Good day, and welcome to the First BanCorp. 2016 First Quarter Results Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Mr. John Pelling, Investor Relations Officer. Please go ahead.

Thank you, Nan. 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 2016. Joining me today 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 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 the important factors described in the company's latest Securities and Exchange Commission 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 and press release issued by First BanCorp., you can access them under the IR section of the company's website at firstbankpr.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman. Aurelio? Aurelio Alemán-Bermúdez: Thank you, John. Good morning, everyone, and thank you for joining us again to discuss our first quarter results. On the call with me today, as usual, is Orlando Berges, our CFO. Orlando will cover a lot of the details for the financial results of the quarter. Let's begin with some of the highlights of the quarter. Please turn to Slide 5 of the deck. We have to say that we had a strong quarter, generating $23 million of net income. We're really very pleased about that. On an adjusted basis, it was $26 million, which Orlando will cover in detail. This compares to $15 million in the fourth quarter. I want to highlight not necessarily…

[Operator Instructions] Our first question comes from Brian Klock of Keefe, Bruyette, & Woods.

So Aurelio, I looked at 2 things that I thought were -- or nice positives were the expense control still and the margin expansion. So Orlando talked a lot about the expense items, and again, good job on the expense control. Maybe you can talk a little bit about what you saw with the margin expansion, actually, the good commercial loan yield expansion. So maybe you can talk about that? And then the second question is after some lumpiness with those big payoffs, how are you thinking about loan growth in Puerto Rico, Florida, Virgin Islands for the rest of the year? Aurelio Alemán-Bermúdez: Okay. On the first one, obviously, you basically see the benefit of the short-term rates LIBOR moving. We have a significant portion of the portfolio, the commercial, which is viable. So that has been supporting it. The -- on the other hand, we had some big payoffs this quarter, some of them voluntary and some of them meaning that we decided not to participate in the loans. We have a good pipeline, in Florida, you saw the numbers. The pipeline continues to build and it's healthy. Puerto Rico will be more cautious, obviously, as we continue to move on. But when you look at the 3 main line of businesses that we have: mortgage, consumer and commercial, we feel pretty good about being able to sustain the loan book, okay? We have to work harder, and that's why we ask our teams to do. But definitely, we're out there looking for volume, looking for business. I think if we see a better outcome from now to June 30 of the potential intervention of Congress or resolution on the negotiations of the debt, obviously, there's a lot of activity right now waiting on the sidelines that could -- and definitely would generate additional volume and would make that portion of the challenge much easier for the local markets. So, but we -- I think we still have 3.5 million people out here. A lot of businesses, a lot of activity, retail sales continue at healthy levels. Auto sales adjusted, but a healthy level and still attractive rates on the mortgage business. So there is a lot to do. And obviously, if things get resolved in a positive manner, it will even look better, the chance to grow the portfolio.

Okay. And just a quick follow-up. So maybe right now, with everything somewhat in limbo on the fiscal front, so there might still be a little bit of, I guess, pent-up demand that might just be waiting, and to the extent that there could be some resolution, you may see something maybe towards the end of the second quarter that could show up as some -- maybe some increased demand? Aurelio Alemán-Bermúdez: Yes, there is demand, obviously, but they're on the sideline, including investors, including new investment in new business, including consumer making decisions for buying a house or not. So this macro uncertainty hurts every business segment. But there's a healthy -- still a healthy volume. We did over $700 million between both, and it's not that far from the first quarter last year from a seasonality perspective. And when you add the 3 line of credits, the 3 regions, we expect to be above that number in the second quarter. So obviously, the opportunity for growing the portfolio in Puerto Rico will definitely depend on that macro cloud recovery from that perspective. There is still some -- remember, there's still some noise in the moratorium law, for example. There is still a project in the Senate being discussed about some additional modifications to the law. So we don't have full clarity of the extent of the moratorium, yet. And again, that brings -- that's what is today in the newspaper, those changes, for example. So obviously, we hope that gets clarified in the next couple of weeks. Also, we can put a framework into that segment of events, just the moratorium law by itself. So -- but again, there is still a lot of activity, a lot to do, a lot of business to look after. Orlando Berges-González: Yes. On the net interest margin, Brian, again, the one pressure it's going to come from putting these loans in nonperforming, that adds a bit of pressure. But on the other hand, we continue to -- we ended up the quarter with $800 million in cash and money markets. So we continue to reduce the size of the brokered CD portfolio, which would save some money there to compensate for some of the impact.

Our next question comes from Alex Twerdahl of Sandler O'Neill.

A couple of questions here. One, you mentioned in the press release that there was a decrease in the provision for residential mortgages that was driven by lower underlying loss severity. Is that lower underlying loss severity specific to the first quarter? Or is it something that you've seen kind of trending in the right direction over 2015? And how often do you kind of like reconsider how much of a reserve you need for residential? Is that something that's done annually? Maybe you can give us a little more color surrounding that thought. Orlando Berges-González: The reserve, it's analyzed quarterly. We look at that quarterly. In this specific case, what's happening to them, the loss severity on loans end up in foreclosure stage and end up being foreclosed, that we were using on the assumption was higher, that the experience has shown over the last 12 months. That one we don't change every quarter. Obviously, we like to see a trend and the number was a bit smaller. So we ended up adjusting some of the reserve components on those items that go to, to obviously, the latter part of the foreclosure stage.

Okay, good. And then the 2 big loans that paid down during the quarter, were those local Puerto Rico loans or were they national loans? Orlando Berges-González: They were -- one is a VI loan, one is a Puerto Rico loan, but they were based here, I mean, either VI or Puerto Rico.

Okay. And those are... Orlando Berges-González: No national credits or participation spreads or anything like that. Those were loans originated by our credit groups.

Okay. And they're refinancing away to other local banks? Orlando Berges-González: One of them was -- the VI was a full payoff that they did. The other one was, yes, there was some refinancing locally done on the commercial loan in Puerto Rico.

Okay. And then you kind of broke out the loan growth somewhat in Florida versus -- and the Virgin Islands, et cetera. Deposit growth, is that also pretty strong in Florida? Or is the deposit growth more Puerto Rico, the core deposit growth? Orlando Berges-González: The core deposit growth has been mostly Puerto Rico and a bit in the VI. Florida, probably you have seen in there. We are seeing very stiff composition for deposits in the Florida market, with pretty high pricing being paid, and we are not willing to go at those levels. So in fact, we have seen some reductions in Florida, but more than compensated by growth in Puerto Rico and the VI. The good thing being that we're growing a lot in most markets in Puerto Rico and the VI in DDA accounts. And even though the base in Florida of demand deposit accounts is smaller, in reality, we did grow in that account -- in that category, but it's a small category compared to the level of time deposit maturities we had in the quarter in Florida, meaning Florida.

Okay. And then just finally, on the margin, kind of a nitpicky question, but you alluded to the margin being somewhat pressured in the fourth quarter due to some temporary deposits. I can't remember if I read the headlines right. But are some of those deposits back in the local banks and maybe back at FirstBank and would pressure the margin in the second quarter? Orlando Berges-González: No, these were -- if you remember, there was the entity, the government entity that controls all property tax collections, those monies used to be at GDB at some point in time. They were on sort of a legal case with GDB to try to get segregation of the funds, and they moved the money on a short-term basis to the banks. We ended up with $140 million or so of those deposits, which we knew were only going to be there for about 2 or 3 months, so we couldn't invest in anything higher yielding. Therefore, you have the earning asset, but a very low earning asset on the books. We made a small amount on the spread but not significant. So those deposits, the ones that were going to go away were withdrawn at the end -- in the fourth quarter. So that's why there was an impact in the fourth quarter, but we don't have that this quarter nor it's going to affect the future quarters.

Okay. So there's no other government agencies, whether it's CRIM or something else that have, given the turmoil with the GDB, have decided to park funds with you guys that would have similar impact in the second quarter or the third quarter? Orlando Berges-González: No, we don't know of any, specifically. There always could be movement. But those specific ones, we knew they were going to be short term. We knew it's going to be 2 or 3 months. So that's why there is a direct impact.

[Operator Instructions] Our next question comes from Brett Rabatin of Piper Jaffray.

Wanted just to go -- I got distracted for a minute, so you may have talked about this a little bit, but just want to go back to kind of managing the balance sheet from here and you've lowered the brokered CDs and obviously, growth is a challenge, commercial originations, seasonality, et cetera. Just thinking about managing NII from here, will you guys continue to lower the cost of funds enough to keep NII flat to slightly possibly higher? Or how do we think about the management of the balance sheet vis-à-vis the margin going forward? Orlando Berges-González: So the margin going forward, it's 2 things. One, we -- I mentioned a bit before that we're going to get some pressure from the NPAs, the loans going into NPA. On the other hand, we ended up the quarter with $800 million in cash and money market investments. So that gives us some space to continue to lower the size of the brokered CD portfolio. What we have been doing with the brokered CDs, it's -- obviously, the plan is to continue to reduce them. We've been successful on the deposit strategy. So that opens space to continue to execute on the brokered CD reduction. We focus more and try to extend the term a bit for interest rate risk management, which increases the rate, but overall, decreases the expense component because of a much smaller average balance on brokered CDs. So that's how we've compensated a bit. Clearly, the amount of cash that we have at this point, at stipulated [[ph] points on the Fed, it's something that depends on how interest rates move to be able to pursue something. So we're constantly looking for ways to make that money work a little bit better. So that's also a component that should help compensate any other pressures we have. So we don't see -- the margin should stay within this level, with some of this impact that I just mentioned. But not -- obviously the pickup on LIBOR going up helps us on the volume of floating rate loans we have on the commercial portfolio. So we did see some pickup in there from the repricing. So as some of the loans continue to reprice, they will reprice at slightly better rates from the increase in LIBOR.

Okay. And then the other thing, I totally understand that moving that TDF to nonaccrual based on kind of what's happening, but how do we think about impairment of that exposure from here? What do you guys think about the future of that individual credit? Aurelio Alemán-Bermúdez: There's several components to it. Obviously, we have the underlying collateral, which is an important component. And obviously, we have to work on determining what is the value, at the end of the day, of the guarantee. And it's a combination, as Orlando also mentioned, we have provision for these assets for the last 3 quarters in a row. So I think for now, we still, as I mentioned before, the moratorium law is still undergoing some changes. There will be negotiations with GDB on the matter. And basically, I think during this quarter, all those events should unveil. But I think we have made some statements that we were not expecting a significant item after we did the provision in December on this portion of the assets. Orlando Berges-González: What we did with this, obviously, as Aurelio mentioned, there is a collateral value that is part of the analysis of the impairment. And then on the TDF part, we make some similar assumptions on probability of default and probability of recoveries, that we use market information such as Moody's and some of the things that we see. We do think that, that the TDF guarantee at the end has value, value more than it's been given, but under the circumstances, we're applying some discounts based on the probability of default and recoveries that we see on the GDB side.

Okay. And then just last, and you may have addressed this, I heard you talk about it somewhat. But just thinking about the growth in the Florida from here, will you guys ramp up what you're doing in Florida to try to mitigate more of what's going on in terms of the Puerto Rican... Aurelio Alemán-Bermúdez: We are, we actually are. And some of the investments that I highlighted, entering the Brickell market which we were not, looking at it from the 3 business segments, the deposits, commercial segment, the mortgage segment. We will continue to improve talent and increase the capacity of the teams. And we're looking after growing that market, definitely. Orlando Berges-González: You saw the originations in the Florida market were higher than last quarter. And if you compare it to the first quarter of 2015, they were significantly higher, they were about 60% higher. So we've been -- we have been picking up the originations in that market.

This concludes our question-and-answer session. At this time, I'd like to turn the conference back to John Pelling for closing remarks.

Thank you, Nan. Thank you, everyone, for your interest today. We will be attending the Piper Jaffray Conference in Orlando, Florida next week, May 4 through 6. So hopefully, we'll see some of you there. Again, we thank you for your interest in First BanCorp., and this will conclude the call. Thank you. Aurelio Alemán-Bermúdez: Thank you to all.

Today's conference has now concluded. Thank you for attending the presentation. You may disconnect your lines.