Q3 2019 Earnings Call

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I'll now like to turn the conference over to John Pelling.

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Thank you Nick good morning, everyone and thank you for joining first Bancorp's conference calls and webcast to discuss the Companys financial results for the third quarter 2019. This was the strategic transaction now announced after the close yesterday.

Joining me today for first Bancorp are really Waldman, President and Chief Executive Officer lender, Burris Executive Vice President and Chief Financial Officer.

Before we begin todays call is my responsibility to inform you of this call may involve certain forward looking statements such as projections of revenue earnings and capital structures. All statements in the plans objectives of the company's business.

Companies actual results could differ materially from a forward looking statements made due to the important factors described in the companies like the 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 transaction presentation or press release, you can access them at our website at one first bank Dot com.

It's time I'd like to turn the call over to our CEO , Oh well ill.

Thank you John and good morning, everyone and thank you for joining us do they it's an important called.

We'll be discussing the third quarter results and we would be discussing the exciting conceptually we announced yesterday.

So it wouldn't be it wouldn't be a different bulb. We're definitely very excited about this idea that sexual report the last night, we would be this cost in Dod one in the second part of this call.

Then we will have played joined Q on a sexual affordable for both result.

So please please let's move to the do it took were highlights a late fivefold today.

We will report this morning, while we go see another strong border a bottom line result, with net income of 46.3, representing just per share [noise].

It is important to lead to highlight Dod core franchise metrics continue continued positive on movie in the right directional.

Dr Pepper ratio income other so any medium level nearly the single increase quarter to water by 1.9, mainly on and on 12 million when we compared to the same quarter in the prior year.

Our loan portfolio declined this border approximately 137 million.

I I have to say that we'd be isn't in this case will you be you. This reduction was a positive one because he was driven by by a large baleful too long. So we're actually criticise on a repayment or another large nonperforming loan. So it will improve our risk profile on the portfolio.

In spite of this year over year, the loan portfolio has grown almost 3%.

The composed of 19% in clinical Schumer, 3% increase into commercial in construction, while with throughout the ugly continue to reduce the the more good there with the age ammonia portfolio, which you are where you have the I've read being reduced 6.5 person.

What do you naturals I read a lot worse drunk public water is a third quarters not usually a stronger one but this one what was a really good one with one point.

1 billion in originations or renewals.

On the M.P.A. side, we're very pleased to say that the basketball forgot eight improvement on reduction go do you know these water with 52 million reduction.

Or 114% no. They MP eight a. assets represent only 2.65% of the of the book.

Which is the lowest though we hiding in many many years.

On the funding side Gordy balls. Its you know, it's likely degrees driven by government broker Cds because he's would you. So we're always going to continue.

And then Capitala, obviously continues to grow now with 2.2 million.

Thank you we'll book a nine point certainly not Emilio then obviously, where you when you all you know I think excellent copied the Nols, which has been a question and you know the private school.

So would that would that summary, I'm going to turn the call overnight Orlando and would be back to go over the the dispersant. They should later.

Good morning, everyone Oh, it any comments on this third quarter was a wasn't very good quarter to some extent are driven by improvements in you come out that likely related components that led to a probation reductions him and improvements in net interest income.

Net income up he said with 46.3 million or 21 cents, a chair, which compares to 41.3 million or 19 cents a chair last quarter.

Adjusted on a on a non-GAAP basis net income was 44.7, which is about 20 cents a chair compared to 40.8 million last quarter, you can see that detail of the breakdown on on the earnings release that with US I know this morning.

Oh pretax pre provision remain strong at 70.2 million slightly lower than a 71 million a cheap.

Second quarter.

The provision for the quarter with a much better it probably Chinese down.

5.1 million to 7.4 million in the quarter.

It was mostly driven by EUR 600 million reserve releases in commercial loans.

Combination of Oh historical a lower historical loss rates in the portfolio. So.

The early payoff of 120 million into large criticize loans hotelier ill mention and some credit upgrades. We have yeah, we had in the quarter.

In terms of net interest income or that it that interest income grew one point ninemillion.

However, I'd like to point out that we are starting to see a thing Michael believe planning interest rates in our young the variable rate loans.

On one hand, we saw interest income grew a growing 2.9 million.

Due to an increase of 96 million in the average balance of consumer loans and we saw an additional 3 million growth from the accelerated discount accretion Oh, a acquired loan that was paid off.

In the quarter.

On the other high and we saw resumption of 900000 from the downward repricing, though on the variable rate commercial loans.

And and 700000 more related to the reduction in commercial portfolio associated with all these large pay downs.

Oh net interest margin for the quarter with about 489 very closely coordinated from last quarter.

But outside of the accelerated discount accretion I I, just mentioned improve the margin by about 10 basis points in the quarter.

The one thing important with LIBOR and Prime a project that to the Greece murder, a we believe margin will we'll see some pressure if it happens that's a the Bible rate loans <unk> reprice.

That could be partially compensated by by the trends in growth that we've had in the consumer portfolios.

But I am assuming no changes in deposits, we do expect a little bit of pressure on the margin.

Maybe close to the up a number for the quarter I said after excluding the discount accretion or slightly lower than than that I'm off.

The next few quarters.

Oh on non interest income it was fairly fairly comparable to last quarter.

We did see.

Remember last quarter, we had a 600000 that are gain from a recovery.

On insurance proceeds related to do insurance claims.

And we did have this quarter of 500000, OBO odpi charges on the private label MBS, we help on the books on them that we saw some increases in service charges and an fee based income related to two transactions.

The expenses for the quarter, where 92.8 million gifts under the 92.9 million, we had last quarter.

The main items is a we did have a 25 million decreasing Oreo expenses, mostly lower right down to the value of Oreo properties.

And we had a 700000 decreasing and occupancy cost.

If you recall last quarter, we had a write down of up some capitalized cost them a project that would change at the color you probably got what's changed and we eliminated some of the components.

We did see increases in in professional service fees in the quarter, 600000, where legal fees related to but the boat that projects, mostly mostly associated with what.

The transaction, we disclosed last night.

And I know at 400000 on assessment of something totally related projects, we had in the quarter.

Also employee compensation was a higher us though we.

I'd salary increases took that took effect that merit increases took effect in say no in July .

And we have when it's ready in the quarter.

Regarding asset quality I think that with a hotel you made reference to we had a very good quarter, we were able to.

To sell at 31.5 million nonaccrual commercial mortgage loan into Florida region or not sell but it was repaid.

Which it was the largest not accrual in the portfolio.

We had collections of 300 million or non performing the quarter, we'd was a pretty good and and also we sold at 10.8 million Oreo property. We had went up for sometime.

Oh, sorry sold the nonperforming came down 52 million to 332 million compared to 384 million last quarter.

The steady Greece, we had in the quarter was partially offset by by 1.2 million increasing nonaccrual loans are primarily auto.

Finance leases signed heats up.

Important to mention that obviously asset portfolios have competed to grow down delinquency trends have continued to be good and charge off trends have continued to be very good but it's a much higher portfolio. So we're going to see a little bit of that happening.

Which you know and that up with some somebody should not even close to nonaccruals up for the quarter.

But overall a pretty good result, so in terms of movement in one non performing assets.

Charge offs were net charge offs were down in the quarter.

Were 13.8 million or we just 61 basis.

This compares to 24 million last quarter, we did have a 12 million.

11, and have million chart show, which they get on the second quarter on that on the loan was the nonperforming loan that was paid off this quarter.

Oh the ratio of the allowance coverage is side of what 85 to loans held for investment.

Slightly down for the 189 last quarter.

But also you can see on on the slide that up that commercial NPL portfolios have come down significantly there now so 76 million and they are carried out at 41 cents into dollar basically on the books.

Before we have called has hotelier mentioned, we've got all go to our presentation on this for the transaction and then we'll.

Address all the questions.

Thank you Orlando.

Please please move to a slide number three on the on the second presentation.

Title Acquisitional about goes on there were totally.

Definitely as I say, we're really excited about this this drug announcement.

It is it is transformational for the company.

It will give us scale, which is important to continue competing on expanding in this market.

And I think I think very clear we want to it we want to get bigger we went out we see an opportunity to the growing the market with this acquisition.

It will like to see one plus one be company.

No one plus one become one and half so we're going to work toward achieving that some of the assumptions on the presentation, which you could be less conservative.

Our driven by the fact that we would like to have more presence retain more clients grow more clients and expand our brands now word to serve the communities on the clients better.

The.

As you can see in the announcement that if any the agreement we signed the agreement yesterday is going to go to a process of both approval, which is costamare to those type. These type of transactions. So the announcement is the signing of the agreement we're going to go to the bulk of approval the filing the application and we should move on and we estimate.

Somewhere mid 20 Blaney you can see letting you know how things are operating in this market.

On a regulatory views on the market that this this is a process that we would work.

In hand onto how would the regulators over the next month.

He is filing the obligation on so many that require information we dare I say remains safe, we paid 62 medium 63 million premium for two Gordon you want liquidity.

And again, a I'm going to try to walk you doing the highlights our London will cover the details of the terms on the structural that need.

We're very excited that we feel is a is that is a very efficient capital deployment.

A we are blurring is strong and stable earnings stream.

We're also very pleased to see how we expand the talent bench outgrowth retail commercial business banking and risk management functions. So that definitely this on Thunder team.

So over on joins our team we've done expanded a talent bench for four wells to continue our our combined strategy.

Also you know that on Sasha would get will position on revenue as a larger company.

To do continue expanding our investment in technology.

Which would you simply because boenning E filing that it's running with disruptive.

Definitely when you are all this together we leave we're going to be stronger competitive door to further support the growth in Puerto Rico uneconomic recall that the redevelopment opportunity.

Yeah, let's let's move to slide four for a moment.

Yeah. This is just on overview.

So what is what are the acid what is it compositional santander today as of June 30.

Plain 18, 6.2 billion assets 3.1 billion loans on 5 billion in deposits on approximately 1000 employees.

We did 27 branch locations are complimentary dollar footprint and definitely we will allow us to provide.

Better services.

Moving to buy five.

Pro forma basis.

The using again June 30, plenty 19, the combined entity will have 17.6 billion in deposits.

12 billion in loans and 14.2 billion in deposits.

Becoming the number lagging ports equal us we are today.

You know all areas.

The pro forma lumped, we posted ratio will be 84% us as we achieve an improved mix of deposit.

Yes.

Good noting the agreement we will not be acquiring any nonperforming assets. So by if we pro forma again as of June 30, DMP, a and B O low ratios would both be reduced and be able to 2.2%.

I also want to highlight that as we say this is an all cash transaction.

Our projected pro forma coverage ratios are still you know well in excess of all the way capitalized regulatory guidelines.

With that pro forma leverage ratio over 11% CD, one at 15.3% on total risk based capital ratio at close approximately of pro Formaed, 18%.

Yes.

Let's move to slide seven so you can see more granularity on the on the pro forma combined institution.

We we would be growing market share in every segment the we participate today.

The.

On the pro forma loan portfolio brings a lot of your participation on the commercial activity for record specifically some of the segments.

We are small like the small pieces of business banking an opportunity to grow in those segments.

And then when you look at the pro forma deposit mix is definitely healthy in the fourth quarter Broadworks, though we have in the in the core deposits. So it's a similar loan profile two hours in terms of broken position, obviously within consumer we have the auto lending, which you know is no. One of the offers that they had the something there, but we met with.

Scaling the credit card business I mean, the person on low business.

It definitely the transaction when you look at the deposit mix will will definitely enhance our funding profile our cost of funds and our customer base.

Moving to slide eight when you look at the pro forma branch network.

Definitely on the positive even see we reached 20% off of the boss it in the island, which has been our goal for some time.

20, 120, almost 22% of till the last it that Brad you can see that branch footprint is complimentary to our given some of these are not breast is in the in the island in the west side on sales part of the island, which we definitely need.

So so we definitely the transaction it's both complement study on it helps grow the franchise.

So with that would that so many I'm going to hand, the call to Orlando. So he can expand on the on the structure. We definitely look forward to welcoming this under team on the customers to the first one family and we're very optimistic with future growth at these potential done such a brings.

Hey, so.

I thought I didn't mention I Oh, we're extremely excited I would.

I was in these deal and having been able to reach this stuff but.

It it's I'm going to walk you through some of the key component of the transaction I'm trying to address later on any any questions.

The transaction that I would tell you also mentioned is an all cash transactions. There is a significant building liquidity.

In both so our balance sheet and in terms of cash and securities as well as incent them, There's biology.

Which helps in and achieving the the structure.

The premium it's 63 million dollar he made reference to which is Oh, what 17 out of how percent over the 362 million of sent underscore tangible common equity as of June .

For a total based price of 425 million.

In addition of candidate has 638 million in excess capital that will be paid at par.

He also made reference to and it's important to highlight that we will not be acquiring any nonperforming assets in this transaction.

The purchase price represents approximately 7.2 times last 12 month adjusted earnings.

Given the fact to every auction in of the excess capital.

And I, obviously, it's subject to adjustments based on Santanders balance sheet at closing date.

Which as we said we expect to be sometime mid 2020.

Pending the receivable necessary regulatory approvals.

Assuming a full year earnings and cost savings for 2020.

And we used 20 wedding.

Because of the availability of consensus information this transaction would be what 35% liquidity to.

Consensus estimate of 81 cents a chair.

I would assume the transaction would have been completed beginning of 2020, and obviously glutes earnings throughout the full 12, 12 months' set up a bolt institutions.

The tangible book value per share dilution on the transaction in at closing is estimated to be approximately 7%.

With on air error, and Bayko about about 2.6 year using the crossover method.

Some of the assumptions that we have done in that but in fact, showing it in modeling this transaction.

Estimated that we could actually we can achieve approximately 48 million in cost savings.

Which is up about 35% over the last 12 month non interest expenses.

Excluding Oreo.

Oreo, it's coming over the transaction.

This this is.

Oh I'm trying to extensive due diligence process, we have gone through through different components and I'm trying to achieve somebody objectives that Oh delio, just Mike referenced.

I'm, assuming a me that 2020 closing, we anticipate that those savings or will be our 25% would be achieved in 2020, and obviously a 100% other savings will be not by 20.1.

Also with model a reduction of approximately 4 million in pretax.

Non interest income due to the limitations of the Durbin Amendment, which are applicable to off of an institution with more than 10 billion in asset, which was not a applicable to santander in Puerto Rico.

We did conduct.

Oh, an analysis of rubber although.

Commercial consumer and residential portfolio. So what do you made some comparable you landmark, which they made those markets are approximately 5.9%.

And and looking at the other components Weve estimated.

That primarily the core deposit intangible it's about wanting to have present value and the same thing on the credit card deposit relationship, which is how about a 3% a value it's been assigned in the model.

If intangibles are being amortized over seven years using that some of that your digits.

Like to point out that.

The transaction also Santander has.

Our portfolio, which is tied to.

Co branded card with a with Jetblue.

That portfolio, it's being transferred one institution. So it's not part of the transaction. It's been included from excluded from the analysis.

Lastly, we have estimated that transaction costs.

On restructuring charges will be approximately $76 million.

50% of that being incurred.

I closed or or closely thereafter, and the other 50% in 2021, once we achieve all conversion and integration.

I would also like to touch a bit.

So.

If you will know the adoption of Seasonalities effective but at the beginning of 2024 for institutions with Kolon years like like off.

I see so changes the way the accounting is known for acquired loans.

In one part we still have to follow the rules for accounting for business combination, where all assets, our mark to market, which includes obviously marketing loans at fair value.

However, in addition to sell required set up for loans that are not consider but what we called PD Lone star purchase credit deteriorated loans.

Additional allowance will have to be storage in accordance with a new standard.

In essence duplicating some of the impact.

The impact will be recover a compensated in the future Ethernet fair value marks our COO really accretive back to income or the estimated life of loan portfolios of the specific loan portfolios.

So.

You might see so what we've done it's a using the fair value assessment of the portfolios that we did.

Given the expected closing on May 20.

So we anticipate that need to establish a few sell allowance for non BCD loans at closing in the range about 45 to 55 million pretax.

It would be approximately 20 to 34 million after tax.

This this will increase of dilution at closing intangible book value per share by analysis showed one and 1.6% to 1.9% over the 7% dilution that I that I just mentioned so that's that's been part of part of the analysis.

Clearly as I mentioned, there will be some accretion of some of the impact coming back in the future year.

With that I like to open the call for questions on multiple presentations the earnings.

Infection.

Yes.

[noise]. Thank you well now begin the question answer session.

Good question, you make press star one on your telephone keypad.

She was in the speakerphone, please pick up your handset before pressing the keys.

Anytime question, it's been interesting.

Your question. Please press Star then.

First question comes from Ebrahim Poonawala Bank of America Merrill Lynch go ahead.

Good morning, guys.

My name by name.

So I guess just first question I think.

You mentioned that you made some conservative assumptions that on.

How you've laid out either the expense savings or the earnings accretion tied to the deal I think.

Some of the feedback from investors or Knight has also been on some of the lines, where does expectation if we could see better than 35% earnings accretion.

One I would appreciate if you could again, yes in terms of the potential for that happening.

And also tied to that if you can talk about any known as deposits that you wouldn't be running off are falling deal, which may have made sense as part of Santander global but don't as part of everything.

Okay. Let me let me Yeah, let me cover the during its first I think first of all.

Obviously, we still operating on the on the Puerto Rico economy. So we know that predicting the economy.

It's not an easy task.

So we took a conservative approach both over the anomaly growth, but obviously the you know we're assuming the S. There's going to be certain growth I was going to give us opportunity. So so you know this works doorways. Our goal is to after we combined the two institution. We can start actually me some some additional growth so for that.

Need definitely due to retain us much clients on as much.

Brandon you know personnel to continue the task of increasing the franchise you also need to to retain a significant part of the brand nowhere to continue to continue servicing and deliver into larger and larger client base. So so as we go to the approval of processing dilation plan.

Mining and all the things that will will take goes over the next six months, we'll learn more we will continue to view you know how the economy, it's moving.

We have sectors of our strategy.

That US you know for example, a strategically we're increasing mortgage origination when they come for me what were decreasing the portfolio size. So so we'd be adjusting all those hold was estimated so we think it's a balancing.

He is a balanced approach you know as being a balancing act.

The way we presented on this actually on these a balanced approach.

Yes, you know they could be an opportunity to devote to higher number as you guys. You know you Oriental estimates are up put around.

But when we first before getting to that would like to see how we make sure that we maximize the resources and maximize the growth opportunities as we going to be.

A stronger competitor.

There are certain segments that we are small compared to go to date like small base and some business banking. This gives the opportunity to be a larger competitors. This sector. Some of the cash management Serbia's there's number of clients you know there's unexpired there to credit cards, there's going to be scale in better scaling curriculum personal loan by having larger portfolio.

It is in both segments so.

So we think our approach is the right one a yes numbers goody ball fun and as we continue progressing quarter by quarter. We'll we'll update you guys would that would that that's the main strategic but the goal that don't section.

Okay.

And then the bosses yet we are assuming a conservative.

Hey, we're assuming it goes over the 20%.

In the model accretion on deposits.

There are some intercompany buses in some of that will stay somewhat there will not would not stable, but theres a government accumulation ongoing deposit that beans happening in Puerto Rico over time. So we believe that you all institutions in Puerto Rico, not only us.

I would see ones these data, Puerto Rico's restructure Andy on the Minis approved as some of the government liquidity will be utilized.

Well, so taking that into considerations or 84 pro forma include considers that already.

On a core deposit base, a which you know it's really it really is really very strong you know.

Ratio from where we are to the central loan to deposit so with that is the idle that answer your question.

Got it and just in terms of Orlando, If you could you remind us in terms of just the funding.

There is about $900 million of cash on the balance sheet at the end of the quarter. If you could just talked to in terms of how much of the did you get funded to this cash or where that cash spend should be coming out of the data that would be helpful.

Yes.

Well the model them all in we did that those assume that one.

When you add on the for 25 under under 638. It. So it's a billion dollars of gosh sites coming out.

And definitely the model assumes that up.

Reduction in interest income associated with that catch that goes out.

It's the way we see it it's a it's a combination of the liquidity, we have been catch and and the way leveled securities that we have.

Obviously, we have the flexibility of.

Drawing a line or using repos, FHLB lines or using repulsive needed, but as I mentioned also there are significant built in liquidity in santanders I want to achieve.

So and a bunch of that liquidity, it's going to be complement that on both institutions once combined.

So that's why does the deal was structure. This way we feel it's up it's a very doable transaction, but clearly as.

As you will mention about a billion dollar comes out and that does affect some of them batsmen income at this point a large long as you saw was sitting in the fight account when 80.

So its a.

So that kind of impact on on on the income statement, but it's been incorporated into into the numbers that we're assuming for.

Or the.

Earnings accretion.

Got it and just one last question on the deal in terms of the 6% credit Mark seems high given what.

Because gone towards the last few years.

And obviously not taking on the NPS if anything specific in that portfolio there.

Assumed higher credit Mark why you just being conservative there.

Yes, so remember that a new to fair value marks I assume lifetime losses in there.

The portfolio there is nothing.

They have a good portfolio.

You made reference to we were not getting the nonperforming.

But what you still have a credit card portfolio in there you have a mortgage portfolio, which is longer term I want a billion dollar in mortgages. So I'd say, it's that combination of the components with lifetime losses kind of scenarios that led to those marks.

We will obviously have data that again.

The the Mark it's a it's been a combination of of external parties, we used for that brand side for us for the assessment other markets as well as using the internal models that we use for for the five unfair.

See fell on all those components. So we've we've done a lot of work will that that has to be updated anyway.

I thought transaction date, but I was.

Most reasonable estimate based on on all the information we at this point.

Got it thank you I'll detail.

Thank you. Our next question comes from Alex Twerdahl.

Handler O'neil go ahead.

Hi, Good morning, guys morning, Alex.

Congrats again is saying finally announced.

Thanks.

A couple of clarification questions in the cost saves number that 35%.

And their branch consolidations contemplated in that number.

There is there is you know primarily you're gonna see overhead you don't technology components legal marketing a lot of on it. So the expenses there is a smaller assumption on that on that part yes.

But the final number hasnt been determined yes.

Okay. So seems like there is a little bit of essential.

That 35% as things get assessed.

Potentially move a little bit higher as a as it gets closer to close and thereafter.

I think it goes together with growth opportunities.

The good obviously are the best part of the deal. If you view you want to grow then then you have to do less reduction on expenses.

Got it remember they keep their key R&D view as Aurelio mentioned they set up this is our various strategic transaction within its going Oh.

Well section of extremely well for the future. So you know it's not a financial.

Immediate financial transaction, but a long term financial transaction the way, we see so we want to be able to maximize the capacities the combined entities.

Got it and then just to clarify the 25% realized in 2020 that assumes 12 million over the 48 million. It as soon as realized in 2020, right not 25% of 35%.

No I know, it's a it's a 12 million correct yes.

Okay and then.

I think there's a comment in the press released last night that there is potential adjustment the pricing based on Santanders balance sheet. The time of closing what would trigger.

An adjustment to the pricing of the transaction.

The way the weighted transaction is structure its.

You will see the deal by the documents of the deal.

Polished, but it's basically a calculation of of abate tangible common equity, which is based on the size of the institution. So obviously, we do expect that day institution will continue to execute basis a person.

And and of the base capital, we're using its 8%.

So they position will continue to do business on growth so if that happened.

The price might go up a bit Eva even when and if it comes down in size by any recent it might come down a bit. So we just tried to point out at the premium it's based on up on a base capital, which could could change on on.

On size of the balance sheet us of transaction days and then the excess capital remains a closing will be paid apart.

Right and then and then just a quick question on.

No I think this is something that you guys have obviously been preparing your balance sheet for for quite some time can you maybe just shed a little light and sort of where you are in terms of.

Preliminary conversations you've had in the confidence and being able to get this thing close in sort of I know you said mid 2020, which gives us a lot of wiggle room, but just in terms of capital levels in terms of balance sheet capacity things any do you know are you.

I mean do you feel like.

From a regulatory standpoint, they are pretty good spot to get this thing closed in early two months delay I.

I think well I think the capital the committing capital.

It's it's strong when you look bad.

Deals in the market and if you compared to.

To the asset quality profile that is a pro forma on if you can see there.

How much excess compared to normal even even for Puerto Rico, we only 11% leverage I think we think is a store number.

Yes, and obviously again, the the estimated pro Formaed closing leverage to leverage so as a matter of brought this you know the formal application process is the only forum to Luisa regulators will provided if any view on on done on a transaction proposed however.

Q4 month disclosure on an important aspect of any bank supervisory relationship with our regulators and the content of those discussions are definitely go see either they are considered continuing supervisory confidential information for band that we're not out we're not allowed to share, but but I can say that hour.

Cushion to they have been very helpful in preparing loss to other as the key points that most likely arise in the form obligation losses.

So we think this structure that we have put together is strong.

It would be goes all the metrics the Dod that make an institutional more healthy or are actually cover in the weighted than a sexual structure.

And as you know with Santander, keeping the nonperforming and with all sobbing achieve.

Reductions we have achieved in in a in nonperforming and classified assets I think that positions a solution and a much better way for or any transaction close on improved funding profile.

Thanks for taking my questions. Thank you Alex.

Thank you.

Next question comes from Brett Rabatin Piper Jaffray go ahead.

Hi, guys. Good morning, congrats on the deal.

Thank you Brett thanks.

Morning.

Wanted to.

I guess first just go back to.

Just thinking about the deal and you know that [noise].

You are having durbin be lower can you give us a mistake or that the numbers. You gave you gave it on the card portfolio, how big it was or how much the income that you're gonna.

Not be pulling over from from that institution.

Well, we did some estimates based on their compensation or other fee based.

Died approximately 4 million pretax give or take 3 million after tax of Oh.

Oh about being come.

If there is a possibility we won't be able to charge.

So that for our modeling purposes, we're excluding that amount of income from from the other fee based income that data Santander has had an institution.

Obviously, we need to go through a very much detail.

At the end, but but based on the information.

We feel it's a reasonable estimate estimate of what could be the impact based on similar some remember when this was adopted we went through similar analysis for ourselves and see what was the impact. So we use the same kind of approach to estimate what could be the impact on on their numbers.

And the Fourmillion that's on the card portfolio, it or is that durbin or is that something I'm confused.

It's durbin everything related to Durbin limitation huh.

Okay.

Right.

Yes about the Cardinals the card you mean, the debt Luguarda portfolio, then, yes, I mean can right.

Right right the card portfolio.

It's 75 million dollar portfolio, that's not coming over.

Interest income on that is about 14%.

Yeah. That's also been take it out and what the fee base, a 4 million is mostly smoking Derby. Please.

Okay.

And then how are you your margin would've been down 10 basis points. If you exclude the discount accretion benefit in the quarter.

Can you talk about both your margin going forward I know you said a little better pressure.

The fat cats.

Maybe give us color on you know how much.

Your margin comes down from here with fat cats on how you're thinking about their balance sheet with lower rates.

See I mean, our margins remember that there were few components of great coming down we we.

Built in but some more liquidity on some of the repayments we had a large large repayments on the commercial portfolio and we did have some repayments on the on the investment portfolio also so looking for where the way the market moves we've continued to who to accumulate a bit of.

Much more than we would like to see it so that affected margin.

And and and as I mentioned.

With rates coming down there was 900000 dollar impact up it's a bit difficult to estimate exactly we think it's going to it's going up with better pressure on margin to come down a little bit more.

Obviously, there remember there is a combination of.

The consumer portfolios are still moving well so those are higher yielding.

On the other hand, we have continued to reduce the size of our mortgage portfolio with originations of.

I have worked with in paper to be sold in the market rather than than keeping them on the on the books.

So those combined.

I will put a little bit of pressure, so I'm, assuming that we're going to come down a bit from the 479.

No not normal pay downs and Norma.

Deposit behavior will help keep dad.

Reduction at I'd.

Not a large amount, but but it's a bit difficult to say with way the way rates have been moving.

In their their balance sheet would I would say would have similar behavior. They have a good amount of liquidity and obviously with a transaction the billion. It's going to go out. So there is there was some impact on interest income not necessarily a margin because obviously those does that billion dollar would be low yielding kind of.

Investment.

So we're looking at it mostly from the interest income perspective drive down the the margin perspective in that sense.

But I'm sorry, I don't thing, it's a different from what what you're seeing in other places that there was a little bit of fresh or margin, yes. The target portfolio has a lower a lower amount of both proportion of variable rate loans.

Than ours.

Is having a fixed rate mortgage having a fixed rate personal loans.

Credit card portfolio, which actually are mostly on anything.

Told that really easily and then they did the the loans tied to LIBOR embark on our local.

Yeah.

Okay, and then on Cecil the 45 to 55 million that's for the acquired portfolio. If I understand correctly do you have an estimate for your portfolio.

Well we.

I do I don't have it I'm not disclosing it yet because we're going to pool of include that on the Q, Brad we have gone through the full exercise we have gone through a different iterations overseas. So.

Although those numbers were going to them, we're going to chair what the estimated impact were seen on c. so for our portfolio.

That number the number we were estimated on their portfolio are on non PC loans. Obviously, we felt it was important to two gave us some idea where we see the range coming in their portfolio up for the impact on on dilution.

Well you can share that what's important that you all.

On the Stan.

So a but but within a couple of weeks once abolished the Q, you'll see a little bit of of the disclosures on the on the estimated impact will have on our institution.

Okay.

Uh huh.

Got it we're going to have that no matter what so the one thing would be the new impact what would be only acquired transaction.

Okay.

And then one of them good just I cant one more on credit you know, it's your net charge off for a lower I guess is lower but you had higher migration and dampier is this corner.

Given what we're saying what credit trends and it would seem like your provisioning level, that's economist and third quarter.

You know could be sustainable can you just talk about provisioning.

From here and.

Absent that increase and inflow in Threeq you are you expecting credit to continue to improve.

I think yeah, I think we hope to see how their balance sheet is also changing the loan portfolio changing.

The you know the makes up a lot.

Core mortgage portfolio in reducing even though originations are are increasing and conforming is the one that we are now we're increasing for the portfolio, it's going a little doubt consumer goods will continue to grow though it's our expectation.

Both auto personal alone credit cards, although three for products and commercial.

We'll also grow but when you look at a proportion in relation component of the consumer is higher than commercial.

So from that perspective.

A.

Predicting that operationally is going to be driven by how this portfolio makes us more definitely.

We see very stable migration.

Great demands, we see very early good early indications on the on the delinquencies, which is really aware dealing primarily leading indicator. So from that perspective, you know there's a lot of multi barge inside those farmers who are very aware.

But but we continue to see a positive trend.

The.

When you add all the or the components within keep in mind that.

Obviously this quarter, we did have.

Some reserve releases on the large repayments 120 million dollar repayments were criticized loans. So they had some some reserve releases in there you don't have that every quarter.

And and and you have to bottoms. The fact that as we grow that the consumer portfolio, you're going to have some more charge offs is you have you'll have some provision associated with it but at much higher dealing asset at the same time on on the income statement.

So you asked me I mean, we had out.

How about not not being more than 50 million.

That that stands.

I think 7 million units on the low side of a quarter.

We will never never get to a 50 million I would say in this in this Karen.

Scenario based on the behavior of the other portfolio.

Okay. Appreciate all the color.

Thank you.

Our next question comes from Joe God.

Securities go ahead.

Yeah, Hi, good morning congratulations.

Good morning go.

Yeah, just let me talk a little bit on want to when it bretts questions on the margin Yeah, just see that yes.

Santanders.

And then there's just margins about.

Looking at this correctly about 100 basis points lower than.

The first banks and just wondering if there's any.

Huh.

Changes in mix or any structural changes that.

You'll be able to accomplish.

Shortly after the acquisition that might.

Yeah, so narrow that difference between.

The margin what you're acquiring.

Yes the.

Hello.

There I want to keep in mind, you have to the thing a little bit about their compensation number one.

Proportionally they have a large amount of investments and catch up balance sheet on the balance sheet.

Number two.

Our portfolio are.

Higher components, our commercial mortgages.

Uh huh, so those those items would by themselves deal slow lower kind of interest.

Right.

On the other hand.

We should get up which by not having the nonperforming.

That that it's under budget.

And that would would help improve if you look at their consumer portfolio, it's mostly credit card.

So we do have other components of our consumer portfolios that improve the margin. So as we can develop more some of those businesses through further branch network would improve the margin, but you have to keep in mind, what the composition of over there.

Fair enough that mix.

Okay.

Thank you that's all I had.

Thanks, Joe.

Our next question comes from Glenn mouth.

W. Go ahead.

Hi, good morning, guys.

Honenone congratulations on the deal I'm just from a bigger pressprich.

Your picture perspective, we've seen a lot of consolidation on the island over the last year and a half whether its portfolio is their whole bank I really I'd be interested to get from your perspective.

You've all been a long time bankers on the island, how do you see the environment of banking changing on the island in banks roles in the future Puerto Rico.

Well I think you know the one thing is definitely the local capital it's been invested in in in growing in Puerto Rico for the last years and we've seen how popular how das said, we see how Oriental is doing it on how we're going to be doing it.

A theres other players like CD among ESCO.

Which are also being growing in recent years.

Puerto Rico. It's also due to digital channels. We have other competitors that are very active integrated care market, they're very active the personal auto market, they're very active in the deposit so to the landscape. It's not just the branch networks, we have to US we all doing we're also investing indeed.

John is on technology component and then do you odd the credit unions, which you know we divide a grade yields into sector.

The Bops, which are the longer great news and then the fell agree unions both of them have continued to growth.

The largest if you out on the co ops, there are the logic largest lender or personal loans. They had the largest market share all together.

They also have 40% of the branches in Puerto Rico, and you out all the branches of the greater unions that are physically in the island.

And then you see some of the other further like a unions continue expanding they definitely they have a competitive advantage on the taxable from the dioxide.

And there is no buyers of entity for the unions to continue growing Puerto Rico some of them continue to open branches.

And they have they been very active in the offering of the boxes. So.

So we think you know it's it continues to be competitive within the scale that we're going to half.

To help us to be to be brook competition in certain sectors that we havent been able to successfully do would like like some of this small bases and commercial banking sectors. So by having you'd want to expand the brands now where we also compete to the larger do not your banking.

Okay. Thank you and.

You look at loans on the island in normalized for the for the pay Downs and maybe there are the run off in the Reggie book claims runoff in the resi book It looks like it's about 3% quarter over quarter annualized growth is that kind of where you see any the island growing at an all show with with respect to bringing on site.

And there's mortgage book or your plans to continue to target kind of run mortgages down or or does this kind of volte or some of those plans.

Yes, I think you know senior mortgage book will reach next year the final stabilization.

A when you calculate our 3% year over year remember that we have taken down significant mpls.

So the risking is be board is being part of our history for the last 10 years.

And we don't see we see we finish in Dod.

A you know in in the coming quarters, so from that perspective a.

We broadly can achieve more than that the person.

Once you can see there or the all the aspects and there is a component that we were not participating over this period would you the construction sector, which we are starting to see so new projects coming into the pipeline and even though the funds as we're all aware that the color refunds of Puerto Rico.

I have been delayed on our moving slowly.

The coming at a pace that obviously will last more than none we all want it to last week at the end, it's going to bring more loan volume.

A on the construction sector as we see it.

So so.

Ben certain moving parts in how well or 9 billion loan portfolio Huds move over the last 10 years with you know MPL cells migration of our iOS.

You know originations and then you know say Pulpo participations, which we also bought of or de risking Noble's was also due to reduced concentration on some bottle words and some of that looks achievable. So we're delighted you actually this quarter. We achieved some of that also so it is I think lighting.

You know that they presented is is if the low end on the number we should be we should be capable of doing better than that.

Okay. Thank you and.

Did I was just forget the she still can't do you disclose the percentage of non PCD loans that you're acquiring and the breakout versus the whole number or not.

We did not you know remember that.

I think the definitions are really I'm all on their seasonal I it requires.

Requires.

A lot more analysis, we'd estimate how much whether or not BCD. Obviously, it's it's a higher percentage of not BCD from PC long because our keeping the nonperforming.

But but the rules for Cecil are a bit.

More.

Gray area kind of thing are more ample than the old BC I kind of definitions.

So we did some estimates to get to those numbers that I showed on on that 45 to 55 million, which obviously will you know us we go through the integration.

I run out to cope with specific amounts.

But but there is there are some space. It out you know if you can think of Oh.

Although they become institution.

Any kind of low delinquency could could offer a definition of BCD things like that so that that's why it's a little bit difficult to say specific number.

Okay. Thank you.

Up next as a follow up question from Ebrahim Poonawala from Bank of America Merrill Lynch go ahead.

Hey, guys just a quick question just sit on capital.

I'm assuming is.

See shakes out somewhere between 10, and 11% pro forma for the deal Oh, sorry, if I missed that but.

One thing in terms of additional capital actions should we anticipate that the dividend that you initiated last year, we still see some a movement on that I can you.

Shaded in the fourth quarter of last year, and just in terms of the outlook of where a pro forma Tc would be in kind of your expectations beyond that I know.

The deal probably to be priority right now, but it can just talk to how you think about capital levels pro forma for the deal and then your plans to use that.

Yes, Youre right that the list that there is a priority and but also there could be Islam rule for moving on the dividend as you see where the earnings are.

And how much failed we have a definitely other larger actions will have to wait on the we have the final number.

And we are ready to close the deal and we closed the deal but when when you look at it on a pro forma basis, assuming the Puerto Rico economy continue on the base. It is moving on the asset quality trends continue on the base would be in achieving the they should be opportunities for four days and elections. After we close the deal.

Got it thank you.

Our next is a follow up question from Brett Rabatin.

Piper Jaffray. Please go ahead.

Hi, guys. Just wanted to go back to you know talking about the assumptions on the deal and thank you know I guess first everyone's super focused on 35% expense side can you can you just go back to you know the branch assumption and it you said, Tom or smaller thank you know.

How much of the 27.

Okay actions, you might look out and just talk about.

What percentage of facilities might be able to expense saving assumption that you have.

We were not giving a specific number branches what Brad. The you know there's also their back office facilities.

Our data are that are embedded in this.

The.

US both both institutions us.

Like facility.

And.

Peter centers, and yeah technology components or buying.

These with which definitely would be put together.

So that is a number that we're not we're not disclosing who want to make sure. We go to a more detail you.

I will link with the growth strategies.

And make sure that at the end, we can disclose our board when you look at 25%, we feel very comfortable with that number.

Okay.

And then wanted to make sure I understood. I mean, you you've got a few things that are kind of.

On that dragged down and I are fee income pro forma, but obviously, there's going to be things that you'll do with the balance sheet at all.

The synergistic can can you maybe just talk about you know once you've gotten a deal closed.

What opportunities you see what's the balance sheet in terms of your comment earlier about you know some things could be conservative.

Yeah.

Well the.

But the opportunities that we see is number one I would tell you made reference to the.

Small business and and.

Middle market business, or we think that that that would help a they combine institution develop further develop that business, yes, indeed medial in that timeframe of a projection that we have for you know we chair.

I think it's important to highlight.

Im glad you asked the question, whereas we're assuming no growth.

Our loan portfolio for the target you know in that period of time.

Okay. So really it is had no growth in audio in the assumptions.

As Orlando say, we help area that we believe.

But again, we want to put that into the into our new projections. Once we go to a more.

The the process and link that to to the trends that we could do to see an economy.

Putting it in a project that Peter that we're sharing with you on the presentations.

That is that if the assumption is no no growth in little portfolio.

Okay and does does the increased size of the platform does it change your ability.

To compete.

Better in terms of larger credits on the island.

A change the ability to reach out to clients a.

I think it also it also you know if you have a larger corporate banking team you can get to more clients too so.

Changeability our own levels, we are your or even a personal loans on Greg to the branches. In addition to the needle channels. So that is an expanded.

In most of the products mortgage the same.

Auto we doing direct but with the rest of the products.

The user branch and where the sales teams.

The which which are going to be and expand the group.

Okay, and and then one other last one for me just on them on the mortgage portfolio I'm just curious how much more you want to de emphasized.

That piece of the book given the Cecil treatment.

Well when we we don't we basically.

Want to see you know the mix of conforming.

A is really our focus on the non interest income that comes with that.

We see we brought you should expect next year seminar decrease through the end of the year on the mortgage portfolio, which you know and then and then that should start leveling two to the to the level that we see by by the until next year.

Because they only in agents on repayment aren't going to be broadly.

Loans one to the other.

Okay, I said last one but actually I'm wondering if I could.

Just the just thinking about the portfolio before the close of the deal.

Given that you're going to deploy all this capital with it would it be fair to assume that took the loan portfolio might be flattish in the next few quarters.

You mean hours.

Correct.

I can tell you that we expect to grow in the consumer we asked but to continue reducing the mortgage on the commercial is very deal driven.

A small and middle it's growing it corporately depends on when does that get close in the quarter and prepayments that we receive to offset.

Obviously this quarter if you'd be was a strong origination water. What is also there were 150 million in in good good prepayments, which while we called good prepayments.

The so.

So our goal is to grow that portfolio. Obviously, you know how the opportunities on the pipeline on the buybacks are positive.

Well, it's you know how fast we can close we're now these deals that will make the difference in having a if you don't appreciable net growth.

We'll continue our normal business, we don't intend to hold back remember right. After all we continue to generate revenues and net income and that builds of capital. So allows for the for the growth component on the balance sheet yeah.

Okay.

Great appreciate all or some color.

Thank you.

[noise] acts as a follow up question from Alex Twerdahl Sandler O'neill go ahead.

Hey, guys just a couple of follow ups for me I'd first like you have the the cost of deposits on Santanders deposit book.

It is slightly lower than our cost of interest bearing deposits.

Okay.

And that is that for your total interest bearing deposits are just below are concerned or total interest bearing including broker.

Okay, and then the $120 million a large criticized commercial mortgages that that pay down during the quarter. When there was in Puerto Rico and if so do they re fi with another bank or were they paid off or was there outside money they came into borrowing.

Maybe elaborate a little bit of what happened to them.

Actually no both of them reply.

A.

The five other banks among portals equal other type of funding sources.

Okay.

Transactions related to acquisitions are those on it.

Okay and that is it fair to assume that essentially didn't take the jetblue credit card portfolio I'm not sure if that was an option or not but is it fair to assume that the loans that you took are all loans that you want and there will not be any divestitures of concentrations or anything like that following the closing.

Fans action.

It is fair yes.

Okay.

Great. That's all my follow up thanks, Thank you Alex.

I just want to mention you know I know that that the.

The Kiani signaling sober just Wanna mention that we're definitely very pleased went on there has been an extremely good banking franchise in Puerto Rico, and we were really excited about the combination. So we look forward to to continue updating you asked this process progress.

Over the next month and thank you all for your attention today, just just real quick on the Investor front.

We have a number of Comparators upcoming Bank of America Conference in New York November 5th and sixth Sandler Conference in Naples on November 14, We also have of Bank of America Investor Tour to permit on December 12 [noise].

With that we are we greatly appreciate your ongoing support and we look forward to seeing many many of you at these upcoming conferences.

That we will conclude the call. Thank you.

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