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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 2005 , or
     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from ___to ___.
Commission File No. 001-12647
ORIENTAL FINANCIAL GROUP INC.
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0538893
Principal Executive Offices:
998 San Roberto Street
Professional Offices Park SE 4th Floor
San Juan, Puerto Rico 00926
Telephone Number: (787) 771-6800
 
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock
($1.00 par value per share)
7.125% Noncumulative Monthly Income Preferred Stock, Series A ($1.00 par value per share, $25.00 liquidation preference per share);
7.0% Noncumulative Monthly Income Preferred Stock, Series B ($1.00 par value per share, $25.00 liquidation preference per share)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
             
Yes   þ   No   o
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)
             
Yes   þ   No   o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
     The aggregate market value of the common stock held by non-affiliates of Oriental Financial Group Inc. (the “Group”) was $633.1 million based upon the reported closing price of $28.31 on the New York Stock Exchange as of December 31, 2004.
As of August 31, 2005, the Group had 24,846,884 shares of common stock outstanding.
Documents Incorporated By Reference
Portions of the Group’s annual report to shareholders for fiscal year 2005 are incorporated herein by reference in response to Items 5 through 9A of Part II and Item 15(a)(1) of Part IV.
Portion of the Group’s definitive proxy statement relating to the 2005 annual meeting of shareholders are incorporated herein by reference in response to Items 10 through 14 of Part III.
 
 

 

ORIENTAL FINANCIAL GROUP INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
TABLE OF CONTENTS
     
   
   
   
   
   
 
   
   
   
   
   
   
   
   
   
 
   
Item 10. Directors and Executive Officers of the Registrant
   
Item 11. Executive Compensation
   
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
   
Item 13. Certain Relationships and Related Transactions
   
Item 14. Principal Accountant Fees and Services
   
 
   
   
  EX-10.5 LEASE AGREEMENT DATED MAY 18, 2004
  EX-10.6 FIRST AMENDMENT TO LEASE AGREEMENT DATED MAY 18,2004
  EX-10.7 AGREEMENTS BETWEEN ORIENTAL FINANCIAL GROUP INC. AND JOSE ENRIQUE FERNANDEZ
  EX-10.8 EMPLOYMENT AGREEMENT BETWEEN ORIENTAL FINANCIAL GROUP INC AND JOSE RAFAEL FERNANDEZ
  EX-10.9 CHANGE IN CONTROL COMPENSATION AGREEMENT BETWEEN ORIENTAL FINANCIAL GROUP INC AND JOSE E.FENANDEZ
  EX-10.10 CHANGE IN CONTROL COMPENSATION AGREEMENT BETWEEN ORIENTAL FINANCIAL GROUP AND HECTOR MENDEZ
  EX-10.11 CHANGE IN CONTROL COMPENSATION AGREEMENT ORIENTAL FINANCIAL GROUP AND JOSE E. FERNANDEZ RICHARD
  EX-10.12 CHANGE IN CONTROL COMPENSATION AGREMENT BETWEEN ORIENTAL FINANCIAL GROUP, INC AND JOSE R. FERNANDEZ
  EX-10.13 CHANGE IN CONTROL COMPENSATION AGREEMENT BETWEEN ORIENTAL FINANCIAL GROUP, INC AND NOBERTO GONZALEZ
  EX-10.14 CHANGE IN CONTROL COMPENSATION AGREEMENT BETWEEN ORIENTAL FINANCIAL GROUP INC AND GANESH KUMAR
  EX-10.15 CHANGE IN CONTROL COMPENSATION AGREEMENT BETWEEN ORIENTAL FINANCIAL GROUP INC AND CARLOS VELEZ
  EX-10.16 CHANGE IN CONTROL COMPENSATION AGREEMENT BETWEEN ORIENTAL FINANCIAL GROUP INC AND NESTOR VALE
  EX-10.17 CHANGE IN CONTROL COMPENSATION AGREEMENT BETWEEN ORIENTAL FINANCIAL GROUP INC AND CARLOS J. NIEVES
  EX-21 LIST OF SUBSIDIARIES
  EX-23 CONSENT OF DELOITTE & TOUCHE LLP
  EX-31.1 SECTION 302 CERTIFICATION OF CEO
  EX-31.1 SECTION 302 CERTIFICATION OF CFO
  EX-32.1 SECTION 906 CERTIFICATION OF CEO
  EX-32.1 SECTION 906 CERTIFICATION OF CFO

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FORWARD-LOOKING STATEMENTS
When used in this Form 10-K or future filings by Oriental Financial Group Inc. (“the Group”) with the Securities and Exchange Commission (the “SEC”), in the Group’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “project,” “believe,” “should” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
The future results of the Group could be affected by subsequent events and could differ materially from those expressed in forward-looking statements. If future events and actual performance differ from the Group’s assumptions, the actual results could vary significantly from the performance projected in the forward-looking statements.
The Group wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are based on management’s current expectations, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities, competitive, and regulatory factors, legislative changes and accounting pronouncements, could affect the Group’s financial performance and could cause the Group’s actual results for future periods to differ materially from those anticipated or projected. The Group does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
PART I
ITEM 1. BUSINESS
General
The Group provides comprehensive financial services to its clients through a complete range of consumer and commercial banking-financial solutions, including consumer, commercial and mortgage lending; checking and savings accounts; financial planning, insurance, money management, and investment brokerage; and corporate and individual trust and retirement services. The Group operates through three major business segments: Banking, Treasury and Financial Services, and distinguishes itself based on quality service, and marketing focused on professionals and owners of small and mid-sized businesses, primarily in Puerto Rico. The Group has 24 financial centers in Puerto Rico and a subsidiary, Caribbean Pension Consultants Inc. (“CPC”), based in Boca Raton, Florida. The Group’s strategy is to strengthen its banking-financial services franchise by expanding its commercial and consumer lending businesses, increasing the level of integration in the marketing and delivery of banking and financial services, opening approximately two new financial centers per year, continuing to maintain effective asset-liability management, and growing non-interest revenues from banking and financial services and improving operating efficiencies.
The Group is a diversified, publicly-owned financial holding company with $7.2 billion in total financial assets managed and owned, incorporated on June 14, 1996 under the laws of the Commonwealth of Puerto Rico, providing services through its subsidiaries. Oriental Bank and Trust (the “Bank”), the Group’s main subsidiary, is a full-service Puerto Rico commercial bank with its main office located in San Juan, Puerto Rico. The Bank has 24 branches located throughout Puerto Rico. The Bank was incorporated in 1964 as a federal mutual savings and loan association. It became a federal mutual savings bank in July 1983 and converted to a federal stock savings bank in April 1987. Its conversion from a federally-chartered savings bank to a commercial bank chartered under the banking laws of the Commonwealth of Puerto Rico, on June 30, 1994, allowed the Bank to more effectively pursue opportunities in its market and obtain more flexibility in its businesses, placing the Bank in the mainstream of financial services in Puerto Rico. The Bank offers banking services such as mortgage, commercial and consumer lending, saving and time deposit products, financial planning, and corporate and individual trust services. The Bank also operates two international banking entities pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended (the “IBE Act”), one operates as a unit of the Bank, named O.B.T. International Bank, and the other operates as a wholly owned subsidiary of the Bank, named Oriental International Bank Inc. (“Oriental International”), organized in November 2003. The Group transferred most of the assets and liabilities of O.B.T. International Bank to the new IBE subsidiary as of January 1, 2004. The international banking entities offer the Bank certain Puerto Rico tax advantages and their services are limited under Puerto Rico law to persons and assets / liabilities located outside of Puerto Rico.
Oriental Financial Services Corp. (“OFSC”) and Oriental Insurance Inc. (“Oriental Insurance”) are Puerto Rico corporations and the Group’s subsidiaries engaged in securities brokerage/investment banking and insurance agency services, respectively. OFSC, a member of the National Association of Securities Dealers, Inc. (the “NASD”) and the Securities Investor Protection Corporation, is a registered securities broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934. OFSC does not carry customer accounts and is, accordingly, exempt from the Customer Protection Rule (SEC Rule 15c3-3) pursuant to subsection (k)(2)(ii) of such rule.

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In January 2005, OFSC was selected for the third time to serve as Senior Manager for the next two years, for the Commonwealth of Puerto Rico’s bond syndicate in partnership with Banc of America Securities LLC. OFSC has entered into an agreement to seek municipal securities business with Banc of America Securities LLC, two consulting services agreement with Bank of America, N.A., and Bank of America Leasing and Capital, LLC, and a client services agreement with Bank of America Capital Management, LLC.
In October 2001 and August 2003, Oriental Financial (PR) Statutory Trust I (the “Statutory Trust I”) and Oriental Financial (PR) Statutory Trust II (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 million of trust redeemable preferred securities were issued by the Statutory Trust I and by the Statutory Trust II, respectively, as part of pooled underwriting transactions. Pooled underwriting involves participating with other bank holding companies in issuing the securities through a special purpose pooling vehicle created by the underwriters.
In January 2003, the Group acquired all of the outstanding common stock of CPC, a Florida Corporation headquartered in Boca Raton, Florida, which is engaged in the administration of retirement plans in the United States of America, Puerto Rico and the Caribbean.
The Group is subject to the provisions of the U.S. Bank Holding Company Act of 1956, as amended, (the “Bank Holding Company Act”) and, accordingly, subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Bank is regulated by various agencies in the United States and the Commonwealth of Puerto Rico. Its main regulators are the Commissioner of Financial Institutions of Puerto Rico (the “Commissioner”) and the Federal Deposit Insurance Corporation (the “FDIC”). The FDIC insures the Bank’s deposits up to $100,000 per depositor. The Bank is further subject to the regulation of the Puerto Rico Finance Board. Other agencies, such as the SEC, regulate additional aspects of the Group’s operations (see “Regulation and Supervision”). OFSC is subject to the supervision, examination and regulation of the NASD, the SEC, and the Commissioner. Oriental Insurance is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico.
The Group is a legal entity separate and distinct from the Bank, OFSC, the Statutory Trusts, CPC and Oriental Insurance. There are various legal limitations governing the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with the Group or its other subsidiaries.
Market Area and Business Segments
Puerto Rico, where the banking market is highly competitive, is the main geographic business and service area of the Group. As of June 30, 2005, Puerto Rico had 11 banking institutions with a total of approximately $97.1 billion in assets according to industry statistics published by the FDIC. The Group ranked 8th based on total assets at June 30, 2005. Puerto Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions in the United States of America.
In addition, the Group competes with brokerage firms with retail operations, credit unions, cooperatives, small loan companies, insurance agencies and mortgage banks in Puerto Rico. The Group encounters intense competition in attracting and retaining deposits and in its consumer and commercial lending activities.
Management believes that the Group has been able to compete effectively for deposits and loans by offering a variety of transaction account products and loans with competitive terms, by emphasizing the quality of its service, by pricing its products at competitive interest rates and by offering convenient branch locations. The Group’s ability to originate loans depends primarily on the service it provides to its borrowers in making prompt credit decisions and on the rates and fees that it charges.
The Group has three reportable segments: Treasury, Banking 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 organizational structure, nature of products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Group measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, interest spread, loan production and fees generated.
Banking includes the Bank’s branches and mortgage banking activities, with traditional banking products such as deposits and mortgage, commercial and consumer loans. The Bank’s lending activities are primarily with consumers located in Puerto Rico. The Bank’s loan transactions include a diversified number of industries and activities, all of which are encompassed within three main categories: mortgage, commercial and consumer.
The Treasury segment encompasses all of the Group’s treasury functions. The Group’s investment portfolio primarily consists of mortgage-backed securities, collateralized mortgage obligations, U.S. Treasury notes, U.S. Government agency bonds, P.R. Government obligations, municipal bonds and money market instruments.

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Mortgage-backed securities, the largest component, consist principally of pools of residential loans that are made to consumers and then resold in the form of certificates, the payment of interest and principal of which is guaranteed by the Government National Mortgage Corporation (the “GNMA”), the Federal National Mortgage Association (the “FNMA”) and the Federal Home Loan Mortgage Corporation (the “FHLMC”) in the open market. For more information, see Note 3 to the consolidated financial statements incorporated by reference in this report.
The Group’s mortgage banking activities consist of the origination and purchase of mortgage loans and the subsequent sale in the secondary market. The Group originates FHA (“Federal Housing Administration”) insured and VA (“Veteran Administration”) guaranteed mortgages for issuance of GNMA mortgage-backed securities, and conventional mortgage loans for issuance of FNMA or FHLMC mortgage-backed securities, using another institution as the issuer. Mortgages included in the resulting GNMA, FNMA and FHLMC pools are serviced by another institution. The Group outsources the servicing of its mortgage loan portfolio to a third party.
The Group’s principal funding sources are securities sold under agreements to repurchase, branch deposits, Federal Home Loan Bank (the “FHLB”) advances, subordinated capital notes and term notes. Through its branch system, the Bank offers personal non-interest and interest-bearing checking accounts, savings accounts, certificates of deposit, individual retirement accounts (“IRAs”) and commercial non-interest bearing checking accounts. The FDIC insures the Bank’s deposit accounts up to applicable limits. Management makes retail deposit pricing decisions periodically through the Assets and Liabilities Management Committee (the “ALCO”), which adjusts the rates paid on retail deposits in response to general market conditions and local competition. Pricing decisions take into account the rates being offered by other local banks, LIBOR and mainland United States market interest rates.
The financial services business segment is comprised of the Bank’s trust division (“Oriental Trust”), the security brokerage and investment banking subsidiary (OFSC), the insurance agency subsidiary (Oriental Insurance), and the pension plan administration subsidiary (CPC). The core operations of this segment are financial planning, investment banking, money management, investment brokerage services, insurance sales activity, corporate and individual trust services, as well as pension plan administration services. Oriental Trust offers various types of IRAs, custodian accounts and corporate trust accounts. CPC manages 401(k) and Keogh retirement plans. OFSC offers a wide array of investment alternatives to its client base such as tax-advantaged fixed income securities, mutual funds, stocks and bonds. Oriental Insurance offers insurance products to its client base, such as fixed and variable annuities, and property, casualty, title and life insurance.
For more information regarding the performance of the Group’s reportable segments, please refer to Note 17 to the consolidated financial statements incorporated by reference in this report.
Regulation and Supervision
The Group is subject to ongoing regulation, supervision, and examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board and the SEC periodic reports and other information concerning its own business operations and those of its subsidiaries. In addition, under the provisions of the Bank Holding Company Act, a bank holding company must obtain Federal Reserve Board approval before it acquires, directly or indirectly, ownership or control of more than 5% of the voting shares of another bank. Furthermore, Federal Reserve Board approval must also be obtained before such a company acquires all or substantially all of the assets of another bank or merges or consolidates with another bank holding company. The Federal Reserve Board also has the authority to issue cease and desist orders against bank holding companies and their non-bank subsidiaries.
A bank holding company is prohibited under the Bank Holding Company Act, with limited exceptions, from engaging, directly or indirectly, in any business unrelated to the business of banking or of managing or controlling banks. One of the exceptions to these prohibitions permits ownership by a bank holding company of the shares of any company if the Federal Reserve Board, after due notice and opportunity for hearing, by regulation or order, has determined that the activities of the company in question are so closely related to the business of banking or of managing or controlling banks as to be incidental thereto.
Under Federal Reserve Board policy, a bank holding company, such as the Group, is expected to act as a source of financial and managerial strength to its banking subsidiaries and to also commit resources to support them. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. The Bank is currently the only depository institution subsidiary of the Group.
The Gramm-Leach-Bliley Act of 1999, revised and expanded the provisions of the Bank Holding Company Act by including a new section that permits a bank holding company to elect to become a financial holding company to engage in a full range of activities that are “financial in nature”. The qualification requirements and the process for a bank holding company

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that elects to be treated as a financial holding company requires that all of the subsidiary banks controlled by the bank holding company at the time of election must be and remain at all times “well capitalized” and “well managed”.
The Gramm-Leach-Bliley Act further requires that, in the event that the bank holding company elects to become a financial holding company, the election must be made by filing a written declaration with the appropriate Federal Reserve Bank that: (i) states that the bank holding company elects to become a financial holding company; (ii) provides the name and head office address of the bank holding company and each depository institution controlled by the bank holding company; (iii) certifies that each depository institution controlled by the bank holding company is “well capitalized” as of the date the bank holding company submits its declaration; (iv) provides the capital ratios for all relevant capital measures as of the close of the previous quarter for each depository institution controlled by the bank holding company on the date the bank holding company submits it declaration; and (v) certifies that each depository institution controlled by the bank holding company is “well managed” as of the date the bank holding company submits its declaration. The bank holding company must have also achieved at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act during the institution’s most recent examination.
Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary to a financial activity provided it does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act specifically provides that the following activities have been determined to be “financial in nature”: (a) lending, trust and other banking activities; (b) insurance activities; (c) financial, investment or economic advisory services; (d) securitization of assets; (e) securities underwriting and dealing; (f) existing bank holding company domestic activities; (g) existing bank holding company foreign activities; and (h) merchant banking activities.
In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand the list of financial or incidental activities, but requires consultation with the U.S. Treasury Department, and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
The Bank is subject to extensive regulation and examination by the Commissioner and the FDIC, which insures its deposits to the maximum extent permitted by law, and is subject to certain Federal Reserve Board regulations of transactions with Bank affiliates. The federal and Puerto Rico laws and regulations which are applicable to the Bank, regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds, and the nature and amount of and collateral for certain loans. In addition to the impact of such regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
Holding Company Structure
The Bank is subject to restrictions under federal laws that limit the transfer of funds to its affiliates (including the Group), whether in the form of loans, other extensions of credit, investments or asset purchases, among others. Such transfers are limited to 10% of the transferring institution’s capital stock and surplus with respect to any affiliate (including the Group), and with respect to all affiliates to an aggregate of 20% of the transferring institution’s capital stock and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts.
Since the Group is a holding company, its right to participate in the assets of any subsidiary upon the latter’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors (including depositors in the case of depository institution subsidiaries) except to the extent that the Group is a creditor with recognized claims against the subsidiary.
Under the Federal Deposit Insurance Act (“FDIA”), a depository institution (which definition includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution or (2) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined generally as the appointment of a conservator, receiver or other legal custodian and “in danger of default” is defined generally as the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance. The Bank is currently the only FDIC-insured depository institution subsidiary of the Group. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owed by a subsidiary bank to its parent company is subordinated to the subsidiary bank’s cross-guarantee liability with respect to commonly controlled insured depository institutions.

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Dividend Restrictions
The principal source of funds for the Group is the dividends from the Bank. The ability of the Bank to pay dividends on its common stock is restricted by the Puerto Rico Banking Act of 1933, as amended (the “Puerto Rico Banking Act”), the FDIA and FDIC regulations. In general terms, the Puerto Rico Banking Act provides that when the expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be charged against the undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If there is no sufficient reserve fund to cover such balance in whole or in part, the outstanding amount shall be charged against the bank’s capital account. The Puerto Rico Banking Act provides that until said capital has been restored to its original amount and the reserve fund to 20% of the original capital, the bank may not declare any dividends. In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a bank.
The payment of dividends by the Bank may also be affected by other regulatory requirements and policies, such as maintenance of adequate capital. If, in the opinion of the regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. The Federal Reserve Board has issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of operating earnings for the current and preceding two years. In addition, all insured depository institutions are subject to the capital-based limitations required by the Federal Deposit Insurance Corporation Improvement Act of 1991(“FDICIA”).
Federal Home Loan Bank System
The FHLB system, of which the Bank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board (the “FHFB”). The FHLB serves as credit facility for member institutions within their assigned regions. They are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. They make loans (i.e., advances) to members in accordance with policies and procedures established by the FHLB and the boards of directors of each regional FHLB.
As a system member, the Bank is entitled to borrow from the FHLB of New York (the “FHLB-NY”) and is required to own capital stock in the FHLB-NY in an amount equal to the greater of 1% of the aggregate of the unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each fiscal year, which for this purpose is deemed to be not less than 30% of assets or 5% of the total amount of advances by the FHLB-NY to the Bank. The Bank is in compliance with the stock ownership rules described above with respect to such advances, commitments and letters of credit and home mortgage loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB-NY to the Bank are secured by a portion of the Bank’s mortgage loan portfolio, certain other investments and the capital stock of the FHLB-NY held by the Bank.
Federal Deposit Insurance Corporation Improvement Act
Under FDICIA, the federal banking regulators must take prompt corrective action in respect to depository institutions that do not meet minimum capital requirements. FDICIA, and the regulations issued thereunder established five capital tiers: (i) “well capitalized”, if it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more, and is not subject to any written capital order or directive; (ii) “adequately capitalized”, if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized”, (iii) “undercapitalized”, if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based ratio that is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) “significantly undercapitalized”, if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0%, and (v) “critically undercapitalized”, if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any of the first four categories. As of June 30, 2005, the Bank is a “well-capitalized” institution.
FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fees to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. Significantly undercapitalized depository institutions may be subject to a

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number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from corresponding banks. Critically undercapitalized depository institutions are subject to the appointment of a receiver or conservator.
Insurance of Accounts and FDIC Insurance Assessments
The FDIC insures the Bank’s deposit accounts up to the applicable limits. The insurance of deposit accounts by the FDIC subjects the Bank to comprehensive regulation, supervision, and examination by the FDIC. If the Bank violates its duties as an insured institution, engages in unsafe and unsound practices, is in an unsound and unsafe condition, or has violated any applicable FDIC requirements, the FDIC may terminate the insurance of depository accounts of the Bank.
The Bank is subject to FDIC deposit insurance assessments. Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution’s risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured institution is also assigned to one of the following “supervisory subgroups:” “A,” “B,” or “C.” Group “A” institutions, like the Bank, are financially sound institutions with only a few minor weaknesses; Group “B” institutions are institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration; and Group “C” institutions are institutions with respect to which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness.
The Deposit Insurance Funds Act of 1996 (the “DIFA”) was enacted on September 30, 1996. DIFA repealed the statutory minimum premium. Thereafter, premiums related to deposits assessed by both the Bank Insurance Fund (the “BIF”) and the Savings Association Insurance Fund (the “SAIF”) are assessed at a rate of 0 to 27 basis points per $100 deposits based on the risk-based assessment. Currently, the Bank’s deposit insurance premium charged by the SAIF is $0.014 for every $100 of deposits.
Regulatory Capital Requirements
The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. Under the guidelines the minimum ratio of qualifying total capital to risk-weighted assets is 8%. At least half of the total capital is to be comprised of common equity, retained earnings, minority interest in unconsolidated subsidiaries, non-cumulative perpetual preferred stock (“Tier 1 Capital”). The remainder may consist of a limited amount of subordinated debt, other preferred stock and a limited amount of loan and lease loss reserves (“Tier 2 Capital”).
The Federal Reserve Board has adopted regulations with respect to risk-based and leverage capital ratios that require most intangibles, including core deposit intangibles, to be deducted from Tier 1 Capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to originated and purchased mortgage servicing rights and purchased credit card relationships and include a “grandfathered” provision permitting inclusion of certain existing intangibles.
In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 Capital to quarterly average assets) guidelines for bank holding companies and member banks. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies and member banks that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies and member banks are required to maintain a minimum ratio of Tier 1 to total assets of 4%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines point out that the Federal Reserve Board will continue to consider a “tangible Tier 1 leverage ratio” and other indicators of capital strength in evaluating proposals for expansion or new activities.
Failure to meet the capital guidelines could subject an institution to a variety of enforcement actions, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business. At June 30, 2005, the Group was in compliance with all capital requirements. For more information, please refer to Note 2 to the Consolidated Financial Statements incorporated by reference in this report.
Safety and Soundness Standards
Section 39 of the FDIA, as amended by FDICIA, requires each federal banking agency to prescribe for all insured depository institutions standards relating to internal control, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. In addition, each federal banking agency also is required to adopt for all insured depository institutions and their holding companies standards that specify (i) a maximum ratio of classified assets to capital, (ii) minimum earnings sufficient to absorb losses without impairing capital, (iii) to the extent feasible, a minimum ratio of market value to book value for publicly-traded shares of the institution or holding company, and (iv) such other standards relating to asset quality, earnings and valuation as the agency deems appropriate. Finally, each

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federal banking agency is required to prescribe standards for the employment contracts and other compensation arrangements of executive officers, employees, directors and principal stockholders of insured depository institutions that would prohibit compensation, benefits and other arrangements that are excessive or that could lead to a material financial loss for the institution. If an insured depository institution or its holding company fails to meet any of the standards described above, it will be required to submit to the appropriate federal banking agency a plan specifying the steps that will be taken to cure the deficiency. If an institution or holding company fails to submit an acceptable plan or fails to implement the plan, the appropriate federal banking agency will require the institution or holding company to correct the deficiency and, until it is corrected, may impose other restrictions on the institution or holding company, including any of the restrictions applicable under the prompt corrective action provisions of FDICIA.
The FDIC and the other federal banking agencies have Interagency Guidelines Establishing Standards for Safety and Soundness that, among other things, set forth standards relating to internal controls, information systems and internal audit systems, loan documentation, credit, underwriting, interest rate exposure, asset growth and employee compensation.
Activities and Investments of Insured State-Chartered Banks
Section 24 of the FDIA, as amended by FDICIA, generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under FDIC regulations of equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank, such as the Bank, is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
Under the FDIC regulations governing the activities and investments of insured state banks which further implemented Section 24 of the FDIA, as amended by FDICIA. An insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.
Transactions with Affiliates and Related Parties
Transactions between the Bank and any of its affiliates are governed by sections 23A and 23B of the Federal Reserve Act. These sections are important statutory provisions designed to protect a depository institution from transfer to its affiliates the subsidy arising from the institution’s access to the Federal safety net. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. Generally, sections 23A and 23B (1) limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the bank’s capital stock and surplus, and limit such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (2) require that all such transactions be on terms that are consistent with safe and sound banking practices. The term “covered transactions” includes the making of loans, purchase of or investment in securities issued by the affiliate, purchase of assets, issuance of guarantees and other similar types of transactions. Most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amount, depending on the nature of the collateral. In addition, any covered transaction by a bank with an affiliate and any sale of assets or provision of services to an affiliate must be on terms that are substantially the same, or at least as favorable, to the bank as those prevailing at the time for comparable transactions with nonaffiliated companies.
Regulation W of the Federal Reserve Bank Board comprehensively implements sections 23A and 23B. The regulation unified and updated staff interpretations issued over the years prior to its adoption, incorporated several interpretative proposals (such as to clarify when transactions with an unrelated third party will be attributed to an affiliate), and addressed issues arising as a result of the expanded scope of non-banking activities engaged in by banks and bank holding companies and authorized for financial holding companies under the Gramm-Leach-Bliley Act.
Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans by a bank to executive officers, directors, and principal shareholders. Regulation O of the Federal Reserve Board implements these provisions. Under Section 22(h) and Regulation O, loans to a director, an executive officer and to a greater than 10% shareholders of a bank and certain of their related interests (“insiders”), and insiders of its affiliates, may not exceed, together with all other outstanding loans to such person and related interests, the bank’s loans-to-one-borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) and Regulation O also require that loans to insiders and to insiders of affiliates be made on terms substantially the same as offered in comparable transactions to other persons, unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to

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employees of the bank and (ii) does not give preference to insiders over other employees of the bank. Section 22(h) and Regulation O also require prior board of directors’ approval for certain loans, and the aggregate amount of extensions of credit by a bank to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) and Regulation O place additional restrictions on loans to executive officers.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”), as implemented by the Congress in 1977, a financial institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires federal examiners, in connection with the examination of a financial institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Group has a Compliance Department, which oversees the planning of products and services offered to the community, especially those aimed to serve low and moderate income communities .
USA Patriot Act
Under Title III of the USA Patriot Act, enacted on October 26, 2001, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions, including the Group and the Bank, are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions.
The U.S. Treasury Department has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.
Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal consequences for the institution. The Group and its subsidiaries, including the Bank, have adopted appropriate policies, procedures and controls to address compliance with the USA Patriot Act under existing regulations, and will continue to revise and update their policies, procedures and controls to reflect changes required by the USA Patriot Act and Treasury’s regulations.
Privacy Policies
Under the Gramm-Leach-Bliley Act, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request, and establish procedures and practices to protect customer data from unauthorized access. The Group and its subsidiaries have established policies and procedures to assure the Group’s compliance with all privacy provisions of the Gramm-Leach-Bliley Act.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“SOA”) implemented legislative reforms intended to address corporate and accounting fraud. SOA contains reforms of various business practices and numerous aspects of corporate governance. Most of these requirements have been implemented pursuant to regulations issued by the SEC. The following is a summary of certain key provisions of SOA.
In addition to the establishment of an accounting oversight board that enforces auditing, quality control and independence standards and is funded by fees from all registered public accounting firms and publicly traded companies, SOA places restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. Any non-audit services being provided to a public company audit client requires pre-approval by the audit committee. In addition, SOA makes certain changes to the requirements for partner rotation after a period of time. SOA requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. In addition, counsel is required to report evidence of a material violation of securities laws or a breach of fiduciary duties to the company’s chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.
Under this law, longer prison terms apply to corporate executives who violate federal securities laws; the period during which certain types of suits can be brought against a company or its officers is extended and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives (other than loans by financial institutions permitted by federal rules or regulations) are restricted. In addition, the legislation accelerates the time frame for disclosures by public companies, as they must

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immediately disclose any material changes in their financial condition or operations. Directors and executive officers required to report changes in ownership in a company’s securities must now report any such change within two business days of the change.
SOA increases responsibilities and codifies certain requirements relating to audit committees of public companies and how they interact with the company’s registered public accounting firm. Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the company. In addition, companies are required to disclose whether at least one member of the committee is a “financial expert” (as such term is defined by the SEC) and if not, why not. A company’s registered public accounting firm is prohibited from performing statutorily mandated audit services for a company if the company’s chief executive officer, chief financial officer, controller, chief accounting officer or any person serving in equivalent positions had been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. SOA also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statements materially misleading.
SOA also has provisions relating to inclusion of certain internal control reports and assessments by management in the annual report to stockholders. The law also requires the company’s registered public accounting firm that issues the audit report to attest to and report on management’s assessment of the company’s internal controls. Commencing with its 2005 annual report, the Group will be required to include an internal control report containing management’s assertions regarding the effectiveness of the Group’s internal control structure and procedures over financial reporting. The internal control report must include a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the Group; of management’s assessment as to the effectiveness of the Group’s internal control over financial reporting based on management’s evaluation of it, as of year-end; and of the framework used by management as criteria for evaluating the effectiveness of the Group’s internal control over financial reporting. In addition, Section 404 of SOA requires the Group’s independent accounting firm to attest to, and report on, management’s assessment of the Group’s internal control over financial reporting in accordance with standards established by the Public Company Accounting Oversight Board (“PCAOB”), which is required to be filed as part of the annual report.
Internet access to reports
The Group’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on or through the Group’s internet website www.orientalonline.com , as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
The Group’s corporate governance guidelines, code of business conduct and ethics and the charters of its audit committee, compensation committee and corporate governance and nominating committee are available free of charge on the Group’s website www.orientalonline.com in the investor relations section under the corporate governance link.
Puerto Rico Banking Act
As a Puerto Rico-chartered commercial bank, the Bank is subject to regulation and supervision by the Commissioner under the Puerto Rico Banking Act, which contains provisions governing the incorporation and organization, rights and responsibilities of directors, officers and stockholders as well as the corporate powers, savings, lending, capital and investment requirements and other aspects of the Bank and its affairs. In addition, the Commissioner is given extensive rulemaking power and administrative discretion under the Puerto Rico Banking Act. The Commissioner generally examines the Bank at least once every year.
The Puerto Rico Banking Act requires that at least 10% of the yearly net income of the Bank be credited annually to a reserve fund. This apportionment shall be done every year until the reserve fund shall be equal to the 10% of total deposits or 100% of total additional paid-in capital on common and preferred stock, whichever is greater. As of June 30, 2005, the Bank’s capital reserve fund was $33,893,000, which was within the required parameters.
The Puerto Rico Banking Act also provides that when the expenditures of a bank are greater that the receipts, the excess of the former over the latter shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital.
The Puerto Rico Banking Act further requires every bank to maintain a legal reserve which shall not be less than 20% of its demand liabilities, except government deposits (federal, commonwealth and municipal) which are secured by actual collateral.

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The Puerto Rico Banking Act also requires change of control filings. When any person or entity will own, directly or indirectly, upon consummation of a transfer, 5% or more of the outstanding voting capital stock of a bank, the acquiring parties must inform the Commissioner of the details not less than 60 days prior to the date said transfer is to be consummated. The transfer shall require the approval of the Commissioner if it results in a change of control of the bank. Under the Puerto Rico Banking Act, a change of control is presumed if an acquirer who did not own more than 5% of the voting capital stock before the transfer exceeds such percentage after the transfer.
The Puerto Rico Banking Act generally restricts the amount a bank can lend to a single borrower. The Act prohibits one or more loans to the same person, firm, partnership, corporation or related parties financially dependent, in an aggregate amount that exceeds 15% of the bank’s paid-in capital and reserve fund. The regulations issued thereunder by the Commissioner expand the above limitation to include 15% of 50% of the bank’s retained earnings. This additional lending limit is only allowed to institutions with: (1) a rating of “1” on their last regulatory examination and (2) classification of a “well-capitalized” institution. The 15% limitation is not applicable to loans guaranteed by collateral having a fair value of at least 25% more than the loan amount. It is also not applicable to letters of credit or guarantees and loans guaranteed by bonds, securities and debts of the government of the United States or Puerto Rico or bonds of Puerto Rico governmental agencies, instrumentalities or municipalities. As of June 30, 2005, there were no loans that exceeded the maximum amount that the Bank could have loaned to a single borrower.
The Puerto Rico Finance Board, which is composed of the Commissioner, the President of the Government Development Bank of Puerto Rico, and the Puerto Rico Secretaries of Commerce, Treasury and Consumer Affairs and three public interest representatives, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in the Commonwealth. The Puerto Rico Finance Board promulgates regulations that specify maximum rates on various types of loans to individuals.
The current regulations of the Puerto Rico Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses (including real estate development loans, but excluding certain other personal and commercial loans secured by mortgages on real estate property) is to be determined by free competition. The Puerto Rico Finance Board also has the authority to regulate maximum finance charges on retail installment sales contracts and for credit card purchases. There is presently no maximum rate for retail installment sales contracts and for credit card purchases.
International Banking Center Regulatory Act of Puerto Rico
The business and operations of O.B.T. International Bank and Oriental International are subject to supervision and regulation by the Commissioner. Under the IBE Act, no sale, encumbrance, assignment, merger, exchange or transfer of shares, interest or participation in the capital of an international banking entity (an “IBE”) may be initiated without the prior approval of the Commissioner, if by such transaction a person would acquire, directly or indirectly, control of 10% or more of any class of stock, interest or participation in the capital of the IBE. The IBE Act and the regulations issued thereunder by the Commissioner (the “IBE Regulations”) limit the business activities that may be carried out by an IBE. Such activities are limited in part to persons and assets / liabilities located outside of Puerto Rico. The IBE Act provides further that every IBE must have not less than $300,000 of unencumbered assets or acceptable financial guarantees.
Pursuant to the IBE Act and the IBE Regulations, the Bank’s IBEs have to maintain books and records of all their transactions in the ordinary course of business. They are also required to submit quarterly and annual reports of their financial condition and results of operations to the Commissioner, including annual audited financial statements.
The IBE Act empowers the Commissioner to revoke or suspend, after notice and hearing, a license issued thereunder if, among other things, the IBE fails to comply with the IBE Act, the IBE Regulations or the terms of its license, or if the Commissioner finds that the business or affairs of the IBE are conducted in a manner that is not consistent with the public interest.
In November 2003, the IBE Act was amended to impose income taxes at normal statutory rates on each IBE that operates as a unit of a bank, such as O.B.T. International Bank, if the IBE’s net income generated after December 31, 2003 exceeds 40 percent of the bank’s net income in the taxable year commenced on July 1, 2003, 30 percent of the bank’s net income in the taxable year commencing on July 1, 2004, and 20 percent of the bank’s net income in the taxable year commencing on July 1, 2005, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a bank, such as Oriental International. As of January 1, 2004, most of the assets and liabilities of O.B.T. International Bank were transferred to Oriental International.
Employees
At June 30, 2005, the Group had 520 employees. None of its employees is represented by a collective bargaining group. The Group considers its employee relations to be good.

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ITEM 2. PROPERTIES
The Group leases its main offices located at Professional Offices Park, 998 San Roberto Street, San Juan, Puerto Rico. The executive office, treasury, trust division, brokerage, investment banking, insurance services, and back-office support departments are at such location.
The Bank owns seven branch premises and leases seventeen branch commercial offices throughout Puerto Rico. The Bank’s management believes that each of its facilities is well maintained and suitable for its purpose and can readily obtain appropriate additional space as may be required at competitive rates by extending expiring leases or finding alternative space.
At June 30, 2005, the aggregate future rental commitments under the terms of the leases, exclusive of taxes, insurance and maintenance expenses payable by the Group, was $17.3 million.
On June 30, 2005, the Group sold the Las Cumbres building, a two-story structure located at 1990 Las Cumbres Avenue, San Juan, Puerto Rico, for the amount of $3,355,000, to a local investor and his spouse. The local investor is the brother of José Enrique Fernández, Chairman of the Group’s Board of Directors. The building was the principal property owned by the Group for banking operations and other services. The Bank’s mortgage banking division and one of the principal branches and financial services office (brokerage and insurance) are located in this building. The book value of this property at June 30, 2005, was $1.3 million. Also, on the same date, the Bank entered into a triple net lease agreement with the new owner for a period of 10 years. In summary, the lease contract provides for an annual rent of $324,000 or a monthly rent of $27,000, for 13,200 square feet, including 42 parking spaces. During the lease term, the rental fee will increase by 6% every three years, except for the last year on which the increment will be 2%. The transaction was accounted for accordance to the provisions of SFAS 13, as amended by SFAS 98, “Accounting for Leases: Sale-leaseback Transactions Involving Real Estate,” and accordingly, the lease portion of the transaction was classified as an operating lease and the gain on the sale portion of the transaction was deferred and will be amortized to income over the lease term (10 years) in proportion to the related gross rental expense for the leasedback property each period.
On July 6, 2004, the Group announced plans for its new headquarters, Oriental Group Tower, which will consolidate all corporate offices and support facilities into a building under construction at Professional Offices Park in San Juan, Puerto Rico. The Group will be the anchor tenant by leasing 55,336 square feet of office space in the fourth, fifth and sixth floors.
At present, the Group’s executive offices, the main offices of OFSC, as well as several support facilities of the Group, are located at two different buildings within the Professional Offices Park facilities, and at the Tres Rios Building located in Guaynabo, Puerto Rico. All these facilities will be relocated to the new building. Occupancy of the new building is expected in March 2006, subject to completion of the building. The lease term will be for 10 years and will commence on the date that the premises are ready for occupancy.
The Group’s investment in premises and equipment, exclusive of leasehold improvements, at June 30, 2005, was $9.6 million.
ITEM 3. LEGAL PROCEEDINGS
On August 14, 1998, as a result of a review of its accounts in connection with the admission by a former Group officer of having embezzled funds, and manipulated bank accounts and records, the Group became aware of certain irregularities. The Group notified the appropriate regulatory authorities and commenced an intensive investigation with the assistance of forensic accountants, fraud experts and legal counsel. The investigation determined losses of $9.6 million ($5.8 net of tax) resulting from dishonest and fraudulent acts and omissions involving several former Group employees, which were submitted to the Group’s fidelity insurance policy (the “Policy”) issued by Federal Insurance Company, Inc. (“FIC”). In the opinion of the Group’s management, its legal counsel and experts, the losses determined by the investigation were covered by the Policy. However, FIC denied all claims for such losses. On August 11, 2000, the Group filed a lawsuit in the United States District Court for the District of Puerto Rico against FIC, a stock insurance corporation organized under the laws of the State of Indiana, for breach of insurance contract, breach of covenant of good faith and fair dealing and damages, seeking payment of the Group’s $9.6 million insurance claim loss and the payment of consequential damages of no less than $13.0 million resulting from FIC capricious, arbitrary fraudulent and without cause denial of the Group’s claim. The losses resulting from such dishonest and fraudulent acts and omissions were expensed in prior years.
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.

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ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Group’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG”. Information concerning the range of high and low sales prices for the Group’s common stock for each quarter in the previous two fiscal years, as well as cash dividends declared for such fiscal years are contained in Table 7 (“Capital, Dividends and Stock Data”) and under the “Stockholders’ Equity” caption in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and is incorporated herein by reference.
Information concerning legal or regulatory restrictions on the payment of dividends by the Group and the Bank is contained under the caption “Dividend Restrictions” in Item 1 of this report.
As of June 30, 2005, the Group had approximately 6,760 holders of record of its common stock, including all directors, officers of the Group, and beneficial owners whose shares are held in “street” name by securities broker-dealers or other nominees.
On November 30, 2004, the Group declared a ten percent (10%) stock dividend on common stock held by shareholders of record as of December 31, 2004. As a result, a total of 2,260,396 shares of common stock were distributed on January 17, 2005 (1,993,711 shares of common stock were issued and 266,685 were distributed from the Group’s treasury stock account.) For purposes of the computation of income per common share, cash dividend and stock price, the stock dividend was retroactively recognized for all periods presented in the accompanying consolidated financial statements.
Also, on November 20, 2003, the Group declared a ten percent (10%) stock dividend on common stock held by shareholders of record as of December 31, 2003. As a result, 1,798,722 shares of common stock were distributed on January 15, 2004, from the Group’s treasury stock account. For purposes of the computation of income per common share, cash dividend and stock price, the stock dividend was retroactively recognized for all periods presented in the accompanying consolidated financial statements.
On February 12, 2004, the Group filed a registration statement with the SEC for an offering of 2,565,000 shares of common stock. The registration statement was amended on February 27, 2004. The offering consisted of 1,700,000 shares offered by the Group, and an aggregate of 865,000 shares offered by three stockholders of the Group. The offering also included an additional 384,750 shares subject to over-allotment options granted by the Group and the selling stockholders to the underwriters. The registration statement, as amended, was declared effective by the SEC on March 3, 2004.
On March 20, 2004, the underwriters exercised their options to purchase from the Group and the selling stockholders an aggregate of 384,750 shares of the Group’s common stock to cover over-allotments (255,000 of these shares were purchased from the Group and 129,750 from the three selling stockholders of the Group). Following such exercise, the total offering was for 2,949,750 shares at a public offering price of $28.00 per share, consisting of 1,955,000 shares offered by the Group and an aggregate of 994,750 shares by the three selling stockholders of the Group. Proceeds to the Group from the issuance of common stock were approximately $51,560,000, net of $3,180,000 of issuance costs.
The Puerto Rico Internal Revenue Code of 1994, as amended, generally imposes a withholding tax on the amount of any dividends paid by Puerto Rico corporations to individuals, whether residents of Puerto Rico or not, trusts, estates, and special partnerships at a special 10% withholding tax rate. Prior to the first dividend distribution for the taxable year, such shareholders may elect to be taxed on the dividends at the regular rates, in which case the special 10% tax will not be withheld from such year’s distributions. Dividends distributed by Puerto Rico corporations to foreign corporations or partnerships not engaged in trade or business in Puerto Rico are also generally subject to withholding tax at a 10% rate.
United States citizens who are non-residents of Puerto Rico will not be subject to Puerto Rico tax on dividends if said individual’s gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married, and form AS 2732 of the Puerto Rico Treasury Department “Withholding Tax Exemption Certificate for the Purpose of Section 1147” is filed with the withholding agent. U.S. income tax law permits a credit against the U.S. income tax liability, subject to certain limitations, for certain foreign income taxes paid or deemed paid with respect to dividends from foreign corporations, such as the Group.
The Group has three stock options plans: the 1996, 1998 and 2000 Incentive Stock Option Plans, all of which were approved by the Group’s stockholders. These plans offer key officers, directors and employees an opportunity to purchase shares of the Group’s common stock. The Compensation Committee of the Board of Directors has sole authority and absolute discretion as to the number of stock options to be granted, their vesting rights, and the options exercise price.

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The following table shows certain information pertaining to the plans:
                         
    (a)   (b)   (c)
                    Number of securities
                    remaining available
                    for future issuance
                    under equity
                    compensation plans
    Number of securities to be   Weighted-average exercise   (excluding those
    issued upon exercise of   price of outstanding   reflected in column
Plan Category   outstanding options   options   (a))
Equity compensation plans
approved by shareholders
                       
 
1996 Plan
    681,103     $ 15.54       32,452  
1998 Plan
    410,294       10.93       160,203  
2000 Plan
    127,936       9.38     —
 
Total
    1,219,333     $ 13.23       192,656  
 
On December 16, 2004 the Financial Accounting Standard Board (“FASB”) published Statement 123(R) requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The required adoption date of Statement 123(R) for a public company with year end in June 30, is July 1, 2005. The Group will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after June 15, 2005.
On June 30, 2005, the Compensation Committee of the Group’s Board of Directors approved the acceleration of the vesting of all unvested options to purchase shares of common stock of OFG that were held by employees, officers and directors as of June 30, 2005. As a result, options to purchase 1,219,333 shares became exercisable. The purpose of the accelerated vesting is to enable the Group to avoid recognizing in its income statement compensation expense associated with these options in future periods, upon adoption of Statement 123(R). The future expense to be avoided as a result of the acceleration of the vesting of these options amounts to approximately $3.4 million on a pre-tax basis over the course of the original vesting period, of which $1.5 million will be avoided for the fiscal year ending June 30, 2006, $0.8 million for the second fiscal year, $0.5 million for the third fiscal year, $0.3 million for each of the subsequent two fiscal years, and $65,000 for the sixth fiscal year.
Purchases of equity securities by the issuer and affiliated purchasers
The following table sets forth issuer purchases of equity securities made by the Group during the three-month period ended June 30, 2005:
                                 
    (a)   (b)   (c)   (d)
                            Maximum Number
                            (or Approximate
                    Total Number of   Dollar Value) of
                    Shares (or Units)   Shares (or Units)
    Total Number of           Purchased as Part of   that May Yet Be
    Shares (or units)   Average Price Paid   Publicly Announced   Purchased Under the
Period   Purchased   per Share (or Unit)   Plans or Programs   Plans or Programs (1)
From April 1, 2005 to April 30, 2005
    200,000     $ 14.86       200,000     $ 4,866,613  
From May 1, 2005 to May 31, 2005
    30,000 (2)   $ 14.43       —     $ 4,866,613  
From June 1, 2005 to June 30, 2005
    —       —       —     $ 4,866,613  
Total
    230,000     $ 14.65       200,000     $ 4,866,613  
 
Notes:
(1) On March 27, 2003, the Group’s Board of Directors announced the authorization of a program for the repurchase of up to $9.0 million of its outstanding shares of common stock. This program superseded the ongoing repurchase program established earlier. The authority granted by the Board of Directors does not require the Group to repurchase any shares. The Group will make such repurchases from time to time in the open market at such times and prices as market conditions shall warrant, and in compliance with the terms of applicable federal and Puerto Rico laws and

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regulations. On August 30, 2005, the Board approved a new stock repurchase program for the repurchase of up to $12.1 million of the Group’s outstanding shares of common stock, which will replace the current program.
(2) During the three-month period ended June 30, 2005, the Group repurchased 30,000 of its shares of common stock in the open market, at a total cost of $432,857, which are held in treasury to be used as part of the Group’s matching contribution under its defined contribution 1165(E) plan. This purchase was accounted for separately from purchases under the last publicly announced repurchase program.
For more information, please refer to Notes 1 and 2 to the consolidated financial statements incorporated by reference in this report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference from portions of the 2005 annual report to shareholders filed as Exhibit 13.0. The following ratios of the Group should be read in conjunction with the portions of such report filed as Exhibit 13.0. Selected financial data are presented for the last five fiscal years.
The ratios shown below demonstrate the Group’s ability to generate sufficient earnings to pay the fixed charges or expenses of its debt and preferred stock dividends. The Group’s consolidated ratios of earnings to combined fixed charges and preferred stock dividends were computed by dividing earnings by combined fixed charges and preferred stock dividends, as specified below, using two different assumptions, one excluding interest on deposits and the second including interest on deposits:
                                         
    Year Ended June 30,
    2005     2004     2003     2002     2001  
     
Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends:
                                       
Excluding Interest on Deposits
    1.62x       2.18x       2.08x       1.69x       2.17x  
Including Interest on Deposits
    1.46x       1.76x       1.64x       1.42x       1.06x  
For purposes of computing the consolidated ratios of earnings to combined fixed charges and preferred stock dividends, earnings consist of pre-tax income from continuing operations plus fixed charges and amortization of capitalized interest, less interest capitalized. Fixed charges consist of interest expensed and capitalized, amortization of debt issuance costs, and the Group’s estimate of the interest component of rental expense. The term “preferred stock dividends” is the amount of pre-tax earnings that is required to pay dividends on the Group’s outstanding preferred stock. As of June 30, 2005 and 2004, the Group had noncumulative preferred stock issued and outstanding amounting to $68,000,000 as follows: (1) Series A, amounting to $33,500,000 or 1,340,000 shares at a $25 liquidation value; and (2) Series B amounting to $34,500,000 or 1,380,000 shares, at a $25 liquidation value. As of June 30, 2003, 2002, and 2001, the Group had noncumulative preferred stock, Series A, issued and outstanding amounting to $33,500,000 or 1,340,000 shares at a $25 liquidation value.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference from portions of the 2005 annual report to shareholders filed as Exhibit 13.0 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information regarding the market risk of the Group is incorporated herein by reference from portions of the 2005 annual report to shareholders filed as Exhibit 13.0, under the caption “Quantitative and Qualitative Disclosures about Market Risk”.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference from portions of the 2005 annual report to shareholders filed as Exhibit 13.0. The consolidated financial statements of this report set forth the list of all reports required by this item and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Group’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as

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defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this annual report on Form 10-K, an evaluation was carried out under the supervision and with the participation of the Group’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Group’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation, the management in the best of their knowledge concluded that, as of June 30, 2005, the Group’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Group in the reports that it files or submits under the Securities Exchange Act of 1934.
Internal Control over Financial Reporting
There have not been any changes in the Group’s internal control over financial reporting (as such term is defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Group’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Group’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management’s responsibilities related to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States. As disclosed in the Management’s Report on Internal Control Over Financial Reporting included in the consolidated financial statements as presented in and incorporated by reference from the Group’s 2005 annual report to shareholders, management assessed the Group’s system of internal control over financial reporting as of June 30, 2005, in relation to criteria for effective internal control over financial reporting as described in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Group’s management believes that, as of June 30, 2005, its system of internal control over financial reporting met those criteria and is effective.
During the last fiscal quarter, there was no change in the Group’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, such internal control.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
Items 10 through 14 will be provided by incorporating the information required under such items by reference to the Group’s definitive proxy statement to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) — Financial Statements
The list of financial statements required by this item is set forth in the financial data index incorporated by reference from portions of the 2005 annual report to shareholders.
(a)(2) — Financial Statement Schedules
No schedules are presented because the information is not applicable or is included in the consolidated financial statements or in the notes thereto described in (a)(1) above.

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(a)(3) – Exhibits
     
EXHIBIT NO.:   DESCRIPTION OF DOCUMENT:
3(i)
  Amended and Restated Certificate of Incorporation. (1)
 
   
3(ii)
  By-Laws. (2)
 
   
4.1
  Certificate of Designation creating the 7.125% Noncumulative Monthly Income Preferred Stock, Series A (3)
 
   
4.2
  Certificate of Designation creating the 7.0% Noncumulative Monthly Income Preferred Stock, Series B (4)
 
   
10.1
  1996 Incentive Stock Option Plan. (5)
 
   
10.2
  1998 Incentive Stock Option Plan. (6)
 
   
10.3
  2000 Incentive Stock Option Plan. (7)
 
   
10.4
  Form of Stock Option Grant. (8)
 
   
10.5
  Lease Agreement Between Oriental Financial Group Inc. and Professional Office Park V, Inc.
 
   
10.6
  First Amendment to Lease Agreement Dated May 18, 2004, Between Oriental Financial Group Inc. and Professional Office Park V, Inc.
 
   
10.7
  Agreements between Oriental Financial Group Inc. and José Enrique Fernández
 
   
10.8
  Employment Agreement between Oriental Financial Group Inc. and José Rafael Fernández
 
   
10.9
  Change in Control Compensation Agreement between Oriental Financial Group Inc. and José E. Fernández
 
   
10.10
  Change in Control Compensation Agreement between Oriental Financial Group Inc. and Héctor Méndez
 
   
10.11
  Change in Control Compensation Agreement between Oriental Financial Group Inc. and Jose E. Fernández Richards
 
   
10.12
  Change in Control Compensation Agreement between Oriental Financial Group Inc. and Jose R. Fernández
 
   
10.13
  Change in Control Compensation Agreement between Oriental Financial Group Inc. and Norberto González
 
   
10.14
  Change in Control Compensation Agreement between Oriental Financial Group Inc. and Ganesh Kumar
 
   
10.15
  Change in Control Compensation Agreement between Oriental Financial Group Inc. and Carlos Vélez
 
   
10.16
  Change in Control Compensation Agreement between Oriental Financial Group Inc. and Néstor Vale
 
   
10.17
  Change in Control Compensation Agreement between Oriental Financial Group Inc. and Carlos J. Nieves
 
   
13
  Portions of annual report to security holders incorporated herein by reference.
 
   
21
  List of Subsidiaries
 
   
23
  Consent of Deloitte & Touche LLP
 
   
31.1
  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1
  Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
32.2
  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
1.   Incorporated herein by reference from Exhibit No. 3 of the Group’s registration statement on Form S-3 filed with the SEC on April 2, 1999.
 
2.   Incorporated herein by reference from Exhibit No. 3(ii) of the Group’s current report on Form 8-K filed with the SEC on September 1, 2005.
 
3.   Incorporated herein by reference from Exhibit No. 4.1 of the Group’s registration statement on Form 8-A filed with the SEC on April 30, 1999.
 
4.   Incorporated herein by reference from Exhibit No. 4.1 of the Group’s registration statement on Form 8-A filed with the SEC on September 26, 2003.
 
5.   Incorporated herein by reference from the Group’s definitive proxy statement for the 1997 annual meeting of stockholders filed with the SEC on September 19, 1997.
 
6.   Incorporated herein by reference from the Group’s definitive proxy statement for the 1998 annual meeting of stockholders filed with the SEC on September 29, 1998.
 
7.   Incorporated herein by reference from the Group’s definitive proxy statement for the 2000 annual meeting of stockholders filed with the SEC on November 17, 2000.
 
8.   Incorporated herein by reference from Exhibit No. 10.4 of the Group’s annual report on Form 10-K filed with the SEC on September 13, 2004.

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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ORIENTAL FINANCIAL GROUP INC.
         
By: /s/ José Rafael Férnandez
      Dated: September 13, 2005
José Rafael Fernández,
       
President and Chief Executive Officer
       
 
       
By: /s/ Héctor Méndez
      Dated: September 13, 2005
Héctor Méndez,
       
Senior Executive Vice President,
       
Treasurer and Chief Financial Officer
       
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated.
         
By: /s/ José E. Fernández
      Dated: September 13, 2005
José E. Fernández
       
Chairman of the Board
       
 
       
By: /s/ José Rafael Fernández
      Dated: September 13, 2005
José Rafael Fernandez
       
Director
       
 
       
By: /s/ Pablo I. Altieri
      Dated: September 13, 2005
Dr. Pablo I. Altieri
       
Director
       
 
       
By: /s/ Efraín Archilla
      Dated: September 13, 2005
Efraín Archilla
       
Director
       
 
       
By: /s/ Julian Inclán
      Dated: September 13, 2005
Julian Inclán
       
Director
       
 
       
By: /s/ Emilio Rodríguez, Jr.
      Dated: September 13, 2005
Emilio Rodríguez, Jr.
       
Director
       
 
       
By: /s/ Francisco Arriví
      Dated: September 13, 2005
Francisco Arriví
       
Director
       
 
       
By: /s/ Miguel Vázquez Deynes
      Dated: September 13, 2005
Miguel Vázquez Deynes
       
Director
       
 
       
By: /s/ Maricarmen Aponte
      Dated: September 13, 2005
Maricarmen Aponte
       
Director
       
 
       
By: /s/ José Gil de Lamadrid
      Dated: September 13, 2005
José Gil De Lamadrid
       
Director
       

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By: /s/ Juan Carlos Aguayo
      Dated: September 13, 2005
Juan Carlos Aguayo
       
Director
       
         
 By: /s/ Alberto Richa
      Dated: September 13, 2005
Alberto Richa (1)
       
Director
       
 
(1)   Mr. Richa resigned to the Group’s Board of Directors effective August 30, 2005

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EXHIBIT 13.0
ORIENTAL FINANCIAL GROUP INC.
FORM-10K
FINANCIAL DATA INDEX
     
    PAGE
FINANCIAL STATEMENTS
   
  F-1
Attestation Report of Independent Registered Public Accounting Firm on Section 404
  F-2
  F-3
  F-4
  F-5
  F-6
  F-7
  F-8 to F-41
FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION
   
  F-42 to F-66
  F-66 to F-72
  F-73

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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 financial condition of Oriental Financial Group Inc. and its subsidiaries (the “Group”) as of June 30, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity, comprehensive income, and cash flows for each of the three years in the period 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 audits.
We conducted our audits in accordance with 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, such consolidated financial statements present fairly, in all material respects, the financial position of Oriental Financial Group Inc. and its subsidiaries as of June 30, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2005, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Group’s internal control over financial reporting as of June 30, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 9, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Group ‘s internal control over financial reporting and an unqualified opinion on the effectiveness of the Group’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
San Juan, Puerto Rico
September 9, 2005
Stamp No. 2088062
affixed to original.

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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 management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting that Oriental Financial Group Inc. and its subsidiaries (the “ Group”) maintained effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing, and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the 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, management’s assessment that the Group maintained effective internal control over financial reporting as of June 30, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Oriental Financial Group Inc. and its subsidiaries as of and for the year ended June 30, 2005, and our report dated September 9, 2005 expressed an unqualified opinion on those financial statements.
San Juan, Puerto Rico
September 9, 2005

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Table of Contents

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 adequate internal control over financial reporting, as defined in Rules 13a — 15(f) and 15d – 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 authorizations 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.
The Group’s management has assessed the effectiveness of the Group’s internal control over financial reporting as of June 30, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on its assessment, management has concluded that the Group maintained effective internal control over financial reporting as of June 30, 2005 based on the criteria referred to above.
The Group management’s assessment of the effectiveness of its internal control over financial reporting as of June 30, 2005, has been audited by Deloitte & Touche LLP, the Group’s independent registered public accounting firm, as stated in their report which appears on the previous page.
                 
By:
  /s/José Rafael Fernández       By:   /s/ Héctor Méndez
 
               
José Rafael Fernández       Héctor Méndez
President and Chief Executive Officer       Senior Executive Vice President,
Date: September 13, 2005       Treasurer and Chief Financial Officer
            Date: September 13, 2005

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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2005 AND 2004
     (In thousands, except share data)
                 
    2005     2004  
ASSETS
               
 
               
Cash and due from banks
  $ 14,892     $ 9,284  
 
           
 
               
Investments:
               
Time deposits with other banks
    30,000       —  
Money market investments
    9,791       7,747  
 
           
Short term investments
    39,791       7,747  
 
           
Trading securities, at fair value with amortized cost of $259 (June 30, 2004 — $561)
    265       574  
 
           
Investment securities available-for-sale, at fair value with amortized cost of $1,036,153 (June 30, 2004 — $1,533,145)
               
Securities pledged that can be repledged
    409,556       986,165  
Other investment securities
    620,164       541,242  
 
           
Total investment securities available-for-sale
    1,029,720       1,527,407  
 
           
Investment securities held-to-maturity, at amortized cost with fair value of $2,142,708 (June 30, 2004 — $1,275,534):
               
Securities pledged that can be repledged
    1,802,596       1,002,041  
Other investment securities
    332,150       280,821  
 
           
Total investment securities held-to-maturity
    2,134,746       1,282,862  
 
           
Federal Home Loan Bank (FHLB) stock, at cost
    27,058       28,160  
 
           
Total investments
    3,231,580       2,846,750  
 
           
 
               
Securities sold but not yet delivered
    1,034       47,312  
 
           
 
               
Loans:
               
Mortgage loans held-for-sale, at lower of cost or market
    17,963       5,814  
Loans receivable, net of allowance for loan losses of $6,495 (June 30, 2004 — $7,553)
    889,428       737,642  
 
           
Total loans, net
    907,391       743,456  
 
           
 
               
Accrued interest receivable
    23,735       19,127  
Premises and equipment, net
    15,269       18,552  
Deferred tax asset, net
    6,191       7,337  
Foreclosed real estate, net
    4,186       888  
Other assets
    46,374       32,989  
 
           
 
               
Total assets
  $ 4,250,652     $ 3,725,695  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Deposits:
               
Demand deposits
  $ 152,165     $ 126,296  
Savings accounts
    93,925       88,463  
Certificates of deposit
    1,006,807       809,590  
 
           
Total deposits
    1,252,897       1,024,349  
 
           
 
               
Borrowings:
               
Securities sold under agreements to repurchase
    2,191,756       1,895,865  
Advances from FHLB
    300,000       300,000  
Term notes
    15,000       15,000  
Federal Funds purchased
    12,310       —  
Subordinated capital notes
    72,166       72,166  
 
           
Total borrowings
    2,591,232       2,283,031  
 
           
 
               
Securities and loans purchased but not yet received
    22,772       89,068  
Accrued expenses and other liabilities
    42,584       34,580  
 
           
 
               
Total liabilities
    3,909,485       3,431,028  
 
           
 
               
Commitments and contingencies
    —       —  
 
               
Stockholders’ equity:
               
Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation value; 1,340,000 shares of Series A and 1,380,000 shares of Series B issued and outstanding
    68,000       68,000  
Common stock, $1 par value; 40,000,000 shares authorized; 25,103,636 shares issued (June 30, 2004 — 22,253,084 shares)
    25,104       22,253  
Additional paid-in capital
    187,301       125,206  
Legal surplus
    33,893       27,425  
Retained earnings
    68,620       101,723  
Treasury stock, at cost 228,000 (June 30, 2004 — 246,441 shares)
    (3,368 )     (4,578 )
Accumulated other comprehensive loss, net of tax benefit of $311 (June 30, 2004 - tax $474)
    (38,383 )     (45,362 )
 
           
Total stockholders’ equity
    341,167       294,667  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 4,250,652     $ 3,725,695  
 
           
See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED JUNE 30 2005, 2004 AND 2003
      (In thousands, except per share data)
                         
    2005     2004     2003  
Interest income:
                       
Loans
  $ 54,966     $ 52,130     $ 51,486  
Mortgage-backed securities
    103,425       104,779       96,225  
Investment securities
    30,395       7,312       3,739  
Short term investments
    526       164       296  
 
                 
Total interest income
    189,312       164,385       151,746  
 
                 
 
                       
Interest expense:
                       
Deposits
    29,744       30,012       33,657  
Securities sold under agreements to repurchase
    60,524       36,018       33,834  
Advances from FHLB, term notes and other borrowings
    8,313       8,158       7,918  
Subordinated capital notes
    4,318       2,986       1,926  
 
                 
Total interest expense
    102,899       77,174       77,335  
 
                 
 
                       
Net interest income
    86,413       87,211       74,411  
Provision for loan losses
    3,315       4,587       4,190  
 
                 
Net interest income after provision for loan losses
    83,098       82,624       70,221  
 
                 
 
                       
Non-interest income (expense):
                       
Commissions and fees from fiduciary activities
    7,641       8,636       6,891  
Commissions and fees from broker, investment banking and insurance activities
    6,730       8,981       7,581  
Banking service revenues
    7,752       7,165       5,968  
Net gain (loss) on:
                       
Mortgage banking activities
    7,774       7,719       8,026  
Securities available-for-sale
    7,446       13,414       14,223  
Derivatives
    (2,811 )     11       (4,061 )
Trading securities
    (15 )     21       571  
Premises and equipment
    —       —       (219 )
Other
    368       87       59  
 
                 
Total non-interest income, net
    34,885       46,034       39,039  
 
                 
 
                       
Non-interest expenses:
                       
Compensation and employees’ benefits
    26,663       24,579       20,563  
Occupancy and equipment
    10,583       9,639       9,079  
Advertising and business promotion
    6,506       7,466       7,052  
Professional and service fees
    6,994       5,631       6,467  
Communication
    1,630       1,849       1,671  
Loan servicing expenses
    1,727       1,853       1,775  
Taxes, other than payroll and income taxes
    1,836       1,754       1,556  
Electronic banking charges
    2,075       1,679       1,244  
Printing, postage, stationery and supplies
    891       1,121       1,038  
Insurance, including deposit insurance
    767       791       736  
Other
    3,348       3,070       2,475  
 
                 
Total non-interest expenses
    63,020       59,432       53,656  
 
                 
 
                       
Income before income taxes
    54,963       69,226       55,604  
Income tax benefit (expense)
    1,649       (5,577 )     (4,284 )
 
                 
Net income
    56,612       63,649       51,320  
Less: Dividends on preferred stock
    (4,802 )     (4,198 )     (2,387 )
 
                 
Net income available to common shareholders
  $ 51,810     $ 59,451     $ 48,933  
 
                 
 
                       
Income per common share:
                       
Basic
  $ 2.11     $ 2.65     $ 2.32  
 
                 
Diluted
  $ 2.05     $ 2.49     $ 2.15  
 
                 
 
                       
Average common shares outstanding
    24,571       22,394       21,049  
Average potential common share-options
    687       1,451       1,683  
 
                 
 
    25,258       23,845       22,732  
 
                 
 
                       
Cash dividends per share of common stock
  $ 0.55     $ 0.51     $ 0.45  
 
                 
See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED JUNE 30 2005, 2004 AND 2003
      (In thousands)
                         
CHANGES IN STOCKHOLDERS’ EQUITY:   2005     2004     2003  
       
Preferred stock:
                       
Balance at beginning of period
  $ 68,000     $ 33,500     $ 33,500  
Issuance of preferred stock
    —       34,500       —  
 
                 
Balance at end of period
    68,000       68,000       33,500  
 
                 
 
                       
Common stock:
                       
Balance at beginning of period
    22,253       19,684       15,300  
Issuance of common stock
    —       1,955       —  
Stock options exercised
    857       614       520  
Stock dividend and stock split effected in the form of a dividend
    1,994       —       3,864  
 
                 
Balance at end of period
    25,104       22,253       19,684  
 
                 
 
                       
Additional paid-in capital:
                       
Balance at beginning of period
    125,206       57,236       52,670  
Issuance of common stock
    —       52,785       —  
Stock options and related
    3,650       5,282       4,566  
Stock dividend and stock split effected in the form of a dividend
    58,455       14,526       —  
Common stock issuance costs
    (10 )     (3,180 )     —  
Preferred stock issuance costs
    —       (1,443 )     —  
 
                 
Balance at end of period
    187,301       125,206       57,236  
 
                 
 
                       
Legal surplus:
                       
Balance at beginning of period
    27,425       21,099       15,997  
Transfer from retained earnings
    6,468       6,326       5,102  
 
                 
Balance at end of period
    33,893       27,425       21,099  
 
                 
 
                       
Retained earnings:
                       
Balance at beginning of period
    101,723       106,358       75,806  
Net income
    56,612       63,649       51,320  
Cash dividends declared on common stock
    (13,522 )     (11,425 )     (9,415 )
Stock dividend and stock split effected in the form of a dividend
    (64,923 )     (46,335 )     (3,864 )
Cash dividends declared on preferred stock
    (4,802 )     (4,198 )     (2,387 )
Transfer to legal surplus
    (6,468 )     (6,326 )     (5,102 )
 
                 
Balance at end of period
    68,620       101,723       106,358  
 
                 
 
                       
Treasury stock:
                       
Balance at beginning of period
    (4,578 )     (35,888 )     (33,674 )
Stock purchased / used to match defined contribution plan 1165(e)
    (3,263 )     (499 )     (2,214 )
Stock dividend
    4,473       31,809       —  
 
                 
Balance at end of period
    (3,368 )     (4,578 )     (35,888 )
 
                 
 
                       
Accumulated other comprehensive income (loss), net of tax:
                       
Balance at beginning of period
    (45,362 )     (309 )     6,830  
Other comprehensive income (loss), net of tax
    6,979       (45,053 )     (7,139 )
 
                 
Balance at end of period
    (38,383 )     (45,362 )     (309 )
 
                 
 
                       
Total stockholders’ equity
  $ 341,167     $ 294,667     $ 201,680  
 
                 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE FISCAL YEARS ENDED JUNE 30 2005, 2004 AND 2003
      (In thousands)
                         
COMPREHENSIVE INCOME   2005     2004     2003  
             
Net income
  $ 56,612     $ 63,649     $ 51,320  
 
                 
 
                       
Other comprehensive income (loss), net of tax:
                       
Unrealized gain (loss) on securities available-for-sale arising during the period
  $ 10,830     $ (65,037 )   $ 28,691  
Realized gains on investment securities available-for-sale included in net income
    (7,446 )     (13,414 )     (14,223 )
Unrealized gain (loss) on derivatives designated as cash flows hedges arising during the period
    (6,372 )     11,134       (36,318 )
Realized loss on derivatives designated as cash flow hedges included in net income
    10,131       17,744       16,141  
Amount reclassified into earnings during the period related to transition adjustment on derivative activities
    —       372       227  
Income tax effect related to unrealized (gain) loss on securities available-for-sale
    (164 )     4,148       (1,657 )
 
                 
Other comprehensive income (loss) for the period
    6,979       (45,053 )     (7,139 )
 
                 
 
                       
Comprehensive income
  $ 63,591     $ 18,596     $ 44,181  
 
                 
See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
      (In thousands)
                         
    2005     2004     2003  
Cash flows from operating activities:
                       
Net income
  $ 56,612     $ 63,649     $ 51,320  
 
                 
Adjustments to reconcile net income to net cash used in operating activities:
                       
Amortization of deferred loan origination fees, net of costs
    (2,609 )     (2,971 )     (2,005 )
Amortization of premiums, net of accretion of discounts on investment securities, net
    9,835       12,535       7,086  
Depreciation and amortization of premises and equipment
    5,857       4,970       4,692  
Deferred income tax expense
    982       397       76  
Equity in earnings of investment in limited liability partnership
    (247 )     —       —  
Provision for loan losses
    3,315       4,587       4,190  
Loss (gain) on:
                       
Sale of securities available-for-sale
    (7,446 )     (13,414 )     (14,223 )
Mortgage banking activities
    (7,774 )     (7,719 )     (8,026 )
Derivatives
    2,811       (11 )     4,061  
Sale of premises and equipment
    —       —       219  
Originations of loans held-for-sale
    (178,256 )     (227,964 )     (113,548 )
Proceeds from sale of loans held-for-sale
    102,305       124,813       2,867  
Net decrease (increase) in:
                       
Trading securities
    309       463       8,222  
Accrued interest receivable
    (4,608 )     (1,411 )     (2,018 )
Other assets
    (11,820 )     (1,761 )     5,627  
Net increase (decrease) in:
                       
Accrued interest on deposits and borrowings
    5,252       2,628       (384 )
Other liabilities
    1,296       (1,314 )     1,218  
 
                 
Total adjustments
    (80,798 )     (106,172 )     (101,946 )
 
                 
 
                       
Net cash used in operating activities
    (24,186 )     (42,523 )     (50,626 )
 
                 
 
                       
Cash flows from investing activities:
                       
Net decrease (increase) in time deposits with other banks Purchases of:
    (30,000 )     365       (120 )
Investment securities available-for-sale
    (1,738,613 )     (1,740,118 )     (1,912,359 )
Investment securities held-to-maturity
    (529,006 )     (288,959 )     —  
FHLB stock
    —       (5,623 )     (6,493 )
Purchases of equity options and put options
    (1,371 )     (2,425 )     (2,238 )
Maturities and redemption of:
 
Investment securities available-for-sale
    562,230       710,782       1,061,919  
Investment securities held-to-maturity
    232,290       34,709       —  
FHLB stock
    1,102       —       1,166  
Proceeds from sales of:
                       
Investment securities available-for-sale
    1,143,501       610,566       681,234  
Premises and fixed assets
    3,355       —       —  
Other real estate owned
    3,034       885       —  
Loan production:
                       
Origination and purchase of loans, excluding loans held-for-sale
    (333,177 )     (199,262 )     (324,980 )
Principal repayment of loans
    206,113       180,138       168,343  
Additions to premises and equipment
    (4,073 )     (7,360 )     (2,866 )
Other
    —       (1,083 )     (1,592 )
 
                 
Net cash used in investing activities
    (484,616 )     (707,385 )     (337,986 )
 
                 
 
                       
Cash flows from financing activities:
                       
Net increase (decrease) in:
                       
Deposits
    224,928       (25,468 )     78,391  
Securities sold under agreements to repurchase
    295,891       495,267       403,729  
Federal funds purchased
    12,310                  
Proceeds from:
                       
Advances from FHLB
    2,204,272       734,200       949,700  
Exercise of stock options, net
    4,507       5,896       5,086  
Repayments of advances from FHLB
    (2,204,272 )     (564,200 )     (1,027,900 )
Issuance of subordinated capital notes
    —       35,043       —  
Issuance of common stock, net
    —       51,560       —  
Issuance of preferred stock, net
    —       33,057       —  
Common stock purchased
    (3,263 )     (499 )     (2,214 )
Dividends paid
    (17,919 )     (15,014 )     (11,395 )
 
                 
Net cash provided by financing activities
    516,454       749,842       395,397  
 
                 
 
                       
Net change in cash and cash equivalents
    7,652       (66 )     6,785  
Cash and cash equivalents at beginning of year
    17,031       17,097       10,312  
 
                 
Cash and cash equivalents at end of year
  $ 24,683     $ 17,031     $ 17,097  
 
                 
 
                       
Cash and cash equivalents include:
                       
Cash and due from banks
  $ 14,892     $ 9,284     $ 15,945  
Money Market Investments
    9,791       7,747       1,152  
 
                 
 
  $ 24,683     $ 17,031     $ 17,097  
 
                 
 
                       
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
                       
Interest paid
  $ 97,647     $ 74,546     $ 76,416  
 
                 
Income taxes paid
  $ 554     $ 1,894     $ 88  
 
                 
Mortgage loans securitized into mortgage-backed securities
  $ 85,809     $ 100,202     $ 110,843  
 
                 
Investment securities available-for-sale transferred to held-to-maturity
  $ 565,191     $ 1,114,424     $ —  
 
                 
Accrued dividend payable
  $ 3,487     $ 3,081     $ 2,472  
 
                 
Other comprehensive income (loss) for the year
  $ 6,979     $ (45,053 )   $ (7,139 )
 
                 
Securities sold but not yet delivered
  $ 1,034     $ 47,312     $ 1,894  
 
                 
Securities and loans purchased but not yet received
  $ 22,772     $ 89,068     $ 152,219  
 
                 
Transfer from loans to foreclosed real estate
  $ 4,689     $ 1,237     $ 571  
 
                 
Stock dividend paid from treasury stock
  $ 4,474     $ 31,809     $ —  
 
                 
See notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2005 AND 2004
AND FOR EACH OF THE THREE YEARS IN THE
PERIOD 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 accounting principles generally accepted in the United States of America (“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 financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. It has four subsidiaries, Oriental Bank and Trust (the “Bank”), Oriental Financial Services Corp. (“Oriental Financial Services”), Oriental Insurance, Inc. and Caribbean Pension Consultants, Inc. The Group also has two special purpose entities, Oriental Financial (PR) Statutory Trust I (the “Statutory Trust I”) and Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”). The Bank has two wholly-owned subsidiaries, Oriental International Bank, Inc. and Oriental Mortgage, Inc. Through these subsidiaries, the Group provides a wide range of financial services such as mortgage, commercial and consumer lending, financial planning, insurance sales, money management and investment brokerage services, as well as corporate and individual trust services. Note 17 to the consolidated financial statements present 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 Bank Holding Company Act of 1956, as amended, which is administered by the Board of Governors of the Federal Reserve System.
The Bank operates through twenty-four branches located throughout the island and is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of Puerto Rico and the Federal Deposit Insurance Corporation (“FDIC”), which insures its deposits through the Savings Association Insurance Fund (SAIF), up to $100,000 per depositor. The Bank has a wholly-owned subsidiary, Oriental Mortgage Corporation (“Oriental Mortgage”), which is currently inactive, and its only asset is a cash account with an insignificant balance as of June 30, 2005 and 2004. The Bank also operates an international banking entity (“IBE”), which is a unit of the Bank, named O.B.T. International Bank, pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended (the “IBE Act”). In November 2003, the Group organized a new IBE, named Oriental International Bank Inc., as a wholly owned subsidiary of the Bank. The Group transferred as of January 1, 2004 most of the assets and liabilities of O.B.T. International Bank to the new IBE subsidiary. The IBE offers the Bank certain Puerto Rico tax advantages and its services are limited under Puerto Rico law to persons and assets/liabilities located outside of Puerto Rico.
Oriental Financial Services is subject to the supervision, examination and regulation of the National Association of Securities Dealers, Inc., the Securities and Exchange Commission (“SEC”), and the Office of the Commissioner of Financial Institutions of Puerto Rico. Oriental Insurance is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico.
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, income tax, and the valuation of derivatives.
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.

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Significant Group Concentrations of Credit Risk
Most of the Group’s business activities are with customers located in Puerto Rico. Note 3 discusses the types of securities in which the Group invests. Note 5 discusses the types of lending the Group engages in. The Group does not have any significant concentrations with any one industry or customer.
Cash Equivalents
For purposes of presentation in the consolidated statements of cash flows, the Group considers as cash equivalents all money market instruments that are not pledged with maturities of three months or less at the date of acquisition.
Earnings per Common Share
Basic earnings per share excludes potential dilutive common shares and is calculated by dividing net 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 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 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 market 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 agreements, 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 as held-to-maturity, available-for-sale or trading. Securities for which the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Securities that might be sold prior to maturity because of interest rate changes, to meet liquidity needs, or to better match the repricing characteristics of funding sources are classified as available-for-sale. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of tax in other comprehensive income.
The Group classifies as trading those securities that are acquired and held principally for the purpose of selling them in the near 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. Interest revenue arising from trading instruments is included in the statements of income as part of interest income.
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 securities available for sale, and unrealized loss valuation adjustments considered other than temporary, if any, on securities classified as either available-for-sale or held-to-maturity are reported separately in the statements of income. The cost of securities sold is determined on the specific identification method.
Impairment of Investment Securities
The Group evaluates its securities available-for-sale and held-to-maturity for impairment. An impairment charge in the consolidated statements of income is recognized when the decline in the fair value of investments below their cost basis is judged to be other-than-temporary. The Group considers various factors in determining whether it should recognize an impairment charge, including, but not limited to the length of time and extent to which the fair value has been less than its cost basis, and the Group’s intent and ability to hold the investment for a period of time sufficient to allow for any

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anticipated recovery in market value. For debt securities, the Group also considers, among other factors, the debtor’s repayment ability on its bond obligations and its cash and capital generation ability.
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 (refer to Note 10), 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 should be bifurcated and carried at fair value.
The Group uses 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.
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. 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 loss allowances for such risks if and when these are deemed necessary.
Mortgage Banking Activities and Loans Held-For-Sale
The mortgages reported as loans held-for-sale are stated at the lower of cost or market 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. From time to time, the Group sells loans 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) certificates using another institution as issuer. This other institution services the mortgages included in the resulting GNMA, FNMA and FHLMC pools.
Servicing rights on mortgage loans originated and held by the Group are sold to another financial institution. The gain on the sale of these rights is amortized over the expected life of the loans unless the loans are sold, at which time the unamortized deferred gain is taken into 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, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan

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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 principal and/or interest, except for well-collateralized real estate loans for which recognition is discontinued when they become 365 days or more past due and are written down, if necessary, based on the specific evaluation of the collateral underlying the loan. Loans for which the recognition of interest income has been discontinued are designated as non-accruing. 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.
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 uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Group follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses. This methodology consists of several key elements. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Group.
Included in the review of individual loans are those that are impaired, as provided in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” A loan is considered impaired when, based on current information and events, it is probable that the Group will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of small balance, homogeneous loans that are collectively evaluated for impairment and 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. The portfolios of 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 following are the credit risk categories (established by the FDIC Interagency Policy Statement of 1993): pass, special mention, substandard, doubtful and loss.
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: the overall historical loss trends (one year and three years) and other information including underwriting standards, economic trends and unusual events such as hurricanes.
Loan loss ratios and credit risk categories, are updated quarterly and are applied in the context of GAAP and the Joint Interagency Guidance on the importance of depository institutions having prudent, conservative, but not excessive loan loss allowances that fall within an acceptable range of estimated losses. While management uses available information in estimating possible loan losses, future changes to the allowance may be necessary based on factors beyond the Group’s control, such as factors affecting general economic conditions.
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

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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 fiscal years 2005, 2004 and 2003.
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 loan balance over the estimated fair market 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. Any excess of the carrying value over the estimated fair market value, less estimated costs to sale is charged to operations. The costs and expenses associated to holding these properties in portfolio are expensed as incurred.
Investments in limited liability partnerships
Investment in limited partnerships is accounted for in accordance to the provisions of EITF D-46, “Accounting for Limited Partnership Investment,” which requires the application of the equity method to investments in limited partnerships, pursuant to paragraph 8 of AICPA Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures,”. The statement requires the use of the equity method unless the investor’s interest is “so minor that the limited partner may have virtually no influence over partnership operating and financial policies.” The general practice is that investments of more than 3% to 5% are considered to be more than minor.
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.
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.
The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Group’s net deferred tax assets assumes that the Group will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, the Group may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of income.
Management evaluates the realizability of the deferred tax assets on a quarterly basis and assesses the need for a valuation allowance. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in the Group’s tax provision in the period of change. As of June 30, 2005 and 2004, the Group had no recorded valuation allowances related to its net deferred tax assets.
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 a component of accrued liabilities.
On August 1, 2005 the Puerto Rico Legislature approved Law No. 41 “Law of the Educational Future of the Puerto Rican Children”. This law imposes an additional tax of 2.5 % on taxable net income. This law is applicable to all corporations and partnerships with a taxable net income over $20,000, according to part (a) of Section 1015 of the Puerto Rico Internal Revenue Code of 1994.

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The law will be effective for tax years beginning after December 31, 2004 and finish on or before December 31, 2006. Also ,the effectiveness of this law is subject to the final approval of the Joint Resolution of the Legislature Number 445, concerning the General Budget for the 2005-2006 fiscal year.
Stock Option Plans
At June 30, 2005, the Group had three stock-based employee compensation plans: the 1996, 1998, and 2000 Incentive Stock Option Plans, which are described more fully in Note 2. The Group follows the intrinsic value-based method of accounting for measuring compensation expense, if any. The Group accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Compensation expense is generally recognized for any excess of the quoted market price of the Group’s stock at measurement date over the amount an employee must pay to acquire the stock. No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Group had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation:
                         
    Year Ended June 30,  
    2005     2004     2003  
(In thousands, except for per share data)                        
Net income, as reported
  $ 56,612     $ 63,649     $ 51,320  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards
    1,459       1,394       1,417  
 
                 
Pro forma net income
    55,153       62,255       49,903  
Less: Dividends on preferred stock
    (4,802 )     (4,198 )     (2,387 )
 
                 
Pro forma net income available to common shareholders
  $ 50,351     $ 58,057     $ 47,516  
 
                 
 
                       
Earning per share:
                       
Basic — as reported
  $ 2.11     $ 2.65     $ 2.32  
 
                 
Basic — pro forma
  $ 2.05     $ 2.59     $ 2.26  
 
                 
 
                       
Diluted — as reported
  $ 2.05     $ 2.49     $ 2.15  
 
                 
Diluted — pro forma
  $ 1.99     $ 2.43     $ 2.09  
 
                 
 
                       
Average common shares outstanding
    24,571       22,394       21,049  
Average potential common share-options
    687       1,451       1,683  
 
                 
 
    25,258       23,845       22,732  
 
                 
The average fair value of each option granted in fiscal years 2005, 2004 and 2003 was $13.09, $6.81 and $4.54, respectively. The average fair value of each option granted in fiscal years 2005, 2004 and 2003 was estimated at the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in the Group’s employee options. Use of an option valuation model, as required by GAAP, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each option grant. Because the Group’s employee options have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect the Group’s estimate of the fair value of those options, in the Group’s opinion, the existing valuation models, including Black-Scholes, are not reliable single measures. The use of other option pricing models may result in different fair values of the Group’s employee options.
The following assumptions were used in estimating the fair value of the options granted, after giving retroactive effect to the 10% stock dividend:
  (1)   The expected option term is 7 years.
 
  (2)   The expected weighted average volatility was 35% for options granted in fiscal 2005 (2004 — 33%, 2003 — 32%).
 
  (3)   The expected weighted average dividend yield was 2.75% for options granted in fiscal 2005 (2004 — 2.25%, 2003 — 2.61%).
 
  (4)   The weighted average risk-free interest rate was 4.06% for options granted in fiscal 2005 (2004 — 3.77%, 2003 — 3.71%).

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The diluted per share calculations for the years ended June 30, 2005, 2004 and 2003 have been adjusted from previous reported figures to take into account additional incentive stock options required to be issued by the anti-dilution provisions of employment agreements with certain executives. The contractual provisions required the Group to adjust stock options granted to the executives pursuant to their employment agreements to avoid any form of dilution, including dilution resulting from stock dividends and additional offerings of common stock by the Group. Although all stock options granted to the executives had been adjusted pursuant to the anti-dilution provisions of the Group’s incentive stock option plans to account for stock dividends, the stock options granted to the executives pursuant to their employment agreements had not been adjusted as contractually mandated for additional events of dilution such as the Group’s issuance of common stock in 2004, and the granting of stock options from time to time to other participants under the Group’s incentive stock option plans.
After an evaluation on the merits, the Compensation Committee of the Group’s Board of Directors determined during the fourth quarter of the year ended June 30, 2005 that the executives were entitled to additional options for the implied value of their exercised options by crediting them the amount of such implied value upon future exercises of stock options granted under the Group’s incentive stock option plans and by issuing to each executive the number of additional stock options required to account for the events of dilution with respect to unexercised options granted to them under their employment agreements.
As a result, the Group has increased the number of options used in the calculation of fully diluted shares by 363,325 for the first three quarterly periods of fiscal 2005 and for fiscal years 2004 and 2003, which represent the Group’s calculation of the additional options affecting these periods. The additional options reduced diluted per share results by approximately one cent per share for fiscal 2005 and four cents per share for fiscal years 2004 and 2003. (See note 2).
On June 30, 2005, the compensation committee of the Group’s Board of Directors approved the acceleration of the vesting of all outstanding options to purchase shares of common stock of the Group that were held by employees, officers and directors as of June 30, 2005. As a result, options to purchase approximately 1,219,333 shares became exercisable. The purpose of the accelerated vesting is to enable the Group to avoid recognizing in its income statement compensation expense associated with these options in future periods, upon adoption of Statement 123(R). (See note 2).
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 on available-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 statements of financial condition, such items, along with net income, are components of comprehensive income.
New Accounting Pronouncements
FASB Statement No. 123 (R) — Accounting for Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standard Board (“FASB”) published Statement 123(R) requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. The Group will be required to apply Statement 123(R) on July 1, 2005.
At June 30, 2005, the Group had three stock-based employee compensation plans, which are described more fully in Note 1. Up to June 30, 2005, the Group accounted for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted during previous fiscal periods under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Please refer to the Table included in Note 1 for an illustration of the effect in net income and earnings per share if the Group had applied the fair value recognition provisions.
On June 30, 2005, the compensation committee of the Group’s Board of Directors approved the acceleration of the vesting of all outstanding options to purchase shares of common stock of the Group that were held by employees, officers and

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directors as of June 30, 2005. As a result, options to purchase approximately 1,219,333 shares became exercisable. The purpose of the accelerated vesting is to enable the Group to avoid recognizing in its income statement compensation expense associated with these options in future periods, upon adoption of Statement 123(R). The future expense to be avoided as a result of the acceleration of the vesting of these options amounts to approximately $3.4 million on a pre-tax basis over the course of the original vesting period, of which $1.5 million will be avoided in the first fiscal year to be ended June 30, 2006, $0.8 million in the second fiscal year, $0.5 million in the third fiscal year, $0.3 million in each of the subsequent two fiscal years and $65,000 in the sixth fiscal year.
SFAS No. 153 “Exchanges of Nonmonetary Assets”
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” This statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The entity’s future cash flows are expected to significantly change if either of the following criteria is met: a) the configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred or b) the entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. A qualitative assessment will, in some cases, be conclusive in determining that the estimated cash flows of the entity are expected to significantly change as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.
SFAS No. 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This Statement replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This Statement requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. This Statement also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. This Statement carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This Statement also carries forward the guidance in Opinion 20 requiring justification of a change in accounting principle on the basis of preferability. This Statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. This Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. Management believes that the adoption of this statement will not have a significant effect on the Group’s consolidated financial statements.
Reclassifications
Certain reclassifications have been made to prior years’ financial statements to conform with the current year presentation.
2. STOCKHOLDERS’ EQUITY
Common Stock
On February 12, 2004, the Group filed a registration statement with the SEC for an offering of 2,565,000 shares of common stock. The registration statement was amended on February 27, 2004. The offering consisted of 1,700,000 shares offered by the Group, and an aggregate of 865,000 shares offered by three stockholders of the Group. The offering also included an additional 384,750 shares subject to over-allotment options granted by the Group and the selling

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stockholders to the underwriters. The registration statement, as amended, was declared effective by the SEC on March 3, 2004.
On March 20, 2004, the underwriters exercised their options to purchase from the Group and the selling stockholders an aggregate of 384,750 shares of the Group’s common stock to cover over-allotments (255,000 of these shares were purchased from the Group and 129,750 from the three selling stockholders of the Group). Following such exercise, the total offering was for 2,949,750 shares at a public offering price of $28.00 per share, consisting of 1,955,000 shares offered by the Group and an aggregate of 994,750 shares by the three selling stockholders of the Group. Proceeds to the Group from the issuance of common stock were approximately $51,560,000, net of $3,180,000 of issuance costs .
Stock Dividend and Stock Split
On October 28, 2002, the Group declared a twenty-five percent (25%) stock split effected in the form of a dividend on common stock held by shareholders of record as of December 30, 2002. As a result, 3,864,800 shares of common stock were distributed on January 15, 2003.
On November 20, 2003, the Group declared a ten percent (10%) stock dividend on common stock held by shareholders of record as of December 31, 2003. As a result, 1,798,722 shares of common stock were distributed on January 15, 2004, from the Group’s treasury stock account. For purposes of the computation of income per common share, cash dividends and stock price, the stock dividend was retroactively recognized for all periods presented in the accompanying consolidated financial statements.
Also, on November 30, 2004, the Group declared a ten percent (10%) stock dividend on common stock held by shareholders of record as of December 31, 2004. As a result, a total of 2,236,152 shares of common stock were distributed on January 17, 2005 (1,993,711 shares of common stock were issued and 242,441 were distributed from the Group’s treasury stock account.) For purposes of the computation of income per common share, cash dividends and stock price, the stock dividend was retroactively recognized for all periods presented in the accompanying consolidated financial statements.
Treasury Stock
On March 26, 2003, the Group’s Board of Directors announced the authorization of a program for the repurchase of up to $9.0 million of its outstanding shares of common stock. This program superseded the ongoing repurchase program established earlier. The authority granted by the Board of Directors does not require the Group to repurchase any shares. The Group will make such repurchases from time to time in the open market at such times and prices as market conditions shall warrant, and in compliance with the terms of applicable federal and Puerto Rico laws and regulations.
The activity of common shares held in treasury by the Group for the years ended June 30, 2005, 2004 and 2003 is set forth below.
                                                 
    (In thousands)
    2005   2004   2003
            Dollar           Dollar           Dollar
    Shares   Amount   Shares   Amount   Shares   Amount
             
Beginning of year
    246     $ 4,578       2,025     $ 35,888       1,534     $ 33,674  
 
                                               
Common shares repurchased under repurchase program
    200       2,962       16       394       97       2,214  
 
                                               
Common shares repurchased/used to match defined contribution plan, net
    24       301       4       105       —       —  
 
                                               
Stock split
    —       —       —       —       394       —  
 
                                               
Stock dividend
    (242 )     (4,473 )     (1,799 )     (31,809 )     —       —  
             
End of year
    228     $ 3,368       246     $ 4,578       2,025     $ 35,888  
             
Stock Option Plans
At June 30, 2005, the Group had three stock-based employee compensation plans: the 1996, 1998, and 2000 Incentive Stock Option Plans. These plans offer key officers, directors and employees an opportunity to purchase shares of the Group’s common stock. The Compensation Committee of the Board of Directors has sole authority and absolute discretion as to the number of stock options to be granted to any officer, director or employee, their vesting rights, and the options’ exercise prices. The plans provide for a proportionate adjustment in the exercise price and the number of shares that can

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be purchased in case of merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split in which the number of shares of common stock of the Group as a whole are increased, decreased, changed into or exchanged for a different number or kind of shares or securities. Stock options vested upon completion of specified years of service.
The Group follows the intrinsic value-based method of accounting for measuring compensation expense, if any. The Group accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Compensation expense is generally recognized for any excess of the quoted market price of the Group’s stock at measurement date over the amount an employee must pay to acquire the stock. No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
The activity in outstanding options for the years ended June 30, 2005, 2004 and 2003, is set forth below:
                                                 
    2005     2004     2003  
            Weighted             Weighted             Weighted  
    Number     Average     Number     Average     Number     Average  
    Of     Exercise     Of     Exercise     Of     Exercise  
    Options     Price     Options     Price     Options     Price  
Beginning of year
    1,522,137     $ 12.55       1,876,044     $ 11.42       2,132,630     $ 13.40  
Transactions before stock dividend:
                                               
Options granted
    157,000       28.04       115,266       23.92       25,000       18.95  
Options exercised
    (331,887 )     14.61       (344,237 )     8.89       (158,570 )     8.81  
Options forfeited
    (93,751 )     11.95       (40,704 )     12.93       (74,479 )     8.97  
                   
 
    1,253,499       14.94       1,606,369       12.78       1,924,581       14.02  
 
                                               
Stock dividend effect
    125,350       13.58       160,637       11.62       481,145       11.22  
Transactions after stock dividend:
                                               
Options granted
    393,825       8.47       77,500       26.71       15,000       20.24  
Options exercised
    (506,086 )     18.28       (269,701 )     10.52       (361,381 )     9.24  
Options forfeited
    (47,255 )     12.41       (52,668 )     12.53       (183,301 )     10.65  
 
                                   
End of year
    1,219,333     $ 13.23       1,522,137     $ 12.55       1,876,044     $ 11.42  
 
                                   
The following table summarizes the range of exercise prices and the weighted average remaining contractual life of the options outstanding at June 30, 2005:
                                         
    Outstanding     Exercisable  
            Weighted     Weighted             Weighted  
            Average     Average             Average  
    Number of     Exercise     Contract Life     Number of     Exercise  
Range of Exercise Prices   Options     Price     (Years)     Options     Price  
$0.00 to $2.82
    139,313     $ 0.18       10.0       139,313     $ 0.18  
$5.63 to $8.45
    323,064     $ 7.31       5.1       323,064     $ 7.31  
$8.45 to $11.27
    82,051     $ 10.74       4.8       82,051     $ 10.74  
$11.27 to $14.09
    248,148     $ 12.84       6.8       248,148     $ 12.84  
$14.09 to $16.90
    41,622     $ 15.90       7.3       41,622     $ 15.90  
$16.90 to $19.72
    24,200     $ 19.28       8.1       24,200     $ 19.28  
$19.72 to $22.54
    88,935     $ 19.90       8.1       88,935     $ 19.90  
$22.54 to $25.35
    199,400     $ 23.95       8.9       199,400     $ 23.95  
$25.35 to $28.17
    72,600     $ 24.53       9.3       72,600     $ 24.53  
 
                             
 
    1,219,333     $ 13.23       7.6       1,219,333     $ 13.23  
 
                             
On June 30, 2005, the compensation committee of the Group’s Board of Directors approved the acceleration of the vesting of all outstanding options to purchase shares of common stock of the Group that were held by employees, officers and

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directors as of June 30, 2005. As a result, options to purchase approximately 1,219,333 shares became exercisable. The purpose of the accelerated vesting is to enable the Group to avoid recognizing in its income statement compensation expense associated with these options in future periods, upon adoption of Statement 123(R). The future expense to be avoided as a result of the acceleration of the vesting of these options amounts to approximately $3.4 million on a pre-tax basis over the course of the original vesting period, of which $1.5 million will be avoided in fiscal year to be ending June 30, 2006, $0.8 million in the second fiscal year, $0.5 million in the third fiscal year, $0.3 million in each of the subsequent two fiscal years and $65,000 in the sixth year fiscal year.
Earnings per Common Share
The calculation of earnings per common share for the fiscal years ended June 30, 2005, 2004 and 2003 follows:
                         
    June 30,  
(In thousands, except per share data)   2005     2004     2003  
Net income
  $ 56,612     $ 63,649     $ 51,320  
Less: Preferred stock dividend
    (4,802 )     (4,198 )     (2,387 )
 
                 
Net income available to common stockholders
  $ 51,810     $ 59,451     $ 48,933  
 
                 
 
                       
Weighted average common shares and share equivalents:
                       
Average common shares outstanding
    24,571       22,394       21,049  
Common stock equivalents — options
    687       1,451       1,683  
 
                 
Total
    25,258       23,845       22,732  
 
                 
 
                       
Earnings per common share – basic
  $ 2.11     $ 2.65     $ 2.32  
 
                 
Earnings per common share – diluted
  $ 2.05     $ 2.49     $ 2.15  
 
                 
For the year ended June 30, 2005 and 2004, stock options without a dilutive effect on earnings per share not included in the calculation amounted to 207,545 and 31,560, respectively. For the year ended June 30, 2003, all stock options outstanding had a dilutive effect on earnings per share.
The diluted per share calculations for the years ended June 30, 2005, 2004 and 2003 have been adjusted from previously reported figures to take into account additional incentive stock options required to be issued by the anti-dilution provisions of employment agreements with certain executives. The contractual provisions required the Group to adjust stock options granted to the executives pursuant to their employment agreements to avoid any form of dilution, including dilution resulting from stock dividends and additional offerings of common stock by the Group. Although all stock options granted to the executives had been adjusted pursuant to the anti-dilution provisions of the Group’s incentive stock option plans to account for stock dividends, the stock options granted to the executives pursuant to their employment agreements had not been adjusted as contractually mandated for additional events of dilution such as the Group’s issuance of common stock in 2004, the quarterly cash dividends declared on its common stock and the granting of stock options from time to time to other participants under the Group’s incentive stock option plans.
After an evaluation on the merits, the Compensation Committee of the Group’s Board of Directors determined during the fourth quarter of the year ended June 30, 2005 that the executives were entitled to additional options for the implied value of their exercised options by crediting them the amount of such implied value upon future exercises of stock options granted under the Group’s incentive stock option plans and by issuing to each executive the number of additional stock options required to account for the events of dilution with respect to unexercised options granted to them under their employment agreements.
As a result, the Group has increased the number of options used in the calculation of fully diluted shares by 363,325 for the first three quarterly periods of fiscal 2005 and for fiscal years 2004 and 2003, which represent the Group’s calculation of the additional options affecting these periods. The effect is to reduce per diluted share results by approximately one cent per share for fiscal 2005 and four cents per share for fiscal years 2004 and 2003.
Legal Surplus
The Banking Act of the Commonwealth of Puerto Rico 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 to 10% of total deposits or 100% of total additional paid in capital on common and preferred stock, whichever is greater. At June 30, 2005, legal surplus amounted to $33,893,000 (2004 — $27,425,000). The amount transferred to the legal surplus account is not available for payment of dividends to shareholders. In addition, the Federal Reserve Board has issued a policy statement that bank holding companies should generally pay dividends only from operating

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earnings of the current and preceding two years.
Preferred Stock
On May 28, 1999, the Group issued 1,340,000 shares of 7.125% Non-cumulative Monthly Income Preferred Stock, Series A, at $25 per share. 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% Non-cumulative Monthly Income Preferred Stock, Series B, at $25 per share. Proceeds from issuance of the Series B Preferred Stock, were approximately $33,057,000, net of $1,443,000 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 Loss
Accumulated other comprehensive loss, net of income tax, as of June 30 consisted of:
                 
    (In thousands)  
    2005     2004  
       
Unrealized loss on derivatives designated as cash flow hedges
  $ 8,768     $ 12,527  
Unrealized loss on securities available-for-sale transfered to held to maturity
    24,211       27,572  
Unrealized loss on securities available-for-sale
    5,404       5,263  
 
           
 
  $ 38,383     $ 45,362  
 
           
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) and of Tier 1 capital (as defined) to average assets (as defined). As of June 30, 2005 and 2004, the Group and the Bank met all capital adequacy requirements to which they are subject.
As of June 30, 2005, the most recent notification from the Federal Deposit Insurance Corporation 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 June 30, were as follows:

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                                    Minimum To Be Well
                                    Capitalized Under
                    Minimum Capital   Prompt Corrective
    Actual   Requirement   Action Provisions
    (Dollars in thousands)
    Amount   Ratio   Amount   Ratio   Amount   Ratio
Group Ratios
                                               
As of June 30, 2005
                                               
Total Capital to Risk-Weighted Assets
  $ 454,038       39.39 %   $ 92,210       8.00 %     N/A       N/A  
Tier I Risk-Based Capital to Risk-Weighted Assets
  $ 447,543       38.83 %   $ 46,105       4.00 %     N/A       N/A  
Tier I Capital to Average Assets
  $ 447,543       10.65 %   $ 168,080       4.00 %     N/A       N/A  
 
                                               
As of June 30, 2004
                                               
Total Capital to Risk-Weighted Assets
  $ 415,560       38.69 %   $ 85,932       8.00 %     N/A       N/A  
Tier I Risk-Based Capital to Risk-Weighted Assets
  $ 408,007       37.98 %   $ 42,966       4.00 %     N/A       N/A  
Tier I Capital to Average Assets
  $ 408,007       11.24 %   $ 145,209       4.00 %     N/A       N/A  
 
                                               
Bank Ratios
                                               
As of June 30, 2005
                                               
Total Capital to Risk-Weighted Assets
  $ 292,784       25.66 %   $ 91,264       8.00 %   $ 114,080       10.00 %
Tier I Risk-Based Capital to Risk-Weighted Assets
  $ 286,289       25.10 %   $ 45,632       4.00 %   $ 68,448       6.00 %
Tier I Capital to Average Assets
  $ 286,289       6.86 %   $ 166,815       4.00 %   $ 208,518       5.00 %
 
                                               
As of June 30, 2004
                                               
Total Capital to Risk-Weighted Assets
  $ 234,118       23.74 %   $ 78,891       8.00 %   $ 86,670       10.00 %
Tier I Risk-Based Capital to Risk-Weighted Assets
  $ 226,565       22.98 %   $ 39,445       4.00 %   $ 52,002       6.00 %
Tier I Capital to Average Assets
  $ 226,565       6.50 %   $ 139,349       4.00 %   $ 144,574       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.
On July 2, 2003, the Federal Reserve Board issued a supervisory letter SR 03-13 instructing bank holding companies to continue to include trust preferred securities in their Tier 1 capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve Board intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance.
3. INVESTMENTS
Short Term Investments
At June 30, 2005, the Group’s short term investments were comprised of Money Market accounts in the amount of $9,791,000 (2004 — $7,747,000) and time deposits with other banks in the amount of $30,000,000.

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Investment Securities
The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by the Group at June 30, 2005 and 2004, were as follows:
                                         
    June 30, 2005 (In thousands)  
            Gross     Gross             Weighted  
    Amortized     Unrealized     Unrealized     Fair     Average  
    Cost     Gains     Losses     Value     Yield  
     
Available-for-sale
                                       
US Treasury securities
  $ 174,823     $ —     $ 1,807     $ 173,016       3.47 %
Puerto Rico Government and agency obligations
    45,744       1,138       152       46,730       5.78 %
Corporate bonds and other
    69,028       4       3,098       65,934       4.45 %
 
                               
Total investment securities
    289,595       1,142       5,057       285,680          
 
                               
FNMA and FHLMC certificates
    549,936       477       1,880       548,533       4.48 %
GNMA certificates
    13,959       306       36       14,229       5.65 %
Collateralized mortgage obligations (CMOs)
    182,663       410       1,795       181,278       4.61 %
 
                               
Total mortgage-backed-securities and CMO’s
    746,558       1,193       3,711       744,040          
 
                               
Total securities available-for-sale
  $ 1,036,153     $ 2,335     $ 8,768     $ 1,029,720       4.40 %
 
                             
 
                                       
Held-to-maturity
                                       
US Treasury securities
    856,964       968       7,250       850,682       3.76 %
Puerto Rico Government and agency obligations
    62,094       10       1,664       60,440       5.33 %
 
                               
Total investment securities
    919,058       978       8,914       911,122          
 
                               
FNMA and FHLMC certificates
    914,174       14,226       2,184       926,216       5.11 %
GNMA certificates
    250,189       4,520       473       254,236       5.33 %
Collateralized mortgage obligations
    51,325       181       372       51,134       4.49 %
 
                               
Total mortgage-backed-securities and CMO’s
    1,215,688       18,927       3,029       1,231,586          
 
                               
Total securities held-to-maturity
    2,134,746       19,905       11,943       2,142,708       4.59 %
 
                             
Total
  $ 3,170,899     $ 22,240     $ 20,711     $ 3,172,428       4.53 %
 
                             
                                         
    June 30, 2004 (In thousands)
            Gross     Gross             Weighted  
    Amortized     Unrealized     Unrealized     Fair     Average  
    Cost     Gains     Losses     Value     Yield  
     
Available-for-sale
                                       
US Treasury securities
  $ 208,485     $ 406     $ 1,914     $ 206,977       3.43 %
Puerto Rico Government and agency obligations
    51,990       1,418       197       53,211       5.79 %
Other debt securities
    19,350       1,286       —       20,636       6.83 %
 
                               
Total investment securities
    279,825       3,110       2,111       280,824          
 
                               
FNMA and FHLMC certificates
    936,710       3,330       6,736       933,304       4.39 %
GNMA certificates
    88,409       247       2,059       86,597       3.82 %
Collateralized mortgage obligations
    228,201       976       2,495       226,682       5.09 %
 
                               
Total mortgage-backed-securities and CMO’s
    1,253,320       4,553       11,290       1,246,583          
 
                               
Total securities available-for-sale
  $ 1,533,145     $ 7,663     $ 13,401     $ 1,527,407       4.39 %
 
                             
 
                                       
Held-to-maturity
                                       
Puerto Rico Government and agency obligations
    62,097       —       1,437       60,660       5.33 %
 
                               
Total investment securities
    62,097       —       1,437       60,660          
 
                               
FNMA and FHLMC certificates
    897,119       725       5,406       892,438       5.07 %
GNMA certificates
    323,646       483       1,693       322,436       5.10 %
 
                               
Total mortgage-backed-securities and CMO’s
    1,220,765       1,208       7,099       1,214,874          
 
                               
Total securities held-to-maturity
    1,282,862       1,208       8,536       1,275,534       5.09 %
 
                             
Total
  $ 2,816,007     $ 8,871     $ 21,937     $ 2,802,941       4.74 %
 
                             

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The next table shows the amortized cost and fair value of the Group’s investment securities at June 30, 2005, 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 prepayments and/or call options.
                                 
    (In thousands)
    Available-for-sale   Held-to-maturity
    Amortized Cost   Fair Value   Amortized Cost   Fair Value
         
Investment Securities
                               
Due within one year
  $ —     $ —     $ 20,074     $ 19,845  
Due after 1 to 5 years
    250,236       245,541       687,176       680,625  
Due after 5 to 10 years
    4,987       5,173       149,714       150,212  
Due after 10 years
    34,372       34,966       62,094       60,440  
         
 
    289,595       285,680       919,058       911,122  
         
 
                               
Mortgage-backed securities
                               
Due after 1 to 5 years
    685       719       —       —  
Due after 5 to 10 years
    12,511       12,283       —       —  
Due after 10 years
    733,362       731,038       1,215,688       1,231,586  
         
 
    746,558       744,040       1,215,688       1,231,586  
         
 
  $ 1,036,153     $ 1,029,720     $ 2,134,746     $ 2,142,708  
         
Net proceeds from the sale of investment securities available-for-sale during fiscal 2005 totaled $1,143,501,000 (2004 — $610,566,000; 2003 — $681,234,000). Gross realized gains and losses on those sales during fiscal 2005 were $12,186,000 and $4,740,000 respectively (2004 — $17,301,000 and $3,887,000, respectively; 2003 — $16,794,000 and $2,571,000, respectively).
During the fiscal years ended June 30, 2005 and 2004, the Group’s management reclassified, at fair value, $565,191,000 and $1,114,424,000, respectively, of its available-for-sale investment portfolio to the held-to-maturity investment category as management intends to hold these securities to maturity . The unrealized loss on those securities transferred to held-to-maturity category amounted to $24.2 and $27.6 million at June 30, 2005 and 2004, respectively, and is included as part of the accumulated other comprehensive loss in the consolidated statements of financial condition. This unrealized loss is amortized over the remaining life of the securities as a yield adjustment.
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 June 30, 2005 and 2004.

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June 30, 2005
Available-for-sale
(In thousands)
                         
    Less than 12 months  
    Amortized     Unrealized     Market  
    Cost     Loss     Value  
US Treasury securities
  $ 174,823     $ (1,807 )   $ 173,016  
Puerto Rico Government and agency obligations
    14,381       (152 )     14,229  
Mortgage-backed-securities and CMO’s
    426,657       (1,626 )     425,031  
Other debt securities
    66,993       (3,098 )     63,895  
 
                 
 
    682,854       (6,683 )     676,171  
 
                 
                         
    12 months or more  
    Amortized     Unrealized     Market  
    Cost     Loss     Value  
Mortgage-backed-securities and CMO’s
    139,387       (2,085 )     137,302  
 
                 
 
    139,387       (2,085 )     137,302  
 
                 
                         
    Total  
    Amortized     Unrealized     Market  
    Cost     Loss     Value  
US Treasury securities
    174,823       (1,807 )     173,016  
Puerto Rico Government and agency obligations
    14,381       (152 )     14,229  
Mortgage-backed-securities and CMO’s
    566,044       (3,711 )     562,333  
Other debt securities
    66,993       (3,098 )     63,895  
 
                 
 
  $ 822,241     $ (8,768 )   $ 813,473  
 
                 
Held-to-maturity
(In thousands)
                         
    Less than 12 months  
    Amortized     Unrealized     Market  
    Cost     Loss     Value  
US Treasury securities
  $ 702,535     $ (7,250 )   $ 695,285  
Mortgage-backed-securities and CMO’s
    183,997       (1,209 )     182,788  
 
                 
 
    886,532       (8,459 )     878,073  
 
                 
                         
    12 months or more  
    Amortized     Unrealized     Market  
    Cost     Loss     Value  
Puerto Rico Government and agency obligations
    52,130       (1,664 )     50,465  
Mortgage-backed-securities and CMO’s
    121,351       (1,820 )     119,532  
 
                 
 
    173,481       (3,484 )     169,997  
 
                 
                         
    Total  
    Amortized     Unrealized     Market  
    Cost     Loss     Value  
US Treasury securities
    702,535       (7,250 )     695,285  
Puerto Rico Government and agency obligations
    52,130       (1,664 )     50,465  
Mortgage-backed-securities and CMO’s
    305,348       (3,029 )     302,320  
 
                 
 
  $ 1,060,013     $ (11,943 )   $ 1,048,070  
 
                 

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June 30, 2004
Available-for-sale
(In thousands)
                         
    Less than 12 months
    Amortized   Unrealized   Market
    Cost   Loss   Value
US Treasury securities
  $ 75,161     $ (1,061 )   $ 74,100  
Puerto Rico Government and agency obligations
    6,201       (172 )     6,029  
Mortgage-backed-securities and CMO’s
    873,833       (11,290 )     862,543  
 
 
    955,195       (12,523 )     942,672  
 
                         
    12 months or more
    Amortized   Unrealized   Market
    Cost   Loss   Value
US Treasury securities
    10,218       (854 )     9,364  
Puerto Rico Government and agency obligations
    2,524       (24 )     2,500  
 
 
    12,742       (878 )     11,864  
 
                         
    Total
    Amortized   Unrealized   Market
    Cost   Loss   Value
US Treasury securities
    85,379       (1,915 )     83,464  
Puerto Rico Government and agency obligations
    8,725       (196 )     8,529  
Mortgage-backed-securities and CMO’s
    873,833       (11,290 )     862,543  
 
 
  $ 967,937     $ (13,401 )   $ 954,536  
 
Held-to-maturity
(In thousands)
                         
    Total — Less than 12 months
    Amortized   Unrealized   Market
    Cost   Loss   Value
Puerto Rico Government and agency obligations
  $ 62,097     $ (1,437 )   $ 60,660  
Mortgage-backed-securities and CMO’s
    503,862       (7,099 )     496,763  
 
 
  $ 565,959     $ (8,536 )   $ 557,423  
 
Securities in an unrealized loss position at June 30, 2005 are mainly composed of securities issued or backed by U.S. government agencies and U.S. Government sponsored agencies. The vast majority of them are rated the equivalent of AAA by nationally recognized statistical rating organizations. The investment portfolio is structured primarily with highly liquid securities which posses a large and efficient secondary market. Valuations are performed on a monthly basis using a third party provider and dealer quotes. Management believes that the unrealized losses in the investment portfolio at June 30, 2005 are mainly related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuer. The Group is a well capitalized financial institution which has the ability and intent to hold the investment securities with unrealized losses until maturity or until the unrealized losses are recovered, and expects to continue its pattern of holding the securities until the forecasted recovery of fair value.
Trading Securities
At June 30, 2005, trading securities owned by the Group totaled $265,000 (2004 — $574,000). A summary of trading securities owned by the Group at June 30, is as follows:
                 
    (In thousands)
    2005   2004
P.R. Government and agency obligations
  $ 144     $ 538  
Mortgage-backed securities
    32       36  
Other equity securities
    89       —  
     
Total trading securities
  $ 265     $ 574  
     
At June 30, 2005 and 2004, the Group’s trading portfolio weighted average yield was 4.14% and 5.81%, respectively.

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4. PLEDGED ASSETS
At June 30, 2005, residential mortgage loans amounting to $395,942,000 were pledged to secure advances and borrowings from the FHLB. Investment securities with fair values totaling $2,220,923,000, $195,030,000, $16,810,000 and $21,784,000 at June 30, 2005, were pledged to secure investment securities sold under agreements to repurchase (see Note 9), public fund deposits (see Note 8), term notes (see Note 9) and interest rate swap agreements, respectively. Also, investment securities with fair values totaling $1,747,000 and $397,000 at June 30, 2005, were pledged to the Federal Reserve Bank of New York and to the Puerto Rico Treasury Department (for the Oriental Bank and Trust’s IBE unit), respectively.
5. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans Receivable
The composition of the Group’s loan portfolio at June 30, was as follows:
                 
    (In thousands)  
    2005     2004  
Loans secured by real estate:
               
Residential — 1 to 4 family
  $ 692,258     $ 586,498  
Non-residential real estate loans
    4,185       4,259  
Home equity loans and secured personal loans
    47,891       65,924  
Commercial
    116,982       72,018  
 
           
 
    861,316       728,699  
Less: deferred loan fees, net
    (8,363 )     (11,716 )
 
           
 
    852,953       716,983  
 
           
 
               
Other loans:
               
Commercial
    12,983       9,828  
Personal consumer loans and credit lines
    30,027       18,510  
Less: deferred loan fees, net
    (40 )     (126 )
 
           
 
    42,970       28,212  
 
           
Loans receivable
    895,923       745,195  
Allowance for loan losses
    (6,495 )     (7,553 )
 
           
Loans receivable
    889,428       737,642  
Loans held-for-sale (residential 1 to 4 family mortgage loans)
    17,963       5,814  
 
           
Total loans receivable, net
  $ 907,391     $ 743,456  
 
           
In fiscal 2005, residential mortgage loans production, including loans purchased, amounted to $404,634,000 (2004 — $332,510,000) and mortgage loan sales/conversions totaled $188,114,000 (2004 - $228,380,000).
At June 30, 2005, residential mortgage loans held-for-sale amounted to $17,963,000 (2004 - $5,814,000). All residential mortgage loans originated and sold during fiscal 2005 were sold based on pre-established commitments or at market values. In fiscal 2005, the Group recognized gains of $7,774,000 (2004 — $7,719,000; 2003 — $8,026,000) in these sales which are presented in the statements of income as part of the mortgage banking activities.
At June 30, 2005, loans on which the accrual of interest has been discontinued amounted to approximately $21,859,000 (2004 — $23,714,000; 2003 — $10,350,000). The gross interest income that would have been recorded in fiscal 2005 if non-accrual loans had performed in accordance with their original terms amounted to approximately $2,164,000 (2004 — $843,000; 2003 — $648,000).
On August 31, 2004, September 30, 2004, and March 30, 2005, the Group entered into three agreements to purchase a total $114.9 million of fixed rate mortgage loans from a financial institution in Puerto Rico. As part of the agreements, the seller guarantees the scheduled timely payments of principal as well as interest payable on the aggregate outstanding principal balance of the mortgage loans based on variable interest rate equal to 150 basis points plus 90 day LIBOR. Swaps have been accounted for in the Group’s consolidated financial statements to give effect to the conversion of fixed rate loans into variable rates. These swaps are considered by management as balance guaranteed swaps because their notional amounts, fixed interest rates and other terms match to those of the outstanding purchased mortgage loans. Since the contracts meet the sale accounting provisions of SFAS No. 140, “Accounting for Transfers and Servicing of

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Financial Assets and Extinguishments of Liabilities,” SFAS No. 133 and related interpretations provide that the interest rate swaps be accounted for separately. Since the hedged item and the hedging instrument have identical critical terms, no ineffectiveness is assumed and the fair value changes in the interest rate swaps are recorded as changes in the value of both the interest rate swaps and the mortgage loans. At June 30, 2005, the notional amount of these interest rate swaps and the principal balance of the mortgage loans amounted to $106,702,000; the weighted average floating rate received at fiscal year end was 3.47%; the weighted average pay fixed rate at year end was 6.20%; and the floating rate spread was 150 basis points. (Refer to Note 10.)
Also on February 11, 2005 and June 30, 2005, the Group entered into separate agreements with a Public Corporation of the Commonwealth of Puerto Rico and a commercial bank to purchase a total of $15.6 million and $22.2 million, respectively, of residential mortgage loans. The Group purchased all rights, title and interest in all the residential loans purchased during Fiscal 2005.
Allowance for Loan Losses
The changes in the allowance for loan losses for the last three fiscal years ended June 30, were as follows:
                         
    (In thousands)  
    2005     2004     2003  
Balance at beginning of year
  $ 7,553     $ 5,031     $ 3,039  
Provision for loan losses
    3,315       4,587       4,190  
Loans charged-off
    (5,094 )     (3,207 )     (3,095 )
Recoveries
    721       1,142       897  
 
                 
Balance at end of year
  $ 6,495     $ 7,553     $ 5,031  
 
                 
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 June 30, 2005, the total investment in impaired commercial loans was $3,199,000 (2004 — $715,000). The impaired commercial loans were measured based on the fair value of collateral. The average investment in impaired commercial loans for the fiscal year ended June 30, 2005 and 2004 amounted to $2,327,000 and $2,100,000, respectively. Management determined that impaired loans did not required valuation allowance in accordance with FASB Statement 114 “Accounting by Creditor’s for Impairment of a Loan”
The provision for loan losses for the year ended June 30, 2005 totaled $3.3 million, a 27.7% decrease from the $4.6 million reported for the year ended June 30, 2004. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, Management determined that the provision for the year ended June 30, 2005 was adequate in order to maintain the allowance for loan losses at an appropriate level, even though the loan portfolio increased from $745.2 million as of June 30, 2004 to $895.2 million as of June 30, 2005 (a 20.1% increase) and there was an increase in the net credit losses from $2.1 million for the year ended June 30, 2004 to $4.4 million for the year ended June 30, 2005 (an increase of 111.7%). The main reason for the decrease in the provision is that during the year ended June 30, 2004 Management charged against earnings the provision for the possible losses on certain nonperforming loans which were in the process of evaluation. During the year ended June 30, 2005, these loans or portions thereof were charged-off against the allowance established in the previous fiscal year since such loans or the portions thereof were determined to be uncollectible. The increase in the loan portfolio is mainly related to new high quality and well collateralized loans which do not require large amounts of allowance for loan losses.
Concentration of Credit Risk
Substantially all loans of the Group are to residents and enterprises in Puerto Rico; therefore, the loan portfolio is susceptible to events affecting Puerto Rico’s economy. At June 30, 2005, loans secured by real estate comprise 96% of the loans portfolio and are considered well-collateralized, thus reducing the risk of potential losses.

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6. PREMISES AND EQUIPMENT
Premises and equipment at June 30, are stated at cost less accumulated depreciation and amortization as follows:
                     
    Useful      
    Life   (In thousands)  
    (Years)   2005     2004  
Land
  —   $ 1,014     $ 1,112  
Buildings and improvements
  40     3,224       5,580  
Leasehold improvements
  5 — 10     7,255       7,034  
Furniture and fixtures
  3 — 7     5,276       5,006  
EDP and other equipment
  3 — 7     12,555       12,154  
 
               
 
        29,324       30,886  
Less: accumulated depreciation and amortization
        (14,055 )     (12,334 )
 
               
 
      $ 15,269     $ 18,552  
 
               
Depreciation and amortization of premises and equipment for the year ended June 30, 2005 totaled $5,857,000 (2004 — $4,970,000; 2003- $4,692,000). These are included in the statements of income as part of occupancy and equipment expenses.
On June 30, 2005, the Group sold the Las Cumbres building, a two-story structure located at 1990 Las Cumbres Avenue, San Juan, Puerto Rico, for the amount of $3,355,000. The building was the principal property owned by the Group for banking operations and other services. The Bank’s mortgage banking division and one of the principal branches and financial services office (brokerage and insurance) are located in this building. The book value of this property at June 30, 2005, was $1.3 million. Also, on the same date, the Bank entered into a triple net lease agreement with the new owner for a period of 10 years. In summary, the lease contract provides for an annual rent of $324,000 or a monthly rent of $27,000, for 13,200 square feet, including 42 parking spaces. During the lease term, the rental fee will increase by 6% every three years, except for the last year on which the increment will be 2%. The transaction was accounted for accordance to the provisions of SFAS 13, as amended by SFAS 98, “Accounting for Leases: Sale-leaseback Transactions Involving Real Estate,” and accordingly, the lease portion of the transaction was classified as an operating lease and the gain on the sale portion of the transaction was deferred and will be amortized to income over the lease term (10 years) in proportion to the related gross rental expense for the leasedback property each period.
7. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable at June 30, 2005 consists of $6,725,000 from loans (2004 — $6,684,000) and $17,010,000 from investments (2004 — $12,443,000).
Other assets at June 30, consist of the following:
                 
    (In thousands)  
    2005     2004  
Investment in equity indexed options
  $ 18,999     $ 16,536  
Investment in limited liability partnership
    10,247       —  
Deferred charges
    3,536       4,786  
Prepaid expenses
    3,764       2,507  
Accounts receivable
    3,590       4,952  
Investment in Statutory Trusts
    2,171       2,170  
Goodwill
    2,006       2,021  
Prepaid income tax
    2,061       17  
 
           
 
  $ 46,374     $ 32,989  
 
           
On January 31, 2005, Oriental International Bank, Inc. subscribed an agreement with Quiddity Earnings Diversification Fund, L.P. (“The Partnership”) to purchase units of partnership interest for $10,000,000. The Partnership was organized under the laws of the State of Illinois, and is engaged in the speculative trading of futures and futures options contracts on a wide range of financial instruments. The General Partner is Quiddity LLC (the “General Partner”). The General Partner is an Illinois limited liability company and is the commodity pool operator of the Partnership.

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The general partner and each limited partner share in the profits and losses of the partnership in proportion to their respective interest in the partnership. During the fiscal year ended as of June 30, 2005, a profit of $246,834 was credited to earnings. This transaction was accounted in accordance to the provisions of EITF D-46, Accounting for Limited Partnership Investment, which results in the application of the equity method to the investments in limited partnerships. No consolidation is required since the Group have virtually no influence over the partnership operating and financial policies.
8. DEPOSITS AND RELATED INTEREST
At June 30, 2005, the weighted average interest rate of the Group’s deposits was 2.73% (2004 - 2.88%) considering non-interest bearing deposits of $62,231,000 (2004 — $44,622,000). Interest expense for the last three fiscal years ended June 30, is set forth below:
                         
    (In thousands)  
    2005     2004     2003  
Demand deposits
  $ 900     $ 818     $ 1,054  
Savings deposits
    941       1,081       1,319  
Certificates of deposit
    27,903       28,113       31,284  
 
                 
 
  $ 29,744     $ 30,012     $ 33,657  
 
                 
At June 30, 2005, time deposits in denominations of $100,000 or higher amounted to $582,121,000 (2004 — $359,423,000) including: (i) brokered certificates of deposit of $255,793,000 (2004 - $123,124,000) at a weighted average rate of 3.04%, (2004- 1.05%); and (ii) public fund deposits from various local government agencies of $134,138,000 (2004 — $120,911,000) at a weighted average rate of 3.20% (2004 – 1.22%), which were collateralized with investment securities with fair value of $195,030,000 (2004 — $181,109,000).
Scheduled maturities of certificates of deposits at June 30, 2005 are as follows:
         
    (In thousands)  
Within one year:
       
Three (3) months or less
  $ 376,523  
Over 3 months through 1 year
    391,080  
 
     
 
    767,604  
Over 1 through 2 years
    105,940  
Over 2 through 3 years
    86,362  
Over 3 through 4 years
    29,107  
Over 4 through 5 years
    15,985  
Over 5 years
    1,809  
 
     
 
  $ 1,006,807  
 
     
9. BORROWINGS
Securities Sold under Agreements to Repurchase
At June 30, 2005, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties with whom the repurchase agreements were transacted. The counterparties have agreed to resell to the Group the same or similar securities at the maturity of the agreements. Securities sold under agreements to repurchase at June 30, 2005 mature as follows: within 30 days – $1,342,800,000; between 31 to 90 days – $667,903,000; and between 91 to 106 days – $181,053,000.
At June 30, 2005, securities sold under agreements to repurchase (classified by counterparty) were as follows:
                 
    (In thousands)  
            Fair Value of  
    Borrowing     Underlying  
    Balance     Collateral  
Lehman Brothers Inc.
  $ 1,168,502     $ 1,171,080  
Credit Suisse First Boston Corporation
    373,824       391,243  
Citigroup Securities
    20,577       20,557  
Bank of America
    628,853       638,043  
 
           
Total
  $ 2,191,756     $ 2,220,923  
 
           

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Borrowings under repurchase agreements at June 30, were collateralized as follows:
                                 
    (In thousands)  
    2005     2004  
            Fair Value of             Fair Value of  
    Borrowing     Underlying     Borrowing     Underlying  
    Balance     Collateral     Balance     Collateral  
GNMA certificates
  $ 168,003     $ 170,407     $ 222,287     $ 223,076  
FNMA certificates
    782,034       798,919       974,483       1,013,715  
FHLMC certificates
    972,614       981,927       485,925       511,623  
CMOs
    —       —       141,959       146,714  
US Treasury Bonds
    269,105       269,670       71,211       72,402  
 
                       
Total
  $ 2,191,756     $ 2,220,923     $ 1,895,865     $ 1,967,530  
 
                       
At June 30, 2005, the weighted average interest rate of the Group’s repurchase agreements was 3.07% (2004 — 1.23%) and included agreements with interest ranging from 1.90% to 3.47% (2004 — from 0.90% to 1.56%). The following summarizes significant data on securities sold under agreements to repurchase for the years ended June 30, 2005 and 2004:
                 
    (In thousands)  
    2005     2004  
Average daily aggregate balance outstanding
  $ 2,174,312     $ 1,597,720  
 
           
Maximum amount outstanding at any month-end
  $ 2,398,861     $ 1,895,865  
 
           
Weighted average interest rate during the year
    2.78 %     2.26 %
 
           
Weighted average interest rate at year end
    3.07 %     1.23 %
 
           
Advances from the Federal Home Loan Bank
At June 30, advances from the Federal Home Loan Bank of New York (FHLB) consist of the following:
                     
        (In thousands)  
Maturity Date   Fixed Interest Rate   2005     2004  
   
July—2005
  1.57%   $ 50,000     $ 50,000  
April—2006
  2.48%     25,000       25,000  
July—2006
  2.01%     50,000       50,000  
July—2006
  2.13%     50,000       50,000  
August—2006
  2.96%     50,000       50,000  
April—2007
  3.09%     25,000       25,000  
August—2008
  4.07%     50,000       50,000  
 
               
 
      $ 300,000     $ 300,000  
 
               
Weighted average interest rate
        2.62 %     2.62 %
 
               
Advances are received from the FHLB under an agreement whereby the Group is required to maintain a minimum amount of qualifying collateral with a market value of at least 110% of the outstanding advances. At June 30, 2005, these advances were secured by mortgage loans amounting to $395,942,000. Also, at June 30, 2005, the Group has an additional borrowing capacity with the FHLB of $26.8 million. At June 30, 2005, average maturity of FHLB’s advances was 15.4 months (2004 — 29.2 months).
Term Notes
At June 30, 2005 and 2004, there was one term note outstanding in the amount of $15,000,000, with a floating interest rate due quarterly (2005 — 2.83%; 2004 — 0.94%), a maturity date of March 27, 2007, and secured by investment securities with fair value amounting to $16,810,000 (2004 — $16,727,000).

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Subordinated Capital Notes
Subordinated capital notes amounted to $72,166,000 at June 30, 2005 and 2004.
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 million of trust redeemable preferred securities were issued by the Statutory Trust I and by the Statutory Trust II, respectively, as part of pooled underwriting transactions. Pooled underwriting involves participating with other bank holding companies in issuing the securities through a special purpose pooling vehicle created by the underwriters.
The proceeds from these issuances were used by the Statutory Trust I and the Statutory Trust II to purchase a like amount of floating rate junior subordinated deferrable interest debentures (“subordinated capital notes”) issued by the Group. The first of these subordinated capital notes has a par value of $36.1 million, bear interest based on 3 months LIBOR plus 360 basis points (7.12% at June 30, 2005; 5.20% at June 30, 2004) provided, however, that prior to December 18, 2006, this interest rate shall not exceed 12.5%, payable quarterly, and matures on December 23, 2031. The second one, has a par value of $36.1 million, bears interest based on 3 months LIBOR plus 295 basis points (6.47% at June 30, 2005; 4.55% at June 30, 2004), payable quarterly, and matures on September 17, 2033. Both subordinated capital notes may be called at par after five years. The trust redeemable preferred securities have the same maturity and call provisions as the subordinated capital notes. The subordinated deferrable interest debentures issued by the Group are accounted for as a liability denominated as subordinated capital notes on the consolidated statements of financial condition.
In August 2004, the Group entered into a $35 million notional amount interest rate swap to fix the cost of the subordinate capital notes of the Statutory Trust I. This swap was fixed at a rate of 6.57% and matures on December 18, 2006 . At the time the transaction was done, the cost of fixing the rate on the additional $35 million in subordinated capital notes for the Statutory Trust II, was deemed too expensive for the Group to absorb full coverage. The cost for the additional swap would be for a longer dated swap given the longer call date on the subordinated capital notes, which would have effectively raise the cost on the trade.
The subordinated capital notes are treated as Tier-1 capital for regulatory purposes. On March 4, 2005, the Federal Reserve Board issued a final rule that continues to allow trust preferred securities to be included in Tier 1 regulatory capital, subject to stricter quantitative and qualitative limits. Under this rule, restricted core capital elements, which are trust preferred securities, qualifying cumulative perpetual preferred stock (and related surplus) and certain minority interests in consolidated subsidiaries, are limited in the aggregate to no more than 25% of a bank holding company’s core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. In addition, the amount of restricted core capital elements (other than qualifying mandatory convertible preferred securities) that an internationally active bank holding company is a bank holding company that (i) as of its most recent year-end FR Y-9C reports has total consolidated assets equal to $250 billion or more, or (ii) on a consolidated basis, reports total on-balance sheet foreign exposure of $10 billion or more on its filings of the most recent year-end FFIEC 009 Country Exposure Report.
Unused Lines of Credit
The Group maintains lines of credit with three financial institutions from which funds are drawn as needed. At June 30, 2005, the Group’s total available funds under these lines of credit totaled $55,000,000 (2004 — $25,000,000). At June 30, 2005 and 2004, there was no balance outstanding under these lines of credit.
10. DERIVATIVE ACTIVITIES
The Group utilizes various derivative instruments for hedging purposes, as part of its asset and liability management. These transactions involve both credit and market risks. The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. The actual risk of loss is the cost of replacing, at market, these contracts in the event of default by the counterparties. The Group controls the credit risk of its derivative financial instrument agreements through credit approvals, limits, monitoring procedures and collateral, when considered necessary.
The Group generally uses interest rate swaps and options in managing its interest rate risk exposure. Certain swaps were entered into to convert the forecasted rolled over of short-term borrowings into fixed rate liabilities for longer periods and provide

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protection against increases in short-term interest rates. Under these swaps, the Group pays a fixed monthly or quarterly cost and receives a floating thirty or ninety-day payment based on LIBOR. Floating rate payments received from the swap counterparties offset to the interest payments to be made on the forecasted rollover of short-term borrowings thus resulting in a net fixed rate cost to the Group.
Also in August 2004, the Group entered into a $35 million notional amount interest rate swap to fix the cost of the subordinate capital notes of the Statutory Trust I. This swap was fixed at a rate of 6.57% and matures on December 18, 2006.
The Group’s swaps (excluding those used to manage exposure to the stock market and those described below used to hedge the mortgage loans purchased) and their terms at June 30, 2005 and 2004 are set forth in the table below:
                 
    (Dollars in thousands)
    2005   2004
Swaps:
               
Pay fix swaps notional amount
  $ 885,000     $ 900,000  
Weighted average pay rate — fixed
    3.44 %     3.47 %
Weighted average receive rate — floating
    3.27 %     1.25 %
Maturity in months
    4 to 64       3 to 76  
Floating rate as a percent of LIBOR
    100 %     100 %
Derivative instruments are recognized as assets and liabilities at fair value. If certain conditions are met, the derivative may qualify for hedge accounting treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”) or (c) a hedge of foreign currency exposure (“foreign currency hedge”).
In the case of a qualifying fair value hedge, changes in the value of the derivative instruments that have been highly effective are recognized in current period earnings along with the change in value of the designated hedged item. In the 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 (loss), 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 should be bifurcated and carried at fair value.
During fiscal year 2005, the Group bought a put and call option contracts for the purpose of economically hedging $100,000,000 in US Treasury Notes. The objective of the hedges was to protect the fair value of the US Treasury Notes classified as available-for-sale. The net effect of these transactions was to reduce earnings by $719,000. There were no put or call options at June 30, 2005.
On August 31, 2004, September 30, 2004, and March 30, 2005, the Group entered into three agreements to purchase a total $114.9 million of fixed rate mortgage loans from a financial institution in Puerto Rico. As part of the agreements, the seller guarantees the scheduled timely payments of principal as well as interest payable on the aggregate outstanding principal balance of the mortgage loans based on variable interest rate equal to 150 basis points plus 90 day LIBOR. Swaps have been accounted for in the Group’s consolidated financial statements to give effect to the conversion of fixed rate loans into variable rates. These swaps are considered by management as balance guaranteed swaps because their notional amounts, fixed interest rates and other terms match to those of the outstanding purchased mortgage loans. Since the contracts meet with the sale accounting provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” SFAS No. 133 and related interpretations provide that these interest rate swaps be accounted for separately. Since the hedged item and the hedging instrument have identical critical terms, no ineffectiveness is assumed and the fair value changes in the interest rate swaps are recorded as changes in the value of both the interest rate swaps and the mortgage loans. At June 30, 2005, the notional amount of these interest rate swaps and the principal balance of the mortgage loans amounted to $106,702,000; the weighted average receive floating rate at fiscal year end was 3.47%; the weighted average pay fixed rate at year end was 6.20%; and the floating rate spread was 150 basis points.

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The Group offers its customers certificates of deposit with an option tied to the performance of the Standard & Poor’s 500 stock market index. At the end of five years, the depositor receives a specified percentage of the average increase of the month-end value of the index. If the index decreases, the depositor receives the principal without any interest. The Group uses swap and option agreements with major money center banks and major broker-dealer companies to manage its exposure to changes in this index. Under the terms of the option agreements, the Group receives the average increase in the month-end value of the index in exchange for a fixed premium. Under the term of the swap agreements, the Group receives the average increase in the month-end value of the index in exchange for a quarterly fixed interest cost. The changes in fair value of the swap agreements used to economically hedge the certificates of deposit are recorded in earnings in accordance with SFAS No. 133, as amended.
Derivative instruments are generally negotiated over-the-counter (“OTC”) contracts. Negotiated OTC derivatives are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise price and maturity.
Information pertaining to the notional amounts of the Group’s derivative financial instruments as of June 30, 2005 and 2004 is as follows:
                 
    Notional Amount  
    (In thousands)  
    2005     2004  
Type of Contract:
               
 
               
Cash Flow Hedging Activities:
               
Interest rate swaps used to hedge:
               
Securities sold under agreement to repurchase
  $ 850,000     $ 900,000  
Subordinated capital notes
    35,000       —  
Fair Value Hedging Activities:
               
Balance guaranteed swaps
    106,703       —  
 
           
 
  $ 991,703     $ 900,000  
 
           
 
               
Derivatives Not Designated as Hedge:
               
Purchased options used to manage exposure to the stock market on stock indexed deposits
  $ 186,010     $ 227,260  
Embedded options on stock indexed deposits
    178,478       218,884  
 
           
 
  $ 364,488     $ 446,144  
 
           
At June 30, 2005, the contractual maturities of interest rate swaps (excluding balances guaranteed swap) and equity indexed options, by fiscal year were as follows:
                                 
    (In thousands)  
            Equity Indexed              
Year Ending   Cash Flows Hedging     Options     Equity Indexed        
June 30,   Swaps     Purchased     Options Sold     Total  
2006
  $ 325,000     $ 54,150     $ 52,369     $ 431,519  
2007
    410,000       58,490       55,306       523,796  
2008
    —       35,860       34,010       69,870  
2009
    —       27,760       27,218       54,978  
2010
    —       9,750       9,575       19,325  
2011
    150,000       —       —       150,000  
 
                       
 
  $ 885,000     $ 186,010     $ 178,478     $ 1,249,488  
 
                       
During fiscal years 2005, 2004 and 2003, net interest expense on interest rate swaps amounted to $10,131,000, $17,744,000, and $16,141,000, respectively, which represent 10%, 23% and 21%, respectively, of the total interest

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expense recorded for such fiscal years. The average interest rate of the interest rate swaps during fiscal years 2005 borrowings, 2004 and 2003, were 1.14%, 1.15% and 1.39%, respectively.
Gains (losses) credited (charged) to earnings and reflected as “Derivative” in the consolidated statements of income during fiscal years 2005, 2004 and 2003 amounted to ($2.8) million, $11,000 and ($4.1) million, respectively.
An unrealized loss of $6.4 million on derivatives designated as cash flow hedges was included in other comprehensive income for fiscal 2005, (2004 — unrealized loss of $11.1 million).
At June 30, 2005 and 2004, the fair value of derivatives was recognized as either assets or liabilities in the consolidated statements of financial condition as follows: to fix the cost of the forecasted rollover or short-term borrowings and hedge the mortgage loans purchased represented a liability of $14.9 million and $13.8 million, respectively, presented in accrued expenses and other liabilities; the purchased options used to manage the exposure to the stock market on stock indexed deposits represented an other asset of $19.0 million and $16.5 million, respectively; the options sold to customers embedded in the certificates of deposit represented a liability of $18.2 million and $16.2 million, respectively, recorded in deposits.
11. 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 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, 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. In fiscal 2005, the Group contributed 8,807 (2004 — 7,195; 2003 — 6,723) shares of its common stock with a market value of approximately $249,000 (2004 — $194,800; 2003 — $172,700) 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 executive management a non-qualified deferred compensation plan, where executives can defer taxable income. Both the employer and 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.
12. 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:
                 
    (In thousands)  
    2005     2004  
Balance at the beginning of year
  $ 3,559     $ 3,747  
New loans
    2,233       85  
Payments
    (189 )     (273 )
 
           
Balance at the end of year
  $ 5,603     $ 3,559  
 
           
As stated in Note 6, on June 30, 2005 the Group sold the Las Cumbres building, which was the principal property owned by the Group, to a local investor and his spouse for $3,355,000. The local investor is the brother of the Chairman of the Group’s Board of Directors. Also, on the same date the Bank entered into a triple net lease agreement with the new owner of the building for a term of 10 years. Refer to Note 6 for more information about these transactions.

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13. INCOME TAX
Under the Puerto Rico Internal Revenue Code of 1994, as amended (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 (benefit) expense for the years ended June 30, follows:
                         
    (In thousands)  
    2005     2004     2003  
Current income tax (benefit) expense
  $ (2,631 )   $ 5,180     $ 4,208  
Deferred income tax expense
    982       397       76  
 
                 
Income tax (benefit) expense
  $ (1,649 )   $ 5,577     $ 4,284  
 
                 
The Group maintained an effective tax rate lower than the statutory rate of 39% mainly due to the interest income arising from certain mortgage loans, investments and mortgage-backed securities exempt for Puerto Rico 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. In fiscal 2005, the Group generated tax-exempt interest income of $127,855,000 (2004 — $100,906,000; 2003 - $82,618,000). Exempt interest relates mostly to interest earned on obligations of the United States and Puerto Rico governments and certain mortgage-backed securities, including securities held by the Bank’s International Banking Entities.
The Bank makes provisions for tax contingencies based on management’s estimates. During fiscal year 2005, income tax expense was reduced by $2.8 million, which represents tax contingencies no longer required. As a result, the effective income tax rate was a negative 3.0 percent at the end of fiscal year, compared to a positive 8.1 percent in the prior year period.
The reconciliation between the Puerto Rico income tax statutory rate and the effective tax rate as reported for each of the last three fiscal years ended June 30, follows:
                                                 
    (Dollars in thousands)
    2005   2004   2003
    Amount   Rate   Amount   Rate   Amount   Rate
             
Statutory rate
  $ 21,436       39.0 %   $ 26,998       39.0 %   $ 21,686       39.0 %
Increase (decrease) in rate resulting from:
                                               
 
                                               
Exempt interest income, net
    (23,090 )     -42.0 %     (23,991 )     -34.7 %     (20,923 )     -37.6 %
Non deductible charges
    746       1.4 %     1,378       2.0 %     925       1.7 %
Tax assessment covering prior years
    —       0.0 %     —       0.0 %     1,800       3.2 %
Provision/(credit) for Income Tax Assesment
    (2,800 )     -5.1 %     —       0 %     —       0 %
Other items, net
    2,059       3.7 %     1,192       1.8 %     796       1.4 %
             
Income tax (benefit) expense
  $ (1,649 )     -3.0 %   $ 5,577       8.1 %   $ 4,284       7.7 %
             

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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 June 30, were as follows:
                 
    (In thousands)  
    2005     2004  
Allowance for loan losses
  $ 2,533     $ 2,946  
Deferred gain on sale of servicing rights
    2,119       2,473  
Deferred gain on sale of assets
    130       —  
Deferred loan origination fees
    3,044       4,115  
Charitable contributions
    46       —  
Other
    180       —  
 
           
Total deferred tax assets
    8,052       9,534  
 
           
 
Unrealized gains on derivative activities, net
    (86 )     (35 )
Unrealized gains (losses) included in other comprehensive income
    112       (193 )
Deferred loan origination costs
    (1,887 )     (1,969 )
 
           
Total deferred tax liabilities
    (1,861 )     (2,197 )
 
           
 
               
Deferred tax asset, net
  $ 6,191     $ 7,337  
 
           
No valuation allowance was deemed necessary as of June 30, 2005 and 2004.
The Group benefits from favorable tax treatment under regulations relating to the activities of the Bank’s IBE’s. 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.
Puerto Rico international banking entities, or IBE’s, are currently exempt from taxation under Puerto Rico law. In November 2003, the Puerto Rico’s legislature enacted a law amending the IBE Act. This law imposes income taxes at normal statutory rates on each IBE that operates as a unit of a Bank, if the IBE’s net income generated after December 31, 2003 exceeds 40 percent of the Bank’s net income in the taxable year commenced on July 1, 2003, 30 percent of the Bank’s net income in the taxable year commenced on July 1, 2004, and 20 percent of the Bank’s net income in the taxable year commencing on July 1, 2005, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a bank.
The Group has an IBE that operates as a unit of the Bank. In November 2003, the Group organized a new IBE that operates as a subsidiary of the Bank. The Group transferred as of January 1, 2004 most of the assets and liabilities of the IBE unit to the new subsidiary, to maintain the income tax exemption of such activities. Although this transfer of IBE assets allows the Group to continue enjoying tax benefits, there cannot be any assurance that the IBE Act will not be modified in the future in a manner to reduce the tax benefits available to the new IBE subsidiary.
On August 1, 2005 the Puerto Rico Legislature approved the Law No. 41 “Law of the Educational Future of the Puerto Rican Children”. The law imposes an additional tax of 2.5 % on taxable net income. This law is applicable to all corporations and partnerships with a taxable net income over $20,000, according to part (a) of Section 1015 of the Puerto Rico Internal Revenue Code of 1994. The law will be effective for tax years beginning after December 31, 2004 and finish on or before December 31, 2006. Also the effectiveness of this law is subject to the final approval of the Joint Resolution of the Legislature Number 445, concerning the General Budget for the 2005-2006 fiscal year.
14. COMMITMENTS
Loan Commitments
At June 30, 2005, there were $18,191,000 (2004 — $18,382,000) of unused lines of credit provided to customers and $38,140,000 (2004 — $10,273,000) in commitments to originate commercial loans. 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 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 a case-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.

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Lease Commitments
The Group has entered into various operating lease agreements for branch facilities and administrative offices. Rent expense for fiscal 2005 amounted to $2,963,000 (2004 — $2,873,000; 2003 — $2,808,000). Future rental commitments under terms of leases in effect at June 30, 2005, exclusive of taxes, insurance and maintenance expenses payable by the Group, are summarized as follows:
         
    Minimum Rent  
Year Ending June 30,   (In thousands)  
2006
  $ 2,748  
2007
    2,310  
2008
    2,167  
2009
    2,107  
2010
    1,958  
Thereafter
    5,974  
 
     
 
  $ 17,264  
 
     
On July 6, 2004, the Group announced plans for its new headquarters, Oriental Group Tower, which will consolidate all corporate offices and support facilities into a building under construction at Professional Offices Park in San Juan, Puerto Rico. The Group will be the anchor tenant by leasing 55,336 square feet office space in the fourth, fifth and sixth floors, at $22.63 per square feet, excluding taxes, insurance and operating expenses, which will be charged separately. At present the Group’s executive offices, the main offices of Oriental Financial Services, as well as several support facilities of the Group, are located at two different buildings within the Professional Offices Park facilities, and at the Tres Rios Building located in Guaynabo, Puerto Rico. All these facilities will be relocated to the new building. Occupancy of the new building is expected in March 2006, subject to completion of the building. The lease term will be for 10 years and will commence on the date that the premises are ready for occupancy.
On June 30, 2005, the Group sold Las Cumbres building, a two-story structure located at 1990 Las Cumbres Avenue, San Juan, Puerto Rico. Also, on the same date, the Bank entered into a triple net lease agreement with the new owner for a period of 10 years. In summary, the lease contract provides for an annual rent of $324,000 or a monthly rent of $27,000, for 13,200 square feet, including 42 parking spaces. During the lease term, the rental fee will increase by 6% every three years, except for the last year on which the increment will be 2%. The transaction was accounted for accordance to the provisions of SFAS 13, as amended by SFAS 98, “Accounting for Leases: Sale-leaseback Transactions Involving Real Estate,” and accordingly, the lease portion of the transaction was classified as an operating lease and the gain on the sale portion of the transaction was deferred and will be amortized to income over the lease term (10 years) in proportion to the related gross rental expense for the leasedback property each period.
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 ($5.8 net of tax) resulting from dishonest and fraudulent acts and omissions involving several former Group employees, which were submitted to the Group’s fidelity insurance policy (“Policy”) issued by Federal Insurance Company, Inc. (“FIC”). In the opinion of the Group’s management, its legal counsel and experts, the losses determined by the investigation were covered by the policy. However, FIC denied all claims for such losses. On August 11, 2000, the Group filed a lawsuit in the United States District Court for the District of Puerto Rico against FIC, a stock insurance corporation organized under the laws of the State of Indiana, for breach of insurance contract, breach of covenant of good faith and fair dealing and damages, seeking payment of the Group’s $9.6 million insurance claim loss and the payment of consequential damages of no less than $13.0 million resulting from FIC’s capricious, arbitrary, fraudulent and without cause denial of the Group’s claim. The losses that resulted from such dishonest and fraudulent acts and omissions were recognized in prior years. Legal and other expenses related to this claim were expensed in the current and prior years.
In addition, the Group and its subsidiaries are defendants in a number of legal proceedings incidental to their businesses. The Group is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group’s financial condition or results of operations.

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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.
The estimated fair value and carrying value of the Group’s financial instruments at June 30, is as follows:
                                 
    (In thousands)  
    2005     2004  
    Fair     Carrying     Fair     Carrying  
    Value     Value     Value     Value  
Financial Assets:
                               
Cash and due from banks
  $ 14,892     $ 14,892     $ 9,284     $ 9,284  
Money market investments
    9,791       9,791       7,747       7,747  
Time deposits with other banks
    30,000       30,000       —       —  
Trading securities
    265       265       574       574  
Investment securities available-for-sale
    1,029,720       1,029,720       1,527,407       1,527,407  
Investment securities held-to-maturity
    2,142,708       2,134,746       1,275,534       1,282,862  
FHLB stock
    27,058       27,058       28,160       28,160  
Securities sold but yet not delivered
    1,034       1,034       47,312       47,312  
Total loans (including loans held-for-sale)
    917,721       907,391       730,335       743,456  
Equity options purchased
    18,999       18,999       16,536       16,536  
Accrued interest receivable
    23,735       23,735       19,127       19,127  
 
                               
Financial Liabilities:
                               
Deposits, including accrued interest
    1,247,805       1,252,897       1,035,841       1,024,349  
Securities sold under agreements to repurchase
    2,191,507       2,191,756       1,895,865       1,895,865  
Advances from FHLB
    297,123       300,000       294,658       300,000  
Subordinated capital notes
    72,166       72,166       72,166       72,166  
Term notes
    15,000       15,000       15,000       15,000  
Federal funds purchased
    12,310       12,310       —       —  
Securities and loans purchased but not yet received
    22,772       22,772       89,068       89,068  
 
                               
Accrued expenses and other liabilities
    42,584       42,584       34,580       34,580  
                                 
    (In thousands)  
    2005     2004  
    Contract or             Contract or        
    Notional     Fair     Notional     Fair  
    Amount     Value     Amount     Value  
Off-Balance Sheet Items:
                               
Liabilities:
                               
Commitments to extend credit
  $ 38,140     $ (763 )   $ 10,273     $ (205 )
Unused lines of credit
    18,191       (364 )     18,382       (368 )

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The following methods and assumptions were used to estimate the fair values of significant financial instruments at June 30, 2005 and 2004:
  •   Cash and due from banks, 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 and other liabilities 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 quoted market prices for similar securities. 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 or contractual agreements to sell. The fair value of the loan portfolio has been estimated for loan portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate mortgage 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 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 non-interest bearing demand deposits, savings and NOW 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.
 
  •   The fair value of interest rate swaps (excluding balance guarantee swaps) and index option contracts were obtained from dealer quotes. In the case of balance guarantee swaps, the fair values were estimated by management based on the present value of expected future cash flows using discount rates of the swap yield curve and considering prepayment assumptions for similar mortgage loans. 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 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, whose principal activity is to originate and purchase mortgage loans for the Group’s own portfolio. From time to time, if conditions so warrant, it may sell loans to other financial institutions or securitize conforming loans into GNMA, FNMA and FHLMC certificates using another institution as issuer. The other institution services mortgages included in the resulting GNMA, FNMA, and FHLMC pools. The Group also sells the rights to service mortgage loans to others.
The Treasury segment encompasses all of the Group’s assets and liabilities management activities such as: purchases and sales of investment securities, derivatives and borrowings.
Financial services are comprised of the Bank’s trust division (Oriental Trust), the securities brokerage subsidiary (Oriental Financial Services), the insurance agency subsidiary (Oriental Insurance), and the pension plan administration subsidiary

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(CPC). The core operations of this segment are financial planning, money management and investment brokerage services, insurance sales activity, corporate and individual trust services, as well as pension plan administration services.
Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices. The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies”. Following are the results of operations and the selected financial information by operating segment as of and for each of the three-year in the period ended June 30:
                                                 
Year ended June 30, (Dollars in thousands)  
                    Financial     Total Major              
    Banking     Treasury     Services     Segments     Eliminations     Total  
     
Fiscal 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       6,141       14,510       34,885       —       34,885  
Non-interest expenses
    (50,923 )     (1,458 )     (10,639 )     (63,020 )     —       (63,020 )
Intersegment revenue
    3,684       —       —       3,684       (3,684 )     —  
Intersegment expense
    —       (558 )     (3,126 )     (3,684 )     3,684       —  
Provision for loan losses
    (3,315 )     —       —       (3,315 )             (3,315 )
 
Income (loss) before income taxes
  $ (1,776 )   $ 55,935     $ 804     $ 54,963     $ —     $ 54,963  
 
Total assets as of June 30,
  $ 977,083     $ 3,655,639     $ 9,592     $ 4,642,314     $ (391,662 )   $ 4,250,652  
 
 
                                               
Fiscal 2004
                                               
Interest income
  $ 52,126     $ 112,174     $ 85     $ 164,385     $ —     $ 164,385  
Interest expense
    (17,109 )     (60,065 )     —       (77,174 )     —       (77,174 )
 
Net interest income
    35,017       52,109       85       87,211       —       87,211  
Non-interest income
    14,748       13,575       17,711       46,034       —       46,034  
Non-interest expenses
    (42,524 )     (3,254 )     (13,654 )     (59,432 )     —       (59,432 )
Intersegment revenue
    2,964       —       1,028       3,992       (3,992 )     —  
Intersegment expense
    —       (392 )     (3,600 )     (3,992 )     3,992       —  
Provision for loan losses
    (4,587 )     —       —       (4,587 )     —       (4,587 )
 
Income before taxes
  $ 5,618     $ 62,038     $ 1,570     $ 69,226     $ —     $ 69,226  
 
Total assets as of June 30,
  $ 771,483     $ 3,096,449     $ 12,342     $ 3,880,274     $ (154,579 )   $ 3,725,695  
 
 
                                               
Fiscal 2003
                                               
Interest income
  $ 51,486     $ 100,176     $ 84     $ 151,746     $ —     $ 151,746  
Interest expense
    (20,312 )     (57,023 )     —       (77,335 )     —       (77,335 )
 
Net interest income
    31,174       43,153       84       74,411       —       74,411  
Non-interest income
    13,350       10,766       14,923       39,039               39,039  
Non-interest expenses
    (41,424 )     (2,850 )     (9,382 )     (53,656 )             (53,656 )
Intersegment revenue
    4,888       —       276       5,164       (5,164 )     —  
Intersegment expense
    (2,136 )     (329 )     (2,699 )     (5,164 )     5,164       —  
Provision for loan losses
    (4,190 )     —       —       (4,190 )     —       (4,190 )
 
Income before taxes
  $ 1,662     $ 50,740     $ 3,202     $ 55,604     $ —     $ 55,604  
 
Total assets as of June 30,
  $ 822,681     $ 2,423,203     $ 9,746     $ 3,255,630     $ (215,079 )   $ 3,040,551  
 

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18. ORIENTAL FINANCIAL GROUP INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
The principal source of income for the Group consists of dividends from the Bank. 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. Cash dividends paid by the Bank to the Group amounted to $5,000,000, $23,000,000 and $11,500,000 for the years ended June 30, 2005, 2004 and 2003, respectively.
The following condensed financial information presents the financial position of the Parent Company Only as of June 30, 2005 and 2004 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2005:
ORIENTAL FINANCIAL GROUP INC.
CONDENSED STATEMENTS OF FINANCIAL POSITION
                 
(Parent Company Only)   As of June,  
(In thousands)   2005     2004  
ASSETS
               
Cash and cash equivalents
  $ 15,489     $ 10,926  
Investment securities available-for-sale, at fair value
    11,734       12,240  
Investment securities held-to-maturity, at amortized cost
    11,130       11,134  
Investment in bank subsidiary, at equity method
    247,000       180,737  
Investment in nonbank subsidiaries, at equity method
    10,054       12,607  
Due from bank subsidiary
    119,954       140,602  
Other assets
    2,221       2,231  
 
           
Total assets
  $ 417,582     $ 370,477  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Dividend payable
  $ 3,487     $ 3,081  
Due to nonbank subsidiaries
    175       126  
Subordinated capital notes
    72,166       72,166  
Deferred tax liability, net
    152       155  
Accrued expenses and other liabilities
    435       282  
 
           
Total liabilities
    76,415       75,810  
Stockholders’ equity
    341,167       294,667  
 
           
Total liabilities and stockholders’ equity
  $ 417,582     $ 370,477  
 
           
CONDENSED STATEMENTS OF INCOME AND OF COMPREHENSIVE INCOME
                         
(Parent Company Only)   As of June,  
(In thousands)   2005     2004     2003  
Income:
                       
Dividends from bank subsidiary current year earnings
  $ 5,000     $ 23,000     $ 11,500  
Dividends from nonbank subsidiary current year earnings
    121       143       57  
Interest income
    1,287       1,744       2,811  
Investment and trading activities, net and others
    —       1,952       278  
 
                 
Total income
    6,408       26,839       14,646  
 
                 
 
                       
Expenses:
                       
Interest expense
    4,325       3,005       2,006  
Operating expenses
    2,656       1,511       1,128  
 
                 
Total expenses
    6,981       4,516       3,134  
 
                 
 
                       
Income (loss) before income taxes
    (573 )     22,323       11,512  
Income tax benefit (expense)
    —       —       (202 )
 
                 
Income (loss) before changes in undistributed earnings of subsidiaries
    (573 )     22,323       11,310  
Equity in undistributed earnings from:
                       
Bank subsidiary
    59,679       40,300       39,525  
Nonbank subsidiaries
    (2,494 )     1,026       485  
 
                 
Net income
    56,612       63,649       51,320  
Other comprehensive loss, net of taxes
    6,979       (45,053 )     (7,139 )
 
                 
Comprehensive income
  $ 63,591     $ 18,596     $ 44,181  
 
                 

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STATEMENTS OF CASH FLOWS FOR FISCAL YEARS ENDED JUNE 30, :
                         
(In thousands)   2005     2004     2003  
Cash flows from operating activities:
                       
Net income
  $ 56,612     $ 63,649     $ 51,320  
 
                 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Equity in earnings from banking subsidiary
    (59,679 )     (40,256 )     (39,525 )
Equity in losses (earnings) from non-banking subsidiaries
    2,494       (1,070 )     (485 )
Net amortization of premiums on investment securities
    9       61       208  
Realized gain on sale of investments
    —       (1,952 )     (300 )
Deferred income tax expense
    —       —       202  
Decrease (increase) in other assets
    63       (74 )     99  
Increase ( decrease) in accrued expenses and liabilities
    541       513       (76 )
 
                 
Total adjustments
    (56,592 )     (42,778 )     (39,877 )
 
                 
 
                       
Net cash provided by operating activities
    40       20,871       11,443  
 
                 
Cash flows from investing activities:
                       
Purchase of investment securities available for sale
    —       —       (18,236 )
Redemptions and sales of investment securities available-for-sale
    507       26,676       11,367  
Redemptions of investment securities held-to-maturity
    4       4       —  
Net decrease (increase) in due from bank subsidiary, net
    20,648       (140,602 )     —  
Acquisition of and capital contribution in non-banking subsidiary
    —       (1,083 )     (1,591 )
 
                 
Net cash provided by (used in) investing activities
    21,159       (115,005 )     (8,460 )
 
                 
 
                       
Cash flows from financing activities:
                       
Net increase (decrease) in securities sold under agreements to repurchase
    —       (7,599 )     7,599  
Proceeds from exercise of stock options
    4,507       5,896       5,086  
Net increase in due to nonbank subsidiaries, net
    49       65       52  
Net increase (decrease) in due to bank subsidiaries, net
    —       (2,005 )     1,495  
Net proceeds from issuance of preferred stock
    —       33,057       —  
Net proceeds from issuance of common stock
    (10 )      51,560       —  
Net proceeds from issuance of subordinated notes payable to nonbank subsidiary
    —       35,043       —  
Purchase of treasury stock
    (3,263 )     (499 )     (2,214 )
Dividends paid
    (17,919 )     (15,014 )     (11,395 )
 
                 
Net cash provided by (used in) financing activities
    (16,636 )     100,504       623  
 
                 
 
                       
Increase in cash and cash equivalents
    4,563       6,370       3,606  
Cash and cash equivalents at beginning of year
    10,926       4,556       950  
 
                 
Cash and cash equivalents at end of year
  $ 15,489     $ 10,926     $ 4,556  
 
                 
19. SUBSEQUENT EVENTS
On August 30, 2005, the Group’s Board of Directors (the “Board) approved and amendment to Section I of Article IX of the Group’s By-Laws to change its fiscal year to a calendar year. The Group’s fiscal year was from July 1 of each year to June 30 of the following year. The Group’s transition period will be from July 1, 2005 to December 31, 2005.
Also, on August 30, 2005, the Board approved a new stock repurchase program for the repurchase of up to $12.1 million of the Group’s outstanding shares of common stock, which will replace the previous program approved on March 27, 2004.

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SELECTED FINANCIAL DATA
FIVE-YEAR PERIOD ENDED JUNE 30, 2005
(IN THOUSANDS, EXCEPT PER SHARE DATA)
                                         
    June 30,     June 30,     June 30,     June 30,     June 30,  
EARNINGS:   2005     2004     2003     2002     2001  
Interest income
  $ 189,312     $ 164,385     $ 151,746     $ 141,695     $ 120,344  
Interest expense
    102,899       77,174       77,335       82,695       91,281  
 
                             
Net interest income
    86,413       87,211       74,411       59,000       29,063  
Provision for loan losses
    3,315       4,587       4,190       2,117       2,903  
 
                             
Net interest income after provision for loan losses
    83,098       82,624       70,221       56,883       26,160  
Non-interest income
    34,885       46,034       39,039       31,250       20,383  
Non-interest expenses
    63,020       59,432       53,656       48,962       39,228  
 
                             
Income before taxes
    54,963       69,226       55,604       39,171       7,315  
Income tax benefit (expense)
    1,649       (5,577 )     (4,284 )     (720 )     1,318  
 
                             
Income before cumulative effect of change in accounting principle
    56,612       63,649       51,320       38,451       8,633  
Cumulative effect of change in accounting principle, net of tax
    —       —       —       —       (164 )
 
                             
Net Income
    56,612       63,649       51,320       38,451       8,469  
Less: dividends on preferred stock
    (4,802 )     (4,198 )     (2,387 )     (2,387 )     (2,387 )
 
                             
Net income available to common shareholders
  $ 51,810     $ 59,451     $ 8,933     $ 36,064     $ 6,082  
 
                             
 
                                       
PER SHARE AND DIVIDENDS DATA (1):
                                       
 
Basic EPS before cumulative effect of change in accounting principle
  $ 2.11     $ 2.65     $ 2.32     $ 1.74     $ 0.30  
 
                             
Basic EPS after cumulative effect of change in accounting principle
  $ 2.11     $ 2.65     $ 2.32     $ 1.74     $ 0.29  
 
                             
Diluted EPS before cumulative effect of change in accounting principle
  $ 2.05     $ 2.49     $ 2.15     $ 1.63     $ 0.29  
 
                             
Diluted EPS after cumulative effect of change in accounting principle
  $ 2.05     $ 2.49     $ 2.15     $ 1.63     $ 0.28  
 
                             
 
                                       
Average common shares outstanding
    24,571       22,394       21,049       20,738       20,867  
Average potential common share-options
    687       1,451       1,683       1,408       741  
 
                             
Average shares and shares equivalents
    25,258       23,845       22,732       22,146       21,608  
 
                             
 
                                       
Book value per common share
  $ 10.97     $ 9.36     $ 7.87     $ 6.38     $ 3.84  
 
                             
Market price at end of year
  $ 15.26     $ 24.61     $ 21.23     $ 16.76     $ 11.42  
 
                             
Cash dividends declared per common share
  $ 0.55     $ 0.51     $ 0.45     $ 0.38     $ 0.36  
 
                             
Cash dividends declared on common share
  $ 13,522     $ 11,425     $ 9,415     $ 7,840     $ 7,533  
 
                             
 
(1)   Per share related information has been retroactively adjusted to reflect stock splits and stock dividends, when applicable.
                                         
YEAR END BALANCES (as of June 30,):   2005     2004     2003     2002     2001  
 
Trust assets managed
  $ 1,823,292     $ 1,670,651     $ 1,670,437     $ 1,382,268     $ 1,444,534  
Broker-dealer assets gathered
    1,135,115       1,051,812       962,919       1,118,181       1,002,253  
 
                             
Assets managed
    2,958,407       2,722,463       2,633,356       2,500,449       2,446,787  
Assets owned
    4,250,652       3,725,695       3,040,551       2,485,393       2,033,706  
 
                             
Total financial assets managed and owned
  $ 7,209,059     $ 6,448,158     $ 5,673,907     $ 4,985,842     $ 4,480,493  
 
                             
 
                                       
Investments and loans
                                       
Investments
  $ 3,231,580     $ 2,846,750     $ 2,232,330     $ 1,757,435     $ 1,459,991  
Loans and leases (including loans held-for-sale), net
    907,391       743,456       728,462       576,770       462,579  
Securities sold but not yet delivered
    1,034       47,312       1,894       71,750       14,108  
 
                             
 
  $ 4,140,005     $ 3,637,518     $ 2,962,686     $ 2,405,955     $ 1,936,678  
 
                             
 
                                       
Deposits and Borrowings
                                       
Deposits
  $ 1,252,897     $ 1,024,349     $ 1,044,265     $ 968,850     $ 815,538  
Repurchase agreements
    2,191,756       1,895,865       1,400,598       996,869       915,471  
Other borrowings
    399,476       387,166       181,083       259,283       165,000  
Securities and loans purchased but not yet received
    22,772       89,068       152,219       56,195       —  
 
                             
 
  $ 3,866,901     $ 3,396,448     $ 2,778,165     $ 2,281,197     $ 1,896,009  
 
                             
 
                                       
Stockholders’ equity
                                       
Preferred equity
  $ 68,000     $ 68,000     $ 33,500     $ 33,500     $ 33,500  
Common equity
    273,167       226,667       168,180       132,929       79,990  
 
                             
 
  $ 341,167     $ 294,667     $ 201,680     $ 166,429     $ 113,490  
 
                             
 
                                       
Capital ratios
                                       
Leverage capital
    10.65 %     11.24 %     8.19 %     7.80 %     6.68 %
 
                             
Tier 1 risk-based capital
    38.83 %     37.98 %     24.48 %     21.76 %     19.53 %
 
                             
Total risk-based capital
    39.39 %     38.69 %     25.00 %     22.10 %     19.96 %
 
                             
 
                                       
SELECTED FINANCIAL RATIOS AND OTHER INFORMATION:
                                       
 
Return on average assets (ROA)
    1.39 %     1.91 %     1.88 %     1.67 %     0.49 %
 
                             
Return on average common equity (ROE)
    20.15 %     34.64 %     31.33 %     32.47 %     7.85 %
 
                             
Equity-to-assets ratio
    8.03 %     7.91 %     6.63 %     6.70 %     5.58 %
 
                             
Efficiency ratio
    54.01 %     49.61 %     51.35 %     57.22 %     72.06 %
 
                             
Expense ratio
    0.83 %     0.85 %     0.99 %     1.04 %     0.85 %
 
                             
Interest rate spread
    2.00 %     2.64 %     2.91 %     2.59 %     1.52 %
 
                             
Number of financial centers
    24       23       23       21       20  
 
                             

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Management’s Discussion and Analysis
of Financial Condition and Results of Operations
For the Year ended June 30, 2005
OVERVIEW OF FINANCIAL PERFORMANCE
Comparison of year ended June 30, 2005 and year ended June 30, 2004:
The Group’s diversified mix of businesses produces both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as 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 produce a balanced and growing revenue stream.
During fiscal 2005, the Group continued expanding its executive management team and strengthened its banking and financial service franchise. The Group continued with The Oriental Way program to deliver world-class products and services, targeting the personal and commercial needs of Puerto Rico’s professionals and owners of small and mid-sized businesses. The results of these efforts reflected continued growth in commercial loans, an improvement in mortgage loans in the last half of the year, and tight control over non-interest expenses.
For fiscal 2005, net income was $56.6 million, a decrease of 11.1% compared with $63.6 million reported in fiscal 2004. Earnings per diluted share decreased 17.7% to $2.05, compared to last year’s $2.49 per share. Net income for the quarter ended June 30, 2005, was $6.4 million, a decrease of 61.8% compared with net income of $16.9 million reported in the quarter ended June 30, 2004. Earnings per diluted share decreased 61.2% to $0.26, compared to last year’s $0.67.
The diluted per share calculations for fiscals, 2005, 2004 and 2003 have been adjusted from previous reported figures to take into account additional incentive stock options required to be issued by the anti-dilution provisions of employment agreements with certain executives. The contractual provisions required the Group to adjust stock options granted to certain executives pursuant to their employment agreements to avoid any form of dilution, including dilution resulting from stock dividends, and additional offerings of common stock by the Group. Although all stock options granted to such executives had been adjusted pursuant to the anti-dilution provisions of the Group’s incentive stock option plans to account for stock dividends, the stock options granted to them pursuant to their employment agreements had not been adjusted as contractually mandated for additional events of dilution, such as the Group’s issuance of common stock in 2004, the quarterly cash dividends declared on its common stock, and the granting of stock options from time to time to other participants under the Group’s incentive stock option plans.
After an evaluation on the merits, the Compensation Committee of the Group’s Board of Directors determined during the fourth quarter of fiscal 2005 that such executives were entitled to additional options for the implied value of their exercised options by crediting them the amount of such implied value upon future exercises of stock options granted under the Group’s incentive stock option plans and by issuing to each executive the number of additional stock options required to account for the events of dilution with respect to unexercised options granted to them under their employment agreements. The excess price paid was adjusted as a debit to additional paid-in capital, and the additional stock options granted was accounted for as usual according to GAAP.
As a result of the Compensation Committee’s evaluation, the Group has increased the number of options used in the calculation of fully diluted shares by 363,325 for the first three quarters of fiscal 2005 and for fiscals 2004 and 2003, which represents the Group’s calculation of the additional options affecting these periods. The effect is to reduce diluted per share results by approximately one cent per share for fiscal 2005 and four cents per share for each fiscal year, commencing with fiscal 2003. See note 2 to the consolidated financial statements.
The Group maintains an outstanding return on equity (net income to average common equity) and a superior return on assets (net income to average assets) when compared to its peer group. Return on common equity (ROE) and return on assets (ROA) for fiscal 2005 were 20.15% and 1.39%, respectively, which represent a decrease of 41.8% in ROE, from 34.64% in fiscal 2004, and a decrease of 27.2% in ROA, from 1.91% in fiscal 2004.

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Net interest income represented approximately 71% of the Group’s total revenues (defined as net interest income plus non interest income) in fiscal 2005. For fiscal 2005, net interest income was $86.4 million, a decrease of 0.9% from the $87.2 million recorded for fiscal 2004. For the quarter ended June 30, 2005, net interest income decreased 14.7% to $19.3 million, compared with $22.6 million recorded in the quarter ended June 30, 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 fiscal 2005 was 2.00% compared to 2.64% in the prior year. Investment yields declined as the Group continued to reposition the portfolio, shifting into shorter-term government securities and away from longer-term, mortgage-backed securities. At June 30, 2005, interest earning assets increased 13.8% to $4.140 billion compared to June 30, 2004, reflecting a 13.5% increase in investments to $3.232 billion, which consisted mainly of AAA rated mortgage-backed securities and U.S. government and agency obligations.
The provision for loan losses for fiscal 2005 decreased 27.7% to $3.3 million from $4.6 million for fiscal 2004 reflecting lower loss reserve requirements related to the stabilization of commercial and consumer loan business in fiscal 2005. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for the year ended June 30, 2005 was adequate in order to maintain the allowance for loan losses at an appropriate level, even though the loan portfolio increased from $745.2 million as of June 30, 2004 to $895.2 million as of June 30, 2005 (a 20.1% increase) and there was an increase in the net credit losses from $2.1 million for the year ended June 30, 2004 to $4.4 million for the year ended June 30, 2005 (an increase of 111.7%). The main reason for the decrease in the provision is that during the year ended June 30, 2004, management charged against earnings the provision for the possible losses on certain nonperforming loans which were in the process of evaluation. During the year ended June 30, 2005, these loans or portions thereof were charged-off against the allowance established in the previous fiscal year since such loans or the portions thereof were determined to be uncollectible. The increase in the loan portfolio is mainly related to new high quality and well collateralized loans which do not require large amounts of allowance for loan losses.
Non-interest income represented approximately 29% of the Group’s total revenues (defined as net interest income plus non interest income) in fiscal 2005. For fiscal 2005, non-interest income decreased 24.2% to $34.9 million from $46.0 million a year earlier. Performance in the year reflects increases in banking service revenues, totally offset by decreases in revenues from financial services, investment banking activities, and securities, derivatives and trading activities. Total non-interest banking and financial services revenues decreased 8.0% to $29.9 million in fiscal 2005 compared to $32.5 million in fiscal 2004. Banking service revenues increased 8.2% to $7.8 million compared to $7.2 million in fiscal 2004. Financial service revenues (commissions and fees from securities brokerage, investment banking, insurance and fiduciary activities) decreased 18.4% to $14.4 million compared to $17.6 million in fiscal 2004.
For fiscal 2005, mortgage-banking revenues were $7.8 million reflecting an increase of 0.7% when compared with $7.7 million for the previous fiscal year. Such increase in mortgage revenues resulted from higher gains on sale of whole-loans in the open market.
Non-interest expenses for fiscal 2005 increased 6.0% to $63.0 million, compared to $59.4 million in the previous fiscal year, reflecting tight cost controls. The increase was mainly due to increases in professional and service fees, in part due to the impact of the requirements of the Sarbanes-Oxley Act, and the salaries increment of 2%. The Group’s efficiency ratio in fiscal 2005 was 54.01%, compared to 49.61% a year earlier. 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.
Total Group financial assets (including assets managed by the trust department, the retirement plan administration subsidiary, and broker-dealer subsidiary) increased 11.8% to $7.2 billion as of June 30, 2005, compared to $6.4 billion as of June 30, 2004. Assets managed by the Group’s trust department, the retirement plan administration subsidiary, and the broker-dealer subsidiary increased 8.7%, year-to-year, to $3.0 billion from $2.7 billion in fiscal 2004. This increase was primarily due to the equity market recovery impact on assets gathered by the Group’s securities broker-dealer subsidiary as well as the development of new business and trust relationships throughout the year. The Group’s bank assets reached $4.251 billion as of June 30, 2005, an increase of 14.1%, compared to $3.726 billion as of June 30, 2004. Major contributors to this increase were the investment securities portfolio, which increased by 13.5% or $384.8 million, along with the loan portfolio, which increased by $163.9 million or 22.1%.
On the liability side, total deposits increased by 22.3% from $1.024 billion at June 30, 2004, to $1.253 billion at June 30, 2005. This performance reflects the Group’s strategy of attracting longer-term checking and savings deposits from consumer, professional and commercial customers, based on the Group’s total capabilities to serve their needs. Total borrowings increased 13.5% from $2.283 billion at June 30, 2004, to $2.591 billion at June 30, 2005. The increase in borrowings was concentrated in larger balances of repurchase agreements and federal funds purchased during fiscal 2005. The increase in borrowed funds was used primarily to fund the Group’s investment and loan portfolio growth.

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The Group continued strengthening its capital base during fiscal 2005. Stockholders’ equity as of June 30, 2005 was $341.2 million, an increase of 15.8% from $294.7 million as of June 30, 2004. This increase reflects the impact of earnings retention.
Comparison of year ended June 30, 2004 and year ended June 30, 2003:
For fiscal 2004, net income was $63.6 million, an increase of 24.0% compared with $51.3 million reported in fiscal 2003. Earnings per diluted share increased 15.8% to $2.49, compared to last year’s $2.15 per share. Net income for the quarter ended June 30, 2004, was $18.1 million, an increase of 27.1% compared with net income of $14.2 million reported in the quarter ended June 30, 2003. Earnings per diluted share increased 11.9% to $0.66, compared to last year’s $0.59.
Earnings per share for the fiscal year and fourth quarter were affected by more average shares outstanding in both periods, as a result of the Group’s March 2004 secondary offering of 1,955,000 common shares, which raised $51.6 million (net of expenses), and dividends paid on the Series B Preferred Stock issued in September 2003, which raised $33.1 million (net of expenses). Excluding the effect of the new shares and the Series B Preferred Stock dividend, earnings per share would have been higher by an additional $0.14 for the year and by an additional $0.08 for the quarter, and would have resulted in an earnings per share growth of 21.2% for fiscal 2004 and 22.4% for the fourth quarter compared to the corresponding prior year periods.
The Group maintained an outstanding return on equity (net income to average common equity) and a superior return on assets (net income to average assets) when compared to its peer group. Return on common equity (ROE) and return on assets (ROA) for fiscal 2004 were 34.64% and 1.91%, respectively, which represent an increase of 10.6% in ROE, from 31.33% in fiscal 2003, and an increase of 2.0% in ROA, from 1.88% in fiscal 2003.
Net interest income represented approximately 65% of the Group’s total revenues (defined as net interest income plus non interest income) in fiscal 2004. For fiscal 2004, net interest income was $87.2 million, an increase of 17.2% from the $74.4 million recorded for fiscal 2003. For the quarter ended June 30, 2004, net interest income increased 24.9% to $22.6 million, compared with $18.1 million recorded in the quarter ended June 30, 2003. Results benefited from a larger volume of interest earning assets (investment and loans) partially offset by lower average yields. Interest rate spread equaled 2.64% for fiscal 2004. At June 30, 2004, interest earning assets increased 22.8% to $3.637 billion compared to June 30, 2003, reflecting a 27.5% increase in investments to $2.847 billion, which consisted mainly of AAA rated mortgage-backed securities and Puerto Rico government agencies obligations.
The provision for loan losses for fiscal 2004 increased 9.5% to $4.6 million from $4.2 million for fiscal 2003 reflecting higher loss reserve requirements related to the expanded commercial and consumer loan business in fiscal 2004.
Non-interest income represented approximately 35% of the Group’s total revenues (defined as net interest income plus non interest income) in fiscal 2004. For fiscal 2004, non-interest income grew by 17.9% to $46.0 million from $39.0 million a year earlier. Key factors for such increase included the success of the Group’s product and service marketing programs, the result of general improvement in equity markets, increased underwriting activities, higher revenues from fiduciary service fees, and income generated by Caribbean Pension Consultants, Inc., which was acquired in January 2003. Total non-interest banking and financial services revenues increased 14.2% to $32.5 million in fiscal 2004 compared to $28.5 million in fiscal 2003. Banking service revenues increased 20.1% to $7.2 million compared to $6.0 million in fiscal 2003. Financial service revenues (commissions and fees from broker, insurance and fiduciary activities) increased 21.7% to $17.6 million compared to $14.5 million in fiscal 2003.
For fiscal 2004, mortgage-banking activity revenue was $7.7 million reflecting a decrease of 3.8% when compared with $8.0 million for the previous fiscal year. Such decrease in mortgage production was primarily due to the Group’s decision to temporarily moderate loan activity based on fourth quarter market conditions, which also resulted in lower mortgage banking revenue.
Non-interest expenses for fiscal 2004 increased 10.8% to $59.4 million, compared to $53.7 million in the previous fiscal year. However, the Group’s efficiency ratio in fiscal 2004 improved to 49.61%, compared to 51.35% a year earlier. With the launch of its growth program, the Group incurred higher outlays for human resources, technology and marketing, among others, during the first quarter of fiscal 2004.
Total Group financial assets (including assets managed by the trust department, the retirement plan administration subsidiary, and broker-dealer subsidiary) increased 13.6% to $6.4 billion as of June 30, 2004, compared to $5.7 billion as of June 30, 2003. Assets managed by the Group’s trust department, the retirement plan administration subsidiary, and broker-dealer subsidiary increased 3.4%, year-to-year, to $2.7 billion from $2.6 billion in fiscal 2003. This increase was primarily due to the equity market recovery impact on assets gathered by the Group’s securities broker-dealer subsidiary. The Group’s bank assets reached $3.726 billion as of June 30, 2004, an increase of 22.5%, compared to $3.040 billion as of June 30, 2003. Major contributors to this increase were the investment securities portfolio, which increased by 27.5% or $614.4 million, along with the loan portfolio, which increased by $15.0 million or 2.1%.

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The Group continued strengthening its capital base during fiscal 2004 . Stockholders’ equity as of June 30, 2004 was $294.7 million, an increase of 46.1% from $201.7 million as of June 30, 2003. This increase reflects the improvement in net income, net proceeds of $33.1 million from the issuance of the Series B Preferred Stock in the first quarter of fiscal 2004 and $51.6 million, net of related expenses, from the issuance of 1,955,000 shares of common stock in the third quarter of fiscal 2004, partially offset by the increase in the accumulated other comprehensive loss of $45.1 million, mostly associated with an increase in unrealized losses on the securities available-for-sale portfolio from fiscal 2003 to fiscal 2004.
On the liability side, total deposits decreased by 1.9% from $1.044 billion at June 30, 2003, to $1.024 billion at June 30, 2004. The decrease in deposits primarily reflects the Group’s decision to cut back on certificates of deposit in favor of other lower-cost funding sources. Total borrowings increased 44.3% from $1.582 billion at June 30, 2003, to $2.283 billion at June 30, 2004. The increase in borrowings was concentrated in larger balances of repurchase agreements, Federal Home Loan Bank of New York advances and subordinated capital notes. The increase in borrowed funds was used primarily to fund the Group’ investment and loan portfolio growth.

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TABLE 1 — FISCAL YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE: Years ended June 30, 2005, 2004 and 2003
                                                                         
(Dollars in thousands)  
    Interest     Average rate     Average balance  
    2005     2004     2003*     2005     2004     2003*     2005     2004     2003*  
             
A — TAX EQUIVALENT SPREAD
                                                                       
 
                                                                       
Interest-earning assets
  $ 189,312     $ 164,385     $ 151,746       4.81 %     5.19 %     6.09 %   $ 3,932,822     $ 3,168,832     $ 2,493,382  
Tax equivalent adjustment
    42,411       35,223       52,895       1.08 %     1.11 %     2.12 %     —       —       —  
             
Interest-earning assets — tax equivalent
    231,723       199,608       204,641       5.89 %     6.30 %     8.21 %     3,932,822       3,168,832       2,493,382  
Interest-bearing liabilities
    102,899       77,174       77,335       2.81 %     2.55 %     3.18 %     3,659,858       3,026,876       2,430,456  
             
Tax equivalent net interest income / spread
  $ 128,824     $ 122,434     $ 127,306       3.08 %     3.75 %     5.03 %   $ 272,964     $ 141,956     $ 62,926  
             
Tax equivalent interest rate margin
                            3.27 %     3.86 %     5.11 %                        
                                                     
 
                                                                       
B — NORMAL SPREAD
                                                                       
 
                                                                       
Interest-earning assets:
                                                                       
Investments:
                                                                       
Investment securities
  $ 135,710     $ 113,732     $ 100,905       4.41 %     4.70 %     5.61 %   $ 3,074,679     $ 2,419,264     $ 1,799,458  
Investment management fees
    (1,898 )     (1,685 )     (1,443 )     -0.06 %     -0.07 %     -0.08 %     —       —       —  
             
Total investment securities
    133,812       112,047       99,462       4.35 %     4.63 %     5.53 %     3,074,679       2,419,264       1,799,458  
Trading securities
    8       44       502       1.21 %     3.26 %     4.86 %     662       1,350       10,332  
Money market investments
    526       164       296       2.00 %     1.53 %     1.93 %     26,242       10,714       15,345  
             
 
    134,346       112,255       100,260       4.33 %     4.62 %     5.49 %     3,101,583       2,431,328       1,825,135  
             
 
                                                                       
Loans (1):
    —       —       —                                                  
Real estate (2)
    45,943       46,467       45,848       6.57 %     7.01 %     7.54 %     699,027       662,590       608,189  
Commercial
    6,674       3,336       2,958       6.14 %     5.85 %     7.31 %     108,636       57,047       40,477  
Consumer
    2,349       2,327       2,680       9.96 %     13.02 %     13.69 %     23,576       17,867       19,581  
             
 
    54,966       52,130       51,486       6.61 %     7.07 %     7.70 %     831,239       737,504       668,247  
             
 
                                                                       
 
    189,312       164,385       151,746       4.81 %     5.19 %     6.09 %     3,932,822       3,168,832       2,493,382  
             
 
                                                                       
Interest-bearing liabilities:
                                                                       
Deposits:
                                                                       
Non-interest bearing deposits
    —       —       —       —       —       —       54,986       51,906       56,263  
Now Accounts
    900       818       1,054       1.05 %     1.08 %     1.69 %     85,756       75,495       62,436  
Savings
    941       1,079       1,319       1.01 %     1.22 %     1.55 %     93,218       88,568       84,874  
Certificates of deposits
    27,903       28,115       31,284       3.27 %     3.38 %     3.83 %     854,337       831,167       816,197  
             
 
    29,744       30,012       33,657       2.73 %     2.87 %     3.30 %     1,088,297       1,047,136       1,019,770  
             
 
                                                                       
Borrowings:
                                                                       
Repurchase agreements
    49,746       17,805       17,362       2.29 %     1.12 %     1.50 %     2,174,312       1,595,717       1,158,243  
Interest rate risk management
    10,131       17,744       16,141       0.47 %     1.11 %     1.39 %     —       —       —  
Financing fees
    647       469       331       0.03 %     0.03 %     0.03 %     —       —       —  
             
Total repurchase agreements
    60,524       36,018       33,834       2.78 %     2.26 %     2.92 %     2,174,312       1,595,717       1,158,243  
             
FHLB advances
    7,962       8,011       7,709       2.58 %     2.63 %     3.83 %     308,930       304,547       201,360  
Subordinated capital notes
    4,318       2,986       1,926       5.98 %     4.63 %     5.34 %     72,166       64,476       36,083  
Term Notes
    317       147       209       2.11 %     0.98 %     1.39 %     15,000       15,000       15,000  
Other borrowings
    34       —       —       2.95 %     —       —       1,153       —       —  
             
 
    73,155       47,162       43,678       2.84 %     2.38 %     3.10 %     2,571,561       1,979,740       1,410,686  
             
 
                                                                       
 
    102,899       77,174       77,335       2.81 %     2.55 %     3.18 %     3,659,858       3,026,876       2,430,456  
             
 
                                                                       
Net interest income / spread
  $ 86,413     $ 87,211     $ 74,411       2.00 %     2.64 %     2.91 %                        
                                 
 
                                                                       
Interest rate margin
                            2.19 %     2.75 %     2.99 %                        
                                 
 
                                                                       
Excess of interest-earning assets over interest-bearing liabilities                                   $ 272,964     $ 141,956     $ 62,926  
             
 
                                                                       
Interest-earning assets over interest-bearing liabilities ratio                                     107.46 %     104.69 %     102.59 %
             
                                                                         
    Fiscal 2005 versus 2004                             Fiscal 2004 versus 2003  
Interest Income:   Volume     Rate     Total                             Volume     Rate     Total  
C. CHANGES IN NET INTEREST INCOME DUE TO (3):
                                                                       
Loans (1)
  $ 6,342     $ (3,506 )   $ 2,836                             $ 5,089     $ (4,445 )   $ 644  
Investments
    29,383       (7,292 )     22,091                               29,710       (17,715 )     11,995  
                   
 
    35,725       (10,798 )     24,927                               34,799       (22,160 )     12,639  
                   
Interest Expense:
                                                                       
Deposits
    1,154       (1,422 )     (268 )                             883       (4,528 )     (3,645 )
Repurchase agreements
    21,598       2,908       24,506                               14,581       (12,397 )     2,184  
Other borrowings
    363       1,124       1,487                               4,250       (2,950 )     1,300  
 
    23,115       2,610       25,725                               19,713       (19,874 )     (161 )
                   
Net Interest Income
  $ 12,610     $ (13,408 )   $ (798 )                           $ 15,085     $ (2,285 )   $ 12,800  
                   
 
*   Certain adjustments were made to conform figures to current period presentation.
(1) —   Loan fees amounted to $2,430, $2,923 and $2,333 in fiscal 2005, 2004 and 2003, respectively.
(2) —   Real estate loans averages include loans held-for-sale.
(3) —   The changes that are not due solely to volume or rate are allocated on the proportion of the change in each category.

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Net Interest Income
Comparison of year ended June 30, 2005 and year ended June 30, 2004:
Net interest income is affected by the difference between rates earned on the Group’s interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest-earning assets and interest-bearing liabilities (interest rate margin). As further discussed in the Risk Management section of this report, the Group constantly monitors the composition and repricing of its assets and liabilities to maintain its net interest income at adequate levels. 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.
Net interest income decreased 0.1%, to $86.4 million in fiscal 2005, from $87.2 million in fiscal 2004. This decrease was due to a positive volume variance of $12.6 million, offset by a negative rate variance of $13.4 million, as average interest earning assets increased 24.1%, to $3.933 billion as of June 30, 2005, from $3.169 billion as of June 30, 2004, while the interest rate margin declined 56 basis points, to 2.19% for fiscal 2005, from 2.75% for fiscal 2004. The interest rate spread declined 64 basis points, to 2.00% in fiscal 2005, from 2.64% in fiscal 2004, due to a 38 basis point decline in the average yield of interest earning assets to 4.81%, from 5.19%, in addition to a 26 basis point increase in the average cost of funds to 2.81%, from 2.55%. The decline 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 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 15.2%, to $189.3 million for fiscal 2005, as compared to $164.4 million for fiscal 2004, reflecting a 24.1% increase in the average balance of interest earnings assets, to $3.933 billion in fiscal 2005, from $3.169 billion in fiscal 2004, partially offset by the decline in yield to 4.81%, from 5.19%. Interest income is generated by investment securities, which accounted for 70.9%, and from loans, which accounted for 29.1%. Interest income from investments increased 19.7%, to $134.3 million, due to a 27.6% increase in the average balance of investments, to $3.102 billion, partially offset by a 29 basis points decline in yield, to 4.33%, from 4.62%. The increase in investments reflects a 397.6% increase in U.S. government and agency obligations, to $1.030 billion as of June 30, 2005, from $207.0 million as of June 30, 2004, partially offset by a 20.6% decrease in mortgage-backed securities, to $1.960 billion as of June 30, 2005, from $2.467 billion as of June 30, 2004. Interest income from loans increased 5.4%, to $55.0 million, due to a 12.7% increase in the average balance of loans, to $831.2 million, partially offset by a 46 basis points decline in yield, to 6.61%, from 7.07%. The increase in loans primarily reflects a 14.9% increase in residential, non residential and home equity real estate loans, to $762.3 million in fiscal 2005, from $662.4 million in fiscal 2004, and a 59.0% increase in commercial loans, reflecting the continued expansion of that business, to $129.7 million in fiscal 2005, from $81.6 million in fiscal 2004. Approximately 90% of the commercial loans are secured by real estate.
Interest expense increased 33.3%, to $102.9 million in fiscal 2005, from $77.2 million in fiscal 2004, due to a 26 basis point increase in the average cost of retail and wholesale funds, to 2.81% in fiscal 2005, from 2.55% in fiscal 2004. The increase is also due to the expansion of the average interest-bearing liabilities to $3.660 billion, from $3.027 billion, in order to fund the growth of the Group’s investment and loan portfolios. The average cost of retail deposits declined 14 basis points, to 2.73% in fiscal 2005, from 2.87% in fiscal 2004, and the average cost of wholesale funding sources increased 46 basis points, to 2.84%, from 2.38%, substantially reflected in repurchase agreements, which increased 52 basis points, to 2.78% and subordinated capital notes which increased 135 basis points.
Comparison of year ended June 30, 2004 and year ended June 30, 2003:
Net interest income increased 17.2%, to $87.2 million in fiscal 2004, from $74.4 million in fiscal 2003. This increase was due to a positive volume variance of $15.1 million, partially offset by a negative rate variance of $2.3 million, as average interest earning assets increased 27.1%, to $3.169 billion as of June 30, 2004, from $2.493 billion as of June 30, 2003, while the interest rate margin declined 24 basis points, to 2.75% in fiscal 2004, from 2.99% in fiscal 2003. The interest rate spread declined 27 basis points, to 2.64% in fiscal 2004, from 2.91% in fiscal 2003, due to a 90 basis point decline in the average yield of interest earning assets to 5.19%, from 6.09%, partially offset by a 63 basis point decline in the average cost of funds to 2.55%, from 3.18%. The decline 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 the re-pricing of adjustable and floating rate commercial loans. The decline in the average cost of funds was primarily due to reductions in rates paid on retail deposits, reflecting the prevailing lower interest rate scenario, and to management’s decision to reduce the use of higher-cost, retail certificates of deposit in favor of lower-cost, wholesale funding sources.
Interest income increased 8.3%, to $164.4 million in fiscal 2004, as compared to $151.7 million in fiscal 2003, reflecting a 27.1% increase in the average balance of interest earnings assets, to $3.169 billion in fiscal 2004, from $2.493 billion in fiscal 2003, partially offset by the decline in yield to 5.19%, from 6.09%. Interest income is generated by investment securities, which accounted for 68.3%, and from loans, which accounted for 31.7%. Interest income from investments

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increased 12.0%, to $112.3 million, due to a 33.2% increase in the average balance of investments, to $2.431 billion, partially offset by an 87 basis points decline in yield, to 4.62%, from 5.49%. The increase in investments reflects a 17.9% increase in mortgage-backed securities, to $2.467 billion as of June 30, 2004, from $2.093 billion as of June 30, 2003, and a 209.8% increase in P.R. and U.S. government and agency obligations, to $322.3 million as of June 30, 2004, from $104.0 million as of June 30, 2003. Interest income from loans increased 1.3%, to $52.1 million, due to a 10.4% increase in the average balance of loans, to $737.5 million, partially offset by a 63 basis points decline in yield, to 7.07%, from 7.70%. The increase in loans primarily reflects an 8.9% increase in real estate loans, to $662.4 million in fiscal 2004, from $608.2 million in fiscal 2003, and a 40.9% increase in commercial loans, reflecting the initial expansion of that business, to $57.0 million in fiscal 2004, from $40.5 million in fiscal 2003. Approximately 90% of the commercial loans are secured by real estate.
Interest expense declined 0.21%, to $77.2 million in fiscal 2004, from $77.3 million in fiscal 2003, due to a 63 basis point reduction in the average cost of retail and wholesale funds, to 2.55% for fiscal 2004, from 3.18% for fiscal 2003. This decline more than offset the cost of expanding interest-bearing liabilities, to $3.027 billion, from $2.430 billion, in order to fund the growth of the Group’s investment and loan portfolios. The average cost of retail deposits declined 43 basis points, to 2.87% in fiscal 2004, from 3.30% in fiscal 2003, and the average cost of wholesale funding sources declined 72 basis points, to 2.38%, from 3.10%, with the largest average cost reductions occurring in Federal Home Loan Bank of New York advances, which dropped 120 basis points, to 2.63%, and in repurchase agreements, which dropped 66 basis points, to 2.26%.
Comparison of years ended June 30, 2003 and 2002:
For fiscal 2003, net interest income amounted to $74.4 million, up 26.2% from $59.0 million for the fiscal year ended June 30, 2002. This increase was due to a positive volume variance of $7.7 million and a positive rate variance of $7.8 million that also, in part, resulted from the impact of an additional Federal Reserve Board interest rate reduction, which resulted in a lower average cost of funds (3.18% for fiscal 2003 versus 3.95% in the same period of fiscal 2002). At the same time, the Group continues its hedge strategy to lock its interest rate spread by increasing the volume of interest rate swaps; see “Interest Rate Risk and Assets/Liability Management”.
The interest rate spread for fiscal 2003, improved 32 basis points to 2.91% compared with 2.59% for fiscal 2002 . As previously mentioned, this increase was mainly due to a decrease in the average cost of funds. 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.
The Group’s interest income for fiscal 2003 increased 7.1% from $141.7 million reported in fiscal 2002, to $151.7 million. The increase in interest income resulted from a larger volume of average interest-earning assets ($2.493 billion in fiscal 2003 versus $2.167 billion in fiscal 2002) partially offset by a decline in their yield performance (6.09% in fiscal 2003 versus 6.54% in fiscal 2002).
Increase in interest-earning assets was concentrated on the investment portfolio and real estate loans, comprised mostly of residential mortgage loans. The average volume of total investments for fiscal 2003 grew 12.8% ($1.825 billion in fiscal 2003 versus $1.617 billion in fiscal 2002) when compared to the same period a year earlier. This increase was concentrated in mortgage-backed securities, which increased 25.1% from $1.673 billion as of June 30, 2002, to $2.093 billion as of June 30, 2003. Likewise, the average volume of real estate loans grew by 22.7% for fiscal 2003 (from $495.6 million in fiscal 2002, to $608.2 million in fiscal 2003), along with an increase in the average volume of commercial loans that grew by 29.1% in fiscal 2003, when compared with the same period in fiscal 2002 ($40.5 million in fiscal 2003 versus $31.3 million in fiscal 2002.) Most of the commercial loans are secured by real estate.
The average yield on interest-earning assets was 6.09%, 45 basis points lower than the 6.54% in fiscal 2002. The yield dilution experienced in fiscal 2003 was caused by the expansion of the Group’s mortgage-backed securities investment portfolio, which carries a lower yield than the loan portfolio but provides less risk and generates a significant amount of tax-exempt income (see “Tax Equivalent Spread” on Table 1).
Interest expense decreased for fiscal 2003 by 6.6% (to $77.3 million in fiscal 2003, from $82.7 million in fiscal 2002). A lower average cost of funds (3.18% for fiscal 2003 versus 3.95% for fiscal 2002), drove this decrease. Larger volumes of borrowings and deposits, which were necessary to fund the growth of the Group’s investment portfolio, caused an increase in average interest-bearing liabilities. See Table 1 for the impact on interest expense due to changes in volume and rates.
The cost of short-term financing continued to fall over the course of fiscal 2003. The average cost of borrowings for fiscal 2003 decreased 93 basis points (from 4.03% in fiscal 2002, to 3.10% in fiscal 2003). The largest average reduction was in repurchase agreements, which decreased 106 basis points from 3.98% in fiscal 2002, to 2.92% in fiscal 2003.

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TABLE 2 — NON-INTEREST INCOME SUMMARY
THREE-YEAR PERIOD ENDED JUNE 30, 2005
(Dollars in thousands)
                                 
    2005     2004     Variance %     2003  
 
                       
Mortgage banking activities
  $ 7,774     $ 7,719       0.7 %   $ 8,026  
 
                               
Commissions and fees from fiduciary, brokerage, investment banking, and insurance activities
    14,371       17,617       -18.4 %     14,472  
 
                       
Non-banking service revenues
    22,145       25,336       -12.6 %     22,498  
 
                       
 
                               
Fees on deposit accounts
    4,858       4,887       -0.6 %     4,075  
Bank service charges and commissions
    2,079       2,037       2.1 %     1,625  
Other operating revenues
    815       241       238.2 %     268  
 
                       
Banking service revenues
    7,752       7,165       8.2 %     5,968  
 
                       
 
                               
Securities net activity
    7,446       13,414       -44.5 %     14,223  
Derivatives net gain (loss)
    (2,811 )     11       -25654.6 %     (4,061 )
Trading net gain (loss)
    (15 )     21       -171.4 %     571  
 
                       
Securities, derivatives and trading activities
    4,620       13,446       -65.6 %     10,733  
 
                       
 
                               
 
                       
Other non-interest income
    368       87       323.0 %     (160 )
 
                       
 
                               
Total non-interest income
  $ 34,885     $ 46,034       -24.2 %   $ 39,039  
 
                       
Non-Interest Income
Comparison of year ended June 30, 2005 and year ended June 30, 2004:
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 broker-dealer subsidiary, the level of mortgage banking activities, deposit accounts and insurance products. As shown in Table 2, non-interest income for fiscal 2005 decreased 24.2%, from $46.0 million to $34.9 million, when compared to fiscal 2004.
One of the main components of non-interest income is mortgage-banking activities. Such income increased 0.7% in fiscal 2005 (from $7.7 million in fiscal 2004, to $7.8 million in fiscal 2005), in relation to an increase of 21.7% in residential mortgage loan production (from $331.5 million in fiscal 2004, to $404.6 million in fiscal 2005). This increase in mortgage production was primarily due to the purchase of loans to third-party investors amounting to $153.8 million compared to $1.0 million last year.
Commissions and fees from fiduciary activities and commissions and fees from securities brokerage, investment banking and insurance activities decreased 11.5% and 25.1%, respectively, to $7.6 million and $6.7 million in fiscal 2005, from $8.6 million and $9.0 million in fiscal 2004. Decrease for the year reflected 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.
Bank service revenues, which consist primarily of fees generated by deposit accounts, electronic banking and customer services, continued with an increase of 8.2% (to $7.8 million in fiscal 2005, from $7.2 million in fiscal 2004) mainly driven by the strategy of strengthening the Group’s banking franchise by expanding its ability to attract deposits and build relationships with individual, professional and commercial customers through aggressive marketing and the expansion of our sales force.
Securities, derivatives and trading activities decreased 65.6% in fiscal 2005 (to a net gain of $4.6 million in fiscal 2005 from a net gain of $13.4 in fiscal 2004), mainly affected by negative results in derivative activity which reflected a loss during fiscal 2005 (loss of $2.8 million in fiscal 2005, compared to $11,000 net gain in fiscal 2004). Securities and trading net activity also decreased when compared to previous fiscal 2004.
Securities net activities showed a 44.5% decrease from a net gain of $13.4 million in fiscal 2004, to a net gain of $7.4 million in fiscal 2005, while trading net activities revenues showed a decrease of 171.4% to a net loss of $15,000 in fiscal 2005, compared to a net gain of $21,000 in fiscal 2004. As in previous fiscal 2004, this decrease in trading net activities revenues is mainly due to the unfavorable conditions of the secondary market due to the higher short term rates.
Derivative activities resulted in unrealized losses of $2.8 million for fiscal 2005; while for fiscal 2004 the unrealized gain amounted to $11,000. These fluctuations are related to the mark-to-market of derivative instruments which we expect to continue improving as interest rates go up.

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Comparison of year ended June 30, 2004 and year ended June 30, 2003:
Non-interest income for fiscal 2004 increased 17.9%, from $39.0 million to $46.0 million, when compared to fiscal 2003.
Commissions and fees from fiduciary activities and commissions and fees from securities brokerage and insurance activities, two of the main components of non-interest income, increased 25.3% and 18.5%, respectively, to $8.6 million and $9.0 million in fiscal 2004, from $6.9 million and $7.6 million in fiscal 2003. Growth for the year reflected the general improvement in equity markets, increased underwriting activities, higher service fees in fiduciary activities, and income generated by CPC the retirement plan administration subsidiary, which was acquired in January 2003.
Another component of non-interest income is mortgage-banking activities. Such income decreased 3.8% in fiscal 2004 (from $8.0 million in fiscal 2003, to $7.7 million in fiscal 2004), in relation to a decrease of 8.0% in residential mortgage loan production (from $357.0 million in fiscal 2003, to $328.8 million in fiscal 2004). Such decrease in mortgage production was primarily due to the Group’s decision to temporarily moderate home loan activity based on fourth quarter market conditions, which also resulted in lower mortgage banking revenues.
Bank service revenues, which consist primarily of fees generated by deposit accounts, electronic banking and customer services, continued with an increase of 20.1% (to $7.2 million in fiscal 2004, from $6.0 million in fiscal 2003), mainly due to a 19.9% increase in fees on deposit accounts, from $4.0 million for fiscal 2003, to $4.9 million in fiscal 2004. This increase in bank service revenues was mainly driven by an increase in the fees on deposit accounts mostly overdraft fees related to the bank overdraft privilege program attached to consumer deposit accounts and the success of the Group’s product and service marketing programs. Bank service charges and commissions increased 25.4% to $2.0 million in fiscal 2004 from $1.6 million in fiscal 2003. Most of this increase was related to higher transactional volume in The Bank’s debit and credit cards.
Securities, derivatives and trading activities increased 25.3% in fiscal 2004 (to a net gain of $13.4 million in fiscal 2004 from a net gain of $10.7 in fiscal 2003), mainly driven by a positive results in derivatives activity which carried a substantial loss during fiscal 2003 (from $4.1 million net loss in fiscal 2003, to $11,000 net gains in fiscal 2004). Securities and trading net activity slightly decreased when compared to previous fiscal 2003.
Securities net activities showed a 5.7% decrease from a net gain of $14.2 million in fiscal 2003 to a net gain of $13.4 million in fiscal 2004, while trading net activities revenues showed a decrease of 96.3% to a net gain of $21,000 in fiscal 2004, compared to a net gain of $571,000 million in fiscal 2003. As in fiscal 2003, this decrease in trading net activities revenues is mainly due to a substantial decrease in the average volume of trading portfolio. The average trading portfolio dropped from $10.3 million in fiscal 2003 to an average of $1.4 million in fiscal 2004.

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TABLE 3 — NON-INTEREST EXPENSES SUMMARY
THREE-YEAR PERIOD ENDED JUNE 30 2005
(Dollars in thousands)
                                 
    2005     2004     Variance %     2003  
Compensation and employees’ benefits
  $ 26,663     $ 24,579       8.5 %   $ 20,563  
Occupancy and equipment
    10,583       9,639       9.8 %     9,079  
Advertising and business promotion
    6,506       7,466       -12.9 %     7,052  
Professional and service fees
    6,994       5,631       24.2 %     6,467  
Communication
    1,630       1,849       -11.8 %     1,671  
Loan servicing expenses
    1,727       1,853       -6.8 %     1,775  
Taxes, other than payroll and income taxes
    1,836       1,754       4.7 %     1,556  
Electronic banking charges
    2,075       1,679       23.6 %     1,244  
Printing, postage, stationery and supplies
    891       1,121       -20.5 %     1,038  
Insurance, including deposits insurance
    767       791       -3.0 %     736  
Other operating expenses
    3,348       3,070       9.1 %     2,475  
 
                         
Total non-interest expenses
  $ 63,020     $ 59,432       6.0 %   $ 53,656  
 
                       
 
                               
Relevant ratios and data:
                               
Non-interest income to Non-interest expenses ratio
    55.36 %     77.46 %             72.76 %
 
                         
Efficiency ratio
    54.01 %     49.61 %             51.35 %
 
                         
Expense ratio
    0.83 %     0.85 %             0.99 %
 
                         
Compensation and benefits to non-interest expenses
    42.3 %     41.4 %             38.3 %
 
                         
Compensation to total assets
    0.63 %     0.66 %             0.68 %
 
                         
Average compensation per employee (annualized)
  $ 50.4     $ 45.1             $ 40.6  
 
                         
Average number of employees
    529       545               506  
 
                         
Bank assets per employee
  $ 8,035     $ 6,836             $ 6,009  
 
                         
 
                               
Total workforce:
                               
Banking operations
    426       454               423  
Trust operations
    52       52               57  
Brokerage and Insurance operations
    42       20               33  
 
                         
Total workforce
    520       526               513  
 
                         
Non-Interest Expenses
Comparison of year ended June 30, 2005 and year ended June 30, 2004:
Non-interest expenses in fiscal 2005 increased 6.0% (from 10.8%), from $59.4 million in fiscal 2004 to $63.0 million in fiscal 2005. The increment in non-interest expenses in the year reflects the Group’s spending on “The Oriental Way” program, specifically for the expansion and improvement of the Group’s sales capabilities, including additional experienced lenders, marketing, enhancing branch distribution and support risk management processes. Also, these results include expenses for new technology for the implementation of PeopleSoft enterprise software to increase efficiencies and also include the cost of documentation and testing of Sarbanes-Oxley Act Section 404 provisions 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.
Employees’ compensation and benefits is the Group’s largest non-interest expense category. In fiscal 2005, compensation and benefit expense increased 8.5% as compared to 19.5% in 2004 to $26.7 million versus $24.6 million in fiscal 2004, reflecting expansion of the sales force, salary increases and the recruitment of experienced high-level management in order to generate a higher volume of business and improve operations.
Occupancy and equipment expenses increased 9.8%, from $9.6 million in fiscal 2004 to $10.6 million in fiscal 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 expected move to new facilities in the last quarter of fiscal year 2006.
During fiscal 2005, the cost of advertising and business promotions decreased 12.9% to $6.5 million versus $7.5 million in fiscal 2004. Such activity was mainly due to management’s strategy of redistributing the marketing expenses for the fiscal year as the Group continued its selective promotional campaign to enhance the market recognition of new and existing products, to increase fee-based revenues and to strengthen the banking and financial services franchise.
In fiscal 2005, professional and service fees increased 24.2%, from $5.6 million in fiscal 2004 to $7.0 million in fiscal 2005. The increase in the period was due to the effect of reviews performed by advisors in specific operational areas to improve financial and operational performances and expenses associated with the implementation of Section 404 the Sarbanes-Oxley Act.

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The aggregated decrease in communication, insurance and printing, postage, stationery and supplies expenses is principally due to effective cost controls without affecting the general growth in the Group’s business activities, products and services.
The rise in electronic banking charges, municipal and other general taxes, and other operating expenses is principally due to the general growth in the Group’s business activities, products and services offered.
Comparison of year ended June 30, 2004 and year ended June 30, 2003:
In fiscal 2004, non-interest expenses increased 10.8%, from $53.7 million in fiscal 2003 to $59.4 million in fiscal 2004, reflecting the impact of the Group’s expansion strategy. The Group’s incurred higher outlays for human resources, technology and marketing, among others, during the first quarter of fiscal 2004, as it continued its growth program. Thereafter, the Group was able to realign costs, with expenses trending lower in the last three quarters of fiscal 2004.
Employees’ compensation and benefits is the Group’s largest non-interest expense category. In fiscal 2004, compensation and benefit expense increased 19.5% to $24.6 million versus $20.6 million in fiscal 2003, reflecting an expansion of the Group’s work force as part of its growth program which includes the improvement of the sales force through the addition of experienced lenders and the expansion of the executive team.
Occupancy and equipment expenses increased 6.2%, from $9.1 million in fiscal 2003 to $9.6 million in fiscal 2004, due to higher depreciation resulting from upgrades to technology and infrastructure in The Group’s financial centers in order to improve efficiency.
During fiscal 2004, advertising and business promotions increased 5.9% to $7.5 million versus $7.1 million in fiscal 2003. The Group focused on marketing campaigns that expanded the awareness of new and existing products and contributed to the 17.9% increase in fee-based revenues, compared to fiscal 2003.
In fiscal 2004, professional and service fees decreased 12.9%, from $6.5 million in fiscal 2003 to $5.6 million in fiscal 2004. The decrease was due to specific cost control initiatives effectively implemented by management.
The rise in electronic banking charges, communication, municipal and other general taxes, insurance, printing, postage, stationery and supply, and other operating expenses are principally due to the general growth in the Group’s business activities, products and services offered.
Provision for Loan Losses
The provision for loan losses for the year ended June 30, 2005 totaled $3.3 million, a 27.7% decrease from the $4.6 million reported for the year ended June 30, 2004. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, Management determined that the provision for the year ended June 30, 2005 was adequate in order to maintain the allowance for loan losses at an appropriate level, even though the loan portfolio increased from $745.2 million as of June 30, 2004 to $895.2 million as of June 30, 2005 (a 20.1% increase) and there was an increase in the net credit losses from $2.1 million for the year ended June 30, 2004 to $4.4 million for the year ended June 30, 2005 (an increase of 111.7%). The main reason for the decrease in the provision is that during the year ended June 30, 2004 Management charged against earnings the provision for the possible losses on certain nonperforming loans which were in the process of evaluation. During the year ended June 30, 2005, these loans or portions thereof were charged-off against the allowance established in the previous fiscal year since such loans or the portions thereof were determined to be uncollectible. The increase in the loan portfolio is mainly related to new high quality and well collateralized loans which do not require large amounts of allowance for loan losses.
Net credit losses increased 111.7%, from $2.1 million in fiscal 2004 to $4.4 million in fiscal 2005. The increase was primarily due to $2.5 million increment in net credit losses from real estate loans. Total loss recoveries decreased from $1.1 million as of June 30, 2004 to $720,000 as of June 30, 2005. As result, the recoveries to net charge-offs ratio decreased from 35.6% in fiscal 2004 to 14.1% for fiscal 2005.
Residential real estate loans net credit losses in fiscal 2005 were $2.9 million as compared to $378,000 in the prior fiscal year. Commercial loans net credit losses increased to $496,000 in fiscal 2005, when compared to $110,000 in the previous fiscal year. Almost all the commercial lending that the Group is originating is collateralized by real estate.
Net credit losses on consumer loans decreased when compared with the prior fiscal year. In fiscal 2005, net credit losses on consumer loans were $1.0 million, a decrease of 41.2% when compared with fiscal 2004 in which the Group had net credit losses of $1.7 million.

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The Group evaluates all loans, some individually and other as homogeneous groups, for purposes of determining impairment. At June 30, 2005, the total investment in impaired commercial loans was $3.2 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 fiscal 2005 amounted to $2.3 million compared to $2.1 million for fiscal 2004.
Comparison of year ended June 30, 2004 and year ended June 30, 2003:
The provision for loan losses for fiscal 2004, totaled $4.6 million, a 9.5% increase from the $4.2 million reported for the previous fiscal year. The increase in the provision for loan losses reflects the required provisions needed to cover any loss exposure in commercial and real estate non-performing loans as of June 30, 2004 and the expected increase in the consumer loans portfolio as the Group revitalized such lending activity during the fourth quarter of fiscal 2004. Non-performing loans increased 6.9%, from $28.9 million as of June 30, 2003, to $30.9 million as of June 30, 2004. The increase in non-performing loans came from the residential real estate and commercial loan portfolios. The commercial and residential real estate portfolios are well collateralized and the Group does not expect any major losses on such portfolios.
During the last two quarters of fiscal 2004, no major increases in net credit losses were experienced, but the actual level of credit losses support the provision for the period to maintain an adequate reserve for possible loan losses. Net credit losses for the fiscal year decreased 6.0%, from $2.2 million in fiscal 2003 to $2.1 million in fiscal 2004. Such decrease was mainly due to an increase experienced in total loss recoveries. Total loss recoveries increased from $897,000 as of June 30, 2003 to $1.1 million as of June 30, 2004. As result, the recoveries to net charge-offs ratio improved from 29.0% in fiscal 2003 to 35.6% in fiscal 2004.
Residential real state loans net credit losses in fiscal 2004 were $378,000 as compared with $5,000 in the prior fiscal year. The amount for fiscal 2004 represents charge-offs on two real estate loans. Commercial loans net credit losses increased to $110,000 in fiscal 2004, when compared with a net recovery of $39,000 in the previous fiscal year. Management performed a review of the entire commercial loan portfolio and determined to recognize as losses during the second quarter of fiscal 2004 certain loans considered uncollectible or of such little value that their continuance as bankable assets was not warranted. This review reflects the Group’s strategy to expand its commercial loan portfolio, primarily collateralized by real estate.
Net credit losses on consumer loans decreased when compared with the prior fiscal year. In fiscal 2004, net credit losses on consumer loans were $1.7 million, a decrease of 25.4% when compared with fiscal 2003 in which the Group had net credit losses of $2.3 million.
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.
Provision for Income Taxes
The income tax benefit was $1.6 million for fiscal 2005, as compared with a provision for income taxes of $5.6 million for fiscal 2004. The tax benefit for 2005 takes into account, among other things, the expiration of certain tax contingencies. Also, the effective income tax rate is lower than the statutory tax rate for the Group, which is 39%, due to the high level of tax-advantaged interest income earned on certain investments and loans, net of the disallowance of related expenses attributable to the exempt income. In addition, the Puerto Rico Internal Revenue Code of 1994, as amended, provides a dividend received deduction of 100% on dividends received from wholly-owned subsidiaries subject to income taxation in Puerto Rico. Exempt interest relates principally to interest earned on obligations of the United States and Puerto Rico governments and certain mortgage-backed securities, including securities held by the Group’s international banking entities.
The Group recognized a provision for income taxes of $5.6 million in fiscal 2004, compared with a provision of $4.3 million in the previous fiscal year. The main reason for the increase of fiscal 2004 tax expense is the increase in income before income taxes of 24.5% when compared to fiscal 2003 results.
On August 1, 2005 the Puerto Rico Legislature approved the Law No. 41 “Law of the Educational Future of the Puerto Rican Children”. This law imposes an additional tax of 2.5 % on taxable net income. This law is applicable to all corporations and partnerships with a taxable net income over $20,000, according to part (a) of Section 1015 of the Puerto Rico Internal Revenue Code of 1994.
This law will be effective for tax years beginning after December 31, 2004 and finish on or before December 31, 2006. Also the effectiveness of this law is subject to the final approval of the Joint Resolution of the Legislature Number 445, concerning the General Budget for the 2005-2006 fiscal year.

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FINANCIAL CONDITION
Group’s Bank Assets
At June 30, 2005, the Group’s total assets amounted to $4.251 billion, an increase of 14.1% when compared to $3.726 billion at June 30, 2004. At the same date, interest-earning assets reached $4.140 billion, up 13.8% versus $3.638 billion at June 30, 2004.
As detailed in Table 4 below, 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, CMO’s and Puerto Rico government and agency bonds. At June 30, 2005, the investment portfolio increased 13.5%, to $3.232 billion, from $2.847 billion as of June 30, 2004. The increase reflects the purchases of U.S. and Puerto Rico government securities and, in the second quarter of fiscal 2005, sales of 30-year maturity mortgage-backed securities and collateralized mortgage obligations. These activities are in line with the Group’s strategy in a rising interest rate environment of investing in fixed and variable rate, short-term and medium-term government securities, and the sale of longer-term mortgage-backed securities.
Growth in U.S. government securities drove the investment portfolio’s expansion. U.S. government securities increased 397.6% from last year to $1,030 million as of June 30, 2005 from $207 million on June 30, 2004, as the Group continued its asset liability management strategies of rebalancing its asset mix through sound and lesser-risk asset acquisitions. Mortgage-backed securities decreased 20.6% to $1.960 billion (60.6% of the total investment portfolio) from $2.467 billion (86.7% of the total investment portfolio) in the year before.
As of June 30, 2005, the Group had no securities of a single issuer, other than U.S. government agencies and corporations including FHLB, FNMA and GNMA, that exceeded 10% of consolidated stockholders’ equity.
TABLE 4 — BANK ASSETS SUMMARY AND COMPOSITION
AS OF JUNE 30, 2005, 2004 and 2003
(Dollars in thousands)
                                 
                    Variance        
    2005     2004     %     2003  
Investments:
                               
Mortgage-backed securities
  $ 1,959,760     $ 2,467,384       -20.6 %   $ 2,092,939  
U.S. Government and agency obligations
    1,029,980       206,977       397.6 %     53,813  
P.R. Government and agency obligations
    108,968       115,846       -5.9 %     50,208  
Other investment securities
    66,023       20,636       219.9 %     11,681  
Short-term investments
    39,791       7,747       413.6 %     1,152  
FHLB stock
    27,058       28,160       (0.04 )     22,537  
 
                       
 
    3,231,580       2,846,750       13.5 %     2,232,330  
 
                       
 
                               
Loans:
                               
Loans receivable
    895,923       745,195       20.2 %     724,295  
Allowance for loan losses
    (6,495 )     (7,553 )     -14.0 %     (5,031 )
 
                       
Loans receivable, net
    889,428       737,642       20.6 %     719,264  
Mortgage loans held for sale
    17,963       5,814       209.0 %     9,198  
 
                       
Total loans receivable, net
    907,391       743,456       22.1 %     728,462  
 
                       
 
                               
Securities sold but not yet delivered
    1,034       47,312       -97.80 %     1,894  
 
                       
 
                               
Total securities and loans
    4,140,005       3,637,518       13.8 %     2,962,686  
 
                       
 
                               
Other assets:
                               
Cash and due from banks
    14,892       9,284       60.4 %     15,945  
Accrued interest receivable
    23,735       19,127       24.1 %     17,716  
Premises and equipment, net
    15,269       18,552       -17.7 %     16,162  
Deferred tax asset, net
    6,191       7,337       -15.6 %     3,731  
Foreclosed real estate, net
    4,186       888       371.4 %     536  
Other assets
    46,374       32,989       40.6 %     23,775  
 
                       
Total other assets
    110,647       88,177       25.5 %     77,865  
 
                       
 
                               
Total assets
  $ 4,250,652     $ 3,725,695       14.1 %   $ 3,040,551  
 
                       
 
                               
Investments portfolio composition:
                               
Mortgage-backed securities
    60.6 %     86.7 %             93.8 %
U.S. Government and agency obligations
    31.9 %     7.3 %             2.4 %
P.R. Government and agency obligations
    3.4 %     4.1 %             2.2 %
FHLB stock, short term investments and debt securities
    4.1 %     1.9 %             1.6 %
 
                         
 
    100.0 %     100.0 %             100.0 %
 
                         

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Refer to Note 3 of the consolidated financial statement for information related to the carrying amount of trading, available-for-sale, and held to maturity investment securities at June 30, 2005, by contractual maturity.
At June 30, 2005, the Group’s loan portfolio, the second largest category of the Group’s interest-earning assets, amounted to $907.4 million, 22.1% higher than the $743.5 million at June 30, 2004. The Group’s loan portfolio is mainly comprised of residential loans, home equity loans, and commercial loans collateralized by real estate. As shown in Table 5 below, the real estate mortgage loan portfolio amounted to $735.2 million or 82.5% of the loan portfolio as of June 30, 2005, compared to $645.0 million or 86.790% of the loan portfolio at June 30, 2004. Mortgage production of $250.8 million declined 24.3% compared to the prior year, but with a new mortgage operation management team appointed in December 2004, production increased 12% from the December 2004 quarter and is expected to continue to increase going forward. The Group sold/converted residential mortgage loans in the secondary market totaled $188 million in fiscal 2005 compared to $228 million sold/converted in fiscal 2004.
The second largest component of the Group’s loan portfolio are commercial loans, most of which are collateralized by real estate. At June 30, 2005, the commercial loan portfolio totaled $129.7 million (14.5% of the Group’s total loan portfolio), a substantial growth of 58.9% when compared to $81.6 million at June 30, 2004 (10.9% of the Group’s total loan portfolio). Production of commercial loans increased 61.3%, to $90.9 million compared to $56.4 million in the prior fiscal year. The increase reflected the Group’s expansion of its commercial business with professionals and small and mid-sized businesses, and participations in commercial real estate loans.
The consumer loan portfolio totaled $30.3 million (3.4% of total loan portfolio at June 30, 2005), a 62.3% increase when compared to fiscal 2004 portfolio of $18.7 million (2.4% total loan portfolio at June 30, 2004). Consumer loan production reflected last year’s expansion of the business, which resulted in a 273.4% increase in production.
The following table summarizes the remaining contractual maturities of the Group’s total loans divided to reflect cash flows as of June 30, 2005. Contractual maturities do not necessarily reflect the actual term of a loan, including prepayments.
                                                 
            Maturities  
                    After one year to five        
    Balance             years     After five years  
    outstanding at     One Year     Fixed     Variable     Fixed     Variable  
    June 30, 2005     or Less     Interest Rates     Interest Rates     Interest Rates     Interest Rates  
            (In thousands)              
           
Real estate, mainly residential
  $ 753,934     $ 1,179     $ 34,304     $ —     $ 607,962     $ 110,490 (1)
 
                                   
Commercial, mainly real estate
    129,670       33,133       4,878       73,468       1,015       17,175  
 
                                   
Consumer
    30,282       16,085       13,363       —       834       —  
 
                                   
Total
  $ 913,886     $ 50,397     $ 52,545     $ 73,468     $ 609,811     $ 127,665  
 
                                   
 
(1)   Fixed rate converted to variable (see note 4).
At June 30, 2004, the Group’s total assets amounted to $3.726 billion (an increase of 22.5% when compared to $3.041 billion at June 30, 2003). At the same date, interest-earning assets reached $3.638 billion, up 22.8% versus $2.963 billion a year earlier. An increase in mortgage-backed securities drove the investment portfolio expansion. Mortgage-backed securities increased 17.9% to $2.467 billion (86.7% of the total investment portfolio) from $2.093 billion (93.8% of the total investment portfolio) the year before, reflecting the Group strategy of rebalancing its asset mix through sound and lesser risk asset acquisitions.
At June 30, 2004, the Group’s loan portfolio amounted to $743.5 million, 2.1% higher than the $728.5 million at June 30, 2003. In fiscal 2003, the Group continued focusing on loan originations which are collateralized, primarily residential, commercial and personal loans with mortgage collateral, while deemphasizing unsecured personal loans.

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Selected Financial Data
Five-Year Period Ended June 30, 2005
(Dollars in thousands)
TABLE 5 — LOANS RECEIVABLE COMPOSITION:
                                         
    2005     2004     2003     2002     2001  
Secured by real estate, mainly residential
  $ 735,971     $ 644,964     $ 660,874     $ 506,872     $ 392,492  
Commercial, mainly real estate
    129,670       81,572       43,553       41,205       25,829  
Consumer
    30,282       18,659       19,826       22,077       22,717  
Financing leases (1)
    —       —       42       295       827  
 
                             
Loans receivable
    895,923       745,195       724,295       570,449       441,865  
Allowance for loan losses
    (6,495 )     (7,553 )     (5,031 )     (3,039 )     (2,856 )
 
                             
Loans receivable, net
    889,428       737,642       719,264       567,410       439,009  
Loans held for sale
    17,963       5,814       9,198       9,360       23,570  
 
                             
Loans receivable, net
  $ 907,391     $ 743,456     $ 728,462     $ 576,770     $ 462,579  
 
                             
 
                                       
Loans portfolio composition percentages:
                                       
Real estate-mortgage, mainly residential (2)
    82.5 %     86.7 %     91.0 %     89.0 %     89.0 %
Commercial, mainly real estate
    14.2 %     10.9 %     5.9 %     7.1 %     5.6 %
Consumer
    3.3 %     2.4 %     2.7 %     3.8 %     4.9 %
Financing leases
    0.0 %     0.0 %     0.4 %     0.0 %     1.0 %
 
                             
Total loans receivable
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 
                             
 
(1)   Discontinued in June 2000.
 
(2)   Includes loans held for sale
Liabilities and Funding Sources
As shown in Table 6 below, at June 30, 2005, the Group’s total liabilities reached $3.909 billion, 13.9% higher than the $3.431 billion reported a year earlier. Interest-bearing liabilities, the Group’s funding sources, amounted to $3.805 billion at the end of fiscal 2005 versus $3.352 billion the year before, a 13.5% increase. The rise in deposits, other borrowings and repurchase agreements drove this growth.
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, term notes, subordinated capital notes, other borrowings and unused lines of credit. At June 30, 2005, borrowings amounted to $2.591 billion, 13.5% higher than the $2.283 billion at June 30, 2004. The increase, mainly in repurchase agreements, reflects the funding needed to maintain the Group’s growth strategy for loans and investment portfolios. Repurchase agreements as of June 30, 2005 amounted to $2.192 billion, a 15.6% increase when compared to $1.896 billion as of June 30, 2004.
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 remained at $300 million, same as a year earlier. All of these advances mature between July 2005 and August 2008. Table 6 presents the composition of the Group’s other borrowings at the end of the periods analyzed. However, the Group has the capacity to expand such source of funding up to a maximum of $560 million based on the $27.0 million of capital contribution that the Group has allocated with FHLB.

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TABLE 6 – LIABILITIES SUMMARY AND COMPOSITION
AS OF JUNE 30, 2005, 2004 AND 2003
(Dollars in (thousand)
                                 
                    Variance        
    2005     2004     %     2003  
Deposits:
                               
Non-interest bearing deposits
  $ 62,205     $ 44,622       39.4 %   $ 63,919  
Now accounts
    89,930       81,644       10.1 %     68,389  
Savings accounts
    93,920       88,459       6.2 %     92,206  
Certificates of deposit
    1,002,908       807,783       24.2 %     817,895  
 
                       
 
    1,248,963       1,022,508       22.1 %     1,042,409  
Accrued interest payable
    3,934       1,841       113.7 %     1,856  
 
                       
 
    1,252,897       1,024,349       22.3 %     1,044,265  
 
                       
 
                               
Borrowings:
                               
Repurchase agreements
    2,191,756       1,895,865       15.6 %     1,400,598  
Advances from FHLB
    300,000       300,000       0.0 %     130,000  
Subordinated capital notes
    72,166       72,166       0.0 %     36,083  
Term notes
    15,000       15,000       0.0 %     15,000  
Federal funds purchased
    12,310       —       100.0 %     —  
 
                       
 
    2,591,232       2,283,031       13.5 %     1,581,681  
 
                       
 
                               
Securities and loans purchased but not yet received
    22,772       89,068       -74.4 %     152,219  
 
                       
 
                               
Total deposits and borrowings
    3,866,901       3,396,448       13.9 %     2,778,165  
Other liabilities
    42,584       34,580       23.1 %     60,706  
 
                       
Total liabilities
  $ 3,909,485     $ 3,431,028       13.9 %   $ 2,838,871  
 
                       
 
                               
Deposits portfolio composition percentages:
                               
Non-interest bearing deposits
    5.0 %     4.4 %             6.1 %
Now accounts
    7.2 %     8.0 %             6.6 %
Savings accounts
    7.5 %     8.7 %             8.8 %
Certificates of deposit
    80.3 %     78.9 %             78.5 %
 
                         
 
    100.0 %     100.0 %             100.0 %
 
                         
 
                               
Borrowings portfolio composition percentages:
                               
Repurchase agreements
    84.6 %     83.0 %             88.6 %
Advances from FHLB
    11.6 %     13.1 %             8.2 %
Subordinated capital notes
    2.8 %     3.2 %             2.3 %
Term notes
    0.6 %     0.7 %             0.9 %
Federal funds purchased
    0.4 %     0.0 %             0.0 %
 
                         
 
    100.0 %     100.0 %             100.0 %
 
                         
 
                               
Securities sold under agreements to repurchase
                               
Amount outstanding at year-end
  $ 2,191,756     $ 1,895,865             $ 1,400,598  
 
                         
Daily average outstanding balance
  $ 2,174,312     $ 1,597,720             $ 1,158,243  
 
                         
Maximum outstanding balance at any month-end
  $ 2,398,861     $ 1,895,865             $ 1,400,598  
 
                         
Weighted average interest rate:
                               
For the year
    2.29 %     1.12 %             1.50 %
 
                         
At year end
    3.07 %     1.23 %             1.12 %
 
                         
At June 30, 2005, deposits, the second largest category of the Group’s interest-bearing liabilities reached $1.253 billion, up 22.3% from $1.024 billion at June 30, 2004. Deposits reflected a 24.2% growth in certificates of deposits, to $1.0 billion primarily due to increase in one year CDs. Such increases are due in part to the Group’s success in opening accounts as part of its expanded commercial and consumer lending businesses and as that of the Oriental Preferred program of bank services and accounts, as well as brokered deposits.
At June 30, 2005, the scheduled maturities of time deposits and individual retirement accounts (IRA) of $100,000 or more were as follows:
         
    (In thousands)  
3 months or less
  $ 307,052  
Over 3 months through 6 months
    57,058  
Over 6 months through 12 months
    196,303  
Over 12 months
    28,597  
 
     
Total
  $ 589,010  
 
     
At June 30, 2004, the Group’s total liabilities reached $3.431 billion, 20.9% higher than the $2.839 billion reported a year earlier. Interest-bearing liabilities, the Group’s funding sources, amounted to $3.396 billion at the end of fiscal 2004 versus

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$2.778 billion the year before, a 22.3% increase. The rise in FHLB funds, subordinated capital notes and repurchase agreements drove this growth. At June 30, 2004, borrowings amounted to $2.283 billion, 44.3% higher than the $1.582 billion at June 30, 2003.
At June 30, 2004, deposits reached $1.024 billion, down 1.9%, versus $1.044 billion in fiscal 2003. The decrease in deposits primarily reflects the Group’s decision to cut back on certificates of deposit in favor of lower-cost funding sources.
Stockholders’ Equity
At June 30, 2005, the Group’s total stockholders’ equity was $341.2 million, a 15.8% increase, when compared to $294.7 million at June 30, 2004. This increase was due to the net effect of earnings retention from operations and to a reduction in accumulated other comprehensive loss. As of June 30, 2005, accumulated comprehensive loss amounted to $38.4 million, a decrease of $7.0 million, when compared to the $45.4 million loss recorded as of June 30, 2004. Net accumulated other comprehensive loss consists of the unrealized loss on derivatives designated as cash flow hedges and the unrealized gain or loss on investment securities available-for-sale, net of deferred tax.
At June 30, 2005, accumulated unrealized loss, net of tax, on derivatives designated as cash flow hedges was $8.8 million, a $4.1 million decrease, when compared to an accumulated unrealized loss of $12.5 million at June 30, 2004. Accumulated unrealized loss, net of tax, on investment securities available-for-sale amounted to $29.6 million at June 30, 2005, after a $3.5 million decrease, when compared with an accumulated unrealized loss of $32.8 million at June 30, 2004. Accumulated unrealized loss, net of tax, on investment securities available-for-sale at June 30, 2005 includes an unrealized loss amounting to $24.2 million related to securities transferred to the held-to-maturity category, mostly during fiscal 2004. This unrealized loss is amortized over the remaining life of the securities as a yield adjustment.
On November 30, 2004, the Group declared $3.5 million in cash dividends, a 25.0% increase when compared to $2.8 million declared for the same period a year ago. The Group also declared a 10% stock dividend paid to holders of record as of December 31, 2004.
The Group’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol OFG. At June 30, 2005, the Group’s market capitalization for its outstanding common stock was $501.2 million ($15.26 per share).
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 leverage capital ratio of 4%. As shown in Table 7 below and in Note 2 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.

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TABLE 7 — CAPITAL, DIVIDENDS AND STOCK DATA
AS OF JUNE 30, 2005, 2004 and 2003
(In thousands, except for per share data)
                                 
                    Variance        
    2005     2004     %     2003  
Capital data:
                               
Stockholders’ equity
  $ 341,167     $ 294,667       15.8 %   $ 201,680  
 
                       
 
                               
Regulatory Capital Ratios data:
                               
Leverage Capital Ratio
    10.65 %     11.24 %     -5.2 %     8.19 %
 
                       
Minimum Leverage Capital Ratio Required
    4.00 %     4.00 %             4.00 %
 
                         
Actual Tier 1 Capital
  $ 447,543     $ 408,007       9.7 %   $ 234,979  
 
                       
Minimum Tier 1 Capital Required
  $ 168,080     $ 145,209       15.8 %   $ 114,720  
 
                       
 
                               
Tier 1 Risk-Based Capital Ratio
    38.83 %     37.98 %     2.2 %     24.48 %
 
                       
Minimum Tier 1 Risk-Based Capital Ratio Required
    4.00 %     4.00 %             4.00 %
 
                         
Actual Tier 1 Risk-Based Capital
  $ 447,543     $ 408,007       9.7 %   $ 234,979  
 
                       
Minimum Tier 1 Risk-Based Capital Required
  $ 46,105     $ 42,966       7.3 %   $ 38,400  
 
                       
 
                               
Total Risk-Based Capital Ratio
    39.39 %     38.69 %     1.8 %     25.00 %
 
                       
Minimum Total Risk-Based Capital Ratio Required
    8.00 %     8.00 %             8.00 %
 
                         
Actual Total Risk-Based Capital
  $ 454,038     $ 415,560       9.3 %   $ 240,010  
 
                       
Minimum Total Risk-Based Capital Required
  $ 92,210     $ 85,932       7.3 %   $ 76,800  
 
                       
 
                               
Stock data:
                               
Outstanding common shares, net of treasury (1)
    24,904       24,208       35.7 %     21,368  
 
                       
Book value (1)
  $ 10.97     $ 9.36       -11.1 %   $ 7.87  
 
                       
Market Price at end of period
  $ 15.26     $ 24.61       -38.0 %   $ 21.23  
 
                       
Market capitalization
  $ 501,245     $ 595,729       -15.9 %   $ 453,660  
 
                       
 
                               
Common dividend data:
                               
Cash dividends declared
  $ 13,522     $ 11,425       18.4 %   $ 9,415  
 
                       
Cash dividends declared per share (1)
  $ 0.55     $ 0.51       7.8 %   $ 0.38  
 
                       
Payout ratio
    26.10 %     19.22 %     35.8 %     0.00 %
 
                       
Dividend yield
    2.33 %     2.19 %     6.4 %     0.00 %
 
                       
The following provides the high and low prices and dividend per share of the Group’s stock for each quarter of the last three fiscal periods. Common stock prices and cash dividend per share were adjusted to give retroactive effect to the stock dividend declared on the Group’s common stock.
                         
                    Cash  
    Price             Dividend  
    High     Low     Per share  
Fiscal 2005
                       
June 30, 2005
  $ 23.47     $ 13.66     $ 0.14  
 
                 
March 31, 2005
  $ 28.94     $ 22.97     $ 0.14  
 
                 
December 31, 2004
  $ 28.41     $ 24.37     $ 0.14  
 
                 
September 30, 2004 (1)
  $ 26.64     $ 22.76     $ 0.13  
 
                 
 
                       
Fiscal 2004 (1)
                       
June 30, 2004
  $ 29.77     $ 23.26     $ 0.13  
 
                 
March 31, 2004
  $ 29.55     $ 22.45     $ 0.13  
 
                 
December 31, 2003
  $ 23.77     $ 19.87     $ 0.13  
 
                 
September 30, 2003
  $ 22.30     $ 19.28     $ 0.12  
 
                 
 
                       
Fiscal 2003 (1)
                       
June 30, 2003
  $ 21.77     $ 17.90     $ 0.12  
 
                 
March 31, 2003
  $ 17.96     $ 16.58     $ 0.12  
 
                 
December 31, 2002
  $ 17.03     $ 13.12     $ 0.12  
 
                 
September 30, 2002
  $ 16.69     $ 13.72     $ 0.10  
 
                 
 
(1)   Adjusted to give retroactive effect to the 10% stock dividends declared on the Group’s common stock on November 30, 2004.

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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 June 30, 2005, such assets reached $7.2 billion – up 11.8% from $6.4 billion at June 30, 2004. The increase was mainly due to an increase of 14.1% in the Group’s assets owned, when compared to June 30, 2004, and to an increase of 7.9% in the equity value of broker-dealer assets gathered, when compared to June 30, 2004. The Group’s financial assets’ principal component is the assets owned by the Group, of which about 98% are owned by the Group’s banking subsidiary. In fiscal 2004, the Group’s total financial assets reached $6.4 billion, up 12.2% from $5.7 billion at June 30, 2003.
Another component of financial assets are 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 June 30, 2005, total assets managed by the Group’s trust division amounted to $1.823 billion, an increase of 9.1% over the $1.671 billion at June 30, 2004. As of June 30, 2004, total assets managed by the Group’s trust division amounted to $1.671 billion, slightly higher than the $1.670 billion at June 30, 2003.
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 June 30, 2005, total assets gathered by the broker-dealer from its customer investment accounts increased 7.9%, to $1.135 billion as of June 30, 2005, from $1.052 billion as of June 30, 2004. This increase, as mentioned before, was primarily due to the impact on the assets gathered by the Group’s securities broker-dealer subsidiary of the equity market recovery trend started during the second half of fiscal 2004 and continued throughout fiscal 2005, as well as the development of new business and trust relationships through the year. At June 30, 2004, total assets gathered by the broker-dealer from its customer investment accounts reached $1.052 billion, up 13.9% from $962.9 million at the end of fiscal 2003.
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 potential losses based upon an evaluation of known and inherent risks. The Group’s allowance for loan losses policy provides for a detailed quarterly analysis of possible losses. Refer to details of the methodology in this section for more information. 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 June 30, 2005, the Group’s allowance for loan losses amounted to $6.5 million or 0.71% of total loans versus $7.6 million or 1.01% of total loans at June 30, 2004. Commercial loans allowances increased 30.1% by $397,000 while residential real estate decreased 18.0% or $694,000, when compared with balances recorded at June 30, 2004. The consumer loans allowance decreased by 8.7% or $127,000, when compared to $1.5 million recorded at June 30, 2004.
The provision for loan losses for the year ended June 30, 2005 totaled $3.3 million, a 27.7% decrease from the $4.6 million reported for the year ended June 30, 2004. Based on an analysis of the credit quality and the composition of the Group’s loan portfolio, management determined that the provision for the year ended June 30, 2005 was adequate in order to maintain the allowance for loan losses at an appropriate level, even though the loan portfolio increased from $745.2 million as of June 30, 2004 to $895.2 million as of June 30, 2005 (a 20.1% increase) and there was an increase in the net credit losses from $2.1 million for the year ended June 30, 2004 to $4.4 million for the year ended June 30, 2005 (an increase of 111.7%). The main reason for the decrease in the provision, is that during the year ended June 30, 2004, management charged against earnings the provision for the possible losses on certain nonperforming loans which were in the process of evaluation. During the year ended June 30, 2005, these loans or portions thereof were charged-off against the allowance established in the previous fiscal year since such loans or the portions thereof were determined to be uncollectible. The increase in the loan portfolio is mainly related to new high quality and well collateralized loans which do not require large amounts of allowance for loan losses.
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.

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TABLE 8 — ALLOWANCE FOR LOAN LOSSES SUMMARY:
Five-Year Period Ended June 30, 2005
(Dollars in thousands)
                                         
    2005     2004     2003     2002     2001  
Balance at beginning of period
  $ 7,553     $ 5,031     $ 3,039     $ 2,856     $ 6,837  
Provision for loan losses
    3,315       4,587       4,190       2,117       2,903  
Net credit losses — see Table 10
    (4,373 )     (2,065 )     (2,198 )     (1,934 )     (6,884 )
 
                             
Balance at end of period
  $ 6,495     $ 7,553     $ 5,031     $ 3,039     $ 2,856  
 
                             
TABLE 9 — ALLOWANCE FOR LOAN LOSSES BREAKDOWN:
Five-Year Period Ended June 30, 2005
(Dollars in thousands)
                                         
    2005     2004     2003     2002     2001  
Residential real estate (1)
  $ 3,167     $ 3,861     $ 1,749     $ 1,178     $ 816  
Commercial
    1,714       1,317       433       284       419  
Consumer
    1,335       1,462       1,289       1,486       1,318  
Financing leases (2)
    —       —       10       73       303  
Unallocated allowance
    279       913       1,550       18       —  
 
                             
 
  $ 6,495     $ 7,553     $ 5,031     $ 3,039     $ 2,856  
 
                             
 
                                       
Allowance composition:
                                       
Residential real estate
    48.8 %     51.1 %     34.8 %     38.8 %     28.6 %
Commercial
    26.4 %     17.4 %     8.6 %     9.3 %     14.7 %
Consumer
    20.6 %     19.4 %     25.6 %     48.9 %     46.1 %
Financing leases (2)
    0.0 %     0.0 %     0.2 %     2.4 %     10.6 %
Unallocated allowance
    4.2 %     12.1 %     30.8 %     0.6 %     0.0 %
 
                             
 
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 
                             
 
                                       
Allowance coverage ratio at end of year
                                       
Applicable to:
                                       
Real estate — mortgage
    0.42 %     0.59 %     0.26 %     0.23 %     0.20 %
Commercial
    1.32 %     1.61 %     0.99 %     0.69 %     1.62 %
Consumer
    4.41 %     7.84 %     6.50 %     6.73 %     5.80 %
Financing leases (2)
    0.00 %     0.00 %     23.81 %     24.75 %     36.64 %
 
                             
Unallocated allowance to total loans
    0.03 %     0.10 %     0.21 %     0.00 %     0.00 %
 
                             
Total allowance to total loans
    0.71 %     1.01 %     0.69 %     0.52 %     0.61 %
 
                             
 
                                       
Other selected data and ratios:
                                       
Recoveries to net charge-off’s
    14.1 %     35.6 %     29.0 %     31.9 %     23.8 %
 
                             
Allowance coverage ratio to:
                                       
Non-performing loans
    21.1 %     24.5 %     17.4 %     15.1 %     16.9 %
 
                             
Non-real estate non-performing loans
    139.0 %     229.8 %     217.3 %     256.2 %     103.4 %
 
                             
 
(1)   Includes loans held for sale.
 
(2)   Discontinued in June 2000.

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TABLE 10 — NET CREDIT LOSSES STATISTICS :
Five-Year Period Ended June 30, 2005
(Dollars in thousands)
                                         
    2005     2004     2003     2002     2001  
Real estate
                                       
Charge-offs
  $ (2,860 )   $ (378 )   $ (5 )   $ (30 )   $ (77 )
Recoveries
    —       —       —       —       —  
 
                             
 
    (2,860 )     (378 )     (5 )     (30 )     (77 )
 
                             
 
                                       
Commercial
                                       
Charge-offs
    (614 )     (249 )     (24 )     —       (222 )
Recoveries
    118       139       63       42       58  
 
                             
 
    (496 )     (110 )     39       42       (164 )
 
                             
 
                                       
Consumer
                                       
Charge-offs
    (1,619 )     (2,563 )     (2,928 )     (2,389 )     (3,289 )
Recoveries
    602       832       606       566       1,352  
 
                             
 
    (1,017 )     (1,731 )     (2,322 )     (1,823 )     (1,471 )
 
                             
 
                                       
Financing leases (1)
                                       
Charge-offs
    —       (17 )     (138 )     (420 )     (5,442 )
Recoveries
    —       171       228       297       736  
 
                             
 
    —       154       90       (123 )     (4,706 )
 
                             
 
                                       
Net credit losses
                                       
Total charge-offs
    (5,093 )     (3,207 )     (3,095 )     (2,839 )     (9,030 )
Total recoveries
    720       1,142       897       905       2,146  
 
                             
 
  $ (4,373 )   $ (2,065 )   $ (2,198 )   $ (1,934 )   $ (6,884 )
 
                             
 
                                       
Net credit losses (recoveries) to average loans:
                                       
Real estate
    0.41 %     0.06 %     0.00 %     0.01 %     0.02 %
 
                             
Commercial
    0.46 %     0.19 %     -0.10 %     -0.13 %     0.72 %
 
                             
Consumer
    4.31 %     9.70 %     11.97 %     8.46 %     7.54 %
 
                             
Financing leases (1)
    0.00 %     1100.00 %     -50.85 %     22.20 %     95.90 %
 
                             
Total
    0.53 %     0.28 %     0.33 %     0.35 %     1.55 %
 
                             
 
                                       
Average loans (2):
                                       
Real estate
  $ 699,027     $ 662,590     $ 608,189     $ 495,631     $ 401,916  
Commercial
    108,636       57,047       40,477       31,345       22,926  
Consumer
    23,576       17,853       19,404       21,549       19,517  
Financing leases (1)
    —       14       177       554       4,907  
 
                             
Total
  $ 831,239     $ 737,504     $ 668,070     $ 549,079     $ 444,359  
 
                             
 
(1)   Discontinued in June 2000.
 
(2)   Includes loans held for sale.
TABLE 11 — NON-PERFORMING ASSETS :
Five-Year Period Ended June 30, 2005
(Dollars in thousands)
                                         
    2005     2004     2003     2002     2001  
Non-performing assets:
                                       
Non-performing loans
                                       
Non-accruing loans
  $ 21,859     $ 23,714     $ 10,350     $ 10,196     $ 6,537  
Accruing loans over 90 days past due
    8,997       7,224       18,532       9,920       10,366  
 
                             
Total non-performing loans (see Table 12 below)
    30,856       30,938       28,882       20,116       16,903  
Foreclosed real estate
    4,186       888       536       476       847  
Repossessed autos and equipment
    —       —       —       —       107  
 
                             
Total non-performing assets
  $ 35,042     $ 31,826     $ 29,418     $ 20,592     $ 17,857  
 
                             
 
                                       
Non-performing assets to total assets
    0.82 %     0.85 %     0.97 %     0.83 %     0.88 %
 
                             
 
                                       
Interest that could have been recorded in the period (if the loans had not been classified as non-accruing loans)
  $ 2,164     $ 843     $ 648     $ 724     $ 664  
 
                             

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TABLE 12 — NON-PERFORMING LOANS :
Five-Year Period Ended June 30, 2005
(Dollars in thousands)
                                         
    2005     2004     2003     2002     2001  
Non-performing loans:
                                       
Residential real estate
  $ 26,184     $ 27,651     $ 26,567     $ 18,930     $ 14,140  
Commercial, mainly real estate
    4,549       2,954       1,798       585       1,535  
Consumer
    123       333       498       454       588  
Financing leases (1)
    —       —       19       147       640  
 
                             
Total
  $ 30,856     $ 30,938     $ 28,882     $ 20,116     $ 16,903  
 
                             
 
                                       
Non-performing loans composition percentages:
                                       
Residential real estate
    84.9 %     89.4 %     92.0 %     94.1 %     83.7 %
Commercial, mainly real estate
    14.7 %     9.6 %     6.2 %     2.9 %     9.1 %
Consumer
    0.4 %     1.1 %     1.7 %     2.3 %     3.5 %
Financing leases (1)
    0.0 %     0.0 %     0.1 %     0.7 %     3.8 %
 
                             
Total
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 
                             
 
                                       
Non-performing loans to:
                                       
Total loans
    3.38 %     4.12 %     3.94 %     3.47 %     3.63 %
 
                             
Total assets
    0.73 %     0.83 %     0.95 %     0.81 %     0.83 %
 
                             
Total capital
    9.04 %     10.50 %     14.32 %     12.09 %     14.89 %
 
                             
 
(1)   Discontinued in June 2002.
Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Group.
Included in the review of individual loans are those that are impaired. A loan is considered impaired when, based on current information and events, it is probable that the Group will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of small balance, homogeneous loans that are collectively evaluated for impairment 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. 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 following are the credit risk categories (established by the FDIC Interagency Policy Statement of 1993) used:
1. Pass — loans considered highly collectible due to their repayment history or current status (to be in this category a loan cannot be more than 90 days past due).
2 . Special Mention — loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the loan.
3 . Substandard — loans inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
4 . Doubtful — loans that have all the weaknesses inherent in substandard, with the added characteristic that collection or liquidation in full is highly questionable and improbable.

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5 . Loss — loans considered uncollectible and of such little value that their continuance as bankable assets is not warranted.
The Group, using an aged-based rating system, applies an overall allowance percentage to each loan portfolio category based on historical credit losses adjusted for current conditions and trends. This delinquency-based calculation is the starting point for management’s determination of the required level of the allowance for loan losses. Other data considered in this determination includes:
  1.   Overall historical loss trends; and
 
  2.   Other information, including underwriting standards, economic trends and unusual events.
Loan loss ratios and credit risk categories, are updated quarterly and are applied in the context of accounting principles generally accepted in the United States of America (“GAAP”) and the Joint Interagency Guidance on the importance of depository institutions having prudent, conservative, but not excessive loan loss allowances that fall within an acceptable range of estimated losses. While management uses available information in estimating possible loan losses, future changes to the allowance may be necessary based on factors beyond the Group’s control, such as factors affecting general economic conditions.
An unallocated allowance is established recognizing the estimation risk associated with the aged-based rating system and with the specific allowances. It is based upon management’s evaluation of various conditions, the effects of which are not directly measured in determining the aged-based rating system and the specific allowances. These conditions include then-existing general economic and business conditions affecting our key lending areas; credit quality trends, including trends in non-performing loans expected to result from existing conditions, collateral values, loan volumes and concentrations, seasoning of the 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 fiscal 2005, net credit losses amounted to $4.4 million, a 111.8% increase when compared to $2.01 million reported for fiscal 2004. The increase was primarily due to $2.8 million increment in net credit losses for real estate loans. Total loss recoveries decreased from $1.1 million for fiscal year 2004 to $720,000 for fiscal year 2005. As result, the recoveries to net charge-offs ratio decreased from 35.6% in fiscal 2004 to 14.1% for fiscal 2005.
The Group’s non-performing assets include non-performing loans, foreclosed real estate and other repossessed assets (see Tables 11 and 12 above). At June 30 2005, the Group’s non-performing assets totaled $35.0 million (0.82% of total assets) versus $31.8 million (0.85% of total assets) at June 30, 2004. At June 30, 2003 and 2002, non-performing assets amounted to $29.4 million and $20.6 million, respectively (0.97% and 0.83%, respectively, of total assets). This increase was principally due to foreclosed real estate properties which increased by 371.4% to $4.2 million at June 30, 2005 when compared to $888,000 reported at June 30, 2004.
At June 30, 2005, the allowance for loan losses to non-performing loans coverage ratio was 21.1% (24.4% at June 30, 2004. Excluding the lesser-risk real estate loans, the ratio is much higher, 139.0% (229.8% at June 30, 2004).
Detailed information concerning each of the items that comprise non-performing assets follows:
•   Real estate loans — are placed in non-accrual status when they become 365 days or more past due and are written- down, if necessary, based on the specific evaluation of the collateral underlying the loan. At June 30, 2005, the Group’s non-performing real estate loans totaled $26.2 million (84.9% of the Group’s non-performing loans, compared to $27.7 million or 89.4% at June 30, 2004, and to $26.6 million or 92.0% at June 30, 2003). 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 June 30, 2005, the Group’s non-performing commercial business loans amounted to $4.5 million (14.7% of the Group’s non-performing loans, compared to $3.0 million or 9.6% at June 30, 2004, and $1.8 million or 6.2% at June 30, 2003). 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 June 30, 2005, the Group’s non-performing consumer loans amounted to $123,000 (0.4% of the Group’s total non-performing loans, compared to $333,000 or 1.1% at June 30, 2004, and $498,000 or 1.7% at June 30, 2003).
 
•   Finance leases — are placed in non-accrual status when they become 90 days past due. There are no non-performing financing leases at June 30, 2005 and 2004. At June 30, 2003, the Group’s non-performing financing leases portfolio amounted to $19,000 (0.1% of the Group’s total non-performing loans and compared to $147,000 or 0.7% at June 30,

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    2002). The underlying collateral secures these financing leases. As reported, the Group discontinued leasing operations on June 30, 2000.
 
•   Foreclosed real estate — is initially recorded at the lower of the related loan balance or fair value at the date of foreclosure. Any excess of the loan balance over the fair market value of the property is charged against the allowance for loan losses. Subsequently, any excess of the carrying value over the estimated fair market value less selling costs is charged to operations. Management is actively seeking prospective buyers for these foreclosed real estate properties. Foreclosed real estate balance amounted to $4.2 million at June 30, 2005 and $888,000 at June 30, 2004, $536,000 at June 30, 2003 and $476,000 June 30, 2002.
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 June 30, 2005, the aggregate contractual obligations and commercial commitments are:
                                 
    Payments Due by Period  
    Total     Less than 1 year     2 - 5 years     After 5 years  
            (Dollars in thousands)          
       
CONTRACTUAL OBLIGATIONS:
                               
 
                               
Federal Funds purchased
  $ 12,310     $ 12,310     $ —     $ —  
Securities sold under agreements to repurchase
    2,191,756       2,191,756       —       —  
Advances from FHLB
    300,000       75,000       225,000       —  
Term notes
    15,000       —       15,000       —  
Subordinated capital notes
    72,166       —       —       72,166  
Annual rental commitments under noncancelable operating leases
    17,264       2,748       8,542       5,974  
 
                       
Total
  $ 2,608,496     $ 2,281,814     $ 248,542     $ 78,140  
 
                       
 
                               
OTHER COMMERCIAL COMMITMENTS:
                               
Lines of credit
  $ 18,191     $ 18,191     $ —     $ —  
Commitments to extend credit
    38,140       38,140       —       —  
 
                       
Total
  $ 56,331     $ 56,331     $ —     $ —  
 
                       
Such commitments will be funded in the normal course of business from the Bank’s principal sources of funds. At June 30, 2005 the Bank had $730.6 million in time deposits and IRA accounts that mature during the following twelve months. The Bank does not anticipate any difficulty in retaining such deposits.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted 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 necessary move in the same direction or with the same magnitude as the prices of goods and services since such prices are affected by inflation.
Quantitative And Qualitative Disclosures About Market Risk
Interest Rate Risk and Asset/Liability Management
The Group’s interest rate risk and asset and liability management is the responsibility of the Asset and Liability Management Committee (“ALCO”), which reports to the Board of Directors and is composed of members of the Group’s senior management. The principal objective of ALCO is to enhance profitability while maintaining appropriate levels of interest rate and liquidity risks. ALCO is also involved in formulating economic projections and strategies used by the Group in its planning and budgeting process. It oversees the Group’s sources, uses and pricing of funds.

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Interest rate risk can be defined as the exposure of the Group’s operating results or financial position to adverse movements in market interest rates, which mainly occurs when assets and liabilities reprice at different times and at different rates. This difference is commonly referred to as a “maturity mismatch” or “gap”. The Group employs various techniques to assess the degree of interest rate risk.
The Group is liability sensitive due to its fixed rate and medium to long-term asset composition being funded with shorter-term repricing liabilities. As a result, the Group utilizes various derivative instruments for hedging purposes, such as interest rate swap agreements. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations and payments are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. The actual risk of loss is the cost of replacing, at market, these contracts in the event of default by the counterparties. The Group controls the credit risk of its derivative financial instrument agreements through credit approvals, limits, monitoring procedures and collateral, when considered necessary.
The Group generally uses interest rate swaps and options, in managing its interest rate risk exposure. Certain swaps were executed 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 pays a fixed monthly or quarterly cost and receives a floating monthly or quarterly payment based on LIBOR. Floating rate payments received from the swap counterparties offset to the interest payments to be made on the forecasted rollover of short-term borrowings thus resulting in a net fixed rate cost to the Group.
Also in August 2004, the Group entered into a $35 million notional amount interest rate swap to fix the cost of the subordinate capital notes of the Statutory Trust I. This swap was fixed at a rate of 6.57% and matures on December 18, 2006.
The Group’s swaps (excluding those used to manage exposure to the stock market at June 30, 2005 and 2004 are set forth in the table below:
                 
    (Dollars in thousands)  
    2005     2004  
Swaps:
               
Pay fixed swaps notional amount
  $ 885,000     $ 900,000  
Weighted average pay rate – fixed
    3.44 %     3.47 %
Weighted average receive rate – floating
    3.27 %     1.25 %
Maturity in months
    4 to 64       3 to 76  
Floating rate as a percent of LIBOR
    100 %     100 %
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 will receive a specified percentage of the average increase of the month-end value of the stock index. If the index decreases, the depositor receives the principal without any interest. The Group uses swap and option agreements with major money center banks and major broker-dealer companies to manage its exposure to changes in those indexes. Under the terms of the option agreements, the Group will receive the average increase in the month-end value of the corresponding index in exchange for a fixed premium. Under the term of the swap agreements, the Group will receive the average increase in the month-end value of the corresponding index in exchange for a quarterly fixed interest cost. The changes in fair value of the options purchased, the swap agreements 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.
During fiscal year 2005, the Group bought put and call option contracts for the purpose of economically hedging $100,000,000 in US Treasury Notes. The objective of the hedges was to protect the fair value of the US Treasury Notes classified as available-for-sale. The net effect of these transactions was to reduce earnings by $719,000. There were no put or call options at June 30, 2005.
On August 31, 2004, September 30, 2004, and March 30, 2005, the Group entered into three agreements to purchase a total $114.9 million of fixed rate mortgage loans from a financial institution in Puerto Rico. As part of the agreements, the seller guarantees the scheduled timely payments of principal as well as interest payable on the aggregate outstanding principal balance of the mortgage loans based on variable interest rate equal to 150 basis points plus 90 days LIBOR.

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Swap has been accounted for in the Group’s consolidated financial statements to give effect to the conversion of fixed rate loans into variable rates loans, without embedded cap. These swaps are considered by management as balance guaranteed swaps because their notional amounts, fixed interest rates and other terms match to those of the outstanding purchased mortgage loans. Since the contracts meet with the sale accounting provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” SFAS No. 133 and related interpretations provide that these interest rate swaps be accounted for separately. Since the hedged item and the hedging instrument have identical critical terms, no ineffectiveness is assumed and the fair value changes in the interest rate swaps are recorded as changes in the value of both the interest rate swaps and the mortgage loans. At June 30, 2005, the notional amount of these interest rate swaps and the principal balance of the mortgage loans amounted to $106,702,000; the weighted average receive floating rate at fiscal year end was 3.47%; the weighted average pay fixed rate at year end was 6.20%; and the floating rate spread was 150 basis points.
Information pertaining to the notional amounts of the Group’s derivative financial instruments as of June 30, 2005 and 2004 is as follows:
                 
    Notional Amount  
    (In thousands)  
Type of Contract:   2005     2004  
Cash Flows Hedging Activities:
               
Interest rate swaps used to hedge:
               
Securities sold under agreement to repurchase
  $ 850,000     $ 900,000  
Subordinated capital notes
    35,000       —  
Fair Value Hedging Activities:
               
Balance guaranteed swap
    106,703       —  
 
           
 
  $ 991,703     $ 900,000  
 
           
 
               
Derivatives Not Designated as Hedge:
               
Purchased options used to manage exposure to the stock market on stock indexed deposits
  $ 186,010     $ 227,260  
Embedded options on stock indexed deposits
    178,478       218,884  
 
           
 
  $ 364,488     $ 446,144  
 
           
At June 30, 2005, the contractual maturities of interest rate swaps and equity indexed options, by fiscal year were as follows:
                                 
    (In thousands)  
            Equity Indexed              
            Options              
    Cash Flows Hedging     Purchased and     Equity Indexed        
Year Ending June 30,   Swaps     Swaps     Options Sold     Total  
2006
  $ 325,000     $ 54,150     $ 52,369     $ 431,519  
2007
    410,000       58,490       55,306       523,796  
2008
    —       35,860       34,010       69,870  
2009
    —       27,760       27,218       54,978  
2010
    —       9,750       9,575       19,325  
2011
    150,000       —       —       150,000  
 
                       
 
  $ 885,000     $ 186,010     $ 178,478     $ 1,249,488  
 
                       
Gains (losses) credited to earnings and reflected as “Derivatives” in the consolidated statement of income during fiscal years 2005, 2004 and 2003 amounted to ($2.8) million, $11,000 and ($4.0) million, respectively. Unrealized loss of $6.4 million and unrealized gain of $11.1 million, on derivatives designated as cash flow hedges were included in other comprehensive income for fiscal 2005 and 2004, respectively. Ineffectiveness of $1.1 million was credited to earnings during fiscal year 2005. No ineffectiveness was charged to earnings during fiscal year 2004.

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At June 30, 2005 and 2004, the fair value of derivatives was recognized as either assets or liabilities in the consolidated statements of financial condition as follows: (i)the fair value of the interest rate swaps used to manage the exposure to the stock market on stock indexed deposits, fix the cost of short-term borrowings, and hedge the mortgage loans purchased, represented a liability of $14.9 million and $13.8 million, respectively, in accrued expenses and other liabilities; (ii) the purchased options used to manage the exposure to the stock market on stock indexed deposits represented an asset of $19.0 million and $16.5 million, respectively; and (iii) the options sold to customers embedded in the certificates of deposit represented a liability of $18.2 million and $16.2 million, respectively, recorded in deposits.
The Group is exposed to a reduction in the level of net interest income (“NII”) in a rising interest rate environment. NII will fluctuate with changes in the levels of interest rate affecting interest-sensitive assets and liabilities. Both hypothetical rate scenarios consider a gradual change of 200 basis points during the twelve-month period. The decreasing rate scenario has a floor of 1%. This floor causes liabilities (already around 1%) to have little cost reduction, while the assets do have a decrease in yields, causing a small loss in certain declining rate simulations. If (1) the rates in effect at year-end remain constant, or increase or decrease on an instantaneous and sustained change of plus 200 basis points or minus 50 basis points, and (2) all scheduled repricing, reinvestments and estimated prepayments, and reissuances are constant, or increase or decrease accordingly; NII will fluctuate as shown on the following table:
                         
Change in   Expected     Amount     Percent  
Interest rate   NII (1)     Change     Change  
June 30,2005:
                       
Base Scenario
                       
Flat
  $ 78,855     $ —       0.00 %
 
                 
+ 200 Basis points
  $ 50,236     $ (28,619 )     -36.29 %
 
                 
- 50 Basis points
  $ 84,867     $ 6,012       7.62 %
 
                 
 
                       
June 30, 2004:
                       
Base Scenario
                       
Flat
  $ 133,430     $ —       0.00 %
 
                 
+ 200 Basis points
  $ 123,552     $ (9,878 )     -7.40 %
 
                 
- 50 Basis points
  $ 132,876     $ (554 )     -0.42 %
 
                 
 
(1)   The NII figures exclude the effect of the amortization of loan fees.
NII was increased with the savings of not booking additional expensive swaps. The savings was offset by the effect of a flat curve; higher funding cost with lower asset yields. The Group recognizes that the risk to rate sensitivity is high. Market changed and opened a window to buy swaps. We bought $325 million of 5 year swaps in September of 2005 fixing our liabilities cost. This transaction will decrease substantially the sensitivity to a level close to the limits set in our policy of 15% (versus current sensitivity of -36.29% at closing).
As a long term strategy to lower the interest risk, the Group will also: (1) Open 10 branches that will provide increases in core deposits; (2) Change the mix of assets of 80% investments and 20% in loans to 60% and 40%, respectively. The loan increase will be mostly on Commercial floating rate loans; and (3) Liabilities will be extended.
Liquidity Risk Management
The objective of the Group’s asset and liability management function is to maintain consistent growth in net interest income within the Group’s policy limits. This objective is accomplished through management of the Group’s balance sheet composition, liquidity, and interest rate risk exposure arising from changing economic conditions, interest rates and customer preferences.
The goal of liquidity management is to provide adequate funds to meet changes in loan demand or unexpected deposit withdrawals. This is accomplished by maintaining liquid assets in the form of investment securities, maintaining sufficient unused borrowing capacity in the national money markets and delivering consistent growth in core deposits. As of June 30, 2005, the Group had approximately $1.1 billion in investments available to cover liquidity needs. Additional asset-driven liquidity is provided by securitizable loan assets. These sources, in addition to the Group’s 10.7% average equity capital base, provide a stable funding base.

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In addition to core deposit funding, the Group also accesses a variety of other short-term and long-term funding sources. Short-term funding sources mainly include securities sold under agreements to repurchase. Borrowing funding source limits are determined annually by each counterparty and depend on the Bank’s financial condition and delivery of acceptable collateral securities. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The Group also uses the FHLB as a funding source, issuing notes payable, such as advances, through its FHLB member subsidiary, the Bank. This funding source requires the Bank to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At June 30, 2005, the Group has an additional borrowing capacity with the FHLB of $26.8 million.
In addition, the Bank utilizes the National Certificate of Deposit (“CD”) Market as a source of cost effective deposit funding in addition to local market deposit inflows. Depositors in this market consist of credit unions, banking institutions, CD brokers and some private corporations or non-profit organizations. The Bank’s ability to acquire brokered deposits can be restricted if it becomes in the future less than well capitalized. An adequately-capitalized bank, by regulation, may not accept deposits from brokers unless it applies for and receives a waiver from the FDIC.
As of June 30, 2005, the Bank had line of credit agreements with other financial institutions permitting the Bank to borrow a maximum aggregate amount of $55.0 million (no borrowings were made during the year ended June 30, 2005 under such lines of credit). The agreements provide for unsecured advances to be used by the Group on an overnight basis. Interest rate is negotiated at the time of the transaction. The credit agreements are renewable annually.
The Group’s liquidity targets are reviewed monthly by the ALCO Committee and are based on the Group’s commitment to make loans and investments and its ability to generate funds.
The Group’s investment portfolio as of June 30, 2005 had an effective duration of 2.33 years. This duration is actively managed in order to maintain an efficient liquidity ratio.
The principal source of funds for the Group are dividends from the Bank. The ability of the Bank to pay dividends is restricted by regulatory authorities (see “Dividend Restrictions” under “Regulation and Supervision”). Primarily, through such dividends the Group meets its cash obligations and pays dividends to its common and preferred stockholders. Management believes that the Group will continue to meet its cash obligations as they become due and pay dividends as they are declared.
Changes in statutes and regulations, including tax laws and rules
The Group, as a Puerto Rico-chartered financial holding company, and its subsidiaries, are each subject to extensive federal and local governmental supervision and regulation relating to its banking, securities and insurance business. The Group also benefits from favorable tax treatment under regulations relating to the activities of its international banking entities. In addition, there are laws and other regulations that restrict transactions between the Group and its subsidiaries. Any change in such tax or other regulations, whether by applicable regulators or as a result of legislation subsequently enacted by the Congress of the United States or the Legislature of Puerto Rico, could adversely affect the Group’s profits and financial condition.
On August 1, 2005 the Puerto Rico Legislature approved the Law No. 41 “Law of the Educational Future of the Puerto Rican Children”. This law imposes an additional tax of 2.5 % on taxable net income. This law is applicable to all corporations and partnerships with a taxable net income over $20,000, according to part (a) of Section 1015 of the Puerto Rico Internal Revenue Code of 1994.
This law will be effective for tax years beginning after December 31, 2004 and finish on or before December 31, 2006. Also the effectiveness of this law is subject to the final approval of the Joint Resolution of the Legislature Number 445, concerning the General Budget for the 2005-2006 fiscal year.
Puerto Rico international banking entities, or IBE’s, are currently exempt from taxation under Puerto Rico law. In 2004, Puerto Rico enacted a law amending the IBE Act. This law imposes income taxes at normal statutory rates on each IBE that operates as a unit of a bank, if the IBE’s net income generated after December 31, 2003 exceeds 40 percent of the bank’s net income in the taxable year commenced on July 1, 2003, 30 percent of the bank’s net income in the taxable year commenced on July 1, 2004, and 20 percent of the bank’s net income in the taxable year commenced on July 1, 2005, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a bank.
The Group has an IBE that operates as a unit of the Bank. In November 2003, the Group organized a new IBE that operates as a subsidiary of the Bank. The Bank transferred as of January 1, 2004, substantially all of the Bank’s IBE assets to the new IBE subsidiary. Although this transfer of IBE assets allows the Group to continue enjoying tax benefits, there cannot be any assurance that the IBE Act will not be modified in the future in a manner to reduce the tax benefits available to the new IBE subsidiary.

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Critical Accounting Policies
The consolidated financial statements of the Group are prepared in accordance with GAAP and with general practices within the financial industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at 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. The Group believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.
•   Allowance for Loan Losses. The Group assesses the overall risks in its loan portfolio and establishes and maintains a reserve for probable losses thereon. The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on the evaluation of known and inherent risks in the Group’s loan portfolio. The Group’s management evaluates the adequacy of the allowance for loan losses on a quarterly basis. Based on current and expected economic conditions, the expected level on net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses, management considers that the allowance for loan losses is adequate to absorb probable losses on its loan portfolio. In determining the allowance, management considers the portfolio risk characteristics, prior loss experience, prevailing and projected economic conditions and loan impairment measurements. Any significant changes in these considerations would have an impact on the allowance for loan losses. See Financial Condition – Allowance for Loan Losses and Non-Performing Assets and Note 1 to the consolidated financial statements – Summary of Significant Accounting Policies for a detailed description of the Group’s estimation process and methodology related to the allowance for loan losses.
 
•   Income Taxes. In preparing the consolidated financial statements, management of the Group is required to estimate income taxes. This involves an estimation of current 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 tax expense involves estimates and assumptions that require the Group to assume certain positions based on its interpretation of current tax regulations. Changes in assumptions affecting estimates may be required in the future and estimated tax liabilities may need to be increased or decreased accordingly. The 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 or adjust valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of income.
 
•   Financial Instruments. Certain financial instruments including derivatives, hedged items and investment securities available-for-sale are recorded at fair value and unrealized gains and losses are recorded in other comprehensive income or other gains and losses as appropriate. Fair values are based on listed market prices, if available. If listed market prices are not available, fair value is determined based on other relevant factors including price quotations for similar instruments. Fair value for certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments as well as time valued and yield curve or volatility factors underlying the positions. See Note 1 to the consolidated financial statements – Summary of Significant Accounting Policies for a detailed description of the Group’s estimation process and methodology related to the financial instruments.
New Accounting Developments
FASB Statement No. 123 (R)- Accounting for Stock-Based Compensation
On December 16, 2004 the Financial Accounting Standard Board (“FASB”) published Statement 123(R) requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. The Group will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. Required adoption date of Statement 123(R) for a public company with year-end of June 30, is on July 1, 2005.
At June 30, 2005, the Group had three stock-based employee compensation plans, which are described more fully in Note 1. At present, the Group accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. No stock-based employee compensation cost

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is reflected in net income, as all options granted during previous fiscal periods under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Please refer to the Table included in Note 1 to the consolidated financial statement for an illustration of the effect on net income and earnings per share if the Group had applied the fair value recognition provisions.
On June 30, 2005, the Compensation Committee of Group’s Board of Directors approved the acceleration of the vesting of all unvested options to purchase shares of common stock of OFG that were held by employees, officers and directors as of June 30, 2005. As a result, options to purchase approximately 1,219,333 shares became exercisable. The purpose of the accelerated vesting is to enable the Group to avoid recognizing in its income statement compensation expense associated with these options in future periods, upon adoption of Statement 123(R). The future expense to be avoided as a result of the acceleration of the vesting of these options amounts to approximately $3.4 million on a pre-tax basis over the course of the original vesting period, of which $1.5 million occurs in the first fiscal year ending June 30, 2006, $0.8 million in the second fiscal year, $0.5 million in the third fiscal year, $0.3 million in each of the subsequent two fiscal years, and $65,000 in the sixth year fiscal year.
SFAS No. 153 “Exchanges of Nonmonetary Assets”
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” This statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The entity’s future cash flows are expected to significantly change if either of the following criteria is met: a) the configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred. b) the entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. A qualitative assessment will, in some cases, be conclusive in determining that the estimated cash flows of the entity are expected to significantly change as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.
SFAS No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This Statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principles. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This Statement requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. This Statement also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. This Statement carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This Statement also carries forward the guidance in Opinion 20 requiring justification of a change in accounting principle on the basis of preferability. This Statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. This Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. Management believes that the adoption of this statement will not have a material effect on the Group’s consolidated financial statements.

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TABLE 13 — SELECTED QUARTERLY FINANCIAL DATA :
FISCAL YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(dollars in thousands)
                                         
    September 30,     December 31,     March 31,     June 30,     YTD  
FISCAL 2005
                                       
Interest income
  $ 44,947     $ 47,917     $ 47,572     $ 48,876     $ 189,312  
Interest expense
    (21,294 )     (24,855 )     (27,162 )     (29,588 )     (102,899 )
 
                             
Net interest income
    23,653       23,062       20,410       19,288       86,413  
Provision for loan losses
    (700 )     (1,105 )     (660 )     (850 )     (3,315 )
 
                             
Net interest income after provision for loan losses
    22,953       21,957       19,750       18,438       83,098  
Non-interest income
    10,404       11,943       6,101       6,437       34,885  
Non-interest expenses
    (15,183 )     (15,508 )     (15,472 )     (16,857 )     (63,020 )
 
                             
Income before taxes
    18,174       18,392       10,379       8,018       54,963  
Income tax (expense) benefit
    (768 )     123       2,671       (377 )     1,649  
 
                             
Net income
    17,406       18,515       13,050       7,641       56,612  
Less: Dividends on preferred stock
    (1,200 )     (1,200 )     (1,200 )     (1,202 )     (4,802 )
 
                             
Net income available to common shareholders
  $ 16,206     $ 17,315     $ 11,850     $ 6,439     $ 51,810  
 
                             
 
                                       
Per share data (1):
                                       
Basic
  $ 0.67     $ 0.70     $ 0.48     $ 0.26     $ 2.11  
 
                             
Diluted
  $ 0.64     $ 0.68     $ 0.46     $ 0.26     $ 2.05  
 
                             
 
                                       
Average common shares outstanding
    24,262       24,552       24,628       24,847       24,571  
 
                             
Average potential common share-options
    1,195       1,059       1,001       357       687  
 
                             
Average shares and shares equivalents
    25,457       25,611       25,629       25,204       25,258  
 
                             
 
                                       
Selected Financial Ratios:
                                       
Return on average assets (ROA)
    1.84 %     1.78 %     1.25 %     1.99 %     1.39 %
 
                             
Return on average equity (ROE)
    27.60 %     27.26 %     17.67 %     32.33 %     20.15 %
 
                             
Efficiency ratio
    48.42 %     47.88 %     57.97 %     47.70 %     54.01 %
 
                             
Expense ratio
    0.83 %     0.62 %     0.91 %     0.79 %     0.83 %
 
                             
Interest rate spread
    2.46 %     2.11 %     1.82 %     1.68 %     2.00 %
 
                             
 
                                       
FISCAL 2004
                                       
Interest income
  $ 37,365     $ 42,085     $ 42,447     $ 42,488     $ 164,385  
Interest expense
    (18,467 )     (19,139 )     (19,691 )     (19,877 )     (77,174 )
 
                             
Net interest income
    18,898       22,946       22,756       22,611       87,211  
Provision for loan losses
    1,340       1,014       1,050       1,183       4,587  
 
                             
Net interest income after provision for loan losses
    17,558       21,932       21,706       21,428       82,624  
Non-interest income
    12,942       9,357       11,199       12,536       46,034  
Non-interest expenses
    15,381       14,603       14,997       14,451       59,432  
 
                             
Income before taxes
    15,119       16,686       17,908       19,513       69,226  
Income tax expense
    (1,560 )     (998 )     (1,585 )     (1,434 )     (5,577 )
 
                             
Net income
    13,559       15,688       16,323       18,079       63,649  
Less: Dividends on preferred stock
    (597 )     (1,200 )     (1,200 )     (1,201 )     (4,198 )
 
                             
Net income available to common shareholders
  $ 12,962     $ 14,488     $ 15,123     $ 16,878     $ 59,451  
 
                             
 
                                     
 
                                       
Per share data (1):
                                       
Basic
  $ 0.61     $ 0.67     $ 0.68     $ 0.70     $ 2.65  
 
                             
Diluted
  $ 0.56     $ 0.63     $ 0.64     $ 0.66     $ 2.49  
 
                             
 
                                       
Average common shares outstanding
    21,394       21,685       22,318       24,181       22,394  
Average potential common share-options
    1,590       1,433       1,444       1,310       1,451  
 
                             
Average shares and shares equivalents
    22,984       23,118       23,762       25,491       23,845  
 
                             
 
                                       
Selected Financial Ratios:
                                       
Return on average assets (ROA)
    1.74 %     1.95 %     1.93 %     1.99 %     1.91 %
 
                             
Return on average equity (ROE)
    30.34 %     41.28 %     36.35 %     32.33 %     34.64 %
 
                             
Efficiency ratio
    55.09 %     47.60 %     48.53 %     47.70 %     49.63 %
 
                             
Expense ratio
    0.88 %     0.89 %     0.85 %     0.79 %     0.85 %
 
                             
Interest rate spread
    2.56 %     2.85 %     2.68 %     2.48 %     2.64 %
 
                             

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TABLE 13 — SELECTED QUARTERLY FINANCIAL DATA :
FISCAL YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(dollars in thousands)
                                         
    September 30,     December 31,     March 31,     June 30,     YTD  
FISCAL 2003
                                       
Interest income
  $ 37,714     $ 37,851     $ 39,121     $ 37,060     $ 151,746  
Interest expense
    19,548       19,414       19,420       18,953       77,335  
 
                             
Net interest income
    18,166       18,437       19,701       18,107       74,411  
Provision for loan losses
    840       1,100       850       1,400       4,190  
 
                             
Net interest income after provision for loan losses
    17,326       17,337       18,851       16,707       70,221  
Non-interest income
    7,567       8,592       8,622       14,258       39,039  
Non-interest expenses
    (12,836 )     (12,471 )     (13,770 )     (14,579 )     (53,656 )
 
                             
Income before taxes
    12,057       13,458       13,703       16,386       55,604  
Income tax expense
    (483 )     (943 )     (697 )     (2,161 )     (4,284 )
 
                             
Net income
    11,574       12,515       13,006       14,225       51,320  
Less: Dividends on preferred stock
    (597 )     (597 )     (597 )     (596 )     (2,387 )
 
                             
Net income available to common shareholders
  $ 10,977     $ 11,918     $ 12,409     $ 13,629     $ 48,933  
 
                             
 
                                       
Per share data (1):
                                       
Basic
  $ 0.53     $ 0.57     $ 0.59     $ 0.64     $ 2.32  
 
                             
Diluted
  $ 0.49     $ 0.53     $ 0.55     $ 0.59     $ 2.15  
 
                             
 
                                       
Average common shares outstanding
    20,839       21,005       21,055       21,244       21,049  
Average potential common share-options
    1,712       1,659       1,698       1,662       1,683  
 
                             
Average shares and shares equivalents
    22,551       22,664       22,753       22,906       22,732  
 
                             
 
                                       
Selected Financial Ratios:
                                       
Return on average assets (ROA)
    1.84 %     1.87 %     1.82 %     1.99 %     1.88 %
 
                             
Return on average equity (ROE)
    31.10 %     31.25 %     30.45 %     32.06 %     31.33 %
 
                             
Efficiency ratio
    52.47 %     48.76 %     51.54 %     55.22 %     51.35 %
 
                             
Expense ratio
    1.14 %     0.82 %     1.03 %     0.99 %     0.99 %
 
                             
Interest rate spread
    3.08 %     2.97 %     2.93 %     2.65 %     2.91 %
 
                             
 
(1)   Adjusted for stock dividends and stock splits effected in the form of dividend.

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EXHIBIT 10.5

LEASE AGREEMENT

ENTERED into this 18th day of May, 2004, by and between PROFESSIONAL OFFICES PARK V, INC. (hereafter "Landlord"), a corporation organized and existing under the laws of the Commonwealth of Puerto Rico, and ORIENTAL FINANCIAL GROUP INC., a financial holding company organized and existing under the laws of the Commonwealth of Puerto Rico (hereafter "Tenant").

1. THE LAND. Landlord is the owner of that certain parcel of land with an area of approximately 17,047.5556 square meters, located at State Road Number 1, kilometer 15.1, Marginal Road, Monacillos Ward, San Juan, Puerto Rico, more accurately described in the survey attached hereto as EXHIBIT A, with full and unimpaired access to State Road Number One and State Road #8838 (hereafter the "Land") . The legal description of the Land and its recording data appears in EXHIBIT B attached hereto.

2. PLANS AND SPECIFICATIONS FOR THE BUILDING. Landlord engaged the services of Underwood Architects (the "Building Architects")to prepare the plans and specifications, including but not limited to schematic drawings, design development, floor plans, parking plans, and final drawings (hereafter the "Plans and Specifications") for the construction by Landlord of a fifteen (15) story building on the Land (Tower III), with approximately 130,896 square feet of rentable space (hereafter the "Building"). The construction plans and specifications of the Building (hereafter the "Construction Plans") are attached hereto as EXHIBIT C.

2.1. Landlord has delivered a full copy of the Construction Plans to Tenant. Tenant shall provide Landlord

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a preliminary floor plan distribution for the Premises (as such term is hereinafter defined) no later than December 1st, 2004 and the final floor plan distribution not later than April 1st, 2005.

3. CONSTRUCTION OF BUILDING. Landlord represents to Tenant that construction of the Building on the Land will be carried out in accordance with the Plans and Specifications, good construction practice, in a workmanlike manner and in compliance with all applicable governmental laws and regulations, including zoning and building codes and regulations.

3.1. As soon as practicable, but not later than one hundred and twenty (120) days prior to the projected substantial completion date for the Building established in paragraph 8, as such substantial completion date may be extended pursuant to paragraph 8.1, Tenant and Tenant's agents and contractors shall have the required access to the Premises to make such leasehold improvements to the Premises as may be deemed necessary by Tenant, and to install Tenant's communications antenna, satellite dish, building signage, telephone communications, security, and computer systems and other trade fixtures and equipment (hereinafter collectively "Tenant's Improvements"), all of which is hereby authorized by Landlord subject only to the compliance by Tenant with the applicable provisions of this Agreement. The cost and expenses of Tenant's Improvements shall be for the account of Tenant. Landlord will coordinate with the Building's Contractor to insure that Tenant, its agents and contractors shall have the required access to the Building and the Premises to perform Tenant's Improvements.

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3.2. CONSTRUCTION OF TENANT'S IMPROVEMENTS. The Building and the Premises shall be considered ready for the construction of Tenant's Improvements when it has been enclosed and access to the Building and the Premises is possible, at a minimum, by means of a construction elevator (hoist).

3.3. Landlord shall make the improvements to the Premises listed in EXHIBIT D at its own cost and expense. Landlord shall install a sprinkler system in all floors of the Building, except for the area in the Premises designated by Tenant to be occupied by Tenant's data processing equipment. If required, Tenant shall provide, at its own cost and expense, fire prevention and safety measures for such areas.

4. THE PREMISES. Tenant shall lease from Landlord the fifth (5th) and sixth (6th) floors of the Building, each with a rentable area of 21,706 square feet, for a total rentable area of 43,412 square feet (the "Premises"). The total rentable area of the Premises and the Building and the percentage that the Premises represents of the total rentable area of the Building shall be determined by the Building Architects and verified by Tenant's architects upon the substantial completion of the Building using the American National Standard BOMA ANSI 265.1-1980, as reaffirmed in 1989, published by the Building Owners and Managers Association (the "BOMA System").

4.1. Tenant shall have the option to lease the fourth (4th) floor of the Building with a rentable area of 21,706 square feet. Tenant's option of leasing the fourth (4th) floor of the Building will expire on February

1st,

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2005. If Tenant exercises such option, the total rentable area of the Premises shall be 65,118 square feet, as may be adjusted following the procedure described above.

4.2. Commencing with rental offers made by Landlord after the Commencement Date, Tenant shall have the first right of refusal with respect to leasing of space in the Building by Landlord. Tenant shall have fifteen (15) business days from Landlord's written notice in which to accept the space and execute the appropriate lease amendment incorporating such space into this Agreement. If Tenant fails to accept the space, Landlord may lease it to another tenant. If Tenant accepts the space, the Basic Rent (as defined hereinbelow) applicable to the lease of such additional space by Tenant shall be the same to that offered by Landlord to the prospective tenant. All other terms and conditions applicable to the lease of the Premises under this Agreement shall be applicable to the lease of such additional space.

5. FINANCING. Landlord represents that it has secured at its own risk, cost and expense, the interim financing necessary for the construction of the Building as well as its permanent financing, as required to fulfill Landlord's obligations under this Agreement.

6. AUTHORIZED USE. Landlord represents, warrants, and agrees that the Land, the Building, the Premises and the use and occupancy of the Premises by Tenant for the purposes authorized in paragraph 21 of this Agreement shall comply with all applicable laws and regulations from time to time in effect.

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7. TENANT ACCESS. During the period of construction, Tenant and its representatives shall have access to the Land, the Building and the Premises at all reasonable times for the purpose of inspecting the work as it progresses to determine compliance with this Agreement and the Plans and Specifications.

7.1. Such access by Tenant shall not interfere with construction by Landlord. No such inspection by Tenant or failure to inspect shall relieve Landlord of its responsibility for constructing the Building in accordance with the Plans and Specifications.

8. TIME FOR SUBSTANTIAL COMPLETION. The Building shall be substantially completed not later than March 31st, 2006. Unavoidable delays solely caused by, or arising out of, adverse weather conditions, unforeseeable labor or material shortages, action of the civil authorities or any other cause beyond the control of Landlord shall extend the construction completion date on a day for day basis, provided that Landlord notifies Tenant of such occurrence within five (5) calendar days after the start of any such delay and within five (5) calendar days after the resumption of work.

8.1. In the event that Landlord or the Building Architects determine or anticipate that the substantial completion of the Building will not occur by March 31st, 2006, Landlord shall promptly give Tenant notice of such delay. If the substantial completion of the Building is not expected to occur before October 1st, 2006, Tenant shall have the option to terminate this Agreement at any time by notice to Landlord and, upon such termination, both parties shall be relieved of all obligations to each other emanating

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from this Agreement, and neither party shall have any liability to the other emanating from this Agreement, except that Landlord shall reimburse Tenant for the cost and expenses of any Tenant's Improvements made by Tenant pursuant to paragraph 3.1 above; provided, however, that in no event shall Landlord be responsible for the reimbursement of such cost and expenses in excess of $10.00 per usable square feet.

9. PERFORMANCE BOND. Landlord has secured a bond from the contractor under the contract for construction of the Building guaranteeing the performance by such contractor of all the undertakings, covenants, terms, conditions and agreements to be performed and observed by the contractor under said contract.

10. SUBSTANTIAL COMPLETION. Construction of the Building and the Premises shall be considered substantially completed when all work has been finished in accordance with the Plans and Specifications, including the work to be performed by Landlord on the Premises pursuant to paragraph 3.3, and a preliminary certificate of occupancy shall have been issued by the appropriate governmental agency permitting the use and occupancy of the Building and the Premises by Tenant for the purposes herein authorized.

10.1. Substantial completion of the Building and the Premises shall include but not be limited to, the following: (i) air conditioning, plumbing and electrical systems, and elevators installed and operating and in good working condition; (ii) a temporary or permanent certificate of occupancy issued by the appropriate government agency,

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permitting the occupancy of the Building and the Premises for the purposes and use intended by Tenant.

11. INSURANCE DURING CONSTRUCTION. During construction, Landlord shall maintain such insurance coverage with carriers licensed to do business in Puerto Rico and acceptable to Tenant, as it may be necessary to protect Tenant from claims for property damage or bodily injury, including death, which may arise from and during the construction of the Building and Landlord's work on the Premises, whether such claims be against Landlord or any contractor or anyone directly or indirectly employed by either of them. Tenant shall be named as an additional insured under all such policies. Landlord shall deliver to Tenant an insurance certificate evidencing such insurance within thirty (30) days from the date hereof.

12. COMMENCEMENT DATE. Subject to the provisions of paragraphs 10 and 14 of this Agreement, the lease term and the obligation to pay rent shall commence on the date that the Premises are ready for occupancy by Tenant as defined in paragraph 14 (the "Commencement Date").

13. INITIAL TERM. The lease term shall be for a period of ten (10) years commencing on the Commencement Date (the "Initial Term").

14. READY FOR OCCUPANCY. For purposes of paragraph 12 of this Agreement, the Premises shall be ready for occupancy upon the occurrence of all of the following to the satisfaction of Tenant: (a) the issuance of a preliminary certificate of occupancy by the appropriate authorities permitting the use and occupancy of the Building and the Premises by Tenant for the

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purpose of conducting the business of Tenant. Landlord shall pursue with due diligence all action required for the issuance of such certificate of occupancy;
(b) the substantial completion of (i) the Building and the Premises, (ii) all construction, installation, and other work required to be done by Landlord hereunder; and (iii) the plumbing, air conditioning and electrical systems serving the Building and the Premises; (c) the means of ingress and egress to the Building, the Building's parking garage and the Premises are in no manner obstructed; and (d) Tenant shall have inspected the Land, the Building and the Premises and notified Landlord to have found them to its satisfaction. Landlord shall notify Tenant thirty (30) days prior to the date Landlord expects to have the Premises ready for occupancy, during which period Tenant shall have the right to inspect.

15. EXTENSIONS OF TERM. Tenant shall have the option to extend the Initial Term upon the same terms and conditions contained in this Agreement (except that the rent shall be increased as hereafter provided) for a second term of five (5) years (hereafter the "First Extended Term") to commence on the day after expiration of the Initial Term; for a third term of five (5) years (hereafter the "Second Extended Term"), to commence on the day after expiration of the First Extended Term and for a fourth term of five (5) years (hereafter the "Third Extended Term"), to commence on the day after expiration of the Second Extended Term.

15.1. Not later than twelve (12) months from the date of expiration of the Initial Term or of any extension thereof, Landlord shall send Tenant a reminder notice and

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Tenant shall have ninety (90) days from the date of such notice to exercise its option to extend the term.

15.2. Tenant will have the option to terminate this Agreement at any time after the end of the fifth (5th) year of the Initial Term and during any extended term with the payment of a penalty of one (1) year Basic and Additional Rent (as such terms are defined herein below) and after having notified Landlord of the exercise of such option at least 120 days prior to the intended date of termination. The termination penalty will be paid by Tenant in twelve (12) equal monthly installments of Basic and Additional Rent following the date of termination. Should Landlord lease all or part of the Premises during the twelve (12) months following the termination of the Lease Agreement, the amount to be paid as penalty by Tenant will be reduced by an amount equal to the Basic and Additional Rent per square feet payable by the new tenant to Landlord.

16. RENT. Tenant shall pay to Landlord a basic rent for the Premises (the "Basic Rent") as follows:

16.1. For the Initial Term - $22.63 per rentable square foot per annum;

16.2. For the First Extended Term - $25.00 per rentable square foot per annum;

16.3. For the Second Extended Term - $27.63 per rentable square foot per annum; and

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16.4 For the Third Extended Term - $30.52 per rentable square foot per annum.

17. PAYMENT OF RENT. Prior to the Commencement Date of the Initial Term, the aggregate number of rentable square feet in the Premises shall be determined as provided in paragraph 4 and the rent shall be fixed and established as a full dollar amount per year and month. All rent shall be payable in legal tender of the United States of America, without notice or demand, at the address designated hereunder for notices, in equal monthly installments, in advance on the first day of each calendar month of the Lease Term. If the Lease Term commences on a day other than the first day of a calendar month, Tenant shall pay to Landlord, on or before the Commencement Date, a pro rata portion of the monthly installment of rent due for such a partial month, such pro rata portion to be based on the number of days remaining in such partial month after the Commencement Date.

17.1. No security deposit shall be required.

17.2. The extension of time for payment of any installment of rent, or the acceptance by Landlord of any payment other than as herein specified, shall not be a waiver of the rights of Landlord to insist on that all other payments of rent be made in the manner and at the time herein specified.

17.3. No payment by Tenant or receipt by Landlord of a lesser amount than the stipulated monthly rent shall be deemed other than a payment on account of the earliest rent due, nor shall any endorsement or statement on any check or on any letter accompanying any payment be deemed an accord

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and satisfaction. Landlord may accept such check or payment without prejudice to its right to recover the balance of the rent due or to pursue any other remedy provided for in this Agreement.

17.4. Any amounts payable by Tenant to Landlord not paid when due shall bear interest at Citibank, N.A. New York base (prime) rate, from due date until paid. Payment of such interest shall not excuse or cure any default by Tenant under this Agreement provided, however, that, notwithstanding the foregoing, the first time in any Lease Year that any payment due hereunder is not paid on its due date, or within five (5) days thereafter, no interest shall be due on such late payment if such payment is made in full not later than five (5) days after its due date.

18. NAME; COLOR SCHEME OF BUILDING. During the Initial Term and, if applicable, the First Extended Term and the Second Extended Term, and provided that it leases from Landlord at least 43,412 square feet of rentable space in the Building (as such rentable square footage may be adjusted pursuant to the provision of paragraph 4), Tenant shall have the exclusive right to (i) select the exterior and interior color scheme for the Building, except for the color scheme for the interiors of those premises that may be leased to other tenants, provided, that the selection of the exterior and the interior color scheme for the Building is made by Tenant not later than one hundred eighty (180) days prior to November 16, 2005, the estimated date for the commencement of Tenant's Improvements as provided in paragraph 3.2 (as it may be extended as provided herein) and, provided further, that once such selection is made by Tenant, the color scheme shall remain the same for the duration of this

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Agreement unless Tenant and Landlord shall mutually agree otherwise; (ii) name and identify the Building with a name, trade name or trademark (or combinations thereof) selected by Tenant; and (iii) place or install on the Land, the exterior and interior of the Building, the lobbies of the floors where the Premises are located, and in the Premises such names, markings, letterings, signs and other indicia as Tenant shall deem proper or advisable, all in good taste and in compliance with all applicable laws and regulations. Tenant shall bear the cost of any name, trade name or trademark (or combinations thereof) installed by Tenant in the Land, the Building or the Premises. The Building will be known as the "Oriental Group Building." All Building identifications will have Oriental Group's name. Tenant will be allowed to place banners and video displays in the exterior of the Building and signs in the lobby with prior approval from Landlord which will not be unreasonably denied, delayed or conditioned. Tenant will be the only institution allowed to place signs in the exterior of the Building and its lobby.

18.1. Tenant shall pay Landlord an annual fee of $24,000 in equal monthly installments for the rights described above. In the event that Tenant exercises its option to lease an additional floor in the Building as provided in paragraph 4.1, Tenant will not have to pay the $24,000 annual fee provided for above.

18.2 If Tenant does not lease at least 43,412 rentable square feet in the Building (as may be adjusted pursuant to paragraph 4.), Tenant's rights with respect to the color scheme and the name and identity of the Building as described in this paragraph 18 shall cease and Tenant shall no longer be obligated to pay Landlord the annual fee

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for those rights provided for in paragraph 18.1 above. The above notwithstanding, while this lease agreement is in effect, the color scheme and the name and identity of the Building shall never correspond to that of a competitor of Tenant.

19. ALTERATIONS OR IMPROVEMENTS BY TENANT. Except as otherwise provided in paragraph 3.1, during the lease term Tenant may, at its own cost and expense, and with the prior written consent of Landlord, which shall not be unreasonably withheld, delayed, or conditioned, make structural improvements, betterments, alterations and additions to the Premises; non-structural improvements, betterments, alterations, and additions to the Premises shall not require the prior written consent of Landlord. Title to all improvements, alterations and additions made by Tenant to the Premises under the provision of paragraph 3.1 or this paragraph, other than trade fixtures, equipment and other movable property, shall pass to Landlord upon the expiration or earlier termination of this Agreement without any compensation to Tenant.

19.1. TENANT'S IMPROVEMENT ALLOWANCE. Notwithstanding anything herein to the contrary, Landlord shall reimburse Tenant in cash the first $376,620 spent by Tenant in Tenant's Improvements. Such reimbursement shall be made by Landlord to Tenant within thirty (30) days after Tenant's Architect certifies to Landlord that Tenant's Improvements to the Premises have been completed in accordance with the plans and specifications therefor. The Tenant's Improvement allowance will increase by $188,310 if Tenant exercises its option to lease the 4th floor of the Building.

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19.2. Landlord will pay Tenant a minimum of $250,000 to compensate for unamortized leasehold improvements of Tenant at Premises leased from Landlord and Landlord's affiliates at the time this lease agreement is executed (the "vacated premises") , on the first to occur of, (i) one hundred twenty (120) days from the Commencement Date or (ii) ten (10) days after receipt of payment from new tenant, as follows:

a. If new tenant (s) for the vacated premises pay(s) Landlord $250,000 or more for the leasehold improvements to the vacated premises, Landlord will pay Tenant the amount paid to it by such tenant(s) plus $100,000;

b. If new tenant (s) for the vacated premises pay(s) Landlord $150,000 or more but less than $250,000 for the leasehold improvements to the vacated premises, Landlord will pay Tenant the amount paid to it by such tenant(s) plus $100,000; and

c. If new tenant(s) for the vacated premises pay (s) Landlord less than $150,000 for the leasehold improvements to the vacated premises, Landlord shall pay Tenant $250,000.

19.3. Landlord hereby consents to the installation, maintenance, and removal by Tenant of up to two (2) satellite dish-type antennas or other common roof top communication systems on the roof of the Building with the exception of the elevators roof.

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20. REAL ESTATE TAXES. Tenant shall pay to Landlord as additional rent an amount equal to Tenant's proportionate share of real property taxes for any tax year during the lease term ("Tenant's Real Property Taxes") which shall be paid in accordance with sections (i) through (iii) below. Tenant's Real Property Taxes shall be prorated on a per diem basis for any partial tax year included within the lease term. Tenant's Real Property Taxes shall be paid as follows:

(i) Landlord has informed Tenant that it has estimated the real property taxes on the Land, the Building and the Premises for the first year of the lease term (base year) at $1.39 per rentable square feet. Tenant's obligation hereunder shall be to pay such amount as additional rent as provided in (ii) below until such time as the Land, Building and Premises are assessed by the taxing authority and the corresponding tax bill is issued by such taxing authority.

(ii) Thereafter, after receipt of the annual property tax bill for the Land and the Building, Landlord shall furnish Tenant a tax statement together with a copy of said tax bill. Commencing on the Commencement Date, Tenant shall pay one-twelfth (1/12) of Tenant's Real Property Taxes based on Landlord's estimate as provided in (i) above or as shown on the current tax statement, on a monthly basis, together with payments of the Basic Rent, as an estimate and on account of Tenant's Real Property Taxes for the current year, which payments shall continue until receipt by Tenant of a tax statement or other notice from Landlord, pursuant to subsection (iii) below, revising the amount of Tenant's Real Property Taxes or increasing the amount of monthly estimated payments.

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(iii) All estimated monthly payments shall be subject to an adjustment when the actual real property taxes for the applicable year can be verified. If the actual taxes are less than the amounts upon which the payments previously made by Tenant were based, Tenant shall receive a credit against the first installment(s) of rent coming due after the end of the calendar year in which such adjustment is received in the amount by which Tenant's payment of Tenant's Real Property Taxes exceeded the payments actually due for the applicable year, or if the lease term has expired, Landlord shall refund the amount of any such overpayment to Tenant within fifteen (15) days after determination of the amount due to Tenant. If the actual taxes are more than the amounts upon which the payments previously made by Tenant were based, the installment of rent next coming due shall include the corresponding retroactive adjustment and subsequent installments of rent shall be adjusted accordingly.

21. USE OF PREMISES. Tenant may use the Premises to conduct its business consisting of financial services and related activities, including general office, data processing, employee cafeteria with vending machines, print shop, storage and related incidental administrative and office use, and for general office use.

21.1 Tenant shall keep and maintain the Premises in good order, condition and repair, except to the extent that Landlord is obligated to do so, and shall keep the Premises free of dirt, rubbish and obstructions.

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22. PARKING.

22.1 Tenant shall be entitled to the exclusive use of 150 reserved covered parking spaces at no additional cost to Tenant. The locations of those covered parking spaces are indicated in EXHIBIT E.

22.2 Landlord will provide Tenant 77 additional reserved covered parking spaces rent free for the first two (2) years of the Lease Term at the locations indicated in Exhibit E. After the two (2) year rent-free period, rent for the 77 covered parking spaces will be $90 per parking space per month.

22.3 Tenant shall have the option to lease from Landlord up to 120 additional reserved covered parking spaces at a cost of $90 per parking space per month.

22.4 The parking rent is to be paid by Tenant to Landlord as additional rent within the monthly rent invoice. All Tenant reserved parking spaces shall be marked on the pavement by Tenant.

22.5 In the event that Tenant leases additional office space in the Building, Landlord shall provide Tenant 3.6 additional reserved covered parking spaces for each 1,000 square feet of additional rentable space, at no cost to Tenant.

22.6 Tenant will have the right to occasional overnight parking of cars, trucks, and trailers in the parking spaces assigned to it.

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23. UTILITIES. Tenant shall be responsible for the payment of water, gas, electricity, telephone and similar utility services provided to the Premises and utilized by Tenant, all of which shall be separately metered.

23.1. Tenant and/or Tenant's telecommunication companies, including but not limited to, local exchange telecommunication companies and alternative access vendor service companies, shall have the right of access to, from and within the Building (including a pathway to the Premises) for the installation and operation of Tenant's telecommunications systems including, but not limited to, voice, video, data, and any other telecommunication services provided over wire, fiber optic, microwave, wireless, and any other transmission systems, for part or all of Tenant's telecommunications to, from and within the Building and the Premises.

24. BUILDING OPERATION AND SERVICES. The Building will be operated as an office building with normal business operation, Monday through Friday from 7:00
a.m. to 8:00 p.m., and Saturdays from 8:00 a.m. to 12:00 p.m. ("Normal Hours"), except for the following legal holidays in the Commonwealth of Puerto Rico: New Year Day (January 1st) , Three Kings Day (January 6th) , Presidents Day, Holy Friday, Memorial Day, U.S. Independence Day (July 4th) , Puerto Rico Constitution Day (July 25th) , Labor Day, Elections Day (election years), Thanksgiving Day, and Christmas Day (December 25). Landlord will provide flexible access to the Building, to the Building's parking garage, and the Premises to Tenant's authorized personnel on a 24 hours a day, 7 days a week basis. The following services shall be provided to the Building and/or the Premises by Landlord:

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(i) ventilating and air conditioning to provide a reasonably comfortable temperature and ventilation in the common areas of the Building and air conditioning for connection to the distribution system on the floor of the Building where the Premises are located during Normal Hours;

(ii) water, electric, and telephone services for connection to the distribution system for these services on the floors of the Building where the Premises are located;

(iii) cleaning and janitorial services for the Building excluding the Premises, of a scope, quality and frequency of such services customarily provided by landlords of first-class office buildings in San Juan, Puerto Rico;

(iv) five (5) fully automatic elevators for the use of tenants and visitors for access to and from the floors of the Building and its parking garage;

(v) elevator services for freight and maintenance during Normal Hours;

(vi) twenty-four (24) hours a day, seven (7) days a week security services to the Building and the Offices Park which shall consist of at least one (1) security guard on duty at the entrances of the Offices Park;

(vii) sprinkler and fire protection system for the Building and the Premises, including regular checking testing and servicing thereof;

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(viii) exterminating services for the Building and the Premises, with a frequency of no less than once a month;

(ix) replacement of lighting tubes, lamp bulbs, and ballast required in the common areas of the Building.

24.1. The services identified above shall be provided by Landlord as part of the Building's operating expenses.

24.2. In case Landlord is prevented or delayed in furnishing any service to be provided by Landlord to Tenant as set forth in this Agreement for any reason or cause whether or not in Landlord's control, Landlord shall not be liable to Tenant therefore unless the interruption continues unremedied for a period of three (3) consecutive business days, nor shall Tenant be entitled to any abatement or reduction in the Basic Rent or Additional Rent by reason thereof except as provided below, nor shall the same give rise to a claim in Tenant's favor that such absence of Building services constitutes actual or constructive, total or partial eviction, or renders the Premises untenantable. Landlord shall use its best efforts to restore such service as soon as reasonably possible. However, in the event such service is not restored within three (3) business days, whether or not through the fault of Landlord, to the extent that Tenant cannot reasonably use all or any part of the Premises, Basic Rent and Additional Rent shall abate as to such part effective on the fourth (4th) business day and continue until such service is restored. If such service is not restored within sixty (60) consecutive days of

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interruption, then Tenant shall have the right and option to cancel and terminate this Agreement, on ten (10) days written notice to Landlord, and thereafter shall be relieved of all further liability under this Agreement.

25. MAINTENANCE, REPAIRS AND JANITORIAL CLEANING SERVICES BY TENANT. Tenant shall, at its sole cost and expense, maintain, repair and provide janitorial services to the interior of the Premises, its doorways, windows (interior cleaning only) and walls, and keep the same in good condition and repair, reasonable wear and tear excepted.

26. MAINTENANCE AND REPAIRS BY LANDLORD. Landlord shall be responsible for making all repairs necessary to maintain the plumbing, the fire protection, sprinkler and security systems, ventilating, air conditioning and electric systems of the Building and those serving the Premises; the elevators servicing the Building; the electric feeder lines carrying electricity to the distribution boxes servicing each floor of the Building (but not including the cost of maintenance and repair of the electric lines carrying electricity from the distribution box to the Premises); external windows; and structural components of the floors (excluding carpet, linoleum, wood, tiles or other flooring installed by Tenant). Landlord shall be responsible for maintaining any connections to the Building plumbing, electric and air conditioning systems, and for making all repairs to the meters installed for measuring utility consumption. Landlord shall not be obligated to commence any such repairs within the Premises (other than normal air conditioning maintenance) until after receipt of written notice from Tenant that such repair is needed. If any such repair is caused by any act, omission or negligence of Tenant or its employees, agents, invitees,

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licensees, subtenants, or contractors, Landlord shall have the right to make the repair at Tenant's sole cost and expense, provided that if the damage necessitating such repairs is covered by insurance carried by Landlord or Tenant, the proceeds of such insurance shall be made available by Landlord, or by Tenant, as the case may be, to cover the cost of such repairs. If Tenant requires maintenance, servicing, repair or replacement of any special plumbing, ventilating, air conditioning, electric, fire protection or sprinkler system installed for the Tenant's benefit in the Premises, such as any special air extractor equipment, whether or not such system is tied into the standard Building systems, such maintenance, servicing, repair or replacement shall be made by Landlord, its agents, or contractors, or, if Tenant shall so determine, by engineers or contractors engaged by Tenant but, in either event, at the sole expense of Tenant, unless the need for such repairs is caused solely by the negligence or willful misconduct of Landlord, its contractors, agents or employees. Any repairs by Landlord for Tenant's account shall be performed by Landlord or under Landlord's supervision, and the cost of such repairs shall be at rates competitive in the San Juan market for work of the same type.

26.1. Landlord shall provide regular maintenance to and service the ventilating and air conditioning equipment servicing the Premises (for example, without limitation, regular filter changes and fan belt replacement). Except with regard to repair or replacement following a casualty or an eminent domain taking, or due to the negligence or willful misconduct of the Landlord, Tenant shall be responsible for all maintenance, repair and replacement of any kind and nature of the Premises, at Tenant's sole expense.

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26.2. If Landlord shall fail to commence repairs or provide maintenance or services as required by this Agreement within ten (10) days after notice by Tenant of needed repairs, maintenance or services, Tenant may cause such repairs, maintenance or services to be made or provided by others for the account of Landlord. Tenant may make or provide for the account of Landlord such temporary emergency repairs and services as may deemed necessary by Tenant.

27. OPERATING EXPENSES; INSURANCE AND TENANT'S REAL PROPERTY TAXES. During the terms of this Agreement, Tenant shall pay in addition to the Basic Rent, Tenant's proportionate share of all operating expenses, insurance and Tenant's Real Property Taxes for each operating year (the "Additional Rent"), in accordance with the following:

27.1. Operating expenses shall be all costs incurred by Landlord for the operation, repair and maintenance of: (i) the common areas, parking spaces, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, common area lighting facilities, surrounding areas to the Offices Park, and fences and gates; (ii) trash disposal services;
(iii) tenant's directories; (iv) fire detection systems, including sprinkler system maintenance and repair; (v) security services; (vi) management services related to the operation of the Building; (vii) any other service to be provided by Landlord related to the operation of the Building; (viii) insurance premiums and deductibles over the Land and the Building; and real property taxes for the Land and the Building.

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27.2. Operating expenses shall not include any special assessment that will have the effect of increasing the value of the Land or the Building; repairs or other work occasioned by fire, hurricane, flooding, windstorm or other insured casualty or hazard, to the extent that Landlord receives proceeds of insurance therefore; any capital repairs or improvements made by Landlord to the Land or the Building; depreciation of the Building; brokers commissions for procuring tenants; advertising expenses; cost of renovating rental spaces; principal or interest payments for any financing; the cost of correcting any construction defects in the Land or the Building; or any other expenses of Landlord not directly related to the operation of the Land or the Building. Tenant's share of management or administration services for the Land and Building shall not exceed four percent (4%) of Tenant's net rental payments for the Premises.

27.3. All operating expenses shall be "net" and, for that purpose, shall be reduced by the amount of any reimbursement or credit received or receivable by Landlord directly related to an item of cost that is included in operating expenses.

27.4. Not later than the Commencement Date, and the commencement of each lease year thereafter, Landlord shall submit for the review of Tenant, Landlord's budget of operating expenses for the Land, the Building and the Offices Park for the next lease year (hereafter the "Proposed Schedule of Operating Expenses").

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27.5. Tenant's proportionate share of operating expenses for the Land and Building shall be calculated by dividing the total number of rentable square feet in the Premises by the total number of square feet of rentable space in the Building, and multiplying this result by the operating expenses per rentable square feet reflected in the Proposed Schedule of Operating Expenses for the Land and the Building.

27.6. Tenant's proportionate share of operating expenses for the Offices Park shall be calculated by dividing the total number of rentable square feet in the Premises by the total number of square feet of rentable space in the Offices Park, and multiplying this result by the operating expenses per rentable square feet reflected in the Proposed Schedule of Operating Expenses for the Offices Park.

27.7. Tenant's Additional Rent shall be payable by Tenant in advance, in twelve equal monthly installments, together with the payment of Basic Rent.

27.8. Not later than forty-five (45) calendar days after the close of each calendar year, Landlord shall submit for the review and approval of Tenant a schedule of actual operating expenses incurred by Landlord in connection with the operation of the Land, the Building, and the Offices Park (hereafter the "Schedule of Actual Operating Expenses") for the immediately preceding calendar year. Tenant shall have access to the books and records of Landlord pertaining to the Schedule of Operating Expenses, and the right to audit, review and copy such books and records for the

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calendar year in question, except in case of fraud in which the term will be extended for an additional three (3) years. Any differences between the Proposed Scheduled of Operating Expenses and the Actual Schedule of Operating Expenses shall be promptly paid by Tenant or credited by Landlord, as the case may be.

27.9. Notwithstanding any provision herein above contained to the contrary, for the first three (3) years of the Initial Term, the operating expenses per rentable square foot shall be $5.50 plus Tenant's proportionate share of the insurance costs for the Building and the Land, provided however, that the operating expenses for the first three (3) years of the Initial Term are subject to increase only with respect to (i) security and payroll in the event of a Federal Minimum Wage increase and
(ii) an increase in the Building's utilities costs exceeding 10% of the rates in effect on the Commencement Date.

27.10. Notwithstanding the provisions of this paragraph 27, it is hereby understood and agreed that, excluding any increases in real property taxes and insurance expenses, increases with respect to operating expenses payable by Tenant hereunder shall never exceed 3% from one calendar year to the next commencing with the fourth (4th) lease year of the Initial Term. In computing the 3% limitation referred to above, increases in the cost of service provided by third party contractors and increases in utilities costs in excess of 10% shall be excluded.

28. RIGHT OF ENTRY TO REPAIR. Landlord shall have the right to enter the Premises from time to time to inspect or to

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make repairs and maintenance. Except for the event of an emergency threatening bodily injury or substantial property damage, such inspections, repairs, and maintenance shall be performed with prior reasonable notice to Tenant, in such reasonable manner and at such reasonable times as shall not interfere with Tenant's business operations. In exercising its right of entry, Landlord, its agents and employees shall comply with all rules and regulations as Tenant may have implemented and notified to Landlord.

29. ENVIRONMENTAL MATTERS. Landlord covenants, warrants, and represents that the Premises, the Building, and the Land will be free of any friable asbestos containing materials.

Landlord covenants, warrants, and represents that to the best of its knowledge, after thorough investigation, the Premises, the Building, and the Land do not (or will not) contain any environmental contaminants ("toxic contamination") of any kind (including PCBs, except for PCBs that are totally contained within light fixtures and exterior transformers) and will not have a magnetic flux density ("MFD") level greater than 10 milliGauss in any one location, nor an average MFD level greater than 5 milliGauss throughout the Premises. At any time during the term of this Agreement, Tenant shall have the right and option to investigate the Building and the Premises for the presence of asbestos and PCBs and MFD levels and to investigate the Land for the presence of toxic contaminants.

Landlord covenants, represents, and warrants that all common areas and Building systems shall be maintained in such a way as to keep airborne concentrations of the spores and other

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by-products of toxic or hazardous molds and other biota to levels that will not be injurious to human health.

Landlord agrees to indemnify and hold Tenant harmless from any and all damages, losses, expenses (including reasonable attorneys' fees), claims or actions related to or arising out of any subsequent discovery of friable asbestos or toxic contamination at the Premises, the Building or the Land (but excluding Tenant's Improvements.) In the event of such a finding, or in the event of any breach of a covenant, warranty or representation by Landlord under this paragraph, in addition to all other rights and remedies available by Tenant, Tenant shall have the option of terminating this Agreement without penalty of any kind and be released from any liability under the Agreement after the date of such termination.

29.1. Tenant agrees to indemnify, defend, and hold harmless Landlord, its employees, agents, officers, directors, and assigns from any and all claims, liabilities, costs (including reasonable attorney's fees), and damages out of Tenant's use of the Premises for the release, threatened release, storage, generation, transportation, reclamation, recycling or disposal of any hazardous waste, toxic substance, or any other regulated substance. Such indemnification shall require Tenant to remedy at Tenant's sole cost and expense any release or threatened release of hazardous waste or any regulated substance and shall require Tenant to comply with all federal and local statutes, rules, regulations, ordinances, orders and permits applicable to hazardous waste, toxic substance, or any other regulated substance.

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30. INSURANCE BY LANDLORD. Landlord shall, at all times during the term of this Agreement and any extension thereof, at Landlord's own cost and expense, procure and continue in force insurance coverage: (i) for loss or damage to the Land and the Building, including the Premises (other than Tenant's Improvements), in the amount of the replacement value, providing protection against all perils included within the classification of fire, standard extended coverage, including vandalism and malicious mischief, earthquake, collapse and sprinkler leakage; and (ii) for bodily injury liability and property damage liability insurance coverage in an amount of not less than $3,000,000 for injury or death to any person or for damage to property arising from any one occurrence. Upon completion of all construction work Landlord and Tenant shall determine whether or not it is advisable to procure flood insurance and, if so, set adequate limits of coverage for said peril.

30.1. For purposes of Landlord obtaining the required insurance coverage, Tenant shall notify Landlord of the cost of Tenant's Improvements, not later than thirty (30) days after their completion date.

31. INSURANCE BY TENANT. Tenant shall, at all times during the term of this Agreement and any extension thereof, at Tenant's own cost and expense, procure and continue in force insurance coverage for: (i) loss or damage to Tenant's Improvements; (ii) loss or damage to Tenant's personal property including furniture, fixtures and equipment providing protection against all perils included within the classification of fire, standard extended coverage, including vandalism and malicious mischief, earthquake, and sprinkler leakage; and (iii) bodily injury liability and property damage liability insurance coverage in an

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amount of not less than $3,000,000 for injury or death to any person or for damage to property arising from any one occurrence. Landlord shall be named as additional insured under such policies, and all such policies shall provide for payment for loss thereunder to Tenant or Landlord, as their interest may appear.

32. INSURANCE POLICIES. All insurance policies shall be with insurance companies licensed to do business in the Commonwealth of Puerto Rico. Each party shall furnish to the other the corresponding certificates of insurance upon reasonable request. No such policy shall be cancelable or subject to reduction of coverage or to any other modification materially affecting coverage except after thirty (30) days prior written notice to the party named as an additional insured. Renewal premiums on such insurance shall be paid not less than ten (10) days prior to expiration of such insurance and the insuring party shall deliver evidence of such renewal to the other party.

32.1. If either party shall fail to procure and maintain the required insurance coverage, the other may, but shall not be required to, procure and maintain the same at the expense of the other party.

32.2. Each party shall cooperate with the other in collecting any insurance proceeds due, and shall execute, acknowledge and deliver proofs of loss and other instruments facilitating such collection.

33. LEASE AGREEMENTS PRESENTLY IN EFFECT. Tenant and Landlord are parties to the following lease agreements in effect on the date of execution of this Agreement: POP IV (1) dated

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January 29, 1999; POP IV(2), dated December l, 1999; POP V (offices) dated April 3, 2001; and POP V (Bank Branch) dated November 9, 2000 (the "Present Leases")

33.1 In consideration for entering into this Agreement, Tenant and Landlord have agreed as follows with respect to the Present Leases:

a. All of Tenant's obligations under the Present Leases shall cease and terminate on the Commencement Date, except with respect to the Bank Branch; and

b. Except with respect to the Bank Branch, the Basic Rent under the Present Leases in effect on the date of execution of this Agreement shall be the applicable Basic Rent for all of the spaces under the Present Leases to the date of termination of the Present Leases as provided in a. above.

34. DAMAGE OR DESTRUCTION. If the Land, the Building or the Premises are damaged or destroyed by fire or other casualty insurable under the terms of this Agreement, Landlord shall promptly repair, replace or rebuild the same. Tenant shall cooperate with Landlord in processing any insurance claims.

34.1. In the event of such repair, replacement or rebuilding, rent shall be abated in proportion to the extent to which Tenant is deprived of the use and occupancy of the Premises. The full rent shall again become payable after the completion of such repair, replacement or rebuilding.

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34.2. If the Land or the Building is damaged or destroyed to the extent that Tenant cannot reasonably continue to use and occupy the Premises and it will take more than ninety (90) days from the date of the casualty to repair, replace or rebuild, or if Landlord does not repair, replace or rebuild within ninety (90) days from the date of the casualty, then Tenant at its option may terminate this Agreement, effective as of the date of the occurrence of such damage or destruction. In the event that Tenant elects to terminate this Agreement pursuant to the provisions of this paragraph 34.2, Tenant shall have no other remedy, nor any further claims against Landlord, for Landlord's failure to repair, replace or rebuild the Land or the Building, unless such damage or destruction was caused by a negligent act or omission of Landlord, or by those for which Landlord is responsible for at law.

35. CONDEMNATION. In the event that the whole of the Land or the Building shall be condemned or taken in any manner for any public or quasi-public use, this Agreement shall forthwith cease and terminate as of the date of vesting of title in the condemning authority. In the event that only a part of the Land or the Building shall be so condemned or taken then, effective as of the date of such vesting of title, the rent hereunder for such part shall be equitably abated and this Agreement shall continue unaffected as to such part not so taken, unless terminated as hereafter provided.

35.1. If only a part of the Land or the Building shall be so condemned or taken and after Tenant and Landlord come to an agreement that the remaining part is inadequate for the continued use of the Premises by Tenant, then Tenant

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may, at its option, terminate this Agreement effective as of the date of such vesting of title.

35.2. If only a part of the Land or Building shall be so condemned or taken and this Agreement is not terminated as provided herein, Landlord shall, at its expense, restore with all due diligence the remaining portions of the Land and Building, as nearly as practicable to the same condition as they were in prior to such condemnation or taking. If such restoration shall not be effected within ninety (90) days after the vesting of title to the portion of the Land or Building taken, Tenant shall have the right to terminate this Agreement effective as of the date of such vesting of title.

35.3. All compensation awarded for any such taking or conveyance, whether for the whole or a part of the leased premises, shall go to and shall be the sole property of Landlord, whether such damages shall be awarded as compensation for the unexpired portion of, or diminution in the value of, the leasehold or for compensation, or damages to the leased premises or otherwise; and the tenant hereby assigns to Landlord all of Tenant's right, title and interest in and to any and all such compensation provided, however, that nothing herein contained shall be construed to preclude Tenant from prosecuting any claim directly against the condemning authority, but not against Landlord, for Tenant's relocation and moving expense, provided further that no such claim shall diminish or otherwise affect Landlord's real estate property award.

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36. QUIET ENJOYMENT. Tenant's right to quiet enjoyment of the Premises shall not be disturbed in any respect by Landlord or his successor, transferees and assigns if Tenant is not in default. In the event Landlord shall sell, transfer or encumber all or any portion of the Land or the Building, or its leasehold interest by operation of law, foreclosure or otherwise, or if the premises become subject to the jurisdiction of the bankruptcy court, then it shall be deemed and construed without further agreement that Tenant shall be promptly notified, and that any assignee, transferee, successor, buyer, or third party, including any person appointed by such bankruptcy court has reaffirmed this Agreement, attorney Tenant, and assumed and agreed to take subject to this Agreement and agreed to carry out all covenants, terms and conditions of this Agreement.

37. DEFAULT BY TENANT. The occurrence of any one of the following events shall constitute a material default and breach of this Agreement by Tenant: (i) the abandonment of the Premises; (ii) failure to make any monthly installment of rent or any other payment when and as due and such failure shall continue for a period of thirty (30) days after written notice to Tenant; or (iii) failure to observe or perform any of the covenants, conditions or provisions of this Agreement, where such failure shall continue for a period of sixty (60) days after written notice from Landlord, provided, however, that Tenant shall not be deemed to be in default if Tenant commenced such cure within said sixty (60) days period and thereafter diligently pursues such cure to completion; or (iv) the making by Tenant of any general assignment or general arrangement for the benefit of creditors, or the filing by or for reorganization or arrangement under any law relating to bankruptcy, or the appointment of a trustee or receiver to take possession of substantially all of Tenant's

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assets or of Tenant's interest in this Agreement, or the attachment, execution or other judicial seizure of substantially all of the Tenant's assets interest in this Agreement, unless any such action is dismissed or discharged within ninety (90) days.

37.1. In the event of any such material default or breach by Tenant, Landlord may at any time thereafter, with notice and demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have by reason of such default or breach: (i) terminate the Lease Agreement and Tenant's right to possession of the Premises by any lawful means, in which case Tenant shall after notice and demand surrender possession of the Premises; and (ii) pursue any other remedy now or hereafter available to Landlord under the Lease Agreement or by law.

37.2. Should Landlord terminate this Agreement for default, in addition to any other remedies Landlord may have, Landlord may recover from Tenant all damages suffered by reason of such default, including the cost of recovering and reletting the Premises and reasonable attorney's fees.

38. DEFAULT BY LANDLORD. Landlord shall be in default if Landlord fails in the observance or performance of any of Landlord's covenants, conditions, agreements or obligations contained in the Lease Agreement and such failure continues for a period of sixty (60) days after notice from Tenant.

38.1. In the event Landlord is in default of any payment or other obligation to a third party, including any tax payments owed on the Land or the Building, and such default may place in jeopardy Landlord's interest over the

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Land, the Building or this Agreement, or may place in jeopardy Tenant's rights under this Agreement, Landlord shall timely notify Tenant of such default, and Tenant shall have the right, but not the obligation, to cure Landlord's default, and the right to collect from Landlord the amount of any payment made or reasonable expenses incurred for Landlord.

38.2. Tenant may recover from Landlord all damages incurred by Tenant by reason of Landlord's default, including reasonable attorney's fees, and may pursue any other remedy available under this Agreement or by law.

39. RECORDATION OF LEASE. This Agreement shall be recordable in the appropriate Registry of Property, as a lien. Tenant shall pay all expenses related to the execution and recordation of the public deed containing the terms and conditions of this Agreement. Landlord shall execute all such documents as may be necessary to obtain such recordation. Tenant shall pay for all expenses related to the cancellation of the lease and its recordation in the Registry of Property.

40. NOTICES. Any notices, requests, consents and other communications required or permitted under this Agreement shall be in writing (including telefax and e-mail communications) and shall be (as elected by the person giving the notice) hand delivered by messenger or courier service, telecommunicated, or mailed (airmail if international) by registered or certified mail (postage prepaid), return receipt requested, at the respective addresses of each party set forth below:

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If to Landlord, to
Professional Offices Park V, Inc. attention: Enrique Vila del Corral P.O. Box 11363
San Juan, Puerto Rico 00922-1363, or EVC@professionalofficepark.com

If to Tenant, to
Oriental Group
attention: Norberto Gonzalez P.O. Box 195115
San Juan, Puerto Rico, 00919-5115, or NOGONZALEZ@orientalfg.com

With copies to:

Rafael Cruz
PO Box 195115
San Juan, Puerto Rico 00919-5115, or RCRUZ@orientalfg.com, and

Carlos O. Souffront
McConnell Valdes
P.O. Box 364225
San Juan, Puerto Rico 00936-4225, or COS@mcvpr.com

Each such notice shall be deemed delivered (i) on the date delivered receipt acknowledged if by personal delivery, (ii) on the date of transmission with confirmed answer back if by telefax, or (iii) on the date upon which the return receipt is signed or delivery is refused or the notice is designated by the postal authorities as not deliverable, as the case may be, if mailed.

By giving to the other party at least fifteen (15) days prior written notice thereof, such party and its permitted successors and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses.

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41. RESERVED.

42. SURRENDER. Upon expiration or sooner termination of this Agreement, Tenant shall surrender the Premises to Landlord, including all improvements and additions constructed or placed by Tenant thereon, except Tenant's trade fixtures, equipment and other movable property, broom clean, free of subtenancies, and in good condition and repair, reasonable wear and tear, damage by fire or other casualty and other conditions not the responsibility or obligation of Tenant to repair or replace excepted.

42.1. Any trade fixtures, equipment or personal property of Tenant or to any subtenant, not removed shall be deemed abandoned and become the property of Landlord without any payment or offset therefore. Or, if Landlord shall elect, Landlord may remove such fixtures, equipment or property from the Premises and store them at Tenant's risk and expense. Tenant shall repair and restore, and save Landlord harmless from, all damage to the Premises caused by such removal, whether by Tenant or by Landlord.

43. HOLDING OVER. If Tenant remains in possession of the Premises or any part thereof after the expiration or termination of the Third Extended Term of this Agreement without the express written consent of Landlord, such occupancy shall be a tenancy from month to month at a rental per square foot of 15% over the last monthly rental plus all other charges payable hereunder, and upon all the terms hereof applicable to a month-to-month tenancy. Notwithstanding, such holding over by Tenant shall in no event exceed ninety (90) days.

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44. ASSIGNMENT AND SUBLETTING. Tenant may not assign or transfer the Lease Agreement or sublet the Premises either in whole or in part without Landlord's prior written consent, which consent shall not be unreasonably withheld, delayed or conditioned.

44.1 Notwithstanding anything to the contrary provided above, Tenant shall have the right, without obtaining Landlord's consent to assign its interest in or sublet the Premises or any part thereof at any time during the lease term, to any parent, subsidiary or affiliate corporation or entity of Tenant; or to the surviving corporation or entity (the "Surviving Entity") in connection with a merger, consolidation, amalgamation or acquisition involving tenant or any of its parents, affiliates or subsidiaries; nor shall any such consent be required in the case of an assignment or sublease to any person, firm or corporation, or any group or combination thereof, who is acquiring all or most of the assets of Tenant, provided that the acquirer undertakes in writing to respect the lease Agreement. In addition, the following shall not be deemed to be an assignment by Tenant of this Agreement: (i) the sale or offering for sale to the public, either pursuant to a public or private offering, of the stock of Tenant or its parent entity or of new stock of Tenant or its parent entity; (ii) the sale or transfer of stock by any stockholders of tenant or its parent entity either through or over a recognized exchange or over-the-counter or privately, and (iii) the sale or transfer of stock pursuant to a will, trust or by gift or devise. Tenant covenants to advise Landlord of the occurrence of any such event. In connection with any assignment of this Agreement to a Surviving Entity,

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effective as of the date of such assignment, tenant shall be released from all liability under this Agreement, provided that the Surviving Entity assumes all of Tenant's obligation hereunder and agrees to perform all of the obligations of Tenant under this Agreement and that Landlord has consented in writing to such release of Tenant from liability under this Lease Agreement, which consent shall not be unreasonably withheld, delayed or conditioned.

44.2 Tenant's request for Landlord's consent shall be in writing and contain the name, address, and description of the business of the proposed assignee or subtenant, its most recent financial statement and other evidence of financial responsibility and a copy of the proposed sublease or assignment.

44.3 Within thirty (30) days from receipt of such request that includes the information described in Paragraph 44.2 above, Landlord shall grant or refuse its consent to the proposed assignment, provided, however, that if Landlord shall not notify Tenant to the contrary within said thirty (30) day period, Landlord shall be deemed to have consented to such assignment or sublease.

45. INDEMNITY. Tenant and Landlord shall promptly and mutually indemnify and save each other harmless and their agents, servants and employees against and from any and all liability, fines, suits, claims, demands, expenses and actions arising by reason of injury to persons or property or violation of any law or ordinance occurring in the Premises, caused in whole or in part by any act or omission on the part of the Tenant or Landlord, or their employees (whether or not acting within the

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scope of employment) servants, agents, licensees, visitors, assigns or tenants or by any use or occupancy of the Premises or any breach, violation or non performance of any covenant in this Agreement on their part to be observed or performed.

46. BROKERS. Landlord represents and warrants that Landlord did not engage or deal with any real estate broker in connection with this Agreement. Tenant represents and warrants that Tenant did not engage or deal with any real estate broker in connection with this Agreement. Landlord agrees to save and hold harmless Tenant of and from any brokerage commission or finder's fee claimed with respect to the Agreement, any extension or renewal thereof, any purchase of the Land or the Building by Tenant pursuant to its rights hereunder.

47. CONSENT NOT UNREASONABLY WITHHELD. Whenever the consent or approval of Landlord or Tenant is required or requested, such consent or approval shall not be unreasonably withheld or delayed.

48. GOVERNING LAW. This Agreement shall be governed by the laws of the Commonwealth of Puerto Rico. The invalidity or unenforceability of any provision of this Agreement shall not affect or impair any other provision.

49. CUMULATIVE RIGHTS. The failure of any of the parties to insist upon a strict performance of any term or condition of this Agreement shall not be a waiver of any right or remedy, or a waiver of any subsequent breach of such term or condition.

49.1 All rights and remedies of the parties are cumulative. The exercise of one or more rights or remedies

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shall not exclude or waive the right to exercise any other. All such rights and remedies may be exercised and enforced concurrently and whenever and as often as the parties deems necessary. The rights and remedies of the parties are in addition to those available as a matter of law.

50. SUCCESSORS AND ASSIGNS. The covenants, terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors, and assigns.

51. ENTIRE AGREEMENT. This Agreement supersedes and cancels any and all previous negotiations, arrangements, understandings, agreements, representations, and warranties, if any, between the parties, and none thereof shall be used to interpret or construe this Agreement. This Agreement may not be changed or modified except by agreement in writing executed by the parties.

52. SEVERABILITY. The invalidity of any provision of this Agreement as determined by a court of competent jurisdiction shall not affect the validity of any other provision.

Executed in San Juan, Puerto Rico, on the date first written above. 

PROFESSIONAL OFFICES PARK V, INC.                ORIENTAL FINANCIAL GROUP, INC.

/s/ Enrique Vila del Corral                      /s/ Norberto Gonzalez
------------------------------                   ------------------------------
Enrique Vila del Corral                          Norberto Gonzalez
President                                        Executive Vice President

EXHIBIT 10.6

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FIRST AMENDMENT TO LEASE AGREEMENT, DATED MAY 18, 2004

between

PROFESSIONAL OFFICES PARK V, INC., LANDLORD

and

ORIENTAL FINANCIAL GROUP INC., TENANT

This First Amendment to Lease Agreement dated as of July 15th, 2005 between PROFESSIONAL OFFICES PARK V, INC., as Landlord, and ORIENTAL FINANCIAL
GROUP Inc., as Tenant.

WITNESSETH:

WHEREAS, Landlord and Tenant entered into a lease agreement dated May 18, 2004, for premises (the "Premises") located at State Road Number 1, kilometer 15.1, Marginal Road, Monacillos Ward, San Juan, Puerto Rico, which lease as may be further amended or modified is hereafter called the "Lease";

WHEREAS, Landlord and Tenant have agreed to amend the Lease to add additional space on the fourth (4th) floor of the Building (the "Additional Space") and thus, increase the rentable square feet area of the Premises and in certain other respects;

NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Landlord and Tenant agree that the Lease shall be amended as follows:

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1. Unless otherwise provided, terms used herein shall have the same meaning assigned thereto under the Lease.

2. The following terms and conditions apply to the lease of the Additional Space:

(a) ADDITIONAL SPACE: The space shown in Exhibit A hereto with an area of 11,924 rentable square feet (using the BOMA System).

(b) Except as otherwise specifically provided herein, all of the terms and conditions applicable to the Premises shall be applicable to the Additional Space.

3. Section 4. The Premises of the Lease is hereby amended to read as follows:

"4. THE PREMISES. Tenant shall lease from Landlord the fifth (5th), sixth (6th) floors and half of the rentable area of the fourth (4th) floor of the Building. The fifth (5th) and sixth (6th) floors each with rentable area of 21,706 square feet and approximately half of the fourth (4th) floor with a rentable area of 11,924 square feet for a total rentable area of 55,336 square feet (the "Premises"). The total rentable area of the Premises and the Building and the percentage that the Premises represents of the total rentable area of the Building shall be determined by the Building Architects and verified by Tenant's architects upon the substantial completion of the Building using the American National Standard BOMA ANSI 265.1-1980, as reaffirmed in 1989, published by the Building Owners and Managers Association (the "BOMA System").

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"4.1 From the date of execution of this First Amendment to Lease Agreement to the Commencement Date, Tenant shall have the first right of refusal with respect to leasing the balance of the fourth
(4th) floor of the Building. Tenant's first right of refusal with respect to leasing the balance of the fourth (4th) floor of the Building with a rentable area of 9,782 square feet shall be governed by the provisions of Section 4.2 of the May 18th, 2004 lease agreement."

4. Sub-section 19.1 of Section 19 Tenant's Improvement Allowance of the Lease is hereby amended to read as follows:

"19.1 Tenant's Improvement Allowance. Notwithstanding anything herein to the contrary, Landlord shall reimburse Tenant in cash the first $469,404 spent by Tenant in Tenant's Improvements. Such reimbursement shall be made by Landlord to Tenant within thirty (30) days after Tenant's Architect certifies to Landlord that Tenant's Improvements to the Premises have been completed in accordance with the plans and specifications therefore. The Tenant's Improvement Allowance will increase by $95,526 before landlord makes improvement to floor to permit multiple tenants, if Tenant leases the balance of the fourth (4th) floor of the Building pursuant to the provisions of
Section 4.1 hereinabove."

5. Sub-section 22.1 of Section 22 Parkings of the Lease is hereby amended to read as follows:

"22. Parking.

22.1 Tenant shall be entitled to the exclusive use of 190 reserved covered parking spaces at no additional cost to

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Tenant. The locations of those covered parking spaces are indicated in Exhibit E."

6. Other than as set forth herein, all of the terms and conditions of the Lease shall remain unamended and in full force and effect and are hereby ratified and confirmed in all respects. The parties hereby agree that this Lease Amendment represents the entire agreement between the parties with respect to the matters herein contained and may not be changed, modified, or altered except by a written agreement signed by the parties thereto. This Amendment and the Lease shall be read and construed together as one instrument. Except for those which are set forth in this Lease Amendment, no representations, warranties, or agreements have been made by Landlord or Tenant to one another with respect to this Lease Amendment.

7. Landlord and Tenant warrant and represent that their undersigned representatives have all due power and authority to execute this Lease Amendment on behalf of Landlord and Tenant respectively and that all necessary action has been taken to ensure the validity and enforceability of the terms and provisions of this Lease Amendment.

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IN WITNESS WHEREFORE, the parties have caused this Amendment to be executed this 15th day of July, 2005.

PROFESSIONAL OFFICES PARK V, INC.
Landlord 

By: /s/ Enrique Vila Del Corral
    ---------------------------------------
    Enrique Vila Del Corral, CPA President

ORIENTAL FINANCIAL GROUP INC.
Tenant 

By: /s/ Jose Rafael Fernandez
    ---------------------------------------
    Jose Rafael Fernandez
    President & CEO

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EXHIBIT A

[OFFICE FLOOR PLAN]

EXHIBIT 10.7

AGREEMENT

BETWEEN

ORIENTAL FINANCIAL GROUP INC.

AND

JOSE ENRIQUE FERNANDEZ

AGREEMENT made as of the 4th day of April, 2005, by and between ORIENTAL FINANCIAL GROUP INC., a financial holding company which has its principal office in San Juan, Puerto Rico (hereinafter referred to as the "Company") and JOSE ENRIQUE FERNANDEZ (sometimes hereinafter referred to as the "Chairman").

WITNESSETH:

WHEREAS, Jose Enrique Fernandez has been the President, Chief Executive Officer and Chairman of the Company since October, 1988 and the retention of his services as non-executive Chairman of the Company's Board of Directors is of material importance to the preservation and enhancement of the value of the Company's business;

WHEREAS, the Company and the Chairman wish to enter into this Agreement and intend that this Agreement shall become effective as of January 1, 2005;

NOW THEREFORE, in consideration of the mutual covenants set forth, the Company and the Chairman do hereby agree as follows:

1. TERM OF ENGAGEMENT

1.1 The Company hereby retain the services of Mr. Jose Enrique Fernandez as Chairman of its Board of Directors and the Chairman hereby accepts said retention and agrees to render such

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services to the Company on the terms and conditions set forth in this Agreement for a term of three (3) years commencing on January 1st, 2005 (the "Effective Date") and terminating on December 31, 2007, unless further extended or sooner terminated in accordance with the terms and conditions hereinafter set forth.

Not less than one hundred twenty (120) days in advance of the expiration of the term of this Agreement the parties will determine whether to extend the term and, if extended, under which terms and conditions.

1.2 During the term of this Agreement, the Chairman shall devote his best efforts to performing such services for the Company as may be consistent with his title of non-executive Chairman of the Company's Board of Directors.

1.3 The services of the Chairman to the Company shall be rendered principally in the Commonwealth of Puerto Rico, but he shall do such traveling on behalf of the Company as may be reasonably required by his duties.

1.4 The Chairman shall continue to occupy his position as a Director of the Company and of the Bank. Furthermore, during the term of this Agreement or extension thereof and for any elections of Directors of the Company in which his term as Director will expire, the Board of Directors shall nominate and recommend to the stockholders the election of the Chairman as a Director and, if elected, the Board of Directors of the Company and of the Bank shall, respectively, name the Chairman to the position of Chairman of the Board of Directors of the Company and of the Bank.

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2. COMPETITIVE ACTIVITIES:

2.1 The Chairman agrees that during the term of this Agreement, except with the express written consent of the Company's Board of Directors, he will not, directly or indirectly, engage or participate in, become a director of, or render advisory or other services for, or in connection with, or become interested in, or make financial investment in any firm, corporation, business entity or business enterprise competitive with or to any business of the Company; provided, however, that the Chairman shall not thereby be precluded or prohibited from owning passive investments including investments in the securities of other financial institutions, so long as such ownership does not require him to devote substantial time to the management or control of the business or activities in which he has invested. The above notwithstanding, it is specifically agreed by the parties hereto that the Chairman's investment and active involvement in an international banking entity known as "Omega Overseas Investment Corporation" shall be exempt from the provisions of this Section 2.

2.2 The Chairman agrees and acknowledges that during the time that this Agreement is in effect, he will maintain an intimate knowledge of the activities and affairs of the Company including trade secrets and other confidential matters. As a result, and also because of the special, unique, and extraordinary services that the Chairman is capable of performing for the Company or one of its competitors, the Chairman recognises that the services to be rendered by him hereunder are of a character giving them a peculiar value, the loss of which cannot be adequately or reasonably compensated for by damages. Therefore, if during the time he is rendering services to the Company, the Chairman renders services to a

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competitor of the Company other than as authorized pursuant to Section 2.1 hereof, the Company shall be entitled to immediate injunctive or other equitable relief to restrain the Chairman from rendering his services to the competitor of the Company, in addition to any other remedies to which the Company may be entitled under law; provided, however, that the right to such injunctive or other equitable relief shall not survive the termination of this Agreement.

3. COMPENSATION AND REIMBURSEMENT OF EXPENSES:

3.1 COMPENSATION. The Company will compensate and pay for the Chairman's services an annual base fee of $300,000 for the first year of the term of this Agreement; $225,000 for the second year of the term of this Agreement; and $150,000 for the third year of the term of this Agreement. The Chairman's annual base fee for any extension of the term of this agreement shall be mutually agreed by the Company and the Chairman.

3.2 BONUS. The Chairman shall be paid an annual cash bonus of $200,000 for each of the first and second year of the term of this Agreement and of $150,000 for the third year. The annual cash bonus shall be paid to the Chairman not later than January 15, 2006, 2007 and 2008, respectively.

3.3 CAR ALLOWANCE. The Company shall provide the Chairman a car allowance in the sum of thirty thousand dollars ($30,000) for the first year of the term of this Agreement and of twenty four thousand dollars ($24,000) for the second and third year of the term of this Agreement. From such allowance the Chairman shall pay all his car related expenses, such as car lease payment

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insurance, repairs, maintenance, gasoline, chauffeur, and related equipment such as a car installed cellular phone.

3.4 MEMBERSHIPS. During the term of this Agreement and any extension thereof, the Company shall provide and maintain at its expense membership in such social and business clubs which in the judgement of the Chairman are reasonably appropriate to the performance of his duties pursuant to this Agreement. Such membership shall be maintained in the name of the Chairman and he shall be reimbursed for all reasonable expenses and charges incurred by him at such clubs in performing his company-related duties hereunder.

3.5 REIMBURSEMENT OF EXPENSES. Not less frequently than monthly, the Company shall pay for or reimburse the Chairman for all reasonable travel and other expenses incurred by the Chairman in the performance of his duties under this Agreement, including, without limiting the generality of the foregoing, the allowance and reimbursable expenses provided for in Section 3.3 and 3.4 herein above.

3.6 OFFICE. The Company shall furnish the Chairman with private office facilities to be known as the "Office of the Chairman", and provide all necessary secretarial services and such other assistance and accommodations as shall be suitable to the character of the Chairman's position and adequate for the performance of his duties hereunder.

3.7 LIFE INSURANCE. The Company shall provide a ten (10) year term life insurance policy in the sum of two million dollars ($2,000,000) covering the life of the Chairman and having as its beneficiary the Estate of Jose Enrique Fernandez or any other

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person or entity which the Chairman may designate from time to time. All premiums and costs associated with such term life insurance policy shall be for the account of the Company.

3.8 VACATION. The Chairman shall be entitled to forty-five (45) days of paid vacation each year during the term of this agreement.

4. DISABILITY

4.1 If the Chairman shall become disabled or incapacitated to the extent that he is unable to perform his duties hereunder, and so long as such disability continues, the Chairman shall continue to receive his full compensation for a period not to exceed the remaining term of this Agreement.

4.2 There shall be deducted from the amounts paid to the Chairman hereunder during any period of disability or incapacitation, as described in
Section 4.1 hereof, any amounts actually paid to the Chairman pursuant to any disability insurance or other similar such programs which the Company has instituted or may institute on behalf of its employees for the purpose of providing compensation in the event of disability.

5. ADDITIONAL COMPENSATION AND BENEFITS

5.1 During the term of this Agreement, the Chairman will be entitled to participate and receive the benefits and privileges given to employees and executives of the Company or its subsidiaries and affiliates which may now exist or come into existence hereinafter, to the extent commensurate with his then duties and responsibilities, as fixed by the Company's Board of Directors or its Compensation Committee, and, to the extent that the Chairman is otherwise eligible and qualifies, to so

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participate in, and receive such benefits or privileges. Furthermore, as additional consideration for the Chairman entering into this Agreement, the Company agrees that during the Chairman's lifetime, the Chairman and his spouse will be covered by all health, hospitalization and disability insurance and benefits which may be in effect from time to time for the benefit of Company employees and executives. The Company shall pay for all of the cost of providing such insurance and benefits to the Chairman and his spouse during the Chairman's lifetime. The Company shall not make any changes in such plans, benefits or privileges which would adversely affect the Chairman's rights or benefits thereunder, unless such change or changes are made pursuant to a program applicable to all executives of the Company and does not result in a proportionately greater adverse change in the rights of or benefits to the Chairman as compared to any executive officer of the Company. Nothing paid to the Chairman under any plan or arrangement presently in effect or made available in the future shall be deemed in lieu of the base fee or bonus payable to the Chairman pursuant to Sections 3.1 and 3.2 hereof.

6. TERMINATION

6.1 The Board of Directors shall have the right, at any time upon prior written Notice of Termination satisfying the requirements of Section 6.8(b) hereof, to terminate this Agreement, including termination for just cause. For the purpose of this Agreement, "termination for just cause" shall mean termination for the willful and continued failure of the Chairman to perform his duties under this Agreement or the willful engaging by the Chairman in illegal conduct or gross misconduct materially injurious to the Company, as determined by a court of competent jurisdiction or a federal or state

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regulatory agency having jurisdiction over the Company. For purposes of this paragraph, no act, or failure to act, on the Chairman's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company; provided that any act or omission to act on the Chairman's behalf in reliance upon an opinion of counsel to the Company or counsel to the Chairman shall not be deemed to be willful.

6.2 In the event this Agreement is terminated for just cause pursuant to
Section 6.1 hereof, the Chairman shall have no right to compensation or other benefits for any period after such date of termination. If the Chairman is terminated by the Company other than for just cause pursuant to Section 6.1 hereof and other than in connection with a change of control of the Company, as defined in the Compensation Agreement, the Chairman's right to compensation and other benefits under this Agreement shall be as set forth in Sections 6.8(c) and
(d) hereof.

6.3 The Chairman shall have the right, upon prior written Notice of Termination of not less than thirty (30)days satisfying the requirements of
Section 6.8(b) hereof, to terminate this Agreement. In such event, the Chairman shall have the right as of the date of termination to receive all accrued compensation and other benefits provided for in this Agreement. Provided, however, that if the Chairman terminates this Agreement for "good reason" pursuant to Section 6.8 (a) hereof he shall be entitled to receive the severance payment provided for in Section 6.8 (c) hereof. If the Chairman provides a Notice of Termination for good reason the date of Termination shall be the date on which a Notice of Termination is given.

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6.4 If the Chairman is suspended from office and/or temporarily prohibited from participating in the conduct of the Company's affairs pursuant to a notice served under the Federal Deposit Insurance Act ("FDIA") or under the Federal Reserve Act ("FRA"), the Company's obligations under this Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Company shall: (i) pay the Chairman all the compensation withheld while contract obligations were suspended, and,
(ii) reinstate (in whole or in part) any of its obligations which were suspended.

6.5 If the Chairman is removed from office and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under the FDIA or the FRA, all obligations of the Company under this Agreement shall terminate, as of the effective date of the order, but the rights of the Chairman to compensation earned as of the date of termination shall not be affected.

6.6 If the Company is in default, as defined to mean an adjudication or other official determination of a court of competent jurisdiction or other public authority pursuant to which a conservator, receiver or other legal custodian is appointed for the Company for the purpose of liquidation, all obligations under this Agreement shall terminate as of the date of default, but the rights of the Chairman to compensation and benefits accrued as of the date of termination shall not be affected.

6.7 In the event that this Agreement is terminated in a manner which violates the provisions of Section 6.1, as

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determined by a court of competent jurisdiction, the Chairman shall be entitled to reimbursement for all reasonable costs, including attorneys' fees in challenging such termination. Such reimbursement shall be in addition to all rights to which the Chairman is otherwise entitled under this Agreement.

6.8 (a) The Chairman may terminate this Agreement for good reason. For purposes of this Agreement, "good reason" shall mean (i) a failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after a notice of such noncompliance has been given by the Chairman to the Company, or (ii) any purported termination of this Agreement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (b) hereof (and for purposes of this Agreement no such purported termination shall be effective).

(b) Any termination of the Chairman's employment by the Company or by the Chairman shall be communicated by a written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which shall (i) indicate the specific termination provision in the Agreement relied upon; (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of this Agreement under the provision so indicated; (iii) specify a date of termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given except in the case of the Company's termination of this Agreement for Just cause pursuant to Section 6.1 hereof, in which case the Notice of Termination may specify a date of termination as of the date such

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Notice of Termination is given; and (iv) be given in the manner specified in Section, 9.1 hereof.

(c) In the event that: (i) the Chairman shall terminate this Agreement for good reason as defined in subparts (i) or (ii) of Section 6.8 (a) hereof, or (ii) if this Agreement is terminated by the Company for other than just cause pursuant to Section 6.1 hereof and other than in connection with a change in control of the Company, as defined in the Compensation Agreement, then in lieu of any further fee payments to the Chairman for periods subsequent to the date of termination, the Company shall pay as a termination payment to the Chairman an amount equal to the product of (A) the aggregate annual compensation paid to or payable by the Company and any of its subsidiaries to the Chairman, which amount shall include the Chairman's base fee, bonus (equal to the highest cash bonus paid to the Chairman in any of the two fiscal years prior to the date of termination of this Agreement, car allowance and the value of any other benefits provided to the Chairman, during the year in which the termination of this Agreement occurs, multiplied by (B) 2.00, such payment to be made in a lump sum on or before the fifth day following the date of termination.

(d) Unless this Agreement is terminated for just cause pursuant to
Section 6.1 hereof or pursuant to Section 6.5 hereof, the Company shall maintain in full force and effect, for the continued benefit of the Chairman for the balance of the term of this Agreement (as such term may have been extended or provided herein), all benefit plans and programs in which the Chairman was entitled to participate immediately prior to the date of termination, provided that the Chairman's continued participation

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is possible under the general terms and provisions of such plans and programs.

(e) The Chairman shall not be required to mitigate the amount of any payment provided for in paragraphs (c) and (d) of this Section 6.8 by seeking other sources of income or otherwise.

7. INDEMNIFICATION

7.1 The Company shall indemnify the Chairman, to the fullest extent authorized by applicable federal and Commonwealth of Puerto Rico laws and regulations, with respect to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) that the Chairman is a party or is threatened to made a party by reason of the fact that he was the President and Chief Executive Officer of the Company or that he is or was a Director and Chairman of the Company's Board of Directors, or is or was serving at the written request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against costs and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a matter he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, provided that the Company shall not be liable for any amounts which may be due to the Chairman in connection with a settlement of any action, suit or proceeding effected without its prior written consent or any action, suit or proceeding initiated by the Chairman seeking indemnification

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hereunder without its prior written consent. The provisions of this Section 7.1 shall survive the termination of this Agreement.

8. SUCCESSORS OF THE PARTIES

8.1 This Agreement shall inure to the benefit of and be binding upon the Chairman, and, to the extent applicable, his assigns, executors, and personal representatives and the Company, its successors, and assigns, including, without limitation, any person, partnership, or corporation which may acquire all or substantially all of the Company's assets and business, or with or into which the Company may be consolidated or merged, and this provision shall apply in the event of any subsequent merger, consolidation, or transfer.

8.2 This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

9. NOTICES

9.1 All notices required by this Agreement to be given by one party to the other shall be in writing and shall be deemed to have been delivered either:

(a) When personally delivered to the office of the Secretary of the Company at his regular corporate office, or the Chairman in person; or

(b) Five days after depositing such notice in the United States mails, certified mail with return receipt requested and postage prepaid to:

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(i) Jose E. Fernandez 1717 Lila Street San Francisco San Juan, Puerto Rico 00927

(ii) Oriental Financial Group Inc. P.O. Box 195115
San Juan, Puerto Rico 00919-5115

or such other address as either party may designate to the other by notice in writing in accordance with the terms hereof.

10. AMENDMENTS OR ADDITIONS

10.1 No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of the Company shall be required in order for the Company to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement including any termination of this Agreement with or without just cause under Section 6.1 hereof,

11. MISCELLANEOUS

11.1 No course of conduct between the Company and Chairman to exercise any right or power given under this Agreement shall: (i) impair the subsequent exercise of any right or power, or (ii) be construed to be a waiver of any default or any acquiescence in or consent to the curing of any default while any other default shall continue to exist, or be construed to be a waiver of such continuing default or of any other right or power that shall theretofore have arisen; and, every power and remedy granted by law and by this Agreement to any party hereto may be exercised from time to time, and as often as may be deemed expedient. All

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such rights and powers shall be cumulative to the fullest extent permitted by law.

11.2 The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

11.3 This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth of Puerto Rico, except to the extent that such law may be preempted by applicable Federal law, including regulations, opinions or orders duly issued by the FDIC and the ("Federal Law"), in which event this Agreement shall be governed and be interpreted by and under Federal Law. Venue for the litigation of any and all matters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Superior Court of the Commonwealth of Puerto Rico in San Juan, in the case of state court jurisdiction.

11.4 Notwithstanding anything to the contrary herein contained, the payment or obligation to pay any monies or granting of any rights or privileges to the Chairman as provided in this Agreement shall not be in lieu or derogation of the rights and privileges that the Chairman now has under any plan or benefit presently outstanding.

11.5 As used herein the term "Company" shall include all of the Companys subsidiaries and affiliates.

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At San Juan, Puerto Rico as of this 4th day of April, 2005, ORIENTAL

FINANCIAL GROUP INC. 

By: /s/ Jose Enrique Fernandez               By:  /s/  Julian Inclin
    ---------------------------                   ---------------------------
JOSE ENRIQUE FERNANDEZ                              Julian Inclin
      Chairman                                         Director

                                              _________________________________
                                                  Maricarmen Aponte
                                                      Director

                                              /s/ Alberto Richa
                                              ---------------------------
                                                 Alberto Richa
                                                     Director

                                              /s/ Emilio Rodriguez, Jr.
                                              ------------------------
                                              Emilio Rodriguez,
                                                 Jr. Director

EXHIBIT 10.8

EMPLOYMENT AGREEMENT
BETWEEN
ORIENTAL FINANCIAL GROUP INC.
AND
JOSE RAFAEL FERNANDEZ

AGREEMENT made on the 4th day of April, 2005, by and between ORIENTAL FINANCIAL GROUP INC., a financial bank holding company which has its principal office in San Juan, Puerto Rico (sometimes hereinafter referred to as the "Company") and JOSE RAFAEL FERNANDEZ (sometimes hereinafter referred to as the "President").

WITNESSETH:

WHEREAS, Jose Rafael Fernandez has been an executive officer of the Company since June, 1991, is presently its Senior Executive Vice President and Chief Operating Officer, has been appointed as the Company's President and Chief Executive Officer effective January 1, 2005 and the retention of his services for and on behalf of the Company is of material importance to the preservation and enhancement of the value of the Company's business;

WHEREAS, the Company and the President wish to enter into this Agreement and intend that this Agreement shall become effective on January 1, 2005 and replace the Employment Agreement, dated as of February 16, 2001 between the President and the Company, now in effect;

NOW THEREFORE, in consideration of the mutual covenants set forth, the Company and the President do hereby agree as follows:

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1. TERM OF EMPLOYMENT

1.1 The Company hereby employs Jose Rafael Fernandez as President and Chief Executive Officer as hereinafter provided, and the President hereby accepts said employment and agrees to render such services to the Company on the terms and conditions set forth in this Agreement for a term of three (3) years commencing on January 1st, 2005 (the "Effective Date") and terminating on December 31, 2007, unless further extended or sooner terminated in accordance with the terms and conditions hereinafter set forth.

Not less than one hundred twenty (120) days in advance of the expiration of the term of this Agreement the parties will determine whether to extend the term and, if extended, under which terms and conditions.

1.2 During the term of this Agreement, the President shall devote his best efforts to performing such services for the Company as may be consistent with his title of President and Chief Executive Officer and those which from time to time may be assigned to him by the Company's Board of Directors.

1.3 The services of the President to the Company shall be rendered principally in the Commonwealth of Puerto Rico, but he shall do such traveling on behalf of the Company as may be reasonably required by his duties.

1.4 The President shall have sole, full and complete authority to make all determinations concerning hiring, dismissal and compensation for all classes of employees of the Company, which determinations shall be in accordance with the policies for such hiring, dismissal and compensation established by the

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Compensation Committee of the Board of Directors from time to time and in accordance with applicable laws and, the rules and regulations of the Federal Deposit Insurance Corporation (the "FDIC") and the Federal Reserve Board (the "FRB").

1.5 The President shall continue to occupy his position as a Director on the Board of Directors of the Company. Furthermore, during the term of this Agreement or extension thereof and for any elections of Directors in which his term as Director will expire, the Board of Directors shall nominate and recommend to the stockholders the election of the President to the Board of Directors of the Company.

2. COMPETITIVE ACTIVITIES:

2.1 The President agrees that during the term of this Agreement, except with the express written consent of the Board of Directors, he will not, directly or indirectly, engage or participate in, become a director of, or render advisory or other services for, or in connection with, or become interested in, or make financial investment in any firm, corporation, business entity or business enterprise; provided, however, that the President shall not thereby be precluded or prohibited from owning passive investments including investments in the securities of other financial institutions, so long as such ownership does not require him to devote substantial time to management or control of the business or activities in which he has invested.

2.2 The President agrees and acknowledges that during the time that he is employed by the Company, he will maintain an intimate knowledge of the activities and affairs of the Company including trade secrets and other confidential matters. As a

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result, and also because of the special, unique, and extraordinary services that the President is capable of performing for the Company or one of its competitors, the President recognizes that the services to be rendered by him hereunder are of a character giving them a peculiar value, the loss of which cannot be adequately or reasonably compensated for by damages. Therefore, if during the time he is employed by the Company, the President renders services to a competitor of the Company other than as authorized pursuant to Section 2.1 hereof, the Company shall be entitled to immediate injunctive or other equitable relief to restrain the President from rendering his services to the competitor of the Company, in addition to any other remedies to which the Company may be entitled under law; provided, however, that the right to such injunctive or other equitable relief shall not survive the termination of the President's employment with the Company.

3. COMPENSATION AND REIMBURSEMENT OF EXPENSES:

3.1 COMPENSATION. The Company will compensate and pay for the President's services during the term of this Agreement (i) an annual base salary of three hundred twenty-five thousand dollars ($325,000) equivalent to twenty-seven thousand eighty-three dollars with thirty-three cents ($27,083.33) per month from January 1 to June 30, 2005; (ii) an annual base salary of three hundred fifty thousand dollars ($350,000) equivalent to twenty-nine thousand one hundred sixty-six dollars with sixty-six cents ($29,166.66) per month from July 1, 2005 to June 30, 2006; (iii) an annual base salary of four hundred thousand dollars ($400,000) equivalent to thirty-three thousand three hundred thirty-three dollars ($33,333.33) per month from July 1, 2006 to June 30, 2007; and (iv) thirty seven thousand five hundred dollars ($37,500) per month equivalent to an annualized annual base salary of four

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hundred fifty thousand dollars ($450,000) from July 1 to December 31, 2007. The President's base salary for any extension of the term, of this Agreement shall be mutually agreed by the Compensation Committee of the Board of Directors and the President, provided, however, that at no time shall such base salary be reduced below the amount set forth above for the second year of the term of this Agreement.

3.2 BONUS. The Company shall pay the President a bonus of up to 50% of the President's annual base salary as may be earned by him under the Company's "Pay for Performance" compensation plan (the "Plan") for the first year of the term of this Agreement and of up to 55% of the President's annual base salary as may be earned by him under the Plan for each subsequent year of the term of this Agreement.

3.3 CAR ALLOWANCE. During the term of this Agreement and any extension thereof, the Company shall provide the President an annual car allowance in the amount of thirty thousand dollars ($30,000.00) from which the President shall pay all his car related expenses, such as car lease payment insurance, repairs, maintenance, gasoline, chauffeur, and related equipment such as a car installed cellular phone.

3.4 MEMBERSHIPS AND PROFESSIONAL EXPENSES. During the term of this Agreement and any extension thereof, the Company shall provide the President with an annual allowance in the sum of eighteen thousand dollars ($18,000). From such allowance the Executive Officer shall pay the membership expenses for such social and business clubs and professional or training expenses which in his judgement are reasonably appropriate to the performance of his duties as President pursuant to this

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Agreement. Such membership(s) shall be maintained in the name of the President.

3.5 REIMBURSEMENT OF EXPENSES. Not less frequently than, monthly, the Company shall pay for or reimburse the President for-all reasonable travel and other expenses incurred by the President in the performance of his duties under this Agreement, including, without limiting the generality of the foregoing, the allowance and reimbursable expenses provided for in Section 3.3 and 3.4 herein above.

3.6 OFFICE. The Company shall furnish the President with a private office, all necessary secretarial services and such other assistance and accommodations as shall be suitable to the character of the President's position with the Company and adequate for the performance of his duties hereunder.

3.7 LIFE INSURANCE. The Company shall provide a ten (10) year term life insurance policy in the sum of three million dollars (53,000,000) covering the life of the President and having as its beneficiary the Estate of Jose Rafael Fernandez or any other person or entity which the President may designate from time to time. The President authorises the Company to obtain a ten million dollars ($10,000,000) key man term life insurance policy covering his life and having the Company as its beneficiary. For as long as the President is employed by the Company, all premiums and costs associated with such term life insurance policies described above shall be for the account of the Company.

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3.8 VACATION. The President shall be entitled to twenty-two (22) days of paid vacation each year during the term of this agreement.

4. DISABILITY

4.1 if the President shall become disabled or incapacitated to the extent that he is unable to perform his duties hereunder, and so long as such disability continues, the President shall, subject to the provisions of Section 6.2 and 6.3 hereof, continue to receive his full compensation for a period not to exceed the remaining term of this Agreement.

4.2 There shall be deducted from the amounts paid to the President hereunder during any period of disability or incapacitation, as described in
Section 4.1 hereof, any amounts actually paid to the President pursuant to any disability insurance or other similar such programs which the Company has instituted or may institute on behalf of its employees for the purpose of providing compensation in the event of disability.

5. ADDITIONAL COMPENSATION AND BENEFITS

5.1 During the term of this Agreement, the President will be entitled to participate in, and receive the benefits of, any stock option plan, profit sharing plan or other plans, benefits and privileges given to employees and executives of the Company or its subsidiaries and affiliates which may now exist or come into existence hereinafter, to the extent commensurate with his then duties and responsibilities, as fixed by the Compensation Committee of the Board of Directors, and, to the extent that the President is otherwise eligible and qualifies, to so participate in, and receive such benefits or privileges. The Company shall not make any changes in such plans, benefits or privileges which

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would adversely affect the President's rights or benefits thereunder, unless such change or changes are made pursuant to a program applicable to all executives of the Company and does not result in a proportionately greater adverse change in the rights of or benefits to the President as compared to any executive officer of the Company. Nothing paid to the President under any plan or arrangement presently in effect or made available in the future shall be deemed in lieu of the base salary or bonus payable to the President pursuant to Sections 3.1 and 3.2 hereof.

5.2 (a) On November 29, 2004 the Compensation Committee of the Board of Directors of the Company, in contemplation of the execution of this Agreement, granted the President an option to purchase 20,000 shares of the common stock of the Company. The option granted shall be subject to the conditions described in subsections (c) and (d) below except that the exercised period for the option shall commence after the second and end on the tenth anniversary of the date of the grant;

(b) The President shall be granted options to purchase shares of the common stock of the Company as follows: 40,000 shares effective on July 1, 2005, 20,000 shares effective on January 1, 2006 and 20,000 shares effective on January 1, 2007. The options granted to the President pursuant to subsections
(a) and (b) of this Section 5.2 shall be referred to as the "Options".The Options shall be entitled to all of the rights, benefits and privileges to which stock options issued under the Company's Incentive Stock Options Plans are entitled including, without limiting the generality of the foregoing, their adjustment to take into account the dilution effect of stock dividends and stock splits.

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(c) Up to twenty percent (20%) of the Options may be exercised by the President each year during a period commencing after the second and ending on the tenth anniversary of this Agreement, provided that the Options will become fully vested and exercisable in the event of a change of control of the Company as such term is defined in the "Change of Control Compensation Agreement" between the President and the Company dated December 15, 2004, or if the President becomes disabled, dies or retires from employment with the Company; and

(d) The Options shall survive one (1) year after termination of this Agreement, unless said termination is pursuant to Sections 6.1, 6.5 or 6,6 hereto.

6. TERMINATION

6.1 The Board of Directors shall have the right, at any time upon prior written Notice of Termination satisfying the requirements of Section 6.8(b) hereof, to terminate the President's employment hereunder, including termination for just cause. For the purpose of this Agreement, "termination for just cause" shall mean termination for the willful and continued failure of the President to perform his duties under this Agreement or the willful engaging by the President in illegal conduct or gross misconduct materially injurious to the Company, as determined by a court of competent jurisdiction or a federal or state regulatory agency having jurisdiction over the Company. For purposes of this paragraph, no act, or failure to act, on the President's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and

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without reasonable belief that his action or omission was in the best interest of the Company; provided that any act or omission to act on the President's behalf in reliance upon an opinion of counsel to the Company or counsel to the President shall not be deemed to be willful.

6.2 In the event employment is terminated for just cause pursuant to
Section 6.1 hereof, the President shall have no right to compensation or other benefits for any period after such date of termination. If the President is terminated by the Company other than for just cause pursuant to Section 6.1 hereof and other than in connection with a change of control of the Company, as defined in the Compensation Agreement, the President's right to compensation and other benefits under this Agreement shall be as set forth in Sections 6,8(c) and
(d) hereof.

6.3 The President shall have the right, upon prior written Notice of Termination of not less than thirty (30)days satisfying the requirements of
Section 6.8(b) hereof, to terminate his employment hereunder. In such event, the President shall have the right as of the date of termination to receive all accrued compensation and other benefits provided for in this Agreement. Provided, however, that if the President terminates his employment hereunder for "good reason" pursuant to Section 6.8(a) hereof he shall be entitled to receive the severance payment provided for in Section 6.8 (c) hereof. If the President provides a Notice of Termination for good reason the date

-11-

of Termination shall be the date on which a Notice of Termination is given,

6.4 If the President is suspended from office and/or temporarily prohibited from participating in the conduct of the Company's affairs pursuant to a notice served under the Federal Deposit Insurance Act ("FDIA") or under the Federal Reserve Act ("FRA"), the Company's obligations under this Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Company shall: (i) pay the President all the compensation withheld while contract obligations were suspended, and, (ii) reinstate (in whole or in part) any of its obligations which were suspended.

6.5 If the President is removed from office and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under the FDIA or the FRA, all obligations of the Company under this Agreement shall terminate, as of the effective date of the order, but the rights of the President to compensation earned as of the date of termination shall not be affected.

6.6 If the Company is in default, as defined to mean an adjudication or other official determination of a court of competent jurisdiction or other public authority pursuant to which a conservator, receiver or other legal custodian is appointed for the Company for the purpose of liquidation, all

-12-

obligations under this Agreement shall terminate as of the date of default, but the rights of the President to compensation and benefits accrued as of the date of termination shall not be affected.

6.7 In the event that the President is terminated in a manner which violates the provisions of Section 6.1, as determined by a court of competent jurisdiction, the President shall be entitled to reimbursement for all reasonable costs, including attorneys' fees in challenging such termination. Such reimbursement shall be in addition to all rights to which the President is otherwise entitled under this Agreement.

6.8 (a) The President may terminate his employment hereunder for good reason. For purposes of this Agreement, "good reason" shall mean (i) a failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after a notice of such noncompliance has been given by the President to the Company, or (ii) any purported termination of the President's employment hereunder which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (b) hereof (and for purposes of this Agreement no such purported termination shall be effective).

(b) Any termination of the President's employment by the Company or by the President shall be communicated by a written Notice of Termination to the other party hereto. For

-13-

purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which shall (i) indicate the specific termination provision in the Agreement relied upon; (ii) set forth in reasonable detail, the facts and circumstances claimed to provide a basis for termination of the President's employment under the provision so indicated; (iii) specify a date of termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Company's termination of the President's employment for just cause pursuant to Section 6.1 hereof, in which case the Notice of Termination may specify a date of termination as of the date such Notice of Termination is given; and (iv) be given in the manner specified in Section 9.1 hereof.

(c) In the event that: (i) the President shall terminate his employment for good reason as defined in subparts (i) or (ii) of Section 6.8(a) hereof, or (ii) if the President is terminated by the Company for other than just cause pursuant to Section 6.1 hereof and other than in connection with a change in control of the Company, as defined in the Compensation Agreement, then in lieu of any further salary payments to the President for periods subsequent to the date of termination, the Company shall pay as severance to the President an amount equal to the product of (A) the aggregate annual compensation paid to or payable by the Company and any of its subsidiaries to the President, which amount shall include the President's base salary, bonus (equal to the highest cash bonus paid to the

-14-

President in any of the two fiscal years prior to the date of termination of employment, car allowance and the value of any other benefits provided to the President, during the year in which the termination of the President's employment occurs, multiplied by (B) 2.00, such payment to be made in a lump sum on or before the fifth day following the date of termination.

(d) Unless the President's employment is terminated for just cause pursuant to Section 6.1 hereof or pursuant to Sections 6.5 and 6.6 hereof, the Company shall maintain in full force and effect, for the continued benefit of the President for the balance of the term of this Agreement (as such term may have been extended or provided herein), all employee benefit plans and programs in which the President was entitled to participate immediately prior to the date of termination, provided that the President's continued participation is possible under the general terms and provisions of such plans and programs.

(e) The President shall not be required to mitigate the amount of any payment provided for in paragraphs (c) and (d) of this Section 6.8 by seeking other employment or otherwise.

7. INDEMNIFICATION

7.1 The Company shall indemnify the President, to the fullest extent authorized by applicable federal and Commonwealth of Puerto Rico laws and regulations, with respect to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other

-15-

than an action by or in the right of the Company) that the President is a party or is threatened to made a party by reason of the fact that he is or was the President and Chief Executive Officer of the Company or that he is or was a member of the Company's Board of Directors, or is or was serving at the written request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against costs and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a matter he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, provided that the Company shall not be liable for any amounts which may be due to the President in connection with a settlement of any action, suit or proceeding effected without its prior written consent or any action, suit or proceeding initiated by the President seeking indemnification hereunder without its prior written consent. The provisions of this Section 7.1 shall also extend the conjugal partnership of the President and his spouse and to the President's spouse, when applicable, and shall survive the termination of this Agreement.

8. SUCCESSORS OF THE PARTIES

8.1 This Agreement shall inure to the benefit of and be binding upon the President, and, to the extent applicable, his assigns, executors, and personal representatives and the Company,

-16-

its successors, and assigns, including, without limitation, any person, partnership, or corporation which may acquire all or substantially all of the Company's assets and business, or with or into which the Company may be consolidated or merged, and this provision shall apply in the event of any subsequent merger, consolidation, or transfer,

8.2 This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

9. NOTICES

9.1 All notices required by this Agreement to be given by one party to the other shall be in writing and shall be deemed to have been delivered either:

(a) When personally delivered to the office of the Secretary of the Company at his regular corporate office, or the President in person; or

(b) Five days after depositing such notice in the United States mails, certified mail with return receipt requested and postage prepaid to:

(i) Jose R. Fernandez Narciso 1893 Urb. Santa Maria Rio Piedras, PR 00927

-17-

(ii) Oriental Financial Group Inc. P.O. Box 195115
San Juan, Puerto Rico 00919-5115

or such other address as either party may designate to the other by notice in writing in accordance with the terms hereof.

10. AMENDMENTS OR ADDITIONS

10.1 No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of the Company shall be required in order for the Company to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement including any termination of the employment of the President with or without just cause under Section 6.1 hereof.

11. MISCELLANEOUS

11.1 No course of conduct between the Company and President to exercise any right or power given under this Agreement shall: (i) impair the subsequent exercise of any right or power, or (ii) be construed to be a waiver of any default or any acquiescence in or consent to the curing of any default while any other default shall continue to exist, or be construed to be a waiver of such continuing default or of any other right or power that shall theretofore have arisen; and, every power and remedy granted by law and by this Agreement to any party hereto may be exercised from time to time, and as often as may be deemed expedient. All such rights and powers shall be cumulative to the fullest extent permitted by law.

-18-

11.2 The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

11.3 This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth of Puerto Rico, except to the extent that such law may be preempted by applicable Federal law, including regulations, opinions or orders duly issued by the FDIC and the FRB("Federal Law"), in which event this Agreement shall be governed and be interpreted by and under Federal Law. Venue for the litigation of any and all matters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Superior Court of the Commonwealth of Puerto Rico in San Juan, in the case of state court jurisdiction.

11.4 Notwithstanding anything to the contrary herein contained, the payment or obligation to pay any monies or granting of any rights or privileges to the President as provided in this Agreement shall not be in lieu or derogation of the rights and privileges that the President now has under any plan or benefit presently outstanding.

11.5 As used herein the term "Company" shall include all of the Company's subsidiaries and affiliates.

-19-

At San Juan Puerto Rico this 4th day of April, 2005.

ORIENTAL FINANCIAL GROUP INC. 

/s/ Jose Rafael Fernandez           By: /s/ Julian Inclan
-------------------------               -------------------------
JOSE RAFAEL FERNANDEZ                   Julian Inclan
                                           Director

                                        __________________________________
                                            Maricarmen Aponte
                                               Director

                                        /s/ Alberto Richa
                                        -------------------------
                                            Alberto Richa
                                               Director

                                        /s/ Emilio Rodriguez, Jr.
                                        ----------------------------------
                                            Emilio Rodriguez, Jr.
                                                  Director

EXHIBIT 10.9

CHANGE IN CONTROL COMPENSATION AGREEMENT

BETWEEN

ORIENTAL FINANCIAL GROUP INC.

AND

JOSE E. FERNANDEZ

Agreement made as of the 15th day of December, 2004, by and between Oriental Financial Group Inc., a Puerto Rico corporation and a financial holding company with principal offices in San Juan, Puerto Rico (hereinafter referred to as "OFG") and Jose E. Fernandez, of legal age, married, business executive and resident of San Juan, Puerto Rico (hereinafter referred to as the "Executive Officer").

WITNESSETH:

WHEREAS, the Executive Officer is presently the Chairman of the Board, President and CEO of OFG and, effective January 1, 2005, will become the non-executive Chairman of OFG;

WHEREAS, it is in the best interest of OFG to promote the retention of the Executive Officer's services on behalf of OFG by reducing concerns that the Executive Officer may be adversely affected in the event of change in control of OFG as defined herein below;

WHEREAS, OFG and the Executive Officer wish to enter into this Agreement to set forth the terms and conditions for the payment by OFG of certain compensation to the Executive Officer

-2-

in the event of a termination of Executive Officer's employment as a result of a change in control of OFG;

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, OFG and the Executive Officer do hereby agree as follows:

1. TERM.

This Agreement shall be in full force and effect so long as the Executive Officer is employed by the Company.

2. TERMINATION OF EMPLOYMENT DUE TO A CHANGE IN CONTROL

A. In the event there is a Change in Control of OFG (as defined herein below) while this Agreement is in effect and as a result thereof or within one (1) year after the Change in Control, the Executive Officer's employment with OFG is terminated by OFG or its successor in interest, the Executive Officer shall be entitled to the cash payment compensation determined as provided in subparagraph B below.

B. The cash payment compensation shall be in an amount equal to two
(2) times the sum of the Executive Officer's annual base salary at the time the termination of his employment occurs and the last cash bonus paid to the Executive Officer prior to the termination of his employment.

C. The cash payment compensation shall be in lieu of any other payments which the Executive Officer may be entitled to receive by law, contract or otherwise. The cash payment compensation shall be due and payable in a lump sum to

-3-

the Executive Officer on or before the thirtieth (30th) day following the termination of the Executive Officer employment. The receipt of the cash payment compensation shall not affect the rights of Executive Officer to any vested benefits or accrued compensation, including bonuses.

D. For purposes of this Agreement, a "Change in Control of OFG" shall be deemed to have occurred if any Person or persons acting as a group within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of OFG representing 25% or more of either the then outstanding shares of common stocks of OFG or the combined voting power of OFG's then outstanding securities and if individuals who on the date hereof are members of OFG's Board of Directors cease for any reason to constitute at least a majority thereof, unless the appointment election or nomination of each new director who was not a director on the date hereof has been approved by at least two-thirds of the directors in office on the date hereof.

E. For purposes of this Agreement, "Person" shall have the meaning given in Section 3(a) (9) of the Exchange Act, except that such term shall not include (i) OFG or any of its subsidiaries; (ii) an individual who on the date of this Agreement is a director or officer of OFG or any of its subsidiaries, or a beneficial owner of more than ten percent (10%) of OFG's outstanding securities; (iii) a trustee or other fiduciary holding securities under an employee benefit plan of OFG or any of its subsidiaries; (iv) an underwriter temporarily holding securities pursuant to an offering of such securities; or

-4-

(v) a corporation or entity owned, directly or indirectly, by the stockholders of OFG in substantially the same proportion as their ownership of stock of OFG on the date of this Agreement.

F. Notwithstanding anything to the contrary herein, any event or transaction which would otherwise constitute a Change in Control of OFG (hereinafter referred to as a "Transaction") shall not constitute a Change in Control of OFG for purposes of this Agreement if the Executive Officer participates as an acquirer in the Transaction or as an equity investor or stockholder of the acquiring entity or any of its affiliates and thus, the Executive Officer shall not be entitled to receive the benefits provided for in this Agreement.

3. ASSIGNMENT.

This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

4. AMENDMENTS OR ADDITIONS.

No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of OFG shall be required in order for OFG to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement.

-5-

5. MISCELLANEOUS.

A. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

B. This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth of Puerto Rico, except to the extent that such law may be preempted by applicable United States federal law, in which case this Agreement shall be governed and be interpreted by and under United States federal law. Venue for the litigation of any and all maters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Court of First Instance, Superior Part, the Commonwealth of Puerto Rico in San Juan, in the case of state court jurisdiction. 

  EXECUTIVE OFFICER                                ORIENTAL FINANCIAL GROUP INC.

 /s/ Jose E. Fernandez                                  /s/ Julian S. Inclan
------------------------                           -----------------------------
  Jose E. Fernandez                                        Julian S. Inclan

                                                        /s/ Alberto Richa
                                                   -----------------------------
                                                           Alberto Richa

                                                        /s/ Emilio Rodriguez
                                                   -----------------------------
                                                           Emilio Rodriguez

FORM APPROVED ON NOVEMBER 29, 2004

EXHIBIT 10.10

CHANGE IN CONTROL COMPENSATION AGREEMENT

BETWEEN

ORIENTAL FINANCIAL GROUP INC.

AND

HECTOR MENDEZ

Agreement made as of the 15th day of December, 2004, by and between Oriental Financial Group Inc., a Puerto Rico corporation and a financial holding company with principal offices in San Juan, Puerto Rico (hereinafter referred to as "OFG") and Hector Mendez, of legal age, married, business executive and resident of San Juan, Puerto Rico (hereinafter referred to as the "Executive Officer") .

WITNESSETH:

WHEREAS, the Executive Officer is presently a Senior Executive Vice President of OFG;

WHEREAS, it is in the best interest of OFG to promote the retention of the Executive Officer's services on behalf of OFG by reducing concerns that the Executive Officer may be adversely affected in the event of change in control of OFG as defined herein below;

WHEREAS, OFG and the Executive Officer wish to enter into this Agreement to set forth the terms and conditions for the payment by OFG of certain compensation to the Executive Officer in the event of a termination of Executive Officer's employment as a result of a change in control of OFG;

-2-

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, OFG and the Executive Officer do hereby agree as follows:

1. TERM.

This Agreement shall be in full force and effect so long as the Executive Officer is employed by the Company.

2. TERMINATION OF EMPLOYMENT DUE TO A CHANGE IN CONTROL

A. In the event there is a Change in Control of OFG (as defined herein below) while this Agreement is in effect and as a result thereof or within one (1) year after the Change in Control, the Executive Officer's employment with OFG is terminated by OFG or its successor in interest, the Executive Officer shall be entitled to the cash payment compensation determined as provided in subparagraph B below.

B. The cash payment compensation shall be in an amount equal to two (2) times the sum of the Executive Officer's annual base salary at the time the termination of his employment occurs and the last cash bonus paid to the Executive Officer prior to the termination of his employment.

C. The cash payment compensation shall be in lieu of any other payments which the Executive Officer may be entitled to receive by law, contract or otherwise. The cash payment compensation shall be due and payable in a lump sum to the Executive Officer on or before the thirtieth (30th) day following the termination of the Executive Officer employment. The receipt of the cash payment compensation shall not affect the

-3-

rights of Executive Officer to any vested benefits or accrued compensation, including bonuses.

D. For purposes of this Agreement, a "Change in Control of OFG" shall be deemed to have occurred if any Person or persons acting as a group within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of OFG representing 25% or more of either the then outstanding shares of common stocks of OFG or the combined voting power of OFG's then outstanding securities and if individuals who on the date hereof are members of OFG's Board of Directors cease for any reason to constitute at least a majority thereof, unless the appointment election or nomination of each new director who was not a director on the date hereof has been approved by at least two-thirds of the directors in office on the date hereof.

E. For purposes of this Agreement, "Person" shall have the meaning given in Section 3(a) (9) of the Exchange Act, except that such term shall not include (i) OFG or any of its subsidiaries; (ii) an individual who on the date of this Agreement is a director or officer of OFG or any of its subsidiaries, or a beneficial owner of more than ten percent (10%) of OFG's outstanding securities; (iii) a trustee or other fiduciary holding securities under an employee benefit plan of OFG or any of its subsidiaries; (iv) an underwriter temporarily holding securities pursuant to an offering of such securities; or
(v) a corporation or entity owned, directly or indirectly, by the stockholders of OFG in substantially the same proportion as their ownership of stock of OFG on the date of this Agreement.

-4-

F. Notwithstanding anything to the contrary herein, any event or transaction which would otherwise constitute a Change in Control of OFG (hereinafter referred to as a "Transaction") shall not constitute a Change in Control of OFG for purposes of this Agreement if the Executive Officer participates as an acquirer in the Transaction or as an equity investor or stockholder of the acquiring entity or any of its affiliates and thus, the Executive Officer shall not be entitled to receive the benefits provided for in this Agreement.

3. ASSIGNMENT.

This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

4. AMENDMENTS OR ADDITIONS.

No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of OFG shall be required in order for OFG to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement.

-5-

5. MISCELLANEOUS.

A. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

B. This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth of Puerto Rico, except to the extent that such law may be preempted by applicable United States federal law, in which case this Agreement shall be governed and be interpreted by and under United States federal law. Venue for the litigation of any and all maters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Court of First Instance, Superior Part, the Commonwealth of Puerto Rico in San Juan, in the case of state court jurisdiction. 

  EXECUTIVE OFFICER                                ORIENTAL FINANCIAL GROUP INC.

/s/ Hector Mendez                                       /s/ Julian S. Inclan
---------------------                              -----------------------------
    Hector Mendez                                          Julian S. Inclan

                                                        /s/ Alberto Richa
                                                   -----------------------------
                                                           Alberto Richa

                                                        /s/ Emilio Rodriguez
                                                   -----------------------------
                                                           Emilio Rodriguez

FORM APPROVED ON NOVEMBER 29, 2004

EXHIBIT 10.11

CHANGE IN CONTROL COMPENSATION AGREEMENT

BETWEEN

ORIENTAL FINANCIAL GROUP INC.

AND

JOSE E. FERNANDEZ RICHARDS

Agreement made as of the 15th day of December, 2004, by and between Oriental Financial Group Inc., a Puerto Rico corporation and a financial holding company with principal offices in San Juan, Puerto Rico (hereinafter referred to as "OFG") and Jose E. Fernandez Richards, of legal age, married, business executive and resident of San Juan, Puerto Rico (hereinafter referred to as the "Executive Officer").

WITNESSETH:

WHEREAS, the Executive Officer is presently an Senior Vice President of
OFG;

WHEREAS, it is in the best interest of OFG to promote the retention of the Executive Officer's services on behalf of OFG by reducing concerns that the Executive Officer may be adversely affected in the event of change in control of OFG as defined herein below;

WHEREAS, OFG and the Executive Officer wish to enter into this Agreement to set forth the terms and conditions for the payment by OFG of certain compensation to the Executive Officer in the event of a termination of Executive Officer's employment as a result of a change in control of OFG;

-2-

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, OFG and the Executive Officer do hereby agree as follows:

1. TERM.

This Agreement shall be in full force and effect so long as the Executive Officer is employed by the Company.

2. TERMINATION OF EMPLOYMENT DUE TO A CHANGE IN CONTROL

A. In the event there is a Change in Control of OFG (as defined herein below) while this Agreement is in effect and as a result thereof or within one (1) year after the Change in Control, the Executive Officer's employment with OFG is terminated by OFG or its successor in interest, the Executive Officer shall be entitled to the cash payment compensation determined as provided in subparagraph B below.

B. The cash payment compensation shall be in an amount equal to two (2) times the sum of the Executive Officer's annual base salary at the time the termination of his employment occurs and the last cash bonus paid to the Executive Officer prior to the termination of his employment.

C. The cash payment compensation shall be in lieu of any other payments which the Executive Officer may be entitled to receive by law, contract or otherwise. The cash payment compensation shall be due and payable in a lump sum to the Executive Officer on or before the thirtieth (30th) day following the termination of the Executive Officer employment. The receipt of the cash payment compensation shall not affect the

-3-

rights of Executive Officer to any vested benefits or accrued compensation, including bonuses.

D. For purposes of this Agreement, a "Change in Control of OFG" shall be deemed to have occurred if any Person or persons acting as a group within the meaning of Sections 13 (d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of OFG representing 25% or more of either the then outstanding shares of common stocks of OFG or the combined voting power of OFG's then outstanding securities and if individuals who on the date hereof are members of OFG's Board of Directors cease for any reason to constitute at least a majority thereof, unless the appointment election or nomination of each new director who was not a director on the date hereof has been approved by at least two-thirds of the directors in office on the date hereof.

E. For purposes of this Agreement, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, except that such term shall not include (i) OFG or any of its subsidiaries; (ii) an individual who on the date of this Agreement is a director or officer of OFG or any of its subsidiaries, or a beneficial owner of more than ten percent (10%) of OFG's outstanding securities; (iii) a trustee or other fiduciary holding securities under an employee benefit plan of OFG or any of its subsidiaries; (iv) an underwriter temporarily holding securities pursuant to an offering of such securities; or
(v) a corporation or entity owned, directly or indirectly, by the stockholders of OFG in substantially the same proportion as their ownership of stock of OFG on the date of this Agreement.

-4-

F. Notwithstanding anything to the contrary herein, any event or transaction which would otherwise constitute a Change in Control of OFG (hereinafter referred to as a "Transaction") shall not constitute a Change in Control of OFG for purposes of this Agreement if the Executive Officer participates as an acquirer in the Transaction or as an equity investor or stockholder of the acquiring entity or any of its affiliates and thus, the Executive Officer shall not be entitled to receive the benefits provided for in this Agreement.

3. ASSIGNMENT.

This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

4. AMENDMENTS OR ADDITIONS.

No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of OFG shall be required in order for OFG to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement.

-5-

5. MISCELLANEOUS.

A. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

B. This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth of Puerto Rico, except to the extent that such law may be preempted by applicable United States federal law, in which case this Agreement shall be governed and be interpreted by and under United States federal law. Venue for the litigation of any and all maters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Court of First Instance, Superior Part, the Commonwealth of Puerto Rico in San Juan, in the case of state court jurisdiction. 

      EXECUTIVE OFFICER                            ORIENTAL FINANCIAL GROUP INC.

/s/ Jose E. Fernandez Richards                         /s/ Julian s. Inclan
------------------------------                     -----------------------------
  Jose E. Fernandez Richards                              Julian s. Inclan

                                                       /s/ Alberto Richa
                                                   -----------------------------
                                                          Alberto Richa

                                                       /s/ Emilio Rodriguez
                                                   -----------------------------
                                                          Emilio Rodriguez

FORM APPROVED ON NOVEMBER 29, 2004

EXHIBIT 10.12

CHANGE IN CONTROL COMPENSATION AGREEMENT

BETWEEN

ORIENTAL FINANCIAL GROUP INC.

AND

JOSE R. FERNANDEZ

Agreement made as of the 15th day of December, 2004, by and between Oriental Financial Group Inc., a Puerto Rico corporation and a financial holding company with principal offices in San Juan, Puerto Rico (hereinafter referred to as "OFG") and Jose R. Fernandez, of legal age, married, business executive and resident of San Juan, Puerto Rico (hereinafter referred to as the "Executive Officer").

WITNESSETH:

WHEREAS, the Executive Officer is presently the Senior Executive Vice President and COO of OFG and, effective January 1, 2005, will become the President and CEO of OFG;

WHEREAS, it is in the best interest of OFG to promote the retention of the Executive Officer's services on behalf of OFG by reducing concerns that the Executive Officer may be adversely affected in the event of change in control of OFG as defined herein below;

WHEREAS, OFG and the Executive Officer wish to enter into this Agreement to set forth the terms and conditions for the payment by OFG of certain compensation to the Executive Officer

-2-

in the event of a termination of Executive Officer's employment as a result of a change in control of OFG;

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, OFG and the Executive Officer do hereby agree as follows:

1. TERM.

This Agreement shall be in full force and effect so long as the Executive Officer is employed by the Company.

2. TERMINATION OF EMPLOYMENT DUE TO A CHANGE IN CONTROL

A. In the event there is a Change in Control of OFG (as defined herein below) while this Agreement is in effect and as a result thereof or within one (1) year after the Change in Control, the Executive Officer's employment with OFG is terminated by OFG or its successor in interest, the Executive Officer shall be entitled to the cash payment compensation determined as provided in subparagraph B below.

B. The cash payment compensation shall be in an amount equal to two
(2) times the sum of the Executive Officer's annual base salary at the time the termination of his employment occurs and the last cash bonus paid to the Executive Officer prior to the termination of his employment.

C. The cash payment compensation shall be in lieu of any other payments which the Executive Officer may be entitled to receive by law, contract or otherwise. The cash payment compensation shall be due and payable in a lump sum to

-3-

the Executive Officer on or before the thirtieth (30th) day following the termination of the Executive Officer employment. The receipt of the cash payment compensation shall not affect the rights of Executive Officer to any vested benefits or accrued compensation, including bonuses.

D. For purposes of this Agreement, a "Change in Control of OFG" shall be deemed to have occurred if any Person or persons acting as a group within the meaning of Sections 13 (d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of OFG representing 25% or more of either the then outstanding shares of common stocks of OFG or the combined voting power of OFG's then outstanding securities and if individuals who on the date hereof are members of OFG's Board of Directors cease for any reason to constitute at least a majority thereof, unless the appointment election or nomination of each new director who was not a director on the date hereof has been approved by at least two-thirds of the directors in office on the date hereof.

E. For purposes of this Agreement, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, except that such term shall not include (i) OFG or any of its subsidiaries; (ii) an individual who on the date of this Agreement is a director or officer of OFG or any of its subsidiaries, or a beneficial owner of more than ten percent (10%) of OFG's outstanding securities; (iii) a trustee or other fiduciary holding securities under an employee benefit plan of OFG or any of its subsidiaries; (iv) an underwriter temporarily holding securities pursuant to an offering of such securities; or

-4-

(v) a corporation or entity owned, directly or indirectly, by the stockholders of OFG in substantially the same proportion as their ownership of stock of OFG on the date of this Agreement.

F. Notwithstanding anything to the contrary herein, any event or transaction which would otherwise constitute a Change in Control of OFG (hereinafter referred to as a "Transaction") shall not constitute a Change in Control of OFG for purposes of this Agreement if the Executive Officer participates as an acquirer in the Transaction or as an equity investor or stockholder of the acquiring entity or any of its affiliates and thus, the Executive Officer shall not be entitled to receive the benefits provided for in this Agreement.

3. ASSIGNMENT.

This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

4. AMENDMENTS OR ADDITIONS.

No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of OFG shall be required in order for OFG to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement.

-5-

5. MISCELLANEOUS.

A. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

B. This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth of Puerto Rico, except to the extent that such law may be preempted by applicable United States federal law, in which case this Agreement shall be governed and be interpreted by and under United States federal law. Venue for the litigation of any and all maters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Court of First Instance, Superior Part, the Commonwealth of Puerto Rico in San Juan, in the case of state court jurisdiction. 

    EXECUTIVE OFFICER                              ORIENTAL FINANCIAL GROUP INC.

/s/ Jose R. Fernandez                                   /s/ Julian S. Inclan
------------------------                           -----------------------------
   Jose R. Fernandez                                        Julian S. Inclan

                                                        /s/ Alberto Richa
                                                   -----------------------------
                                                           Alberto Richa

                                                        /s/ Emilio Rodriguez
                                                   -----------------------------
                                                           Emilio Rodriguez

FORM APPROVED ON NOVEMBER 29, 2004

EXHIBIT 10.13

CHANGE IN CONTROL COMPENSATION AGREEMENT

BETWEEN

ORIENTAL FINANCIAL GROUP INC.

AND

NORBERTO GONZALEZ

Agreement made as of the 15th day of December, 2004, by and between Oriental Financial Group Inc., a Puerto Rico corporation and a financial holding company with principal offices in San Juan, Puerto Rico (hereinafter referred to as "OFG") and Norberto Gonzalez, of legal age, married, business executive and resident of San Juan, Puerto Rico (hereinafter referred to as the "Executive Officer").

WITNESSETH:

WHEREAS, the Executive Officer is presently a Senior Executive Vice President and acting CFO of OFG;

WHEREAS, it is in the best interest of OFG to promote the retention of the Executive Officer's services on behalf of OFG by reducing concerns that the Executive Officer may be adversely affected in the event of change in control of OFG as defined herein below;

WHEREAS, OFG and the Executive Officer wish to enter into this Agreement to set forth the terms and conditions for the payment by OFG of certain compensation to the Executive Officer in the event of a termination of Executive Officer's employment as a result of a change in control of OFG;

-2-

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, OFG and the Executive Officer do hereby agree as follows:

1. TERM.

This Agreement shall be in full force and effect so long as the Executive Officer is employed by the Company.

2. TERMINATION OF EMPLOYMENT DUE TO A CHANGE IN CONTROL

A. In the event there is a Change in Control ofOFG (as defined herein below) while this Agreement is in effect and as a result thereof or within one (1) year after the Change in Control, the Executive Officer's employment with OFG is terminated by OFG or its successor in interest, the Executive Officer shall be entitled to the cash payment compensation determined as provided in subparagraph B below.

B. The cash payment compensation shall be in an amount equal to two
(2) times the sum of the Executive Officer's annual base salary at the time the termination of his employment occurs and the last cash bonus paid to the Executive Officer prior to the termination of his employment.

C. The cash payment compensation shall be inlieu of any other payments which the Executive Officer may been titled to receive by law, contract or otherwise. The cash payment compensation shall be due and payable in a lump sum to the Executive Officer on or before the thirtieth (30th) day following the termination of the Executive Officer employment. The receipt of the cash payment compensation shall not affect the

-3-

rights of Executive Officer to any vested benefits or accrued compensation, including bonuses.

D. For purposes of this Agreement, a "Change in Control of OFG" shall be deemed to have occurred if any Person or persons acting as a group within the meaning of Sections13 (d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of OFG representing 25% or more of either the then outstanding shares of common stocks of OFG or the combined voting power of OFG's then outstanding securities and if individuals who on the date hereof are members of OFG's Board of Directors cease for any reason to constitute at least a majority thereof, unless the appointment election or nomination of each new director who was not a director on the date hereof has been approved by at least two-thirds of the directors in office on the date hereof.

E. For purposes of this Agreement, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, except that such term shall not include (i) OFG or any of its subsidiaries; (ii) an individual who on the date of this Agreement is a director or officer of OFG or any of its subsidiaries, or a beneficial owner of more than ten percent (10%) of OFG's outstanding securities; (iii) a trustee or other fiduciary holding securities under an employee benefit plan of OFG or any of its subsidiaries; (iv) an underwriter temporarily holding securities pursuant to an offering of such securities; or
(v) a corporation or entity owned, directly or indirectly, by the stockholders of OFG in substantially the same proportion as their ownership of stock of OFG on the date of this Agreement.

-4-

F. Notwithstanding anything to the contrary herein, any event or transaction which would otherwise constitute a Change in Control of OFG (hereinafter referred to as a "Transaction") shall not constitute a Change in Control of OFG for purposes of this Agreement if the Executive Officer participates as an acquirer in the Transaction or as an equity investor or stockholder of the acquiring entity or any of its affiliates and thus, the Executive Officer shall not be entitled to receive the benefits provided for in this Agreement.

3. ASSIGNMENT.

This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

4. AMENDMENTS OR ADDITIONS.

No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of OFG shall be required in order for OFG to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement.

-5-

5. MISCELLANEOUS.

A. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

B. This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth ofPuerto Rico, except to the extent that such law may be preempted by applicable United States federal law, in which case this Agreement shall be governed and be interpreted by and underUnited States federal law. Venue for the litigation of any and all maters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Court of First Instance, Superior Part,the Commonwealth of Puerto Rico in San Juan, in the case of statecourt jurisdiction. 

EXECUTIVE OFFICER                                  ORIENTAL FINANCIAL GROUP INC.

/s/ Norberto Gonzalez                                   /s/ Julian S. Inclan
------------------------                           -----------------------------
   Norberto Gonzalez                                       Julian S. Inclan

                                                        /s/ Alberto Richa
                                                   -----------------------------
                                                           Alberto Richa

                                                        /s/ Emilio Rodriguez
                                                   -----------------------------
                                                           Emilio Rodriguez

FORM APPROVED ON NOVEMBER 29, 2004

EXHIBIT 10.14

CHANGE IN CONTROL COMPENSATION AGREEMENT

BETWEEN

ORIENTAL FINANCIAL GROUP INC.

AND

GANESH KUMAR

Agreement made as of the 15th day of December, 2004, by and between Oriental Financial Group Inc., a Puerto Rico corporation and a financial holding company with principal offices in San Juan, Puerto Rico (hereinafter referred to as "OFG") and Ganesh Kumar, of legal age, married, business executive and resident of Guaynabo, Puerto Rico (hereinafter referred to as the "Executive Officer").

WITNESSETH:

WHEREAS, the Executive Officer is presently an Executive Vice President of
OFG;

WHEREAS, it is in the best interest of OFG to promote the retention of the Executive Officer's services on behalf of OFG by reducing concerns that the Executive Officer may be adversely affected in the event of change in control of OFG as defined herein below;

WHEREAS, OFG and the Executive Officer wish to enter into this Agreement to set forth the terms and conditions for the payment by OFG of certain compensation to the Executive Officer in the event of a termination of Executive Officer's employment as a result of a change in control of OFG;

-2-

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, OFG and the Executive Officer do hereby agree as follows:

1. TERM.

This Agreement shall be in full force and effect so long as the Executive Officer is employed by the Company.

2. TERMINATION OF EMPLOYMENT DUE TO A CHANGE IN CONTROL

A. In the event there is a Change in Control of OFG (as defined herein below) while this Agreement is in effect and as a result thereof or within one (1) year after the Change in Control, the Executive Officer's employment with OFG is terminated by OFG or its successor in interest, the Executive Officer shall be entitled to the cash payment compensation determined as provided in subparagraph B below.

B. The cash payment compensation shall be in an amount equal to two (2) times the sum of the Executive Officer's annual base salary at the time the termination of his employment occurs and the last cash bonus paid to the Executive Officer prior to the termination of his employment.

C. The cash payment compensation shall be in lieu of any other payments which the Executive Officer may be entitled to receive by law, contract or otherwise. The cash payment compensation shall be due and payable in a lump sum to the Executive Officer on or before the thirtieth (30th) day following the termination of the Executive Officer employment. The receipt of the cash payment compensation shall not affect the

-3-

rights of Executive Officer to any vested benefits or accrued compensation, including bonuses.

D. For purposes of this Agreement, a "Change in Control of OFG" shall be deemed to have occurred if any Person or persons acting as a group within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of OFG representing 25% or more of either the then outstanding shares of common stocks of OFG or the combined voting power of OFG's then outstanding securities and if individuals who on the date hereof are members of OFG's Board of Directors cease for any reason to constitute at least a majority thereof, unless the appointment election or nomination of each new director who was not a director on the date hereof has been approved by at least two-thirds of the directors in office on the date hereof.

E. For purposes of this Agreement, "Person" shall have the meaning given in Section 3(a) (9) of the Exchange Act, except that such term shall not include (i) OFG or any of its subsidiaries; (ii) an individual who on the date of this Agreement is a director or officer of OFG or any of its subsidiaries, or a beneficial owner of more than ten percent (10%) of OFG's outstanding securities; (iii) a trustee or other fiduciary holding securities under an employee benefit plan of OFG or any of its subsidiaries; (iv) an underwriter temporarily holding securities pursuant to an offering of such securities; or (v) a corporation or entity owned, directly or indirectly, by the stockholders of OFG in substantially the same proportion as their ownership of stock of OFG on the date of this Agreement.

-4-

F. Notwithstanding anything to the contrary herein, any event or transaction which would otherwise constitute a Change in Control of OFG (hereinafter referred to as a "Transaction") shall not constitute a Change in Control of OFG for purposes of this Agreement if the Executive Officer participates as an acquirer in the Transaction or as an equity investor or stockholder of the acquiring entity or any of its affiliates and thus, the Executive Officer shall not be entitled to receive the benefits provided for in this Agreement.

3. ASSIGNMENT.

This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

4. AMENDMENTS OR ADDITIONS.

No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of OFG shall be required in order for OFG to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement.

-5-

5. MISCELLANEOUS.

A. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

B. This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth of Puerto Rico, except to the extent that such law may be preempted by applicable United States federal law, in which case this Agreement shall be governed and be interpreted by and under United States federal law. Venue for the litigation of any and all maters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Court of First Instance, Superior Part, the Commonwealth of Puerto Rico in San Juan, in the case of state court jurisdiction. 

  EXECUTIVE OFFICER                         ORIENTAL FINANCIAL GROUP INC.

/s/ Ganesh Kumar                            /s/ Julian S. Inclan
----------------------                      -------------------------------
    Ganesh Kumar                                Julian S. Inclan

                                            /s/ Alberto Richa
                                            -------------------------------
                                                Alberto Richa

                                            /s/ Emilio Rodriguez
                                            -------------------------------
                                                Emilio Rodriguez

FORM APPROVED ON NOVEMBER 29, 2004

EXHIBIT 10.15

CHANGE IN CONTROL COMPENSATION AGREEMENT

BETWEEN

ORIENTAL FINANCIAL GROUP INC.

AND

CARLOS VELEZ

Agreement made as of the 15th day of December, 2004, by and between Oriental Financial Group Inc., a Puerto Rico corporation and a financial holding company with principal offices in San Juan, Puerto Rico (hereinafter referred to as "OFG") and Carlos Velez, of legal age, married, business executive and resident of Guaynabo, Puerto Rico (hereinafter referred to as the "Executive Officer").

WITNESSETH:

WHEREAS, the Executive Officer is presently an Executive Vice President of
OFG;

WHEREAS, it is in the best interest of OFG to promote the retention of the Executive Officer's services on behalf of OFG by reducing concerns that the Executive Officer may be adversely affected in the event of change in control of OFG as defined herein below;

WHEREAS, OFG and the Executive Officer wish to enter into this Agreement to set forth the terms and conditions for the payment by OFG of certain compensation to the Executive Officer in the event of a termination of Executive Officer's employment as a result of a change in control of OFG;

-2-

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, OFG and the Executive Officer do hereby agree as follows:

1. TERM.

This Agreement shall be in full force and effect so long as the Executive Officer is employed by the Company.

2. TERMINATION OF EMPLOYMENT DUE TO A CHANGE IN CONTROL

A. In the event there is a Change in Control of OFG (as defined herein below) while this Agreement is in effect and as a result thereof or within one (1) year after the Change in Control, the Executive Officer's employment with OFG is terminated by OFG or its successor in interest, the Executive Officer shall be entitled to the cash payment compensation determined as provided in subparagraph B below.

B. The cash payment compensation shall be in an amount equal to two (2) times the sum of the Executive Officer's annual base salary at the time the termination of his employment occurs and the last cash bonus paid to the Executive Officer prior to the termination of his employment.

C. The cash payment compensation shall be in lieu of any other payments which the Executive Officer may be entitled to receive by law, contract or otherwise. The cash payment compensation shall be due and payable in a lump sum to the Executive Officer on or before the thirtieth (30th) day following the termination of the Executive Officer employment. The receipt of the cash payment compensation shall not affect the

-3-

rights of Executive Officer to any vested benefits or accrued compensation, including bonuses.

D. For purposes of this Agreement, a "Change in Control of OFG" shall be deemed to have occurred if any Person or persons acting as a group within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of OFG representing 25% or more of either the then outstanding shares of common stocks of OFG or the combined voting power of OFG's then outstanding securities and if individuals who on the date hereof are members of OFG's Board of Directors cease for any reason to constitute at least a majority thereof, unless the appointment election or nomination of each new director who was not a director on the date hereof has been approved by at least two-thirds of the directors in office on the date hereof.

E. For purposes of this Agreement, "Person" shall have the meaning given in Section 3(a) (9) of the Exchange Act, except that such term shall not include (i) OFG or any of its subsidiaries; (ii) an individual who on the date of this Agreement is a director or officer of OFG or any of its subsidiaries, or a beneficial owner of more than ten percent (10%) of OFG's outstanding securities; (iii) a trustee or other fiduciary holding securities under an employee benefit plan of OFG or any of its subsidiaries; (iv) an underwriter temporarily holding securities pursuant to an offering of such securities; or (v) a corporation or entity owned, directly or indirectly, by the stockholders of OFG in substantially the same proportion as their ownership of stock of OFG on the date of this Agreement.

-4-

F. Notwithstanding anything to the contrary herein, any event or transaction which would otherwise constitute a Change in Control of OFG (hereinafter referred to as a "Transaction") shall not constitute a Change in Control of OFG for purposes of this Agreement if the Executive Officer participates as an acquirer in the Transaction or as an equity investor or stockholder of the acquiring entity or any of its affiliates and thus, the Executive Officer shall not be entitled to receive the benefits provided for in this Agreement.

3. ASSIGNMENT.

This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

4. AMENDMENTS OR ADDITIONS.

No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of OFG shall be required in order for OFG to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement.

-5-

5. MISCELLANEOUS.

A. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

B. This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth of Puerto Rico, except to the extent that such law may be preempted by applicable United States federal law, in which case this Agreement shall be governed and be interpreted by and under United States federal law. Venue for the litigation of any and all maters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Court of First Instance, Superior Part, the Commonwealth of Puerto Rico in San Juan, in the case of state court jurisdiction. 

  EXECUTIVE OFFICER                           ORIENTAL FINANCIAL GROUP INC.

/s/ Carlos Velez                              /s/ Julian S. Inclan
---------------------------                   ---------------------------
    Carlos Velez                                  Julian S. Inclan

                                              /s/ Alberto Richa
                                              ---------------------------
                                                  Alberto Richa

                                              /s/ Emilio Rodriguez
                                              ---------------------------
                                                  Emilio Rodriguez

FORM APPROVED ON NOVEMBER 29, 2004

EXHIBIT 10.16

CHANGE IN CONTROL COMPENSATION AGREEMENT

BETWEEN

ORIENTAL FINANCIAL GROUP INC.

AND

NESTOR VALE

Agreement made as of the 15th day of December, 2004, by and between Oriental Financial Group Inc., a Puerto Rico corporation and a financial holding company with principal offices in San Juan, Puerto Rico (hereinafter referred to as "OFG") and Nestor Vale, of legal age, married, business executive and resident of Guaynabo, Puerto Rico (hereinafter referred to as the "Executive Officer").

WITNESSETH:

WHEREAS, the Executive Officer is presently a Senior Executive Vice President of OFG;

WHEREAS, it is in the best interest of OFG to promote the retention of the Executive Officer's services on behalf of OFG by reducing concerns that the Executive Officer may be adversely affected in the event of change in control of OFG as defined herein below;

WHEREAS, OFG and the Executive Officer wish to enter into this Agreement to set forth the terms and conditions for the payment by OFG of certain compensation to the Executive Officer in the event of a termination of Executive Officer's employment as a result of a change in control of OFG;

-2-

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, OFG and the Executive Officer do hereby agree as follows:

1. TERM.

This Agreement shall be in full force and effect so long as the Executive Officer is employed by the Company.

2. TERMINATION OF EMPLOYMENT DUE TO A CHANGE IN CONTROL

A. In the event there is a Change in Control of OFG (as defined herein below) while this Agreement is in effect and as a result thereof or within one (1) year after the Change in Control, the Executive Officer's employment with OFG is terminated by OFG or its successor in interest, the Executive Officer shall be entitled to the cash payment compensation determined as provided in subparagraph B below.

B. The cash payment compensation shall be in an amount equal to two (2) times the sum of the Executive Officer's annual base salary at the time the termination of his employment occurs and the last cash bonus paid to the Executive Officer prior to the termination of his employment.

C. The cash payment compensation shall be in lieu of any other payments which the Executive Officer may be entitled to receive by law, contract or otherwise. The cash payment compensation shall be due and payable in a lump sum to the Executive Officer on or before the thirtieth (30th) day following the termination of the Executive Officer employment. The receipt of the cash payment compensation shall not affect the

-3-

rights of Executive Officer to any vested benefits or accrued compensation, including bonuses.

D. For purposes of this Agreement, a "Change in Control of OFG" shall be deemed to have occurred if any Person or persons acting as a group within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of OFG representing 25% or more of either the then outstanding shares of common stocks of OFG or the combined voting power of OFG's then outstanding securities and if individuals who on the date hereof are members of OFG's Board of Directors cease for any reason to constitute at least a majority thereof, unless the appointment election or nomination of each new director who was not a director on the date hereof has been approved by at least two-thirds of the directors in office on the date hereof.

E. For purposes of this Agreement, "Person" shall have the meaning given in Section 3(a) (9) of the Exchange Act, except that such term shall not include (i) OFG or any of its subsidiaries; (ii) an individual who on the date of this Agreement is a director or officer of OFG or any of its subsidiaries, or a beneficial owner of more than ten percent (10%) of OFG's outstanding securities; (iii) a trustee or other fiduciary holding securities under an employee benefit plan of OFG or any of its subsidiaries; (iv) an underwriter temporarily holding securities pursuant to an offering of such securities; or (v) a corporation or entity owned, directly or indirectly, by the stockholders of OFG in substantially the same proportion as their ownership of stock of OFG on the date of this Agreement.

-4-

F. Notwithstanding anything to the contrary herein, any event or transaction which would otherwise constitute a Change in Control of OFG (hereinafter referred to as a "Transaction") shall not constitute a Change in Control of OFG for purposes of this Agreement if the Executive Officer participates as an acquirer in the Transaction or as an equity investor or stockholder of the acquiring entity or any of its affiliates and thus, the Executive Officer shall not be entitled to receive the benefits provided for in this Agreement.

3. ASSIGNMENT.

This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

4. AMENDMENTS OR ADDITIONS.

No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of OFG shall be required in order for OFG to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement.

-5-

5. MISCELLANEOUS.

A. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

B. This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth of Puerto Rico, except to the extent that such law may be preempted by applicable United States federal law, in which case this Agreement shall be governed and be interpreted by and under United States federal law. Venue for the litigation of any and all maters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Court of First Instance, Superior Part, the Commonwealth of Puerto Rico in San Juan, in the case of state court jurisdiction. 

  EXECUTIVE OFFICER                       ORIENTAL FINANCIAL GROUP INC.

/s/ Nestor Vale                           /s/ Julian S. Inclan
------------------------                  -------------------------------
    Nestor Vale                               Julian S. Inclan

                                          /s/ Alberto Richa
                                          -------------------------------
                                              Alberto Richa

                                          /s/ Emilio Rodriguez
                                          --------------------------------
                                             Emilio Rodriguez

FORM APPROVED ON NOVEMBER 29, 2004

EXHIBIT 10.17

CHANGE IN CONTROL COMPENSATION AGREEMENT

BETWEEN

ORIENTAL FINANCIAL GROUP INC.

AND

CARLOS J. NIEVES

Agreement made as of the 15th day of December, 2004, by and between Oriental Financial Group Inc., a Puerto Rico corporation and a financial holding company with principal offices in San Juan, Puerto Rico (hereinafter referred to as "OFG") and Carlos J. Nieves, of legal age, married, business executive and resident of San Juan, Puerto Rico (hereinafter referred to as the "Executive Officer").

WITNESSETH:

WHEREAS, the Executive Officer is presently a Senior Executive Vice President of OFG;

WHEREAS, it is in the best interest of OFG to promote the retention of the Executive Officer's services on behalf of OFG by reducing concerns that the Executive Officer may be adversely affected in the event of change in control of OFG as defined herein below;

WHEREAS, OFG and the Executive Officer wish to enter into this Agreement to set forth the terms and conditions for the payment by OFG of certain compensation to the Executive Officer in the event of a termination of Executive Officer's employment as a result of a change in control of OFG;

-2-

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, OFG and the Executive Officer do hereby agree as follows:

1. TERM.

This Agreement shall be in full force and effect so long as the Executive Officer is employed by the Company.

2. TERMINATION OF EMPLOYMENT DUE TO A CHANGE IN CONTROL

A. In the event there is a Change in Control of OFG (as defined herein below) while this Agreement is in effect and as a result thereof or within one (1) year after the Change in Control, the Executive Officer's employment with OFG is terminated by OFG or its successor in interest, the Executive Officer shall be entitled to the cash payment compensation determined as provided in subparagraph B below.

B. The cash payment compensation shall be in an amount equal to two (2) times the sum of the Executive Officer's annual base salary at the time the termination of his employment occurs and the last cash bonus paid to the Executive Officer prior to the termination of his employment.

C. The cash payment compensation shall be in lieu of any other payments which the Executive Officer may be entitled to receive by law, contract or otherwise. The cash payment compensation shall be due and payable in a lump sum to the Executive Officer on or before the thirtieth (30th) day following the termination of the Executive Officer employment. The receipt of the cash payment compensation shall not affect the

-3-

rights of Executive Officer to any vested benefits or accrued compensation, including bonuses.

D. For purposes of this Agreement, a "Change in Control of OFG" shall be deemed to have occurred if any Person or persons acting as a group within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of OFG representing 25% or more of either the then outstanding shares of common stocks of OFG or the combined voting power of OFG's then outstanding securities and if individuals who on the date hereof are members of OFG's Board of Directors cease for any reason to constitute at least a majority thereof, unless the appointment election or nomination of each new director who was not a director on the date hereof has been approved by at least two-thirds of the directors in office on the date hereof.

E. For purposes of this Agreement, "Person" shall have the meaning given in Section 3(a) (9) of the Exchange Act, except that such term shall not include (i) OFG or any of its subsidiaries; (ii) an individual who on the date of this Agreement is a director or officer of OFG or any of its subsidiaries, or a beneficial owner of more than ten percent (10%) of OFG's outstanding securities; (iii) a trustee or other fiduciary holding securities under an employee benefit plan of OFG or any of its subsidiaries; (iv) an underwriter temporarily holding securities pursuant to an offering of such securities; or (v) a corporation or entity owned, directly or indirectly, by the stockholders of OFG in substantially the same proportion as their ownership of stock of OFG on the date of this Agreement.

-4-

F. Notwithstanding anything to the contrary herein, any event or transaction which would otherwise constitute a Change in Control of OFG (hereinafter referred to as a "Transaction") shall not constitute a Change in Control of OFG for purposes of this Agreement if the Executive Officer participates as an acquirer in the Transaction or as an equity investor or stockholder of the acquiring entity or any of its affiliates and thus, the Executive Officer shall not be entitled to receive the benefits provided for in this Agreement.

3. ASSIGNMENT.

This Agreement is personal to each of the parties hereto and neither party may assign or delegate any of his or its rights or obligations hereunder without first obtaining the written consent of the other party.

4. AMENDMENTS OR ADDITIONS.

No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. The prior approval by a two-thirds affirmative vote of the full Board of Directors of OFG shall be required in order for OFG to authorize any amendments or additions to this Agreement, to give any consent or waivers of provisions of this Agreement, or to take any other action under this Agreement.

-5-

5. MISCELLANEOUS.

A. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

B. This Agreement shall be governed in all respects and be interpreted by and under the laws of the Commonwealth of Puerto Rico, except to the extent that such law may be preempted by applicable United States federal law, in which case this Agreement shall be governed and be interpreted by and under United States federal law. Venue for the litigation of any and all maters arising under or in connection with this Agreement shall be laid in the United States District Court for the District of Puerto Rico, at San Juan, in the case of federal jurisdiction, and in the Court of First Instance, Superior Part, the Commonwealth of Puerto Rico in San Juan, in the case of state court jurisdiction. 

  EXECUTIVE OFFICER                        ORIENTAL FINANCIAL GROUP INC.

/s/ Carlos J. Nieves                       /s/ Julian S. Inclan
--------------------------                 ------------------------------
    Carlos J. Nieves                          Julian S. Inclan

                                           /s/ Alberto Richa
                                           ------------------------------
                                               Alberto Richa

                                           /s/ Emilio Rodriguez
                                           ------------------------------
                                               Emilio Rodriguez

FORM APPROVED ON NOVEMBER 29, 2004

EXHIBIT 21.0

LIST OF SUBSIDIARIES

A) ORIENTAL BANK AND TRUST - an insured non-member commercial bank organized and existing under the laws of the Commonwealth of Puerto Rico.

SUBSIDIARIES OF ORIENTAL BANK AND TRUST:

1. ORIENTAL INTERNATIONAL BANK INC. - an international banking entity organized and existing under the laws of the Commonwealth of Puerto Rico.

2. ORIENTAL MORTGAGE CORPORATION - a mortgage bank organized and existing under the laws of the Commonwealth of Puerto Rico. This corporation is currently not in operation.

B) ORIENTAL FINANCIAL SERVICES CORP. - a registered securities broker-dealer organized and existing under the laws of the Commonwealth of Puerto Rico.

C) ORIENTAL INSURANCE, INC. - a registered insurance agency organized and existing under the laws of the Commonwealth of Puerto Rico.

D) CARIBBEAN PENSION CONSULTANTS, INC - a corporation organized and existing under the laws of the State of Florida that offers third party pension plan administration in the continental U.S., Puerto Rico and the Caribbean.

E) ORIENTAL FINANCIAL (PR) STATUTORY TRUST I - a special purpose statutory trust organized under the laws of the State of Connecticut.

F) ORIENTAL FINANCIAL (PR) STATUTORY TRUST II - a special purpose statutory trust organized under the laws of the State of Connecticut.

EXHIBIT 23.0

I. CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-102696, No. 333-57052 and No. 333-84473 on Form S-8 of our reports dated September 9, 2005, relating to the financial statements of Oriental Financial Group Inc. and management's report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Oriental Financial Group Inc. for the year ended June 30, 2005.

DELOITTE & TOUCHE LLP

San Juan, Puerto Rico
September 9, 2005

Stamp No. 2088061
affixed to original.

EXHIBIT 31.1

MANAGEMENT CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, JOSE RAFAEL FERNANDEZ, President and Chief Executive Officer of Oriental Financial Group Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Oriental Financial Group Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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.

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 

Date: September 13, 2005.

                              By: /s/ Jose Rafael Fernandez
                                  -------------------------------------
                                  Jose Rafael Fernandez
                                  President and Chief Executive Officer

EXHIBIT 31.2

MANAGEMENT CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, HECTOR MENDEZ, Senior Executive Vice President, Treasurer and Chief Financial Officer of Oriental Financial Group Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Oriental Financial Group Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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.

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 

Date: September 13, 2005.

                              By: /s/ Hector Mendez
                                  --------------------------------------
                                  Hector Mendez
                                  Senior Executive Vice President, Treasurer
                                  and Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. Section 1350)

In connection with Oriental Financial Group Inc.'s ("Oriental") annual report on Form 10-K for the year ended June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jose Rafael Fernandez, President and Chief Executive Officer of Oriental, hereby certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Oriental.

In witness whereof, I execute this certification in San Juan, Puerto Rico, this 13th day of September, 2005. 

By: /s/ Jose Rafael Fernandez
--------------------------------------
Jose Rafael Fernandez
President and Chief Executive Officer

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. Section 1350)

In connection with Oriental Financial Group Inc.'s ("Oriental") annual report on Form 10-K for the year ended June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Hector Mendez, Senior Executive Vice President, Treasurer and Chief Financial Officer of Oriental, hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Oriental.

In witness whereof, I execute this certification in San Juan, Puerto Rico, this 13th day of September, 2005. 

By: /s/ Hector Mendez
----------------------------------------
Hector Mendez
Senior Executive Vice President,
Treasurer and Chief Financial Officer