OFG Bancorp (OFG) 2009 Q1 法說會逐字稿

Good morning. My name is Kerry and I will be your conference operator today. Thank you for joining us for this conference call to discuss quarterly results for Oriental Financial Group. Our speakers today are Jose Fernandez, President, Chief Executive Officer and Vice Chairman; Julio Micheo, Senior Executive Vice President, Chief Investment Officer and Treasurer; and Norberto Gonzalez, Executive Vice President and Chief Financial Officer.

Please note that this call may feature certain forward-looking statements about management's goals, plans and expectations, which are subject to various risks and uncertainties outlined in the Risk Factors section of Oriental's Securities and Exchange Commission filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments which occur afterward.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. During the question-and-answer session, we ask questioners to not use cell phones or BlackBerrys as they might cause loud static on the line. I would now like to turn the call over to Mr. Fernandez.

Good morning. Thank you for all being here today. This is our first conference call at Oriental and I am very happy and proud to be here this morning to discuss with all of you the first-quarter results for 2009.

As the operator said, my name is Jose Rafael Fernandez. I am the President and CEO of Oriental. With me today is Julio Micheo. He is Senior Executive Vice President and Treasurer and Chief Investment Officer and Norberto Gonzalez and they will be joining me in this call today to answer some of the questions that you might have.

As I said earlier, this is the first conference call that we do, so I would like to, first of all, ask you guys to give us a little break because this is the first time we do this and don't be too hard on us. But I also think that the quarter results speak for themselves and we had a very strong quarter. I think it reflects the asset and liability composition of our balance sheet and it shows our strong credit quality.

I'd like to give you an overview of what are the main factors that are producing these solid results for this quarter. First, our net interest income was up 23% year over year and 3% sequentially, primarily due to significant lower cost of funds, as well as slightly higher balances in interest-earning assets.

Number two, we had a $10 million gain on the sale of government securities and basically took advantage of the sharp increase in market values on agency securities. As you know, our portfolio is 85%, 86% -- our investment portfolio is 85% or 86% on AAA agency securities. And that is one of the most important factors that differentiates us from the rest of the banks in Puerto Rico and most of the banks in the United States. We have a very conservative balance sheet.

Third, our core banking financial and -- banking and financial services franchise performed very well. We had strong sequential increases in residential mortgage and commercial production. I can say that this quarter, we start to see focus of opportunities, especially in commercial, attracting good-quality clients from the Puerto Rico market at good terms and rates. We are not going out there gangbusters and breaking down the doors in trying to increase our commercial credit given the economic situation in Puerto Rico and I'll talk a little bit about that in a few seconds. But I am very happy with the results in mortgage origination and commercial origination as we continue to make inroads into the market in Puerto Rico and at the same time gain some marketshare.

We are doing all this with a very conservative credit quality and credit culture and a very strong credit quality team. All this has also generated a very strong quarter for us in core deposits. We had a $160 million increase in core retail deposits and that also is a testament to our efforts to get into the mid-net worth and high net worth end market. We have a flagship account called a money account. That account is a money market checking account. It does provide higher yields for clients, but at the same time, we have seen a significant gravitation from local individuals moving away from some of the distressed banks in Puerto Rico and trying to diversify their deposits and Oriental has been a significant beneficiary this quarter of those movements.

And lastly, I think the fact that we have generated an increase in originations in mortgages has allowed us to sell in the window of Fannie and Freddie our mortgage consulting production and generated strong mortgage banking activities. So clearly, we are moving in the right direction and we are winning some marketshare from our competitors in those areas that we have strategically decided to move into.

All this has consequently generated a strong cash flow and at the same time generated for us increasing capital. As you saw today or yesterday in the press release, our common equity increased more than $60 million for the quarter, our book value increased 22% to $10.38 per share. Our tangible equity -- tangible common equity to risk-weighted assets increased 141 basis points to 9.82 and I'd like to make a point here.

In the past, we have been severely chastised for our tangible common equity ratio and investors don't seem to understand that a risk-weighted asset is a more accurate measure of who we are. 86% of our investment portfolio is agency securities. And when you look at our capital structure, it definitely makes a lot more sense to look at Oriental from a risk-weighted asset basis versus a pure total asset basis.

We continue to maintain capital ratios that are comfortably in excess of regulatory requirements and basically, we want to continue to show that growth and we expect to do that in the next several quarters in 2009.

Let me talk a little bit about the local economy in Puerto Rico as I get into discussing the income statement and the net interest income of Oriental. I think when you look at the world, it is still in turmoil economically. Puerto Rico has been in a recession for almost four years now. In the next several months, we're going to start seeing the deployment of the (inaudible) strategies to balance the structural deficit and we are going to see 30,000 to 40,000 employees in the government be displaced. That is certainly going to be affecting the local economy and it is going to be affecting the local financial institutions, especially those who have a significant credit exposure to construction and the commercial.

Having said that, we are very cognizant of that and we expect to see some deterioration on our nonperforming loans, especially on the mortgage side. Our internal analysis demonstrates that if we see 30,000 to 40,000 government employees displaced, we might see an impact of around $7 million to $8 million of additional residential mortgage nonperforming loan increase throughout the year.

But again, as I've said earlier, our loan portfolio is primarily residential mortgage. We do not have any construction financing and therefore, our residential mortgage portfolio is still very conservative in its credit (inaudible) position.

So when we -- let me just talk a little bit about our net interest income. You saw a drop in cost of funds and that is due to two main factors. First, an increasing proportion of our funding is coming from lower cost of deposits. That is the efforts that we mentioned earlier on the money account, but also we're starting to see some increases in commercial accounts from the relationships that we are getting locally.

And the other reason why net interest income also improved and due to the drop in cost of funds is because, starting in early March, we have $1.25 billion in repos that basically repriced to nearly zero. This (inaudible) $1 billion was repriced to a zero cost and $250 million replies to 25 basis points. That is going to reprice on a quarterly basis and we expect that cost of funds to remain during 2009 at those levels. And so therefore, we have a significant benefit there.

This is something that we decided to do back in 2007 and we felt that the dynamics of the market were going to show a decrease in interest rates and we positioned ourselves in that fashion. When we look at the financial services revenue, especially brokerage and trust, we see revenue going down year over year and quarter over quarter and that should not be a surprise. We have lower activity this quarter on the retail brokerage business.

When I look at the first quarter, I think it is low for the year. I think it is going to show a modest -- a sharp increase in the next several quarters, but I think it is going to show an increase and more stabilization and growth than a reduction in the brokerage business. We think we are well-positioned. We have made some adjustment to the salesforce that we have and the management team there and hopefully we will be able to show increases going forward.

Also in financial services, we have other deductions in (inaudible) at the trust and (inaudible) pension consultant. That is primarily due to a reduction in assets under management and the market has played against us in this quarter as it has played against most of the banking and financial services businesses in the States. However, our decline has been lower than the market. We have a higher percentage of our assets in fixed income for our clients, but nevertheless, it shows a reduction in our fees.

Going forward, we are starting to see some good outfits coming into the trust department, good efforts in the 401(k) and personal trust and we feel that, again, as I said earlier, the remaining quarters of the year are going to show an improvement in that area.

Our IRA campaign, given the economics of the market here in Puerto Rico, I was happily surprised that not only did we retain our assets or our deposits on IRA, but we also brought in a significant increase there from other banking competitors that people were diversifying away from.

Banking service revenue was also down year over year, but you start to see some stabilization there versus the December quarter. That is primarily as we finished the deemphasis of the overdraft privilege, which generated some good fee for us, but at the same time, generated some important losses and the market that we were targeting, mid net worth and high net worth are not necessarily the clients that we are looking at in the overdraft privilege. So a couple of quarters ago, we started to deemphasize and we are seeing the pressures there.

However, I am very happy to say that the changes in the core banking system that we did back in 2007, outsourcing to Metavante, are starting to play out as we launched in November and December of last year a cash management platform. We announced a POS platform and those two new services complement very well with our great commercial loan group and we are starting to see good clients and good deposits coming into commercial banking. So we will see some increases in fees in the banking service revenue as we move forward from these areas.

As I mentioned earlier, mortgage banking activities had a very good quarter. We had increasing mortgage originations and therefore, most of our origination was agency or in Fannies and Freddies and we sold them on the window.

Noninterest expenses were in line with our budget. We do have an increase from the prior quarter and against last year. I want to highlight two areas that really we had to go and take the bite there. One of them is professional services. We hired a couple more consultants to help us out in evaluation of level three security and we started that this quarter. And also we are taking into consideration the 20 basis point assessment by the FDIC on the insurance. So those two items are highlighted there on the noninterest expenses.

When we look at credit quality, our net charge-offs were up $900,000 from the fourth quarter. Most of the increase in net charge-offs, I would say, are due to three problem loans that we have shown on the residential mortgage portfolio. Those loans are finally [incurred] to REO and as we have placed them, we took the write-downs. We do not expect the level of mortgage charge-offs to continue to increase at the same rate. We do, for the year, expect total loan -- from the total loan portfolio, our net charge-offs should be around $9 million to $10 million for the whole year. And we feel that, going forward, we will be provisioning and increasing the reserve accordingly. We feel very comparable with the credit exposure that we have right now and the way we have managed it in the past.

As I mentioned earlier, our nonperforming loans increased by $9 million in the fourth quarter. It really shows the deterioration in the economic environment here in Puerto Rico. I don't think we still have hit the bottom here in Puerto Rico. I think what is going to happen in the summer is going to continue to deteriorate the scenarios here in the island. And I think we need to be very conservative and cautious on how we lend and very aggressive and very proactive on how we manage our nonperforming loans.

And lastly, I would like to talk a little bit about the investment securities portfolio. I think it is the most important part of our balance sheet. As I mentioned earlier, the fair value of our investment (inaudible) portfolio increased more than $35 million on a sequential quarter basis.

I mentioned earlier also, most of that increase is due to government-backed securities price increases. The Fed came in and announced a very aggressive, quantitative, easy program and that obviously helped us out. Our level three assets continue to perform, paying interest and paying down principle. The fair value, unamortized value declined slightly reflecting such paydowns. As a result, these (inaudible) now represent a smaller share of our total assets.

We do though continue to monitor them very closely. As I mentioned earlier also, we hired a couple of additional consultants to help us value these securities from a cash flow basis and make sure that we look at it not only from a valuation point of view, but also from a risk management point of view and be clear on what are the risks and what are the opportunities that we see within our level three portfolio, which, at this time, is around 14% to 15% of our total investment portfolio.

This quarter, we decided not to do an early adoption on the recently issued FASB statement of position since there was no need for Oriental to do so. We will do the adoption during the second quarter as everyone else will do and as required by FASB. We continue to monitor our level three securities very closely. We believe we have the ability and the intent to hold these securities and it will allow us to recover the fair value of these securities.

Looking ahead, we continue to believe we are well-positioned to benefit from our strategy. I think this first quarter demonstrated that our core strategic approach to our niche bank strategy is starting to work and we are starting to see a faster movement within the banking market and banking clients in our favor. And I think the market is recognizing and differentiating. It was very hard to differentiate ourselves from the market in the past. Everybody was doing well and I think we have a heck of an opportunity now to make sure that the market doesn't paint us with the same brush as everybody else as we continue to deliver good results.

We continue to expect good non-interest revenue performance going forward. Nonperforming loans, I mentioned they are likely to increase and primarily from the residential mortgage portfolio. But we feel that net charge-offs are going to remain stable as they will be higher than last year, but manageable for the levels that we are talking about, $9 million to $10 million.

We continue to benefit from increased cash flow from our investment securities portfolio and our very good strategic management of that securities portfolio and the dedication that we have put into that. We also are going to benefit from lower interest costs, as I explained on the deposits that we are gathering from our clients, as well as the benefits of the 1.250 repo that we price.

Taxes, even though they are going up on the [local] level, they are not going to be of a major impact on our results as we have a significant portion of our assets on the international banking entity. And going forward, we should continue to see a strong increase in capital in regulatory and GAAP capital.

All of that should put us in a good position to buying. As the time comes by and as the market continues to evolve, it will show us a good opportunity to buy local assets on a risk-adjusted price basis. We will expect the market in the future to continue to display a consolidation movement and if not consolidation, at least a shakeup.

So Oriental is well-positioned to take advantage of that and to help transition this issue here in Puerto Rico. Those are my comments, my general comments. I would like now to open the phone lines to any questions that you might have. I would love to have the name, the name of the person who is making the question so we can relate a little bit better. As I said earlier, I will be trying to answer as many questions and as detailed as I can and Norberto and Julio are with me here, so they will also be assisting me in that task. So again, thank you for your time and opening it up for questions.

(Operator Instructions). Joe Gladue, B. Riley.

Good morning, Jose and Julio and Norberto. I guess let me start out with, I guess, some questions about the securities portfolio. You obviously took some gains, decent gains on securities this quarter. Are you able to -- and I guess this is related to net interest margin -- but are you able to reinvest the proceeds of those things at similar yields to the securities you sold and I guess just make that a general question on expectations on the yield side of the net interest margin equation?

Okay, Joe, as you saw on the results, our interest or the yield on our investment for the quarter went down versus December from 562 to 527. Having said that, that has to do with kind of a timing difference of the -- sell some securities, get the gains, at the same time reinvest with a settlement that is beyond the quarter. However, we do look at our investment portfolio, the yield on that -- the book yield on that portfolio is north of 5.50% and we would expect, as we have reinvested securities, to show around those levels going forward. And I think Julio has anything to add regarding that.

Yes, if you look at our portfolio at the end of the year as we disclosed it in the K, had yields of 5.98%, a little bit under 6%. But clearly, we have, over time, amassed a very -- I mean first quality is also about (inaudible). We have north of $3 million in agency securities, mostly mortgage-backed. So we have been able to amass (inaudible) like that. But buying at the right levels and perhaps buying with the right maturities in a significantly high-yielding portfolio. So from that -- let's say, Joe, from that 5.98%, clearly every time we sell now we will be challenged to reinvest.

But as Jose Rafael said, if you look at a snapshot of where we are at March 31, not just the quarter average as the tables show, you will be north of 5.5%, perhaps in the closer to 5 5/8 area yield. But there has been, let's say, an overall reduction to the yield of (inaudible) 30 to 40 basis points. But in this environment still having a portfolio north of 5.5% is we feel quite an accomplishment. So far and this going forward what will change that story, Joe, clearly will be prepayment. I mean we have typically paid for a higher coupon and we tried to buy with some sort of a story to them so that we feel there may be some prepayment benefit at least for a while.

Of protection.

Of protection, but clearly in an environment in which 30-year mortgage rates are at [4.85]% and 4% coupons are trading at a premium, prepayments have been picking up and that will continue to be, I guess, somewhat of an oppressing thing. The good news is that we start with a very big base, north of 5.5% in the portfolio as of March 31.

Okay. And just on general strategy, do you intend to -- I guess you did grow the securities portfolio some again in the first quarter and you think that is still -- or what is the general direction for the rest of the year?

I think that is a very good point, Joe. Remember that during the quarter, we issued $105 million of the LPPG, (multiple speakers). So we did do that for two reasons. We wanted to lock in money at three years at a very good rate, but we also wanted to raise liquidity and take advantage of the programs that the governments are providing because we feel that the economy of the United States and for that matter the world is not out of the woods. We feel that the US economy is starting to show slower deterioration, but still deteriorating. Even though as Bernanke says, we have seen some green shoots in the economy, commercial real estate and credit cards are kind of coming now into a cycle.

So we are not completely sure that the credit crisis is about to be over. So we can not preempt all that in the quarter, raising additional liquidity through the program and we obviously are investing those proceeds and that is why you see an increase in the investment portfolio.

I think it will be more (technical difficulty) being completely very true that (inaudible) liquidity to really maintain above normal levels of liquidity rather than leveraging slightly across that.

And we are, going forward into the future, looking to strategies that will allow us the flexibility to delever if the opportunity appears in the future. We are setting up ourselves for a situation like that.

Bain Slack, KBW.

Great quarter. I had a couple of quick questions. I wondered if you could give us an update on the TARP application and kind of where that sits right now. And I guess a second to that is kind of with regulatory capital ratios doing quite well, what is the view of it regardless of where the application does sit?

Again, TARP, we are continuing the process of answering questions. I think last time we spoke, I think the TARP application was being reviewed by the New York office. That process has already been done. They recommended to the Washington Interagency Office and they are coming back to us with more questions. However, I have to be very honest. Given the dynamics of what the TARP application [does] and at the same time the TARP acceptance, being a recipient of TARP means, at this time, we are continuing with the process. We are not eliminating ourselves from the process of the application. But at the same time, if we are awarded with the potential of raising some TARP money, we will evaluate at that moment because, as I said earlier, capital is important, but if you would ask me now, it would be very hard for us to accept TARP fund money.

Okay. Second question, last question, I was wondering, on the net interest margin side, if you all have it, do you have a monthly breakdown? Specifically what I am trying to figure out is, with the repricing of the repos that took place in early March, mainly if you had what the March net interest margin was versus the quarter?

You mean the intra-quarter net interest margin? We don't have results right now, but we can provide it to you, Bain. You are asking basically for the -- not the quarter spread, but more -- or the margin, but more the March-end.

Yes, if you had a monthly breakdown because obviously there was a significant dynamic with the $1.25 billion that repriced in early March. And so I am assuming that the March net interest margin obviously ended up much higher than the reported for the quarter and just trying to get a sense of what we are looking at going forward.

But if you look at it though in terms of our weighted average cost of funds for repo, it goes down from I think 410, 415 -- I think 410 to 420, goes down to [292]. So in terms of the cost savings or let's say the cost reduction is significant.

Just to give you the specific number, I have got it in my numbers here. For March, for the month of March, our margin was 2.16.

2.16?

For the month of March.

Right. Okay. Appreciate it.

Because the resale of the repo was basically at the beginning of March.

Right, right. Great. Well, thanks, guys.

Amanda Larsen, Raymond James & Associates.

Hello, guys. How are you?

Hi, Amanda.

A couple of questions. You mentioned that you would be willing to pick up some assets at good prices. What kind of assets are we talking about and does that include also branch purchases maybe to expand the branch footprint?

Amanda, we have been, through the last year and the beginning of this year, repositioning our branch network. We had 24 branches at the beginning of '08. We ended '08 with 23 branches. Primarily what we did was moved some of the smaller legacy branches in the east part of Puerto Rico, consolidated them into more of a centralized eastern branch and moved and opened new locations in the metropolitan area or suburbs. And what we did there was, what we expect to do into the future, is to take advantage of exiting players and looking at good locations with good complementary markets niches and take advantage of that.

To give you an example, we opened, at the beginning of last year, a branch in Bayamon called Plaza del Sol. Two other breakeven points on the branch, which is $20 million in core deposits and by the end of March of this year, that same branch has around $23 million in total deposits and has around $19 million in core deposits. So when you look at that as an example, it clearly shows that our strategy of repositioning our branch network plays in our favor even though there is some current market dynamics that also play in our favor as the market continues to look for diversification of risk into more solid banking institutions.

Okay. Another question, I know that you have a pretty strong medical equipment business. Any opportunities there? I know that -- I think there is a new hospital, a children's hospital or something. Is there any pickup in the medical equipment business at all that you see in the future?

Late in the 2008 year, we did an alliance with GE Health Services here in Puerto Rico and it's going to (inaudible) alliance with them where we will be financing some of -- or looking at financing some of the equipment that they sell to a local medical sector here in Puerto Rico. We have not gone into any high level of volume in that segment, but we have been very strong in the past with the medical professional and the hospitals. Those are segments that have strong ability and have shown some level of earnings growth. So our commercial loan portfolio has benefited from that.

Okay. And then overall -- sorry?

No, go ahead.

Okay. In what markets are you picking up share from your ailing competitors? And have you seen sort of a shift in sentiment because maybe local citizens get it that some of your competitors are ailing? Have you seen kind of a shift to Oriental Financial Group at all?

Well, let me just first say that we are a niche player and we are a segment player in the mid-net worth and the high net worth. It is very hard for us to compare ourselves to banks like Popular and Santander because those guys are larger and they are everything to everyone. We are very much niche-oriented and market-oriented and we continue to focus on that strategy. That is what differentiates us and that's what helps us provide added value to our clients.

Having said that, I can clearly tell you that we have seen increases in the retail deposits and that the main reason for that is people are starting to recognize that they need to move away from some of our other institutions in their deposits to benefit from the diversification and that they feel, as an institution, that provides our security. It is an opportunity for us then at the retail level to be able to show that value add and convert that, let's say, potential long-term relationship into a truly long-term relationship, adding value and doing as we are doing financial planning orientation every time we have an opportunity to their client. Norberto, do you have anything to add?

Yes, I just wanted to add that I think one of the most positive things during the quarter was our demand deposits increased by approximately $150 million during the quarter and even our non-interest-bearing deposits increased by approximately $17 million during the quarter. So those are positive things on daily retail deposits that are coming to us.

Another trend to bear in mind that is not necessarily linked to what you mentioned (inaudible) banking community is the fact that -- I mean in Puerto Rico, there is a significant pool of investments and investors here are typically fixed income. So as typically have invested in local government debt, as some of that debt is perhaps -- has felt some investors that it is at risk of a downgrade, lower investment grade. We also have seen investors going to, in general, to coming back to bank deposits in general away from brokerage accounts in a way and more into plain vanilla bank deposits.

Just to give you a datapoint, our brokerage clients, themselves, have put in Oriental around $150 million in deposits, not in this quarter, but they kind of hold $150 million in deposits in short-term CDs with Oriental. So that kind of shows you it has gone up from like $90 million to $150 million, like $60 million increase in CDs only from our brokerage clients who are pulling money away from the market and just putting it in a safe short-term CD.

Okay. And I have one last question directed at Julio. Has your sentiment changed towards whether you think that the collateral on the repos is going to be put -- has your sentiment changed since about a month ago when you think it will be put?

The repo? Okay, you mean the repo [themselves], the liability [itself], that it will be terminated or the underlying asset collateral?

Well, I basically want to just figure out if your sentiment has changed towards how long you think the benefit from the repo will last.

Okay. Yes, if you are talking about the [bond] reset, there was a one-time reset in March.

Yes.

If it is related to that, it feels to us that, for the time being, that is -- we do not control the put. The put is not controlled by us. We have been in conversations with the bidder and it seems to us, based on those conversations, that they do not have any immediate intention, that is the word, they do not have any immediate intention to terminate the repo simply because they are still -- we know because we collateralize it, they still recognize a significant value to this option itself. The underlying optionality still has eight years remaining. So they still have, let's say, a significant or considerable value ascribed to that option, significant enough for them to tell us that they do not have any immediate -- they do not see any immediate intention to terminate.

So we expect, Amanda, to see the rest of the year to have a zero cost of funds on $1 billion and 25 basis points on $250 million on that repo loan.

Okay, great. Thanks so much, guys.

Avi Barak, Sandler O'Neill.

Good morning, guys. Two quick questions. Firstly, in your earlier comments, I believe you mentioned that your expectations for charge-offs this year in the mortgage portfolio is $9 million to $10 million. Is that -- (multiple speakers)?

No, Avi, I referred to the entire loan portfolio.

Okay, so $9 million to $10 million across the entire loan book?

Correct. So that includes consumer, commercial and residential mortgage. Sorry for the misunderstanding.

No, that's helpful. And then secondly, I was hoping you could give an update or an additional -- some commentary on the structured credit investments, if there has been any additional developments, any kind of deferrals in any of the pools, if you have done another optimization program that you had done I guess it was two quarters ago now?

On the structured credits, Avi, we have not done any type of optimization. Actually this quarter, we saw, as I mentioned earlier, on the analysis that we do from a risk management point of view, we saw some improvement in the performance of the collateral and certainly, the prices in the market continue to show significant pressure down, but we were encouraged to see our subordination continues to cover significantly going forward.

The projected losses.

Projected losses. So we are -- that's kind of what we saw during the quarter. I don't know if Norberto wants to add anything.

I just wanted to add that basically we have the same portfolio structure, create investments that we had at 12/31/08. The fair value of the entire portfolio has not changed that much. There has been a decrease of just over $2 million. Some have increased, some have decreased. The net decrease in the fair value was just over $2 million in the structured credit. So there was really no need to consider an optimization.

(inaudible). This is Julio. We have continued to improve and become more sophisticated at projecting losses because, from a risk management perspective, we want to know what the projections are and the most current analysis still show that subordination holds from recently projected losses. (multiple speakers). Clearly, that is an analysis that is germane to OPPI, but also importantly it is very important to our amounts for an ALM risk management perspective.

Okay and have you given any thought to participation in the PPIP? Obviously, there is still a lot of questions on how it is going to be structured. But assuming that takes off, would you consider selling any of these assets into that program?

We certainly are encouraged by the announcement of the PPIP and we certainly will look into participating. The key here is how are the assets going to be valued and we will evaluate at that time if there is a good opportunity for us to engage in the program. But we see -- from what we hear and what we read and specifically one of our consultants is very close to working with the Treasury Department in valuation of these securities and we have some good conversations with them regarding the levels. And what we hear is encouraging, but we need to wait till June and see how things develop. But we will certainly look at it and evaluate it closely.

Okay. Thank you very much.

(Operator Instructions). Adam Barkstrom, Sterne Agee.

Hey, guys, good morning.

Hi, Adam. How are you?

We're doing well, doing well. How are you guys doing?

All right.

Good deal. Hey, just wanted to follow up on a couple of the previous questions. On the structured credit investments, any way you could share sort of the book and the fair value of that or is that something we need to wait for the Q?

You are going to get it on the 10-Q in detail. We have some [access] in the investor [worksites] that we have not seen in the past.

Right.

We will be expanding our tables in the 10-Q this quarter. (inaudible) specifically if there is any mention of --

As I have said before, basically, we have the same structure grade investment that we had at 12/31/08. So the portfolio in terms of amortized growth is still approximately $136 million. And I mentioned that the fair value had decreased just over $2 million. So as you go back to the --.

I got you, okay.

10-K, it was approximately $136 million fair value, so it is just under $134 million as of March 31.

Okay.

The other part is structured credit investment.

What was the last thing you said?

We are talking just about the structured credit investments at this point.

Right, right.

(inaudible) the numbers that I gave you.

Okay, okay. And do you have those same sort of comparisons for the non-agency CMO book?

Yes, sure. Basically, we have the same portfolio that we had as of 12/31/08. There have been approximately $28 million in repayments. So it has gone down from 637 to 619 and there has been an additional reduction of approximately $10 million overall in the fair value of the (inaudible) agency CMOs.

Okay, very good.

From 529 to 501.

Great. Thank you. That is very helpful. Jose Rafael, I just want to come back and circle back I mean to just kind of one of the earlier questions, but the whole TARP issue. It seems to me that, this late in the game -- let me ask it another way. What's sort of the timing from here going forward as to a decision point on this?

Sure. I wish I could answer that question specifically, but it doesn't depend on us; it depends on the FDIC and the (inaudible). Last I spoke to them, there are like 1400 applications sitting in an interagency committee in Washington. So it is very hard to protect. It is a very slow process and I think we clearly are not -- there are bigger fish to fry in the financial (inaudible) markets in the States and the larger you are, the more attention they pay to you. So I shouldn't be saying those things, but that is how I feel.

Well, let me ask a question a different way. This late in the game and where we are with this whole TARP process and now you have got -- certainly you read the papers as well as we do, but you have got some of the larger players doing everything they can to pay this back. I mean why not just pull your application? I mean at this point, this late in the game, what possible benefit would the TARP provide you?

It provides us the flexibility of -- (inaudible) we don't know what the market is going to look like in three months, let alone in six months or a week. So we are just being prudent and being good risk managers. We don't get paid here for not considering all the options, so I think it is prudent for our shareholders to look at all the opportunities and alternatives that the government are providing and TARP is one of them. We don't have to make a decision, so why not let the process work itself. It also helps us to engage more directly with the FDIC in Washington and those are relationships that I think are very important to continue to foster as we see the continuing of the credit situation here in Puerto Rico and the banking industry.

Right.

It is easier said than done just to pull the plug off. I think we want to keep our options open.

That is a fair point. That is a fair point. Hey, I was wondering if you could give us maybe some macro commentary or give us your sense. You talked about construction and certainly that is a -- condo construction in particular and then high-end condo construction even more particularly as being at least one of the problem areas on the island. And certainly, you guys have minimal -- I guess really no exposure to that. But I am just curious if you have got any sense of -- because we have been hearing that the regulators are taking a -- perhaps taking a stronger stance on some of these areas and just curious what you are hearing, any color you could provide on that issue.

I think that what is going on in the economy of Puerto Rico and what will happen is going to continue to put more and more pressure into the developers and specifically into the condominium. I still don't see prices going down significantly. I start to see or we start to see some more aggressive deals in terms of acquiring these condominiums, but I don't have much more information than that, Adam, unfortunately. You and I know you that we have an excess supply. There are like 5000 of them, you said it a couple of times in you write-ups and I think the government of Puerto Rico is trying to put in some programs that would help, but those plans will help more the lower and middle-sized homes and apartments, not the higher end where you have $500,000 values and above. That is just going to take a while for it to be reabsorbed into the market.

Okay. Fair enough. Norberto, perhaps a question for you and this is kind of a picky analyst question, but remind me -- if you flip to page 3 of the press release and the financial tables, the balance sheet, just looking at the deposit categories this year or this March versus last March, looking at the savings and the demand deposits, this period versus a year ago, it looks like there was some kind of -- was there some kind of reclass or something along there?

Jose Rafael mentioned when he was doing his presentation about the money accounts and the money account, which is (inaudible) account that we have, it had a savings component and a checking component. And basically during this period, three quarters ago, we changed that to a checking only, money market checking only account. So the money account that had been deposited in savings were basically transferred to a checking or demand deposit account. That is basically the main reason.

Okay, fair enough. Very good. All right, gentlemen, thank you and by the way, I think the conference call has been a great idea. We would encourage you to do that going forward.

Thank you. Have a good weekend.

David Hodges, Barrow Hanley.

Good morning, guys. And I would also echo Adam's comments. Thank you very much for the conference call. It is very helpful.

I think, David, you have been a proponent of that for us and here we are.

Well, you picked a good quarter for it definitely. I had a couple of questions. First off, on the repo reset, so that $1.25 billion in funding, I know that it is advantageous to the counterparty to keep that in existence right now. But I was just curious, if that collateral were to be put to you, what approximate cost of funds do you think would be available to you at a suitable duration?

I think there are a couple of things that can happen or a couple of strategies that we can put into place. One of them is to try to reduce those repos completely, the 1.250 or to take advantage of the put and some delever. So based on those two strategies, I think, and maybe Julio can help us out in answering that question regarding the level that we will be doing it, vis-a-vis the length of the repo we were getting.

There has been a significant drying off, significant drying off of the [willingness] on the balance sheet of (inaudible) to really do repos in general and more importantly to extend the year to year. So right now what we are seeing in the market is that there is reseller liquidity anything within the year. I mean those -- there, the cost is very minimal, between 25 to 50 basis points. We could also access the window. So if you look at it, we have, in terms of from an asset liability management perspective, because eventually as everything passes, this cycle too will pass and eventually rates will go up. So we have to also be cognizant of that.

In terms of (inaudible) fee management, what we could do is certainly take advantage of significant low cost of funds in the short term, but maybe mix them with some sort of hedging into -- via swaps or whatever to extend the cost of funds for three or five years. Five-year swaps are in the 2.5 area, three-year swaps are in the, I don't know, 2% area. So liquidity will be about to zero, but still much lower than what the rates were prior to the most recent.

(inaudible)

Okay, good. And another question I had, were you aware of any technical issues related to index fund ownership that may have contributed to the volatility in the share price in the first quarter?

I don't have any hard-core evidence, but I can until you statistically, 25% of our institutional shareholders were index funds. So maybe that gets you some inclination into what created that volatility earlier in the year.

Okay, all right, thank you very much.

Thank you, David. Have a good weekend.

At this time, there are no questions. I would now like to turn the call back to Mr. Fernandez for any closing remarks.

Well, I just want to thank everyone for joining us today. I want to thank Julio and Norberto for sharing this time with me and in presenting our first-quarter 2009 results. We are very happy with the result and we look forward to continuing to show the same level of performance going forward. And I want to wish everyone a good weekend.

Thank you. That concludes today's teleconference. You may now disconnect.