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

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

Commission File Number 001-12647

Oriental Financial Group Inc.

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o 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 the definitions of “large accelerated filer,” “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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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:

33,101,406 common shares ($1.00 par value per share)
outstanding as of April 30, 2010

 

 

TABLE OF CONTENTS

		Page
Part I FINANCIAL INFORMATION:
Item 1 Financial Statements
Unaudited consolidated statements of financial condition at March 31, 2010 and December 31, 2009			1
Unaudited consolidated statements of operations for the quarters ended March 31, 2010 and 2009			2
Unaudited consolidated statements of changes in stockholders’ equity for the quarters ended March 31, 2010 and 2009			3
Unaudited consolidated statements of comprehensive income for the quarters ended March 31, 2010 and 2009			3
Unaudited consolidated statements of cash flows for the quarters ended March 31, 2010 and 2009			4
Notes to unaudited consolidated financial statements			5
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
Item 3 Quantitative and Qualitative Disclosures About Market Risk			57
Item 4 Controls and Procedures			61
PART II OTHER INFORMATION:
Item 1 Legal Proceedings			62
Item 1A Risk Factors			62
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			62
Item 3 Defaults Upon Senior Securities			62
Item 5 Other Information			63
Item 6 Exhibits			63
Signatures			64
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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.

ORIENTAL FINANCIAL GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2010 AND DECEMBER 31, 2009

		March 31,				December 31,
		2010				2009
		(In thousands, except share data)
ASSETS
Cash and cash equivalents
Cash and due from banks		$	450,323			$	247,691
Money market investments			17,758				29,432
Total cash and cash equivalents		$	468,081			$	277,123
Investments:
Trading securities, at fair value with amortized cost of $293 (December 31, 2009 - $522)			293				523
Investment securities available-for-sale, at fair value with amortized cost of $4,673,956 (December 31, 2009 - $5,044,017)			4,616,819				4,953,659
Other investments			150				150
Federal Home Loan Bank (FHLB) stock, at cost			19,937				19,937
Total investments			4,637,199				4,974,269
Securities sold but not yet delivered			116,747				—
Loans:
Mortgage loans held-for-sale, at lower of cost or fair value			27,785				27,261
Loans receivable, net of allowance for loan losses of $25,977 (December 31, 2009 - $23,272)			1,103,494				1,112,808
Total loans, net			1,131,279				1,140,069
Accrued interest receivable			37,100				33,656
Deferred tax asset, net			32,186				31,685
Premises and equipment, net			18,571				19,775
Foreclosed real estate			9,918				9,347
Servicing asset			7,569				7,120
Other assets			49,870				57,789
Total assets		$	6,508,520			$	6,550,833
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits		$	729,769			$	693,506
Savings accounts			108,661				86,792
Certificates of deposit			977,903				965,203
Total deposits			1,816,333				1,745,501
Borrowings:
Federal funds purchased and other short-term borrowings			37,953				49,179
Securities sold under agreements to repurchase			3,557,149				3,557,308
Advances from FHLB			281,687				281,753
FDIC-guaranteed term notes			105,112				105,834
Subordinated capital notes			36,083				36,083
Total borrowings			4,017,984				4,030,157
Securities purchased but not yet received			171,813				413,359
Accrued expenses and other liabilities			38,216				31,650
Total liabilities			6,044,346				6,220,667
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; 34,479,397 shares issued; 33,103,028 shares outstanding (December 31, 2009 - 25,739,397; 24,370,854 )			34,479				25,739
Additional paid-in capital			299,542				213,445
Legal surplus			46,480				45,279
Retained earnings			85,796				77,584
Treasury stock, at cost 1,376,369 shares (December 31, 2009 - 1,368,543 shares)			(17,127	)			(17,142	)
Accumulated other comprehensive loss, net of tax of $3,966 (December 31, 2009 - $7,445)			(52,996	)			(82,739	)
Total stockholders’ equity			464,174				330,166
Commitments and Contingencies
Total liabilities and stockholders’ equity		$	6,508,520			$	6,550,833

See notes to unaudited consolidated financial statements.

ORIENTAL FINANCIAL GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 2010 AND 2009

		Quarter ended March 31
		2010				2009
		(In thousands, except per share data)
Interest income:
Loans		$	17,598			$	18,320
Mortgage-backed securities			43,594				50,708
Investment securities and other			9,105				14,903
Total interest income			70,297				83,931
Interest expense:
Deposits			11,243				13,823
Securities sold under agreements to repurchase			25,285				35,799
Advances from FHLB and other borrowings			3,012				3,096
FDIC-guaranteed term notes			1,021				112
Subordinated capital notes			298				436
Total interest expense			40,859				53,266
Net interest income			29,438				30,665
Provision for loan losses			4,014				3,200
Net interest income after provision for loan losses			25,424				27,465
Non-interest income:
Financial service revenues			3,978				3,114
Banking service revenues			1,647				1,393
Investment banking revenues (losses)			—				(12	)
Mortgage banking activities			1,797				2,153
Total banking and financial service revenues			7,422				6,648
Excess of amortized cost over fair value on other-than-temporarily impaired securities			(39,590	)			—
Non-credit related unrealized loss on securities recognized in other comprehensive income			38,958				—
Other-than-temporary impairments on securities			(632	)			—
Net gain (loss) on:
Sale of securities			12,020				10,340
Derivatives			(10,636	)			434
Trading securities			(3	)			(27	)
Foreclosed real estate			(117	)			(162	)
Other investments			9				13
Other			14				—
Total non-interest income, net			8,077				17,246
Non-interest expenses:
Compensation and employee benefits			8,250				7,724
Occupancy and equipment			3,594				3,489
Professional and service fees			2,153				2,608
Insurance			1,833				815
Taxes, other than payroll and income taxes			857				646
Advertising and business promotion			699				1,204
Electronic banking charges			678				540
Loan servicing expenses			427				383
Communication			342				379
Director and investors relations			315				349
Clearing and wrap fees expenses			297				330
Other			948				806
Total non-interest expenses			20,393				19,273
Income before income taxes			13,108				25,438
Income tax expense			1,172				690
Net income			11,936				24,748
Less: Dividends on preferred stock			(1,201	)			(1,201	)
Income available to common shareholders		$	10,735			$	23,547
Income per common share:
Basic		$	0.42			$	0.97
Diluted		$	0.41			$	0.97
Average common shares outstanding			25,857				24,245
Average potential common shares-options			75				3
Average diluted common shares outstanding			25,932				24,248
Cash dividends per share of common stock		$	0.04			$	0.04

See notes to unaudited consolidated financial statements.

ORIENTAL FINANCIAL GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE QUARTERS ENDED MARCH 31, 2010 AND 2009

		Quarter Ended March 31,
CHANGES IN STOCKHOLDERS’ EQUITY:		2010				2009
		(In thousands)
Preferred stock:
Balance at beginning and end of period		$	68,000			$	68,000
Common stock:
Balance at beginning of period			25,739				25,739
Issuance of common stock			8,740				—
Balance at end of period			34,479				25,739
Additional paid-in capital:
Balance at beginning of period			213,445				212,625
Issuance of common stock			90,896				—
Stock-based compensation expense			263				159
Common stock issuance costs			(5,062	)			—
Balance at end of period			299,542				212,784
Legal surplus:
Balance at beginning of period			45,279				43,016
Transfer from retained earnings			1,201				2,455
Balance at end of period			46,480				45,471
Retained earnings:
Balance at beginning of period			77,584				51,233
Net income			11,936				24,748
Cash dividends declared on common stock			(1,322	)			(972	)
Cash dividends declared on preferred stock			(1,201	)			(1,201	)
Transfer to legal surplus			(1,201	)			(2,455	)
Balance at end of period			85,796				71,353
Treasury stock:
Balance at beginning of period			(17,142	)			(17,109	)
Stock purchased			—				(181	)
Stock used to match defined contribution plan 1165(e)			15				126
Balance at end of period			(17,127	)			(17,164	)
Accumulated other comprehensive loss, net of tax:
Balance at beginning of period			(82,739	)			(122,187	)
Other comprehensive income, net of tax			29,743				35,355
Balance at end of period			(52,996	)			(86,832	)
Total stockholders’ equity		$	464,174			$	319,351

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE QUARTERS ENDED MARCH 31, 2010 AND 2009

		Quarter Ended March 31,
COMPREHENSIVE INCOME		2010				2009
		(In thousands)
Net income		$	11,936			$	24,748
Other comprehensive income:
Unrealized gain on securities available-for-sale arising during the period			44,610				49,874
Realized gain on investment securities included in net income			(12,020	)			(10,340	)
Excess of amortized cost over fair value on other-than-temporarily impaired securities			39,590				—
Non-credit related unrealized loss on securities			(38,958	)			—
Income tax effect related to unrealized gain on securities available-for-sale			(3,479	)			(4,179	)
Other comprehensive income for the period			29,743				35,355
Comprehensive income		$	41,679			$	60,103

See notes to unaudited consolidated financial statements.

ORIENTAL FINANCIAL GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2010 AND 2009

		Quarter Ended March 31,
		2010				2009
		(In thousands)
Cash flows from operating activities:
Net income		$	11,936			$	24,748
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred loan origination fees, net of costs			135				51
Amortization of premiums, net of accretion of discounts			5,559				740
Other-than-temporary impairments on securities			632				—
Depreciation and amortization of premises and equipment			1,333				1,468
Deferred income tax expense (benefit)			(3,979	)			862
Provision for loan losses			4,014				3,200
Stock-based compensation			263				159
Fair value adjustment of servicing asset			(449	)			648
(Gain) loss on:
Sale of securities			(12,020	)			(10,340	)
Sale of mortgage loans held for sale			(862	)			(2,482	)
Derivatives			10,636				(434	)
Mortgage tax credits			—				(2,153	)
Sale of foreclosed real estate			117				162
Sale of premises and equipment			(14	)			—
Originations and purchases of loans held-for-sale			(49,958	)			(55,400	)
Proceeds from sale of loans held-for-sale			17,633				37,799
Net (increase) decrease in:
Trading securities			230				(352	)
Accrued interest receivable			(3,444	)			5,329
Other assets			419				(6,891	)
Net increase (decrease) in:
Accrued interest on deposits and borrowings			(563	)			(2,071	)
Accrued expenses and other liabilities			4,476				2,013
Net cash used in operating activities			(13,906	)			(2,944	)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale			(2,104,008	)			(2,341,384	)
FHLB stock			—				(13,199	)
Equity options			(524	)			(790	)
Maturities and redemptions of:
Investment securities available-for-sale			915,890				1,089,870
FHLB stock			—				14,400
Proceeds from sales of:
Investment securities available-for-sale			1,238,588				1,360,318
Foreclosed real estate			2,228				2,728
Premises and equipment			(75	)			5
Origination and purchase of loans, excluding loans held-for-sale			(28,153	)			(29,726	)
Principal repayment of loans			30,642				30,980
Additions to premises and equipment			(40	)			(1,829	)
Net cash provided by investing activities			54,548				111,373
Cash flows from financing activities:
Net increase (decrease) in:
Deposits			69,377				30,317
Federal funds purchased and other short term borrowings			(11,226	)			15,117
Proceeds from:
Issuance of FDIC-guaranteed term notes			—				105,000
Advances from FHLB			—				760,680
Issuance of common stock, net			94,574				—
Repayments of advances from FHLB			—				(787,380	)
Purchase of treasury stock			—				(181	)
Termination of derivative instruments			(236	)			—
Dividends paid on common and preferred stock			(2,173	)			(4,603	)
Net cash provided by financing activities			150,316				118,950
Net change in cash and cash equivalents			190,958				227,379
Cash and cash equivalents at beginning of period			277,123				66,372
Cash and cash equivalents at end of period		$	468,081			$	293,751
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
Interest paid		$	41,445			$	55,337
Mortgage loans securitized into mortgage-backed securities		$	32,873			$	33,355
Securities sold but not yet delivered		$	116,747			$	289,565
Securities purchased but not yet received		$	171,813			$	112,628
Transfer from loans to foreclosed real estate		$	2,916			$	3,409

See notes to unaudited consolidated financial statements.

ORIENTAL FINANCIAL GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

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

The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results. 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, 2010 and 2009 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, 2009, included in the Group’s 2009 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 a special purpose entity, 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.

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 21 financial centers located throughout Puerto Rico and is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of Puerto Rico (“OCFI”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers banking services such as commercial and consumer lending, saving and time deposit products, financial planning, and corporate and individual trust services, and capitalizes on its commercial banking network to provide mortgage lending products to its clients. 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.

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

The Group’s mortgage banking activities are conducted through a division of the Bank. The mortgage banking activities consist of the origination and purchase of residential mortgage loans for the Group’s own portfolio and, if the conditions so warrant, the Group engages 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. The Group is 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 outsources the servicing of the GNMA, FNMA and FHLMC pools that it issues or originates and of its mortgage loan portfolio.

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.

Loans and Allowance for Loan Losses

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

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

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. A loan is considered impaired when, based on current information and events, it is probable that the Group will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of small balance homogeneous loans that are collectively evaluated for impairment, and loans that are recorded at fair value or at the lower of cost or fair value. The Group measures for impairment all commercial loans over $250 thousand 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 calculation is the starting point for management’s systematic determination of the required level of the allowance for loan losses. Other data considered in this determination includes: the credit grading assigned to commercial loans, delinquency levels, 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.

The Group determines the fair value of its financial instruments based on the Fair Value Measurement framework, which establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 — Level 1 asset and liabilities include equity securities that are traded in an active exchange market, as well as certain U.S. Treasury and other U.S. government agency securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on valuations obtained from third-party pricing services for identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities (e.g. callable brokered CDs and medium-term notes elected for fair value option under the fair value measurement framework), whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Group changed its method of determining the amount of other-than-temporary impairments for debt securities and for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly.

Impairment of Investment Securities

The Group conducts periodic reviews to identify and evaluate each investment in an unrealized loss position for other-than-temporary impairments. On April 1, 2009, the Group adopted FASB Accounting Standard Codification (“ASC”) 320-10-65-1, which changed the accounting requirements for other than temporary impairments for debt securities, and in certain circumstances, separates the amount of total impairment into credit and noncredit-related amounts. The review takes into consideration current market conditions, issuer rating changes and trends, the credit worthiness of the obligor of the security, current analysts’ evaluations, failure of the issuer to make scheduled interest or principal payments, the Group’s intent to not sell the security or whether it is more-likely-than-not that the Group will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term “other than temporary impairment” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Any portion of a decline in value associated with credit loss is recognized in income with the remaining noncredit-related component being recognized in other comprehensive income. A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered, by comparing the present value of cash flows expected to be collected from the security, discounted at the rate equal to the yield used to accrete current and prospective beneficial interest for the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.”

The Group’s review for impairment generally entails:

	•		intent to sell the debt security;
	•		if it is more likely than not that the entity will be required to sell the debt securities before the anticipated recovery;
	•		identification and evaluation of investments that have indications of possible other-than-temporary impairment;
	•		periodic evaluation of investment in FHLB stock;
	•		analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period;
	•		discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as having other-than-temporary impairment and those that would not support other-than-temporary impairment.

Income Taxes

In preparing the unaudited consolidated financial statements, the Group is required to estimate income taxes. This involves an estimate of current income tax expense together with an assessment of temporary differences resulting from differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Group to assume certain positions based on its interpretation of current tax 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 tax rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective tax rate and may require the use of cash in the year of resolution.

The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Group’s net deferred tax assets assumes that the Group will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, the Group may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of operations.

Management evaluates the realizability of the deferred tax assets on a regular basis and assesses the need for a valuation allowance. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in the Group’s tax provision in the period of change.

In addition to valuation allowances, the Group establishes accruals for uncertain tax positions when, despite the belief that the Group’s tax return positions are fully supported, the Group believes that certain positions are likely to be challenged. The uncertain tax positions 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 uncertain tax positions accruals are reflected as income tax payable as a component of accrued expenses and other liabilities. These accruals are reduced upon expiration of statute of limitations.

The Group follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation process, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

The Group’s policy is to include interest and penalties related to unrecognized income tax benefits within the provision for income taxes on the consolidated statements of operations.

Equity-Based Compensation Plans

The Group's Amended and Restated 2007 Omnibus Performance Incentive Plan (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 Omnibus Plan was adopted in 2007 and amended and restated in 2008.

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 Group’s 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.

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

Subsequent Events

The Group has evaluated other events subsequent to the balance sheet date and prior to filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and has adjusted and disclosed those events that have occurred that would require adjustment or disclosure in the consolidated financial statements.

Reclassifications

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

Recent Accounting Developments:

FASB Accounting Standards Update (“ASU”) 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”

Issued October, 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” amends FASB ASC Topic 470 and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendments are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Group did not have a material impact on its unaudited consolidated financial statements as a result of this update.

FASB ASU 2009-16, “Accounting for Transfers of Financial Assets (FASB ASC Subtopic 860-10)”

In June 2009, the FASB issued a revision which eliminates the concept of a “qualifying special-purpose entity” (“QSPEs”), changes the requirements for derecognizing financial assets, and includes additional disclosures requiring more information about transfers of financial assets in which entities have continuing exposure to the risks related to the transferred financial assets. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application was prohibited. The Group has adopted this guidance for transfers of financial assets commencing on January 1, 2010. The adoption of the new accounting guidance on accounting for transfers of financial assets did not have a material effect on the Group’s unaudited consolidated financial statements.

FASB ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (FASB ASC Subtopic 860-10)”

The FASB amended on June 2009 the guidance applicable to variable interest entities (“VIE”) and changed how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The amendments to the consolidated guidance affect all entities that were within the scope of the original guidance, as well as qualifying special-purpose entities (“QSPEs”) that were previously excluded from the guidance. The new guidance requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The new guidance requires ongoing evaluation of whether an enterprise is the primary beneficiary of a variable interest entity. The guidance was effective for the Group commencing on January 1, 2010. The adoption of the new accounting guidance on variable interest entities did not have a material effect on the Group’s unaudited consolidated financial statements.

FASB ASU 2010-06, “Fair Value Measurements and Disclosures (FASB ASC Topic 820) — Improving Disclosures about Fair Value Measurements”

FASB Accounting Standards Update 2010-06, issued in January 2010, requires new disclosures and clarifies some existing disclosure requirements about fair value measurements as set forth in FASB ASC Subtopic 820-10. This update amends Subtopic 820-10 and now requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfer. Also in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances and settlements. In addition, this update clarifies existing disclosures as follows: (i) for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and (ii) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This update is effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances, and settlements in the roll-forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Early application is permitted. This guidance did not have a material effect on the Group’s unaudited consolidated financial statements.

FASB ASU 2010-08, “Technical Corrections to Various Topics”

FASB Accounting Standards Updated 2010-08, issued in February 2010, eliminates some inconsistencies and outdated provisions and provides clarifications to various topics in the FASB ASC. While none of the provisions in the amendments in this update fundamentally change U.S. GAAP, certain clarifications made to the guidance on embedded derivatives and hedging (Subtopic 815-15 of the FASB ASC) may cause a change in the application of that Subtopic, and thus, special transition provisions are provided to accounting changes related to that Subtopic. The amendments in this update are effective for the first reporting period, including interim periods, beginning after issuance, except for certain amendments made to Topic 815 and the nullification of paragraph 852-70-40-45-2, which are effective for periods beginning after December 15, 2009 and December 15, 2008, respectively. The Group did not have an impact on its unaudited consolidated financial statements as a result of this update. This guidance did not have a material effect on the Group’s unaudited consolidated financial statements.

FASB ASU 2010-10, “Consolidation (Topic 810) — Amendments for Certain Investment Funds”

FASB Accounting Standards Update 2010-10, issued in February 2010, clarifies the amendments to the consolidation requirements of Topic 810 resulting from the issuance of Statement 167, which makes the consolidation requirements deferred for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered qualifying special-purpose entities. The amendments in this update are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009, and for interim periods within that first annual reporting period. The effective date coincides with the effective date for the Statement 167 amendments to Topic 810. Early application is not permitted. This guidance did not have a material effect on the Group’s unaudited consolidated financial statements.

FASB ASU 2010-11, “Derivatives and Hedging (Topic 815) — Scope Exception Related to Embedded Credit Derivatives”

FASB Accounting Standards Update 2010-11, issued in March 2010, clarifies the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. The amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed under Section 815-15-25 for potential bifurcation and separate accounting. The amendments in this update are effective as of the beginning of a reporting entity’s first fiscal quarter beginning after June 10, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this update. Currently, the Group does not anticipate that this guidance will have a material effect on the unaudited consolidated financial statements.

FASB ASU 2010-18, “Receivables (Topic 310) — Effect of a Loan Modification when the Loan is Part of a Pool that is Accounted for as a Single Asset”

FASB Accounting Standards Update 2010-18, issued in April 2010, clarifies that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this update are effective for modification of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early application is permitted. The Group does not anticipate that this guidance will have a material effect on the unaudited consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Group’s financial condition, statement of operations or cash flows.

NOTE 2 — INVESTMENTS

Money Market Investments

The Group considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months of less at the date of acquisition. At March 31, 2010, and December 31, 2009, cash equivalents included as part of cash and due from banks amounted to $17.8 million and $29.4 million, respectively.

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by the Group at March 31, 2010 and December 31, 2009, were as follows:

		March 31, 2010
						Gross				Gross								Weighted
		Amortized				Unrealized				Unrealized				Fair				Average
		Cost				Gains				Losses				Value				Yield
		(In thousands)
Available-for-sale
Obligations of US Government sponsored agencies		$	600,926			$	939			$	6,364			$	595,501				4.70	%
Puerto Rico Government and agency obligations			71,556				8				5,051				66,513				5.37	%
Structured credit investments			61,723				—				21,633				40,090				3.68	%
Total investment securities			734,205				947				33,048				702,104
FNMA and FHLMC certificates			3,275,908				18,418				17,079				3,277,247				4.39	%
GNMA certificates			308,636				8,923				—				317,559				4.64	%
CMOs issued by US Government sponsored agencies			245,052				4,076				416				248,712				5.15	%
Non-agency collateralized mortgage obligations			110,155				—				38,958				71,197				5.19	%
Total mortgage-backed-securities and CMOs			3,939,751				31,417				56,453				3,914,715
Total securities available-for-sale		$	4,673,956			$	32,364			$	89,501			$	4,616,819				4.51	%

		December 31, 2009
						Gross				Gross								Weighted
		Amortized				Unrealized				Unrealized				Fair				Average
		Cost				Gains				Losses				Value				Yield
		(In thousands)
Available-for-sale
Obligations of US Government sponsored agencies		$	1,037,722			$	359			$	30,990			$	1,007,091				3.18	%
Puerto Rico Government and agency obligations			71,537				9				6,181				65,365				5.37	%
Structured credit investments			61,722				—				23,340				38,382				3.69	%
Total investment securities			1,170,981				368				60,511				1,110,838
FNMA and FHLMC certificates			2,766,317				22,154				24,298				2,764,173				4.62	%
GNMA certificates			339,830				7,317				1,044				346,103				4.81	%
CMOs issued by US Government sponsored agencies			279,454				7,057				3				286,508				5.20	%
Non-agency collateralized mortgage obligations			487,435				—				41,398				446,037				5.78	%
Total mortgage-backed-securities and CMOs			3,873,036				36,528				66,743				3,842,821
Total securities available-for-sale		$	5,044,017			$	36,896			$	127,254			$	4,953,659				4.48	%

The amortized cost and fair value of the Group’s investment securities at March 31, 2010, by contractual maturity, are shown in the next table. Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. 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.

		March 31, 2010
		Available-for-sale
		Amortized Cost				Fair Value
		(In thousands)
Investment securities
Due after 5 to 10 years			235,979				230,904
Due after 10 years			498,226				471,200
			734,205				702,104
Mortgage-backed securities
Due after 5 to 10 years			16,634				17,445
Due after 10 years			3,923,117				3,897,270
			3,939,751				3,914,715
		$	4,673,956			$	4,616,819

Keeping with the Group’s investment strategy, during the quarters ended March 31, 2010 and 2009, there were certain sales of available-for-sale securities because the Group felt at the time of such sales that gains could be realized while at the same time having good opportunities to invest the proceeds in other investment securities with attractive yields and terms that would allow the Group to continue to protect its net interest margin. Also, the Group, as part of its asset and liability management, purchases agency discount notes close to their maturities as a short term vehicle to reinvest the proceeds of sale transactions until similar investment securities with attractive yields can be purchased. The discount notes are pledged as collateral for repurchase agreements. During the quarter ended March 31, 2010, the Group sold $20.0 million of discount notes with minimal aggregate gross gains which amounted to less than $1 thousand and sold $247.0 million of discounted notes with minimal aggregate gross losses amounted to less than $1 thousand.

In December 2009, the Group made the strategic decision to sell $116.0 million of collateralized debt obligations at a loss of $73.9 million. For the same strategic reasons, in early January 2010, the Group sold $374.3 million of non-agency collateralized mortgage obligations which contemplated a loss of $45.8 million. This loss was accounted for as other-than-temporary impairment in the fourth quarter of 2009 and no additional gain or loss was realized on the sale in January 2010, since these assets were sold at the same value reflected at December 31, 2009.

The tables below present an analysis of the gross realized gains and losses by category for the quarters ended March 31, 2010 and 2009:

Quarter ended March 31, 2010

																						Gross
Description		Original Face				Original Cost				Sale Price				Sale Book Value				Gross Gains				Losses
										(In thousands)
Sale of Securities Available-for-Sale
Investment securities
Obligations of U.S. Government sponsored agencies		$	267,000			$	265,990			$	266,996			$	266,996			$	—			$	—
Mortgage-backed securities and CMOs
FNMA and FHLMC certificates			902,967				750,615				687,211				675,191				12,020				—
GNMA Certificates			32,873				32,927				32,912				32,912				—
Non-agency collateralized mortgage obligations			626,619				623,695				368,216				368,216				—				—
Total mortgage-backed securities and CMOs			1,562,459				1,407,237				1,088,339				1,076,319				12,020				—
Total		$	1,829,459			$	1,673,227			$	1,355,335			$	1,343,315			$	12,020			$	—

Quarter ended March 31, 2009

																		Gross				Gross
Description		Original Face				Original Cost				Sale Price				Sale Book Value				Gains				Losses
										(in thousands)
Sale of Securities Available-for-Sale
Investment securities
Puerto Rico Government and agency obligations		$	11,000			$	11,000			$	11,000			$	11,000			$	—			$	—
Obligations of U.S. Government sponsored agencies			366,000				366,000				365,981				365,981				4				4
Total investment securities			377,000				377,000				376,981				376,981				4				4
Mortgage-backed securities and CMOs
FNMA and FHLMC certificates			458,053				459,756				421,181				410,889				10,292				—
GNMA certificates			40,085				40,588				40,625				40,577				48				—
Total mortgage-backed securities and CMOs			498,138				500,344				461,806				451,466				10,340				—
Total		$	875,138			$	877,344			$	838,787			$	828,447			$	10,344			$	4

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, 2010 and December 31, 2009:

March 31, 2010
Available-for-sale
(In thousands)

		Less than 12 months
		Amortized				Unrealized				Fair
		Cost				Loss				Value
FNMA and FHLMC certificates		$	2,519,775			$	17,079			$	2,502,696
Obligations of US Government sponsored agencies			279,833				5,949				273,884
CMOs issued by US Government sponsored agencies			118,447				416				118,031
			2,918,055				23,444				2,894,611

		12 months or more
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Non-agency collateralized mortgage obligations			110,155				38,958				71,197
Puerto Rico Government and agency obligations			71,174				5,051				66,123
Structured credit investments			61,723				21,633				40,090
Obligations of US Government sponsored agencies			21,093				415				20,678
			264,145				66,057				198,088

		Total
		Amortized				Unrealized				Fair
		Cost				Loss				Value
FNMA and FHLMC certificates			2,519,775				17,079				2,502,696
Obligations of US Government sponsored agencies			300,926				6,364				294,562
CMOs issued by US Government sponsored agencies			118,447				416				118,031
Non-agency collateralized mortgage obligations			110,155				38,958				71,197
Puerto Rico Government and agency obligations			71,174				5,051				66,123
Structured credit investments			61,723				21,633				40,090
		$	3,182,200			$	89,501			$	3,092,699

December 31, 2009
Available-for-sale
(In thousands)

		Less than 12 months
		Amortized				Unrealized				Fair
		Cost				Loss				Value
FNMA and FHLMC certificates			1,772,575				24,287				1,748,288
Obligations of US Government sponsored agencies			602,926				30,990				571,936
GNMA certificates			154,916				1,030				153,886
CMOs issued by US Government sponsored agencies			2,701				3				2,698
			2,533,118				56,310				2,476,808

		12 months or more
		Amortized				Unrealized				Fair
		Cost				Loss				Value
FNMA and FHLMC certificates		$	605			$	11			$	594
GNMA certificates			350				14				336
Non-agency collateralized mortgage obligations			113,122				41,398				71,724
Puerto Rico Government and agency obligations			71,155				6,181				64,974
Structured credit investments			61,722				23,340				38,382
			246,954				70,944				176,010

		Total
		Amortized				Unrealized				Fair
		Cost				Loss				Value
FNMA and FHLMC certificates			1,773,180				24,298				1,748,882
Obligations of US Government sponsored agencies			602,926				30,990				571,936
GNMA certificates			155,266				1,044				154,222
Non-agency collateralized mortgage obligations			113,122				41,398				71,724
Puerto Rico Government and agency obligations			71,155				6,181				64,974
Structured credit investments			61,722				23,340				38,382
CMOs issued by US Government sponsored agencies			2,701				3				2,698
		$	2,780,072			$	127,254			$	2,652,818

The Group constantly monitors the non-agency mortgage-backed securities portfolio to measure the collateral performance and gauge trends for such positions, and the effect of collateral behavior on credit enhancements, cash flows, and fair values of the bonds. The Group also periodically monitors any rating migration, and takes into account the time lag between underlying performance and rating agency actions. This assessment is made using a cash flow model that estimates the cash flows on the underlying mortgages, based on the security-specific collateral and deal structure, and also includes inputs such as constant default rates, prepayment rates, and loss severity. The cash flows estimated by the model are distributed through the different tranches of each security, considering subordination for the different tranches. The anticipated cash flows expected to be collected from these debt securities were discounted at the rate equal to the yield used to accrete the current and prospective beneficial interest for the securities. Significant inputs included estimated cash flows, defaults and recoveries. The present value of the expected cash flows was compared to the current outstanding balance of the tranche to determine the ratio of the estimated present value of expected cash flows to the total current balance for the tranche. This ratio was then multiplied by the principal balance of the security to determine the credit-related impairment loss.

The Group adopted the provisions of FASB ASC 320-10-65-1, as of April 1, 2009. For those debt securities for which the fair value of the security is less than its amortized cost, the Group does not intend to sell such security, and it is more likely than not that it will not be required to sell such security prior to the recovery of its amortized cost basis less any current period credit losses, these provisions require that the credit-related portion of other-than-temporary impairment losses be recognized in earnings while the noncredit-related portion is recognized in other comprehensive income, net of related taxes.

During the quarter ended March 31, 2010 net credit-related impairment losses of $632 thousand were recognized in earnings and $39.0 million of noncredit-related impairment losses were recognized in other comprehensive income for a non-agency collateralized mortgage obligation pool not expected to be sold. Major inputs to measure the amount related to the credit losses were 11.01% of default rate, 43.26% of severity, and 14.25% for prepayment rate.

The following table summarizes other-than-temporary impairment losses (in thousands) on securities for the quarter ended March 31, 2010:

Excess of amortized cost over fair value on other-than-temporarily impaired securities		$	(39,590	)
Non-credit related unrealized loss on securities recognized in other comprehensive income			38,958
Net impairment losses recognized in earnings		$	(632	)

At March 31, 2010 the total credit related other-than-temporary impairment loss recorded on this non-agency collateralized mortgage obligation amounted to $26.0 million ($21.1 million in 2008, before the adoption of FASB ASC 320-10-65-1, $4.3 million in 2009, and $632 thousand in 2010). The Group does not intend to sell this security, and it is more likely than not, that it will not be required to sell this security prior to the recovery of its amortized cost basis less any current period credit losses.

The following table presents a summary of credit-related impairment losses recognized in earnings (in thousands) on the aforementioned security:

Credit-related impairment losses recognized in earnings in:

2008		$	21,080
2009			4,309
2010			632
Total credit related impairment losses recognized in earnings up to March 31, 2010		$	26,021

At March 31, 2010, the Group’s portfolio of structured credit investments amounted to $61.7 million (amortized cost) in the available-for-sale portfolio, with net unrealized losses of approximately $21.6 million. The Group’s structured credit investments portfolio consist of two types of instruments: synthetic collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs). The Group estimates that it will recover all interest and principal for the Group’s specific tranches of these securities. This assessment is based on an analysis in which the credit quality of the Group’s positions was evaluated through a determination of the expected losses on the underlying collateral. The losses on the underlying corporate pools were inferred by observations on the credit ratings and credit spreads of the reference entities or market quotes used to derive the credit spreads. The spreads of the portfolios were converted to loss probabilities, and these were applied to a model that provided estimated projected losses for each security. The model results show that the estimated future collateral losses, if any, are lower than the Group’s subordination levels for each one of these securities. Therefore, these securities are deemed to have sufficient credit support to absorb the estimated collateral losses.

Other than temporary impairment analysis is based on estimates that depend on market conditions and are subject to further change over time. In addition, while the Group believes that the methodology used to value these exposures is reasonable, the methodology is subject to continuing refinement, including those made as a result of market developments. Consequently, it is reasonably possible that changes in estimates or conditions could result in the need to recognize additional other than temporary impairment charges in the future.

Other securities in an unrealized loss position at March 31, 2010 are mainly composed of securities issued or backed by U.S. government agencies and U.S. government sponsored agencies. These investments are primarily highly liquid securities that have a large and efficient secondary market. Valuations are performed on a monthly basis. The Group’s management believes that the unrealized losses of such other securities at March 31, 2010, are also temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuer or guarantor. At March 31, 2010, the Group does not have the intent to sell these investments in unrealized loss position.

NOTE 3 — PLEDGED ASSETS

At March 31, 2010, residential mortgage loans amounting to $538.8 million were pledged to secure advances and borrowings from the FHLB. Investment securities with fair values totaling $3.9 billion, $78.6 million and $52.4 million at March 31, 2010, were pledged to secure investment securities sold under agreements to repurchase, public fund deposits and other funds, respectively. Also, at March 31, 2010, investment securities with fair values totaling $11.7 million were pledged against interest rate swaps contracts, while others with fair values of $120 thousand were pledged to the OCIF.

As of March 31, 2010, investment securities available-for-sale not pledged amounted to $592.0 million. As of March 31, 2010, mortgage loans not pledged amounted to $391.8 million.

NOTE 4 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans Receivable

The Group’s credit activities are mainly with customers located in Puerto Rico. The Group’s loan transactions are encompassed within three main categories: mortgage, commercial and consumer. The composition of the Group’s loan portfolio at March 31, 2010 and December 31, 2009 was as follows:

		(In thousands)
		March 31, 2010				December 31, 2009
Loans secured by real estate:
Residential — 1 to 4 family		$	886,926			$	898,790
Home equity loans, secured personal loans and others			19,356				20,145
Commercial			156,329				157,631
Deferred loan fees, net			(3,334	)			(3,318	)
			1,059,277				1,073,248
Other loans:
Commercial			47,410				40,146
Personal consumer loans and credit lines			22,954				22,864
Deferred loan fees, net			(170	)			(178	)
			70,194				62,832
Loans receivable			1,129,471				1,136,080
Allowance for loan losses			(25,977	)			(23,272	)
Loans receivable, net			1,103,494				1,112,808
Mortgage loans held-for-sale			27,785				27,261
Total loans, net		$	1,131,279			$	1,140,069