First BanCorp (FBP) 2017 Q3 法說會逐字稿

Good morning, and welcome to First Bancorp's Third Quarter 2017 Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over John Pelling, Investor Relations officer. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone, and thank you for joining First Bancorp's conference call and webcast to discuss the company's financial results for the third quarter of 2017.

Joining me 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 is my responsibility to inform you that this call may involve certain forward-looking statements, such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to 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 on our website, www.firstbankpr.com.

At this time, I'd like to turn the call over to our CEO, Aurelio. Aurelio?

Thank you, John. Good morning, everyone, and thank you for joining once again to this call for our third quarter results. On the call with me it's Orlando Berges, our CFO. Orlando will provide the details on the financial results as usual.

But this time, before I begin with the highlights of the quarter, I really want to touch on the situation here in Puerto Rico following the 2 hurricanes, Irma & Maria. Please let's jump to Slide 5. As the audience is aware, the third quarter presented, we have to say, unprecedented challenges to our business, our people, our communities. But we are so very proud on how our team of FirstBank have responded to the situation, the outstanding teamwork, dedication, care they have shown to service the affected customers in these very challenging times.

Irma was, as you know, early in September, the real threat for our Eastern Caribbean region, and it was hard to say what was really the right rehearsal to Puerto Rico. And then Maria was the most -- larger event causing material devastation to the infrastructure of the island. Immediately following the impact of the hurricane, we did ensure the safety of our employees, began working to provide our customer access to banking services. Good to say our 3 main facilities and our technology service platform for consumers and commercial remained operational during and after the storm. And when we -- one week following the impact, actually, before that, the next Monday, we opened the branches and by that week, we achieved 50% of opening of branches to serve the customers, a very high number among the market. We did secure a new supply chain for electricity through generators and worked to reestablish communication channels, as most of our clients have to do the same.

Additionally, it's important to recognize that FirstBank's volunteers have been very active in community support on relief efforts for impacted areas. We have established alliance with large corporations and clients and organizations like Unidos for Puerto Rico relief effort to our communities around the island. We -- I think it's important we recognize that the storms exposed the high level of poverty in the remote areas and mountain areas of Puerto Rico, and we do have a social responsibility to support those in need.

Referring to the graph on Slide 5. As shown in the bottom of the slide, we have to say that we have achieved a lot of progress and our operations are almost back to normal in spite of these challenges and the limitation of some of the key services. Actually today, 92% of the network -- of the branch network is open for service, up from 88% yesterday. And in the Virgin Islands, 82%, so very high percentage we have been able to achieve over past 6 weeks.

And to say that over the last couple of weeks, we are getting better news from business reopening and getting back to business as we all have developed, and our clients have developed, alternative ways of conducting their business, and obviously, the services are coming back to us.

Let's talk about the key service. And let's, please, move to Slide 7 to see where we are -- Slide 6, I'm sorry. Slide 6 shows the progress on the key services in Puerto Rico since September 30. As we can see, everything is in yellow, because there are still many challenges, but, as we can see, there has been progress in most areas over those past weeks. As I say, many industries are building supply chains in order to compensate for this and being able to open their business, and the impact varies by industry.

Again, as we can see, the first top line is electricity generation, which is only at 42% after this period. Unfortunately, we will not be back to normal until we see the island reconnected to the power grid, fully reconnected. And yes, we're making progress, but we remain concerned about the length it is taking -- the long time it's taking to get our energy infrastructure rebuilt. And the impact to the economy, we have to say, is directly correlated to the electrical grid being completely restored. Most recent goals published by the government put this number, the 42%, up to close to 80% by mid-December. Hopefully, we are there.

Okay. So let's move to next slide so we can start talking about the highlights of the quarter. Obviously, our financial results for the third quarter were impacted by the storm and they did include charges of $66.5 million to the provision of loan and leases related to the hurricanes. Orlando will get into much more detail in this area. And this translated into a net loss of $10.8 million for $0.05 per share for the quarter.

Definitely, we have to say that the storms interrupted our collections and loss mitigation efforts. There was very limited ability to contact borrowers during and after the storm, a few weeks after, also. And this definitely impacted our delinquencies and our nonperforming assets.

We did offer relief programs to our credit borrowers in both the commercial and consumer. But it is important to comment that the [relief product] do not apply to late-stage delinquent borrowers and are not offered to pure delinquencies, and Orlando will explain later in more detail.

Excluding the impact of the storm, we were on track to a really good quarter. When we adjust the numbers to reflect the nonrecurring items, net income would have been $27.4 million compared to $27.7 million in prior quarter.

Again, pretax, pre-provision came stronger even though there were certain items that did impact our numbers on the September business volumes. And importantly, I want to highlight that, subsequently to the end of the quarter, we were quite pleased to announce on October 3 that the termination of the formal agreement with the Federal Reserve, something that was pending for some time.

Additionally, we reported, at the end of October, our result for the Dodd-Frank stress test which definitely shows our strong capital position, even in a severely adverse economic scenario.

Let's move to the next slide, so I'll touch on the loan portfolio a bit. Loan portfolio remained flat, and originations and renewal activity was down, impacted by September. Please remember that the hurricane activity started very early in the month of September, strongly in the ECR, lightly in Puerto Rico, and also impacted Florida in the month of September. But our Florida region was a very important contributor to loan origination activity during the quarter, as we can see in the graph up top.

Obviously, regional diversification is important and it helps us in times like this. So definitely, it's an important component of the strategy. It is difficult to comment on the pipeline until we have some sense of timing on the grid. Obviously, we expect some impact this quarter on our origination volumes, some reduction from our normal trend, but things are coming back. We're seeing more applications every day, people buying vehicles. Mortgage originations should start coming up this month and -- but definitely, we have to recognize it's going to take until the first quarter to definitely to see volumes being closer to normal.

On the other hand, we do look for the opportunity in 2008 (sic) [2018] to begin growing our loan portfolio in Puerto Rico as the island rebuilds. Definitely, there will be significant remodeling and reconstruction activity ahead of us for next year both from the private sector and on the Puerto Rico infrastructure, and this should translate to increased loan demand and it's what we expect for 2018.

Just touching on the deposits, the deposit franchise, Slide 10, very stable. We're seeing -- we're monitoring the liquidity of our borrowers. Obviously, there was a demand for cash early in the process. We're seeing that being normalized. We're seeing some increase in deposits. Actually, some of the volume of claims from the insurance claims is coming into the banks. It will be used for reconstruction, but that is already flowing into our accounts.

Touching a little bit on the government exposure on Slide 11. We continue to manage this very closely. And we have to recognize moving from a fiscal crisis to a natural disaster crisis is not an easy task. We have to continue working with the government and supporting as much as we can. We're not looking to increase our exposure to the Puerto Rico government, but, yes, we continue to support our municipalities. And even in this kind of situation, we do feel comfortable with the exposure that we have. And the government deposit relationship with the municipalities continues to be very stable.

Now I'm going to hand the call to Orlando for more details and we will be back for the Q&A.

Good morning, everyone. Well, to out our financial results in perspective, I think it's important that we cover, first, the most significant financial impact from these storms. Clearly, the most significant item was the $66.5 million additional qualitative provision for loan losses that Aurelio mentioned before.

What we've done so far is that our commercial loan officers have been visiting all of our customers to make storm impact assessments on each of them and determine the level of coverage as compared to the damages, including business interruption, property damage, et cetera. However, these events occurred so close to the end of the quarter, that makes it really difficult to estimate the immediate impact on all the customers by September or through today. We expect that this detailed assessment will be substantially completed by the fourth quarter as we obtain more customer-specific information as well as market information.

From the information we've gathered so far, we feel the financial impact will not come so much from physical damage to customer properties, but rather, from the impact to economic activity on the island. So what we have done, it's in order to estimate interim losses in the portfolio resulting from these 2 hurricanes in both regions, we used our internal stress models, in which we have incorporated assumptions for increases in unemployment and decreases in economic activity. These assumptions, we base them on trends we experienced in similar events in Puerto Rico as well as in other markets, for example, Katrina's example and, in Puerto Rico, the Georges Hurricane example. To give you some -- put some perspective, we ran models assuming unemployment doubles in Puerto Rico from current levels to just over 20%; current levels are 10.1%. And when we assume that economic activity index declines proportionally based on this increase in unemployment, the resulting loss ratios from the models were then applied to balances on each of the portfolios to calculate the amounts that were detailed in our press release. We expect this impact to be temporary, since rebuilding efforts will stimulate economic activity as we have seen in other cases, and will accelerate the pace of recovery. And expectation is that it would lead to economic activity levels, by the end of the third quarter of 2018, that will be just below pre-hurricane levels. Obviously, these estimates are judgmental and subject to change as we obtain additional information and we see the trends on the market.

Other areas of impact, you saw net interest income come down. $500,000 of the decline for the quarter was due to lost interest income on residential mortgage loans that migrated to NPAs due to the storm's impact of -- on collection efforts, as Aurelio mentioned. And we also saw the net interest margin decline 5 basis points due to additional liquidity we maintain. Obviously, significant events, recognizing the impact these hurricanes typically have, and in this case even higher because of the magnitude of the hurricanes. We took $250 million in short-term funding to make sure we had excess liquidity in anticipation of customers' need. At the beginning, there was some cash outflow, but clearly, we didn't need all this liquidity and we have already started to pay off all those fundings since deposits ended up increasing through the first few weeks after the hurricane.

On the other income, we saw reductions of $1.7 million in mortgage banking income and this is directly an impact of the reduced level of mortgage originations and subsequent sales, obviously, as we sell a good portion of the conforming paper in the market. And we also saw reductions in the valuation of the mortgage servicing rights.

In other items that fee income is down $400,000 in ATM and POS transactions, the significantly reduced level of POS transactions. We're now at about 62% of the volume of transactions that we were seeing before. And ATM, we're also down from what we were seeing before. And plus, we all did some waiving of fees to help customers access -- provide access to money.

On the expense side, we incurred $1.2 million in storm-related expenses. That includes $600,000 in donations and other relief efforts we carried out. Also, we had salaries and occupancy costs during the time there, the operations were a cost of about $1.7 million. And we charged off around $600,000 of asset impairments that were damages from the hurricane. $2.9 million of these amounts were booked as receivables since it is highly probable that they will be recovered from the insurance.

The quarter results combine everything. As Aurelio mentioned, we posted a net loss of $10.8 million or $0.05 a share compared to a net income of $28 million or $0.13 for the second quarter.

The overall provision for loan losses for third quarter was $75 million, which compares with $18 million last quarter. It primarily was driven by a $66 million provision. On the other hand, on the normal provision, it was lower than last quarter because we had some reserve releases on 2 commercial cases that are now specifically evaluated for impairment and the reserve needed, based on the value of the collateral, was lower than the general reserve and also we had improvements in overall general reserve ratios based on the level of charge-offs we've had over the last few quarters.

The quarter shows a tax benefit of $8.4 million associated with the pretax loss. And the changes in relationship of taxable to exempt income resulted from the increased provision and the fact that we do have only a partial valuation of BPA that affects calculations. So we assume a normalized fourth quarter. We would expect that a tax rate for the year would be somewhere in the range of 22% to 24%. But obviously, it all depends on the whole relationship of the components.

So Aurelio mentioned, our adjusted pretax pre-provision income for the quarter was $53.5 million, down a bit from last quarter. And this quarter, we did have 1 extraordinary gain of $1.4 million since we repurchased 7.3 million of trust preferred securities at 81% of par value.

If we look at non-GAAP normalized net income excluding the impact of Hurricanes Irma and Maria as well as these other items that are not reflective of core performance, like the gain on the trust preferred, the fact that some idle payroll time will be charged to insurance, the hurricane expenses and so on, net income was $27.4 million -- non-GAAP net income $27.4 million, it's over $0.125 a share compared with $27.6 last quarter.

If we look at the expenses for the quarter, the total expenses were $85.6 million, it's down $3.5 million. This amount includes $1.1 million of decrease related to the hurricane expenses that -- and the salaries and payroll that were booked as accounts receivables as we will collect from insurance. And other reductions were mostly on OREO expenses. We had some larger adjustments to values last quarter. And FDIC cost is down as we have improved the liquidity and the level of brokerage CDs that we have on the books.

Credit quality, which is a significant component, as Aurelio also mentioned at the beginning, nonperforming assets increased by $65 million, which is $640 million. Clearly, the hurricanes have interrupted the improving NPA trends we had in the previous quarters. The increasing in the nonperforming is partially attributable to the inflow of 2 large commercial relationships in Puerto Rico, which totaled $34 million. One of these relationships amounting to $21 million was carrying as the principal and interest at September 30, but has been a classified asset for some time due to its financial situation and it's expected that the impact of the hurricane will further affect the financial situation, therefore, we moved the asset to nonperforming.

We also had increases of $23 million and $5 million in nonperforming residential and consumer, which were related to interruptions in regular collection, of course, related to the hurricanes both in the VI and in Puerto Rico.

One thing I'd like to point out that we did implement the faster relief programs that, in essence, provide a 3-month payment extension to customers. However, in accordance with existing guidance, the extensions were applied prospectively from the date of the hurricane. And only customers that were current or had less than 2 payments past due as of the date of the event qualified for the relief. In the case of the Virgin Islands, we defined the date of the event as September 6 with Irma. And in the case of Puerto Rico, it was September 20, when Maria hit the island.

Since all these extensions were applied to future payments, the extensions did not change the loan delinquency status as of the date of the hurricanes and, of course, resulted in an increasing nonperforming as well as the early delinquency information, since we couldn't do our collection efforts and we didn't have some of the branches opened for some of the time frame towards the end of the month of September.

Inflows to nonperforming because of this were $104 million, an increase of $66 million compared to last quarter, which includes the $43 million I mentioned on the commercial side -- $43 million in commercial which includes the 2 cases I mentioned and we had increases of $15 million in residential and $7 million in consumer, which was a lot related to the collection time frames.

Early delinquency also increased to $261 million, that means $67 million higher than last quarter, which, clearly, this one is affected by the interruption of collections and the availability of the branches.

Net charge-offs on the other hand were very much online. There were $17 million or 80 basis points of loans, which is down from $47 million we had last quarter or 2.1% of loans. A large chunk, $31 million of the decrease was primarily related to the effect, in second quarter, of the charge-off, $27.7 million, we took on the 2 -- on the TDF commercial mortgage loans or the commercial mortgage loans guaranteed by TDF. And charge-off of $3.5 million we took on resolution of 1 case last quarter.

The ratio of allowance obviously increased with the additional provision; now it's 2.6% of loans. And commercial NPLs, we are carrying them at $0.50 on the dollar at the end of the quarter.

On the capital front, Aurelio already mentioned, capital ratios remain extremely strong despite the small loss in the quarter. We continue to make interest payments on [drops] and on the preferred dividends and the preferred shares. And also, Aurelio mentioned that we did publish DFAST, as you saw, results. We showed that we have ample capital to sustain any severely adverse economic scenario.

Now I'd like to open the floor for questions.

(Operator Instructions) Today's first question comes from Alex Twerdahl of Sandler O'Neill.

First off, I just wanted to talk a little bit about the provisioning following the hurricanes and the process -- or specifically, the process of assessing individual borrowers. When you came up with your loss estimates and your provisioning for the third quarter, where -- roughly, where were you, would you say, in that process? Was it kind of towards the beginning of the process still or had you made -- had you already made some pretty good headway?

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

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

Great. And so customers that are not on the grid, is it more that they are running with generators and so expenses are going to be higher for the time in which they don't have electricity from the grid? Or is it that they just are unable to operate at full capacity on generators?

You have both. We have both. We have some that -- and for -- Orlando mentioned business interruption coverage. So it depends, some of them have business interruption that will last for 6 months, some of them will only last for 3 months or the equivalent to their net operating income. So those are the analysis that we -- the assessment that we have to make individually. And it's both. Some of them cannot open and some of them -- because of the grid, some of them have been able to move quickly and build a new supply chain so they can open their businesses. So it is a large portfolio and we've been going client by client and having that understanding and being able to conclude this -- that exercise will conclude this quarter as we continue to see progress here, yes.

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

I think we follow -- the models are complex. They take into consideration the unemployment factor. Obviously, again, if unemployment -- if the grid takes longer and businesses don't open timely, unemployment will increase more. Again, it's also related to the grid because both businesses are not hiring or are taking decisions of termination based on the revenues and cash flow. So there has been growth in some of the businesses. There's good stories here to tell also, because of the demand of their services. But in general, we expect -- as Orlando says, we're modeling that the unemployment will increase temporarily. And we're saying, this quarter, in the short-term, and potentially next quarter, we're not assuming that this is going to last longer. So based on that, there could be an impact, and that's what the models are showing. It's across the board on -- when unemployment -- when we use unemployment as a variable; it's across the board on the consumer portfolio, which includes resi, also.

No, the resi is separate from the number, he probably mentioned, but obviously, the models do happen in the calculations, Alex, that you take an auto portfolio, the loss content of an auto portfolio would be lower than the loss content on a credit card portfolio because of the value of the collateral behind it. So all of that is built in the model. But at the end, we do have -- it's an auto portfolio, a credit card portfolio and a smaller personal-line small loans portfolio. So it's divided among them based on the weight of the loss components over time.

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

Well, those are linked to the GDB agreement -- the GDB settlement agreement and TDF agreement. They're expanding the final closing of the exchange which was delayed, so we only recognize what we have received as part of the agreement and obviously, updated our appraisals and value of the collaterals which we own. And that's the portion that is guaranteed [what's in the period], the other portion is fully guaranteed like TDF. And it's been -- we're in the process of selling. So it shows the value we have taken, the charge-offs that are related to that, and we have the collateral now to continue working out those collaterals and those properties. And they are going through the same challenges. The large one is actually getting benefits out of the crisis because it's the largest hotel in the convention center and there's a lot of activity, occupancy is very high and the property saw very, very little damage. And it's actually becoming a better business today than it was prior to it. The other 2 have other type of damages and even though one of them is operating, they need to be fixed to be fully operational. So it really falls under the same analysis and reevaluation that we're making to other borrowers now that we have to work with the borrowers in either bringing their business back to or default on the [property].

And our next question today comes from Brett Rabatin of Piper Jaffray.

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

Well, I think, broadly, that we should -- you should look at, when you look at the numbers here to date this year and the prior years, I think we're showing a good track record. It's really a slow growth. And in executing the strategies across the different businesses, obviously, we're looking to continue the strategy on the commercial business, which is really -- it's really been really the key -- the key business for this year. In the Puerto Rico side, we do believe that if we look at what happened after 2 other storms in the island and the impact of insurance funding loss, other sources of funding, reconstruction funds, it really translates into increased construction activity on the infrastructure and on the supplier side of the equation. We're already seeing some demand on businesses that are supporting that side of the equation, the importing of materials, companies are getting contracts. When you look at the private sector, 30% of the hotels are -- suffered damages and will be -- actually 35%, and will be reconstructed or remodeled. So those are large projects. When you look at the infrastructure of roads, electrical, water and the municipalities, there will be funds in that area, too. When you take it to -- it's a construction industry, when you look at the sector of affordable housing, definitely, there will be some volume in that sector that hasn't been present before. The areas that suffered the most on the housing side were wooden structures in the mountainsides of Puerto Rico and replacing it with cement will probably be the route that we are going to be seeing taken, and will be affordable housing with other space also here. So I don't think there is any specific industry-wide sales. I think it's just when you look at the statistics and the ripple effect that it could have on recovering employment and helping the consumer get back on track. So we're seeing the unemployment issue as a short-term situation. Obviously, we have to take into consideration because we are assuming this is going to bring a material amount of funds into Puerto Rico from one source or the other. Estimated, the inflow, it's estimated in the $40 billion to $50 billion today. So on the other hand, there are still the physical challenges. So that side of the equation is going to get revisited. And obviously, foreign policy or Congress policy also could have an impact on Puerto Rico. But it's part of the process that we have to analyze. We know that, definitely, construction and rebuilding activity is going to happen for sure. So that's the fact -- those are the facts that we have today, yes.

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

Yes, so what -- these models, we have tested over a number of years and, basically, we have stronger relation of what happens to the losses and what happens with unemployment and we have good economic activity indexes. So what we did is, we are seeing, because of the grid, the electrical grid issues, that a large number of customers of businesses are having more difficulty in opening. So we are assuming an accelerated increase in unemployment. Unemployment in Puerto Rico was 10.1%, the last number that was published. And we're assuming that by the end of fourth quarter, that number is hitting 20% -- just over 20% on the assumption in Puerto Rico. And that it starts coming down gradually by the end of the first quarter through the end of the third quarter of 2018 as some of the this economic activity comes back and the grid would be much higher percentage in the first quarter of next year and then the monies of the insurance that are -- start to run on the island by the end of this year and beginning of next year will stimulate some of the economic activity. On the VI, we have similar assumptions, a little bit higher unemployment at the beginning because of the industry, it's a lot of tourism-driven and they're going to be impacted by the fact that this is the high season just coming now and there is going to be some impact on all associated industries to the tourism on the VI, which is a higher real correlation with the economy that is its important vehicle. So it's a quick increase to 20% on unemployment, or 20.2% is the exact number we used; a reduction in economic activity index proportional to that increase by the end of the year and then starts coming down slowly through the end of the -- through the third quarter of 2018.

Okay. That's great. And then just lastly, expenses were a benefit to the light revenue in the quarter. Is your view that you'll be able to maintain kind of that pre-provision or any power throughout this process? Or can you give us, maybe, a little more color what you're assuming happens to fee income from here?

Fee income is still going to be affected on the third quarter -- the fourth quarter, I'm sorry. We -- our fee income is -- the main things on the fee income in our side is it's going to -- it's 4 components, would be, #1 would be the mortgage banking component and we don't feel that the origination, it's going to get to levels pre-hurricane in this fourth quarter. It's going to take through next year. So we're going to see lower gains on sales that we've had at the beginning of the year, so that would be affected. We do believe that there is still going to be some impact on the fourth quarter related to all POS transactions because of the availability of the networks and the impact on the cost -- on the commercial customers. So that's still going to have some impact. Assuming that the grid comes substantially up by the first quarter, we'll see some of that start to normalize by the first quarter of 2018. On the other components that are -- we haven't seen much impact on -- deposits impact went up right after the hurricane and fee income in there, other than decisions we made on waiving fees to -- on ATM transactions or so to provide customers opportunity, those are going to start coming back in the fourth quarter to normal levels. I don't think that's -- by the end of the fourth quarter, it's going to be back to normal levels. And other businesses are continuing, like the insurance, and so it's not a large chunk of our business but it's a decent chunk that is still in there. On the expense side, we do expect to have more expenses related to the hurricane in the fourth quarter. But we do expect that, based on the coverage on our insurance policies, we will recover part of those expenses or a large part of those expenses, so it's going to be an impact. At the end, I think, if the economy moves the way we are anticipating, which is very judgmental at this point, obviously, at the end would be what happens with the net interest income, and we feel that it would normalize at the end of first quarter beginning of second quarter of next year. So I do believe that eventually, we'll be back to the same pretax, pre-provision revenues.

And our next question today comes from Joseph Gladue of Merion Capital Group.

Let me, I guess, touch on the -- one more question about the provision estimate and how you calculated that. Just wondering if you tried to incorporate any estimates in addition to the unemployment growth, if you've tried to incorporate any of the potential population loss that, I guess, we've seen a number of estimates about that. But was that sort of just included as sort of higher unemployment?

If you -- the way we see it, it's a -- I mean, if people leave, obviously, sometimes the unemployment just looks better because of that, because they go out of the firm. And at the end, it's at a -- we have someone that doesn't have the income to be able to contribute to the economy or to pay loans. And the same thing it's going to happen with the economic activity with people leaving. So if you look at what -- when we -- these models have been based on historical information and the loss components. And those loss components have already included the fact that we've had migration out on the population side. So we feel comfortable that any impact from migration, it's properly reflected as part of these 2 major components as part of the modeling. So we didn't incorporate anything specifically separate because we feel it's measured on the unemployment and the economic activity.

Fair enough. Let me just add, if you, I guess, provide any comments on the net interest margin going forward? I think you mentioned that you expect to be drawing down some of the extra liquidity. And I would imagine some of the recovery -- insurance recoveries and everything will likely go in to provide some lower cost funding. But, I mean, do you think that you'll have some decent expansion in the margin over the next couple quarters?

I don't think we're going to have a big expansion. You have conflicting factors affecting the margin. Clearly, it's -- we all have some relief programs that are extending some payments and we need to see what happens with all the payment stream coming back in. And we're seeing that we still have some wholesale funding and the market is not coming down, it's getting a little bit more expensive on the wholesale funding side. And even within our [colonial] market, the market is getting more expensive. So there are going to be a couple of things that are going in opposite directions, so as I mentioned, the margin was affected about 5 basis points by the excess liquidity. We shouldn't have that next quarter. But there was some impact from the nonperforming components. So I would assume, Joe, that it's going to be more at these levels than anything else.

Okay. And just lastly, I'll ask about some of the capital and, I guess, specifically, the repurchase of the trust preferred securities at a discount. Wondering if any more of that is possible? I assume you'd need to get Fed approval for that, if any was available.

Well, as opportunities come to the table, we don't do 2 transactions at the same type. It's something that we continue looking for but it depends on the availability of the transaction.

And they don't happen all the time. They show up, and as you well mentioned, we went to the Fed and they supported the transaction, going [a hybrid] transaction, so we were able to execute it. Others that could come up, that make sense, we'll continue to do the same.

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

That is a fair assumption, yes.

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

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

Thank you, Glen. Thank you. We appreciate it.

Thanks, Glen.

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

I have to say, in general, optimistic. The -- when you look at what we're doing, even though we offered to 100% of the clients, there is a significant number of clients on the consumer and mortgage side that continue making their payments. We're not waiting until December. We're actually calling the portfolio -- instead of doing collection actions, we're calling the portfolio to understand if they have done -- they have some -- lost their jobs or how the unemployment looks so we can prepare for that, but we can't really tell until the end of the period, until this December. On the commercial side, it's not large numbers of customers that have requested the extension, and we are only doing principal payments. We're not impacting the interest payments. And that actually is a case-by-case. When you look at the cycle of the portfolio, it's not the majority. And again, it's a case-by-case matter and we have to be on top of it. We have to make an estimate and the provision includes, for some, a deterioration in the initial period, as Orlando explained, but we do expect that things go back on track after the first quarter.

And just a follow-up. You had said you were seeing applications were up and you gave a little bit of evidence. Could you give any more like anecdotal evidence about what customers you're seeing are borrowing, maybe in what industries, and how things are going there in the near term on the commercial side?

Yes, we're not saying applications were up. I think we're saying that we've seen some activity of some of the borrowers that are related to the construction industry asking for line increases to bring materials, asking for line availability for supplying the services that they have. And that's the type of activity. It's very related to the activity, this reconstruction activity. If you are in the business of services related to construction, in general, you're seeing an increased demand.

And then just lastly -- I'm sorry.

No, I was just going to say -- but not necessarily -- you don't see that on the mortgage side, it's lower, as well as the auto side is lower, but we do expect some of it will start coming out by December.

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

No, to be honest, we are working on having a more in-depth analysis. But data, it's very complex to determine based on that. It requires a lot more. There's some people that moved temporarily and are coming back. But it's -- up to now, everything is anecdotal. There's other sources of information that we are getting to track. I think everybody is trying to get a number -- a more fair number other than anecdotal information that is referred. We know about cases, we know about employees. If I just look at my workforce, it's not a concerning number. It doesn't show a trend, it show just people managing specific situations. We have 2,500 employees in the island. And it's a small proxy or it's still a proxy. And it's not the concern that we have. So yes, there will be -- if you go to the airport, you'll see people mostly at the age of retirement, primarily, is when they are moving out of the island. We don't know if it's temporarily or it is permanent, and I don't think we know -- we will know until the grid is normal and people decide, if I have electricity, I would come back or not. I think that's going to take a couple of quarters to know that number with certainty.

(Operator Instructions) Showing no more further questions, I'd like to turn the conference back over to Mr. Pelling for any closing remarks.

Thank you, Rocco. We'll be on the road next week attending the Bank of America Conference in New York on the 14th. Then we'll be at Sandler O'Neill in Naples, Florida on the 16th. And then, in December, we have the KBW Investor Tour to Puerto Rico on December 11. We appreciate your time and support. This will conclude the call. Thank you.

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