OFG Bancorp's (OFG) CEO José Rafael Fernández on Q3 2016 Results - Earnings Call Transcript

| About: OFG Bancorp (OFG)

OFG Bancorp (NYSE:OFG)

Q3 2016 Earnings Conference Call

October 21, 2016 10:00 a.m. ET

Executives

José Rafael Fernández - President, CEO, and Vice Chairman

Ganesh Kumar - EVP and CFO

Analysts

Brian Klock - Keefe Bruyette & Woods

Brett Rabatin - Piper Jaffray

Joe Gladue - Merion Capital Group

Alex Twerdahl - Sandler O'Neill

Nick Adams - Wellington Management

Operator

Good morning. My name is Paula, and I will be your conference operator today. Thank you for joining us for this conference call for OFG Bancorp. Our speakers are José Rafael Fernández, President, Chief Executive Officer and Vice Chairman; and Ganesh Kumar, Executive Vice President and Chief Financial Officer.

There is a presentation that accompanies today's remarks. It can be found in the Investor Relations Web site on the homepage in the What's New Box or on the webcast, presentations, and other files page. Please note this call may feature forward-looking statements about management's goals, plans and expectations, which are subject to various risks and uncertainties outlined in the risks factor section of OFG'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.

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

José Rafael Fernández

Thank you for joining us this morning, and please turn to slide three. We had another quarter of strong steady performance, earnings per share of $0.26 was slightly better than the prior two quarters. Our Oriental franchise continue to do well. New loan origination totaled $227 million in the third quarter, in line with our target of about a billion dollars a year. We saw a nice expansion of net interest margin, excluding recovery, and retail and commercial deposits grew more than 2% due in part to continued growth of net new customer accounts at an annualized rate of 4%.

Most credit quality metrics remained stable, but there was a major decline in net charges, excluding PREPA. There was also a substantial drop in OREO and REPO balances. This reflects our effective servicing and workout efforts. As a result, return on average assets and return on average tangible common equity hit the highest levels they have been in the last five quarters. As a further consequence, capital continue to build with tangible book value per share now at $15.18 and TCE ratio at 10.25%.

Please turn to slide four. Oriental is now a proven innovator and challenger brand in Puerto Rico. Our goal is to be consistently the best performing bank on the island. To-date, we have been very successful differentiating our brand in a commoditized market, focusing on customer service, targeted marketing, and innovative retail and commercial mobile banking technology. This has been the real force behind our ability to grow our customer base, expand deposits, and generate steady loan volume as always with prudent credit underwriting and pricing discipline.

At the same time, we have proactively managed credit quality and balance sheet risks. As you'll see later in the presentation, we now have less than one-fourth of the Puerto Rico government-related exposure we had three years ago when we acquired the operations of BBVA in Puerto Rico.

We have also been optimizing operating efficiencies, while continuing to invest in the retail channel and customer facing technology. As a result, our game plan going forward is to keep the strategic momentum going. We will continue to grow our originated loan portfolios and enhance operating efficiencies when strategically advantageous. Assuming the economy continues to move along at its present pace, we anticipate similar results for OFG for the next few quarters.

Please turn to slide five. This is our dashboard of key business trends. I have already mentioned a number of them, but let me point out a few others. Originated loan balances showed a slight sequential dip due to the PREPA transaction. Otherwise, they would have been level. Originated loan yields are up primarily due to continued growth in higher-yielding retail categories. We grew retail and commercial deposits while holding costs steady at 53 basis points. As a result of our strong liquidity, we were able to pay down significant amount of borrowings contributing to net interest margin expansion. Fee revenues remained level and the operating efficiency ratio continue to improve for the fifth consecutive quarter.

Before handing over the call to Ganesh, I would like to take this opportunity to discuss the sale of our participation in the PREPA loan. As you know, we acquired it in our purchase of BBVA Puerto Rico operations in December of 2012. While we were hopeful PREPA's agreement with creditors would restructure the credit into a viable and profitable term loan, our thinking evolved over time. Continued uncertainties regarding the economy of Puerto Rico forced us to take a closer look into execution risks as well as how the credit will fair over the next six years. Ultimately, we decided the better option was to take advantage of an opportunity to exit deposition, eliminate the destruction, and immediately improve our overall credit quality and capital positions.

In the final analysis, we are pleased with the decision as clearly reflected in the improved statistics in today's presentation. With PREPA behind us, we look forward to continuing to pursue our strategic goal of becoming the best bank in Puerto Rico with no additional distractions [ph].

Now, here's Ganesh to review the quarter in more detail, after which I will make some closing remarks.

Ganesh Kumar

Thank you, José. I'll start from slide six, covering the loan generation volumes for the quarter. We closed $227 million in new loans in addition to renewals. While lower than the last quarter, it is within the range we have seen over the past few periods. Mortgage production was lower. The overall market is down 18% year-to-date and our loan originations are in line with this trend as well. Commercial originations were within the range; nothing unusual to mention here.

Consumer lending was robust. We continue to refine our direct marketing techniques and the origination to disbursement processes. Auto lending was a little off considering car buying activity is highly sensitive to events like the September blackout, we did not have a meaningful impact.

Moving on to non-interest revenues, banking fees were up a little, caused by usual fluctuations in the transaction volumes. Wealth management fees were down. In second quarter, we recognized certain annual broker dealer and insurance fees. Excluding this, third quarter results were similar. Mortgage banking revenues were up strongly reflecting better margins on secondary market sales and from higher MSR evaluations.

We continue to be an originate-to-sell operation, focusing on high-cycle confirming loans. This quarter we successfully completed our efforts to bring mortgage servicing in-house. Previously we had used another bank locally to service these loans.

Please turn to slide seven. Trends in this quarter's income statement are somewhat similar to last quarter's. Interest income from loans increased approximately $3 million. It included a $2.2 million cost recovery on an acquired former Eurobank loan. Originated loan balances and yields grew and the acquired portfolio run outs were as expected. Excluding the cost recovery loan income increased slightly over the prior period.

Securities income fell slightly due to variations in premium amortization in our MBS portfolio. Interest expense fell close to $1 million this reflected pay downs and maturity borrowings such as Federal Home Loan Bank advances and a subordinated capital notes.

Total provision for loan losses was up $9 million. Increase n provisions for non acquired loans due to $2.9 million towards a sale of PREPA loan and another $2.9 million on a commercial loan. In the acquired loan category we added $4.4 million for the Puerto Rico Housing Finance Authority loans. This loan under purchase accounting has non-recurring amount of $3.5 million or 31% of its ledger balance.

These increases were partially offset by lower provisions on all other loans as net charge offs for the quarter reduced overall. Total non-interest expenses increased approximately $1 million due to a mix of items. G&A alone included $900,000 in expenses associated with the efforts to bring mortgage servicing in-house.

On the plus side, we received an unexpected $5 million recovery from a claim against Bear Stearns this was related to write-offs on a private label CMO we took back in 2009. In addition, taxes benefited from a $300,000 reversal of a contingent tax position. Also effective income tax rate reduced to 26%.

Please turn to slide eight. As I just explained, we had a few quarter specific items both positive and negative. The net effect is not significant clearly demonstrating that our core performance is in line with the prior period results. Rather than go through it by line-by-line, I would be happy to answer any questions during the Q&A.

Please turn to slide nine. There are few things that I would like to point out. As a clarification here we show loan balances held-for-investment and net of allowances. Therefore the second quarter balances is include PREPA while the current quarter does not. If you adjust for this originated loan balances have increased.

The other point is that our core NIM at 4.70% expanded slightly by six basis points. While the loan yields without recoveries is similar to the prior quarters, the improvement primarily comes from the lower interest expenses.

Please turn to slide 10. Here we show the decisive steps we have taken to reduce our direct exposure to Puerto Rico government credits over the last few quarters. From the prior quarter balances fell 50% to $206 million as a result of the PREPA sale.

Moving on to slide 11, you can see our credit quality remained stable. If you exclude PREPA, we see again a meaningful reduction in net charge-offs in sequential quarters. At 1.15% in the third quarter, it is down six basis points due to declines in auto and commercial loan charge offs.

Non-performing loan rate is also down, declining 541 basis points reflecting the PREPA sale. Excluding PREPA, it remained leveled versus the last quarter. Both the early and total delinquency rates are below year ago levels. This is a result of our proactive loan servicing capabilities we have developed that commensurate with the realities of our operating environment.

Please turn to slide 12 to see an update on the loan delinquencies that are due 90 days or more. Please note that these are ledger balances excluding allowances, purchase accounting discounts, and any FDIC loss share obligation.

At $276 million, exiting PREPA enabled us to reduce such delinquencies by 40% from the prior quarter. I want to highlight that $156 million or 57% of these loans are in our acquired book with purchase accounting discounts and some FDIC loss share obligations. The other $120 million is in our originated loan portfolio. To add further color to this, we have a reserve coverage ratio of 11.5% for these loans.

By shortening asset disposal timeframes, we have reduced OREO/REPO balances significantly from last year along with the associated losses. Putting it all together, you can see that we are in vastly improved position in terms of our asset quality.

Please turn to slide 13. Our capital ratio continue to substantially exceed the requirements of a well-capitalized institution. From these ratios, you can see our capital position has increased dramatically since the end of 2012. I would ask you to consider this in the context of negative economic trend in the same period.

Please turn to slide 14. We have ended the quarter with a TCE of $666 million or 15.18 per share, and the TCE ratio of 10.25%. All the three metrics are up from the preceding quarter. This passage of trend should continue as we show continuous quarterly results.

On slide 15, we show some quantitative trends over the last five quarters. The main point here is the stability in our core earnings which we stated as our main goal at the beginning of the year.

With this remarks, I conclude my portion and turn the call back to José.

José Rafael Fernández

Thank you, Ganesh. Please turn to Slide 16. With regards to the macro situation in Puerto Rico, we are pleased to see that the PROMESA board has started its activities. We look forward to seeing them gaining more momentum in exercising their legal mandate of instilling fiscal discipline while providing a path towards a consensual resolution among all stakeholders.

As to the state of Puerto Rico's economy, it remains under pressure because of significant levels of political and fiscal uncertainty. The reality is that a clear path towards sustainable economic growth is imperative and cannot be further delayed. For that to occur, we need strong leadership and we're confident that the fiscal board will provide it.

Having said that, we are convinced that OFG will continue to demonstrate solid and consistent financial results based on our experienced and proven management team, strong capital position, and an accelerated momentum in building a differentiated banking franchise.

With this, we end our formal presentation. Operator, please open up the call to questions.

Question-and-Answer Session

Operator

The floor is now open for your questions [Operator Instructions]. Your first question comes from Brian Klock of Keefe Bruyette & Woods.

Brian Klock

Hey, good morning guys.

José Rafael Fernández

Good morning, Brian. How are you?

Brian Klock

Good. Thank you. Good, thank you. So you know, it's interesting, José Rafael, when you say -- again, we read the headlines and all the negative things going on, but there has obviously been a lot of positive things in the past quarter that you highlighted. When I think about your capital ratios, you did de-risk the balance sheet this quarter, you have got a nice 13% plus ET1 ratio and you are above 10 in the TCE ratio. So, maybe if you talk about what you think about buyback and what would get you more comfortable, not thinking about buying back your stock with it below tangible bucks?

José Rafael Fernández

Yes. You know, Brian, we don't fail to recognize the environment we operate in, and that's something that we are very cognizant of. We've been living in it for -- and operating it for the last 10 or 11 years. So when you look at us from a management perspective, we have consistently and prudently deployed capital either for acquisitions, strategic moves, like we have done, and we have also returned capital to shareholders when we feel that the level of capital that we have and the environment we operate in is one where -- it allows us to return that capital to shareholders. And that's kind of the way we have operated in for the last 12 years that I have been CEO and we have run the bank and H&I [ph] here in Puerto Rico.

That hasn't changed. We still see some uncertainties in Puerto Rico's economy. We also are a regulated institution like any other bank in the United States, and we continue to have a very fluid dialog with our shareholders, with our Board, with our regulators, and when we all feel that this is the right moment to do some capital deployment we will certainly execute in it, but at this point we have not reached that point.

Brian Klock

Okay. And just a quick follow-up on the capital deployment side, I know you have talked about some of the origination data and trends that you have seen. You know, with everything kind of like I said with PROMESA in place and maybe there are some -- maybe you can talk about what you are seeing down on the ground with the commercial customer? You did see some consumer growth. So maybe just talk about what you're seeing now in real-time down on the ground?

José Rafael Fernández

So, on what we are seeing on the commercial side, Brian, is a business community that is hoping for some stability and some level of certainty in terms of the prospects, the economic prospects. I think they are encouraged as I am, and we are with the recent enactment of PROMESA, and the Board been put in place and a lot of that stuff, but the business community also recognizes that there are few more innings to go, and those innings are going to be challenging. It's going to take a quite a bit of effort to make sure that Puerto Rico gets back on track from a fiscal perspective and from a budget -- balance budget perspective. So, I think everyone here in Puerto Rico that runs a business is tiptoeing into slightly more optimistic, little bit more certainty, but not necessarily a completely -- liberated in terms of what the prospects are.

Let me also add, we are in the middle of an election here in Puerto Rico, and gubernatorial, legislative, and municipal elections, it should take place in three weeks or so like the one in the States for President. And that adds another level of uncertainty, Brian. It really does. We have politicians in Puerto Rico still going out and being a populist and making promises that are clearly unattainable. So, that also for prudent business managers creates another layer of uncertainty. We are hopeful that once the elections are over and once the Board gets more traction on the issues at hand in Puerto Rico that we will have more clarity, and we are hopeful that next year we will see a clear path towards economic growth.

Brian Klock

I appreciate that. And so, it just sounds like we have got some uncertainties and maybe there are some positives here past the election and get the fiscal situation down, further down the road. And just there are some uncertainties right now, but maybe that could just be pent-up demand and we will see how that takes out.

José Rafael Fernández

I think that is accurate.

Brian Klock

All right. Thanks for your time, guys.

José Rafael Fernández

Yes, you are welcome.

Operator

Your next question comes from Brett Rabatin of Piper Jaffray.

Brett Rabatin

Hey, guys. Good morning.

José Rafael Fernández

Hi, Brett.

Brett Rabatin

I wanted to -- first to say congrats on getting the PREPA situation taking care of. I was curious on a little bit of slippage maybe in the early stage delinquencies, is there anything to read into that, or can you give us any color on -- I know it's tough when you have one-off items happen, but is there any out for charge-offs maybe continuing to abate over the next few quarters despite the environment?

Ganesh Kumar

No. Brett, this is Ganesh here. Good morning. Early stage delinquency, as you speak, yes, it is up little bit this quarter, but one quarter doesn't make a trend. So we don't see anything concerning at this point in time. Obviously we do have data unlike what we have shown for what has happened subsequent to the quarter. So, we don't see any foreseeable trend over here yet, and keep in mind, we also had a September blackout and you know, even though it was only for couple of days for us, for us personally over here, the whole island sort of suffered through that for around week. And there were some disruptions in our business activities concerning collections and other such activity. So, let's watch and see next quarter and hopefully we will be able to give you a better color on that one.

José Rafael Fernández

Also Brett, as Ganesh mentioning his remarks, we had a mortgage servicing conversion during the quarter, and as you can imagine, it always has a little bit of a disruption in terms of what the conversion. It was seamless, it was a great job that our team did, and we are pretty -- very happy and proud of what we accomplished, but still it has a little bit of a noise. We are seeing already into the fourth quarter and we are confident that this is not a trend, it's just a…

Ganesh Kumar

One thing that we can catch up.

José Rafael Fernández

Yes.

Brett Rabatin

Okay. And then, can you remind us on FHLB and kind of other borrowings, what you might be able to have roll-off here in the next two quarters if the deposit trends continue to be favorable, and does the margin outlook look a little better kind of net-net with the deposit flows you are having?

Ganesh Kumar

We continue to be opportunistic, Brett, as you know, the maturities come, and we assess the liquidity position, and remember, we don't do FHLB primarily for our funding purposes. It's purely for asset liability management purposes. So at this point in time we need to kind of look into the cash position and all of those kind of things. But to give you an idea of what comes tangibly for -- and gives us an opportunity for reducing the interest expenses, we do have a REPO borrowing that's maturing in March, and I think that is a significant item at this point in time because it does carry 4.2% cost, and we don't plan to start off you know, or look at it from that time perspective, maybe we might get shorter term funding, which will be much cheaper than that.

Brett Rabatin

Okay. And then just last question, and sort of [ph] brought it back on the capital levels, is there a roundabout way of deploying capital, you know, perhaps using liquidity to increase the size of the balance sheet and maybe buy more securities, or is there other ways that you might think about using some of this capital besides strictly buying back stock?

José Rafael Fernández

Yes. Brett, we are looking at everything from an organic perspective. We are looking at different opportunities. From a investment portfolio, we are not keen on that. We feel that it adds too much on duration risk and not -- really not much of a spread there for the risk that we are taking. So we are looking organically how come we deploy some of the capital that we have in high ROA type of activities, and we are in the main part of our planning for 2017; so, more to come when we speak next time in 2017.

Brett Rabatin

Okay, fair enough. Thanks for the color.

José Rafael Fernández

Thank you.

Operator

[Operator Instructions] Your next question comes from Joe Gladue of Merion Capital Group.

Joe Gladue

Good morning. Congratulations on the third quarter.

José Rafael Fernández

Hi, Joe. I can barely hear you, can you speak up?

Joe Gladue

Yes, sure. I guess my question was -- regards to the average loan yields, they have been enlarging in recent quarters, and just [technical difficulty] mix -- yes, what's driving that, and I guess can we expect any of that to continue going?

José Rafael Fernández

So, from a loan kind of distribution, we are having good success on our consumer lending part, and got lending business on the auto side as well as on the installment loan side, which has higher yield. So there is a little bit of a shift there in terms of how the production is coming in. So that's one. And I think that's something that you should see into the future, where we are trying to cater to the retail market in Puerto Rico at the right price for the risk that we are taking, and that's what you were seeing this year so far. I don't know if you want to add anything additionally, Ganesh, regarding the…

Ganesh Kumar

No, you have covered it. I think José is right in saying if you look at the acquired -- oh, sorry, the originated book, he mentioned that we are focusing and we have been successful on the retail side, and the commercial side it's been little difficult because of the environment and the uncertainties still. So at this point in time, the mix is favorably shifting towards a higher-yielding retail portfolio, and you know, quite frankly, because there is no opportunities to originate commercial loans at a right pricing that we expect and credit quality we expect. So that's why you are seeing yield higher than normal at this point in time. I cannot say it would continue, but right now that's what we're looking into for next two quarters.

Joe Gladue

And just expand on that a little bit, if you -- just in terms of the competitive environment in the consumer side, is anybody sort of backing out of that market a little bit, or just as competitive as always?

Ganesh Kumar

No, on the contrary, I think after I said this is higher-yielding and this is where we're making money, I'm sure everybody wants to get into that, but it is the reality of the market that I think primarily Puerto Rico what it offers is a retail market. And I think the commercial businesses are as José Rafael said, they -- the market -- we hope it will come back once the cloud lifts over the Puerto Rico economic uncertainties that we have.

Joe Gladue

All right, thank you.

Operator

[Operator Instructions] Your next question comes from Alex Twerdahl of Sandler O'Neill.

Alex Twerdahl

Hey, good morning guys.

José Rafael Fernández

Hi. Good morning.

Alex Twerdahl

Several questions; first of, Ganesh, why did the tax rate declined in the third quarter? The effective tax rate…

Ganesh Kumar

We had a high proportion of the non-exempt income, Alex, and that's quite simply that. So, you know, keep in mind the tax rates are an estimate for the whole year. So every quarter we take a look at the component [ph] of our income, taxable income versus the tax exempt income and we tweak it, and that's what we are expecting at this point in time. So it will be closer to this, if not exactly this. So we had a higher tax exempt income, yes.

Alex Twerdahl

Okay. So, 26% is what we should be borrowing for 2017?

Ganesh Kumar

At about; this quarter it is 26%, and next quarter probably it will be close to that. It depends on what happens next quarter.

Alex Twerdahl

Okay, good. And then the 900 million of G&A expenses related to the mortgage servicing, that's an ongoing G&A expense, correct? That wasn't a one-time thing?

Ganesh Kumar

Correct.

Alex Twerdahl

Okay. And then, did you say the sale of PREPA, that closed early in the fourth quarter, so even though it closed in the fourth quarter, all the capital numbers and everything, tangible book value, all those things are reflective of PREPA, because the position and et cetera was taken in the third quarter. So, there was no -- other than that held-for-sale loan moving off balance sheet in the fourth quarter, there should be really no other impact, is that right?

Ganesh Kumar

It's correct.

José Rafael Fernández

Correct.

Alex Twerdahl

Okay. And then, did you say the 124 million of cash that you are getting in exchange for the PREPA note, have you decided what the use of proceeds for that will be? Is it Group A borrowings or what?

Ganesh Kumar

We don't know. We will look at it from -- again, as I said, this is same answer as when I replied to Brett, regarding the opportunity to reducing borrowings. There is going to be an opportunity in couple of quarters to shed some REPOs that is coming to maturity. So we are -- as we said during the call, first announcement of the PREPA at this point in time, the proceeds we are purely looking for optimizing or making the lability side of the balance sheet better than anything else.

Alex Twerdahl

Okay. And then can you just clarify when you said, I think on page four, the anticipated result is similar to 2016 quarterly performances, what that means? I mean are we looking to extrapolate for the third quarter results? And if so, are you excluding the additional provision from PREPA and the 5 million Bear Stearns claim and the tax rate? Or, are you just saying $0.26 is the right number for the next couple of quarters?

José Rafael Fernández

The latter, $0.26 is the right sense. Whatever happens between the line items, that's what we are saying at this point.

Alex Twerdahl

That's roughly $0.26. And is that good for all of 2017 the way you are looking at it right now? Or is that just…

Ganesh Kumar

I would say the next quarter and the following quarter. And then, probably we can add a little bit more color as we go.

José Rafael Fernández

Remember, Alex, that really looking forward, it's hard to do given the uncertainties in the economy. So, we're really trying to help you guys look at our situation but also from a perspective of a reality in Puerto Rico. So, that's what we are doing.

Ganesh Kumar

I think to add little bit more José Rafael, we would feel lot more comfortable if we know what the Puerto Rico budget is going to be and where the impact is going to be and those kind of things. So, at this point in time, we are operating -- we don't take it that we just know what's going to happen in front -- two quarters in front of us. We always look at six quarter horizon. But the operating assumptions that we have for projecting for the next few quarters, we believe that's going to change.

José Rafael Fernández

And really what we are seeing on the ground here from our operations is that we are gaining market share. We are growing our client base. Deposit flows are coming in nicely. So, all the operating levers are moving in the right direction for us. It's us ourselves as managers that are looking into the short future and there is too much uncertainty. But we are very happy with, with the operating results. We're very happy with the trends that we have in terms of the businesses. And we are very happy on how strategically we have been able in the last three years after the acquisition with BBVA, we have be able to position the bank as a challenging -- a challenger brand and challenging bank with innovation and changes in how service is provided for bank clients.

So, we have great momentum and we look forward to leap the bank forward with additional transformation in that area. I mean we just wish that the economy will come to stronger footing and be able to add another level of speed to what we are doing.

Alex Twerdahl

Yes, I hear you all that. Is there anything on the P&L going forward in the next couple of quarters that we as analysts may not be fully thinking about? For example, the mortgage servicing thing that you moved on this quarter. I don't think it's something that I certainly do not expect that or had in my model. I don't know if anyone else did. But is there anything else that could be like that? Anything strategic in that nature that would impact the P&L or the balance in the next several quarters, or through 2017?

José Rafael Fernández

No. We are basically blocking and tackling as we have done this year. We look at our performance for this, Alex, it's pretty consistent and recurring. And that's what we expect to do in the next several quarters.

Alex Twerdahl

Great. Thank you for taking my question.

José Rafael Fernández

Great. Thank you.

Operator

Your next question comes from Nick Adams of Wellington Management.

Nick Adams

Hi, José and Ganesh.

José Rafael Fernández

How are you?

Ganesh Kumar

How are you, Nick?

José Rafael Fernández

Good morning.

Ganesh Kumar

Good morning.

Nick Adams

Excellent, thank you. You've significantly de-risked the balance sheet with a PREPA sale. Assets are shrinking here. And all your capital ratios are significantly higher than your peers. For what's it worth, it just seems like it's a shame not to be buying back stock here, notwithstanding the uncertainties. If there weren't uncertainties, then your stock wouldn't be at 65% book value.

José Rafael Fernández

Absolutely.

Nick Adams

You can't really have it both ways, either have to believe that your balance sheet is far better than your peers, which is by the numbers it is that you just create a significant amount of liquidity of $120 million that also now yield attached to it. It just seems like it's a really opportunistic time now to take that excess liquidity and that excess capital and put it back into the shares of the stock here because again you're not going to have this opportunity if Puerto Rico stabilizes. And even if doesn't, again your capital ratios and your risk profile is so much lower than your peers, that the buyback is just really I think screaming out for shareholders. And the fact that you don't even have one in place and have that opportunity, makes everybody scratch their heads and wonder well what is it that we're missing. There must be something horrific that management sees that they are not telling us about because the very least at least they did have that buyback as an alternative of use of capital and liquidity.

José Rafael Fernández

Nick, we agree with 100% and that's how we view it too. Unfortunately, we are in the island as our peers are too a well above capital levels. We have higher capital levels from a historical perspective that have never been seen. Having said that too, we also have additional constituent meaning the regulators and keep a dialog with them, but their perspective is one of a even more concern than ours. And we just want to make sure that that dialog continues with them as well as continues with you guys. And that we reach a moment where everybody feels comfortable that this is the right thing to do, but we hear you. We sympathize with you. And, we just need to continue to move forward with on how to achieve that optimal level of capital management.

Nick Adams

Right. Understood. Thank you for the great job.

José Rafael Fernández

Yes, thank you. Thank you.

Operator

Your next question comes from Brett Rabatin of Piper Jaffray.

Brett Rabatin

Hi, just a follow-up on thinking about the discount accretion going forward. Could you guys maybe give us any color on what you might expect the run rate to be at least in the fourth quarter on that, obviously given the higher number in 3Q?

Ganesh Kumar

I think one of the -- I assuming you are excluding the cost recoveries and looking at it. We try to call out the cost recoveries and there are major cost recoveries, but there are small loans. And this quarter we did have a pick up accretable earnings. And the rate at which the cash flows are accreting or we are receiving on the acquired loan, we think it's going to be at the same flat level for the next quarter as [indiscernible] yield level wise.

Brett Rabatin

Yield level wise, okay. Thank you.

Operator

[Operator Instructions] At this time, there are no further questions. I'll now turn the call back over to Mr. Fernández for any closing remarks.

José Rafael Fernández

Thank you, Operator. Thank you to all our stakeholders for listening in today. Looking ahead, we'll be in November 7th. The week of November 7th, we will be visiting investors in Pennsylvania with Merion Capital. December 12th, we will be hosting the Annual KBW Puerto Rico Bank tour in our corporate headquarters. And we preliminarily schedule our fourth quarter conference call for January 31st. So until then, I wish you a great weekend, and thank you again for listening to us today.

Operator

Thank you for your participation in today's conference. This does conclude today's call. You may now disconnect.

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