Group had recorded interest on such note on a cash basis instead of using the retrospective interest method required by Financial Accounting Standards Board Emerging Issues Task Force Abstracts IssueNo. 96-12,“Recognition of Interest Income and Balance Sheet Classification of Structured Notes”. As a result of the adoption of SAB 108, approximately $1.4 million of interest previously recognized on a cash basis in prior periods was reversed and recorded as interest income for 2006.

After considering all of the quantitative and qualitative factors, the Group determined that these accounting adjustments had not previously been material to prior periods when measured using the rollover method. Given that the effect of correcting these misstatements during 2006 would be material to the Group’s 2006 consolidated financial statements using this dual method, the Group concluded that the cumulative effect adjustment method of initially applying the guidance in SAB 108 was appropriate, and adjusted $1.525 million as a cumulative effect on the beginning retained earnings on the 2006 Consolidated Statements of Changes in Stockholder’s Equity.

Commitments and Contingencies

Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

Reclassifications

Certain amounts in prior years have been reclassified to conform to the presentation adopted in the current year.

New Accounting Pronouncements

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 was encouraged, provided that the reporting entity had not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Group adopted the provisions of SFAS No. 157 commencing in the first quarter of 2008. Such

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

provisions are to be applied prospectively. The Group is currently assessing the impact of SFAS No. 157 on its consolidated financial statements, including disclosures.

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, FASB issued SFAS No. 159,“The Fair Value Option for Financial assets and Financial Liabilities, Including an amendment of FASB Statement No. 115”. SFAS No. 159 provides an alternative measurement treatment for certain financial assets and financial liabilities, under aninstrument-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 No. 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 No. 157. The Group adopted the provisions of SFAS No. 159 in January 2008, but decided not to apply the fair value option for any of its financial assets and liabilities, other than those required by SFAS 115.

SFAS No. 141R, “Business Combinations”

In December 2007, the FASB issued SFAS No. 141R,“Business Combinations.” SFAS No. 141R will significantly change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. The statement will also require all acquisition-related costs to be expensed as they are incurred. SFAS No. 141R is required to be applied to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with earlier adoption being prohibited

The Group is currently evaluating the effect, if any, of the adoption of SFAS 141R on its consolidated financial statements, including disclosures.

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.   INVESTMENTS

Investment Securities

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

	December 31, 2007
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
Puerto Rico Government and agency obligations	$	18,331	$	63	$	937	$	17,457		5.69	%
Obligations of US Government sponsored agencies		1,279,977		14,933		—		1,294,910		5.91	%
Structured credit investments		85,548		—		7,188		78,360		5.46	%
Total investment securities		1,383,856		14,996		8,125		1,390,727
FNMA and FHLMC certificates		998,008		10,681		223		1,008,466		5.85	%
GNMA certificates		48,907		869		216		49,560		5.69	%
Non-agency collateralized mortgage obligations (CMOs)		632,992		42		12,505		620,529		5.49	%
Total mortgage-backed-securities and CMOs		1,679,907		11,592		12,944		1,678,555
Total securities available-for-sale		3,063,763		26,588		21,069		3,069,282		5.78	%
Held-to-maturity
Puerto Rico Government and agency obligations		55,206		—		3,781		51,425		5.29	%
Obligations of US Government sponsored agencies		418,731		902		1,980		417,653		4.92	%
Structured credit investments		96,171		—		11,949		84,222		6.69	%
Total investment securities		570,108		902		17,710		553,300
FNMA and FHLMC certificates		624,267		4,331		3,560		625,038		5.03	%
GNMA certificates		161,647		1,504		1,204		161,947		5.36	%
CMOs issued by US Government sponsored agencies		136,865		1,489		527		137,827		5.14	%
Total mortgage-backed-securities and CMOs		922,779		7,324		5,291		924,812
Total securities held-to-maturity		1,492,887		8,226		23,001		1,478,112		5.16	%
Total	$	4,556,650	$	34,814	$	44,070	$	4,547,394		5.58	%

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	December 31, 2006
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
Puerto Rico Government and agency obligations	$	20,254	$	64	$	872	$	19,446		5.68	%
Structured credit and other investments		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	%
Non-agency collateralized mortgage obligations (CMOs)		722,419		7		5,139		717,287		5.48	%
Total mortgage-backed-securities and CMOs		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	%
CMOs issued by US Government sponsored agencies		152,748		18		1,303		151,463		5.13	%
Total mortgage-backed-securities and CMOs		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	%

For the years ended December 31, 2007 and 2006 and the six-month period ended December 31, 2005, the Group’s investment securities portfolio generated tax-exempt interest income of $184.7 million, $146.7 million and $71.4 million, respectively (fiscal year ended June 30, 2005 — $127.9 million). 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 entity. For the years ended December 31, 2007 and 2006, and the six-month period ended December 31, 2005, the Group’s investment securities portfolio generated taxable interest income of $18.9 million, $8.8 million and $2.8 million, respectively (fiscal year ended June 30, 2005 — $6.4 million).

F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The next table shows the amortized cost and fair value of the Group’s investment securities at December 31, 2007, by contractual maturity. Maturities for mortgage-backed securities are based upon contractual terms assuming no prepayments. Expected maturities of investment securities might differ from contractual maturities because they may be subject to prepaymentsand/or call options.

	December 31, 2007
	Available-for-sale				Held-to-maturity
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(In thousands)
Investment securities
Due within one year	$	14,977	$	14,977	$	24,998	$	24,988
Due after 1 to 5 years		—		—		287,377		286,126
Due after 5 to 10 years		914,532		916,058		66,500		58,422
Due after 10 years		454,347		459,692		191,233		183,763
		1,383,856		1,390,727		570,108		553,299
Mortgage-backed securities
Due within one year		77		80		—		—
Due after 1 to 5 years		760		793		—		—
Due after 10 years		1,679,070		1,677,682		922,779		924,813
		1,679,907		1,678,555		922,779		924,813
	$	3,063,763	$	3,069,282	$	1,492,887	$	1,478,112

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.

Net proceeds from the sale of investment securities available-for-sale during the years ended December 31, 2007 and 2006, and the six-month period ended December 31, 2005, totaled $787.3 million, $1.253 billion and $139.9 million, respectively (fiscal year ended June 30, 2005 — $1.1 billion). Gross realized gains on those sales during the year ended December 31, 2007 were $3.8 million. There were no losses on such sales during the year ended December 31, 2007. Gross realized gains and losses for the year ended December 31, 2006 were $5.6 million and $20.8 million, respectively; gross realized gains and losses for the six-month period ended December 31, 2005 were $744,000 and $94,000, respectively; and gross realized gains and losses for the fiscal year ended June 30, 2005 were $12.2 million and $4.7 million, respectively.

During the fourth quarter of 2006, the Group completed an evaluation of its available-for-sale investment portfolio considering 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, and the purchase of $860 million of “AAA”-rated securities with a weighted average yield of 5.55%. Proceeds were used to repay repurchase agreements with a weighted average rate paid of 5.25%.

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 December 31, 2007 and 2006.

December 31, 2007
Available-for-sale

	Less Than 12 Months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Puerto Rico Government and agency obligations	$	1,996	$	325	$	1,671
Mortgage-backed-securities and non-agency CMOs		118,616		336		118,280
Structured credit investments		85,548		7,188		78,360
		206,160		7,849		198,311

	12 Months or More
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Puerto Rico Government and agency obligations		14,152		613		13,539
Mortgage-backed-securities and non-agency CMOs		634,910		12,607		622,303
Structured credit investments		—		—		—
		649,062		13,220		635,842

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Puerto Rico Government and agency obligations		16,148		938		15,210
Mortgage-backed-securities and non-agency CMOs		753,526		12,943		740,583
Structured credit investments		85,548		7,188		78,360
	$	855,222	$	21,069	$	834,153

Held-to-maturity

	Less Than 12 Months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Puerto Rico Government and agency obligations	$	4,238	$	54	$	4,184
Structured credit investments		96,171		11,949		84,222
Mortgage-backed-securities and CMOs issued by US sponsored Government agencies		18,403		129		18,274
		118,812		12,132		106,680

F-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	12 Months or More
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Obligations of US Government sponsored agencies		124,998		1,980		123,018
Puerto Rico Government and agency obligations		50,968		3,727		47,241
Mortgage-backed-securities and CMOs issued by US sponsored Government agencies		373,122		5,162		367,960
		549,088		10,869		538,219

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Obligations of US Government sponsored agencies		124,998		1,980		123,018
Puerto Rico Government and agency obligations		55,206		3,781		51,425
Structured credit investments		96,171		11,949		84,222
Mortgage-backed-securities and CMOs issued by US sponsored Government agencies		391,525		5,291		386,234
	$	667,900	$	23,001	$	644,899

December 31, 2006
Available-for-sale

	Less Than 12 Months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Puerto Rico Government and agency obligations	$	1,996	$	172	$	1,824
Mortgage-backed-securities and non-agency CMOs		880,687		6,641		874,046
Structured credit and other investments		87		57		30
		882,770		6,870		875,900

	12 Months or More
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Puerto Rico Government and agency obligations		14,086		700		13,386
Mortgage-backed-securities and non-agency CMOs		9,101		239		8,862
Structured credit and other investments		24,962		2,290		22,672
		48,149		3,229		44,920

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Puerto Rico Government and agency obligations		16,082		872		15,210
Mortgage-backed-securities and non-agency CMOs		889,788		6,880		882,908
Structured credit and other investments		25,049		2,347		22,702
	$	930,919	$	10,099	$	920,820

F-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Held-to-maturity

	Less Than 12 Months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Mortgage-backed-securities and CMOs issued by US Government-sponsored agencies	$	393,983	$	1,262	$	392,721
		393,983		1,262		392,721

	12 Months or More
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		15,022		128		14,894
Obligations of US Government sponsored agencies		841,900		17,529		824,371
Puerto Rico Government and agency obligations		55,262		3,961		51,301
Mortgage-backed-securities and CMOs issued by US Government-sponsored agencies		484,083		13,745		470,338
		1,396,267		35,363		1,360,904

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
US Treasury securities		15,022		127		14,895
Obligations of US Government sponsored agencies		841,900		17,529		824,371
Puerto Rico Government and agency obligations		55,262		3,961		51,301
Mortgage-backed-securities and CMOs issued by US Government-sponsored agencies		878,066		15,008		863,058
	$	1,790,250	$	36,625	$	1,753,625

At December 31, 2007, mortgage-backed securities include approximately $626.8 million in non-agency collateralized mortgage obligations with unrealized losses of $12.4 million in the Group’s available-for-sale investment securities portfolio. These obligations are collateralized by pools of mortgage loans originated in the U.S., and are senior classes having subordination of losses ranging from 9.0% to 16.2%, which provide the capacity to withstand higher delinquency and foreclosure levels. These issues are rated “AAA” by Standard & Poor’s and “Aaa” by Moody’s. At December 31, 2007, the investment securities portfolio includes structured credit investments issued by U.S. institutions with balances of $85.5 million in the available-for-sale portfolio, and $96.2 million in the held-to-maturity portfolio, with unrealized losses of approximately $7.2 million and $11.9 million, respectively. The unrealized loss position is a reflection of the credit markets’ recent activity, with credit spreads widening significantly. The underlying collateral on the structures that the Group owns has performed adequately, with no defaults to date. The Group is closely monitoring these securities for any decline in value that the Group’s management may consider to be other-than-temporary. 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.

All other securities in an unrealized loss position at December 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 statistical rating organizations. These investments are primarily 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. The Group’s management believes that the unrealized losses of such other securities at December 31, 2007 are temporary and are substantially related to market interest

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

rate fluctuations and not to deterioration in the creditworthiness of the issuer. 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.

During the year ended December 31, 2006, the Group recognized through earnings approximately $2.5 million in losses in corporate securities in the available-for-sale portfolio that the Group’s management considered to be other than temporary impaired. These investments were sold in January 2007. No such charges were recorded in 2007 or prior to 2006.

3.   PLEDGED ASSETS

At December 31, 2007, residential mortgage loans with principal outstanding balances amounting to $529.3 million were pledged to secure advances and borrowings from the FHLB. Investment securities with fair values totaling $4.1 billion, $100.4 million and $7.6 million at December 31, 2007, were pledged to secure investment securities sold under agreements to repurchase (see Note 8), public fund deposits (see Note 7) and other funds, respectively. Also, investment securities with fair values totaling $118,000 at December 31, 2007, were pledged to the Puerto Rico Treasury Department.

As of December 31, 2007, investment securities available-for-sale and held-to-maturity not pledged amounted to $166.2 million and $144.7 million, respectively. As of December 31, 2007, mortgage loans not pledged amounted to $476.9 million.

4.   LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans Receivable

The composition of the Group’s loan portfolio at December 31, 2007 and 2006 was as follows:

	December 31,
	2007			2006
	(In thousands)
Loans secured by real estate:
Residential — 1 to 4 family	$	960,704		$	898,809
Home equity loans, secured personal loans and others		28,783			36,623
Commercial		135,070			223,563
Deferred loan fees, net		(2,887	)		(3,147	)
		1,121,670			1,155,848
Other loans:
Commercial		22,128			18,139
Personal consumer loans and credit lines		29,245			35,772
Deferred loan cost, net		12			24
		51,385			53,935
Loans receivable		1,173,055			1,209,783
Allowance for loan losses		(10,161	)		(8,016	)
Loans receivable, net		1,162,894			1,201,767
Mortgage loans held-for-sale		16,672			10,603
Total loans, net	$	1,179,566		$	1,212,370

In the years ended December 31, 2007 and 2006, and the six-month period ended December 31, 2005, residential mortgage loan production, including loans purchased, amounted to $248.5 million, $478.5 million and

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$135.3 million, respectively (fiscal year ended June 30, 2005 — $289.7 million) and mortgage loan sales/conversions totaled $111.1 million, $94.1 million and $71.6 million, respectively (fiscal year ended June 30, 2005 — $188.1 million). In June 2006 and May 2007, respectively, the Group purchased from two financial institutions all rights, title and interest in certain mortgage loans on residential properties located in Puerto Rico with principal outstanding balances of $173.2 million and $43.9 million, respectively.

At December 31, 2007 and 2006, residential mortgage loans held-for-sale amounted to $16.7 million and $10.6 million, respectively. In the years ended December 31, 2007 and 2006, and the six-month period ended December 31, 2005, the Group recognized gains of $2.4 million, $3.4 million and $1.7 million, respectively, (fiscal year ended June 30, 2005 — $7.8 million) in these sales, which are presented in the consolidated statements of operations as mortgage banking activities.

At December 31, 2007 and 2006, loans on which the accrual of interest has been discontinued amounted to $27.3 million and $17.8 million, respectively. The gross interest income that would have been recorded in the years ended December 31, 2007 and 2006, and six-month period ended December 31, 2005, if non-accrual loans had performed in accordance with their original terms amounted to $4.4 million, $3.4 million and $1.4 million, respectively (fiscal year ended June 30, 2005 — $2.2 million). The Group’s investment in loans past due 90 days or more and still accruing amounted to $38.8 million and $20.5 million at December 31, 2007 and 2006, respectively.

Due to the reclassification of certain mortgage loans purchase transactions as a commercial loan to the seller of the mortgage loans (refer to Note 20), at December 31, 2006 the Group had a lending concentration of $76.8 million outstanding to the financial institution from which it had originally purchased the mortgage loans. The resulting commercial loan was secured by mortgage loans on family residences located in Puerto Rico and the obligations of the borrower under the commercial loan were also secured by a guarantee from its parent company. The reclassification of the mortgage loans purchase transactions as a commercial loan to the seller resulted in the Group booking a loan exceeding the loan-to-one borrower limits imposed by Puerto Rico banking laws. To address this issue, the Group requested a waiver from the OCFI and it was issued on May 4, 2006 allowing the Group to retain the commercial loan on its books until paid in full. Pursuant to an agreement entered into on July 13, 2007, the borrower under the commercial loan and the Group agreed to the repayment of the outstanding principal balance on the commercial loan. In payment of the outstanding principal balance on the commercial loan, the Group (i) retained certain mortgage loans which were part of the collateral for the commercial loan with an outstanding principal balance of $26.6 million; (ii) received from the borrower mortgage loans meeting the Group’s credit underwriting standards with an outstanding principal balance of $25.9 million; and (iii) cash. The Group does not have any lending credit relationship in excess of the applicable lending limit for loans to a single borrower at December 31, 2007.

Allowance for Loan Losses

The changes in the allowance for loan losses for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and the fiscal year ended June 30, 2005, were as follows:

							Six-Month			Fiscal Year
	Year Ended						Period Ended			Ended
	December 31,						December 31,			June 30,
	2007			2006			2005			2005
				(In thousands)
Balance at beginning of period	$	8,016		$	6,630		$	6,495		$	7,553
Provision for loan losses		6,550			4,388			1,902			3,315
Loans charged-off		(4,906	)		(3,678	)		(2,081	)		(5,094	)
Recoveries		501			676			314			721
Balance at end of period	$	10,161		$	8,016		$	6,630		$	6,495

As described in Note 1 under the heading “Loans and Allowance for Loan Losses,” the Group evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. At December 31,

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2007, the total investment in impaired commercial loans was $1.1 million (December 31, 2006 — $2.0 million). The impaired commercial loans were measured based on the fair value of collateral. The average investment in impaired commercial loans for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and for the fiscal year ended June 30, 2005, amounted to $1.5 million, $2.2 million, $3.2 million and $2.3 million, respectively. The Group’s management determined that impaired loans did not require a valuation allowance in accordance with FASB Statement No. 114“Accounting by Creditors for Impairment of a Loan.”

5.   PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2007 and 2006 are stated at cost less accumulated depreciation and amortization as follows:

	Useful Life		December 31,
	(Years)		2007			2006
			(In thousands)
Land		—	$	1,014		$	1,014
Buildings and improvements		40		4,682			2,777
Leasehold improvements		5 — 10		13,411			12,948
Furniture and fixtures		3 —   7		7,162			6,801
Information technology and other		3 —   7		14,072			12,368
				40,341			35,908
Less: accumulated depreciation and amortization				(18,562	)		(15,755	)
			$	21,779		$	20,153

Depreciation and amortization of premises and equipment for the years ended December 31, 2007 and 2006, and the six-month period ended December 31, 2005, totaled $5.4 million, $5.5 million and $3.2 million, respectively (fiscal year ended June 30, 2005 — $5.9 million). These are included in the consolidated statements of operations as part of occupancy and equipment expenses.

6.   ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable at December 31, 2007 and 2006 consists of $10.6 million and $10.1 million, respectively from loans, and $41.7 million and $17.8 million, respectively from investments.

Other assets at December 31, 2007 and 2006 consist of the following:

	December 31,
	2007		2006
	(In thousands)
Prepaid expenses		2,714		2,165
Servicing asset		2,526		1,507
Goodwill		2,006		2,006
Investment in Statutory Trusts		1,086		1,086
Deferred charges		910		1,037
Investment in limited partnership		—		11,913
Accounts receivable and other assets		7,082		5,843
	$	16,324	$	25,557

In August 2007, the IBE subsidiary redeemed and terminated all of its limited partnership units in QED FED II, LCC, a partnership organized under the laws of the State of Illinois that is engaged in the trading of futures and futures options contracts on a wide range of financial instruments, for cash. During the years ended December 31,

F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2007 and 2006, the six-month period ended December 31, 2005, and the fiscal year ended June 30, 2005, (losses)/profits of ($279,000), $828,100, $837,700 and $246,834, respectively, were charged/credited to earnings.

7.   DEPOSITS AND RELATED INTEREST

At December 31, 2007, 2006 and 2005, the weighted average interest rate of the Group’s deposits was 4.34%, 3.78% and 3.17%, respectively, inclusive of non-interest bearing deposits of $50.0 million, $59.6 million and $61.5 million, respectively. Interest expense for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005 and the fiscal year ended June 30, 2005, is set forth below:

					Six-Month
	Year Ended				Period Ended		Fiscal Year Ended
	December 31,				December 31,		June 30,
	2007		2006		2005		2005
			(In thousands)
Demand deposits	$	817	$	857	$	445	$	900
Savings deposits		13,959		5,366		440		941
Certificates of deposit		38,018		40,479		19,396		27,903
	$	52,794	$	46,701	$	20,281	$	29,744

At December 31, 2007 and 2006, time deposits in denominations of $100,000 or higher amounted to $650.8 million, and $439.5 million including: (i) brokered certificates of deposit of $35.0 million and $179.1 million at a weighted average rate of 4.79% and 5.00%; and (ii) public fund deposits from various local government agencies of $95.8 million and $57.9 million at a weighted average rate of 4.56% and 5.30%, which were collateralized with investment securities with fair value of $100.4 million and $119.8 million, respectively .

Excluding equity indexed options in the amount of $38.8 million, which are used by the Group to manage its exposure to the Standard & Poor’s 500 stock market index, and also excluding accrued interest of $3.3 million and unamortized deposit discounts in the amount of $14.0 million, the scheduled maturities of certificates of deposit at December 31, 2007 are as follows:

	(In thousands)
Within one year:
Three(3) months or less	$	218,259
Over 3 months through 1 year		300,037
		518,296
Over 1 through 2 years		89,854
Over 2 through 3 years		27,086
Over 3 through 4 years		24,372
Over 4 through 5 years		50,142
Over 5 years		1,673
	$	711,423

The aggregate amount of overdraft in demand deposit accruals that were reclassified to loans amounted to $1,805,000 as of December 31, 2007, (December 31, 2006 — $1,322,000).

F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   BORROWINGS

Short Term Borrowings

At December 31, 2007, short term borrowings amounted to $27,460,000 (December 31, 2006 — $13,568,000) which mainly consist of federal funds purchased with a weighted average rate of 1.83% (December 31, 2006 — 4.92%).

Securities Sold under Agreements to Repurchase

At December 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.

At December 31, 2007, securities sold under agreements to repurchase (classified by counterparty), excluding accrued interest in the amount of $11.4 million, were as follows:

			Fair Value of
	Borrowing		Underlying
	Balance		Collateral
	(In thousands)
Citigroup	$	1,800,000	$	1,903,831
Credit Suisse First Boston Corporation		1,250,000		1,339,148
UBS Financial Services		500,000		511,330
JP Morgan Chase		200,023		211,295
Merrill Lynch		100,000		107,601
Total	$	3,850,023	$	4,073,205

During the fourth quarter of 2006 and throughout 2007, the Group restructured most of its short-term repurchase agreements portfolio into longer-term, structured repurchase agreements. The terms of these structured positions range between three and ten years, and the counterparts have the right to exercise put options before their contractual maturity from one to three years after the agreements’ settlement dates. The following table shows a summary of these agreements and their terms, excluding accrued interest in the amount of $11.0 million, at December 31, 2007:

		Weighted-									Months
Borrowing		Average			Settlement		Maturity		Next Put		to Next
Balance		Coupon			Date		Date		Date		Put Date
(In thousands)
$	450,000		4.22	%		12/28/2006		12/28/2011		3/28/2008		3
	450,000		4.34	%		12/28/2006		12/28/2011		12/28/2008		12
	750,000		4.34	%		03/02/2007		03/02/2017		3/2/2009		14
	150,000		4.31	%		03/06/2007		12/06/2012		12/7/2009		23
	900,000		3.71	%		03/06/2007		06/06/2017		3/6/2009		14
	350,000		4.26	%		05/09/2007		05/09/2012		2/9/2008		1
	100,000		3.71	%		06/06/2007		03/06/2017		3/6/2009		14
	100,000		4.67	%		07/27/2007		07/27/2014		1/27/2010		25
	100,000		4.39	%		08/14/2007		08/16/2010		2/14/2008		1
	100,000		4.50	%		08/14/2007		08/14/2012		8/14/2009		19
	300,000		4.47	%		09/13/2007		09/13/2012		9/13/2009		20
$	3,750,000		4.17	%

F-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents the borrowings under repurchase agreements, excluding accrued interest in the amount of $11.4 million and $6.5 million, respectively, at December 31, 2007 and 2006, their maturities and approximate fair values of their collateral as follows:

	December 31,
	2007				2006
			Fair Value of				Fair Value of
	Borrowing		Underlying		Borrowing		Underlying
	Balance		Collateral		Balance		Collateral
	(In thousands)
GNMA certificates
Within 30 days	$	4,832	$	27,672	$	96,271	$	99,235
After 30 to 90 days		—		—		26,829		27,316
3 — 5 years		10,729		11,241		—		—
over 5 years		76,816		72,861
		92,377		111,774		123,100		126,551
FNMA certificates
Within 30 days		32,000		101,982		286,046		291,871
After 30 to 90 days		—		—		136,548		139,280
1 — 3 years		3,261		3,401
3 to 5 years		437,719		450,431		116,984		127,625
over 5 years		316,228		299,115
		789,208		854,929		539,578		558,776
FHLMC certificates
Within 30 days		48,168		80,613		157,605		164,610
After 30 to 90 days		—		—		89,952		91,426
1 — 3 years		96,739		100,901
3 to 5 years		242,470		254,043
over 5 years		229,075		221,558		—		—
		616,452		657,115		247,557		256,036
CMOs
Within 30 days		—		17,512		147,687		152,149
3 to 5 years		746,355		743,807		683,016		713,141
		746,355		761,319		830,703		865,290
US Agency securities
Within 30 days		15,023		64,841		403,245		408,687
After 30 to 90 days		—		—		280,062		279,487
3 to 5 years		362,727		385,621		100,000		98,058
over 5 years		1,227,881		1,237,606
		1,605,631		1,688,068		783,307		786,232
US Treasury Bonds
Within 30 days		—		—		5,170		8,674
		—		—		5,170		8,674
Total	$	3,850,023	$	4,073,205	$	2,529,415	$	2,601,559
					��

F-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 31, 2007 and 2006, the weighted average interest rate of the Group’s repurchase agreements was 4.20% and 4.94%, respectively and included agreements with interest ranging from 3.71% to 5.25% and 4.17% to 5.33%, respectively. The following summarizes significant data on securities sold under agreements to repurchase as of December 31, 2007 and 2006, excluding accrued interest:

	December 31,
	2007			2006
	(In thousands)
Average daily aggregate balance outstanding	$	3,154,369		$	2,627,484
Maximum amount outstanding at any month-end	$	3,850,023		$	2,908,561
Weighted average interest rate during the year		4.68	%		5.09	%
Weighted average interest rate at year end		4.20	%		4.94	%

Advances from the Federal Home Loan Bank

At December 31, 2007 and 2006, advances from the FHLB consisted of the following, excluding accrued interest of $1.9 million and $589,000, respectively:

			December 31,
Maturity Date	Fixed Interest Rate		2007			2006
			(In thousands)
January-2007		5.33%	$	—		$	6,900
January-2007		5.41%		—			30,000
January-2007		5.44%		—			30,000
January-2007		5.45%		—			40,000
April-2007		3.09%		—			25,000
August-2008		4.07%		50,000			50,000
May-2012		4.37%		25,000			—
July-2012		4.57%		25,000			—
July-2012		4.26%		25,000			—
August-2012		4.33%		50,000			—
August-2012		4.09%		100,000			—
May-2014		4.20%		25,000			—
May-2014		4.22%		30,000			—
			$	330,000		$	181,900
Weighted average interest rate				4.21	%		4.73	%

Advances are received from the FHLB under an agreement whereby the Group is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At December 31, 2007, these advances were secured by mortgage loans amounting to $529.3 million. Also, at December 31, 2007, the Group has an additional borrowing capacity with the FHLB of $113.3 million. At December 31, 2007, the weighted average maturity of FHLB’s advances was 51.3 months (December 31, 2006 — 5.8 months).

F-34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2007, the Group restructured most of its FHLB advances portfolio into longer-term, structured advances. The terms of these advances range between five and seven years, and the FHLB has the right to exercise put options before the contractual maturity of the advances from six months to one year after the advances’ settlement dates. The following table shows a summary of these advances and their terms, excluding accrued interest in the amount of $1.7 million, at December 31, 2007:

		Weighted-									Months
Borrowing		Average			Settlement		Maturity		Next Put		to Next
Balance		Coupon			Date		Date		Date		Put Date
(In thousands)
$	25,000,000		4.37	%		05/04/2007		05/04/2012		2/5/2008		1
	25,000,000		4.20	%		05/08/2007		05/08/2014		2/8/2008		1
	30,000,000		4.22	%		05/11/2007		05/11/2014		2/13/2008		1
	25,000,000		4.57	%		07/24/2007		07/24/2012		1/24/2008		1
	25,000,000		4.26	%		07/30/2007		07/30/2012		1/30/2008		1
	50,000,000		4.33	%		08/10/2007		08/10/2012		8/10/2008		7
	100,000,000		4.09	%		08/16/2007		08/16/2012		8/16/2008		8
$	280,000,000		4.24	%

Term Notes

At December 31, 2006, there were term notes outstanding in the amount of $15.0 million, with a floating rate due quarterly at 4.98%, which matured on March 27, 2007, and which were secured by investment securities with fair value amounting to $15.5 million. There were no term notes outstanding as of December 31, 2007.

Subordinated Capital Notes

Subordinated capital notes amounted to $36.1 million at December 31, 2007 and 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 each issued by 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 notes 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 costs of the notes. The second one, has a par value of $36.1 million, bears interest based on 3 months LIBOR plus 295 basis points (December 31, 2007 and 2006 — 7.94% and 8.31%, respectively;), payable quarterly, and matures on September 17, 2033. Statutory Trust II may be called at par after five years (on September 17, 2008). The trust redeemable preferred security has the same maturity and call provisions as the subordinated capital notes. The subordinated deferrable interest debentures issued by the Group are accounted for as a liability denominated as subordinated capital notes on the consolidated statements of financial condition.

The subordinated capital note is treated as Tier 1 capital for regulatory purposes. Under Federal Reserve Board rules, 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.

F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The aggregate contractual maturities of long-term borrowings for each of the five years subsequent to December 31, 2007, are: $177.5 million in 2008, none in 2009, $100.0 million in 2010, $900.0 million in 2011, and $3.1 billion in 2012 and thereafter.

9.   DERIVATIVE ACTIVITIES

The Group may use 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, when necessary, collateral.

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.

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 orninety-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 150% 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.

There were no derivatives designated as a hedge as of December 31, 2007 and 2006. 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 $152,530,000 and $131,530,000 as of December 31, 2007 and 2006, respectively; embedded options on stock indexed deposits with notional amounts of $147,073,000 and $122,924,000 as of December 31, 2007 and 2006, respectively.

At December 31, 2007, the yearly contractual maturities of derivative instruments were as follows:

Year Ending	Equity Indexed		Equity Indexed
December 31,	Options Purchased		Options Written
	(In thousands)
2008		35,700		33,308
2009		22,085		20,870
2010		9,045		8,647
2011		21,415		20,825
2012		64,285		63,423
		152,530		147,073

For the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005 and for the fiscal year ended June 30, 2005, net interest (income) expense on interest rate swaps amounted to ($773,000),

F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

($8.5 million), ($1.3 million) and $10.1 million, respectively, which represent -0.36%, -4.5%, -2% and 10%, respectively, of the total interest expense recorded for such periods. The average net interest rate of the interest rate swaps during the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005 and the fiscal year ended June 30, 2005 , was -0.02%, -0.32%, -0.11% and 1.14% , respectively.

Gains (losses) credited (charged) to earnings and reflected as “Derivatives” in the consolidated statements of operations for the years ended December 31, 2007 and 2006 and the six-month period ended December 31, 2005 and for the fiscal year ended June 30, 2005 amounted to $11.0 million, $3.2 million, $1.3 million and ($2.8 million), respectively. During the year ended December 31, 2007, an $8.2 million gain was recognized due to the elimination of forecasted transactions on the cash flow hedges of interest rate swaps that were terminated in 2006, which gains were previously included in other comprehensive income.

At December 31, 2007 and 2006, the purchased options used to manage the exposure to the stock market on stock indexed deposits amounted to $40.7 million and $34.2 million, respectively; the options sold to customers embedded in the certificates of deposit represented a liability of $ $38.8 million and $32.2 million, respectively, recorded in deposits. Also, in a separate transaction during the fourth quarter of 2007, the Group entered into an interest-rate swap to manage its interest rate risk exposure, with a notional amount of $300.0 million, which was subsequently terminated in December 2007, resulting in a gain of approximately $1.6 million.

10.   EMPLOYEE BENEFIT PLAN

The Group has a cash or deferred arrangement profit sharing plan qualified under Section 1165(e) of the Puerto Rico Internal Revenue Code of 1994, as amended (the “Puerto Rico Code”) and the Section 401(a) and (e) of the United States Revenue Code of 1986, as amended (the “U.S. Code”), covering all full-time employees of the Group who have six months of service and are age twenty-one or older. Under this plan, participants may contribute each year from 2% to 10% of their compensation, as defined in the Puerto Rico Code and U.S. Code, up to a specified amount. The Group contributes 80 cents for each dollar contributed by an employee, up to $832 per employee. The Group’s matching contribution is invested in shares of its common stock. The plan is entitled to acquire and hold qualified employer securities as part of its investment of the trust assets pursuant to ERISA Section 407. For the years ended December 31, 2007 and 2006 and the six-month period ended December 31, 2005, the Group contributed 17,216, 12,787 and 2,700, respectively, (fiscal year ended June 30, 2005 — 8,807) shares of its common stock with a fair value of approximately $204,200, $168,200 and $39,000, respectively (fiscal year ended June 30, 2005 — $196,800) at the time of contribution. The Group’s contribution becomes 100% vested once the employee completes three years of service.

Also, the Group offers to its senior management a non-qualified deferred compensation plan, where executives can defer taxable income. Both the employer and the employee have flexibility because non-qualified plans are not subject to ERISA contribution limits nor are they subject to discrimination tests in terms of who must be included in the plan. Under this plan, the employee’s current taxable income is reduced by the amount being deferred. Funds deposited in a deferred compensation plan can accumulate without current income tax to the individual. Taxes are due when the funds are withdrawn, at the current income tax rate which may be lower than the individual’s current tax bracket.

F-37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11.   RELATED PARTY TRANSACTIONS

The Bank grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. These loans are offered at the same terms as loans to non-related parties. The activity and balance of these loans were as follows:

	December 31,
	2007			2006
	(In thousands)
Balance at the beginning of period	$	4,033		$	4,467
New loans		199			736
Repayments and other		(2,272	)		(1,170	)
Balance at the end of period	$	1,960		$	4,033

12.   INCOME TAX

Under the Puerto Rico Code, all companies are treated as separate taxable entities and are not entitled to file consolidated returns. The Group and its subsidiaries are subject to Puerto Rico regular income tax or alternative minimum tax (“AMT”) on income earned from all sources. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any one year may be used to offset regular income tax in future years, subject to certain limitations.

The components of income tax expense (benefit) for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005 and for the fiscal year ended June 30, 2005, are as follows:

						Six-Month
	Year Ended					Period Ended			Fiscal Year Ended
	December 31,					December 31,			June 30,
	2007		2006			2005			2005
	(In thousands)
Current income tax expense (benefit)	$	226	$	1,817		$	4,659		$	(2,631	)
Deferred income tax expense (benefit)		1,332		(3,448	)		(4,532	)		982
Income tax expense (benefit)	$	1,558	$	(1,631	)	$	127		$	(1,649	)

The Group maintained an effective tax rate lower than the statutory rate of 39% as of December 31, 2007, 43.5% as of December 31, 2006, 41.5% as of December 31, 2005, and 39% for the previous period presented, mainly due to the interest income arising from certain mortgage loans, investments and mortgage-backed securities exempt for P.R. income tax purposes, net of expenses attributable to the exempt income. In addition, the Puerto Rico Code provides a dividend received deduction of 100% on dividends received from wholly-owned subsidiaries subject to income taxation in Puerto Rico. For the years ended December 31, 2007 and 2006 and the six-month period ended December 31, 2005, the Group generated tax-exempt interest income of $184.7 million, $146.7 million and $71.4 million, respectively (fiscal year ended June 30, 2005 — $127.9 million). 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 IBE subsidiary.

F-38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The reconciliation between the Puerto Rico income tax statutory rate and the effective tax rate as reported for the year ended December 31, 2007, 2006, the six-month period ended December 31, 2005 and for the fiscal year ended June 30, 2005, are as follows:

													Six-Month
													Period Ended						Fiscal Year
	Year Ended December 31,												December 31,						Ended June 30,
	2007						2006						2005						2005
	Amount			Rate			Amount			Rate			Amount			Rate			Amount			Rate
	(Dollars in thousands)
Statutory rate	$	16,701			39.0	%	$	(2,931	)		43.5	%	$	7,074			41.5	%	$	22,628			39.0	%
Increase (decrease) in rate resulting from:
Exempt interest income, net		(16,052	)		−37.5	%		(3,527	)		52.3	%		(9,625	)		−56.5	%		(23,090	)		−39.8	%
Non-deductible charge		35			0.1	%		37			−0.5	%		28			0.2	%		746			1.3	%
Change in valuation allowance		573			1.3	%		2,029			−30.1	%		1,991			11.7	%		—			0.0	%
Provision/(credit) for income tax contingencies		529			1.2	%		(465	)		6.9	%		4,300			25.2	%		(2,800	)		−4.8	%
Other items, net		(228	)		−0.5	%		3,226			−47.9	%		(3,641	)		−21.4	%		867			1.5	%
Income tax expense (benefit)	$	1,558			3.6	%	$	(1,631	)		24.2	%	$	127			0.8	%	$	(1,649	)		−2.8	%

F-39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred income tax reflects the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. The components of the Group’s deferred tax asset, net at December 31, 2007 and 2006, are as follows:

	December 31,
	2007			2006
	(In thousands)
Allowance for loan losses	$	3,978		$	3,142
Unamortized discount related to mortgage servicing rights sold		1,360			1,745
Deferred gain on sale of assets		261			312
Deferred loan origination fees		2,157			3,043
Unrealized net gains included in other comprehensive income		—			290
S&P option contracts		7,121			6,714
Loss carryforwards		4,233			4,629
Other		133			584
Total gross deferred tax asset		19,243			20,459
Less: Valuation allowance		(4,593	)		(4,020	)
Net deferred tax asset		14,650			16,439
Unrealized net loss included in other comprehensive income		(2,166	)		—
Deferred loan origination costs		(2,122	)		(2,289	)
Total deferred tax liabilities		(4,288	)		(2,289	)
Deferred tax asset, net	$	10,362		$	14,150

In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax asset 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 December 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 carryforward period are reduced.

At December 31, 2007, the holding company and its subsidiaries have loss carryforwards for income tax purposes of approximately $20.3 million, which are available to offset future taxable income, if any, through December 2012.

The Group benefits from favorable tax treatment under regulations relating to the activities of the Bank’s IBE subsidiary. Any change in such tax regulations, whether by applicable regulators or as a result of legislation subsequently enacted by the Legislature of Puerto Rico, could adversely affect the Group’s profits and financial condition.

Effective at the beginning of the first quarter of 2007, the Group adopted the provisions of FIN 48, which contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS 109. 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.

F-40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 classifies unrecognized tax benefits in income taxes payable. No adjustments resulted from the implementation of FIN 48. These gross unrecognized tax benefits would affect the effective tax rate if realized. For the year ended December 31, 2007 there were no changes (new, expiring or settled) unrecognized tax benefits. Therefore the balance at December 31, 2007 was $5.7 million. The tax periods ended June 30, 2003, 2004, and 2005, and December 31, 2005 and 2006 remain subject to examination by the Puerto Rico Department of Treasury.

The Group’s policy to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated 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 ($1.9 million as of December 31, 2007) for the payment of interest and penalties relating to unrecognized tax benefits. On January 13, 2008, $2.4 million in unrecognized tax benefits expired due to statute of limitation. The Group does not anticipate any other significant changes in unrecognized tax benefits during 2008.

13.   STOCKHOLDERS’ EQUITY

Treasury Stock

During 2007, the Group repurchased 458,826 shares of its common stock, at an average price of $9.23, for a total of $4.2 million. On July 27, 2007, the Group’s Board approved a new stock repurchase program pursuant to which the Group is authorized to purchase in the open market up to $15.0 million of its outstanding share of common stock. The shares of common stock so repurchased are to be held by the Group as treasury shares. The new program substituted the previous program approved on August 30, 2005.

The activity in connection with common shares held in treasury by the Group for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and the fiscal year ended June 30, 2005 is set forth below:

													Six-Month Period						Fiscal Year
	Year Ended												Ended						Ended
	December 31,												December 31,						June 30,
	2007						2006						2005						2005
				Dollar						Dollar						Dollar						Dollar
	Shares			Amount			Shares			Amount			Shares			Amount			Shares			Amount
Beginning of period		989		$	12,956			770		$	10,332			228		$	3,368			246		$	4,578
Common shares repurchased under the repurchase program		459			4,236			233			2,817			545			7,003			200			3,014
Common shares repurchased /used to match defined contribution plan, net		(12	)		(169	)		(14	)		(193	)		(3	)		(39	)		24			249
Stock dividend		—			—			—			—			—			—			(242	)		(4,473	)
End of period		1,436		$	17,023			989		$	12,956			770		$	10,332			228		$	3,368

Equity-Based Compensation Plans

Effective April 25, 2007, the Board formally adopted the Omnibus Plan, which provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and dividend equivalents, as well as equity-based performance awards. The Omnibus Plan replaced and superseded the Oriental Financial Group Inc. 1996, 1998 and 2000 Incentive Stock Option Plans (the “Stock Option Plans”). All outstanding stock options under the Stock Option Plans continue in full force and effect, subject to their original terms. Under the Omnibus Plan, the Group granted 33,000 qualified stock options and 38,006 restricted shares in 2007.

F-41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The activity in outstanding options for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and the fiscal year ended June 30, 2005, is set forth below:

	Fiscal Year															Fiscal Year
	Ended December 31,										Six-Month Period Ended December 31,					Ended June 30,
	2007					2006					2005					2005
				Weighted					Weighted					Weighted					Weighted
	Number			Average		Number			Average		Number			Average		Number			Average
	of			Exercise		of			Exercise		of			Exercise		of			Exercise
	Options			Price		Options			Price		Options			Price		Options			Price
Beginning of period		833,533		$	15.61		946,855		$	15.51		1,219,333		$	13.23		1,674,351		$	12.36
Options granted		140,500			12.22		30,000			12.20		56,000	��		15.02		566,525			24.36
Options exercised		(134,586	)		8.52		(72,486	)		8.04		(246,489	)		3.44		(871,162	)		8.15
Options forfeited		(121,747	)		17.09		(70,836	)		19.60		(81,989	)		17.12		(150,381	)		11.95
End of period		717,700		$	16.15		833,533		$	15.61		946,855		$	15.51		1,219,333		$	13.23

The total intrinsic value of stock options exercised during the year ended December 31, 2007, was $412,000.

The following table summarizes the range of exercise prices and the weighted average remaining contractual life of the options outstanding at December 31, 2007:

	Outstanding						Exercisable
			Weighted		Weighted Average				Weighted
	Number of		Average		Contract Life		Number of		Average
Range of Exercise Prices	Options		Exercise Price		(Years)		Options		Exercise Price
$ 5.63 to $ 8.45		58,173	$	7.53		7.3		58,173	$	7.53
8.45 to 11.27		22,966		10.88		4.7		19,966		10.96
11.27 to 14.09		314,599		12.48		2.9		146,299		12.73
14.09 to 16.90		80,487		15.51		4.8		48,487		15.77
19.73 to 22.55		69,575		19.93		4.4		69,575		19.93
22.55 to 25.37		110,850		24.04		3.3		110,850		24.04
25.37 to 28.19		61,050		27.48		3.2		61,050		27.48
		717,700	$	16.15		4.4		514,400	$	17.72
Aggregate Intrinsic Value	$	697,000					$	494,000

The average fair value of each option granted during years ended December 31, 2007 and 2006, and the six-month period ended December 31, 2005, was $3.07, $3.84 and $4.79, respectively, and in fiscal year ended June 30, 2005 was $13.09. 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.

F-42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	Year Ended						Six-Month Period			Fiscal Year
	December 31,						Ended December 31,			Ended June 30,
	2007			2006			2005			2005
Weighted Average Assumptions:
Dividend yield		4.62	%		3.97	%		2.75	%		2.75	%
Expected volatility		33	%		34	%		44	%		35	%
Risk-free interest rate		4.62	%		4.24	%		4.03	%		4.06	%
Expected life (in years)		8.5			8.5			8.5			7

During the year ended December 31, 2007 the Group granted 38,006 restricted shares at a weighted average granted date fair value of $12.49 under the Omnibus Plan. No shares were exercised or forfeited during 2007.

Upon adoption of SFAS 123R on July 1st 2005, the Group recorded approximately $86,000, $23,000 and $11,000 related to compensation expense for qualified stock options and restricted shares issued during the years ended December 31, 2007 and 2006, and the six-month period ended December 31, 2005, respectively. The remaining unrecognized compensation cost related to unvested awards as of December 31, 2007, was approximately $898,000 and the weighted average period of time over which this cost will be recognized is approximately 8.5 years.

Earnings (loss) per Common Share

The calculation of earnings (loss) per common share for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and the fiscal year ended June 30, 2005 is as follows:

	Year Ended						Six-Month Period			Fiscal Year
	December 31,						Ended December 31,			Ended June 30,
	2007			2006			2005			2005
	(In thousands, except per share data)
Net income (loss)	$	41,265		$	(5,106	)	$	16,919		$	59,669
Less: Dividends on preferred stock		(4,802	)		(4,802	)		(2,401	)		(4,802	)
Income (loss) available to common shareholders’	$	36,463		$	(9,908	)	$	14,518		$	54,867
Weighted average common shares and share equivalents:
Average common shares outstanding		24,326			24,562			24,777			24,571
Average potential common shares-options		41			101			154			1,104
Total		24,367			24,663			24,931			25,675
Earnings (loss) per common share — basic	$	1.50		$	(0.40	)	$	0.59		$	2.23
Earnings (loss) per common share — diluted	$	1.50		$	(0.40	)	$	0.58		$	2.14

For the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and the fiscal years ended June 30, 2005, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 635,934, 494,179, 552,869 and 207,545, respectively.

Legal Surplus

The Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At December 31, 2007, legal surplus amounted to $40.6 million (December 31, 2006 — $36.2 million). The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders. In addition, the Federal Reserve

F-43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Board has issued a policy statement that bank holding companies should generally pay dividends only from operating earnings of the current and preceding two years.

Preferred Stock

On May 28, 1999, the Group issued 1,340,000 shares of 7.125% Noncumulative Monthly Income Preferred Stock, Series A, at $25 per share. Proceeds from issuance of the Series A Preferred Stock, were $32.4 million, net of $1.1 million of issuance costs. The Series A Preferred Stock has the following characteristics: (1) annual dividends of $1.78 per share, payable monthly, if declared by the Board of Directors; missed dividends are not cumulative, (2) redeemable at the Group’s option beginning on May 30, 2004, (3) no mandatory redemption or stated maturity date and (4) liquidation value of $25 per share.

On September 30, 2003, the Group issued 1,380,000 shares of 7.0% Noncumulative Monthly Income Preferred Stock, Series B, at $25 per share. Proceeds from issuance of the Series B Preferred Stock, were $33.1 million, net of $1.4 million of issuance costs. The Series B Preferred Stock has the following characteristics: (1) annual dividends of $1.75 per share, payable monthly, if declared by the Board of Directors; missed dividends are not cumulative, (2) redeemable at the Group’s option beginning on October 31, 2008, (3) no mandatory redemption or stated maturity date, and (4) liquidation value of $25 per share.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income (loss), net of income tax, as of December 31, 2007 and 2006, consisted of:

	December 31,
	2007			2006
	(In thousands)
Unrealized loss on securities available-for-sale transferred to held to maturity	$	(16,257	)	$	(18,721	)
Unrealized gain (loss) on securities available-for-sale		3,242			(6,376	)
Realized gain on termination of derivative activities		—			8,998
	$	(13,015	)	$	(16,099	)

Minimum Regulatory Capital Requirements

The Group (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Group’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Group and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Group and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average assets (as defined in the regulations). As of December 31, 2007, 2006 and 2005, the Group and the Bank met all capital adequacy requirements to which they are subject.

F-44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2007 and 2006, the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that have changed the Bank’s category. The Group’s and the Bank’s actual capital amounts and ratios as of December 31, 2007 and 2006 are as follows:

					Minimum Capital
	Actual				Requirement
Group Ratios	Amount		Ratio		Amount		Ratio
			(Dollars in thousands)
As of December 31, 2007
Total Capital to Risk-Weighted Assets	$	406,470		19.06%	$	170,583		8.00%
Tier I Capital to Risk-Weighted Assets	$	396,309		18.59%	$	85,292		4.00%
Tier I Capital to Total Assets	$	396,309		6.69%	$	236,847		4.00%
As of December 31, 2006
Total Capital to Risk-Weighted Assets	$	380,574		22.04%	$	135,677		8.00%
Tier I Capital to Risk-Weighted Assets	$	372,558		21.57%	$	67,830		4.00%
Tier I Capital to Total Assets	$	372,558		8.42%	$	176,987		4.00%

									Minimum To Be Well
									Capitalized Under
					Minimum Capital				Prompt Corrective
	Actual				Requirement				Action Provisions
Bank Ratios	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of December 31, 2007
Total Capital to Risk-Weighted Assets	$	341,713		17.12%	$	159,657		8.00%	$	199,572		10.00%
Tier I Capital to Risk-Weighted Assets	$	331,552		16.61%	$	79,829		4.00%	$	119,743		6.00%
Tier I Capital to Total Assets	$	331,552		5.80%	$	228,768		4.00%	$	285,960		5.00%
As of December 31, 2006
Total Capital to Risk-Weighted Assets	$	293,339		17.49%	$	134,174		8.00%	$	167,651		10.00%
Tier I Capital to Risk-Weighted Assets	$	285,323		17.01%	$	67,095		4.00%	$	100,543		6.00%
Tier I Capital to Total Assets	$	285,323		6.43%	$	177,495		4.00%	$	222,098		5.00%

The Group’s ability to pay dividends to its stockholders and other activities can be restricted if its capital falls below levels established by the Federal Reserve Board’s guidelines. In addition, any bank holding company whose capital falls below levels specified in the guidelines can be required to implement a plan to increase capital.

14.   COMMITMENTS

Loan Commitments

At December 31, 2007, there were $49.6 million in loan commitments, which represents unused lines of credit provided to customers. Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates, bear variable interest and may require payment of a fee. Since the commitments may expire unexercised, the total commitment amounts do not necessarily represent future cash requirements. The Group evaluates each customer’s credit-worthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary by the Group upon extension of credit, is based on management’s credit evaluation of the customer.

At December 31, 2007, commitments to sell or securitize mortgage loans at fair value, expiring on June 30, 2008, amounted to approximately $13.7 million.

F-45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Lease Commitments

The Group has entered into various operating lease agreements for branch facilities and administrative offices. Rent expense for the years ended December 31, 2007 and 2006 and the six-month period ended December 31, 2005 amounted to $4.2 million, $3.9 million and $1.7 million, respectively (fiscal year ended June 30, 2005 — $3.0 million). Future rental commitments under terms of leases in effect at December 31, 2007, exclusive of taxes, insurance and maintenance expenses payable by the Group, are summarized as follows:

Year Ending December 31,	Minimum Rent
	(In thousands)
2008	$	3,200
2009		3,175
2010		3,018
2011		2,967
2012		3,003
Thereafter		7,918
	$	23,281

15.   LITIGATION

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”), a stock insurance corporation organized under the laws of the State of Indiana. 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 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’s bad faith, capricious, arbitrary, fraudulent and without cause denial of the Group’s claims. 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 (“2005 Verdict”). The jury granted the Group $453,219 for fraud and loss documentation in connection with its Accounts Receivable Returned Checks Account and $7,078,640.60 regarding its bad faith claim. 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. The court decided not to enter a final judgment for the aforementioned awards until a new trial regarding the Cash Accounts claim be held. On August 14, 2007, a jury rendered a verdict in favor of FIC and against the Group, regarding its Cash Accounts (“2007 Verdict”).

Judgment pursuant to the aforementioned 2005 and 2007 verdicts was entered on August 15, 2007. FIC filed a motion to set aside the 2005 Verdict which OFG opposed. The Group filed a motion to set aside the 2007 Verdict which FIC opposed. In addition, the Group filed Motion to Correct Judgment, Bill of Costs and Motion for Imposition of Attorneys and Experts Costs so as to recover pre and post judgment interest, costs, fees and expenses related to the prosecution of its claims.

The Group has not recognized any income on these claims since the post-trial motions have not been ruled upon yet and appellate rights have not been exhausted. Thus, the amount to be collected cannot be determined at this time.

F-46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

16.   FAIR VALUE OF FINANCIAL INSTRUMENTS

The reported fair values of financial instruments are based on either quoted market prices for identical or comparable instruments or estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Accordingly, the fair values may not represent the actual values of the financial instruments that could have been realized as of year-end or that will be realized in the future.

The fair value estimates are made at a point in time based on the type of financial instruments and related relevant market information. Quoted market prices are used for financial instruments in which an active market exists. However, because no market exists for a portion of the Group’s financial instruments, fair value estimates are based on judgments regarding the amount and timing of estimated future cash flows, assumed discount rates reflecting varying degrees of risk, and other factors. Because of the uncertainty inherent in estimating fair values, these estimates may vary from the values that would have been used had a ready market for these financial instruments existed.

These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant tangible and intangible assets that are not considered financial instruments are the value of long-term customer relationships of the retail deposits, and premises and equipment.

F-47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The estimated fair value and carrying value of the Group’s financial instruments at December 31, 2007 and 2006 is as follows:

	December 31,
	2007				2006
	Fair		Carrying		Fair		Carrying
	Value		Value		Value		Value
			(In thousands)
Financial Assets:
Cash and cash equivalents	$	88,983	$	88,983	$	39,070	$	39,070
Trading securities		1,122		1,122		243		243
Investment securities available-for-sale		3,069,282		3,069,282		974,960		974,960
Investment securities held-to-maturity		1,478,112		1,492,887		1,931,720		1,967,477
FHLB stock		20,658		20,658		13,607		13,607
Securities sold but yet not delivered		—		—		6,430		6,430
Total loans (including loans held-for-sale)		1,170,493		1,179,566		1,209,177		1,212,370
Equity options purchased		40,709		40,709		34,216		34,216
Accrued interest receivable		52,315		52,315		27,940		27,940
Financial Liabilities:
Deposits		1,228,205		1,246,420		1,220,601		1,232,988
Securities sold under agreements to repurchase		3,954,699		3,861,411		2,523,152		2,535,923
Advances from FHLB		340,259		331,898		180,876		182,489
Subordinated capital notes		36,083		36,083		36,083		36,083
Term notes		—		—		15,000		15,000
Federal funds purchased and other short term borrowings		27,460		27,460		13,568		13,568
Securities and loans purchased but not yet received		119,152		119,152		—		—
Accrued expenses and other liabilities		25,691		25,691		19,509		19,509

The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31, 2007 and 2006:

•  Cash and cash equivalents, money market investments, time deposits with other banks, securities sold but not yet delivered, accrued interest receivable and payable, securities and loans purchased but not yet received, federal funds purchased, accrued expenses, other liabilities, term notes and subordinated capital notes have been valued at the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.

•  The fair value of trading securities and investment securities available-for-sale and held-to-maturity is estimated based on bid quotations from securities dealers. If a quoted market price is not available, fair value is estimated using either quoted market prices for similar securities, or valuations provided by securities dealers. Investments in FHLB stock are valued at their redemption value.

•  The estimated fair value of loans held-for-sale is based on secondary market prices. The fair value of the loan portfolio has been estimated for loan portfolios with similar financial characteristics. Loans are segregated by type, such as mortgage, commercial and consumer. Each loan category is further segmented into fixed and adjustable interest rates and by performing and non-performing categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for prepayment estimates, if any, using estimated current market discount rates that reflect the credit and interest rate risk inherent in the loan. The fair value for

F-48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

significant non-performing loans is based on specific evaluations of discounted expected future cash flows from the loans or its collateral using current appraisals and market rates.

•  The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market discount rates for deposits of similar remaining maturities.

•  For short-term borrowings, the carrying amount is considered a reasonable estimate of fair value. The fair value of long-term borrowings is based on the discounted value of the contractual cash flows, using current estimated market discount rates for borrowings with similar terms and remaining maturities and put dates.

•  The fair value of interest rate swaps and equity index option contracts were estimated by management based on the present value of expected future cash flows using discount rates of the swap yield curve. These fair values represent the estimated amount the Group would receive or pay to terminate the contracts taking into account the current interest rates and the current creditworthiness of the counterparties.

•  The fair value of commitments to extend credit and unused lines of credit is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings.

17.   SEGMENT REPORTING

The Group segregates its businesses into the following major reportable segments of business: 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 its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Group measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated.

Banking includes the Bank’s branches and mortgage banking, with traditional banking products such as deposits and mortgage, commercial and consumer loans. The mortgage banking activities are carried out by the Bank’s mortgage banking division and Oriental Mortgage Corporation, the Bank’s mortgage lending subsidiary, whose principal activity is to originate and purchase mortgage loans for the Group’s own portfolio. The Group originates Federal Housing Administration (“FHA”)-insured and Veterans Administration (“VA”)-guaranteed mortgages that are primarily securitized for issuance of Government National Mortgage Association (“GNMA”) mortgage-backed securities which can be resold to individual or institutional investors in the secondary market. Conventional loans that meet the underwriting requirements for sale or exchange under standard Federal National Mortgage Association (the “FNMA”) or the Federal Home Loan Mortgage Corporation (the “FHLMC”) programs are referred to as conforming mortgage loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed securities. Through December 2005, the Group outsourced the securitization of GNMA, FNMA and FHLMC mortgage-backed securities. In 2006 and after FNMA’s approval for the Group to sell FNMA-conforming conventional mortgage loans directly in the secondary market, the Group became an approved seller of FNMA, as well as FHLMC, mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The Group is also an approved issuer of GNMA mortgage-backed securities. The Group outsourced to a third party the sub-servicing of the GNMA, FNMA and FHLMC pools that it issues and its mortgage loan portfolio.

Treasury activities encompass all of the Group’s treasury-related functions and investment banking business. The Group’s investment portfolio consists of mortgage-backed securities, collateralized mortgage obligations, both non-agency and those issued by U.S. Government agencies, U.S. Treasury notes, U.S. Government agency bonds, P.R. Government obligations, structured credit investments and money market instruments. Mortgage-backed securities, the largest component, consist principally of pools of residential mortgage loans that are made to consumers and then resold in the form of certificates in the secondary market, the payment of interest and principal of which is guaranteed by GNMA, FNMA or FHLMC.

F-49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices. The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies.” Following are the results of operations and the selected financial information by operating segment as of and for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and for the fiscal year ended June 30, 2005:

							Financial			Total Major
Year Ended December 31, 2007	Banking			Treasury			Services			Segments			Eliminations			Total
	(In thousands)
Interest income	$	85,797		$	203,341		$	226		$	289,364		$	—		$	289,364
Interest expense		(34,364	)		(180,344	)		(926	)		(215,634	)		—			(215,634	)
Net interest income (expense)		51,433			22,997			(700	)		73,730			—			73,730
Non-interest income (loss)		14,092			14,110			14,300			42,502			—			42,502
Non-interest expenses		(51,715	)		(2,731	)		(12,413	)		(66,859	)		—			(66,859	)
Intersegment revenue		3,681			—			—			3,681			(3,681	)		—
Intersegment expense		—			(737	)		(2,944	)		(3,681	)		3,681			—
Provision for loan losses		(6,550	)		—			—			(6,550	)					(6,550	)
Income (loss) before income taxes	$	10,941		$	33,639		$	(1,757	)	$	42,823		$	—		$	42,823
Total assets as of December 31, 2007	$	1,604,690		$	4,738,719		$	11,082		$	6,354,491		$	(354,636	)	$	5,999,855

							Financial			Total Major
Year Ended December 31, 2006	Banking			Treasury			Services			Segments			Eliminations			Total
	(In thousands)
Interest income	$	79,267		$	152,830		$	214		$	232,311		$	—		$	232,311
Interest expense		(25,683	)		(161,529	)		(973	)		(188,185	)		—			(188,185	)
Net interest income (expense)		53,584			(8,699	)		(759	)		44,126			—			44,126
Non-interest income (loss)		9,452			(8,430	)		16,216			17,238			—			17,238
Non-interest expenses		(50,177	)		(2,573	)		(10,963	)		(63,713	)		—			(63,713	)
Intersegment revenue		3,952			—			—			3,952			(3,952	)		—
Intersegment expense		—			(806	)		(3,146	)		(3,952	)		3,952			—
Provision for loan losses		(4,388	)		—			—			(4,388	)					(4,388	)
Income (loss) before income taxes	$	12,423		$	(20,508	)	$	1,348		$	(6,737	)	$	—		$	(6,737	)
Total assets as of December 31, 2006	$	1,677,446		$	2,995,634		$	12,014		$	4,685,094		$	(313,108	)	$	4,371,986

F-50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

							Financial			Total Major
Six-Month Period Ended December 31, 2005	Banking			Treasury			Services			Segments			Eliminations			Total
	(In thousands)
Interest income	$	46,754		$	58,267		$	65		$	105,086		$	—		$	105,086
Interest expense		(31,304	)		(39,402	)		—			(70,706	)		—			(70,706	)
Net interest income		15,450			18,865			65			34,380			—			34,380
Non-interest income		5,158			3,737			7,487			16,382			—			16,382
Non-interest expenses		(24,904	)		(1,571	)		(5,339	)		(31,814	)		—			(31,814	)
Intersegment revenue		1,699			—			—			1,699			(1,699	)		—
Intersegment expense		—			(6	)		(1,693	)		(1,699	)		1,699			—
Provision for loan losses		(1,902	)		—			—			(1,902	)					(1,902	)
Income (loss) before income taxes	$	(4,499	)	$	21,025		$	520		$	17,046		$	—		$	17,046
Total assets as of December 31, 2005	$	969,186		$	3,963,013		$	8,513		$	4,940,712		$	(393,763	)	$	4,546,949
Fiscal Year Ended June 30, 2005
Interest income	$	79,220		$	110,033		$	59		$	189,312		$	—		$	189,312
Interest expense		(44,676	)		(58,223	)		—			(102,899	)		—			(102,899	)
Net interest income		34,544			51,810			59			86,413			—			86,413
Non-interest income		14,234			6,480			14,171			34,885			—			34,885
Non-interest expenses		(48,267	)		(1,524	)		(10,172	)		(59,963	)		—			(59,963	)
Intersegment revenue		3,684			—			—			3,684			(3,684	)		—
Intersegment expense		—			(593	)		(3,091	)		(3,684	)		3,684			—
Provision for loan losses		(3,315	)		—			—			(3,315	)					(3,315	)
Income before income taxes	$	880		$	56,173		$	967		$	58,020		$	—		$	58,020
Total assets as of June 30, 2005	$	973,296		$	3,655,649		$	9,582		$	4,638,527		$	(391,662	)	$	4,246,865

18.   ORIENTAL FINANCIAL GROUP INC. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION

As a bank holding company subject to the regulations of the Federal Reserve Board, the Group must obtain approval from the Federal Reserve Board for any dividend if the total of all dividends declared by it in any calendar year would exceed the total of its consolidated net profits for the year, as defined by the Federal Reserve Board, combined with its retained net profits for the two preceding years. The payment of dividends by the Bank to the Group may also be affected by other regulatory requirements and policies, such as the maintenance of certain regulatory capital levels. For the year ended December 31, 2006, the Bank paid $10.0 million in dividends to the Group. No dividends were paid during the year ended December 31, 2007 and for the six-month period ended December 31, 2005. Dividends paid for the fiscal year ended June 30, 2005 amounted to $5.0 million.

F-51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following condensed financial information presents the financial position of the holding company only as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years ended December 31, 2007 and 2006, the six-month period ended December 31, 2005, and the fiscal year ended June 30, 2005:

ORIENTAL FINANCIAL GROUP INC.

CONDENSED STATEMENTS OF FINANCIAL POSITION INFORMATION
(Holding Company Only)

	December 31,
	2007		2006
	(In thousands)
ASSETS
Cash and cash equivalents	$	38,409	$	29,082
Investment securitiesavailable-for-sale, at fair value		319,221		1,700
Other investment securities		1,675		30,949
Investment securitiesheld-to-maturity, at amortized cost		—		21,895
Investment in bank subsidiary, equity method		325,130		282,225
Investment in nonbank subsidiaries, equity method		9,225		10,170
Due from bank subsidiary, net		1,433		—
Other assets		6,299		4,307
Total assets	$	701,392	$	380,328
LIABILITIES AND STOCKHOLDERS’ EQUITY
Securities sold under agreements to repurchase	$	300,000	$	—
Subordinated capital notes		36,083		36,083
Dividend payable		3,377		3,423
Due to Bank subsidiary		656		4,184
Deferred tax liability, net		808		12
Accrued expenses and other liabilities		1,007		200
Total liabilities		341,931		43,902
Stockholders’ equity		359,461		336,426
Total liabilities and stockholders’ equity	$	701,392	$	380,328

F-52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME INFORMATION
(Holding Company Only)

							Six-Month
	Year Ended						Period Ended			Fiscal Year
	December 31,						December 31,			Ended June 30,
	2007			2006			2005			2005
	(In thousands)
Income:
Dividends from bank subsidiary	$	—		$	10,000		$	—		$	5,000
Dividends from nonbank subsidiary		—			—			77			121
Interest income		6,968			2,468			648			1,287
Investment and trading activities, net and other		3,972			(1,127	)		802			—
Total income		10,940			11,341			1,527			6,408
Expenses:
Interest expense		7,234			5,337			2,474			4,325
Operating expenses		4,767			5,408			551			(401	)
Total expenses		12,001			10,745			3,025			3,924
Income (loss) before income taxes		(1,061	)		596			(1,498	)		2,484
Income tax (expense) benefit		33			(5	)		4			—
Income (loss) before changes in undistributed earnings of subsidiaries		(1,028	)		591			(1,494	)		2,484
Equity in undistributed earnings (losses) from:
Bank subsidiary		43,238			(6,631	)		19,846			59,679
Nonbank subsidiaries		(945	)		934			(1,433	)		(2,494	)
Net income (loss)		41,265			(5,106	)		16,919			59,669
Other comprenhensive income, net of taxes		3,084			21,785			499			6,979
Comprehensive income	$	44,349		$	16,679		$	17,418		$	66,648

F-53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED STATEMENTS OF CASH FLOWS INFORMATION
(Holding Company Only)

	Year Ended						Six-Month Period			Fiscal Year Ended
	December 31,						Ended December 31,			June 30,
	2007			2006			2005			2005
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	41,265		$	(5,106	)	$	16,919		$	59,669
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (earnings) losses from banking subsidiary		(43,238	)		6,631			(19,699	)		(59,679	)
Equity in losses (earnings) from non-banking subsidiaries		945			(934	)		1,281			2,494
Amortization of premiums, net of accretion discounts on investment securities		(454	)		(8	)		6			9
Realized gain (loss) on sale of investments		719			1,515			(228	)		—
Stock based compensation		86			15			—			—
Deferred income tax (benefit) expense		(33	)		1			(4	)		—
(Increase) decrease in other assets		(2,028	)		699			(547	)		62
Increase (decrease) in accrued expenses and liabilities		761			(2,303	)		(827	)		(2,267	)
Net cash provided by (used in) operating activities		(1,977	)		510			(3,099	)		288
Cash flows from investing activities:
Purchase of investment securities available for sale		(315,000	)		(2,844	)		—			—
Redemptions and sales of investment securitiesavailable-for-sale		1,496			275			9,515			507
Purchase of investment securitiesheld-to-maturity		—			(6,500	)		(11,100	)		—
Redemptions of investment securitiesheld-to-maturity		21,895			6,745			—			4
Purchase of other investment securities		—			(30,982	)		—			—
Redemptions and sales of other investment securities		29,274			—			—			—
Net (increase) decrease in due from bank subsidiary, net		(982	)		100,804			19,150			20,648
Net (increase) decrease in due from non bank subsidiary, net		(451	)		—			—			—
Acquisition of and capital contribution in non-banking subsidiary		—			(909	)		—			—
Net cash provided by (used in) investing activities		(263,768	)		66,589			17,565			21,159
Cash flows from financing activities:
Net increase in securities sold under agreements to repurchase		300,000			—			—			—
Proceeds from exercise of stock options		1,080			645			1,896			4,507
Net (decrease) increase in due to nonbank subsidiaries, net		—			(200	)		—			49
Net (decrease) increase in due to bank subsidiaries, net		(3,528	)		4,184			—			—
Net proceeds from issuance of common stock		—			—			—			(10	)
Net proceeds from redemptions of subordinated notes payable
to nonbank subsidiary		—			(36,998	)		—			—
Purchase of treasury stock		(4,067	)		(2,624	)		(6,964	)		(3,512	)
Dividends paid		(18,413	)		(18,555	)		(9,356	)		(17,918	)
Net cash provided by (used in) financing activities		275,072			(53,548	)		(14,424	)		(16,884	)
Increase in cash and cash equivalents		9,327			13,551			42			4,563
Cash and cash equivalents at beginning of period		29,082			15,531			15,489			10,926
Cash and cash equivalents at end of period	$	38,409		$	29,082		$	15,531		$	15,489

F-54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

19.   CHANGE IN THE FISCAL YEAR END

On August 20, 2005, the Group changed its fiscal year from a twelve-month period ending June 30th to atwelve-month period ending December 31st. The Group’s consolidated financial statements for the period ended December 31, 2005, include the six-month period from July 1, 2005 to December 31, 2005.

The following table presents certain financial information for the year ended December 31, 2007 and 2006, and the comparative unaudited year ended December 31, 2005, as well as information for the six-month period ended December 31, 2005.

										Six-Month Period Ended
	Year Ended December 31,									December 31,			December 31, 2004
	2007			2006			2005			2005			2004
							(Unaudited)						(Unaudited)
Total interest income	$	289,364		$	232,311		$	201,534		$	105,086		$	92,864
Total interest expense		215,634			188,185			127,456			70,706			46,149
Net interest income		73,730			44,126			74,078			34,380			46,715
Provision for loan losses		6,550			4,388			3,412			1,902			1,805
Total non-interest income		42,502			17,238			28,920			16,382			22,347
Total non-interest expense		66,859			63,713			57,856			31,814			33,921
Income (loss) before income taxes		42,823			(6,737	)		41,730			17,046			33,336
Income tax expense (benefit)		1,558			(1,631	)		(2,168	)		127			645
Net income (loss)		41,265			(5,106	)		43,898			16,919			32,691
Less: Dividends on preferred tocks		(4,802	)		(4,802	)		(4,802	)		(2,401	)		(2,401	)
Income available (loss) to common shareholders	$	36,463		$	(9,908	)	$	39,096		$	14,518		$	30,290
Earnings per Share:
Basic	$	1.50		$	(0.40	)	$	1.58		$	0.59		$	1.24
Diluted	$	1.50		$	(0.40	)	$	1.56		$	0.58		$	1.17
Weighted average basic shares outstanding		24,326			24,562			24,750			24,777			24,407
Weighted average diluted shares outstanding		24,367			24,672			25,083			25,117			25,953
Dividends declared per common share	$	0.56		$	0.56		$	0.56		$	0.28		$	0.27

20.   RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Subsequent to the issuance of the Group’s June 30, 2005 consolidated financial statements, the Group’s management determined that the accounting treatment for certain mortgage-related transactions previously treated as purchases under SFAS No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, and the treatment of certain employee stock option awards as fixed awards as opposed to variable awards did not conform to GAAP, as discussed below. As a result, the accompanying consolidated statement of operations for the year ended June 30, 2005 was restated to correct the accounting for these transactions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Group determined that certain transactions involving the transfer of real estate mortgage loans (“mortgage-related transactions”), secured mainly byone-to-four family residential properties did not constitute purchases under SFAS No. 140 and should have been presented as originations of commercial loans. As a result: (1) such mortgage-related transactions are now presented as commercial loans secured by real estate mortgage loans instead of loan purchases; (2) the associated balance guarantee swap derivative was reversed resulting in a decrease in loansreceivable-net and other liabilities; and (3) for regulatory capital requirement purposes the risk weighting factor on the outstanding balance of such loans increased from 50% to 100%.

The Group has also determined that certain employee stock option awards with anti-dilution provisions should have been accounted for as variable awards under APB Opinion No. 25, “Accounting for Stock Issued to Employees”, given that the terms of these awards are such that the number of shares that the employees are entitled to receive, and the purchase price, depend on events occurring after the date of grant. As a result, compensation expense has been determined taking into account the appropriate measurement dates and market prices of the stock.

A summary of the significant effects of the restatement for the fiscal year ended June 30, 2005, is as follows:

	Fiscal Year Ended
	June 30, 2005
	As Previously
	Reported		As Restated
Non-interest expenses:
Compensation and employees’ benefits	$	26,663	$	23,606
Total non-interest expenses		63,020		59,963
Income before Income taxes		54,963		58,020
Net income		56,612		59,669
Income per common share:
Basic	$	2.11	$	2.23
Diluted	$	2.05	$	2.14

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ORIENTAL FINANCIAL GROUP INC.

SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005, SIX-MONTH PERIODS ENDED
DECEMBER 31, 2005 AND 2004,
AND FOR THE FISCAL YEARS PERIOD ENDED JUNE 30, 2005 AND 2004

	Year Ended December 31,									Six-Month Period Ended December 31,						Fiscal Year Ended June 30,
	2007			2006			2005			2005			2004			2005			2004
	(In thousands, except per share data)
							(Unaudited)						(Unaudited)
EARNINGS:
Interest income	$	289,364		$	232,311		$	201,534		$	105,086		$	92,864		$	189,312		$	164,385
Interest expense		215,634			188,185			127,456			70,706			46,149			102,899			77,174
Net interest income		73,730			44,126			74,078			34,380			46,715			86,413			87,211
Provision for loan losses		6,550			4,388			3,412			1,902			1,805			3,315			4,587
Net interest income after provision for loan losses		67,180			39,738			70,666			32,478			44,910			83,098			82,624
Non-interest income		42,502			17,238			28,920			16,382			22,347			34,885			46,034
Non-interest expenses		66,859			63,713			57,856			31,814			33,921			59,963			63,364
Income (loss) before taxes		42,823			(6,737	)		41,730			17,046			33,336			58,020			65,294
Income tax benefit (expense)		1,558			1,631			2,168			(127	)		(645	)		1,649			(5,577	)
Net Income (loss)		41,265			(5,106	)		43,898			16,919			32,691			59,669			59,717
Less: dividends on preferred stock		(4,802	)		(4,802	)		(4,802	)		(2,401	)		(2,401	)		(4,802	)		(4,198	)
Income available (loss) to common shareholders	$	36,463		$	(9,908	)	$	39,096		$	14,518		$	30,290		$	54,867		$	55,519
PER SHARE AND DIVIDENDS DATA(1):
Earnings (loss) per common shares (basic)	$	1.50		$	(0.40	)	$	1.58		$	0.59		$	1.24		$	2.23		$	2.48
Earnings (loss) per common shares (diluted)	$	1.50		$	(0.40	)	$	1.56		$	0.58		$	1.17		$	2.14		$	2.32
Average common shares outstanding		24,326			24,562			24,750			24,777			24,407			24,571			22,394
Average potential commonshare-options		41			101			333			154			1,546			1,104			1,486
Average shares and shares equivalents		24,367			24,663			25,083			24,931			25,953			25,675			23,880
Book value per common share	$	12.08		$	10.98		$	11.13		$	11.14		$	10.17		$	10.88		$	8.82
Market price at end of period	$	13.41		$	12.95		$	12.36		$	12.36		$	28.31		$	15.26		$	27.07
Cash dividends declared per common share	$	0.56		$	0.56		$	0.56		$	0.28		$	0.27		$	0.55		$	0.51
Cash dividends declared on common shares	$	13,612		$	13,753		$	13,583		$	6,913		$	6,582		$	13,522		$	11,425

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	December 31,									June 30,
	2007			2006			2005			2005			2004			2003
PERIOD END BALANCES:
Investments and loans
Investments	$	4,590,610		$	2,992,236		$	3,473,287		$	3,221,789		$	2,839,003		$	2,231,543
Loans and leases (including loansheld-for-sale), net		1,179,566			1,212,370			903,308			903,604			743,456			728,462
Securities sold but not yet delivered		—			6,430			44,009			1,034			47,312			1,894
	$	5,770,176		$	4,211,036		$	4,420,604		$	4,126,427		$	3,629,771		$	2,961,899
Deposits and Borrowings
Deposits	$	1,246,420		$	1,232,988		$	1,298,568		$	1,252,897		$	1,024,349		$	1,044,265
Repurchase agreements		3,861,411			2,535,923			2,427,880			2,191,756			1,895,865			1,400,598
Other borrowings		395,441			247,140			404,921			399,476			387,166			181,083
Securities and loans purchased but not yet received		111,431			—			43,354			22,772			89,068			152,219
	$	5,614,703		$	4,016,051		$	4,174,723		$	3,866,901		$	3,396,448		$	2,778,165
Stockholders’ equity
Preferred equity	$	68,000		$	68,000		$	68,000		$	68,000		$	68,000		$	33,500
Common equity		291,461			268,426			273,791			270,755			213,646			157,716
	$	359,461		$	336,426		$	341,791		$	338,755		$	281,646		$	191,216
Capital ratios
Leverage capital		6.69	%		8.42	%		10.13	%		10.59	%		10.88	%		7.83	%
Tier 1 risk-based capital		18.59	%		21.57	%		34.70	%		36.97	%		36.77	%		23.36	%
Total risk-based capital		19.06	%		22.04	%		35.22	%		37.51	%		37.48	%		23.88	%
SELECTED FINANCIAL RATIOS AND OTHER INFORMATION:
Return on average assets (ROA)		0.76	%		−0.11	%		1.02	%		1.46	%		1.79	%		1.75	%
Return on average common equity (ROE)		13.52	%		−3.59	%		15.00	%		21.34	%		32.35	%		28.93	%
Equity-to-assets ratio		5.99	%		7.69	%		7.52	%		7.98	%		7.56	%		6.29	%
Efficiency ratio		65.93	%		84.69	%		57.51	%		51.39	%		52.92	%		55.77	%
Expense ratio		0.77	%		0.73	%		0.75	%		0.75	%		0.97	%		1.13	%
Interest rate spread		1.27	%		0.70	%		1.53	%		2.00	%		2.64	%		2.91	%
Number of financial centers		25			25			24			24			23			23
Trust assets managed	$	1,962,226		$	1,848,596		$	1,875,300		$	1,823,292		$	1,670,651		$	1,670,437
Broker-dealer assets gathered		1,281,168			1,143,668			1,132,286			1,135,115			1,051,812			962,919
Assets managed		3,243,394			2,992,264			3,007,586			2,958,407			2,722,463			2,633,356
Assets owned		5,999,856			4,371,986			4,546,949			4,246,865			3,725,695			3,040,551
Total financial assets managed and owned	$	9,243,250		$	7,364,250		$	7,554,535		$	7,205,272		$	6,448,158		$	5,673,907

(1) Per share related information has been retroactively adjusted to reflect stock splits and stock dividends, when applicable.

F-58

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2007

OVERVIEW OF FINANCIAL PERFORMANCE

The following discussion of our financial condition and results of operations should be read in conjunction with Item 6, “Selected Financial Data,” and our consolidated financial statements and related notes in Item 8. This discussion and analysis contains forward-looking statements. Please see “Forward Looking Statements” and “Risk Factors” for discussions of the uncertainties, risks and assumptions associated with these statements.

On August 30, 2005, the Group’s Board of Directors amended Section 1 of Article IX of the Group’s bylaws to change its fiscal year-end from June 30 to December 31. As a result of the change in fiscal year end, the following comparative periods are presented for purposes of discussion of results of operations:

•  Year ended December 31, 2007 compared to year ended December 31, 2006;

•  Year ended December 31, 2006 compared to year ended December 31, 2005 (unaudited); and

•  Six-month period ended December 31, 2005 compared to six-month period ended December 31, 2004 (unaudited).

Comparison of the years ended December 31, 2007 and 2006:

The Group’s 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.

Major highlights for the year ended December 31, 2007 follows:

•  Return on assets (ROA) and common equity (ROE) for 2007 were 0.76% and 13.52%, respectively, a significant improvement from negative returns of -0.11% and -3.59%, respectively, last year.

•  Net interest margin for 2007 increased to 1.51%, up 53 basis points from last year.

•  Book value per common share of $12.08 as of December 31, 2007, represents an increase of 10.0% from last year.

Favorable results achieved in the year ended December 31, 2007 continue to reflect the success of strategies the Group has been pursuing. These strategies included:

1.	The decision to adopt conservative lending policies starting several years ago in light of weakening economic conditions in Puerto Rico.
2.	The repositioning of Oriental’s investment portfolio and related funding to improve margins, in line with what the Group correctly anticipated would be a more positively sloped yield curve.
3.	Growing Oriental’s franchise with the objective of integrating the delivery of banking and financial services to mid andhigh-net worth clients, building recurring non-interest revenues, closely monitoring non-interest expenses, and strengthening the Group’s management team.

For the year ended December 31, 2007, net income available to common shareholders was $36.5 million, compared with net loss to common shareholders of $9.9 million reported in the same period of 2006. Earnings available to common shareholders per diluted share were $1.50, compared to a loss per diluted share of $0.40 reported for 2006. Results for the fourth quarter and year ended December 31, 2006 included $20.7 million, or $0.87 per share, in losses and write-offs, the majority of which related to the sale of lower yielding securities stemming from the repositioning of the available-for-sale securities portfolio that led to a sizeable increase in net interest income in 2007.

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Return on common equity (ROE) and return on assets (ROA) for the year ended December 31, 2007 were 13.52% and 0.76%, respectively, from (3.59%) and (0.11%), respectively, in the same period of 2006.

Net interest income represented 63.4% of the Group’s total revenues (defined as net interest income plus non-interest income) in the year ended December 31, 2007. During the year ended December 31, 2007, net interest income was $73.7 million, an increase of 67.1% from the $44.1 million recorded for the same period of 2006. Higher interest income on increased investment securities and loan volume and average yields was partially offset by higher volume and interest rates on borrowings. Interest rate spread for the year ended December 31, 2007 was 1.27% compared to 0.70% in the same period of 2006. At December 31, 2007 average interest earning assets increased 9.36% to $4.900 billion, compared to $4.481 billion at December 31, 2006, reflecting a 8.57% increase in investments from $3.426 billion to $3.719 billion.

The provision for loan losses for the year ended December 31, 2007 increased 49.3% to $6.6 million from $4.4 million for the same period of 2006, reflecting higher allowance requirements related to increased mortgage and commercial loan business in the period and local economic conditions. For the quarters ended December 31, 2007 and 2006, the provision for loan losses was $2.5 million and $1.5 million, respectively, an increase of 69.1%. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for loan losses for the year ended December 31, 2007 was adequate in order to maintain the allowance for loan losses at an appropriate level.

Non-interest income for 2007 reflects financial service revenue growth of 7.9% to $17.3 million in 2007, compared to $16.0 million in 2006, due to the Group’s success in expanding its business in corporate and personal trusts, retirement, wealth management, and asset protection services for mid and high net worth customers. As a result, trust assets managed increased 6.1% year-over-year, to $2.0 billion at December 31, 2007, and broker-dealer assets gathered increased 12.0% year-over-year, to $1.3 billion. Refer to Table 2 for additional information on the Group’s non-interest income.

Non-interest expenses for the year ended December 31, 2007 increased 4.9% to $66.9 million, compared to $63.7 million for the same period of 2006. Effective cost control has enabled the Group to restrain the growth of overhead costs. Refer to Table 3 for additional information on the Group’s non-interest expenses.

Total Group financial assets (including assets managed by the trust department, the retirement plan administration subsidiary, and securities broker-dealer subsidiary) increased 25.5% to $9.243 billion as of December 31, 2007, compared to $7.366 billion as of December 31, 2006. Assets managed by the Group’s trust department, the retirement plan administration subsidiary, and the securities broker-dealer subsidiary increased to $3.243 billion from $2.992 billion as of December 31, 2006, an increase of 8.4%. The Group’s assets owned totaled $6.000 billion as of December 31, 2007, an increase of 37.2%, compared to $4.372 billion as of December 31, 2006, mainly as a result of an increase in the investment securities portfolio, which increased 53.4% or $1.598 billion.

On the liability side, total deposits increased 1.1%, from $1.233 billion at December 31, 2006, to $1.246 billion at December 31, 2007, mainly from increases in savings accounts. Total borrowings increased 53.0%, from $2.783 billion at December 31, 2006, to $4.257 billion at December 31, 2007, mainly from increased securities sold under agreements to repurchase to finance the increase in investments.

Stockholders’ equity as of December 31, 2007 was $359.5 million, an increase of 6.8% from $336.4 million as of December 31, 2006. The Group’s capital ratios remain significantly above regulatory capital requirements. At December 31, 2007, the Tier 1 Leverage Capital Ratio was 6.69%, Tier 1 Risk-Based Capital Ratio was 18.59%, and Total Risk-Based Capital Ratio was 19.06%.

Comparison of the years ended December 31, 2006 and 2005:

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 has 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 is included as non-interest income in the accompanying consolidated financial 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-put1-year and

F-60

$450 million non-put2-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%, into10-year, non-put2-year structured repurchased agreements, priced at 95 basis points under90-day LIBOR (for a current rate of 4.40%).

For the year ended December 31, 2006, net loss to common shareholders was $9.9 million compared with net income available to common stockholders of $39.1 million reported in the same period of 2005. Loss per diluted share was $0.40, compared to earnings per diluted share of $1.56 reported for the same period of 2005.

Return on common equity (ROE) and return on assets (ROA) for the year ended December 31, 2006 were (3.59%) and (0.11%), respectively, from 15.00% and 1.02%, respectively, in the same period of 2005.

Net interest income represented 71.9% of the Group’s total revenues (defined as net interest income plus non-interest income) in the year ended December 31, 2006. During the year ended December 31, 2006, net interest income was $44.1 million, a decrease of 40.4% from the $74.1 million recorded for the same period of 2005. Higher interest income on increased investment securities and loan volume and average yields was offset by higher volume and interest rates on borrowings. Interest rate spread for the year ended December 31, 2006 was 0.70% compared to 1.53% in the same period of 2005. At December 31, 2006 average interest earning assets increased 7.32% to $4.481 billion, compared to $4.175 billion at December 31, 2005, reflecting a 4.12% increase in investments from $3.290 billion to $3.426 billion, which consisted mainly of AAA-rated mortgage-backed securities and U.S. government and agency obligations.

The provision for loan losses for the year ended December 31, 2006 increased 28.6% to $4.4 million from $3.4 million for the same period of 2005, reflecting higher allowance requirements related to increased mortgage and commercial loan business in the period. For the quarters ended December 31, 2006 and 2005, the provision for loan losses was $1.5 million and $1.0 million, respectively, an increase of 54.6%. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for loan losses for the year ended December 31, 2006 was adequate in order to maintain the allowance for loan losses at an appropriate level.

Non-interest income for 2006 reflects increases in revenues from financial and banking services and investment banking activities, despite the challenging economic environment in Puerto Rico.

Non-interest expenses for the year ended December 31, 2006 increased 10.0% to $63.7 million, compared to $57.9 million for the same period of 2005. Non-interest expenses in the fourth quarter of 2006 included approximately $1.8 million primarily for a supplemental pension payment and charitable contributions made in recognition of the Group’s former Chairman, President, and CEO enhancing the value of Oriental over the course of his 19 years of leadership. Excluding this amount, non-interest expenses for 2006 would have been $61.9 million. The 2005 expenses of $57.9 million reflected a $6.3 million reduction in non-cash compensation related to the variable accounting for certain employee stock options. Excluding this non-cash adjustment, total non-interest expenses for the year ended December 31, 2005 would have been $64.2 million.

Total Group financial assets (including assets managed by the trust department, the retirement plan administration subsidiary, and securities broker-dealer subsidiary) decreased 2.5% to $7.366 billion as of December 31, 2006, compared to $7.555 billion as of December 31, 2005. Assets managed by the Group’s trust department, the retirement plan administration subsidiary, and the securities broker-dealer subsidiary decreased to $2.992 billion from $3.008 billion as of December 31, 2005, a decrease of 0.5%. The Group’s assets owned totaled $4.374 billion as of December 31, 2006, a decrease of 3.8%, compared from $4.547 billion as of December 31, 2005, mainly as a result of a decrease in the investment securities portfolio, which decreased by 13.9% or $481.1 million.

On the liability side, total deposits decreased by 5.1%, from $1.299 billion at December 31, 2005, to $1.233 billion at December 31, 2006, mainly from decreases in certificates of deposit, partially offset by increased savings accounts. Total borrowings decreased 1.8%, from $2.833 billion at December 31, 2005, to $2.782 billion at December 31, 2006, mainly from repayments of repurchase agreements and the redemption of the Statutory Trust I subordinated capital notes in December 2006.

Stockholders’ equity as of December 31, 2006 was $336.4 million, a slight decrease of 1.6% from $341.8 million as of December 31, 2005. As discussed in Note 1 of the accompanying consolidated financial statements, the Group

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adopted SAB 108. As part of the initial implementation, the Group adjusted $1.525 million as an accumulated effect on the beginning retained earnings. The net effect of these adjustments in the consolidated statement of operations for the year ended December 31, 2006 was to increase the previously reported net loss by $93,000 with no effect on per share data. The Group’s capital ratios remain significantly above regulatory capital requirements. At December 31, 2006, the Tier 1 Leverage Capital Ratio was 8.42%, Tier 1 Risk-Based Capital Ratio was 21.57%, and Total Risk-Based Capital Ratio was 22.04%.

Comparison of the six-month periods ended December 31, 2005 and December 31, 2004:

For the six-month period ended December 31, 2005, net income available to common shareholders was $14.5 million, a decrease of 52.1% compared with $30.3 million reported in the same period of 2004. Earnings per diluted share decreased 50.4% to $0.58, compared to $1.17 per share reported for the same period of 2004.

Return on common equity (ROE) and return on assets (ROA) for the six-month period ended December 31, 2005 were 11.54% and 0.77%, respectively, which represent a decrease of 53.4% in ROE, from 24.78% in the same period of 2004, and a decrease of 53.4% in ROA, from 1.65% in the same period of 2004.

Net interest income represented approximately 68% of the Group’s total revenues in the six-month period ended December 31, 2005. During such six-month period, net interest income was $34.4 million, a decrease of 26.4% from the $46.7 million recorded for the same period of 2004. Higher interest income on increased investment securities volume was offset by lower average yields on such investments and higher interest rates on borrowings. Interest rate spread for the six-month period ended December 31, 2005 was 1.33% compared to 2.27% in the same period of 2004. At December 31, 2005, average interest earning assets increased 12.7% to $4.277 billion, compared to $3.796 at December 31, 2004, reflecting a 12.5% increase in investments from $2.984 to $3.358 billion, which consisted mainly of AAA-rated mortgage-backed securities and U.S. government and agency obligations.

The provision for loan losses for the six-month period ended December 31, 2005 increased 5.4% to $1.9 million from $1.8 million for the same period of 2004, reflecting higher allowance requirements related to the increase of commercial and consumer loan business in that period. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for loan losses was adequate in order to maintain the allowance for loan losses at an appropriate level.

Non-interest income represented approximately 32.3% of the Group’s total revenues in the six-month period ended December 31, 2005. For such six-month period, non-interest income decreased 26.7% to $16.4 million from $22.3 million for the same period of 2004. Performance in such period of 2005 reflects increases in banking service revenues, partially offset by decreases in revenues from financial services, investment banking activities, as well as mortgage banking and securities activities.

Total non-interest banking and financial services revenues decreased 19.4% to $13.7 million in the six-month period ended December 31, 2005, compared to $17.0 million for the same period of 2004. Banking service revenues increased 16.5% to $4.5 million compared to $3.9 million for the comparable period of 2004. Financial service revenues decreased 1.4% to $7.5 million compared to $7.6 million for the same period of 2004.

For the six-month period ended December 31, 2005, mortgage-banking revenues were $1.7 million, reflecting a decrease of 69.2% when compared with $5.5 million for the same period of 2004. Such decrease in mortgage revenues resulted from reduced sales of whole-loans in the open market, which resulted in lower gains on such transactions.

Non-interest expenses for the six-month period ended December 31, 2005 decreased 6.2% to $31.8 million, compared to $33.9 million for the same period of 2004, reflecting tight cost controls. The decrease was mainly due to reductions in compensation and employee benefits, as well as in advertising and business promotion and electronic banking charges. Professional and service fees increased 11.6% for such period of 2005, compared to the corresponding 2004 period, in part due to the impact of the compliance requirements of the Sarbanes-Oxley Act of 2002. The Group’s efficiency ratio in the six-month period ended December 31, 2005 was 66.12%, compared to 53.24% for the same six-month period of 2004. The Group computes its efficiency ratio by dividing operating expenses by the sum of net interest income and recurring non-interest income, but excluding gains on sale of investment securities.

F-62

Total Group financial assets (including assets managed by the trust department, the retirement plan administration subsidiary, and securities broker-dealer subsidiary) increased 5.3% to $7.554 billion as of December 31, 2005, compared to $7.173 billion as of December 31, 2004. Assets managed by the Group’s trust department, the retirement plan administration subsidiary, and the securities broker-dealer subsidiary decreased to $3.008 billion from $3.009 billion as of December 31, 2004. The Group’s assets owned reached $4.547 billion as of December 31, 2005, an increase of 9.2%, compared to $4.164 billion as of December 31, 2004. Major contributors to this increase were the investment securities portfolio, which increased by 5.4% or $176.7 million, along with the loan portfolio, which increased by $135.4 million or 17.6%.

On the liability side, total deposits increased by 21.8%, from $1.066 billion at December 31, 2004, to $1.299 billion at December 31, 2005. Total borrowings increased 3.8%, from $2.729 billion at December 31, 2004, to $2.833 billion at December 31, 2005.

The Group continued strengthening its capital base during 2005. Stockholders’ equity as of December 31, 2005 was $341.8 million, an increase of 7.4% from $318.1 million as of December 31, 2004. This increase reflects the impact of earnings retention.

F-63

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

For the Years Ended December 31, 2007 and 2006

	Interest						Average Rate						Average Balance
	December 31,			December 31,			December 31,			December 31,			December 31,			December 31,
	2007			2006			2007			2006			2007			2006
	(Dollars in thousands)
A — TAX EQUIVALENT SPREAD
Interest-earning assets	$	289,364		$	232,311			5.91	%		5.18	%	$	4,899,910		$	4,480,729
Tax equivalent adjustment		63,483			57,657			1.30	%		1.29	%		—			—
Interest-earning assets — tax equivalent		352,847			289,968			7.21	%		6.47	%		4,899,910			4,480,729
Interest-bearing liabilities		215,634			188,185			4.64	%		4.48	%		4,642,889			4,198,401
Tax equivalent net interest income / spread	$	137,213		$	101,783			2.57	%		1.99	%	$	257,022		$	282,328
Tax equivalent interest rate margin								2.81	%		2.27	%
B — NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	$	200,057		$	154,942			5.45	%		4.57	%	$	3,668,534		$	3,386,999
Investment management fees		(210	)		(1,522	)		–0.01	%		–0.04	%		—			—
Total investment securities		199,847			153,420			5.45	%		4.53	%		3,668,534			3,386,999
Trading securities		27			19			3.33	%		5.01	%		811			379
Money market investments		3,688			2,057			7.37	%		5.36	%		50,023			38,360
		203,562			155,496			5.47	%		4.54	%		3,719,368			3,425,738
Loans:
Mortgage		66,343			55,278			6.60	%		6.86	%		1,005,751			805,285
Commercial		16,061			17,417			11.17	%		8.20	%		143,802			212,294
Consumer		3,398			4,120			10.97	%		11.01	%		30,989			37,412
		85,802			76,815			7.27	%		7.28	%		1,180,542			1,054,991
		289,364			232,311			5.91	%		5.18	%		4,899,910			4,480,729
Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—			—			—			—			35,909			39,177
Now accounts		817			857			1.29	%		1.09	%		63,303			78,826
Savings		13,958			5,366			4.58	%		3.25	%		304,781			165,249
Certificates of deposit		38,019			40,478			4.67	%		4.26	%		813,483			950,695
		52,794			46,701			4.34	%		3.78	%		1,217,476			1,233,947
Borrowings:
Repurchase agreements		147,847			133,646			4.68	%		5.09	%		3,154,369			2,627,484
Interest rate risk management		(773	)		(8,494	)		−0.02	%		−0.32	%		—			—
Financing fees		586			562			0.02	%		0.02	%		—			—
Total repurchase agreements		147,660			125,714			4.68	%		4.78	%		3,154,369			2,627,484
FHLB advances		10,883			8,968			5.17	%		3.74	%		210,690			239,590
Subordinated capital notes		3,138			5,331			8.70	%		7.54	%		36,083			70,732
Term notes		176			846			3.78	%		5.64	%		4,670			15,000
Other borrowings		982			625			5.01	%		5.37	%		19,601			11,648
		162,840			141,484			4.75	%		4.77	%		3,425,413			2,964,454
		215,634			188,185			4.64	%		4.48	%		4,642,889			4,198,401
Net interest income/spread	$	73,730		$	44,126			1.27	%		0.70	%
Interest rate margin								1.51	%		0.98	%
Excess of interest-earning assets over interest-bearing liabilities													$	257,021		$	282,328
Interest-earning assets over interest-bearing liabilities ratio														105.54	%		106.72	%

F-64

C.   CHANGES IN NET INTEREST INCOME DUE TO:

	December 31, 2007 versus December 31, 2006
	Volume			Rate			Total
Interest Income:
Loans	$	9,125		$	(138	)	$	8,987
Investments		16,070			31,996			48,066
		25,195			31,858			57,053
Interest Expense:
Deposits		(714	)		6,807			6,093
Repurchase agreements		24,665			(2,719	)		21,946
Other borrowings		(3,692	)		3,102			(590	)
		20,259			7,190			27,449
	$	4,936		$	24,668		$	29,604

F-65

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

For the Years Ended December 31, 2006 and 2005

	Interest						Average Rate						Average Balance
	December 31,			December 31,			December 31,			December 31,			December 31,			December 31,
	2006			2005			2006			2005			2006			2005
	(Dollars in thousands)
A — TAX EQUIVALENT SPREAD
Interest-earning assets	$	232,311		$	201,534			5.18	%		4.83	%	$	4,480,729		$	4,175,143
Tax equivalent adjustment		57,657			45,156			1.29	%		1.08	%		—			—
Interest-earning assets — tax equivalent		289,968			246,690			6.47	%		5.91	%		4,480,729			4,175,143
Interest-bearing liabilities		188,185			127,456			4.48	%		3.30	%		4,198,401			3,857,666
Tax equivalent net interest income/spread	$	101,783		$	119,234			1.99	%		2.61	%	$	282,328		$	317,477
Tax equivalent interest rate margin								2.27	%		2.86	%
B — NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	$	154,942		$	142,211			4.57	%		4.38	%	$	3,386,999		$	3,245,440
Investment management fees		(1,522	)		(1,764	)		−0.04	%		−0.05	%		—			—
Total investment securities		153,420			140,447			4.53	%		4.33	%		3,386,999			3,245,440
Trading securities		19			9			5.01	%		3.08	%		379			292
Money market investments		2,057			1,820			5.36	%		4.10	%		38,360			44,341
		155,496			142,276			4.54	%		4.32	%		3,425,738			3,290,073
Loans:
Mortgage		55,278			43,482			6.86	%		5.95	%		805,285			730,614
Commercial		17,417			12,790			8.20	%		10.20	%		212,294			125,395
Consumer		4,120			2,986			11.01	%		10.27	%		37,412			29,061
		76,815			59,258			7.28	%		6.70	%		1,054,991			885,070
		232,311			201,534			5.18	%		4.83	%		4,480,729			4,175,143
Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—			—			—			—			39,177			42,508
Now accounts		857			908			1.09	%		1.05	%		78,826			86,703
Savings		5,366			909			3.25	%		1.01	%		165,249			89,948
Certificates of deposit		40,478			34,784			4.26	%		3.54	%		950,695			983,582
		46,701			36,601			3.78	%		3.04	%		1,233,947			1,202,741
Borrowings:
Repurchase agreements		133,646			74,696			5.09	%		3.31	%		2,627,484			2,255,199
Interest rate risk management		(8,494	)		1,486			−0.32	%		0.07	%		—			—
Financing fees		562			695			0.02	%		0.03	%		—			—
Total repurchase agreements		125,714			76,877			4.78	%		3.41	%		2,627,484			2,255,199
FHLB advances		8,968			8,553			3.74	%		2.79	%		239,590			306,398
Subordinated capital notes		5,331			4,743			7.54	%		6.57	%		70,732			72,166
Term notes		846			456			5.64	%		3.04	%		15,000			15,000
Other borrowings		625			226			5.37	%		3.67	%		11,648			6,162
		141,484			90,855			4.77	%		3.42	%		2,964,454			2,654,925
		188,185			127,456			4.48	%		3.30	%		4,198,401			3,857,666
Net interest income / spread	$	44,126		$	74,078			0.70	%		1.53	%
Interest rate margin								0.98	%		1.78	%
Excess of interest-earning assets over interest-bearing liabilities													$	282,328		$	317,477
Interest-earning assets over interest-bearing liabilities ratio														106.72	%		108.23	%

F-66

C.   CHANGES IN NET INTEREST INCOME DUE TO:

	December 31, 2006 versus
	December 31, 2005
	Volume			Rate			Total
Interest Income:
Loans	$	4,351		$	8,868		$	13,219
Investments		13,206			4,352			17,558
		17,557			13,220			30,777
Interest Expense:
Deposits		922			9,178			10,100
Repurchase agreements		9,146			39,692			48,838
Other borrowings		(2,387	)		4,178			1,791
		7,681			53,048			60,729
	$	9,876		$	(39,828	)	$	(29,952	)

F-67

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

For the Six-Month Periods Ended December 31, 2005 and 2004

	Interest						Average Rate						Average Balance
	Six-Month Period Ended						Six-Month Period Ended						Six-Month Period Ended
	December 31,						December 31,						December 31,
	2005			2004			2005			2004			2005			2004
	(Dollars in thousands)
A — TAX EQUIVALENT SPREAD
Interest-earning assets	$	105,086		$	92,864			4.91	%		4.89	%	$	4,276,515		$	3,795,805
Tax equivalent adjustment		23,912			21,167			1.12	%		1.12	%		—			—
Interest-earning assets — tax equivalent		128,998			114,031			6.03	%		6.01	%		4,276,515			3,795,805
Interest-bearing liabilities		70,706			46,149			3.58	%		2.62	%		3,953,452			3,526,701
Tax equivalent net interest income/spread	$	58,292		$	67,882			2.45	%		3.39	%	$	323,063		$	269,104
Tax equivalent interest rate margin								2.72	%		3.58	%
B — NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	$	73,540		$	67,039			4.46	%		4.53	%	$	3,300,864		$	2,962,126
Investment management fees		(824	)		(958	)		−0.05	%		−0.06	%		—			—
Total investment securities		72,716			66,081			4.41	%		4.47	%		3,300,864			2,962,126
Trading securities		4			2			3.31	%		0.41	%		242			975
Money market investments		1,465			171			5.17	%		1.65	%		56,691			20,788
		74,185			66,254			4.42	%		4.44	%		3,357,797			2,983,889
Loans:
Mortgage		24,617			22,558			6.50	%		6.50	%		757,207			694,529
Commercial		4,602			3,002			7.11	%		6.24	%		129,506			96,264
Consumer		1,682			1,050			10.51	%		9.94	%		32,005			21,123
		30,901			26,610			6.73	%		6.55	%		918,718			811,916
		105,086			92,864			4.91	%		4.89	%		4,276,515			3,795,805
Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—			—			—			—			60,334			50,728
Now accounts		445			438			1.05	%		1.06	%		84,809			82,931
Savings		440			472			1.02	%		1.02	%		86,135			92,623
Certificates of deposit		19,396			12,513			3.70	%		3.16	%		1,049,495			793,112
		20,281			13,423			3.17	%		2.63	%		1,280,773			1,019,394
Borrowings:
Repurchase agreements		43,807			18,856			3.86	%		1.79	%		2,270,145			2,109,690
Interest rate risk management		(1,255	)		7,388			–0.11	%		0.70	%		—			—
Financing fees		357			311			0.03	%		0.03	%		—			—
Total repurchase agreements		42,909			26,555			3.78	%		2.52	%		2,270,145			2,109,690
FHLB advances		4,595			4,002			3.01	%		2.58	%		305,430			310,451
Subordinated capital notes		2,470			2,046			6.85	%		5.67	%		72,166			72,166
Term notes		261			123			3.48	%		1.64	%		15,000			15,000
Other borrowings		190			—			3.82	%		—			9,938			—
		50,425			32,726			3.77	%		2.61	%		2,672,679			2,507,307
		70,706			46,149			3.58	%		2.62	%		3,953,452			2,526,701
Net interest income/spread	$	34,380		$	46,715			1.33	%		2.27	%
Interest rate margin								1.61	%		2.46	%
Excess of interest-earning assets over interest-bearing liabilities													$	323,063		$	269,104
Interest-earning assets over interest-bearing liabilities ratio														108.17	%		107.63	%

F-68

C. CHANGES IN NET INTEREST INCOME DUE TO:

	December 31, 2005 versus December 31, 2004
	Volume		Rate			Total
Interest Income:
Loans	$	3,615	$	676		$	4,291
Investments		8,262		(331	)		7,931
		11,877		345			12,222
Interest Expense:
Deposits		6,762		96			6,858
Repurchase agreements		1,838		14,515			16,354
Other borrowings		75		1,271			1,345
		8,675		15,882			24,557
	$	3,202	$	(15,537	)	$	(12,335	)

F-69

Net Interest Income

Comparison of the years ended December 31, 2007 and 2006:

Net interest income is affected by the difference between rates earned on the Group’s interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest-earning assets and interest-bearing liabilities (interest rate margin). As further discussed in the Risk Management section of this report, the Group monitors the composition and repricing of its assets and liabilities to maintain its net interest income at adequate levels. Table 1 shows the major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the years ended December 31, 2007 and 2006.

Net interest income increased 67.1% to $73.7 million in the year ended December 31, 2007, from $44.1 million in the same period of 2006. This increase was due to a positive volume variance of $25.2 million, and a positive rate variance of $31.9 million, as average interest earning assets increased 9.36% to $4.900 billion as of December 31, 2007, from $4.481 billion as of December 31, 2006. The interest rate margin increased 53 basis points to 1.51% for the year ended December 31, 2007, from 0.98% for the same period of 2006. The interest rate spread increased 53 basis points to 1.27% for the year ended December 31, 2007, from 0.70% for the same period of 2006, due to a 73 basis point increase in the average yield of interest earning assets to 5.91% from 5.18%, offset by a 16 basis point increase in the average cost of funds to 4.64% from 4.48%. Overall improvement was due to the repositioning of the Group’s investment portfolio and related funding to improve margin in line with what the Group correctly anticipated would be a more positively sloped yield curve.

Interest income increased 24.6% to $289.4 million for the year ended December 31, 2007, as compared to $232.3 million for the period of 2006, reflecting the increase in the average balance of interest earning assets and yields. Interest income is generated by investment securities, which accounted for 70.3% of total interest income, and from loans, which accounted for 29.7% of total interest income. Interest income from investments increased 30.9% to $203.6 million, due to an 8.6% increase in the average balance of investments, which grew to $3.719 billion from $3.426 billion, and by 93 basis point increase in yield from 4.54% to 5.47%. Interest income from loans increased 11.7% to $85.8 million, mainly due to a 11.9% increase in the average balance of loans, which grew to $1.181 billion from $1.655 billion. Yields remained constant at 7.27% in 2007 and 7.28% in 2006.

Interest expense increased 14.6%, to $215.6 million for year ended December 31, 2007, from $188.2 million for the same period of 2006, due to a 16 basis point increase in the average cost of retail and wholesale funds, to 4.64% for 2007, from 4.48% for the same period of 2006. The increase is due to higher average interest-bearing liabilities which grew to $4.643 billion, from $4.198 billion, year over year, in order to fund the growth of the Group’s investment and loan portfolios. The average cost of retail deposits increased 56 basis points, to 4.34% for the year ended December 31, 2007, from 3.78% for the same period of 2006, and the average cost of wholesale funding sources decreased 2 basis points, to 4.75%, from 4.77%, specifically reflected in repurchase agreements, which decreased 10 basis points, to 4.68% from 4.78% due to the strategic repositioning of the repurchase agreements portfolio.

Comparison of the years ended December 31, 2006 and 2005:

Table 1A shows the major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the years ended December 31, 2006 and 2005.

Net interest income decreased 40.4% to $44.1 million in the year ended December 31, 2006, from $74.1 million in the same period of 2005. This decrease was due to a positive volume variance of $9.9 million, offset by a negative rate variance of $39.8 million, as average interest earning assets increased 7.32% to $4.481 billion as of December 31, 2006, from $4.175 billion as of December 31, 2005, while the interest rate margin declined 80 basis points to 0.98% for the year ended December 31, 2006, from 1.78% for the same period of 2005. The interest rate spread declined 83 basis points to 0.70% for the year ended December 31, 2006, from 1.53% for the same period of 2005, due to a 35 basis point increase in the average yield of interest earning assets to 5.18% from 4.83%, offset by a 118 basis point increase in the average cost of funds to 4.48% from 3.30%. The increase in the average yield of interest earning assets was primarily due to the purchase of securities with higher rates, reflecting market conditions, prepayments of lower

F-70

rate mortgage loans and mortgage-backed securities, and the repricing of adjustable and floating interest rate commercial loans. The increase in the average cost of funds was primarily due to higher rates paid on repurchase agreements and other borrowings due to the impact of the increases in short-term borrowing rates.

Interest income increased 15.3% to $232.3 million for the year ended December 31, 2006, as compared to $201.5 million for the period of 2005, reflecting the increase in the average balance of interest earning assets and in yields. Interest income is generated by investment securities, which accounted for 66.7% of total interest income, and from loans, which accounted for 33.3% of total interest income. Interest income from investments increased 9.3% to $155.5 million, due to a 4.1% increase in the average balance of investments, which grew to $3.426 billion from $3.290 billion, and by an 22 basis point increase in yield from 4.32% to 4.54%. Interest income from loans increased 29.6% to $76.8 million, mainly due to a 19.2% increase in the average balance of loans, which grew to $1.055 billion from $885 million, and a 58 basis point increase in yield from 6.70% to 7.28%.

Interest expense increased 47.6%, to $188.2 million for the year ended December 31, 2006, from $127.5 million for the same period of 2005, due to a 118 basis point increase in the average cost of retail and wholesale funds, to 4.48% for 2006, from 3.30% for the same period of 2005. The increase is due to higher average interest-bearing liabilities which grew to $4.198 billion, from $3.858 billion, year over year, in order to fund the growth of the Group’s investment and loan portfolios. The average cost of retail deposits increased 74 basis points, to 3.78% for the year ended December 31, 2006, from 3.04% for the same period of 2005, and the average cost of wholesale funding sources increased 135 basis points, to 4.77%, from 3.42%, substantially reflected in repurchase agreements, which increased 137 basis points, to 4.78% from 3.41%.

Comparison of the six-month periods ended December 31, 2005 and 2004:

Table 1B shows the major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the six-month periods ended December 31, 2005 and 2004.

Net interest income decreased 26.4% to $34.4 million in the six-month period ended December 31, 2005, from $46.7 million in the same six-month period of 2004. This decrease was due to a positive volume variance of $3.2 million, offset by a negative rate variance of $15.5 million, as average interest earning assets increased 12.7% to $4.277 billion as of December 31, 2005, from $3.796 billion as of December 31, 2004, while the interest rate margin declined 85 basis points to 1.61% for the same period of 2005, from 2.46% for the same period of 2004. The interest rate spread declined 94 basis points to 1.33% for the six-month period ended December 31, 2005, from 2.27% for the same period of 2004, due to a 2 basis point increase in the average yield of interest earning assets to 4.91% from 4.89%, in addition to a 96 basis point increase in the average cost of funds to 3.58% from 2.62%. The increase in the average yield of interest earning assets was primarily due to the purchase of securities with lower rates, reflecting market conditions, prepayments of higher rate mortgage loans and mortgage-backed securities, and the repricing of adjustable and floating interest rate commercial loans. The increase in the average cost of funds was primarily due to higher rates paid on repurchase agreements and other borrowings due to the impact of the increases in short-term borrowing rates.

Interest income increased 13.2% to $105.1 million for the six-month period ended December 31, 2005, as compared to $92.9 million for the same six-month period of 2004, reflecting a 12.7% increase in the average balance of interest earning assets, which grew to $4.277 billion in the six-month period ended December 31, 2005, from $3.796 billion for the same period of 2004, with an increase in yield to 4.91% from 4.89%. Interest income is generated by investment securities, which accounted for 70.6% of total interest income, and from loans, which accounted for 29.4% of total interest income. Interest income from investments increased 12.0% to $74.2 million, due to a 12.5% increase in the average balance of investments, which grew to $3.358 billion, partially offset by a 2 basis point decline in yield from 4.44% to 4.42%. The increase in investments reflects a 21.5% increase in U.S. government and agency obligations, which grew to $1.251 billion as of December 31, 2005, from $819.0 million as of December 31, 2004. Interest income from loans increased 16.1% to $30.9 million, mainly due to a 13.2% increase in the average balance of loans, which grew to $918.7 million, in addition to an 18 basis point increase in yield from 6.55% to 6.73%. Total loans remained approximately at the same level comparing December 31, 2005 to June 30, 2005 at $903 million.

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Interest expense increased 53.2%, to $70.7 million for the six-month period ended December 31, 2005, from $46.1 million for the same period of 2004, due to a 96 basis point increase in the average cost of retail and wholesale funds, to 3.58% for the 2005 six-month period, from 2.62% for the same period of 2004. The increase is also due to the expansion of the average interest-bearing liabilities to $3.953 billion, from $3.527 billion, in order to fund the growth of the Group’s investment and loan portfolios. The average cost of retail deposits increased 54 basis points, to 3.17% for the six-month period ended December 31, 2005, from 2.63% for the same period of 2004, and the average cost of wholesale funding sources increased 116 basis points, to 3.77%, from 2.61%, substantially reflected in repurchase agreements, which increased 126 basis points, to 3.78%, and subordinated capital notes which increased 118 basis points.

TABLE 2 — NON-INTEREST INCOME SUMMARY
FOR THE YEARS ENDED ENDED DECEMBER 31, 2007, 2006 AND 2005,
FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 2005 AND 2004,
AND FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

	Fiscal Year Ended												Six-Month Period Ended
	December 31,												December 31,					Fiscal Year Ended June 30,
	2007			2006			Variance%			2005			2005		2004			2005			2004
										(Unaudited)					(Unaudited)
	(Dollars in thousands)
Financial service revenues	$	17,295		$	16,029			7.9	%	$	14,029		$	7,432	$	7,435		$	14,032		$	17,617
Banking service revenues		7,862			9,006			−12.7	%		8,315			4,495		3,721			7,541			7,165
Investment banking revenues		126			2,701			−95.3	%		235			74		177			339			—
Mortgage banking activities		2,401			3,368			−28.7	%		3,943			1,702		5,532			7,774			7,719
Total banking and financial service revenues		27,684			31,104			−11.0	%		26,522			13,703		16,865			29,686			32,501
Securities net activity		3,799			(17,637	)		121.5	%		3,173			650		5,642			8,165			13,414
Derivatives net gain (loss)		10,997			3,218			241.7	%		(2,061	)		1,077		(393	)		(3,530	)		11
Trading net gain (loss)		23			28			−17.9	%		(48	)		5		38			(15	)		21
Loss on early extinguishment of Subordinated capital notes		—			(915	)		100.0	%		—			—		—			—			—
Income from other investments		236			—			100.0	%		—			—		—			—			—
Securities, derivatives and trading activities		15,055			(15,306	)		−198.4	%		1,064			1,732		5,287			4,620			13,446
Investment in limited liability partnership		—			828			−100.0	%		1,085			838		—			246			—
Other income		(237	)		612			−138.7	%		249			110		195			334			87
Other non-interest income		(237	)		1,440			−116.5	%		1,334			948		195			580			87
Total non-interest income	$	42,502		$	17,238			146.6	%	$	28,920		$	16,383	$	22,347		$	34,886		$	46,034

Non-Interest Income

Comparison of the years ended December 31, 2007 and 2006:

Non-interest income 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 and investment activities by the securities broker-dealer subsidiary, the level of mortgage banking activities, and fees from deposit accounts and insurance products. As shown in Table 2, non-interest income for the year ended December 31, 2007 increased 146.6%, from $17.2 million to $42.5 million, when compared to the same period in 2006.

Financial services revenues, which consist of commissions and fees from fiduciary activities, and commissions and fees from securities brokerage, and insurance activities, increased 7.9%, to $17.3 million in the year ended December 31, 2007, from $16.0 million in the same period of 2006. Banking service revenues, which consist primarily of fees generated by deposit accounts, electronic banking and customer services, decreased 12.7% to $7.9 million in the year ended December 31, 2007, from $9.0 million in the same period of 2006, mainly driven by reduced consumer banking activity. Investment banking revenues declined due to fewer transactions in 2007 as compared to 2006. Income generated from mortgage banking activities decreased 28.7% in the year ended December 31, 2007, from $3.4 million in the year ended December 31, 2006, to $2.4 million in the same period of 2007 mainly the result of reduced mortgage loan production.

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Revenues from securities, derivatives and trading activities for the year ended December 31, 2007 reflects the Group’s previously disclosed 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 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 basic and fully diluted share) of the gain as non-interest income in the quarter ended March 31, 2007. Revenues from securities, derivatives and trading activities in the year ended December 31, 2006 reflects the $16.0 million loss incurred with respect to the repositioning of the investment securities portfolio.

Comparison of the years ended December 31, 2006 and 2005:

Non-interest income 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 and investment activities by the securities broker-dealer subsidiary, the level of mortgage banking activities, and fees from deposit accounts and insurance products. As shown in Table 2, non-interest income for the year ended December 31, 2006 decreased 40.4%, from $28.9 million to $17.2 million, when compared to the same period in 2005.

Income generated from mortgage banking activities decreased 14.6% in the year ended December 31, 2006, from $3.9 million in the year ended December 31, 2005, to $3.4 million in the same period of 2006. Financial services revenues, which consist of commissions and fees from fiduciary activities, and commissions and fees from securities brokerage, and insurance activities, increased 14.3%, to $16.0 million in the year ended December 31, 2006, from $14.0 million in the same period of 2005. Banking service revenues, which consist primarily of fees generated by deposit accounts, electronic banking and customer services, continued with an increase of 8.3% to $9.0 million in the year ended December 31, 2006, from $8.3 million in the same period of 2005, mainly driven by the strategy of strengthening the Group’s banking franchise by expanding our ability to attract deposits and build relationships with individual, professional and commercial customers through aggressive marketing and the expansion of the Group’s sales force.

Revenues from securities, derivatives and trading activities in the year ended December 31, 2006 reflects the $16.0 million loss incurred with respect to the repositioning of the investment securities portfolio partially offset by increased gains on derivatives instruments due to a positive variance in the mark-to-market of such positions.

Comparison of the six-month periods ended December 31, 2005 and 2004:

As shown in Table 2, non-interest income for the six-month period ended December 31, 2005 decreased 26.7%, from $22.3 million to $16.4 million, when compared to the same period in 2004. Income generated from mortgage banking activities decreased 69.2% in the six-month period ended December 31, 2005, from $5.5 million in the six-month period ended December 31, 2004, to $1.7 million in the same period of 2005.

Financial services revenues decreased 0.3% and 2.7%, respectively, to $4.1 million and $3.4 million in the six-month period ended December 31, 2005, from $4.1 million and $3.5 million in the same period of 2004. Decrease for the period reflected the temporarily reduced market for public finance activities in Puerto Rico which affects revenues from brokerage and investment banking activities in the local retail public finance market.

Banking service revenues increased 16.5% to $4.5 million in the six-month period ended December 31, 2005, from $3.9 million in the same period of 2004.

Revenues from securities, derivatives and trading activities decreased 63.9% in the six-month period ended December 31, 2005 due to a net gain of $1.9 million in the 2005 six-month period from a net gain of $5.3 in the same period of 2004. The reduction in securities net activity, which was principally due to the Group’s strategy of retaining a higher amount of profitable investment securities to obtain recurring interest income, offset the positive results in derivatives activity, which reflected a net gain of $5,000 during the six-month period ended December 31, 2005, compared to a $322,000 net loss in the same period of 2004.

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TABLE 3 — NON-INTEREST EXPENSES SUMMARY
FOR THE YEARS ENDED ENDED DECEMBER 31, 2007, 2006 AND 2005,
FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 2005,
AND 2004 AND FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

													Six-Month Period
													Ended
	Year Ended December 31,												December 31,						Fiscal Year Ended June 30,
	2007			2006			Variance%			2005			2005			2004			2005			2004
										(Unaudited)						(Unaudited)
	(Dollars in thousands)
Compensation and employees’ benefits	$	28,376		$	24,630			15.2	%	$	20,410		$	12,714		$	15,910		$	23,606		$	28,511
Occupancy and equipment		12,624			11,573			9.1	%		11,331			5,798			5,050			10,583			9,639
Professional and service fees		7,161			6,821			5.0	%		7,385			3,771			3,380			6,994			5,631
Advertising and business promotion		4,472			4,466			0.1	%		5,276			2,862			3,306			5,720			6,850
Taxes, other than payroll and income taxes		2,151			2,405			−10.6	%		2,129			1,195			902			1,836			1,754
Director and investors relations		2,103			2,323			−9.5	%		918			374			339			883			677
Loan servicing expenses		1,740			2,017			−13.7	%		1,742			911			896			1,727			1,853
Electronic banking charges		1,826			1,914			−4.6	%		1,914			854			1,015			2,075			1,679
Communication		1,302			1,598			−18.5	%		1,624			837			843			1,630			1,849
Printing, postage, stationery and supplies		842			995			−15.4	%		945			528			474			891			1,121
Insurance		848			861			−1.5	%		749			374			392			767			791
Other operating expenses		3,414			4,110			−16.9	%		3,433			1,596			1,414			3,251			3,009
Total non-interest expenses	$	66,859		$	63,713			4.9	%	$	57,856		$	31,814		$	33,921		$	59,963		$	63,364
Relevant ratios and data:
Non-interest income to Non-interest expenses ratio		63.57	%		28.35	%					49.99	%		51.49	%		65.88	%		58.18	%		72.65	%
Efficiency ratio		65.93	%		86.33	%					57.51	%		66.17	%		53.24	%		51.39	%		52.92	%
Expense ratio		0.77	%		0.73	%					0.75	%		0.85	%		0.89	%		0.75	%		0.97	%
Compensation and benefits to non-interest expenses		42.4	%		38.7	%					35.3	%		40.0	%		46.9	%		39.4	%		45.0	%
Compensation to total assets		0.47	%		0.56	%					0.45	%		0.56	%		0.76	%		0.56	%		0.77	%
Average compensation per employee (annualized)	$	53.5		$	46.4					$	38.7		$	48.8		$	60.6		$	44.6		$	52.3
Average number of employees		522			530						527			521			525			529			545
Assets per employee	$	11,320		$	8,552					$	8,624		$	8,723		$	7,932		$	8,028		$	6,836
Total workforce		518			535						520			520			554			520			526

Non-Interest Expenses

Comparison of the years ended December 31, 2007 and 2006:

Non-interest expenses for the year ended December 31, 2007 increased 4.9% to $66.9 million, compared to $63.7 million for the same period of 2006. During the year ended December 31, 2007, compensation and employees’ benefits increased 15.2% to $28.4 million from $24.6 million in the year ended December 31, 2006. Such increase was mainly due to lower deferred costs pursuant to SFAS No. 91(“Accounting for Non Refundable Fees Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases and Amendment of FASB Statement No. 13, 60 and 65 and a rescission of FASB Statement No. 17”) due to reduced mortgage loan production.

In the year ended December 31, 2007, taxes, other than payroll and income taxes, director and investor relations, loan servicing expense, communication and other operating expenses decreased 10.6%, 9.5%, 13.7%, 18.5% and 16.9%, respectively, compared to the year ended December 31, 2006, reflecting the Group’s cost control program.

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Comparison of the years ended December 31, 2006 and 2005:

Non-interest expenses for the year ended December 31, 2006 increased 10.1% to $63.7 million, compared to $57.9 million for the same period of 2005. Non-interest expenses in the fourth quarter of 2006 included approximately $1.8 million primarily for a supplemental pension payment and charitable contributions made in recognition of the Group’s former Chairman, President, and CEO enhancing the value of Oriental over the course of his 19 years of leadership. Excluding this amount, non-interest expenses for 2006 would have been $61.5 million. The 2005 expenses of $57.9 million reflected a $6.3 million reduction in non-cash compensation related to the variable accounting for certain employee stock options. Excluding this non-cash adjustment, total non-interest expenses for the year ended December 31, 2005 would have been $64.1 million.

During the year ended December 31, 2006, the cost of advertising and business promotions decreased 15.4% to $4.4 million from $5.3 million in the year ended December 31, 2005. Such reduction was mainly due to the Group’s continued use of more selective promotional campaigns to enhance the market recognition of new and existing products, to increase fee-based revenues, and to strengthen the banking and financial services franchise.

In the year ended December 31, 2006, professional and service fees decreased 7.6%, from $7.4 million in 2005 to $6.8 million in 2006. The decrease was due to the effect of reviews performed by advisors in specific operational areas to improve financial and operational performance and expenses associated with SOX implementation and additional audit fees related to the change in the Group’s fiscal year incurred during 2005.

Comparison of the six-month periods ended December 31, 2005 and 2004:

Non-interest expenses in the six-month period ended December 31, 2005 decreased 6.2%, from $33.9 million in the six-month period ended December 31, 2004 to $31.8 million in the same period of 2005. The decrease in non-interest expenses was mainly the result of a 20.1% reduction in compensation and employee benefits expense from the six-month period ended December 31, 2004 to the comparative 2005 period, from $15.9 million to $12.7 million, respectively. The reduction was mainly due to the recording of compensation expense for the six-month period ended December 31, 2004 of $3.2 million as a result of the application of the variable accounting to outstanding options granted to certain employees. No such expense was required for the six-month period ended December 31, 2005.

The increment in non-interest expenses, other than in compensation and employees’ benefits, during the comparative six-month periods reflects the Group’s expansion and improvement of the Group’s sales capabilities, including additional experienced lenders, marketing, enhancing branch distribution and support risk management processes. Also, these results include expenses for new technology for the implementation of PeopleSoft enterprise software to increase efficiencies, and cost of documentation and testing required by SOX regarding management’s assessment of internal control over financial reporting. Consequently, expenses have been pared in other areas, consistent with management’s goal of limiting expense growth to those areas that directly contribute to increase the efficiency, service quality and profitability of the Group.

Occupancy and equipment expenses increased 14.8%, from $5.1 million in the six-month period ended December 31, 2004 to $5.8 million in the six-month period ended December 31, 2005, due to higher depreciation resulting from upgrading technology, infrastructure in our financial centers in order to improve efficiency and the acceleration of leasehold improvements amortization due to the move to new facilities in May 2006.

During the six-month period ended December 31, 2005, the cost of advertising and business promotions decreased 20.5% to $2.9 million versus $3.3 million in the six-month period ended December 31, 2004. Such activity was mainly due to management’s strategy of redistributing the marketing expenses for the 2005 six-month period ended December 31, as the Group continued its selective promotional campaign.

In the six-month period ended December 31, 2005, professional and service fees increased 11.6%, from $3.4 million in the six-month period ended December 31 2004 to $3.8 million in the 2005 six-month period. The increase in the period was due to the effect of reviews performed by advisors in specific operational areas to improve financial and operational performance and expenses associated with SOX implementation.

The aggregate decrease in communication, electronic banking charges and insurance is principally due to effective cost controls without affecting the general growth in the Group’s business activities, products and services.

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The rise in taxes other than payroll and income taxes, and other operating expenses is principally due to the general growth in the Group’s business activities, products and services offered.

Provision for Loan Losses

Comparison of the years ended December 31, 2007 and 2006:

The provision for loan losses for the year ended December 31, 2007 totaled $6.6 million, a 49.3% increase from the $4.4 million reported for 2006, which is in line with the increase in non-performing loans of the Group. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for 2007 was adequate in order to maintain the allowance for loan losses at an adequate level.

Net credit losses increased 46.8% during 2007 primarily due to increased net credit losses from mortgage loans due to the overall deterioration of the economy in Puerto Rico. Recoveries decreased from $677,000 for 2006 to $501,000 for 2007. As result, the recoveries to charge-offs ratio decreased from 18.4% in 2006, to 10.2% in 2007. Mortgage loan charge-offs in 2007 were $2.0 million as compared to $896,000 in 2006. Commercial loans net credit losses increased to $252,000 in 2007, when compared with $161,000 in 2006. Commercial loans originated by the Group are mainly collateralized by mortgages.

Net credit losses on consumer loans increased when compared to 2006. In 2007, net credit losses on consumer loans were $2.1 million, an increase of 7.7% when compared to 2006 in which the Group had net credit losses of $2.0 million.

The Group evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. At December 31, 2007, the total investment in impaired commercial loans was $1.1 million. Impaired commercial loans are measured based on the fair value of collateral. The Group determined that no specific impairment allowance was required for such loans. The average investment in impaired commercial loans for the year ended December 31, 2007 amounted to $1.5 million compared to $2.2 million for the year ended December 31, 2006.

The Group follows a residential mortgage lending policy, in which more than 90% of its residential mortgage portfolio consists of fixed-rate, fully amortizing, well-documented loans. Furthermore, the Group has never been active in negative amortization loans or adjustable-rate mortgage loans, including those with teaser rates, and does not originate construction and development loans.

Please refer to the Allowance for Loan Losses and Non-Performing Assets section on Table 8 through Table 12 for a more detailed analysis of the allowances for loan losses, net credit losses and credit quality statistics.

Comparison of the years ended December 31, 2006 and 2005:

The provision for loan losses for the year ended December 31, 2006 totaled $4.4 million, a 28.6% increase from the $3.4 million reported for 2005, which is in line with the Group’s 34.3% growth in loans during 2006. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for 2006 was adequate in order to maintain the allowance for loan losses at an adequate level.

The 30.9% reduction in net credit losses during 2006 was primarily due to a $1.4 million decrease in net credit losses from mortgage loans. Recoveries increased from $597,000 for 2005 to $677,000 for 2006. As result, the recoveries to charge-offs ratio increased from 15.1% in 2005, to 18.4% in 2006.

Mortgage loan charge-offs in 2006 were $896,000 as compared to $2.4 million in 2005. Commercial loans net credit losses decreased to $161,000 in 2006, when compared from $646,000 in 2005. The commercial lending that the Group originates is mainly collateralized by mortgages.

Net credit losses on consumer loans increased when compared to 2005. In 2006, net credit losses on consumer loans were $2.0 million, an increase of 40.9% when compared to 2005 in which the Group had net credit losses of $1.4 million, reflecting the deterioration in consumer lending due to adverse economic conditions in Puerto Rico.

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

F-76

commercial loans are measured based on the fair value of collateral. The Group determined that no specific impairment allowance was required for such loans. The average investment in impaired commercial loans for the year ended December 31, 2006 amounted to $2.2 million compared to $3.2 million for the six-month period ended December 31, 2005.

Please refer to the Allowance for Loan Losses and Non-Performing Assets section on Table 8 through Table 12 for a more detailed analysis of the allowances for loan losses, net credit losses and credit quality statistics.

Comparison of the six-month periods ended December 31, 2005 and 2004:

The provision for loan losses for the six-month period ended December 31, 2005 totaled $1.9 million, a 5.4% increase from the $1.8 million reported for the six-month period ended December 31, 2004. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision was adequate in order to maintain the allowance for loan losses at an appropriate level.

The reduction in net credit losses of 1.5% during the six-month period ended December 31, 2005 was primarily due to a $568,000 decrease in net credit losses from mortgage loans. Recoveries decreased from $438,000 for the six-month period ended December 31, 2004 to $314,000 for the corresponding 2005 six-month period. As result, the recoveries to charge-offs ratio decreased from 19.6% in the six-month period ended December 31, 2004 to 15.1% in the corresponding 2005 six-month period.

Mortgage loan charge-offs in the six-month period ended December 31, 2005 were $774,000 as compared to $1.2 million in the same period of 2004. Commercial loans net credit losses increased to $164,000 in the 2005 six-month period, when compared to $25,000 in the same period of 2004.

Net credit losses on consumer loans increased when compared with the 2004 period. In the six-month period ended December 31, 2005, net credit losses on consumer loans were $974,000, an increase of 70.4% when compared with the same period of 2004 in which the Group had net credit losses of $571,000.

At December 31, 2005, the total investment in impaired commercial loans was $3.6 million. The Group determined that no specific impairment allowance was required for such loans. The average investment in impaired commercial loans for the year ended December 31, 2005 amounted to $3.2 million compared to $2.3 million for the year ended June 30, 2005.

Income Taxes

The income tax expense was $1.6 million for the year ended December 31, 2007, as compared to a benefit of $1.6 million for 2006. The tax benefit in 2006 takes into account, among other things, the expiration of certain tax contingencies. Also, the effective income tax rate in 2007 was lower than the 39% statutory tax rate for the Group, 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 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.

FINANCIAL CONDITION

Assets Owned

At December 31, 2007, the Group’s total assets amounted to $6.000 billion, an increase of 37.2% when compared to $4.372 billion at December 31, 2006, and interest-earning assets reached $5.765 billion, up 37.1%, versus $4.200 billion at December 31, 2006.

As detailed in Table 4, investments are the Group’s largest interest-earning assets component. Investments principally consist of money market instruments, U.S. government and agency bonds, mortgage-backed securities and Puerto Rico government and agency bonds. At December 31, 2007, the investment portfolio increased 53.5% to $4.586 billion, from $2.987 billion as of December 31, 2006, principally as a result of the repositioning of the available-for-sale portfolio and the market opportunities taken to improve the Group’s interest margins.

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TABLE 4 — ASSETS SUMMARY AND COMPOSITION
AS OF DECEMBER 31, 2007, 2006 AND 2005

	December 31,			December 31,			Variance			December 31,
	2007			2006			%			2005
	(Dollars in thousands)
Investments:
Mortgage-backed securities	$	2,602,766		$	1,955,566			33.1	%	$	1,961,285
U.S. Government and agency obligations		1,698,748			863,019			96.8	%		1,251,058
P.R. Government and agency obligations		72,667			100,729			−27.9	%		90,333
Other investment securities		189,109			23,366			709.3	%		90,609
Short-term investments		—			—			—			60,000
FHLB stock		20,658			13,607			51.8	%		20,002
Other investments		1,662			30,949			−94.6	%		—
		4,585,610			2,987,236			53.5	%		3,473,287
Loans:
Loans receivable		1,173,055			1,209,783			−3.0	%		900,992
Allowance for loan losses		(10,161	)		(8,016	)		26.8	%		(6,630	)
Loans receivable, net		1,162,894			1,201,767			−3.2	%		894,362
Mortgage loans held for sale		16,672			10,603			57.2	%		8,946
Total loans		1,179,566			1,212,370			−2.7	%		903,308
Securities sold but not yet delivered		—			6,430			−100.0	%		44,009
Total securities and loans		5,765,176			4,206,036			37.1	%		4,420,604
Other assets:
Cash and due from banks		22,858			15,341			49.0	%		13,789
Money Market Investments		66,125			23,729			178.7	%		3,480
Accrued interest receivable		52,315			27,940			87.2	%		29,067
Premises and equipment, net		21,779			20,153			8.1	%		14,828
Deferred tax asset, net		10,362			14,150			−26.8	%		12,222
Foreclosed real estate		4,207			4,864			−13.5	%		4,802
Investment in Equity indexed options		40,709			34,216			19.0	%		22,054
Other assets		16,324			25,557			−36.1	%		26,103
Total other assets		234,679			165,950			41.4	%		126,345
Total assets	$	5,999,855		$	4,371,986			37.2	%	$	4,546,949
Investments portfolio composition:
Mortgage-backed securities		56.8	%		65.5	%					56.5	%
U.S. Government and agency obligations		37.0	%		28.9	%					36.0	%
P.R. Government and agency obligations		1.6	%		3.4	%					2.6	%
FHLB stock, short term investments and other investment securities		4.6	%		2.3	%					4.9	%
		100.0	%		100.0	%					100.0	%

Refer to Note 2 of the accompanying consolidated financial statements for information related to the carrying amount of available-for-sale and held-to-maturity investment securities at December 31, 2007, by contractual maturity.

F-78

At December 31, 2007, the Group’s loan portfolio, the second largest category of the Group’s interest-earning assets, amounted to $1.180 billion, a decrease of 2.7% when compared to the $1.212 billion at December 31, 2006. The Group’s loan portfolio is mainly comprised of residential loans, home equity loans, and commercial loans collateralized by mortgages on real estate in Puerto Rico. As shown in Table 5, the mortgage loan portfolio amounted to $986.6 million or 84.1% of the loan portfolio as of December 31, 2007, compared to $932.3 million or 77.1% of the loan portfolio at December 31, 2006. Mortgage production and purchases of $248.5 million for the year ended December 31, 2007 decreased 48.1%, from $478.5 million, when compared to the year ended December 31, 2005.

The second largest component of the Group’s loan portfolio is commercial loans. At December 31, 2007, the commercial loan portfolio totaled $157.2 million (13.4% of the Group’s total loan portfolio), in comparison to $241.4 million at December 31, 2006 (19.9% of the Group’s total loan portfolio). The decrease in commercial loans was mainly on July 13, 2007, when the Group unwound certain mortgage-related transactions.

The consumer loan portfolio totaled $29.2 million (2.5% of total loan portfolio at December 31, 2007), a decrease of 18.9% when compared to the December 31, 2006 portfolio of $36.1 million (3.0% total loan portfolio at such date). Consumer loan production decreased 56.7% for the year ended December 31, 2007 from $16.6 million in 2006 to $7.2 million in 2007.

The following table summarizes the remaining contractual maturities of the Group’s total loans segmented to reflect cash flows as of December 31, 2007. Contractual maturities do not necessarily reflect the actual term of a loan, considering prepayments.

			Maturities
					After One Year to Five Years				After Five Years
	Balance				Fixed		Variable		Fixed		Variable
	outstanding at		One Year		Interest		Interest		Interest		Interest
	December 31, 2007		or Less		Rates		Rates		Rates		Rates
					(In thousands)
Mortgage, mainly residential	$	1,006,157	$	4,056	$	6,965	$	—	$	995,136	$	—
Commercial, mainly real estate		157,198		51,001		37,973		54,783		7,893		5,548
Consumer		29,246		6,959		17,154		—		5,133		—
Total	$	1,192,601	$	62,016	$	62,092	$	54,783	$	1,008,162	$	5,548

F-79

TABLE 5 — LOANS RECEIVABLE COMPOSITION:
Selected Financial Data
As of December 31, 2007, 2006 and 2005

	December 31,
	2007			2006			2005
	(Dollars in thousands)
Mortgage, mainly residential	$	986,612		$	932,285		$	637,318
Commercial, mainly real estate		157,198			241,433			227,846
Consumer		29,245			36,065			35,828
Loans receivable		1,173,055			1,209,783			900,992
Allowance for loan losses		(10,161	)		(8,016	)		(6,630	)
Loans receivable, net		1,162,894			1,201,767			894,362
Mortgage loans held for sale		16,672			10,603			8,946
Total loans, net	$	1,179,566		$	1,212,370		$	903,308
Loans portfolio composition percentages:
Mortgage, mainly residential		84.1	%		77.1	%		71.0	%
Commercial, mainly real estate		13.4	%		19.9	%		25.0	%
Consumer		2.5	%		3.0	%		4.0	%
Total loans		100.0	%		100.0	%		100.0	%

Liabilities and Funding Sources

As shown in Table 6, at December 31, 2007, the Group’s total liabilities reached $5.640 billion, 39.7% higher than the $4.037 billion reported at December 31, 2006. Interest-bearing liabilities, the Group’s funding sources, amounted to $5.503 billion at December 31, 2007 versus $4.015 billion at December 31, 2006, a 37.1% increase, mainly driven by the increase in repurchase agreements used to fund the purchase of additional investment securities.

Borrowings are the Group’s largest interest-bearing liability component. Borrowings consist mainly of diversified funding sources through the use of FHLB advances and borrowings, repurchase agreements, subordinated capital notes, other borrowings and lines of credit. At December 31, 2007, borrowings amounted to $4.257 billion, 53.0% higher than the $2.782 billion recorded at December 31, 2006. Repurchase agreements as of December 31, 2007 amounted to $3.861 billion, a 52.3% increase when compared to $2.536 billion as of December 31, 2006.

The FHLB system functions as a source of credit for financial institutions that are members of a regional Federal Home Loan Bank. As a member of the FHLB, the Group can obtain advances from the FHLB, secured by the FHLB stock owned by the Group, as well as by certain of the Group’s mortgage loans and investment securities. FHLB funding amounted to $331.9 million at December 31, 2007, versus $181.9 million at December 31, 2006. These advances mature from August 2008 through May 2014.

F-80

TABLE 6 — LIABILITIES SUMMARY AND COMPOSITION
AS OF DECEMBER 31, 2007, 2006 AND 2005

	December 31,			December 31,			Variance			December 31,
	2007			2006			%			2005
	(Dollars in thousands)
Deposits:
Non-interest bearing deposits	$	50,149		$	59,603			−15.9	%	$	61,473
Now accounts		68,994			72,810			−5.2	%		85,119
Savings accounts		387,788			266,181			45.7	%		82,640
Certificates of deposit		736,186			829,867			−11.3	%		1,061,401
		1,243,117			1,228,461			1.2	%		1,290,633
Accrued interest payable		3,303			4,527			−27.0	%		7,935
		1,246,420			1,232,988			1.1	%		1,298,568
Borrowings:
Federal funds purchases and other short term borrowings		27,460			13,568			102.4	%		4,455
Repurchase agreements		3,861,411			2,535,923			52.3	%		2,427,880
Advances from FHLB		331,898			181,900			82.5	%		313,300
Subordinated capital notes		36,083			36,083			0.0	%		72,166
Term notes		—			15,000			−100.0	%		15,000
		4,256,852			2,782,474			53.0	%		2,832,801
Total deposits and borrowings		5,503,272			4,015,462			37.1	%		4,131,369
Securities and loans purchased but not yet received		111,431			—			100.0	%		43,354
Other liabilities		25,691			21,802			17.8	%		30,435
Total liabilities	$	5,640,394		$	4,037,264			39.7	%	$	4,205,158
Deposits portfolio composition percentages:
Non-interest bearing deposits		4.0	%		4.8	%					4.8	%
Now accounts		5.6	%		5.9	%					6.6	%
Savings accounts		31.2	%		21.7	%					6.4	%
Certificates of deposit		59.2	%		67.6	%					82.2	%
		100.0	%		100.0	%					100.0	%
Borrowings portfolio composition percentages:
Federal funds purchases and other short term borrowings		0.7	%		0.5	%					0.2	%
Repurchase agreements		90.7	%		91.1	%					85.7	%
Advances from FHLB		7.8	%		6.5	%					11.1	%
Subordinated capital notes		0.8	%		1.3	%					2.5	%
Term notes		0.0	%		0.6	%					0.5	%
		100.0	%		100.0	%					100.0	%
Securities sold under agreements to repurchase
Amount outstanding at year-end	$	3,861,411		$	2,535,923					$	2,427,880
Daily average outstanding balance	$	3,154,369		$	2,627,323					$	2,270,145
Maximum outstanding balance at any month-end	$	3,861,411		$	2,923,796					$	2,427,880
Weighted average interest rate(1):
For the period		4.68	%		5.09	%					3.31	%
At period end		4.20	%		4.94	%					4.01	%

(1) Excludes effect of interest rate risk management and financing fees.

F-81

At December 31, 2007, deposits, the second largest category of the Group’s interest-bearing liabilities reached $1.246 billion, up 1.1% from $1.233 billion at December 31, 2006. Deposits reflected an 11.3% decrease in certificates of deposit, to $736.2 million, primarily due to a decrease of $144.1 million in brokered CDs. This decrease was offset by an increase in savings accounts.

At December 31, 2007, the scheduled maturities of time deposits and individual retirement accounts (IRAs) of $100,000 or more were as follows:

	(In thousands)
3 months or less	$	211,776
Over 3 months through 6 months		186,809
Over 6 months through 12 months		90,764
Over 12 months		161,460
Total	$	650,809

Stockholders’ Equity

At December 31, 2007, the Group’s total stockholders’ equity was $359.5 million, a 6.8% increase, when compared to $336.4 million at December 31, 2006. The Group’s capital ratios remain significantly above regulatory capital requirements. At December 31, 2007, the Tier 1 Leverage Capital Ratio was 6.69%, the Tier 1 Risk-Based Capital Ratio was 18.59%, and the Total Risk-Based Capital Ratio was 19.06%.

The Bank is considered “well-capitalized” under the regulatory framework for prompt corrective action if it meets or exceeds a Tier I risk-based capital ratio of 6%, a total risk-based capital ratio of 10% and a leverage capital ratio of 5%. In addition, the Group and the Bank meet the following minimum capital requirements: a Tier I risk-based capital ratio of 4%, a total risk-based capital ratio of 8% and a Tier 1 leverage capital ratio of 4%. As shown in Table 7 and in Note 13 to the consolidated financial statements, the Group and the Bank comfortably exceed these benchmarks due to the high level of capital and the quality and conservative nature of its assets.

The Group’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol OFG. At December 31, 2007, the Group’s market capitalization for its outstanding common stock was $323.5 million ($13.41 per share).

F-82

TABLE 7 — CAPITAL, DIVIDENDS AND STOCK DATA
AS OF DECEMBER 31, 2007, 2006 AND 2005

	December 31,			December 31,			Variance			December 31,
	2007			2006			%			2005
	(In thousands, except for per share data)
Capital data:
Stockholders’ equity	$	359,461		$	336,426			6.8	%	$	341,791
Regulatory Capital Ratios data:
Leverage Capital Ratio		6.69	%		8.42	%		−20.5	%		10.13	%
Minimum Leverage Capital Ratio Required		4.00	%		4.00	%					4.00	%
Actual Tier 1 Capital	$	396,309		$	372,558			6.4	%	$	447,669
Minimum Tier 1 Capital Required	$	236,847		$	176,987			33.8	%	$	176,790
Tier 1 Risk-Based Capital Ratio		18.59	%		21.57	%		−13.8	%		34.70	%
Minimum Tier 1 Risk-Based Capital Ratio Required		4.00	%		4.00	%					4.00	%
Actual Tier 1 Risk-Based Capital	$	396,309		$	372,558			6.4	%	$	447,669
Minimum Tier 1 Risk-Based Capital Required	$	85,292		$	67,830			25.7	%	$	51,602
Total Risk-Based Capital Ratio		19.06	%		22.04	%		−13.5	%		35.22	%
Minimum Total Risk-Based Capital Ratio Required		8.00	%		8.00	%					8.00	%
Actual Total Risk-Based Capital	$	406,470		$	380,574			6.8	%	$	454,299
Minimum Total Risk-Based Capital Required	$	170,583		$	135,677			25.7	%	$	103,204
Stock data:
Outstanding common shares, net of treasury		24,121			24,453			−1.4	%		24,580
Book value	$	12.08		$	10.98			10.0	%	$	11.13
Market Price at end of period	$	13.41		$	12.95			3.6	%	$	12.36
Market capitalization	$	323,463		$	316,671			2.1	%	$	303,809
Common dividend data:
Cash dividends declared(1)	$	13,612		$	13,753			−1.0	%	$	6,913
Cash dividends declared per share(1)	$	0.56		$	0.56			0.0	%	$	0.28
Payout ratio		37.33	%		−140.12	%		−126.6	%		47.61	%
Dividend yield		4.78	%		4.39	%		—			4.34	%

(1) The information presented for December 31, 2005, reflects cash dividends declared for the six-month period ended on that date.

F-83

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

					Cash
	Price				Dividend
	High		Low		Per share
December 31, 2007
December 31, 2007	$	14.56	$	11.01	$	0.14
September 30, 2007	$	11.38	$	8.39	$	0.14
June 30, 2007	$	12.00	$	10.58	$	0.14
March 31, 2007	$	13.41	$	11.25	$	0.14
December 31, 2006
December 31, 2006	$	13.57	$	11.47	$	0.14
September 30, 2006	$	12.86	$	11.82	$	0.14
June 30, 2006	$	13.99	$	11.96	$	0.14
March 31, 2006	$	14.46	$	12.41	$	0.14

Group’s Financial Assets

The Group’s total financial assets include the Group’s assets and the assets managed by the Group’s trust division, the retirement plan administration subsidiary, and the securities broker-dealer subsidiary. At December 31, 2007, such assets totaled $9.243 billion, an increase of 25.5% from $7.364 billion at December 31, 2006. This was mainly due to an increase of 37.2% in the Group’s assets owned, when compared to December 31, 2006. The principal component of the Group’s financial assets is the assets owned by the Group, of which about 98% are owned by the Group’s banking subsidiary.

Another component of financial assets is the assets managed by the Group’s trust division and the retirement plan administration subsidiary. The Group’s trust division offers various types of IRA products and manages 401(K) and Keogh retirement plans, custodian and corporate trust accounts, while the retirement plan administration subsidiary manages private pension plans. As of December 31, 2007, total assets managed by the Group’s trust division amounted to $1.962 billion, an increase of 6.10% over the $1.849 billion at December 31, 2006.

The other financial asset component is the assets gathered by the Group’s securities broker-dealer subsidiary. The Group’s broker-dealer subsidiary offers a wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks and bonds. At December 31, 2007, total assets gathered by the broker-dealer from its customer investment accounts increased 12.0%, to $1.281 billion as of December 31, 2007, from $1.144 billion as of December 31, 2006.

Allowance for Loan Losses and Non-Performing Assets

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. Tables 8 through 12 set forth an analysis of activity in the allowance for loan losses and present selected loan loss statistics. In addition, refer to Table 5 for the composition (“mix”) of the loan portfolio.

At December 31, 2007, the Group’s allowance for loan losses amounted to $10.2 million or 0.85% of total loans versus $8.0 million or 0.66% of total loans at December 31, 2006. The allowance for residential mortgage loans increased by 60.1% or $2.2 million, when compared with balances recorded at December 31, 2006. The allowance for commercial loans remained constant at $1.8 million year over year, while the allowance for consumer loans increased by 3.2% or $62,000, when compared to $1.9 million recorded at December 30, 2006.

F-84

The provision for loan losses for 2007 totaled $6.6 million, a 49.3% increase from the $4.4 million reported for 2006. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for 2006 was adequate in order to maintain the allowance for loan losses at an appropriate level.

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 collectability 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.

TABLE 8 — ALLOWANCE FOR LOAN LOSSES SUMMARY

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005,

SIX-MONTH PERIODS ENDED DECEMBER 31, 2005 AND 2004,

AND FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

	Year Ended December 31,									Six-Month Period Ended December 31,						Fiscal Year Ended June 30,
	2007			2006			2005			2005			2004			2005			2004
	(Dollars in thousands)
Balance at beginning of period	$	8,016		$	6,630		$	7,565		$	6,495		$	7,553		$	7,553		$	5,031
Provision for loan losses		6,550			4,388			3,412			1,902			1,805			3,315			4,587
Net credit losses — see Table 10		(4,405	)		(3,002	)		(4,347	)		(1,767	)		(1,793	)		(4,373	)		(2,065	)
Balance at end of period	$	10,161		$	8,016		$	6,630		$	6,630		$	7,565		$	6,495		$	7,553

F-85

TABLE 9 — ALLOWANCE FOR LOAN LOSSES BREAKDOWN
AS OF DECEMBER 31, 2007, 2006 AND 2005,
AND FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

	Year Ended December 31,						Fiscal Year Ended June 30,
	2007			2006			2005			2005			2004
	(Dollars in thousands)
Mortgage	$	5,958		$	3,721		$	3,185		$	3,167		$	3,861
Commercial		1,838			1,831			1,723			1,714			1,317
Consumer		2,006			1,944			1,417			1,335			1,462
Unallocated allowance		359			520			305			279			913
	$	10,161		$	8,016		$	6,630		$	6,495		$	7,553
Allowance composition:
Mortgage		58.7	%		46.4	%		48.0	%		48.7	%		51.1	%
Commercial		18.1	%		22.8	%		26.0	%		26.4	%		17.4	%
Consumer		19.7	%		24.3	%		21.4	%		20.6	%		19.4	%
Unallocated allowance		3.5	%		6.5	%		4.6	%		4.3	%		12.1	%
		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Allowance coverage ratio at end of period Applicable to:
Mortgage		0.59	%		0.39	%		0.50	%		0.51	%		0.60	%
Commercial		1.17	%		0.76	%		0.76	%		0.73	%		1.61	%
Consumer		6.86	%		5.36	%		3.96	%		4.41	%		7.84	%
Unallocated allowance to total loans		0.03	%		0.04	%		0.03	%		0.03	%		0.12	%
Total allowance to total loans		0.85	%		0.66	%		0.73	%		0.71	%		1.01	%
Other selected data and ratios:
Allowance coverage ratio to:
Non-performing loans		15.4	%		20.9	%		23.3	%		23.3	%		25.1	%
Non-real estate non-performing loans		314.5	%		205.9	%		135.4	%		135.4	%		184.7	%

F-86

TABLE 10 — NET CREDIT LOSSES STATISTICS:

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005,

SIX-MONTH PERIODS ENDED DECEMBER 31, 2005 AND 2004,

AND FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

										Six-Month Period Ended
	Year Ended December 31,									December 31,						Fiscal Year Ended June 30,
	2007			2006			2005			2005			2004			2005			2004
Mortgage
Charge-offs	$	(2,030	)	$	(896	)	$	(2,437	)	$	(774	)	$	(1,198	)	$	(2,861	)	$	(378	)
Recoveries		15			40			145			145			—			—			—
		(2,015	)		(856	)		(2,292	)		(629	)		(1,198	)		(2,861	)		(378	)
Commercial
Charge-offs		(359	)		(277	)		(665	)		(180	)		(129	)		(614	)		(249	)
Recoveries		107			116			19			16			105			119			139
		(252	)		(161	)		(646	)		(164	)		(24	)		(495	)		(110	)
Consumer
Charge-offs		(2,517	)		(2,505	)		(1,842	)		(1,127	)		(904	)		(1,619	)		(2,580	)
Recoveries		379			520			433			153			333			602			1,003
		(2,138	)		(1,985	)		(1,409	)		(974	)		(571	)		(1,017	)		(1,577	)
Net credit losses
Total charge-offs		(4,906	)		(3,678	)		(4,944	)		(2,081	)		(2,231	)		(5,094	)		(3,207	)
Total recoveries		501			676			597			314			438			721			1,142
	$	(4,405	)	$	(3,002	)	$	(4,347	)	$	(1,767	)	$	(1,793	)	$	(4,373	)	$	(2,065	)
Net credit losses to average loans:
Mortgage		0.20	%		0.11	%		0.31	%		0.17	%		0.34	%		0.41	%		0.06	%
Commercial		0.18	%		0.08	%		0.52	%		0.25	%		0.05	%		0.46	%		0.19	%
Consumer		6.91	%		5.31	%		4.85	%		6.08	%		5.41	%		4.31	%		8.83	%
Total		0.37	%		0.28	%		0.49	%		0.38	%		0.44	%		0.53	%		0.28	%
Recoveries to charge-offs		10.2	%		18.4	%		12.1	%		15.1	%		19.6	%		14.2	%		35.6	%
Average Loans
Mortgage	$	1,005,751		$	805,285		$	730,614		$	757,207		$	694,529		$	699,027		$	662,590
Commercial		143,802			212,294			125,395			129,506			96,264			108,636			57,047
Consumer		30,989			37,412			29,061			32,005			21,123			23,576			17,867
Total	$	1,180,542		$	1,054,991		$	885,070		$	918,718		$	811,916		$	831,239		$	737,504

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TABLE 11 — NON-PERFORMING ASSETS

	December 31,									June 30,
	2007			2006			2005			2005			2004
	(Dollars in thousands)
Non-performing assets:
Non-performing loans
Non-accruing loans	$	27,347		$	17,845		$	18,986		$	21,859		$	23,714
Accruing loans over 90 days past due		38,762			20,453			9,447			8,997			7,224
Total non-performing loans (see Table 12 below)		66,109			38,298			28,433			30,856			30,938
Foreclosed real estate		4,207			4,864			4,802			4,186			888
Total non-performing assets	$	70,316		$	43,162		$	33,235		$	35,042		$	31,826
Non-performing assets to total assets		1.17	%		0.99	%		0.73	%		0.83	%		0.85	%

					Six-Month
	Year Ended				Period Ended		Fiscal Year
	December 31,				December 31,		Ended June 30,
	2007		2006		2005		2005		2004
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	4,359	$	3,433	$	1,403	$	2,164	$	843

TABLE 12 — NON-PERFORMING LOANS:

AS OF DECEMBER 31, 2007, 2006 AND 2005

	December 31,
	2007			2006			2005
	(Dollars in thousands)
Non-performing loans:
Mortgage	$	62,878		$	34,404		$	23,535
Commercial, mainly real estate		2,413			3,167			4,600
Consumer		818			727			298
Total	$	66,109		$	38,298		$	28,433
Non-performing loans composition percentages:
Mortgage		95.1	%		89.8	%		82.8	%
Commercial, mainly real estate		3.7	%		8.3	%		16.2	%
Consumer		1.2	%		1.9	%		1.0	%
Total		100.0	%		100.0	%		100.0	%
Non-performing loans to:
Total loans		5.56	%		3.14	%		3.12	%
Total assets		1.10	%		0.88	%		0.63	%
Total capital		18.39	%		11.38	%		8.32	%

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, following the provisions of SFAS No. 114. 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

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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 under the provisions of SFAS No. 5, and for 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 and 90 days past due. The portfolios of residential mortgages and consumer loans are considered homogeneous and are evaluated collectively for impairment.

For loans that are not individually graded, the Group uses a methodology that follows a loan credit risk rating process that involves dividing loans into risk categories. The Group, using an aged-based rating system, applies an overall allowance percentage to each loan portfolio category based on historical credit losses adjusted for current conditions and trends. This delinquency-based calculation is the starting point for management’s determination of the required level of the allowance for loan losses. Other data considered in this determination includes overall historical loss trends and 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 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 aged-based rating system and with the specific allowances. It is based upon management’s evaluation of various macroeconomic conditions, the effects of which are not directly measured in determining the aged-based rating system and the specific allowances. These conditions include then-existing general economic and business conditions affecting our key lending areas; credit quality trends, including trends in non-performing loans expected to result from existing conditions, collateral values, loan volumes and concentrations, seasoning of the loans 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.

During the year ended December 31, 2007, net credit losses amounted to $4.4 million, a 46.8% increase when compared to $3.0 million reported for the same period of 2006. The increase was primarily due to a $1.2 million in net credit losses for mortgage loans. Total recoveries decreased from $677,000 in 2006 to $501,000 in 2007. As a result, the recoveries to charge-offs ratio decreased from 18.4% in 2006, to 10.2% in 2007.

The Group’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At December 31 2007, the Group’s non-performing assets totaled $70.3 million (1.17% of total assets) versus $43.2 million (0.99% of total assets) at December 31, 2006.

At December 31, 2007, the allowance for loan losses to non-performing loans coverage ratio was 15.4% (20.9% at December 31, 2006. Excluding the lesser-risk mortgage loans, the ratio is 314.5% (205.9% at December 31, 2006).

In July 2007, the Group regained control of all the servicing for its outstanding mortgage loans and subcontracted it out to a leading third party servicer. This has enabled the Group to better monitor performance and implement aggressive loss mitigation measures which, it is believed, will help stabilize the level of non-performing residential mortgage loans in the near future. The Group does not expect the increase in non-performing residential mortgage loans to translate into significantly higher losses as these loans are generally well collateralized with adequateloan-to-value ratios.

The Group follows a conservative residential mortgage lending policy, with more than 90% of its residential mortgage portfolio consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans offered by certain major US mortgage loan originators. Furthermore, Oriental has never been active in negative amortization loans or adjustable rate mortgage loans, including those with teaser rates, and does not originate construction and development loans.

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Detailed information concerning each of the items that comprise non-performing assets follows:

•  Mortgage loans — residential mortgage loans are placed in non-accrual status when they become 365 days or more past due, or earlier if other factors indicate that the collection of principal an interest is doubtful, and are written down, if necessary, based on the specific evaluation of the collateral underlying the loan. At December 31, 2007, the Group’s non-performing mortgage loans totaled $62.9 million or 82.8% of the Group’s non-performing loans, compared to $34.4 million or 89.8% at December 31, 2006, and to $23.5 million or 82.8% at December 31, 2005. Non-performing loans in this category are primarily residential mortgage loans. Based on the value of the underlying collateral and the loan-to-value ratios, management considers that no significant losses will be incurred on this portfolio.

•  Commercial business loans — are placed in non-accrual status when they become 90 days or more past due and are charged-off based on the specific evaluation of the underlying collateral. At December 31, 2007, the Group’s non-performing commercial business loans amounted to $2.4 million or 3.7% of the Group’s non-performing loans, compared to $3.2 million or 8.3% at December 31, 2006, and $4.6 million or 16.2% at December 31, 2005. Most of this portfolio is also collateralized by real estate and no significant losses are expected.

•  Consumer loans — are placed in non-accrual status when they become 90 days past due and charged-off when payments are delinquent 120 days. At December 31, 2007, the Group’s non-performing consumer loans amounted to $818,000 or 1.2% of the Group’s total non-performing loans, compared to $727,000 or 1.9% at December 31, 2006, and $208,000 or 1.0% at December 31, 2005.

•  Foreclosed real estate assets — are 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 value of the property is charged against the allowance for loan losses. Subsequently, any excess of the carrying value over the estimated fair value less selling costs is charged to operations. Management is actively seeking prospective buyers for these foreclosed properties. Foreclosed real estate amounted to $4.2 million at December 31, 2007, $4.9 million at December 31, 2006 and $4.8 million at December 31, 2005

Contractual Obligations and Commercial Commitments

As disclosed in the notes to the Group’s consolidated financial statements, the Group has certain obligations and commitments to make future payments under contracts. At December 31, 2007, the aggregate contractual obligations and commercial commitments are:

	Payments Due by Period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		After 5 years
	(Dollars in thousands)
CONTRACTUAL OBLIGATIONS(1):
Federal funds purchased and other short term borrowings	$	27,460	$	27,460	$	—	$	—	$	—
Securities sold under agreements to repurchase		3,850,023		100,023		100,000		1,800,000		1,850,000
Advances from FHLB		330,000		50,000		—		225,000		55,000
Subordinated capital notes		36,083		—		—		—		36,083
Annual rental commitments under noncancelable operating leases		23,281		3,200		6,193		5,970		7,918
Total	$	4,266,847	$	180,683	$	106,193	$	2,030,970	$	1,949,001

(1) Excluding accrued interest.

Such commitments will be funded in the normal course of business from the Bank’s principal sources of funds. At December 31, 2006 the Bank had $612.4 million in certificates of deposit that mature during the following twelve months.

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Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services since such prices are affected by inflation.

RISK MANAGEMENT

Background

The Group’s risk management policies are established by its Board of Directors (the “Board”), implemented by management, through the adoption of a risk management program, which is overseen and monitored by the Chief Risk Officer and the Risk Management Committee (RMC). During 2007, the Group continued to refine and enhance its risk management program by strengthening policies, processes and procedures necessary to maintain effective risk management.

All aspects of the Group’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential to risk management. As more fully discussed below, the Group’s primary risks exposure include, market, interest rate, credit, liquidity, operational and concentration risks.

Market Risk

Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or prices. The Group evaluates market risk together with interest rate risk (See “Interest Rate Risk” below).

The Group’s financial results and capital levels are constantly exposed to market risk. The Board and management are primarily responsible for ensuring that the market risk assumed by the Group complies with the guidelines established by Board approved policies. The Board has delegated the management of this risk to the Asset and Liability Management Committee (“ALCO”) which is composed of certain executive officers from the business, treasury and finance areas. One of ALCO’s primary goals is to ensure that the market risk assumed by the Group is within the parameters established in the policies adopted by the Board.

Interest Rate Risk

Interest rate risk is the exposure of the Group’s earnings or capital to adverse movements in interest rates. It is a predominant market risk in terms of its potential impact on earnings.

The Group manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income. ALCO is responsible for monitoring compliance with the market risk policies approved by the Board and adopting interest risk management strategies. In that role, ALCO oversees interest rate risk, liquidity management and other related matters.

In discharging its responsibilities, ALCO examines current and expected conditions in world financial markets, competition and prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities, recent or proposed changes to the investment portfolio, alternative funding sources and their costs, hedging and the possible purchase of derivatives such as swaps and caps, and any tax or regulatory issues which may be pertinent to these areas. ALCO approves funding decisions in light of the Group’s overall growth strategies and objectives.

Each month, the Group performs a net interest income simulation analysis on a consolidated basis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a

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one to three-year time horizon, assuming gradual upward and downward interest rate movements of 200 basis points, achieved during a twelve-month period. Simulations are carried out in two ways:

(1) using a static balance sheet as the Group had on the simulation date, and

(2) using a growing balance sheet based on recent growth patterns and strategies.

The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and cost, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may be important in projecting the future growth of net interest income.

The Group uses asset-liability management software to project future movements in the Group’s balance sheet and income statement. The starting point of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations. For the simulation made as of December 31, 2007, and based on the significant downward shift in rates experienced at the beginning of 2008, the Group’s ALCO decided to update the rates as of the end of January 2008 and use these as the starting point for the projections.

These simulations are highly complex, and use many simplifying assumptions that are intended to reflect the general behavior of the Group over the period in question. There can be no assurance that actual events will match these assumptions in all cases. For this reason, the results of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates.

The following table presents the results of the simulations as of December 31, 2007, assuming a one-year time horizon:

	December 31, 2007
	Net Interest Income Risk (projected for 2008)
	Static Balance Sheet						Growing Simulation
	Amount			Percent			Amount			Percent
Change in Interest Rate	Change			Change			Change			Change
	(Dollars in thousands)
+200 Basis points	$	1,349			1.36	%	$	3,447			3.00	%
−200 Basis points	$	(1,266	)		−1.27	%	$	(7,391	)		−6.44	%

Future net interest income could be affected by the Group’s investments in callable securities, and its structured repurchase agreements and advances from the FHLB.

As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of the Group’s assets and liabilities, the maturity and the repricing frequency of the liabilities has been extended to longer terms. Also, the concentration of long-term fixed rate securities has been reduced.

Derivatives.  The Group uses derivative instruments and other strategies to manage its exposure to interest rate risk caused by changes in interest rates beyond management’s control.

The following summarizes strategies, including derivative activities, used by the Group in managing interest rate risk:

Interest rate swaps —Interest rate swap agreements generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying principal. The interest rate swaps have been utilized to convert short term repurchase agreements into fix rate to better match the repricing nature of these borrowings. There were no outstanding interest rate swaps as of December 31, 2007 or 2006.

Interest rate cap agreements —Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The Group may utilize interest rate cap agreements to protect against rising interest rates. There were no outstanding interest rate caps as of December 31, 2007 or 2006.

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Structured repurchase agreements — The Group uses structured repurchase agreements, with embedded call options, to reduce the Group’s exposure to interest rate risk by lengthening the contractual maturities of its liabilities, while keeping funding costs low.

The Group offers its customers certificates of deposit with an option tied to the performance of the Standard & Poor’s 500 stock market index. At the end of five years, the depositor receives a minimum return or a specified percentage of the average increase of the month-end value of the stock index. The Group uses option agreements with major money center banks and major broker-dealer companies to manage its exposure to changes in those indexes. Under the terms of the option agreements, the Group receives the average increase in the month-end value of the corresponding index in exchange for a fixed premium. The changes in fair value of the options purchased and the options embedded in the certificates of deposit are recorded in earnings.

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

At December 31, 2007, the contractual maturities of the equity indexed options, by fiscal year were as follows:

	Equity Indexed		Equity Indexed
Year Ending December 31,	Options Purchased		Options Written
	(In thousands)
2008	$	35,700	$	33,308
2009		22,085		20,870
2010		9,045		8,647
2011		21,415		20,825
2012		64,285		63,423
	$	152,530	$	147,073

At December 31, 2007 and 2006, the fair value the purchased options used to manage the exposure to the stock market on stock indexed deposits represented an asset of $40.7 million, and $34.2 million, respectively; and the options sold to customers embedded in the certificates of deposit represented a liability of $38.8 million and $32.2 million, respectively, recorded in deposits.

Credit Risk

Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in accordance with its terms. The principal source of credit risk for the Group’s is its lending activities. (Refer to the “Allowance for Loan Losses and Non-Performing Assets” section for further details.)

The Group manages its credit risk through a comprehensive credit policy which establishes sound underwriting standards, by monitoring and evaluating loan portfolio quality, and by the constant assessment of reserves and loan concentrations. The Group also employs proactive collection and loss mitigation practices.

The Group may also encounter risk of default in relation to its securities portfolio. The securities held by the Group are principally mortgage-backed securities and U.S. Treasury and agency securities. Thus, a substantial portion of these instruments are guaranteed by mortgages, a U.S. government-sponsored entity or the full faith and credit of the U.S. government, and are deemed to be of the highest credit quality. The available-for-sale securities portfolio also includes approximately $626.8 million in non-government agency pass-through collateralized mortgage obligations. These obligations are senior classes having subordination of losses ranging from 9.0% to 16.2%, which provide the capacity to withstand higher delinquency and foreclosure levels. These issues are rated “AAA” by Standard & Poor’s and “Aa” by Moody’s. At December 31, 2007, the Group held structured credit investments with balances of $85.5 million in the available-for-sale portfolio, and $96.2 million in the held-to-maturity portfolio. These issues are rated investment-grade by Standard & Poor’s (“AAA”, “AA” or “A”) and Moody’s (“A2”). The unrealized loss position is a reflection of the recent dislocations seen in the financial and credit markets, which have created a significant widening in the market’s credit spreads. The underlying reference long portfolios (collateral)

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on the structures are substantively investment grade, they have performed adequately, there have been no defaults to date, and none of our structured credit investments have been downgraded.

Management’s Credit Committee, composed of the Group’s Chief Executive Officer, Chief Credit Risk Officer and other senior executives, has primary responsibility for setting strategies to achieve the Group’s credit risk goals and objectives. Those goals and objectives are set forth in the Group’s Credit Policy.

Liquidity Risk

Liquidity risk is the risk of the Group not being able to generate sufficient cash from either assets or liabilities to meet obligations as they become due, without incurring substantial losses. The Group’s cash requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as they mature, and funding of new and existing investment as required.

Effective liquidity management requires that the Group have sufficient cash available at all times to meet its financial commitments, finance planned growth and have a reasonable safety margin for normal as well as unexpected cash needs. ALCO is responsible for managing the Group’s liquidity risk in accordance with the policies adopted by the Board. In discharging its liquidity risk management obligations, ALCO approves operating and contingency procedures and monitors their implementation. The Group’s Treasurer and CIO is responsible for the implementation of the liquidity risk management policies adopted by the Board and of the operating and contingency procedures adopted by ALCO, and for monitoring the Group’s liquidity position on an ongoing basis. Using measures of liquidity developed by the Group’s Treasury Division under several different scenarios, the Treasury Division, ALCO and the Board review the Group’s liquidity position on a daily, monthly and quarterly basis, respectively.

The Group meets its liquidity management objectives by maintaining (i) liquid assets in the form of investment securities,(ii) sufficient unused borrowing capacity in the national money markets, and achieving (iii) consistent growth in core deposits. As of December 31, 2007, the Group had approximately $310.9 million in investments available to cover liquidity needs. Additional asset-driven liquidity is provided by the availability of loan assets to pledge. These sources, in addition to the Group’s 6.69% average equity capital base, provide a stable funding base.

The Group utilizes different sources of funding to help ensure that adequate levels of liquidity are available when needed. Diversification of funding sources is of great importance as it protects the Group’s liquidity from market disruptions. The principal sources of short-term funds are deposits, securities sold under agreements to repurchase, and lines of credit with the FHLB. ALCO reviews credit availability on a regular basis. The Group securitizes and sells mortgage loans as supplemental source of funding. Long-term certificates of deposit as well as long-term funding through the issuance of notes have also provided additional funding. The cost of these different alternatives, among other things, is taken into consideration. The Group’s principal uses of funds are the origination of loans and the repayment of maturing deposit accounts and borrowings.

Operational Risk

Operational risk is the risk of loss from inadequate or failed internal processes, personnel and systems or from external events. All functions, products and services of the Group are susceptible to operational risk.

The Group faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products. Coupled with external influences such as market conditions, security risks, and legal risk, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk, the Group has developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these policies and procedures is to provide reasonable assurance that the Group’s business operations are functioning within established limits.

The Group classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and assessments. With respect to corporate wide risks, such as information security, business recovery, legal and compliance, the Group has specialized groups, such as Information Security,

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Corporate Compliance, Information Technology and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the business groups. All these matters are reviewed and discussed in the RMC.

The Group is subject to extensive regulation in the different jurisdictions in which it conducts its business, and this regulatory scrutiny has been significantly increasing over the last several years. The Group has established and continues to enhance procedures based on legal and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. The Group has a corporate compliance function, headed by a Senior Compliance Officer who reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and implementation of an enterprise-wide compliance program.

Concentration Risk

Substantially all of the Group’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico. As a consequence, the Group’s profitability and financial condition may be adversely affected by an extended economic slowdown, adverse political or economic developments in Puerto Rico or the effects of a natural disaster, all of which could result in a reduction in loan originations, an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the value of its loans and loan servicing portfolio.

Puerto Rico is currently in a general economic slowdown that has caused a reduction in private sector employment and consumer spending. Increases in oil prices and other consumer goods and services, coupled with a 7% sales tax implemented in October 2006 as part of a government program of tax and fiscal reforms, have also contributed to the general economic slowdown.

These economic concerns and uncertainties in the private and public sectors have had an adverse effect in the credit quality of our loan portfolios as delinquency rates have increased in the short-term and may continue to increase until the economy stabilizes. The reduction in consumer spending may continue to impact growth in our other interest and non-interest revenue sources.

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QUARTERLY FINANCIAL DATA (Unaudited)

The following is a summary of the unaudited quarterly results of operations:

TABLE 13A — SELECTED QUARTERLY FINANCIAL DATA:

	Quarter Ended
	March 31,			June 30,			September 30,			December 31,
Year Ended December 31, 2007	2007			2007			2007			2007
	(In thousands, except for per share data)
Interest income	$	61,500		$	70,801		$	74,926		$	82,138
Interest expense		48,234			53,111			55,276			59,135
Net interest income		13,266			17,690			19,650			23,003
Provision for loan losses		(1,075	)		(1,375	)		(1,614	)		(2,486	)
Net interest income after provision for loan losses		12,191			16,315			18,036			20,517
Total non-interest income		15,251			7,796			7,134			12,442
Total non-interest expenses		15,827			17,477			16,522			17,032
Income before taxes		11,615			6,634			8,648			15,927
Income tax expense		624			187			196			551
Net income		10,991			6,447			8,452			15,376
Less: Dividends on preferred stock		(1,200	)		(1,201	)		(1,200	)		(1,201	)
Income available to common shareholders	$	9,791		$	5,246		$	7,252		$	14,175
Per share data:
Basic	$	0.40		$	0.21		$	0.30		$	0.59
Diluted	$	0.40		$	0.21		$	0.30		$	0.59

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TABLE 13B — SELECTED QUARTERLY FINANCIAL DATA:

	Quarter Ended
	March 31,			June 30,			September 30,			December 31,
Year Ended December 31, 2006	2006			2006			2006			2006
	(In thousands, except for per share data)
Interest income	$	55,992		$	56,894		$	60,865		$	58,560
Interest expense		40,780			46,186			51,912			49,307
Net interest income		15,212			10,708			8,953			9,253
Provision for loan losses		(1,101	)		(947	)		(870	)		(1,470	)
Net interest income after provision for loan losses		14,111			9,761			8,083			7,783
Total non-interest income		8,953			7,521			9,885			(9,121	)
Total non-interest expenses		14,883			14,784			15,145			18,901
Income before taxes		8,181			2,498			2,823			(20,239	)
Income tax expense		131			(21	)		446			(2,187	)
Net income		8,050			2,519			2,377			(18,052	)
Less: Dividends on preferred stock		(1,200	)		(1,201	)		(1,200	)		(1,201	)
Income available to common shareholders	$	6,850		$	1,318		$	1,177		$	(19,253	)
Per share data:
Basic	$	0.28		$	0.05		$	0.05		$	(0.78	)
Diluted	$	0.28		$	0.05		$	0.05		$	(0.78	)

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TABLE 13C — SELECTED QUARTERLY FINANCIAL DATA:

	Quarter Ended
	September 30,			December 31,
Six-Month Period Ended December 31, 2005	2005			2005
	(In thousands, except for per share data)
Interest income	$	50,813		$	54,273
Interest expense		33,485			37,221
Net interest income		17,328			17,052
Provision for loan losses		951			951
Net interest income after provision for loan losses		16,377			16,101
Total non-interest income		7,825			8,557
Total non-interest expenses		15,390			16,424
Income before taxes		8,812			8,234
Income tax expense		(391	)		264
Net income		8,421			8,498
Less: Dividends on preferred stock		(1,200	)		(1,201	)
Income available to common shareholders	$	7,221		$	7,297
Per share data:
Basic	$	0.29		$	0.30
Diluted	$	0.29		$	0.29

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TABLE 13D — SELECTED QUARTERLY FINANCIAL DATA:

	Quarter Ended
	September 30,			December 31,			March 31,			June 30,
Year Ended June 30, 2005	2004			2004			2005			2005
	(In thousands, except for per share data)
Interest income	$	44,947		$	47,917		$	47,572		$	48,876
Interest expense		21,294			24,855			27,162			29,588
Net interest income		23,653			23,062			20,410			19,288
Provision for loan losses		700			1,105			660			850
Net interest income after provision for loan losses		22,953			21,957			19,750			18,438
Total non-interest income		10,404			11,943			6,101			6,437
Total non-interest expenses		15,461			18,460			12,148			13,894
Income before taxes		17,896			15,440			13,703			10,981
Income tax expense		(768	)		123			2,671			(377	)
Net income		17,128			15,563			16,374			10,604
Less: Dividends on preferred stock		(1,200	)		(1,201	)		(1,200	)		(1,201	)
Income available to common shareholders	$	15,928		$	14,362		$	15,174		$	9,403
Per share data:
Basic	$	0.66		$	0.59		$	0.62		$	0.38
Diluted	$	0.61		$	0.55		$	0.58		$	0.37

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Critical Accounting Policies

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

A transfer of financial assets is accounted for as a sale when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the transferor, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity. As such, the Group recognizes the financial assets and servicing assets it controls and the liabilities it has incurred. At the same time, it ceases to recognize financial assets when control has been surrendered and liabilities when they are extinguished.

Derivative Financial Instruments

As part of the Group’s asset and liability management, the Group uses interest-rate contracts, which include interest-rate swaps to hedge various exposures or to modify interest rate characteristics of various statement of financial condition accounts.

The Group follows Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that all derivative instruments be recognized as assets and liabilities at fair value. If certain conditions are met, the derivative may qualify for hedge accounting treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”) or (c) a hedge of foreign currency exposure (“foreign currency hedge”).

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

Certain contracts contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated and carried at fair value.

The Group may use several 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 to derive the fair value of certain derivatives contracts.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability 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 collectability 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

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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.

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 between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Group to assume certain positions based on its interpretation of current tax regulations. Changes in assumptions affecting estimates may be required in the future and estimated tax 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 tax contingency accruals and changes to such accruals, including related interest and penalties, as considered appropriate by management. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to the Group’s effective rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective rate and may require the use of cash in the year of resolution.

New Accounting Pronouncements

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 was encouraged, provided that the reporting entity had not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Group adopted the provisions of SFAS No. 157 commencing in the first quarter of 2008. Such provisions are to be applied prospectively. The Group is currently assessing the impact of SFAS No. 157 on its consolidated financial statements, including disclosures.

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 No. 159,“The Fair Value Option for Financial assets and Financial Liabilities, Including an amendment of FASB Statement No. 115”. SFAS No. 159 provides an alternative measurement treatment for certain financial assets and financial liabilities, under aninstrument-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 No. 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 No. 157. The Group adopted the provisions of SFAS 159 in January 2008, but decided not to apply the fair value option for any of its financial assets and liabilities, other than those required by SFAS 115.

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SFAS No. 141R, “Business Combinations”

In December 2007, the FASB issued SFAS No. 141R,“Business Combinations.” SFAS No. 141R will significantly change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. The statement will also require all acquisition-related costs to be expensed as they are incurred. SFAS No. 141R is required to be applied to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with earlier adoption being prohibited. The Group is currently evaluating the effect, if any, of the adoption of SFAS 141R on its consolidated financial statements, including disclosures.

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