OFG Bancorp (OFG) 2010 Q3 法說會逐字稿

Good morning.

My name is Wes 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 R.

Fernandez, President, Chief Executive Officer and Vice Chairman; Julio R.

Micheo, Senior Executive Vice President, Chief Investment Strategist; and Jose Gonzalez, Senior Executive Vice President, Banking and Corporate Development.

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 factor 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 afterward.

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

After the speakers' remarks there will be a question and answer session.

(Operator Instructions).

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

Fernandez.

Thank you for calling in today.

We have a presentation that accompanies our remarks.

It can be found on our Investor Relations site on the page titled Webcasts, Presentations & Other Files.

Along with our news release last night, we also filed our 10-Q.

We hope to do this on a regular basis.

While mostly this was another eventful quarter for us as we transform Oriental into a bank that generates an increasing amount of recurring income from customer based businesses versus investment securities.

In addition we have taken some long-awaited initial steps to reduce the size of our investment portfolio and to deleverage our balance sheet.

I'll review the quarter and then Julio and Jose Ramon will join me for the Q&A.

Unfortunately, Norberto Gonzalez, our CFO, could not be here today because of a family matter.

There were a number of important highlights during the quarter.

We are generating a greater proportion of interest income from loans.

That income is more than making up for the declining income from investments, which is due to our strategically reducing our investment securities portfolio and lower yields on new investments.

We're beginning to see stronger growth in the production of commercial loans and leases with commercial banking representing a larger share of our products.

This is a direct result of the expansion of our commercial team, which we doubled in size since the beginning of the year.

Building our commercial loan portfolio is key to our strategy for replacing Eurobank loans as they mature and for reducing our investment securities portfolio.

We have continued to grow our core retail deposits both in volume and as a percentage of interest bearing assets.

We're doing so not to rate but based on our marketing, reputation, capital position, brand and larger branch network.

All these factors have begun to positively affect our asset gathering capabilities.

We saw particularly strong growth in trust assets as well as solid increases in broker dealer assets during the quarter.

Revenues from trusts typically follow asset growth, so this bodes well for non-interest income going forward.

With regards to non-interest income, that too has continued to grow also in terms of volume and percentage of net income.

Key factors this quarter were full three months of the Eurobank point of sale business, general banking fees and a strong performance in mortgage banking.

Our mortgage business is benefiting from a number of factors including the new housing stimulus law and our expanded market share.

We've been aggressively integrating Eurobank and generating cost savings.

At the end of the quarter we closed nine Eurobank branches and consolidated two Oriental branches into the 11 Eurobank branches we kept.

Oriental now has a network of 30 well positioned branches focused on our target market in Metro San Juan and strategic locations elsewhere around the island.

Last week we moved most of Eurobank's customers over to our Oriental banking platform.

Closing the branches and moving Eurobank's platform to Oriental should reduce our non-interest expenses at least $1.5m in the fourth quarter.

We still have additional cost savings to implement.

The bottom line here is that we continue to be on track for a 30% to 35% Eurobank cost saving, starting in 2011.

The branch and systems conversion went very smoothly.

It involved 14,000 deposit accounts and 16,717 credit accounts, representing $750m in deposits and $1.5b in total assets.

Oriental's state of the art platform of products and services is now available to all of our new clients from Eurobank who did not previously have a relationship with us.

It enables our centralized credit team to better manage acquired relationships.

And it enables us to achieve better operating leverage from our existing platform.

All of this, plus the capital we raised earlier this year, has put us in a stronger position to deleverage and take down some borrowings as well as to take an additional step to reduce the size of our investment securities portfolio.

During the quarter we paid off a 4.39% $100m repo and the 88 basis points $595m remaining balance on our FDIC note.

Looking ahead, our strategy is straightforward.

Continue to increase revenue to commercial loan production on our banking and wealth management activities, reduce our cost of funds and complete the Eurobank cost savings integration program.

Now let's look at the income statement.

I'll be comparing the third quarter to the second quarter unless otherwise noted.

Interest income of $81m increased 1.7% sequentially.

Interest income from loans increased 17% and yield expanded to 7.2% from 6.99%.

This was mainly the result of three months versus two from the former Eurobank loans.

As a share of total interest income, loans represented a record 42% versus 23% in the year ago quarter.

This more than offset the 7% decline we received from the investment securities due to lower yields.

Interest expense of $43m increased marginally.

Net interest income increased more than 3% to $38m.

Net interest margin declined slightly.

Net interest margin should expand in the first quarter of next year.

Looking at banking and wealth management revenues, that was up 14% to $11.4m.

Banking service revenues increased 14%.

This reflected a full quarter of fees from the former Eurobank commercial and retail deposit accounts as well as commercial point of sale and cash management services.

Revenues from mortgage banking activities increased 46%.

This was due to higher production, better pricing of products sold into the secondary market, and increased origination and servicing fees.

Moving to non-interest expenses, these increased $4.9m to about $33m.

This increase was primarily due to $10.2m attributable to the former Eurobank operations for three months as compared to $5.4m for two months in the second quarter.

At this point we have reduced the annualized cost of Eurobank by 26%, or about $14.7m, from a starting point of $57m.

Our target going into the [technical difficulty] about a 30% to 35% savings to bring our total consolidated non-interest costs down to about $31m a quarter in 2011.

Non-operating items resulted in a net loss of about $44m.

These are all explained in the news release on the 10-Q, but let me run through them.

There were two items related to the Eurobank acquisition.

First, a non-cash dividend of $22.7m.

This related to the conversion of our preferred Series C shares, which raised a net of $189m in connection with the acquisition of Eurobank.

This dividend did not affect stockholders' equity or book value per common share, but did reduce per common share calculations.

We also had an accretion of $1.8m of the FDIC loss share indemnification assets related to the former Eurobank loan portfolio and there were three items related to investment securities portfolio.

There was a gain of $14m on the sale of securities as we took advantage of low interest rates during the quarter.

We had charges of $14.7m in other temporary experiment on the BALTA private CMO.

Our loss consumptions now consider the macroeconomic effect of the recent foreclosure moratorium in some states, and other economic uncertainties.

And third, we had a loss of $22.6m on derivative activities.

This reflected realized losses of $17.3m due to the termination of forward settled swaps.

These terminations enabled us to enter into new forward settled swap contracts for the same notional amount while effectively reducing the interest rate of the pay fixed side of such deals from an average rate of 2.45% to an average rate of 1.83%.

The balance reflected an unrealized valuation loss of $4.9m on the new swaps.

The bottom line is that these forward settled swaps will enable Oriental to fix at 1.83% the price of $1.25b in repurchase agreements that come up for renewal in December 2011 and May 2012 that currently have a blended cost of 4.4%.

Separately, we have an adjustment to the fair value of the acquired Eurobank loans.

This resulted in decreasing the value of the loans by around $49m and second quarter net interest margin by around $1.7m.

Increasing FDIC indemnification assets by about $43m and reducing our second quarter bargain purchase gained by the difference, or about $4m on a net after tax basis.

At the same time, it increased our total accretable yield on the covered loans to $201m from $198m.

Now let's turn to the balance sheet.

I'll be comparing September 30 to June 30 unless otherwise noted.

Total non-covered loans, net of $1.1b were approximately level with June 30.

This reflected increases in commercial and consumer loans offsetting maturing residential mortgage loans.

Covered loans of $723m declined $35m.

This reflected the regular maturity of loans in the Eurobank loan portfolio.

Total loan production on purchases increased 16% to $103m.

Production on commercial loans and leases combined increase 41% to $31m.

Year to date commercial loan and lease production is up 102% and represents 27% of total loan production on purchases versus a 16% share in the year ago period.

With regards to credit quality of non-covered loans, our portfolio continues to perform well, considering the economic environment in Puerto Rico.

Provision for loan on lease losses remain level with the second quarter.

Net credit losses increased about half of what they increased in the second quarter.

Year to date, they are running at a $5.8m, in line with our expectation of $8m to $9m for the full year.

As a result, the allowance for loan and lease losses now represents 2.54% of loans versus 1.72% a year ago.

Non-performing loans increased marginally.

We do not expect our non-performing loans to result in significantly higher losses as most are well collateralized with other adequate loan to value ratios.

The size of our investment securities portfolio increased $624m and total investments declined 59% of assets at September 30, 2010 compared to 71% a year ago.

As of September 2010, the effective duration of the total portfolio was 3.12 years and CPRs, or repayment speeds of the mortgage backed securities portfolio was 20.33.

Approximately 96% of Oriental's portfolio consists of fixed rate mortgage backed securities or notes guaranteed or issued by the US government.

We continue to be pleased with our deposit performance.

Core retail deposits increased $64m to $1.9b.

They have now grown nine quarters in a row, increasing to 29% of interest bearing liabilities compared to 24% a year ago.

Total borrowing declined $742m.

This reflects our pay down of the FDIC notes and the $100m repo.

Borrowings declined to 61% of interest bearing liabilities compared to 68% a year ago.

Looking at our capital position, total stockholders' equity was $717m, a decline of $22m from June 30, 2010.

This reflected a change in retained earnings and a reduction in accumulated other comprehensive income.

Book value per share declined less than 2% to $14.01 on a 40% increase in shares from the conversion of the preferreds.

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

At September 30, 2010, the leveraged capital ratio was 8.99%, Tier 1 risk based capital ratio was 24% and total risk based capital ratio was 25.02%.

In addition, tangible common equities total assets was 8.72%, up from 5.88% the previous quarter.

And tangible common equity to risk weighted assets was 21.86%, up from 15.62%.

The bottom line is that we are pleased to report that our employees continue to benefit from what we regard as a once in a lifetime opportunity.

We continue to transform Oriental into a top customer oriented banking and wealth management services company in Puerto Rico.

And again our goal is not to be the biggest, but to continue to be the best and most profitable.

To date, the results are highly encouraging.

Now we'll be happy to take questions.

(Operator Instructions).

And your first question comes from the line of Brett Scheiner from FBR Capital Markets.

Hey guys, how are you doing.

This is actually Thomas [Atrill] on behalf of Brett.

I have a couple of quick questions on the margin.

With the FDIC notes and the $100m repo being taken off the books this quarter, what kind of impact do you see the NIM heading into the fourth quarter?

We think the NIM certainly will improve.

One of the reasons why the net interest margin was reduced in this quarter is related to some of the transactions that we did in the investment portfolio.

We kept a significant amount of cash invested in discounts notes at very small, very low yield.

So we do expect into the fourth quarter to have a higher net interest margin.

I would venture to say we had 2.22% this quarter interest rate margin.

We'll be closer to 2.30% to 2.35% into the fourth quarter.

Okay, that's very helpful.

And any other near-term dynamics, whether that's repaying borrowings etc that maybe offer some opportunity in NIM even past 4Q?

Not until December of 2011 where we have around $900m of repos maturing.

Okay, thanks very much.

That's all I have.

You're welcome.

Your next question comes from Bain Slack of KBW.

Good afternoon.

Hi, Bain.

I guess follow up on the previous question with regard to opportunities for lower cost of funds.

Within the cost of deposits it looked like we saw about a 5 basis point drop.

Looking at the interest rate environment on the island subsequently in the quarter, and where you see deposit rates going as a result of the consolidation, how much more room do you think you have on that deposit book?

I think -- I wish it would be easier to answer that question or at least in a more positive manner.

We still see higher interest rates offered on CDs and deposit accounts from some of the competing banks.

Not as much as we have seen in the past, but still larger institutions are trying to keep some of their existing customers in their network.

So it's a little more challenging than we have expected at this point in time after the consolidation.

Having said that, I think from my core perspective, Oriental has the opportunity to continue to reduce the cost of funds on the existing checking accounts that we have.

And we will see some of that benefit coming in to the first quarter of 2011.

And when we price it means also we'll see some of that benefit partially on the fourth quarter.

Okay, great.

And switching subjects here quickly to the OTTI charge of $14.7m, if I recall from my notes, I think the total charge we've taken on the BALTA book now is about $40m.

So that's about 37% of the total charges.

Is it safe to say that we're probably close to the end, if not at the end, of these significant OTTI charges?

It's hard to tell Bain.

Let me just give you some background of the most recent OTTI, which is this quarter.

The $14.7m OTTI was a result of our modeling being more -- adding more severity to our modeling due to the moratorium on foreclosures in the States, in several states.

If we would have not changed that modeling, the OTTI have been around $2.5m.

So that gives you an idea of the severity that we added into our modeling for the BALTA.

So that would, it seems to me, it would go along the lines of what you were saying.

However, these are -- the mortgages underneath or supporting this BALTA are really loans that are highly underperforming in terms of delinquency, very near 40%.

So I think we're there, but I can't give you a [date] on that one.

We might have additional OTTI and its order of magnitude in the coming quarters if delinquency ratios continue to deteriorate.

But we have seen in the last couple of months and Julio can add he if he wants, if he needs to, I think we've seen stabilization on the delinquencies on the BALTA.

And even some improvement on the 90 day delinquency.

But that's a side effect.

Yes, definitely what you saw is by adjusting the modeling, the assumption of the modeling you saw one big huge adjustment.

But prospectively, it would be fair to assume that if there be -- any OTTI would be more -- would be less significant than that.

If you take the BALTA at the 60 plus day delinquency, probably the 40%, the severity in -- the actual severity that we have seen in that particular security is now 50%.

So if you multiply both, it would seem that 20%, 25% should be the most and we have 37% in OTTI.

So it would seem, based on the experience and performance, credit performance we're seeing, that the OTTI is very adequately reserved.

Okay, great.

And how does that relate to the cash flow that you guys are seeing in that particular portfolio?

Could you -- to do with cash flow?

I'm sorry, could you repeat the question?

I'm sorry, I guess what I mean is with regard to the performance, in other words, have there been any missed payments you guys are receiving--?

We continue to receive the payments, but we're starting to see actual losses coming in the last -- the first time we had an actual loss coming in was this type of loan in September.

So we have actual losses coming for the first time in September.

Cash flows continue to come in on the performance end.

Got it.

If I can add, all of this subordination embedded in the instrument is completely depleted.

So there's actual losses coming in that go versus the LTPI, obviously.

Okay.

And this last question is switching to looking -- this transition to becoming more bank like and the hiring of further employees, it looked like we saw the commercial loan production increase to over $26m up from $20m last quarter.

How does the pipeline of new loan growth look going into the fourth quarter?

Hi, Bain.

It looks reasonably strong still.

We still have a weak economy, but we have less participants in the market, less competition.

Nevertheless we have to be careful what we select to get involved in.

Given those caveats, I think we have a reasonable pipeline and more aggressive objectives for next year for the commercial banking side of the business.

We do want to have a sustained effort through both our retail distribution network and our corporate banking network to maintain an interesting and strong pipeline for the next year.

So I hope this is the first quarter of a stronger loan origination on the commercial side that we will see going forward.

Bain, I would add also we're in the middle of continuing to recruit new people, new team members into the commercial and corporate businesses.

So what we're seeing right now is, as Jose Ramon mentions, higher pipeline and higher probability of both senior loans.

But also bringing in and welcoming new team members on the commercial and the corporate sector, and to our lenders and credit officers.

Okay, fantastic.

Thanks for the color.

All right.

Your next question comes from Avi Barak from Sandler O'Neill.

Good afternoon, guys.

Hi, Avi.

This is your last one, I hear, right?

This is my last one.

I have my cohort sitting with me.

Just had four quick unrelated questions for you.

First, as you noted in the press release there was considerable deleveraging during the quarter.

I'm just wondering is there a specific asset size you have in mind, or a specific capital ratio you have in mind that you're targeting, or is it just that's what made sense for this quarter?

Really the latter.

It made sense for the quarter.

The opportunities are presented.

We had some repos maturing.

The FDIC note that we, I think I mentioned earlier, is not only operationally very difficult to handle in terms of the Eurobank transaction and how the cash flows were being managed, so we wanted to get it out of the way.

We also could do it with our excess cash flow and our excess commercial securities that we had.

We had some progress here that we bought in order for us to get the note paid off.

So those were the opportunities that presented at that point in time and we executed on them.

At this time we feel that the level of assets that we have will remain somewhat steady from here on as we don't have any additional significant opportunities to delever until the end of next year.

Okay, that's helpful.

Switching gears to asset quality.

It seems like the inflow of non-performers is slowing to its lowest level in recent memory.

Can we read anything broadly into that, or macro wise into that, that maybe we are finally, after so many years, seeing some kind of stabilization in Puerto Rico, or is it still too early to tell?

I'll say a couple of things and then Jose Ramon also will add something here.

But from my perspective, I think what you saw last year and part of this year in terms of increasing non-performing loans on residential mortgage has to do with the vintage 2005/2006.

Those were more aggressive type of underwriting that were done not only in Puerto Rico as a whole, Oriental to some degree.

So it is not surprising for us to start seeing stabilization there because the 2007, 2008, 2009 and 2010, the -- at Oriental the parameter for -- the credit parameters utilized were significantly more conservative.

In addition to that, we -- as you know, we don't have any construction lending unit here.

So we don't have on our residential mortgage book, we don't have any new construction type of residential loans made.

So that also is a positive factor for us.

And we feel that from here on it's a matter of how the economy performs.

And I feel that we're in a tipping point in the economy where we could stabilize for a longer period of time, or really move into the negative side.

So we've got to be very cautious at this point in time.

I would only add on the macro level.

You covered our portfolio.

On the macro level I guess, in general, you're seen a slowing down of the rate of new non-performing loans I guess, at banks in general in Puerto Rico.

But I wouldn't call a bottom yet on the economy.

I think there's still significant risk to the economy.

And you still have to be careful.

And we may see stabilization at this level of non-performing loans in the system in general.

But we're not out of the woods, I would say, and 2011 I think we have to approach cautiously in terms of level of non-performing even as we have done through the worst of the vintages on the mortgage side and most of the construction lending.

I'm talking about the system in general, not just Oriental at this moment.

So I think in general we are cautious, not ready to call a bottom, but from our point of view in our own portfolio, I think it's a hopeful sign that we have seen less non-performings coming in.

Okay.

That's helpful also.

Again switching gears, something that seems to be more of an issue for the larger mega banks, but just wanted to cover my bases with OFG.

Do you have any exposure at this point?

What's your assumption for exposure to the potential reps and warranty issue, both with the GSEs and any mortgages you may have sold to the private sector?

I don't think we have any exposure at all.

This issue I think is mostly a non-issue for Puerto Rico loan originators because in general the -- are you talking about the issues that have led to the foreclosure?

No, I'm referring to problems with documentation, for example, that you sold mortgages to Fannie, Freddie, etc, and they're coming back to you and saying you didn't cross your Is, dot your Ts and you have to buy back these mortgages.

No, I -- I don't think, in the case of Oriental, there's any issue there.

And in general, given the notarial law in Puerto Rico for real estate transactions which is civil code in origin, not common law, it's quite more convoluted and formal.

It's probably much less likely that you would see that originating from Puerto Rico.

As Julio Roman say, I think from a Puerto Rico perspective, that's a non-issue.

Yes.

Yes.

Okay.

And then lastly, if I could follow up on Bain's earlier questions about pricing on the island.

You touched on deposits.

Just curious if there's actually been any improvement on the loan side as far as pricing goes?

That was part of the things that everyone was hopeful for after the consolidation earlier this year that maybe the erratic pricing on the loan side from some of the players who are no longer participating in the market that things would improve.

Is there any signs that that's improving yet, or still pretty tough?

Well, yes, in general, yes, with mixed results.

First of all, you know that for a long time in Puerto Rico there were banks willing to price loans to local borrowers off LIBOR, even though that would have been more suitable for a major corporate client with access to the capital markets.

Now particularly no clients in Puerto Rico from any solution are getting LIBOR based pricing.

Most everybody is in a prime plus sort of setting.

So the starting point to begin with is sounder and more controllable, if you will, by the banks in general.

The second issue is the effort to have floors, effective floors on pricing, so that even if you have prime plus 1 or 2, you have a floor that is reasonable given your need for a spread.

And I guess that's the biggest bone of contention when we compete nowadays trying to establish floors on formula pricing that do not go below, say 5.5%, 6%.

Some people sometimes price loans without a floor, or with very aggressive floors.

But in general, I think the fact that now we mostly see loans priced off of prime instead of LIBOR and generally with floors has led to a firmer pricing market for -- on the asset side, on the lending side here and less instances of irrational pricing, even though they crop up every so often, if somebody really wants to keep a client for any particular reason or wants to grab a stellar client from another institution.

So in general some improvement, yes.

Okay.

Thank you very much.

Welcome.

Your next question comes from the line of Chris Gamaitoni of Compass Point.

Thanks for taking my call.

Could you tell me how much of your operating expenses are attributed to the securities portfolio?

The operating expenses attributable to the securities portfolio, I don't have that with me right now, but we can provide that to you, Chris.

I really don't have that off the top of my head.

Right.

What is the operating efficiency ratio of the commercial bank?

You mean by itself?

Right.

So if I'm looking at just the commercial bank in its own segment as we transition to that strategy, what is your operating efficiency ratio today and where would you like that to go in the future?

We have (multiple speakers)

If you look at the 10-Q on page 51, you have the segment reporting there Chris and you'll be able to see the non-interest expenses for the bank and for the treasury and for the Wealth Management unit.

And right now, for the bank you have around $24.5m, $25m of non-interest expenses.

Page 51 Chris.

Right.

So on $20m -- let's say $31m of revenue, you have $24m of expenses?

Right.

$34m of interest income and around $9.3m of non-interest income on the banking side, but $24.6m of expenses.

Okay.

Thanks.

Moving on from that, what is the -- how much capital do you think you need to run the business when you move forward and sell the securities portfolios as your repo lines expire?

I think from -- there's several angles that you need to look at this from.

One is the minimum capital that would be required for us to run an organization, a banking organization like we have, from a regulatory perspective.

And we're trying to run this organization, this bank, or this financial services company from a 7 to 7.5 tangible common equity minimum level.

So that's where we are looking from.

We are also cognizant of the fact that we have a larger amount of capital at this time, and that is because we are first of all in a macroeconomic environment that needs us to be cautious.

And as I said, I won't mention, we're still not out of the woods there.

Number two, we feel that there's still opportunities for us to grow organically and inorganically.

And that would require the higher proportion of capital and interest and securities portfolio.

So we need to have that dry powder in capital for us to be -- to have the ability to execute on opportunities in the future.

Having said that, we also recognize that there is a consistent and constant evaluation of our capital levels at the management level and at the Board level for us to decide in terms of our future capital return to our investors from a cash division and from a repurchase of stock.

And that is something that we constantly evaluate and we will continue to look at that in 2011.

Okay.

And then just on the BALTA deal, what is the current amortized UPV that you own on that deal?

It's about -- it is right now -- it's around $126m, that's the par value, the unpaid principal balance, if you want to call it.

And the amortized cost of $85.7m, and a fair value of $63.2m.

Okay.

That's perfect.

I think that's everything I have.

Thank you for taking my call.

Right, thank you.

Your next question comes from Joe Gladue from B.

Riley.

Good afternoon.

Hi, Joe.

I jumped on late, so I apologize if you've covered this.

But just wondering on the expenses relating to the Eurobank integration.

I guess in the press release there it was saying it was -- I guess it was $10.2m in the quarter that you incurred.

Just wondering how much of that, if any, will continue on into the fourth quarter?

The way we're looking at this, Joe, is Eurobank operation had a yearly, or an annual cost basis of around $57m.

That $57m we projected a 30% to 35% saving starting in January 2011.

So right now, as of September when we finish the quarter, we had around $10m of Eurobank expenses on the quarter.

So that's a run rate of around $40m.

A little bit higher than $40m.

So into the fourth quarter, we feel that we are going to be able to reduce another $1.5m from that on a quarterly basis to start moving towards the first quarter of 2011 where we plan on reaching our goal on the saving side due to reduction of around $20m.

Okay.

All right.

And just -- do you have what the trends were in early stage delinquencies, 30 to 89 days past due loans?

I'm sorry, Joe, the first part of your question again?

The 30 to 89 day past due loans, what were the trends in that, or where did that end up at the end of the quarter?

I'll get them to you.

I don't have them with me.

We'll send you an email.

Okay, thank you.

I don't--.

All right, that's all I had.

Okay.

(Operator Instructions).

Our next question comes from Ryan Zacariah of Jacobs Asset Management.

Hey guys, thanks for taking my question.

So just as it relates to the accretable yield and how that filters in, in the second quarter it was basically at a $20m per quarter run rate and then this quarter it seems like it's been ratcheted down to a $16.7m run rate, which would imply an extension in the loan lives on the covered assets.

Is $16.7m the number we should be thinking about, or should we be thinking about something closer to the $20m that it was running at in Q2?

The reason why you're seeing a change in the June 30 accretable yield calculation or number, it's because we re-measured the entire loan portfolio in Eurobank as I explained on the call.

And that in itself created a reduction of around $1.7m on the June 30 number on the income that we generated, interest income that we generated from the Eurobank loans.

So when we reported on June 30 that we had $13.5m of interest income from Eurobank, we went back, as is required by the accounting literature, and we went back and reduced that number by $1.7m to $11.8m or change.

Now the $16.5m that we have this quarter is the actual accretable yield that we recognize this quarter.

And then going to the fourth quarter we will start using the higher number of accretable yield, or accretable income that we talked about, based on the $201m not the $198m.

But how do you expect that amount to come in?

Do you expect it to come in over the next eight quarters?

Do you expect it to come in over the next 10 or 12 quarters?

I'm just trying to get a feel for what we can expect in accretable yield.

Yes.

I think it's going to take longer than we anticipated.

When I say longer, meaning closer to 10 to 12 quarters.

The reason why I say that is when we onboarded all the loans, there was a lot of missing documentation.

And we realized that there was a bucket on the loan portfolio that we were modeling them at the regular P&I loan and in reality they had some of the loan on it, and those loans have higher severity, as we do the analysis on the cash flows going forward.

So it's going to take I think a little longer on us recognizing that accretable yield into income.

But as I said, it's going to be 10 to 12 quarters versus a shorter level of number of quarters than we expected.

So 10 to 12 quarters for the remaining $173m?

No, from day one.

Day one.

Well, it was previously running at almost 10 quarters even on the first quarter -- on the second quarter run rate that was adjusted.

So --

Closer to nine yes.

So now we're probably closer to let's say -- this includes 11 or 12 quarters.

Okay.

Thank you very much, guys.

Okay.

And at this time I'm showing no further questions.

I'll turn the conference back to Mr.

Jose Rafael Fernandez.

Well, thank you all for joining us in this conference call.

I appreciate your time, and look forward for our next conference call at the end of the fourth quarter 2010.

Have a great afternoon and a great weekend.

And ladies and gentlemen, that concludes our Oriental Financial Group conference call for today.

We appreciate your time.

You may now disconnect.