OFG Bancorp (OFG) 2009 Q4 法說會逐字稿

Good morning, my name is Brandy, 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 presenters 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 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 afterwards. (Operator Instructions). I would now like to turn the call over to Mr. Fernandez.

Hello everyone. Thank you for calling in this morning. I will review the highlights of the quarter and the year, and now then Julio and Norberto and I will answer questions.

The first thing I would like to focus on is the strength of our banking and financial services franchise in a year that was one of the most volatile in the history of the banking industry, and an extremely challenging year in Puerto Rico, Oriental performed very well.

We emerged in a very strong financial position with one of the strongest balance sheets among the banks on the island. We were also profitable. Our pretax operating income increased 9.9% year-over-year to $62.1 million. And we are moving decisively towards a strategic shift on our balance sheet.

In banking we achieved a nearly 30% or $323 million increase in core deposit growth. This reflects a flight to safety in the local market and the success of our relationship banking team. We do not have to resort to rate increases as other banks did, and the increasing retail deposits significantly reduced the need for wholesale deposits. While most of the growth was in consumer deposits, we have seen a nice increase also in commercial deposits.

We have made significant inroads in mortgage banking in a very difficult market. We have been very active, but have remained very conservative credit-wise. If you look at our mortgage portfolio it went down slightly, about 8%, as we continued to sell new conforming residential mortgage loans into secondary market versus keeping them on our books. To that end, total residential mortgage production and purchases increased more than 8% to $257 million.

Revenue from mortgage banking activities increased more than 2.5 times to nearly $10 million. This figure includes our growing servicing portfolio, which is a source of recurring revenue.

In commercial banking assets increased almost 6% or $10 million to nearly $200 million. The most important part is that we generated $58 million in new commercial loans in 2009, up 4% from last year. We are starting to see especially good quality commercial loans and better pricing. Despite the difficult economy in Puerto Rico, we believe we have a very good opportunity going forward to grow this portfolio.

In addition, we had a successful launch during 2009 of our commercial POS cash management business. It generated $1 million in fees during the year, and is on its way to approach $2 million in fees in 2010. This enabled banking service revenue to grow 5% to $6 million, marking the first up year we have had since 2006 in fees for banking.

In Financial Services we have done an excellent job in the trust business. Our 401(k) and Keogh business reached an all-time high in balances, and brokerage came back stronger in the fourth quarter, as we predicted. As a result, total client assets managed increased more than 6% year-over-year to $3.1 billion.

Financial service revenue was up 8% in the fourth quarter after having been down 19% the first nine months of the year. In addition, the IRA market is stabilizing. Our main fund, the DGI, had an excellent performance in 2009. IRA deposits are up 9% year-over-year to $313 million compared to being down 9.8% in 2008. We anticipate a very successful IRA season in 2010 as well.

Now let's turn to the sale of the CDOs and the CMOs. In evaluating our performance at the end of the year in December we saw these three things. One, as you know, we generated significant net gains from sales of agency securities, derivative activities and trading activities during 2009. These amounted to nearly $120 million on a pretax basis, including approximately $22 million in gains on the sale of agency securities in the fourth quarter.

These gains enable us to build up a significant amount of regulatory capital well in excess of the required levels for a well-capitalized institution.

Two, we believe we were managing net interest margin very well, despite lower yields on new securities purchased, keeping in mind that the nonagency CMOs we were holding had higher yields in the 5% to 6% range.

Three, we saw the market for the nonagency CMO and CDO begin to warm up, resulting in an improvement in potential liquidation prices. Based on this situation we believe that in order to move toward the Oriental of the future, the type of institution that we want to be in a few years, we needed to be proactive. We needed to eliminate from our balance sheet those assets that might be a hurdle to our potential participation in growth opportunities on the island.

Because most of these nonagency securities have been downgraded below investment grade, we had to calculate these at 200% risk-weight for regulatory capital purposes. In addition, the below investment grade ratings of these nonagency securities could adversely affect our overall asset quality. Thus, we believe the best strategy at this point was to sell certain CDOs and nonagency CMOs, which represented 75% of our nonagency securities portfolio.

There are three major beneficial effects of these transactions. Number one, we have a very clean balance sheet now, with much less in the way of nonagency securities. Our investment portfolio of about $5 billion includes only $175 million in nonagency investments. In other words, approximately 96% of our investment securities are backed by the US government, either the full faith and credit of the government, or through government-sponsored agencies.

Number two, our risk-based capital position has improved significantly. We went from assigning 200% of capital to these securities to only 20% as we replace them with agency securities. As a result, our Tier 1 risk-based capital ratio jumped to 18.79% from 15.81% at September 30. Total risk-based capital ratio increased to 19.84% from 16.45%, and total equity to risk-weighted assets went to 14.96% from 12.88% -- 12.18%.

Number three, by selling these CDOs and nonagency CMOs we significantly reduced our exposure to credit risk in the US economy. Thus, we are well-positioned to take advantage of opportunities organically or otherwise that might occur in Puerto Rico.

Now I would like to go into more details on these transactions. We sold four CDOs in December of 2009 for combined proceeds of $42 million. At the time of sale these had an amortized cost of $160 million, and this resulted in a loss of $74 million.

In January 2010 we sold two Countrywide CMOs for a combined $286 million in proceeds. At the time of sale these had an amortized cost of $321 million. This resulted in a loss of $35 million. Also, in January 2010 we sold five smaller pieces of nonagency CMOs for a combined $89 million in proceeds. At the time of sale these had an amortized cost of $99 million, and this resulted in a loss of $11 million.

In all, the sale of these seven nonagency CMOs resulted in a loss of $46 million, which as required, was accounted for as other than temporary impairment in the fourth quarter of 2009. The sale of the CDOs and nonagency CMOs did not have a material negative affect in our stockholders equity, as these securities had always been accounted for as per value using Level III pricing, with the corresponding unrealized losses being a reduction of stockholders equity.

By selling these securities the net decrease in our stockholders equity was approximately $35 million, or only 6.5% of the $536 million principal balance of CDOs and CMOs sold.

The end result, today total capital at December 31 -- I'm sorry, stood at $330 million, up 26% from a year ago. And our liquidity levels are now at approximately 13% of assets. After the call, on our investor relations website we will be posting the (inaudible) of the CDOs and CMOs result and our remaining nonagency securities and some additional data.

Now let's turn into the remaining nonagency portfolio. We kept one CMO, [Debalta], which has an amortized cost of $113 million and a fair value of $72 million. One CDO, [Punta Redda], with a cost of $26 million, and a fair value of $16 million. And the three CLOs with a cost of $36 million and a fair value of $23 million.

We feel comfortable with the protection we have on those assets, plus the OTTI we have already taken. So we believe the risk these securities represent will be very manageable going forward.

The Debalta CMO, as you know and have heard from us many times, is an Alt-A five-year hybrid ARM. Over the years we have taken $25 million of OTTI on this security. Debalta continues to repay principal on a monthly basis, reducing further our exposure. The principal balance of this security has been reduced by $79 million in principal repayments since it was acquired in December of 2006.

The Punta Redda CDO has different credit characteristics than the CDOs we sold. It still can withstand more than 20 defaults before we risk principal. Finally, the CLOs are collateralized by bank whole loans. Subordination ranges from 7.5% to 26.1%, again a manageable risk.

Now let's talk about net interest margin. Net interest margin fell slightly from the third to the fourth quarter. This reflected the sale of the securities in the quarter that generated some gains. And as part of the reinvestment of the proceeds, we held a monthly average cash and/or discount note balance of approximately $366 million, yielding close to 0%.

Going forward, we recognize that the nonagency CMOs we sold yielded about 6%, so there will be some compression from that. We have mitigated that somewhat by reinvesting those proceeds in shorter duration agency paper, yielding approximately 4%. At the same time, we have eliminated potential OTTIs from the CMOs and the CDOs cell.

While our longer term outlook is for higher rates -- a higher rate environment, short to near term we expect yields will be trending a little higher. Also, our financing is at fixed-rate for more than one year term. Thus our outlook for 2010 is that net interest margin should be about 2% to 2.10%.

As for credit quality, we believe our losses continue to be under control. Nonperforming loans are up, but at a slower pace. We have increased our allowance for loan losses. It is now 2% of loans. That is a level we feel very comfortable with, given the low credit risk we have on our loan portfolio.

Our residential mortgage loan portfolio has an average balance of $150,000. What we are seeing from delinquent loans when we reappraise the properties is a 10% to 15% reduction in market value. With a loan-to-value average on our portfolio of about 75% to 78%, we still have a nice cushion. After doing stress analysis our projection of losses in the mortgage loan portfolio for 2010 is similar to last year.

Looking at 2010 we expect the local economy to continue to contract, but at a slower pace than 2009. Grave risks are still evident in high end residential construction, but we do not participate in that market. Having said that, we believe we are well-positioned in this environment to continue to grow in 2010 and the years ahead in order to become more of a bank.

There are many unsatisfied commercial clients presently in Puerto Rico which have good credit quality and fit in well with our professional market and middle-market type of clients. To capture that business we are expanding our commercial lending unit. We hired three new commercial lending bankers, as well as two more credit analysts. We are looking to add several more experienced lenders that will continue to add depth to that unit.

We believe we have a very solid credit team to help us manage this effort. This is a team that helped us from being an aggressive lender in the past. As a result we are experiencing minimal net charges. Now this team is helping us deal with a new power line that is occurring in the commercial banking on the island.

As for retail banking, while it is unlikely that we're going to replicate our recent deposit growth, we do continue to see a flight to safety in 2010. I would like to point out that we are not just waiting for depositors to walk through the door. We have built a highly motivated and incentivized group of relationship bankers. They are doing a great job attracting clients to Oriental. And they realize we are experiencing a once-in-a-lifetime opportunity to expand the bank. And we appreciate their efforts.

To conclude, in 2010 we continue to expect good banking and financial services revenue. Nonperforming loans may still increase, but we do not envision any major increases in net charges. Net interest margins should be fairly stable, given the parameters we have discussed, all of which should continue to see a strong increase in capital. And that puts us in a good position to grow from within as opportunities arise.

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

(Operator Instructions). James Ellman, Seacliff.

I was hoping you could give me -- or give us a little bit of insight into what led you to trigger the sale of these securities at this time. Was it because you had some inkling that there were going to be some FDIC assisted deals up for bidding sooner rather than later, and so you needed to clear the decks?

Can you give your name again?

James Ellman. I am at Seacliff in San Francisco.

Hi, James. The rationale we discussed it in my initial comments. We feel that we needed to get out of the credit exposure that we have to the nonagency CMOs. From a regulatory point of view we wanted to make sure that we are clean in that space. As you probably understand, regulators are looking at this on a little delayed basis. They are not necessarily forward-looking. So when you look at the securities today, they lean below investment grade. They put a lot of emphasis on the 200% risk capital that we need to assign and risk-weight it. And that is part of the rationale.

Again, we feel that we have a great opportunity here in Puerto Rico to grow our bank as we have seen the distress in the island. We wanted to also to have the flexibility of our balance sheet to grow accordingly.

Then can you just elaborate on your expectations for organic loan growth in the next year or two? What sort of pace do you think is reasonable to assume? And also could you comment on what is your appetite for acquisitions, and would they solely in Puerto Rico? And of what sort of size would you be looking at?

From the production point of view -- loan production point of view, you have to understand that the mortgage side of our production is mostly conforming and we sell. So we are targeting to do around $300 million in originations in mortgage for 2010. That, again, is going to be primarily conforming, and we sell the conforming loans. So that is not going to add up to the balances of loans.

On the commercial side, I think with the team that we have, and if we add up -- I mentioned earlier a couple more experienced bankers, we can do better than what we did last year, probably get closer to $80 million to $90 million.

Now on the question regarding our appetite for acquisitions, the market right now here is significantly distressed. We are open to entertain ideas, and certainly we will. But at this time it is on the hands of the regulators to decide how things are going to be moving.

Then regarding the size, and I'm talking about Puerto Rico, that is our focus. Regarding the size, it is a little premature for us to have that identified, but ballpark figure, it is not going to -- our intention is not to convert Oriental to a $20 billion bank and grow. Our objective is to be the most profitable bank, and not necessarily the largest.

So frankly I am not necessarily focused on size. We want to see assets that complement what we are doing in the niche market that we are in. And that complement our financial services and advisory services approach. And if that provides us an opportunity to grow, we will certainly aggressively pursue that.

Bain Slack, KBW.

Congratulations on cleaning up the balance sheet. I guess with that in mind, I just wanted to touch back on the 4% of, I guess, the non-industry paper that was left, I guess specifically with the Debalta. I understand what you were saying in terms of the protection there and the marks that you've taken on the paper. But I am just wondering more from the strategic point of view, given the decisions that that's the other two transactions with the CMOs -- the nonagency CMOs and CDOs, way not go ahead and just continue further cleanup and just remove this as well?

We feel that the securities that we have are, first of all, significantly less in size, and with significantly different credit characteristics with subordination in -- as I mentioned earlier, on the CDOs we have excess subordination. On Debalta we have already $25 million of OTTI. And liquidation values vary across the different spectrum. So the market is not completely open for all these securities, and you need to manage accordingly.

So when you look at what we are holding, we feel that we have significantly less credit exposure on the securities that we keep, with cushion from the OTTIs that we have taken, and the subordination that we still have remaining at all of them. In addition to that, we feel that at the moment we made the transactions that we discussed today liquidation prices were still very variable from one security to another.

Do you want to add anything (inaudible)?

Sure. Since it is really lower credit collateral, the liquidation price -- the investors are still requiring a much higher IRR for those type of securities. It is important to mention that the private-label CMOs that we sold, most of them, if not all of them can we sell them at prices which were above our fair -- level III fair value.

That's correct.

They were accretive to tangible common equity. That was not the case with the CDOs, but it was the case of the private-label CMOs. And in Debalta, as we are starting to directionally see that, that there is appetite so that perhaps even could suggest that we could revise our fair value. But there is still significant discounts to what the estimated loss -- if you do -- based on we have two consulting firms that do that independent loss projection. Then they do present value analysis of that production. And it is still the liquidation bid in the market is still significantly lower.

So it feels that as if we would leave a lot of money on the table. Even though the bids have improved significantly, perhaps even higher than fair value, they are still a significant distance from what the present value of the projected losses would suggest will finally occur.

I would also like to also add that the one year prepayment speeds of the Debalta is in the 16, 17 CPR rate. So again, we are going to continue to see a principal repayment at par, and we feel comfortable with that.

It feels that from now until reset we could easily collect another 30% at particularly, which it would sell at a good dollar discount we forego that recovery.

That is very helpful. I guess with what you have said, combined with the earlier comments about the changes, I guess in the other markets in terms of liquidity, theoretically if the demand for these types of assets, or if the market were to come back and some activity in these assets over the next six months, given everything else being equal, would that be something maybe you considered for selling or --?

At this time it is pure speculation. I can't give you that answer. Today and for the foreseeable future we expect to keep the securities in the books, and (technical difficulty) that we have discussed.

Just a final question before I go. I guess, you did address some of the moves that companies are making in terms of preparing for a higher rate environment. I know last quarter you commented, if I'm correct, on not only the higher cash balances, but the $600 million in forward settled (multiple speakers).

Yes, we now have $900 million.

Okay that was that. So the -- so that is an additional $300 million?

That's right.

That's right.

Instead of being 3 into 2, it is 2 into 2.

2 into 2, which we did into the strength of the market. So that is by now a total of $900 million (inaudible). More importantly, then the impact and mark to market, while this thing finally settles, a more important aspect of it is that it coincides with the maturity of a repo in December of 2011. So that the rate at which we would reset would be significantly lower than where the maturity settles.

That is on the coupon of the maturity. That is what we are looking at. So that we can lock in money so that the funding prospectively after that repo maturity is lower than the coupon that it currently has.

I'm sorry, on the repo that had repriced last year, I guess, any update on that in terms of --?

We expect the repo to continue to be at this level. It is callable every quarter this year. And from the indications that we have so far, it remains there.

Great, thanks.

You've got to remember that as long as we have -- and the (inaudible) continues -- there was one (inaudible), but the (inaudible) continues to express that they will keep rates at low for an extended period. Which means that were we to receive that collateral back, we could finance it, let's say, between 25 basis points to 35 basis points.

So there is no significant -- there is no -- we cannot assume that there is a significant increase to cost of funds just simply because they put it back to us.

Right, thanks.

Joe Gladue, B. Riley.

A couple of questions on just the credit quality. I noticed there is -- I guess, a sizable percentage increase, at least, in the nonperforming commercial loans and an increase in the charge-offs in that segment. Just wondering if you could give us a little idea of what that was and what you're seeing in that segment.

Sure. I will let Norberto show answer that one.

On the commercial loans one of the participations that we have discussed before that we have within our institution is it has some delinquency problems. We decided to put it in nonaccrual as of December 31. That is the main reason for increasing in nonperforming commercial loans.

What is the size? The size of the loans?

The size of the loans is like [$10] million at this point. There was some increase in charge-offs basically on some write-downs. But as Rafael explained during his presentation, our projection of losses for loans is not very different to what we had during 2009.

Just give us an indication of what the trend was in the early delinquencies dated 89 days past due.

Actually, the early delinquency is stable. What you're seeing is not an increase on the early delinquency, you are seeing an increase on the 90 day plus, as the earlier delinquency starts to go past down to the 90 days pocket. But we are not seeing significant higher levels of delinquency on our residential portfolio.

On the expansion of the (inaudible), do you think there is much opportunity to get relationship deposits with some of those loans?

Yes, I think so. As I said earlier, I think there is an opportunity for us to cater into clients that are of our niche, that are business owners, professionals, middle market, and those come in with deposit relationships. So, yes, I do feel that that is our opportunity, and that is why we are investing this year and last year more into the commercial businesses -- commercial lending business.

The POS business and cash management, I mentioned it earlier, was a very good performer in its first year, and we expect that to continue into 2010 too. So we are going out to clients, and not necessarily going and trying to sell a commercial loan. We try to go and bring in a relationship.

Again, it is hard for a bank of our size to be everything to everyone, and we do not expect to do that. But for us to be the number two or number three bank to a middle-market client that has a Popular, or has another institution as their primary bank, it is a great opportunity for us. And I personally am going out and being part of the salesforce in this effort.

I guess lastly I'll just ask a little bit about the outlook on the asset management side. I know you guys have had some successes over the past year getting some new accounts and stuff. Just give a little color on the outlook for there in 2010?

From a trust 2009 was a very good year. I expect that to continue into 2010. I think it is a market where we are a significant predominant leader there. And especially the 401(k) personal trust and IRA is going to be a great opportunity for us this year -- even what I mentioned earlier. So the trust space, I am very encouraged with the work that we are doing there.

On the brokerage side I think we stabilized halfway through the year, and even what the market was doing. Now we have a very good, strong salesforce that we expect to grow by three or four additional investment executives. And try to look at advising and expanding relationships that we have today.

So, yes, that is our core, and that is out how we look at expanding our business, using our advising model and transferring it to the different banking businesses.

Amanda Larsen, Raymond James.

Most of my questions have been answered thus far, but I will ask you a couple of little ones. You said point-of-sale generated about $1 million this quarter. Is that a good run rate to assume, or do you think you can get that up a little bit?

It is $1 million for the year.

Okay.

So POS is $1 million per year and we are projecting to double that in 2010. Again, POS started in February of 2009. So it is a business that started probably -- you had $1 million in 11 or 10 months of business.

I saw there was a little bit of an uptick in the expenses. And I'm going to assume, correct me if I am wrong, that it was due to some hiring initiatives. But was there anything else like there was seasonal that was baked in there that we should look at?

A couple of things. One is -- I am not sure if you are -- actually when you say the hiring of people. I think part of it had to do with on the HR side, on the compensation side is the variable incentives and tje bonuses based on the year's performance. So that is a variable number.

Then more importantly, the FDIC assessment and the FDIC insurance payment, that is part of the driving force on the insurance expense. Then we had a professional services expense increase due to the contract -- we contracted the external consultants for the CMOs that Julio mentioned earlier. That is an expense that when we look forward to reduce into 2010.

Okay. Then on the same topic, hiring people in the future now, is that going to be something that will be more spotty, since you are pretty small institution and a couple of extra bankers will make a big impact?

The way we look at this is not necessarily the traditional banking way. We kind of look at it from more of an incentive type of compensation. That is the vision that I'm trying to bring into the entire organization from top to bottom, where the variable compensation component is more predominant -- it becomes more predominant than traditional banks.

The reason why we do that is because, again as I mentioned, we see a very good opportunity for us to grab some marketshare here. And I plan, and we plan, on hiring professionals that will be willing to come here for a base compensation, but with significant upside variable. That is the model that I like to manage going forward.

Are you picking up anybody from the other institutions?

In some cases yes. In other cases are individuals who have been in the banking business and have experience, and we have contacted them to help us out. We have done that through the last five years. Our Chief Credit Officer, he was a 25 year veteran at Citibank -- Chief Credit Officer of Citibank, Puerto Rico. And we brought him in to Oriental after he spent eight or nine years outside of the banking business. He has done a great job with his team to help us out in this credit times.

So that is how we look at it. We look at competitors and we look at the entire -- we don't even look at Puerto Rico only, we see opportunities on hiring people from outside of Puerto Rico that are willing to come to Puerto Rico.

Then lastly, it looks like savings accounts came down a bunch. Was that intentional, or could you just let me know the dynamics of why savings accounts were down in the quarter?

You mean savings accounts?

Yes.

Frankly, I'm not really sure why. If you look for the quarter --.

I think she is probably thinking about the money accounts still that (multiple speakers) in December '08. And we [lately] converted our money accounts, let's say our flagship deposit account from a savings and checking account to a checking account only. So it is still showing in the comparisons with the previous year. (multiple speakers).

But really we have gone up. Deposit accounts, savings accounts went up --.

Retail deposits (multiple speakers).

Retail went up significantly. But the savings account probably is up very little, but it is up. But the most important part of it is the commercial savings and commercial checking accounts have gone up also 100% from a level of around $70 million to double that to $150 million, $160 million. So we have seen the same momentum that we have on retail at a lower scale, but also in commercial savings and checking accounts.

Very good. Thanks so much.

Adam Barkstrom, Sterne Agee.

I am sorry, I jumped on the call a little bit late, so I may have missed -- you may have answered this before, but if you wouldn't mind maybe I could ask the question again. So the remaining balances of the structured credit and the nonagency CMOs, I'm just curious why, if you're going to liquidate that for, I guess for risk-based capital purposes, why not liquidate the entire book?

You are right. We answered that question earlier.

I am sorry if I missed it. Maybe if you could go through that one more time for me, I would really appreciate it.

Sure, sure. I will do that. First, not all the markets are completely open and are completely liquid, so when you look at those securities on a one-on-one basis, not all of their liquidating values make sense for us to execute a sale. So that is one.

Two, we feel that the remaining securities that we have, Debalta, the three CLOs, and the remaining CDO have significant more protection. Debalta has $25 million of OTTI. The CDOs have subordination between 7% or 8% to 25%, 26%. And the CDO has 20 (inaudible) before we risk principle. So the credit profile and the risk profile of those three buckets that we are keeping is significantly less.

Also in size. I mean, we sold the larger sizes type securities too. So that is the rationale. We feel that going forward, an example Debalta is $113 million that we have on amortized costs. And it continues to pay interest and principal at a rate. The principal is being paid at a rate of around 16, 17 CPR. So in a couple of years we are going to have 30% back at par, and the market will adjust to that.

So I don't expect and we don't expect to have any transaction being done on those securities in the foreseeable future. We feel that we have ample capital to deal with the opportunity that we have at hand, and to manage the basically 3.5% of nonagency securities that we have on the investment portfolio.

Okay, great. Thank you. Then if I look - I was just looking at the income statement, could you give us a little color around the $9.1 million derivatives gain in the income statement?

That is -- we answered a question earlier. We have $900 million of forward sales interest rate swaps. The $9 million is basically the valuation of that at December 31.

$900 million forward sales swaps. Okay. Great, thank you, gentlemen.

Avi Barak, Sandler O'Neill.

Two quick questions for you. Jose, earlier in your commentary you noted that there is an expectation for continued economic contraction on the island. I am wondering is that consistent with what the GDB is putting out, or is that just more of an internal Oriental model, a gut feel? And has the inflow of the stimulus money have, or is it having, any effect on economic growth?

You asked three questions in one. I will try to answer one by one. One is, yes, what we feel is pretty much probably a little bit beblow the projections of the GDB. We do have economists that are local economists that also provide us information. And we also see what is going on in the market. So, yes, it is below.

I want to highlight to you that from a credit risk exposure Oriental really doesn't have that significant exposure. So I want to highlight that to you, because the local economy in Puerto Rico is certainly affecting larger, more exposed banks to construction lending, especially on the high end and on the construction residential construction side.

The second question that you asked was, and you have to remind me all the three questions. The second question was -- what was it? I forgot.

Was the inflow of stimulus money -- I know there was a lot of press put out that that is going to have a good effect on improving the economy on the island.

I think the stimulus helped on the retail sales in December and November. I think everybody got their $800 check in Puerto Rico. And they are good Puerto Ricans, they spent it. I think that helped retail sales, and it gives a little boost to the economy.

I think the government is doing a good job at trying to look for ways to expand the economy so that private/public partnerships, and that is part of what also has the -- I think the economy has somehow reached a stable stage. That is due primarily to the stimulus package that we are receiving, and it is trickling down I think at a faster rate at the end of the year than earlier. So, yes, I think there is a cushion effect from the stimulus package.

Thanks. Then a second question. I'm not sure how much of an answer you can give me, but I will just throw it out there. Obviously, as you noted on risk-weighted and regulatory capital, OFG looks fine, if not well above most bank averages. But with continued focus on the tangible common or the TCU ratio, obviously that looks a little bit lower. How should we be thinking about it? How are you thinking about it? Would OFG consider a potential capital raise just to get that metric more in line where with where other community banks are, or to take advantage of additional marketshare opportunities in Puerto Rico?

You know, some people are willing to paint companies with a different brush, and I think that is the case of Oriental. It is hard. It is on a one-on-one basis, but I think Oriental cannot be painted with the same brush as everybody else in the island, or in the United States for that matter.

I think what we have accomplished in terms of our credit profile and our risk-weighted assets, including what we did in the fourth quarter, reflects our vision of having a clean balance sheet. That if we -- the market chooses to measure it by 4% tangible common equity, that is life and that is how it works.

I think our credit exposure is significantly reduced now. And I encourage all analysts to look at this in a different way. We don't have construction. We don't have a large commercial lending book. Our residential mortgage book is only -- an average loan is $150,000 or less. So really it goes beyond my mind for just trying to raise capital to meet the mass investor world.

I think what really counts is how we are positioned from a risk-weighted basis, and what that platform provides us from an opportunity point of view. So that is how I see it. And we certainly will entertain ideas, but as we see it today, I think we are in an extremely enviable position compared to our peers.

Fair enough.

That is not to mention that, yes, we have been contacted by investment banks that would be willing to work with us to raise capital if the opportunities arise -- the opportunities to acquire and to intervene arise.

[Sabir Josual], [Seven River Capital].

Just a question on capital capacity.

Can you repeat your name again, please.

My name is [Sabir]. You marked your securities book up, but you guys don't take marks on your corresponding repo book. I am just wondering, can you estimate the impact on book value of unwinding these repos, in case you need to demonstrate to regulators that you can actually free up the capital?

The estimated cost of unwinding, yes, we do manage that. We see it every month. I don't know how relevant that is to us or to regulators, because our repos are fixed for up to three, four years, and they have a fixed cost -- so above the levels that are today. So to us getting them unwind --.

Obviously the closer we get to the maturities of the repos, the lower determination falls get. Yet, it is measured in terms of percentages of the, let's say, the face value of the repos, that there are some that are close to 3%. There are some that are higher. It depends on how far we are from the maturity.

I understand. Okay. What sort of haircuts are the dealers demanding right out on collateral?

In this sense of these are long-term, they were done two years ago, they are between 3% to 5%, the haircut. So we have much better haircuts than what the Street is requiring right now.

I am glad you asked that question, because that goes in line with where are our liquidity levels. We have excess collateral and we have a rate of around 13% of assets in liquidity right now -- liquidity levels.

I guess the question was geared around that liquidity. How liquid is that book, if you have to sell it and you have to take off the repo. So if you had to sell your liquid assets to raise capital, you actually have to unwind the repos. The other (multiple speakers) the cost of unwinding those repos?

Yes, we do.

We do. We do, and --

Can you tell us what the number is?

At this time I don't share that information publicly. We do -- we will share it on the 10-K when it is published. But it is a number that it is in the range of, let's say, between $150 million to $200 million. If you want the real number, you've got to [do it], whatever meaning that gives you.

But let me tell you, we don't need to unwind repos, and we don't need to sell securities to move forward. We have excess capital from a risk-weighted basis. So I'm trying to understand your question where it comes from.

[If] we did terminate, let's say, on one or two repos a couple of quarters ago, and there was a termination cost, which was $17 million. So as I said, it is a percentage of the amount of the repos, and it can be 3%, it can be 8% on the amount. So as we reach the maturity, the determination on the cost of the repos continues to decrease accordingly.

Got it.

The nonagency book that we sold, it was fully paid for. So there was no financing, the liquidity increased by pretty much that amount. (multiple speakers).

(multiple speakers) collateral is for any repos.

So that is kind of the information.

As Jose [and I] mentioned, this really, when you look at capital to risk-weighted assets, there is really no compelling reason for us to delever, if you will, which is I guess what you are suggesting. But if we were to look at deleveraging opportunities, the first repo that would come to mind would be the one that is floating rate with the (inaudible) formula. Because that is -- has a significantly low, when compared to the others, termination.

So [when] we need to delever, and that is building on the quarter, that would really boost all our ratios significantly, but there is no evident need of that.

Thanks a lot guys. That is very helpful.

Brian Hagler, Kennedy Capital.

Just two quick questions. I appreciate all the detail on the nonagency stuff that you sold and that you retained. You are talking about the remaining protection on some of the stuff that you kept. You took $25 million OTTI on Debalta, and you went through the subordination levels on the CDOs. I just missed the metrics on the CLOs.

From 7.5% subordination to 26% subordination.

And the CLOs is very important. These are secured bank loans. So these are mostly middle-market loans, which is an asset class that historically SMP has data. The recoveries are like set in the 70s. Because they basically are secured by everything -- receivables, machinery, anything that they can mortgage, whether it is chattel or property, these are all secured bank loans behind them -- behind the CLOS.

On top of that fact that they are secured loans themselves, then it is what Jose Rafael mentioned, we have the subordination on top of that.

Great. And I think you said the subordination on the CDOs was like 8% to 20% as well, something like that?

No, on the CDOs we have 20 defaults available before we risk principal on a book of $125 million, right?

Yes.

It is a synthetic CDO.

Yes, that CDOs -- and this is very important, we had not mentioned it. One of the reasons why we kept the CDO and we did not keep the other one, first of all, with the (inaudible) we had in the other one, we only had four defaults to go before principle was impaired. Because the formula was a fixed recovery formula, whereas in this CDO that we have now it is basically a market recovery formula.

To give you an example, we saw a default in a company, but we recovered almost 80% of it via the market recovery formula. So that is one of the main reasons, not only the 20 names, but the fact that it is a market recovery versus a fixed recovery formula, which makes keeping the $26 million CDO so much more appealing for us.

Okay, got that. I appreciate it. My second question just had to do with, do you know what the unrealized gains are on your agency portfolio?

Yes, we can provide you that information. I can tell you that from December to today our agency book has improving value around $20 million to $30 million. So there is some metric there from a book value point of view. But Norberto has that information.

There was definitely a reduction in value as of December. So when you look the -- when you look at our 10-K when there appears the investment and securities table in the 10-K, in the case of the Fannie Maes and Freddie Macs there was a net unrealized loss at December 30, '09 of approximately $2 million. In the Ginnie Maes there was a net unrealized gain of approximately $6 million. And in the case of the other obligations of US government-sponsored agencies there was an unrealized loss at that time of approximately $30 million.

But the market has recovered during January, as Jose Rafael said. That is one of the reasons that we have the $900 million of interest rate swaps. Obviously if the fair value of the investment decrease then the value of the swap increases.

And we have almost $4 billion of agency mortgage-backed -- $3.8 billion agency mortgage-backed. If you look at (inaudible) and 5.5, which are representative of our of our portfolio, are up 1% from December 31 to now. So 1% of $3.8 billion, you can do the math.

And then on our $600 million agency debenture portfolio, ten-year yields are about 20 basis points. And this is ten-year duration, so that is another 1.5%, 2% of $600 million. So you could see that the book value has significantly improved from December 31 to now.

I appreciate the detail, guys, thanks.

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

Thank you for your questions and for your participation today. We appreciate your joining us, and we appreciate your interest in Oriental. We look forward to chatting with you again when we report first-quarter results in April.

On behalf of the Oriental team in Puerto Rico, we would like to wish all of you a very good day and a wonderful weekend. And thank you for your interest and support in Oriental. Have a great day.

This concludes today's Oriental Financial Group's conference call. You may now disconnect.