Oriental Financial Group Fourth Quarter & 2011 Results

Oriental Financial Group Inc. (NYSE: OFG) today announced results for the fourth quarter and year ended December 31, 2011.

“We achieved major progress in 2011 executing on our strategies, growing our franchise value and returning capital to investors,” said José Rafael Fernández, President, Chief Executive Officer and Vice- Chairman of the Board. “We are entering 2012 with increasing momentum in our ability to expand quality credit and deposit relationships, as well as continuing to build our reputation as a solid commercial lender.

“We are also selectively reducing our wholesale funding and generating more interest income from loans. The 2010 Eurobank acquisition is becoming more accretive than originally expected. This should continue to benefit Oriental in upcoming quarters as well.

”During the fourth quarter, we reduced and renewed certain repos in a manner that should positively impact results in 2012 and beyond. We also recorded a charge on a CDO sold in January. On a pre-tax operating income basis, we had a solidly profitable fourth quarter and an excellent year.

“The steps we have taken are expected to enhance Oriental’s plans to grow our banking capabilities, fortify our already strong capital position, and further improve performance.”

2011 Financial Summary

• Income available to common shareholders of $29.6 million, or $ 0.67 per diluted share, compared to loss of $18.2 million, or ($0.50) per share, in 2010.
• Pre-tax operating income of $48.6 million increased 22.5% from $39.7 million in 2010.
• Strong growth in core lending, banking and wealth management operations, including a more than 38% increase in commercial loan production.
• Book value per share at December 31, 2011 of $15.22, up 6.2% from a year ago and 1.5% from September 30, 2011.
• Due to the Company’s stock repurchase program, common shares outstanding at December 31, 2011 of 41.2 million were reduced 11.0% from a year ago and 6.3% from September 30, 2011.
• Cash dividends per common share of $0.21 for the year, up 23.5% from 2010.
• Net credit losses of only 0.81% of average loans outstanding, while the allowance for loan losses increased 17.8%.

4Q11 Financial Summary

• Loss to common shareholders of $13.1 million, or ($0.31) per share, which includes an income tax benefit of $4.8 million. This compares to income of $3.9 million, or $0.08 per share, in the year ago quarter, and income of $15.6 million, or $0.35 per share, in the quarter ended September 30, 2011.
• Results reflected the following charges that are not considered part of Oriental’s pre-tax operating income: (i) a $15.0 million other than temporary impairment (OTTI) charge on the aforementioned collateralized debt obligation (CDO); (ii) a $2.4 million write-down of interest receivable on delinquent residential mortgage loans; and (iii) a $2.4 million write-down on foreclosed properties and other non-performing real estate-related assets, most of which were acquired as part of the FDIC assisted Eurobank acquisition.
• Oriental sold the aforementioned CDO in January 2012 for $10.5 million. The security, which was no longer consistent with the Company’s investment strategy, had experienced market deterioration in recent months. At September 30, 2011, it had an unrealized loss of approximately $10.0 million.
• Pre-tax operating income of $6.1 million. This compares to a loss of $0.6 million in the year ago quarter and income of $11.5 million in the third quarter of 2011. Compared to the preceding quarter, the fourth quarter of 2011 included $6.2 million in additional premium amortization on mortgage backed securities (MBS), partially offset by continued growth in core lending, banking and wealth management activities.

4Q11 Income Statement Analysis

• Interest income from loans of $39.4 million increased 11.3% from the third quarter. Growth was due to continued improved performance of covered loans (the former Eurobank loans) and growth of Oriental’s non-covered commercial, auto leasing and consumer loan portfolio.
• Interest income from investment securities of $25.9 million declined 28.5% from the third quarter. This primarily reflected increased premium amortization, based on an increase in repayments as a result of the current interest rate environment. Other factors were lower balances and yields.
• Total interest expense of $37.4 million declined 4.3% from the third quarter. This was due to reduced cost of deposits (both retail and wholesale) and lower cost and lower balances of wholesale funding.
• Total banking and wealth management revenues of $12.4 million increased 9.8% from the third quarter. Wealth management revenues grew 10.0% due to increased brokerage and trust business. Assets under management of $4.1 billion at December 31, 2011 were up 4.0% from September 30, 2011, including a 7.5% increase in brokerage account assets. Banking service revenues increased 14.6% due to the use of more commercial products and services.
• Non-interest expenses of $30.4 million were flat with the third quarter due to effective cost controls.

Partial Pay Down of Repurchase Agreements

• In December 2011, $600 million in repurchase agreement (repo) funding with an average cost of 4.23% matured. Utilizing cash on hand and proceeds from the sale of approximately $77 million of mortgage backed securities, half of the repos were paid off. The remaining balance was renewed for an average period of approximately three and a half years at an effective fixed rate of 2.36%.
• These transactions enabled Oriental to eliminate $300 million in wholesale funding, reduce cost of funds on an additional $300 million of borrowings, and deploy cash at a significantly higher return – all of which is expected to generate approximately $13 million more in net interest income on an annualized basis. Oriental reduced repo funding by a total of $400 million in 2011, including the early extinguishment of a $100 million repo in the third quarter.

December 31, 2011 Balance Sheet Analysis

• Cash and cash equivalents (including securities purchased under agreements to resell) of $605.5 million declined $76.9 million from September 30, 2011, reflecting the aforementioned repo pay down, partially offset by repayments on MBS.
• Total investments of $3.9 billion declined 5.4% from September 30, 2011, primarily reflecting the aforementioned pre-payments on MBS and sale of securities.
• Total non-covered loans of approximately $1.2 billion increased 1.2% from September 30, 2011. Growth of commercial, leasing and consumer loans more than offset the reduction of residential mortgage loans. Covered loans of $533.5 million declined 5.0% from September 30, 2011 as they continue to pay down.
• Loan production in the strategically significant commercial category totaled $47.5 million, up 58.0% from the third quarter. For the year, commercial loan production increased 38.3%, to $139.8 million.
• Retail deposits of $2.0 billion remained approximately level compared to September 30, 2011 as cost of those deposits dropped to 1.66% from 1.79%. For the year, interest-bearing savings and demand deposits increased 2.2%, while cost of retail deposits dropped to 1.81% in 2011 from 2.23% in 2010.
• Stockholders’ equity of $695.6 million declined 4.4% from September 30, 2011, primarily due to stock repurchases. Book value per share, however, increased to $15.22 as of December 31, 2011 from $14.99 as of September 30, 2011.

Other 4Q11 Highlights

• Credit Quality: The allowance of $37.0 million increased 3.2%, equal to 3.06% of total non-covered loans and leases versus 3.00% at September 30, 2011. Net credit losses of $2.7 million resulted in a total of $9.6 million for the year. Non-performing assets increased less than 1.0% from September 30, 2011.
• Stock Repurchases: As part of its authorization to repurchase $70 million in shares of its common stock in the open market, Oriental bought approximately 2.8 million shares, at an average price of $10.57 per share, during the quarter ended December 31, 2011. Under the current authorization, Oriental can buy back approximately $40 million more in shares. For all of 2011, Oriental bought approximately 5.2 million shares at an average price of $11.28 per share.
• Capital: Oriental maintains regulatory capital ratios well above the requirements for a well-capitalized institution. At December 31, 2011, the Leverage Capital Ratio was 9.65%, Tier-1 Risk-Based Capital Ratio was 31.56%, and Total Risk-Based Capital Ratio was 32.84%.

Conference Call

A conference call to discuss Oriental’s results, outlook and related matters will be held Tuesday, January 31, 2012, at 8:30 AM Eastern Time / 9:30 AM Puerto Rico Time. The call will be accessible live via a webcast on Oriental’s Investor Relations website at www.orientalfg.com. A webcast replay will be available shortly thereafter. Access the webcast link in advance to download any necessary software.

About Oriental Financial Group

Oriental Financial Group Inc. is a diversified financial holding company that operates under U.S. and Puerto Rico banking laws and regulations, principally through its two subsidiaries, Oriental Bank and Trust and Oriental Financial Services. Now in its 48 ^th year in business, Oriental provides a full range of commercial, consumer and mortgage banking services, as well as financial planning, trust, insurance, investment brokerage and investment banking services, primarily in Puerto Rico, through 30 financial centers. Investor information about Oriental can be found at www.orientalfg.com.

Non-GAAP Financial Measures

From time to time, Oriental uses certain non-GAAP measures of financial performance to supplement the financial statements presented in accordance with GAAP. Oriental presents non-GAAP measures when its management believes that the additional information is useful and meaningful to investors. Non-GAAP measures do not have any standardized meaning and are therefore unlikely to be comparable to similar measures presented by other companies. The presentation of non-GAAP measures is not intended to be a substitute for, and should not be considered in isolation from, the financial measures reported in accordance with GAAP.

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