ORIENTAL FINANCIAL GROUP, INC.

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 June 30, 2008


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

For the transition period from to

Commission File Number 001-12647

Oriental Financial Group Inc.


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

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

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

Yes þ No o

Indicate by check mark whether the registrant 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
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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

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

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.

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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.

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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.

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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.

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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

-5-

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.

-6-

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,

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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:

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	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:

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	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	%

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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	$	—

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June 30, 2008

Available-for-sale

(In thousands)


	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Obligations of U.S. government entities	$	19,285	$	210	$	19,075
Mortgage-backed securities and CMOs		1,339,361		30,260		1,309,101
Structured credit investments		60,000		14,100		45,900

		1,418,646		44,570		1,374,076


	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Puerto Rico government and agency obligations		16,184		706		15,478
Mortgage-backed securities and CMOs		592,327		49,535		542,792
Structured credit investments		25,548		2,340		23,208

		634,059		52,581		581,478


	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Obligations of U.S. government entities		19,285		210		19,075
Puerto Rico government and agency obligations		16,184		706		15,478
Mortgage-backed securities and CMOs		1,931,688		79,795		1,851,893
Structured credit investments		85,548		16,440		69,108

	$	2,052,705	$	97,151	$	1,955,554

Held-to-maturity

(In thousands)


	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Mortgage-backed securities and CMOs	$	636,823	$	6,470	$	630,353
Structured credit investments		96,171		29,682		66,489

		732,994		36,152		696,842

12 months or more

Amortized

Unrealized

Fair

Cost

Loss

Value

Puerto Rico government and agency obligations

55,164

3,745

51,419

Mortgage-backed securities and CMOs

83,618

3,126

80,492

138,782

6,871

131,911


	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
Puerto Rico government and agency obligations		55,164		3,745		51,419
Mortgage-backed securities and CMOs		720,441		9,596		710,845
Structured credit investments		96,171		29,682		66,489

	$	871,776	$	43,023	$	828,753

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December 31, 2007

Available-for-sale

(In thousands)


	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value

Puerto Rico Government and agency obligations	$	1,996	$	325	$	1,671
Mortgage-backed-securities and CMOs		118,616		336		118,280
Structured credit investments		85,548		7,188		78,360

		206,160		7,849		198,311

12 months or more

Amortized

Unrealized

Fair

Cost

Loss

Value

Puerto Rico Government and agency obligations

14,152

612

13,540

Mortgage-backed-securities and CMOs

634,910

12,608

622,302

649,062

13,220

635,842


	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value

Puerto Rico Government and agency obligations		16,148		937		15,211
Mortgage-backed-securities and CMOs		753,526		12,944		740,582
Structured credit investments		85,548		7,188		78,360

	$	855,222	$	21,069	$	834,153

Held-to-maturity

(In thousands)


	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value

Puerto Rico Government and agency obligations	$	4,238	$	54	$	4,184
Mortgage-backed-securities and CMOs		18,403		129		18,274
Structured credit investments		96,171		11,949		84,222

		118,812		12,132		106,680


	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value

Obligations of US Government sponsored agencies		124,998		1,980		123,018
Puerto Rico Government and agency obligations		50,968		3,727		47,241
Mortgage-backed-securities and CMOs		373,122		5,162		367,960

		549,088		10,869		538,219


	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value

Obligations of US Government sponsored agencies		124,998		1,980		123,018
Puerto Rico Government and agency obligations		55,206		3,781		51,425
Mortgage-backed-securities and CMOs		391,525		5,291		386,234
Structured credit investments		96,171		11,949		84,222

	$	667,900	$	23,001	$	644,899

At June 30, 2008, mortgage-backed securities include approximately $710.0 million in non-agency collateralized mortgage obligations with unrealized losses of $53.4 million in the Group’s available-for-sale investment securities portfolio. These obligations are collateralized by pools of mortgage loans originated in the U.S., and are senior classes having subordination of losses ranging from 4.7% to 16.6%, which provide the capacity to absorb estimated collateral losses. These issues, including one that is backed by Alternative-A (Alt-A) loan collateral originated in 2006, are rated “AAA” by Standard & Poor’s and “Aaa” by Moody’s.

At June 30, 2008, the investment securities portfolio includes structured credit investments issued by U.S. institutions with balances of $85.5 million in the available-for-sale portfolio, and $96.2 million in the held-to-maturity portfolio, with unrealized losses of approximately $16.4 million and $29.7 million, respectively. The unrealized loss position is a reflection of the credit markets’ recent activity, with credit spreads widening significantly. The underlying collateral on the structures that the Group owns has performed adequately, with no defaults to date, and none of the structured credit investments has been downgraded.

All other securities in an unrealized loss position at June 30, 2008, 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

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of such other securities at June 30, 2008, are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuer.

At June 30, 2008, management 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. The Group is closely monitoring these securities for any decline in value that the Group’s management may consider to be other-than-temporary.

NOTE 3 — LOANS 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 June 30, 2008, and December 31, 2007, was as follows:


	(In thousands)
	June 30, 2008			December 31, 2007

Loans secured by real estate:
Residential mortgage loans	$	968,875		$	960,704
Home equity loans, secured personal loans and others		26,210			28,783
Commercial		153,509			135,070
Deferred loan fees, net		(3,320	)		(2,887	)

		1,145,274			1,121,670

Other loans:
Commercial		17,335			22,128
Personal consumer loans and credit lines		25,479			29,245
Deferred loan (fees) cost, net		(168	)		12

		42,646			51,385

Loans receivable		1,187,920			1,173,055
Allowance for loan losses		(11,885	)		(10,161	)

Loans receivable, net		1,176,035			1,162,894
Mortgage loans held-for-sale		42,122			16,672

Total loans, net	$	1,218,157		$	1,179,566

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 and six-month periods ended June 30, 2008 and 2007.

The Group evaluates all loans, some individually, and others as homogeneous groups, for purposes of determining impairment. At June 30, 2008, and December 31, 2007, the total balance of impaired loans was $1.6 million and $1.1 million, respectively. The impaired loans were measured based on the fair value of collateral. The Group’s management determined that impaired loans did not require a valuation allowance in accordance with SFAS 114.

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NOTE 4 — PLEDGED ASSETS

At June 30, 2008, residential mortgage loans amounting to $500.0 million were pledged to secure advances and borrowings from the FHLB. Investment securities with fair values totaling $4.133 billion, $130.2 million, and $113.0 million at June 30, 2008, were pledged to secure securities sold under agreements to repurchase, public fund deposits and other funds, respectively. Also, investment securities with fair value totaling $120,000 at June 30, 2008, were pledged to the Puerto Rico Treasury Department.

As of June 30, 2008, investment securities available-for-sale and held-to-maturity not pledged amounted to $168.9 million and $76.4 million, respectively. As of June 30, 2008, mortgage loans not pledged amounted to $533.8 million.

NOTE 5 — OTHER ASSETS

Other assets at June 30, 2008, and December 31, 2007 include the following:


	(In thousands)
	June 30, 2008		December 31, 2007
Prepaid expenses	$	5,004	$	2,645
Mortgage tax credits		4,992		69
Servicing asset		2,934		2,526
Goodwill		2,006		2,006
Investment in Statutory Trust		1,086		1,086
Deferred charges		893		910
Accounts receivable and other assets		10,628		7,082

	$	27,543	$	16,324

Mortgage tax credits in the table above, are related to the approval on December 14, 2007, of the Act Number 97 (“the Act”) to stimulate the economy and private investment by stimulating the real estate industry, in particular the sale of housing. Under the terms of the Act certain home mortgage loans qualify for a government credit of up to $25,000. The Group disburses 100% of the residence purchase price not covered by down payment and records a loan for the amount disbursed less the government credit. The government credit is recorded as a mortgage tax credit, which can be used as a reduction of the Group’s income tax liability commencing with calendar year 2008. Mortgage tax credits are transferable.

NOTE 6 — BORROWINGS

Short Term Borrowings

At June 30, 2008, short term borrowings amounted to $41.6 million (December 31, 2007 — $27.5 million) which mainly consist of federal funds purchased with a weighted average rate of 1.75% (December 31, 2007 — 1.83%).

Securities Sold under Agreements to Repurchase

At June 30, 2008, 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.

Securities sold under agreements to repurchase, excluding accrued interest in the amount of $10.8 million at June 30, 2008, mature as follows:

-16-


	(In thousands)
	Balance
Short-term repurchase agreements
Due within 30 days	$	50,000


Structured repurchase agreements
Due after 1 to 3 years		100,000
Due after 3 to 5 years		1,800,000
Due after 5 to 10 years		1,850,000

Sub-total structured repurchase agreements		3,750,000


Total repurchase agreements	$	3,800,000

During the fourth quarter of 2006 and throughout 2007, the Group restructured most of its short-term repurchase agreements portfolio into longer-term, structured repurchase agreements. The terms of these structured positions range between three and ten years, and the counterparts have the right to exercise put options before their contractual maturity from one to three years after the agreements’ settlement dates. The following table shows a summary of these agreements and their terms at June 30, 2008:

(In thousands)


		Weighted-
Borrowing		Average			Settlement
Balance		Coupon			Date		Maturity Date		Next Put Date
$	450,000		4.34	%		12/28/2006		12/28/2011		12/28/2008
	450,000		4.22	%		12/28/2006		12/28/2011		9/28/2008
	250,000		4.44	%		3/02/2007		3/02/2017		3/2/2009
	500,000		4.46	%		3/02/2007		3/02/2017		3/2/2009
	150,000		4.31	%		3/06/2007		12/06/2012		12/7/2009
	900,000		3.71	%		3/06/2007		3/06/2017		3/6/2009
	350,000		4.26	%		5/09/2007		5/09/2012		8/9/2008
	100,000		3.71	%		3/06/2007		3/06/2017		3/6/2009
	100,000		4.67	%		7/27/2007		7/27/2014		1/27/2010
	100,000		4.39	%		8/14/2007		8/16/2010		8/14/2008
	100,000		4.50	%		8/14/2007		8/14/2012		8/14/2009
	300,000		4.47	%		9/13/2007		9/13/2012		9/13/2009

$	3,750,000		4.19	%

Advances from the Federal Home Loan Bank

At June 30, 2008, the advances from the FHLB, excluding accrued interest in the amount of $1.9 million, mature as follows:


	(In thousands)
	Balance
Short-term FHLB advances
Due after 60 to 90 days	$	50,000


Structured FHLB advances
Due after 3 to 5 years		225,000
Due after 5 to 10 years		55,000

Sub-total structured FHLB advances		280,000


Total FHLB advances	$	330,000

-17-

During 2007, the Group restructured most of its FHLB advances portfolio into longer-term, structured advances. The terms of these advances range between five and seven years, and the FHLB has the right to exercise put options before the contractual maturity of the advances from six months to one year after the advances’ settlement dates. The following table shows a summary of these advances and their terms at June 30, 2008:

(In thousands)


		Weighted-
Borrowing		Average			Settlement
Balance		Coupon			Date		Maturity Date		Next Put Date
$	25,000		4.37	%		5/04/2007		5/04/2012		8/5/2008
	25,000		4.20	%		5/08/2007		5/08/2014		8/8/2008
	30,000		4.22	%		5/11/2007		5/11/2014		8/13/2008
	25,000		4.57	%		7/24/2007		7/24/2012		7/24/2008
	25,000		4.26	%		7/30/2007		7/30/2012		7/30/2008
	50,000		4.33	%		8/10/2007		8/10/2012		8/10/2008
	100,000		4.09	%		8/16/2007		8/16/2012		8/16/2008

$	280,000		4.24	%

Subordinated Capital Notes

Subordinated capital notes amounted to $36.1 million at June 30, 2008, and December 31, 2007.

In October 2001 and August 2003, the Statutory Trust I and the Statutory Trust II, respectively, special purpose entities of the Group, were formed for the purpose of issuing trust redeemable preferred securities. In December 2001 and September 2003, $35.0 million of trust redeemable preferred securities were issued by each of the Statutory Trust I and the Statutory Trust II, respectively, as part of pooled underwriting transactions. Pooled underwriting involves participating with other bank holding companies in issuing the securities through a special purpose pooling vehicle created by the underwriters.

The proceeds from these issuances were used by the Statutory Trust I and the Statutory Trust II to purchase a like amount of floating rate junior subordinated deferrable interest debentures (“subordinated capital notes”) issued by the Group. The call provision of the subordinated capital note purchased by the Statutory Trust I was exercised by the Group in December 2006. The other subordinated capital note has a par value of $36.1 million, bears interest based on 3-month LIBOR plus 295 basis points (5.76% at June 30, 2008; 7.94% at December 31, 2007), payable quarterly, and matures on September 17, 2033. The subordinated capital note purchased by the Statutory Trust II may be called at par after five years (September 2008). The trust redeemable preferred securities have the same maturity and call provisions as the subordinated capital notes. The subordinated deferrable interest debentures issued by the Group are accounted for as a liability denominated as subordinated capital notes on the unaudited consolidated statements of financial condition.

The subordinated capital notes are treated as Tier 1 capital for regulatory purposes. Under Federal Reserve Board rules, restricted core capital elements, which are qualifying trust preferred securities, qualifying cumulative perpetual preferred stock (and related surplus) and certain minority interests in consolidated subsidiaries, are limited in the aggregate to no more than 25% of a bank holding company’s core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability.

NOTE 7 — DERIVATIVE ACTIVITIES

The Group may use various derivative instruments as part of its asset and liability management. These transactions involve both credit and market risks. The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. The actual risk of loss is the cost of replacing, at market, these contracts in the event of default by the counterparties. The Group controls the credit risk of its derivative financial instrument agreements through credit approvals, limits, monitoring procedures and collateral, when considered necessary.

Derivative instruments are generally negotiated over-the-counter (“OTC”) contracts. Negotiated OTC derivatives are generally entered into between two counterparties that negotiate specific contractual terms, including the underlying instrument, amount, exercise price and maturity.

-18-

The Group generally uses interest rate swaps and options in managing its interest rate risk exposure. Certain swaps were entered into to convert the forecasted rollover of short-term borrowings into fixed rate liabilities for longer periods and provide protection against increases in short-term interest rates. Under these swaps, the Group paid a fixed monthly or quarterly cost and received a floating thirty or ninety-day payment based on LIBOR. Floating rate payments received from the swap counterparties partially offset the interest payments to be made on the forecasted rollover of short-term borrowings.

During the six-month period ended June 30, 2008, losses of $7.6 million were recognized and reflected as “Derivatives” in the unaudited consolidated statements of income. This was mainly due to an interest-rate swap contract that the Group entered in on January 2008 to manage the Group’s interest rate risk exposure with a notional amount of $500 million. Such contract was subsequently terminated, resulting in a loss to the Group of approximately $7.9 million. For the six-month period ended June 30, 2007, gains of $8.4 million were recognized and reflected as “Derivatives” in the unaudited consolidated statements of income, which included and $8.2 million gain from the elimination of forecasted transactions on interest rate swaps unwound in 2006. There were no outstanding interest-rate swap contracts at June 30, 2008 and December 31, 2007.

The Group offers its customers certificates of deposit with an option tied to the performance of the Standard & Poor’s 500 stock market index. The Group uses option agreements with major broker-dealer companies to manage its exposure to changes in this index. Under the terms of the option agreements, the Group receives the average increase in the month-end value of the index in exchange for a fixed premium. The changes in fair value of the option agreements used to manage the exposure in the stock market in the certificates of deposit are recorded in earnings in accordance with SFAS No. 133, as amended.

There were no derivatives designated as a hedge as of June 30, 2008, and December 31, 2007. Derivatives not designated as a hedge, consist of purchased options used to manage the exposure to the stock market on stock indexed deposits with notional amounts of $150,335,000 and $152,530,000 as of June 30, 2008, and December 31, 2007, respectively; embedded options on stock indexed deposits with notional amounts of $141,524,605 and $147,073,000 as of June 30, 2008, and December 31, 2007, respectively.

At June 30, 2008, and December 31, 2007, the purchased options used to manage the exposure to the stock market on stock indexed deposits amounted represented and asset of $27.6 million and $40.7 million, respectively; the options sold to customers embedded in the certificates of deposit and recorded as deposits in the unaudited consolidated statement of financial condition, represented a liability of $26.2 million and $38.8 million, respectively.

NOTE 8 — FAIR VALUE

As discussed in Note 1, effective January 1, 2008, the Group adopted SFAS 157, which provides a framework for measuring fair value under GAAP.

Fair Value Measurement

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on valuations obtained from third-party pricing services for identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities (e.g. callable brokered CDs and medium-term notes elected for fair value option under SFAS 159) whose value is determined using a pricing model with

-19-

inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

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

The following is a description of the valuation methodologies used for instruments measured at fair value:

Investment securities

The fair value of investment securities is based on quoted market prices, when available, or market prices provided by recognized broker dealers. If listed prices or quotes are not available, fair values is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument. Structured credit investments and a non-agency collateralized mortgage obligation backed by Alternative-A (Alt-A) loan collateral originated in 2006 are not trading actively in the current market; accordingly, they do not exhibit readily observable prices. Based on their valuation methodology, such investments are classified as Level 3. The estimated fair value of the structured credit investments and the non-agency collateralized mortgage obligation backed by Alternative-A (Alt-A) loan collateral originated in 2006 are determined by using a third-party cash flow valuation model to calculate the present value of projected future cash flows. The assumptions used which are highly uncertain and require a high degree of judgment, include primarily market discount rates, current spreads, duration, leverage, delinquency and loss rates. The assumptions used are drawn from a combination of internal and external data sources. A third-party valuation of these investments, in which all economic assumptions are determined by this third-party (external-based valuation), is obtained at least on a quarterly basis and is used by management as a benchmark to evaluate the adequacy of the cash flow model and the reasonableness of the assumptions and fair value estimates developed internally for the internal-based valuation. The external-based valuations are analyzed and assumptions are evaluated and incorporated in the internal-based valuation model when deemed necessary and agreed by management.

Derivative instruments

The fair values of the derivative instruments were provided by valuation experts and counterparties. Certain derivatives with limited market activity are valued using externally developed models that consider unobservable market parameters. The Group offers its customers certificates of deposit with an option tied to the performance of the Standard & Poor’s 500 stock market index (S&P Index), and uses equity indexed option agreements with major broker-dealer companies to manage its exposure to changes in this index. Their fair value is obtained from counterparties or an external pricing source and validated by management. Based on their valuation methodology, are classified as Level 3. These options are tied in to Asian options whose payoff is linked to the average value of the S&P Index on a specific set of dates during the life of the option. The methodology uses an average rate option or a cash-settled option whose payoff is based on the difference between the expected average value of the S&P Index during the remaining life of the option and the strike price at inception. The assumptions used which are uncertain and require a degree of judgment, include primarily S&P Index volatility and leverage. The external-based valuations are analyzed and assumptions are evaluated and incorporated in either an internal-based valuation model when deemed necessary or compared to counterparties prices and agreed by management.

Assets and liabilities measured at fair value on a recurring basis, including financial liabilities for which the Group has elected the fair value option, are summarized below:


	June 30, 2008
	Fair Value Measurements
(In thousands)	Level 1		Level 2		Level 3

Investment securities available-for-sale	$	—	$	3,171,129	$	211,178
Money market instruments		44,902		—		—
Derivative asset		—		—		27,641
Derivative liability		—		—		(26,177	)

	$	44,902	$	3,171,129	$	212,642

-20-

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter and six-month period ended June 30, 2008.


	Total Fair Value Measurements									Total Fair Value Measurements
	(Quarter ended June 30, 2008)									(Six-month period ended June 30, 2008)
	Investment									Investment
	securities									securities
Level 3 Instruments Only	available			Derivative			Derivative			available			Derivative			Derivative
(In thousands)	for-sale			asset			liability			for-sale			asset			liability

Beginning balance	$	73,658		$	34,475		$	(32,806	)	$	78,360		$	40,709		$	(38,793	)
Total gains (losses) (realized/unrealized):
Included in earnings		—			(712	)		939			—			(3,873	)		4,172
Included in other comprehensive income		(4,550	)		—			—			(9,252	)		—			—
New instruments acquired		—			2,574			(2,541	)		—			3,384			(3,344	)
Principal repayment and amortization		—			(8,696	)		8,231			—			(12,579	)		11,788
Transfer of non-agency CMOs to Level 3		142,070			—			—			142,070			—			—


Ending balance	$	211,178		$	27,641		$	(26,177	)	$	211,178		$	27,641		$	(26,177	)

NOTE 9 — SEGMENT REPORTING

The Group segregates its businesses into the following major reportable segments: Banking, Treasury, and Financial Services. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Group’s organization, nature of products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Group measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production and fees generated. In March 2008, management decided to reclassify and present investment banking revenues in the Financial Services segment, rather than in the Treasury segment. This reclassification was retroactively presented in the table below.

Banking includes the Bank’s branches and mortgage banking, with traditional banking products such as deposits and mortgage, commercial and consumer loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate mortgage loans for the Group’s own portfolio, and Oriental Mortgage Corporation, the Bank’s mortgage lending subsidiary. As part of its mortgage banking activities, the Group may sell loans directly into the secondary market or securitize conforming loans into mortgage-backed securities.

The Treasury segment encompasses all of the Group’s asset and liability management activities such as: purchases and sales of investment securities, interest rate risk management, derivatives, and borrowings.

Financial services is comprised of the Bank’s trust division (Oriental Trust), the broker-dealer subsidiary (Oriental Financial Services Corp.), the insurance agency subsidiary (Oriental Insurance, Inc.), and the pension plan administration subsidiary (Caribbean Pension Consultants, Inc.). The core operations of this segment are financial planning, money management and investment brokerage services, insurance sales, investment banking, corporate and individual trust and retirement services, as well as pension plan administration services.

Inter-segment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices. The accounting policies of the segments are the same followed by the Group, which are described in the “Summary of Significant Accounting Policies” included in the Group’s annual report on Form 10-K. Following are the results of operations and the selected financial information by operating segment for the quarters and six-month periods ended June 30, 2008 and 2007:

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	Unaudited (In thousands)
							Financial			Total						Consolidated
	Banking			Treasury			Services			Segments			Eliminations			Total

Quarter ended June 30, 2008
Interest income	$	20,567		$	64,569		$	22		$	85,158		$	—		$	85,158
Interest expense		(8,322	)		(48,401	)		—			(56,723	)		—			(56,723	)

Net interest income		12,245			16,168			22			28,435			—			28,435
Non-interest income (loss)		2,589			(41	)		4,102			6,650			—			6,650
Non-interest expenses		(14,181	)		(945	)		(2,954	)		(18,080	)		—			(18,080	)
Intersegment revenue		852			—			—			852			(852	)		—
Intersegment expense		—			(150	)		(702	)		(852	)		852			—
Provision for loan losses		(1,980	)		—			—			(1,980	)		—			(1,980	)

Income (loss) before income taxes	$	(475	)	$	15,032		$	468		$	15,025		$	—		$	15,025


Total assets at June 30, 2008	$	1,573,026		$	4,768,752		$	11,003		$	6,352,781		$	(292,602	)	$	6,060,179


Quarter ended June 30, 2007
Interest income	$	22,666		$	48,078		$	57		$	70,801		$	—		$	70,801
Interest expense		(9,307	)		(43,572	)		(232	)		(53,111	)		—			(53,111	)

Net interest income (expense)		13,359			4,506			(175	)		17,690			—			17,690
Non-interest income		1,747			2,194			3,855			7,796			—			7,796
Non-interest expenses		(13,683	)		(848	)		(2,946	)		(17,477	)		—			(17,477	)
Intersegment revenue		928			—			—			928			(928	)		—
Intersegment expense		—			(152	)		(776	)		(928	)		928			—
Provision for loan losses		(1,375	)		—			—			(1,375	)		—			(1,375	)

Income (loss) before income taxes	$	976		$	5,700		$	(42	)	$	6,634		$	—		$	6,634


Total assets at June 30, 2007	$	1,748,466		$	3,829,549		$	12,077		$	5,590,092		$	(299,443	)	$	5,290,649


	Unaudited (In thousands)
							Financial			Total						Consolidated
	Banking			Treasury			Services			Segments			Eliminations			Total

Six-month period ended June 30, 2008
Interest income	$	40,391		$	126,810		$	58		$	167,259		$	—		$	167,259
Interest expense		(18,006	)		(95,909	)		—			(113,915	)		—			(113,915	)

Net interest income		22,385			30,901			58			53,344			—			53,344
Non-interest income		5,223			1,234			9,057			15,514			—			15,514
Non-interest expenses		(27,760	)		(2,011	)		(6,039	)		(35,810	)		—			(35,810	)
Intersegment revenue		1,792			—			—			1,792			(1,792	)		—
Intersegment expense		—			(342	)		(1,450	)		(1,792	)		1,792			—
Provision for loan losses		(3,630	)		—			—			(3,630	)		—			(3,630	)

Income (loss) before income taxes	$	(1,990	)	$	29,782		$	1,626		$	29,418		$	—		$	29,418


Total assets at June 30, 2008	$	1,573,026		$	4,768,752		$	11,003		$	6,352,781		$	(292,602	)	$	6,060,179


Six-month period ended June 30, 2007
Interest income	$	45,009		$	87,161		$	130		$	132,300		$	—		$	132,300
Interest expense		(17,716	)		(83,065	)		(441	)		(101,222	)		—			(101,222	)

Net interest income (expense)		27,293			4,096			(311	)		31,078			—			31,078
Non-interest income		3,024			11,146			8,757			22,927			—			22,927
Non-interest expenses		(25,734	)		(1,579	)		(5,991	)		(33,304	)		—			(33,304	)
Intersegment revenue		1,876			—			—			1,876			(1,876	)		—
Intersegment expense		—			(298	)		(1,578	)		(1,876	)		1,876			—
Provision for loan losses		(2,450	)		—			—			(2,450	)		—			(2,450	)

Income before income taxes	$	4,009		$	13,365		$	877		$	18,251		$	—		$	18,251


Total assets at June 30, 2007	$	1,748,466		$	3,829,549		$	12,077		$	5,590,092		$	(299,443	)	$	5,290,649

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SELECTED FINANCIAL DATA

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007

(In thousands, except per share data)


	Quarter ended June 30,									Six-months ended June 30,
	2008			2007			Variance %			2008			2007			Variance %
EARNINGS DATA:

Interest income	$	85,158		$	70,801			20.3	%	$	167,259		$	132,300			26.4	%
Interest expense		56,723			53,111			6.8	%		113,915			101,222			12.5	%

Net interest income		28,435			17,690			60.7	%		53,344			31,078			71.6	%
Provision for loan losses		1,980			1,375			44.0	%		3,630			2,450			48.2	%

Net interest income after provision for loan losses		26,455			16,315			62.2	%		49,714			28,628			73.7	%
Non-interest income		6,650			7,796			-14.7	%		15,514			22,927			-32.3	%
Non-interest expenses		18,080			17,477			3.5	%		35,810			33,304			7.5	%

Income before taxes		15,025			6,634			126.5	%		29,418			18,251			61.2	%
Income tax expense (benefit)		598			187			219.8	%		(1,857	)		811			-329.0	%

Net Income		14,427			6,447			123.8	%		31,275			17,440			79.3	%
Less: dividends on preferred stock		(1,200	)		(1,201	)		-0.1	%		(2,401	)		(2,401	)		—

Net income available to common shareholders	$	13,227		$	5,246			152.1	%	$	28,874		$	15,039			92.0	%


PER SHARE DATA:
Basic	$	0.54		$	0.21			157.1	%	$	1.19		$	0.61			95.1	%

Diluted	$	0.54		$	0.21			157.1	%	$	1.19		$	0.61			95.1	%


Average common shares outstanding		24,290			24,488			-0.8	%		24,227			24,480			-1.0	%
Average potential common share-options		94			75			25.3	%		110			97			13.4	%

Average shares and shares equivalents		24,384			24,563			-0.7	%		24,337			24,577			-1.0	%


Book value per common share	$	9.60		$	9.99			-3.9	%	$	9.60		$	9.99			-3.9	%

Market price at end of period	$	14.26		$	10.91			30.7	%	$	14.26		$	10.91			30.7	%

Cash dividends declared per common share	$	0.14		$	0.14			0.0	%	$	0.28		$	0.28			0.0	%

Cash dividends declared on common share	$	3,405		$	3,433			-0.8	%	$	6,804		$	6,861			-0.8	%


Return on average assets (ROA)		0.95	%		0.49	%		93.9	%		1.01	%		0.70	%		44.3	%

Return on average common equity (ROE)		20.65	%		7.87	%		162.4	%		20.64	%		11.22	%		84.0	%

Equity-to-assets ratio		4.97	%		5.93	%		-16.2	%		4.97	%		5.93	%		-16.2	%

Efficiency ratio		51.82	%		72.30	%		-28.3	%		53.20	%		75.11	%		-29.2	%

Expense ratio		0.78	%		0.78	%		0.0	%		0.74	%		0.81	%		-8.6	%

Interest rate spread		1.68	%		1.17	%		43.6	%		1.53	%		1.04	%		47.1	%

Interest rate margin		1.90	%		1.40	%		35.7	%		1.80	%		1.30	%		38.5	%

Number of financial centers		24			24			0.0	%		24			24			0.0	%

-23-


	June 30,			December 31,
PERIOD END BALANCES AND CAPITAL RATIOS:	2008			2007			Variance %
(In thousands)

Investments and loans
Investments securities	$	4,643,977		$	4,585,610			1.27	%
Loans (including loans held-for-sale), net		1,218,157			1,179,566			3.27	%

	$	5,862,134		$	5,765,176			1.68	%

Deposits and Borrowings
Deposits	$	1,492,419		$	1,246,420			19.74	%
Repurchase agreements		3,810,752			3,861,411			-1.31	%
Other borrowings		409,561			395,441			3.57	%
Securities purchased but not yet received		23,103			111,431			-79.27	%

	$	5,735,835		$	5,614,703			2.16	%

Stockholders’ equity
Preferred equity	$	68,000		$	68,000			0.00	%
Common equity		233,167			291,461			-20.00	%

	$	301,167		$	359,461			-16.22	%

Capital ratios
Leverage capital		6.80	%		6.69	%		1.64	%

Tier 1 risk-based capital		17.26	%		18.59	%		-7.15	%

Total risk-based capital		17.76	%		19.06	%		-6.82	%


Trust assets managed	$	1,936,804		$	1,962,226			-1.30	%
Broker-dealer assets gathered		1,294,010			1,281,168			1.00	%

Assets managed		3,230,814			3,243,394			-0.39	%
Assets owned		6,060,179			5,999,855			1.01	%

Total financial assets managed and owned	$	9,290,993		$	9,243,249			0.52	%

OVERVIEW OF FINANCIAL PERFORMANCE

Introduction

The Group’s diversified mix of businesses and products generates both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as securities brokerage, fiduciary services, investment banking, insurance and pension administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial markets fluctuations and other external factors, the Group’s commitment is to continue producing a balanced and growing revenue stream.

During the second quarter of 2008, the strategies in place enabled the Group to continue to perform well despite the turbulent credit market and the recession in Puerto Rico. Highlights for the second quarter included:

	•		The sixth consecutive quarter of net interest margin improvement, to 1.90% from 1.40% in the year ago quarter and 1.68% in the previous quarter

	•		Significant reduction in cost of funds to 4.01%, down 9.7% from the year ago quarter and down 4.8% from the previous quarter

	•		Growth in loan originations, which totaled $92.6 million for the second quarter, representing increases of 7.2% from the year ago quarter and 39.8% from the previous quarter, while maintaining high credit quality

	•		A continued year over year increase in profitability even though the Group’s total assets are at the same level as at December 31, 2007 and slightly lower than at March 31, 2008

-24-

Income Available to Common Shareholders

For the quarter and six-month periods ended June 30, 2008, the Group’s income available to common shareholders totaled $13.2 million and $28.9 million, respectively, compared to $5.2 million and $15.0 million, respectively, in the comparable year-ago quarter and six-month period. Earnings per basic and fully diluted common share were $0.54 for the quarter ended June 30, 2008, compared to $0.21 per basic and fully diluted common share in the same year-ago quarter, and $1.19 for the six-month period ended June 30, 2008, compared to $0.61 in the year ago period.

Return on Average Assets and Common Equity

Return on average common equity (ROE) for the quarter and six-month period ended June 30, 2008, was 20.65% and 20.64%, respectively, up from 7.87% and 11.22%, for the quarter and six-months ended June 30, 2007, respectively. Return on average assets (ROA) for the quarter and six-month period ended June 30, 2008, was 0.95% and 1.01%, respectively, up from 0.49% and 0.70%, for the quarter and six-months ended June 30, 2007, respectively, representing an increase of 93.9% and 44.3% over the same year-ago periods.

Net Interest Income after Provision for Loan Losses

Net interest income after provision for loan losses increased 62.2% for the quarter and 73.7% for the six-month period ended June 30, 2008, totaling $26.5 million and $49.7 million, respectively, compared with $16.3 million and $28.6 million for the same periods last year. The increase of 20.3% and 26.4% in interest income for the quarter and six-month period ended June 30, 2008, totaling $85.2 million and $167.3 million, respectively, compared with $70.8 million and $132.3 million, respectively, for the same periods last year was mainly due to higher investment securities volumes and higher average yields. Interest expense increased by 6.8% and 12.5% for the quarter and six-month periods ended June 30, 2008, as compared to same periods last year, primarily due to higher average balances in the deposits and borrowings portfolios. Net interest margin for the quarter and six-month periods ended June 30, 2008, was 1.90% and 1.80%, respectively, compared to 1.40% and 1.30%, respectively, for the same periods last year.

Non-Interest Income

Total non-interest income was $6.7 million and $15.5 million, respectively, for the quarter and six-month period ended June 30, 2008, representing a decrease of 14.7% and of 32.3%, when compared to the corresponding periods ended June 30, 2007. Total banking and financial services revenues of $6.5 million for the quarter ended June 30, 2008, remained level when compared to the same period a year ago, and amounted to $14.0 million for the six-month period ended June 30, 2008, an increase of 5.3% from the $13.3 million for the same period a year ago. Securities, derivatives and trading activities revenues for the quarter and six-month period ended June 30, 2008 amounted to $458,000 and $2.1 million, respectively, compared to $292,000 and $9.5 million, for the same periods year-ago, mainly due to a gain of $8.2 million that resulted from the elimination of forecasted transactions on the cash flow hedges of interest rate swaps contracts that were terminated in July and December 2006.

Non-Interest Expenses

Non-interest expenses totaled $18.1 million and $35.8 million, respectively, for the quarter and six-month period ended June 30, 2008, compared to $17.5 million and $33.3 million, respectively, in the year ago periods, primarily as a result of higher insurance, professional fees and compensation expense.

Income Tax Expense

The income tax expense (benefit) was $598,000 and ($1.9) million, respectively, for the quarter and six-month period ended June 30, 2008, compared to an expense $187,000 and $811,000 for the respective periods ended June 30, 2007, mainly due to the expiration of certain tax contingencies and the reassessment of the valuation allowance for the deferred tax asset.

Group’s Financial Assets

The Group’s total financial assets include owned assets and the assets managed by the trust division, the securities broker-dealer subsidiary, and the private pension plan administration subsidiary. At June 30, 2008, total financial assets reached $9.291 billion, compared to $9.243 billion at December 31, 2007, a 0.52% increase. When compared to December 31, 2007, there was 1.01% increase in assets owned as of June 30, 2008, while assets managed by the trust division and the broker-dealer subsidiary remained leveled at $3.2 billion. Owned assets are approximately 95% owned by the Group’s banking subsidiary and its IBE subsidiary.

-25-

The Group’s trust division offers various types of individual retirement accounts (“IRA”) and manages 401(K) and Keogh retirement plans and custodian and corporate trust accounts, while Caribbean Pension Consultants, Inc. (“CPC”) manages the administration of private pension plans. At June 30, 2008, total assets managed by the Group’s trust division and CPC amounted to $1.937 billion, compared to $1.962 billion at December 31, 2007. The Group’s broker-dealer subsidiary offers a wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks, bonds and money management wrap-fee programs. At June 30, 2008, total assets gathered by the broker-dealer from its customer investment accounts increased to $1.294 billion, compared to $1.281 billion at December 31, 2007.

Interest Earning Assets

The investment portfolio amounted to $4.644 billion at June 30, 2008, a 1.27% increase compared to $4.586 billion at December 31, 2007, while the loan portfolio increased 3.27% to $1.218 billion at June 30, 2008, compared to $1.180 billion at December 31, 2007.

The mortgage loan portfolio totaled $1.034 billion at June 30, 2008, a 1.60% increase from $1.018 million at June 30, 2007, and an increase of 3.10%, from $1.003 million at December 31, 2007. Mortgage loan production for the six-month period ended June 30, 2008, totaled $125.3 million, which represents a 7.2% decrease compared to the same period last year. This decrease was due, in part, to a reduction in consumer demand, and the result of tighter underwriting standards adopted by the Group in view of the current economic environment.

Interest Bearing Liabilities

Total deposits amounted to $1.492 billion at June 30, 2008, an increase of 19.74% compared to $1.246 billion at December 31, 2007, primarily due to increased retail certificate of deposit and savings accounts, and a $117.4 million increase during the second quarter of 2008 in wholesale certificates of deposit that are used as a more economical and flexible alternative for replacing higher cost deposits and short-term repurchase agreements.

Stockholders’ Equity

Stockholders’ equity at June 30, 2008, was $301.2 million, compared to $359.5 million at December 31, 2007, reflecting decreased mark-to-market valuation on the available-for-sale investment securities portfolio, partially offset by a 42.2% increase in retained earnings.

The Group’s capital ratios remain above regulatory capital requirements, with risk-based capital ratios significantly above regulatory capital adequacy guidelines. At June 30, 2008, Tier 1 Leverage Capital Ratio was 6.80% (1.7 times the minimum of 4.00%), Tier 1 Risk-Based Capital Ratio was 17.26% (4.3 times the minimum of 4.00%), and Total Risk-Based Capital Ratio was 17.76% (2.2 times the minimum of 8.00%).

-26-

TABLE 1 — QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED JUNE 30, 2008 AND 2007
(In thousands)


	Interest								Average rate									Average balance
						Variance									Variance									Variance
	2008		2007			in %			2008			2007			in BPS			2008			2007			in %

A — TAX EQUIVALENT SPREAD

Interest-earning assets	$	85,158	$	70,801			20.3	%		5.69	%		5.61	%		8		$	5,984,658		$	5,046,727			18.6	%
Tax equivalent adjustment		28,113		26,920			4.4	%		1.88	%		2.13	%		(25	)		—			—			—

Interest-earning assets — tax equivalent		113,271		97,721			15.9	%		7.57	%		7.74	%		(17	)		5,984,658			5,046,727			18.6	%
Interest-bearing liabilities		56,722		53,111			6.8	%		4.01	%		4.44	%		(43	)		5,664,472			4,781,106			18.5	%

Tax equivalent net interest income / spread	$	56,549	$	44,610			26.8	%		3.56	%		3.30	%		26		$	320,186		$	265,621			20.5	%

Tax equivalent interest rate margin										3.78	%		3.53	%		25


B — NORMAL SPREAD

Interest-earning assets:
Investments:
Investment securities	$	64,858	$	47,595			36.3	%		5.49	%		5.11	%		38		$	4,728,682		$	3,727,268			26.9	%
Trading securities		4		3			33.3	%		5.00	%		6.45	%		(145	)		320			186			72.2	%
Money market investments		614		888			-30.9	%		5.16	%		5.73	%		(57	)		47,558			61,965			-23.3	%

		65,476		48,486			35.0	%		5.48	%		5.12	%		36			4,776,560			3,789,419			26.0	%

Loans:
Mortgage		16,608		16,888			-1.7	%		6.47	%		6.78	%		(31	)		1,026,184			995,669			3.1	%
Commercial		2,438		4,554			-46.5	%		6.26	%		7.93	%		(167	)		155,889			229,750			-32.1	%
Consumer		636		873			-27.1	%		9.78	%		10.95	%		(117	)		26,025			31,889			-18.4	%

		19,682		22,315			-11.8	%		6.52	%		7.10	%		(58	)		1,208,098			1,257,308			-3.9	%

		85,158		70,801			20.3	%		5.69	%		5.61	%		8			5,984,658			5,046,727			18.6	%

Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—		—			—			—			—			—			37,874			35,827			5.7	%
Now accounts		187		206			-9.2	%		1.05	%		1.19	%		(14	)		71,306			69,131			3.1	%
Savings		3,313		3,351			-1.1	%		3.04	%		4.27	%		(123	)		435,257			314,151			38.6	%
Certificates of deposit		8,765		10,044			-12.7	%		3.97	%		4.66	%		(69	)		883,467			861,244			2.6	%

		12,265		13,601			-9.8	%		3.44	%		4.25	%		(81	)		1,427,904			1,280,353			11.5	%

Borrowings:
Repurchase agreements		40,208		36,542			10.0	%		4.20	%		4.46	%		(26	)		3,832,251			3,274,576			17.0	%
Financing fees		—		(25	)		-100.0	%		0.00	%		0.00	%		0			—			—			—

Total repurchase agreements		40,208		36,517			10.1	%		4.20	%		4.46	%		(26	)		3,832,251			3,274,576			17.0	%
FHLB advances		3,507		1,981			77.0	%		4.24	%		4.57	%		(33	)		330,559			173,419			90.6	%
Subordinated capital notes		534		766			-30.4	%		5.91	%		8.75	%		(284	)		36,083			35,000			3.1	%
Term notes		—		6			-100.0	%		0.00	%		2.19	%		(219	)		—			1,108			-100.0	%
Other borrowings		209		240			-12.8	%		2.22	%		5.77	%		(355	)		37,675			16,650			126.3	%

		44,458		39,510			12.5	%		4.20	%		4.51	%		(31	)		4,236,568			3,500,753			21.0	%


		56,723		53,111			6.8	%		4.01	%		4.44	%		(43	)		5,664,472			4,781,106			18.5	%


Net interest income / spread	$	28,435	$	17,690			60.7	%		1.68	%		1.17	%		51


Interest rate margin										1.90	%		1.40	%		50


Excess of average interest-earning assets over average interest-bearing liabilities																		$	320,186		$	265,621			20.5	%

Average interest-earning assets over average interest-bearing liabilities ratio																			105.65	%		105.56	%


C. Changes in net interest income due to:	Volume			Rate			Total


Interest Income:
Investments	$	12,631		$	4,358		$	16,989
Loans		(873	)		(1,759	)		(2,632	)

		11,758			2,599			14,357


Interest Expense:
Deposits		1,567			(2,903	)		(1,336	)
Repurchase agreements		6,219			(2,526	)		3,693
Other borrowings		2,357			(1,101	)		1,256

		10,143			(6,530	)		3,613


Net Interest Income	$	1,615		$	9,129		$	10,744

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TABLE 1A — YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007

(In thousands)


	Interest								Average rate									Average balance
						Variance									Variance									Variance
	2008		2007			in %			2008			2007			in BPS			2008			2007			in %
A — TAX EQUIVALENT SPREAD
Interest-earning assets	$	167,259	$	132,300			26.4	%		5.65	%		5.54	%		11		$	5,921,928		$	4,777,612			24.0	%
Tax equivalent adjustment		55,246		50,572			9.2	%		1.87	%		2.12	%		(25	)		—			—			—

Interest-earning assets — tax equivalent		222,505		182,872			21.7	%		7.52	%		7.66	%		(14	)		5,921,928			4,777,612			24.0	%
Interest-bearing liabilities		113,915		101,222			12.5	%		4.12	%		4.50	%		(38	)		5,528,851			4,501,685			22.8	%

Tax equivalent net interest income / spread	$	108,590	$	81,650			33.0	%		3.40	%		3.16	%		24		$	393,077		$	275,927			42.5	%

Tax equivalent interest rate margin										3.67	%		3.42	%		25

B — NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	$	126,273	$	87,069			45.0	%		5.40	%		5.00	%		40		$	4,680,539		$	3,483,777			34.4	%
Investment management fees		—		(290	)		-100.0	%		0.00	%		-0.02	%		2			—			—			—

Total investment securities		126,273		86,779			45.5	%		5.40	%		4.98	%		42			4,680,539			3,483,777			34.4	%
Trading securities		9		14			-35.7	%		3.99	%		4.28	%		(29	)		451			654			-31.0	%
Money market investments		1,467		1,344			9.2	%		4.31	%		5.76	%		(145	)		68,060			46,682			45.8	%

		127,749		88,137			44.9	%		5.38	%		4.99	%		39			4,749,050			3,531,113			34.5	%

Loans:
Mortgage		32,932		33,215			-0.9	%		6.46	%		6.77	%		(31	)		1,019,699			981,416			3.9	%
Commercial		5,251		9,156			-42.6	%		8.24	%		7.90	%		34			127,401			231,915			-45.1	%
Consumer		1,327		1,792			-25.9	%		10.30	%		10.81	%		(51	)		25,778			33,168			-22.3	%

		39,510		44,163			-10.5	%		6.74	%		7.09	%		(35	)		1,172,878			1,246,499			-5.9	%

		167,259		132,300			26.4	%		5.65	%		5.54	%		11			5,921,928			4,777,612			24.0	%

Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits		—		—			—			—			—			—			36,513			36,266			0.7	%
Now accounts		398		409			-2.6	%		1.27	%		1.16	%		11			62,977			70,282			-10.4	%
Savings		7,701		6,268			22.9	%		3.66	%		4.18	%		(52	)		420,841			299,900			40.3	%
Certificates of deposit		16,595		19,172			-13.4	%		4.29	%		4.56	%		(27	)		773,648			840,369			-7.9	%

		24,694		25,849			-4.5	%		3.82	%		4.15	%		(33	)		1,293,979			1,246,817			3.8	%

Borrowings:
Repurchase agreements		80,448		69,636			15.5	%		4.20	%		4.60	%		(40	)		3,828,410			3,025,163			26.6	%
Interest rate risk management		—		(773	)		-100.0	%		0.00	%		-0.05	%		5			—			—			—
Financing fees		—		441			-100.0	%		0.00	%		0.03	%		(3	)		—			—			—

Total repurchase agreements		80,448		69,304			16.1	%		4.20	%		4.58	%		(38	)		3,828,410			3,025,163			26.6	%
FHLB advances		7,046		3,905			80.4	%		4.24	%		4.60	%		(36	)		332,402			169,725			95.8	%
Subordinated capital notes		1,236		1,524			-18.9	%		6.85	%		8.58	%		(173	)		36,083			35,539			1.5	%
Term notes		—		195			-100.0	%		0.00	%		5.12	%		(512	)		—			7,044			-100.0	%
Other borrowings		491		445			10.3	%		2.58	%		5.29	%		(271	)		37,977			17,397			118.3	%

		89,221		75,373			18.4	%		4.21	%		4.63	%		(42	)		4,234,872			3,254,868			30.1	%

		113,915		101,222			12.5	%		4.12	%		4.50	%		(38	)		5,528,851			4,501,685			22.8	%

Net interest income / spread	$	53,344	$	31,078			71.6	%		1.53	%		1.04	%		49

Interest rate margin										1.80	%		1.30	%		50

Excess of average interest-earning assets over average interest-bearing liabilities																		$	393,077		$	275,927			42.5	%

Average interest-earning assets over average interest-bearing liabilities ratio																			107.11	%		106.13	%


C. Changes in net interest income due to:	Volume			Rate			Total


Interest Income:
Investments	$	30,400		$	9,213		$	39,613
Loans		(2,609	)		(2,045	)		(4,654	)

		27,791			7,168			34,959


Interest Expense:
Deposits		978			(2,133	)		(1,155	)
Repurchase agreements		18,402			(7,258	)		11,144
Other borrowings		4,670			(1,966	)		2,704

		24,050			(11,357	)		12,693


Net Interest Income	$	3,741		$	18,525		$	22,266

Net interest income is a function of the difference between rates earned on the Group’s interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest-earning assets and interest-bearing liabilities (interest rate margin). Typically, bank liabilities re-price in line with changes in short-term rates, while many asset positions are affected by longer-term rates. The Group constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net interest income at adequate levels.

-28-

For the quarter and six-month period ended June 30, 2008, net interest income amounted to $28.4 million and $53.3 million, respectively, an increase of 60.7% and 71.6% from $17.7 million and $31.1 million, in the same periods of the previous year. The increase for the quarter and six-month period reflects a 20.3% and 26.4% increase in interest income, due to a positive volume variance $11.8 million and $27.8 million, respectively, and a positive rate variance of $2.6 million and $7.2 million, respectively. The increase of 6.8% and 12.5% in interest expense for the quarter and six-month period ended June 30, 2008, was primarily the result of an increase of $10.1 million and $24.1 million, respectively in interest expense from higher volume of interest-bearing liabilities, offset by reduced rates on such interest-bearing liabilities. Interest rate spread increased 51 basis points to 1.68% for the quarter ended June 30, 2008, from 1.17% in the June 30, 2007 quarter, and 49 basis points to 1.53% for the six-month period ended June 30, 2008 from 1.04% for the year ago period. These increases reflect the full benefits of the actions taken by the Group to reposition the available-for-sale investment securities portfolio and its funding in late 2006 and during 2007.

For the quarter and six-month period ended June 30, 2008, the average balances of total interest-earnings assets were $5.985 billion and $5.922 billion, an 18.6% and 24.0% increase from the same periods last year. The increase in the quarterly average balance reflects increases of 26.0% to $4.777 billion in the investment portfolio, partially offset by a decrease of 3.9% to $1.208 billion in the loans portfolio for the 2008 quarter. The increase in the six-month period average balance reflects increases of 34.5% to $4.749 billion in the investment portfolio, partially offset by a decrease of 5.9% to $1.173 billion in the loans portfolio for the 2008 six-month period.

For the quarter and six-month period ended June 30, 2008, the average yield on interest-earning assets was 5.69% and 5.65%, respectively, compared to 5.61% and 5.54% in the same period last year, due to higher average yields in the investment portfolio, offset by lower yields in the loan portfolio. The investment portfolio yield increased to 5.48% and 5.38% in the quarter and six-month period ended June 30, 2008, respectively, versus 5.12% and 4.99%, in the same period last year, respectively, due to additions of higher-yielding investments.

For the quarter and six-month period ended June 30, 2008, interest expense amounted to $56.7 million and $113.9 million, respectively, an increase of 6.8% and 12.5%, respectively, from $53.1 million and $101.2 million, in the same period last year, mainly resulting from higher volume of interest-bearing liabilities.

For the quarter ended June 30, 2008, the cost of deposits decreased 81 basis points to 3.44%, as compared to the same period a year ago. For the six-month period ended June 30, 2008, the cost of deposits decreased 33 basis points to 3.82%, as compared to the same period a year ago. The decrease reflects lower average rates paid on higher balances, most significantly in savings and certificates of deposit accounts. For the quarter and six-month period ended June 30, 2008, the cost of borrowings decreased 31 basis points and 42 basis points, respectively, to 4.20% and 4.21%, respectively, from the same period last year.

TABLE 2 — NON-INTEREST INCOME SUMMARY:

FOR THE QUARTERS AND SIX-MONTHS PERIODS ENDED JUNE 30, 2008 AND 2007

(In thousands)


	Quarter ended June 30,								Six-Month period ended June 30,
	2008			2007		Variance %			2008			2007		Variance %
Financial service revenues	$	4,500		$	4,049		11.1	%	$	8,740		$	8,892		-1.7	%
Banking service revenues		1,395			2,265		-38.4	%		2,922			4,139		-29.4	%
Investment banking revenues		12			—		100.0	%		750			—		100.0	%
Mortgage banking activities		545			170		220.6	%		1,551			232		568.5	%

Total banking and financial service revenues		6,452			6,484		-0.5	%		13,963			13,263		5.3	%

Securities net activity		198			10		1880.0	%		9,512			369		2477.8	%
Derivatives net gain (loss)		228			88		159.1	%		(7,575	)		8,384		-190.4	%
Trading net gain (loss)		16			2		700.0	%		(1	)		2		-150.0	%
Income from other investments		16			192		-91.7	%		126			701		-82.0	%

Securities, derivatives and trading activities		458			292		56.8	%		2,062			9,456		-78.2	%

Equity in earnings of investment in limited liability partnership		—			967		100.0	%		—			76		100.0	%
Gain (loss) on foreclosed real estate		(260	)		30		-966.7	%		(510	)		67		-861.2	%
Other		—			23		100.0	%		(1	)		65		-101.5	%

Total non-interest income	$	6,650		$	7,796		-14.7	%	$	15,514		$	22,927		-32.3	%

-29-

Non-interest income is affected by the amount of securities, derivatives and trading transactions, the level of trust assets under management, transactions generated by the gathering of financial assets by the securities broker-dealer subsidiary, the level of investment and mortgage banking activities, and the fees generated from loans, deposit accounts, and insurance activities.

Non-interest income totaled $6.7 million and $15.5 million in the quarter and six-month periods ended June 30, 2008, a decrease of 14.7% and 32.3% when compared to $7.8 million and $22.9 million in the same periods last year. Decreases in revenues from securities and derivatives activities were partially offset by increases in revenues generated mortgage and investment banking activities.

Financial service revenues, generated from trust, mortgage banking, investment banking, brokerage, and insurance activities is the principal recurring component of non-interest income. For the quarter and six-month periods ended June 30, 2008, revenues from such activities were $6.5 million and $14.0 million, an decrease of 0.5% when compared with the quarter last year and an increase of 5.3% compared with June 2007, from the $6.5 million and $13.3 million recorded by the Group for the same respective period last year. Financial service revenues increased by 11.1% to $4.5 million for the quarter and decreased by 1.7% to $8.7 million for the six-month periods ended June 30, 2008, from $4.0 million and $8.9 million in the same corresponding period last year. Revenues from mortgage banking activities for the quarter and six-month periods ended June 30, 2008, were $545,000 and $1.6 million, a considerable increase when compared to $170,000 and $232,000 for the same period a year ago. Investment banking revenues for the quarter and six-month periods ended June 30, 2008, amounted to $12,000 and $750,000.

Banking service revenue, another major component of non-interest income, consists primarily of fees generated by deposit accounts, electronic banking services, and bank service commissions. For the quarter and six-month periods ended June 30, 2008, these revenues were $1.4 million and $2.9 million, a decrease of 38.4% and 29.4% from $2.3 million and $4.1 million for the same period last year, reflecting reduced consumer banking activity.

For the quarter and six-month periods ended June 30, 2008, gains from securities, derivatives and trading activities were $458,000 and $2.1 million, compared to $292,000 and $9.5 million for the same period last year. During the six-month period ended June 30, 2008, losses of $7.6 million were recognized and reflected as “Derivatives” in the unaudited consolidated statements of income. This was mainly due to an interest-rate swap contract that the Group entered in on January 2008 to manage the Group’s interest rate risk exposure with a notional amount of $500 million. Such contract was subsequently terminated, resulting in a loss to the Group of approximately $7.9 million. For the six-month period ended June 30, 2007, gains of $8.4 million were recognized and reflected as “Derivatives” in the unaudited consolidated statements of income, which included and $8.2 million gain from the elimination of forecasted transactions on interest rate swaps unwound in 2006.

-30-

TABLE 3 — NON-INTEREST EXPENSES SUMMARY
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,
	2008			2007			Variance %			2008			2007			Variance %

Compensation and employee benefits	$	7,824		$	6,916			13.1	%	$	15,539		$	13,661			13.7	%
Occupancy and equipment		3,365			3,343			0.7	%		6,652			6,337			5.0	%
Professional and service fees		2,267			1,984			14.3	%		4,147			3,522			17.7	%
Advertising and business promotion		836			1,118			-25.2	%		1,910			1,911			-0.1	%
Loan servicing expenses		339			540			-37.2	%		670			1,063			-37.0	%
Directors and investor relations expenses		303			769			-60.6	%		581			1,300			-55.3	%
Taxes, other than payroll and income taxes		607			489			24.1	%		1,218			937			30.0	%
Electronic banking charges		396			457			-13.3	%		814			916			-11.1	%
Clearing and wrap fees expenses		313			310			1.0	%		607			675			-10.1	%
Communications		325			308			5.5	%		650			646			0.6	%
Insurance		579			211			174.4	%		1,181			427			176.6	%
Foreclosure expenses		201			338			-40.5	%		351			405			-13.3	%
Printing, postage, stationery and supplies		245			189			29.6	%		522			391			33.5	%
Other expenses		480			505			-5.0	%		968			1,113			-13.0	%

Total non-interest expenses	$	18,080		$	17,477			3.5	%	$	35,810		$	33,304			7.5	%


Relevant ratios and data:
Compensation and benefits to non-interest expenses		43.3	%		39.6	%					43.4	%		41.0	%

Compensation to total assets (annualized)		0.52	%		0.52	%					0.51	%		0.52	%

Average compensation per employee (annualized)	$	56.6		$	53.6					$	56.5		$	52.1

Average number of employees		553			516						550			524

Assets owned per average employee	$	10,959		$	10,253					$	11,019		$	10,097

Non-interest expenses for the quarter and six-month period ended June 30, 2008, were $18.1 million and $35.8 million, representing increases of 3.5% and 7.5%, respectively, when compared to $17.5 million and $33.3 million in the same period a year ago, primarily as a result of higher professional fees, insurance expense and compensation expense. The non-interest expense results reflect an efficiency ratio of 51.82% for the quarter ended June 30, 2008, compared to 72.30% in the same quarter last year. For the six-month period ended June 30, 2007, the efficiency ratio was 53.20% compared to 75.11% for the same period last year. The efficiency ratio measures how much of a company’s revenue is used to pay operating expenses. The Group computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and non-interest income, but excluding gains on sale of investments securities, derivatives gains or losses and other income that may be considered volatile in nature. Management believes that the exclusion of those items permit greater comparability. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation amounted to $1.6 million and $9.7 million for the six-month period ended June 30, 2008 and 2007, respectively.

-31-

TABLE 4 — ALLOWANCE FOR LOAN LOSSES SUMMARY
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(In thousands)


	Quarter Ended June 30,						Change in			Six-Month Period Ended June 30,						Change in
	2008			2007			%			2008			2007			%

Balance at beginning of period	$	11,092		$	8,046			37.9	%	$	10,161		$	8,016			26.8	%
Provision for loan losses		1,980			1,375			44.0	%		3,630			2,450			48.2	%
Net credit losses — see Table 5		(1,187	)		(989	)		20.0	%		(1,906	)		(2,034	)		-6.3	%

Balance at end of period	$	11,885		$	8,432			41.0	%	$	11,885		$	8,432			41.0	%


Selected Data and Ratios:
Outstanding gross loans at June 30,										$	1,230,042		$	1,280,609			-3.9	%
Allowance coverage ratios:
Total loans											0.97	%		0.65	%		49.23	%
Non-performing loans											17.27	%		16.70	%		3.41	%
Non-mortgage non-performing loans											299.67	%		217.30	%		37.91	%

TABLE 5 — NET CREDIT LOSSES STATISTICS
(In thousands)


	Quarter Ended June 30,						Change in			Six-Month Period Ended June 30,						Change in
	2008			2007			%			2008			2007			%
Mortgage
Charge-offs	$	(314	)	$	(480	)		-34.6	%	$	(480	)	$	(1,026	)		-53.2	%
Recoveries		—			—			—			—			—			—

		(314	)		(480	)		-34.6	%		(480	)		(1,026	)		-53.2	%

Commercial
Charge-offs		(142	)		(14	)		914.3	%		(142	)		(14	)		914.3	%
Recoveries		1			13			-92.3	%		14			22			-36.4	%

		(141	)		(1	)		14000.0	%		(128	)		8			-1700.0	%

Consumer
Charge-offs		(801	)		(611	)		31.1	%		(1,432	)		(1,232	)		16.2	%
Recoveries		69			103			-33.0	%		134			216			-38.0	%

		(732	)		(508	)		44.1	%		(1,298	)		(1,016	)		27.8	%

Net credit losses
Total charge-offs		(1,257	)		(1,105	)		13.8	%		(2,054	)		(2,272	)		-9.6	%
Total recoveries		70			116			-39.7	%		148			238			-37.8	%

	$	(1,187	)	$	(989	)		20.0	%	$	(1,906	)	$	(2,034	)		-6.3	%


Net credit losses (recoveries) to average loans outstanding (1):
Mortgage		0.12	%		0.19	%					0.09	%		0.21	%

Commercial		0.36	%		0.00	%					0.20	%		-0.01	%

Consumer		11.25	%		6.37	%					10.07	%		6.13	%

Total		0.39	%		0.31	%					0.33	%		0.33	%


Recoveries to charge-offs		5.57	%		10.50	%		-47.0	%		7.21	%		10.48	%		-31.2	%


Average loans:
Mortgage	$	1,026,184		$	995,669			3.1	%	$	1,019,699		$	981,416			3.9	%
Commercial		155,889			229,750			-32.1	%		127,401			231,915			-45.1	%
Consumer		26,025			31,889			-18.4	%		25,778			33,168			-22.3	%

Total	$	1,208,098		$	1,257,308			-3.9	%	$	1,172,878		$	1,246,499			-5.9	%


(1)		Annualized ratios

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TABLE 6 — ALLOWANCE FOR LOSSES BREAKDOWN
AS OF JUNE 30, 2008 AND 2007, AND DECEMBER 31, 2007
(In thousands)


	June 30,			December 31,			Variance			June 30,
	2008			2007			%			2007
Allowance for loan losses breakdown:
Mortgage	$	6,618		$	5,958			11.1	%	$	4,476
Commercial		2,618			1,838			42.4	%		1,953
Consumer		1,967			2,006			-1.9	%		1,711
Unallocated allowance		682			359			90.0	%		292

	$	11,885		$	10,161			17.0	%	$	8,432


Allowance composition:
Mortgage		55.7	%		58.7	%					53.1	%
Commercial		22.0	%		18.1	%					23.2	%
Consumer		16.6	%		19.7	%					20.3	%
Unallocated allowance		5.7	%		3.5	%					3.5	%

		100.0	%		100.0	%					100.0	%

The provision for loan losses for the quarter and six-month periods ended June 30, 2008, totaled $1.9 million and $3.6 million, representing an increase of 44.0% and 48.2% from the $1.4 million and $2.5 million reported for the same quarter last year. Based on an analysis of the credit quality and composition of the loan portfolio, the Group determined that the provision for the quarter and six-month period ended June 30, 2008, was adequate in order to maintain the allowance for loan losses at an appropriate level.

Net credit losses for the quarter and six-month periods ended June 30, 2008, increased from $1.0 million (0.31% of average loans outstanding) in the quarter ended June 30, 2007, to $1.2 million (0.39%) in the corresponding quarter of 2008, and decreased from $2.0 million (0.33% average loans outstanding) in the first six months of 2007, to $1.9 million (0.33%) for the same period of 2008. The decrease was primarily due to a $546,000 reduction in net credit losses from mortgage loans. Non-performing loans of $68.8 million at June 30, 2008, were 36.3% higher than the $50.5 million at June 30, 2007, but only 4.1% higher than the $66.1 million at December 31, 2007, and 0.5% lower than the $69.2 million at March 31, 2008, the first sequential quarter reduction in non-performing loans in two years.

Included in the review of individual loans are those that are impaired, under the provisions of 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, and loans that are recorded at fair value or at the lower of cost or market. The portfolios of mortgage and consumer loans are considered homogeneous, and are evaluated collectively for impairment. For the commercial loans portfolio, all loans over $250,000 and over 90-days past due are evaluated for impairment, under the provisions of SFAS 114. At June 30, 2008, the total investment in impaired loans was $1.6 million, compared to $1.1 million at December 31, 2007. Impaired loans are measured based on the fair value of collateral method, since all impaired loans during the period were collateral dependant. The Group determined that no specific impairment allowance was required for such loans, as the loan collateral fair value exceeds the loan’s book value.

-33-

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 overall historical loss trends and other information, including underwriting standards, economic trends and unusual events.

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

An unallocated allowance is established recognizing the estimation risk associated with the rating system and with the specific allowances. It is based upon management’s evaluation of various conditions, the effects of which are not directly measured in determining the rating system and the specific allowances. These conditions include then-existing general economic and business conditions affecting our key lending areas; credit quality trends, including trends in non-performing loans expected to result from existing conditions, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, regulatory examination results, and findings by the Group’s management. The evaluation of the inherent loss regarding these conditions involves a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.

-34-

FINANCIAL CONDITION

TABLE 7 — BANK ASSETS SUMMARY AND COMPOSITION
AS OF JUNE 30, 2008 AND 2007, AND DECEMBER 31, 2007
(In thousands)


	June 30,			December 31,			Variance			June 30,
	2008			2007			%			2007

Investments:
Mortgage-backed securities	$	3,401,693		$	2,602,766			30.7	%	$	1,910,348
U.S. Government and agency obligations		982,496			1,698,748			-42.2	%		1,618,549
P.R. Government and agency obligations		72,232			72,667			-0.6	%		100,070
Other Securities		165,344			189,109			-12.6	%		42,482
FHLB stock		22,062			20,658			6.8	%		13,908
Other Investments		150			1,662			-91.0	%		31,770

		4,643,977			4,585,610			1.27	%		3,717,127

Loans:
Loans receivable		1,187,920			1,173,055			1.3	%		1,214,577
Allowance for loan losses		(11,885	)		(10,161	)		17.0	%		(8,432	)

Loans receivable, net		1,176,035			1,162,894			1.1	%		1,206,145
Mortgage loans held-for-sale		42,122			16,672			152.7	%		66,032

Total loans receivable, net		1,218,157			1,179,566			3.3	%		1,272,177


Securities sold but not yet delivered		—			—			0.0	%		46,461


Total securities and loans		5,862,134			5,765,176			1.7	%		5,035,765

Other assets:
Cash and due from banks		56,486			88,983			-36.5	%		91,418
Accrued interest receivable		42,842			52,315			-18.1	%		45,807
Premises and equipment, net		21,378			21,779			-1.8	%		19,390
Deferred tax asset, net		17,249			10,362			66.5	%		18,005
Foreclosed real estate, net		4,906			4,207			16.6	%		4,971
Investment in equity indexed options		27,641			40,709			-32.1	%		43,358
Other assets		27,543			16,324			68.7	%		31,935

Total other assets		198,045			234,679			-15.6	%		254,884


Total assets	$	6,060,179		$	5,999,855			1.0	%	$	5,290,649


Investments portfolio composition:
Mortgage-backed securities		73.3	%		56.8	%					51.4	%
U.S. Government securities		21.2	%		37.0	%					43.5	%
P.R. Government securities		1.6	%		1.6	%					2.7	%
FHLB stock and other investments		4.0	%		4.6	%					2.4	%

		100.0	%		100.0	%					100.0	%

At June 30, 2008, the Group’s total assets amounted to $6.060 billion, an increase of 1.0%, when compared to $6.0 billion at December 31, 2007. Interest-earning assets were $5.862 billion at June 30, 2008, a 1.7% increase compared to $5.765 billion at December 31, 2007.

Investments principally consist of U.S. government and agency obligations, mortgage-backed securities, collateralized mortgage obligations, and Puerto Rico government bonds. At June 30, 2008, the investment portfolio increased 1.27% to $4.644 billion, from $4.586 billion at December 31, 2007. For further details regarding the Group’s investment securities, refer to Note 2 of the unaudited consolidated financial statements.

At June 30, 2008, the Group’s loan portfolio, the second largest category of the Group’s interest-earning assets, amounted to $1.218 billion, an increase of 3.3% when compared to $1.180 billion at December 31, 2007. The Group’s loan portfolio is mainly comprised of residential loans, home equity loans, and commercial loans collateralized by mortgages on real estate located in Puerto Rico. Loan production and purchases for the quarter and six-month periods ended June 30, 2008, increased 7.2% and 0.1%, respectively, to $92.6 million and $158.9 million, compared to the quarter and six-month period ended June 30, 2007.

-35-

TABLE 8 — NON-PERFORMING ASSETS
AS OF JUNE 30, 2008 AND 2007, AND DECEMBER 31, 2007

(In thousands)


	June 30,			December 31,			Variance			June 30,
	2008			2007			%			2007
Non-performing assets:
Non-accruing loans	$	30,440		$	27,347			11.3	%	$	19,902
Accruing loans		38,393			38,762			-1.0	%		30,598

Total non-performing loans		68,833			66,109			4.1	%		50,500
Foreclosed real estate		4,906			4,207			16.6	%		4,971

Total non-performing assets	$	73,739		$	70,316			4.9	%	$	55,471


Non-performing assets to total assets		1.22	%		1.17	%					1.05	%

TABLE 9 — NON-PERFORMING LOANS
AS OF JUNE 30, 2008 AND 2007, AND DECEMBER 31, 2007
(In thousands)


	June 30,			December 31,			Variance			June 30,
	2008			2007			%			2007
Non-performing loans:
Mortgage	$	64,867		$	62,878			3.2	%	$	46,626
Commercial, mainly secured by real estate		3,026			2,413			25.4	%		3,204
Consumer		940			818			14.9	%		670

Total	$	68,833		$	66,109			4.1	%	$	50,500


Non-performing loans composition:
Mortgage		94.2	%		95.1	%					92.3	%
Commercial, mainly secured by real estate		4.4	%		3.7	%					6.3	%
Consumer		1.4	%		1.2	%					1.3	%

Total		100.00	%		100.00	%					100.00	%


Non-performing loans to:
Total loans		5.60	%		5.56	%		0.72	%		3.94	%

Total assets		1.14	%		1.10	%		3.6	%		0.95	%

During the second quarter of 2008, the Group observed the first sequential quarter reduction in non-performing loans in two years, from $69.2 million at March 31, 2008, to $68.8 million at June 30, 2008.

At June 30, 2008, the allowance for loan losses to non-performing loans coverage ratio was 17.27%. Detailed information concerning each of the items that comprise non-performing assets follows:

•		Mortgage loans are placed on a non-accrual basis when they become 365 days or more past due and are written-down, if necessary, based on the specific evaluation of the collateral underlying the loan. At June 30, 2008, the Group’s non-performing mortgage loans totaled $64.9 million (94.2% of the Group’s non-performing loans), a 3.2% increase from the $62.9 million (95.1% of the Group’s non-performing loans) reported at December 31, 2007. Non-performing loans in this category are primarily residential mortgage loans.

•		Commercial loans are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the underlying collateral, if any. At June 30, 2008, the Group’s non-performing commercial loans amounted to $3.0 million (4.4% of the Group’s non-performing loans), a 25.4% increase when compared to non-performing commercial loans of $2.4 million reported at December 31, 2007 (3.7% of the Group’s non-performing loans). Most of this portfolio is collateralized by commercial real estate properties.

•		Consumer loans are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit. At June 30, 2008, the Group’s non-performing consumer loans amounted to $940,000 (1.4% of the Group’s total non-performing loans), an increase from the $818,000 reported at December 31, 2007 (1.2% of total non-performing loans).

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•

Foreclosed real estate is initially recorded at the lower of the related loan balance or fair value at the date of foreclosure. Any excess of the loan balance over the fair value of the property is charged against the allowance for loan losses. Subsequently, any excess of the carrying value over the estimated fair value less disposition cost is charged to operations. Proceeds from sales of foreclosed real estate properties during the quarter ended June 30, 2008, totaled approximately $1.5 million.

At June 30, 2008, the Group’s total liabilities were $5.759 billion, 2.1% higher than the $5.640 billion reported at December 31, 2007. Deposits and borrowings, the Group’s funding sources, amounted to $5.713 billion at June 30, 2008, an increase of 3.8% when compared to $5.503 billion reported at December 31, 2007. At June 30, 2008, borrowings represented 73.9% of interest-bearing liabilities and deposits represented 26.1%, versus 77.4% and 22.6%, respectively, at December 31, 2007.

The FHLB system functions as a source of credit to financial institutions that are members of a regional Federal Home Loan Bank. As a member of the FHLB, the Group can obtain advances from the FHLB, secured by the FHLB stock owned by the Group, as well as by certain of the Group’s mortgages and investment securities. FHLB advances, including accrued interest, totaled $331.9 million at June 30, 2008, and December 31, 2007. The Group has the capacity to expand FHLB funding up to a maximum of $500.0 million based on the assets pledged by the Group on the FHLB.

At June 30, 2008, deposits reached $1.492 billion, up 19.7%, compared to the $1.246 billion reported at December 31, 2007. The increase is deposits was driven by savings accounts, which totaled $407.9 million at June 30, 2008, up 5.2% when compared to the $387.8 million reported at December 31, 2007, and also by certificates of deposit, which increased $219.6 million during the quarter ended June 30, 2008, from $736.2 million at December 31, 2007, to $955.8 million.

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TABLE 10 — LIABILITIES SUMMARY AND COMPOSITION
AS OF JUNE 30, 2008 AND 2007, AND DECEMBER 31, 2007
(In thousands)


	June 30,			December 31,			Variance			June 30,
	2008			2007			%			2007
Deposits:
Non-interest bearing deposits	$	55,936		$	50,149			11.5	%	$	44,867
Now accounts		68,195			68,994			-1.2	%		66,819
Savings accounts		407,907			387,788			5.2	%		326,124
Certificates of deposit		955,790			736,186			29.8	%		885,184

		1,487,828			1,243,117			19.7	%		1,322,994
Accrued interest payable		4,591			3,303			39.0	%		6,668

		1,492,419			1,246,420			19.7	%		1,329,662

Borrowings:
Repurchase agreements		3,810,752			3,861,411			-1.3	%		3,283,796
Advances from FHLB		331,895			331,898			0.0	%		180,895
Subordinated capital notes		36,083			36,083			0.0	%		36,083
Federal funds purchased and other short term borrowings		41,583			27,460			51.4	%		24,641

		4,220,313			4,256,852			-0.9	%		3,525,415


Total deposits and borrowings		5,712,732			5,503,272			3.8	%		4,855,077


Securities purchased but not yet received		23,103			111,431			-79.3	%		100,067
Other liabilities		23,177			25,691			-9.8	%		22,030

Total liabilities	$	5,759,012		$	5,640,394			2.1	%	$	4,977,174


Deposits portfolio composition percentages:
Non-interest bearing deposits		3.8	%		4.0	%					3.4	%
Now accounts		4.6	%		5.6	%					5.1	%
Savings accounts		27.4	%		31.2	%					24.7	%
Certificates of deposit		64.2	%		59.2	%					66.9	%

		100.0	%		100.0	%					100.0	%

Borrowings portfolio composition percentages:
Repurchase agreements		90.3	%		90.7	%					93.2	%
Advances from FHLB		7.9	%		7.8	%					5.1	%
Subordinated capital notes		0.8	%		0.8	%					1.0	%
Federal funds purchased and other short term borrowings		1.0	%		0.7	%					0.7	%

		100.0	%		100.0	%					100.0	%


Repurchase agreements
Amount outstanding at quarter-end	$	3,810,752		$	3,861,411					$	3,283,796

Daily average outstanding balance	$	3,828,410		$	3,154,369					$	3,287,489

Maximum outstanding balance at any month-end	$	3,847,633		$	3,861,411					$	3,319,688

Stockholders’ Equity

At June 30, 2008, the Group’s total stockholders’ equity was $301.2 million, a 16.2% decrease when compared to $359.5 million at December 31, 2007. The change reflects a reduction in the fair value of the available-for-sale investment securities portfolio, primarily due to the widening of credit spreads in the second quarter of 2008. The Group’s capital ratios remain above regulatory capital requirements. At June 30, 2008, the Tier 1 Leverage Capital Ratio was 6.80%, the Tier 1 Risk-Based Capital Ratio was 17.26%, and the Total Risk-Based Capital Ratio was 17.76%.

The Bank is considered “well-capitalized” under the regulatory framework for prompt corrective action if it meets or exceeds a Tier I Risk-Based Capital Ratio of 6%, a Total Risk-Based Capital Ratio of 10% and a Leverage Capital Ratio of 5%. In addition, the Group and the Bank meet the following minimum capital requirements: a Tier I Risk-Based Capital Ratio of 4%, a Total Risk-Based Capital Ratio of 8% and a Tier 1 Leverage Capital Ratio of 4%. As shown in Table 11, the Group exceeds these benchmarks due to the high level of capital and the quality and conservative nature of its assets.

Under the regulatory framework for prompt corrective action, banks that meet or exceed a Tier I Capital Risk-Based ratio of 6%, a Total Capital Risk-Based Ratio of 10% and a Leverage Ratio of 5% are considered well capitalized. The Bank exceeds those regulatory capital requirements.

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The following are the consolidated capital ratios of the Group at June 30, 2008 and 2007, and December 31, 2007:

TABLE 11 — CAPITAL, DIVIDENDS AND STOCK DATA

AS OF JUNE 30, 2008 AND 2007, AND DECEMBER 31, 2007
(In thousands, except per share data)


	June 30,			December 31,			Variance			June 30,
	2008			2007			%			2007
Capital data:
Stockholders’ equity	$	301,167		$	359,461			-16.2	%	$	313,475


Regulatory Capital Ratios data:
Leverage Capital Ratio		6.80	%		6.69	%		1.6	%		7.23	%

Minimum Leverage Capital Ratio Required		4.00	%		4.00	%					4.00	%

Actual Tier 1 Capital	$	413,767		$	396,309			4.4	%	$	381,489

Minimum Tier 1 Capital Required	$	243,414		$	236,847			2.8	%	$	210,972


Tier 1 Risk-Based Capital Ratio		17.26	%		18.59	%		-7.2	%		19.32	%

Minimum Tier 1 Risk-Based Capital Ratio Required		4.00	%		4.00	%					4.00	%

Actual Tier 1 Risk-Based Capital	$	413,767		$	396,309			4.4	%	$	381,489

Minimum Tier 1 Risk-Based Capital Required	$	95,867		$	85,292			12.4	%	$	78,970


Total Risk-Based Capital Ratio		17.76	%		19.06	%		-6.8	%		19.75	%

Minimum Total Risk-Based Capital Ratio Required		8.00	%		8.00	%					8.00	%

Actual Total Risk-Based Capital	$	425,652		$	406,470			4.7	%	$	389,921

Minimum Total Risk-Based Capital Required	$	191,735		$	170,583			12.4	%	$	157,940


Stock data:
Outstanding common shares, net of treasury		24,292			24,121			0.7	%		24,520

Book value	$	9.60		$	12.08			-20.5	%	$	9.99

Market price at end of period	$	14.26		$	13.41			6.3	%	$	10.91

Market capitalization	$	346,404		$	323,463			7.1	%	$	267,517


	June 30,			June 30,			Variance
	2008			2007			%
Common dividend data:
Cash dividends declared	$	6,804		$	6,861			-0.8	%

Cash dividends declared per share	$	0.28		$	0.28			0.0	%

Payout ratio		23.53	%		45.90	%		-48.7	%

Dividend yield		3.06	%		4.62	%		-33.8	%

The following provides the high and low prices and dividend per share of the Group’s stock for each quarter of the last three years. Common stock prices and cash dividend per share were adjusted to give retroactive effect to the stock dividend declared on the Group’s common stock.

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	Price
					Cash Dividend
Quarter ended	High		Low		per share

2008
June 30, 2008		20.57		14.26		0.14

March 31, 2008		23.28		12.79		0.14


2007
December 31, 2007		14.70		11.12		0.14

September 30, 2007		11.63		8.57		0.14

June 30, 2007		12.42		10.81		0.14

March 31, 2007		14.04		11.65		0.14


2006
December 31, 2006		13.57		11.47		0.14

September 30, 2006		12.86		11.82		0.14

June 30, 2006		13.99		11.96		0.14

March 31, 2006		14.46		12.41		0.14

At June 30, 2008 and December 31, 2007, the Bank was considered “well capitalized” under the FDIC regulatory framework for prompt corrective action. To be classified as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios set forth in the following table:


	June 30,			December 31,			Variance			June 30,
(In thousands)	2008			2007			%			2007
Oriental Bank and Trust Regulatory Capital Ratios:
Total Tier 1 Capital to Total Assets		5.83	%		5.80	%		0.5	%		5.85	%

Actual Tier 1 Capital	$	335,433		$	331,552			1.2	%	$	302,160

Minimum Capital Requirement (4%)	$	230,318		$	228,768			0.7	%	$	206,615

Minimum to be well capitalized (5%)	$	287,897		$	285,960			0.7	%	$	258,269


Tier 1 Capital to Risk-Weighted Average		15.98	%		16.61	%		-3.8	%		15.52	%

Actual Tier 1 Risk-Based Capital	$	335,433		$	331,552			1.2	%	$	302,160

Minimum Capital Requirement (4%)	$	83,946		$	79,829			5.2	%	$	77,900

Minimum to be well capitalized (6%)	$	125,920		$	119,743			5.2	%	$	116,850


Total Capital to Risk-Weighted assets		16.55	%		17.12	%		-3.3	%		15.95	%

Actual Total Risk-Based Capital	$	347,318		$	341,713			1.6	%	$	310,592

Minimum Capital Requirement (8%)	$	167,893		$	159,657			5.2	%	$	155,800

Minimum to be well capitalized (10%)	$	209,866		$	199,572			5.2	%	$	194,750

The Group’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol OFG. At June 30, 2008, the Group’s market capitalization for its outstanding common stock was $346.4 million ($14.26 per share).

On April 25, 2007, the Board of Directors adopted the Oriental Financial Group Inc. 2007 Omnibus Performance Incentive Plan (the “Omnibus Plan”), which was subsequently approved at the June 27, 2007 annual meeting of stockholders. 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. Refer to Note 1 of the accompanying unaudited consolidated financial statements for additional information regarding the Omnibus Plan.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

RISK MANAGEMENT

Background

The Group’s risk management policies are established by the Board, implemented by management through the adoption of a risk management program overseen and monitored by the Chief Risk Officer and the Risk Management Committee (RMC). The Group has continued to refine and enhance its risk management program by strengthening policies, processes and procedures necessary to maintain effective risk management.

All aspects of the Group’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential to risk management. As more fully discussed below, the Group’s primary risks exposure include, market, interest rate, credit, liquidity, operational and concentration risks.

Market Risk

Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or prices. The Group evaluates market risk together with interest rate risk (See “Interest Rate Risk” below).

The Group’s financial results and capital levels are constantly exposed to market risk. The Board and management are primarily responsible for ensuring that the market risk assumed by the Group complies with the guidelines established by Board approved policies. The Board has delegated the management of this risk to the Asset and Liability Management Committee (“ALCO”) which is composed of certain executive officers from the Group’s business, treasury and finance areas. One of ALCO’s primary goals is to ensure that the market risk assumed by the Group is within the parameters established in the policies adopted by the Board.

Interest Rate Risk

Interest rate risk is the exposure of the Group’s earnings or capital to adverse movements in interest rates. It is a predominant market risk in terms of its potential impact on earnings.

The Group manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income. ALCO is responsible for monitoring compliance with the market risk policies approved by the Board and adopting interest risk management strategies. In that role, ALCO oversees interest rate risk, liquidity management and other related matters.

In discharging its responsibilities, ALCO examines current and expected conditions in world financial markets, competition and prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities, recent or proposed changes to the investment portfolio, alternative funding sources and their costs, hedging and the possible purchase of derivatives such as swaps and caps, and any tax or regulatory issues which may be pertinent to these areas. ALCO approves funding decisions in light of the Group’s overall growth strategies and objectives.

Each month, the Group performs a net interest income simulation analysis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a one to three-year time horizon, assuming gradual upward and downward interest rate movements of 200 basis points, achieved during a twelve-month period. Simulations are carried out in two ways:

	(1)		using the Group’s static balance sheet as of the simulation date, and

	(2)		using a growing balance sheet based on recent growth patterns and strategies.

The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and cost, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may be important in projecting the future growth of net interest income.

The Group uses an asset-liability management software to project future movements in the Group’s balance sheet and income statement. The starting point of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations.

These simulations are highly complex, and use many simplifying assumptions that are intended to reflect the general behavior of the Group over the period in question. There can be no assurance that actual events will match these assumptions in all cases. For this reason, the results of these simulations are only approximations of the true

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sensitivity of net interest income to changes in market interest rates. The following table presents the results of the simulations at June 30, 2008, assuming a one-year time horizon:


	Net Interest Income Risk (one year projection)
	Static Balance Sheet						Growing simulation
	Amount			Percent			Amount			Percent
Change in interest rate	Change			Change			Change			Change
(In thousands)

+ 200 Basis points	$	(20,070	)		-17.45	%	$	(14,020	)		-11.96	%

+ 100 Basis points	$	(7,823	)		-6.80	%	$	(5,323	)		-4.54	%

- 100 Basis points	$	771			0.67	%	$	781			0.67	%

- 200 Basis points	$	(3,431	)		-2.98	%	$	(5,539	)		-4.72	%

Future net interest income could be affected by the Group’s investments in callable securities, prepayment risk related to mortgage loans and mortgage-backed securities, and its structured repurchase agreements and advances from the FHLB. As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of the Group’s assets and liabilities, the maturity and the repricing frequency of the liabilities has been extended to longer terms. The concentration of long-term fixed rate securities has also been reduced.

The Group uses derivative instruments and other strategies to manage its exposure to interest rate risk caused by changes in interest rates beyond management’s control. The following summarizes strategies, including derivative activities, used by the Group in managing interest rate risk:

Interest rate swaps — Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal. The interest rate swaps have been utilized to convert short term repurchase agreements into fix rate to better match the repricing nature of these borrowings. There were no outstanding interest rate swaps at June 30, 2008, or December 31, 2007.

Structured borrowings — The Group uses structured repurchase agreements and advances from the FHLB, with embedded call options, to reduce the Group’s exposure to interest rate risk by lengthening the contractual maturities of its liabilities, while keeping funding costs low. For further details regarding the Group’s structured borrowings, refer to Note 6 of the unaudited consolidated financial statements.

The Group offers its customers certificates of deposit with an option tied to the performance of the Standard & Poor’s 500 stock market index. At the end of five years, the depositor receives a minimum return or a specified percentage of the average increase of the month-end value of the stock index. The Group uses option agreements with major money center banks and major broker-dealer companies to manage its exposure to changes in those indexes. Under the terms of the option agreements, the Group receives the average increase in the month-end value of the corresponding index in exchange for a fixed premium. The changes in fair value of the options purchased and the options embedded in the certificates of deposit are recorded in earnings.

Derivatives instruments are generally negotiated over-the-counter (“OTC”) contracts. Negotiated OTC derivatives are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise price and maturity.

At June 30, 2008, and December 31, 2007, the fair value the purchased options used to manage the exposure to the stock market on stock indexed deposits represented an asset of $27.6 million and $40.7 million, respectively; and the options sold to customers embedded in the certificates of deposit and recorded as deposits in the unaudited consolidated statement of financial condition, represented a liability of $26.2 million and $38.8 million, respectively.

Credit Risk

Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in accordance with its terms. The principal source of credit risk for the Group’s is its lending activities. (Refer to the “Allowance for Loan Losses and Non-Performing Assets” section for further details.)

The Group manages its credit risk through a comprehensive credit policy which establishes sound underwriting standards, by monitoring and evaluating loan portfolio quality, and by the constant assessment of reserves and loan concentrations. The Group also employs proactive collection and loss mitigation practices.

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The Group may also encounter risk of default in relation to its securities portfolio. The securities held by the Group are principally mortgage-backed securities and U.S. Treasury and agency securities. Thus, a substantial portion of these instruments are guaranteed by mortgages, a U.S. government-sponsored entity or the full faith and credit of the U.S. government, and are deemed to be of the highest credit quality. At June 30, 2008, mortgage-backed securities include approximately $710.0 million in non-agency collateralized mortgage obligations with unrealized losses of $53.4 million in the Group’s available-for-sale investment securities portfolio. These obligations are collateralized by pools of mortgage loans originated in the U.S., and are senior classes having subordination of losses ranging from 4.7% to 16.6%, which provide the capacity to absorb estimated collateral losses. These issues, including one that is backed by Alternative-A (Alt-A) loan collateral originated in 2006, are rated “AAA” by Standard & Poor’s and “Aaa” by Moody’s.

The unrealized loss position is a reflection of the recent dislocations seen in the financial and credit markets, which have created a significant widening in the market’s credit spreads. The underlying reference long portfolios (collateral) on the structures are substantively investment grade, they have performed adequately, there have been no defaults to date, and none of our structured credit investments have been downgraded.

Management’s Credit Committee, composed of the Group’s Chief Executive Officer, Chief Credit Risk Officer and other senior executives, has primary responsibility for setting strategies to achieve the Group’s credit risk goals and objectives. Those goals and objectives are set forth in the Group’s Credit Policy.

Liquidity Risk

Liquidity risk is the risk of the Group not being able to generate sufficient cash from either assets or liabilities to meet obligations as they become due, without incurring substantial losses. The Group’s cash requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as they mature, and funding of new and existing investment as required.

Effective liquidity management requires that the Group have sufficient cash available at all times to meet its financial commitments, finance planned growth and have a reasonable safety margin for normal as well as unexpected cash needs. ALCO is responsible for managing the Group’s liquidity risk in accordance with the policies adopted by the Board. In discharging its liquidity risk management obligations, ALCO approves operating and contingency procedures and monitors their implementation. The Group’s Treasurer and CIO is responsible for the implementation of the liquidity risk management policies adopted by the Board and the operating and contingency procedures adopted by ALCO, and for monitoring the Group’s liquidity position on an ongoing basis. Using measures of liquidity developed by the Group’s Treasury Division under several different scenarios, the Treasury Division, ALCO and the Board review the Group’s liquidity position on a daily, monthly and quarterly basis, respectively.

The Group meets its liquidity management objectives by maintaining (i) liquid assets in the form of investment securities,(ii) sufficient unused borrowing capacity in the national money markets, and achieving (iii) consistent growth in core deposits. At June 30, 2008, the Group had approximately $245.3 million in investments available to cover liquidity needs. Additional asset-driven liquidity is provided by the availability of loan assets to pledge. These sources, in addition to the Group’s 6.80% average equity capital base, provide a stable funding base.

The Group utilizes different sources of funding to help ensure that adequate levels of liquidity are available when needed. Diversification of funding sources is of great importance as it protects the Group’s liquidity from market disruptions. The principal sources of short-term funds are deposits, securities sold under agreements to repurchase, and lines of credit with the FHLB. ALCO reviews credit availability on a regular basis. The Group securitizes and sells mortgage loans as supplemental source of funding. Long-term certificates of deposit as well as long-term funding through the issuance of notes have also provided additional funding. The cost of these different alternatives, among other things, is taken into consideration. The Group’s principal uses of funds are the origination of loans and the repayment of maturing deposit accounts and borrowings.

Operational Risk

Operational risk is the risk of loss from inadequate or failed internal processes, personnel and systems or from external events. All functions, products and services of the Group are susceptible to operational risk.

The Group faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products. Coupled with external influences such as market conditions, security risks, and legal risk, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk, the Group has developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these policies and procedures is to provide reasonable assurance that the Group’s business operations are functioning within established limits.

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The Group classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and assessments. With respect to corporate wide risks, such as information security, business recovery, legal and compliance, the Group has specialized groups, such as the office of the General Counsel, Information Security, Corporate Compliance, Information Technology and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the business groups. All these matters are reviewed and discussed in the RMC.

The Group is subject to extensive regulation in the different jurisdictions in which it conducts its business, and this regulatory scrutiny has significantly increased over the last several years. The Group has established and continues to enhance procedures based on legal and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. The Group has a corporate compliance function, headed by a Senior Compliance Officer who reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and implementation of an enterprise-wide compliance program.

Concentration Risk

Substantially all of the Group’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico. As a consequence, the Group’s profitability and financial condition may be adversely affected by an extended economic slowdown, adverse political or economic developments in Puerto Rico or the effects of a natural disaster, all of which could result in a reduction in loan originations, an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the value of its loans and loan servicing portfolio.

Puerto Rico is currently in a general economic slowdown that has caused a reduction in private sector employment and consumer spending. These economic concerns and uncertainties in the private and public sectors have had an adverse effect in the credit quality of our loan portfolios as delinquency rates have increased in the short-term and may continue to increase until the economy stabilizes. The reduction in consumer spending may continue to impact growth in our other interest and non-interest revenue sources.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Group’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Group’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation, the CEO and the CFO have concluded that, as of the end of such period, the Group’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Group in the reports that it files or submits under the Exchange Act.

Internal Control over Financial Reporting

There were no changes in the Group’s internal control over financial reporting (as such term is defined on rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the quarter ended June 30, 2008.

PART — II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

On August 11, 2000, the Group filed a lawsuit in the United States District Court for the District of Puerto Rico (the “Court”) against Federal Insurance Company, Inc. (“FIC”) for breach of insurance contract, breach of covenant of good faith and fair dealing and damages. On October 3, 2005, a jury rendered a verdict of $7.5 million in favor of the Group (the “2005 Verdict”). The jury could not reach a decision on a portion of the Group’s claim, thus forcing a new trial. After retrial of that portion of the Group’s claim, on August 14, 2007, a jury rendered a verdict in favor of FIC and against the Group (the “2007 Verdict”). Judgment pursuant to the aforementioned 2005 and 2007 verdicts was entered on August 15, 2007. By an Opinion and Order dated July 31, 2008, the Court set aside the portion of the 2005 Verdict granting the Group consequential damages in the amount of $7,078,640.60, and reaffirmed the 2007 Verdict. The Court upheld the award of $453,000 to the Group under the 2005 Verdict. The Group is considering its options with respect to the Court’s decisions described above.

The Group has not recognized any income on these claims since several post-trial motions have not been ruled upon yet and appellate rights have not been exhausted. Thus, the amount to be collected cannot be determined at this time.

In addition, the Group and its subsidiaries are defendants in a number of legal proceedings incidental to their business. The Group is vigorously contesting such claims. Based upon a review by legal counsel and the

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development of these matters to date, Management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group’s financial condition or results of operations.

Item 1A. RISK FACTORS

There have been no material changes to the risk factors as previously disclosed under Item 1A to Part 1 of the Group’s annual report on Form 10-K for the fiscal year ended December 31, 2007.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

	a)		None

	b)		Not applicable

	c)		Purchases of equity securities by the issuer and affiliated purchasers.

On July 27 2007, the Board approved a new stock repurchase program pursuant to which the Group is authorized to purchase in the open market up to $15.0 million of its outstanding share of common stock. The program was announced on July 31, 2007. The shares of common stock so repurchased are to be held by the Group as treasury shares. The new program will substitute the previous program approved on August 30, 2005.

There were no purchases of equity securities under this repurchase program during the quarter ended June 30 2008. The approximate dollar value of shares that may yet be repurchased under the plan amounted to $11.3 million at June 30, 2008.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

The annual meeting of stockholders of the Group was held on June 18, 2008, for (i) the election of three directors for a three-year term expiring at the 2011 annual meeting of shareholders and until their successors are duly elected and qualified; (ii) to consider and approve an amendment to the Oriental Financial Group Inc. 2007 Omnibus Performance Incentive Plan to include a minimum one-year performance period for awards of performance shares and performance units, and a minimum three-year restriction period for awards of restricted stock and restricted units, and (iii) to ratify the selection of KPMG LLP as our independent auditors for the fiscal year ending December 31, 2008. There was no solicitation in opposition to the Board’s nominees, which were all elected, the amendment to the Omnibus Plan was approved, and KMPG LLP was ratified. The voting results were as follows:

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		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


	Original				Sale		Sale Book
Description	Face		Original Cost		Proceeds		Value		Gains		Losses


Gain on sale of securities available-for-sale
Investment securities
Corporate bonds and other	$	25,000	$	24,909	$	23,032	$	22,674	$	358	$	—


	$	25,000	$	24,909	$	23,032	$	22,674	$	358	$	—


	For					Withheld
	#		%			#		%
Proposal 1-Election of Directors
Three-year term
Juan C. Aguayo		19,118,839		94.9	%		1,029,205		5.1	%
Pablo I. Altieri		19,008,963		94.3	%		1,139,081		5.7	%
Francisco Arriví		19,087,217		94.7	%		1,060,827		5.3	%


	For					Against					Abstain					Broker Non-Vote
	#		%			#		%			#		%			#		%
Proposal 2-Approval of amendment to the Omnibus Plan		14,523,306		72.1	%		577,220		2.9	%		351,804		1.7	%		4,695,714		23.3	%


31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



By:	/s/ José Rafael Fernández	Dated: August 8, 2008
	José Rafael Fernández
	President and Chief Executive Officer


By:	/s/ Norberto González	Dated: August 8, 2008
	Norberto González
	Executive Vice President and Chief Financial Officer