Good morning, and welcome to the First BanCorp Third Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to John Pelling, IRO. Please go ahead..

Thank you, Debbie. Good morning, everyone, and thank you for joining First BanCorp’s conference call and webcast to discuss the company’s financial results for the third quarter 2020. Joining you today from First BanCorp are Aurelio Alemán, 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 that 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 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, 1firstbank.com. At this time, I’d like to turn the call over to our CEO, Aurelio Alemán.

Aurelio?.

Thank you, John. Good morning, everyone, and thanks for joining our earnings call today. Please let’s move to Slide 4 of the presentation. It was a very important quarter for our corporation and I would like to go over some key highlights and then expanding in certain matters.

First of all, we’re extremely pleased with that we completed our strategic acquisition by closing the Santander transaction on September 1. These transactions not only solidifies our position in the Island, but strengthens our competitiveness in commercial, retail, as well as residential. Very pleased to welcome our 150,000 new customers.

We look forward to support them, to support their plans with unexpanded branch network, expanded service channels and enhanced technological offerings.

On the economic front, definitely the relief funds from the pandemic combined with 2017 hurricane funds being deployed half bolstered liquidity in our market, and we’ll continue to drive economic activity. We’ll touch on that.

On the balance sheet side, even following the completion of the acquisition, we truly sustain a fortress balance sheet, our liquidity, reserve, capital levels are among the highest in the banking sector. Corporate FirstBank was strong for the quarter.

We generated $28.6 million of net income pre-tax pre-provision was $77 million with only one month of earnings from the acquire operations and longer in nations were strong at $971 million for the quarter. We basically increased originations in all categories through the quarter.

Total deposits including broker and government increased to $12.5 million. And finally our capital ratio remain among the highest in the banking sectors and capital actions remain a priority as we see the economic environment stabilizing. Now let’s cover more closely if you recite them on Slide 6, start with Slide 6.

Let’s talk about the transaction definitely was a long time in the making and as you see, we really improve our market position in all key areas. As you recall, the transaction was announced back in October 2019 and closing and completing, it was impacted by the COVID pandemic definitely.

But since then, some of the real metrics have improved from announcement. We still expect 35% EPS accretion to consensus estimates. The revised TBV at closing is estimated at 4% lower than our estimate. And we expect less than two years of earnback back now.

This improvement is driven by slightly smaller loan portfolio, additional research delivered at closing and the right marks due to a rate environment. While cost savings are estimated at $48 million, we definitely work harder to see if there areas that we are going to achieve more. But we’re also focused on growing the franchise.

So it’s a balancing act as we move forward and achieve our goals of be more efficient and increase market share. I think together we have an excellent team and we’re working diligently to integrate and to turn on the growth engines as opportunities comes in the economy. I want to touch on the integration. We made a lot of progress on the first 45 days.

Integration is underway. In those 45 days, we completed the conversion and integration of the mortgage business, the insurance agency, and several administrative functions, the plan is to complete the integration process by the end of the second quarter 2021.

And these do consider remembered that we continue to operate on their COVID limitation and distancing and obviously a process of this magnitude takes times.

We also around this month as part of the program as part of the synergies and integration, we announced a voluntary separation program that provides an opportunity for early retirement to approximately 160 employees or the combined institution. This program will be executed over the next three quarters, starting in the fourth quarter.

Other potential synergies identify include the opportunity of consolidating 8 to 10 branches, definitely the incremental utilization of data channels could drive other efficiencies. But again, we don’t want to hamper our potential to grow our market share within our expanded market distribution that we have.

So we will continue to move our report on this effort. Now let’s move to Slide 7. The new combined balance sheet is solid and well diversified. The $2.6 billion acquired loan portfolio definitely complements ours nicely, and the deposit books improve our funding. The – now the loan to deposit ratio stand at 78%.

And obviously we have an expanded customer base to cross-sell and moved to other products. Let’s move to Slide 8 to talk about the economy. I think the quarter, we clearly saw the correlation of the reopening where markets and the trends of economic recovery. It was clearly reflected in the third quarter.

And remember that in the case of Puerto Rico, we have some severe tightening in the second quarter, and some of those rules were relaxed later. We’re still operating under certain lockdowns, but the – I think the market has reacted very well to the situation and getting used to operate under that scenario.

Importantly, to support this economy, there are still over $60 billion of pandemic and hurricane relief. So those are numbers are a big for this economy. And there’s a lot of going on regarding reconstruction. The funds are being deployed. And they’re definitely showing the liquidity and activity.

Employment figures continue to turn positive recent numbers as of August are 92% off of 2019. So definitely there’s a recovery on the employment side. From the perspective of our client base, 100% of our corporate clients are operating and close to 99% of the business banking clients are reopened well. There are sectors that are more sensitive.

The hospitality industry continued to reflect lower occupancy but improving trends. Our hotel portfolio it below typical occupancy level and someone airport traffic is low, it closer to 50%. And as we are all aware, this is – these are the segments that are more sensitive and will require longer recovery period. So we continue to closely monitor.

On the other hand from the business activity perspective, lending activity for the quarter was near pre-pandemic levels and digital activity is up significantly. Retail lending for the quarters were very strong for both auto and mortgage lending. And actually it came about pre-pandemic level.

So we are optimistic with the recovery and the possibilities of additional stimulus, but we are also vigilant to the fact that potential economic hurdles could come if there’s a need to implement the insurance restrictions of COVID in the future. So we have to be watchful. Please now let’s move to Slide 9.

We wanted to give you an update on the relief programs trends, the relief trends are actually positive. The graph show the peaks and lows over the last six months, actually since March of the different regions and products.

I think we see a positive trend during the quarter or actually after the quarter closes, our active moratoriums were reduced to only 0.8% of the portfolio, less than 1%. This is as of October 21. I think so far the post moratoriums payments performance is positive with 98% of commercial clients scoring and 94% of retail as October 21.

It’s important to know that this data reflects only the due dates prior to October 21 regarding the payment patterns. So we have to wait until the end of the month to see the final trend.

We do have a segment of the commercial portfolio that belongs to the industries that I mentioned, the more sensitive ones, such as hospitality, retail, and entertainment that could need additional support through a longer stabilization period.

Those are being evaluated on their – the potential modification of terms provided by the Section 14 of CARES Act.

So please let’s move to Slide 8, here we have all the trend of the balance sheet, where we – how we compare to peers and definitely [indiscernible] acquisition, our liquidity level, reserve collaboration, capital position, they really give us opportunity with we’re positioned well to take advantage of any growth opportunities.

Definitely, we’d be good stewards of our capital position and again, capital deployment opportunities remain a priority once our economic environment stabilized. Let’s move to Slide 9 for a moment. I wanted to talk about and show you the trends of core metrics. Obviously, this graph shows the trends on the positive impact of the acquire operation.

We generate the incremental PPNR net income with only one month of earnings contribution for the core operations. And again, the enhanced funding profile should help us driving additional revenues. Longer in Asia, as I mentioned, we’re solid for the quarter.

You look at the level and the international adoption rates continue to improve during this pandemic. We will continue to work harder now with more clients or more distribution points to improve our level of service to all our customers.

I have to say that I’m really proud of my team and we’ll have been able to accomplish so far managing the pandemic challenges. And we’re definitely excited for the future growth prospects of our institution. And we also excited to show our patient investors, while we are able to accomplish.

With that, I will turn the call to Orlando to cover the details of some of the financial metrics. Thanks to all..

Good morning, everyone. As Aurelio made reference to net income for the quarter was $28.6 million, or $0.13 a share compared to $21 million last quarter.

We breakdown the components, you can see that Corporation’s legacy core basis achieve the net income of $44.3 million, which mostly, it’s a result of reductions in the require provision for credit losses. Last quarter, we had a provision of $39 million as compared to $8 million this quarter.

During the quarter, the improvement on macroeconomic projected variable to most portfolios except for the commercial real estate, as well as some changes in portfolio balances led to this reduction. The acquired Santander operation contributed $3.5 million of after tax net income. That excludes the Day 1 CECL adjustments, which I’ll touch upon.

This results including back of the amortization of the fair value marks on all the assets and liabilities and the amortization of the resulting intangibles. For example, one of the other things that had impact we look at the investment portfolio, Santander had U.S. treasuries – launch U.S.

treasuries portfolio that after marks resulted in a portfolio of yields only 15 basis points. Since then, we decided that to improve margin to sell this portfolio and reinvested in other securities according to our policies, which yield around 94 basis points, which will improve going forward some of the deals.

On the other hand, amortization of some of the other discounts and intangibles result in $1 million improvement in net interest income from the combination of loan and deposit, our preliminary fair value adjustments that have been moved. We look at other – the other components of transactions, some large ones that were in the quarter.

The first one would be the CECL, I made reference too. CECL requires that in the case of business combination, we set up an allowance for credit losses, on top on non-purchase credit deteriorated loans on top of or in addition to any kind of fair value measurements.

This resulted in recognition of an allowance of almost $39 million for the quarter, in addition to those fair value marks. The non-purchase credit deteriorated portfolio, it’s about $1.7 billion after marks. During the quarter, we also decided to sell around $116 million of MBS that were experiencing significant prepayments.

And that resulted in a gain of about $5.1 million from the transaction. And it’s being reinvested again in other instruments. Merger and restructuring costs, Aurelio mentioned, some of it.

During the quarter, we had $10.4 million, which compared to $2.9 million in the last quarter, which was mostly legal, financial and financial consulting piece, as well as some conversion related costs, as we prepare for the conversion. So far, we have incurred about $25 million in expenses related to the transaction over the last few quarters.

And during the fourth quarter, we expect to have some amounts associated with the voluntary separation program that Aurelio mentioned, as well as costs associated with branch and other consolidations, as we finalize the sessions on data those processes.

Finally, the other large items is that we need up analysis completed analyze, so the DTA now, including the Santander operation and that we told that in the reversal of approximately $8 million of deferred tax asset, valuation allowance we had on books.

Net interest income for the quarter was $148.7 million, which is $13.5 million higher than last quarter, $14 million of that was the Santander operation. On the other hand, the legacy by our FirstBank operation had a reduction of $500,000 and income as compared to last quarter.

In here, reduction in rates obviously accelerated prepayments on the investment portfolio has been large higher proportion of cash and investment securities to total learning assets have resulted in a reduction in the name on FirstBank. Last quarter, we had 4.22% NIM that you saw in our prior release, that number it’s down to our 3.94% this quarter.

Break it down some of the components is a commercial loan repricing with our 4 basis points of the reduction. But the – had much higher proportion of cash on investment securities, as well as the large prepayments and the alternative for reimbursement affected by 18 basis points more of that margin.

Santander on a standalone was about – the margin was about 3.89% considering the purchase accounting adjustments and that combined with FirstBank ended up with a 3.93% margin that you see on the release.

Non-interest income improved to $29.9 million, the $9 million – this $9 million increase includes $5 million in the gains on sales that I might reference to before of securities that I made reference to. We had $3.4 million increase in revenue for mortgage banking activities. Mostly or all of it, it’s related to sales of a residential mortgage.

This quarter, we had a much active – much more active quarter on originations that what we had in the second quarter and ended up selling $98 million more in conforming paper that we did last quarter, resulting that revenue increase.

Also the reopening of businesses as we have seen on the quarter, seen a much higher level of credit and debit card activity, which improved dining plus ATM, merchant fees and some of the other components that improve the income by our $2.8 million in the quarter.

And then the improvement we had in deposit service fees associated with the Santander transaction that brought in $1.1 million of additional deposit fees to the operation.

On the expense side, expenses were $107 million that includes $10.7 million in expenses for the Santander – where Santander operation and $96.8 million for the FirstBank legacy operation. This $96 million is $7 million higher than the $89 million, almost $90 million we had last quarter.

As I mentioned, the merger and restructuring costs for the quarter were $10.4 million, which is $7.5 million higher than last quarter, basically created most of the increase. But on the quarter, we – if we exclude this FirstBank was $86.4 million of expenses.

COVID related expenses were about $1 million this quarter, which is down about $2 million from last quarter, but other expenses obviously as we saw improvements in volume of transactions and improvement in fee, we also have higher expenses associated with that volume of business in those debit and credit card transactions.

The allowance for credit losses increased significantly as of September 30, the allowance for loans and lease accounting was up $65 million to $385 million as compared to June. Mostly, it’s due to the initial allowance for credit losses require to the Santander operation.

If we look at total allowance for credit losses, including on bonded commitments and debt securities, that’s up to $403 million. This quarter as I mentioned before, we recorded was $38.8 million in allowance for credit losses in total $37.5 million of that is related to loans. That builds up that allowance touched it with a portfolio.

And in addition for PCD loans or purchase credit deteriorated specifically, we establish a 20 – almost $29 million allowance.

We represent the fair value marks on this loan, which is requires that what is commonly referred to as [indiscernible] that the loans we presented growth and discount we presented in the allowance, those two combined were about $65 million.

The ratio of the allowance for credit losses on loans, the total loans was 3.25% at September, slightly down from 3.40% we had at June, but a very significant coverage, if we consider that we added a large amount of portfolios that a large part of it is also a mark-to-market and fair value mark-to-market and has been discounted.

On a non-GAAP basis, if we exclude the PPP loans, which don’t carry much reserve the ratio of the allowance to total loans was 3.38% as compared to 3.55% last quarter. Asset quality remained good in the quarter.

Non-performings are down $10.5 million to $293 million most of the reduction happened on the OREO portfolio, which decreased $7.3 million, mostly sales, whether we’re completed in the quarter.

Migrations to non-performing were higher this quarter as moratoriums expired, we start getting back to levels of more to the normal levels that we were seeing before. And we are in a position to continue to pursue some of the foreclosure processes that were put on hold for a couple of quarters, as we provided those moratoriums to customers.

The inflows were $18.4 million this quarter, which is $10 million higher than last quarter. Capital ratios remain really strong. As you can see even with the impact of the acquisition, we still have Tier 1 ratio of 17%.

The leverage ratio I think that’s important to mention, you see it’s about 13% for the quarter, but we only have Santander operation for one month in the quarter, so average assets were less.

If we were to normalize and assume the full quarter of average assets, that ratio would be closer to 11% also with that, and that was – what we expect that it’s still very significant with the acquisition of $5 billion plus in assets in the quarter. With that, I will open the call for questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ebrahim Poonawala with Bank of America. Please go ahead..

Good morning guys..

Good morning, Ebrahim..

Good morning, Ebrahim..

So in your prepared remarks, Aurelio, you mentioned a bunch of times around the focus on capital return and optimism about things getting better, barring any sort of negative developments in COVID.

Like by my math, like when you look at your largest competitor, their Tier I leverage ratio is about 8%, you’re at 11% and about 300 basis points of excess capital, very conservatively. As a shareholder, you would want the bank to act now given where the stock is. Just talk to us around level of urgency with the deal being done.

Do you think the regulators are onboard to the – I know you can’t talk about your regulatory discussions, but there should be a sense of urgency I would imagine in executing this given where the stock is. So just may if you could talk about that..

Yes, I think – Ebrahim, thank you for the question. Yes, we have a sense of urgency. We understand the importance of the customer. On the other hand, it’s really about the environment. You have to see what’s happening around the world and we have to see what’s happening in the U.S. and we have the elections.

Commenting on that, I think, Puerto Rico is also positioned with Congress to benefit either case, so things will continue independently of wins we believe, but the COVID, the risk, it’s still out there. Hopefully, we don’t have to go back to more lockdowns or closing. We have seen the impact.

Yes, there’s another stimulus that the high priority that will come. But I think we have a lot more visibility first quarter on this, okay. There’s also some regulatory guideline regarding this matter we issued through the end of the year. So, there is a priority for the management team. Yes, we recognized the excess capital.

I think we need to get through the end of the year, close the year see where the economic trends are in the next round. We have a couple of quarters that we increase – we provision incrementally in a material amount. We are well covered, but all that depends on the economic forecast.

So I think that we need an additional step of time in this matter to be prudent and make sure that – yes, the economy is stabilizing.

And as we are learning to work on the COVID environment, we know that you can operate, you know that you can be – you’re going to achieve your business, you know you have to spend some money for that to happen, but in some environments we’re watchful of additional restrictions. So that is a caveat here, okay..

Understood and thanks for that. And I guess just moving on Orlando on Slide 11, looking at pre-provision earnings if you get the full quarter impact for some candor impacts about $87 million in quarterly pre-provision earnings.

Outside of the $48 million in cost saves that you expect, talk to us in terms of your outlook on PPNR or revenue relative to third quarter levels as it pertains to fee income and the margin outlook..

So, I think as I earlier said, what are the levers here, obviously loan growth. We will look to achieve some loan growth, but again it’s read by the economy and the opportunities. We have seen good numbers in the mortgage business, again commercially solid auto it continues to sustain.

On the other hand, you have still some margin compression risk that is still out there. We’re still repricing, we have excess liquidity, liquidity continues to grow. And we have other components in the investment portfolio, I think, Orlando covered some levers that we’re pulling there. But on the other hand, we continue to have higher prepayments.

So and then obviously the expense there’s synergies and the expense will move to positive. But all those levers regarding PPNR without getting into the provision, there’s – we have a lot more levers than we had before closing the deal. And we’re very focused on how we pull these levers lever.

Some of them we control, some of them we don’t control like the rate environment. But that’s really – now it’s about execution and achieving what we have in the plan on integration, the estimates that we provided to you on how long it takes and how much it will cost to get those synergies is sustained. So that is our plan.

We’ll continue to execute recognizing that, yes, the right environment is still a challenge..

Keeping in mind that the savings it’s in part related also to integration process. So they don’t happen immediately with two or three quarters before we achieve full benefit of both savings and we could get. We’re still running systems independently we’re still covering costs related to running the Santander system.

So there is a number of things that will happen as we go through the integration over the next three quarters that Aurelio mentioned. And that’s going to push it. The margin it’s a challenge. And at this point, the expectation is not necessarily interest rate reduction, but it’s more of a mix and they impact us.

We don’t mind having a lot of deposits and we are not have having a lot of liquidity, but it does have an impact. And the prepayments that we are seeing in the portfolio, it’s a pretty large, much higher than we would have anticipated a couple of quarters ago..

I appreciate the challenge with the margin Orlando.

Do you think NII, which is about $177 million on the full quarter basis for the combined bank, can at least hang in flat to high from here, or do you feel the pressure on NII as well?.

We’re hoping that it’s going to stay flat to higher a little bit base. And then also what Aurelio said that now as we integrate we can pursue additional business. We do see some things that have to be taken into accounts like mortgage originations are good, but we’re doing a lot of conforming paper, so that’s been sold.

We’re generating income, but it’s resulting in some reductions on the portfolio side on one hand. So the mix is going to be the pressure component here more than the rates going forward. We still have a little bit on the repricing side of the liabilities as time deposits come due, the renewal rates are lower.

And some of these CDs that were issued a couple of years ago. So there is a little bit in there, but it’s going to be more of a mixed kind of thing..

Got it. Thanks for taking all my questions..

Thank you..

[Operator Instructions] Our next question comes from Alex Twerdahl with Piper Sandler. Please go ahead..

Hi, good morning, guys..

Good morning, Alex..

Good morning, Alex..

First of all, just wanted to circle back to what you’re talking about with capital return. And obviously understand that there’s a lot of moving parts in the economy, and we’re not out of the woods yet on COVID, et cetera.

But when we are out of the woods, is there a formal process that you guys need to go through in order to turn on a buyback at some point in time, and then you can sort of elaborate on what that might look like?.

All capital actions have a formal process that is delineated either by regulation or by our capital plans. So after you complete your analysis and your recommendations, you have to go to the process and engage in the different flavors so we can execute it if it’s a buyback, obviously, I think it’s a common process that people know.

Obviously, I think the – I don’t think it’s a process, what is holding us today? I think we have to make sure that we do at the right time, as things move forward, we have priorities that are the integration and we have priorities that are sustaining our asset quality. And again those are challenged by the current COVID situation.

I think we have to take that in mind, so that’s really, we need to see more evidence of stabilization before concluding on that decision, Alex..

Okay. Understood. And then just as I look at the pro forma balance sheet, it seems like, you guys do have a lot of liquidity and then you have some higher costing brokered CDs, and you got some FHLB advances that are a little bit higher costing today.

I mean, are there some opportunities to do some de-leveraging to get rid of some inefficient leverage out there?.

Clearly and you can see that the level of broker deposits has been coming down. In reality, we have not been renewing any of the broker deposits. We do have some – they’re not as expensive, but we do have some broker money market accounts in here that move a little bit up and down every quarter.

But on the brokered CD side, we’re not renewing it and letting it go. It’s much cheaper using the cash that you have on hand, even with the lower cost broker deposits out there. But obviously, you have to go through the process of the maturity of those. But we have not been renewing any broker deposits or FHLB advances that mature.

So those are some of the opportunities, as well as what I mentioned on the repricing of the time deposits that come due, that were price at a much higher rates, a couple of – one or two years ago when they were issued..

Are there big tranches of either brokered CDs or advances that will be coming or maturing in the near-term?.

The way we structure the brokered CDs that we are issuing with really spread to try to not have precisely that a big chunk coming in and facing point in time in the market that was – at some point market becomes complex for some of these issuance. So it’s not a bunch, it’s a bit every quarter. That’s what we have a bit every quarter..

Okay.

And then can you help us sort of figure out the loan mark, inclusive of the credit adjustment, that would be coming back through NII over the life of the loan and sort of how that project that purchase accounting accretion over the next couple of quarters?.

Obviously the marks on the PCBB portfolio are part of the research and those marks don’t accrete back, it’s a matter of just up or down, depends on the CCL sequel analysis that you do going forward.

In the case of the non-PCBB portfolios, there is about $30 million – $35 million, $36 million of mark that would be both credit and rates that would come back through the life of the loans.

And obviously, the mortgage loans will take longer because the commercial loans are typically happening faster because of the maturity terms, so more or less those are the components. It’s – we’ll see a chunk between three months and three years, which is related to commercial and the consumer portfolios.

And then the mortgage loans will be more during the five to seven year term..

Great. And then just a final question for me is, just as I think about expenses and sort of the phase in on cost saves. Can you kind of help us get a sense for sort of the cadence of the cost saves coming in over 2021? I know you got the guidance in the slide deck.

And then also the voluntary retirement program, is that part of the $48 million of cost saves, or is that additional to that?.

That’s part – the cost save will come from rationalizing operations, technology side, the Santander costs, whereas compared to adding that type of operation to our technology structure it’s higher.

So we – the voluntaries operation has an immediate cost, but then you start saving from that point on, those are positions that are in general, if not all basically all will not be – would not be. So those are immediate savings. And that was part of the assumptions we did from the start that we would do something like this.

So a chunk will start with those voluntary separation in January, technology ones, which is another large one will start happening in the end of the year, but most of it in the first half of 2021.

And then the other one would be facilities, that will take a little bit of time because we – again Aurelio, mentioned there is related to branch consolidations when we decide to do that, we don’t want to offend customer, but – that’s why I mentioned that, we’ll see the full benefits starting really on the second half of 2021..

Yes. Some of them have been achieved already, and you’re going to see some of them in this quarter, as we integrate operations and systems, we completed two significant businesses this quarter, early in October, so some of the benefit comes into the quarter.

So obviously that’s our focus on priority, it’s a lot of little things also when you add marketing costs, legal on the different consultants and professional services. And that’s what we come up with the potential saves..

Perfect. Thank you for taking my questions..

Thank you, Alex..

[Operator Instructions] At this time, there are no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to John Pelling for any closing remarks..

Thank you, Debbie. On the IR front, we have a couple of virtual conferences coming up here in November. November 9 the Piper Sandler conference and on the 10, a panel conference, so we look forward to chatting with you then. We appreciate your continued support and this will conclude the conference call. Thank you..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..