First BanCorp. (FBP) Q1 2022 Earnings Report, Transcript and Summary

Hello everybody, and welcome to the First Bancorp First Quarter Earnings 2022 Financial Results. My name is Sam, and I'll be coordinating your call today. [Operator Instructions] I'll now hand you over to your host, Ramon Rodriguez, Corporate Strategy and Investor Relations Officer to begin. Ramon, please go ahead.

Thank you, Sam. Good morning, everyone, and thank you for joining First Bancorp's conference call and webcast to discuss the company's financial results for the first quarter of 2022. Joining you today from First Bancorp are Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at fbpinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman.

Thanks, Ramon, and good morning to everyone, and thanks for joining our call today. Please let's move to Slide four to discuss the highlights of the quarter. We are very, very pleased to begin 2022 on a high note with another record quarter of, I would say, exceptional result for the franchise. We generated $82.6 million in net income or $0.41 per share. And I think more importantly, a record $111.8 million in adjusted pre-tax, pre-provision income. We clearly see the benefits of scale of being a larger organization, sequential increases in pre-tax, pre-provision income over the last five quarters are attributed to our discipline approach to execute on identify operational efficiencies, related to the acquisition, but also additional business rationalization opportunities that were identified during that integration process. I want to congratulate and thank my teams for this consistent performance under what we can call, you know, a challenging operating cycle, so thanks to all my teams. Net interest income was slightly up to $185.6 million and the margin expanded by 20 basis points to 3.81%. Also it's clearly our economic backdrop continues to benefit credit performance, as we can see in asset quality and -- stabilized asset quality and low delinquency rates. Obviously, we could see an improved long-term economic outlook in Puerto Rico that also prompted the recognition of a provision benefit of $13.8 million during the quarter. Asset-quality as it continued to improve, non-performing assets decreased by $1.6 million to $156.5 million, primarily driven by the reduction in non-accrual resi -- residential mortgages and the ratio of the ACL to loans and finance leases decreased to 2.21%. On the capital front, during the quarter, we continued to execute on our plan to return capital. We completed the 2021 approved share repurchase program by repurchasing 3.4 million shares of common stock amounting to approximately $50 million. That basically completed the program that we announced back in April 2021. So we ended the first quarter with a 17.7% common equity Tier 1 ratio, leaving ample room to execute on further capital deployment initiatives over the next quarter, which we will be discussed later in the call. So let's move to Slide five to review some highlights on deposit and loan performance, please. I think finally, we achieved some growth in the loan portfolio, we'll be looking after this for some time, very, very positive on the way the finance are looking. Linked-quarter growth margin inflection point to the balance sheet as balances other than PPP loans were up by $85 million when compared to the fourth quarter. The growth was driven by $91 million increase in commercial, $88 million increase in consumer and partially offset by $94 million decrease in the resi. The total loan originations were healthy, although a little bit lower than fourth quarter, primarily driven by the number of the dollars of commercial refinancing and renewals that were completed this first quarter. We do expect loan growth to continue accelerating during the year. Again, loan balances are healthy and they should begin and continue to close. It's a combination of different projects, initiatives, acquisitions, including the government investment in the disaster recoveries flow of funds. I will have to say that loan portfolio balances are still impacted by asset liquidity. We still have paydowns and loan utilizations are not at their top level. So but on the other hand, loan originations are strong, and we continue to center in increasing both the consumer and commercial loan books. While we have mentioned before, we continue to focus in originating conforming residential mortgages and towards sustaining the size of the residential portfolio and originating in gain on sale on the mortgage book. In terms of deposit, deposit moves nicely excluding broker and government, the way we like to measure core raised an increase of $55 million during the quarter. So let's please move to Slide six to cover some additional highlights. Definitely, there is potential negative impact of global geopolitical conditions are in place. I think we all recognize that such as increasing oil prices and what's going to be the real impact of that. We see disruption on the supply chain, and we definitely see labor cost inflation. So in spite of this, I would have to say that there's many, many economic levers supporting our growth outlook and objectives in our main market. In Puerto Rico, just to summarize, consistent economic indicators continue to improve and are above 2019 pre-pandemic levels. Labor market continues to pick up. Total employment rates reached its highest level in recent history during March -- during February actually, but continued through March. The labor participation rate improved to 44.7%, compared to 40% pre-pandemic. And the unemployment rate is reaching an all-time high every month. Now March reported 6.5% -- an all-time lower, sorry, March reported a 6.5% unemployment rate. I don't remember seeing this before. The economic activity in there, which is highly correlated to GMP has already reached pre-pandemic levels. I think it's importantly we have mentioned this, and everybody is very aware, but the recent resolution of the government debt restructuring, we believe will allow officials to shift resources and efforts toward the economic growth initiatives that are important. There is still a large amount of obligated funds, as you can see publicly and disaster relief funds that are pending to be dispersed, which definitely, hopefully, they will continue to support the structural improvement needed in our environment, such as the very important and critical modernization of our energy grid. Also, I would have to say, Puerto Rico continues to benefit from a high vaccination rate, which has led to an easing of COVID-related restriction, and we have to say a full reopening of the economy. Sustained increase in retail, auto sales, home sales, both new and existing, is evidence of improved consumer confidence. Tourism remains very active with passenger activity at our main airport 3.2% above pre-pandemic levels, ADR for hotel rooms increasing, driven by higher occupancy rates. Our view of improving demographic trends is supported by new residential housing construction and the important available taxes and products continue to attract investors to move into the island. As our top priorities, we continue to make progress on our omni-channel strategy and value proposition. During the quarter, we executed actually a little bit ahead of time, some additional branch rationalization opportunities that were identified in the later part of the integration. This actually as supported by increase in digital engagement, which moved some of the traffic of our brick-and-mortar channels. Digital engagement this quarter continued to grow with registered digital banking user increasing 5% linked quarter-by-quarter, now capturing over 42% of deposit transactions through digital and self-service channels. Most importantly, we have a goal of launching a digital enhancement of product or service every quarter. This quarter, we launched our new mobile Business Digital application for all our small, medium and large businesses, which they can -- in the mobile device, they can add functionality as remote deposit capture and other additional functionality. They will, obviously, can transact 24/7 in a very safe and reliable digital environment. We mentioned before, but we're going to continue with a sustained investment in additional digital functionalities through the year, and it's a very important to continue enhancing our omni-channel experience to our customers. Definitely, the franchise continued to demonstrate the strength of the quarter’s balance sheet and how we have been able to capitalize under this improving operating backdrop. After concluding our '22 capital planning process, we announced last night that we're very pleased to announce the approval of another $350 million share repurchase program to be executed over the next quarters and an increase of 20% to our quarterly common dividend. We're extremely committed to preserving shareholder value, investing in our franchise and improving our competitive position in the market we serve and we see the opportunities to continue in that path. So now I will turn the call over to Orlando for more detail on our financial results.

Good morning, everyone. As Aurelio mentioned, we had a very, very strong quarter. As you saw in the release, earnings reached $82.6 million, $0.41 a share, which compares to $73.6 million last quarter or $0.36 a share. Looking at the specifics, the quarter showed improvements of $1.5 million in net interest income, $2.5 million in other income and expenses were $4.8 million lower than last quarter. And I will touch up on those in more detail in the next few slides. But going to the provision, the provision for the quarter was a net benefit of $13.8 million, similar to the $12.2 million benefit we had in the fourth quarter of 2021, driven by the outlook, the positive outlook on the macroeconomic variables, both actual and expected even within the uncertainties going on the -- a war on Ukraine and some of these impacts as they relate to the qualitative factors that we have on the reserves. Pre-tax, pre-provision, again, really strong at $111.8 million, $7 million higher than last quarter, so very, very strong result for the quarter. When looking at specific components, the net interest income for the quarter was $185.6 million. We grew $1.5 million, and margin expanded by 20 basis points to 3.81%. The quarter shows increases in interest income on investment securities, a combination of the reinvestment yields, which have improved, and we've seen significant reductions in prepayments on the existing portfolio, which entails lower premium amortizations for the quarter. The overall yield on cash and investments increased 22 basis points, part of it, obviously, the money market and flagships it’s lower as we have used it for other purposes. The cost of interest-bearing liabilities improved 5 basis points, and that's part of where we have used the cash. We had higher cost repos that matured during the quarter, and we had some advances -- official fee advances are matured at the end of last quarter, and they were not renewed, therefore, resulting in reductions in some of the expense components -- interest expense components. The quarter also -- a couple of things that quarter had two days less than last quarter. That means about $2.4 million impact on net interest income. But on the other hand, we had part of it compensated by a collection of $1.1 million on non-accrual loan that was paid off. Going forward, we still see some margin pickup that is going to come from the repricing of variable rate loans. A number of those loans repriced at the beginning of each quarter, so some of the largest impact that happened past the end of the quarter, we'll see on the repricing happening now in April and early May. And we also obviously expect some higher reinvestment yields from the normal cash flows coming back from the portfolio on the agency paper we have. Deposit pricing on the market, as we have discussed in the past, will happen at a lower -- at a slower pace than the loan price -- repricing. But the way we see it, it will depend a bit on the number and speed of future interest rate hikes, which could speed the betas that we have seen in the market in the past. In the non-interest income, it was very much in line with last quarter, except that we collected $3 million in seasonal contingent insurance commission this quarter. It happens every first quarter of the year based on prior year volumes. The one thing we have seen, it's a refinancing -- mortgage refinancing have come down. So that component of the packaged and selling, it's mostly on new purchases that are happening in the market. Expenses with -- which I know, you have asked a lot about it, and it's been one of the main focus. Expenses were almost $107 million, $106.7 million, compared to $111 million in the last quarter. Last quarter, we had $1.9 million in merger and integration expenses that we didn't have any this quarter. If we exclude these items, the expenses for the quarter were $2.9 million lower than the fourth quarter of 2021. We have continued to work on maximizing the efficiencies after completing the integration of the acquired operations and in fact, have identified some additional opportunities. However, expenses in reality for the quarter were lower than anticipated and some of the main factors that we had, it's -- we continue to run at a higher level of vacancies, again, driven by post-pandemic labor market dynamics. Last January, we mentioned that we had seen some improvements in hiring trends, but in reality, it was not sustained throughout the quarter, leaving us with still reasonably high level of vacancies as compared to normal operating environment. Disposition of value of OREO properties continues to offset OREO-related operating expenses, we had a $720,000 gain in OREO lower than last quarter, but still, again, which is traditionally is not something that we have seen. And we expect that eventually will revert back to more of a normalized cost of handling reprocessed properties. Business promotion for the quarter was $2.3 million lower than last quarter. It's a lot with seasonality and timing of marketing campaigns and sponsorships. So we'll see some variability from quarter-to-quarter depending on our marketing strategies going on. Also, this quarter, we received $1 million in credit card network expense reimbursements based on last year volumes that offset some of the credit card costs for the quarter. Lastly, but not small, what we have seen it’s with all the global supply chain dislocations and the timing of being able to obtain what's needed for the different facilities, construction and some of the information technology projects, the expense impact from some of these strategies, it's delayed. We continue with many of these projects, as Aurelio mentioned, but we have seen some delays on that. So that would have some impact on the timing of those expenses. In general, we believe that some of these factors will continue to persist going 2022. But in addition, we have been identifying other efficiencies, as I mentioned before, that are being implemented. This quarter we closed three branches and we see that there are some opportunities on three others that we probably going to be acting on towards the end of the year. So those are additional opportunities. As a result, we feel that a normalized expense levels we have been talking to you about, we're revising that to a level of about $114 million to $116 million range. With the second quarter being lower -- slightly lower than that because of the timing of some of these efforts that I previously mentioned. The efficiency ratio for the quarter, as you saw, was pretty low, was 48.8% lower than obviously what we anticipated. And looking at this ratio based on the normalized expense levels, we are now seeing, we expect an efficiency ratio would be more at the 52% range than what in the past we have talked about 55%. Aurelio touched upon asset-quality, but asset-quality trends continue to be positive. Non-performing assets decreased $1.6 million, and it's represent now 0.79% of total assets. NPA reduction mostly -- was mostly on the residential mortgage side that came down by $6.3 million. That includes a full repayment of a non-performing of $1.3 million. However, we did see some increase in inflows of NPLs reaching $21.6 million this quarter, compared to $15 million last quarter. The increase mostly related to two commercial loan migrations, which were about $4 million. The other ones, we have seen some migration on the consumer side. But if you keep in mind that our portfolio is significantly higher than what it used to be percentage-wise continue -- migration continues to be very much at a better pace than what we had in the past. Finally, delinquency, meaning loans are 30 to 89 days increased $10 million in the quarter. But in reality, it's all related to $17.2 million in loans that mature in the quarter are in the process of being renewed commercial loans specifically. These loans are carrying up some principal and interest. So it's not an issue of delinquency, but we do what [indiscernible] once they reach maturity. On the residential and consumer portfolios, we saw reductions in early delinquency as compared to last quarter. Aurelio also touched on the allowance, but the allowance for the quarter was $260 million, which is $20 million down from last quarter. On loans, the allowance on loans was $245 million, which is down $24 million. Reduction, again, as I mentioned, it's improvement trends that we continue to see on actual and projected macroeconomic variables and the impact those variables have on some of the qualitative reserves we have. The ratio of the allowance to loans, it's 2.2%, compared to 2.5% what we have last quarter. On the capital front, an important subject, we continue with the execution of our plan. As you saw in the release, we completed the $50 million pending from the $300 million plan. We repurchased 3.4 million shares. And we also paid $19.9 million in dividends. But even with the execution of the strategies, the strong earnings are maintaining our capital ratio significantly above well capitalized. As you can see in the chart, Tier 1, as an example, Tier 1 common equity ratio only decreased 1 basis points from December, it's from 17.8% to 17.7%, still pretty significant. During the quarter, we did have an impact on tangible book value of common share, which decreased from $10.07 at the end of '21 to $8.63, decreases related to the $50 million in repurchases but more important on $132 million adjustment to other comprehensive loss resulting from the fair value, the decrease in fair value of the securities available for investment based on market interest rates. The OCI impact will reverse over time since we have the intent and more important than anything, based on the strong liquidity position we have. We have the ability to hold these securities and have other sources, so we're not seeing that as an immediate risk. We feel that at the end, the risk and the economics are the same, no matter how you look at it and where things set. And lastly, but not less important, we continue with the execution of approved deployment -- capital deployment strategies. We announced a couple of significant ones last night that you saw. Aurelio mentioned the new repurchase plan as well as an increase in the common dividend starting this quarter. With that, I would like to open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Brett Rabatin from Hovde Group.

Hey, good morning, everyone.

Good morning, Brett.

I wanted to first ask, just thinking about the loan origination trend versus the expectation for loan growth, I think if I got it right, that you're expecting loan growth to improve a little bit from here. Can you talk maybe about the loan origination trends? They were a little bit lower year-over-year and quarter-to-quarter, but it sounds like you're pretty bullish on the economy. Maybe just some thoughts on the loan growth outlook and what segments you see growing and how you see the pipeline trending through the year?

Yes. Yes. Obviously, I think the -- to make sure the way we report is on Page 6 of the deck, I think it is 5, I'm sorry. Obviously, you can see the trends. The consumer segment obviously is continued to show increase over the last, if you look at those five quarters. I think when you look at the commercial, there's a timely matter of the renewals, which is embedded in this number. But if we compare quarter-to-quarter, linked quarter -- meaning -- I'm sorry, last year quarter, first quarter versus this year quarter first quarter, obviously, new money, it's higher. The -- we expect the construction portfolio to increase. We actually have been very surprised that we continue to make more construction loans, but they are repaid fairly quickly in terms of the resi side because of the absorption. We do have a better pipeline if I compare this year to last year on both commercial and construction. And we have the volume of applications and incoming applications across the consumer businesses are also higher. The -- obviously, on the mortgage business, that's not the case on the resi mortgage because of the rate environment, refinancing is lower. So we also expressed that portfolio will continue to subside. And on the other hand, we have less PPP loans remaining on the book. So -- and we expect, as liquidity moves on, that some of the usage of the credit lines, inventory also contributes to some increase in the loan portfolio.

Okay. That's helpful. Appreciate that. And then I wanted to make sure there's some moving pieces, obviously, with the margin you had less premium that benefited the securities portfolio, lower government deposits. I wanted to make sure -- I guess from a static perspective, your filing is going to indicate 4% in NII side with 200 basis points. I wanted to make sure I understood sort of the outlook on the margin and what you might do to optimize the balance sheet from here. It would seem like you indicated the margin should move higher. I guess I'm just trying to get a sense of the moving pieces and the magnitude of the increase from here.

Okay. So the component -- the commercial lending component, there is a floating side of it. We have a good chunk of the commercial portfolio that flows with LIBOR or prime. Most of it is based on three-month LIBOR, so the three-month LIBOR component typically -- not all of it, but typically reprices at the beginning of each quarter. So the largest chunk of the improvement it is going to happen now in April as compared to what happened in January with the increases that we had in there. So that's going to give us some pickup on the commercial side tied to LIBOR, so that's one component. We are seeing reinvestment deals on the investment portfolio at a much better rate as you have seen in the market. So that allows us to reinvest the cash flows that come in from normal repayment of the agency paper that it's a CMO-type paper that pays some cash flow, monthly cash flows to be reinvested at better rates. We continue to, as I mentioned, some of the all the longer-term debt like FHLB advances and repo we're not renewing those. Those were higher rates. It's becoming a smaller chunk of the portfolio, so it has less impact, but still that is there. And at the end, we had a significant amount of cash. You probably saw that cash came down. Part of it is because of reactions on the long-term borrowings, but part of it is also some of the government deposits that left -- so that -- we use cash on those deposits and in reality, some securities that were pledged as collateral became available. So that's lower yielding assets that now change to the mix of in performing assets. On the deposit side, what happened, Brett, it's -- we -- obviously, the market -- we don't see the market moving as fast. We have seen some credit units to move. And we feel that what we're anticipating is some behavior changes back to where they were before, meaning there were significant movements in 2021 on time deposit maturities that people move into either 1 month time deposit, something we rarely saw before or into transaction accounts that it's going to come back into some of these term deposits rate change on the deposits. So those -- it's on two different sites, but the net effect of all that we expect some pickup on the margin still going forward.

Okay. That's helpful, Orlando. And then I wanted to make sure I understood, you revised the guidance, if I heard right, $114 million to $116 million, with it being a little lower than that in the second quarter. What components pick up from here? What spending do you need to do? And how do you -- just trying to get a better flavor for Puerto Rican banks? And in general, have had lower expenses in their guidance. And I think a part of that might be that you want to make some hires and spend some money on business promotion that was seasonally low in the first quarter, but I wanted to make sure I understood the components of the increase from here.

Yes. You mentioned one, which is very important. It's -- we -- on the compensation side, the salary expense is lower than we had anticipated, because of the level of vacancies. We continue to push to hire some of those positions. We feel that a long-term impact of that, it's going to reflect on service. We don't want that happening. So we're pushing, but there are some market realities. There’s also salary adjustments that are being contemplated as part of the plan for the second half of the year based on, again, on dynamics in the market and what's happening out there in terms of hiring. So that complicates some of the expense components. The other one that I think is -- the OREO component, typically, you don't have a profit. We've been having profits because of the disposition values. But remember, those are properties that came into OREOs when prices were lower. Therefore, those volumes were lower. Now we're getting the recovery on those -- but the new things that are coming in when you go to operate values are based on current value. So you will see less of that and still we have operating expenses, obviously, on a much smaller portfolio. So expenses are also lower, which that helps. But we shouldn't see a profit going forward on the OREO side, as I said. Marketing, it's one that we have a few things going on that we're going to be launching. Some of the expenses are related to some of those marketing strategies. So that's why I said the number for the first quarter is lower than we anticipate on the next few quarters based on the marketing strategies we have outlined for the execution. And the last component is -- there have been -- we've been working on several projects. On the facility side, we have a large project of getting all the facilities to accommodate all of our people after integration. It's taking longer than we expected because of the availability of some of the materials for the remodeling and even getting the furniture in. So that has delayed some of the process and has delayed also obviously, the impact on the expense side, since we don't have it yet. And we've seen some technology projects that also have some delays that we are expecting to start happening in the second half of the year. So those combined are the things that are creating the increase on the expense side. Clearly, we had originally provided a higher number of $117 million to $119 million after integration and looking at all the components and what's been renegotiated on the contracts -- we feel those expenses, combined with some of these difficulties in getting things on should be more on the $114 million to $116 million range. But those are the main reasons for the change from what we are. We -- in reality, we were lower this quarter than we were anticipating originally.

Okay. That's great color. Appreciate it.

Thank you, Brett. Our next question comes from Ebrahim Poonawala from Bank of America. Ebrahim your line is now open, please go ahead.

Orlando, good morning.

Good morning, Ebrahim.

Hi, Ebrahim

Sure. Just wanted to follow-up on asset sensitivity, so I heard you in terms of you mentioned the margins could benefit. If I heard you correctly, your loans tend to reprice at the end of the quarter. And I'm looking at your asset sensitivity in the 10-K, positive 200 bps ramp is about 5% NII upside. And I'm not sure if I missed it, but give us a sense of if you get 100 basis points of hikes from the Fed in May and June, where did the margin set to 20 basis points of expansion more or less, would appreciate any kind of color or framework that is in for us?

Yes. We have not provided that. I know that some institutions have said, but my concern with that, Ebrahim, it’s -- I can tell you a number, which is based on everything else being equal and not changing. When in reality, I'm expecting some change in behaviors on some of the deposit repricing component. So when I -- when you see that number of the 5% that you make reference to on the 10-K at December 31st, that included some of that impact on repricing. So it's a combination of the two. That's why I'm saying it all depends on if rates moved slower, the repricing component that I'm assuming for deposits, it's going to happen at a much lower pace. And that's why we haven't been providing that kind of indication that you are mentioning. We have stayed to the overall component of the impact on net interest margin -- net interest income, I'm sorry, as you saw in the 10-K.

Got it. And remind me again, do you -- if I get the public fund deposits declined this quarter. As we look out, do you still expect deposits to run off from here? Or do you expect deposit growth?

On the government side, we still feel that there will be some usage. Remember that there are some large components that are related to -- so we have funds from the energy authority that are related to the reconstruction. So eventually, it's going to be used. Some of the municipalities, we don't see that changing that much, because it's all operational accounts. So it's a function of the economics of the municipalities. The funds that moved out related to the settlement of the debt, those are out already. So we don't have anything else. So on the government side, we do expect a little bit of reduction. On the customer side, we don't expect significant growth, but we don't expect reductions. We feel it's going to be fairly stable on the core deposit side, meaning our retail and commercial customers.

Okay. So loan government is relatively steady state. And then and understood. And just the final question around, as you think about credit quality, and I heard what you said earlier, like where do you see -- how much more do we have before reserves bottom out? Just give us -- remind us what the CECL day one was, I know it was some noise given the deal at the time. But what do you see as a steady-state reserve level? Is it 50 basis points lower from here? Or could it be like, any thought perspective would be helpful.

The reserves, you mean?

Yes, the reserve ratio.

The ratio. Yes, the ratio -- there is -- on Slide 12, I don't know if you have it handy, but you can see what we had at adoption of CECL, it was 2.6% reserve at that time. Remember that --after that was before the transaction with Santander, and we did not acquire any non-performing assets on those loans, on those portfolios. So that helped the mix of what you have. The -- we have taken a number of the qualitative components that reserves coming down. I believe that now with loan growth we should see some provisioning coming in future quarters, not [Technical Difficulty] but some provisioning because, on the other hand, the residential portfolio, which is a longer-lived portfolio entails a higher percentage of reserve typically, because of the life of the loan. And we've seen reductions, and we expect to continue to see some reductions. So net-net, I would assume that percentage-wise, reserve it's going to come down a bit. Dollar-wise, we'll have some provisioning, but not at the levels we had back in 2019 or anything like that.

Got it. Thanks for taking my questions.

Thank you, Ebrahim. Our next question comes from Timur Braziler of Wells Fargo. Timur, your line is now open, please go ahead.

Hi, good morning.

Hi, good morning.

Good morning. How are you?

Good. Thank you. Just following up on the last line of questioning, looking at the commercial allowance levels, there was a pretty good reduction this quarter. I'm assuming that was all qualitative in nature. And is that largely why you're assuming kind of provisioning from here in a more stable allowance? And I guess if -- how much more room is there on the commercial side, specifically for further qualitative adjustments down, or could we actually see that reserve level on the commercial book increase if trends deteriorate more broadly speaking?

On your first comment, it's totally correct that remember that when you look at the composition there were a number of modifications done on the CARES Act. There were a number of cases that during the pandemic had moratoriums and all of that. So related to all those components, there were a number of qualitative reserves that we tied to the specific loan and to, obviously, the macroeconomic expectations that were used in the modeling. So clearly, what we have seen it’s as time goes by, most of those loans have significantly improved their financial position. We haven't seen the -- they have been meeting every requirement we had as part of the modifications that were done or the extensions that were done and that's resulted in some of those reductions that you mentioned. With the -- and that happened mostly on the CRE side more than anything. On the commercial side, you have some impact, which is related to what is -- what could be the expectation on the impact of the Ukranian war, if that were to last longer or long event, instead of a short event. So to answer your question, on the commercial side, related to some of the old things, we feel that a qualitative could come down if some of the issues associated with the economic impact of the conflict were to be eliminated and are part of the modeling purpose. Otherwise, it's going to be more of a volume-related component. As Aurelio mentioned, we saw PPP loans come down significantly in the quarter or as a percentage of what we had outstanding, but those loans had basically no reserve or no reserve at all, as compared to new loans coming in, which will go through a normal borrowing process. So it's -- the improvements could come from those macroeconomic impacts that are at this point incorporated in the modeling associated with the conflict.

Okay. That's good color. I appreciate that. Maybe switching to expenses, if I can ask a follow-up question on expenses, maybe a little bit differently. How much of that $114 million to $116 million updated guidance is dependent on new hiring versus kind of earmarked projects and earmarked spend that's more formulaic?

Meaning from -- going from where we are to that point or the reduction on the guidance?

No. Going from where we are today to that low $114 million, how much of that is dependent on new hiring versus internal spend?

There is a combination of new hires. And remember, it's a combination of new hires and what we expect it’s going to happen with salary basis.

Compensation adjustments.

Adjustments and merits and some other things, so that would make up about half of it. The other component, the seasonality on the business promotion, it would make maybe $1.5 million of that. The other things will come from the projects.

Okay. And then you had mentioned the role that credit unions play on the island. I'm just wondering, as we look at deposit betas and deposit pricing, is it the three banks and really popular that's going to be driving deposit costs on the island? Or do the credit unions have enough market share that they could accelerate maybe beta expectations above kind of how we're thinking about it?

The credit unions have about close to between 8% and 10% market share. So they are a player. And there are some other credit unions that are federal that are not reported in that number. So they're also a player. Then you also have some digital banks that are active in the island. So even though they're a smaller player, they are a player when rates go up. So we take all that into consideration and but obviously, the lead bank is in the driving seat when you look at the market share that they have. So it is still -- I will say it's still a competitive environment. But obviously, remember, there's a lot of excess liquidity, too, which comes into the equation. So we do expect in our Florida business that those rates will move at a faster rate, rate increases on the deposit side move at faster rate. But not necessarily, we expect that to be the case in Puerto Rico.

What we have seen active -- what we have seen them more active, it's been on the time deposit side, which they put out information in the market, like add some things like that. So it creates some of the noise.

Okay, thank you.

Thank you, Timur. Our next question comes from Alex Twerdahl of Piper Sandler. Alex, your line is now open, please go ahead.

Hey, good morning guys.

Good morning, Alex.

I was hoping maybe really, Orlando, you could give us a little bit of commentary on some of the things that we might not be able to get exactly from looking at the jobs numbers that you alluded to earlier? And specifically, kind of how wage inflation might be impacting the median household income in Puerto Rico? And I know you might not have specific numbers at your fingertips, but just kind of anecdotally, what are you having to pay people today versus a couple of years ago? And I'm just trying to sort of frame it in the context of, obviously, inflation is kind of a hot button topic everywhere and I've heard some concern over maybe just given that people in Puerto Rico make less money that maybe inflation is a bigger deal down there, the cost of oil or gas is a bigger deal. But I'm also under the impression they're making a lot more money than they used to. So I was hoping maybe you could sort of put some of that stuff into context for us.

Yes. I think, we have to use anecdotal data because there's no real data from the government side. Obviously, when you look at the unemployment rate and the labor participation going up, something is going up, something is going on, definitely, for sure. And when you look at more people hiring, obviously, in an economic, remember, we go back to living in a very prolonged recession. So when the economy grows, there's always more competition in the job market, and that's what we're experiencing in Puerto Rico, service centers, call centers, if just to anecdotally you take the call center staff, which all banks have, at some point in time, we paid 3 years ago, we were paying minimum salary. Now we're probably paying 25% above or 30% above minimum salary. So those are the kind of numbers anything happened with tellers and the branch, which are quite a large number of them in each bank still. So the same thing happened. And then at the professional level, we're probably 10%, 15% up versus the two prior years. So when Orlando mentioned that -- and also remember, the stimulus improved the consumer position. I'm sure the per capita income of Puerto Rico when we look at the number, it's much higher. So at the end of the day, I think it's good for the economy that we -- personally, I think it's good for the people and the economy that we have that we -- they get paid more, that people make more money. So obviously, the purchase capacity of the consumer is improved. And -- but I think -- I don't think anyone is over reacting. I think we're all managing the situation little by little on a protection basis. And I think this can be adjusted too, at some point in time. We have to wait the impact of the potential recession that is being discussed and the impact that we know is going to have on the oil cost in Puerto Rico and the energy cost. And so we have to be cautious and monitor every quarter and protect our competitive positioning in how we pay. But I don't think anyone is getting crazy. It's just managing the situation in a prudent manner.

I mean remember that minimum salary went up 10% starting January, just the basic minimum salary. And in reality, many entities are ended up paying higher than minimum salaries on those positions.

Great. That's a great color.

But on the other hand, Alex -- yes. On the other hand, remember, I think we are seeing our case, we're seeing the benefit of larger scale. And we did a very deep dive on our operations. We did for the integration, we did a -- truly the entire productivity exercise in every function that took more than 1.5 years to execute. So we had identified opportunities. Not many banks are showing the 52% -- the 48% efficiency ratio and saying that 52% is probably the more normalized scenario. So I think that -- so we're trying to be prudent and also obviously very focused on inefficient, too.

Yes, right. As you kind of talk about your loan growth and outlook commentary, and you also alluded to some of the federal money coming from Hurricane Maria that you're starting to see flow a little bit. Do you have a line of sight on any bigger projects that might be coming online later this year? I know that in the past, you've talked about some of the programs and the applications that your customers have filed waiting on government approval. I was just wondering if you could give us any sort of update to kind of help us understand when some of those projects might actually start to come online?

Yes. Yes. We -- the IPG program, which is the name the government gave to the program is in the later stage of underwriting, and we expect some of these products to be announced in the third quarter. So we are participating in some of those as they -- some of them will get -- the benefit of the projects or not, but most of these projects could happen either case with the benefit or without the benefit. But yes, there are construction projects related to hotels or residential development or even improve office space or development centers that could come into the play. And some of them are also infrastructure related.

Okay. And then as I think through the $350 million buyback that you guys authorized last night, what -- is there an expectation on the cadence? I know it's kind of over the course of four quarters, but could you sort of frame the ranges that you potentially could do in any given quarter?

I think we're going to be opportunistic on it. Let's see how things move, and we have not disclosed a specific execution plan, but we will do that at a later stage.

Okay. And I'm sorry, did I cut you off on -- where we going to have a follow-up comment on the last question.

No, no.

Okay, good. All right, well thank you for taking my questions.

Thank you, Alex.

Thank you, Alex. And our final question today comes from Kelly Motta of KBW. Kelly, your line is now open, please go ahead.

Hi, good morning. Thanks for the question.

Welcome, welcome to the call Kelly.

Very happy to be joining. Most of mine have been asked and answered already. But circling back to the discussion of credit, you obviously had a large release and things have been really looking up in Puerto Rico and charge-offs have been really, really insignificant. Just wondering if you guys have a sense of sort of over the intermediate term, what a normalized level of charge-offs could look like for you guys? I know there's simply some reserve releases, but also wanted to discuss more on kind of the loan loss component of that when thinking about the provision?

I mean, at this stage, meaning 2022, I frankly don't see significant changes on the current trends of charge-offs. We're not seeing that on -- remember that this is the end stage of what happens with early delinquency migration of loans, risk classifications and all of that. And that has been really consistent. We -- some of the increases we're seeing is -- there is always going to be some charge-off at the end on the consumer portfolios. That's typical of the industry, percentage-wise as small. Dollars have increased a bit because of the size of the consumer portfolios. But we don't see anything that it's going to take us to a significantly higher number. If you look at way back, you wouldn't see on commercial side more than 50 basis points in charge-offs. And mortgage in the Puerto Rico market at a point in time, if you hit 10 basis points was a lot. So at this stage, I don't see why the numbers are going to change in the -- for 2022 or the near-term.

I think we have leading indicators that will help us answer that question as we continue to move forward. Right now, delinquencies are at the lowest we have it for some time. And we did mention, I think, in the last quarter call, in the prior quarter call, we mentioned that we were expecting as liquidity runoff on the consumer after the stimulus that some impact will have on the delinquencies or even the inflows, we haven't seen that yet. We haven't seen that yet, but because stimulus continue to flow and unemployment is better. So it's supported by economic indicators that are the backdrop. So that -- but I think we have plenty leading indicators the way we monitor the portfolio to help us raise that flag if that would be the case.

Got it. That's really helpful. I appreciate all the color. And if I could, I wanted to ask a kind of a nitpicky question on the 52% efficiency guidance. I appreciate your conservatism there. And that you're taking your expense up from where they are here because of the issues you discussed. But if I just take the high end, the $116 million over your FTE NII and fees. I have you between 51% and 52%. Is that efficiency guidance? Is that on an FTE basis or should be using GAAP NII? I'm just struggling to see how you can get to 52% even increasing expenses because presumably NII will expand here?

Yes, it's based on GAAP NII. Not on FTE NII.

Okay. I think that's really helpful. Well, all my questions have mostly been asked and answered. I appreciate the time today, and thanks again for letting me join the call.

Thank you, Kelly.

Thank you.

Thank you, Kelly. And there are no further questions. So we would like to thank everyone for participating in today's call. This now concludes today's call. Thank you again for joining. You may now disconnect your lines.