Edited Transcript of FBP earnings conference call or presentation 30-Apr-20 2:00pm GMT

Santurce May 9, 2020 (Thomson StreetEvents) — Edited Transcript of First Bancorp earnings conference call or presentation Thursday, April 30, 2020 at 2:00:00pm GMT

First BanCorp. – President, CEO & Director

* John B. Pelling

First BanCorp. – IR Officer & Capital Planning Officer

First BanCorp. – Executive VP, CFO & Interim CAO

Good morning, and welcome to the First BanCorp 1Q 2020 Results Conference Call. (Operator Instruction] Please note, this event is being recorded.

I’d now like to turn the conference over to Mr. John Pelling, Investor Relations Officer from First Bancorp. Thank you, and over to you, sir.

John B. Pelling, First BanCorp. – IR Officer & Capital Planning Officer [2]

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 of 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 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.

And 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 Alemán. Aurelio?

Aurelio Alemán-Bermudez, First BanCorp. – President, CEO & Director [3]

Thank you, John. Good morning, everyone. I hope you are all safe and healthy.

Before going into the detail of the quarter, I think we need to discuss the more pressing matter at hand, which is the impact of this pandemic on our customers, employees and how we have managed through a lockdown, which was 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 humanitarian and economic standpoint. This have been hard to many families. And I want to take the opportunity to personally acknowledge the excellent work of 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 lockdown. 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 swiftly, 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 mother nature events, hurricanes or earthquakes, our teams truly learned how to respond to crisis, and we did immediately. We implemented remote work, divided personnel into team, dispersing working areas to limit contact with each other and customers, implement the strict cleaning and safety protocol, and most recently, we implemented contact tracing and began testing — COVID-19 testing for — to all our employees that are working on premises with very positive results actually.

I have been extremely pleased with our operating strength and digital readiness. Our digital channels are supporting our customers under the 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 $319 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 implementation of 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 gradually 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 lockdown, 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’s driven by the effect of the deteriorated economic forecast under COVID.

Also, it’s important to highlight that loan origination was disrupted toward the end of the quarter. The origination reached over $800 million even though we actually started with a 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 2 weeks in August (sic) [March], there was very limited origination. This 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 a little bit more later.

NPAs remained relatively flat. Deposits grew $91 million. And they actually continued to grow this quarter driven by primarily increase in Puerto Rico and reductions in — slight reductions in Florida and ECR.

Again, I think the bottom line is, yes, this was not in the 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 the — in any bank in the country. Our reserve coverage for CECL are among also the highest of any bank. So we are up there with a lot of capital and 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 little bit more on page — Slide 7. Yes, 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 2 weeks are always important in every quarter for closings.

The Puerto Rico and ECR rules are straight. No mortgage closings, no other sales and limited commercial activity, mostly focused on PPP. In Florida, they are less restrictive. So we continue to originate mortgages. And from commercial activity, that was actually pending closing and, obviously, PPP loans.

When you look at forward into our second quarter, well, I think the reopening time lines will define when these 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 time lines — our curves are designed. We’re learning from the outside, from China, from other markets, what happened — what should happen in reopening in the different line of businesses. We continue to manage renewals. We continue to support draws on revolving lines. And the USVI actually announced reopening next week. We are all waiting for the announcement of updates from the Puerto Rico government. That should happen in the next couple of days to see — there is a high expectation on the private sector that Puerto Rico reopens and puts some flexibility on the lockdown rules sometimes early next week.

Additionally and not surprisingly, we also experienced reduced volumes in ATM, POS, Debit ATH, credit cards. Obviously, Internet and mobile are increasing. And most likely, this continue again until our markets gradually begin to open again.

I’m going to cover some credit quality matters. Definitely, this time around, the — different to prior crisis, from a credit standpoint, they are what we consider strong mitigants in place for the next 90 to 180 days. They are supported by the CARES Act, supported by regulatory guidance for moratoriums and also some local Puerto Rico incentives. So I think we learned a lot from prior experiences on crises. So we gather a firm understanding and 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. I really thank my team for all this effort. We have analyzed every large borrower and we have done a lot in the consumer portfolios.

As of yesterday, we have offered relief programs to 38% of the portfolio, approximately $3.5 billion. And we have approved 2,576, as of yesterday, Paycheck Protection Program to over $319 million. Highlight, I want to say, 90% of these loans are in amounts below $250,000 and 63% are in amounts below $50,000. So we’re truly supporting the small segment.

Today, we continue setting up applications until funds are available at SBA. So this will continue. We’re monitoring every day when funds will run out, but obviously, there’s some applications that we’re still getting, even if it’s a late-stage because some customers are reacting now to the availability of the program. We feel our borrowers and credit quality should be supported by these programs in the near term.

In addition, I just want to highlight, in addition to the federal stimulus package, it’s 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 3 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.

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Orlando Berges-González, First BanCorp. – Executive VP, CFO & Interim CAO [4]

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Good morning, everyone.

As Aurelio mentioned, we generated $2.3 million of net income this quarter, which is $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 will remember from last quarter, the expense 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 pretax pre-provision of $68 million, which compared to $72 million last quarter.

This quarter results include 2 large items: #1, 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 new accounting rules for expected credit losses. And when we talk about credit losses, important to clarify, it includes losses on loans, it includes losses on unfunded commitments as well as any estimated losses on debt securities. But as of January 1, we recorded an additional 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 of $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 have — under a 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 use to — for the reasonable and supportable time frames. Reasonable, supportable time frames for — it’s a couple of — 2 years in Puerto Rico and 4 years in the Florida market, give or take, and then we revert to historical losses. And the projections do incorporate 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, the CECL allowance as of March stands at $308 million. That includes $293 million related to loans, about $6 million related to unfunded commitments and about $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 1.72% allowance we had as of December.

In terms of noninterest 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 1 less day in the quarter plus the impact of the repricing, mostly on the variable rate of commercial loans during the quarter. One day for us in the quarter represents approximately $900,000 in impact in 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 the lockdowns and that affected the end — the ultimate average earning assets we had for the quarter. Margin stood at 4.63% compared to 4.70% in the fourth quarter of 2019. Again, 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 the full effect of the rates is 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, of 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 funds. Interest cost on deposit accounts have been adjusted on all categories, showing an overall reduction of 6 basis points for the quarter. Time deposits 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 tapped lower cost of funding such as the Fed discount window just as a way of testing the lines and waiting for some stability on market rates. We also saw disruptions on how Federal Home Loan Bank advances went up and down in the quarter as well as some broker CDs. So there has been some disruption throughout the latter part of the quarter.

From a liquidity perspective, we have really high levels of liquidity. Cash and free 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 have seen.

If we move to noninterest income, noninterest income was $30.2 million, which is up $5.8 million from last quarter. This is a — a few major components. The $8.2 million tax exempt gain we had on the sale of securities. The — during the quarter, we saw at the end of the quarter, realities. 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 our $276 million of available-for-sale U.S. agencies MBS that we had in the portfolio.

Also in the quarter, we had an increase of $2.7 million in insurance income, mostly was related to seasonal contingent commission received in the first quarter of each year based on the volumes that were produced prior years. We did see, however, some reductions starting 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 decreased and we had — we saw a fee base 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, the disruptions from the quarantines and lockdowns were — on nonessential business were large on this category.

Important — remember that last quarter, we did realize a $2.1 million gain on the sale of a nonaccrual commercial mortgage loan. So that’s part of the variance on the other side.

In terms of expenses, noninterest 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 acquisition 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 a $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 Christmas bonus that are accrued in the first quarter, partially offset by 1 less day in the quarter. At this point, we are — as 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’re ready to act depending on how we see the volume estimates that we can originate.

In terms of asset quality, nonperforming remained relatively flat. It was only a $400,000 increase in the quarter to $317.8 million as of March. Nonaccrual loans increased a bit more by $1.6 million. It’s — reality, we had a $3.4 million increase in nonaccrual 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 nonaccruals from early 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 99 days past due, depending on the type of portfolio. Migration to nonperforming in the second quarter would come from those loans, mostly from loans that did not meet the criteria for moratoriums or were not considered for moratoriums based on financial reasons, but again, there is always — there’s percentage of the loans that continue to make payments. So if someone stops, it could affect also nonperforming, but we don’t expect big changes in 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 at 78 basis points on average loans. And we don’t expect significant changes in the second quarter as we have moratoriums in place but — or in basically all the second quarter.

At this time, I’d like to open the call for questions.

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Questions and Answers

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Operator [1]

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[Operator Instruction] We have a first question from the line of Ebrahim Poonawala from Bank of America.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division – Director [2]

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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 on a model-driven standpoint, Orlando, if you can talk about if the loss rates that you’ve experienced over the last 5, 10 years led to a much higher loss number than you would have otherwise expect — if you can just talk to that in terms of the modern aspects that might have led to that reserve build.

And secondly, Aurelio, if you can just talk about this, how does this compare when you look at your borrowers, be it C&I and CRE relative to the hurricane and previous crisis that we’ve had, from a balance sheet, the capacity of these borrowers and the ability of the island to kind of just navigate through this?

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Orlando Berges-González, First BanCorp. – Executive VP, CFO & Interim CAO [3]

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Okay. Let’s start off with the calculation. As you know, we implemented CECL. Our CECL methodology takes into account, as required by CECL, what is called a reasonable and supportable time frame. In Puerto Rico, we have defined that as 2 years because we feel that the economy in Puerto Rico has been very difficult to predict over a longer time frame. So using the 2 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 estimates is an impact of macroeconomic variables that are key for the different portfolios, the key ones, meaning something like unemployment is key, house price index is key. We see GNP impact, population and things like that, but unemployment and HPI are some of the key ones.

After the 2 years, then we revert to what is our historical loss components. And for that, we use a much higher rate than what we see on some of these components in Puerto Rico today. Like unemployment, it’s a good example. So we revert to numbers that are above the 12% unemployment rates.

So the economic factors that are under reasonable and supportable changed by significant amounts from what we had as of the end of the year when we ran the CECL estimates for day 1 accounting. The reason — the reversion time frames would be sort of similar because we’re going through those historical losses that, again, are much higher than what we have now. So when they combine those 2 components and 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 could be large over the first 1 or 2 quarters and then starts coming down. So those kind of impacts do have an immediate calculation impact on the estimated losses.

What would happen with commercial portfolio, the last time the commercial business handled very well the hurricane, which is the most recent one. They were able to manage reopening their operation in a very reasonable time frame, and they had the reserves, the damages they had on the — resulting from the hurricane either were covered by insurance or we’re not that large. So they managed well. The key question here is what would be reopening dates and what kind of implication it would have in different business sectors.

If you have — if you go to the other presentation, you can take a look, we did include in there a little bit of the breakdown of the portfolio, the commercial portfolio, by major industries. So that you can see a bit what we have, the challenge now is trying to assess that reopening and the impact it could have on the businesses.

Clearly, when we ran 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, like 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.

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Aurelio Alemán-Bermudez, First BanCorp. – President, CEO & Director [4]

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Okay. So you have a second part of the question, Ebrahim. If I understood correctly, you wanted me to comment on how this compares to the process of Maria, just to make sure.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division – Director [5]

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Yes, that and if you can just talk about — so it feels like there’s been significant stimulus for the — for Puerto Rico, both from a federal level and locally. How significant is that in terms of bridging some of this time period of the lockdowns? If you can talk through that.

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Aurelio Alemán-Bermudez, First BanCorp. – President, CEO & Director [6]

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Okay. And I’m going to compare it to Maria a bit because remember we did — in Maria, we did a reserve provision of about $70 million that time and we based on actually expected recovery curves of the different industries. What is the impact in the short term? What happened in the next quarter, next quarter? The truth is with the hurricane, it was easier to predict reopening curve because it was based on damages, electrical grid coming back. So you have a little bit more expectations on when things will go back to normal. And we actually assume that in certain sector, it was going to take a year because of the size of the reconstruction, and in others what’s going to be no impact and in others improve itself right away.

So here, it plays 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 with 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 have closed have requested the moratoriums. And this time, it’s probably not only 90 days if the closing get extended or the recovery curves are later, we’re going to have the flexibility to go probably 6 months or 180 days, or in some cases, you have other alternatives to restructure the loans and they don’t become TDR. So we’re going to go — we have more — I want to say we have more tools to mitigate.

Obviously, the cash flow coming from the programs, which it’s personnel or business, is also significant. Obviously, during the hurricane, we had payment from insurance companies, we don’t have that now. But at the end of the day, what are we doing to reassess, I think the second quarter is going to be key, is to continue to work with every borrower, understand what else we need to do to continue supporting them and apply the reopening curves as they are defined.

I think we’re all learning every day how China is behaving, which is ahead in the process or how other states in the U.S. are behaving and how other industries are behaving. So there’s a lot of moving parts that are driven by reopening, but I think we have enough mitigants for the next 90 to 180 days to basically support our clients even if they are they are working on unlimited operating conditions. So did that answer your question?

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division – Director [7]

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Yes. All very helpful.

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Operator [8]

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

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Glen Philip Manna, Keefe, Bruyette, & Woods, Inc., Research Division – Associate [9]

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I just had a question on the Santander acquisition. There was 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 given quarantining? And as a 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?

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Aurelio Alemán-Bermudez, First BanCorp. – President, CEO & Director [10]

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Yes. First question, definitely, as we said, I think our statement is fairly clear of what we can say about the transaction, taking into account what’s happening with the pandemic and which we’re working through requests from the different regulators who are looking at the deal. We have announced — when we announced the beginning of 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, obviously, the contract has a lot of language. It’s a public document. And if I remember correctly, yes, it expires in — but there’s a 90-day process to extend, a 90-days clause to extend. There’s a lot of other elements in the agreement that I’m not going to discus in the call. But I think the agreement is pretty clear how price is determined, how NPAs are excluded, how there are things that are as of the closing date, whenever that be.

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Glen Philip Manna, Keefe, Bruyette, & Woods, Inc., Research Division – Associate [11]

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Okay. Great. 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?

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Orlando Berges-González, First BanCorp. – Executive VP, CFO & Interim CAO [12]

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Yes. The only thing that I would say is some of it has already happened. Remember that the K 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 reopenings and when we can go back to originating on a normal level.

As Aurelio mentioned, the lockdown in Puerto Rico did shut down the door on loans, on most loans originations. So we don’t know when that’s going to be reopened. And the second thing is that 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.

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Glen Philip Manna, Keefe, Bruyette, & Woods, Inc., Research Division – Associate [13]

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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 can just tell us what you’ve done to eliminate some of the soft spots in the portfolio that may have helped — hurt FBP during the last crisis and how you’ve tried to strengthen up the resiliency of the portfolio for the future.

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Aurelio Alemán-Bermudez, First BanCorp. – President, CEO & Director [14]

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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 improved our risk profile and quality of the portfolio, not only the reserves and the capital, but really the diversification of the book across 3 regions, across different line of businesses.

I’m proud of we have a much modern construction portfolio. We have less bulky relationships also. So obviously, it’s a better risk profile from any of the prior comparisons. And if you take the 2019 end of year asset quality metrics and you go back to any of the prior periods, even delinquency levels are the lowest. So we’re starting in a — with a great strength on both side of the equation.

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Orlando Berges-González, First BanCorp. – Executive VP, CFO & Interim CAO [15]

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The other thing I would add, Glen, is remember that in — back in 2008 — so the prices on the market were really high. So there is a significant implication to loan-to-values. As we adjusted policies for origination since then and based on the market continued reduction, the reality is that loan-to-values are in a much better place than they were after everything started happening in the 2008 recession. So that improves the position on some of the CRE portfolios. And again, as Aurelio mentioned, the fact that we have smaller construction portfolio, especially in residential construction, so that improves a lot where we stand as compared to prior cycles.

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Operator [16]

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We have next question from the line of Alex Twerdahl from Piper Sandler.

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Alexander Roberts Huxley Twerdahl, Piper Sandler & Co., Research Division – MD & Senior Analyst [17]

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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 that 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 your 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 were kind of teeter-tottering that it winds up benefiting you guys in a little bit — in a little way.

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Aurelio Alemán-Bermudez, First BanCorp. – President, CEO & Director [18]

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

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Orlando Berges-González, First BanCorp. – Executive VP, CFO & Interim CAO [19]

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

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Alexander Roberts Huxley Twerdahl, Piper Sandler & Co., Research Division – MD & Senior Analyst [20]

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Okay. But based on how they did it after Hurricane Maria, you kind of 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.

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Aurelio Alemán-Bermudez, First BanCorp. – President, CEO & Director [21]

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Yes. We haven’t — yes.

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Alexander Roberts Huxley Twerdahl, Piper Sandler & Co., Research Division – MD & Senior Analyst [22]

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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 it should be down meaningfully? Or is there a scenario where it actually could increase from here?

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Orlando Berges-González, First BanCorp. – Executive VP, CFO & Interim CAO [23]

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The — okay, on the first question, yes, unemployment is one of the critical components in the Puerto Rico market. That’s very obvious. We — different portfolios have different variables, so 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 and you take like half of the component by industry and sector and it’s tailored to each market.

So the fact that — if you take — in the case of Puerto Rico the projection is that they were projecting on November a population reduction towards the end of 2021, that has slowed down significantly or stayed flat. So those components 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 of Puerto Rico as well as Florida market. But it’s also going to start coming down slowly at second quarter, staying there basically through mid-2021 at those levels and then starts coming down a little bit more going — after mid-2021.

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 a change and the change is negative immediate, so that has a 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. Are we 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 say, in a portfolio like mortgage, if I get payments on loans that are season loans that have been around for 7, 8 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, it has less risk but it has longer life.

So if originations are down and factors would remain the same, and we don’t see significant changes in charge-offs, then your statement is correct. But there are so many models that are really difficult at this point, Alex. If you — in the first quarter, we were estimating that the allowance would have been close to the charge-offs, which is where the — based on the preliminary economic scenarios that were out there, obviously, everything changed.

So no changes to economic scenarios, a smaller portfolio because of payments with lower level of origination to solid reductions in provisioning or no provisioning, it could technically be. Any change in the mix because we expect to originate, we don’t expect to be shut down for the full quarter, then it would change a bit those variables. But clearly, I would say that the biggest factor is whether we feel that the economic scenario is going to get much worse or stay 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.

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Alexander Roberts Huxley Twerdahl, Piper Sandler & Co., Research Division – MD & Senior Analyst [24]

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Okay. That’s helpful. And then just final question from 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 1.5 months, how should we think about the loan balances kind of then maybe put that into context of sort of the pace of amortization in some of your portfolios? Just so we can sort of be all on the same page with that.

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Aurelio Alemán-Bermudez, First BanCorp. – President, CEO & Director [25]

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Yes. I think there’s positive and negative here. One, you have to consider the level of moratoriums that, basically, we will not be receiving repayments. So no balances will stay. Right now, it’s close to 40% of the portfolio. So that’s one element that mitigates there is a contraction.

Second element is Florida will continue to see loan activity, obviously not at the same level of prior quarters, but there is loan activity. Obviously, I know the PPP, it’s a low-yield loan, but we already exceeded the $320 million and we probably will get to $380 million by the end of the — by somewhere at the month or May. And then the reopening days, the VI just reopened on Monday, obviously, it’s going to be trying to determine at what level recoveries — what level of recovery we estimate the paces 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 what the private industry is pushing for. But obviously, the mortgage business has no reason to be closed down at this stage. So auto lending is another component, dealers are actively pushing for being able to reopen, they’re 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.

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Alexander Roberts Huxley Twerdahl, Piper Sandler & Co., Research Division – MD & Senior Analyst [26]

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

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Aurelio Alemán-Bermudez, First BanCorp. – President, CEO & Director [27]

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We don’t have it available, but at some point in time, we will update the investor deck with it. We — we’re still receiving applications. I have to say that, obviously, first round was obviously more sophisticated borrowers move ahead on it. And then obviously, I think the smaller businesses are now the lead. Hopefully, funds continue, but we — our average loan is fairly granular. 63% below $50,000, so — 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 until funds are available.

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Orlando Berges-González, First BanCorp. – Executive VP, CFO & Interim CAO [28]

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Yes. The — obviously, we can estimate it. We’re doing it as part of it. The only challenge that I’m, at this point, Alex, is it’s not only the estimated fee on the whole thing, it’s a matter of also the life of the loan, the estimated life of the loan. Because one thing is having the fee spread out over 2 years, one thing is saying it’s a fee over 1 year in terms of ultimate profitability results.

So that’s the other challenge 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 6 months. So you already have sort of a 6-month number there that should be taken into account. So those 2 are the ones we’re trying to combine to come up with what the expected life and then what the expected recognition of the piece. And what it does to the yield on those loans.

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Alexander Roberts Huxley Twerdahl, Piper Sandler & Co., Research Division – MD & Senior Analyst [29]

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Yes. 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 the CARES stimulus bill, might go a little bit farther 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 maybe these loans — there’s a higher percentage of them that actually might just be 2-year, 1% loans?

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Aurelio Alemán-Bermudez, First BanCorp. – President, CEO & Director [30]

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I think — obviously, if you remember the forgivable expectations of these loans is high, I would say between 60% and 80%, 75%. So what has remained there is yet to be determined once we start processing the second phase of the program. Which is a forgiveness part. That’s why it makes it so difficult because it’s — then is when you’re going to know exactly what could be the remaining terms of these loans.

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Orlando Berges-González, First BanCorp. – Executive VP, CFO & Interim CAO [31]

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My guess is that everyone that is going for the forgivable component, it’s going to try to not start paying anything after 6 months, because otherwise, they do need to start making some payments. So that would churn in some of those. But the other ones, the ones that use it for something else or the portion of the component that’s used would stay there for a longer term, the 2 years probably.

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Operator [32]

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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, Mr. Pelling.

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John B. Pelling, First BanCorp. – IR Officer & Capital Planning Officer [33]

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Thank you, Vikram. On the investor front, we’re scheduled to attend the Deutsche Bank conference on May 26, and Sandler was hosting or doing an investor tour to Puerto Rico on June 11. We will be doing those telephonically. We want to thank you for your continued support. We look forward to seeing all of you again when the markets reopen. At this point, we will conclude our call. Thank you.

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Operator [34]

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Thank you, sir. The conference call is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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