Good morning and welcome to the First BanCorp 1Q 2020 Results Conference Call. [Operator Instruction] After today's presentation, there will be an opportunity to ask questions. [Operator Instruction] And I'd like to turn the conference over to Mr. John Pelling, Investor Relations Officer, First BanCorp. Thank you and over to you, sir..

Thank you, Vikram. Good morning, everyone and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the first quarter 2020. Joining you today from First BanCorp are Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer.

Before we begin today's call, it is my responsibility to inform you, this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company's business.

The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call.

If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website, 1firstbankpr.com. Additionally, we filed a COVID pandemic response investor deck on our website as well. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman.

Aurelio?.

Thank you, John. Good morning, everyone. Hope you're all safe and a healthy.

Before going into the detail of the quarter, I think we need to discuss the more present matter at hand, which is the impact of this pandemic on our customers, employees and how we have managed to a locked down, which were put in place in Puerto Rico and ECR around mid-March and subsequently in Florida with actually less restrictive operating rules.

So let's please move to Slide 5. First of all, our hearts go out to all those families impacted by the crisis in both from humanitarian and economic standpoint.

This has been hard to many families and I want to take the opportunity to personally acknowledge the excellent work on my team and thank my teams and our dedicated frontline employees, who have been supporting our clients every day during this pandemic and during the general lock down.

I have to say really no one was really prepared for this type of event, but based on our recent experiences managing natural disaster, we felt prepared to act safely, adjust our plans accordingly, as we learn through the process and move our teams in the right direction.

Going just back a couple of years having endured a decade long recession, unprecedented modern nature events, here again for earthquakes. Our teams truly learn how to respond to crisis, we did immediately.

We implemented remote work, divided personally to team, disbursing working areas to limit contact to each other and customers, implement the restrict cleaning safety protocol. Most recently, we implemented contact tracing and began testing -- COVID-19 testing for -- to our employees that are working on-premises, which very positive results actually.

I have been extremely pleased with our operating strength and digital readiness. Our digital channels are supporting our customers on their limitation of social distancing. We swiftly implemented our moratorium programs, contacting borrowers, providing certain level of automation to the process.

We also achieved, what I consider a very strong performance in the rollout of the SBA PPP program with the support of the FIS numerated platform. As of yesterday, we have approved over 2,500 loans and over $219 million, which is actually more than our fair share of the commercial lending market in Puerto Rico and that covers all the regions.

The rollout of the federal product like, PPP, the moratorium should definitely help mitigate credit quality deterioration in the short-term. We -- I think, I want to emphasize, we're entering this crisis from a position of institutional strengths to really support our people, clients and shareholders.

And today, obviously, we all remain vigilant as certain markets began to relatively open and we have our plans in place for that. Please, move into Slide 6 now. Well, when we look at the results obviously, results were impacted by the lock down, which was first initiated in Puerto Rico and ECR and then in Florida, as I mentioned.

Obviously, the fact that we implemented CECL, which Orlando will cover in greater detail. In spite of that, we generated some net income of $2.3 million or $0.01 a share. And when you look at the reserve build of almost $60 million that driven by the effect of the deteriorated economic forecast under COVID.

Also, it's important to highlight the loan origination was disrupted toward the end of the quarter. Origination reach over a $100 million even though we actually start that with very strong pipeline.

The loan portfolio grew slightly $9.3 million driven by commercial and construction in Florida and consumer in Puerto Rico, offset by our strategy to reduce the residential portfolio. During the last two weeks in lock down there was very limited origination that it was halted in most of the products.

We're not closing mortgages in Puerto Rico, no auto sales are taking place so the auto lending and mortgage volumes are not present. I'll talk about that in a little bit more later.

NPAs remained relatively flat, deposits grew $91 million and they actually continue to grow this quarter, driven by primarily increase in Puerto Rico or reductions in -- slight reductions in Florida and ECR.

Again, I think the bottom line is, yes, there was results, but the main message here is that we really -- we feel we're really well prepared to handle the cycle. We have significant experience managing crisis and we're entering this crisis from a position of strength. Our capitals are among the highest in any bank in the country.

Our retail coverage for CECL are among also the highest of any bank, so we are up there with a lot of capital of reserve to support the crisis. We generated pre-provision income a little bit above $68 million this quarter and this along with the strong capital and reserve supports our current dividend.

So let's talk about the quarter, a bit more on pages to Slide 7. Yeah, I want to cover loan originations because it was really a good quarter. It was coming at a great pace, I have to say, with a very solid pipeline. Obviously, the last two weeks are always important in every quarter for closings.

The Puerto Rico and ECR rules are straight, no mortgage closings, no auto sales and limited commercial activity mostly focus on PPP. In Florida, they are less restrictive, so we continue to originate mortgages and some commercial activity that was actually pending, closing and obviously PPP loans. When you look at forward into the second quarter.

Well, I think the reopening timelines will be fine.

When this volumes come back to the table, we cannot give you a specific guidance on that, but we'll keep you up to-date as reopening timelines or curves or design, we're learning from the outside, from China, from other market, what's happening -- what should happen in reopening in the different line of businesses. We continue to manage renewals.

We continue to support growth on revolving lines and the USVI actually announced reopening next week. We are all waiting for the announcement of update from the Puerto Rico Government and that should happen in the next couple of day to see.

There is a high expectation on the private sector that Puerto Rico reopens and put some flexibility on the lock down rules sometimes early next week.

Additionally, and not surprisingly, we also experienced reduced volumes in ATM, POS, debit ATH, credit card obviously Internet on mobile are increasing and most likely this continue again until our markets gradually begin to open again. I want to cover some credit quality matters.

Definitely this time around the different to prior crisis from a great standpoint, there are -- what we can see a strong mitigants in place for the next 90 to 180 days. They are supported by the CARES act, which supported by regulatory guidance for moratoriums and also from local Puerto Rico incentive.

So I think we learn a lot from prior experiences on crisis, so we gather from understanding an efficiency on the moratorium process. We immediately began in March contacting our borrowers, analyzing their situation and implementing the program. We have done a lot -- and I really thank my team for all this effort.

We have analyze every large borrower and we have done a lot of the consumer portfolios. As of yesterday, we have offered release product to 38% of the portfolio, approximately $3.5 billion. We have approved 2,576 as of yesterday Paycheck Protection Program to over $290 million.

Highlight, I want to say 90% of these loans are in amounts below $250,000 and 63%, and in amounts below $50,000. So we are, we're totally supporting the small segment. Today, we continue setting applications on until funds are available at our SBA.

So this will continue, we are monitoring every day wind farms will run out, but obviously there is some application that we're still getting even is at late-stage for some customer are reacting now to the availability of the program. We feel our borrowers have credit quality should be supported by these products in the near term.

In addition, I just want to highlight in addition to the important to know that the Puerto Rico government and the fiscal board allocated approximately $900 million to stimulate the economy and support those impacted by the pandemic. So when you add all those three large initiatives, there should be some positive mitigant here.

Now I'm going to hand the call to Orlando to cover the financial details and we'll come back for questions later. Thank you all..

Good morning, everyone. So Aurelio mentioned, we generated $2.3 million of net income this quarter which is a $0.01 per share. That compares with $36.4 million or $0.16 a share in the fourth quarter.

We did have several unusual items in all quarters, but you'll remember from last quarter, the expenses associated with the transaction resulted in a non-GAAP adjusted net income of $42.8 million or $0.19 a share. He also made reference to tax pre-provision of $68 million, which compared to $72 million last quarter.

This quarter results include two large items. Number one, an $8.2 million tax exempt gain on the sale of securities that improved earnings per share basically by $0.04. And we had a reserve build for loans and debt securities of $59.8 million, driven by the effect of the COVID pandemic on Moody's forecasted economic scenarios.

This reserve build had an after-tax impact of $39.8 million, which is approximately $0.18 a share for the quarter. Important for this quarter was the adoption of CECL, which as you know, it's a new accounting rules or expected credit losses.

And when we talk about credit losses, it's important to clarify it includes a lot of the loans -- includes on lot's of unfunded commitments as well as any estimated losses on debt securities. As of January 1, we recorded regional allowance for overall credit losses of $93 million upon adoption of the CECL standard.

For this quarter, the provision -- the total provision ended up being $77.3 million, which includes the reserve build I just made reference to, up $59.8 million and approximately $17.5 million, which is basically coverage charge-offs for the quarter and it would have been close to what we think would under normal economic scenario would have been the reserve -- the provision for the quarter.

This provision calculations are based on Moody's economic projections, as I just mentioned that are the ones that we used to -- for the reasonable and supportable time frames. reasonable, supportable time frames for, it's a couple of two years in Puerto Rico and four years in the Florida market, give or take and then we revert to historical losses.

And the projection do incorporate and an impact of the pandemic, as well as the economic stimulus -- federal economic stimulus on macroeconomic variables, which are the key to determine expected losses.

Overall, that CECL allowance as of March stands at $308 million that includes our $293 million related to loans, about $6 million related to unfunded commitments and other $10 million related to debt securities.

The loan component -- the allowance for credit losses on loans represents 3.24% of loans at quarter end, which has significantly grown from the $172 million allowance we had as of December. In terms of non-interest income, I'm sorry, in terms of net interest income, for the first quarter, we had a decrease of $1.3 million.

The amount -- the net interest income for the quarter was $138.6 million, which compares to $139.9 million for the last quarter. And this reduction, it's one less day in the quarter, plus the impact of the repricing mostly on the variable rate at commercial loans during the quarter.

One day for us in the quarter represents approximately $900,000 in impact net interest income.

This quarter we did have some growth in average earning assets as compared to last quarter, but loan originations in the second half were limited, as Aurelio mentioned due to lock downs and that affected the ultimate average earning assets we had for the quarter. Margin stood at $463 million compared to $470 million in the fourth quarter of 2019.

Again lower -- the lower interest rate environment and the number of rate reductions. Going forward, it's still a bit difficult to estimate, we expect some decrease as a full effect of the rates, it's reflected in the second quarter.

Moratoriums on loan customers should slow down reductions on the size of the portfolio, but in reality, there is a component of -- as Aurelio made reference to, when we open -- when Puerto Rico reopens and what's going to happen with some of the higher yielding consumer portfolios that come into the balance sheet.

Overall, we continue to work on improving our cost of fund -- interest cost on deposit accounts have been adjusted on all categories showing in an overall reduction of 6 basis points for the quarter.

Time deposits however represent 40% of the interest bearing deposits and adjustments on this product take longer to show since it depends on the maturities of the time deposits. In the quarter, we've also had -- lower cost of funding, such as Fed discount window as a way of testing the lines and waiting for some stability on market rates.

We all saw disruptions on how Federal Home Loan Bank advances went up and down in the quarter as well as on brokered CDs. So there has been some disruption throughout the year -- latter part of the quarter. From a liquidity perspective, we have really high levels of liquidity, cash on pre-liquid securities represent about 17.5% of assets.

And we expect to continue to have comfortable liquidity levels based on the inflow of funds from the local and federal stimulus package that we are seeing. If we move to non-interest income. Non-interest income was up $30.2 million, which is up $5.8 million from last quarter.

This is few major components, the $8.2 million tax-exempt gain we had on the sale of securities. During the quarter, we sold our -- at the end of the quarter reality with the sharp reduction in rates, we had a portion of the portfolio, we felt that it's subject to significant prepayment risk and we decided to sell part of that portfolio.

So we ended up selling about $276 million of available for sale agencies -- US agencies MBS that we had in the portfolio.

Also in the quarter, we had an increase of $2.7 million in insurance income, mostly it was related to the seasonal contingent commission we received in the first quarter of each year, based on the volumes that were produced prior years.

We did see however some reductions at the end of the quarter on the lower volume of originations of mortgage auto and so, which ends up being some insurance income component associated with it.

Transaction fee income, as Aurelio mentioned from credit card, debit card, POS all decrease and we heard, we saw a fee-based on all those components come down by $1.3 million, part of it is seasonal.

There is always some reduction in the first quarter, but in reality there is disruptions from the quarantine and lock downs were on non-essential basis where large on this category.

Important, remember that last quarter, we did realize a $2.1 million gain on the sale of a non-accrual commercial mortgage loans, so that's part of the variance on the other side.

In terms of expenses, non-interest expenses amounted to $92.2 million, which is $10 million lower than last quarter, primarily the decrease in merger and restructuring costs in connection with the pending acquisitions of Santander.

We had $10.8 million last quarter, which included advisory fees, legal, valuation and a number of other components and also included $3.4 million related to a voluntary separation program we offered to eligible employees of FirstBank.

We also saw $2 million decrease in OREO expenses, primarily $1.5 million related to write-downs on the value of OREOs. Employee compensation and benefit expenses grew $2 million, mostly driven by higher seasonal payroll taxes and Christos bonds that are included in the first quarter, partially offset by one less day in the quarter.

At this point, we are -- everyone else, it's, we're doing full reassessment of all expense line items to start reducing all discretionary spending in line with business volume adjustments that could happen. So we are ready to act, depending on how we see the volume estimates that we can originate.

In terms of asset quality, non-performing remained relatively flat. It was only $400,000 increase in the quarter to $317.8 million as of March. Non-accrual loans increase a bit more by $1.6 million it's -- reality we had $3.4 million increase in non-accrual consumer loans, mostly auto.

Keep in mind the portfolio, it's also growing a lot over the last couple of years and we had a decrease of $3.3 million in commercial and construction non-accruals, primarily collection of $3.1 million that we achieved in the first quarter.

So Aurelio mentioned, we have been implementing moratoriums to loans that were current or less than 89 days past due, depending on the type of portfolio.

Migration to non-performing on the second quarter would come from those loans, mostly from loans that did not meet the criteria for moratoriums or we're not considered to -- for moratoriums based on financial reasons. But again, there is always -- there is a percentage of the loans that continue to make payments.

So if someone stops, it could affect also non-performing. But we don't expect big changes on the second quarter related to this category. Same thing for charge-offs.

Charge-offs for the quarter were $1.3 million lower than last quarter, 78 basis points on average loans and we don't expect significant changes in the second quarter, as we have moratoriums in place basically all the second quarter. At this time, I'd like to open the call for questions..

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] We have a first question from the line of Ebrahim Poonawala from Bank of America. Please go ahead..

So I guess, just in terms of the reserve build, if we can start with that during the quarter. I guess, about 3.2%.

One, just from a modern driven standpoint, Orlando, if you can talk about, if the loss rates that you've experienced over the last five, 10 years, led to a much higher loss number, then you would have otherwise -- let's do, what you would otherwise expect if you can just talk to that in terms of the modern aspects that might have led to that result build? And secondly, Aurelio, if you can just talk about is, how does this compare, when you look at your borrowers both C&I and CRE relative to the hurricane and previous crisis that we've had from our balance sheet per capacity of these borrowers and the ability of the island to kind of just navigate through this?.

Okay. Let's start with the calculation. As you know, we implemented CECL. Our CECL methodology takes into account as required by CECL what it's called a reasonable or supportable timeframe. In Puerto Rico, we have defined that as two years because we feel that the economy in Puerto Rico has been very difficult to predict over a longer timeframe.

So using that two years, it's something that we can feel comfortable on how projections are made. We use Moody's for that calculation, and what Moody's estimated the impact of macroeconomic variables that are key for the different portfolios.

The key ones meaning something like unemployment, it's key house price index is key, we see E&P impact population and things like that, but unemployment and HPI are some of the key ones.

After that two years, then we revert to what is our historical lows components and for that we use a much higher rate that what we see on some of these components in Puerto Rico today. Like unemployment, it's a good examples so we were two numbers that are above the 12% unemployment rates.

So the economic factors that are under reasonable and supportable change by significant amounts from what we had as of the end of the year, when we run the CECL estimates for day one accounting.

The reason of the reversion time frames would be sort of similar because we're going to those historical losses that again at much higher than what we have not, so when they combine those two components on how they change, it impacts the numbers.

Keep in mind that, Moody's is assuming -- it's estimating as well as we are that, the immediate impact on unemployment would be large over the first, one or two quarters and then starts coming down. So those kind of impact do have an immediate calculation impact on the estimated losses.

What would happen with commercial portfolios, the last time the commercial business handled very well the hurricane, which is the most recent one.

They were able to manage reopening the operation in a very reasonable time frames, and they had the reserves that the damages they had on the --- on resulting from the hurricane either were covered by insurance or we're not that large, so they manage well.

The key question here is, what would be opening dates and what kind of implication, it would have in different business sectors. If you have -- if you go to the older presentation, you can take a look, we did include in there, a little bit of the break down -- a breakdown of the portfolio, of the commercial portfolio by major industries.

So that you can see a bit what we have.

The challenge now it's trying to assess that reopening and the impact it could have on the business, it’s clearly, when we run the CECL calculations, you could see that some of these -- some of the industry that we mentioned in the press release, we're carrying a part of the increase in the allowance, transportation for example, that meaning a bit of car rentals, airlines and some of those kind of industries, a bit on retail real estate meaning shopping centers mostly.

So those kind of industries we're expecting higher impact. At the beginning and that's reflected on the estimated loss calculations..

Okay. So that you have a second part of the question Ebrahim, if understood correctly, you want to me to comment on how it is compares to the process on Maria, just to make sure..

Yeah. And if you could just talk about -- so it feels like there has been significant stimulus for the Puerto Rico, both from a federal level and locally.

How significant is that in terms of bridging some of this time period of the lock downs, if you can talk to that?.

Okay. And I'm going to compared to Maria a bit because remember, we did in Maria within a provision of about $70 million that time and we based on actually expect the recovery curves of the different industries. What was the impact in the short term, what happened in the second -- next quarter, next quarter.

The proceeds with the European -- it was easier to predict reopening curve because it was based on damage, electrical grid coming back or you have a little bit more expectations on when things will come back to normal. And we actually assume that in certain sector we're going to take a year because of the size of the reconstruction.

I mean, others what's going to be no impact in others improving sales right away.

So here, in place a little bit similar obviously conditions are different and, but in the store, we didn't have -- we have very limited support, for example, we were not able to start immediately where moratoriums, it took about a month to actually put things into effect.

Here we started on March 16 because we already had the programs, regulatory guidance came out. Then the CARES act actually provided some additional flexibility on TDRs. So there are a lot more tools today than we had at the point on the storm.

So what we believe that's going to have -- it's going to be great mitigants to short-term deterioration because, large numbers of borrowers, that are close are -- have requested the amount of volumes and this time it’s probably not only 90 days, is the closing that extend that or the recovery our later, we're going to have the flexibility to probably six months or 180 days or in some cases you have other alternative to restructure the loans and they will become TDR.

So we have more -- when I say, we have more tools to mitigate. Obviously, the cash flow coming from the programs, which it's personal or business it's is also significant. Obviously, during the hurricane we had payments from insurance companies. We don't have that now.

But, at the end of the day, what we are doing to reassess, I think the second quarter is going to be key, it's continue to work with everybody understand what else we need to do to continue supporting them and apply the reopening curves as they are defined.

I think, we are all learning every day, how China is behaving, which is ahead in the process or how other states in the US are behaving and how other industries are behaving.

So there is a lot of moving parts that are driven by reopening, but I think we have enough mitigants for the next 90 days to 180 days to basically support our clients even if they are, they are working on unlimited operating conditions, so does that answer your question..

Yeah. Very helpful. Thanks for taking my questions..

Thank you. We have next question from the line of Glen Manna from Keefe, Bruyette & Woods. Please go ahead..

So I just had -- I'm doing well. How are you? So I just had a question on the Santander acquisition. There were some language in the press release that, you thought it was unlikely to close by the middle of 2Q '20.

Maybe -- and I realize that you can't give us too much detail, but could you describe the process right now given the quarantines would you say the project is not moving forward or just kind of moving forward, but at a slower pace giving quarantining.

And as the second part of that, if I recall correctly, from the filing documents you guys had 12 months from the effective date back in October to close the deal.

Is that correct? And are there any provisions to extend that, if it wouldn't close by then?.

Yeah. I'll first question definitely as we said, I think our statement is fairly clear. What we can say about the transaction, taking into account. What's happening with the pandemic and we're working through request from the different regulators are looking at the deal.

We have announced the deal in October, we provided an estimated closing date -- closing time of middle 2020 -- mid of 2020. So what we're saying to the market is, we see that at this stage, unlikely because obviously, yes, People are working but the pace of progress is different. So that's the answer to the first question.

The second -- the answer to the second question is, obviously the contract has a lot of language as a public document. And if I remember correctly, yes, expires in -- well, there is a 90-day process to extend and 90 days close to extent.

There is a lot of other elements in the agreement that I'm not going to discuss in the call, but I think the agreement, it's pretty clear how prices determining, how NPAs are excluded, how the things that actually the closing date whenever that would be..

Okay. Great. Thank you. And, Orlando, when we last spoke, I think you said that net NII trends were kind of tracking the asset sensitivity simulations that you had put out in the K.

Is that still the case?.

Yes. The only thing is that I would say, some of it, it's already happened, remember that the Ks was based on December 31 information. Some of it is already happening as rates have come down significantly.

The only challenge to those numbers would be on the forward-looking kind of growth scenario depending on what happens with reopening and when we can go back to originating on the normal level. As Aurelio mentioned, the locked down in Puerto Rico, they did shut down the door on loans -- on most loans originations.

So we don't know when is that's going to be reopened. And the second thing, it all depends a bit on some of the businesses. So, there is another component coming in other than rates that we need to try to estimate here, which is a challenge at this point..

Okay. And then just lastly, I think we all kind of look back to the last crisis that happened, and think that that's what's going to happen again.

But maybe Aurelio you could just tell us what you've done to eliminate some of the soft spots in the portfolio that may have help -- hurt SVP during the last crisis and how you tried to strengthen up the resiliency of the portfolio for the future?.

Well, you can go back to, we had higher levels of NPAs back in June 2017 before the last crisis. We have a comparison table in the other presentation that talks about the prior financial crisis.

So, it significantly improve our risk profile and quality of the portfolio, not only the reserves on the capital, but we're really the diversification of the book across three regions, across different line of business is, I'm proud of. We have a much moderate construction portfolio. We have less bulky relationships also.

So obviously it's a better risk profile from any of the prior-year comparisons. And if you take the 2019 end of the year, asset quality metrics and you go back to any of the prior periods even delinquency levels are they've always so. So we're starting with a great strength on both side of the equation..

The other thing I would add, Glen, it's remember that back in 2008 and so the crisis on the market were really high. So there is a significant implication to loan to values, as we adjusted policies were origination since then and based on the market continue reduction.

The reality is loan to values and in a much better place that they were after everything started happening 2008 recession. So that improves the positioning on some of the CRE portfolios. And as Aurelio mentioned the fact that we have is more a construction portfolios by selling and residential construction.

So that improves a lot where we stand as compared to prior cycles..

Thank you. We have next question from the line of Alex Twerdahl from Piper Sandler. Please go ahead..

Just a couple of questions back to the Santander transaction and one of the things, if I remember correctly about that deal that was kind of interesting, is that you guys are not acquiring any NPLs from Santander? So I'm just wondering, if you could kind of help us put in time -- to put into the context of what's going on today with loan modifications going on and kind of whether or not their policies are identical to year policies in terms of who gets modified.

And sort of what that loan looks like and then whether or not you think that potentially the delay of the transaction could actually wind up, if there are some credits that maybe you could kind of teeter-totter that, it winds up benefiting you guys in a little bit -- in a little way..

Yeah. The reality -- we're not there yet. We have to -- there is a lot of things that we continue to consider looking into, but we just, we're focused on what we have on our hand today. So there is different language in the agreement that you can review and what are the avenues for conditions, like the one you mentioned..

Yeah. The agreement had wording on -- they have to continue to follow the policies they had agreement, they have to be consistent any deviations have to be a withdrawn. So there are things like that, at the end would be sort of a normal business. Moratoriums are -- so are difficult to judge at this point..

Okay. But based on how they did after Hurricane Maria.

You guys have some sense for what their criteria might be and therefore, there should be no changes and that should be consistent, you’re comfortable with that holding true?.

Yeah..

Next question, back to the reserve and CECL, you talked a little bit Orlando about sort of the shape of what's going to happen going forward, but first off, it seems to me like unemployment is a much bigger input to the reserve or to the CECL model down in Puerto Rico relative to GDP on the island.

First off, is that correct? And secondly, can you help us just sort of think around the different outcomes for the provision for the second quarter.

Just kind of what would have to change in the CECL model for that provision to go, to be similar to what we saw this quarter or is it a fair expectation that as you down meaningfully or is there a scenario where it actually getting increase from here?.

Okay. On the first question, yes, unemployment, it's one of the critical components in the Puerto Rico market that's very obvious.

We -- different portfolios have different variables that it's not only one, some of the key ones are, as I mentioned, unemployment and HPI, but others affect different parts of the portfolio, remember that some of it is broken down like you take CRE it takes -- has a component by industry and sector and it's tailored to each market.

So the fact that -- if you're taking the case of Puerto Rico the projection is that they were projecting on November, population reduction towards the end of 2021 that has slowed down significantly or stayed flat.

So those component change the mix of some of the variables, but clearly the unemployment, one it's going up, and the assumption is that it goes up on -- in the first quarter, it's going to go up in all Puerto Rico as well as Florida market.

But it's also, it's also going to start coming down slowly second quarter staying there basically through mid-2021 at those levels and then starts coming down a little bit more going after mid 21.

So all those factors are the ones that are leading to these changes when you have, remember, it's not the absolute number, but it's the change and the change its negative immediate. So that has an negative impact immediately. So that's the relevance of how the movement on the estimated macroeconomic happens.

Second quarter, I mean it's, there are a number of factors. Clearly, number one would be, what is the projected scenario? We are assuming -- if we assume that the projected scenario movement is exactly the same as this one, then a lot has to do with levels of originations and level of repayments.

Keep in mind, when you look at this component, the complexity of CECL is that, if I get payments on loans let's take a portfolio like mortgage.

If I get payments on loans that are seasoned loans that have been around for seven, eight years, those loans carry an estimated reserve, which is smaller because of the seasonality and the time frame that those loans have left as part of the estimate.

While a new loan still have the full estimated life even though it's a new loan with new policies at less risk, but it has longer life. So originations are down and factors would remain the same and we don't see significant changes in charge off, then your statement is correct.

But there are so many variables that are really difficult at this point, Alex, that if you -- in the first quarter, we were estimating that the allowance would have been closely charge-offs, which is based on the preliminary economic scenarios that were out there, obviously everything changed.

So no changes to economic scenarios, a smaller portfolio because of payment with lower level of origination should be solid reductions in provisioning or no provision. It could technically be.

Any change in the mix because we expect to originate -- we don't expect to be shut down for the whole quarter, then it would change a bit those bar levels, but clearly I would say that the biggest factor is whether we feel that the economic scenario, it's going to get much worse or stayed the same or get better.

If it's much worse then, which is not what we all think at this point. It could change this mix..

Okay. That's helpful. And then just final question for me. Can you help us just think through the loan balances and kind of, if you exclude out the PPP for the second quarter. If loan originations are essentially halted in Puerto Rico for the last month and a half.

How should we think about the loan balances, kind of a maybe put them the context of sort of the pace of amortization in some of your portfolio just so we can sort of be on the same page with that..

Yeah. I think, there is positive and negative here. One you have to consider the level of moratoriums that basically we will not be receiving repayments so loan balances will stay. Right now it's close to 40% of the portfolio, so that's one element, that mitigates the retail contraction.

Second element as Florida will continue to see loan activity, obviously not at the same levels of prior quarters, but there is a loan activity. Obviously, I know the PPP, it's a low yield loan, but we already exceeded that $320 million and we probably will get to, to create it by the end of the -- by somewhere at the end of the month or May.

And then, the reopening days that reopened on Monday. Obviously, it's going to be, trying to determine our level recoveries. What level of recovery we estimate that basis of origination, we don't have a final answer on that.

And in Puerto Rico, we expect that business like the mortgage business and some of the commercial activity being reopened, partially next week or no later than May 15 that is for the private industry is pushing for, but obviously the mortgage basis had no reasons to be closed down at this stage.

So as another component, dealers are actively pushing for being able to reopen, they are open in most of the states, not in Puerto Rico. So it's a very difficult estimate to be honest with you, because it depends on reopening and then recovery curves of the volumes..

Okay. Understood.

And then just final question for me on the PPP, the $380 million -- $320 million to potentially $380 million that you alluded to, is that, is there a way that kind of breakout the weighted average fee that would be associated with those loans based on their loan sizes?.

We don't have it available, but at some point in time, we will update the investor deck with it. We still, we still receiving applications. I have to say that obviously first round was obviously, more sophisticated borrowers move ahead on it. And then, I think smaller business are now the lead.

Hopefully funds continue, but we, our average loan it is fairly granular at 63% below $50,000 million of the loan. So when you look at it, the focus is on the lower end not the higher end, at least in our experience, we will continue to receive applications once available..

Obviously, we can't estimated it, we're -- do we need as part of it. The only challenge that I'm -- at this point, Alex, it's not only the estimated fee on the whole thing. It's a matter of also the life of the loan estimated life of the loan, because one thing, it's how in the fees spread out over two years.

One thing is the fee over one year in terms of ultimate profitability results. So that's the other challenges that we're trying to assess both components, how long would it take for customers to come back with all the information. And we know that obviously the loan doesn't pay interest for the first-six months.

So you already have sort of a six-month number there that that should be taken into account. So those two are the ones we're trying to combined to come up with what we expected life and then what the expected recognition of the piece. And what it does to the yield on those loans..

Yeah. Okay. And then just -- and to that point in Puerto Rico, where -- obviously, the program is very powerful. But also unemployment, the additional unemployment benefits provided by this -- the cares stimulus bill might go a little bit far than in a place like Puerto Rico.

Do you expect the weighted average life of these things to be kind of on the shorter side, the way a lot of the banks elsewhere in the country are talking, or do you think that may be viewed loans or is it higher percentage on that actually might just be two year or 1% loan?.

I think obviously, remember the forgivable expectations of this loans is high. I will say between 60% and 80%, 75%. So what is remain there is, is yet to be determined.

Once we start processing, the second phase of the program, which is a forgiveness applied, that's why it makes us so difficult because is then when you're going to know exactly what could be the remaining terms of this loan..

My guess is that everyone that that is going for the forgivable component, it's going to prior not to start paying anything after six months because otherwise they do need to start making some payments.

So that would, showed in some of those, but the other ones, the ones that are use it for something else or the portion of the component reduced which would stay there for a longer term, the two years probably..

Okay. Thanks for taking my questions..

Thank you, sir. This concludes our question-and-answer session. I'd now like to turn the conference back over to Mr. John Pelling for any closing remarks. Over to you, Pelling..

Thank you, Vikram. On the investor front for scheduled to attend the Deutsche Bank Conference on May 26th and Sandler was hosting -- or doing our Investor Tour to Puerto Rico on June 11. We will be doing those telephonically. Now, we want to thank you for your continued support. We look forward to seeing all of you again when the markets reopened.

At this point, we will conclude our call. Thank you..

Thank you, Sir. The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect..