OFG Bancorp (OFG) 2009 Q3 法說會逐字稿

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

Please note, 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 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 may occur afterwards.

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 not to use cell phones or BlackBerry's as they may cause loud static on the line. I would like to now turn the call over to Mr. Fernandez.

Good morning, everybody; thank you for calling in this morning. I'll review the highlights of the quarter and then Julio, Norberto and I will be able to answer some of your questions.

As noted in our news release, we achieved pretax operating income of approximately $15.4 million which compares favorably to $14.2 million in the year ago quarter. We also benefited from the strategic positioning of our investment securities portfolio continuing to take advantage of market conditions to realize gains on sales of securities of $35.5 million.

These gains more than offset a $17.6 million charge for early termination of a $200 million repo at a cost of around 4.47% as we previously announced three months ago, and a credit related other than temporary impairment charge of $8.3 million on some non-agency mortgage-backed securities.

The other than temporary impairment charges basically consist of $5.3 million on our two countrywide private label CMO's, $2.7 million on the [Balta] private-label CMO and less than $300,000 on two other much smaller private-label CMO's. There were no major changes in the fair value of the private-label CMO's and in the structured credit investment during the third quarter and we continue to have the same securities.

From a big picture point of view we continue to move forward with our strategic direction. First, we continue to grow our core franchise focusing on mid and high net worth customers. We added another $97.5 million in customer deposits while actually lowering rates during the quarter. So that's a very nice positive. Assets under management increased more than 5% while banking and financial services revenue were up only slightly from the second quarter, which is a notable accomplishment given today's local economy.

Second, we continue to increase capital and liquidity with a goal of attaining a fortress balance sheet and positioning Oriental prudently in light of Puerto Rico's economic climate, but also being prepared for market opportunities in the island. Stockholders equity increased $23 million to $382.6 million and our book value per common share increased by almost $1 during the quarter to $12.98.

Third, we started to transition our investment strategy to a potentially [ripe] interest rate environment. We invested a portion of the proceeds from the securities we sold into highly liquid short-term agency discount notes. While this slightly reduced net interest income margin it enabled us to reduce the risk of fair value volatility going forward. And I will be explaining a little bit more detail in the next couple of minutes.

On the banking side of our franchise, core retail deposits continue to grow as we capture more market share in Puerto Rico and attractive customers in part because of our financial position. Customers are also utilizing our services and generating banking service revenues in a more consistent way. And our new commercial and cash management and point of sale business is also doing well; we started at the beginning of the year and it continues to grow very nicely.

Compared to the year ago quarter this quarter we had 31% more of our clients using our value added account features such as ATMs, debit cards, checking, online services and telephone banking, again proving that we continue to penetrate our market.

On the financial services side, assets under management with generated return fees increased to close to $3 billion. We also saw good client growth in the trust business and we are seeing quarter by quarter how we are continuing to consolidate on the retirement market in the island as a leader.

As a result of this we saw another sequential increase in financial services revenue. We still believe that upcoming quarters will be challenging for financial services at the brokerage level, but our diversified strategy of insurance and trust together with financial services should continue to play out well for us.

On the mortgage banking side of our franchise we posted another good quarter keeping in mind the credit conditions in Puerto Rico. On a year-to-date basis our production is 2.4% above last year. On residential mortgage loans originating in the quarter the average FICO score was 724 and the average loan to value ratio was 84%.

We sell, as you know, most of our conforming mortgages which this quarter represented 94% of our mortgage production. And retain the servicing rights. As we package and sell more mortgages those fees create a growing source of recurring fee income while also taking some credit risk off the balance sheet.

Net interest income for the quarter increased 17.3% compared with a year ago quarter due to an improvement in the net interest margin to 2.17 from 1.88 in the year ago quarter primarily reflecting a lower cost of funds. That's mainly coming from the repo side where we extinguished $200 million, as I said earlier, carrying a cost of 4.47 and the steepening repo that we have discussed in previous conference calls are still at $1 billion at 0% and $200 million at 25 basis points.

We are growing deposits while actually lowering rates on our money market and money checking accounts and we continue to seek increasing the balances so that the market is continuing to recognize our financial stability and strength. Benefiting from the strategic position of our investment securities portfolio. during the third quarter we, as I said earlier, recognized gains on sales securities of $35.5 million.

Proceeds from these sales of securities have been used in a combination of strategies to position Oriental for a potential increase in interest rates while also enabling us to maintain the flexibility to take advantage of local market opportunities. These strategies include -- keeping higher levels of short-term money market instruments and investing in seasoned US agency mortgage-backed securities and short to intermediate maturing US agency debentures.

From the expense side we had a lower level of expenses as compared to the second quarter which included an industrywide FDIC special assessment. Occupancy is higher by 5% versus last year, that reflects the two new branches that we acquired from [Banco Popular] last year and Bayamon and [Caguas] which, by the way, are doing extremely well, both of them.

However, subsequent to the end of the third quarter we also consolidated two older nearby branches that were in inferior locations. As a result our branch count has declined from 23 to 21, which will reduce occupancy costs going forward. On a year-to-date basis our efficiency ratio has improved to 51.31% from 53% for the first nine months of '08.

Turning to credit quality, we had less than $950,000 in net credit losses compared to $2.1 million in the second quarter, that is 32 basis points of average loans outstanding versus 70 that we had in the second quarter and 78 in the first quarter. We continue to increase the allowance for loan losses; our third-quarter provision was $4.4 million, $750,000 higher than the prior quarter. The allowance is now at $20.2 million, up from $16.7 million in the last quarter and $12.5 million in the September '08 quarter.

The ratio of our allowance for loan losses to total loans also increased during the last 12 months from basically 1% as of September 30 to 1.72 as of September 30, 2009. Nonperforming assets increased only $2.4 million and the increase is primarily going from the residential mortgages as the economy of Puerto Rico continues to stagnate. We do not expect nonperforming loans to result in significant higher losses as most are well collateralized with adequate loan to values.

Looking at the investment securities portfolio, we continue to have 85% of our investment portfolio in the US backed securities on notes guaranteed by Fannie, Freddie and Ginny and US senior debt obligations backed by the US government. The remaining balance consists of 10% in non-agency CMO's, 3% in structured credit investments and 2% in Puerto Rico in government and agency obligations.

The amortized cost and fair value of our securities portfolio decreased by approximately $460 million during this quarter and this was due to -- one, the $200 million deleverage on the termination of the repo; two, $206 million of principal repayments on mortgage-backed securities during the third quarter; and three, $55 million of short-term investments used to repay maturing broker CDs.

The amortized cost of the private label CMO's declined approximately $37 million reflecting the OTTI that I mentioned earlier and $28 million of principal repayments during the quarter. There were no major changes in the fair value prices of the private label CMO's and the structured credits for the second quarter from the second quarter to the third quarter.

There have been no actual losses on the tranches of the private label CMO's that we own. The projected losses are basically the credit related OTTI that we have taken. And we continue to emphasize that every dollar that comes back in principal comes back at par and accrues to our capital. So there's hidden value there.

Our outlook regarding our investment securities at the end of 2006, we began to reposition our portfolio and wholesale funding for a falling rate environment and we have profited very nicely from that. We are now trying to move the ship in a direction where the market will be different the next couple of years, meaning potentially higher rates.

We're trying to achieve maximum flexibility to protect capital and to be ready for opportunities in the local market to achieve our goal of a more bank like balance sheet. In addition to keeping higher levels of cash at the end of the quarter we bought $600 million of forward settled interest rate swaps to protect the value of our securities should rates go higher.

Turning to our franchise, last quarter I talked about two challenges we faced in the second half of the year apart from the local economy. One is the need to generate bank assets at a faster pace. We're talking about good quality residential mortgages and commercial loans. However, we continue to believe this is not the time to be an aggressive lender as there are still issues in Puerto Rico with the economy and the banking space.

Having said that, we continue to work to identify potential commercial clients and try to bring them in as evidenced by our nearly 40% pick up in commercial production during the quarter. We are starting to see more opportunities at a more reasonable price and we're starting to hire experienced commercial bankers from competitors to have them bring their commercial relationship on board to Oriental.

Two is a need to convert our new banking depositors into full financial service customers and we're doing that. Customers are starting to identify Oriental as a desirable place to be and our strategies and the training that we have put into place in our branches are starting to work. We have $770 million in core deposits that have average balances of around $60,000 per account.

We're working on using our proven skills in investment management with these clients and move part of that money to our financial services businesses. We have already implemented more than 4,800 of our most valuable practice profile in two, that's up from 3000 at the end of the second quarter and as a result new clients are starting to use other products and services.

Finally, there is a local economy, Puerto Rico continues to be under pressure psychologically and financially and it won't ease up soon. The headlines are not likely to be good. Unemployment and bankruptcies will likely continue to rise and real estate values may go down. We don't think this is going to affect Oriental significantly because we have been lending with conservative loan to value ratios in residential real estate site as well as the commercial side.

Our allowance for loan losses have increased to $20.2 million on a portfolio of $1.2 billion of primarily residential mortgage loans, so we have coverage of 1.72%. We do not anticipate a significant increase in charge-offs, so this service should continue to build.

To conclude, we continue to expect good banking and financial revenue going forward, nonperforming loans may still increase, but we do not envision any major increases in net charge-offs. Net interest margin should continue to perform well given the parameters we have discussed today, all of which should continue to see a strong increase in capital and that puts us in a good position for the long-awaited shakeout in Puerto Rico banking.

Now we will open the phone lines for any questions you may have. Operator, would you please begin the question-and-answer session?

(Operator Instructions). Bain Slack, KBW.

Good morning. I wonder if you could give us a little color on the security portfolio over the next 12 months. What is the cash flow and I guess the repayments -- or the rolloff on that? And the strategy of where you'll be putting that over the next year?

Sure, let me just give an introduction to the answer to that question and I'll defer to Julio to give you a little more information. As I mentioned there, Bain, and as we mentioned, what we're trying to do is making sure that we position our investment portfolio in a way that protects ourselves a little bit from an expected rising interest rate scenario. The question is not if, it's when.

So what we're trying to do here is, first, make sure that we have a duration that is shorter and we're starting to move in that direction, not that we're going to completely shift the direction of the portfolio but we're just going to have a little bit more protection there with the swaps.

And two, we are also keeping some flexibility on the cash side as we're going to be reinvesting at higher yields potentially if what we're expecting to happen occurs. So that's kind of the objective. I'm going to defer to Julio so that he can also add to your question.

Yes. The $200 million deleverage are what I call our core portfolio holdings because, as Jose Rafael mentioned, we have been increasing our let's say cash and cash equivalents, which are great, let's say defense and ammunition, but basically are yielding zero. So our core holdings would be around $4.8 billion and change. Of that we have $3.3 billion in agency pass-throughs and CMO's.

So cash flow I would expect between $400 million to $500 million -- for that portfolio to provide between $400 million to $500 million, that's assuming (inaudible) CPR in the portfolio. The portfolio is tilted towards high coupons, 5.5's and some 5's.

Okay. And I guess on the funding side, as you noted, you're able to grow your core deposit base and at the same time bring down cost. I guess I'm wondering what's going on competitively there? And also if you can talk about the borrowing cost over the next 12 months relative to what your security strategy is?

Okay, from the core funding point of view certainly we continue to increase our balances and we reduce our cost, even though the full impact of our reduction in cost is not really shown this quarter. But we continue to take advantage of our solid financial position and the market is recognizing that.

So from a competitive standpoint we are still seeing some institutions paying in checking accounts in Puerto Rico 150 basis points above us right now, or more. So even that scenario is helping us differentiate. And we do not expect to have the same rate of growth in core deposits going forward, but we certainly have had a very good year so far as the financial results of Oriental have been clearly differentiating from the rest of the industry in Puerto Rico.

Now from a -- you asked the second question, on the second part of your question was regarding the --

Wholesale.

-- the wholesale funding. There you need to understand that the impact of the deleverage that we mentioned did not take effect, you do not have full effect of that reduction in this quarter, so you're going to see the full effect in this fourth quarter. So that's one thing that you need to take into consideration from a funding point of view.

And the other impact that you need to have there and it's not necessarily from a funding, it's more from a transitioning of the sales that we made that we kept a higher, significantly higher levels of cash at 0%. So that's from a NIM point of view contraction is the reason for that. So those are factors that we do not expect to see in a significant or meaningful way going forward, especially in the next 12 months.

But we have -- I think it's important to also mention we have been using the increase in core deposits to basically pay down --

Correct.

-- broker CDs and we envision continuing to doing that, paying down broker CDs.

That's a very good point. We have reduced broker CDs from the 400 level to a 350 (multiple speakers). From 518 as of December 31, '08 to 354 (multiple speakers) between now and the end of the year we have about another $[130] million.

This year?

This year, the year which will probably be paid down.

So that's also going to be part of our strategy to have a more -- we are probably the second bank in the island with the least reliance to broker CDs. And we'll continue to move in the right direction there too.

Great. And Julio, did I hear you say it was $138 million?

About $130 million from now until year end of broker CDs.

That are coming due, that mature.

That mature, yes.

Okay, great. And just two quick more questions. We saw the -- I noted the movement in the assets under management, the two trusts that you brought over, about $75 million I guess. Could you give a little color on I guess what happened there and I guess what -- and going forward what further opportunity do you see to bring more assets under management?

I'm glad that you mentioned that, Bain, because what we're seeing at the trust level particularly is a very good momentum in us bringing assets from the competition and starting to recognize what we have been saying for many, many quarters. But the larger clients that are used to being in international institutions that have branches in the island that are having some significant issues also are under pressure. And we're taking advantage of that.

So not only as the retirement market from the banking perspective reduced significantly in terms of the players, the brokerage side of the market also is having some difficulties internationally and also to some degree locally. And we have been very successful in attracting those relationships in the last two quarters. So I'm very happy with the result that we have and we feel that going forward a 401(k) market and personal trust market are going to continue to increase very nicely.

Great. And just last question. I actually just want to see if I can get a comment on the -- it's more of a (inaudible) question. I saw a story this morning with regard to a large petroleum refinery issue. And it seemed to indicate that it may have some issues with regard to gas prices locally. Is there any more update on that? And do you expect any economic impact?

Well, it happened at 1 in the morning or 12.30 in the evening this morning. I frankly did not realize that it had happened until 6 in the morning. But it was a very large explosion, apparently a 3 Richter scale type of explosion, equivalent to some significant earthquake type of thing.

The fire is still going; it's going to go for two or three days. And the economic impact -- I heard the governor saying that it's going to be localized to the Company and the neighborhoods surrounding the Company. But it's not measured from the cost of gasoline prices, etc., I haven't heard anything. But, yes, it was a very big explosion and the island today is a little shocked from that.

Understand being that it's really storage and not -- they don't refine there, they just basically store.

So it's contained, it's not going to go worse than that, it's just that it's going to take a while for it to burn off.

Okay, okay. Well, thanks for the overview on the quarter. And I'll talk to you guys later.

Joe Gladue, B. Riley.

Good morning. Let me first ask about the provisioning and the thought behind there. I guess the provision this quarter was bigger not only than net charge-offs, but also bigger than the increase in nonperforming loans during the quarter. Not that I object to improving the reserve, but just wondering what's driving that large provision?

I'll let Norberto answer that.

Yes, do you see at the last page of the tables? You see that part of the increase is related to commercial loans, increasing nonperforming loans. And when a commercial loan becomes nonperforming it requires a higher provision, a higher allowance than when a residential mortgage becomes nonperforming. So that I would say is the main reason for the increase in the requirement of the provision in the quarter.

I guess that's part of what I was getting at. That increase in provision could provide for a 100% loss on those increased commercial nonperformers plus take care of the net charge-offs. I guess I hope the loss severity is not -- wouldn't be that bad.

Well, let me tell you I don't -- we are not expecting to have any significant losses from the commercial real estate portfolio. We do recognize that we are in a difficult economic situation so we need to be prudent. So that's basically what we're doing. Apart from the fact that Norberto mentioned, I think from a macro point of view we're just making sure that as we continue to grow our commercial portfolio, which you didn't see this quarter, but we do expect that to continue to move forward and grow. We want to make sure that we have adequate allowance. And again this all is setting us up to being more let's say readier for opportunities in the future too.

All right, that sort of leads into my next question. You did mention that you're trying to attract some commercial lenders. Just wondering --have you already done some of that or I guess wondering how you'll work to attract them from competitors given that I guess you've been frankly a less aggressive commercial lender historically than a lot of the other institutions. And I wonder if that hinders your recruiting efforts?

I think that's a very good question, Joe. We did hire one experienced commercial lender from a competitor. And so far she's been with us for two months and there are some very good relationships that are being presented to us and the market is enthusiastic on let's say hearing what we can offer. We do not expect here to try to become the number one banking relationship of these types of clients, but we will be happy to be a second kind of banking relationship for these middle-market clients.

And I am very optimistic that we have an opportunity here to organically bring good relationships that can complement the other services that we offer outside of commercial and grow organically to become more bank like while we try to decipher how the local banking industry is going to play out in terms of consolidation.

And I guess you touched on it in the comments, but the 0% funding, I believe that comes up or has another renewal or put date in early December, I just wonder what the outlook is beyond that?

Continues to be the same. Frankly as of today we do not expect that to change in the near future meaning this quarter or several quarters into next year.

All right, I'll step back and let somebody else have some questions.

Adam Barkstrom, Sterne Agee.

Good morning. So I missed the story on the refiner -- what is it, a gas storage facility that had an explosion late last night?

Gulf petroleum storage, I think like 10 or 11 tanks exploded and there are 21 or 22 that have not. And they don't expect them to explode either.

Where is it on the island?

That is in the (multiple speakers) close to San Juan. It's let's say a suburb of San Juan but not to where we are, it's more in an industrial side.

Okay. All right, so you talked about -- let me go back, I'm sorry, I'm stumbling here. But the OTTI, I know you addressed that in your opening comments. Could you go through that again? I wasn't quick enough to write all of that down.

Sure, let me see if I can find it here because I'm not quick enough with my memory here. But the OTTI, all right, here we go. We have an OTTI of around $8 million, okay. And it is $5.3 million on our two countrywide private-label CMO's, $2.7 million on the Balta, and less than $300,000 on two smaller pieces that we have on private -- on other private-label CMO's.

All right the 2.7 was what?

2.7 was the Balta (multiple speakers) the Alt-A private-label CMO. And the countrywide are prime collateral.

Basically all the OTTI was on the non-agency CMO portfolio.

Got it, okay. Super. And then you're talking about repositioning the balance sheet, etc., etc. Just in general terms what does that mean for the margins looking out? Are you thinking about stable margins from here projecting out or how should we think about margins?

Well, I think -- and I'll let Julio add to what I say, but I think that before I answer that question you need to understand what are the issues that are impacting this quarter that might not give you a full picture of our margin. So I'm going to say -- I said already the 200 deleverage we do not have a full impact this quarter. The higher levels of cash that we had this quarter and we do not expect to have that high of a level.

On the sales of securities we kept $400 million or $500 million in cash for a significant period of time during the quarter so that's at 0%. So that again is a factor. And the full impact on the reduction of the money account did not take effect fully during this quarter. And I mean will take effect fully this quarter and into 2010 it will certainly have a larger impact.

Just to give you an idea, we have reduced the cost of the checking account from what it was in the summer at 350 to 250 right now. So there is a significant impact there. And we are not seeing any significant reduction in balances. So our strategy is working out there from a deposit -- retail deposit core funding point of view.

So having said that, I think when you look at our net interest margin going into 2000 -- let's say into this quarter and 2010, I think it's going to be certainly north of 2% and it's going to let's say be above these levels and stable there. I really don't want to give an indication or how you call it guidance going forward. But that's how we see it.

It's going to be north of 2% and it's going to require some short-term cost. And we recognize that. We said it a quarter ago. But we don't think it's going to be detrimental to the short-term either. So if you -- you want to model your numbers based on a NIM north of 2%, that's a fair number.

Okay. What -- how are you thinking about ultimately how the banking situation is going to play out there in Puerto Rico, and that's point one. And point two, what is your appetite for a potential FDIC assisted deal?

Well first question first. I think how things are going to play out depends specifically on the FDIC. So they are the ones who are basically going to be calling the shots in my view. So that's my first reaction to your first question.

The second question, if we have any appetite for an FDIC assisted transaction? The answer is yes. That is something that I think we need to evaluate and it's part of our -- it's called a longer term inorganic strategy to become more bank like. And to position ourselves as a significant let's say player in the consumer but also in the commercial market in Puerto Rico as we see competitors -- the competition reducing.

But, yes, we certainly will entertain that and I think we have the capital. And I think we have the ability to raise the capital having an opportunity like you are speculating on.

Okay. And then what's your sense -- maybe you don't have a sense of this, but do you get the sense that maybe over the last quarter or so that the regulators collectively are taking perhaps a more stringent look at the bank situation there? Prior to that, I mean, it just seems like they weren't visible or weren't really around. Any sense -- I mean can you -- I mean from your perspective do you get any sense of any kind of change in the regulatory attitude at all?

Yes. I mean, I think we've seen changing regulatory attitude in the entire United States I mean, since the beginning of the year. And Puerto Rico has not been an exception. So I think the answer to your question is yes, there is a change in attitude. And they're looking very closely at all the banks. So that's a normal thing and I think it's just a matter of time before things start to play out.

Okay. And then if I could ask one more, maybe a little bit more detail on I guess Joe's question. But you're talking about the credit and the nonperformings in the commercial book is what you highlighted in the press release. I mean, any particular color you can give us on that, any particular areas, give us some more color on that?

You mean on the provisioning or the commercial --?

No, no, I'm sorry. I was looking at the commercial is mainly real estate to pick up in the nonperforming assets.

Yes, you know, what -- and Norberto can add if I'm saying something that is not correct, correct me. But what we have seen in the pick up in nonperforming loans and commercial real estate loans are nothing too significant. These are let's say 15 loans, 20 loans that are small balance. Our average balance here is let's say $300,000 to $400,000 on the loans that we have. We might have one loan that is $2 million that is nonperforming. The rest are smaller loans.

Basically our commercial loans are all collateralized by commercial real estate properties with good loan to value ratios. The thing is from the numbers perspective; if we have two or three loans that become nonperforming it does show in the numbers, because our numbers are still small. Then when you have an increase in $2 million it may require $600,000 to $700,000 more provision. And then it does show in terms of the ratio. But we're not talking about big numbers anyway.

And if you want -- if I kind of talk about where is the risk today on our commercial real estate portfolio? Well, we have two participations that are construction participations, and they total around $8 million on the aggregate both, so the sum of both is $8 million. They are right now performing, but there is risk there. We feel that we're not going to lose anything there. But it's going to take longer for us to get out of those loans. But that's kind of the, if you ask me, that is where we have the highest risk there.

And just to add, clarify, the risk there is basically a risk in terms of repayment (inaudible) construction (multiple speakers).

It does.

Those two projects are already completed behind the repayment base. So there's no construction risk there.

Correct. Thank you, Norberto, for clarifying that.

Okay, so real quick on those two projects. What kind of projects are they?

Condominiums in the metropolitan area, $350,000 to $500,000. One participation with a balance of $1.6 million, another participation with a balance of around $6.8 million to $7 million, that's it. And they're slowly selling the units and every time they sell a unit they reduce our balance and pay interest.

Okay. And then last one. I know you keep a pretty tight watch on the situation with the local government. I'm just curious if you can quantify for us, is [Fortunio] done with the job cuts or do you think there are going to be more? How do you see that playing out?

I don't know, really. I think he says that he's done so I take his word for it. I mean, I think going through the process of this magnitude and thinking that we're going to have another situation of layoffs of this magnitude I think is just too painful. So I assume that they have done the analysis and I have complete trust in not only the governor, but also his team especially at the GDB that are doing a good analysis and detailed analysis on what they need to do to prevent us from going -- prevent the economy of Puerto Rico from going nowhere and potentially having credit issues on our debt.

So my view of it is that I take his word, I think this is it in terms of layoffs and we got a -- yesterday we had a conference with investors from public partnerships, public-private partnerships and it was a total success in terms of attendance. And they already have deadlines for projects that are being negotiated as we speak. So I think by December 31 there's going to be a couple of [priorities] that are going to start coming out.

So those are things that are let's say counterbalancing the negative effect of the layoffs. They also -- the Obama plan and the monies are starting to come in probably at a faster pace. So those things are stabilizing. The challenge is there is no growth, there's going to be stabilization in terms of a stagnant economy remaining stagnant but no growth. So that's my view of it.

All right, gentlemen, thank you.

Amanda Larsen, Raymond James.

Yes, most of my questions have been answered so far. So I'm just going to make a couple up. I guess the stimulus, is there anything specific that's going to affect Oriental specifically? Something you could take advantage of because of it? Like do you think you're going to lend more once the stimulus comes on? I just want to know if there's anything specific you're looking forward to when the stimulus hits in the first quarter, second quarter of 2010?

You know, I think driven from the stimulus I don't think it's going to make much of a difference or impacting to Oriental. I think what's going to make a difference or an impact is how the local banking market plays out and how constrained are competitors in terms of lending and in terms of attracting clients. And I think that's our opportunity and we need to be aggressive at after that, going after that business.

That's why I think it's our opportunity and I think that's what's going to help us move faster. But I don't think the stimulus is going to -- what it's going to do to us and is going to do to everybody else I think is to provide some type of cushion (technical difficulty) of a floor -- but in terms of getting a worse economic situation. But I don't think it's going to expand the economy in a significant way.

So stabilization and not growth, like you were saying?

Yes.

Okay. You mentioned -- you know your asset management business is doing pretty well. Is there potential to take over any other asset management or trust businesses in Puerto Rico?

There might be, but I am not as convinced. The players that were in the market have gone out. Santander stepped out of the market there, R&G stepped out, Doral stepped out and the players are Popular, UBS and ourselves. Western is still there in terms of a competitor, but we don't see them too often in our client or potential client acquisition efforts. So I'm not sure.

So I think the best -- for us to grow the retirement market and the asset management part I think is more organic and us having the credibility and the experience and the track record to attract those clients. (multiple speakers) that's what we've done in the last three or four quarters.

Okay. I guess just playing on the other people's questions about consolidation. Do you think consolidation in Puerto Rico has been imminent for the past three, five years, everyone has been saying it forever. But do you think we're getting closer? I mean obviously the Fed caught up with Euro Bank recently. It's definitely the smallest bank; it's probably the easiest bank to do something with. But do you think we're getting closer? Are you seeing things in Puerto Rico that we're not seeing here because we're just not down there?

No, I don't have anything specific. I see what -- I think what you guys are seeing. We're here and I think the regulators are doing their job. And I think they're going to move in as is required and the issue is either liquidity or capital that triggers those events. So they're going to start working on those and I think that's what we are seeing.

So every day that goes by I think we're getting closer to a consolidation of the banking industry in Puerto Rico. But I really would not like to speculate when would that happen. Certainly it should happen sooner rather than later.

Okay. And then I have two questions on your -- specific to the Company. I understand that there are some expense saves that can be achieved. The run rate this quarter, like the core expenses were at about $20.5 million. Is that like a run rate we can look at for the future? Or is it going to be on the decline due to the branches, I kind of just want to speculate on the expenses going forward.

I would say between $19.5 million and $20 million.

Okay, very good. And then on the provision, obviously you're provisioning way higher than your charge-offs, but you're provisioning because nonperformings are increasing. But should we just expect you to continue at this level because you can? Because you still post solid EPS by still over reserving. Should we just continue to expect you guys to over reserve for the time being?

We don't think we're over reserving. Our accountants don't allow us to talk about those terms. So we feel that we are reserving what we need to reserve, Amanda. And I think going forward you can assume that at this rate, at this level it's a reasonable level going forward. Unless there are some changes on the performance of our loans, one way or the other I think it's going to be around these levels.

What we can say is that obviously the provision should continue to be higher than the charge-offs. So in terms of variation on the allowance on absolute number should continue to increase. And if our loan balance doesn't increase that much the ratio will continue to increase, which is what has been happening.

We have coverage of 175, 176. Some of you guys say it's high, it's okay, some others say it's low. We feel that it's adequate because of the composition of our loans. So we need to work on what's the right level. And if you ask me I would love to continue growing our loan portfolio and continue to growing our allowance to match a closer number to between 175 and 2%.

Sometimes when you look at the allowance that let's say too much of a macro way from the total nonperforming then you really reach a wrong conclusion. I like to see also that we have over $20 million of allowance. And in terms of our nonperforming commercial loans, they are only $8.8 million. So basically our allowance is more than twice our nonperforming commercial loans. Obviously there are a lot of nonperforming residential mortgage loans but the allowance requirement for such loans is significantly less than for commercial loans.

Okay. And then just one more question came up. Your investment securities portfolio, are we in an unrealized -- on the AFS side are we on an unrealized gain or loss [division] at this point after the sale? And can we expect to see continued gain on sale of securities?

Well, there's an OCI of $106 million. So --

Mostly due to the (multiple speakers).

Exactly, mostly due to the private label CMO's. Going forward our investment portfolio, it just depends how the market performs. But when we invest in securities we do not invest to make a gain on the transaction on a sale, we invest because of the characteristics of the investment and the yield and the return that we can receive.

So if there is an opportunity for us and it makes sense to us from a net interest margin point of view and from a continuous capital acquisition or capital accumulation in these times we certainly will look at it. But we do have some unrealized gains in the portfolio, Amanda.

Okay, and just lastly, did that improve over the quarter? Because I'm kind of seeing that across-the-board on different banks' balance sheets.

What improved?

The unrealized gain position.

For the quarter?

Yes.

For the quarter, yes. As we have a very strong, specifically very strong mortgage market.

Yes, and really the sales have been more strategies that we have positioned that have really matured vis-a-vis a particular repayment outlook and that has played out and we've decided to basically capitalize and exit this strategy. But I would venture to say that going forward, and specifically since we have taken -- we've tried to position it into somewhat of a lower duration, the performing will look more stable going forward, I would venture to say.

Yes.

Okay, very good. Outstanding performance yet again. Thanks, guys.

Avi Barak, Sandler O'Neill.

A couple of quick questions for you. As you noted earlier in your commentary, there continues to be significant dislocation in the Puerto Rico banking market. I was hoping you could comment on the market share that you're picking up on the loan side. How has your underwriting changed over the past few quarters across the different loan categories as you pick up that share? Has it changed and --?

No, it hasn't changed. We still have a bogey of no higher than 80% loan-to-value in residential mortgage loans and a FICO score of 661 or higher. As I mentioned earlier, we sell most of our originations since it's 94% conforming, so we sell it.

On the commercial side we also have not changed our parameters, we continue to -- I think the market is moving towards us instead of us moving towards the market in terms of the credit discipline -- and on pricing. So I think we don't need to change much. We just need to go out and bring the relationships in and try to fit them into our credit parameters and our pricing structure.

So when you look at commercial -- we did say real estate commercial loan loan-to-value no higher than 70%. We are looking at low leverage type of businesses when we do C&I's and we're very conservative. I think we have a very good credit team here and have helped us not falling into some of the current problems in the island. So I'm very happy with that.

And on the consumer side, Avi, it's really not that significant for us. And we are a very passive player there; we have a $20 million portfolio. And we have a new credit card coming out but it's exclusively to higher end middle market type of individuals. And personal loan business -- unsecured personal loan business, we might do $1 million to $2 million of -- I would say $1 million to $1.5 million a month in originations. And again FICO scores need to be above 700 for the un-secured.

And our rate is not going to be like I heard over the radio this morning, a 399 type of personal loan un-secured rate. We'd do above 10%. So that's kind of our philosophy and we don't -- we haven't changed it and we don't expect to change it into the future.

Okay, thanks. Second question, could you give us a break down, and I apologize if you mentioned this already, between what was production on the loan side and what was purchases?

You know, pretty much everything was origination. So when you look at our production for the month in mortgage $55 million were originations and $1 million -- in the quarter, I'm sorry -- and $1.7 million was purchases. So really it's all originations. And then on commercial it's all originations too, $10.5 million.

It's on page 5 of the tables, on the end.

Okay, thank you. And then lastly, on the capital front with continued focus of the market on this tangible common ratio versus regulatory capital. How do you feel about OFG at 4.9%? And are there any current plans to raise traditional forms of capital at this point?

Well, first I think we have done an excellent job of organically increasing our capital situation. So I think it's $130 million that we've done so far by increasing our capital. That's the first thing. The second thing is the composition of our assets, Avi, really make it not fair to be measured on a tangible common equity basis to total assets versus a tangible common equity to risk weighted assets. So I feel that from that perspective we are close to 10% right now and I think we're very good at that in that ratio.

So that's kind of the way we see it from a capital raising point of view. I think, again, we're working towards continuing to build capital to -- organically and if we see an opportunity into the future that will assist us, help us in transforming our balance sheet that makes a lot of sense financially we'll certainly explore and if we're required to add more capital we'll certainly also explore that.

Okay. Thank you very much.

Joe Gladue, B. Riley.

Just a couple of quick ones. Could you give us an idea how much early delinquencies, 30- to 89-day delinquencies are and what the trend in those were in the quarter?

You mean for mortgages?

Just overall (multiple speakers).

(multiple speakers)

Early delinquencies 30 to 89.

It probably remained stable, I'd say, Joe. But I think if you want a specific number to that, Norberto can give you a call and give you the specific number because I don't have it off the top of my head. We were yesterday at a committee where that was discussed. And my recollection is that it remains stable from the June quarter to the September quarter.

(inaudible). There has not been a significant change.

Okay.

We owe you that call to you, we'll give it to you.

All right, thanks.

What was the other question, Joe?

Well I guess just another thing. Do you know how much sort of on average or in aggregate the non-agency CMO's have been written down now from their I guess face value?

Yes, Norberto has that information.

You mean in terms of OTTI or in terms of amortized cost or --?

Yes, in terms of the OTTI.

Well, in terms of OTTI, this quarter we had this $8.3 million. In the previous quarter we had $4.4 million plus, that's 12 and change for the first nine months. And the only other OTTI that we had was the one we had with the Alt-A in September -- in September of 2008 which was like $13 million, $14 million.

Right.

So in total it's like a $25 million so far.

Okay. And could you remind me -- I don't have it in front of me -- what's the total value of those?

Of the non-agencies?

Yes.

Well, in terms of the amortized cost of the non-agency or the entire non-agency portfolio as of September 30, '09 is $558 million. And in terms of [per] value it's $457 million.

Okay. That was it, thank you.

At this time and there are no further questions. I will now turn the call back over to management for closing remarks.

Thank you all for spending an hour with us, learning about our third-quarter results. Again we're very happy with our results and we continue to work diligently to achieve our goals of increasing capital and positioning ourselves for executing on our strategy. So have a great day today and a wonderful weekend.

Thank you for participating in today's conference. You may now disconnect.