ORIENTAL FINANCIAL GROUP INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number 001-12647

Oriental Financial Group Inc.


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

Principal Executive Offices:

998 San Roberto Street
Professional Offices Park, S.E.
San Juan, Puerto Rico 00926
Telephone Number: (787) 771-6800

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

Yes [x] No [ ].

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [x] No [ ].

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

19,785,942 common shares ($1.00 par value per share)

outstanding as of December 31, 2003

TABLE OF CONTENTS


			PAGE

PART - 1	FINANCIAL INFORMATION:		2
Item - 1		Financial Statements	2
		Unaudited consolidated statements of financial condition at December 31, 2003 and June 30, 2003	2
		Unaudited consolidated statements of income for the quarter and six-month periods ended December 31, 2003 and 2002	3
		Unaudited consolidated statements of changes in stockholders’ equity for the six-month periods ended December 31, 2003 and 2002	4
		Unaudited consolidated statements of comprehensive income (loss) for the quarter and six-month periods ended December 31, 2003 and 2002	4
		Unaudited consolidated statements of cash flows for the six-month periods ended December 31, 2003 and 2002	5
		Notes to unaudited consolidated financial statements	6
Item - 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item - 3		Quantitative and Qualitative Disclosures about Market Risk	36
Item - 4		Controls and Procedures	39
PART - 2	OTHER INFORMATION:		40
Item - 1		Legal Proceedings	40
Item - 2		Change in Securities and Use of Proceeds	40
Item - 3		Defaults upon Senior Securities	41
Item - 4		Submissions of Matters to a Vote of Security Holders	41
Item - 5		Other Information	41
Item - 6		Exhibits and Reports on Form 8-K	42
		Signatures	42
		Certifications

PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2003 AND JUNE 30, 2003
(In thousands, except shares information)


				December 31,			June 30,
				2003			2003

ASSETS
Cash and due from banks				$	7,746		$	15,945

Investments:
	Short term investments				3,645			1,152

	Trading securities, at fair value with amortized cost of $1,740 (June 30, 2003 - - $998)				1,760			1,037

	Investment securities available-for-sale, at fair value with amortized cost of $1,402,700 (June 30, 2003 - $2,162,480):
			Securities pledged that can be repledged		1,022,332			1,446,385
			Other investment securities		399,591			761,219

			Total investment securities available-for-sale		1,421,923			2,207,604

	Investment securities held-to-maturity, at amortized cost with fair value of $1,106,483 :
			Securities pledged that can be repledged		854,082			—
			Other investment securities		235,686			—

			Total investment securities held-to-maturity		1,089,768			—

	Federal Home Loan Bank (FHLB) stock, at cost				22,537			22,537

		Total investments			2,539,633			2,232,330

Securities sold but not yet delivered					7,304			1,894

Loans:
	Mortgage loans held-for-sale, at lower of cost or market				34,332			9,198
	Loans receivable, net of allowance for loan losses of $6,020 (June 30, 2003 - $5,031)				677,095			719,264

		Total loans, net			711,427			728,462

Accrued interest receivable					19,341			17,716
Foreclosed real estate, net					601			536
Premises and equipment, net					18,503			16,162
Other assets					39,688			27,506

Total assets				$	3,344,243		$	3,040,551

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
	Demand deposits			$	115,955		$	132,328
	Saving accounts				87,337			92,210
	Individual retirement accounts				361,120			348,346
	Certificates of deposit				513,339			471,381

		Total deposits			1,077,751			1,044,265

Borrowings:
	Securities sold under agreements to repurchase				1,605,647			1,400,598
	Advances from FHLB				301,000			130,000
	Subordinated capital notes				72,166			36,083
	Term notes				15,000			15,000

		Total borrowings			1,993,813			1,581,681

Securities purchased but not yet received					317			152,219

Accrued expenses and other liabilities					48,845			60,706

Total liabilities					3,120,726			2,838,871

Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation value; 1,340,000 shares of Series A and 1,380,000 shares of Series B issued and outstanding [June 30, 2003 - 1,340,000 shares of Series A]				68,000			33,500
	Common stock, $1 par value; 40,000,000 shares authorized; 20,028,383 shares issued (June 30, 2003 - 19,684,343 shares)				20,028			19,684
	Additional paid-in capital				73,035			57,236
	Legal surplus				23,371			21,099
	Retained earnings				79,926			106,358
	Treasury stock, at cost, 242,441 shares (June 30, 2003 - 2,025,363 shares)				(4,473	)		(35,888	)
	Accumulated other comprehensive loss, net of tax effect of $3,407 (June 30, 2003 - $1,566)				(36,370	)		(309	)

	Total stockholders’ equity				223,517			201,680

Total liabilities and stockholders’ equity				$	3,344,243		$	3,040,551

See notes to consolidated financial statements.

-2-

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTER AND SIX-MONTH PERIODS ENDED DECEMBER 31, 2003 AND 2002
(In thousands, except per share information)


				Quarter Period						Six-Month Period

				2003			2002			2003			2002

Interest income:
Loans				$	13,403		$	12,812		$	27,033		$	25,447
Mortgage-backed securities					26,563			24,023			48,734			48,423
Investment securities					2,066			852			3,591			1,478
Short term investments					53			164			93			218

		Total interest income			42,085			37,851			79,451			75,566

Interest expense:
Deposits					7,763			8,512			15,303			17,333
Securities sold under agreements to repurchase					8,444			8,311			16,940			16,435
Other borrowed funds					2,107			2,088			4,034			4,179
Subordinated capital notes					825			503			1,329			1,015

		Total interest expense			19,139			19,414			37,606			38,962

Net interest income					22,946			18,437			41,845			36,604
Provision for loan losses					1,014			1,100			2,354			1,940

Net interest income after provision for loan losses					21,932			17,337			39,491			34,664

Non-interest income (losses):
Trust, money management, brokerage and insurance fees:
			Commissions and fees from fiduciary activities		2,145			1,431			4,304			2,871
			Commissions, broker fees and other		1,559			1,821			3,420			2,985
			Insurance commissions and fees		590			722			1,133			957
Banking service revenues					1,709			1,458			3,405			2,978
Net gain (loss) on sale and valuation of:
		Mortgage banking activities			1,708			1,709			4,454			3,651
		Sale of securities available-for-sale			2,247			2,056			6,211			6,388
		Derivatives activities			(608	)		(725	)		(660	)		(3,990	)
		Trading securities			(17	)		120			(9	)		540
		Premises and equipment			—			—			—			(220	)
		Other			24			—			39			—

		Total non-interest income, net			9,357			8,592			22,297			16,160

Non-interest expenses:
Compensation and employees’ benefits					5,719			4,526			11,774			9,168
Occupancy and equipment					2,324			2,193			4,618			4,353
Advertising and business promotion					2,097			1,763			4,167			3,557
Professional and service fees					1,435			1,517			3,075			3,344
Communication					471			397			924			821
Taxes, other than payroll and income taxes					433			388			865			776
Printing, postage, stationery and supplies					295			236			589			510
Insurance, including deposit insurance					198			205			393			347
Other					1,631			1,246			3,578			2,433

		Total non-interest expenses			14,603			12,471			29,983			25,309

Income before income taxes					16,686			13,458			31,805			25,515
	Income tax expense				(998	)		(943	)		(2,558	)		(1,426	)

Net income					15,688			12,515			29,247			24,089
	Less: Dividends on preferred stock				(1,200	)		(597	)		(1,797	)		(1,193	)

Net income available to common shareholders				$	14,488		$	11,918		$	27,450		$	22,896

Income per common share:
Basic				$	0.73		$	0.62		$	1.40		$	1.21

Diluted				$	0.70		$	0.59		$	1.33		$	1.13

Average common shares outstanding					19,714			19,095			19,582			18,984
Average potential common share-options					973			1,178			1,044			1,212

					20,687			20,273			20,626			20,196

Cash dividends per share of common stock				$	0.14		$	0.13		$	0.27		$	0.24

See notes to consolidated financial statements.

-3-

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 2003 AND 2002
(In thousands)


CHANGES IN STOCKHOLDERS’ EQUITY:			2003		2002

Preferred stock:
	Balance at beginning of period		$	33,500	$	33,500
	Issuance of preferred stock			34,500		—

		Balance at end of period		68,000