Document:

EX-10.11(A) ADDENDUM TO COMMON STOCK PURCHASE WARR

 

Exhibit 10.11(a)

Addendum to Common Stock Purchase Warrant dated June 30, 2006

This will confirm the understanding that with regard to the warrant to purchase 175,000 shares of
common stock of Tutogen Medical, Inc. held by Azimuth Opportunity Ltd., there is no circumstance a
cash settlement is provided for pursuant to the terms of the warrant and the Registration Rights
Agreement dated June 30, 2006.

	 	 	 	 	 
	Acknowledged:

Azimuth Opportunity, Ltd.

 	 	 
	By:  	/s/ Deirdre M. McCoy
 	 	 
	 	Name: Deirdre M. McCoy 		 	 
	 	Title:   Corporate Secretary	 	 	 
	 
	Tutogen Medical, Inc.

 	 	 
	By:  	/s/ Lee Robert Johnston, Jr.
 	 	 
	 	Name: Lee Robert Johnston, Jr.	 	 	 
	 	Title:   Chief Financial OfficerEX-10.21 INVESTMENT MANAGEMENT AGREEMENT

 

Exhibit 10.21

INVESTMENT MANAGEMENT AGREEMENT

Regular Account

(Third-Party Custodian)

     THIS AGREEMENT, made this 17 day of January, 2007 by and between Bear Stearns Asset Management
Inc., a New York corporation with principal offices at 383 Madison Avenue, New York, New York 10179
(the “Investment Manager”), and Oriental Financial Group Inc., Oriental Bank & Trust, and Oriental
International Bank Inc., each a Puerto Rico corporation with principal offices at Oriental Center,
Professional Offices Park, 997 San Roberto Street, 10th Floor, San Juan Puerto Rico 00926
(collectively, the “Client”).

WITNESSETH:

     WHEREAS, Client desires to engage the Investment Manager on or around March 1, 2007 (the
“Effective Date”) to supervise and manage certain of its assets held in custody by Mellon
Bank, N.A., as custodian (the “Custodian”), in accordance with the terms and conditions hereinafter
set forth and the Investment Manager desires to accept such engagement in accordance with such
terms and conditions.

     NOW, THEREFORE, the parties hereto hereby agree as follows:

     1. Appointment of Investment Manager.

     (a) Client hereby appoints the Investment Manager as his attorney-in-fact to invest and
reinvest the Investment Account Assets (as defined in paragraph 3 hereof) as fully as Client
itself could do in accordance with the investment guidelines set forth in Exhibit A attached
hereto, as the same may be amended in writing from time to time by Client (the “Investment
Guidelines”).

     (b) The Investment Manager hereby accepts such appointment and agrees to supervise and direct
the investment of the Investment Account Assets in accordance with the Investment Guidelines In
addition, for the Investment Manager’s reference, Client’s Investment Policy, as the same may be
amended from time to time (the “Investment Policy”) is set forth in Exhibit B attached hereto.

     (c) Subject to subparagraphs (a) and (b) above, the Investment Manager may, in its full
discretion and without obligation on its part to give prior notice to the Custodian or Client, (i)
buy, sell, exchange, convert, lender and otherwise trade in any bonds or other securities, and (ii)
execute securities transactions through accounts established with such brokers or dealers as the
Investment Manager may select, other than any Affiliate (as defined in paragraph (e) below) of the
Investment Manager.

     (d) Client has directed the Custodian, and the Custodian has agreed, to act in accordance with
the instructions of the Investment Manager. The Investment Manager shall at no time have custody of
or physical control over the Investment Account Assets and the Investment Manager shall not be
liable for any act or omission of the Custodian.

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     (e) For purposes of this Agreement, the term “Affiliate” of, or “Affiliated” with, a specified
person means a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.

     2. Investment Guidelines. Client may amend the Investment Guidelines by written notice
thereof to Investment Manager; provided, however, that the Investment Manager will not
follow any such amended Investment Guidelines until it has received written notice thereof
from Client. After receiving such written notice, the Investment Manager will implement
the amended Investment Guidelines as soon as practicable unless Client is otherwise
notified.

     3. Investment Account Assets. Client shall identify to the Investment Manager certain
assets which it intends Investment Manager to manage together with any subsequent cash and
investments which Client may from time to time place in its account with the Custodian
(the “Investment Account”), plus all investments, reinvestments and proceeds of the sale
thereof, all dividends and interest earned thereon and all appreciation thereof and
additions thereto, less any withdrawals therefrom (collectively, the “Investment Account
Assets”). Should there be any disparity between the Investment Account Assets identified
by Client and the assets initially delivered or otherwise made available to Investment
Manager by Client, Investment Manager reserves the right to postpone investment of such
assets until such time as there is conformity between such assets and those identified by
Client. Client shall not place any assets in its account that it does not intend
Investment Manager to manage according to the Investment Guidelines. Client shall promptly
notify Investment Manager of any additional assets it contributes to the Investment
Account Assets and Investment Manager shall invest such additional assets according to the
Investment Guidelines as soon as practicable thereafter. If Client fails to notify
Investment Manager of a contribution of additional assets, such assets will not be managed
by the Investment Manager: however, if the Investment Manager discovers additional assets
in the Client’s account during a reconciliation with the records of the Custodian, such
assets will be presumed to be Investment Account Assets and invested as soon as
practicable after such discovery. Client shall also notify Investment Manager prior to
withdrawing any Investment Account Assets, and should it fail to do so, it shall be
responsible for all interest, account overdraft fees and other charges incurred as a
result.

     4. Standard of Care.

     (a) The Investment Manager shall perform its duties and obligations hereunder
with the care, skill, prudence and diligence under the circumstances then prevailing
that a prudent man acting in a like capacity and familiar with such matters would use
in the conduct of an enterprise of a like character and with like aims.

     (b) The Investment Manager shall diversify the Investment Account Assets so as
to minimize the risk of large losses, unless under the circumstances it is clearly
prudent not to do so.

     (c) The Investment Manager shall discharge its duties and obligations hereunder
with respect to the Investment Account Assets solely in the interest of Client and in
accordance with the Investment Guidelines.

     5. Representations and Warranties of Client. Client hereby represents and warrants to the
Investment Manager that (a) it is authorized to enter into this Agreement and to appoint the
Investment Manager as its Investment Manager in accordance with the terms hereof; (b) there are no
restrictions or limitations on the investment of Investment Account Assets by the Investment

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Manager or any other activity contemplated by this Agreement other than as may be communicated
from time to time in writing to the Investment Manager; (c) the Custodian will be the custodian of
the Investment Account Assets on the Effective Date of this Agreement; (d) if another entity should
be substituted for the Custodian as custodian of the Investment Account Assets, the Investment
Manager shall promptly be notified of such substitution and the substituted entity will thereafter
be deemed to be the Custodian for purposes of this Agreement; and (c) it shall promptly notify the
Custodian of the appointment of the Investment Manager by delivering a copy of this Agreement to
the Custodian. Client agrees to indemnify the Investment Manager and hold it harmless against any
and all losses, costs, claims and liabilities which the Investment Manager may suffer or incur
arising out of a breach by Client of its representations and warranties contained herein.

     6. Procedures. All transactions will be consummated by payment to, or delivery by, the
Custodian of all cash and/or securities to or from the Investment Account. Instructions
from the Investment Manager to the Custodian shall be made by such methods as may be
agreed upon by the Investment Manager and the Custodian, and the Investment Manager shall
instruct all brokers or dealers executing orders on behalf of the Investment Account to
forward to the Custodian and Client copies of all brokerage confirmations promptly after
the execution of transactions.

     7. Reports; Meetings.

     (a) Client has arranged or will arrange to receive monthly reports concerning the status of
the Investment Account from the Custodian and shall cause the Custodian to provide copies of such
monthly reports to the Investment Manager. Client shall also receive confirmations of all
transactions from the Custodian and shall rely upon such monthly reports and trade confirmations
from the Custodian for purposes of its tax reporting.

     (b) The Investment Manager, at its expense, shall provide Client with quarterly summaries of
the performance of the Investment Account Assets and annual reports of such performance.

     (c) Client and the Investment Manager shall meet periodically, at such times as Client may
reasonably request, concerning the Investment Account.

     (d) The Investment Manager, at its expense, shall provide Client with such other economic,
statistical and investment analysis and reports as Client shall reasonably request from time to
time.

     8. Confidential Relationship. All information and recommendations furnished by the
Investment Manager to the Custodian and Client shall be regarded as confidential by each such
party. The Investment Manager shall regard as confidential all information concerning the
affairs, operations and investments of Client, including all information provided by Client to
the Investment Manager pursuant to this Agreement.

     9. Services to Other Clients; Liability. It is understood that the Investment Manager
performs investment advisory services for various clients. Client agrees that the Investment
Manager may give advice and take action with respect to any of its other clients which may
differ from the advice given to, or the timing or nature of action taken with respect to, the
Investment Account Assets, provided that the policy and practice of the Investment Manager is
not to favor or disfavor consistently or consciously any client or class of clients in the
allocation of investment opportunities and that, to the extent practical, such opportunities
are allocated among clients over a period of time on a fair and equitable basis. Nothing
herein contained shall be construed so as to prevent the

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Investment Manager or any of its directors, officers, employees or Affiliates in any way from
purchasing or selling any securities for its or their own accounts prior to, simultaneously with or
subsequent to any recommendation or action taken with respect to the Investment Account Assets or impose upon the Investment Manager any obligation to purchase or sell or to recommend for
purchase or sale for the Investment Account any security which the Investment Manager or any of its
directors, officers, employees or Affiliates may purchase or sell for its or their own accounts or
for the account of any other client, advisory or otherwise; provided always, however, that the
Investment Manager shall use its best efforts to maximize the gains for the Investment Account
Assets and that no transaction shall violate any applicable law.

     10. Allocation of Brokerage. In selecting brokers or dealers to execute orders for the
purchase or sale of securities for the Investment Account, the Investment Manager shall use its
best efforts to obtain for Client the most favorable price and execution available from brokers or
dealers; provided, however, that it is expressly authorized to consider the fact that a broker or
dealer has furnished statistical, research or other information or services which enhance the
Investment Manager’s investment research and portfolio management capability generally. Brokerage
commissions charged to the Investment Account will generally be discounted from prevailing rates,
but may not represent the maximum discounts obtainable at any given time.

          Investment Manager shall not be authorized to effect “agency cross transactions” (as defined
in Rule 206(3)-2 promulgated by the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended (the “Advisers Act”)) with its Affiliated broker-dealers whereby
they act as agent for, and receive commissions from, the Investment Account and the party on the
other side of the transaction.

          If Client is a non-natural person, in accordance with Section 1l(a) of the Securities Exchange
Act of 1934, as amended, and Rule 11a2-2(T) adopted by the Securities and Exchange Commission (the
“SEC”) thereunder, the Investment Manager will provide to Client annually a statement showing the
total amount of brokerage commissions charged by the Investment Manager to the Investment Account
during the year as well as such other information as may be requested by Client to determine
whether to authorize the Investment Manager’s execution of transactions for the Investment Account.

     11. Proxies. The Investment Manager will vote all proxies solicited by or with respect to the
issuers of securities in which the Investment Account Assets may be invested from time to time.
Proxies will be voted from and after the date on which an account is established for Client with
the authorized proxy agent of the Investment Manager (the “Proxy Account”). The Proxy Account will
be established as soon as practicable following the opening of the Investment Account by the
Investment Manager. If Client has consented to the lending of securities in the Investment Account
to third parties either by the Investment Manager or the Custodian and any such loan is outstanding
upon the occurrence of a record date for the securities on loan, the borrower of such securities
will have the right to vote proxies with respect to such securities and such proxies will not
therefore be eligible for voting on Client’s behalf by the Investment Manager.

     12. Class Actions and Other Proceedings. The Investment Manager shall not be required to
file claims, commence, render advice with respect to, or otherwise actively participate in
any legal proceedings related to issuers of securities in which Client has an interest.

     13. Fees. The compensation of the Investment Manager shall be calculated and paid
quarterly in arrears based on the average of the month-end market values of the Investment
Account Assets during each quarter that this Agreement is in effect (with any partial
months or quarters being

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prorated). Such quarterly fees shall be computed in accordance with the Fee Schedule attached
hereto as Exhibit C, which Fee Schedule will remain in effect for a period of two (2) years from
the effective date of this Agreement and may thereafter be amended from time to time by the
Investment Manager upon ninety (90) days’ prior written notice to Client. All fees payable to the
Investment Manager pursuant to this Agreement shall be paid free and clear of all deductions or
withholding.

     14. Valuation. Securities held in the Investment Account will generally be valued by
independent pricing services. When an independent price for a particular security is
either unavailable or deemed by the Investment Manager, in its sole discretion, to be
unreliable, such security will be valued in a manner determined in good faith by the
Investment Manager to reflect its fair market value. For purposes of calculating the fees
due to the Investment Manager pursuant to paragraph 13 above, total market values reported by the Investment Manager shall include
accrued dividends and interest.

     15. Representation and Warranty of Investment Manager. The Investment Manager
represents and warrants to Client that it is registered as an investment adviser under the
Advisers Act; that the Investment Manager is authorized and empowered to enter into this
Agreement and perform its duties and obligations hereunder; that the execution, delivery
and performance of this Agreement does not conflict with any obligation by which the
Investment Manager is bound, whether arising by contract, operation of law or otherwise;
and that neither the Investment Manager nor any of its advisory representatives for the
Investment Account is a person subject to an SEC order issued under Section 203(e) or
203(f) of the Advisers Act. The Investment Manager shall promptly notify Client in writing
of the occurrence of any event that may materially adversely affect any representation and
warranty included in this paragraph.

     16. Indemnification and Hold Harmless. The Investment Manager shall indemnify and
hold harmless Client, its Affiliates, and/or their respective directors, officers,
employees and agents (collectively, the “Client Indemnified Parties”), from any and all
claims, charges, demands, losses, damages, expenses, obligations and liabilities of any
kind or nature whatsoever (including, without limitation, any and all reasonable legal
expenses and costs and expenses related to investigating or defending any such
claims, charges and demands) (collectively, “Losses”) incurred by such Client
Indemnified Party by reason of (i) any acts, omissions or alleged acts or omissions
arising out of or in connection with the Investment Account, any investment made or held
by or with respect to the Investment Account or this Agreement, provided that such acts,
omissions or alleged acts or omission upon which such action or threatened claim, charge,
demand, action or proceeding are based were not made in bad faith by such Client
Indemnified Party or did not constitute willful misconduct or gross negligence by such
Client Indemnified Party, or (ii) any acts of omissions, or alleged acts or omissions, of
any agent of any Client Indemnified Party, provided that such agent was selected, engaged
or retained by the Client Indemnified Party in accordance with the standard above.

          The Client shall indemnify and hold harmless the Investment Manager, its Affiliates, and/or
their respective directors, officers, employees and agents (collectively, the “Investment Manager
indemnified Parties”), from any and all Losses incurred by such Investment Manager Indemnified
Party by reason of (i) any acts, omissions or alleged acts or omissions arising out of or in
connection with the Investment Account, any investment made or held by or with respect to the
Investment. Account or this Agreement, provided that such acts, omissions or alleged acts or
omissions upon which such actual or threatened claim, charge, demand, action or proceeding are
based were not made in bad faith by such Client Indemnified Party or did not constitute willful
misconduct or gross negligence by such Investment Manager Indemnified Party,

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or (ii) any acts or omissions, or alleged acts or omissions, of any agent of any Investment
Manager Indemnified Party, provided that such agent was selected, engaged or retained by the
Investment Manager Indemnified Party in accordance with the standard above.

     17. Force Majeure. The Investment Manager shall not be responsible or liable for any failure
or delay in the performance of its obligations under this Agreement arising out of or caused,
directly or indirectly, by circumstances beyond its control, including without limitation, acts of
God, earthquakes, fires, floods, wars, acts of terrorism, acts of civil or military authorities, or
governmental actions.

     18. Non-Public Information. Client acknowledges and agrees that the Investment Manager or its
Affiliates may acquire confidential or material non-public information in the course of its
investment activities and that it will not divulge such information to Client, will not take any
action regarding the Investment Account on the basis of such information, and may be precluded from
acting on the basis of such information in regard to the Investment Account.

     19. Termination. Client may terminate this Agreement at any time by giving written notice
thereof to the Investment Manager. The Investment Manager may terminate this Agreement upon one
hundred and twenty days (120) days’ written notice of such termination to Client. Fees payable
hereunder will be prorated to the date of termination as specified in the notice of termination.

     20. Non-Assignability. No assignment (as that term is defined in the Advisers Act) of this
Agreement shall be made by the Investment Manager without the express written consent of Client.

     21. Acknowledgement and Consent of Use of Client’s Name. Client acknowledges and
consents to permit the Investment Manager to use Client’s name in Investment Manager’s client
brochures, marketing or advertising materials. Client understands that the consent to use is only
for the purpose of showing other potential Clients, that Client uses the investment advisory
services of the Investment Manager. The Investment Manager will not disclose any other information
about Client or its account assets without the Client’s express written consent.

     22. Notices. Unless otherwise specified herein, all notices, instructions and advices with
respect to securities transactions or any other matters contemplated by this Agreement shall be
deemed duly given either when delivered in writing to the addresses set forth below or when
deposited by first class mail addressed as follows:

	 	 	 	 	 
	 
	 	(a)    To Client:	 	Oriental Financial Group Inc.
	 
	 	 	 	Oriental Center
	 
	 	 	 	Professional Offices Park
	 
	 	 	 	997 San Roberto Street
	 
	 	 	 	10th Floor
	 
	 	 	 	San Juan, Puerto Rico 00926
	 
	 	 	 	Attn: President and CEO
	 
	 	 	 	 
	 
	 	 	 	Oriental Bank & Trust
	 
	 	 	 	Oriental Center
	 
	 	 	 	Professional Offices Park
	 
	 	 	 	997 San Roberto Street
	 
	 	 	 	10th Floor

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	 	 	 	San Juan, Puerto Rico 00926
	 
	 	 	 	Attn: President and CEO
	 
	 	 	 	 
	 
	 	 	 	and
	 
	 	 	 	 
	 
	 	 	 	Oriental International Bank Inc.
	 
	 	 	 	Oriental Center
	 
	 	 	 	Professional Offices Park
	 
	 	 	 	997 San Roberto Street
	 
	 	 	 	10th Floor
	 
	 	 	 	San Juan, Puerto Rico 00926
	 
	 	 	 	Attn: President and CEO
	 
	 	 	 	 
	 
	 	(b)  To the Custodian:	 	Mellon Bank, N.A.
	 
	 	 	 	One Mellon Center
	 
	 	 	 	500 Grant Street
	 
	 	 	 	18th Floor
	 
	 	 	 	Pittsburgh, PA 15258-0000
	 
	 	 	 	Attn: Bill Johnson
	 
	 	 	 	 
	 
	 	(c)    To the Investment Manager:	 	Bear Stearns Asset Management Inc.
	 
	 	 	 	383 Madison Avenue
	 
	 	 	 	New York, New York 10179
	 
	 	 	 	Attn:  President, with a copy to
	 
	 	 	 	Chief Operating Officer

     23. Disclosure Statement. The Investment Manager has delivered to Client and Client hereby
acknowledges receipt of the Investment Manager’s written disclosure statement (consisting of a copy
of Part II of Form ADV as currently in effect) at least 48 hours prior to Client’s entering into
this Agreement with the Investment Manager.

     24. Entire Agreement; Amendment. This Agreement, together with the Exhibits annexed hereto,
states the entire agreement of the parties hereto; is intended to be the complete and exclusive
statement of the terms hereof; and, except as provided in paragraphs 25 and 12 hereof, may not be
modified or amended except by a writing signed by the parties hereto.

     25. Governing Law. This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York and any dispute or controversy arising out of this Agreement shall be
settled by arbitration in New York, New York, in accordance with the rules and regulations of the
New York Stock Exchange, Inc.

     26. Effective Date. This Agreement shall become effective on the day and year first above
written.

[Intentionally left in blank, Signature page follows.]

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     IN WITNESS WHEREOF, Client and the Investment Manager have executed this Agreement on the
day and year first above written.

	 	 	 	 	 
	 	ORIENTAL FINANCIAL GROUP INC. 

 	 
	 	By:  	/s/ José R. Fernández	 
	 	 	Name:  	José R. Fernández 	 
	 	 	Title: President & CEO 	 
	 
	 	ORIENTAL BANK & TRUST 

 	 
	 	By:  	/s/ José R. Fernández	 
	 	 	Name:  	José R. Fernández 	 
	 	 	Title: President & CEO 	 
	 
	 	ORIENTAL INTERNATIONAL BANK INC. 

 	 
	 	By:  	/s/ José R. Fernández 	 
	 	 	Name:  	José R. Fernández 	 
	 	 	Title: President & CEO 	 
	 

	 	 	 	 	 
	BEAR STEARNS ASSET MANAGEMENT INC. 

 
	By:  	/s/ Rajan Govindan 	 	 
	 	Name:  	Rajan Govindan 	 	 
	 	Title:  SMD	 
	 

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EXHIBIT A

INVESTMENT GUIDELINES

*Portions
of this exhibit are intentionally omitted because confidential treatment has been requested
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934, as amended. The omitted information, which consist of two and a half pages, has been filed separately with the U. S. Securities and Exchange Commission.

Eligible Counterparties

	 	 	 	 	 
	Banks	 	Broker Dealers
	Barclays Bank

	 	Lehman Brothers
	 	Sandtandar Securities
	Citibank

	 	Morgan Stanley
	 	BBVA Capital Oppenheimer Capital
	Banco Bilbao Vizcaya Argentaria

	 	Credit Suisse First Boston
	 	Doral Securities
	Economic Development Bank

	 	Popular Securities
	 	Samuel Ramirez
	Government Development Bank

	 	UBS (Paine Webber)
	 	Gen Re Financial
	Banco de Santandar

	 	Merrill Lynch
	 	Cohen Bros
	Canadian Imperial Bank

	 	Wachovia (Prudential Securities)
	 	Cantor Fitzgerald
	Bank
of Nova Scotia

	 	Bear Stearns
	 	HSBC
	Royal
Bank of Canada

	 	Citigroup
	 	Washington Mutual
	JP Morgan Chase

	 	ABN-AMRO
	 	RBS/Greenwich Capital
	Deutsche
Bank

	 	Goldman Sachs
	 	Countrywide
	Federal
Home Loan Bank of New York

	 	JP Morgan Securities
	 	 
	ABN-AMRO

	 	Fannie Mae
	 	 
	Banco
Popular

	 	Freddie Mac
	 	 
	Societe
Generale

	 	FIMAT
	 	 
	Bank
of America

	 	Keef Bruyette & Woods
	 	 
	Rabobank

	 	Sandler O’Neil
	 	 

 

EXHIBIT B

INVESTMENT POLICY

*Portions
of this exhibit are intentionally omitted because confidential treatment has been requested
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted
information, which consists of 13 pages, has been filed separately with the U.S. Securities and Exchange Commission.

     APPENDIX: REFERENCE INFORMATION

     A. Securities Held for Investment, Sale or Trading

     Oriental’s securities are classified as held-to-maturity, available for sale, or trading:

	 	1)	 	HELD TO MATURITY: An investment portfolio comprised of those securities purchased or
originated to generate income by maintaining a positive spread over the cost of related
funding source(s) were Oriental has the positive intent and ability to hold to maturity
regardless of economic environment.
	 
	 	2)	 	AVAILABLE FOR SALE: A portfolio of securities either intended for sale or for which a
claim to be held to maturity cannot be sufficiently substantiated.
	 
	 	3)	 	TRADING: A portfolio consisting of those securities purchased in order to maximize
short-term gains. It also includes the mortgage banking activity to comply with FAS 115.
However, Oriental is not precluded from classifying as trading a security it plans to hold
for a longer period.

     B. Accounting

     GAAP (Generally Accepted Accounting Principles):

Oriental’s accounting for its investment portfolio and any possible future trading
and sale portfolios will follow General Accepted Accounting Principles (GAAP). GAAP accounting
(as promulgated under FAS #115) became effective for fiscal years beginning after 12/15/93 and
is summarized in the following table:

	 	 	 
	Investment Types	 	Accounting1
	 
	 	 
	Debt Securities
	 	 
	Held to Maturity
	 	Amortized Cost
	Available for Sale
	 	Fair Value2 
	Trading
	 	Market3
	 
	 	 
	Mortgage-Backed Securities
	 	 
	Held to Maturity
	 	Amortized Cost
	Available for Sale
	 	Fair Value2
	Trading
	 	Market3
	 
	 	 
	Transfer of Securities
	 	 
	Between Trading and Held to
	 	 

 

 

	 	 	 
	Investment Types	 	Accounting1
	 
	Maturity/Available for Sale
	 	Market3
	From Held to Maturity to
	 	 
	Available for Sale
	 	Fair Value2
	From Available for Sale to
	 	 
	Held to Maturity
	 	Fair Value/Amortized Cost4

 

			
	1.	 	The accounting guidance in the table does not include accounting for investments with
permanent impairment, which must always be considered under GAAP. Additionally, this
guidance does not address the accounting for securities acquired for hedging purposes. The
Treasurer or his designee will evaluate positions that have unrealized losses to
determine if these are “Other-than-temporarily impaired”, and present such results to
ALCO.
	 
	2.	 	Net unrealized gains and losses (excluding permanent impairment and adjusted for
taxes) are recognized as an adjustment to capital until final deposition or recovery.
There is no interim income statement impact.
	 
	3.	 	Unrealized gains and losses are recognized in the income statement.
	 
	4.	 	When securities are transferred to a held to maturity account from an available for
sale account, unrealized gains/losses remain in contra equity account, which is
amortized/accreted under interest method over the transferred securities’ remaining
lives.

     Regulatory:

The accounting guidelines established under SFAS #115 also effect financial reporting to the
banking regulators. The various investment portfolio classifications and their current values must
be identified in quarterly call reports.

However, net gains (losses) in available-for-sale debt securities are not included in regulatory
capital for the purposes of computing the leverage and risk-based ratios. Equity securities with
readily determinable market values are valued at the lower of cost or fair value for regulatory
capital purposes.

     C. Investment Types

Listed below are available investment opportunities currently permitted by banking regulations
and their current risk weight under the FDIC Risk-Based Capital Guidelines:

          FEDERAL FUNDS (OVERNIGHT)

These are very short-term (less than 7 days) sales to other banks of available balances in excess
of requirements. They are defined by regulatory authorities as “sales of assets” and are therefore
not subject to lending limitations other than those self-imposed by the Bank within its Limitations
on Interbank Liabilities compliance statement. Current risk weight: 20%.

 

 

          FEDERAL FUNDS (TERM)

These are essentially fixed-rate advances made to other banks for terms beyond one business
day. The market generally specifies maturities of one, two, three, six and twelve months. They are
treated as loans (although not evidenced by notes) and are subject to lending limitations as well
as those imposed by the Bank’s Limitations on Interbank Liabilities statement. Current risk weight:
20%.

          BANKER’S ACCEPTANCES

Notes, which have been accepted and discounted by a bank. The primary obligor is the accepting
bank. In the event of default by the bank, recourse to the maker of the note is available. There is
an organized secondary market wherein these obligations may be bought and sold. Legal lending
limits apply. Current risk weight 20%.

          RESELL AGREEMENTS

These are short term investments were Oriental buys a security with an agreement to sell back.
The difference between the buy and sell prices is the yield of the investment. The type of security
bought with agreement to resell sets the credit risk of the transaction. When the transaction is
shorter than a week, there might not be delivery of the security.

          PURCHASE/PUT BACK TRANSACTIONS

From time to time the Bank can take advantage of opportunities in the markets by purchasing
securities with a put back to the broker/dealer at a guaranteed price in the future. The put
eliminates the market risk from the transaction and the Bank is guaranteed the spread during the
period it owns the security.

This transaction is very similar to a repurchase agreement since the broker/dealer is committed to
purchasing the security at a pre-arranged price. Therefore, purchase put back transactions will be
subject to the same credit limits as resell agreements, if the following conditions are met:

	 	1.	 	The put price must be negotiated the same day the security is purchased.
	 
	 	2.	 	The security purchased must comply with the credit policy of these guidelines.
	 
	 	3.	 	The put must be exercised the same day the security is purchased.
	 
	 	4.	 	The broker/dealer granting the put must be in the approved list of broker/dealer.
	 
	 	5.	 	The amount at risk in the put contract must be within the pre-approved limits of the
counterparty.

          U.S. TREASURY SECURITIES

These are direct obligations of the U.S. Treasury and are therefore of unquestioned credit
quality. They may be purchased in maturities ranging from 1 day to 30 years and include zero coupon
instruments. They have a secondary market of great depth, breadth and

 

 

resiliency, which assures ready liquidity. They may serve as collateral for repurchase agreements
(temporary sales under agreement to repurchase) without the necessity of maintaining reserve
requirements against the liability. Repurchase agreements will be negotiated to finance the
acquisition of other assets and will be limited to the size of the portfolio and liquidity
constraints. Current risk weight: 0%.

          FEDERAL AGENCY SECURITIES

These are direct obligations issued by various agencies of the Federal Government (e.g. GNMA,
FNMA, FHLMC, and SLMA). While not all bear the explicit guarantee of the U.S. Treasury, it is
implicitly deemed unthinkable that the U.S. Government would allow any of its agencies to default
on outstanding debt. For this reason, we will treat these securities, for all practical purposes
including reserve requirements and repurchase agreement acceptability, the same as U.S. Treasury
securities. Current risk weight: GNMA’s - 0%, others -20%.

          CERTIFICATES OF DEPOSIT (CD’s)

For investment purposes, these should be classified into two categories: CD’s > $100,000 (i.e.
Jumbo’s) and Brokered CD’s. Current risk weight: 20%.

Jumbo CD’s are obligations, which have been issued by other banks with common maturities of 1, 3
and 6 months. A secondary market exists wherein these may be purchased and sold, thus providing
essential liquidity.

Brokered CD’s are obligations issued by other banks and thrifts in denominations <$100,000 and,
therefore, are 100% insured by the FD1C. Since it is unthinkable that the U.S. Government would
allow any of its agencies to dishonor outstanding guarantees relied upon by the depositing public,
Oriental will treat these like Federal Agency Securities in terms of safety and soundness. Brokered
CD’s are subject to early withdrawal penalties.

          MORTGAGE-BACKED SECURITIES (MBS)

These are cash flow bonds secured by FHA/VA mortgages in the case of MBS issued by the
Governmental National Mortgage Association (GNMA) and secured by conventional loans in MBS issued
by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Corporation
(FNMA). The GNMA issues have the same credit quality as U.S. Governments and are backed by the U.S.
Treasury as to the timely repayment of principal and interest. FNMA is a Federal Agency, FHLMC is a
private corporation, but for all intents and purposes, may be viewed as comparable to FNMA in
credit quality. The FHLMC mortgage-backed securities are called “participation certificates” (PC).
Private label securities with AAA ratings are also readily available. They represent pools backed
by non-Agency guaranteed whole loans for which various credit enhancements have been added to
obtain the AAA rating. Current risk weight: GNMA’s — 0%; Other Agency — 20%; Private Issue -      %.

 

 

          COLLATERALIZED MORTGAGE OBLIGATIONS (CMO)

These are bonds collateralized by mortgage-backed securities above. While investments in MBS
(a single class security) result in the investor receiving his pro rata share of all principal and
interest payments, a CMO (a multiple class or tranche security) passes through cash flows depending
upon the structure of the particular CMO issue. Since all issues are different, it is important
that the characteristics of the specific instrument and class be understood prior to purchase. CMOs
can be acquired with fixed or floating rate interest streams. Current risk weight: 20%, 50% or 100%
depending on issuer/guarantee and other characteristics.

          NON MORTGAGE ASSET-BACKED SECURITIES

These are cash flow bonds secured primarily by consumer credit such as credit cards and
automobile loans. These frequently carry third party insurance and/or are over-collateralized to
achieve AA ratings. Current risk weight: —%

          MUNICIPAL BONDS AND NOTES

These are obligations issued by states, counties and municipalities or their agencies.
Included are general obligation bonds, industrial development revenue bonds and other revenue
bonds. Current risk weight: GO’s , Revenues , IRB’s —%

          CORPORATE BONDS OR NOTES AND PREFERRED STOCK ISSUES

These are obligations evidencing debts of corporations. Current risk weight: —%

          COMMERCIAL PAPER

These are high grade unsecured short-term notes issued by major corporations. Current risk weight:

          FEDERAL HOME LOAN BANK DEPOSITS (OVERNIGHT AND TERM)

Deposits for one day (overnight) at the Federal Home Loan Bank are interest-bearing at a rate
comparable to Federal Funds overnight rates. The Federal Home Loan Bank also offers fixed rates on
deposits of more than one day. Current risk weight: ___%

     D. Identification of Risk

Investment decisions will be based upon a thorough analysis of each security instrument to
determine its quality, inherent risks, fit within the overall asset/liability management objectives
of Oriental, effect on Oriental’s risk-based capital measurement and prospects

 

 

for yield and/or appreciation. Lack of adequate information increases the degree of risk. These
risks include the following;

Credit (Default) Risk — The potential for failure of a debtor to make timely payments of
principal and interest as they become due.

Liquidity Risk  — The risk that a financial instrument cannot be sold or closed out
quickly, at or close to its implicit economic value. As liquidity decreases bid/offer spreads
typically widen.

Interest Rate Risk — The risk that interest rates will change, causing a decline in either
the market price for the security or a decline in yield. Additionally, certain structure
product may include conditions whereby a securities interest payments will depend on key,
short-term rates. Changes in short-term rates will therefore affect the overall yield of such
investments.

Prepayment Risk — The risk that the actual prepayment of principal is different from the
expected prepayment speed assumptions, thereby affecting the actual market price and yield of
the investment.

Market Risk — The risk that the market price of the security will decline substantially
for reasons such as market pricing aberrations, and changes in supply and demand
characteristics of a particular security market(s). Market risk is also used synonymously for
Price Risk, which results from some of the previously listed sources as well as other financial
variables to which a specific security may be linked for purposes of deriving its interest and
principal cash flows.

Operating Risk — The potential risk ofloss because of inadequate policies, procedures,
controls, error, fraud, etc.

     E. Limitations on Interbank Liabilities

Oriental recognizes the inherent credit, liquidity and operational risks inherent in dealing
with other depository institutions; particularly in the fed funds market. Accordingly, to prevent
excessive exposure to any single correspondent we establish the following general standards for
selecting correspondents as well as internal limits for allowable exposure.

In selecting new correspondents, Oriental must gain comfort as to the adequacy of the institution’s
financial condition, and therefore, its ability to make payments in full and in a timely manner.
Accordingly, the most recently available financial statements will be reviewed with a focus on
earnings, capital, non-performing assets and existing borrowing levels. New correspondent
relationships will not be established with Banks classified as “significantly or critically
undercapitalized” (i.e. risk-based capital under 6.0% and leverage under 3.0%).

 

 

Receipt and review of financial information will be documented no less than annually for all
correspondents. Subject to this minimum, the Bank shall establish the level and frequency of
monitoring required based on:

	 	(1)	 	the extent to which exposure approaches Oriental’s internal limits;
	 
	 	(2)	 	the volatility of the exposure; and
	 
	 	(3)	 	the financial condition of the correspondent.

Classification of all correspondents (to whom the Bank has credit exposure) as to Well/ Adequately/
Under/ Significantly Under/ Critically Under Capitalized will be made quarterly since limits are
established based upon these classifications. The Bank shall terminate its relationship with any
correspondent the financial condition of which has significantly deteriorated below acceptable
levels.

Oriental’s review of a correspondent’s financial condition will be based on one or more of the
correspondent’s most recently available financial statement, Report of Condition, Regulatory
Financial Report (“Call”), or bank rating report for the correspondent, as the case may be. The
following general internal limits shall apply with respect to the capital level of correspondents:

	 	 	 	 	 	 	 	 	 
	Capitalization	 	Interday Limit	 	Intraday Limit
	Classification	 	% Capital	 	% Capital
	Well Capitalized
	 	 	100	%	 	 	200	%
	Adequate
	 	 	100	%	 	 	200	%
	Under
	 	 	25	%	 	 	100	%
	Significantly Under
	 	 	10	%(l)	 	 	20	%
	Critically Under
	 	 	0	%(2)	 	 	0	%

 

			
	(1)	 	Requires prior approval from Board of Directors on exception basis
	 
	(2)	 	May lend only on a secured basis; Prior approval required from Board of Directors

From time to time Oriental, when deemed necessary, may establish limits, which differ, based upon
form of exposure (e.g. on- vs. off-balance sheet), nature of products, and maturity structure (e.g.
overnight vs. term fed funds).

Oriental shall structure transactions or monitor exposure to a correspondent to ensure that
Oriental’s exposure ordinarily does not exceed the internal limits established by this policy,
(including those limits established for credit exposure) excepting, however, occasional excesses
resulting from unusual market disturbances, market movements favorable to Oriental, increases in
activity, operational problems, or other unusual circumstances.

If excesses over Oriental’s approved limits occur. Oriental shall promptly take action to eliminate
any such excess exposure.

 

 

The specific limits on exposure set forth above shall be further subject to the reasonable
standards set forth in this Investment Policy.

     F. Authorized Brokers/Dealers/Banks

     BANKS

Barclays Bank

Citibank, N.A.

Banco Bilbao Vizcaya Argentaria

Economic Development Bank

Government Development Bank ($60 million)

Banco de Santander de PR

Canadian Imperial Bank

Bank of Nova Scotia

Royal Bank of Canada

JP Morgan Chase

Deutsche Bank

Federal Home Loan Bank of New York

ABM-AMRO

Banco Popular de Puerto Rico

Societe Generale

Bank of America

Rabobank

     BROKER DEALERS

Lehman Brothers

Morgan Stanley

Credit Suisse First Boston

Popular Securities

UBS (Paine Webber)

Merrill Lynch

Wachovia (Prudential Securities)

Bear Stearns

Citigroup

ABN-AMRO

Goldman Sachs

JP Morgan Securities

Fannie Mae

Freddie Mac

 

 

FLMAT

Keef Bruyette & Woods

Sandler O’Neil

Santander Securities

BBVA Capital

Oppenheimer Capital

Gen Re Financial

Cantor Fitzgerald

RBS — Greenwich Capital

Washington Mutual

HSBC

Countrywide Securities

Other dealers, banks or issuers may be approved by ALCO on an on-going basis, provided the general
dispositions of this Investment Policies are in consideration when approval by the Committee is
requested.

     Definitions (See Note)

Clean CD’s are the direct deposits with the listed institutions, without Guarantees, but not
exceeding the stated amounts. Tenors over 270 days require additional Credit Committee approval.

Reverse Repos can be made with PR Government or Agency Securities, or US Government and Agency
Securities. The total reverse repo cannot exceed the stated amounts. All reverse repos have to be
closed with a minimum of 100.5% of collateral if Treasuries are used, and 102% if MBS are used.
Tenors over 180 days require additional Credit Committee approval. All transactions in excess of 14
days require delivery of securities to our custody account.

Forward Purchases or Sales refer to the buying and selling of securities from others where you can
have, at any point in time, unsettled bought or sold securities. The risk exposure is from the
trade date to settlement date. Once they are bought and settled, the risk of the Bank is only from
the issuer. During the credit risk period the amount of risk is the market rate change that can
occur. If a fail occurs, the security or loan will have to be replaced, thus the loss that could
occur is limited to the change in price from trade date to replacement date of security or loan.
For purposes of this policy, the risk will be as follows (the % is from the amount sold or bought):

10%
for 15 days or less

12% for 16 to 30 days

15% for 31 to 60 days

20% for 61 to 90 days

 

 

Purchases of Mortgages from Mortgage Bankers require prior approval to purchase from ALCO.

Swaps have fluctuating collateral requirements. Contracts may require an up front % requirement per
year plus the mark to market of the swap. Additional collateral can be required if the valuation of
the collateral drops below the required percent per annum, and/or if the swap value drops.

The swaps we normally book pay long and receive short. This could create a negative cash flow,
putting the credit risk on the counterparty. If we book a swap where we pay short and receive long,
the credit risk is reversed. We would require a mark to market on the swap.

 

 

EXHIBIT C

ANNUAL FEE SCHEDULE

*This information is intentionally omitted because confidential treatment has been requested
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted
information has been filed separately with the U.S. Securities and Exchange Commission.

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