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? Aurelio Alemán: 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…

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…

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. Aurelio Alemán: 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. Aurelio Alemán: 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. Aurelio Alemán: 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. Aurelio Alemán: 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? Aurelio Alemán: 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? Aurelio Alemán: 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. Aurelio Alemán: 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. Aurelio Alemán: 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.