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 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     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

24,292,786 common shares ($1.00 par value per share)
outstanding as of July 31, 2008

 

 

TABLE OF CONTENTS

				Page
Part I FINANCIAL INFORMATION:
Item 1		Financial Statements
Unaudited consolidated statements of financial condition at June 30, 2008 and December 31, 2007					1
Unaudited consolidated statements of income for the quarters and six-month periods ended June 30, 2008 and 2007					2
Unaudited consolidated statements of changes in stockholders’ equity for the quarters and six-month periods ended June 30, 2008 and 2007					3
Unaudited consolidated statements of comprehensive income for the quarters and six-month periods ended June 30, 2008 and 2007					3
Unaudited consolidated statements of cash flows for the six-month periods ended June 30, 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			23
Item 3		Quantitative and Qualitative Disclosures About Market Risk			41
Item 4		Controls and Procedures			44
PART II OTHER INFORMATION:
Item 1		Legal Proceedings			44
Item 1A		Risk Factors			45
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3		Defaults Upon Senior Securities			45
Item 4		Submissions of Matters to a Vote of Security Holders			45
Item 5		Other Information			46
Item 6		Exhibits			46
Signatures					47
Certifications					48
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
JUNE 30, 2008 AND DECEMBER 31, 2007
(In thousands, except share data)

		June 30,				December 31,
		2008				2007
ASSETS
Cash and due from banks		$	56,486			$	88,983
Investments:
Trading securities, at fair value with amortized cost of $1,298 (December 31, 2007 — $1,103)			1,311				1,122
Investment securities available-for-sale, at fair value with amortized cost of $3,467,005 (December 31, 2007 — $3,063,763)
Securities pledged that can be repledged			3,213,381				2,903,078
Other investment securities			168,926				166,204
Total investment securities available-for-sale			3,382,307				3,069,282
Investment securities held-to-maturity, at amortized cost with fair value of $1,198,736 (December 31, 2007 — $1,478,112)
Securities pledged that can be repledged			1,161,754				1,348,159
Other investment securities			76,393				144,728
Total investment securities held-to-maturity			1,238,147				1,492,887
Federal Home Loan Bank (FHLB) stock, at cost			22,062				20,658
Other investments			150				1,661
Total investments			4,643,977				4,585,610
Loans:
Mortgage loans held-for-sale, at lower of cost or market			42,122				16,672
Loans receivable, net of allowance for loan losses of $11,885 (December 31, 2007 — $10,161)			1,176,035				1,162,894
Total loans, net			1,218,157				1,179,566
Accrued interest receivable			42,842				52,315
Premises and equipment, net			21,378				21,779
Deferred tax asset, net			17,249				10,362
Foreclosed real estate			4,906				4,207
Investment in equity indexed options			27,641				40,709
Other assets			27,543				16,324
Total assets		$	6,060,179			$	5,999,855
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits		$	124,140			$	119,152
Savings accounts			407,911				387,790
Certificates of deposit			960,368				739,478
Total deposits			1,492,419				1,246,420
Borrowings:
Federal funds purchased and other short term borrowings			41,583				27,460
Securities sold under agreements to repurchase			3,810,752				3,861,411
Advances from FHLB			331,895				331,898
Subordinated capital notes			36,083				36,083
Total borrowings			4,220,313				4,256,852
Securities purchased but not yet received			23,103				111,431
Accrued expenses and other liabilities			23,177				25,691
Total liabilities			5,759,012				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; 25,736,121 shares issued; 24,292,086 shares outstanding (December 31, 2007-25,555,575; 24,120,771)			25,736				25,557
Additional paid-in capital			212,282				210,073
Legal surplus			43,533				40,573
Retained earnings			64,406				45,296
Treasury stock, at cost 1,444,035 shares (December 31, 2007 — 1,436,426 shares)			(17,136	)			(17,023	)
Accumulated other comprehensive loss, net of tax of $4,402 (December 31, 2007 — $2,166)			(95,654	)			(13,015	)
Total stockholders’ equity			301,167				359,461
Commitments and Contingencies
Total liabilities and stockholders’ equity		$	6,060,179			$	5,999,855

See notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(In thousands, except per share data)

		Quarter Ended June 30,								Six-Month Period Ended June 30,
		2008				2007				2008				2007
Interest income:
Loans		$	19,682			$	22,315			$	39,510			$	44,163
Mortgage-backed securities			47,765				25,268				87,266				50,766
Investment securities and other			17,711				23,218				40,483				37,371
Total interest income			85,158				70,801				167,259				132,300
Interest expense:
Deposits			12,265				13,601				24,694				25,849
Securities sold under agreements to repurchase			40,208				36,546				80,448				69,334
Advances from FHLB, term notes and other borrowings			3,716				2,198				7,537				4,515
Subordinated capital notes			534				766				1,236				1,524
Total interest expense			56,723				53,111				113,915				101,222
Net interest income			28,435				17,690				53,344				31,078
Provision for loan losses			1,980				1,375				3,630				2,450
Net interest income after provision for loan losses			26,455				16,315				49,714				28,628
Non-interest income:
Financial service revenues			4,500				4,049				8,740				8,892
Banking service revenues			1,395				2,265				2,922				4,139
Investment banking revenues			12				—				750				—
Mortgage banking activities			545				170				1,551				232
Net gain (loss) on:
Sale of securities available-for-sale			198				—				9,522				358
Derivatives			228				88				(7,575	)			8,384
Trading securities			16				2				(1	)			2
Other investments			16				1,169				116				788
Foreclosed real estate			(260	)			30				(510	)			67
Other			—				23				(1	)			65
Total non-interest income, net			6,650				7,796				15,514				22,927
Non-interest expenses:
Compensation and employee benefits			7,824				6,916				15,539				13,661
Occupancy and equipment			3,365				3,343				6,652				6,337
Professional and service fees			2,267				1,984				4,147				3,522
Advertising and business promotion			836				1,118				1,910				1,911
Directors and investor relations			303				769				581				1,300
Loan servicing expenses			339				540				670				1,063
Taxes, other than payroll and income taxes			607				489				1,218				937
Electronic banking charges			396				457				814				916
Clearing and wrap fees expenses			313				310				607				675
Communication			325				308				650				646
Insurance			579				211				1,181				427
Foreclosure expenses			201				338				351				405
Printing, postage, stationery and supplies			245				189				522				391
Other			480				505				968				1,113
Total non-interest expenses			18,080				17,477				35,810				33,304
Income before income taxes			15,025				6,634				29,418				18,251
Income tax expense (benefit)			598				187				(1,857	)			811
Net income			14,427				6,447				31,275				17,440
Less: Dividends on preferred stock			(1,200	)			(1,201	)			(2,401	)			(2,401	)
Income available to common shareholders		$	13,227			$	5,246			$	28,874			$	15,039
Income per common share:
Basic		$	0.54			$	0.21			$	1.19			$	0.61
Diluted		$	0.54			$	0.21			$	1.19			$	0.61
Average common shares outstanding			24,290				24,488				24,227				24,480
Average potential common shares-options			94				75				110				97
Average diluted common shares outstanding			24,384				24,563				24,337				24,577
Cash dividends per share of common stock		$	0.14			$	0.14			$	0.28			$	0.28

See notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(In thousands)

		Six-Month Period Ended June 30,
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			179				112
Balance at end of period			25,736				25,543
Additional paid-in capital:
Balance at beginning of period			210,073				209,033
Stock-based compensation expense			252				12
Stock options exercised			1,957				815
Balance at end of period			212,282				209,860
Legal surplus:
Balance at beginning of period			40,573				36,245
Transfer from retained earnings			2,960				2,067
Balance at end of period			43,533				38,312
Retained earnings:
Balance at beginning of period			45,296				26,772
Net income			31,275				17,440
Cash dividends declared on common stock			(6,804	)			(6,861	)
Cash dividends declared on preferred stock			(2,401	)			(2,401	)
Transfer to legal surplus			(2,960	)			(2,067	)
Balance at end of period			64,406				32,883
Treasury stock:
Balance at beginning of period			(17,023	)			(12,956	)
Stock used to match defined contribution plan 1165(e)			121				175
Stock purchased			(234	)			(530	)
Balance at end of period			(17,136	)			(13,311	)
Accumulated other comprehensive loss, net of tax:
Balance at beginning of period			(13,015	)			(16,099	)
Other comprehensive loss, net of tax			(82,639	)			(31,713	)
Balance at end of period			(95,654	)			(47,812	)
Total stockholders’ equity		$	301,167			$	313,475

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(In thousands)

		Quarter Ended June 30,								Six-Month Period Ended June 30,
COMPREHENSIVE INCOME		2008				2007				2008				2007
Net income		$	14,427			$	6,447			$	31,275			$	17,440
Other comprehensive loss, net of tax:
Unrealized loss on securities available-for-sale			(51,649	)			(31,296	)			(79,685	)			(26,097	)
Realized gain on investment securities available-for-sale included in net income			(198	)			—				(9,522	)			(358	)
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 on securities available-for-sale			4,156				4,381				6,568				3,740
Other comprehensive loss for the period			(47,691	)			(26,915	)			(82,639	)			(31,713	)
Comprehensive loss		$	(33,264	)		$	(20,468	)		$	(51,364	)		$	(14,273	)

See notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(In thousands)

		Six-Month Period Ended June 30,
		2008				2007
Cash flows from operating activities:
Net income		$	31,275			$	17,440
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred loan origination fees, net of costs			(214	)			(771	)
Amortization of premiums, net of accretion of discounts			31				4,143
Depreciation and amortization of premises and equipment			2,613				2,916
Deferred income tax benefit			(319	)			(116	)
Equity in earnings of investment in limited liability partnership			—				(75	)
Provision for loan losses			3,630				2,450
Common stock used to match defined contribution plan 1165(e)			121				175
Stock-based compensation			252				12
(Gain) loss on:
Sale of securities available-for-sale			(9,522	)			(358	)
Mortgage banking activities			(1,551	)			(232	)
Derivatives			7,575				(8,898	)
Foreclosed real estate			510				(67	)
Sale of premises and equipment			1				(20	)
Originations and purchases of loans held-for-sale			(74,265	)			(80,420	)
Proceeds from sale of loans held-for-sale			20,918				25,223
Net decrease (increase) in:
Trading securities			(189	)			(305	)
Accrued interest receivable			9,473				(17,867	)
Other assets			(11,219	)			(4,597	)
Net increase (decrease) in:
Accrued interest on deposits and borrowings			604				(4,216	)
Other liabilities			(3,332	)			1,015
Net cash used in operating activities			(23,608	)			(64,568	)
Cash flows from investing activities:
Net increase in securities purchased under agreements to resell			—				(16,200	)
Purchases of:
Investment securities available-for-sale			(2,790,964	)			(1,053,377	)
Investment securities held-to-maturity			—				(10,772	)
Other investments			—				(701	)
Equity options			(1,729	)			(9,504	)
FHLB stock			(7,089	)			(17,162	)
Maturities and redemptions of:
Investment securities available-for-sale			1,396,359				70,857
Investment securities held-to-maturity			254,978				273,663
Other investments			1,511				—
FHLB stock			5,685				16,860
Proceeds from sales of:
Investment securities available-for-sale			943,134				23,032
Foreclosed real estate			2,466				1,414
Premises and equipment			14				—
Loan production:
Origination and purchase of loans, excluding loans held-for-sale			(84,597	)			(85,230	)
Principal repayment of loans			63,977				77,719
Additions to premises and equipment			(2,227	)			(2,133	)
Net cash used in investing activities			(218,482	)			(731,534	)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits			260,671				96,770
Securities sold under agreements to repurchase			(50,023	)			750,161
Federal funds purchased and other short term borrowings			14,123				11,073
Proceeds from:
Advances from FHLB			294,750				2,463,370
Exercise of stock options			2,136				927
Repayments of advances from FHLB			(294,750	)			(2,465,270	)
Repurchase of treasury stock			(234	)			(530	)
Maturity of term note			—				(15,000	)
Termination of derivative instrument			(7,875	)			—
Dividend paid on common and preferred stock			(9,205	)			(9,262	)
Net cash provided by financing activities			209,593				832,239
Net change in cash and due from banks			(32,497	)			36,137
Cash and due from banks at beginning of period			88,983				34,070
Cash and due from banks at end of period		$	56,486			$	70,207
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
Interest paid		$	113,311			$	96,790
Income tax paid		$	37			$	—
Mortgage loans securitized into mortgage-backed securities		$	29,836			$	—
Securities sold but not yet delivered		$	—			$	46,461
Securities purchased but not yet received		$	23,103			$	100,067
Transfer from loans to foreclosed real estate		$	3,675			$	1,454

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”). 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 June 30, 2008, and December 31, 2007, and the consolidated results of operations and cash flows for the quarters and six-month periods ended June 30, 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 six-month periods ended June 30, 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.

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. 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 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-an amendment of FASB Statements No. 5 and 15” (“SFAS 114”). A loan is considered impaired when, based on current information and events, it is probable that the Group will be unable to collect the scheduled payments of principal or interest when due according 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” (“SFAS 5”), 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.

SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), establishes a fair value hierarchy that prioritizes the inputs to 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 under SFAS 157 are described below:

Basis of Fair Value Measurement

Level 1		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2		Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3		Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

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. For further details regarding the Group’s investment securities and fair value measurements, refer to Note 2 and Note 8, 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 unaudited 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% for 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 June 30, 2008, a valuation allowance of approximately $1.5 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”, on January 1, 2007, the Group recognized 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. On January 13, 2008, $2.4 million in unrecognized tax benefits expired due to the statute of limitations. The Group does not anticipate any other significant changes in unrecognized tax benefits during 2008. The balance of unrecognized tax benefits at June 30, 2008 was $4.0 million (December 31, 2007 — $5.7 million). The tax periods ended June 30, 2004, and 2005, and December 31, 2005, 2006 and 2007, remain subject to examination by the Puerto Rico Department of Treasury.

The Group’s policy to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the unaudited 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 (June 30, 2008-$1.3 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”) 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:

		Six-Month Period Ended
		June 30,
		2008				2007
Weighted Average Assumptions:
Dividend yield			4.40	%			4.54	%
Expected volatility			31.86	%			33.34	%
Risk-free interest rate			4.33	%			4.65	%
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:

FASB Staff Position (FSP) FAS No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.”

In February 2008, the FASB issued FSP FAS No. 140-3, which requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction under SFAS No. 140 unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace. FSP No. 140-3 is effective for fiscal years beginning after November 15, 2008, and will be applied to new transactions entered into after the date of adoption. Early adoption is prohibited. The Group is currently evaluating the impact of adopting FSP No. 140-3 on its financial condition and cash flows. Adoption of FSP No. 140-3 will have no effect on the Group’s results of operations.

SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities— an amendment of FASB Statement No. 133.”

In March 2008, the FASB issued SFAS No. 161, requiring enhanced disclosures about an entity’s derivative and hedging activities, and is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early application encouraged. The Group will adopt SFAS No. 161 in the first quarter of 2009. Since SFAS No. 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS No. 161 will not affect the Group’s financial condition, results of operations or cash flows.

FASB Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”

In June 2008, the FASB issued FSP EITF No. 03-6-1, which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The Group does not expect adoption of FSP EITF No. 03-6-1 to have a material effect on its results of operations or earnings per share.

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 June 30, 2008, and December 31, 2007, cash equivalents included as part of cash and due from banks amounted to $44.9 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 June 30, 2008, and December 31, 2007, were as follows:

		June 30, 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		$	16,564			$	13			$	706			$	15,871				5.58	%
Obligations of US Government sponsored agencies			750,784				7,013				210				757,587				5.69	%
Structured credit investments			85,548				—				16,440				69,108				4.74	%
Total investment securities			852,896				7,026				17,356				842,566
FNMA and FHLMC certificates			1,518,229				4,729				15,983				1,506,975				5.81	%
GNMA certificates			49,385				684				260				49,809				5.68	%
Non-agency collateralized mortgage obligations (CMOs)			710,041				—				53,374				656,667				5.61	%
CMOs issued by US Government sponsored agencies			336,454				14				10,178				326,290				5.37	%
Total mortgage-backed-securities and CMOs			2,614,109				5,427				79,795				2,539,741
Total securities available-for-sale			3,467,005				12,453				97,151				3,382,307				5.67	%
Held-to-maturity
Puerto Rico Government and agency obligations			55,164				—				3,745				51,419				5.29	%
Obligations of US Government sponsored agencies			224,860				1,497				—				226,357				4.78	%
Structured credit investments			96,171				—				29,682				66,489				4.48	%
Total investment securities			376,195				1,497				33,427				344,265
FNMA and FHLMC certificates			583,107				83				7,544				575,646				5.06	%
GNMA certificates			152,260				115				1,715				150,660				5.37	%
CMOs issued by US Government sponsored agencies			126,585				1,917				337				128,165				5.15	%
Total mortgage-backed-securities and CMOs			861,952				2,115				9,596				854,471
Total securities held-to-maturity			1,238,147				3,612				43,023				1,198,736				5.02	%
Total		$	4,705,152			$	16,065			$	140,174			$	4,581,043				5.50	%

		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 June 30, 2008, 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.

		(In thousands)
		Available-for-sale								Held-to-maturity
		Amortized								Amortized
		Cost				Fair Value				Cost				Fair Value
Investment securities
Due within 1 year		$	1,499			$	1,499			$	—			$	—
Due after 1 to 5 years			—				—				125,000				126,355
Due after 5 to 10 years			347,738				337,210				60,000				41,775
Due after 10 years			503,659				503,857				191,195				176,135
			852,896				842,566				376,195				344,265
Mortgage-backed securities
Due within 1 year			27				27				—				—
Due after 1 to 5 years			660				688				—				—
Due after 5 to 10 years			—				—				58,425				56,442
Due after 10 years			2,613,422				2,539,026				803,527				798,029
			2,614,109				2,539,741				861,952				854,471
		$	3,467,005			$	3,382,307			$	1,238,147			$	1,198,736

In keeping with the Group’s investment strategy, during the six-month periods ended June 30, 2008 and 2007, 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. Proceeds from the sale of investment securities available-for-sale during the six-month periods ended June 30, 2008 and 2007, totaled $943.1 million and $23.0 million, respectively. Realized gains on those sales during the six-month periods ended June 30, 2008 and 2007, were $9.5 million and $358,000, respectively. There were no realized losses on those sales during the six-month periods ended June 30, 2008 and 2007.

The table below presents an analysis of the gross realized gains and losses by category for the six-month periods ended June 30, 2008 and 2007:

Six-month period ended June 30, 2008

In thousands

														Sale Book
Description		Original Face				Original Cost				Sale Proceeds				Value				Gains				Losses
Gain on Sale of Securities Available-for-Sale
Investment securities
Puerto Rico Government and agency obligations		$	1,830			$	1,843			$	1,862			$	1,804			$	58			$	—
Obligations of U.S. Government sponsored agencies			709,300				708,957				718,291				709,070				9,221				—
Total investment securities			711,130				710,800				720,153				710,874				9,279				—
Mortgage-backed securities and CMOs
FNMA and FHLMC certificates			250,287				250,506				198,348				198,229				119				—
GNMA certificates			24,958				26,440				24,633				24,509				124				—
Total mortgage-backed securities and CMOs			275,245				276,946				222,981				222,738				243				—
		$	986,375			$	987,746			$	943,134			$	933,612			$	9,522			$	—