Good morning and welcome to the First BanCorp First Quarter 2017 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, Investor Relations Officer. Please go ahead.

Thank you, Gary. 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 2017. Joining me today from First BanCorp are Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today’s call, it is my responsibility to inform you 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 or press release issued by First BanCorp, you can access them at our website, www.firstbankpr.com. At this time, I’d like to turn the call over to our CEO, Aurelio Aleman. Aurelio?

Thank you, John. Good morning, everyone, and thank you for joining us to discuss our first quarter results. On the call with me today is our Chief Financial Officer, Orlando Berges. Orlando will provide the details on our financial results. But first let me walk through some of the key highlights for the quarter. Please turn to Slide 5. We are quite pleased with the results of the first quarter, especially in light of the fact that our main markets continues to face the fiscal headwinds that I believe everyone is aware. We did generated $25.5 million net income during the quarter or $0.11 per share. Orlando will cover the detail obviously, this number shows some noise on OTTI charges and the tax benefits. Orlando will cover that in detail, but most importantly, we – I want to highlight that we improve all our core operating metrics during the quarter including credit, capital, the deposit franchise and most importantly the core earnings. Our pretax pre-provision income came in at 55.4. We – now we have two quarters in a row where we achieved the $55 million level from the prior 54 for some consecutive quarters. This could become our new target. We continue to expand our NIM up further during the quarter and we continue to show a good trend for managing our expense base which was below the $90 million level this quarter. Actually, if we exclude OREO expense it was below the $85 million and I think we have mentioned in prior calls that our goal was to staying expenses below the $90 million excluding OREO while $85 million will become our new target. Core deposits net of government and broker increased $36 million while reducing reliance from broker CDs by $81 million with the franchise continues to…

Good morning everyone. As Aurelio mentioned, for the first quarter, we posted a net income of $25.5 million or $0.11 per diluted share, which compares with $23.9 million last quarter. The calculation per share thus reflect the fact that the – dividends on preferred throughout the quarter allowing the amount of income as Aurelio obviously commented. Assets for the quarter were $11.9 billion which is basically flat from last quarter and some of the things Aurelio touched upon we’ll cover in a few slides. Included in the results for the quarter is $12.2 million other than temporary impairment charge on Puerto Rico government, so clearly I would talk on in a couple of slides and also $33.2 million tax benefit for the quarter. This quarter, we changed the tax status of couple of stuffs from taxable corporations to limited liability companies. With this structure, we can make the election through the entities are partnership for income tax purposes in Puerto Rico which allows us to you to offer someone entity against earnings of another entity. So we thought of reversing $13.2 million of our net reversable so far with that assets valuation allowances that we had on the book. Also in the quarter, as Aurelio mentioned, we completed the sale of the PREPA lending facility. That resulted in a small provision of $600,000 provision for loan losses of $600,000. And also, in the quarter, we increased by $10.8 million the specific reserve for the commercial mortgage loans guaranteed by TDF that we have on the book, a function of obviously what happened to the fiscal plan and some of the growth that we saw later in the – at the latter part of the quarter. Total provision for the quarter was $25.4 million, $2.2 million higher than last quarter including…

[Operator Instructions] The first question comes from Brett Rabatin with Piper Jaffray. Please go ahead.

Hey, good morning guys.

Good morning, Brett.

Good morning, Brett.

Wanted to first ask on the new expense guidance of $85 million, just does that include the OREO expenses and that would obviously indicate that you are going have lower expenses going forward? Can you talk, maybe a little more about what you are expecting on the various...?

We’ve been talking about $90 million excluding OREO. If you see where we are today, we are on the base with the orders, actually – five excluding the OREO in both quarters. So, the guidance is excluding the OREO. OREO moving target, depends on potential transactions that we try to sell or not, the level of appraisals that we have to any specific quarters, valuation of properties, so it’s a very difficult target to estimate, it is of the timing, when you look at it through the year, it’s usually within the target, but it provides noise within quarters, so that’s why you heard about sell the quarter’s target excluding the OREO.

Okay. And then, wanted just to go to some of the noise around the government exposure. Can you give us some color around the updated mark on TDF funds, the guarantee and the underlying properties and then, would you think about, you sold PREPA, would you think about possibly getting out of TDF or the OTTI exposure. I know you marked them pretty heavily, but.

Those, I have to do – I know there is some continuous conversations that we play not only first, regarding exposures, so I get preferred to do delay this discussion of that further. Obviously, that takes probably next week. I think that we include how aggressive it might be the asset growth and basically the relative values that we have provided through – we think to obviously the collateral of the operating entities, I think we can comment that while there are sales the largest exposures could be the great interest on the facility. So it’s generating cash flow, you know the need of the guarantee, the others obviously have ensured and continue to ensure of making those payments. I think when we look at the detail of the press release, actually where they be carrying that, blended with the OTTI charge that we said. And obviously, a large portion of them have the real estate collateral on that. So you might see more detail on when we file the Qs, okay?

Okay.

And that will…

Okay.

Really address it might be a doubt.

Okay. And then just last, I know some of the origination for refinancings but those loan growth improve was with Florida or basically is a flat kind of outlook still more likely?

Was it for…

For the year you mean?

Yes.

For the year, yes, the outlook is flat. Obviously, while we turn this replacing the NPLs with performing and we also mentioned the target of performing books, which was $2 million but one portion obviously the asset generation basically the non-performing asset reduction, that trend actually – trying to focus on doing a better job this year in holding the NPAs down and hopefully we can actually – and Florida comes with to the one of the – we also are looking to stabilize the construction on the consumer portfolio in Puerto Rico which when you look at the credit metrics the consumer portfolio is basically showing the best quality metrics for the past four years. So, we see the CMO portfolio to come up that – we do that contraction while actually starting a turnaround. So those were the components, but, yes, net-net flat portfolio through the end of the year, yes.

Okay. Great, appreciate the start.

Thank you, Brett.

The next question comes from Alex Twerdahl with Sandler O’Neill. Please go ahead.

Hey good morning guys.

Good morning, Alex.

I just want if you can give us a little bit more color around if the DTA, the valuation allowance with some of the things you did this quarter, it sounds like you are versed a little bit more of the valuation allowance from the DTA associated with First Bank. But then, just as a bottom of the page, I show no page, when you talk about income taxes in the press release now says the net valuation allowance has gone to $195.5 million. So when we kind of think about the valuation allowance and the potential one day for that that you reversed, assuming then earnings at some point to get much get better, should we thinking about $195.5 million or should we be thinking about the valuation allowance of $154.7 million, so to say with First Bank?

Yes, the 154, it’s a number that we’ve been discussing mostly, it is now down to 154. Remember that in Puerto Rico, we are taxed based on legal entities. So - some of the changes we – I meant from the report trying to maximize cash usage. The two large components were the First Bank, the deferred tax asset valuation allowance and then there was a valuation allowance on the holding company, be it’s a holding company it’s mostly expenses. This legal restructure did allows us to have the entities that are through partnership. We already had one entity which had losses which was part of the First Bank valuation allowance and those losses couldn’t be used unless we had another similar entity. Now with the restructuring, we can use some of it. And that’s why we were able to reverse – we did some net reversal of those $13 million that I mentioned. But also, the restructuring will allow us to start using or realizing some benefits out of the losses we have in at the holding company and being able to use some revenues again NOLs at the bank. So the holding company component, it will be difficult to have a reversal or estimate a reversal because of it. Revenue components that are there, but the other things on the First Bank side of it which is a 155, you mentioned, it’s the one that we are talking about.

Okay, so 155. So the rest of it’s really there, but it’s going to be hard to foresee it ever being reversed.

Yes.

Okay.

At this time, based on the restructure we have it would be.

Okay. And then, with the new expense guidance of $85 million per quarter, we’ve kind of using sort of a pretax pre-provision estimate of like $50 million is kind of a reasonable bogie, trying to feed that every quarter. Should we now be thinking of that number, $55 million of pre-tax pre-provision which is, you beat that over the last couple of quarters, but is that now a healthy projection going forward? Is there is some other components in the P&L that that we are not thinking about?

Well, we don’t quote any projections. Projection is very different to a goal or a target. So – but, obviously, in line with the extent we are – obviously, we will work hard to sustain the $55 million, but yes, there results are yet that $55 million as obviously sustaining the loan portfolio or not being able to achieve to get back the non-interest income on the mortgage side. The mortgage market if takes up, so as anything important to recognize that the rate environment will have an impact on the non-interest income side, the mortgage as we have less interest to sell in the secondary market, a significant portion of the Puerto Rico production is sold on account basis it’s already 80%. So those two considerations, obviously, if you do somewhere between the $50 million and the $55 million, understanding that the mortgage market could pose a risk in general not to on the First Bank but to all the industry.

Okay. And then, can you give us a little bit more color on the TDF loans? I know you said, 56% of unpaid principal balance, but if I am not mistaken three loans, can you give us the break down on those three loans the unpaid principal balance and the holding values of each?

The three of them, it’s – the unpaid principal balance one of them, the book value, I am sorry, on the three of them.

Yes, I think, Orlando, the 56 often group the securities portion growth or you could line them, okay.

Yes, three and the quotient on the carrying amount, we plan to book that on the two, Alex, it one a modification with the government on the bids and hopefully we can get some priority on existing loans and we are trying to stay away from money, politics on specific loans. In the mean time, hopefully we will disclose that on the Qs. But it’s in line with what we have seen on the last few quarters. We’ve been applying principals to collect them and as I mentioned the book value, it’s $0.01 before the third. And the carrying amount, the 56 carrying amount includes the bonds and the – both the TDFs – I am sorry, the GDB and the Puerto Rico those are priority bonds which have an applied principal balance of 65. So we have taken over 34 million of OTTI charges. So I can give you some more views by – two days, and hopefully that would help you.

Okay, we will be looking out for in the 10-Q. Thanks for taking my questions.

You bet.

Thanks, Alex.

[Operator Instructions] The next question comes from Joe Gladue with Merion Capital Group. Please go ahead.

Hey, good morning.

Hey, Joe.

Hey, just hope you could give us a little color on what’s going on in Florida. I know you had the new options, wondering how they are going. And if you could give us a little color on, I guess, what was driving the decrease in deposits in Florida?

You want to do that Orlando? Yes.

Yes, let me first clarify Joe, the – in Florida are not new, we had some planned renewals. The new facilities we have, we opened it in last year and we did remodeled some facilities on

West Kendell.

On West Kendell. The deposit in Florida, the broker deposits has mostly in Puerto Rico and a little bit in the Virgin Islands, deposits in Florida have come down a bit. The market has become very expensive on deposits, certainly on time deposits and we’ve been able to continue to increase the deposit base in Puerto Rico at a lower rate which is not what happened five years ago. So we do not want to compete on time deposits. We have continued to pursue our business strategy in Florida for our business generation. So our non-interest bearing deposits have continued to come up in the market, in the Florida market and we’ve been growing on that – our core customers on the front end. But that’s not enough to offset the reductions in time deposits and for now, we don’t foresee us trying to compete and we don’t need that expensive funding. So we continue to drive deposit growth from our Puerto Rico operations.

Okay. I guess, wanted to get a better idea on the – with the change in the tax status, the entities, how is that going to affect your overall tax rate going forward or what we can think for tax?

Yes, obviously, there was a one-time change, which is a one year start, so here because of our valuations allowance, so part of the benefit came in and that one-time – one of the entities will continue to generate something. So, right now, we are estimating it at a effective tax rate for you on a yearly basis, should be somewhere around including all entities, including entities that are having some losses, somewhere between 25% and 26%. But that’s based on current estimated yearly revenues and mix between entities. So that obviously subject to movement as we - dependent on exempt versus non-exempt and then taxable versus non-taxable entities. But that should be – where we are experienced right now.

All right. Thank you and I guess, lastly, I’ll ask if you can – you have any feelings on the timing for the FED order?

No, obviously, we don’t share the conversation with the regulators, unfortunately I cannot give you any guidance on that.

All right. Fair enough. Thank you.

Thank you, Joe.

[Operator Instructions] Showing no further questions. 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, Gary. We appreciate your interest in First BanCorp. Upcoming in May, we have the Piper Jaffray conference in Palm Beach, May 15th and 17th and then we are doing a Puerto Rico Community Bank Day with Piper as well on June 13th in New York. At this time, we will conclude the call. Thank you everyone. We appreciate your interest.

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