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Text: Joining you today from First Bancorp are Aurelio Alemain, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer.
It was a very important quarter for our corporation and I would like to go over some key highlights and then expand in certain matters.
First of all, we're extremely pleased with -- that we completed our strategic acquisition by closing the Santander transaction on September 1.
This transaction not only solidifies our position in the island, but strengthens our competitiveness in commercial, retail as well as residential.
On the economic front, definitely the relief fund from the pandemic combined with 2017 hurricane funds being deployed have bolstered liquidity in our market and will continue to drive economic activity.
We'll touch on that.
On the balance sheet side, even following the completion of the acquisition we truly sustain a fortress balance sheet, our liquidity reserve capital levels are among the highest in the banking sector.
Core performance was strong for the quarter.
We generated $28.6 million of net income.
Pretax pre-provision was $77 million with only one month of earnings from the acquired operations and loan originations were strong at $971 million for the quarter.
We basically increased originations in all categories through the quarter.
Total deposits, excluding brokered and government, increased to $12.5 million.
And finally, our capital ratios remain among the highest in the banking sectors and capital actions remain a priority as we see the economic environment stabilizing.
Now let's cover more closely a few of these items on Slide 6, starting with Slide 6.
Let's talk about the transaction.
Definitely, it was a long time in the making.
And as you see, we really improved our market position in all key areas.
As you recall, the transaction was announced back in October 2019, and closing and completing was impacted by the COVID pandemic, definitely.
But since then, some of the deal metrics have improved from announcement.
We still expect 35% earnings per share accretion to consensus estimates.
The revised TBB at closing is estimated at 4%, lower than our original estimate.
And we expect less than two years of earnback now.
This improvement is driven by slightly smaller loan portfolio, additional reserve delivered at closing and the rate marks due to the rate environment.
While cost savings are estimated at $48 million, we definitely work harder to see the areas that we can achieve more.
But we're also focused on growing the franchise.
So it's a balancing act as we move forward and achieve our goals of being more efficient and increased market share.
I think together, we have an excellent team and we're working diligently to integrate and to turn on the growth engines as opportunities comes in the economy.
I want to touch on the integration.
We made a lot of progress on the first 45 days.
Integration is under way.
In those 45 days, we completed the conversion and integration of the mortgage business, the insurance agency and several administrative functions.
The plan is to complete the integration process by the end of the second quarter 2021.
And these do consider -- remember that we continue to operate under COVID limitation and distancing, and obviously a process of this magnitude takes time.
We also announced this month as part of the program -- as part of the synergies and integration, we announced a voluntary separation program that provides an opportunity for early retirement to approximately 160 employees of the combined institutions.
This program will be executed over the next three quarters, starting in the fourth quarter.
Other potential synergies identified include the opportunity of consolidating eight to 10 branches.
Definitely, the incremental utilization of digital channels could drive other efficiencies.
But again, we don't want to hamper our potential to grow our market share with the now expanded market distribution that we have.
So we'll continue to move and report on this effort.
Now let's move to Slide 7.
The new combined balance sheet is solid and well diversified.
The $2.6 billion acquired loan portfolio definitely complements ours nicely and the deposit books improves our funding.
Now the loan-to-deposit ratio stands at 78%.
And obviously, we have an expanded customer base to cross-sell and move to other products.
Let's move to Slide eight to talk about the economy.
I think in the quarter, we clearly saw the correlation of the reopening in our markets and the trends of economic recovery was clearly reflected in the third quarter.
Remember that in the case of Puerto Rico, we had some severe tightening in the second quarter, and some of those rules were relaxed later.
We're still operating under certain lockdowns.
But the -- I think the market has reacted very well to the situation and getting used to operate under that scenario.
Importantly, to support this economy, there is still over $60 billion of pandemic and hurricane relief.
So those are numbers that are big for this economy and there's a lot of going on regarding reconstruction.
Those funds are being deployed and they're definitely showing the liquidity and activity.
Employment figures continue to turn positive.
Recent numbers as of August are 92% of August 2019.
So definitely, there's a recovery on the employment side.
From the perspective of our client base, 100% of our corporate clients are operating and close to 99% of the business banking clients have reopened well.
There are sectors that are more sensitive.
The hospitality industry continued to reflect lower occupancy, but got improving trends.
Our hotel portfolio, it's below typical occupancy level and San Juan airport traffic is low, closer to 50%.
And as we are all aware, these are the segments that are more sensitive and will require longer recovery period.
So we continue to closely monitor.
On the other hand, from the business activity perspective, lending activity for the quarter was near pre-pandemic levels and digital activity is up significantly.
Retail lending for the quarter was very strong for both auto and mortgage lending and actually it came above pre-pandemic levels.
So we are optimistic with the recovery and the possibilities of additional stimulus, but we are also vigilant to the fact that potential economic hurdles could come if there is a need to implement additional restrictions for COVID in the future.
So we have to be watchful.
Please now let's move to Slide 9.
We wanted to give you an update on the relief programs trend.
The relief trends are actually positive.
The graph show the peaks and lows over the last six months, actually since March, of the different regions and products.
I think we see a positive trend during the quarter -- or actually, after the quarter closes.
Our active moratoriums were reduced to only 0.8% of the portfolio, less than 1%.
This is as of October 21.
I think so far the post-moratorium payment performance is positive with 98% of commercial clients current and 94% of retail as of October 21.
It's important to note that this data reflects only the due dates prior to October 21 regarding the payment patterns.
So we have to wait until the end of the month to see the final trend.
We do have a segment of the commercial portfolio that belongs to the industries that I mentioned, the more sensitive ones, such as hospitality, retail and entertainment that could need additional support through a longer stabilization period.
Those are being evaluated under the potential modification of terms provided by the Section 14 of the CARES Act.
So please let's go to Slide 8.
Here we have how -- the trend of the balance sheet, where we -- how we compare to peers and definitely post acquisition, our liquidity level, reserve coverage and capital position.
They really give us opportunity with the -- we're positioned well to take advantage of any growth opportunity.
We definitely will be good stewards of our capital position, and again, capital deployment opportunities remain a priority once our economic environment stabilizes.
Let's move to Slide nine for a moment.
I wanted to talk about and show you the trends of core metrics.
Obviously, this graph shows the trends and the positive impact of the acquired operation.
We generate the incremental PPNR and net income with only one month of earnings contribution for the core operations.
And again, the enhanced funding profile should help us driving additional revenues.
Loan origination, as I mentioned, were solid for the quarter, you look at the level.
And digital adoption rates continued to improve during this pandemic.
We will continue to work harder now with more clients and more distribution points to improve our level of service to all our customers.
I have to say that I'm really proud of my team and what we have been able to accomplish so far, managing the pandemic challenges, and we're definitely excited for the future growth prospects of our institution.
And we're also excited to show our patient investors what we are able to accomplish.
As Aurelio made reference to, net income for the quarter was $28.6 million or $0.13 a share compared to $21 million last quarter.
If we break down the components, you can see that corporation's legacy core business achieved a net income of $44.3 million, which mostly it's a result of reductions in the required provision for credit losses.
Last quarter, we had a provision of $39 million as compared to $8 million this quarter.
During the quarter, the improvements on macroeconomic projected variables in most portfolios, except for the commercial real estate, as well as some changes in portfolio balances led to this reduction.
The acquired Santander operation contributed $3.5 million of after-tax net income.
That excludes the one CECL adjustments, which I'll touch upon.
These results include the impact of the amortization of the fair value marks on all the assets and liabilities and the amortization of the resulting intangibles.
For example, one of -- few other things that had impact -- if we look at the investment portfolio, Santander had a U.S. treasuries -- a large U.S. treasuries portfolio that after March resulted in a portfolio of yields only 15 basis points.
Since then, we decided that to improve margin to sell this portfolio and reinvest it in other securities according to our policies, which yield around 94 basis points, which will improve going forward some of the yield.
On the other hand, amortization of some of the other discounts and intangibles resulted in about $1 million improvement in net interest income from the combination of loan and deposit, preliminary fair value adjustments that have been booked.
If we look at other -- at the other components of transactions, some large ones that were in the quarter, the first one would be the CECL I made reference to.
CECL requires that in the case of a business combination, we set up an allowance for credit losses on top -- on non-purchased credit deteriorated loans on top of or in addition to any kind of fair value measurement.
This resulted in a recognition of an allowance of almost $39 million for the quarter in addition to those fair value marks.
The non-purchased credit deteriorated portfolio, it's about $1.7 billion after marks.
During the quarter, we also decided to sell around $160 million of MBS that were experiencing significant prepayments, and that resulted in a gain of about $5.1 million from the transaction and it's being reinvested again in other instruments.
Merger and restructuring costs, Aurelio mentioned some of it.
During the quarter, we had $10.4 million, which compares to $2.9 million in the last quarter, which was mostly legal and financial consulting piece as well as some conversion-related cost as we prepare for the conversion.
So far, we have incurred about $25 million in expenses related to the transaction over the last few quarters.
And during the fourth quarter, we expect to have some amounts associated with the voluntary separation program that Aurelio mentioned as well as costs associated with branch and other consolidations as we finalize decisions on those processes.
Finally, the other large item.
We did have an analysis -- completed an analysis of the DTA now including the Santander operation, and that resulted in the reversal of approximately $8 million of deferred tax asset valuation allowance we had on the books.
Net interest income for the quarter was $148.7 million, which is $13.5 million higher than last quarter.
$14 million of that was the Santander operation.
On the other hand, the legacy FirstBank operation had a reduction of $500,000 in interest income as compared to last quarter.
And here, reduction in rates, obviously, accelerated.
Prepayments on the investment portfolio has been large.
Higher proportion of cash and investment securities to total earning assets have resulted in a reduction in the NIM on FirstBank.
Last quarter, we had 4.22% of NIM that you saw in our prior release.
That number is down to about 3.94% this quarter.
Breaking down some of the components.
Commercial loan repricing was about four basis points of the reduction, but the much higher proportion of cash and investment securities as well as the large prepayments and the alternative for reinvestment affected by 18 basis points more that margin.
Santander on a stand-alone was about -- the margin was about 3.89% considering the purchase accounting adjustments, and that combined with FirstBank ended up with a 3.93% margin that you see on the release.
Noninterest income improved to $29.9 million.
The $9 million -- this $9 million increase includes $5 million in the gains on sales that I made reference to before, of securities that I made reference to.
We had $3.4 million increase in revenue from mortgage banking activities.
Mostly or all of it, it's related to sales of residential mortgage.
This quarter, we had a much active -- much more active quarter on originations than what we had in the second quarter and ended up selling $98 million more in conforming paper than we did last quarter resulting in that revenue increase.
Also, the reopening of businesses, as we have seen on the quarter, seen a much higher level of credit and debit card activity, which improved -- that includes ATM, merchant fees and some of the other components, that improved fee income by about $2.8 million in the quarter.
And then the improvement we had in deposit service fees associated with the Santander transaction that brought in $1.1 million of additional deposit fees to the operation.
On the expense side, expenses were $107 million.
That includes $10.7 million in expenses for the acquired Santander operation and a $96.8 million for the FirstBank legacy operation.
This $96 million is $7 million higher than the 89 -- almost $90 million we had last quarter.
As I mentioned, the merger and restructuring costs for the quarter were $10.4 million, which is $7.5 million higher than last quarter, basically created most of the increase.
But in the quarter, we -- if we exclude this, FirstBank was $86.4 million of expenses.
COVID-related expenses were about $1 million this quarter, which is down about $2 million from last quarter.
But other expenses -- obviously, as we saw improvements in volume of transactions and improvement in fee, we also have some higher expenses associated with that volume of business in those debit and credit card transactions.
The allowance for credit losses has increased significantly.
As of September 30, the allowance for loans and leases only was up $65 million to $385 million as compared to June.
Mostly it's due to the initial allowance for credit losses required to the Santander operation.
If we look at total allowance for credit losses including unfunded commitments and debt securities, that's up to $403 million.
This quarter, as I mentioned before, we recorded about $38 million in allowance for credit losses in total.
$37.5 million of that is related to loans.
That build up -- that allowance associated with the portfolio.
And in addition, for PCD loans or purchased credit deteriorated specifically, we established a 20 -- almost $29 million allowance, which represents the fair value marks on this loan, which CECL requires that -- what is commonly referred to as a gross up, that the loans represented gross and the discount represented in the allowance.
Those two combined were about $65 million.
The ratio of the allowance for credit losses on loans -- to total loans was 3.25% at September, slightly down from 3.40% we had at June, but a very significant coverage if we consider that we added a large amount of portfolios, that a large part of it is also mark-to-market and fair value mark-to-market and has been discounted.
On a non-GAAP basis, if we exclude the PPP loans, which don't carry much reserve, the ratio of the allowance to total loans was 3.38% as compared to 3.55% last quarter.
Asset quality remained good in the quarter.
Non-performance are down $10.5 million, $293 million.
Most of the reduction happened on the OREO portfolio, which decreased $7.3 million.
Mostly sales were completed in the quarter.
Migrations to nonperforming were higher this quarter.
As moratoriums expire, we start getting back to levels of more -- to the normal levels that we were seeing before.
And we are in a position to continue to pursue some of the foreclosure processes that were put on hold for a couple of quarters as we provided those moratoriums to customers.
The inflows were $18.4 million this quarter, which is $10 million higher than last quarter.
Capital ratios remained really strong.
As you can see, even with the impact of the acquisition, we still have Tier one ratios of 17%.
The leverage ratio, I think that's important to mention.
You see it's about 13% for the quarter.
But we only had Santander operation for one month in the quarter, so average assets were less.
If we were to normalize and assume the full quarter of average assets, that ratio will be closer to 11%, just over that.
And that was -- we expect that it's still very significant with the acquisition of $5-plus million in assets in the quarter.

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compname reports q3 earnings per share $0.13.
q3 earnings per share $0.13.
net interest income increased by $13.5 million to $148.7 million for q3 of 2020, compared to $135.2 million for q2 of 2020.

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