First BanCorp. (FBP) Q3 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the First BanCorp Third Quarter 2017 Results Conference Call. 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, Rocco. 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 2017. Joining me today from FBP 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 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 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. Aurelio?

Thank you, John. Good morning, everyone, and thank you for joining us to discuss our third quarter results. On the call with its Orlando Berges our CFO. Orlando will provide the details on the financials as usual. But this time before I begin with the highlights of the quarter I really want to touch on the situation here in – following that two year against Irma and Maria. Let’s jump to slide 5, as the audience are aware that present that we’ve to say on president the challenge is to our business, our people, our communities, what we’re so very proud of how team of First Bank has responded to a situation, the outstanding the-board dedication care they have shown to show their effect. If you know early in September the real threat for our Eastern Caribbean and we as to say was really address really to Puerto-Rico and then Maria was a most larger event causing station to the infrastructure of the island. Immediately following the impact of the hurricane, we did ensure the safety of our employees who have been working to provide our customers access to working services, good to say our facilities and our technology service platform for consumers and commercial or remain operational during and after the storm. And one week following the impact actually before that the next Monday, we opened the branches and by that we achieved 50% of opening all branches to serve the costumers, a very high number among the the market. We did secure a new supply chain for electricity generators and are going to establish communication channels, most of our clients how to do things. Additionally, it's important to recognize that FirstBank has volunteer, volunteers have been very active in community support and relief efforts for impacted area. We have a established alliance with large corporation and clients an organization like [indiscernible] Puerto Rico who are really helpful towards the communities around the island. I think it's important we recognize that the storms expose the high level of poverty in the in the remote areas, the mountain areas for Puerto Rico and we do have a social responsibility to support those in need. Referring to the graph on slide 5, showing the bottom of the slight we have to say that we have achieved a lot of progress. And our operations are almost back to normal in spite of the challenges and the limitation of some of the key services. Actually today 92% of the bank of the network is open for service up from 88% yesterday. And in the Virgin Island 82%, so very high percentage, we are being able to achieve over the past six weeks. To say that over the last couple of weeks, we are getting better from business reopening and getting back to business, as we all have developed our clients are developing alternate ways of conducting their business and obviously the services are coming back to us. Let's talk about the key service and please move to slide 7 to see where we are. Slide 6, I am sorry. Slide 6 shows the progress on the key services in Puerto Rico since September ’13, we can see everything is in jalo because the still you know many challenges but as we can see there's been progress in most areas over those past weeks but I must say many industries have business supply chain, in order to compensate for this and be able to offer the business and the impact by industry. Again as we can see the first top line is electricity generation which only 42% after this period unfortunately we will not be back to normal until we see the island reconnected to the power grid fully reconnected and yes we're making progress but we remain concerned about the [indiscernible] time is taking to get our energy infrastructure rebuild and the impact to the economy we have to say directly correlated to the electrical grid being completely restored. Most recent goals polished by the government put this number, the 42% up to close to 80% by mid-December, hopefully we are there. Okay. Okay, so let's move to next slide, so we can start talking about the highlights of the quarter. Obviously our financial results for the third quarter were impacted by the storm and they did included charges of 66. 5 million to the provision of [indiscernible] related to Hurricane, Orlando will get into much more detail in this area. This translate into a net loss of $10.8 million or a $0.05 per share for the quarter, definitely we have to say that the storms interrupted our collections and lost mitigation efforts there was very limited ability to contact borrower during and after the storm and a few weeks after also. And this definitely impacted our delinquencies and our non-performing assets, we did offer really programs to our credit borrowers in both the commercial and consumer but it is important to comment that the [indiscernible] income borrowers and are not offered to pure delinquencies and Orlando will explain later in more detail. Excluding the impact of the storm, we were on track to do a really good quarter. When we had got the numbers to reflect them recurring items, net income will have been 27.4 million compared to 27.7 the prior quarter. Again, pre-tax pre-provision came stronger even though there was certain items that did impacted our numbers on the September business volumes. And importantly I want to highlight that subsequently to the end of the quarter, we are quite pleased to announced on October 3rd that the termination of the formal agreement with the Federal Reserve, something that was pending for some time. Additionally, we reported at the end of October our result for the [indiscernible] stress test which definitely show our strong capital position even in really worse economic scenario. Let us move to the next slide on the loan portfolio a bit. Loan portfolio remain flat and renewal activity was down and impacted by September, please remember that hurricane connectivity started very early in the in the month of September, strongly in the ACR and lightly Puerto Rico and also impacted Florida in a most of the September. But flow in our region was a very important contributor to loan and lease activity during the quarter as we can see in the graph on the top. Obviously regional diversification is important and it helped us in times like this so definitely it’s an important component of the strategy. It is difficult to comment on the pipeline until have some sense of timing on the grip, obviously we expect some impact this quarter, our initial volumes with some reduction from our normal trend but things are coming back, we are seeing more applications everyday people buying because mortgage origination should start coming up this month but definitely we have to recognize it's going to take until the first quarter to definitely see volumes being closer to normal. On the other hand, we do look for the opportunity 2018 to begin growing our loan portfolio in Porto Rico as the island rebuild, definitely there will be a significant re-modeling and reconstruction activity ahead of our for next year both from the private sector and on the Puerto Rico infrastructure and this should translate to increase loan demand and this is what we expect for 2018. Just touching on the deposits, the deposit franchise [indiscernible] very stable. We are monitoring the liquidity of our borrowers, obviously there was a demand for cash early in the process which thing is normalized. We're seeing some increase in the process actually some of the volume of claims on the issuance from the claims is coming into the bank, it will be used for reconstruction that that is already flowing into our account. Touching a little bit on the government exposure on slide 11, we continue to manage this very closely and we have to recognize moving from a fiscal crisis to a natural disaster crisis is not an easy task. We have to continue working with the government and supporting as much as we can, we're not looking to increase our exposure to the Puerto Rico government but yes we continue to support our municipalities and even in the current situation, we do feel comfortable with the exposure that we and the government deposit, a relationship with these municipalities continue to be very stable. Now I’m going to hand the call to Orlando for more details and we will be back for Q&A.

Good morning, everyone. To put financial results in perspective, I think it's important that we covered first the most significant financial impact from the storms. Clearly, the most significant item was a 66.5 million additional qualitative provision for loan losses that I Aurelio mentioned before. What we've done so far, it's a commercial loan officers visiting all of our customers to make storm impact assessments on each of them and determine the level of coverage as compared to the damage including business interruption, property damage et cetera. However, these events occur so close to the end of the quarter that makes it really difficult to estimate the immediate impact on all the costumers by September or through today. We expect that these detail assessment will be substantially completed by the fourth quarter as we obtain more customer specific information as well as market information. From the information we've gathered so far, we feel the financial impact will not come so much from physical damage to the customer property but rather from the impact to economic activity on the island. So what we have done it’s in order to estimating our interim losses in the portfolio resulting from these two hurricanes in both regions. We used our internal stress models in which we have incorporated assumptions for increases in unemployment and decreases in economic activity. These assumptions we base them on trends experienced and similar events in Puerto Rico as well as in other market for example Katrina example and an important in Puerto Rico the Georgia Hurricane example. To give you some-- put some perspective we ran models assuming unemployment doubled in Puerto Rico from current levels to just over 20% current levels are 10.1% and when we assume that economic activity index declined proportionally based on this increase an unemployment, the resulting the loss ratios from the models were then applied to balances on each of the portfolios to calculate the amount we are detail in our press release. We expect this impact to be temporary since the rebuilding efforts will stimulate economic activity that we have seen in other cases and will accelerate the pace of recovery and expectation is that it would lead to economic activity levels by the end of the third quarter of 2018 that will be just below pre-hurricane levels. Obviously these estimates are just mental and subject to change as we obtain additional information and we see the trends on the market. Other areas of impact, you saw net with interesting come down 500,000 a decline, for the quarter was due to a lot intuiting common residential mortgage loans that migrated to NPAs due to the storm's impact on collection efforts that Aurelio has mentioned and we also saw the net interest margin decline five basis points due to additional liquidity we maintain. Obviously significant events recognizing the impact if you reckon typically half and in this case even higher because of the magnitude of the hurricane, we took 250 million in short term funding to make sure we had excess liquidity in anticipation of costumers need. At the beginning there were some cash outflow but clearly we did need all this liquidity and we have already started to buy up all those funding since we deposit and there are increasing through the first few weeks after the hurricane. On the other income we saw reductions of 1.7 million in mortgage banking income and this is directly effect of the reduced level of mortgage originations and subsequent sales obviously as we sale good portion of the conforming paper in the market and we also saw reductions in the valuation of the mortgage servicing rights. In other items, the fee income is down 400,00 and ATM and POS transactions significantly reduced level of POS transactions we're now at about 62% of the volume of transactions that we were seen before and ATM we are also down from what we were seen before. Of course we did some weaving the piece to help customers, provide access to the money. On the expense side, we incurred 1.2 million in storm related expenses that includes 600,000 in donations and other relief efforts we carried out. Also, we had salaries and occupancy cost during the time the operation work also about 1.7 million and we charge around 600,000 opacity [indiscernible] that were damages from the hurricane. A 2.9 million of this amounts were book as we see it into, it is highly probable that they will be recovered from the insurance The quarter we sought combine everything, As Aurelio mentioned, we posted a net loss of 10.8 million of $0.05 a share compared to a net income of 28 million or $0.13 for the second quarter, the overall provision for loan losses for the third quarter with 75 million which compares with 18 million last quarter, primarily was driven by the 66 million provision. On the other hand, under normal provision, it was lower than last quarter because we had some reserve releases on two commercial cases that are now specifically evaluated for impermanent and the reserve needed based on the value of the collateral was lower than the year on reserve and also we had improvements in overall general reserve ratios based on the level of charge offs, we've had over the last quarters. The quarter shows a tax benefit of 8.4 million associated with pretax loss and the changes in the relationship of taxable to exempt income resulting from the increase provision and the fact that we do have only a partial evaluation detail that affects calculations. So if we assume a normalized fourth quarter we would expect that a tax rate for the year would be somewhere in the range of 22% to 24% but obviously it all depends on the whole relationship of the components. So as Aurelio mentioned, adjusted pretax pre-provision income for the quarter was 53.5 million down a bit from last quarter and this quarter we did have one extraordinary gain of 1.4 million as we purchased 7.3 million across prefer securities at 81% of par value. If you look at non-GAAP normalized net income excluding the impact of Hurricanes Irma and Maria as well as these other items that are not reflective of core performance like the gain on the trust preferred the fact that some idle payroll time will be charged to insurance hurricane expenses, net income was 27.4 million, non-GAAP net income 27.4 million, it's $0.125a share compared with 27.6 last quarter. If we look at the expenses for the quarter, the total expenses were 85.6 million which is down 3.5 million, this amount includes 1.1 million of decrease related to the hurricane expenses and the salaries and payroll that were booked as a accounts receivable so we will collect from insurance and other reductions were mostly on all the other expenses, we had some larger adjustments to values last quarter and FDIC cost is down as we have improved liquidity and the level of brokered CDs that we have on the books. Credit quality which is a significant component, Aurelio also mentioned at the beginning non-performing assets increase by 65 million which in 640 million clearly the hurricane have that an improving NPA trends we had in the previous quarters. The increase in the non-performing, that’s partially attributable to, in flow of two large commercial relationship in Puerto Rico which sort of 34 million, one of this relationships amounted to 21 million was carrying to our principal interest at September 30th but has been classified asset for some time due to its financial situation and it's expected that the impact of the hurricane will further affect their financial situation therefore we move the asset to non-performing. We also had increases of 23 million and 5 million in non-performing residential and consumers which were related to interruption in regular collection efforts related to the hurricane both in Libya and in Puerto Rico. One thing I like to point out that we did implement this also relief programs that in essence provide a three month payment extension to costumers. However, in accordance with the existing guidance the extensions were applied prospectively from the date of the hurricane and only costumers that were current or had less than two payments for us to do, so the rate of the event, qualify for the relief. In the case of the Virgin Island, we define the date of the event as a September 6 was Irma and in the case of Puerto Rico it was September 20th when Maria hit the island. Since all the expenses were applied to future payments, the extensions did not change the loan delinquency status as of the rate of the hurricanes and of course resulted in an increase in non-performing as well as the earlier delinquency information since we couldn't do all collection efforts and we didn't have some of the branches open for some of the timeframe towards the end of the month of September. In-flows to nonperforming because of this were 104 million, an increase of 66 million compared to last quarter which includes the 43 million commercial which included the two cases I mentioned and we had increases of 15 million in residential and 7 million in consumer which was a lot related to the collection timeframes. Early delinquency also increased to 261 million that means 67 million higher than last quarter which clearly this one is affected by the interruption of collections and the availability of the branches. Net charge-off on the other hand where very much on line there were 17 million or 80 basis points of loans which is down from 47 million we had last quarter or 2.1% of loans. A large chunk, 31 million that increase was primarily related to the factor in the second quarter of the charge-off 27.7 million we took on the TDF commercial mortgage loans or commercial mortgage loans guaranteed by TDF. And charge-off a 3.5 million we took on resolution of one case last quarter. The ratio of allowance obviously increased with the additional provision of 2.6% of loans and commercial MPLs we are carrying them at $0.50 on the dollar at the end of the quarter. On the capital front, Aurelio already mentioned capital ratios remained extremely strong despite the small loss in the quarter. We continue to make interest payments on drops and on the preferred dividends, the preferred shares and also Aurelio mentioned that we re-publish, repurchase or resold which show that we have ample capital to sustain and it's a very adverse economic scenario. Now, I like to open the floor for questions.

Thank you. We will now begin the question and answer session. [Operator Instructions]. Today's first question comes from Alex Twerdahl of Sandler O’Neill, please go ahead.

Good morning guys.

Good Morning Alex, good to have you.

Thank you. First off, I just want to talk a little bit about the provisioning following the hurricanes and specifically the process of assessing individual borrowers, when you came up with your last estimates in your provisioning for the third quarter, roughly where were you would you say in that process was that kind of towards beginning of the process still or had you already made some pretty good headwinds?

We took a look. We have visited all customers at the time we did this, all customers with balances of 10 million or more, we were going down the line on the others. Clearly, the preliminary visits are based on what kind of damages we saw, what kind of insurance, how is the business interruption but it takes a little bit of more time to understand. Okay, once you go into the detail of business interruption, what's covered, how much time if any they're going to be shut down or not, all that assessment requires a little bit more time so if you look at that from the Puerto Rico portfolio, we saw by the end of September or early October about 75% of the balances, since then we have we have made some more grounds looking at all the other ones. But still we -- it's a preliminary one and you still have to go back and understand what's happening during the quarter on the business side to really fully assess what's going on with each of these customers.

Yes and I think Alex I just want to add obviously variable here. For some of the clients coming back to the great, the operating expense is higher when they have to operate with diesel or when they cannot open if there is no grid and so it is really different by the industry. We see, for example, all the hospitals are back to the grid they were supported by [indiscernible] to their own cash flow because they are critical services and so it's really varied by industry. Retail, mall, some of them are open, a few of them are still close as of today, and then you know we don't have a lot of manufacturing but that’s our priority for bring him back to the grip but it’s still not up there, So, it’s really varies by industry and it's good what we're seeing, more clients reopening but won’t have more assurance until the provision reflects the uncertainty that brings to the table for today and we will not see, we will have not more clarity probably until we reach mid-December and we see that if 42% is really back to 80% or not. So, I think I want to mention it because it's an important factor I think we overcome all the factors are telecommunications, gas stations are open supermarket, and obviously bank branches are in a very high percentage now. So, it's really how we look at our clients by industry as we get closer to December and hopefully we that accelerate, there's a lot of attention into that around the world and obviously everybody is working hard to bring that up as soon as possible but it's a difficult task, there was significant damage to the grid and it's a difficult task.

Right and so customers that are not on the grid is it more [indiscernible] or expenses are going to be higher for the time in which they don't have electricity from the grid or is that the just are unable to operate a full capacity on generators?

We have both, for Orlando mentioned business interruption coverage, so it depends, some of them have business interruption that will last for six months, some of them will only last for three months or the equivalent to their net operating income so those are the analyses, the assessment that we have to make individually and it's both, some of them cannot open and some of them because of the grid some of them have been able to move quickly and build a new supply chain so they can open their businesses so it is a large portfolio and we've been going client by client and having an understanding and be able to conclude that exercise will conclude this quarter as we continue to see progress here. Yes.

Okay and then it seems from the additional general provisioning that you did in the quarter that you provided a little bit more towards consumer loans which intuitively makes sense but is there a specific segment of the consumer portfolio that in your stress models, is a little bit more at risk?

I think we follow, the models are complex, they take into consideration the unemployment factor, obviously again if an unemployment – if the grid takes longer and business doesn’t open timely when employment will increase more. Again, it's also related to the grid because business are not hiring or taking decisions of terminations based on the revenue and cash flows. There is being growth in some of the businesses, there is good stories here to tell also because of the demand of their services but in general we [indiscernible] say we're modeling that the unemployment will increase temporarily and we were saying this quarter and the short term and potentially next quarter we're not assuming that this is going to last longer. So based on that there could be an impact. And that's what the models are showing. It's across the board on unemployment when we use unemployment as a variable is across the board on the consumer portfolio which include resi also.

No, the resi is separate from the number he probably mentioned but obviously the model do happen in their calculations Alex that if you take an order portfolio, the loss content of an order portfolio would be lower than the loss content on a credit card portfolio because of the value of the collateral behind it. So all of that is built in the model but at the end we do have, it’s an auto portfolio, or credit portfolio or is a more personnel on small loans portfolio so it’s divided among them based on their weight of a loss components over time.

Okay that's good color and then just finally, the TDF loan, I know you made some progress on it and you received the cash payment, can you just give us an update for exactly how the TDF loans stand going to the third quarter and likely impacted by the hurricanes like everything else but just for a full update on how that particular set of loans stands today?

Well those are linked to the GDB agreement, the GDB settlement agreement and they are spending the final closing of the exchange which was delayed so we only recognize, what we have received as part of the agreement and obviously updated appraisals and value of the collaterals which we own and that is the portion that the guarantee [indiscernible] guarantee by TDF and we are in the process selling. So, it shows the value, we have taken, the charges that are related to that and we have the collateral now to continue working out those collaterals and those properties and they are going to the same challenges, the large one is actually, getting benefits out of the crisis because it’s the largest hotel in the conventional center and there is a lot of activity, occupancy is very high and the property offered a very little damage and is actually becoming a better business to it and it was prior to it. The other two types of damages and even though one of them is operating, they need to be fixed to be fully operational. So really falls under the same analysis and evaluation that we're making to other borrowers now that we have to work with the borrowers and in either bringing the business back toward this position of profit.

Okay. Great thanks for taking my question.

And our next question today comes from Brett Rabatin of Piper Jaffray Companies. Please go ahead.

Hi. Good morning everyone.

Hi Brett.

Good morning Brett.

I wanted to first just talk about the loan demand and I know it's early to make any predictions for the fourth quarter and obviously the originations were impacted in 3Q but you've said you're going to look at growing the loan portfolio in ’18 and you mentioned construction, can you talk about the growth prospects in Florida and then aside from possible construction in Puerto Rico, what portfolios you expect to grow over the next year and what you're looking for from just overall volume perspective?

I think Florida we should, you should look at when you look at the numbers here today this year and the prior years I think we are showing a track record, it's really a slow growth and it’s in the strategies across the different businesses. Obviously, we were looking to continue the strategy on the commercial business which has really been key business for this year. In the Puerto Rico side, we do believe that if we look at what happened after two other storms in the island and the impact of insurance funding loss, all the sources of funding reconstruction funds, it really translates into increased construction activity on the infrastructure and on the suppliers side of the equation, we have already seen some demand on businesses that are supporting that side of the equation, the importing of materials, companies are getting contracts, when you look at the private sector 30% of the hotels are suffered damages and will be a actually 35 and will be reconstructed or remodeled. So those are large projects. When you look the infrastructure of roads electrical water and the municipalities, there would be found in that area when you take into-- it's a construction industry when you look at the factor of affordable housing, definitely there will be some volume in that sector that hasn't been present before, the area that suffered the most on the housing side, were wooden structures in the in the mountain side of Puerto Rico and replacing it with cerement will probably be the route that we are going to be seeing taken and will be affordable housing with space also here. So, I don't think there's any specific industry by itself, I think it's just when you look at the statistics and the ripple effect that could have on recovering employment and helping the consumer they get back on track and so we are seeing unemployment issue for term, so I assume obviously we have to take into consideration because we are assuming this is going to bring material amount of function to Puerto Rico from one source of the other estimated the inflow, it’s estimated in the $40 billion to $50 billion to date. On the other hand, they have still got these challenges, so that’s the equation, it’s going to get revisited and obviously foreign policy or congress policy also could have an impact on Puerto Rico what but it’s part of the process and we have to analyze. We know that definitely construction and rebuilding activity is going to happen for sure so those are the factor we have today, yes.

Okay and then I just want to go back to the provision and making sure I understand the assumptions and I appreciate the color you gave around your assessment and essentially that the economy would be weaker and then possibly, later in 2018 you might have stability, a little bit lower than the pre-hurricane levels, and I want to make sure and understood what you're assuming for unemployment and are you assuming the if the power comes back in the fourth quarter, can you give us a little more color on some of the assumptions you are making with that provisioning?

Yes. So, this model we have tested over a number of years and basically we have stronger correlation of what happens with losses and what happens with unemployment and we had economic activity in exists, so what we did that we are seeing, because of the great electrical grid issues there are large number of costumers of -- businesses are having more difficulty in opening. So we are assuming an accelerated increase in unemployment, unemployment in Puerto Rico was 10.1% the last number that was published and we are assuming that by the end of the fourth quarter the number is hitting 20%, just over 20% on the assumption in Puerto Rico and it starts coming down gradually by the end of the first quarter through the end of the third quarter of 2018. Some of this economic activity comes back and the grade would be much higher percentage in the first quarter of next year and then the monies of the insurance start to run on the island by the end of this year and beginning of next year, we will accumulate some of the economic activity. On the BI, we have similar assumptions, a little bit higher unemployment at the beginning because of the industry it’s a lot of tourism driven and they are going to be impacted by the fact that this is a high season just coming now and there is going to be some impact on all the industries to the tourism on the BI which is high correlation with the economy that it is important to Puerto Rico. So it can increase to 20% on unemployment or 20.2% is exact number we used, reduction in economic activity in this proportional to that increase, by the end of year and then starts coming down slowly through the third quarter of 2018.

Okay and then just lastly expenses were benefit to the late revenue in the quarter, is your view that you will be able to maintain, kind of their pre-provision earning power throughout this process or can you give us, I will be little -- what color on what you're assuming happens to fee income premier?

Fee income is still going to be affected on the fourth quarter. The main things on the things coming our side, it's four components; number one would be the mortgage banking component and we don't feel that the origination, it's going to get to level to pre-hurricane in this fourth quarter, it's going to take through next year. So we're going to see lower gains on sales that we've had at the beginning of the year so that would be affected. We do believe that there is still going to be some impact on the fourth quarter related to all [indiscernible] because of the availability of the networks and the impact on the cost on the commercial customers so that that still going to have some impact. Assuming that the grid comes substantially up, the first quarter we will see some of that start to normalize by the first quarter of 2018. The other components are, we haven't seen much impact on, deposit impact went up right after the here and fee income in there other than decisions we made on waiving fees through on ATM transactions are so to provide customers opportunities those are going to start coming back in the fourth quarter to normal levels, I don't think that by the end of the fourth quarter it's going to be back to normal levels. And other businesses are continuing, like insurance and so it’s not a large chunk of our business but it's a decent chunk that it's still in there. On the expense side, we do expect to have more of expenses related to the hurricane in the fourth quarter but we do expect that based on the corporation and our insurance policies we will recover part of those expenses are a large part of those expenses, so it's going to be an impact. At the end at the end, if economy moves the way we're anticipating which is very judgmental at this point, obviously at the end would be what happens with the net interest income and we feel that it would normalize the end of first quarter beginning of second quarter of next year. So, I do believe that eventually we will be back to the same pretax, pre-provision revenues.

Okay, great I appreciate the color.

And our next question today comes from Jo Gladue of Merion Capital Group. Please go ahead.

Good morning.

Hi Jo.

Hi Jo.

Let me, I guess touch on the one more question about your provision estimates and how you calculated it, I just wondering if you tried to incorporate any estimates in addition to the unemployment growth that you have tried to incorporate any of the potential population loss, certainly I guess we've seen the number of estimates about that but that sort of just included sort of higher unemployment.

The way we see it, I mean if people leave obviously sometimes the unemployment looks better because of that because they go out of the Permian, at the end we have someone that doesn't have the income to be able to contribute to the economy or to pay loans and the same thing it’s going to happen with the economic activity with people leave and so if you look at this model have been based on historical information and the loss components and those loss components have already included the fact that we've had a migration out on the population side. So we feel comfortable that any part from migration it's properly reflected as part of this two major component and as part of the modeling. So we did not incorporate anything specifically separate because we feel it’s measured on the unemployment and the economic activity.

Okay, fair enough. Let me ask, I guess, provide any comments on the net interest margin going forward, I think you mentioned that you expect to be drawing down some of the extra liquidity and I would imagine some of the insurance recoveries and everything will likely go into provide some lower cost funding. Do you think you'll have some, some decent expansion in the margin over the next couple of quarters?

I don't think we're going to have a big expansion. You have completing factors affecting the margin clearly we all have some relief programs that are extending some payment and we need to see what happens with all the payments when coming back again. And we are seeing that we still have some wholesale funding and the market is not coming down, getting a little bit more expensive on the hotel front inside and even within our Florida market, the market is getting more expensive. So there are going to be a couple of things that are going in opposite direction. So, as I mentioned the margin was affected about five basis points by excess liquidity, we shouldn’t have that next quarter but there was some impact from the non-performing component so I would assume though that it's going to be more at this level than anything else.

And I guess lastly I will ask about, some of the capital and I guess, specifically the repurchase of the trust preferred securities at a discount, wondering if anymore of that is possible, I assume you do get Fed approval for that if any was available?

Well, as opportunities come to the table, we done two transactions of the same type it's something that we continue looking for but it depends on the availability of the of the transaction.

And they don't have it all the time. They show up and as [indiscernible] mentioned we went to the Fed and they supported the transaction -- going ahead with the transactions, so we were able to execute it. The other side I could come up that make sense will continue to be the same.

And then you have other capital actions but I would imagine, some of the disruptions from the storms would have put any potential action off down the road a little bit until things settle down is that a fair assumption?

That is a fair assumption, yes.

Alright, that’s it from me. Thanks.

Thank you.

And our next question comes from Glenn [indiscernible], Please go ahead.

Hi. Congratulations on the bank's response to these disasters, you guys have faced a lot of adversity over the last few years and you've always stepped up and I think that's for the credit of your associates and your management team.

Thank you, Glenn. I appreciate it.

Thanks.

Just looking at the customers that are kind of taking the payment -- advantage of the payment holiday right now, can you give us some color on that and maybe then what your expectations are in late December when these payment holidays kind of expire? What are your expectations for people to come back to paying?

I have to say general optimistic. When you look at what we were doing, even though we offered to 200% to the client, there is a retaining a number of clients on the consumer and mortgage side and then continue making their payments. We're not waiting until December, we are actually calling the portfolio instead of doing collection actions, we're calling the portfolio to understand they have done lost their jobs or while the unemployment looks so we can prepare for that but we can’t really tell until the end of the period until the December. On the commercial side, it's not a large numbers of customers that I have requested the extension and we only doing principle payments, we are not impacting the interest payments and that actually second case by case when you look at the size of the portfolio on the majority and again it is a case by case matter and we have to be on top of it. We make an estimate and the provision includes for submit the ratio initial period as Orlando explained but we do expect that things go back on track after the first quarter of the year.

Okay, and just a follow up, you said you would you were seeing applications were up and you gave a little bit of evidence, could you give any more like anecdotal evidence about what customers you're seeing are borrowing maybe and what industries and how things are going there in the near term?

We are nothing applicant. We have seen some activity or some of the borrowers that are related to construction industry acting for line increases to bring materials, availability for supplying the services that they have and that’s the type of the activities very related to the reconstruction activity. If you're in the business of services related to construction, in general, you are seeing an increased demand.

And then, lastly, I am sorry...

No, I was just going to say but naturally, you don't see that on the mortgage side, it’s low lower as well as the order side is lower but we do expect the some of it will start coming up by December.

And then just lastly on the immigration question, you have a pretty extensive Florida franchise, are you able to track either through credit card usage or ATM withdrawals what proportion of your customers that were typically in Puerto Rico have kind of moved over to Florida?

No, to be honest, we are working on having more definite analysis but data it’s very complex to determine based on that. It requires a lot more, there are some people that move temporarily and are coming back but up to now everything is anecdotal, there's other sources of information that we getting to track, I think everybody is trying to get a number and more framed number other than anecdotal, the information that is referred, we know about cases we know employees, I just look at my large forces, not a concerning number, it doesn't show a trend, it show just people managing a specific situations. We have 2500 employees in the island and [audio gap] up to the airport you see people mostly at the age of retirement primarily when they're moving out of the island we don't know it's temporary or it is preeminent and I don't think we will not until the grade is normal and people decide it, if I have electricity I would come back or not, I think that’s going to take a couple of quarters to know that number with certainty.

Great, thank you for taking my questions.

Thank you, Glenn.

[Operator Instructions], so end of the questions, I am going to return the conference back over to Mr. Pelling for any closing remarks.

Thank you, Rocco. Moving on the road next week attending the Bank of America Conference in New York on 14th and then will be at Sandler O'Neill at Maple’s Court on the 16th and then in December we have KBW tour to Puerto Rico on December 11. We appreciate your time and support. This will conclude call. Thank you.

And thank you sir, this conference is now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.