UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2008

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

For the transition period from                      to                     

Oriental Financial Group Inc.

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

Principal Executive Offices:
997 San Roberto Street
Oriental Center 10th Floor
Professional Offices Park
San Juan, Puerto Rico 00926
Telephone Number: (787) 771-6800

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

24,289,667 common shares ($1.00 par value per share)
outstanding as of April 30, 2008

 

 

TABLE OF CONTENTS

		Page
Part I FINANCIAL INFORMATION:
Item 1 Financial Statements
Unaudited consolidated statements of financial condition at March 31, 2008 and December 31, 2007			1
Unaudited consolidated statements of income for the quarters ended March 31, 2008 and 2007			2
Unaudited consolidated statements of changes in stockholders’ equity for the quarters ended March 31, 2008 and 2007			3
Unaudited consolidated statements of comprehensive income for the quarters ended March 31, 2008 and 2007			3
Unaudited consolidated statements of cash flows for the quarters ended March 31, 2008 and 2007			4
Notes to unaudited consolidated financial statements			5
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3 Quantitative and Qualitative Disclosures About Market Risk			37
Item 4 Controls and Procedures			40
PART II OTHER INFORMATION:
Item 1 Legal Proceedings			41
Item 1A Risk Factors			41
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3 Defaults Upon Senior Securities			42
Item 4 Submissions of Matters to a Vote of Security Holders			42
Item 5 Other Information			42
Item 6 Exhibits			42
Signatures			43
Certifications			44
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32.1 SECTION 906, CERTIFICATION OF THE CEO
EX-32.2 SECTION 906, CERTIFICATION OF THE CFO

FORWARD-LOOKING STATEMENTS

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

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

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

PART — I            FINANCIAL INFORMATION

ITEM — I            FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2008 AND DECEMBER 31, 2007
(In thousands, except share data)

		March 31,				December 31,
		2008				2007
ASSETS
Cash and due from banks		$	50,052			$	88,983
Investments:
Trading securities, at fair value with amortized cost of $92 (December 31, 2007 - $1,103)			93				1,122
Investment securities available-for-sale, at fair value with amortized cost of $3,497,906 (December 31, 2007 - $3,063,763)
Securities pledged that can be repledged			3,301,880				2,903,078
Other investment securities			163,861				166,204
Total investment securities available-for-sale			3,465,741				3,069,282
Investment securities held-to-maturity, at amortized cost with fair value of $1,263,260 (December 31, 2007 - $1,478,112)
Securities pledged that can be repledged			1,188,029				1,348,159
Other investment securities			89,142				144,728
Total investment securities held-to-maturity			1,277,171				1,492,887
Federal Home Loan Bank (FHLB) stock, at cost			20,658				20,658
Other Investments			150				1,661
Total investments			4,763,813				4,585,610
Securities sold but not yet delivered			26,995				—
Loans:
Mortgage loans held-for-sale, at lower of cost or market			25,577				16,672
Loans receivable, net of allowance for loan losses of $11,092 (December 31, 2007 - $10,161)			1,159,856				1,162,894
Total loans, net			1,185,433				1,179,566
Accrued interest receivable			37,026				52,315
Premises and equipment, net			21,587				21,779
Deferred tax asset, net			12,931				10,362
Foreclosed real estate			4,119				4,207
Investment in equity indexed options			34,475				40,709
Other assets			21,688				16,324
Total assets		$	6,158,119			$	5,999,855
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits		$	128,273			$	119,152
Savings accounts			453,711				387,790
Certificates of deposit			860,004				739,478
Total deposits			1,441,988				1,246,420
Borrowings:
Federal funds purchased and other short term borrowings			36,517				27,460
Securities sold under agreements to repurchase			3,847,633				3,861,411
Advances from FHLB			331,853				331,898
Subordinated capital notes			36,083				36,083
Total borrowings			4,252,086				4,256,852
Securities purchased but not yet received			101,375				111,431
Accrued expenses and other liabilities			23,912				25,691
Total liabilities			5,819,361				5,640,394
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; 25,732,340 shares issued; 24,285,291 shares outstanding (December 31, 2007 - 25,555,575; 24,120,771)			25,732				25,557
Additional paid-in capital			212,056				210,073
Legal surplus			42,140				40,573
Retained earnings			55,977				45,296
Treasury stock, at cost 1,447,049 shares (December 31, 2007 - 1,436,426 shares)			(17,184	)			(17,023	)
Accumulated other comprehensive loss, net of tax of $246 (December 31, 2007 - $2,166)			(47,963	)			(13,015	)
Total stockholders’ equity			338,758				359,461
Commitments and Contingencies
Total liabilities and stockholders’ equity		$	6,158,119			$	5,999,855

See notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 31, 2008 AND 2007
(In thousands, except per share data)

		Quarter ended March 31,
		2008				2007
Interest income:
Loans		$	19,828			$	21,849
Mortgage-backed securities			39,501				25,498
Investment securities and other			22,772				14,153
Total interest income			82,101				61,500
Interest expense:
Deposits			12,429				12,370
Securities sold under agreements to repurchase			40,240				32,789
Advances from FHLB, term notes and other borrowings			3,821				2,317
Subordinated capital notes			702				758
Total interest expense			57,192				48,234
Net interest income			24,909				13,266
Provision for loan losses			1,650				1,075
Net interest income after provision for loan losses			23,259				12,191
Non-interest income:
Financial service revenues			4,240				4,843
Banking service revenues			1,527				1,874
Investment banking revenues			738				—
Mortgage banking activities			1,006				62
Net gain (loss) on:
Securities available-for-sale			9,297				358
Derivatives			(7,803	)			8,418
Other investments			110				(360	)
Sale of foreclosed real estate			(250	)			37
Other			(1	)			19
Total non-interest income, net			8,864				15,251
Non-interest expenses:
Compensation and employees’ benefits			7,715				6,745
Occupancy and equipment			3,287				2,994
Professional and service fees			1,880				1,538
Advertising and business promotion			1,074				793
Directors and investor relations			278				531
Loan servicing expenses			331				523
Taxes, other than payroll and income taxes			611				448
Electronic banking charges			418				458
Clearing and wrap fees expenses			294				253
Communication			325				338
Insurance			602				216
Printing, postage, stationery and supplies			277				202
Other			638				788
Total non-interest expenses			17,730				15,827
Income before income taxes			14,393				11,615
Income tax expense (benefit)			(2,455	)			624
Net income			16,848				10,991
Less: Dividends on preferred stock			(1,201	)			(1,200	)
Income available to common shareholders		$	15,647			$	9,791
Income per common share:
Basic		$	0.65			$	0.40
Diluted		$	0.64			$	0.40
Average common shares outstanding			24,164				24,472
Average potential common shares-options			125				93
Average diluted common shares outstanding			24,289				24,565
Cash dividends per share of common stock		$	0.14			$	0.14

See notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE QUARTERS ENDED MARCH 31, 2008 AND 2007
(In thousands)

		Quarter Ended March 31,
CHANGES IN STOCKHOLDERS’ EQUITY:		2008				2007
Preferred stock:
Balance at beginning and end of period		$	68,000			$	68,000
Common stock:
Balance at beginning of period			25,557				25,431
Stock options exercised			175				30
Balance at end of period			25,732				25,461
Additional paid-in capital:
Balance at beginning of period			210,073				209,033
Stock-based compensation expense			73				4
Stock options exercised			1,910				189
Balance at end of period			212,056				209,226
Legal surplus:
Balance at beginning of period			40,573				36,245
Transfer from retained earnings			1,567				1,179
Balance at end of period			42,140				37,424
Retained earnings:
Balance at beginning of period			45,296				26,772
Net income			16,848				10,991
Cash dividends declared on common stock			(3,399	)			(3,428	)
Cash dividends declared on preferred stock			(1,201	)			(1,200	)
Transfer to legal surplus			(1,567	)			(1,179	)
Balance at end of period			55,977				31,956
Treasury stock:
Balance at beginning of period			(17,023	)			(12,956	)
Stock used to match defined contribution plan 1165(e)			74				108
Stock purchased			(235	)			—
Balance at end of period			(17,184	)			(12,848	)
Accumulated other comprehensive loss, net of tax;
Balance at beginning of period			(13,015	)			(16,099	)
Other comprehensive loss, net of tax			(34,948	)			(4,798	)
Balance at end of period			(47,963	)			(20,897	)
Total stockholders’ equity		$	338,758			$	338,322

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE QUARTERS ENDED MARCH 31, 2008 AND 2007
(In thousands)

		Quarter Ended March 31,
COMPREHENSIVE INCOME		2008				2007
Net income		$	16,848			$	10,991
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available-for-sale			(28,063	)			4,841
Realized gain on investment securities available-for-sale included in net income			(9,297	)			—
Gains on derivatives designated as cash flow hedges included in net income			—				(773	)
Gain from termination of cash flow hedging			—				(8,225	)
Income tax effect related to unrealized loss (gain) on securities available-for-sale			2,412				(641	)
Other comprehensive loss for the period			(34,948	)			(4,798	)
Comprehensive income (loss)		$	(18,100	)		$	6,193

See notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2008 AND 2007
(In thousands)

		Quarters Ended March 31,
		2008				2007
Cash flows from operating activities:
Net income		$	16,848			$	10,991
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of deferred loan origination fees, net of costs			(100	)			(285	)
Amortization of premiums, net of accretion of discounts			(256	)			986
Depreciation and amortization of premises and equipment			1,275				1,393
Deferred income tax benefit			(157	)			(53	)
Equity in earnings of investment in limited liability partnership			—				892
Provision for loan losses			1,650				1,075
Common stock used to match defined contribution plan 1165(e)			74				108
Stock-based compensation			73				4
(Gain) loss on:
Sale of securities available-for-sale			(9,297	)			(358	)
Mortgage banking activities			(1,006	)			(62	)
Derivatives			7,803				(9,052	)
Sale of foreclosed real estate			250				(37	)
Sale of premises and equipment			1				—
Originations and purchases of loans held-for-sale			(28,142	)			(36,766	)
Proceeds from sale of loans held-for-sale			7,293				5,227
Net decrease (increase) in:
Trading securities			1,029				(218	)
Accrued interest receivable			15,289				(2,542	)
Other assets			(5,364	)			(3,239	)
Net (decrease) in:
Accrued interest on deposits and borrowings			(729	)			(2,683	)
Other liabilities			(1,740	)			(636	)
Net cash provided by (used in) operating activities			4,794				(35,255	)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale			(2,389,555	)			(900,000	)
Other investments			—				(31	)
Equity options			(484	)			(5,764	)
FHLB stock			(4,835	)			—
Maturities and redemptions of:
Investment securities available-for-sale			1,227,451				30,160
Investment securities held-to-maturity			215,533				63,663
Other investments			1,511				—
FHLB stock			4,835				(590	)
Proceeds from sales of:
Investment securities available-for-sale			713,216				23,031
Foreclosed real estate			969				820
Premises and equipment			14				—
Origination and purchase of loans, excluding loans held-for-sale			(38,097	)			(35,515	)
Principal repayment of loans			39,158				43,563
Additions to premises and equipment			(1,098	)			(1,093	)
Net cash used in investing activities			(231,382	)			(781,756	)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits			202,613				104,304
Securities sold under agreements to repurchase			(13,388	)			759,788
Federal funds purchased			9,057				(10,429	)
Proceeds from:
Advances from FHLB			248,150				1,121,320
Exercise of stock options			2,085				219
Repayments of advances from FHLB			(248,150	)			(1,108,220	)
Purchase of treasury stock			(235	)			—
Termination of derivative instrument			(7,875	)			—
Maturity of term note			—				(15,000	)
Dividend paid on common and preferred stock			(4,600	)			(4,628	)
Net cash provided by financing activities			187,657				847,354
Net change in cash and due from banks			(38,931	)			30,343
Cash and due from banks at beginning of period			88,983				34,070
Cash and due from banks at end of period		$	50,052			$	64,413
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
Interest paid		$	57,921			$	45,828
Mortgage loans securitized into mortgage-backed securities		$	12,246			$	—
Securities sold but not yet delivered		$	26,995			$	74,289
Securities purchased but not yet received		$	101,375			$	40,067
Transfer from loans to foreclosed real estate		$	1,131			$	1,239

See notes to unaudited consolidated financial statements.

ORIENTAL FINANCIAL GROUP INC.

NOTE 1 — BASIS OF PRESENTATION

The accounting and reporting policies of Oriental Financial Group Inc. (the “Group” or “Oriental”) conform with U.S. generally accepted accounting principles (“GAAP”) and to financial services industry practices.

The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these consolidated financial statements include all adjustments necessary, all of which are of normal recurring nature, to present fairly the consolidated statement of financial condition as of March 31, 2008, and December 31, 2007, and the consolidated results of operations and cash flows for the quarters ended March 31, 2008 and 2007. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. The results of operations and cash flows for the periods ended March 31, 2008 and 2007 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2007, included in the Group’s 2007 annual report on Form 10-K.

Nature of Operations

The Group is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. It has four direct subsidiaries, Oriental Bank and Trust (the “Bank”), Oriental Financial Services Corp. (“Oriental Financial Services”), Oriental Insurance, Inc. (“Oriental Insurance”) and Caribbean Pension Consultants, Inc., which is located in Boca Raton, Florida. The Group also has two special purpose entities, Oriental Financial (PR) Statutory Trust I (the “Statutory Trust I”, presently inactive) and Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”). Through these subsidiaries and its divisions, the Group provides a wide range of financial services such as mortgage, commercial and consumer lending, financial planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual trust services. Note 10 to the unconsolidated financial statements presents further information about the operations of the Group’s business segments.

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

The Bank operates through 24 financial centers located throughout Puerto Rico and is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of Puerto Rico (“OCIF”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers banking services such as commercial and consumer lending, saving and time deposit products, financial planning, and corporate and individual trust services, and capitalizes on its commercial banking network to provide mortgage lending products to its clients. Oriental International Bank Inc. (“OIB”), a wholly-owned subsidiary of the Bank, operates as an international banking entity (“IBE”) pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended. OIB offers the Bank certain Puerto Rico tax advantages. OIB activities are limited under Puerto Rico law to persons and assets/liabilities located outside of Puerto Rico. The Group previously had another IBE, which operated as a division of the Bank, and was liquidated on May 31, 2007 after obtaining all the corresponding regulatory approvals.

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

The Group’s mortgage banking activities are conducted through a division of the Bank, and also through its mortgage lending subsidiary, Oriental Mortgage Corporation. The mortgage banking activities primarily consist of the origination and purchase of residential mortgage loans for the Group’s own portfolio and from time to time, if the conditions so warrant, the Group may engage in the sale of such loans to other financial institutions in the secondary market. The Group originates Federal Housing Administration (“FHA”)-insured and Veterans Administration (“VA”)-guaranteed mortgages that are primarily securitized for issuance of Government National Mortgage Association (“GNMA”) mortgage-backed securities which can be resold to individual or institutional investors in the secondary market. Conventional loans that meet the underwriting requirements for sale or exchange under standard Federal National Mortgage Association (the “FNMA”) or the Federal Home Loan Mortgage Corporation (the “FHLMC”) programs are referred to as conforming mortgage loans and are also securitized for

issuance of FNMA or FHLMC mortgage-backed securities. In 2006, and after FNMA’s approval for the Group to sell FNMA-conforming conventional mortgage loans directly in the secondary market, the Group became an approved seller of FNMA, as well as FHLMC, mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The Group is also an approved issuer of GNMA mortgage-backed securities. The Group continues to outsource the servicing of the GNMA, FNMA and FHLMC pools that it issues and of its mortgage loan portfolio.

In January 2008, the Group entered into an exclusive alliance with Primerica Financial Services, Inc., a wholly-owned subsidiary of Citigroup, in which the Group is the supplier of a mortgage platform and related services for Primerica in its program to market home loans to its clients in Puerto Rico.

Significant Accounting Policies

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

Allowance for Loan Losses

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

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

Included in the review of individual loans are those that are impaired, as provided in the Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan.” A loan is considered impaired when, based on current information and events, it is probable that the Group will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of small balance homogeneous loans that are collectively evaluated for impairment under the provisions of SFAS No. 5, “Accounting for Contingencies”, as amended, and loans that are recorded at fair value or at the lower of cost or market. The Group measures for impairment all commercial loans over $250,000 and over 90-days past-due. The portfolios of mortgage and consumer loans are considered homogeneous, and are evaluated collectively for impairment.

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

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

Financial Instruments

Certain financial instruments including derivatives, trading securities and investment securities available-for-sale are recorded at fair value and unrealized gains and losses are recorded in other comprehensive income or

as part of non-interest income, as appropriate. Fair values are based on listed market prices, if available. If listed market prices are not available, fair value is determined based on other relevant factors, including price quotations for similar instruments. The fair values of certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments as well as time value and yield curve or volatility factors underlying the positions. For further details regarding the Group’s investment securities and fair value measurements, refer to Note 2 and Note 9, respectively, of the unaudited consolidated financial statements.

Impairment of Investment Securities

The Group evaluates its securities available-for-sale and held-to-maturity for impairment. An impairment charge in the consolidated statements of income is recognized when the decline in the fair value of investments below their cost basis is judged to be other-than-temporary. The Group considers various factors in determining whether it should recognize an impairment charge, including, but not limited to the length of time and extent to which the fair value has been less than its cost basis, and the Group’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For debt securities, the Group also considers, among other factors, the investors repayment ability on its debt obligations and its cash and capital generation ability.

Income Taxes

In preparing the unconsolidated 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 laws and regulations. Changes in assumptions affecting estimates may be required in the future and estimated tax assets or liabilities may need to be increased or decreased accordingly. The accrual for tax contingencies is adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to the Group’s effective rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective rate and may require the use of cash in the year of resolution.

The Group maintained an effective tax rate lower than the maximum marginal statutory rate of 39% as of March 31, 2008 and 2007, mainly due to the interest income arising from investments exempt from Puerto Rico income taxes, net of expenses attributable to the exempt income. Exempt interest relates mostly to interest earned on obligations of the United States and Puerto Rico governments and certain mortgage-backed securities, including securities held by OIB.

The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Group’s net deferred tax assets assumes that the Group will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, the Group may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of income. Management evaluates the realizability of the deferred tax assets on a regular basis and assesses the need for a valuation allowance. Changes in valuation allowance from period to period are included in the Group’s tax provision in the period of change. As of March 31, 2008, a valuation allowance of approximately $2.5 million was recorded to offset deferred tax asset that the Group believes it is more likely than not would be realized in future periods.

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

Beginning with the adoption of Financial Accounting Standard Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” as of January 1, 2007, the Group recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Unrecognized tax benefits are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Prior to the adoption of FIN 48, the Group recognized the effect of income tax positions only if such positions were probable of being sustained.

The total amount of gross unrecognized tax benefits as of the date of adoption that would affect the effective tax rate was $5.7 million. The Group classifies unrecognized tax benefits in income taxes payable. No adjustments resulted from the implementation of FIN 48. These gross unrecognized tax benefits would affect the effective tax rate if realized. For the quarter ended March 31, 2008, $2.4 million (including interest and penalties) in unrecognized tax benefits expired due to statute of limitation. There were no new or settled unrecognized tax benefits. The balance of unrecognized tax benefits at March 31, 2008 was $4.0 million (December 31, 2007 — $5.7 million). The tax periods ended June 30, 2004, and 2005, and December 31, 2005 and 2006, remain subject to examination by the Puerto Rico Department of Treasury. The Group does not anticipate any other significant changes in unrecognized tax benefits during 2008.

The Group’s policy to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated statements of income did not change as a result of implementing the provisions of FIN 48. As of the date of adoption of FIN 48, the Group had accrued $1.3 million (March 31, 2008-$1.2 million; December 31, 2007-$1.9 million) for the payment of interest and penalties relating to unrecognized tax benefits.

Equity-Based Compensation Plans

On April 25, 2007, the Board of Directors (the “Board”) formally adopted the Oriental Financial Group Inc. 2007 Omnibus Performance Incentive Plan (the “Omnibus Plan”), which was subsequently approved by the Group’s stockholders at their annual meeting held on June 27, 2007. The Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and dividend equivalents, as well as equity-based performance awards.

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

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

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

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

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

		Quarter Ended
		March 31,
		2008				2007
Weighted Average Assumptions:
Dividend yield			4.40	%			4.20	%
Expected volatility			31.86	%			33.72	%
Risk-free interest rate			4.33	%			4.33	%
Expected life (in years)			8.5				8.5

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

Recent Accounting Developments:

SFAS No. 157, “Fair Value Measurements”

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

This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application was encouraged, provided that the reporting entity had not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Group adopted the provisions of SFAS No. 157 commencing in the first quarter of 2008. For further details and the effect on the Group’s financial condition, refer to Note 9 of the unaudited consolidated financial statements.

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

On February 15, 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial assets and Financial Liabilities, Including an amendment of FASB Statement No. 115”. SFAS No. 159 provides an alternative measurement treatment for certain financial assets and financial liabilities, under an instrument-by-instrument election, that permits fair value to be used for both initial and subsequent measurement, with changes in fair value recognized in earnings. Adoption of SFAS No. 159 in January 2008 did not have an impact on the Group’s financial statements.

SFAS No. 141R, “Business Combinations”

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

The Group is currently evaluating the effect, if any, of the adoption of a SFAS No. 141R on its consolidated financial statements, including disclosures.

NOTE 2 — INVESTMENT SECURITIES

Money Market Investments

The Group considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition. At March 31, 2008, and December 31, 2007, cash equivalents included as part of cash and due from banks amounted to $13.2 million and $66.1 million, respectively.

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the investment securities as of March 31, 2008, and December 31, 2007, were as follows:

		March 31, 2008 (In thousands)
						Gross				Gross								Weighted
		Amortized				Unrealized				Unrealized				Fair				Average
		Cost				Gains				Losses				Value				Yield
Available-for-sale
Puerto Rico Government and agency obligations		$	17,513			$	48			$	887			$	16,674				5.63	%
Obligations of US Government sponsored agencies			707,989				16,209				—				724,198				5.64	%
Structured credit investments			85,548				—				11,890				73,658				4.65	%
Total investment securities			811,050				16,257				12,777				814,530
FNMA and FHLMC certificates			1,583,767				20,925				943				1,603,749				5.68	%
GNMA certificates			51,562				1,162				55				52,669				5.66	%
Non-agency collateralized mortgage obligations (CMOs)			714,807				—				45,291				669,516				5.58	%
CMOs issued by US Government sponsored agencies			336,720				40				11,483				325,277				5.35	%
Total mortgage-backed-securities and CMOs			2,686,856				22,127				57,772				2,651,211
Total securities available-for-sale			3,497,906				38,384				70,549				3,465,741				5.60	%
Held-to-maturity
Puerto Rico Government and agency obligations			55,205				—				3,797				51,408				5.29	%
Obligations of US Government sponsored agencies			231,354				3,313				—				234,667				4.81	%
Structured credit investments			96,171				—				27,552				68,619				5.08	%
Total investment securities			382,730				3,313				31,349				354,694
FNMA and FHLMC certificates			606,259				8,982				922				614,319				5.05	%
GNMA certificates			156,289				2,863				529				158,623				5.34	%
CMOs issued by US Government sponsored agencies			131,893				3,761				30				135,624				5.15	%
Total mortgage-backed-securities and CMOs			894,441				15,606				1,481				908,566
Total securities held-to-maturity			1,277,171				18,919				32,830				1,263,260				5.06	%
Total		$	4,775,077			$	57,303			$	103,379			$	4,729,001				5.45	%

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

The amortized cost and fair value of the Group’s investment securities available-for-sale and held-to-maturity at March 31, 2008, by contractual maturity, are shown in the next table. Expected maturities may differ from

contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

		(In thousands)
		Available-for-sale								Held-to-maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Investment securities
Due within 1 year		$	7,998			$	7,998			$	—			$	—
Due after 1 to 5 years			—				—				125,000				128,106
Due after 5 to 10 years			348,700				345,710				66,500				50,832
Due after 10 years			454,352				460,822				191,230				175,756
			811,050				814,530				382,730				354,694
Mortgage-backed securities
Due within 1 year			52				54				—				—
Due after 1 to 5 years			685				717				—				—
Due after 5 to 10 years			—				—				9,002				9,055
Due after 10 years			2,686,119				2,650,440				885,439				899,511
			2,686,856				2,651,211				894,441				908,566
		$	3,497,906			$	3,465,741			$	1,277,171			$	1,263,260

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

Proceeds from the sale of investment securities available-for-sale during the periods ended March 31, 2008, and March 31, 2007, totaled $713.2 million and $23.0 million, respectively. Realized gains on those sales during the periods ended March 31, 2008 and 2007, were $9.3 million and $358,000, respectively.

The following table shows the Group’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2008, and December 31, 2007.

March 31, 2008
Available-for-sale
(In thousands)

		Less than 12 months
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Obligations of U.S. government entities		$	7,998			$	—			$	7,998
Mortgage-backed securities and CMOs			657,093				14,608				642,485
Structured credit investments			85,548				11,890				73,658
			750,639				26,498				724,141

		12 months or more
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Puerto Rico government and agency obligations			16,166				887				15,279
Mortgage-backed securities and CMOs			616,321				43,164				573,157
			632,487				44,051				588,436

		Total
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Obligations of U.S. government entities			7,998				—				7,998
Puerto Rico government and agency obligations			16,166				887				15,279
Mortgage-backed securities and CMOs			1,273,414				57,772				1,215,642
Structured credit investments			85,548				11,890				73,658
		$	1,383,126			$	70,549			$	1,312,577

Held-to-maturity
(In thousands)

		Less than 12 months
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Puerto Rico government and agency obligations		$	4,236			$	47			$	4,189
Mortgage-backed securities and CMOs			118,200				286				117,914
Structured credit investments			96,171				27,552				68,619
			218,607				27,885				190,722

		12 months or more
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Puerto Rico government and agency obligations			50,969				3,750				47,219
Mortgage-backed securities and CMOs			88,976				1,195				87,781
			139,945				4,945				135,000

		Total
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Puerto Rico government and agency obligations			55,205				3,797				51,408
Mortgage-backed securities and CMOs			207,176				1,481				205,695
Structured credit investments			96,171				27,552				68,619
		$	358,552			$	32,830			$	325,722

December 31, 2007
Available-for-sale
(In thousands)

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

		12 months or more
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Puerto Rico Government and agency obligations			14,152				612				13,540
Mortgage-backed-securities and CMOs			634,910				12,608				622,302
			649,062				13,220				635,842

		Total
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Puerto Rico Government and agency obligations			16,148				937				15,211
Mortgage-backed-securities and CMOs			753,526				12,944				740,582
Structured credit investments			85,548				7,188				78,360
		$	855,222			$	21,069			$	834,153

Held-to-maturity
(In thousands)

		Less than 12 months
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Puerto Rico Government and agency obligations		$	4,238			$	54			$	4,184
Mortgage-backed-securities and CMOs			18,403				129				18,274
Structured credit investments			96,171				11,949				84,222
			118,812				12,132				106,680