OFG BANCORP - Quarter Report: 2009 March (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2009

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

24,225,944 common shares ($1.00 par value per share) outstanding as of April 30, 2009

 

 

TABLE OF CONTENTS

		Page
Part I FINANCIAL INFORMATION:
Item 1 Financial Statements
Unaudited consolidated statements of financial condition at March 31, 2009 and December 31, 2008			1
Unaudited consolidated statements of operations for the quarters ended March 31, 2009 and 2008			2
Unaudited consolidated statements of changes in stockholders’ equity for the quarters ended March 31, 2009 and 2008			3
Unaudited consolidated statements of comprehensive income for the quarters ended March 31, 2009 and 2008			3
Unaudited consolidated statements of cash flows for the quarters ended March 31, 2009 and 2008			4
Notes to unaudited consolidated financial statements			5
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3 Quantitative and Qualitative Disclosures About Market Risk			43
Item 4 Controls and Procedures			46
PART II OTHER INFORMATION:
Item 1 Legal Proceedings			46
Item 1A Risk Factors			46
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3 Defaults Upon Senior Securities			47
Item 4 Submissions of Matters to a Vote of Security Holders			47
Item 5 Other Information			47
Item 6 Exhibits			47
Signatures			48
Certifications			49
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.

PART — I FINANCIAL INFORMATION

ITEM — I FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2009 AND DECEMBER 31, 2008
(In thousands, except share data)

		March 31,				December 31,
		2009				2008
ASSETS
Cash and due from banks		$	293,750			$	66,372
Investments:
Trading securities, at fair value with amortized cost of $633 (December 31, 2008 - $255)			608				256
Investment securities available-for-sale, at fair value with amortized cost of $4,648,495 (December 31, 2008 - $4,052,574)
Securities pledged that can be repledged			4,333,749				3,790,733
Other investment securities			221,784				133,474
Total investment securities available-for-sale			4,555,533				3,924,207
Other Investments			150				150
Federal Home Loan Bank (FHLB) stock, at cost			19,812				21,013
Total investments			4,576,103				3,945,626
Securities sold but not yet delivered			289,565				834,976
Loans:
Mortgage loans held-for-sale, at lower of cost or fair value			34,278				26,562
Loans receivable, net of allowance for loan losses of $15,147 (December 31, 2008 - $14,293)			1,165,153				1,192,550
Total loans, net			1,199,431				1,219,112
Accrued interest receivable			38,585				43,914
Premises and equipment, net			21,540				21,184
Deferred tax asset, net			23,422				28,463
Foreclosed real estate			9,681				9,162
Investment in equity indexed options			3,052				12,801
Other assets			30,817				23,926
Total assets		$	6,485,946			$	6,205,536
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits		$	568,808			$	453,690
Savings accounts			55,079				50,153
Certificates of deposit			1,182,359				1,281,457
Total deposits			1,806,246				1,785,300
Borrowings:
Federal funds purchased and other short term borrowings			44,310				29,193
Securities sold under agreements to repurchase			3,757,411				3,761,121
Advances from FHLB			281,675				308,442
FDIC-guaranteed term notes			105,112				—
Subordinated capital notes			36,083				36,083
Total borrowings			4,224,591				4,134,839
Securities purchased but not yet received			112,628				398
Accrued expenses and other liabilities			23,130				23,682
Total liabilities			6,166,595				5,944,219
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; 25,739,397 shares issued; 24,222,778 shares outstanding (December 31, 2008 - 25,739,397; 24,297,132)			25,739				25,739
Additional paid-in capital			212,784				212,625
Legal surplus			45,471				43,016
Retained earnings			71,353				51,233
Treasury stock, at cost 1,516,619 shares (December 31, 2008 - 1,442,265 shares)			(17,164	)			(17,109	)
Accumulated other comprehensive loss, net of tax of $1,825 (December 31, 2008 - $6,004)			(86,832	)			(122,187	)
Total stockholders’ equity			319,351				261,317
Commitments and Contingencies
Total liabilities and stockholders’ equity		$	6,485,946			$	6,205,536

See notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 2009 AND 2008
(In thousands, except per share data)

		Quarter ended March 31,
		2009				2008
Interest income:
Loans		$	18,320			$	19,828
Mortgage-backed securities			50,708				39,501
Investment securities and other			14,903				22,772
Total interest income			83,931				82,101
Interest expense:
Deposits			13,823				12,429
Securities sold under agreements to repurchase			35,799				40,240
Advances from FHLB and other borrowings			3,096				3,821
FDIC-guaranteed term notes			112				—
Subordinated capital notes			436				702
Total interest expense			53,266				57,192
Net interest income			30,665				24,909
Provision for loan losses			3,200				1,650
Net interest income after provision for loan losses			27,465				23,259
Non-interest income:
Financial service revenues			3,114				4,240
Banking service revenues			1,393				1,527
Investment banking revenues (losses)			(12	)			738
Mortgage banking activities			2,153				1,006
Net gain (loss) on:
Sale of securities			10,340				9,324
Derivatives			434				(7,803	)
Trading securities			(27	)			(17	)
Other investments			13				100
Foreclosed real estate			(162	)			(250	)
Other			—				(1	)
Total non-interest income, net			17,246				8,864
Non-interest expenses:
Compensation and employees’ benefits			7,724				7,715
Occupancy and equipment			3,489				3,287
Professional and service fees			2,608				1,880
Advertising and business promotion			1,204				1,074
Insurance			815				602
Taxes, other than payroll and income taxes			646				611
Electronic banking charges			540				418
Loan servicing expenses			383				331
Communication			379				325
Directors and investor relations			349				278
Clearing and wrap fees expenses			330				294
Other			806				915
Total non-interest expenses			19,273				17,730
Income before income taxes			25,438				14,393
Income tax expense (benefit)			690				(2,455	)
Net income			24,748				16,848
Less: Dividends on preferred stock			(1,201	)			(1,201	)
Income available to common shareholders		$	23,547			$	15,647
Income per common share:
Basic		$	0.97			$	0.65
Diluted		$	0.97			$	0.64
Average common shares outstanding			24,245				24,164
Average potential common shares-options			3				125
Average diluted common shares outstanding			24,248				24,289
Cash dividends per share of common stock		$	0.04			$	0.14

See notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE QUARTERS ENDED MARCH 31, 2009 AND 2008
(In thousands)

		Quarter Ended March 31,
CHANGES IN STOCKHOLDERS’ EQUITY:		2009				2008
Preferred stock:
Balance at beginning and end of period		$	68,000			$	68,000
Common stock:
Balance at beginning of period			25,739				25,557
Stock options exercised			—				175
Balance at end of period			25,739				25,732
Additional paid-in capital:
Balance at beginning of period			212,625				210,073
Stock-based compensation expense			159				73
Stock options exercised			—				1,910
Balance at end of period			212,784				212,056
Legal surplus:
Balance at beginning of period			43,016				40,573
Transfer from retained earnings			2,455				1,567
Balance at end of period			45,471				42,140
Retained earnings:
Balance at beginning of period			51,233				45,296
Net income			24,748				16,848
Cash dividends declared on common stock			(972	)			(3,399	)
Cash dividends declared on preferred stock			(1,201	)			(1,201	)
Transfer to legal surplus			(2,455	)			(1,567	)
Balance at end of period			71,353				55,977
Treasury stock:
Balance at beginning of period			(17,109	)			(17,023	)
Stock used to match defined contribution plan 1165(e)			126				74
Stock purchased			(181	)			(235	)
Balance at end of period			(17,164	)			(17,184	)
Accumulated other comprehensive loss, net of tax:
Balance at beginning of period			(122,187	)			(13,015	)
Other comprehensive income (loss), net of tax			35,355				(34,948	)
Balance at end of period			(86,832	)			(47,963	)
Total stockholders’ equity		$	319,351			$	338,758

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE QUARTERS ENDED MARCH 31, 2009 AND 2008
(In thousands)

		Quarter Ended March 31,
COMPREHENSIVE INCOME		2009				2008
Net income		$	24,748			$	16,848
Other comprehensive income (loss):
Unrealized gain (loss) on securities available-for-sale			49,874				(28,036	)
Realized gain on investment securities available-for-sale included in net income			(10,340	)			(9,324	)
Income tax effect related to unrealized loss (gain) on securities available-for-sale			(4,179	)			2,412
Other comprehensive income (loss) for the period			35,355				(34,948	)
Comprehensive income (loss)		$	60,103			$	(18,100	)

See notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2009 AND 2008
(In thousands)

		Quarters Ended March 31,
		2009				2008
Cash flows from operating activities:
Net income		$	24,748			$	16,848
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of deferred loan origination fees, net of costs			51				(100	)
Amortization of premiums, net of accretion of discounts			740				(256	)
Depreciation and amortization of premises and equipment			1,468				1,275
Deferred income tax expense (benefit)			862				(157	)
Provision for loan losses			3,200				1,650
Common stock used to match defined contribution plan 1165(e)			126				74
Stock-based compensation			159				73
(Gain) loss on:
Sale of securities available-for-sale			(10,340	)			(9,324	)
Mortgage banking activities			(2,153	)			(1,006	)
Derivatives			(434	)			7,803
Sale of foreclosed real estate			162				250
Originations and purchases of loans held-for-sale			(57,553	)			(28,142	)
Proceeds from sale of loans held-for-sale			22,980				7,293
Net decrease (increase) in:
Trading securities			(352	)			1,029
Accrued interest receivable			5,329				15,289
Other assets			(6,891	)			(5,364	)
Net decrease in:
Accrued interest on deposits and borrowings			(2,071	)			(729	)
Other liabilities			(544	)			(1,740	)
Net cash provided by (used in) operating activities			(20,513	)			4,766
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale			(2,341,384	)			(2,389,555	)
Equity options			(790	)			(484	)
FHLB stock			(13,199	)			(4,835	)
Maturities and redemptions of:
Investment securities available-for-sale			1,089,870				1,227,478
Investment securities held-to-maturity			—				215,533
Other investments			—				1,511
FHLB stock			14,400				4,835
Proceeds from sales of:
Investment securities available-for-sale			1,360,318				713,216
Loans receivable			15,138				—
Foreclosed real estate			2,728				969
Premises and equipment			5				15
Origination and purchase of loans, excluding loans held-for-sale			(29,726	)			(38,097	)
Principal repayments of loans			30,980				39,158
Additions to premises and equipment			(1,829	)			(1,098	)
Net cash provided by (used in) investing activities			126,511				(231,354	)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits			30,317				202,613
Securities sold under agreements to repurchase			—				(13,388	)
Federal funds purchased			15,117				9,057
Proceeds from:
Issuance of FDIC-guaranted term notes			105,000				—
Advances from FHLB			760,680				248,150
Exercise of stock options			—				2,085
Repayments of advances from FHLB			(787,380	)			(248,150	)
Purchase of treasury stock			(181	)			(235	)
Termination of derivative instrument			—				(7,875	)
Dividends paid on common and preferred stock			(2,173	)			(4,600	)
Net cash provided by financing activities			121,380				187,657
Net change in cash and due from banks			227,378				(38,931	)
Cash and due from banks at beginning of period			66,372				88,983
Cash and due from banks at end of period		$	293,750			$	50,052
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
Interest paid		$	55,337			$	57,921
Mortgage loans securitized into mortgage-backed securities		$	33,355			$	12,246
Securities sold but not yet delivered		$	289,565			$	26,995
Securities purchased but not yet received		$	112,628			$	101,375
Transfer from loans to foreclosed real estate		$	3,409			$	1,131

See notes to unaudited consolidated financial statements.

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 March 31, 2009, and December 31, 2008, and the consolidated results of operations and cash flows for the quarters ended March 31, 2009 and 2008. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. The results of operations and cash flows for the periods ended March 31, 2009 and 2008 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, 2008, included in the Group’s 2008 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. Note 9 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 23 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. 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.

Significant Accounting Policies

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

Allowance for Loan Losses

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

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

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

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

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

Financial Instruments

Certain financial instruments including derivatives, trading securities and investment securities available-for-sale are recorded at fair value and unrealized gains and losses are recorded in other comprehensive income or as part of non-interest income, as appropriate. Fair values are based on listed market prices, if available. If listed market prices are not available, fair value is determined based on other relevant factors, including price quotations for similar instruments. The fair values of certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments as well as time value and yield curve or volatility factors underlying the positions.

SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), 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 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.

Impairment of Investment Securities

The Group conducts periodic reviews to identify and evaluate each investment in an unrealized loss position, in accordance with FASB Staff Position No. 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (FSP FAS 115-1). An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in accumulated other comprehensive income for available-for-sale securities, while such losses related to held-to-maturity securities are not recorded, as these investments are carried at their amortized cost (less any other-than-temporary impairment). Regardless of the classification of the securities as available-for-sale or held-to-maturity, the Group has assessed each position for credit impairment.

Factors considered in determining whether a loss is temporary include:

	•		the length of time and the extent to which fair value has been below cost;
	•		the severity of the impairment;
	•		the cause of the impairment and the financial condition and near-term prospects of the issuer;
	•		activity in the market of the issuer which may indicate adverse credit conditions; and
	•		the Group’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

The Group’s review for impairment generally entails:

	•		identification and evaluation of investments that have indications of possible other-than-temporary impairment;
	•		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; and
	•		documentation of the results of these analyses.

The extent of the Group’s analysis regarding credit quality and the stress on assumptions used in the analysis have been refined for securities where the current fair value or other characteristics of the security warrant. Given the declines in fair values and length of time in which non-agency collateralized mortgage obligations and structured credit investments have been in an unrealized loss position, general concerns regarding housing prices and the delinquency and default rates on the mortgage loans and credit spreads underlying these securities, the Group’s analysis for identifying securities for which all principal and interest contractually due might not be recovered have been performed.

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 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 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.

The Group follows the provisions of Financial Accounting Standard Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”, which contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS 109. 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 to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated statements of operations did not change as a result of implementing the provisions of FIN 48.

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.

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

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

		Quarter Ended
		March 31,
		2009				2008
Weighted Average Assumptions:
Dividend yield			4.64	%			4.40	%
Expected volatility			33.60	%			31.86	%
Risk-free interest rate			4.49	%			4.33	%
Expected life (in years)			8.5				8.5

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

Recent Accounting Developments:

FASB Staff Position (“FSP”) FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”

FSP FAS 157-4, issued by the FASB in April 2009, provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of FSP FAS 157-4 are effective for the Group’s interim period ending after June 15, 2009, but entities may early adopt for the interim and annual periods ending after March 15, 2009. Management decided not to do an early adoption, and is currently evaluating the effect that the provisions of FSP FAS 157-4 may have on the Group’s statements of financial condition and income.

FSP FAS 115-2 and FAS 124-2, issued by the FASB in April 2009, amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. These FSPs do not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Group’s interim period ending after June 15, 2009, but entities may early adopt for the interim and annual periods ending after March 15, 2009. Management decided not to do an early adoption, and is currently evaluating the effect that the provisions of FSP FAS 115-2 and FAS 124-2 may have on the Group’s statements of financial condition and income.

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”

FSP FAS 107-1 and APB 28-1, issued by the FASB in April 2009, amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. These FSPs also amend APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Group’s interim period ending after June 15, 2009, but entities may early adopt for the interim and annual periods ending after March 15, 2009. Management decided not to do an early adoption, but as FSP FAS 107-1 and APB 28-1 amend only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Group’s statements of financial condition and income.

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 or less at the date of acquisition. At March 31, 2009, and December 31, 2008, cash equivalents included as part of cash and due from banks amounted to $270.9 million and $52.0 million, respectively.

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the investment securities as of March 31, 2009, and December 31, 2008, were as follows:

		March 31, 2009 (In thousands)
						Gross				Gross								Weighted
		Amortized				Unrealized				Unrealized				Fair				Average
		Cost				Gains				Losses				Value				Yield
Available-for-sale
Obligations of US Government sponsored agencies		$	664,146			$	5,451			$	54			$	669,543				5.98	%
Puerto Rico Government and agency obligations			80,616				5				8,227				72,394				5.39	%
Structured credit investments			176,536				1,597				44,318				133,815				3.57	%
Total investment securities			921,298				7,053				52,599				875,752
FNMA and FHLMC certificates			2,146,614				44,540				57				2,191,097				4.95	%
GNMA certificates			301,198				8,894				206				309,886				5.38	%
CMOs issued by US Government sponsored agencies			660,153				17,402				—				677,555				5.32	%
Non-agency collateralized mortgage obligations			619,232				—				117,989				501,243				8.43	%
Total mortgage-backed-securities and CMOs			3,727,197				70,836				118,252				3,679,781
Total securities available-for-sale		$	4,648,495			$	77,889			$	170,851			$	4,555,533				5.60	%

		December 31, 2008 (In thousands)
						Gross				Gross								Weighted
		Amortized				Unrealized				Unrealized				Fair				Average
		Cost				Gains				Losses				Value				Yield
Available-for-sale
Obligations of US Government sponsored agencies		$	941,144			$	7,172			$	6,400			$	941,916				5.37	%
Puerto Rico Government and agency obligations			91,599				597				9,307				82,889				5.40	%
Structured credit investments			176,127				3,469				43,415				136,181				4.25	%
Total investment securities			1,208,870				11,238				59,122				1,160,986
FNMA and FHLMC certificates			1,521,428				25,527				205				1,546,750				5.51	%
GNMA certificates			332,071				4,206				496				335,781				5.76	%
CMOs issued by US Government sponsored agencies			352,579				202				1,755				351,026				5.34	%
Non-agency collateralized mortgage obligations			637,626				—				107,962				529,664				8.49	%
Total mortgage-backed-securities and CMOs			2,843,704				29,935				110,418				2,763,221
Total securities available-for-sale		$	4,052,574			$	41,173			$	169,540			$	3,924,207				5.90	%

The amortized cost and fair value of the Group’s investment securities available-for-sale at March 31, 2009, 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
		Amortized Cost				Fair Value
Investment securities
Due after 1 to 5 years		$	9,000			$	9,000
Due after 5 to 10 years			228,747				213,952
Due after 10 years			683,551				652,800
			921,298				875,752
Mortgage-backed securities
Due after 5 to 10 years			21,427				21,754
Due after 10 years			3,705,770				3,658,027
			3,727,197				3,679,781
		$	4,648,495			$	4,555,533

Keeping with the Group’s investment strategy, during the quarters ended March 31, 2009 and 2008, 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 sales 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, 2009, the Group sold $260.0 million of discount notes with minimum aggregate gross gains of approximately $4,000 and sold $107.0 million of discount notes with minimum aggregate gross losses of approximately $4,000.

The table below presents an analysis on a trade date accounting of the gross realized gains and losses by category for the quarters ended March 31, 2009 and 2008:

 

In thousands
Description		Original Face				Original Cost				Sale Price				Sale Book Value				Gross Gains				Gross Losses
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

 

In thousands																		Gross				Gross
Description		Original Face				Original Cost				Sale Price				Sale Book Value				Gains				Losses
Sale of Securities Available-for-Sale
Investment securities
Puerto Rico Government and agency obligations		$	830			$	833			$	852			$	837			$	15			$	—
Obligations of U.S. Government sponsored agencies			695,000				694,665				703,968				694,747				9,221				—
Total investment securities			695,830				695,498				704,820				695,584				9,236				—
Mortgage-backed securities and CMOs
GNMA certificates			9,959				10,225				8,396				8,308				88				—
Total mortgage-backed securities and CMOs			9,959				10,225				8,396				8,308				88				—
Total		$	705,789			$	705,723			$	713,216			$	703,892			$	9,324			$	—

The following table shows the Group’s gross unrealized losses and fair value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2009, and December 31, 2008.

March 31, 2009

 

Available-for-sale

 

(In thousands)

		Less than 12 months
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Non-agency collaterized mortgage obligations		$	20,586			$	2,610			$	17,976
Structured credit investments			29,272				2,129				27,143
Obligations of US Government sponsored agencies			19,285				54				19,231
GNMA certificates			3,920				29				3,891
FNMA and FHLMC certificates			6,350				16				6,334
			79,413				4,838				74,575

		12 months or more
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Non-agency collaterized mortgage obligations			598,646				115,379				483,267
Structured credit investments			121,717				42,189				79,528
Puerto Rico Government and agency obligations			71,236				8,227				63,009
GNMA certificates			8,934				177				8,757
FNMA and FHLMC certificates			1,011				41				970
			801,544				166,013				635,531

		Total
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Non-agency collaterized mortgage obligations			619,232				117,989				501,243
Structured credit investments			150,989				44,318				106,671
Puerto Rico Government and agency obligations			71,236				8,227				63,009
Obligations of US Government sponsored agencies			19,285				54				19,231
GNMA certificates			12,854				206				12,648
FNMA and FHLMC certificates			7,361				57				7,304
		$	880,957			$	170,851			$	710,106

December 31, 2008

 

Available-for-sale

 

(In thousands)

		Less than 12 months
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Non-agency collaterized mortgage obligations		$	234,198			$	48,564			$	185,634
CMOs issued by US Government sponsored agencies			334,690				1,756				332,934
Obligations of US Government sponsored agencies			325,500				6,400				319,100
Structured credit investments			50,262				11,815				38,447
Puerto Rico Government and agency obligations			252				1				251
FNMA and FHLMC certificates			52,519				148				52,371
GNMA certificates			19,582				229				19,353
			1,017,003				68,913				948,090

		12 months or more
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Non-agency collaterized mortgage obligations			403,428				59,398				344,030
Structured credit investments			100,548				31,599				68,949
Puerto Rico Government and agency obligations			71,218				9,306				61,912
FNMA and FHLMC certificates			1,025				57				968
GNMA certificates			9,084				267				8,817
			585,303				100,627				484,676

		Total
		Amortized				Unrealized				Fair
		Cost				Loss				Value
Non-agency collaterized mortgage obligations			637,626				107,962				529,664
CMOs issued by US Government sponsored agencies			334,690				1,756				332,934
Obligations of US Government sponsored agencies			325,500				6,400				319,100
Structured credit investments			150,810				43,414				107,396
Puerto Rico Government and agency obligations			71,470				9,307				62,163
FNMA and FHLMC certificates			53,544				205				53,339
GNMA certificates			28,666				496				28,170
		$	1,602,306			$	169,540			$	1,432,766

At March 31, 2009, the Group’s available-for-sale investment securities portfolio included approximately $619.2 million in non-agency collateralized mortgage obligations with unrealized losses of approximately $118.0 million. The Group constantly monitors such non-agency mortgage-backed securities to measure the collateral performance and gauge trends for these 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. The collateral for all of the non-agency collateralized mortgage obligations, except for the ALT A CMO which is more thoroughly discussed below, has performed well since the issuance of each security, and the estimated future collateral losses are lower than the subordination levels of these securities. 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 model results as of March 31, 2009 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.

In the specific case of the ALT A CMO, this security has been carefully monitored during the past year. As of September 30, 2008, the Group considered that the deterioration in the performance of underlying loans, including increases in delinquency and loss experience, resulted in projected losses which exceeded the tranche subordination. As a result, an other than temporary impairment amounting to $38.9 million was recorded at that time. As of March 31, 2009, the Group updated its estimate of fair value of the security considering new market conditions. Based on the Group’s estimate using market participant data, projected losses in excess of remaining subordination at that date were not greater that the estimated losses contemplated by projected cash flow estimates determined upon previous impairment of the security. Consequently, the Group has determined that no additional impairment charge is necessary as of March 31, 2009.

At March 31, 2009, the Group held structured credit investments amounting to $176.5 million in the available-for-sale portfolio, with net unrealized losses of approximately $42.7 million. The Group’s structured credit investments portfolio consist of two types of instruments: synthetic collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs). At March 31, 2009, the Group estimated 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 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 cash flow model that provided estimated projected losses for each security. The model results as of March 31, 2009 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, 2009, 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 using a third party provider and dealer quotes. The Group’s management believes that the unrealized losses of such other securities at March 31, 2009, are 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, 2009, the Group has the intent and ability to hold these investments until a period of time sufficient to allow for any recovery in fair value or maturity up to (or beyond) the cost of these investments.

At March 31, 2009, residential mortgage loans amounting to $606.4 million were pledged to secure advances and borrowings from the FHLB. Investment securities with fair values totaling $4.206 billion, $83.9 million, and $43.8 million at March 31, 2009, were pledged to secure securities sold under agreements to repurchase, public fund deposits and other funds, respectively. Also, investment securities with fair value totaling $114,000 at March 31, 2009, were pledged to the Puerto Rico Treasury Department.

As of March 31, 2009, investment securities available-for-sale not pledged amounted to $221.8 million. As of March 31, 2009, mortgage loans not pledged amounted to $392.8 million.

NOTE 4 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans

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, 2009, and December 31, 2008, was as follows:

		(In thousands)
		March 31, 2009				December 31, 2008
Loans secured by real estate:
Residential mortgage loans		$	945,753			$	976,569
Home equity loans, secured personal loans and others			22,581				23,507
Commercial			124,572				145,377
Deferred loan fees, net			(3,340	)			(3,197	)
			1,089,566				1,142,256
Other loans:
Commercial			69,573				41,700
Personal consumer loans and credit lines			21,330				23,054
Deferred loan fees, net			(169	)			(167	)
			90,734				64,587
Loans receivable			1,180,300				1,206,843
Allowance for loan losses			(15,147	)			(14,293	)
Loans receivable, net			1,165,153				1,192,550
Mortgage loans held-for-sale			34,278				26,562
Total loans, net		$	1,199,431			$	1,219,112

Allowance for Loan Losses

The Group maintains an allowance for loan losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. The Group’s allowance for loan losses policy provides for a detailed quarterly analysis of probable losses. The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial condition of borrowers and other pertinent factors.

While management uses available information in estimating probable loan losses, future additions to the allowance may be required based on factors beyond the Group’s control. Refer to Table 4 of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details related to the changes in the allowance for loan losses for the quarters ended March 31, 2009 and 2008.

The Group evaluates all loans, some individually, and others as homogeneous groups, for purposes of determining impairment. At March 31, 2009, and December 31, 2008, the total balance of impaired commercial loans was $7.7 million and $4.6 million, respectively. The impaired commercial loans were measured based on the fair value of collateral. The Group’s management determined that impaired loans required a valuation allowance in accordance with FASB Statement No. 114 “Accounting by Creditors for Impairment of a Loan” of approximately $1.0 million at March 31, 2009. No allowance was required at March 31, 2008.

NOTE 5 — OTHER ASSETS

Other assets at March 31, 2009, and December 31, 2008 consist of the following:

		(In thousands)
		March 31, 2009				December 31, 2008
Mortgage tax credits		$	5,047			$	5,047
Debt issuance costs			4,381				900
Servicing asset			3,467				2,819
Prepaid expenses			2,817				3,433
Goodwill			2,006				2,006
Investment in Statutory Trust			1,086				1,086
Accounts receivable and other assets			12,013				8,635
		$	30,817			$	23,926

NOTE 6 — BORROWINGS

          Short Term Borrowings

At March 31, 2009, short term borrowings amounted to $44.3 million (December 31, 2008 — $29.2 million) which mainly consist of federal funds purchased with a weighted average rate of 0.70% (December 31, 2008 — 1.49%).

          Securities Sold under Agreements to Repurchase

At March 31, 2009, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties with whom the repurchase agreements were transacted. The counterparties have agreed to resell to the Group the same or similar securities at the maturity of the agreements.

At March 31, 2009, securities sold under agreements to repurchase (classified by counterparty), excluding accrued interest in the amount of $7.4 million, were as follows:

		(In thousands)
						Fair Value of
		Borrowing				Underlying
		Balance				Collateral
Citigroup		$	1,800,000			$	2,138,365
Credit Suisse First Boston Corporation			1,250,000				1,430,626
UBS Financial Services			500,000				589,334
JP Morgan Chase			100,000				109,565
Merrill Lynch			100,000				110,505
Total		$	3,750,000			$	4,378,395