OFG Bancorp (OFG) 2010 Q4 法說會逐字稿

Good morning, my name is Paula and I will be your conference operator today.

Thank you for joining us for this conference call for Oriental Financial Group.

Our participants today are Jose Rafael Fernandez, President, Chief Executive Officer and Vice Chairman; Jose Ramon Gonzalez, Senior Executive Vice President Banking and Corporate Development; and Norberto Gonzalez, Executive Vice President and Chief Financial Officer; and Julio Micheo, Senior Executive Vice President and Chief Investment Strategist.

Please note this call me 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 occur afterwards.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question-and-answer session.

During the question-and-answer session we ask questioners to not use cell phones or BlackBerries as they might cause loud static on the line.

I would now like to turn the call over to Mr.

Fernandez.

Thank you for listening in today.

As we have done on previous calls, we have a presentation that accompanies our remarks.

It can be found on our Investor Relations site under page titled webcast presentations and other filings.

As we finish a very busy, active and successful year at Oriental, let's take a step back and look at the big picture.

As we have said many times, our goal is to transform Oriental by growing our core Oriental Bank and Trust and Oriental Financial Services franchise to generate a greater proportion of revenue from customer-based businesses versus investments, and to have a more bank-like balance sheet.

We believe that as we demonstrate success we should be able to expand our earnings, as well as our multiple, and create additional value for our investors.

I want to show you in a very simple way how we have made major strides over the past two years in that transition.

In particular in 2010, due in part to both the Eurobank acquisition and to our organic growth.

First, let's look at interest earning assets.

Since the first quarter of 2009 they have grown 9% to about $6.6 billion.

Over that period investments have fallen 75% of assets to 67%, and loans and cash increased from 25% to 33%.

You can see a somewhat similar changeover on our interest-bearing liabilities.

Since the first quarter of 2009 these have grown from 12% to about $6.5 billion.

Over that time period, borrowings have fallen from 69% of funding to 60%, and deposits have grown from 31% to 40%.

You can see an even more dramatic change when you look at recurring net revenues.

This is based on interest income from investments less the cost of wholesale funding, interest income from loans less the cost of deposits, and core noninterest income from banking, wealth management and mortgage banking activities.

Since the first quarter of 2009 these revenues have grown 9% to the $41 million we did in the fourth quarter of 2010.

Over that time period interest income from investments have fallen from 70% of revenues to 22%, while interest income from loans plus core noninterest income have grown from 30% in the first quarter of 2009 to 78% of revenues in the fourth quarter of 2010.

We believe this is an important sign of strong progress toward our goal.

Looking ahead, all the positive trends we have been seeing at Oriental Bank and Trust and Oriental Financial Services should continue.

They should continue to enable us to make further progress in generating more revenue from lending and wealth management activities.

As an indication of our confidence in the future, today we announced a new $30 million stock repurchase program.

This program replaces the $15 million program announced mid 2007.

The expanded share buyback program follows our 25% increase in the quarterly common stock dividend announced last year.

Now let's look at the quarter.

In today's call we will be comparing our results on a sequential quarter basis, unless otherwise noted.

I will focus on core banking and wealth management operations.

Norberto will cover other major areas of the income statement and balance sheet.

With a larger salesforce, production of commercial loans and leases increased 28%, close to $40 million.

Credit quality on loans not covered under the share loss agreements with the FDIC remain at levels -- at a level that I believe is the best in Puerto Rico.

Provision for loan losses was down nearly 10%.

Net credit losses declined 22% and the allowance increased 6%.

Nonperforming loans increased approximately $12 million.

This mainly reflects our $10 million participation in a shared national credit commercial loan.

This loan continues to comply with all contractual payments, but was adversely classified due to an estimated reduction in the appraised value of the property held as collateral.

We continue to also demonstrate our ability to gather core retail and commercial deposits.

These grew 6% to a record $2 billion.

Cost of deposit declined to 1.95% from 2.03% in the third quarter, and 2.90% in the year-ago quarter, as deposit pricing in Puerto Rico starts to reflect a more reasonable level of competition.

When we look at noninterest income, banking service revenues increased 10% on a sequential quarter basis, and more than doubled compared to the fourth quarter 2009.

In our wealth management business assets increased more than 9%, as a result wealth management revenues were up nicely, about that 3% sequentially and nearly 9% year-over-year.

Finally, noninterest expenses declined more than $1 million.

As planned we have achieved approximately 30% annualized Eurobank cost savings, and we have continued with our ongoing cost control strategy.

There are a variety of factors guiding our growth in banking and wealth management.

First, is our expanded commercial team under the direction of Jose Ramon Gonzalez.

Recently we also added another seasoned banker with 25 years of experience to lead the middle-market corporate team.

Our strategy of focusing on quality clients disenfranchised by other banks is working.

This is resulting in increased commercial lending and deposit.

In addition, we believe the local economy, though still challenging, is beginning to show signs of possible stabilization.

Second, we are benefiting from our larger more strategically located network of 30 branches combined with our well-trained staff.

This is enabling us to attract both deposits and wealth management assets.

Throughout the year we added four seasoned investment advisors who are bringing their customer assets to Oriental.

Now I would like to past to Norberto so he can in detail -- more detail discuss the income statement and the margin.

Thank you, Jose.

As you saw in our release, interest income declined $8.8 million, basically all related to the investment in mortgage-backed securities portfolio.

This was primarily due to higher premium amortization as a result of an increase in prepayments of mortgage-backed securities early in the fourth quarter, as well as a lower yield on recently purchased securities.

As a result, yield on investment securities was 3.35% versus 3.78% in the previous quarter.

Loan yield, however, continued to increase to 7.32% from 7.20% in the third quarter, and 6.16% in the year-ago quarter.

It is important to highlight that loans generated 47% of total interest income in the fourth quarter versus 42% in the third quarter, and only 24% in the year-ago quarter.

As for interest expense, that fell $1.3 million.

Interest expense on borrowings declined in absolute dollars but increased in cost of funds.

This was primarily due to these September 2010 repayment of the FDIC note related to the Eurobank position that had a low rate.

The [steepening] repos continued to stay in effect.

Interest expense on deposits declined in dollars and in cost of funds.

This is the ninth consecutive quarter in which we have seen cost of deposits decline.

There were three other items of note in this quarter.

We recorded a $6.3 million net provision for credit impairment attributable to various pools of loans covered under the shared loss agreements with the FDIC.

This impairment consists of $49.3 million in gross estimated losses, less a $43 million increase in the FDIC shared loss indemnification asset.

On the other hand, from our position on April 30, 2010 through December 31, 2010, forward loans have generated $23.4 million more in cash flows than originally expected.

If the cash flows continue to outperform the original estimate, the allowance for loan losses for these pools may be reduced and the interest income for these loans may be increased.

The second item that I want to highlight was a gain on the real estate activities of $22.9 million.

This represents the increase in the valuation of interest-rate swaps used to manage Oriental's future interest rate exposure.

The third item I would like to highlight is our strategic decision in December 2010 to sell the remaining balance of the BALTA private label collateralized mortgage obligation.

The proceeds from such sale amounted to approximately $63.5 million, which were slightly higher than the $63.2 million fair value at which this instrument was carried in books.

This small $200,000 difference represents a positive effect on stockholders equity for Oriental.

A loss of $22.8 million was recorded in the fourth quarter for the difference between the amortized cost and the sales price.

As a result of the BALTA sale, approximately 98% of Oriental investment securities portfolio now consists of fixed-rate mortgage-backed securities or notes backed either by a US government-sponsored entity or the full faith and credit of the US government.

During the fourth quarter we purchased Fannie Mae and Freddie Mac certificates and categorized them as held to maturity with a December 31, 2010 balance of $690 million.

Yield on the new securities purchased during the quarter was approximately 3.4%.

On the slides we have in our Investor Relations website you will see we provided you with some additional update on investments, such as custom prepayment rate, amortization and duration.

Our total stockholders equity continued to be very strong.

It rose to $732.3 million at December 31, 2010, an increase of 122% from a year ago and 3.7% from September 30, 2010.

The book value per share also increased to $14.33, up 32.5% from $10.82 a year ago and 3.9% from $13.79 at September 30, 2010.

We continue to maintain regulatory capital ratios well above the requirements for a well-capitalized institution, and probably the best in Puerto Rico.

At December 31, 2010, the leverage capital ratio was 9.56%.

Tier 1 risk-based capital ratio was 26.42%.

And total risk-based capital ratio was 27.69%.

Value of common equity to total assets increased to 9.04% from 3.97% on December 31, 2009, and 8.72% at September 30, 2010.

Now I would like to turn the call back to Jose.

Thank you, Norberto.

Our strategy is straightforward.

First, we need to continue to increase revenues through commercial loan production and banking and wealth management activities.

We also need to focus on continuing to reduce our cost of funds, both core and wholesale.

Third, we need to carefully manage our investment securities portfolio.

Fourth, stay open to good opportunities that might result from further consolidation in the local market.

And lastly, return capital to investors when appropriate.

As I have said before, our goal is not to be the biggest, but continue to be the best and most profitable bank and wealth management company.

To date the results are highly encouraging.

Now we will be happy to take your questions.

(Operator Instructions).

During today's question-and-answer session we do ask questioners to not use cell phones or BlackBerrys as they may cause loud static on the phone.

Joe Gladue, B.

Riley.

The first question, I guess I would like a little more clarity on the additional $6.2 million expense on covered loans.

Of course, you initially took some pretty large write-downs on those -- fair value adjustments.

I am just wondering what is causing that additional markdown so soon.

I think Norberto can answer that a lot better than I can.

So, Norberto, would you please?

Sure.

All the loans that we acquired in the Eurobank transaction are basically segregated by pools.

That is how the analysis is done.

We have a total of 48 pools.

So we analyze pool by pool, and some pools are performing better, some pools are not performing as good as we had expected.

In the ones that are performing better normally there is an increase in yield that we will record prospectively.

In the case of -- there are some pools in which there has been some deterioration, and it is an analysis of an allowance (inaudible) as with any given loan.

So for those cases we had to make an analysis, and obviously consider the 80% that the FDIC is going to reimburse, and then recognize that addition of provision that we disclosed in the release, which is a grade impairment.

It is recorded as a provision.

(multiple speakers).

So when you look at the entire Eurobank portfolio we acquired, one of the things that you will notice is that Norberto mentioned you have some pools that have a negative performance versus the projected that we had at the beginning of the transaction.

But on the aggregate, as we mentioned, there is around $23 million positive cash flow versus what we had originally expected.

And at this point what we are doing is not necessarily reyielding that going forward, but on the contrary, being conservative and just giving one more quarter of performance and see if it merits a reyielding.

And we want to make sure that we keep on keeping an eye on the delinquency rates and those buckets and making sure that it warrants a reyielding.

Because we really don't want to do a reyielding back and forth quarter after quarter.

We need to go at this every quarter as part of the accounting rules.

So, again, it is just the way it works.

On the decline in the securities portfolio and the yield, can you break out how much of that was just due to prepayments and accelerated premium amortization versus just lower yields on new investments?

Sure, I have some information here.

Let me see if I can -- okay.

Around from the third quarter to the fourth quarter the difference between, in terms of interest income, the difference on premium amortization was around $5.3 million.

So we had $5.3 million of additional premium amortization on the fourth quarter versus the third quarter.

Okay, that is very helpful.

Just wondering, in terms of the buyback program, can you characterize how you're going to approach that?

Are you going to -- is it going to be opportunistic when the prices of the stock is attractive or just when you have some unused cash flow coming in, or do you think you'll do that on a more regular basis?

The way we see it, and the way we discussed this at the Board is that when we look at the end of the year we wanted to give ourselves some time to see how the Eurobank acquisition was playing out.

We see very good prospects into the future in all our operations.

So we feel that this year's performance is going to continue to expand our capital base.

And when you look at our stock repurchase program, the way we want to execute it is that right now we are selling at a significant discount to book value.

It is started around $12 and the book value was $14.30 or something like that.

So when you look at our stock we feel it is undervalued.

Right now the best way for us to have a good return for investors is right now showing that repurchase.

So we will look at it, as I just said.

I think if the stock remains around these levels we will be buying stock.

Okay, and I will ask one more and then step back into queue.

Just in regards to reserve levels, still putting in provision that is exceeding net charge-offs and building up the reserve.

Do you see an end to that reserve build any time in the next couple of quarters?

The provision this quarter was lower than the previous quarter, and there is always going to be some provision.

Our charge-offs, as always, they have been fairly low in terms of to total loans.

But as we have seen in the Island, delinquency is still not decreasing, so the fact that the delinquency is still fairly high in the Puerto Rico market leads us to believe that our allowance should not be decreasing.

So in terms of what we are projecting, I think that our provision for noncovered loans will stay as it was in this quarter.

And maybe we'll go a little bit lower, but our provision will continue, as we succeed in a reasonable way the net charge-offs for each period.

All right, thank you.

Also take into account that the loan portfolio is growing, so the character of the balance sheet is changing.

And even though we think we are growing the portfolio in a very deliberate and conservative manner with respect to the risk characteristics, you will see a loan provision that is appropriate and prudent in light of that changing balance sheet composition.

So it is, I think, a prudent provision at the moment and should continue to be so as we grow loan portfolio.

Okay, that's helpful.

Thank you.

Derek Hewett, KBW.

I have a follow-up question to Joe's.

In terms of the total premium amortization, what was that for the quarter?

You want the specific number?

Yes.

I will give you both.

Third quarter 2010 the premium amortization was $10.9 million, and the fourth quarter was $16.2 million.

Okay, great.

Then could we talk a little bit about the run rate for the former Eurobank operations.

Based on that $57 million expense level, and 35% cost saves, gets you to a run rate of about $37 million.

And it looks like based on this past quarter you guys are at a run rate of $32 million.

Is the roughly $8 million of Eurobank expenses a good run rate heading into 2011, or do you think that might go up a little bit?

That is reasonable to project.

As I said earlier, I think last quarter we are projecting to have total year expense (inaudible) interest expenses of around $124 million.

That is around $31 million per quarter, if I'm not mistaken.

So with this we basically have accomplished what we have said we had accomplished in terms of Eurobank savings.

I think we did beyond that.

So right now what you're going to see us is we're going to continue to invest in our commercial banking and retail banking operation.

Continue to attract good talent on that area and also on the wealth management side.

As I said, we have also added some good investment advisors that have experience here in the Island.

So that is where we will be investing our -- into 2011.

We will also have some additional marketing investment also as we try to take advantage of what is going on in the local market.

So all in all I would say use $124 million of yearly noninterest expenses there.

Okay, great.

Thank you.

My last question is in regards to the deposit outlook.

It looks like you guys are continuing to ratchet down those rates.

Any additional relief in 2011?

Are things getting a little bit more rational?

I think so.

You still have the sporadic situation, but in general terms we feel here at Oriental that we'll continue to see a lower cost of funds on our core funding.

And as you have seen, we have done that for ten quarters in a row, while we also increased our total balance.

I think we grew around $600 million and some in 2010 in core deposits.

So I think we have a better rate of declining cost of funds going into 2011 than what we had in the second half of 2010.

Okay, great, thank you very much.

Brett Scheiner, FBR Capital Markets.

Just a couple of cleanup questions and then we will go to net interest income.

First, is the $10 million new nonaccrual syndicated credit in Puerto Rico?

Yes.

Yes, it is in Puerto Rico.

Okay.

The $42 million in structured credits remaining, I know you posted a Q (inaudible) we appreciate.

Can you give us an idea of whether these are marked?

What is the mark?

I don't have it off the top of my mind.

But the mark is -- let's see, I think I have it here.

It is very similar to what it had as of --

September?

As of September.

Yes, let's say the structured credits, the amortized cost was $61.7 million, and the fair value $41.7 million.

So (inaudible) realized loans.

Okay, great, thank you.

Just some color on the tax rate going forward.

Norberto can give you an answer on that.

The tax, as you may know, a new tax reform has been recently approved by the government of Puerto Rico.

Corporate tax rates have been reduced from 39% to 30%.

That is going to be positive for the banks and for us in the near to long term.

So we are now in the process of reviewing the effect that it will have.

But I would say in terms of modeling for 2011, we are using something between 12% and 15% in terms of our effective tax rate.

Okay, that's very helpful.

Then, finally, forgetting the actual size of the MBS broke, with the additional MBS purchases, and now the 10-year back up again in the last week or so, can you talk about how much of the $7 million loss quarter over quarter from net interest income on MBS will be recouped as you buy additional MBS for 1Q and the full run rate in 2Q?

At this time it will be a little premature for us to give you specifics on that.

But we have certainly seen a slower rate of prepayment on some of the pools that -- across the acceleration in the fourth quarter.

So I don't think we're going to go back to the same level of interest income from investments that we had in the third quarter, but we certainly are going to have an improvement on the fourth quarter.

And we need to see one more month to feel more comfortable with a specific number.

Okay, great.

Then one last question, will the BALTA sale affect dollar net interest income in any way?

Yes, it does.

We had it at at 5% and change, so there is going to be an effect for the year on the $64 million that we had.

So it is probably like $3 million or $4 million.

No, it is more -- more closer to $4 million to $5 million [if] interest income grows.

But you invest those funds at 3.5% to 3.75%, so the difference is the effect.

Obviously, now that we sold BALTA, and as I mentioned, we got more than $63 million in cash from the sale of the BALTA, one of the things that the analysts have always care or asking in the calls is how are the possiblity other than temporary impairments when we don't have age for now.

(multiple speakers) or so.

Okay, great.

Thanks guys.

Adam Barkstrom, Sterne Agee.

Could you -- just to come back to the covered loans, can you give us some color -- was that in the construction book, was it CRE, was it mortgage?

Any color you can provide around that would be helpful, because you guys did take some significant marks across-the-board on your bank's portfolio.

I would say it was more on commercial real estate, commercial loans backed by real estate collateral.

Not necessarily construction, because we had already taken a big mark on the construction.

Some construction, but in general the commercial loans backed by real estate collateral.

Was that more of a collateral valuation issue or was it more of a payment debt service or -- a performance issue?

Delinquent?

Appraisal.

A lot of it was --

Appraisal?

Yes.

Both, I would say both.

But in some of those appraisals in some cases where there has been some increase in delinquency in some of those pools that I mentioned.

As (inaudible) explained, in terms of the aggregate of the 48 pools that we established from that acquisition, the actual cash flows have exceeded the expected cash flow by $23.4 million.

But in some of those specific pools, the difference has been there.

And in those pools were the ones that -- in some of those pools were new ones that we had the trade impairment.

And the overall positive gross gets worked into a higher yield, but the negatives gets adjusted immediately.

Right?

(multiple speakers) adjusted immediately.

Then you really have an improvement but (multiple speakers).

Obviously in some of these pools that are outperforming the expectations, most probably would eventually have increasing interest income.

But we still have to give it at least one more quarter to be able to do that.

Could I flip the question around and ask you maybe those pools that are outperforming, is there any particular pattern there, i.e., are you seeing that mostly from their construction?

Is it -- any similar characteristics there you could share?

I think it is a sort of relative, Adam, to the initial valuation.

So it is hard to get a trend and extrapolate that into a larger perspective on the entire portfolio.

I think Norberto mentioned some of these commercial real estate loans have a higher level of delinquency that when you run the models that we use the proportion to project and they have this cash flow comparison, and that is what we are seeing right now.

But to be specific and get a full idea of how this is happening, it is kind of --

The thing is that this portfolio from Eurobank was predominantly a portfolio of commercial loans backed by real estate.

So the way that the pools were segregated based on the size of the loan, of yields, if they are fixed or they are variable.

So there are many different categories.

But I can say, for example, one that comes to the top of my head right, the leasing portfolio we had a big mark down on the leasing portfolio.

And the leasing portfolio is behaving better than what we were expecting.

In that the cash flows -- the actual are definitely exceeding the -- we expect that is a portfolio that the possibility of having a reyielding is high.

So thinking about that and going forward, and you guys taking another quarter to be conservative before you take the benefit to margin.

Any idea what we could possibly see as far as a margin boost from this?

Sure.

I think you should start looking into the first quarter.

You should look at a margin -- I would look at it more like a -- to interest rate spread more than the margin, because of the FDIC (multiple speakers) kind of muddles up the margin calculation.

But spread, interest rate spreads, we should be looking between 2.05% to 2.10% for the first quarter annualized.

That is what we are targeting.

And this does not include any reyielding of the Eurobank -- the acquired portfolio.

Then what about -- how are you thinking specifically about the margin then?

Because I thought that we heard last quarter that we would -- that you maybe have some lift in the margin this quarter.

And I guess because the premium amortization we kind of saw the opposite.

But how are you thinking about that now?

Well, we see a stabilization on prepayment levels.

So CDRs are starting to stablize and (inaudible) are going up, so the investments will be at a higher yield.

So we have a positive outlook into our margin going into 2011.

And, frankly, we did not clearly see the ramp up in prepayments in the fourth quarter as (multiple speakers).

It was higher than we had expected.

So that is how we see it.

Then just to follow up, somebody asked previously about the shared national credit.

Is that the only one you have or do you guys have a sizable -- it may be the wrong word, but do you guys have a portfolio of those credits?

No, it is the only one we have.

Again, it is local Puerto Rico credits that is managed by Citibank.

And the FDIC asked us to classify it, and we did.

Again, it is performing, but there is a deficiency in the --

The estimated value of the collateral.

Correct.

So that is why we have it at the nonperforming loan.

Right now it is accruing.

Everything is going down to amortize the principal of the loan.

So we are not recognizing any interest income there.

Okay.

And anybody else.

But that is the only credit that we have [matching our share].

The rest of our credits, except for one participation that we have in construction that has a balance of around $6 million, it is fully completed, it is selling units.

That is the other, I would say, a large loan -- commercial construction loan that we have.

The others basically are what we have in our portfolio.

You saw the improvement in originations in commercial this quarter.

We continued to see the benefits of the market being -- kind of focused -- everybody focusing on cleaning up their situation.

And we are getting in between there and trying to attract good clients from those banks.

And we are seeing that in the fourth quarter and we project that into 2011 also.

Okay, let me ask one more than I will hop back in queue.

You guys in previous presentations, I believe, I can't put my hand on it, but you guys used to talk about ROA and ROE goals.

I just didn't see it in this one, and was just curious.

Any changes there or are you guys still sticking with the ROA of 1% and ROE of 15% for 2012?

ROA of 1% is certainly a goal.

15% ROE, I think it is a harder target to achieve on a consistent long-term basis.

So we've got to do a lot with not only the market, but also the regulatory environment and the capital requirements together.

So I think when we look at ourselves we start to look at ourselves more like trying to target a 12% target.

In fact, go to that level.

On a consistent recurring basis, that is what we are trying to achieve.

I think 2012 gives us a great opportunity to achieve that.

So any idea -- sorry, I know this is the last one -- but not to pin you down specifically, but we were looking at numbers yesterday and trying to think about what asset levels would be in 2012, given the continued runoff at Eurobank.

Within some type of range do you guys have an idea of what you think your asset level, your earning asset level is going to be by 2012?

Hard to say, because we have several options to execute during 2011 that will affect that number directly.

And the growth positions will be made in the latter part of the 2011 year.

But we do have some good projections in loan growth into 2011, but we also have the Eurobank loan amounts running off.

So I would -- for 2011 I would use a level close to what we have, maybe a little lower.

And then by the end of the year we have some decisions to make in terms of our investment portfolio and how we go from there.

James Ellman, Seacliff Capital.

Could you give us an idea on where you would be comfortable bringing your tangible common equity down to with your share repurchases?

You have now have your TCE above 9%.

To what level would you be willing to bring it and still be comfortable?

The number is 7.5%.

I don't want to give you the impression though that we are just going to go out and buy shares and bring it down to 7.5%.

But we feel comfortable with a tangible common equity of around 7.5%.

Again, I don't want to -- so please do not miss the fact that there are opportunities here in Puerto Rico to acquire assets or to look at -- or different situations in the local market that I think they appear, they present to ourselves, we would certainly look at them, and we want to keep capital available for those opportunities.

It seemed the only obvious deal of that nature would be the FDIC seizing FirstBank Puerto Rico and selling a portion of the company to you.

With FirstBank now trading above $5 and Doral having offered to buy the company, it seems that much less likely that that bank would be seized by the FDIC.

So what other opportunities are there?

There doesn't seem to be others.

And if so, there have been not many others, why not buy back significantly more stock and bring your TCE down closer to 7.5%?

I think we need to look at your premises, and your premise of there not being other opportunities, I am not necessarily in agreement with.

I think there is some good opportunities that we can look at.

And as I said before, this is a share repurchase plan that we are executing now at the beginning of the year, and it is part of a process.

We are not going to go out and do a massive repurchase plan at the beginning of the year without making sure that things in the local market stabilize.

And so, again, our philosophy is to go step-by-step.

And we have executed as such in the past, and we plan on doing so into the future.

All right.

As you just mentioned that your total assets are likely to shrink, at least by a certain amount during the course of this year, and as you continue to have profits going into retained earnings, that would imply that TCE will continue to build, correct?

Right.

Correct.

Do you expect that we're going to see a TCE of 10% or 11% later this year?

I don't see how we would do that.

Again, we were looking at this on a consistent and recurring basis.

We are not just executing this situation on the repurchase and forgetting about it.

We are constantly looking at ways to return capital for investors if there is no other better return on our capital from an acquisition perspective.

So we look at it frequently, and the first step means the repurchase program announced today.

And there are going to be other steps that could be additional or not even additional, just taking advantage of local opportunities in the market.

Chris Gamaitoni, Compass Point.

Thanks for taking my call.

Most have been answered, but I will just harp on two things.

What would you say the level of Tier 1 common that you're comfortable at running at?

TCE is a little bit more flexible, given you have a lot of assets that are very low risk-weighted.

But where do you feel comfortable running on that on a normalized basis?

Tangible common equity risk-based, I looked at it more closer to the 8% level.

Right now I believe it is around 10%, if I'm not mistaken.

Tier 1 common?

I'm sorry?

Your Tier 1 common on a risk-based is around 10%?

Tier 1 (multiple speakers).

Oh, I am sorry (multiple speakers) and risk-weighted basis is (multiple speakers).

I am sorry.

Again, I thought you said (multiple speakers).

I am sorry.

So right now the risk-weighted tangible common equity is around 25%.

And, again, the Tier 1, I don't have a specific number that I can give you.

It just depends on the level of risk asset that we have.

And I need to kind of (inaudible) on here.

We have a -- I just want to ascertain you're talking about the Tier 1 -- in terms of the Tier 1 risk-based capital ratio from the regulatory perspective, which is now at the 26.42% level, is that the ratio you are referring to?

Yes.

That ratio has been well above the capital requirements, and obviously we can assume more risk in terms of the change in the mix from investments to loan purchase, where we have been talking.

So based on what I said earlier, if we have a loan balance that is increasing on the noncovered portion -- let's say on all loans, covered and noncovered remain, let's say, slightly down from what we have right now, even the Eurobank loan.

That number is going to be -- and then we have the repurchase, so we reduce some of the capital.

You're going to have some -- I think we will stay quite close to that number.

(multiple speakers) very high.

I don't see how it is going to go down unless we have an additional increment in risk assets that will come out additional to the organic projections that we have.

You are making my point.

When you look at on a risk-weighted basis you probably have $300 million-ish of excess capital that is constrained by the leverage ratio in a relatively low spread business.

On a 10% levered basis that is increasing your loan outstanding by 300%.

I doubt you need that much for growth, unless I'm missing something.

I'm just trying to understand the decision to continue to --

One moment.

My apologies, Chris, continue.

Okay, that was my question.

Could an you finish the question, because I couldn't hear the last part.

Sure.

I am just trying to understand continuing to maintain and purchase new MBS.

And I understand there is a time component with the repo lines, but after that what is the thought of investing in a relatively low capital efficient return business instead of buying back stock when you have such a cheap -- you try to set a cheap multiple?

So, again, it is something that we need to decide at the end of the year, if I understand your question correctly.

There is not much we can do in terms of our balance sheet until the end of the year because of our repos.

So given that our --

I guess our announcement of the stock repurchase program is basically consistent with your (multiple speakers), I think.

Then moving outside of the acquisition opportunities, could you just go into that a little more?

There is only eight banks in Puerto Rico period.

So excess of Popular -- and obviously are there branches you could purchase from larger banks, or is there financial companies that aren't banks that you could purchase?

I am just trying to figure out where these opportunities lay that you speak about.

I'm having trouble finding them.

I don't go into specifics, but I can tell you that from the seven banks that are here in Puerto Rico, there are opportunities to do business with some of them.

And you know who those are, and I really don't want to discuss this in specifics.

In general terms it seems to me that the local market needs to still have some more consolidation.

And we have excess capital, as you all know, and I think it puts us in a good position for us to evaluate possibilities.

And that is the logic behind our execution here.

Ryan Zacharia, JAM.

Thanks for taking my question.

So just to clarify, on the cash flow expectations on Eurobank, even with the impairment of some of the 48 pools, your cash flow expectations have actually increased.

That is a correct assumption?

The difference between actual and expected has been increased.

So be $988.5 million cash flow expectation there has been overall a positive adjustment to that $988.5 million, but you're going to recognize it -- well, you haven't done the reyielding, but assuming you do the reyielding and you come out to the same place as you did this quarter, you will recognize that difference prospectively?

Yes, if we (inaudible).

We do a reyielding and we do a remeasurement and the whole time.

And into the second quarter of -- up to the end of the first quarter of 2011 we have to decide if we take that as a positive improvement in yield on the Eurobank portfolio.

And as I said before, the analysis is done on a pool by pool basis, so we reach different conclusions on each pool.

That for one pool maybe a reyielding, for another pool maybe an impairment.

I understand.

But the $23.4 million that reflects in totality the upside to your cash flow expectations, taking into account that some of the pools have underperformed and others have overperformed?

Right, that is (inaudible) of all the 48 pools.

So taking that a step further, assuming that maintains, your accretable yields will increase?

Yes, the answer is yes.

Just a question on the premium amortization.

I know that it has been discussed, so excuse me if I have asked this and you have answered it, or were unable to answer it.

But I'm just trying to get a feel for what you think holding the rate environment constant from here on out, what premium amortization on a normalized basis looks like maybe for Q1, Q2?

That question was asked earlier, and at this time at this point I don't have a specific number.

Certainly it is going to be better than the fourth quarter, but not at the level of the third quarter number.

We have seen that the prepayment speeds on these mortgage-backed securities stabilizing.

So we expect a less [premium] amortization into the first quarter.

I like to take a couple more weeks to see how February performs, and I will feel more comfortable giving you a specific number.

Why is it that it won't be as favorable as 3Q?

I mean, prevailing rates are higher now, what is driving that?

The prepayment speeds are stabilizing.

They are not reducing significantly yet.

So if we see that, that is one reason we are not giving you a specific number because the reduction in prepayment speed has not played out yet, as is shown to a level that has (inaudible) constant, but still small -- a little higher than what we had in the third quarter.

So that is the reason behind it.

Okay, thanks a lot guys.

Michael Sarcone, Sandler O'Neill.

Most of my questions have been asked and answered, so I just have one.

You currently have around $450 million of cash on the balance sheet.

I know you have the $30 million buyback.

That leaves $420 million.

What is the minimum amount of cash you would be comfortable with on the balance sheet?

And then, secone, how quickly do you think you could deploy whatever excess cash you have?

I would say $200 million will be the minimum that we would keep in cash.

We have been slow in investing that cash, because we feel that interest rates will go up and we don't want to lock in at these low rates.

But we are managing that on a month-to-month basis.

But the low level that we keep on cash will be around $200 million.

Okay, that's good.

Thank you.

[Michael King], (inaudible) Capital Management.

I just wanted to get back to you -- the discussion about just various M&A opportunities on the Island.

So when you're looking at these what type of return hurdles and other metrics are you looking for from these opportunities?

You saw what we did with Eurobank back in April.

So those are the levels.

It is close to 20%, 21%, 22%, that is what we would be looking at, because these are [assisted] transactions that on a risk/reward basis are very compelling for us.

That is what we would look at.

I guess also can you just -- we have discussed this probably at length today, but can you discuss your priorities versus between M&A opportunities versus organic loan growth versus share repurchases?

Our priority is very clear.

It is organic loan growth.

We are investing in people.

We are looking for the long-term.

We are trying to grow a franchise here.

We are building the process as we have done throughout the entire last two years.

We have reduced the cost of funds.

We have expanded our branches to 30.

We have added excellent executive team to that side of the business, as well as the wealth management business.

So that is our priority, and that is what we are working on.

We have a [pile on] strategy that is -- we've got to see what the market is showing us here locally in Puerto Rico, and that is the way we have been managing the bank for the last two years, as we see things deteriorating here in the Island.

So, yes, I think our focus is organically you are seeing results in the fourth quarter, as we have hit a $40 million origination in commercial loans and leases.

Expect that number to continue to gradually move up as we bring new clients that are not necessarily well taken care of by other banks.

And they are good quality clients that have a good business and they need a bank for the long term.

And that is our main focus.

Great, thank you.

Brett Scheiner, FBR Capital Markets.

Just one quick question.

Can you discuss any potential legal remedies from securities losses?

I will discount that to zero.

Okay, thank you.

Joe Gladue, B.

Riley.

Just a quick follow-up on loan originations.

It is good to see the increases in commercial loans, but I am just wondering about the decline in mortgage originations.

I just want to be sure that is really due to market forces and not any intentional pullback at all from that market.

No, it is not really an intentional pullback.

Actually, in the fourth quarter we spent some time making sure that we improve our delivery time, origination time.

So we have some key (inaudible) there in terms of the origination.

But we expect to get back to the same level that we were in the third quarter into the first quarter of 2011.

So that is what happened there.

I guess I will ask one other follow-up on -- I guess, you have had some questions about asset deployment and potential acquisitions.

Are you still looking at any possibilities of making any acquisitions on the asset management side?

Yes, those are opportunities that we see also.

We are growing it organically, and that is our focus.

But there are opportunities here also in the wealth management and trust business and brokerage business.

I look at Puerto Rico, and Puerto Rico is going through a pretty -- in the financial services side, it is going through a pretty big transition here.

And people are focusing on banks primarily, but underneath there is insurance agencies, there are brokerage firms, there are trust businesses and wealth management businesses that we also compete against and we look at.

So those are all also part of our outlook.

Okay, thank you.

Chris Gamaitoni, Compass Point.

Just a small housekeeping item.

Do you plan on continuing to move more of your purchases into held to maturity?

I think when you look at our reinvestment of securities we have some cash flow that comes in.

I think we are going to be investing more in the held to maturity, but not necessarily exclusively there.

We want to have some flexibility in terms of the mark-to-market as interest rates are low.

But we will also be looking at lower duration type of investments too, and those we would keep in available for sale.

So from a strategic point of view, we are going to look at both, not necessarily do everything on held to maturity.

At this time there are no further questions.

I will now turn the call back over to Mr.

Fernandez for any closing remarks.

Well, thank you everybody for listening today.

We look forward to talking to you again when we report our first-quarter results for 2011.

Have a great day.

Thank you.

This does conclude today's conference.

You may now disconnect.