Hello, and welcome to today's First BanCorp 2Q 2022 Financial Results. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to turn the call over to Ramon Rodriguez, Corporate Strategy and Investor Relations Officer. The floor is yours. Please go ahead.

Thank you, Elliot. Good morning, everyone and thank you for joining First Bancorp's conference call and webcast to discuss the company's financial results for the second 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 everyone and thanks for joining us today for joining this earnings call. Let's please move to slide four to discuss the highlights of the quarter. As we reported, we continue to perform exceptionally well during the second quarter, we earned $74.7 million in net income or $0.38 per share and delivered our fifth consecutive increase in adjusted pre-tax, pre-provision income by reaching a record of $118.8 million during the quarter. This result were achieved under a quite challenging global economic backdrop. And definitely demonstrate our capacity to execute and responsibly grow regardless of the operating environment. I would like to thank all our teams in Puerto Rico, Florida and the ECR for the commitment and execution during the first half of the year. Net interest income increased 5.7% linked quarter to $196.2 million and the margin expanded by 21 basis points to 4.02%. Also, we recorded a provision for credit losses of $10 million, primarily reflecting an overall increase in the loan portfolio and increased uncertainty that is reflected in the forecast of certain macroeconomic variables and the impact on qualitative reserve. Asset quality continued to improve during the quarter with nonperforming assets decreasing by $9 million, now to $147 million, driven by reductions in non-accrual residential mortgage loans and pay downs of non-accrual commercial loans. The ratio of the ACL for loans and finance leases to loans held for investment slightly increased to 2.25% during the quarter. On the capital front, we continue to execute on our capital deployment plan and repurchased approximately 7 million shares of common stock for a total purchase price of $100 million. This was done under the previously announced $350 million stock repurchase program. We ended the second quarter with a 17.2% common equity Tier 1, quite strong. Leaving…

Good morning, everyone. As Aurelio mentioned, results for the quarter were strong. We reached $74.7 million, $0.38 a share, slightly down from the $82.6 million we achieved last quarter, but there were two major components in the quarter. First, the impact of the rising market interest rates on the loan growth led to an increase of $10.6 million in net interest income. We also had a [Technical Difficulty]. The provision for credit losses this quarter was an expense of $10 million, which compares with a net benefit of $13.8 million. The provision reflects, obviously, increase on the portfolio, as well as increased uncertainty that is included as part of the forecasted economic macro variables that we use for the calculation of reserves and provisioning. Charge-offs in the quarter were better than last quarter, and that help on the other hand. The net interest income totaled $196 million in the quarter, which is an increase of $10.6 million, I just mentioned, as compared to $185 million we had last quarter. Margin expanded 19 basis points from 3.81% to 4% -- 5% growth in the quarter. If we look at components, loan repricing in the quarter represent approximately $3.5 million of the increase in interest income for the quarter and the increase in the portfolio balances, if we exclude the PPP reduction, represent additional $1.9 million in interest income. Reduction in PPP decreased interest income by $1.2 million in the quarter. The investment securities and cash based on repricing and investments at higher rates improved by $5.3 million, interest income improved by $5.3 million, leading to an increase in yields, obviously, and a reduced premium amortization as prepayments have come down on the portfolio. This quarter also had one more day than last quarter, that adds about $1.5 million in net interest…

Thank you. [Operator Instructions] Our first question comes from Brett Rabatin from Hovde Group. Your line is open. Please go ahead.

Hey, good morning, everyone.

Good morning, Brett. How are you?

I'm good. Thanks. Wanted to first just ask about the commercial strength in originations and maybe whatever additional color you could provide on the fintech partnership and what that entails and what that might mean for loan growth going forward?

Okay. I'll take it separately. I think over the other -- over the year, we've been discussing about the island we are building. And there's a lot happening in the island in terms of even M&A activity, companies buying other companies, investors coming in, some private deals, some privatization deals, public-private partnerships, some hotels moving from one hand to the other. So deal flow, it's very active and we continue to see new capital coming in. So I think that, obviously, for me is the primary source of it. Secondly, commercial activity continues, construction activity continues. I think if we look at the first five months of the year, some of the funds deployed were close to $900 million if you look at the public data. And we believe by -- and this is a five month, so that should reach over $2 billion when we -- if we look at the remainder of the year. So that is contributing. We continue to see requests for line of credit supporting the contractors. Obviously, as everywhere in the world, things are delayed because of supply chain, materials not necessarily came on time. So timing it's always a consideration. So we feel -- and in our main market in the U. S., which is Florida, the balance was also very strong. Florida continue to see inflows. Look at the public demographics, demand for office, which is not happening anywhere else, it's happening in Florida. So obviously, companies moving their headquarters or residents looking for homes. So we think it's stable. We're not talking about double digit growth, we're talking about prudent growth. So -- and that's what we continue to support. Remember, last year we also -- after the -- during the acquisition, we also achieved some selective renewal of the portfolio in certain cases just to make sure it fits our risk profile targets. That -- obviously, that is fast, that will happen in 2021, which definitely impacted our volumes in that. So we feel optimistic about what we have at hand today on the commercial side. Secondly, we've been working with this fintech for some time and we just launched the small business lending, which is going to be supported by the clients, very similar platform that we use for PPP loans, which was broadly used by clients, supported by a lot of good feedback from clients in terms of the self-service capabilities. And definitely that will -- that increase our capacity to penetrate the small landings and small business segment, which were pretty good in the metro area based on the branch concentration. I think we believe we have opportunities in the other regions of the island. So that's rolling out here and it's rolling out in the ECR. That answer the question.

Okay. That's a great. Yes, that's helpful. And I wanted to make sure I understood the guidance. I think I heard $113 million and $114 million to $115 million for the fourth quarter in expenses 3Q, 4Q. And then the efficiency ratio maybe to tick back up towards 50% going forward or maybe for the back half of the year, and given the additional NIM expansion, it would seem like it would stay under 50%. Is there anything I'm missing with the balance sheet or fee income that makes that number move up a little bit?

No, you're right. The name expansion with the component of the expenses that are expected should take us somewhere close to the 50%, maybe just under the 50%. Just to clarify one thing, the only component on that guidance is the volatility that we have seen on the OREO results, which has been positive, obviously, and we like it, but that one I'm trying to exclude because of the expectation at some point was not there. And we still see some opportunities in the third quarter to offset some of those costs, maybe not at the level of gains that we saw in the second quarter, but that would offset some expenses. But clearly, you're correct that with the expectation of NIM expansion and those expense levels, we feel that we'll be just under the 50% or very close to it.

Okay. And then maybe just one last one from me. If you look -- I like to see chart in the deck with the EAI index and it's something I've been tracking and it's a little higher than it was pre pandemic. I'm curious if you guys feel like the economy is at this point better than pre pandemic? And what's your sense of the funds fall into the island kind of continuing to improve the local market in Puerto Rico?

I think there are sectors that are better than pre pandemic. When you look at the construction sectors and those -- or benefit on that supply chain and suppliers and engineers and everything that is related to construction is more advanced. Obviously, the employment market is stronger. When you look at the unemployment, but also when you look at the workforce, the numbers that we have reached in terms of workforce in the island. And obviously, when you look at it -- when I say it's strong, everybody's hiring still. So obviously, the impact of inflation in oil and we still see excess liquidity compared to average balances, which -- that are still over 30% on pre pandemics. So there is some excess liquidity there to support -- that should support to mitigate inflation. So -- but today conditions, I have to say, look better than we were in pre pandemic. How long they're going to remain or not? It's really the uncertainty. How hard is the impact of inflation or not, continues to be the uncertainty, but today conditions when we look at balances and even asset quality, even the metrics of -- all the metrics that we're showing today are better than prepayment.

Okay. Great. Appreciate all the color.

Our next question comes from Timur Braziler from Wells Fargo. Your line is open.

Hi, good morning, gentlemen.

Hi, good morning.

Maybe just starting on the funding side, can you talk through the expectation for funding second half loan growth. Should we see additional usage of the bond books and cash to fund that growth or is the expectation that deposit growth resumes here in the back end of the year?

Well, we -- it's a combination. We have a high level of investment portfolio at this point. There is a normal cash flow component coming out of that portfolio that we believe it's going to be offsetting any cash needs for the lending side. As Aurelio mentioned, we believe that at second half -- the deposit growth is going to be -- is not going to be like we saw in 2021 or 2020. We're seeing some reductions already and some movement to our resources. So that's part of what’s reflected in the quarter. But having need for wholesale funding would be very limited at this point. We don't foresee that based on current liquidity levels and the existing liquidity that we get every month from the investment portfolio. It's a function of how much ends up in investment versus loans at the end.

Okay. And then it looks like Florida government deposits had a nice quarter. I guess, what's the outlook there? Is that -- the effort there to kind of self-fund Florida production on the loan side? And then, as you expect deposit betas to increase in the back of the year, I'm just wondering what the driver of that expectation is, because the results so far seem very strong and doesn't seem like your competitors are really pushing the envelope as far as deposit costs yet?

Well, first, let's quantify that, the government deposit growth versus really in Porto Rico and [indiscernible], not in Florida. Just to make sure you saw that, which -- that's where we have the large government business, probably that we have small government business. So we see that as a stable source that we remember that what we have mentioned in the past. There are some funds deposited here that are the typical operating funds from municipalities. And so that we believe are going to be stable funding, but we do have some funding from some of the reconstruction activity that happens with the energy authority [indiscernible] that those would be sort of more volatile depending on what kind of the status of the different projects they have on their way. So government funding, it's going to be there, it's stable. I think that the betas that I mentioned under deposit is that we -- the market came down dramatically like it happened in the states that after seeing the 75 basis points increase last month and expecting another one, we are seeing the market options on treasuries and other options competing there. We do compete also with credit unions. So we foresee that some of that will put some pressure on interest rates. There is a customer retention component that we have to be conscious of and customer relationships that we have, that's why we see -- the higher the Fed moves, the more reaction we're just going to start seeing from customers. So we feel it's reasonable to assume that betas will start moving in the market based on what's happened over the last month or so and we're are just going to expect it to happen now at the end of this month.

Okay. Thank you for that clarification. And then just, I guess, lastly for me on credit. Maybe just talk through a little bit about the tick up in auto delinquencies on the early stage. Is that at all indicative of us kind reaching the bottom here for how good credit has been? And as you look at your allowance ratio, I think you had guided well that we're going to see a positive provision here in second quarter. We saw a positive provision here in the second quarter. As we look at the allowance ratio here, assuming the environment doesn't change, could we expect further reductions going forward? Or is this a level that you'd like to maintain?

Well, the first question you had, we feel we're at a very low level of delinquencies in the market. Have we reached the bottom, maybe we have. The market has been very stable for a while. We've seen -- keep in mind that some of the dollar increase also on the delinquency side is related to the portfolio size increase, not necessarily percentage wise. But the provisioning and the reserves on the consumer side reflect the growth, as I mentioned, but also reflects some expectations on deterioration that could happen on the unemployment rates and a couple of other key macro indicators for the consumer portfolios. So assuming that nothing happened, yes, eventually maybe we don't need as much in reserves, but we cannot assume that there won't be any impact related to the inflation component on the market. That's why we continue to include environmental components and qualitative components, as well as looking at some of the more stress economic scenarios as part of the calculation of our reserves to make sure that we're reflecting any trends that the market might show going forward.

Great. Thank you for that color.

Our next question comes from Alex Twerdahl from Piper Sandler. Your line is open.

Good morning, guys.

Good morning, Alex.

Hi, Alex.

I'm just wondering, it made a lot of sense. Our mortgage banking is a pretty big driver in the fee income. It's been a lot of sense to sell all the production with rates being where they were over the last couple of years. But now with rates kind of pushing above 5%, I'm just wondering if the thought process around mortgage changes and if potentially that could go for being a drag on overall balances to maybe even flat or contributory in the next couple of quarters?

Have you seen this quarter, you saw some positive trends on prepayments also in the portfolio. And when we look at the activity being originated, the reality, yes, when the conforming rates are somewhat paired to the portfolio rates, that tends to happen and it's happening in the recent months. So I would not say we're in line to achieve growth in the mortgage portfolio. But I think the contraction that we have experienced on the portfolio should be reduced -- should be reduced. I'm not sure when is the point that we're going to reach full coverage of the full prepayment, repayment and prepayment of the portfolio. But we can get back to you on that later.

Keep in mind, Alex, that the overall originations, the market originations of mortgages have gone down. So it's a shift on the mix of what's been originated, but it's also a lower level of originations. We don't have the level of refinancings we saw over the last couple of years with rates being so low. So that's part of it in terms of not only the mix, but the overall level of originations in the market.

Okay, thanks. And then just to be clear, the tick up in the ACL and the consumer portfolio, that's not being driven by anything you're specifically seeing. That's just trying get ahead of some concerns in the market and maybe putting a little bit more way in an otherwise good quarter. Is that the right way to think about that?

Yes, we -- if you look at the uptake, it's basically two components that we serve went up by about $6 million related -- on the consumer side related to growth. And it went up about $3 million related to macroeconomic assumptions. Other than that, it's a normal movement depending on what gets repaid and what comes in. But clearly, we haven't seen anything other than the projected macroeconomics that are relevant in the portfolio. Any changes in projections of unemployment on the consumer side, that moves the needle on the reserves.

Okay. And then just a final question for me. I think really you alluded to the projection of around $2 billion of federal money by the end of the year going down to the island. Can you help us sort of connect the dots and sort of how that will actually impact loan growth or how that potentially impact loan growth at First Bank?

Difficult correlation, but just economic activity normally support our loan growth, it support the economy itself. As I said, in eight months I think the right number -- the number that is public. In five months, they have done $160 million of disbursements. And the goal is to reach $2 billion, which we think going to happen. So it's just additional support in the economy overall, difficult to say how much that translated to a specific loan numbers. But for us, the expectation is that, we're going to achieve growth in the commercial book through the remainder of the year.

Great. Thanks for taking my questions.

Thank you, Alex.

Our next question comes from Kelly Motter from KBW. Your line is open. Please go ahead.

Hi, good morning. Thank you so much for the question.

Hi, Kelly.

Maybe turning to the balance sheet, you had a nice deployment of cash once again this quarter. Just wondering any updated thoughts on what a normalized level of cash looks like at this point in the cycle and where you may be comfortable taking it, given the puts and takes of the macro backdrop? Thanks.

The normal levels of cash will be -- on a normalized scenario would be what we expect, what we would need only for purpose of reserve requirements. Other than that, we're just leaving money on the table. But clearly, there was too much liquidity. The investment options were not there, so we were keeping a much higher level than what we would typically keep. As you mentioned, you saw a reduction from one quarter to the other was significant. We came down from $1.7 million to $1.3 million so at the end of this quarter. Probably that number normalized basis is going to be more on the $800 million than anything else, considering all components. But it all depends on the options that we have available. And what we see in terms of deposit movement or so. Keep in mind that some of the government deposits are collateralized, but we don't -- we use the cash typically to move any needs. It hasn't been much, but we do keep some amounts associated with that as part of our liquidity component.

Got it. So it seems like you're still running pretty high there and you mentioned, you expect deposit betas to kind of pick up from here. Fair to say that, we're going to still see some nice NIM expansion from here, albeit maybe at a slower rate than what we saw in second quarter? Is that a fair assumption as we look ahead?

It is a fair assumption. We would have -- assuming -- whether at the end, but assuming the 75 basis points of Fed, that also would put some and remember that there was some of the increases in June reflect -- start reflecting in July. So we definitely expect some expansion in there. Even with [Multiple Speakers]

Thank you so much for the questions. I appreciate it.

We have a follow-up question from Brett Rabatin. Your line is open. Please go ahead.

Hey, guys. I just wanted to ask on the tax rate. What's a good number going forward? Just kind of given the movement in the past few quarters?

I mean, the tax rate reduction is because we've been implementing some strategies to -- in terms of the shift from taxable to exempt income on the investment side and we've been doing that. Overall, it's still with the growth in the portfolio. Remember that if the loan portfolio grows, that -- also that it's going to be taxable phone and so it depends on that number. So the rate that we are now in that 30 -- overall affected, because remember that in Puerto Rico, you're taxed by legal entity and depends on the shift of earnings between the subset that we have. But that 32% to 33% should be more or less the average that we see for the rest of the year.

Okay. And then wanted to follow-up on the balance sheet in general. My presumption is, we'll see more of what we saw in the third -- in the second quarter, in the third and fourth quarter where you use liquidity to fund loan growth and so maybe the balance sheet stays the same or maybe shrinks a little bit depending on deposits. Is that a fair assumption or do you think you'll actually grow the balance sheet?

No, that is a fair assumption, Brett. We're seeing it the same way.

Okay. Great. Appreciate additional color.

Thanks.

This concludes our Q&A session and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.