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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto
 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:
 
  þ o
  o o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
  o þ
 Number of shares outstanding of the registrants common stock, as of the latest practicable
date:
 45,274,338 common shares ($1.00 par value per share) outstanding as of April 30, 2011




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TABLE OF CONTENTS
 PagePart I FINANCIAL INFORMATION:Item 1 Financial StatementsUnaudited consolidated statements of financial condition at March
31, 2011 and December 31, 2010
    
    
    1Unaudited consolidated statements of operations for the quarters
ended March 31, 2011 and 2010
    
    
    2Unaudited consolidated statements of changes in stockholders
equity for the quarters ended March 31, 2011 and 2010
    
    
    3Unaudited consolidated statements of comprehensive income for the
quarters ended March 31, 2011 and 2010
    
    
    4Unaudited consolidated statements of cash flows for the quarters
ended March 31, 2011 and 2010
    
    
    5Notes to unaudited consolidated financial statements
    
    
    8Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    62Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    88Item 4 Controls and Procedures
    
    
    91PART II OTHER INFORMATION:Item 1 Legal Proceedings
    
    
    91Item 1A Risk Factors
    
    
    91Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    91Item 3 Defaults Upon Senior Securities
    
    
    91Item 5 Other Information
    
    
    91Item 6 Exhibits
    
    
    93Signatures
    
    
    94EX-31.1EX-31.2EX-32.1EX-32.2




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FORWARD-LOOKING STATEMENTS
   
    
    the rate of growth in the economy and employment levels, as well as general business and economic
conditions;
    
    changes in interest rates, as well as the magnitude of such changes;
    
    the fiscal and monetary policies of the federal government and its agencies;
    
    changes in federal bank regulatory and supervisory policies, including required levels of
capital;
    
    the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Act) on our businesses, business practices and cost of operations;
    
    the relative strength or weakness of the consumer and commercial credit sectors and of the
real estate market in Puerto Rico;
    
    the performance of the stock and bond markets;
    
    competition in the financial services industry;
    
    additional Federal Deposit Insurance Corporation (FDIC) assessments; and
    
    possible legislative, tax or regulatory changes.




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ORIENTAL FINANCIAL GROUP INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION  MARCH 31, 2011 AND DECEMBER 31, 2010
 March 31,
    
    
    December 31,2011
    
    
    2010(In thousands, except share data)ASSETSCash and cash equivalentsCash and due from banks
    
    $
    315,351
    
    
    $
    337,218Money market investments
    
    
    2,060
    
    
    
    111,728Total cash and cash equivalents
    
    
    317,411
    
    
    
    448,946Investments:Trading securities, at fair value, with amortized cost of $1,447 (December 31, 2010 - $1,306)
    
    
    1,444
    
    
    
    1,330Investment securities available-for-sale, at fair value, with amortized cost of $3,562,745
(December 31, 2010 - $3,661,146)
    
    
    3,587,930
    
    
    
    3,700,064Investment securities held-to-maturity, at amortized cost, with fair value of $855,816
(December 31, 2010 - $675,721)
    
    
    875,494
    
    
    
    689,917Federal Home Loan Bank (FHLB) stock, at cost
    
    
    22,496
    
    
    
    22,496Other investments
    
    
    150
    
    
    
    150Total investments
    
    
    4,487,514
    
    
    
    4,413,957Loans:Mortgage loans held-for-sale, at lower of cost or fair value
    
    
    34,216
    
    
    
    33,979Loans not covered under shared-loss agreements with the FDIC, net of allowance for loan
and lease losses of $32,727 (December 31, 2010 - $31,430)
    
    
    1,108,324
    
    
    
    1,117,859Loans covered under shared-loss agreements with the FDIC, net of allowance for loan
and lease losses of $53,480 (December 31, 2010 - $49,286)
    
    
    589,912
    
    
    
    620,732Total loans, net
    
    
    1,732,452
    
    
    
    1,772,570FDIC shared-loss indemnification asset
    
    
    436,889
    
    
    
    471,872Foreclosed real estate covered under shared-loss agreements with the FDIC
    
    
    17,302
    
    
    
    15,962Foreclosed
real estate not covered under shared-loss agreements with the FDIC
    
    
    12,793
    
    
    
    11,969Accrued interest receivable
    
    
    28,634
    
    
    
    28,716Deferred tax asset, net
    
    
    30,404
    
    
    
    30,350Premises and equipment, net
    
    
    23,353
    
    
    
    23,941Forward settlement swaps
    
    
    7,203
    
    
    
    11,023Investment in equity indexed options
    
    
    11,764
    
    
    
    9,870Investment in swap options
    
    
    7,804
    
    
    
    7,422Other assets
    
    
    62,606
    
    
    
    64,422Total assets
    
    $
    7,176,129
    
    
    $
    7,311,020LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Demand deposits
    
    $
    947,526
    
    
    $
    954,554Savings accounts
    
    
    240,863
    
    
    
    235,690Certificates of deposit
    
    
    1,313,083
    
    
    
    1,398,644Total deposits
    
    
    2,501,472
    
    
    
    2,588,888Borrowings:Short-term borrowings
    
    
    32,335
    
    
    
    42,470Securities sold under agreements to repurchase
    
    
    3,456,605
    
    
    
    3,456,781Advances from FHLB
    
    
    281,687
    
    
    
    281,753FDIC-guaranteed term notes
    
    
    105,112
    
    
    
    105,834Subordinated capital notes
    
    
    36,083
    
    
    
    36,083Total borrowings
    
    
    3,911,822
    
    
    
    3,922,921FDIC net settlement payable
    
    
    1,774
    
    
    
    23,082Accrued expenses and other liabilities
    
    
    47,933
    
    
    
    43,798Total liabilities
    
    
    6,463,001
    
    
    
    6,578,689Stockholders equity:Preferred stock, $1 par value; 10,000,000 shares authorized; 1,340,000 shares of Series A and
1,380,000 shares of Series B issued and outstanding, $25 liquidation value.
    
    
    68,000
    
    
    
    68,000Common stock, $1 par value; 100,000,000 shares authorized; 47,807,984 shares issued;
45,375,090 shares outstanding (December 31, 2010 - 47,807,734; 46,348,667)
    
    
    47,808
    
    
    
    47,808Treasury stock, at cost, 2,432,894 shares (December 31, 2010 - 1,459,067 shares)
    
    
    (28,746
    )
    
    
    (16,732
    )Additional paid-in capital
    
    
    498,303
    
    
    
    498,435Legal surplus
    
    
    46,717
    
    
    
    46,331Retained earnings
    
    
    50,727
    
    
    
    51,502Accumulated other comprehensive income, net of tax of ($1,807) (December 31, 2010 - ($2,108))
    
    
    30,319
    
    
    
    36,987Total stockholders equity
    
    
    713,128
    
    
    
    732,331Total liabilities and stockholders equity
    
    $
    7,176,129
    
    
    $
    7,311,020
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ORIENTAL FINANCIAL GROUP INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 2011 AND 2010
 Quarter ended March 31,2011
    
    
    2010(In thousands, except per share data)Interest income:LoansLoans not covered under shared-loss agreements with the FDIC
    
    $
    17,841
    
    
    $
    17,637Loans covered under shared-loss agreements with the FDIC
    
    
    14,226
    
    
    
    Mortgage-backed securities
    
    
    43,738
    
    
    
    43,594Investment securities and other
    
    
    2,105
    
    
    
    9,105Total interest income
    
    
    77,910
    
    
    
    70,336Interest expense:Deposits
    
    
    12,214
    
    
    
    11,243Securities sold under agreements to repurchase
    
    
    24,159
    
    
    
    25,285Advances from FHLB and other borrowings
    
    
    3,049
    
    
    
    3,012FDIC-guaranteed term notes
    
    
    1,021
    
    
    
    1,021Subordinated capital notes
    
    
    302
    
    
    
    298Total interest expense
    
    
    40,745
    
    
    
    40,859Net interest income
    
    
    37,165
    
    
    
    29,477Provision for non-covered loan and lease losses
    
    
    3,800
    
    
    
    4,014Provision for covered loan and lease losses, net
    
    
    549
    
    
    
    Net interest income after provision for loan and lease losses
    
    
    32,816
    
    
    
    25,463Non-interest income:Wealth management revenues
    
    
    4,682
    
    
    
    3,978Banking service revenues
    
    
    3,835
    
    
    
    1,622Mortgage banking activities
    
    
    1,959
    
    
    
    1,797Total banking and wealth management revenues
    
    
    10,476
    
    
    
    7,397Total loss on other-than-temporarily impaired securities
    
    
    
    
    
    
    (39,590
    )Portion of loss on securities recognized in other comprehensive income
    
    
    
    
    
    
    38,958Other-than-temporary impairments on securities
    
    
    
    
    
    
    (632
    )Accretion of FDIC loss-share indemnification asset, net
    
    
    1,211
    
    
    
    Net gain (loss) on:Sale of securities
    
    
    (2
    )
    
    
    12,020Derivatives
    
    
    (3,968
    )
    
    
    (10,636
    )Trading securities
    
    
    (31
    )
    
    
    (3
    )Foreclosed real estate
    
    
    (132
    )
    
    
    (117
    )Other
    
    
    (27
    )
    
    
    9Total non-interest income, net
    
    
    7,527
    
    
    
    8,038Non-interest expenses:Compensation and employee benefits
    
    
    11,688
    
    
    
    8,250Professional and service fees
    
    
    5,451
    
    
    
    2,153Occupancy and equipment
    
    
    4,405
    
    
    
    3,594Insurance
    
    
    1,985
    
    
    
    1,833Electronic banking charges
    
    
    1,454
    
    
    
    678Taxes, other than payroll and income taxes
    
    
    1,380
    
    
    
    857Advertising and business promotion
    
    
    1,165
    
    
    
    699Loan servicing and clearing expenses
    
    
    1,021
    
    
    
    724Foreclosure and repossession expenses
    
    
    729
    
    
    
    302Communication
    
    
    397
    
    
    
    342Director and investors relations
    
    
    287
    
    
    
    315Printing, postage, stationery and supplies
    
    
    282
    
    
    
    203Other
    
    
    546
    
    
    
    443Total non-interest expenses
    
    
    30,790
    
    
    
    20,393Income before income taxes
    
    
    9,553
    
    
    
    13,108Income tax expense
    
    
    6,472
    
    
    
    1,172Net income
    
    
    3,081
    
    
    
    11,936Less: Dividends on preferred stock
    
    
    (1,201
    )
    
    
    (1,201
    )Income available to common shareholders
    
    $
    1,880
    
    
    $
    10,735Income per common share:Basic
    
    $
    0.04
    
    
    $
    0.42Diluted
    
    $
    0.04
    
    
    $
    0.41Average common shares outstanding and equivalents
    
    
    46,179
    
    
    
    25,932Cash dividends per share of common stock
    
    $
    0.05
    
    
    $
    0.04
 See notes to unaudited consolidated financial statements.
 2




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ORIENTAL FINANCIAL GROUP INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE QUARTERS ENDED MARCH 31, 2011 AND 2010
 Quarter Ended March 31,2011
    
    
    2010(In thousands)Preferred stock:Balance at beginning and end of period
    
    $
    68,000
    
    
    $
    68,000Common stock:Balance at beginning of period
    
    
    47,808
    
    
    
    25,739Issuance of common stock
    
    
    
    
    
    
    8,740Balance at end of period
    
    
    47,808
    
    
    
    34,479Additional paid-in capital:Balance at beginning of period
    
    
    498,435
    
    
    
    213,445Issuance of
common stock
    
    
    
    
    
    
    90,896Stock-based compensation expense
    
    
    368
    
    
    
    263Exercised restricted stock units with treasury shares
    
    
    (500
    )
    
    
    Common stock
issuance cost
    
    
    
    
    
    
    (5,062
    )Balance at end of period
    
    
    498,303
    
    
    
    299,542Legal surplus:Balance at beginning of period
    
    
    46,331
    
    
    
    45,279Transfer from retained earnings
    
    
    386
    
    
    
    1,201Balance at end of period
    
    
    46,717
    
    
    
    46,480Retained earnings:Balance at beginning of period
    
    
    51,502
    
    
    
    77,584Net income
    
    
    3,081
    
    
    
    11,936Cash dividends declared on common stock
    
    
    (2,269
    )
    
    
    (1,322
    )Cash dividends declared on preferred stock
    
    
    (1,201
    )
    
    
    (1,201
    )Transfer to legal surplus
    
    
    (386
    )
    
    
    (1,201
    )Balance at end of period
    
    
    50,727
    
    
    
    85,796Treasury stock:Balance at beginning of period
    
    
    (16,732
    )
    
    
    (17,142
    )Stock purchased under the repurchase program
    
    
    (12,530
    )
    
    
    Exercised restricted stock units with treasury shares
    
    
    500
    
    
    
    Stock used to match defined contribution plan
    
    
    16
    
    
    
    15Balance at end of period
    
    
    (28,746
    )
    
    
    (17,127
    )Accumulated other comprehensive income (loss), net of tax:Balance at beginning of period
    
    
    36,987
    
    
    
    (82,739
    )Other comprehensive income (loss), net of tax
    
    
    (6,668
    )
    
    
    29,743Balance at end of period
    
    
    30,319
    
    
    
    (52,996
    )Total stockholders equity
    
    $
    713,128
    
    
    $
    464,174
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ORIENTAL FINANCIAL GROUP INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE QUARTERS ENDED MARCH 31, 2011 AND 2010
 Quarter Ended March 31,2011
    
    
    2010(In thousands)Net income
    
    $
    3,081
    
    
    $
    11,936Other comprehensive income (loss):Unrealized gain (loss) on securities available-for-sale arising during the period
    
    
    (13,738
    )
    
    
    44,610Realized (gain) loss on investment securities included in net income
    
    
    2
    
    
    
    (12,020
    )Total loss on other- than-temporarily impaired securities
    
    
    
    
    
    
    39,590Portion of loss on securities recognized in other comprehensive income
    
    
    
    
    
    
    (38,958
    )Unrealized gains on cash flow hedges arising during the period
    
    
    7,123
    
    
    
    Income tax effect
    
    
    (55
    )
    
    
    (3,479
    )Other comprehensive income (loss) for the period
    
    
    (6,668
    )
    
    
    29,743Comprehensive income (loss)
    
    $
    (3,587
    )
    
    $
    41,679
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ORIENTAL FINANCIAL GROUP INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2011 AND 2010
 Quarter Ended March 31,2011
    
    
    2010(In thousands)Cash flows from operating activities:Net income
    
    $
    3,081
    
    
    $
    11,936Adjustments to reconcile net income to net cash used in operating activities:Amortization of deferred loan origination fees, net of costs
    
    
    10
    
    
    
    135Amortization of premiums, net of accretion of discounts
    
    
    7,638
    
    
    
    5,559Amortization of core deposit intangible
    
    
    36
    
    
    
    Accretion of FDIC loss-share indemnification asset, net
    
    
    (1,211
    )
    
    
    Other-than-temporary impairments on securities
    
    
    
    
    
    
    632Depreciation and amortization of premises and equipment
    
    
    1,468
    
    
    
    1,333Deferred income taxes, net
    
    
    (109
    )
    
    
    (3,979
    )Provision for loan and lease losses, net
    
    
    4,349
    
    
    
    4,014Stock-based compensation
    
    
    368
    
    
    
    263Fair value adjustment of servicing asset
    
    
    (440
    )
    
    
    (449
    )(Gain) loss on:Sale of securities
    
    
    2
    
    
    
    (12,020
    )Sale of mortgage loans held for sale
    
    
    (799
    )
    
    
    (862
    )Derivatives
    
    
    3,968
    
    
    
    10,636Sale of foreclosed real estate
    
    
    132
    
    
    
    117Sale of premises and equipment
    
    
    8
    
    
    
    (14
    )Originations and purchases of loans held-for-sale
    
    
    (52,807
    )
    
    
    (49,958
    )Proceeds from sale of loans held-for-sale
    
    
    17,970
    
    
    
    17,633Net (increase) decrease in:Trading securities
    
    
    (114
    )
    
    
    230Accrued interest receivable
    
    
    112
    
    
    
    (3,444
    )Other assets
    
    
    2,374
    
    
    
    419Net increase (decrease) in:Accrued interest on deposits and borrowings
    
    
    (312
    )
    
    
    (563
    )Accrued expenses and other liabilities
    
    
    (17,143
    )
    
    
    4,476Net cash used in operating activities
    
    
    (31,419
    )
    
    
    (13,906
    )
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ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2011 AND 2010
 Quarter Ended March 31,2011
    
    
    2010(In thousands)Cash flows from investing activities:Purchases of:Investment securities available-for-sale
    
    
    (222,947
    )
    
    
    (2,104,008
    )Investment securities held-to-maturity
    
    
    (209,112
    )
    
    
    Equity options
    
    
    (525
    )
    
    
    (524
    )Maturities and redemptions of:Investment securities available-for-sale
    
    
    303,270
    
    
    
    915,890Investment securities held-to-maturity
    
    
    22,042
    
    
    
    Proceeds from sales of:Investment securities available-for-sale
    
    
    44,528
    
    
    
    1,238,588Foreclosed real estate
    
    
    2,397
    
    
    
    2,228Other repossessed assets
    
    
    589
    
    
    
    Premises and equipment
    
    
    (26
    )
    
    
    (75
    )Origination and purchase of loans, excluding loans held-for-sale
    
    
    (25,155
    )
    
    
    (28,153
    )Principal repayment of loans
    
    
    54,868
    
    
    
    30,642Shared-loss agreements reimbursements from the FDIC
    
    
    39,839
    
    
    
    Additions to premises and equipment
    
    
    (861
    )
    
    
    (40
    )Net cash provided by investing activities
    
    
    8,907
    
    
    
    54,548Cash flows from financing activities:Net increase (decrease) in:Deposits
    
    
    (89,422
    )
    
    
    69,377Short term borrowings
    
    
    (10,135
    )
    
    
    (11,226
    )Proceeds from issuance of common stock, net
    
    
    
    
    
    
    94,574Purchase of treasury stock
    
    
    (12,530
    )
    
    
    Termination of derivative instruments
    
    
    6,534
    
    
    
    (236
    )Dividends paid on preferred stock
    
    
    (1,201
    )
    
    
    (1,201
    )Dividends paid on common stock
    
    
    (2,269
    )
    
    
    (972
    )Net cash provided by (used in) financing activities
    
    
    (109,023
    )
    
    
    150,316Net change in cash and cash equivalents
    
    
    (131,535
    )
    
    
    190,958Cash and cash equivalents at beginning of period
    
    
    448,946
    
    
    
    277,123Cash and cash equivalents at end of period
    
    $
    317,411
    
    
    $
    468,081
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ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2011 AND 2010
 Quarter Ended March 31,2011
    
    
    2010(In thousands)Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:Interest paid
    
    $
    41,057
    
    
    $
    41,445Mortgage loans securitized into mortgage-backed securities
    
    $
    32,599
    
    
    $
    32,873Securities sold but not yet delivered
    
    $
    
    
    
    $
    116,747Securities purchased but not yet received
    
    $
    
    
    
    $
    171,813Transfer from loans to foreclosed real estate and other repossed assets
    
    $
    4,693
    
    
    $
    2,916
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ORIENTAL FINANCIAL GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION
   Nature of Operations
      8




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Significant Accounting Policies
  Loans and Allowance for Loan and Lease Losses
  Non-Covered Loans
     9




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Mortgage
Loans:
 Commercial loans:
 Consumer loans:
 Leasing:
  10




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Covered Loans
       Lease Financing
   Financial Instruments
  11




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Level 1
 Level 2
 Level 3
  Impairment of Investment Securities
   
    
    identification and evaluation of investments that have indications of possible
other-than-temporary impairment;
    
    analysis of individual investments that have fair values less than amortized cost,
including consideration of the length of time the investment has been in an unrealized loss
position and the expected recovery period;
    
    the financial condition of the issuer or issuers;
    
    the creditworthiness of the obligor of the security;
    
    actual collateral attributes;
    
    any rating changes by a rating agency;
    
    current analysts evaluations;
    
    the payment structure of the debt security and the likelihood of the issuer being able
to make payments;
 12




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
    
    current market conditions;
    
    adverse conditions specifically related to the security, industry, or a geographic
area;
    
    the Groups intent to sell the debt security;
    
    whether it is more-likely-than-not that the Group will be required to sell the debt
security before its anticipated recovery;
    
    and other qualitative factors that could support or not an other-than-temporary
impairment.
 Derivative Instruments and Hedging Activities
       13




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##### Table of Contents



FDIC Shared-Loss Indemnification Asset
   Core Deposit Intangible
  Foreclosed Real Estate and Other Repossessed Property
 Non-covered Foreclosed Real Estate
  14




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##### Table of Contents



Covered Foreclosed Real Estate and Other Repossessed Property
 Covered foreclosed real estate and other repossessed property were initially recorded at their
estimated fair value on the acquisition date, based on appraisal value less estimated selling
costs. Any subsequent write-downs due to declines in fair value are charged to non-interest
expense with a partially offsetting non-interest income for the loss reimbursement under the FDIC
shared-loss agreement. Any recoveries of previous write downs are
credited to non-interest expenses
with a corresponding charge to non-interest income for the portion of the recovery that is due to
the FDIC.
 Income Taxes
        15




---



##### Table of Contents



Equity-Based Compensation Plan
       Subsequent Events
  Reclassifications
  16




---



##### Table of Contents



Recent Accounting Developments:
 Fair Value Measurements and Disclosures
 Credit Quality and Allowance for Credit Losses Disclosures
 Troubled Debt Restructuring 
  NOTE 2  FDIC-ASSISTED ACQUISITION AND FDIC SHARED-LOSS INDEMNIFICATION ASSET
   17




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##### Table of Contents



Quarter EndedMarch 31, 2011(In thousands)Balance at December 31, 2010
    
    $
    471,872Shared-loss agreements reimbursements from the FDIC
    
    
    (39,839
    )Credit impairment losses to be covered under shared-loss agreements
    
    
    3,645Accretion of FDIC shared-loss indemnification asset, net
    
    
    1,211Balance at March 31, 2011
    
    $
    436,889
 18




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##### Table of Contents



NOTE 3  INVESTMENTS
 Money Market Investments
  Investment Securities
  March 31, 2011Gross
    
    
    Gross
    
    
    
    
    
    
    WeightedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    AverageCost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Yield(In thousands)Available-for-saleObligations
of Puerto Rico Government and political subdivisions
    
    $
    81,152
    
    
    $
    60
    
    
    $
    3,954
    
    
    $
    77,258
    
    
    
    5.14
    %Structured credit investments
    
    
    61,725
    
    
    
    
    
    
    
    16,563
    
    
    
    45,162
    
    
    
    3.69
    %Total investment securities
    
    
    142,877
    
    
    
    60
    
    
    
    20,517
    
    
    
    122,420FNMA and FHLMC certificates
    
    
    3,156,825
    
    
    
    33,471
    
    
    
    3,004
    
    
    
    3,187,292
    
    
    
    3.78
    %GNMA certificates
    
    
    108,905
    
    
    
    8,805
    
    
    
    
    
    
    
    117,710
    
    
    
    5.23
    %CMOs issued by US Government sponsored agencies
    
    
    154,138
    
    
    
    6,400
    
    
    
    30
    
    
    
    160,508
    
    
    
    4.98
    %Total mortgage-backed securities
    
    
    3,419,868
    
    
    
    48,676
    
    
    
    3,034
    
    
    
    3,465,510Total securities available-for-sale
    
    
    3,562,745
    
    
    
    48,736
    
    
    
    23,551
    
    
    
    3,587,930
    
    
    
    3.91
    %Held-to-maturityMortgage-backed securitiesFNMA and FHLMC certificates
    
    
    875,494
    
    
    
    
    
    
    
    19,678
    
    
    
    855,816
    
    
    
    3.77
    %Total
    
    $
    4,438,239
    
    
    $
    48,736
    
    
    $
    43,229
    
    
    $
    4,443,746
    
    
    
    3.88
    %
 19




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##### Table of Contents



December 31, 2010Gross
    
    
    Gross
    
    
    
    
    
    
    WeightedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    AverageCost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Yield(In thousands)Available-for-saleObligations
of Puerto Rico Government and political subdivisions
    
    $
    71,128
    
    
    $
    160
    
    
    $
    3,625
    
    
    $
    67,663
    
    
    
    5.37
    %Structured credit investments
    
    
    61,724
    
    
    
    
    
    
    
    20,031
    
    
    
    41,693
    
    
    
    3.68
    %Obligations of US Government sponsored agencies
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    0.01
    %Total investment securities
    
    
    135,852
    
    
    
    160
    
    
    
    23,656
    
    
    
    112,356FNMA and FHLMC certificates
    
    
    3,238,802
    
    
    
    45,446
    
    
    
    2,058
    
    
    
    3,282,190
    
    
    
    3.70
    %GNMA certificates
    
    
    118,191
    
    
    
    9,523
    
    
    
    
    
    
    
    127,714
    
    
    
    5.19
    %CMOs issued by US Government sponsored agencies
    
    
    168,301
    
    
    
    9,524
    
    
    
    21
    
    
    
    177,804
    
    
    
    5.01
    %Total mortgage-backed securities
    
    
    3,525,294
    
    
    
    64,493
    
    
    
    2,079
    
    
    
    3,587,708Total securities available-for-sale
    
    
    3,661,146
    
    
    
    64,653
    
    
    
    25,735
    
    
    
    3,700,064
    
    
    
    3.84
    %Held-to-maturityMortgage-backed securitiesFNMA and FHLMC certificates
    
    
    689,917
    
    
    
    
    
    
    
    14,196
    
    
    
    675,721
    
    
    
    3.74
    %Total
    
    $
    4,351,063
    
    
    $
    64,653
    
    
    $
    39,931
    
    
    $
    4,375,785
    
    
    
    3.82
    %
  20




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##### Table of Contents



March 31, 2011Available-for-sale
    
    
    Held-to-maturityAmortized Cost
    
    
    Fair Value
    
    
    Amortized Cost
    
    
    Fair Value(In thousands)
    
    
    (In thousands)Investment securitiesDue from 1 to 5 yearsObligations
of Puerto Rico Government and political subdivisions
    
    $
    10,386
    
    
    $
    10,341
    
    
    $
    
    
    
    $
    Total due from 1 to 5 years
    
    
    10,386
    
    
    
    10,341
    
    
    
    
    
    
    
    Due after 5 to 10 yearsObligations
of Puerto Rico Government and political subdivisions
    
    
    13,702
    
    
    
    12,814
    
    
    
    
    
    
    
    Structured credit investments
    
    
    11,977
    
    
    
    9,427
    
    
    
    
    
    
    
    Total due after 5 to 10 years
    
    
    25,679
    
    
    
    22,241
    
    
    
    
    
    
    
    Due after 10 yearsObligations
of Puerto Rico Government and political subdivisions
    
    
    57,064
    
    
    
    54,103
    
    
    
    
    
    
    
    Structured credit investments
    
    
    49,748
    
    
    
    35,735
    
    
    
    
    
    
    
    Total due after 10 years
    
    
    106,812
    
    
    
    89,838
    
    
    
    
    
    
    
    Total investment securities
    
    
    142,877
    
    
    
    122,420
    
    
    
    
    
    
    
    Mortgage-backed securitiesDue after 5 to 10 yearsFNMA and FHLMC certificates
    
    
    12,779
    
    
    
    13,526
    
    
    
    
    
    
    
    Due after 10 yearsFNMA and FHLMC certificates
    
    
    3,144,047
    
    
    
    3,173,766
    
    
    
    875,494
    
    
    
    855,816GNMA certificates
    
    
    108,905
    
    
    
    117,710
    
    
    
    
    
    
    
    CMOs issued by US Government sponsored agencies
    
    
    154,137
    
    
    
    160,508
    
    
    
    
    
    
    
    Total due after 10 years
    
    
    3,407,089
    
    
    
    3,451,984
    
    
    
    875,494
    
    
    
    855,816Total mortgage-backed securities
    
    
    3,419,868
    
    
    
    3,465,510
    
    
    
    875,494
    
    
    
    855,816Total
    
    $
    3,562,745
    
    
    $
    3,587,930
    
    
    $
    875,494
    
    
    $
    855,816
  21




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##### Table of Contents



Quarter Ended March 31, 2011Description
    
    Face Value
    
    
    Cost
    
    
    Sale Price
    
    
    Sale Book Value
    
    
    Gross Gains
    
    
    Gross Losses(In thousands)Sale of Securities Available-for-SaleInvestment securitiesObligations of U.S. Government
sponsored agencies
    
    $
    10,600
    
    
    $
    10,599
    
    
    $
    10,600
    
    
    $
    10,600
    
    
    $
    
    
    
    $
    Total investment securities
    
    
    10,600
    
    
    
    10,599
    
    
    
    10,600
    
    
    
    10,600
    
    
    
    
    
    
    
    Mortgage-backed securitiesFNMA and FHLMC certificates
    
    
    1,056
    
    
    
    1,073
    
    
    
    1,073
    
    
    
    1,073
    
    
    
    
    
    
    
    GNMA certificates
    
    
    32,599
    
    
    
    32,795
    
    
    
    32,855
    
    
    
    32,857
    
    
    
    
    
    
    
    2Total mortgage-backed securities
    
    
    33,655
    
    
    
    33,868
    
    
    
    33,928
    
    
    
    33,930
    
    
    
    
    
    
    
    2Total
    
    $
    44,255
    
    
    $
    44,467
    
    
    $
    44,528
    
    
    $
    44,530
    
    
    $
    
    
    
    $
    2
 Quarter Ended March 31, 2010Description
    
    Face Value
    
    
    Cost
    
    
    Sale Price
    
    
    Sale Book Value
    
    
    Gross Gains
    
    
    Gross Losses(In thousands)Sale of Securities Available-for-SaleInvestment securitiesObligations of U.S. Government
sponsored agencies
    
    $
    267,000
    
    
    $
    265,990
    
    
    $
    266,996
    
    
    $
    266,996
    
    
    $
    
    
    
    $
    Mortgage-backed securitiesFNMA and FHLMC certificates
    
    
    902,967
    
    
    
    750,615
    
    
    
    687,211
    
    
    
    675,191
    
    
    
    12,020
    
    
    
    GNMA certificates
    
    
    32,873
    
    
    
    32,927
    
    
    
    32,912
    
    
    
    32,912
    
    
    
    
    
    
    
    Non-agency collaterized mortgage
obligations
    
    
    626,619
    
    
    
    623,695
    
    
    
    368,216
    
    
    
    368,216
    
    
    
    
    
    
    
    Total mortgage-backed securities
    
    
    1,562,459
    
    
    
    1,407,237
    
    
    
    1,088,339
    
    
    
    1,076,319
    
    
    
    12,020
    
    
    
    Total
    
    $
    1,829,459
    
    
    $
    1,673,227
    
    
    $
    1,355,335
    
    
    $
    1,343,315
    
    
    $
    12,020
    
    
    $
    
 22




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##### Table of Contents



March 31, 2011
Available-for-sale
(In thousands)
 Less than 12 monthsAmortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Loss
    
    
    ValueFNMA and FHLMC certificates
    
    $
    291,849
    
    
    $
    3,004
    
    
    $
    288,845Obligations
of Puerto Rico Government and political subdivisions
    
    
    19,974
    
    
    
    119
    
    
    
    19,855CMOs issued by U.S. Government sponsored agencies
    
    
    2,572
    
    
    
    30
    
    
    
    2,542314,395
    
    
    
    3,153
    
    
    
    311,242
 12 months or moreAmortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Loss
    
    
    ValueStructured credit investments
    
    
    61,725
    
    
    
    16,563
    
    
    
    45,162Obligations
of Puerto Rico Government and political subdivisions
    
    
    50,792
    
    
    
    3,835
    
    
    
    46,957112,517
    
    
    
    20,398
    
    
    
    92,119
 TotalAmortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Loss
    
    
    ValueFNMA and FHLMC certificates
    
    
    291,849
    
    
    
    3,004
    
    
    
    288,845Structured credit investments
    
    
    61,725
    
    
    
    16,563
    
    
    
    45,162Obligations
of Puerto Rico Government and political subdivisions
    
    
    70,766
    
    
    
    3,954
    
    
    
    66,812CMOs issued by US Government sponsored agencies
    
    
    2,572
    
    
    
    30
    
    
    
    2,542$
    426,912
    
    
    $
    23,551
    
    
    $
    403,361
 March 31, 2011
Held-to-maturity
(In thousands)
 Less than 12 monthsAmortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Loss
    
    
    ValueFNMA and FHLMC certificates
    
    $
    875,494
    
    
    $
    19,678
    
    
    $
    855,816
 23




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##### Table of Contents



December 31, 2010
Available-for-sale
(In thousands)
 Less than 12 monthsAmortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Loss
    
    
    ValueFNMA and FHLMC certificates
    
    $
    245,533
    
    
    $
    2,058
    
    
    $
    243,475CMOs issued by US Government sponsored agencies
    
    
    2,591
    
    
    
    21
    
    
    
    2,570Obligations of US Government sponsored agencies
    
    
    1,000
    
    
    
    
    
    
    
    1,000249,124
    
    
    
    2,079
    
    
    
    247,045
 12 months or moreAmortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Loss
    
    
    ValueStructured credit investments
    
    
    61,724
    
    
    
    20,031
    
    
    
    41,693Obligations
of Puerto Rico Government and political subdivisions
    
    
    50,773
    
    
    
    3,625
    
    
    
    47,148112,497
    
    
    
    23,656
    
    
    
    88,841
 TotalAmortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Loss
    
    
    ValueFNMA and FHLMC certificates
    
    
    245,533
    
    
    
    2,058
    
    
    
    243,475Structured credit investments
    
    
    61,724
    
    
    
    20,031
    
    
    
    41,693Obligations
of Puerto Rico Government and political subdivisions
    
    
    50,773
    
    
    
    3,625
    
    
    
    47,148CMOs issued by US Government sponsored agencies
    
    
    2,591
    
    
    
    21
    
    
    
    2,570Obligations of US Government sponsored agencies
    
    
    1,000
    
    
    
    
    
    
    
    1,000$
    361,621
    
    
    $
    25,735
    
    
    $
    335,886
 December 31, 2010
Held-to-maturity
(In thousands)
 Less than 12 monthsAmortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Loss
    
    
    ValueFNMA and FHLMC certificates
    
    $
    689,917
    
    
    $
    14,196
    
    
    $
    675,721
   
    
    identification and evaluation of investments that have indications of possible
other-than-temporary impairment;
    
    analysis of individual investments that have fair values less than amortized cost,
including consideration of the length of time the investment has been in an unrealized loss
position and the expected recovery period;
    
    the financial condition of the issuer or issuers;
    
    the creditworthiness of the obligor of the security;
    
    actual collateral attributes;
    
    any rating changes by a rating agency;
    
    current analysts evaluations;
    
    the payment structure of the debt security and the likelihood of the issuer being able
to make payments;
 24




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##### Table of Contents




    
    current market conditions;
    
    adverse conditions specifically related to the security, industry, or a geographic
area;
    
    the Groups intent to sell the debt security;
    
    whether it is more-likely-than-not that the Group will be required to sell the debt
security before its anticipated recovery;
    
    and other qualitative factors that could support or not an other-than-temporary
impairment.
       
    
    Identification of the estimated fair value of the contractual coupon of the loans
underlying the CLO. This information is obtained directly from the trustees reports for
each CLO security.
    
    Calculation of the yield-to-maturity for each loan in the CLO, and determination of the
interest rate spread (yield less the risk-free rate).
    
    Estimated default probabilities for each loan in the CLO. These are based on the credit
ratings for each company in the structure, and this information also is obtained directly
from the trustees reports for each CLO security. The default probabilities are adjusted
based on the credit rating assuming the highest default probabilities for the loans of those
entities with the lowest credit ratings. In addition to determining the current default
probabilities, estimates are developed to calculate the cumulative default probabilities in
successive years. To establish the reasonability of the default estimates, market-implied
default rates are compared to historical credit ratings-based default rates.
    
    Once the default probabilities are estimated, the average numbers of defaults is
calculated for the loans underlying each CLO security. In those cases where defaults are
deemed to occur, a recovery rate is applied to the cash flow determination at the time in
which the default is expected to occur. The recovery rate is based on average historical
information for similar securities, as well as the actual recovery rates for defaults that
have occurred within the pool of loans underlying the securities owned by the Group.
 25




---



##### Table of Contents




    
    One hundred simulations are carried out and run through a cash flow engine for the
underlying pool of loans in each CLO security. Each one of the simulations uses different
default estimates and forward yield curve assumptions.
     NOTE 4  PLEDGED ASSETS
   26




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##### Table of Contents



NOTE 5  LOANS RECEIVABLE AND ALLOWANCE FOR LOAN AND LEASE LOSSES
 Loans Receivable Composition
  December 31,March 31, 2011
    
    
    2010(In thousands)Loans non-covered under shared-loss agreements with FDIC:Loans secured by real estate:Residential - 1 to 4 family
    
    $
    837,645
    
    
    $
    847,402Home equity loans, secured personal loans and others
    
    
    23,957
    
    
    
    25,080Commercial
    
    
    214,365
    
    
    
    210,530Deferred loan fees, net
    
    
    (4,029
    )
    
    
    (3,931
    )1,071,938
    
    
    
    1,079,081Other loans:Commercial
    
    
    16,923
    
    
    
    24,462Personal consumer loans and credit lines
    
    
    38,788
    
    
    
    35,912Leasing
    
    
    13,763
    
    
    
    10,257Deferred loan fees, net
    
    
    (361
    )
    
    
    (423
    )69,113
    
    
    
    70,208Loans receivable
    
    
    1,141,051
    
    
    
    1,149,289Allowance for loan and lease losses
    
    
    (32,727
    )
    
    
    (31,430
    )Loans receivable, net
    
    
    1,108,324
    
    
    
    1,117,859Mortgage loans held-for-sale
    
    
    34,216
    
    
    
    33,979Total loans non-covered under shared-loss agreements with FDIC, net
    
    
    1,142,540
    
    
    
    1,151,838Loans covered under shared-loss agreements with FDIC:Loans secured by 1-4 family residential properties
    
    
    161,145
    
    
    
    166,865Construction and development secured by 1-4 family residential properties
    
    
    16,516
    
    
    
    17,253Commercial and other construction
    
    
    378,961
    
    
    
    388,261Leasing
    
    
    69,630
    
    
    
    79,093Consumer
    
    
    17,140
    
    
    
    18,546Total loans covered under shared-loss agreements with FDIC
    
    
    643,392
    
    
    
    670,018Allowance for loan and lease losses on covered loans
    
    
    (53,480
    )
    
    
    (49,286
    )Total loans covered under shared-loss agreements with FDIC, net
    
    
    589,912
    
    
    
    620,732Total loans receivable, net
    
    $
    1,732,452
    
    
    $
    1,772,570
 27




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##### Table of Contents



Loans PastDue Over 9030-59 Days
    
    
    60-89 Days
    
    
    Greater than
    
    
    Total Past
    
    
    
    
    
    
    
    
    
    
    Days and StillPast Due
    
    
    Past Due
    
    
    90 Days
    
    
    Due
    
    
    Current
    
    
    Total Loans
    
    
    AccruingMarch 31, 2011:Loans not covered under shared-loss agreements with the
FDIC:MortgageResidentialTraditional
    
    $
    23,089
    
    
    $
    9,760
    
    
    $
    72,293
    
    
    $
    105,142
    
    
    $
    626,009
    
    
    $
    731,151
    
    
    $
    30,636Non-traditional
    
    
    1,843
    
    
    
    835
    
    
    
    10,582
    
    
    
    13,260
    
    
    
    63,847
    
    
    
    77,107
    
    
    
    3,163Loss mitigation program
    
    
    2,816
    
    
    
    918
    
    
    
    9,474
    
    
    
    13,208
    
    
    
    40,081
    
    
    
    53,289
    
    
    
    5,96327,748
    
    
    
    11,513
    
    
    
    92,349
    
    
    
    131,610
    
    
    
    729,937
    
    
    
    861,547
    
    
    
    39,762Home equity loans, secured personal loans
    
    
    148
    
    
    
    
    
    
    
    333
    
    
    
    481
    
    
    
    995
    
    
    
    1,476
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    55
    
    
    
    
    
    
    
    55
    
    
    
    27,896
    
    
    
    11,513
    
    
    
    92,737
    
    
    
    132,146
    
    
    
    730,932
    
    
    
    863,078
    
    
    
    39,762Commercial
    
    
    1,742
    
    
    
    1,557
    
    
    
    22,685
    
    
    
    25,984
    
    
    
    205,304
    
    
    
    231,288
    
    
    
    ConsumerPersonal consumer loans and credit lines  secured
    
    
    74
    
    
    
    13
    
    
    
    45
    
    
    
    132
    
    
    
    5,733
    
    
    
    5,865
    
    
    
    Personal consumer loans and credit lines 
unsecured
    
    
    412
    
    
    
    124
    
    
    
    124
    
    
    
    660
    
    
    
    17,775
    
    
    
    18,435
    
    
    
    Credit cards
    
    
    323
    
    
    
    114
    
    
    
    268
    
    
    
    705
    
    
    
    3,804
    
    
    
    4,509
    
    
    
    Overdrafts
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    8,497
    
    
    
    8,503
    
    
    
    809
    
    
    
    251
    
    
    
    443
    
    
    
    1,503
    
    
    
    35,809
    
    
    
    37,312
    
    
    
    Leasing
    
    
    
    
    
    
    207
    
    
    
    395
    
    
    
    602
    
    
    
    13,161
    
    
    
    13,763
    
    
    
    Total loans not covered under shared-loss
agreements with the FDIC
    
    $
    30,447
    
    
    $
    13,528
    
    
    $
    116,260
    
    
    $
    160,235
    
    
    $
    985,206
    
    
    $
    1,145,441
    
    
    $
    39,762
 28




---



##### Table of Contents



Loans PastDue Over 9030-59 Days
    
    
    60-89 Days
    
    
    Greater than
    
    
    Total Past
    
    
    
    
    
    
    
    
    
    
    Days and StillPast Due
    
    
    Past Due
    
    
    90 Days
    
    
    Due
    
    
    Current
    
    
    Total Loans
    
    
    AccruingDecember 31, 2010:Loans not covered under shared-loss agreements with the
FDIC:MortgageResidentialTraditional
    
    $
    22,093
    
    
    $
    9,414
    
    
    $
    76,604
    
    
    $
    108,111
    
    
    $
    638,158
    
    
    $
    746,269
    
    
    $
    37,850Non-traditional
    
    
    837
    
    
    
    845
    
    
    
    12,016
    
    
    
    13,698
    
    
    
    66,056
    
    
    
    79,754
    
    
    
    4,953Loss mitigation program
    
    
    2,528
    
    
    
    1,043
    
    
    
    9,336
    
    
    
    12,907
    
    
    
    33,497
    
    
    
    46,404
    
    
    
    6,06025,458
    
    
    
    11,302
    
    
    
    97,956
    
    
    
    134,716
    
    
    
    737,711
    
    
    
    872,427
    
    
    
    48,863Home equity loans, secured personal loans
    
    
    149
    
    
    
    
    
    
    
    340
    
    
    
    489
    
    
    
    961
    
    
    
    1,450
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    55
    
    
    
    
    
    
    
    55
    
    
    
    25,607
    
    
    
    11,302
    
    
    
    98,351
    
    
    
    135,260
    
    
    
    738,672
    
    
    
    873,932
    
    
    
    48,863Commercial
    
    
    1,123
    
    
    
    9,367
    
    
    
    13,390
    
    
    
    23,880
    
    
    
    210,396
    
    
    
    234,276
    
    
    
    ConsumerPersonal consumer loans and credit lines  secured
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    4,853
    
    
    
    4,876
    
    
    
    Personal consumer loans and credit lines 
unsecured
    
    
    419
    
    
    
    207
    
    
    
    136
    
    
    
    762
    
    
    
    17,576
    
    
    
    18,338
    
    
    
    Credit cards
    
    
    262
    
    
    
    173
    
    
    
    285
    
    
    
    720
    
    
    
    3,620
    
    
    
    4,340
    
    
    
    Overdrafts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,624
    
    
    
    7,624
    
    
    
    704
    
    
    
    380
    
    
    
    421
    
    
    
    1,505
    
    
    
    33,673
    
    
    
    35,178
    
    
    
    Leasing
    
    
    
    
    
    
    79
    
    
    
    35
    
    
    
    114
    
    
    
    10,143
    
    
    
    10,257
    
    
    
    Total loans not covered under shared-loss
agreements with the FDIC
    
    $
    27,434
    
    
    $
    21,128
    
    
    $
    112,197
    
    
    $
    160,759
    
    
    $
    992,884
    
    
    $
    1,153,643
    
    
    $
    48,863
 Non-covered Loans
   29




---



##### Table of Contents



March 31,
    
    
    December 31,2011
    
    
    2010(In thousands)MortgageResidentialTraditional
    
    $
    41,656
    
    
    $
    38,754Non-traditional
    
    
    7,419
    
    
    
    7,063Loss mitigation program
    
    
    3,511
    
    
    
    3,27652,586
    
    
    
    49,093Home equity loans, secured personal loans
    
    
    333
    
    
    
    340Other
    
    
    55
    
    
    
    5552,974
    
    
    
    49,488Commercial
    
    
    27,562
    
    
    
    23,619ConsumerPersonal consumer loans and credit lines  unsecured
    
    
    176
    
    
    
    136Credit cards
    
    
    268
    
    
    
    285444
    
    
    
    421Leasing
    
    
    395
    
    
    
    35Total
    
    $
    81,375
    
    
    $
    73,563
  Credit Quality Indicators
    30




---



##### Table of Contents



Special Mention:
 Substandard:
 Doubtful:
 ASC 310-10-35:
  BalanceOutstanding at
    
    
    DelinquencyMarch 31, 2011
    
    
    Pass
    
    
    Special Mention
    
    
    Substandard
    
    
    Doubtful
    
    
    ASC 310-10-35(In thousands)Commercial
    
    $
    231,288
    
    
    $
    181,278
    
    
    $
    5,682
    
    
    $
    16,516
    
    
    $
    141
    
    
    $
    27,671
 BalanceOutstanding at
    
    
    DelinquencyDecember 31, 2010
    
    
    Pass
    
    
    Special Mention
    
    
    Substandard
    
    
    Doubtful
    
    
    ASC 310-10-35(In thousands)Commercial
    
    $
    234,276
    
    
    $
    188,281
    
    
    $
    5,908
    
    
    $
    14,046
    
    
    $
    143
    
    
    $
    25,898
 31




---



##### Table of Contents



BalanceOutstanding at
    
    
    
    
    
    
    
    
    
    
    DelinquencyMarch 31, 2011
    
    
    0-90 days
    
    
    91-120 days
    
    
    121-365 days
    
    
    Over 365 days
    
    
    ASC 310-10-35(In thousands)MortgageTraditional
    
    $
    731,151
    
    
    $
    658,858
    
    
    $
    4,880
    
    
    $
    25,756
    
    
    $
    41,657
    
    
    $
    Non-traditional
    
    
    77,107
    
    
    
    66,525
    
    
    
    209
    
    
    
    2,954
    
    
    
    7,419
    
    
    
    Loss mitigation program
    
    
    53,289
    
    
    
    16,041
    
    
    
    88
    
    
    
    1,101
    
    
    
    2,852
    
    
    
    33,207861,547
    
    
    
    741,424
    
    
    
    5,177
    
    
    
    29,811
    
    
    
    51,928
    
    
    
    33,207Home equity loans, secured personal loans
    
    
    1,476
    
    
    
    1,143
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    Other
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    863,078
    
    
    
    742,567
    
    
    
    5,177
    
    
    
    29,811
    
    
    
    52,316
    
    
    
    33,207Consumer
    
    
    37,312
    
    
    
    36,869
    
    
    
    185
    
    
    
    258
    
    
    
    
    
    
    
    Leasing
    
    
    13,763
    
    
    
    13,368
    
    
    
    200
    
    
    
    195
    
    
    
    
    
    
    
    Total
    
    $
    914,153
    
    
    $
    792,804
    
    
    $
    5,562
    
    
    $
    30,264
    
    
    $
    52,316
    
    
    $
    33,207
 BalanceOutstanding at
    
    
    
    
    
    
    
    
    
    
    DelinquencyDecember 31, 2010
    
    
    0-90 days
    
    
    91-120 days
    
    
    121-365 days
    
    
    Over 365 days
    
    
    ASC 310-10-35(In thousands)MortgageTraditional
    
    $
    746,269
    
    
    $
    669,665
    
    
    $
    5,560
    
    
    $
    32,291
    
    
    $
    38,753
    
    
    $
    Non-traditional
    
    
    79,754
    
    
    
    67,738
    
    
    
    1,012
    
    
    
    3,941
    
    
    
    7,063
    
    
    
    Loss mitigation program
    
    
    46,404
    
    
    
    7,738
    
    
    
    
    
    
    
    2,064
    
    
    
    2,553
    
    
    
    34,049872,427
    
    
    
    745,141
    
    
    
    6,572
    
    
    
    38,296
    
    
    
    48,369
    
    
    
    34,049Home equity loans, secured personal loans
    
    
    1,450
    
    
    
    1,110
    
    
    
    
    
    
    
    
    
    
    
    340
    
    
    
    Other
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    873,932
    
    
    
    746,251
    
    
    
    6,572
    
    
    
    38,296
    
    
    
    48,764
    
    
    
    34,049Consumer
    
    
    35,178
    
    
    
    33,817
    
    
    
    1,129
    
    
    
    232
    
    
    
    
    
    
    
    Leasing
    
    
    10,257
    
    
    
    10,222
    
    
    
    8
    
    
    
    27
    
    
    
    
    
    
    
    Total
    
    $
    919,367
    
    
    $
    790,290
    
    
    $
    7,709
    
    
    $
    38,555
    
    
    $
    48,764
    
    
    $
    34,049
  32




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##### Table of Contents



Allowance for Loan and Lease Losses
 Non-Covered Loans
   Mortgage
    
    
    Commercial
    
    
    Consumer
    
    
    Leasing
    
    
    Unallocated
    
    
    TotalMarch 31, 2011Allowance for loan and lease losses for non-covered loans:Balance at beginning of period
    
    $
    16,179
    
    
    $
    11,153
    
    
    $
    2,286
    
    
    $
    860
    
    
    $
    952
    
    
    $
    31,430Charge-offs
    
    
    (1,821
    )
    
    
    (309
    )
    
    
    (448
    )
    
    
    (60
    )
    
    
    
    
    
    
    (2,638
    )Recoveries
    
    
    45
    
    
    
    37
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    135Provision for non-covered loan and lease losses
    
    
    3,462
    
    
    
    1,126
    
    
    
    (6
    )
    
    
    158
    
    
    
    (940
    )
    
    
    3,800Balance at end of period
    
    $
    17,865
    
    
    $
    12,007
    
    
    $
    1,885
    
    
    $
    958
    
    
    $
    12
    
    
    $
    32,727Ending allowance balance attributable to loans:Individually evaluated for impairment
    
    $
    2,229
    
    
    $
    1,164
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,393Collectively evaluated for impairment
    
    
    15,636
    
    
    
    10,843
    
    
    
    1,885
    
    
    
    958
    
    
    
    12
    
    
    
    29,334Total ending allowance balance
    
    $
    17,865
    
    
    $
    12,007
    
    
    $
    1,885
    
    
    $
    958
    
    
    $
    12
    
    
    $
    32,727Loans:Individually evaluated for impairment
    
    $
    33,207
    
    
    $
    27,671
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    60,878Collectively evaluated for impairment
    
    
    828,395
    
    
    
    203,617
    
    
    
    38,788
    
    
    
    13,763
    
    
    
    
    
    
    
    1,084,563Total ending non-covered loans balance
    
    $
    861,602
    
    
    $
    231,288
    
    
    $
    38,788
    
    
    $
    13,763
    
    
    $
    
    
    
    $
    1,145,441
 33




---



##### Table of Contents



Mortgage
    
    
    Commercial
    
    
    Consumer
    
    
    Leasing
    
    
    Unallocated
    
    
    TotalMarch 31, 2010Allowance for loan and lease losses for non-covered loans:Balance at beginning of period
    
    $
    15,044
    
    
    $
    7,112
    
    
    $
    864
    
    
    $
    
    
    
    $
    252
    
    
    $
    23,272Charge-offs
    
    
    (1,096
    )
    
    
    (110
    )
    
    
    (186
    )
    
    
    
    
    
    
    
    
    
    
    (1,392
    )Recoveries
    
    
    
    
    
    
    11
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    83Provision for non-covered loan and lease losses
    
    
    3,841
    
    
    
    (701
    )
    
    
    (72
    )
    
    
    
    
    
    
    946
    
    
    
    4,014Balance at end of period
    
    $
    17,789
    
    
    $
    6,312
    
    
    $
    678
    
    
    $
    
    
    
    $
    1,198
    
    
    $
    25,977Ending allowance balance attributable to loans:Individually evaluated for impairment
    
    $
    706
    
    
    $
    624
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,330Collectively evaluated for impairment
    
    
    17,083
    
    
    
    5,688
    
    
    
    678
    
    
    
    
    
    
    
    1,198
    
    
    
    24,647Total ending allowance balance
    
    $
    17,789
    
    
    $
    6,312
    
    
    $
    678
    
    
    $
    
    
    
    $
    1,198
    
    
    $
    25,977Loans:Individually evaluated for impairment
    
    $
    10,490
    
    
    $
    16,594
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    27,084Collectively evaluated for impairment
    
    
    895,792
    
    
    
    187,145
    
    
    
    22,954
    
    
    
    
    
    
    
    
    
    
    
    1,105,891Total ending non-covered loans balance
    
    $
    906,282
    
    
    $
    203,739
    
    
    $
    22,954
    
    
    $
    
    
    
    $
    
    
    
    $
    1,132,975
  34




---



##### Table of Contents



March 31, 2011AverageUnpaid
    
    
    Recorded
    
    
    Specific
    
    
    
    
    
    
    RecordedPrincipal
    
    
    Investment
    
    
    Allowance
    
    
    Coverage
    
    
    Investment(In thousands)Impaired loans with specific allowanceCommercial
    
    $
    18,025
    
    
    $
    16,146
    
    
    $
    1,164
    
    
    
    7
    %
    
    $
    16,576Residential  loss mitigation program
    
    
    33,207
    
    
    
    33,207
    
    
    
    2,229
    
    
    
    7
    %
    
    
    34,324Impaired loans with no specific allowanceCommercial
    
    
    11,525
    
    
    
    11,525
    
    
    
    
    
    
    
    0
    %
    
    
    10,541Total investment in impaired loans
    
    $
    62,757
    
    
    $
    60,878
    
    
    $
    3,393
    
    
    
    6
    %
    
    $
    61,441
 December 31, 2010AverageUnpaid
    
    
    Recorded
    
    
    Specific
    
    
    
    
    
    
    RecordedPrincipal
    
    
    Investment
    
    
    Allowance
    
    
    Coverage
    
    
    Investment(In thousands)Impaired loans with specific allowanceCommercial
    
    $
    11,948
    
    
    $
    10,070
    
    
    $
    823
    
    
    
    8
    %
    
    $
    10,622Residential  loss mitigation program
    
    
    34,049
    
    
    
    34,049
    
    
    
    2,250
    
    
    
    7
    %
    
    
    16,977Impaired loans with no specific allowanceCommercial
    
    
    15,828
    
    
    
    15,828
    
    
    
    
    
    
    
    0
    %
    
    
    11,472Total investment in impaired loans
    
    $
    61,825
    
    
    $
    59,947
    
    
    $
    3,073
    
    
    
    5
    %
    
    $
    39,071
   Interest Income RecognizedFor the Quarter Ended March 31,2011
    
    
    2010Impaired loans with specific allowanceCommercial
    
    $
    144
    
    
    $
    108Residential  Loss mitigation program
    
    
    484
    
    
    
    156Impaired loans with no specific allowanceCommercial
    
    
    197
    
    
    
    98Total interest income from impaired loans
    
    $
    825
    
    
    $
    362
 35




---



##### Table of Contents



Covered Loans under ASC 310-30
    Total Loans Acquired(In thousands)Contractual balance
    
    $
    1,145,058Carrying amount
    
    $
    643,392
  Accretable YieldActivity(In thousands)Balance at December 31, 2010
    
    $
    (148,558
    )Accretion
    
    
    14,226Transfer to non-accretable discount
    
    
    4,091Cost recovery
    
    
    (294
    )Balance at March 31, 2011
    
    $
    (130,535
    )
 Non-AccretableDiscount Activity(In thousands)Balance at December 31, 2010
    
    $
    (603,309
    )Principal losses
    
    
    42,863Transfer from accretable discount
    
    
    (4,091
    )Cost recovery
    
    
    294Balance at March 31, 2011
    
    $
    (564,243
    )
 36




---



##### Table of Contents



March 31, 2011AverageUnpaid
    
    
    Recorded
    
    
    Specific
    
    
    
    
    
    
    RecordedPrincipal
    
    
    Investment
    
    
    Allowance
    
    
    Coverage
    
    
    Investment(In thousands)Covered LoansImpaired covered loans with specific allowanceLoans secured by 1-4 family residential properties
    
    $
    63,085
    
    
    $
    44,013
    
    
    $
    5,019
    
    
    
    11
    %
    
    $
    44,826Construction and development secured by 1-4 family residential properties
    
    
    55,337
    
    
    
    11,519
    
    
    
    1,670
    
    
    
    15
    %
    
    
    11,584Commercial and other construction
    
    
    620,533
    
    
    
    305,006
    
    
    
    43,840
    
    
    
    14
    %
    
    
    310,639Consumer
    
    
    26,297
    
    
    
    16,985
    
    
    
    2,951
    
    
    
    17
    %
    
    
    18,680Total investment in impaired covered loans
    
    $
    765,252
    
    
    $
    377,523
    
    
    $
    53,480
    
    
    
    14
    %
    
    $
    385,729
 December 31, 2010AverageUnpaid
    
    
    Recorded
    
    
    Specific
    
    
    
    
    
    
    RecordedPrincipal
    
    
    Investment
    
    
    Allowance
    
    
    Coverage
    
    
    Investment(In thousands)Covered LoansImpaired covered loans with specific allowanceLoans secured by 1-4 family residential properties
    
    $
    64,366
    
    
    $
    38,885
    
    
    $
    3,582
    
    
    
    9
    %
    
    $
    38,667Construction and development secured by 1-4 family residential properties
    
    
    55,524
    
    
    
    11,828
    
    
    
    1,939
    
    
    
    16
    %
    
    
    12,541Commercial and other construction
    
    
    637,044
    
    
    
    318,404
    
    
    
    43,765
    
    
    
    14
    %
    
    
    324,946Total investment in impaired covered loans
    
    $
    756,934
    
    
    $
    369,117
    
    
    $
    49,286
    
    
    
    13
    %
    
    $
    376,154
   Quarter EndedMarch 31, 2011(In thousands)Balance at beginning of the period
    
    $
    49,286Provision for covered loan and lease losses
    
    
    549FDIC loss-share portion of provision for covered loan and lease losses
    
    
    3,645Balance at end of the period
    
    $
    53,480
 37




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##### Table of Contents



NOTE 6  SERVICING ASSETS
      Quarter Ended March 31,2011
    
    
    2010(In thousands)Fair value at beginning of period
    
    $
    9,695
    
    
    $
    7,120Servicing from mortgage securitizations or assets transfers
    
    
    520
    
    
    
    685Changes due to payments on loans
    
    
    (608
    )
    
    
    (104
    )Changes in fair value due to changes in valuation model inputs or assumptions
    
    
    356
    
    
    
    (132
    )Fair value at end of period
    
    $
    9,963
    
    
    $
    7,569
  Quarter Ended March 31,2011
    
    
    2010Constant prepayment rate
    
    
    7.87% - 15.74
    %
    
    
    8.40% - 29.58
    %Discount rate
    
    
    11.00% - 14.00
    %
    
    
    11.00% - 14.00
    %
  Quarter Ended March 31,2011Discount rate
    
    
    13.58% - 17.38
    %
 38




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##### Table of Contents



March 31, 2011(in thousands)Mortgage related servicing assetCarrying value of mortgage servicing asset
    
    $
    9,365Constant prepayment rateDecrease in fair value due to 10% adverse change
    
    $
    (344
    )Decrease in fair value due to 20% adverse change
    
    $
    (668
    )Discount rateDecrease in fair value due to 10% adverse change
    
    $
    (428
    )Decrease in fair value due to 20% adverse change
    
    $
    (820
    )Leasing servicing assetCarrying value of leasing servicing asset
    
    $
    598Discount rateDecrease in fair value due to 10% adverse change
    
    
    (7
    )Decrease in fair value due to 20% adverse change
    
    $
    (14
    )
     39




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##### Table of Contents



NOTE 7  PREMISES AND EQUIPMENT
  Useful Life
    
    
    March 31,
    
    
    December 31,(Years)
    
    
    2011
    
    
    2010(In thousands)Land
    
    
    
    
    
    $
    2,328
    
    
    $
    2,328Buildings and improvements
    
    
    40
    
    
    
    6,295
    
    
    
    6,301Leasehold improvements
    
    
    510
    
    
    
    20,440
    
    
    
    20,564Furniture and fixtures
    
    
    37
    
    
    
    10,009
    
    
    
    10,099Information technology and other
    
    
    37
    
    
    
    19,190
    
    
    
    19,07458,262
    
    
    
    58,366Less: accumulated depreciation and amortization
    
    
    
    
    
    
    (34,909
    )
    
    
    (34,425
    )$
    23,353
    
    
    $
    23,941
  NOTE 8  DERIVATIVE ACTIVITIES
  Forward-settlement Swaps
    40




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##### Table of Contents



Trade
    
    
    SettlementNotional Amount
    
    
    Fixed Rate
    
    Date
    
    
    Date
    
    
    Maturity Date(In thousands)$
    100,000
    
    
    1.1275%
    
    
    03/18/11
    
    
    
    12/28/11
    
    
    
    06/28/13100,000
    
    
    1.2725%
    
    
    03/18/11
    
    
    
    12/28/11
    
    
    
    09/28/13125,000
    
    
    1.6550%
    
    
    03/18/11
    
    
    
    05/09/12
    
    
    
    02/09/14100,000
    
    
    1.5300%
    
    
    03/18/11
    
    
    
    12/28/11
    
    
    
    03/28/14125,000
    
    
    1.7700%
    
    
    03/18/11
    
    
    
    05/09/12
    
    
    
    05/09/14100,000
    
    
    1.8975%
    
    
    03/18/11
    
    
    
    05/09/12
    
    
    
    08/09/14100,000
    
    
    1.9275%
    
    
    03/18/11
    
    
    
    12/28/11
    
    
    
    01/28/15100,000
    
    
    2.0000%
    
    
    03/18/11
    
    
    
    12/28/11
    
    
    
    03/28/15100,000
    
    
    2.1100%
    
    
    03/18/11
    
    
    
    12/28/11
    
    
    
    06/28/15$
    950,000
  Swap Options
  Trade
    
    
    Option
    
    
    Swap Start
    
    
    Swap MaturityNotional Amount
    
    
    Fixed Rate
    
    Date
    
    
    Maturity Date
    
    
    Date
    
    
    Date(In thousands)$
    100,000
    
    
    2.1225%
    
    
    11/15/10
    
    
    
    08/10/12
    
    
    
    08/14/12
    
    
    
    05/14/15150,000
    
    
    2.6400%
    
    
    11/15/10
    
    
    
    12/04/12
    
    
    
    12/06/12
    
    
    
    06/06/16$
    250,000
 Options tied to Standard & Poors 500 Stock Market Index
  41




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##### Table of Contents



NOTE 9  ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
  March 31,
    
    
    December 31,2011
    
    
    2010(In thousands)Loans
    
    $
    10,913
    
    
    $
    11,068Investments
    
    
    17,721
    
    
    
    17,648$
    28,634
    
    
    $
    28,716
  March 31,
    
    
    December 31,2011
    
    
    2010(In thousands)Prepaid FDIC insurance
    
    $
    15,173
    
    
    $
    16,796Servicing assets
    
    
    9,963
    
    
    
    9,695Other prepaid expenses
    
    
    8,133
    
    
    
    8,224Goodwill
    
    
    3,662
    
    
    
    3,662Mortgage tax credits
    
    
    3,105
    
    
    
    3,105Other repossessed assets (covered by FDIC shared-loss agreements)
    
    
    2,479
    
    
    
    2,341Debt issuance costs
    
    
    1,991
    
    
    
    2,299Core deposit intangible
    
    
    1,292
    
    
    
    1,328Investment in Statutory Trust
    
    
    1,086
    
    
    
    1,086Accounts receivable and other assets
    
    
    15,722
    
    
    
    15,886$
    62,606
    
    
    $
    64,422
     42




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##### Table of Contents



NOTE 10  DEPOSITS AND RELATED INTEREST
  March 31, 2011
    
    
    December 31, 2010(In thousands)Non-interest bearing demand deposits
    
    $
    175,679
    
    
    $
    170,705Interest-bearing savings and demand deposits
    
    
    1,012,710
    
    
    
    1,019,539Individual retirement accounts
    
    
    358,688
    
    
    
    361,972Retail certificates of deposit
    
    
    490,313
    
    
    
    477,180Total retail deposits
    
    
    2,037,390
    
    
    
    2,029,396Institutional deposits
    
    
    240,779
    
    
    
    280,617Brokered deposits
    
    
    223,303
    
    
    
    278,875$
    2,501,472
    
    
    $
    2,588,888
  Quarter Ended March 31,2011
    
    
    2010(In thousands)Demand and savings deposits
    
    $
    4,597
    
    
    $
    3,904Certificates of deposit
    
    
    7,617
    
    
    
    7,339$
    12,214
    
    
    $
    11,243
   (In thousands)Within one year:Three (3) months or less
    
    $
    379,282Over 3 months through 1 year
    
    
    465,824845,106Over 1 through 2 years
    
    
    264,556Over 2 through 3 years
    
    
    115,852Over 3 through 4 years
    
    
    43,202Over 4 through 5 years
    
    
    32,341$
    1,301,057
  43




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##### Table of Contents



NOTE 11  BORROWINGS
 Short Term Borrowings
  Securities Sold under Agreements to Repurchase
   March 31,
    
    
    December 31,2011
    
    
    2010Fair Value of
    
    
    
    
    
    
    Fair Value ofBorrowing
    
    
    Underlying
    
    
    Borrowing
    
    
    UnderlyingBalance
    
    
    Collateral
    
    
    Balance
    
    
    Collateral(In thousands)
    
    
    (In thousands)Citigroup Global Markets Inc.
    
    $
    1,600,000
    
    
    $
    1,739,088
    
    
    $
    1,600,000
    
    
    $
    1,752,619Credit Suisse Securities (USA) LLC
    
    
    1,250,000
    
    
    
    1,323,982
    
    
    
    1,250,000
    
    
    
    1,325,392UBS Financial Services Inc.
    
    
    500,000
    
    
    
    597,404
    
    
    
    500,000
    
    
    
    605,706JP Morgan Chase Bank NA
    
    
    100,000
    
    
    
    119,495
    
    
    
    100,000
    
    
    
    119,997Total
    
    $
    3,450,000
    
    
    $
    3,779,969
    
    
    $
    3,450,000
    
    
    $
    3,803,714
 44




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##### Table of Contents



Weighted-Borrowing
    
    
    Average
    
    
    
    
    
    
    Maturity
    
    
    Next PutYear of Maturity
    
    Balance
    
    
    Coupon
    
    
    Settlement Date
    
    
    Date
    
    
    Date(In thousands)2011$
    100,000
    
    
    
    4.17
    %
    
    
    12/28/2006
    
    
    
    12/28/2011
    
    
    
    6/28/201150,000
    
    
    
    4.13
    %
    
    
    12/28/2006
    
    
    
    12/28/2011
    
    
    
    6/28/2011100,000
    
    
    
    4.29
    %
    
    
    12/28/2006
    
    
    
    12/28/2011
    
    
    
    6/28/2011350,000
    
    
    
    4.25
    %
    
    
    12/28/2006
    
    
    
    12/28/2011
    
    
    
    6/28/2011600,0002012350,000
    
    
    
    4.26
    %
    
    
    5/9/2007
    
    
    
    5/9/2012
    
    
    
    5/9/2011100,000
    
    
    
    4.50
    %
    
    
    8/14/2007
    
    
    
    8/14/2012
    
    
    
    5/16/2011100,000
    
    
    
    4.47
    %
    
    
    9/13/2007
    
    
    
    9/13/2012
    
    
    
    6/13/2011150,000
    
    
    
    4.31
    %
    
    
    3/6/2007
    
    
    
    12/6/2012
    
    
    
    6/6/2011700,0002014100,000
    
    
    
    4.72
    %
    
    
    7/27/2007
    
    
    
    7/27/2014
    
    
    
    4/27/2011300,000
    
    
    
    2.86
    %
    
    
    3/28/2011
    
    
    
    9/28/2014
    
    
    
    N/A400,0002017500,000
    
    
    
    4.67
    %
    
    
    3/2/2007
    
    
    
    3/2/2017
    
    
    
    6/2/2011250,000
    
    
    
    0.25
    %
    
    
    3/2/2007
    
    
    
    3/2/2017
    
    
    
    6/2/2011100,000
    
    
    
    0.00
    %
    
    
    6/6/2007
    
    
    
    3/6/2017
    
    
    
    6/6/2011900,000
    
    
    
    0.00
    %
    
    
    3/6/2007
    
    
    
    6/6/2017
    
    
    
    6/6/20111,750,000$
    3,450,000
    
    
    
    2.70
    %
  Advances from the Federal Home Loan Bank
  45




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##### Table of Contents



Weighted-AverageYear of Maturity
    
    Borrowing Balance
    
    Coupon
    
    Settlement Date
    
    Maturity Date
    
    Next Put Date(In thousands)2012$
    25,000
    
    
    
    4.37
    %
    
    5/4/2007
    
    5/4/2012
    
    5/4/201125,000
    
    
    
    4.57
    %
    
    7/24/2007
    
    7/24/2012
    
    4/24/201125,000
    
    
    
    4.26
    %
    
    7/30/2007
    
    7/30/2012
    
    4/31/201150,000
    
    
    
    4.33
    %
    
    8/10/2007
    
    8/10/2012
    
    5/11/2011100,000
    
    
    
    4.09
    %
    
    8/16/2007
    
    8/16/2012
    
    5/16/2011225,000201425,000
    
    
    
    4.20
    %
    
    5/8/2007
    
    5/8/2014
    
    5/8/201130,000
    
    
    
    4.22
    %
    
    5/11/2007
    
    5/11/2014
    
    5/10/201155,000$
    280,000
    
    
    
    4.24
    %
  Subordinated Capital Notes
     46




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##### Table of Contents



FDIC- Guaranteed Term Notes  Temporary Liquidity Guarantee Program
  NOTE 12  INCOME TAXES
     NOTE 13  STOCKHOLDERS EQUITY
 Preferred Stock
    47




---



##### Table of Contents



Common Stock
    Treasury Stock
   Total number ofshares purchasedas part of stockTotal number of
    
    
    Average price paid
    
    
    repurchaseshares purchased
    
    
    per share
    
    
    programsJanuary 2011
    
    
    
    
    
    $
    
    
    
    
    February 2011
    
    
    476,132
    
    
    $
    12.12
    
    
    
    476,132March 2011
    
    
    552,447
    
    
    $
    12.23
    
    
    
    552,447Total
    
    
    1,028,579
    
    
    $
    12.18
    
    
    
    1,028,579
 48




---



##### Table of Contents



Quarter Ended March 31,2011
    
    
    2010Dollar
    
    
    
    
    
    
    DollarShares
    
    
    Amount
    
    
    Shares
    
    
    Amount(In thousands)Beginning of period
    
    
    1,459
    
    
    $
    16,732
    
    
    $
    1,504
    
    
    $
    17,142Common shares used for exercise of restricted stock units
    
    
    (46
    )
    
    
    (500
    )
    
    
    
    
    
    
    Common shares repurchased as part of the stock repurchase program
    
    
    1,029
    
    
    
    12,530
    
    
    
    
    
    
    
    Common shares used to match defined contribution plan, net
    
    
    (9
    )
    
    
    (16
    )
    
    
    (8
    )
    
    
    (15
    )End of period
    
    
    2,433
    
    
    $
    28,746
    
    
    
    1,496
    
    
    $
    17,127
 Regulatory Capital Requirements
   49




---



##### Table of Contents



Minimum CapitalActual
    
    
    RequirementAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Group RatiosAs of March 31, 2011Total Capital to Risk-Weighted Assets
    
    $
    714,936
    
    
    
    31.91
    %
    
    $
    179,251
    
    
    
    8.00
    %Tier 1 Capital to Risk-Weighted Assets
    
    $
    686,202
    
    
    
    30.63
    %
    
    $
    89,625
    
    
    
    4.00
    %Tier 1 Capital to Total Assets
    
    $
    686,202
    
    
    
    9.52
    %
    
    $
    288,462
    
    
    
    4.00
    %As of December 31, 2010Total Capital to Risk-Weighted Assets
    
    $
    727,689
    
    
    
    32.26
    %
    
    $
    180,455
    
    
    
    8.00
    %Tier 1 Capital to Risk-Weighted Assets
    
    $
    698,836
    
    
    
    30.98
    %
    
    $
    90,228
    
    
    
    4.00
    %Tier 1 Capital to Total Assets
    
    $
    698,836
    
    
    
    9.56
    %
    
    $
    292,449
    
    
    
    4.00
    %
 Minimum to be WellCapitalized UnderMinimum Capital
    
    
    Prompt CorrectiveActual
    
    
    Requirement
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Bank RatiosAs of March 31, 2011Total Capital to Risk-Weighted Assets
    
    $
    677,508
    
    
    
    30.65
    %
    
    $
    176,821
    
    
    
    8.00
    %
    
    $
    221,027
    
    
    
    10.00
    %Tier 1 Capital to Risk-Weighted Assets
    
    $
    649,149
    
    
    
    29.37
    %
    
    $
    88,411
    
    
    
    4.00
    %
    
    $
    132,616
    
    
    
    6.00
    %Tier 1 Capital to Total Assets
    
    $
    649,149
    
    
    
    9.18
    %
    
    $
    282,946
    
    
    
    4.00
    %
    
    $
    353,683
    
    
    
    5.00
    %As of December 31, 2010Total Capital to Risk-Weighted Assets
    
    $
    694,461
    
    
    
    31.17
    %
    
    $
    178,226
    
    
    
    8.00
    %
    
    $
    222,782
    
    
    
    10.00
    %Tier 1 Capital to Risk-Weighted Assets
    
    $
    665,952
    
    
    
    29.89
    %
    
    $
    89,113
    
    
    
    4.00
    %
    
    $
    133,669
    
    
    
    6.00
    %Tier 1 Capital to Total Assets
    
    $
    665,952
    
    
    
    9.28
    %
    
    $
    287,060
    
    
    
    4.00
    %
    
    $
    358,825
    
    
    
    5.00
    %
  50




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##### Table of Contents



Equity-Based Compensation Plan
   Quarter Ended March 31,2011
    
    
    2010Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Average
    
    
    Number
    
    
    AverageOf
    
    
    Exercise
    
    
    Of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    PriceBeginning of period
    
    
    765,989
    
    
    $
    15.25
    
    
    
    514,376
    
    
    $
    16.86Options granted
    
    
    69,800
    
    
    
    11.82
    
    
    
    132,700
    
    
    
    11.50Options exercised
    
    
    (250
    )
    
    
    10.29
    
    
    
    
    
    
    
    Options forfeited
    
    
    (16,496
    )
    
    
    18.08
    
    
    
    
    
    
    
    End of period
    
    
    819,043
    
    
    $
    14.90
    
    
    
    647,076
    
    
    $
    15.76
  Outstanding
    
    
    ExercisableWeightedAverageContract
    
    
    
    
    
    WeightedWeighted

    
    
    Life
    
    
    
    
    
    AverageNumber of

    
    
    Average

    
    
    Remaining
    
    
    Number of
    
    
    ExerciseRange of Exercise Prices
    
    Options
    
    
    Exercise Price
    
    
    (Years)
    
    
    Options
    
    
    Price$5.63 to $8.45
    
    
    15,131
    
    
    $
    8.28
    
    
    
    8.1
    
    
    
    1
    
    
    $
    7.748.45 to 11.27
    
    
    2,000
    
    
    
    10.29
    
    
    
    6.4
    
    
    
    500
    
    
    
    10.2911.27 to 14.09
    
    
    572,427
    
    
    
    12.14
    
    
    
    7.4
    
    
    
    170,902
    
    
    
    12.4114.09 to 16.90
    
    
    62,035
    
    
    
    15.60
    
    
    
    3.4
    
    
    
    54,035
    
    
    
    15.6819.72 to 22.54
    
    
    25,050
    
    
    
    20.68
    
    
    
    3.9
    
    
    
    20,800
    
    
    
    20.4422.54 to 25.35
    
    
    83,350
    
    
    
    23.99
    
    
    
    3.0
    
    
    
    83,350
    
    
    
    23.9925.35 to 28.17
    
    
    59,050
    
    
    
    27.46
    
    
    
    3.6
    
    
    
    59,050
    
    
    
    27.46819,043
    
    
    $
    14.90
    
    
    
    6.3
    
    
    
    388,638
    
    
    
    18.06Aggregate Intrinsic Value
    
    $
    392,953
    
    
    
    
    
    
    
    
    
    
    $
    58,247
  51




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##### Table of Contents



Quarter Ended March 31,2011
    
    
    2010Weighted Average Assumptions:Dividend yield
    
    
    1.63
    %
    
    
    1.39
    %Expected volatility
    
    
    59.04
    %
    
    
    58.81
    %Risk-free interest rate
    
    
    3.11
    %
    
    
    3.44
    %Expected life (in years)
    
    
    8.0
    
    
    
    8.0
  Quarter Ended
    
    
    Quarter EndedMarch 31, 2011
    
    
    March 31, 2010Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageRestricted
    
    
    Grant Date
    
    
    Restricted
    
    
    Grant DateUnits
    
    
    Fair Value
    
    
    Units
    
    
    Fair ValueBeginning of period
    
    
    243,525
    
    
    $
    13.43
    
    
    
    147,625
    
    
    $
    14.64Restricted units granted
    
    
    39,500
    
    
    
    11.82
    
    
    
    53,500
    
    
    
    11.40Restricted units lapsed
    
    
    (45,616
    )
    
    
    20.74
    
    
    
    
    
    
    
    Restricted units forfeited
    
    
    (9,238
    )
    
    
    13.38
    
    
    
    (400
    )
    
    
    21.86End of period
    
    
    228,171
    
    
    $
    11.69
    
    
    
    200,725
    
    
    $
    13.76
 Legal Surplus
  Earnings per Common Share
  Quarter ended March 31,2011
    
    
    2010Net income
    
    $
    3,081
    
    
    $
    11,936Less: Dividends on preferred stock
    
    
    (1,201
    )
    
    
    (1,201
    )Income available to common shareholders
    
    $
    1,880
    
    
    $
    10,735Average common shares outstanding and equivalents
    
    
    46,179
    
    
    
    25,932Earnings per common share  basic
    
    $
    0.04
    
    
    $
    0.42Earnings per common share  diluted
    
    $
    0.04
    
    
    $
    0.41
 52




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##### Table of Contents



Accumulated Other Comprehensive Income
  March 31,
    
    
    December 31,2011
    
    
    2010(In thousands)Unrealized gain on securities available-for-sale which are not other-than-temporarily impaired
    
    $
    25,359
    
    
    $
    39,094Unrealized gain on cash flow hedges
    
    
    7,123
    
    
    
    Income tax effect
    
    
    (2,163
    )
    
    
    (2,107
    )$
    30,319
    
    
    $
    36,987
 NOTE 14  FAIR VALUE
  Fair Value Measurement
  Money market investments
 The fair value of money market investments is based on the carrying amounts reflected in the
consolidated statements of financial condition as these are reasonable estimates of fair value
given the short-term nature of the instruments.
 Investment securities
  53




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##### Table of Contents



Derivative instruments
  Servicing assets
  Loans receivable considered impaired that are collateral dependent
  Foreclosed real estate
   March 31, 2011Fair Value MeasurementsLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Investment securities available-for-sale
    
    
    
    
    
    
    3,532,815
    
    
    $
    55,115
    
    
    $
    3,587,930Money market investments
    
    
    2,060
    
    
    
    
    
    
    
    
    
    
    
    2,060Derivative assets
    
    
    
    
    
    
    15,007
    
    
    
    11,764
    
    
    
    26,771Derivative liabilities
    
    
    
    
    
    
    
    
    
    
    (14,316
    )
    
    
    (14,316
    )Servicing assets
    
    
    
    
    
    
    
    
    
    
    9,963
    
    
    
    9,963$
    2,060
    
    
    
    3,547,822
    
    
    $
    62,526
    
    
    $
    3,612,408
 54




---



##### Table of Contents



December 31, 2010Fair Value MeasurementsLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Investment securities available-for-sale
    
    
    
    
    
    
    3,658,371
    
    
    $
    41,693
    
    
    $
    3,700,064Money market investments
    
    
    111,728
    
    
    
    
    
    
    
    
    
    
    
    111,728Derivative assets
    
    
    
    
    
    
    18,445
    
    
    
    9,870
    
    
    
    28,315Derivative liabilities
    
    
    
    
    
    
    (64
    )
    
    
    (12,830
    )
    
    
    (12,894
    )Servicing assets
    
    
    
    
    
    
    
    
    
    
    9,695
    
    
    
    9,695$
    111,728
    
    
    
    3,676,752
    
    
    $
    48,428
    
    
    $
    3,836,908
  Total Fair Value Measurements(Quarter ended March 31, 2011)Investment securities available-for-saleObligations ofPuerto RicoGovernment
    
    
    Derivative
    
    
    Derivativeand political
    
    
    asset (S&P
    
    
    liability (S&P
    
    
    ServicingLevel 3 Instruments Only
    
    CDOs
    
    
    CLOs
    
    
    subdivisions
    
    
    Options)
    
    
    Options)
    
    
    assets(In thousands)Balance at beginning of period
    
    $
    16,143
    
    
    $
    25,550
    
    
    $
    
    
    
    $
    9,870
    
    
    $
    (12,830
    )
    
    $
    9,695Gains (losses) included in earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,749
    
    
    
    (564
    )
    
    
    Changes in fair value of investment
securities available for sale
included in other comprehensive income
    
    
    237
    
    
    
    3,232
    
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    New instruments acquired
    
    
    
    
    
    
    
    
    
    
    10,005
    
    
    
    145
    
    
    
    (1,353
    )
    
    
    520Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    431
    
    
    
    (608
    )Changes in fair value of servicing assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    356Balance at end of period
    
    $
    16,380
    
    
    $
    28,782
    
    
    $
    9,953
    
    
    $
    11,764
    
    
    $
    (14,316
    )
    
    $
    9,963
 55




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##### Table of Contents



Total Fair Value Measurements(Quarter ended March 31, 2010)Investment securities available-for-saleDerivative
    
    
    DerivativeNon-Agency
    
    
    asset (S&P
    
    
    liability (S&P
    
    
    ServicingLevel 3 Instruments Only
    
    CDOs
    
    
    CLOs
    
    
    CMOs
    
    
    Options)
    
    
    Options)
    
    
    assets(In thousands)Balance at beginning of period
    
    $
    15,148
    
    
    $
    23,235
    
    
    $
    71,723
    
    
    $
    6,464
    
    
    $
    (9,543
    )
    
    $
    7,120Gains (losses) included in earnings
    
    
    
    
    
    
    
    
    
    
    (632
    )
    
    
    1,125
    
    
    
    (1,281
    )
    
    
    Changes in fair value of investment
securities available for sale
included in other comprehensive income
    
    
    520
    
    
    
    1,187
    
    
    
    2,440
    
    
    
    
    
    
    
    
    
    
    
    New instruments acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    327
    
    
    
    (342
    )
    
    
    685Amortization
    
    
    
    
    
    
    
    
    
    
    (2,334
    )
    
    
    (41
    )
    
    
    235
    
    
    
    (104
    )Changes in fair value of servicing assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (132
    )Balance at end of period
    
    $
    15,668
    
    
    $
    24,422
    
    
    $
    71,197
    
    
    $
    7,875
    
    
    $
    (10,931
    )
    
    $
    7,569
   March 31, 2011Amortized
    
    
    Unrealized
    
    
    Fair
    
    
    Weighted
    
    
    PrincipalType
    
    Cost
    
    
    Losses
    
    
    Value
    
    
    Average Yield
    
    
    Protection(In thousands)Obligations of Puerto Rico Government
and political subdivisions
    
    $
    10,005
    
    
    $
    52
    
    
    $
    9,953
    
    
    
    3.50
    %Structured credit investmentsCDO
    
    $
    25,548
    
    
    $
    9,168
    
    
    $
    16,380
    
    
    
    5.80
    %
    
    
    6.22
    %CLO
    
    
    15,000
    
    
    
    3,239
    
    
    
    11,761
    
    
    
    2.44
    %
    
    
    7.60
    %CLO
    
    
    11,977
    
    
    
    2,549
    
    
    
    9,428
    
    
    
    1.89
    %
    
    
    26.18
    %CLO
    
    
    9,200
    
    
    
    1,607
    
    
    
    7,593
    
    
    
    2.18
    %
    
    
    20.64
    %$
    61,725
    
    
    $
    16,563
    
    
    $
    45,162
    
    
    
    3.68
    %Total
    
    $
    71,730
    
    
    $
    16,615
    
    
    $
    55,115
    
    
    
    3.67
    %
   56




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##### Table of Contents



Carrying value atMarch 31, 2011
    
    
    December 31, 2010Level 3
    
    
    Level 3(In thousands)
    
    
    (In thousands)Impaired commercial loans
    
    $
    27,671
    
    
    $
    25,898Foreclosed real estate
    
    
    30,095
    
    
    
    27,931$
    57,766
    
    
    $
    53,829
    Fair Value of Financial Instruments
   57




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##### Table of Contents



March 31,
    
    
    December 31,2011
    
    
    2010Fair
    
    
    Carrying
    
    
    Fair
    
    
    CarryingValue
    
    
    Value
    
    
    Value
    
    
    Value(In thousands)Financial Assets:Cash and cash equivalents
    
    $
    317,411
    
    
    $
    317,411
    
    
    $
    448,946
    
    
    $
    448,946Trading securities
    
    
    1,444
    
    
    
    1,444
    
    
    
    1,330
    
    
    
    1,330Investment securities available-for-sale
    
    
    3,587,930
    
    
    
    3,587,930
    
    
    
    3,700,064
    
    
    
    3,700,064Investment securities held-to-maturity
    
    
    855,816
    
    
    
    875,494
    
    
    
    675,721
    
    
    
    689,917Federal Home Loan Bank (FHLB) stock
    
    
    22,496
    
    
    
    22,496
    
    
    
    22,496
    
    
    
    22,496Total loans (including loans held-for-sale)Non-covered loans
    
    
    1,175,294
    
    
    
    1,145,441
    
    
    
    1,150,945
    
    
    
    1,153,643Covered loans
    
    
    553,363
    
    
    
    643,392
    
    
    
    600,421
    
    
    
    670,018Investment in equity indexed options
    
    
    11,764
    
    
    
    11,764
    
    
    
    9,870
    
    
    
    9,870Investment in swap options
    
    
    7,804
    
    
    
    7,804
    
    
    
    7,422
    
    
    
    7,422FDIC shared-loss indemnification asset
    
    
    424,091
    
    
    
    436,889
    
    
    
    430,383
    
    
    
    471,872Accrued interest receivable
    
    
    28,634
    
    
    
    28,634
    
    
    
    28,716
    
    
    
    28,716Derivative assets
    
    
    7,203
    
    
    
    7,203
    
    
    
    11,023
    
    
    
    11,023Servicing assets
    
    
    9,963
    
    
    
    9,963
    
    
    
    9,695
    
    
    
    9,695Financial Liabilities:Deposits
    
    
    2,527,947
    
    
    
    2,501,472
    
    
    
    2,585,922
    
    
    
    2,588,887Securities sold under agreements to repurchase
    
    
    3,680,511
    
    
    
    3,456,605
    
    
    
    3,701,669
    
    
    
    3,456,781Advances from FHLB
    
    
    300,825
    
    
    
    281,687
    
    
    
    303,868
    
    
    
    281,753FDIC-guaranteed term notes
    
    
    107,889
    
    
    
    105,112
    
    
    
    106,428
    
    
    
    105,834Subordinated capital notes
    
    
    36,083
    
    
    
    36,083
    
    
    
    36,083
    
    
    
    36,083Short term borrowings
    
    
    32,335
    
    
    
    32,335
    
    
    
    42,470
    
    
    
    42,470Derivative liabilities
    
    
    14,316
    
    
    
    14,316
    
    
    
    12,894
    
    
    
    12,894Accrued expenses and other liabilities
    
    
    47,933
    
    
    
    47,933
    
    
    
    43,798
    
    
    
    43,798
 58




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##### Table of Contents




    
    Cash and cash equivalents, money market investments, time deposits with other banks,
securities sold but not yet delivered, accrued interest receivable and payable, securities and
loans purchased but not yet received, federal funds purchased, accrued expenses and other
liabilities have been valued at the carrying amounts reflected in the consolidated statements
of financial condition as these are reasonable estimates of fair value given the short-term
nature of the instruments.
 
    
    Investments in FHLB stock are valued at their redemption value.
 
    
    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 value is based upon externally developed models that use both observable and
unobservable inputs depending on the market activity of the instrument. The estimated fair
value of the structured credit investments and the non-agency collateralized mortgage
obligations 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, default, home price depreciation, and loss rates. The assumptions
used are drawn from a wide array of data sources, including the performance of the collateral
underlying each deal. The external-based valuation, which is obtained at least on a quarterly
basis, is analyzed and its assumptions are evaluated and incorporated in either an
internal-based valuation model when deemed necessary or compared to counterparties prices and
agreed by management.
 
    
    The FDIC shared-loss indemnification asset is measured separately from each of the covered
asset categories as it is not contractually embedded in any of the covered asset categories.
The $424.1 million fair value of the FDIC shared-loss indemnification asset represents the
present value of the estimated cash payments (net of amount owed to the FDIC) expected to be
received from the FDIC for future losses on covered assets based on the credit assumptions on
estimated cash flows for each covered asset pool and the loss sharing percentages. The
ultimate collectability of the FDIC shared-loss indemnification asset is dependent upon the
performance of the underlying covered loans, the passage of time and claims paid by the FDIC
which are impacted by the Banks adherence to certain guidelines established by the FDIC.
 
    
    The fair values of the derivative instruments are 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 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 through the use of an external based
valuation that was thoroughly evaluated and adopted by management as its measurement tool for
these options. The payoff of these options 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, which are uncertain and require a degree of judgment, include
primarily S&P Index volatility, forward interest rate projections, estimated index dividend
payout, and leverage.
 
    
    Fair value of interest rate swaps and options on interest rate swaps is based on the net
discounted value of the contractual projected cash flows of both the pay-fixed
receive-variable legs of the contracts. The projected cash flows are based on the forward
yield curve, and discounted using current estimated market rates.
 
    
    The fair value of the covered and non-covered loan portfolio (including loans held-for-sale)
is estimated by segregating by type, such as mortgage,
commercial, consumer, and leasing. Each loan segment is further segmented into fixed and
adjustable interest rates and by performing and non-performing categories. The fair value of
performing loans is calculated by discounting contractual cash flows, adjusted for prepayment
estimates (voluntary and involuntary), if any, using estimated current market discount rates
that reflect the credit and interest rate risk inherent in the loan. This fair value is not
currently an indication of an exit price as that type of assumption could result in a
different fair value estimate.
 
    
    The fair value of demand deposits and savings accounts is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is based on the
discounted value of the contractual cash flows, using estimated current market discount rates
for deposits of similar remaining maturities.
 59




---



##### Table of Contents




    
    For short-term borrowings, the carrying amount is considered a reasonable estimate of fair
value. The subordinated capital note has a par value of $36.1 million, bears interest based on
3-month LIBOR plus 295 basis points (3.26% at March 31, 2011; 3.25% at December 31, 2010),
payable quarterly. The fair value of long-term borrowings is based on the discounted value of
the contractual cash flows, using current estimated market discount rates for borrowings with
similar terms and remaining maturities and put dates.
 
    
    The fair value of commitments to extend credit and unused lines of credit is based on fees
currently charged to enter into similar agreements, taking into account the remaining terms of
the agreements and the counterparties credit standings.
 
    
    The fair value of servicing assets is estimated by using a cash flow valuation model which
calculates the present value of estimated future net servicing cash flows, taking into
consideration actual and expected loan prepayment rates, discount rates, servicing costs, and
other economic factors, which are determined based on current market conditions.
 NOTE 15  SEGMENT REPORTING
     60




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##### Table of Contents



Wealth
    
    
    
    
    
    
    Total Major
    
    
    
    
    
    
    ConsolidatedBanking
    
    
    Management
    
    
    Treasury
    
    
    Segments
    
    
    Eliminations
    
    
    Total(In thousands)Quarter Ended March 31, 2011Interest income
    
    $
    32,058
    
    
    $
    
    
    
    $
    45,852
    
    
    $
    77,910
    
    
    $
    
    
    
    $
    77,910Interest expense
    
    
    (9,378
    )
    
    
    
    
    
    
    (31,367
    )
    
    
    (40,745
    )
    
    
    
    
    
    
    (40,745
    )Net interest income
    
    
    22,680
    
    
    
    
    
    
    
    14,485
    
    
    
    37,165
    
    
    
    
    
    
    
    37,165Provision for non-covered loan and lease losses
    
    
    (3,800
    )
    
    
    
    
    
    
    
    
    
    
    (3,800
    )
    
    
    
    
    
    
    (3,800
    )Provision for covered loan and lease losses
    
    
    (549
    )
    
    
    
    
    
    
    
    
    
    
    (549
    )
    
    
    
    
    
    
    (549
    )Non-interest income (loss)
    
    
    6,745
    
    
    
    4,752
    
    
    
    (3,970
    )
    
    
    7,527
    
    
    
    
    
    
    
    7,527Non-interest expenses
    
    
    (24,241
    )
    
    
    (4,017
    )
    
    
    (2,532
    )
    
    
    (30,790
    )
    
    
    
    
    
    
    (30,790
    )Intersegment revenues
    
    
    412
    
    
    
    
    
    
    
    
    
    
    
    412
    
    
    
    (412
    )
    
    
    Intersegment expenses
    
    
    
    
    
    
    (288
    )
    
    
    (124
    )
    
    
    (412
    )
    
    
    412
    
    
    
    Income before income taxes
    
    $
    1,247
    
    
    $
    447
    
    
    $
    7,859
    
    
    $
    9,553
    
    
    $
    
    
    
    $
    9,553Total assets as of March 31, 2011
    
    $
    3,207,253
    
    
    $
    12,390
    
    
    $
    4,673,186
    
    
    $
    7,892,829
    
    
    $
    (716,700
    )
    
    $
    7,176,129
 Wealth
    
    
    
    
    
    
    Total Major
    
    
    
    
    
    
    ConsolidatedBanking
    
    
    Management
    
    
    Treasury
    
    
    Segments
    
    
    Eliminations
    
    
    Total(In thousands)Quarter Ended March 31, 2010Interest income
    
    $
    17,637
    
    
    $
    4
    
    
    $
    52,695
    
    
    $
    70,336
    
    
    $
    
    
    
    $
    70,336Interest expense
    
    
    (8,271
    )
    
    
    
    
    
    
    (32,588
    )
    
    
    (40,859
    )
    
    
    
    
    
    
    (40,859
    )Net interest income
    
    
    9,366
    
    
    
    4
    
    
    
    20,107
    
    
    
    29,477
    
    
    
    
    
    
    
    29,477Provision for non-covered loan losses
    
    
    (4,014
    )
    
    
    
    
    
    
    
    
    
    
    (4,014
    )
    
    
    
    
    
    
    (4,014
    )Non-interest income
    
    
    2,483
    
    
    
    4,803
    
    
    
    752
    
    
    
    8,038
    
    
    
    
    
    
    
    8,038Non-interest expenses
    
    
    (13,193
    )
    
    
    (3,200
    )
    
    
    (4,000
    )
    
    
    (20,393
    )
    
    
    
    
    
    
    (20,393
    )Intersegment revenues
    
    
    344
    
    
    
    822
    
    
    
    
    
    
    
    1,166
    
    
    
    (1,166
    )
    
    
    Intersegment expenses
    
    
    
    
    
    
    (1,136
    )
    
    
    (30
    )
    
    
    (1,166
    )
    
    
    1,166
    
    
    
    Income (loss) before income taxes
    
    $
    (5,014
    )
    
    $
    1,293
    
    
    $
    16,829
    
    
    $
    13,108
    
    
    $
    
    
    
    $
    13,108Total assets as of March 31, 2010
    
    $
    1,967,184
    
    
    $
    11,080
    
    
    $
    5,005,051
    
    
    $
    6,983,315
    
    
    $
    (474,795
    )
    
    $
    6,508,520
 61




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##### Table of Contents



Item 2
    
     MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 SELECTED FINANCIAL DATA

FOR THE QUARTERS ENDED MARCH 31, 2011 AND 2010
 Quarter ended March 31,2011
    
    
    2010
    
    
    Variance %(Dollars in thousands, except per share data)EARNINGS DATA:Interest income
    
    $
    77,910
    
    
    $
    70,336
    
    
    
    10.8
    %Interest expense
    
    
    40,745
    
    
    
    40,859
    
    
    
    -0.3
    %Net interest income
    
    
    37,165
    
    
    
    29,477
    
    
    
    26.1
    %Provision for non-covered loan and lease losses
    
    
    3,800
    
    
    
    4,014
    
    
    
    -5.3
    %Provision for covered loan and lease losses, net
    
    
    549
    
    
    
    
    
    
    
    100.0
    %Net interest income after provision for loan and lease losses
    
    
    32,816
    
    
    
    25,463
    
    
    
    28.9
    %Non-interest income
    
    
    7,527
    
    
    
    8,038
    
    
    
    -6.4
    %Non-interest expenses
    
    
    30,790
    
    
    
    20,393
    
    
    
    51.0
    %Income before taxes
    
    
    9,553
    
    
    
    13,108
    
    
    
    -27.1
    %Income tax expense
    
    
    6,472
    
    
    
    1,172
    
    
    
    452.2
    %Net Income
    
    
    3,081
    
    
    
    11,936
    
    
    
    -74.2
    %Less: Dividends on preferred stock
    
    
    (1,201
    )
    
    
    (1,201
    )
    
    
    0.0
    %Income available to common shareholders
    
    $
    1,880
    
    
    $
    10,735
    
    
    
    -82.5
    %PER SHARE DATA:Basic
    
    $
    0.04
    
    
    $
    0.42
    
    
    
    -90.2
    %Diluted
    
    $
    0.04
    
    
    $
    0.41
    
    
    
    -90.2
    %Average common shares outstanding and equivalents
    
    
    46,179
    
    
    
    25,932
    
    
    
    78.1
    %Book value per common share
    
    $
    14.22
    
    
    $
    11.97
    
    
    
    18.8
    %Tangible book value per common share
    
    $
    14.11
    
    
    $
    11.91
    
    
    
    18.5
    %Market price at end of period
    
    $
    12.55
    
    
    $
    13.50
    
    
    
    -7.0
    %Cash dividends declared per common share
    
    $
    0.05
    
    
    $
    0.04
    
    
    
    25.2
    %Cash dividends declared on common shares
    
    $
    2,269
    
    
    $
    1,322
    
    
    
    71.7
    %PERFORMANCE RATIOS:Return on average assets (ROA)
    
    
    0.17
    %
    
    
    0.73
    %
    
    
    -76.8
    %Return on average common equity (ROE)
    
    
    1.15
    %
    
    
    13.39
    %
    
    
    -91.4
    %Equity-to-assets ratio
    
    
    9.94
    %
    
    
    7.13
    %
    
    
    39.3
    %Efficiency ratio
    
    
    64.63
    %
    
    
    55.30
    %
    
    
    16.9
    %Expense ratio
    
    
    1.26
    %
    
    
    0.88
    %
    
    
    42.6
    %Interest rate spread
    
    
    2.31
    %
    
    
    1.96
    %
    
    
    17.9
    %Interest rate margin
    
    
    2.30
    %
    
    
    2.00
    %
    
    
    15.0
    %
 62




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##### Table of Contents



March 31,
    
    
    December 31,2011
    
    
    2010
    
    
    Variance %(Dollars in thousands)PERIOD END BALANCES AND CAPITAL RATIOS:Investments and loansInvestments securities
    
    $
    4,487,514
    
    
    $
    4,413,957
    
    
    
    1.7
    %Non-covered loans
    
    
    1,142,540
    
    
    
    1,151,838
    
    
    
    -0.8
    %Covered loans
    
    
    589,912
    
    
    
    620,732
    
    
    
    -5.0
    %$
    6,219,966
    
    
    $
    6,186,527
    
    
    
    0.5
    %Deposits and borrowingsDeposits
    
    $
    2,501,472
    
    
    $
    2,588,887
    
    
    
    -3.4
    %Securities sold under agreements to repurchase
    
    
    3,456,605
    
    
    
    3,456,781
    
    
    
    0.0
    %Other borrowings
    
    
    455,217
    
    
    
    466,140
    
    
    
    -2.3
    %$
    6,413,294
    
    
    $
    6,511,808
    
    
    
    -1.5
    %Stockholders equityPreferred stock
    
    
    68,000
    
    
    
    68,000
    
    
    
    0.0
    %Common stock
    
    
    47,808
    
    
    
    47,808
    
    
    
    0.0
    %Treasury stock, at cost
    
    
    (28,746
    )
    
    
    (16,732
    )
    
    
    71.8
    %Additional paid-in capital
    
    
    498,303
    
    
    
    498,435
    
    
    
    0.0
    %Legal surplus
    
    
    46,717
    
    
    
    46,331
    
    
    
    0.8
    %Retained earnings
    
    
    50,727
    
    
    
    51,502
    
    
    
    -1.5
    %Accumulated other comprehensive income
    
    
    30,319
    
    
    
    36,987
    
    
    
    -18.0
    %$
    713,128
    
    
    $
    732,331
    
    
    
    -2.6
    %Capital ratiosLeverage capital
    
    
    9.52
    %
    
    
    9.56
    %
    
    
    -0.4
    %Tier 1 risk-based capital
    
    
    30.63
    %
    
    
    30.98
    %
    
    
    -1.1
    %Total risk-based capital
    
    
    31.91
    %
    
    
    32.26
    %
    
    
    -1.1
    %Financial assets managedTrust assets managed
    
    $
    2,245,158
    
    
    $
    2,175,270
    
    
    
    3.2
    %Broker-dealer assets gathered
    
    $
    1,792,264
    
    
    $
    1,695,634
    
    
    
    5.7
    %
 63




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##### Table of Contents



OVERVIEW OF FINANCIAL PERFORMANCE
 Introduction
    Highlights
 
    
    Pre-tax operating income of $13.1 million increased 4.7% from the quarter ended March 31,
2010 and more than doubled from the quarter ended December 31, 2010.
 Quarter EndedMarch 31,
    
    
    March 31,
    
    
    December 31,2011
    
    
    2010
    
    
    2010PRE-TAX OPERATING INCOMENet interest income
    
    $
    37,165
    
    
    $
    29,477
    
    
    $
    30,602Less provision for non-covered loan and lease losses
    
    
    (3,800
    )
    
    
    (4,014
    )
    
    
    (3,700
    )Core non-interest income:Wealth management revenues
    
    
    4,682
    
    
    
    3,978
    
    
    
    4,717Banking service revenues
    
    
    3,835
    
    
    
    1,622
    
    
    
    3,805Mortgage banking activities
    
    
    1,959
    
    
    
    1,797
    
    
    
    1,999Total core non-interest income
    
    
    10,476
    
    
    
    7,397
    
    
    
    10,521Less non interest expenses
    
    
    (30,790
    )
    
    
    (20,393
    )
    
    
    (31,649
    )Total Pre-tax operating income
    
    $
    13,051
    
    
    $
    12,467
    
    
    $
    5,774
 
    
    Income available to common shareholders was $1.9 million, or $0.04 per share. This
compares to $10.7 million, or $0.41 per share, in the year ago quarter, and $3.9 million, or
$0.08 per share, in the preceding quarter. These reductions were primarily due to the
re-measurement of a $5.4 million portion of the deferred tax asset, due to a reduction in
the applicable tax rate, and a $4.0 million loss on the strategic sale of forward-settlement
interest rate swaps.
 
    
    Wealth Management revenues increased 17.7% year over year, reflecting growth in brokerage
and trust, and a successful 2011 individual retirement accounts campaign. Assets under
management grew 35.0% year over year, to $4.0 billion.
 64




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##### Table of Contents




    
    Banking service revenues increased 136.4% year over year, reflecting the Groups expanded
and more strategically located branch network. Retail deposits grew 36.7% year over year,
to $2.0 billion, while cost of deposits declined to 1.91% from 2.71% in the quarter ended
March 31, 2010.
    
    Total loans increased 53.1% year over year to $1.7 billion, reflecting the addition of
the former Eurobank loan and leasing portfolios, and increases in commercial loans and
consumer loans of 13.5% and 69.0%, respectively.
    
    Book value per share was $14.22 at March 31, 2011 compared to $11.97 at March 31, 2010
and $14.33 at December 31, 2010; total stockholders equity was $713.1 million (which
reflects approximately $12.5 million in stock repurchases during the first quarter of 2011),
compared to $464.2 million and $732.3 million, respectively; and tangible common equity to
total assets was 8.92% compared to 6.06% and 9.02%, respectively.
 Other Highlights
 
    
    Net interest margin of 2.30% for the quarter ended March 31, 2011 increased 41 basis
points from the same period in 2010. Higher yield as a result of former Eurobank loans and
lower cost of funds were able to offset the decline in yield from investments.
    
    Non-interest expenses of $30.8 million for the quarter ended March 31, 2011 were $10.4
million higher than in the same period in 2010. This increase is mostly related to higher
expenses as a result of the FDIC-assisted acquisition.
    
    Net credit losses (excluding loans covered under shared-loss agreements with the FDIC) of
$2.5 million increased $1.2 million during the quarter ended March 31, 2011 from the same
period in 2010. Non-performing loans (NPLs) decreased 1.4% from December 31, 2010. The
Groups NPLs generally reflect that the economic decline in Puerto Rico is leveling off. The
Group does not expect NPLs to result in significantly higher losses as most loans are
well-collateralized residential mortgages with adequate loan-to-value ratios.
    
    Non-covered loans totaled $1.1 billion, reflecting increases in leases and consumer
loans, which offset reduced residential mortgage loans and commercial loans due to
maturities. Total loan production and purchases declined $23.5 million compared to the
quarter ended December 31, 2010, as the Groups enhanced
commercial banking team made the strategic decision to focus on
developing a larger and higher quality pipeline of new business, with
the goal of increasing commercial loan production during the balance
of 2011.
    
    Core retail deposits increased 0.4% to $2.0 billion, while the Group
strategically reduced institutional and brokered deposits by $95.4 million.
Total borrowings declined 0.3% due to a reduction of short-term borrowings.
    
    Investment securities of $4.5 billion increased 1.7% or $73.6 million. This reflects a
reduction of 3.0% or $112.1 million in the available-for-sale portfolio, due to the maturity
of FNMA and FHLMC certificates, and an increase of 26.9%, or $185.6 million in the
held-to-maturity portfolio.
    
    Approximately 98% of the Groups investment portfolio
consists of agency mortgage-backed securities guaranteed or issued by FNMA, FHLMC or GNMA.
 Share Count
 
    
    Common shares outstanding totaled 45.4 million at March 31, 2011 compared to 33.1
million a year ago. The increase reflects a capital raises in the March and June 2010
quarters related to the FDIC-assisted acquisition of Eurobank, less repurchases during the
March 2011 quarter.
 
    
    During the March 2011 quarter, Oriental returned approximately $12.5 million of its current
$30 million share repurchase program, buying back 1.029 million shares, at an average cost
of $12.18 per share. Subsequently, the Group
returned approximately $1.3 million, buying back 103 thousand
shares, for a total of $13.8 million at the date of this report,
buying back 1.132 million shares, at an average cost of $12.21 per
share.
 65




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##### Table of Contents



Capital
 
    
    The Group continues to maintain regulatory capital ratios well above the requirements for
a well-capitalized institution. At March 31, 2011, the Leverage Capital Ratio was 9.52%,
Tier-1 Risk-Based Capital Ratio was 30.29%, and Total Risk-Based Capital Ratio was 31.57%.
In addition, Tangible Common Equity to risk-weighted assets was 28.26%.
 Non-Operating Items
  
    
    Loss of $4.0 million on derivative activities for the quarter ended March 31, 2011. These
losses were mainly due to realized losses of $4.3 million due to the terminations of
forward-settlement swaps with a notional amount of $1.25 billion. These terminations allowed
the Group to enter into new forward-settlement swap contracts with a notional amount of $950
million. The new swaps will reduce the cost of $600 million of wholesale borrowings to 1.66%
from 4.23%, starting December 28, 2011, and will also lower the cost of $350 million of
wholesale borrowings to 1.77% from 4.26%, starting May 9, 2012. The Group is applying cash
flow hedge accounting on the new swaps; any future fluctuations in value will be recorded
through other comprehensive income to the extent there is no significant ineffectiveness in
the cash flow hedges.
 
    
    Accretion of $1.2 million of the FDIC loss-share indemnification asset related to the
former Eurobank loan portfolio. The estimated fair value of this asset was determined by
discounting the projected cash flows related to the shared-loss agreements based on
expected reimbursements, primarily for credit losses on covered assets. The time value of
money incorporated into the present value computation is accreted over the shorter of
the shared-loss agreements terms or the holding period of the covered assets.
 66




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##### Table of Contents



TABLE 1  QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS PERIODS ENDED MARCH 31, 2011 AND 2010  (Dollars in thousands)
 Interest
    
    
    Average rate
    
    
    Average balanceMarch
    
    
    March
    
    
    March
    
    
    March
    
    
    March
    
    
    March2011
    
    
    2010
    
    
    2011
    
    
    2010
    
    
    2011
    
    
    2010A  TAX EQUIVALENT SPREADInterest-earning assets
    
    $
    77,910
    
    
    $
    70,336
    
    
    
    4.82
    %
    
    
    4.77
    %
    
    $
    6,468,854
    
    
    $
    5,900,944Tax equivalent adjustment
    
    
    15,005
    
    
    
    23,193
    
    
    
    0.93
    %
    
    
    1.57
    %
    
    
    
    
    
    
    Interest-earning assets  tax equivalent
    
    
    92,915
    
    
    
    93,529
    
    
    
    5.75
    %
    
    
    6.34
    %
    
    
    6,468,854
    
    
    
    5,900,944Interest-bearing liabilities
    
    
    40,745
    
    
    
    40,859
    
    
    
    2.51
    %
    
    
    2.81
    %
    
    
    6,486,440
    
    
    
    5,818,999Tax equivalent net interest income / spread
    
    
    52,170
    
    
    
    52,670
    
    
    
    3.24
    %
    
    
    3.53
    %
    
    
    (17,586
    )
    
    
    81,945Tax equivalent interest rate margin
    
    
    
    
    
    
    
    
    
    
    3.23
    %
    
    
    3.57
    %B  NORMAL SPREADInterest-earning assets:Investments:Investment securities
    
    
    45,606
    
    
    
    52,657
    
    
    
    4.09
    %
    
    
    4.53
    %
    
    
    4,461,874
    
    
    
    4,653,348Trading securities
    
    
    (13
    )
    
    
    2
    
    
    
    -5.50
    %
    
    
    3.01
    %
    
    
    945
    
    
    
    266Money market investments
    
    
    250
    
    
    
    40
    
    
    
    0.58
    %
    
    
    0.16
    %
    
    
    172,550
    
    
    
    97,20545,843
    
    
    
    52,699
    
    
    
    3.96
    %
    
    
    4.44
    %
    
    
    4,635,369
    
    
    
    4,750,819Loans not
covered under shared-loss agreements with the FDIC:Mortgage
    
    
    13,264
    
    
    
    14,430
    
    
    
    5.95
    %
    
    
    6.19
    %
    
    
    891,889
    
    
    
    932,659Commercial
    
    
    3,503
    
    
    
    2,727
    
    
    
    6.03
    %
    
    
    5.61
    %
    
    
    232,223
    
    
    
    194,403Leasing
    
    
    278
    
    
    
    
    
    
    
    10.39
    %
    
    
    0.00
    %
    
    
    10,704
    
    
    
    Consumer
    
    
    796
    
    
    
    480
    
    
    
    8.50
    %
    
    
    8.33
    %
    
    
    37,480
    
    
    
    23,06317,841
    
    
    
    17,637
    
    
    
    6.09
    %
    
    
    6.13
    %
    
    
    1,172,296
    
    
    
    1,150,125Loans covered under shared-loss agreements with the FDIC:Loans secured by residential properties
    
    
    3,496
    
    
    
    
    
    
    
    7.62
    %
    
    
    
    
    
    
    183,410
    
    
    
    Commercial and construction
    
    
    7,760
    
    
    
    
    
    
    
    8.06
    %
    
    
    
    
    
    
    385,109
    
    
    
    Leasing
    
    
    2,483
    
    
    
    
    
    
    
    13.40
    %
    
    
    
    
    
    
    74,145
    
    
    
    Consumer
    
    
    487
    
    
    
    
    
    
    
    10.52
    %
    
    
    
    
    
    
    18,524
    
    
    
    14,226
    
    
    
    
    
    
    
    8.61
    %
    
    
    
    
    
    
    661,188
    
    
    
    32,067
    
    
    
    17,637
    
    
    
    7.00
    %
    
    
    6.13
    %
    
    
    1,833,485
    
    
    
    1,150,12577,910
    
    
    
    70,336
    
    
    
    4.82
    %
    
    
    4.77
    %
    
    
    6,468,854
    
    
    
    5,900,944Interest-bearing liabilities:Deposits:Non-interest bearing deposit
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    169,175
    
    
    
    71,658Now accounts
    
    
    3,570
    
    
    
    3,495
    
    
    
    1.84
    %
    
    
    2.24
    %
    
    
    777,569
    
    
    
    625,155Savings and money market
    
    
    1,027
    
    
    
    409
    
    
    
    1.66
    %
    
    
    1.69
    %
    
    
    247,709
    
    
    
    96,688Individual retirement accounts
    
    
    2,633
    
    
    
    2,529
    
    
    
    2.92
    %
    
    
    3.19
    %
    
    
    360,351
    
    
    
    317,006Retail certificates of deposit
    
    
    3,960
    
    
    
    2,935
    
    
    
    3.32
    %
    
    
    3.53
    %
    
    
    477,565
    
    
    
    332,335Total retail deposits
    
    
    11,190
    
    
    
    9,368
    
    
    
    2.20
    %
    
    
    2.60
    %
    
    
    2,032,369
    
    
    
    1,442,842Institutional deposits
    
    
    (203
    )
    
    
    542
    
    
    
    -0.32
    %
    
    
    1.47
    %
    
    
    255,737
    
    
    
    147,219Brokered deposits
    
    
    1,227
    
    
    
    1,333
    
    
    
    1.80
    %
    
    
    3.10
    %
    
    
    272,396
    
    
    
    172,049Total wholesale deposits
    
    
    1,024
    
    
    
    1,875
    
    
    
    0.78
    %
    
    
    2.35
    %
    
    
    528,133
    
    
    
    319,26812,214
    
    
    
    11,243
    
    
    
    1.91
    %
    
    
    2.55
    %
    
    
    2,560,501
    
    
    
    1,762,110Borrowings:Securities sold under agreements to repurchase
    
    
    24,159
    
    
    
    25,285
    
    
    
    2.79
    %
    
    
    2.82
    %
    
    
    3,462,255
    
    
    
    3,589,057Advances from FHLB and other borrowings
    
    
    3,049
    
    
    
    3,012
    
    
    
    3.79
    %
    
    
    3.70
    %
    
    
    321,759
    
    
    
    325,908FDIC-guaranteed term notes
    
    
    1,021
    
    
    
    1,021
    
    
    
    3.86
    %
    
    
    3.86
    %
    
    
    105,841
    
    
    
    105,841Subordinated capital notes
    
    
    302
    
    
    
    298
    
    
    
    3.35
    %
    
    
    3.30
    %
    
    
    36,083
    
    
    
    36,08328,531
    
    
    
    29,616
    
    
    
    2.91
    %
    
    
    2.92
    %
    
    
    3,925,938
    
    
    
    4,056,88940,745
    
    
    
    40,859
    
    
    
    2.51
    %
    
    
    2.81
    %
    
    
    6,486,440
    
    
    
    5,818,999Net interest income / spread
    
    $
    37,165
    
    
    $
    29,477
    
    
    
    2.31
    %
    
    
    1.96
    %Interest rate margin
    
    
    
    
    
    
    
    
    
    
    2.30
    %
    
    
    2.00
    %Excess of average interest-earning assets over average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (17,586
    )
    
    $
    81,945Average interest-earning assets to average interest-bearing
liabilities ratio
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99.73
    %
    
    
    101.41
    %
 Volume
    
    
    Rate
    
    
    TotalC  CHANGES IN NET INTEREST INCOME DUE TO:Interest Income:Investments
    
    $
    (1,281
    )
    
    $
    (5,575
    )
    
    $
    (6,856
    )Loans
    
    
    14,565
    
    
    
    (136
    )
    
    
    14,42913,284
    
    
    
    (5,711
    )
    
    
    7,573Interest Expense:Deposits
    
    
    5,094
    
    
    
    (4,123
    )
    
    
    971Repurchase agreements
    
    
    (893
    )
    
    
    (233
    )
    
    
    (1,126
    )Other borrowings
    
    
    (38
    )
    
    
    79
    
    
    
    414,163
    
    
    
    (4,277
    )
    
    
    (114
    )Net Interest Income
    
    $
    9,121
    
    
    $
    (1,434
    )
    
    $
    7,687
 67




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TABLE 2  NON-INTEREST INCOME SUMMARY
FOR THE QUARTERS ENDED MARCH 31, 2011 AND 2010  (Dollars in thousands)
 Quarter ended March 31,2011
    
    
    2010
    
    
    Variance %Wealth management revenues
    
    $
    4,682
    
    
    $
    3,978
    
    
    
    17.7
    %Banking service revenues
    
    
    3,835
    
    
    
    1,622
    
    
    
    136.4
    %Mortgage banking activities
    
    
    1,959
    
    
    
    1,797
    
    
    
    9.0
    %Total banking and wealth management revenues
    
    
    10,476
    
    
    
    7,397
    
    
    
    41.6
    %Total other-than-temporarily impaired securities
    
    
    
    
    
    
    (39,590
    )
    
    
    -100.0
    %Portion of loss on securities recognized in other
comprehensive income
    
    
    
    
    
    
    38,958
    
    
    
    -100.0
    %Other-than-temporary impairments on securities
    
    
    
    
    
    
    (632
    )
    
    
    -100.0
    %Accretion of FDIC loss-share indemnification asset
    
    
    1,211
    
    
    
    
    
    
    
    100.0
    %Net gain (loss) on:Sale of securities
    
    
    (2
    )
    
    
    12,020
    
    
    
    -100.0
    %Derivatives
    
    
    (3,968
    )
    
    
    (10,636
    )
    
    
    -62.7
    %Trading securities
    
    
    (31
    )
    
    
    (3
    )
    
    
    933.3
    %Foreclosed real estate
    
    
    (132
    )
    
    
    (117
    )
    
    
    12.8
    %Other
    
    
    (27
    )
    
    
    9
    
    
    
    -400.0
    %(2,949
    )
    
    
    641
    
    
    
    -560.1
    %Total non-interest income
    
    $
    7,527
    
    
    $
    8,038
    
    
    
    -6.4
    %
      69




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TABLE 3  NON-INTEREST EXPENSES SUMMARY 
FOR THE QUARTERS
ENDED MARCH 31, 2011 AND 2010  (Dollars in thousands)
 Quarter ended March 31,2011
    
    
    2010
    
    
    Variance %Compensation and employee benefits
    
    $
    11,688
    
    
    $
    8,250
    
    
    
    41.7
    %Professional and service fees
    
    
    5,451
    
    
    
    2,153
    
    
    
    153.2
    %Occupancy and equipment
    
    
    4,405
    
    
    
    3,594
    
    
    
    22.6
    %Insurance
    
    
    1,985
    
    
    
    1,833
    
    
    
    8.3
    %Electronic banking charges
    
    
    1,454
    
    
    
    678
    
    
    
    114.5
    %Taxes, other than payroll and income taxes
    
    
    1,380
    
    
    
    857
    
    
    
    61.0
    %Advertising and business promotion
    
    
    1,165
    
    
    
    699
    
    
    
    66.7
    %Loan servicing and clearing expenses
    
    
    1,021
    
    
    
    724
    
    
    
    41.0
    %Communication
    
    
    397
    
    
    
    342
    
    
    
    16.1
    %Director and investor relations
    
    
    287
    
    
    
    315
    
    
    
    -8.9
    %Other operating expenses
    
    
    1,557
    
    
    
    948
    
    
    
    64.2
    %Total non-interest expenses
    
    $
    30,790
    
    
    $
    20,393
    
    
    
    51.0
    %Relevant ratios and data:Efficiency ratio
    
    
    64.63
    %
    
    
    55.30
    %Expense ratio
    
    
    1.26
    %
    
    
    0.83
    %Compensation and benefits to non-
interest expense
    
    
    37.96
    %
    
    
    40.46
    %Compensation to total assets owned
    
    
    0.65
    %
    
    
    0.51
    %Average number of employees
    
    
    723
    
    
    
    522Average compensation per employee
    
    $
    64.6
    
    
    $
    63.2Assets owned per average employee
    
    $
    9,921
    
    
    $
    12,468
    70




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TABLE 4  ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY
 FOR THE QUARTERS
ENDED MARCH 31, 2011 AND 2010
 Quarter ended March 31,
    
    
    Variance2011
    
    
    2010
    
    
    %Non-covered loansBalance at beginning of period
    
    $
    31,430
    
    
    $
    23,272
    
    
    
    35.1
    %Provision for non-covered loan and lease losses
    
    
    3,800
    
    
    
    4,014
    
    
    
    -5.3
    %Charge-offs
    
    
    (2,638
    )
    
    
    (1,392
    )
    
    
    89.5
    %Recoveries
    
    
    135
    
    
    
    83
    
    
    
    62.7
    %Balance at end of period
    
    $
    32,727
    
    
    $
    25,977
    
    
    
    26.0
    %Covered loansBalance at beginning of period
    
    $
    49,286
    
    
    $
    
    
    
    
    100.0
    %Provision for covered loan and lease losses
    
    
    549
    
    
    
    
    
    
    
    100.0
    %FDIC shared-loss portion on provision for covered loan
and lease losses
    
    
    3,645
    
    
    
    
    
    
    
    100.0
    %Balance at end of period
    
    $
    53,480
    
    
    $
    
    
    
    
    100.0
    %
 71




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TABLE 5  ALLOWANCE FOR NON-COVERED LOAN AND LEASE LOSSES BREAKDOWN
 March 31,
    
    
    December 31,2011
    
    
    2010
    
    
    Variance (%)(Dollars in thousands)Mortgage
    
    $
    17,865
    
    
    $
    16,179
    
    
    
    10.4
    %Commercial
    
    
    12,007
    
    
    
    11,153
    
    
    
    7.7
    %Consumer
    
    
    1,885
    
    
    
    2,286
    
    
    
    -17.5
    %Leasing
    
    
    958
    
    
    
    860
    
    
    
    11.4
    %Unallocated allowance
    
    
    12
    
    
    
    952
    
    
    
    -98.7
    %$
    32,727
    
    
    $
    31,430
    
    
    
    4.1
    %Allowance composition:Mortgage
    
    
    54.59
    %
    
    
    51.48
    %
    
    
    6.04
    %Commercial
    
    
    36.69
    %
    
    
    35.49
    %
    
    
    3.38
    %Consumer
    
    
    5.76
    %
    
    
    7.27
    %
    
    
    -20.77
    %Leasing
    
    
    2.93
    %
    
    
    2.74
    %
    
    
    6.93
    %Unallocated allowance
    
    
    0.03
    %
    
    
    3.03
    %
    
    
    -99.01
    %100.00
    %
    
    
    100.00
    %Allowance coverage ratio at end of period applicable to:Mortgage
    
    
    2.07
    %
    
    
    1.85
    %
    
    
    11.89
    %Commercial
    
    
    5.19
    %
    
    
    4.76
    %
    
    
    9.03
    %Consumer
    
    
    4.86
    %
    
    
    6.24
    %
    
    
    -22.12
    %Leasing
    
    
    6.96
    %
    
    
    8.38
    %
    
    
    -16.95
    %Unallocated allowance to total loans
    
    
    0.00
    %
    
    
    0.08
    %
    
    
    -100.00
    %Total allowance to total loans
    
    
    2.86
    %
    
    
    2.72
    %
    
    
    5.15
    %Allowance
coverage ratio to non-performing loans:Mortgage
    
    
    19.33
    %
    
    
    16.51
    %
    
    
    17.12
    %Commercial
    
    
    43.56
    %
    
    
    47.22
    %
    
    
    -7.74
    %Consumer
    
    
    242.60
    %
    
    
    300.00
    %
    
    
    -19.13
    %Leasing
    
    
    242.53
    %
    
    
    2457.14
    %
    
    
    -90.13
    %Total
    
    
    27.02
    %
    
    
    25.59
    %
    
    
    5.59
    %
 72




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TABLE 6  NET CREDIT LOSSES STATISTICS
FOR THE QUARTERS ENDED MARCH 31, 2011 AND 2010
 Quarter Ended March 31,
    
    
    Variance2011
    
    
    2010
    
    
    %(In thousands)MortgageCharge-offs
    
    $
    (1,820
    )
    
    $
    (1,096
    )
    
    
    66.1
    %Recoveries
    
    
    45
    
    
    
    
    
    
    
    100.0
    %(1,775
    )
    
    
    (1,096
    )
    
    
    62.0
    %CommercialCharge-offs
    
    
    (309
    )
    
    
    (110
    )
    
    
    180.9
    %Recoveries
    
    
    37
    
    
    
    11
    
    
    
    236.4
    %(272
    )
    
    
    (99
    )
    
    
    174.7
    %ConsumerCharge-offs
    
    
    (448
    )
    
    
    (186
    )
    
    
    140.9
    %Recoveries
    
    
    53
    
    
    
    72
    
    
    
    -26.4
    %(395
    )
    
    
    (114
    )
    
    
    246.5
    %LeasingCharge-offs
    
    
    (61
    )
    
    
    
    
    
    
    -100.0
    %Recoveries
    
    
    
    
    
    
    
    
    
    
    0.0
    %(61
    )
    
    
    
    
    
    
    -100.0
    %Net credit lossesTotal charge-offs
    
    
    (2,638
    )
    
    
    (1,392
    )
    
    
    89.5
    %Total recoveries
    
    
    135
    
    
    
    83
    
    
    
    62.7
    %$
    (2,503
    )
    
    $
    (1,309
    )
    
    
    91.2
    %Net credit losses (recoveries) to average loans outstanding:Mortgage
    
    
    0.80
    %
    
    
    0.47
    %
    
    
    70.2
    %Commercial
    
    
    0.47
    %
    
    
    0.20
    %
    
    
    135.0
    %Consumer
    
    
    4.22
    %
    
    
    1.98
    %
    
    
    113.1
    %Leasing
    
    
    2.26
    %
    
    
    0.00
    %
    
    
    100.0
    %Total
    
    
    0.85
    %
    
    
    0.46
    %
    
    
    84.8
    %Recoveries to charge-offs
    
    
    5.11
    %
    
    
    5.10
    %
    
    
    0.2
    %Average loans not covered under shared-loss agreements with the FDIC:Mortgage
    
    $
    891,889
    
    
    $
    932,659
    
    
    
    -4.4
    %Commercial
    
    
    232,223
    
    
    
    194,403
    
    
    
    19.5
    %Consumer
    
    
    37,480
    
    
    
    23,063
    
    
    
    62.5
    %Leasing
    
    
    10,704
    
    
    
    
    
    
    
    100.0
    %Total
    
    $
    1,172,296
    
    
    $
    1,150,125
    
    
    
    1.9
    %
 73




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75




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TABLE 7  HIGHER RISK RESIDENTIAL
MORTGAGE LOANS AS OF MARCH 31, 2011
 Higher-Risk Residential Mortgage Loans*Junior Lien Mortages
    
    
    Interest Only Loans
    
    
    High Loan-to-Value Ratio MortgagesLTV 90% to 100%Carrying Value
    
    
    Allowance
    
    
    Coverage
    
    
    Carrying Value
    
    
    Allowance
    
    
    Coverage
    
    
    Carrying Value
    
    
    Allowance
    
    
    Coverage(In thousands)Delinquency:Up to 90 days
    
    $
    20,815
    
    
    $
    517
    
    
    
    2.48
    %
    
    $
    34,152
    
    
    $
    1,127
    
    
    
    3.30
    %
    
    $
    95,975
    
    
    $
    1,526
    
    
    
    1.59
    %91 - 120 days
    
    
    95
    
    
    
    4
    
    
    
    4.21
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    380
    
    
    
    9
    
    
    
    2.37
    %121 - 180 days
    
    
    217
    
    
    
    20
    
    
    
    9.22
    %
    
    
    114
    
    
    
    13
    
    
    
    11.40
    %
    
    
    2,277
    
    
    
    99
    
    
    
    4.35
    %181 - 365 days
    
    
    1,020
    
    
    
    63
    
    
    
    6.18
    %
    
    
    164
    
    
    
    19
    
    
    
    11.59
    %
    
    
    4,188
    
    
    
    229
    
    
    
    5.47
    %Over 365 days
    
    
    1,755
    
    
    
    476
    
    
    
    27.12
    %
    
    
    3,999
    
    
    
    1,452
    
    
    
    36.31
    %
    
    
    9,819
    
    
    
    1,479
    
    
    
    15.06
    %Total
    
    $
    23,902
    
    
    $
    1,080
    
    
    
    4.52
    %
    
    $
    38,429
    
    
    $
    2,611
    
    
    
    6.79
    %
    
    $
    112,639
    
    
    $
    3,342
    
    
    
    2.97
    %Percentage of total
loans not covered byFDIC shared-loss
agreements
    
    
    2.01
    %
    
    
    
    
    
    
    
    
    
    
    3.24
    %
    
    
    
    
    
    
    
    
    
    
    9.49
    %Refinanced or
Modified Loans:Amount
    
    $
    1,680
    
    
    $
    93
    
    
    
    5.54
    %
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    11,363
    
    
    $
    597
    
    
    
    5.25
    %Percentage of
Higher-Risk Loan
Category
    
    
    7.03
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    10.09
    %Current Loan-to-Value:Under 70%
    
    $
    18,150
    
    
    $
    743
    
    
    
    4.09
    %
    
    $
    6,134
    
    
    $
    384
    
    
    
    6.26
    %
    
    $
    
    
    
    $
    
    
    
    
    70% - 79%
    
    
    2,959
    
    
    
    191
    
    
    
    6.45
    %
    
    
    8,092
    
    
    
    715
    
    
    
    8.84
    %
    
    
    
    
    
    
    
    
    
    
    80% - 89%
    
    
    1,942
    
    
    
    69
    
    
    
    3.55
    %
    
    
    9,483
    
    
    
    555
    
    
    
    5.85
    %
    
    
    
    
    
    
    
    
    
    
    90% - 100%
    
    
    851
    
    
    
    77
    
    
    
    9.05
    %
    
    
    14,720
    
    
    
    957
    
    
    
    6.50
    %
    
    
    112,639
    
    
    
    3,342
    
    
    
    2.97
    %$
    23,902
    
    
    $
    1,080
    
    
    
    4.52
    %
    
    $
    38,429
    
    
    $
    2,611
    
    
    
    6.79
    %
    
    $
    112,639
    
    
    $
    3,342
    
    
    
    2.97
    %
 
 *
    
    Loans may be included in more than one
higher-risk loan category 76




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TABLE 8  NON-PERFORMING ASSETS
AS OF MARCH 31, 2011 AND 2010 AND DECEMBER 31, 2010
 March 31,
    
    
    December 31,
    
    
    Variance2011
    
    
    2010
    
    
    (% )(Dollars in thousands)`
Non-performing assets:Non-accruing loansTroubled Debt Restructuring (TDR) loans
    
    $
    14,277
    
    
    $
    2,327
    
    
    
    513.5
    %Other loans
    
    
    67,098
    
    
    
    71,236
    
    
    
    -5.8
    %Accruing loansTroubled Debt Restructuring (TDR) loans
    
    
    4,773
    
    
    
    3,371
    
    
    
    41.6
    %Other loans
    
    
    34,989
    
    
    
    45,490
    
    
    
    -23.1
    %Total non-performing loans
    
    $
    121,137
    
    
    $
    122,424
    
    
    
    -1.1
    %Foreclosed real estate not covered under
the shared-loss agreement with the FDIC
    
    
    12,793
    
    
    
    11,969
    
    
    
    6.9
    %Mortgage loans held for sale in non-accrual
    
    
    295
    
    
    
    
    
    
    
    100.0
    %$
    134,225
    
    
    $
    134,393
    
    
    
    -0.1
    %Non-performing assets to total assets, excluding covered assets
    
    
    2.06
    %
    
    
    2.01
    %
    
    
    2.5
    %Non-performing assets to total capital
    
    
    18.82
    %
    
    
    18.35
    %
    
    
    2.6
    %
 Quarter Ended March 31,2011
    
    
    2010Interest that would have been recorded in the period if the loans
had not been classified as non-accruing loans
    
    $
    1,034
    
    
    $
    829
 77




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TABLE 9  NON-PERFORMING LOANS
AS OF MARCH 31, 2011 AND 2010 AND DECEMBER 31, 2010
 March 31,
    
    
    December 31,2011
    
    
    2010
    
    
    Variance (%)(Dollars in thousands)Non-performing loans:Mortgage
    
    $
    92,403
    
    
    $
    98,008
    
    
    
    -5.7
    %Commercial
    
    
    27,562
    
    
    
    23,619
    
    
    
    16.7
    %Consumer
    
    
    777
    
    
    
    762
    
    
    
    2.0
    %Leasing
    
    
    395
    
    
    
    35
    
    
    
    1028.6
    %Total
    
    $
    121,137
    
    
    $
    122,424
    
    
    
    -1.1
    %Non-performing loans composition percentages:Mortgage
    
    
    76.3
    %
    
    
    80.1
    %Commercial
    
    
    22.8
    %
    
    
    19.3
    %Leasing
    
    
    0.3
    %
    
    
    0.0
    %Consumer
    
    
    0.6
    %
    
    
    0.6
    %Total
    
    
    100.0
    %
    
    
    100.0
    %Non-performing loans to:Total loans, excluding covered loans
    
    
    10.62
    %
    
    
    10.65
    %
    
    
    -0.3
    %Total assets, excluding covered assets
    
    
    1.86
    %
    
    
    1.85
    %
    
    
    0.6
    %Total capital
    
    
    16.99
    %
    
    
    16.72
    %
    
    
    1.6
    %
    
    
    Mortgage loans  well collateralized and in process of collection 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 March
31, 2011, the Groups non-performing mortgage loans totaled $92.4 million (76.3% of the
Groups non-performing loans), a 5.7% decrease from the $98.0 million (80.1% of the Groups
non-performing loans) at December 31, 2010. 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 March 31, 2011, the Groups non-performing commercial
loans amounted to $27.6 million (22.8% of the Groups non-performing loans), an 16.7%
increase when compared to non-performing commercial loans of $23.6 million at December 31,
2010 (19.3% 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 March 31, 2011, the Groups non-performing
consumer loans amounted to $777 thousand (0.6% of the Groups total non-performing loans), a
2.0% increase from the $762 thousand at December 31, 2010 (0.6% of total non-performing
loans).
 78




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
    
    Leases-are placed on non-accrual status when they become 90 days past due and
written-off when payments are delinquent 120 days. At March 31, 2011, the Groups
non-performing leases amounted to $395 thousand (0.3% of the Groups total non-performing
loans), an increase from the $35 thousand at December 31, 2010 (0.03% of total
non-performing loans).
    
    Foreclosed real estate  is initially recorded at the lower of the related loan
balance or fair value less cost to sell as of the date of foreclosure. Any excess of the
loan balance over the fair value of the property is charged against the allowance for loan
and lease losses. Subsequently, any excess of the carrying value over the estimated fair
value less disposition cost is charged to operations. Net losses on the sale of foreclosed
real estate for the quarter ended March 31, 2011 amounted to $132 thousand compared to $117
thousand in the quarter ended March 31, 2010.
  79




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TABLE 10  ASSETS SUMMARY AND COMPOSITION AS OF
MARCH 31, 2011 AND DECEMBER 31, 2010  (Dollars in thousands)
 March 31,
    
    
    December 31,
    
    
    Variance2011
    
    
    2010
    
    
    %Investments:FNMA and FHLMC certificates
    
    $
    4,062,786
    
    
    $
    3,972,107
    
    
    
    2.3
    %Obligations of US Government sponsored agencies
    
    
    
    
    
    
    3,000
    
    
    
    -100.0
    %CMOs issued by US Government sponsored agencies
    
    
    160,508
    
    
    
    177,804
    
    
    
    -9.7
    %GNMA certificates
    
    
    117,710
    
    
    
    127,714
    
    
    
    -7.8
    %Structured credit investments
    
    
    45,162
    
    
    
    41,693
    
    
    
    8.3
    %Obligations of Puerto Rico Government and political subdivisions
    
    
    77,258
    
    
    
    67,663
    
    
    
    14.2
    %FHLB stock
    
    
    22,496
    
    
    
    22,496
    
    
    
    0.0
    %Other investments
    
    
    1,594
    
    
    
    1,480
    
    
    
    7.7
    %4,487,514
    
    
    
    4,413,957
    
    
    
    1.7
    %Loans:Loans receivable
    
    
    1,141,051
    
    
    
    1,149,289
    
    
    
    -0.7
    %Allowance for loan and lease losses
    
    
    (32,727
    )
    
    
    (31,430
    )
    
    
    4.1
    %Loans receivable, net
    
    
    1,108,324
    
    
    
    1,117,859
    
    
    
    -0.9
    %Mortgage loans held for sale
    
    
    34,216
    
    
    
    33,979
    
    
    
    0.7
    %Total loans not covered under shared-loss agreements with the FDIC, net
    
    
    1,142,540
    
    
    
    1,151,838
    
    
    
    -0.8
    %Loans covered under shared-loss agreements with the FDIC
    
    
    643,392
    
    
    
    670,018
    
    
    
    -4.0
    %Allowance for loan and lease losses on covered loans
    
    
    (53,480
    )
    
    
    (49,286
    )
    
    
    8.5
    %Total loans covered under shared-loss agreements with the FDIC
    
    
    589,912
    
    
    
    620,732
    
    
    
    -5.0
    %Total loans, net
    
    
    1,732,452
    
    
    
    1,772,570
    
    
    
    -2.3
    %Total securities and loans
    
    
    6,219,966
    
    
    
    6,186,527
    
    
    
    0.5
    %Other assets:Cash and due from banks
    
    
    315,351
    
    
    
    337,218
    
    
    
    -31.7
    %Money market investments
    
    
    2,060
    
    
    
    111,728
    
    
    
    -22.1
    %Accrued interest receivable
    
    
    28,634
    
    
    
    28,716
    
    
    
    -0.3
    %Deferred tax asset, net
    
    
    30,404
    
    
    
    30,350
    
    
    
    0.2
    %Premises and equipment, net
    
    
    23,353
    
    
    
    23,941
    
    
    
    -2.5
    %FDIC loss-share indemnification asset
    
    
    436,889
    
    
    
    471,872
    
    
    
    -7.4
    %Core deposit intangible
    
    
    1,292
    
    
    
    1,328
    
    
    
    -2.7
    %Foreclosed real estate
    
    
    30,095
    
    
    
    27,931
    
    
    
    7.7
    %Servicing assets
    
    
    9,963
    
    
    
    9,695
    
    
    
    2.8
    %Other assets
    
    
    78,122
    
    
    
    81,714
    
    
    
    -4.4
    %Total other assets
    
    
    956,163
    
    
    
    1,124,493
    
    
    
    -15.0
    %Total assets
    
    $
    7,176,129
    
    
    $
    7,311,020
    
    
    
    -1.8
    %Investments portfolio composition:FNMA and FHLMC certificates
    
    
    90.6
    %
    
    
    90.1
    %Obligations of US Government sponsored agencies
    
    
    0.0
    %
    
    
    0.1
    %Non-agency collateralized mortgage obligations
    
    
    0.0
    %
    
    
    0.0
    %CMOs issued by US Government sponsored agencies
    
    
    3.6
    %
    
    
    4.0
    %GNMA certificates
    
    
    2.6
    %
    
    
    2.9
    %Structured credit investments
    
    
    1.0
    %
    
    
    0.9
    %Obligations of Puerto Rico Government and political subdivisions
    
    
    1.7
    %
    
    
    1.5
    %FHLB stock
    
    
    0.5
    %
    
    
    0.5
    %Other investments
    
    
    0.0
    %
    
    
    0.0
    %100.0
    %
    
    
    100.0
    %
 80




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81




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TABLE 11  LIABILITIES SUMMARY AND COMPOSITION AS OF
MARCH 31, 2011 AND DECEMBER 31, 2010  (Dollars in thousands)
 March 31,
    
    
    December 31,
    
    
    Variance2011
    
    
    2010
    
    
    %(Dollars in thousands)Deposits:Non-interest bearing deposits
    
    $
    175,679
    
    
    $
    170,705
    
    
    
    2.9
    %Now accounts
    
    
    771,822
    
    
    
    783,744
    
    
    
    -1.5
    %Savings and money market accounts
    
    
    240,863
    
    
    
    235,690
    
    
    
    2.2
    %Certificates of deposit
    
    
    1,307,450
    
    
    
    1,393,743
    
    
    
    -6.2
    %2,495,814
    
    
    
    2,583,882
    
    
    
    -3.4
    %Accrued interest payable
    
    
    5,658
    
    
    
    5,005
    
    
    
    13.0
    %2,501,472
    
    
    
    2,588,887
    
    
    
    -3.4
    %Borrowings:Short term borrowings
    
    
    32,335
    
    
    
    42,470
    
    
    
    -23.9
    %Securities sold under agreements to repurchase
    
    
    3,456,605
    
    
    
    3,456,781
    
    
    
    0.0
    %Advances from FHLB
    
    
    281,687
    
    
    
    281,753
    
    
    
    0.0
    %FDIC-guaranteed term notes
    
    
    105,112
    
    
    
    105,834
    
    
    
    -0.7
    %Subordinated capital notes
    
    
    36,083
    
    
    
    36,083
    
    
    
    0.0
    %3,911,822
    
    
    
    3,922,921
    
    
    
    -0.3
    %Total deposits and borrowings
    
    
    6,413,294
    
    
    
    6,511,808
    
    
    
    -1.5
    %FDIC net settlement payable
    
    
    1,774
    
    
    
    23,082
    
    
    
    -92.3
    %Derivative liability
    
    
    
    
    
    
    64
    
    
    
    -100.0
    %Securities and loans purchased but not yet received
    
    
    
    
    
    
    
    
    
    
    0.0
    %Other liabilities
    
    
    47,933
    
    
    
    43,734
    
    
    
    9.6
    %Total liabilities
    
    $
    6,463,001
    
    
    $
    6,578,688
    
    
    
    -1.8
    %Deposits portfolio composition percentages:Non-interest bearing deposits
    
    
    7.0
    %
    
    
    6.6
    %Now accounts
    
    
    30.9
    %
    
    
    30.3
    %Savings accounts
    
    
    9.7
    %
    
    
    9.1
    %Certificates of deposit
    
    
    52.4
    %
    
    
    54.0
    %100.0
    %
    
    
    100.0
    %Borrowings portfolio composition percentages:Federal funds purchases and other short term borrowings
    
    
    0.8
    %
    
    
    1.1
    %Securities sold under agreements to repurchase
    
    
    88.4
    %
    
    
    88.1
    %Advances from FHLB
    
    
    7.2
    %
    
    
    7.2
    %FDIC-guaranteed term notes
    
    
    2.7
    %
    
    
    2.7
    %Subordinated capital notes
    
    
    0.9
    %
    
    
    0.9
    %100.0
    %
    
    
    100.0
    %Securities sold under agreements to repurchaseAmount outstanding at end of period
    
    $
    3,456,605
    
    
    $
    3,456,781Daily average outstanding balance
    
    $
    3,462,255
    
    
    $
    3,545,926Maximum outstanding balance at any month-end
    
    $
    3,466,480
    
    
    $
    3,566,588
 82




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Stockholders Equity
    83




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TABLE 12  CAPITAL, DIVIDENDS AND STOCK DATA
  March 31,
    
    
    December 31,
    
    
    Variance2011
    
    
    2010
    
    
    %Capital data:Stockholders equity
    
    $
    713,128
    
    
    $
    732,331
    
    
    
    -2.6
    %Regulatory Capital Ratios data:Leverage Capital Ratio
    
    
    9.52
    %
    
    
    9.56
    %
    
    
    -0.4
    %Minimum Leverage Capital Ratio Required
    
    
    4.00
    %
    
    
    4.00
    %Actual Tier 1 Capital
    
    $
    686,202
    
    
    $
    698,836
    
    
    
    -1.8
    %Minimum Tier 1 Capital Required
    
    $
    288,462
    
    
    $
    292,449
    
    
    
    -1.4
    %Excess over regulatory requirement
    
    $
    397,740
    
    
    $
    406,387
    
    
    
    -2.1
    %Tier 1 Risk-Based Capital Ratio
    
    
    30.63
    %
    
    
    30.98
    %
    
    
    -1.1
    %Minimum Tier 1 Risk-Based Capital Ratio Required
    
    
    4.00
    %
    
    
    4.00
    %Actual Tier 1 Risk-Based Capital
    
    $
    686,202
    
    
    $
    698,836
    
    
    
    -1.8
    %Actual Tier 1 Common Equity Capital
    
    $
    618,202
    
    
    $
    630,836
    
    
    
    -2.0
    %Minimum Tier 1 Risk-Based Capital Required
    
    $
    89,625
    
    
    $
    90,228
    
    
    
    -0.7
    %Excess over regulatory requirement
    
    $
    596,577
    
    
    $
    608,608
    
    
    
    -2.0
    %Risk-Weighted Assets
    
    $
    2,240,635
    
    
    $
    2,255,691
    
    
    
    -0.7
    %Total Risk-Based Capital Ratio
    
    
    31.91
    %
    
    
    32.26
    %
    
    
    -1.1
    %Minimum Total Risk-Based Capital Ratio Required
    
    
    8.00
    %
    
    
    8.00
    %Actual Total Risk-Based Capital
    
    $
    714,936
    
    
    $
    727,689
    
    
    
    -1.8
    %Minimum Total Risk-Based Capital Required
    
    $
    179,251
    
    
    $
    180,455
    
    
    
    -0.7
    %Excess over regulatory requirement
    
    $
    535,685
    
    
    $
    547,234
    
    
    
    -2.1
    %Risk-Weighted Assets
    
    $
    2,240,635
    
    
    $
    2,255,691
    
    
    
    -0.7
    %Tangible common equity (common equity less
goodwill
and core deposit intangible) to total assets
    
    
    8.92
    %
    
    
    9.02
    %
    
    
    -1.1
    %Tangible common equity to risk-weighted assets
    
    
    28.57
    %
    
    
    29.30
    %
    
    
    -2.5
    %Total equity to total assets
    
    
    9.94
    %
    
    
    10.01
    %
    
    
    -0.7
    %Total equity to risk-weighted assets
    
    
    31.83
    %
    
    
    32.47
    %
    
    
    -2.0
    %Stock data:Outstanding common shares
    
    
    45,375
    
    
    
    46,349
    
    
    
    -2.1
    %Book value per common share
    
    $
    14.22
    
    
    $
    14.33
    
    
    
    -0.8
    %Market price at end of period
    
    $
    12.55
    
    
    $
    12.49
    
    
    
    0.5
    %Market capitalization at end of period
    
    $
    569,456
    
    
    $
    578,899
    
    
    
    -1.6
    %
 Quarter Ended
    
    
    Quarter EndedMarch 31,
    
    
    March 31,
    
    
    Variance2011
    
    
    2010
    
    
    %Common dividend data:Cash dividends declared
    
    $
    2,269
    
    
    $
    1,322
    
    
    
    71.6
    %Cash dividends declared per share
    
    $
    0.05
    
    
    $
    0.04
    
    
    
    23.0
    %Payout ratio
    
    
    122.85
    %
    
    
    9.76
    %
    
    
    1158.7
    %Dividend yield
    
    
    0.39
    %
    
    
    0.30
    %
    
    
    30.5
    %
 84




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##### Table of Contents



March 31,
    
    
    December 31,2011
    
    
    2010(In thousands, except share orper share information)Total
stockholders equity
    
    $
    713,128
    
    
    $
    732,331Less: Preferred stock
    
    
    (68,000
    )
    
    
    (68,000
    )Less: Goodwill
    
    
    (3,662
    )
    
    
    (3,662
    )Less: Core
deposit intangible
    
    
    (1,292
    )
    
    
    (1,328
    )Total tangible common equity
    
    $
    640,174
    
    
    $
    659,341Total assets
    
    $
    7,176,129
    
    
    $
    7,311,020Less: Goodwill
    
    
    (3,662
    )
    
    
    (3,662
    )Less: Core
deposit intangible
    
    
    (1,292
    )
    
    
    (1,328
    )Total tangible assets
    
    $
    7,171,175
    
    
    $
    7,306,030Tangible common equity to tangible assets
    
    
    8.93
    %
    
    
    9.02
    %Common shares outstanding at end of period
    
    
    45,375,090
    
    
    
    46,348,667Tangible book value per common share
    
    $
    14.11
    
    
    $
    14.23
    85




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##### Table of Contents



March 31,
    
    
    December 31,2011
    
    
    2010(In thousands)Common stockholders equity
    
    $
    645,128
    
    
    $
    664,331Less:
Unrealized gains on available-for-sale securities, net
of income tax
    
    
    (23,552
    )
    
    
    (36,987
    )Less: Unrealized gains on cash flow hedges, net of income tax
    
    
    (6,767
    )
    
    
    Less: Disallowed deferred tax assets
    
    
    (25,657
    )
    
    
    (25,548
    )Less: Disallowed servicing assets
    
    
    (996
    )
    
    
    (969
    )Less: Intangible assets:Goodwill
    
    
    (3,662
    )
    
    
    (3,662
    )Core
deposit intangible
    
    
    (1,292
    )
    
    
    (1,328
    )Add: Subordinated capital notes
    
    
    35,000
    
    
    
    35,000Total Tier 1 common equity
    
    $
    618,202
    
    
    $
    630,837
  March 31,
    
    
    December 31,2011
    
    
    2010(in thousands)Risk-based capital:Tier I capital
    
    $
    686,202
    
    
    $
    698,836Supplementary (Tier II) capital
    
    
    28,734
    
    
    
    28,853Total Capital
    
    $
    714,936
    
    
    $
    727,689Risk-weighted assets:Balance sheet items
    
    $
    2,191,003
    
    
    $
    2,216,617Off-balance sheet items
    
    
    49,632
    
    
    
    39,074Total risk-weighted assets
    
    $
    2,240,635
    
    
    $
    2,255,691RatiosTier I capital (minimum required  4%)
    
    
    30.63
    %
    
    
    30.98
    %Total capital ( minimum required  8%)
    
    
    31.91
    %
    
    
    32.26
    %Leverage ratio
    
    
    9.52
    %
    
    
    9.56
    %Equity to assets
    
    
    9.94
    %
    
    
    10.01
    %Tangible equity to assets
    
    
    8.92
    %
    
    
    9.02
    %
  86




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##### Table of Contents



CashPrice
    
    
    DividendHigh
    
    
    Low
    
    
    Per share2011March 31, 2011
    
    $
    12.84
    
    
    $
    11.40
    
    
    $
    0.052010December 31, 2010
    
    $
    13.72
    
    
    $
    11.50
    
    
    $
    0.05September 30, 2010
    
    $
    14.45
    
    
    $
    12.13
    
    
    $
    0.04June 30, 2010
    
    $
    16.72
    
    
    $
    12.49
    
    
    $
    0.04March 31, 2010
    
    $
    14.09
    
    
    $
    10.00
    
    
    $
    0.042009December 31, 2009
    
    $
    13.69
    
    
    $
    9.43
    
    
    $
    0.04September 30, 2009
    
    $
    15.41
    
    
    $
    7.48
    
    
    $
    0.04June 30, 2009
    
    $
    11.27
    
    
    $
    4.88
    
    
    $
    0.04March 31, 2009
    
    $
    7.38
    
    
    $
    0.91
    
    
    $
    0.04
 87




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##### Table of Contents



March 31,
    
    
    December 31,
    
    
    Variance(Dollars in thousands)
    
    2011
    
    
    2010
    
    
    %Oriental Bank and Trust Regulatory
Capital Ratios:Total Tier 1 Capital to Total Assets
    
    
    9.18
    %
    
    
    9.28
    %
    
    
    -1.1
    %Actual Tier 1 Capital
    
    $
    649,149
    
    
    $
    665,952
    
    
    
    -2.5
    %Minimum Capital Requirement (4%)
    
    $
    282,946
    
    
    $
    287,060
    
    
    
    -1.4
    %Minimum to be well capitalized (5%)
    
    $
    353,683
    
    
    $
    358,825
    
    
    
    -1.4
    %Tier 1 Capital to Risk-Weighted Assets
    
    
    29.37
    %
    
    
    29.89
    %
    
    
    -1.7
    %Actual Tier 1 Risk-Based Capital
    
    $
    649,149
    
    
    $
    665,952
    
    
    
    -2.5
    %Minimum Capital Requirement (4%)
    
    $
    88,411
    
    
    $
    89,113
    
    
    
    -0.8
    %Minimum to be well capitalized (6%)
    
    $
    132,616
    
    
    $
    133,669
    
    
    
    -0.8
    %Total Capital to Risk-Weighted Assets
    
    
    30.65
    %
    
    
    31.17
    %
    
    
    -1.7
    %Actual Total Risk-Based Capital
    
    $
    677,508
    
    
    $
    694,461
    
    
    
    -2.4
    %Minimum Capital Requirement (8%)
    
    $
    176,821
    
    
    $
    178,226
    
    
    
    -0.8
    %Minimum to be well capitalized (10%)
    
    $
    221,027
    
    
    $
    222,782
    
    
    
    -0.8
    %
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 RISK MANAGEMENT
 Background
   Market Risk
   88




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##### Table of Contents



Interest Rate Risk
     (1)
    
    using a static balance sheet as the Group had on the simulation date, and(2)
    
    using a dynamic balance sheet based on recent growth patterns and business strategies.
    Net Interest Income Risk (one year projection)Static Balance Sheet
    
    
    Growing simulationAmount
    
    
    Percent
    
    
    Amount
    
    
    PercentChange in interest rate
    
    Change
    
    
    Change
    
    
    Change
    
    
    Change(Dollars in thousands)+ 200 Basis points
    
    $
    28,002
    
    
    
    21.67
    %
    
    $
    29,993
    
    
    
    23.14
    %+ 100 Basis points
    
    $
    15,522
    
    
    
    12.01
    %
    
    $
    16,497
    
    
    
    12.73
    %- 100 Basis points
    
    $
    (31,539
    )
    
    
    -24.41
    %
    
    $
    (33,109
    )
    
    
    -25.54
    %- 200 Basis points
    
    $
    (65,948
    )
    
    
    -51.04
    %
    
    $
    (68,922
    )
    
    
    -53.17
    %
   89




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##### Table of Contents



Interest rate swaps
  S&P options
  Structured borrowings
 Credit Risk
     Liquidity Risk
  90




---



##### Table of Contents



Operational Risk
     91




---



##### Table of Contents



Concentration Risk
   
 Item 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Internal Control over Financial Reporting
  
 PART  II OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 5. Other Information
 92




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##### Table of Contents



Item 6. Exhibits
 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.
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##### Table of Contents



Signatures
  ORIENTAL FINANCIAL GROUP INC.
(Registrant)
 By:
    /s/ José Rafael Fernández
    

    Date: May 6, 2011José Rafael FernándezPresident and Chief Executive OfficerBy:
    /s/ Norberto González
    

    Date: May 6, 2011Norberto GonzálezExecutive Vice President and 
Chief Financial Officer 94