First BanCorp. (FBP) Q1 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the First BanCorp's First Quarter 2018 Results Conference Call. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to John Pelling. Please go ahead.

Thank you, Andrea. 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 2018. Joining today from FBP 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's my responsibility to inform you this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to 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 under firstbankpr.com. At this time, I'd like to turn the call over to Aurelio Alemán. Aurelio? Aurelio Alemán: Thank you, John. Good morning, everyone, and thank you for joining us to discuss our first quarter 2018 results. Please, let's move right away to Slide 5 so I can cover some of the highlights. We're definitely very pleased with our strong results for the first quarter of 2018. Glad to say that all of our core businesses and operating metrics are moving in the right direction with the exception of the declining loan portfolio this quarter, which was not actually a surprise. From a profitability standpoint, a really good quarter. Our net income reached $33.1 million and $0.15 per share. Pretax pre-provisioned income reached record levels of $60.7 million. We also made some progress on the asset quality front. NPAs declined by $13 million. NPLs are down by $21 million, and inflows are also down this quarter. During the quarter, we transferred to held for sale three nonperforming loans, adding to $57 million, which led to an increase in charge-off of $9.7 million related to those loans. This decision was driven by increasing common interest from investors in certain assets, which now gives us the opportunity to work closely -- to move some of these loans out of the balance sheet. These loans are actually under LOIs or under due diligence process for potential sale. Again, credit quality metrics, improving those is really a top priority for 2018, and we will continue to put additional efforts on it. The island continues making progress after the hurricane, and we continue tracking the various economic activity indicators as well as unemployment, which are showing slight improvement on a month-by-month basis. Customer payment trends post moratoriums continue in line with those pre-hurricane levels. We do believe we need to see performance over a few more quarters to have a better sense of sustainability of these trends. We're definitely seeing progress on continuing increasing insurance payments across the commercial portfolio. And obviously, this reflected in the positive impact on the increased liquidity on our deposit balances. Excluding government and broker deposits, our core deposit increased $195 million this quarter, which, importantly, $186 million in noninterest-bearing accounts. Government deposit increased close to $40 million. On the capital front, we executed another small capital action, which, in the first quarter, with the repurchase of -- and cancellation of $23.8 million of TruPS, which also contributed to the quarter, with a $2.3 million gain. Again, we continue growing our capital base. And at quarter-end, tangible book value per share grew to $8.32. Capital metrics continued to improve, and we look forward to returning capital at some point in time in the future. Now let's move to the loan portfolio on Slide 6 to talk about the trends. As I said, loan portfolio declined $96 million this quarter. It is important to comment that significant portion of this decline was due to paydowns and prepayments closely to $62 million and also two note sales that added to $15 million, classified loans that we decided to move out of the book. Loan origination volumes in Puerto Rico and Virgin Islands are still weak if we compare it to prior levels, but I recall that, in every month, we continue with our firm credit policies. There was a slight decrease in all main categories during the quarter on the loan portfolio, but origination levels show increase across all of -- slight increase across all those categories, too. In Florida, quarter was stable, contributing to help sustaining the loan portfolio. I have to comment that the second quarter is building at a better pace across our three regions and should reflect improvement during the second quarter. Ultimately, we look to the opportunity as Puerto Rico continues to rebuild. We look for opportunities to grow the loan portfolio. We don't expect to reach normalized origination levels until probably the third quarter as a trend that we continue to see. Let's move on to deposits, some of the important highlights here. It was a great quarter like the prior one in deposit growth. Obviously, the core is the most important one and the noninterest-bearing continues to contribute to the NIM. Definitely, storm-related factors, so the effect of payment deferrals, disaster relief fund, settlement of insurance claims continue to contribute to this accumulation. And what is also important to note that, if we compare new accounts during the first quarter of 2018 with new accounts to the first quarter of 2017, we did open more accounts in 2018 than in 2017. Please let's move to Slide 7. Before turning to Orlando, definitely capital continues to build. Very strong capital ratios. Total capital of 23% and TCE, 14.8%, almost reaching the 15% point. We don't have any additional notes on capital deployment today, but it definitely is a priority of the management team and the board. So with that, I'll turn the call over to Orlando, so he can cover more detail of the financial highlights of the quarter. Thank you all.

Good morning, everyone. So as Aurelio mentioned, first quarter posted $33 million, as you saw in the press release, $0.15 per share compared to $24 million or $0.11 last quarter. Very good quarter, driven by improvements in net interest income and other income as well as a reduced level of provision for loan losses. If we were to adjust the results to exclude the gain on sale on the droughts and the storm-related charges, which are items we don't believe to be part of core performance, on a non-GAAP basis, the adjusted net income for the first quarter would have been $31.3 million compared to an adjusted net income for the fourth quarter of 2017 of $28.1 million. Provision for the quarter, as you saw, decreased $5.2 million to $20.5 million. That compares with $25.7 million in the fourth quarter. As Aurelio mentioned, during this quarter, we transferred to held for sale three nonperforming commercial and construction loans. The aggregate recorded investment of these loans was $57 million, which resulted in charge-off of $9.7 million and an incremental provision for loan losses of $5.6 million that we took in the quarter. On the other hand, we recorded a release of $6.4 million on our storm environmental reserve, which is primarily resulting from updated assessment on commercial credits that we have discussed over the last two quarters. We have been individually analyzing since the storm to determine their impact. And a decrease that we've seen in the balances of consumer portfolios that were originated prior to the storm as a result of payments. This reduction in the commercial side is basically four relationships that we had previously assessed as medium risk from storm impact but were moved to low risk this quarter upon the reviewed quarterly assessment we had. On the consumer side, we have been -- we have seen payment trends continue to be stable throughout the quarter, and we saw improvements in early delinquency. However, we're still monitoring closely, as moratoriums, even though most expired in December, there were some that ran into January and a little bit into February. So that increased the capacity of consumers to continue to make payments. So our expectations is that any impact on payment behavior or full impact on payment behavior, we wouldn't see it until the end of the second quarter and into the third quarter. Therefore, we have not touched the reserve -- the environmental storm reserve on the consumer side other than for changes in balances. Also, as Aurelio mentioned, our pretax pre-provisioned income in the quarter amounted to $60.7 million, which compared to $53.9 million in the fourth quarter. It's a very good pickup. Part of the improvement, as I mentioned, is on the net interest income. That increased by $2.4 million to $124.7 million as compared to $122 million last quarter -- fourth quarter of '17. This increase reflects, first of all, the full quarter impact of purchases of U.S. agency securities we executed in the latter part of December of '17. And obviously, with the increasing rates, we've seen reductions in premium amortizations because of the lower prepayments that we've had in the portfolios. On the interest expense side, we've also had reductions, about $800,000 related to improved funding mix, which as Aurelio pointed out, we related to that large increase in noninterest-bearing deposits we have seen over the last two quarters. The cost of interest-bearing liabilities have gone up a bit, one basis point, as compared to last quarter. But obviously, we had the benefit of two fewer days in the quarter. On the commercial side, we had some improvement, about $500,000 improvement in net interest income, which is a net effect of basically the upward repricing of the loans. We had a good amount of variable rate loans on the commercial portfolio tied to LIBOR and prime, and that led to pick up in net income on the portfolio. On the other hand, on the consumer portfolio, we saw a reduction related to the number of days. There were two fewer days in the quarter. Margin picked up nicely to 4.40%, again driven by the funding mix that -- improved funding mix based on the level of noninterest-bearing accounts that we have generated over the last two quarters. On the noninterest income, also good improvements from the last two quarters. First of all, we had a gain on the repurchase at a discount of the TruPS that Aurelio made referenced to. That was $2.3 million gain. That is not a recurring thing item. So on a non-GAAP basis, if we exclude the effect of that repurchase, the adjusted noninterest income was $20.5 million as compared to $15 million last quarter, a nice pickup of $5 million. And that reflects $2 million increase in seasonal contingent commissions on the insurance business we had. We had a pickup of $2.3 million in mortgage banking revenues, higher volume of originations in the quarter. We had a $600,000 pickup on transaction banking fees as we have seen transaction volumes of POS and ATMs related approach normalized levels during the quarter as compared to what we saw at the end of last year. And we also had a gain on -- of $800,000 on the sale of a fixed asset of a closed banking facility we had in Florida. So nice pickup on interest income -- on noninterest income. On the expense side, for the first quarter, expenses were $86 million, an increase of $900,000 from the $85 million we showed last quarter. This quarter also reflected some remaining storm-related expenses of $1.6 million, albeit basically repairs under occupancy and equipment, as compared to $1.7 million we had last quarter. Normalizing on a non-GAAP basis, if we exclude these items, the adjusted expenses were $84.4 million for the first quarter, which is $1.1 million higher than last quarter. That reflects a $3 million increase in compensation and benefits. Mostly -- basically seasonal payroll taxes as start of the year people haven't reached the limits and also for bonus accruals that are put throughout the year. On credit cards, we had an increase in expenses of $500,000, which is totally related to increased volume of transaction. And we also had some increases in sales and use tax expense of $500,000, again more repairs and other items subject to tax. This was partially offset by a reduction of $1.9 million we had in REO expenses and the $800,000 decrease in collection fees. Obviously, we had moratoriums during part of a -- most of the fourth quarter and a little bit into this quarter. Also this quarter -- prior quarter, we had about $800,000 expenses in lease-termination costs we didn't have this quarter. But overall, a fairly stable expense base as compared to the prior quarter. In terms of asset quality, the credit quality remains stable. Nonperforming decreased by $13.4 million to $637 million. Nonperforming loans, including held for sale, nonperforming held for sale, decreased by $20 million. Inflows of nonperforming for the quarter were $49.8 million, which is almost $9 million less than last quarter, where we had $58.3 million in inflows. Clearly, commercial credits were down as compared to last quarter in some cases we moved related to the storm impact they had. And -- but on the other hand, with moratoriums expiring, we did have some increases in inflows on residential mortgage and consumer loans as compared to last quarter. So early delinquencies, for this purpose, 30 to 89 days past due, amounted to $202 million as of March, which is $42 million lower than the fourth quarter. Consumer loans in early delinquency decreased $44 million to a level of $66 million. And residential mortgage decreased by $46 million to $69 million as of March. This variance does reflect a combination of clients that resumed their payments after the expiration of their three-month deferral, and obviously, some loans that moved to nonperforming in the quarter. On the commercial side, early delinquency did increase by $48 million, which is primarily related to a downgrade of one facility in Florida, which amounted to $46 million. This is a loan that is current as to interest payments, but the facility expired. And it's in the process of being renewed. Net charge-offs in the quarter, as you saw, were $26 million annualized, 1.21% on loans compared to $24 million or 1.12% of loans in the last quarter. The charge-off do include the $9.7 million I mentioned on the loans that were held for sale, which is our 44 basis points on loans and included $16.9 million on the rest of the portfolio, which is 77 basis points on loans. If we were to look the changes excluding the loans held for sale, the changes in charge-offs related to the portfolio, excluding the charge-off on the loans held for sale, $6.1 million of the decrease was on the commercial portfolio, which the effect on prior quarter of charge-off of $8 million on two collateral dependent loans in Puerto Rico. The loan -- the commercial construction loan charge-offs were $4 million in the first quarter of 2018. And we also had a $2.3 million decrease in residential mortgage loan charge-offs for the quarter, partially offset by about $500,000 increase in consumer loan charge-offs. The ratio of the allowance remained constant at 2.60% of loans compared to 2.62% last quarter. And commercial loans, nonperforming commercial loans, as we have discussed, are now at 49 cents on the dollar, net of charge-off of reserves. So significant reductions. With that, I would like to open the floor for questions.

[Operator Instructions]. And our first question comes from Arren Cyganovich of Citi.

On the face of it, your credit appears to be pretty well contained after the storm, and it feels as though you're having improvement, but your commentary seemed a little cautious to me. What areas do you feel like there's still some outstanding risk? And do you feel like you're still well provisioned for that risk?

On the consumer side, commercial is a little bit easier because obviously we went through a detailed analysis of all loans over $5 million, which make a pretty significant amount of the portfolio. And you can see specifics. On the consumer side, it's a little bit tougher, specifically, when you start looking at the fact that there were moratoriums offered by all the banks in Puerto Rico, including ourselves, and those moratoriums went through the end of December, but some ran in through January or early February, depending on the specific case. We feel that the cash available to customers has allowed customers to continue to make payments. Payment trends have been very consistent with what we were seeing before the hurricane. But once you look at economic information in Puerto Rico, it seems that not everything has been reflected yet on the economy based on the timings of some of the businesses that are temporarily shut down. Some of them paid partially to employees for a while. So there are a number of factors that tells us that there is a possibility we haven't seen yet everything related to the delinquency on the consumer side. However, the same way I tell you that there's something that tells me that the numbers we have estimated are going to be higher than what we had originally estimated. Keep in mind, we made assumptions that the unemployment was going to go up all the way to 20%. The reported number is much lower than that. We think the reality is somewhere in between. And the strength of the economic activity index has been slightly better than what we had anticipated. So those are the positive, but you have to be cautious in terms of seeing trends. And that's why we have decided just to continue to monitor and track performance as we have been doing over the last few months.

Okay. And Aurelio, you'd mentioned that you don't really have any comments on capital return, but there remains a very high level of excess capital. CET1 is above 19%. Are you talking to the regulators about this right now? When do you feel you have comfort to be able to update investors about potential capital return? Aurelio Alemán: Well, conversation with the regulators are confidential, as you know, but it is a priority of the board and is a priority of the management team to get there. As we said in the last call, we didn't expect the news on that front in the early part of 2018. I think once we conclude -- once we conclude on how the provision is going to end and how much for -- we would have to really sort out in the consumer and the mortgage, as Orlando explained, obviously, that will contribute to continue moving forward on the capital front. We did -- we were able to achieve a small action by -- which require regulatory approval, which we'll pay and we executed this TruPS, which contributed to the quarter. So it's not -- we're not stopping efforts. We just continue moving at the pace we believe is prudent at this time. And -- but definitely, I need to say it again, it is a priority of the board and the management team.

Okay. Great. And then just lastly, the deposit, the core deposit inflows were very nice. And are you seeing any evidence of that if that's coming from insurance payments or any idea of how -- what's driving the increases thus far and how long of a tail will you have on that? Aurelio Alemán: On a ballpark basis, we started to see insurance money around November and through March, more or less, $210 million are being received, of which $100 million are being remained in the portfolio approximately. These are approximate numbers based on the large clients that we monitor. We don't monitor the small clients in this -- for this. So we still expect more money to come in. I will say there was a lot of progress on complaints in the first quarter. We continue to see progress in April. So we do expect the same trend to continue for a few more months. There is still claims in process. Some numbers have been provided by some companies. Some of them are in the consumer. And other, they're closer to mid-90%. On the commercial, it's closer to a 50% in terms of claims resolution and settlements. So we should see some additional flow. But, I think we were seeing some core growth also, which is more accounts, more clients and more connectivity that we believe will be sustained for some additional time. The inflow of monies, not only insurance, there's a lot of other support from funds supporting the construction. And we were hopeful that we're going to see more of that activity also benefiting the loan portfolio in the second half of 2018.

Our next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch.

Just wanted to follow up in terms of capital. So I understand, due to private discussions. Could you remind us relative to -- I'm not sure if its the CET1 or tangible common equity, if assuming that the regulators were to give you the go-ahead, what would be the capital levels that you would want to operate at given sort of the macro backdrop there?

Well, I think, Ebrahim, -- it's a difficult -- I'm not going to give you a concrete answer, but it's -- if go back and look at the DFAST filings we did in the middle of the year, it's a pretty good indication of the amount of capital that we need to consider in terms of a stress scenario to incorporate. Still even if you look at that, you will see without severely adverse scenario, we would have significant excess capital that could be in the range of $500 million based on those scenarios. So those are the kind of things that -- once the whole process continues through, as Aurelio mentioned, we'll have to determine the exact amounts. But clearly, that shows a little bit of the excess components that we do have even on a very severe stress scenario.

Good. That's helpful. And again, not to go back to capital return, but it's -- do you think it's more clarity on just in terms of this on the macro front? Like what is it that's preventing you from doing the capital return announcement sooner rather than later? And I'm struggling to understand like is there a chance that the capital return potential gets pushed out into '19 because the regulators would need more clarity on the recovery year for the way things are? Aurelio Alemán: It's very linked to the macro. It's very linked to the macro, it's very linked to -- not only that we use all the regulators, you see the use of the rating agencies. You see how important Puerto Rico economy recovers. We're seeing for the first time economies and even the Fed projections expecting some economic growth next year, driven by all the funds that are coming in the reconstruction. So I think the -- there's -- we're kind of turning a corner into the Puerto Rico economy, but it's not complete clarity out there yet. Remember, there is elements of the fiscal plan that are out there, that will be implemented, that also bring some deductions on the government side and bring some -- bring also some investments, but that is another element. We have to -- we cannot forget the fiscal situation. And [indiscernible] the fiscal plan as published recently.

Understood. And just moving to -- I heard what you said on deposit growth. Is it reasonable, like we've seen noninterest bank deposit growth, I think, 10%, I believe, quarter-over-quarter. Is it reasonable to assume that, that continues sequentially on a double-digit rate for at least the next two quarters as you mentioned core deposit growth, some of the insurance monies which are coming in? Or does it need to maybe set meaningful lower from what we've been seeing in the last two quarters? Aurelio Alemán: The trend is positive. I'm not going to give you a double-digit indicator in looking-forward statements anyway, but the trends continue to be positive. And as long as money continues to flow for reconstruction, that should be the case, but it depends on the speed of that money coming into the economy.

And would you say the speed of that money has been better or slower than you would have expected 3 or 4 months ago? Aurelio Alemán: We actually when the big numbers were put into the picture, in terms of the insurance and federal grants, we estimated 3 to 4 years of deployment. We never assumed it's going to be a lump sum coming in over the first year, so we believe it's going to be probably at the similar pace that we are today. I think the federal money, it has some requirement that have to be met. Some of the money is specifically assigned for housing reconstruction. That takes longer time. Planning, permits and some of them is for roads reconstruction. That also takes longer time for compliance matters. I think we would continue to see that approved -- those approved monies flowing in for generally this year, but also the few more years after here.

Understood. And just dovetailing off that, what is that implying in terms of the margin outlook? It doesn't seem like there's a lot of -- if noninterest-bearing continues at this healthy rate, it doesn't look like you're going to see a significant amount of loan growth, at least in the next quarter. Is the margin still headed higher? Or do you expect to be stable near current levels?

Well, the margin, you have to consider that clearly the noninterest-earning deposits go up, that's going to help the margin. On the other hand, with rates going up, we'll eventually -- which we haven't seen yet on the Puerto Rico market, starts feeling some pressure on interest-bearing side of the equation. We have seen that dramatically in the Florida market, not so much in Puerto Rico. So that would be on the other side. We do benefit from having fairly large percentage of the commercial portfolio floating, which helps. So the margin. For now, I think it's as -- we can sustain. But we need to see what's the sensitivities arising on the Puerto Rico market, how it's going to move.

Understood. And so far, like, I mean, I understand it could change, but so far, you haven't seen a ton of pressure in terms of pricing in Puerto Rico deposits. Fair?

No, we've not seen significant pressure. It's been normal. As I mentioned, overall, we've seen only 1% increase on interest-bearing or one basis point increase on interest-bearing deposit cost for the institutions, so that shows you a little bit.

Our next question comes from Brett Rabatin of Piper Jaffray.

I guess, first, just talk about Puerto Rico from an opportunity perspective. And I guess, there's off and on for the past years, been talking about the local competitive landscape. And so just wanted to give -- maybe get an update on how you view that and if you think there might be opportunities for market share either organic or otherwise coming in the next year. Aurelio Alemán: Yes. Meaningfully, we continue to see three main players very actively charged, the public banks are just -- that we participated in all those calls. And we continue to see other players, which are foreign banks less passive -- more passive in terms of their strategies. Difficult to say what is on each individual plans. But we -- if you look at our investor presentation, I think we clearly state that, organically, we see opportunities in certain sectors which where we are -- where we have 20% or below in the market share of those sectors. Consumer is one of them. The transaction banking market sector is another one of them. And we continue to make progress. We also mentioned in the investor presentation that we do believe there should be opportunities for the organic growth in this market. But obviously, timing of that or the opportunity of that is really -- usually when it comes not necessarily when anyone's plan for it specifically. So it is our view that at one point in time, yes, we should be able to continue achieving some organic growth in the island. And yes, we would like to participate in organic if the opportunity comes.

Okay. And then I just wanted to go to thinking about forward delinquency trends and particularly the consumer book. You had a slight negative provision to the provision that you put up for the hurricanes. Is it your expectation -- I know you're probably going to say it's too early to say anything definitively, but is it your expectation that delinquency trends in the consumer book don't change to the negative from here kind of given some recovery in Puerto Rico? Can you talk about the -- I guess, both auto and then mortgage especially? Aurelio Alemán: Our expectation is that based on the trends that we see so far, if they continue, obviously, we're going to be better off than we estimated. But as I say, we need to have a few more quarters of performance period because there was a lot of liquidity provided to the consumers across the moratoriums of all industries, not only banking, but all type of payments were deferred. So that did provide us certain liquidity. And one quarter is really not enough to say, "This is a real trend." Hopefully, it is. And we're going to have more information by June. And probably we'll conclude by September, which is probably a performance period that we feel more comfortable with. But so far, so good. And what we see is if things getting stable as well as a slight increase in the [indiscernible] by sector and economic activity picking up, there's still shopping centers that are closed. There is still hotels that haven't reopened. So Puerto Rico is not -- if the Puerto Rico economy is not in full force. Some of that has been replaced by the construction sector, which there's massive repairs. I will say, limited new reconstruction yet, but massive repairs of the overall properties, large and small. And hopefully, the large infrastructure projects kick off soon. So that will also provide an inflow to the economy and to the employment sector.

And how would you describe the payment trends, the migration of those maybe the past two months? Aurelio Alemán: You know if you remember that -- we achieved certain improvement -- in September, our consumer NPAs kind of increased because we did not apply the moratoriums to late-stage borrowers, so you've seen some of that recovery in December and recovery this quarter. With payment -- when we look at payment behavior, we are at the levels -- similar levels prior to the hurricane. And so we have a flow during the quarter of the backlog, for example, of auto repossessions. The backlog of foreclosures, the backlog of things that we did not execute in the first quarter because of the moratoriums. But now those are back -- those levels are back to normal as we move through between January and February and March of that backlog.

Payments in January, February and March, the three months, were very, very consistent with the payments in -- during August. So we've been monitoring by portfolio to try to see if there any changes in patterns of payments, and they have been extremely consistent.

Okay. And then just last one, sort of a modeling question. The tax rate was lower than your guidance this quarter. And I realized there was some noise. Can you talk about the tax rate going forward?

Yes. This quarter, obviously, was affected. If you look at the components, the $2.3 million income we have, we had on the trust, those are -- that income is sitting on the holding company. The holding company has NOLs that are fully evaluated. So that eliminates any tax implication on that one and as well as part of the income we had in the insurance company, which is -- which is structure as a partnership applied to the holding company, which basically eliminates some of the impact from that. The estimate we have now based on the mix of expected mix of taxable and exempt income in some of the companies that are not necessarily would benefit from the losses like the holding company, so we'll be around 26% for the year. And that's the best estimate we have so far. This quarter was lower because of these other components.

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

I just want to first ask about the loans that you moved to HFS this quarter. Was this process driven internally? Or is it reactionary to some external demand for, first, some investor interest coming down, looking to get involved with some nonperforming loans down there? Aurelio Alemán: Yes. I think I made a comment in the last call that we have seen increased interest -- incoming interest from investors, and that was actually -- the action was driven by that interest. As I mentioned, some of these loans -- these loans that we moved, they're either in -- have letter of intent or they're already doing some due diligence on these loans.

Yes, so based on the fact, we have decided that and we will pursue a sale if possible. So we decided to move them to held for sale since that decision it's basically compliant with any possible sale in those cases, the three cases, but interest is picking up.

So if the sales go as planned or go off the way that you're expecting them to, is this kind of -- could this be the tip of the iceberg in terms of trying to continue this process? Is there enough investor demand down there? Do you think that in subsequent quarters we'll see loans move to HFS and move up the balance sheet? Aurelio Alemán: Well, that is the cleanest way of improving the cap -- the classifier ratio and the nonperforming asset ratio. We have REOs that are also under the sale process. But as we continue to see this interest, you will see more of this happening, if that's the case. And yet, I have to say that, if that interest continues in recent weeks, we do continue to see -- receive more calls regarding the potential type of asset that investors are looking for.

Great. And then I wanted to ask a little bit more about the specific hurricane-related reserve, which I think stands at $62.1 million right now. If all goes -- I guess, at least within your modeling, as we sit here a year from now, should we expect that reserve to basically be zero, whether being charged off or just released?

Well, let me first clarify. Out of those $62 million, some amounts have already been moved into the specific portfolios based on either cases that have been -- as we mentioned, we look at the commercial portfolio. We determine risk on the portfolio as low, medium, high. And based on that, some loans did move to classified categories. So some amounts of money are already seeing -- $62 million would be what's left as a combination of the $46 million that is left specifically on the loan environment on the storm environmental and about $16 million that have moved out or so into specific components. So the $46 million, which would be clearly, it's a function of what happens as a part of it. If you look at the commercial, there are some cases that we still have medium or high risk associated with those we're monitoring. Depending on what's the ultimate disposition of the insurance claims and reconstruction and the time it takes for them to go back to normal, it could mean you need the whole thing or you can release. Same thing would happen on the consumer, which is, going through a prior discussion, that unemployment and economic activity has trended better than what we had assumed to determine those possible losses. But we need to see more of that trend to be able to finally conclude. So again, that's $46 million that is sitting on -- still on the general reserve that there is a possibility it could move if things get better or trend better than we had anticipated. The one thing we feel comfortable -- it's difficult to say the negative one. So far, the trends have shown that the numbers should have been worse. So that's one thing that we feel comfortable with.

That's very encouraging commentary. And then I just wanted to clarify something, really, you seemed pretty optimistic about the prospects for deposits and loan growth taking off as we head towards the end of the year. But as we look at the fiscal plan and you kind of look at the time frame that's expected for both insurance payout money and for the FEMA money as well as the block grant money, it's really going to trickle in over the course of at least the next 4 to 5 years, and really through the end of the fiscal plan that we're going to see pretty meaningful inflows into the island. So would it be unreasonable to expect very strong deposit and loan growth throughout the entire period? Aurelio Alemán: Yes. There's a direct correlation to the money coming in, the reconstruction activity. And you're seeing it in the deposit balance sheet of all the banks.

Okay. And then just a final question from me. Orlando, in the past, you've guided expenses to $85 million or below. You still feel comfortable with that guidance range?

Yes, we do. Aurelio Alemán: Remember, that guidance of $85 million excluded all expenses. But yes, we do.

Our next question comes from Joe Gladue of Merion Capital Group.

Just wanted to touch base a little bit on, I guess, the margin a little bit. And first off, the securities yields improved a good bit. I know part of that was mix. But still, a nice increase in average securities yields from quarter-to-quarter. Just wondering if you're doing -- investing in anything differently or now versus what you had before?

No, no. It's exactly the same kind of instruments, Joe. You have seen in the past, we use the portfolio for asset liquidity measure more than anything. So we only invest in basically either government securities or agency kind of paper. We -- sometimes, you can be lucky. And we took a good point in December to buy some agency paper that had a decent yield, much better than what we were getting sitting the money on the fed account. So that's part of it. And the other part is what I mentioned, that with rates going up higher, we did see some impact on the capital side, on the other comprehensive income adjustments, but it has reduced the level of prepayments, and that helps on the yields that remain on the portfolio. But no increased risk on the portfolio. We don't take a credit risk much. And no changes on our policies for duration or expected LIBOR portfolio when we invest. So we take into account expected possible prepayments under different scenarios before we invest. So it's been just that. It was not a -- if you go back, it was about $200 million we invested at about 2.70%, whatever, like, 120 basis points higher than we were getting on the fed account. So that's part of the pickup.

And overall, any changes, favorable, unfavorable, in your interest rate sensitivity, given some of the shifting asset and liability mix? Aurelio Alemán: No, not much. We still have pretty the same mix. The -- with the improvements in noninterest-bearing deposits, assuming a typical behavior that it's going to help us. Obviously, because they tend to have, on average, a longer life. The other assets, we've seen a little bit of expected life increases on those securities, but not a lot because they are not longer term. And on the other portfolio, it's the same behavior. So we haven't seen any changes on our IRR at this point.

Our next question comes from Glen Manna of Keefe, Bruyette & Woods.

I was wondering if you might be able to provide some additional details on the 8-K you put out this morning about KPMG resigning as auditor. From the details in the 8-K, it seems like it was a noncontentious split, but investors might have some questions as to the material weakness that was reported. So maybe you could provide some additional details on that. It might be helpful.

Well, not a lot more than I can that was there. As a process of an entity, we've had the auditors for six years. We had some discussions with the audit committee. And we considered that it was a good practice to go ahead and request some proposals for the audit. That was decided at the end of January, as we mentioned in there. Obviously, we got involved into -- everything related to filing the K, so we did not formally launch the process until the 23rd. And as I mentioned -- as we mentioned on the 8-K, KPMG was invited to participate. They decided not to and informed us a couple of days ago. I cannot tell you a specific reason. We were just in the middle of this long process. And -- that's basically what I can tell you, it happened. What's the rationale? I don't know on their side, but they must have something, but nothing related to disagreement with the company or something as you saw. They did provide the required letters where they agreed with the disclosures as they're reflected. And you saw the disclosures on the material weakness probably reflected on the K. So not much more color than that, Glen.

And your RFPs that went out, is it your intention to replace them with another Big four firm? Or did they go out to a wider group of accounting firms?

We went out to a wider group of accounting firms. So we're in the middle of that process.

Okay. I appreciate that. And as far as the $30 million increase in the held for sale in the BVI, could you give us any details on that property? Is that a property that we've known for a long time that's kind of been on the books there? Is that Scrub Island? Aurelio Alemán: Well, we don't name the borrowers by first name and last name on the call. We don't have that many options in the Virgin Islands at that size.

[Operator Instructions]. Our next question is a follow-up from Brett Rabatin of Piper Jaffray.

I just wanted to follow up on the Florida credit. Could you maybe give a little more color on what caused that one to be more of an issue? And then was also just curious, just going back to the whole Puerto Rico opportunity question I had earlier, if you guys were able to do something on the island, would that have implications for the Puerto Rico DTA? Aurelio Alemán: So let me talk about the Florida credit. That said, that's a very old credit. It's a legacy credit that was originated about around 2007. It's a property not in the core Miami-Dade/Broward County. And it's a credit that was up for renewal. And basically, we are doing the renewal process. Occupancy and some other parameters are weaker, so we decided to, based on the financial numbers, to put it on a different classification. And obviously, we are working on the -- it's up-to-date payments. We continue to make the payments while we continue to work on the renewal of the loan.

On the second question -- on the second part of the question, Brett, it's -- if we're able to do something nonorganic, clearly, that is very -- obviously, that improves the income stream of the corporation. That's something that would have some impact on DTA assessment, definitely.

And what would be the amount, maximum, that you could recover over a 10-year period?

Well, we have about $150 million of DTAs valuation allowance in FirstBank. The reason I mentioned FirstBank is because that's the one that has the income stream. And that -- remember, that in Puerto Rico, the law basically was 12 years and then changed to 10 years. So we do have amounts expiring in '21, '22 and '23. So it all depends on the timing of those income stream. And when they come in, based on that, it could be the whole 1 50 or some portion of that, which is the one we've been analyzing.

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, Andrea. On the investor front, we are attending the Piper Jaffray conference in Palm Beach, May 14 and 15. And that will conclude the call. Thank you for interest in First BanCorp.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.