OFG Bancorp (OFG) 2011 Q4 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. Thank you for joining us for this conference call for Oriental Financial Group. Our participants are Jose Rafael Fernandez, President, Chief Executive Officer and Vice Chairman; 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.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. During the question-and-answer session, we ask questioners to not use cellphones or Blackberrys, as they might cause loud static on the line.

I would now like to turn the call over to Mr. Fernandez. Please go ahead.

Thank you for listening in today. Jose Ramon Gonzalez, our Senior Executive Vice President of Banking and Corporate Development is out traveling today on business and will be on the line in case there are any questions regarding our commercial banking business. We have a presentation that accompanies our remarks and provides further information. It can be found on the webcast presentations and other files on our website.

I will review our results and Roberto will go over the fourth quarter and December 31 income statement and balance sheet. I will come back and give you our thoughts regarding the 2012 outlook from a general perspective and then we will go into question and answers.

We are very pleased with the performance of our banking franchise in 2011. The transactions that affected the fourth quarter will enhance our results going forward and benefit us financially. We will go into more detail on that shortly.

Looking at the big picture, a lot has been accomplished over the last five years at Oriental despite the economic and credit situation in Puerto Rico and we will continue to keep working at strategies to more fully develop our core businesses, in particular our commercial banking business.

With our reporting year-end results as I did last year, I would like to share with you how we looked at it. Recurring net revenues from client businesses, lending, banking, and wealth management services continue to grow strongly. This totaled more than $134 million in 2011, up 27% from 2010. This is a significant accomplishment because it shows our building the revenue-generating power of Oriental Bank and Trust and Oriental Financial Services and that we are much less dependent on our investment securities portfolio.

Commercial loan production also continued to demonstrate strong growth. These total close to $140 million in 2011, up 38% from 2010. Commercial production is key to our strategy of building Oriental's loan portfolio into a robust source of profitability.

Our actual net credit losses on all noncovered loans were less than $10 million in 2011, a relatively small amount given the economy in Puerto Rico and the fact that we are entering our sixth year of a recession with unemployment still high.

Looking at core retail deposits, they totaled nearly $2 billion at year-end. While they were down [2.9] year-over-year, that was due to the runoff of older, higher priced CDs. Excluding that, retail deposits were up 2.6%. It's important to note that the cost of total deposits was 1.79% in the fourth quarter compared to 1.95% a year ago.

In another key area, banking and wealth management revenues hit a record $44 million in 2011, up 12.5% from 2010. There are two stories here. First, banking which was up nearly 17% year-over-year; this reflects the growth of new products and services among commercial customers. Second, wealth management, which was up 14.5% year-over-year. This reflects our strong market penetration as we gather more customers and their assets due to our strong financial condition. As for wealth management assets, they too were a record at $4.14 billion at year-end, up 7% from a year ago.

Looking at our balance sheet, loans as a percentage of loans and investments were more than 30% at year-end 2011, the highest level over the last five years. That is up impressively from a low of about 19% in 2009. Total borrowings at $3.5 billion at year-end 2011 were down more than 10% from a year ago and the lowest level over the last five years.

Finally looking at book value per share, that was $15.22, up more than 6% from a year ago. We also paid $0.21 per share in dividends in 2011, up 23.5% from 2010 and the highest amount we've paid in the last three years. With our record of increasing cash dividends, we want to clearly send the message that the long-term outlook of Oriental is a very healthy one and we are very confident of it. Clearly we are moving in the right direction on every strategic front.

Now I'd like to turn the call to Norberto to review the fourth quarter.

Thank you, Jose. To recap fourth-quarter results, we had a loss to common shareholders of $13.1 million or $0.31 per share. This includes approximately $21 million of charges that are not considered part of Oriental's pretax operating income and also an income tax benefit of $4.8 million. On a pretax operating basis, we earned $6.1 million.

Compared to the preceding quarter, the fourth quarter included $6.2 million in additional premium amortization and mortgage-backed securities. In turn, this was partially offset by continued growth in core lending, banking, and wealth management activities.

Talking about interest income, interest income from loans of $39.4 million increased 11.3% from the third quarter. The growth was due to the continued improved performance of covered loans, which are the former Eurobank loans. Growth also came from Oriental's internally generated loans, namely in the commercial auto leasing and consumer categories.

Interest income from investment securities of $25.9 million declined 28.5% from the third quarter. This primarily reflects the increased premium amortization based on an increase in repayments as a result of the current interest rate environment. It was also due to lower balances and yields in the investment securities portfolio.

The total interest expense was $37.4 million and declined 4.3% from the third quarter. This was due to reduced cost of deposits, also due to lower costs of wholesale funding and lower balances of borrowings.

Our total banking and wealth management revenues of $12.4 million increased 9.8% from the third quarter. Wealth management revenues grew close to 10% due to increased brokerage and trust business. Assets under management of $4.1 billion at December 31, 2011 were up approximately 4% from September 30, 2011. Brokerage account assets were up 7.5%.

Banking service revenues also increased approximately 14.6% due to the use of more commercial products and services by our clients. And mortgage banking activities also were up 3.7%.

The results for the fourth quarter reflected the following charges that are not considered part of Oriental's pretax operating income, our core business. We had a $15 million OTTI or other than temporary impairment on the legacy Punto Verde CDO; a $2.4 million write-down of interest receivable on delinquent residential mortgage loans; and a $2.4 million write-down on foreclosed properties and other nonperforming real estate-related assets, most of which were acquired as part of the FDIC-assisted Eurobank acquisition.

We sold a CDO in January 2012 for $10.5 million. This type of investment is no longer consistent with our investment strategy and it had experienced market deterioration in recent months.

Noninterest expenses were $30.4 million and were basically flat as compared with the third quarter as we have continued our effective cost controls.

Another important transaction was that in late December 2011, $600 million in repo funding matured and these borrowings had an average cost of 4.23%. And as we reported in our news release yesterday, using cash on hand and receipts from the sale of approximately $77 million of mortgage backed securities, we paid down half of the repos. The balance was renewed for an average period of approximately 3.5 years at an effective fixed rate of 2.36%.

This transaction enabled us to eliminate $300 million in wholesale funding, reduce cost of funds on $300 million of borrowings, and deploy cash at a significantly higher return. We anticipate all of this will enable us to generate an additional $30 million more in net interest income on an annualized basis as compared to 2011.

Cash and cash equivalents of $605 million effectively declined $77 million on September 30, 2011, which reflects the aforementioned repo pay down partially offset by repayments in mortgage backed securities. The total investment portfolio is at $3.9 billion and declined 5.4% from September 30 reflecting prepayments and mortgage-backed securities and the sale of securities that I just mentioned.

Our noncovered loans, those produced by Oriental, total approximately $1.2 billion. This is an increase of 1.2% from September 30. This was due to growth of commercial leasing and consumer loans, more than offsetting the reduction of residential mortgage loans.

The covered loan portfolio is at $533.5 million. It declined 5% from September as these loans continue to pay down. The allowance for loan losses of $37 million increased 3% and is equal to 3.06% of total noncovered loans and leases compared to 3% at September 30, 2011.

Net credit losses were $2.7 million and resulted in a total of $9.6 million for the year. Nonperforming assets increased less than 1% from September 30.

Our loan production in the strategically significant commercial category totaled $47.5 million. This was up 58% from the third quarter.

Retail deposits at $2 billion remain approximately level compared to September 30 and the cost of those deposits declined as noted earlier to 1.66% from 1.79%. Our stockholders equity is at $695.6 million. This declined 4.4% from September 30, primarily due to stock repurchases. On a per share basis however, book value per share increased to $15.22 as of December 31 from $14.99 as of September 30, 2011.

We bought approximately 2.8 million shares at an average price of $10.57 per share during the fourth quarter. Under the current remaining authorization, we can buy back approximately $40 million in shares. For all of the 2011, Oriental bought approximately 5.2 million shares at an average price of $11.28 per share.

We maintain regulatory capital ratios well above the requirements for a well-capitalized institution. At December 31, 2011, the leverage capital ratio was 9.65%, the Tier 1 risk-based capital ratio was 31.56%, and the total risk-based capital ratio was 32.84%.

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

Thank you, Norberto. Before we wrap up, I wanted to comment on the new assignments that we have given to Norberto and Ganesh starting tomorrow.

One, the move reflector of Phase I, our substantial growth in commercial lending, the rapid expansion of products and services by the bank and the need to continue solidifying our risk management framework. Two, the new fast-changing and more complex regulatory environment, which demands a high level chief risk officer. And three, our policy here at Oriental to rotate executives to different positions to foster innovation at the same time we preserve institutional knowledge.

And last but most important, the moves reflect my confidence in Norberto and Ganesh. They have both been instrumental in transforming Oriental, implementing our new strategic vision and helping to accomplish the dramatic results we have achieved.

Norberto has been assigned responsibility for a new position as Chief Risk Officer. In this role, he assumes all responsibility for enterprise risk management, asset and liability management, compliance, internal audit, loan review, loss share, and regulatory relations.

Ganesh, our COO since 2009, has been named Chief Financial Officer. He will be in charge of corporate finance, strategic planning, accounting, and reporting, and business analytics. In addition, he will continue to manage the wealth management business and the administrative functions of human resources and information technology. Both will continue to report directly to me.

Now let's look at our outlook for 2012. 2011 was a year where we finished the integration of the Eurobank acquisition while also building our commercial banking operation. We were in transition mode. As we begin 2012, we have moved to full execution of our commercial banking and financial services strategies.

I am encouraged with the momentum we have executing our strategies and so with regards to our banking franchise, we expect to continue to build our commercial loan production with quality credits taking advantage of our ability to provide a high level of attention and service to commercial borrowers; continue to effectively manage our Eurobank portfolio to maximize the performance of the loans we acquired; in noninterest revenues, continue to build out more products and services for commercial accounts; in wealth management, continue to expand our market share as well as growing the number of products and services used by clients.

And in consumer banking, we want to continue to attract deposits and quality consumer loans and auto leasing credits.

With regards to our investment securities portfolio, we continue to -- we plan to continue to judiciously reduce its size. And with regards to our wholesale borrowing, we have several maturities during the year that will impact positively our net interest margin as we reprice at a significantly lower cost.

Looking at capital, with the remaining allocation of about $40 million, we will continue our buyback plan. We will also continue to evaluate increasing the dividend. And third, we will continue to be on the lookout for strategic opportunities that could be accretive to earnings and further expand our market share in Puerto Rico.

Looking at the macroeconomic situation in Puerto Rico, although we need to be cautious, we are very encouraged with the most recently released economic data.

That concludes our formal remarks. I'd like to open the call to questions. Thank you.

(Operator Instructions). Michael Sarcone, Sandler O'Neill.

Good morning. First question is on the premium amortization; that picked up in 4Q. What are you seeing so far this year as it relates to prepays and how long do you expect the prepays to stay elevated?

Premium amortization is something that is hard to predict and since we have a large investment securities portfolio, mostly on mortgage-backed securities, it's something that we dedicate a lot of time and effort to it. I can tell you a couple of things and I can -- we have Ramon Rasado, our Treasurer here so he can add any other information.

But we do not expect a higher premium amortization for the entire year of 2012 versus 2011. We feel that the way that we are projecting is just to have the same level of premium amortization as we had in 2011 for 2012. Having said that, though, the first month of the year in January, we are already seeing around $2 million less of premium amortization in January than what we experienced in December.

Just to give you ballpark figures, in December we had around $7 million in premium amortization. In January, we are having close to $5 million. I am rounding numbers here.

So that's kind of what we are seeing but having said that, I stay with my longer-term yearly kind of premium amortization outlook, which is kind of flat versus 2011.

Ramon, is there -- do you have any additional information regarding the premium amortization or any prepayment speeds? Any information on that?

When we look at the forecasts provided by third parties, in line with what Jose Rafael is saying. No, we obviously are very aware that the Fed is looking to lower mortgage rates and that could have an impact. We are following that very closely how market mortgage rates could affect our portfolio. But everything (inaudible) will the $5 million to $6 million amount should be --

We would estimate at this point.

Okay and could you in a broader context relate those comments to maybe what you're looking for total margin in 2012?

Sure. And we have kind of addressed this in the past. What we are looking into 2012, we are seeing certainly lower cost of borrowings. As you know we have several repos and advances maturing during 2012 and we have already a strategy with a lower cost on that. So that's going to be impacting the margin positively.

We're also going to be seeing a lower cost of our core deposits. That's something that we've done throughout the last couple of years and this quarter you clearly see a reduction in our core funding and you will see it again in the 2012 year.

As I said on the premium amortization, we are forecasting a level number versus 2011 and we are seeing also higher income from loans not only from the noncovered as we have continued to generate more commercial loans but also on the covered portfolio as we continue to manage the credits and they start -- they continue to generate better performance.

So having said that, we are targeting a 2.5% margin for 2012.

Thanks. And do you have the amount of unamortized premium on the securities portfolio as of year-end, the nominal amount?

It's $123 million.

Okay, then last question from me. Can you give us an update on any share repurchases year to date?

Yes, we have not repurchased any shares so far this year.

Okay. Thanks, guys.

Brett Scheiner, FBR.

A couple quick questions. The covered loan income up to $22 million in the quarter, would you call that a run rate or is that due to accelerated accretion or accelerated workout?

It's a mixture of both factors. We had some re-yielding done also in the quarter on some of the loan buckets that we have. So we had some improvement. Also when you see the comparison versus the third quarter, remember we had some re-yielding in the September quarter but the full impact of that re-yielding is materialized in the December quarter. So there is a little bit of both. We are seeing better performance on the credits vis-a-vis what we projected. Norberto, do you want --?

Basically the re-yielding is a reflection of the actual cash flows. In the long-term, the actual cash flows have been better than what we had originally expected so the yield is better. Obviously we have to keep in mind that this portfolio is being paid down, so the balance of the portfolio is also going down but obviously yield has been higher because of the improvement in the performance of the portfolio.

Okay, great. And then as far as the 600 in repo that came due that you replaced with 300 of cheaper borrowings, with this set on hold for the basically the foreseeable future, why not roll those shorter?

I will give you the quick answer and I will pass to Ramon for more specifics. But remember we have entered into some swaps for these repos, so there is a fixed cost already into the potential transaction or the actual transaction that we executed in the fourth quarter. That's one thing.

And the other thing is that we also need to manage interest-rate liability and interest-rate sensitivity and as we manage that, we want to make sure that we don't get too much into that type of risk. We are trying to move away from that.

So those are my general themes here. I think that those are the answers unless Ramon has anything but those are the two main points, Brett.

Okay, great. And then can you talk about other non-agency securities balances?

Yes, I will pass to Ramon on that one. We really don't have much.

The only remaining thing that we basically have now that we sold the CDO is the $37 million -- CLOs that we have had for a long time basically. (multiple speakers)

That's basically it and as we generated overall we run the OTTI analysis quarterly and that analysis show that there's no [impact] other than temporary impairments in those securities. Some of them have actually had a ratings upgrade during 2011 so --

That's the only thing we have that is (inaudible).

We do not expect any OTTI on those as they are midmarket loans type of structures and we see them improving as well, as Ramon mentioned, from a rating perspective, they have been operated during 2011.

And they are obviously as we have had for a long time in the available-for-sale portfolio and the $37 million have -- an unrealized loss of approximately $10 million, $10.5 million. So that they are actually around $26 million for purposes of book value.

Okay, then it looks like maybe here there's $600 million or $700 billion of a combination of around 4% plus repo and 4% plus FHLB coming off with the cash balance up on the pre-pays. Do you think that there's more -- a higher likelihood that those will be paid off for cash or do you think those will also be rolled due to the swap agreements?

I will let Ramon answer that. He has got the information on the maturing maturities. But I can tell you from a high level that we do not expect to cancel them. We have already a hedge accounting with them and we will have a significantly reduced cost of funds.

If you want some more specifics, Ramon can provide on those repos.

I think the easiest way to understand what's happening in wholesale funding in 2012 is to look at individual maturities by type. So we have $225 million in home loan bank advances maturing at a rate -- average rate of 4.25 and we have $600 million in repos maturing during the year at an average rate of 4.50. So that's a total of $825 million at an average rate of 4.43.

We have all that hedged and those are hedges that we turned into during the first quarter of last year. So the average rate on the hedges and the fixed rate on the interest-rate swaps is 2.24, so since we are going to be rolling the advances and repos on a floating rate basis, there's going to be a spread to LIBOR on that floating rate.

And if we assume that that spread is about 30 basis points, the effective cost will come down from 4.43 to 2.54. So that is a big thing that [we're going to get a lot] in terms of wholesale funding (inaudible).

Well, $825 -- (multiple speakers) $825 million of total wholesale borrowings.

And that is separate from the improvement in net interest income you talked about earlier?

Correct, yes. The improvement we talked, the $13 million, is specifically referring to the transaction we executed in December.

Okay, that's very helpful. All right, those are all my questions. Thank you very much.

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

I would like to touch little bit more on the margin. Just curious on the transaction with the repos and the securities, mortgage-backed securities sold to retire them, what was the yield on those mortgage-backed securities? I would just like to know what the spread was on that transaction?

Give me a second. We will get it to you.

Those were CMOs and the yield on those was north of 4%.

Yes, 5.04 (multiple speakers) 5.04%, (multiple speakers) 5.04%, Joe.

Okay.

The $77 million of securities that we sold, you must remember that basically what we used mainly to pay off or pay down the repos was to deploy cash, which was basically earning zero.

So in terms of the securities, I just wanted to emphasize that we sold $77 million, not [300].

Right, understood, okay. I guess also noticed you did build up broker deposits by about $50 million during the quarter. I'm just wondering what sort of rates you are paying on those?

Those were more for liquidity purposes we entered just to shore up liquidity and those were very short-term, so the average rate on those was approximately 0.45 mostly for three months.

Okay and on the -- of course interest income on the securities was down about $10 million from third quarter to fourth quarter and you said that about $6 million of that was from premium amortization. Just wondering can you break out I guess the remaining part of that between just reduced yields and volumes on securities just roughly?

While the key aspects to the portfolio management were in the fourth quarter, that we did not come into the market or invest our P&I receipts. So there is some impact of that in the net interest income (inaudible).

We are -- what we are doing or what we were doing during the quarter was that we were basically leaving those funds as I said earning 0.25, waiting for better opportunities to come into the market, so that 0.25 against whatever the yield average in the portfolio was, that's a big impact. Apart from that, we did sell some high yielding securities which are obviously an impact on interest income.

That's kind of the general analysis that we can share with you now, but if you want more specifics, we can provide it to you at a later time, Joe.

Okay, I will shift gears a little bit here. Still adding to the loan loss reserve, just wondering do you have -- when do we get to a point where you can I guess slow down the reserve build? Or are you -- is that build more related to just the continued new loan generation?

It has to do with what you just said. We are growing our commercial loan book and you have to do a little bit with that. It also has to do with our regulatory environment and how Puerto Rico and credit are perceived here all around. So those are two high-level reasons why we are keeping our provisioning pretty much level with 2010.

There is more statistics Norberto can provide, but in general, we feel that we are very well reserved especially when most of our nonperforming are residential mortgage loans. We are cautious with economy and we want to make sure that we don't -- on the reserve -- on the provision. So is there anything you want to add?

Basically our provision has been fairly consistently because our shares have also been fairly consistent but remain low. We have continued to provide more than the charge off. Our allowance has continued to increase. We are entering into, as Joe mentioned, into some commercial loans which are high quality and so on, but in terms of the mechanics of the calculation, the allowance factor that is assigned to commercial loan is higher than the residential mortgage loans, which is the portfolio that is basically going down.

So we basically analyze the allowance every month and we do not expect major changes in the provision. If your question is mainly if we are going to release allowances, that's something that we do not expect. We more or less expect the provision to remain at similar levels. Maybe going down a little bit, if we get many recoveries as we have been getting from some of the Eurobank loans mainly.

But those are in a sense are going (inaudible) separately. I do not expect many changes there at this point.

Okay, and you have said that you expect to continue to grow the commercial loans, but just wondering if you could give us I guess any idea of sort of the pipeline for -- or demand for loans, both commercial and you had good growth in consumer and as well as the mortgage portfolio. How is demand looking? Are you seeing any pickup in interest given I guess at least a few positive economic reports we have seen?

Jose Ramon is connected to the line, so I will defer to him on that question. Mr. Ramon, are you still there?

I'm here. I'm here, Jose Raphael. Yes, Joe, I think you can say the economy feels a little bit better in terms of -- not that it's improving tremendously, but it feels that it has a better tone and more -- a little bit more strength to it. So we are seeing loan demand that is I think a little bit firmer than perhaps a year and a half ago let's say. We are therefore able to continue I think growing this year in the commercial loan area with quality. We are being very careful in what we do in commercial lending. And fortunately, there are not too many competitors with the ability to grow or the appetite to grow in Puerto Rico so we can pretty much pick and choose what we want to do and get involved in in the commercial loan area.

So we continue to expect a favorable environment for us to grow in commercial lending during the course of the year and again hopefully with a somewhat firmer tone to be economy.

Okay, I guess I will ask one final question. You did mention you will still be on the lookout for ways to deploy the capital with any opportunities to purchase assets. It seems like not much is going to happen anytime in the near future in terms of further consolidation on the island. But do you think there will be opportunities for purchases of loan pools or anything along those lines?

We believe so and certainly we will look at and analyze the opportunities with a clearer view of the economy of Puerto Rico and how it's performing and also the credits. But really I think there are opportunities for us to evaluate some book of loans and commercial relationships from other institutions.

We will be very careful on how we evaluate them and make sure that they add to our strategic franchise value as well as they also add to our shareholders being accretive transaction to our shareholders.

So, yes, there is no more specifics that I can share, Joe, but I can tell you that still I believe that the Puerto Rico banking industry is still somewhat over banked and there needs to be further consolidation, although the pace and the speed might be slower vis-a-vis 2010, certainly it slower. There are opportunities for us to evaluate and we're going to be very systematic on how we evaluate those opportunities.

All right, thank you. That's all I had.

Derek Hewett, KBW.

Good morning, gentlemen. My first question is what is the unrealized gain in the securities portfolio? And then to offset that, what is in the negative impact from the swaps?

Okay. Ramon, do you have that?

Yes, the mark-to-market on the portfolio after December 31 of '11 was almost $107 million positive and derivatives had a mark-to-market of negative $47 million.

Okay, just to emphasize that those $107 million includes $20.5 million that is being held to maturity. So in terms of book value is basically 87 -- 86 points

-- $86 million --

$86 million in unrealized gains.

Okay, great. Then I guess given your thoughts on premium amortization for this upcoming year, I am assuming that also includes the potential impact for HARP 2.0.

Yes, we looked at it and we feel that it is already taken care of within the outlook that we are giving on premium amortization.

Okay, great. Could you talk a little bit about the $2.4 million write-off in the delinquency residential mortgages? What was driving that? And also just in terms of how that is placed on the P&L, was that as a negative fiat income item?

It's basically in the other. It's included in the table. Let's say the last item before the title of the noninterest income says that its $3.2 million. That's basically interest receivable. As you know [later] in the year we changed the policy regarding loans in our accrual and as part of that policy, we continue to do an analysis of the collectibility of the interest receivables base of data operations of all the properties that are collateralized in the delinquent residential mortgage loans.

But there was a part that even though it's considered collectible based on all the recent analysis and so on from the regulatory perspective, we've had conversations with our regulators that once the loan is technically in non-accrual, you basically have to reverse everything that is in interest receivable regardless if you consider it collectible or not.

So in that sense, we had the choice of doing -- reporting for GAAP purposes different to the reporting for regulatory purposes, but we decided to be consistent in both things. And we did the research with the regulators and the external accountants and our own research and that's the way that it was concluded that it should be accounted for.

Okay, great. My last question is for Jose Rafael. Could you talk a little bit about your 2012 goals for ROA and ROE and have they changed materially from the 1% ROA and 12% ROE that you had discussed I think in the last conference call?

Yes, I think given what we have said on the margin side and given the growth in fee income that we are having while we keep expenses under control, we have -- we still have the goal of reaching the 1% ROA. I think it's going to be dependent on nonoperating stuff. I don't expect to have any going forward since we don't have any other non-agency type of potential OTTI or any other let's say nonoperating potential charge.

So having said that, I feel that we are -- it's going to be tough but we are going to try to get the 1% ROA and the 12% ROE for the year.

And that's for the entire year, not for the --?

Correct. That's for the entire year, when you look at it from a whole-year perspective.

All right, great. Thank you very much.

Derek, the reason why I say that is because the lower cost of borrowings is not going to be affecting for the whole year. It is going to be incrementally coming in as the repos and the advances mature. So that's why I say at the end of the year when you look back at the year you are going to see a 1% ROA and a 12% ROE. So we are sticking to the numbers still.

Okay, great. Thank you very much.

(Operator Instructions). Michael Sarcone, Sandler O'Neill.

Just one follow-up for me. The operating expenses held in pretty well in 4Q. Can you talk about what you expect or what you're thinking about operating expenses for 2012?

Yes, we do manage expenses pretty tight and we expect the expenses to be around $123 million for the year. That's a little higher than the run rate that we are having now and that's due to us continuing to invest in our commercial banking business and making sure that we have in place the entire -- the full structure and attract the talent that we need to be the best in the business.

So our target is around $123 million for the year. I think we can do better than that and the run rate that we are going out right now is certainly lower than that but we need to still go out and recruit some more people and grow the franchise. So that's kind of the target there, Michael.

Okay, and the comp expense dropped from 3Q. Do you expect that to come back up as you recruit more people?

Slowly. It's going to be incremental. It's not going to have a full-year effect, but yes, it's going to show some increases from the $11 million that we have in the December quarter, it's going to slowly show some increase there.

Okay, thank you.

Brett Scheiner, FBR.

Just a couple follow-ups. Looking at the cash balance and assuming the balance sheet will have some run off and some originations in the commercial side, but will be relatively the same size, what cash balance are you comfortable with? Are you comfortable with the cash balance you are running now? You talked about those short-term liquidity in the wholesale fund?

Certainly we recognize that we have higher than normal levels of cash. We feel more comfortable with around $400 million to $450 million in cash and we will be deploying that cash either on the loan side if we have a higher production level or deploying on a higher-yielding shorter-term type of short duration type of securities vis-a-vis the 0% cash.

And that's in the next few quarters or over the year?

I would say we are trying to achieve that throughout the year but it could be earlier. It's just we feel that interest rates are, as you know, very low and it's very hard to commit capital to long-term at such a low rate.

Okay, great. And then obviously this will be in the K, but if you have it available, do you have the total accretable yield balance?

I don't have it exactly, but it's around $170 million or so, if I'm not mistaken, so that's the accretable yield that we have.

After the re-yield in the quarter?

Correct. Correct.

Thanks so much.

Joe Gladue, B. Riley.

Just one quick follow-up on asset quality. What did 30 to 89 day delinquencies do during the quarter? Do you know what the balance ended up at year end?

Well, I don't have the exact numbers right now but I know that the delinquency at the 30-day level has been lower because we have in addition to growing the business development officers in commercial, we have also solidified our credit and inspirational group and our workout group and that group has been working very hard and they have been able to maintain the delinquency at the early stages lower than what it had been at the beginning part of the year.

All right, thank you.

At this time we have no further questions. I will now turn the call back over to Mr. Fernandez for closing remarks.

Well, thank you very much to all for joining us in the call. I look forward to talking to you again in the near future when we report our first-quarter results for 2012. Thank you all. Have a great day.

Thank you. This concludes today's conference call. You may now disconnect.