First BanCorp. (FBP) Q3 2022 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the First BanCorp 3Q 2022 financial results call. My name is Sam, and I'll be your moderator for today’s call. [Operator Instructions]. I'll now turn the call over to our host, Ramon Rodriguez, Corporate Strategy and Investor Relations Officer. Ramon?

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 third 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. Good morning to everyone, and thanks for joining our earnings call today. Before we discuss the highlights, I would like to provide an update regarding Hurricane Fiona's impact on our main market during the latter part of the quarter. The storm primarily caused flooding, property damage, mostly in the south and southwestern western parts of the island, as well as power outages, and I will say, minor businesses. We were able to continue supporting our clients through the event by leveraging our retail and trust service channels, while gradually resuming bank operations the following day. Our headquarters and main buildings remained fully operational during the event, and no major interactions were registered. Most of the business environment resumed their ordinary course of business during the following week. However, we're providing - we provided certain payment deferral programs to our clients (indiscernible). I’d like to take this opportunity to thank all our colleagues for their dedication and response to our client needs. we're highly encouraged by the strength and resiliency shown by all those in this natural disaster. Once again, we continued to practice our contingency plans With that, please, let's move to Slide 4 to discuss some of the highlights of the quarter. During the quarter, we stay on course and are very pleased to report another strong quarter for our franchise. We earned $74.6 million or $0.40 per share during the quarter, and I think most importantly, reached another record pretax pre-provision income of 142.4 million. This was our sixth consecutive quarter increasing in pretax pre-provision income of 3% compared to the second quarter of 2022, and 18% when compared to the same quarter last year. Net interest income grew by 6% linked quarter to 207.9 million, and the margin expanded by 31 basis points to 431. Orlando will provide more detail on this later. We recorded a provision of 515.8 million for the quarter, reflecting not only crazy portfolio balances, mainly in consumer loans, and slight deterioration in the long-term outlook of certain forecasted microeconomic variables. Asset quality continued to improve, with non-performing asset decreasing by 4.2 million to 143.3 million during the quarter. NP ratio now stands at 78 basis points. Even though the economic backdrop on main lending continues to benefit from improved consumer confidence and a strong labor market, we keep very close monitoring of our portfolio trends and quality, and obviously, we sustain very, very healthy levels of allowance. Finally, our strong capital liquidity profiles did enable us to continue executing our established capital deployment plan, and we've repurchased approximately 5.4 million shares for $75 million during the third quarter. To that end, we have repurchased approximately 12.5 million share for approximately $175 million under the previously announced $350 million stock repurchase program. And year-to-date, including what we did in the first quarter, we have repurchased a total of 225 million during 2022. These results highlight our ability to achieve consistent performance and deliver value to our shareholders, while managing effectively, the operating environment challenges. Please, let's move to it Slide 5. The operating dynamics continue to evolve in line with our main goals. I think we talked about where we want to take the portfolios and record. Loan portfolio balances other than PPP loans, grew by the 112 million when compared to second quarter, primarily driven by increases in consumer and some commercial loans, partially offset by a decrease in residential market. Year-to-date loan portfolio growth has behaved as expected, with target against some commercial and consumer, while raise and reductions in residential mortgage year-to-date commercial growth is about 4%, and consumer is about 11%. We expect to continue capitalizing on rising market opportunities on the commercial construction and consumer segment to win market share during the upcoming quarters, obviously closely monitoring asset quality. I have to say that the loan pipelines coming into the first quarter continue at healthy levels. In core deposits, federal government and broker decreased by 530 million during the quarter, primarily driven by reactions in Puerto Rico and Florida. Deposit market trends in Puerto Rico continue to gradually taper off as high balance depositors search for higher yield deposit alternatives, I will say, particularly in the US treasury market and other non-bank deposit options. However, our (indiscernible) commercial clients in Puerto Rico still remain above pre-pandemic levels. Please let's move to Slide 6 to discuss some of the cooperative environment (indiscernible). While the macroeconomic variables in Puerto Rico continued to show good signs, we continue to see improvement as evidenced by stronger labor market and consumer confidence metrics. Payroll employment reached a record high in August, and was 4.6% year-over-year. The economic activity index, which is a constant indicator of economic conditions, maintaining growth trajectory and registered a 1.7 increase in your July, compared to the same one last year. But most importantly, economic conditions in our market are expected to be supported by the development of disaster - deployment of disaster relief projects during the upcoming years, which will help mitigate a potential slowdown in the US economic activity. A public data shows that the pace of disaster relief funding spending continues to improve, reaching $1.3 billion during the first eight months of 2022. This positive trend is critical for economic development in the island going forward. It's important for our lending activity in that sector. Power is a big objective of leveraging, and in my direct position, to improve our beta scale in the market we operate, it's paying off and has allowed us to continue investing in the franchise while delivering shareholder value. We have been able to timely invest in digital business-enabling technologies that have allowed us to process loans, capture deposits to trust service platforms. To this end, we continue experiencing increased adoption of the recently launched mobile business retail banking and small business lending platforms. Retail banking activity continued to improve. Users are up 6.7% year-over-year, and we continue to capture over 4% of deposit transactions through digital and sales service channels. Additional branch optimization initiatives have been identified and will be executed during the fourth quarter, as we continue to optimize our existing physical channels sales and distribution capabilities. All these initiatives, coupled with our expense management discipline, contribute to support one of the lowest efficiency ratios among our industry, which stands now close to 48%. With that, I will turn now the call to Orlando for more details on the financial highlights. Thanks to all.

Good morning, everyone. So, Aurelio mentioned the results for the quarter were very strong. We had a net income of 34.6 million, which is $0.40 cents a share, which compares with 74.7 million, which about the same last quarter, but at $0.38 cents a share, some of the impact of the repurchases that have been achieved over the year. Pre-tax pre-provision, however, grew 3.6 million, and now stands on 122.4 million for the quarter. What we saw in the quarter is that we continue with a positive impact on interest income from the repricing on the loan side, as well as a higher yield on cash and money market instruments that result from the increasing Fed funds rate. Also, as we had anticipated, we have started to see some acceleration on deposit betas, which have led to increases in the deposit costs, still with margin expansion, as we will discuss a little bit later. Again, as Aurelio mentioned, the provision for the quarter was 15.8 million, which compares with 10 million last quarter. This increase in the provision reflects the growth of the consumer portfolio to a large extent. If you look at a portfolio since December, the consumer portfolios have grown 332 million. And for the third quarter, consumer grew 113 million. Without being repetitive again, the other component, it's - the deterioration we have seen on the forecasted macroeconomic variables. As we all know, with the economic situation across the world, there have been some expectations of some recessionary impacts. For our allowance determination and provision, we continue to weight two scenarios that we have disclosed in the past, a baseline (indiscernible) downside economic scenario to reflect what could be an economic impact. In terms of the hurricane, the financial impact Aurelio mentioned was mostly - mostly was the south and southwest. The credit impact on our commercial customer has been minimal. For the consumer sector, we did establish a moratorium program, as we did in the past, not as spread out as we did before. So far under that program, we have entered into only 56 million in deferral or extension, meaning so far through a couple of days ago. And the hurricane also resulted in about 600,000 reduction in fee income, and 400,000 increase in fee expenses for the quarter. Looking at net interest income, it increased by 11.7 million from 196 million to almost 208 million in the third quarter. Interest income grew 14 million, while interest expense grew 2.3 million in the quarter. On the commercial side, interest income grew 9 million. 8 million of that represents repricing or higher yields on new loan originations, and that resulted in the yield on the commercial portfolio growing 61 basis points in the quarter. In the case of consumer loans, interest income grew 4 million, but was mostly related to increase on average balance as the portfolio on average grew 126 million in the quarter. The average yield - being mostly a fixed rate portfolio, the average yield on the consumer portfolio grew only 1%, which it's part of the new loan originations at higher rates. Interest expense on interest-bearing deposits grew 2.4 million, a 10 basis points increase. Overall, however, interest expense grew by the same amount since during the quarter we had a 200 million FHLB advance that matured and was repaid. And that reduction offset the increasing cost we had on the junior subordinated debentures that are floating weight notes. So, that offset one with the other. The average cost of total interest-bearing liabilities grew 10 basis points in the quarter, also 10 basis points, which is - from 43 basis points last quarter to 53 basis points this quarter. Margin increased 31 basis points from 4% to 431. The improvement in the margin, it's a combination of the impact of the rates, and a little bit of a change in mix on the assets as cash balances that are lower yielding, have decreased. In terms of net interest income, it came down 1.2 million during the quarter. 600,000 of that is related to mortgage banking resulting from the lower gains on mortgage sales in the secondary market. So, the level of originations of conforming mortgages that are sold in the market have come down. But also, we had a 600,000 impact on fees, basically all related to the hurricane. It's like a little bit over 100,000 associated with waived fees we provided to customers on ATM and other type of transactions, as well as 500,000 in transactional fee income reduction on POS terminal and merchant transactions, which were affected by the impact of the hurricane. In terms of expenses, expenses for the quarter were 115.2 million, which compares with 108.3, which is 6.9 million higher than last quarter. If we split this out of bed, as we discussed during the second quarter call, expenses in the second quarter had a benefit of 1.7 million from reversals that associated with resolution of matters that had been previously accrued. If we were to exclude that and also the OREO gains that we had in the quarter, expenses for second quarter were about 111.5 million. That would compare to about 160 million this quarter, also excluding the OREO expenses. When we had this call last quarter, we provided a guidance of that estimated about 2 million increase in expenses for the quarter. The amount was higher than we had originally provided in the guidance. A few things in there. Hurricane, again, it's about $400,000. 300,000 of that, it's related to some donations that were made to nonprofit organizations in communities that were mostly affected by the hurricane. We launched a new brand marketing campaign that added to about $400,000 more than anticipated. The quarter had one extra day in payroll. We had the renewal of the medical plan that came in much higher than we had anticipated before, and the electricity costs came in higher than we had. So, those were some of the items that affected the - ended up being higher than the guidance we had provided. If we look at the fourth quarter and the things that come in and out, we expect that expenses for the fourth quarter would be at the same range, the 116 million range that we had this quarter. It's the most recent estimate we had on expenses. Looking at efficiency, however, even with the increase in expenses, our efficiency ratio continues to be very low at 48.5%, in part also of course driven by revenue increases. And we still estimate that we will be under the 50% efficiency ratio for the end of the year. Asset quality trends, looking at them, continue to be very positive. Non-performing assets decreased by 4.2 million in the quarter, 243 million compared to the 147 million we had last quarter. And also, as Aurelio mentioned, the NPAs are 78 basis points of assets. The reduction on NPAs was - generally includes 1.6 million decrease in residential mortgage non-performing, 2.5 million in commercial, and basically paydowns and pay-up of some non-performing, 3 million decrease in OREO. The only portfolios that went up, it’s the consumer side, it went up 2.5 million. And obviously, there is a size component associated with that. As you see on the inflow side, that went up 3.9 million, which was basically the same thing. Most of it was related on the consumer portfolio. Early delinquency in the quarter, which is defined as 30, 29 days, did go up by 20 million, but there was a significant impact on the portfolio from the payment streams that were effected on the second half of September. Large chunk of the cycles on some of the order portfolios mature on the - in that second half of the month of each month. So, that affected the numbers. We have seen some improvements on that coming down now into October. So, we deemed that as being temporary, most of it. Net charge-offs for the quarter we're 31 basis points, which is up from 21 basis points last quarter. However, you might remember that we did have 1.2 million in recoveries in commercial portfolios last quarter that lowered the charge-off ratios. Looking at the allowance, the allowance on the second quarter ended up at 271 million, which is 7 million higher than last quarter, total allowance. The allowance on just loans and finance leases was 258 million, which is 6 million higher than last quarter, reflecting the movement in the portfolio and again, the deterioration on the long-term outlook of the economic variables. The ratio of the allowance was 228 as of the end of the quarter, compared to 225 as of the end of the second quarter. On the capital front, Aurelio mentioned we continue with the execution of our capital plan. We have repurchased 15 million - 15.9 million shares this year for 225 million, which has been basically offset by the 232 million in earnings we've had year-to-date. Capital reductions have mostly come from repurchases, and the 66 million or so of dividends we've paid over the first nine months. But capital rates has continued to be very strong. You can see on the chart, the tier one common ratio came down just from 17 to 16.7. So, it's only three basis points, while the leverage ratio went up from 10.2 to10.4%. So, both very healthy rates. Tangible book value per share did come back - come down, decrease from 780 to 645 related to the 271 million in additional OCI adjustments from the decrease in the fair value of the securities. Our tangible common equity rates (indiscernible) at the end of the quarter. But as we have mentioned in the past, we believe this is going to reverse over time, since we have the intent. And also based on the liquidity, we have the ability to hold securities through maturity. As you probably have seen on the numbers, securities portfolios has not been growing, and we have monthly repayments somewhere between 40 million and 50 million, which lower the portfolio, and obviously, lower the impact from OCI adjustments. If we were to exclude the OCI on a non-GAAP basis, obviously tangible value per share would be $11.11, and the tangible common equity ratio would be 10.75%. With that, I would like to open the call for questions.

Thank you. [Operator Instructions] Our first question today comes from the line of Timur Braziler with Wells Fargo. Timur, your line is now open.

Hi. Good morning, everyone. Maybe looking at the balance sheet first, particularly on the funding side, how should we be thinking about future asset growth and how that's funded? 68% loan to deposit ratio, 33 plus percent securities stats. You guys have plenty of on balance sheet liquidity. Should we expect you guys to continue using some of that liquidity to fund future loan growth? There's expectation here that loan growth going forward is going to be more or less funded by deposits.

Yes. As Orlando mentioned, securities portfolio is bringing about 40 million, 50 million liquidity for months. We expect to grow that, at least move that - use that liquidity to continue growing the loan portfolio. That's the plan. Net-net, we expect commercial to continue to grow, consumer to continue to grow, and a slight reduction - if you look at the last quarter on the resi side, the contraction trends have also been reduced because obviously the repayment, prepayment on the portfolio and refinancing activity is lower.

Okay. And then I guess on the deposit side, just given some of the broader pressures, and you made comment that some of the deposits are tapering off in Puerto Rico and customers are going into either treasuries or other products, is the expectation there that we should still continue seeing some modest deposit reductions until there's a broader point of stability? Or do you think we're getting closer to a bottom here on balance sheet stability size, at least as far as deposits go?

Yes. To be honest, it's most difficult trend to predict. When you look at it from the average balance perspective, we’re still above pre-pandemic, and that has remained for - and there's still inflow of funds coming in. On the other hand, when you look at large depositors, yes, we're competing with banks. I think we expect slight reduction of the portfolio as things continue to normalize. Obviously, our ability to grow market share and our objective of growing market share is also present. So, we're trying to mitigate and offset some of that average balance construction that should happen. We're bringing some additional market share into it. But I think that net-net, we should expect some additional contraction.

Okay. And then maybe just looking at the Puerto Rican consumer, would love to get your thoughts around the - just more broadly the Puerto Rican consumer, and then just the amount of consumer growth that you continue to experience. What's your appetite for consumer growth in ‘23 as we're heading into this period of more broad kind of economic uncertainty here on the mainland at least. And then as that pertains to actual asset quality, I mean, we're seeing some normalization of credit, it seems like, within the consumer portfolio. Just maybe talk about what you're seeing there as far as credit normalizing and what that could mean for the allowance ratio.

Well, the behavior of the portfolios from a delinquency level across the consumer sector, I would say personal loans and auto are still below pre-pandemic levels. Credit card, it's (indiscernible) levels. That's what we're seeing. The consumer was not using during 2021 to - up to the second quarter, the consumer was not necessarily using the additional liquidity. On the lending side, obviously, the auto lending continues very strong, and we link that to the reduction in unemployment. If people need a car in Puerto Rico, there is no public transportation. And if you're working, you need a car. So, we expect sales to continue healthy. The year, it's turning out 110,000, 120,000 units on new vehicles. We expect that trend to continue, not necessarily increase. But at that level, we have today about 21% market share, and we continue to increase share. So, why not 25, why not 30? It doesn't happen overnight, but we expect to continue our consistent growth over the last three years in that segment. On the consumer lending side, we probably are more conservative in terms of the maximum loan amount. On our credit parameter, we have been able to achieve some growth in that sector over the last most recent quarters. The consumer is back taking consumer loans. And on the credit card, activity continues healthy, is not significant growth, but some positive trends in the portfolio. The delinquencies, the models also include are forecasting some of the macro trends already embedded in the models. So, yes, we could expect some slight increase in delinquencies, but we still believe are going to remain below pre-pandemic levels because of the health of the consumer here when compared to what was the economy before. Today's economy, minimum salaries are better. There's more activity. There's less unemployment. So, all that should result in having a better-quality consumer portfolio than the prior cycle of their economic stress.

Great. Thank you for the color. I'll step back.

Thank you for your question. The next question comes from the line of Alex Twerdahl with Piper Sandler. Alex, your line is now open.

Hey, good morning. I wanted to start on the unfunded construction loan commitments. I think the increase was 57 million during the quarter. I was wondering if you can give us the total amount of unfunded construction loans that's right now on the balance sheet, or I guess off the balance sheet?

Let me see. We have it right here.

I don't have it here, Alex. I'm sorry. We can get that …

Okay.

We’ll make sure we follow for you on the queue, if not so that you can have that information.

Okay. I mean, when I look at the unfunded construction loan commitments, are those - would you say that those are somehow associated with the hurricane relief, some of the projects, part of some of the government programs, or is this separate building activity? And just kind of, where are we in terms of some of these projects? I know that there's money that's waiting to be dispersed on the island. Some of it's been obligated. Some of it hasn't. just, when you think about the construction flows over the next couple of quarters, is that growing unfunded commitment indicative that maybe some of these construction projects are picking up right now?

Yes, the majority is not related to government activity. It is related to private commercial residential construction, some of it. I think it's pretty good distributed. We have some hotels that are - actually, there's one hotel that is - it was spending completion after Hurricane Maria. So, finally, they got settled with insurance. And there's another hotel that was purchased by new investors, and there's money coming in to improve the - modernize the facilities. So, it's related, and there's some commercial activity. There's warehouse. There's - so it's pretty well distributed in different lines of the portfolio. I think very – and very limited number is related to - there's some credit lines related to contractors that are providing services to the government, and some of it is there too. But I will say - but we'll disclose the specific number when we disclose it to you.

Okay. And then one of your competitors a couple of days ago alluded to just excess liquidity on customer balance sheets, both commercial and consumer as sort of a hindrance to loan growth right now. Just customers are very healthy and don't need loans. Would you agree with that sentiment? Are you seeing similar, I guess, resistance or lack of appetite for some of these loans for loan growth to continue?

I have to say, we are coming into the quarter with what I consider healthy pipelines. Some of it were - the last two weeks of the quarter were disrupted, and some of the closings didn't happen. Now, coming into the fourth quarter, they're happening. So, because of the disruption of the storm, the - I have to say that we - what we have at hand today for the quarter is what I consider healthy pipeline in both the commercial and the consumer side.

Okay, that's great color. Thanks. And then as you think about the capital return strategy and just given the run-up in the stock price recently, which is obviously great, how do you think about the buyback when you weigh it against, obviously, still very elevated levels of tier one common capital versus where the shares are trading relative to tangible book value?

Every - that we - something that we - it's been clear in our execution with the buyback is that we keep ourselves the optionality. We don't do ASRs. We haven't done ASRs. We have executed on a quarter-by-quarter basis, taking into consideration internal matters and external matters, market conditions as we move on into this path. Obviously, the better we can execute, the better return we have. We assess that every quarter. We did 50 million the first quarter, 100 million the second quarter, 75 million this past quarter, and we're going through that process right away. So, there's still, as you well know, some 175 million approved to execute. So, obviously, market conditions are important. How we use the capital, we try to be prudent and taking into consideration both the macro and not only the trading level of the shares. But we're going to that exercise right now, but we have all the optionalities in our hand.

Great. And when you think about the trading level of the shares, are you thinking about it relative to stated tangible book value or relative to the tangible book value, excluding the AOCI?

We tend to look at our - as compared to the - excluding the AOCI. Yes.

Okay, great. And then just a final question for me, just, I think you mentioned in the press release that cash and liquid is 18.6%, which is obviously well lower than the total securities portfolio. We can see what actual cash is on the balance sheet. Can you just talk a little bit about the liquidity position? That's, I guess, not straight cash and not necessarily long-term, just so we can make sure that - or just get a sense for your ability to use some of that for funding balance sheet growth with loan growth, I guess, over the next couple of quarters.

That number would mix it up. It’s the cash that we have on hand in the institution for operation, plus the cash that we have at the Fed, plus the securities at fair value that are available to be pledged if we wanted to pledge them. That's what's in there, that combination of the components as a percentage of the total balance sheet, total assets. And on top of that, obviously, we do have the federal home loan bank lines, which is the second major wholesale kind of funding that we use, that is available. We have deposited in there about $1 billion or slightly under that, that we could use for funding. So, that's in there, and obviously you know that there are always other sources that can be tapped in, but we don't see that being a need now. So, those are the functions, what's included on that liquidity component. The federal home loan pipeline is not part of the 18% though. It's only the cash and securities that would be on top of that. That adds about, what, 5% or so more, or a little bit over 5% of assets.

Okay. And I think you said earlier that there's $40 million to $50 million of cash flows from the securities portfolio on a monthly basis. Is that correct?

That is correct. The normal repayment of the portfolio, it's been averaging in that range, 40 million to 50 million.

Okay. Perfect. All right. Thanks for taking my questions.

Remember that duration on our portfolio, it's below four. So, it's not a long-term portfolio.

Okay, that's helpful. Thank you.

Thank you, Alex. The next question comes from the line of Kelly Motta with KBW. Kelly, your line is now open.

Hi. Good morning. Thank you so much for the question. I thought maybe I would step back to the funding. Your deposit beta was pretty low there. Just wondering if you could provide some color on maybe the kind of core non-government deposit base versus the public funds. I would imagine the public funds are closer to 100% beta, but just wanted some clarity around that to better understand the different pieces of the deposit base and beta.

Well, government deposits, it's about $2 billion in deposits. The beta, it's not quite 00%, but clearly, it's much higher than a typical account. So, we - it's been moving. Most of the impact, it's happening the latter part of the quarter and going into the fourth quarter. The other accounts, you have to split, it's like the regular savings account and so small balances. The betas are less than 10%. The high yielding kind of account betas could be somewhere between 30$ and 40%. So, it all depends on the combination. So, Aurelio mentioned, we've seen some movement into treasuries that it's part of the - of what's happening out there, and the yields are pretty high there. So, we don't necessarily compete in there. So, that's a combination. We - obviously as rates have continued to come up, there is also a lag on all this process. So, we're continue to see some acceleration of betas for the third quarter as compared to the second. And the fourth quarter, we'll see that some more acceleration of the betas.

Got it. And then maybe on the loan side and re-pricing there, it looks like loan yields ticked up 31 basis points. Can you just remind us the percentage of the book that floats? I would imagine you're probably pretty much out of floors right now, but any considerations for the re-pricing of the loan book going forward, given where we are in the rate cycle?

Yes. We have about 58% of the commercial portfolio that floats. It's about - 15%, it's prime, and the other, it's either LIBOR or SOFA. And it's mostly three-month LIBOR or SOFA, but there is also one month and some - a little bit here and there on treasuries. So, what you have seen in the numbers, it's that, if you take September rate hike, obviously prime loans got repriced in September, but it was only a part of the monthly impact. The most recent repricing components associated with LIBOR and so forth, especially in the three months, we did not see that repricing until October. Most of those cases do reprice at the beginning of each quarter. And obviously, any future repricing, I mean rate hikes, like for example the expected rate hike for November, we're expecting immediate impact on prime-based loans LIBOR - one month LIBOR or one month SOFA. So, for base loans, we'll see some impact in the quarter. The three months will - probably won't see the impact until the following quarter, but that's a combination. I believe there is - I believe - no, I'm sure on the release, we included that breakdown, Kelly, so that you can see what's the breakdown on the LIBOR versus - LIBOR or SOFA (indiscernible).

Got it. I'll check that out and I'll step back now. Thank you.

Thank you, Kelly. [Operator instructions]. And we have a follow-up from Alex Twerdahl with Piper Sandler. Alex, your line is now open.

Yes. Just one follow-up question on expenses. I think in the slide deck, it says that the efficiency ratio should trend towards 50%. I think in the fourth quarter, you alluded to the efficiency ratio being a little bit below 50% in the fourth quarter. So, I'm just wondering if that 50% guidance, is that more of a 2023, or how should we think about efficiency ratio and sort of expense trends as we head into next year?

Yes. I wouldn't say full ‘23, but clearly, Alex, with this revenue components and how the net interest income has grown because of the repricing, we don't foresee expenses growing that fast to go to. At one point in time, you remember we had spoken about being on a 52% expectation based on current numbers, but we don't see that in the near-term based on the expense we are forecasting and the revenue growth. So, that combination would keep us in that 50% level in the next two or three quarters.

Yes, but just for clarifying purpose, Alex, it should be below 50 to the year, to this year.

Yes, this year, yes. So, definitely, yes.

Okay. And then the expense, obviously there's inflation and other things you can't predict heading into next year, but the expectation is that if rate hikes continue, that will impact the revenue. Expenses, you kind of have a budget in mind for next year that really doesn't depend on what rate hikes we get over the next couple of months. Is that correct?

Not necessarily, but we are forecasting though that some of the - the fact that services are coming in at higher rates, we are seeing some of the like renewals of lease contracts being a bit higher. So, all those things are affecting some of the expense components.

Okay.

And keep in mind that we still would like to cut down a bit on the vacancy factor that we have, still running a bit higher than what we'd like to run.

Okay. And then just to kind of tie it all together on the NIM, you obviously have 42% of commercial loans that are tied to LIBO R that don't reset until October, then the impact from further rate hikes and new loans coming on higher. So, there's clearly a lot of momentum behind net, or I guess interest income. And then expenses have been moving higher. But if you tie it all together, the NIM, we should have at least a couple more quarters of NIM expansion, I would think. As we head into the middle of 2023, I'm just curious how you're thinking about it and if you have any other color that you want to project upon us.

No, I agree with your statement. However, just to - 31 basis points pick-up was a lot. We won't see that same level of pick-up on margin, but we are expecting some margin expansion definitely with the expectation on rates.

Okay. Thank you for taking my follow-ups.

And remember that the 42 - just to clarify one more thing, Alex, the 42% does include some one-month LIBOR or one month SOFA loans that they repriced before the quarter. But the other ones, the three months are the ones that would require a reprice at the beginning of each quarter.

Okay. Thank you for taking my follow-ups.

Thank you, Alex. we have a follow up from Kelly Motta with KBW. Kelly, your line is now open.

Hi. Thanks again for the follow-up. Just a minor housekeeping item. Your fees were slightly lower due to Hurricane Fiona. I would imagine that that would rebound in 4Q with how quickly you guys got the branches up and running the next day. Just, if you could provide any commentary there, that's help - that would be helpful.

We missed the first part of the question. What have you said on the hurricane?

Oh, you put out a minor fee hit.

Oh, our fees? You said the fees?

Yes.

Okay. Yes, definitely. We - obviously, it was a weight component that obviously it's not happening now. And also, it's a transaction-related business that’s come back to normal. We see higher transactions. So, we definitely will see that pickup on the fourth quarter.

Got it. Thanks for taking the follow up.

Thank you, Kelly. We have no further questions waiting at this time. So, that concludes our Q&A, session as well as the First BanCorp. 3Q 2022 financial results call. Thank you all for your participation. You may now disconnect your lines.