First BanCorp (FBP) 2022 Q3 法說會逐字稿

Thank you for standing by, and welcome to the First Bancorp 3Q 2022 Financial Results Call. My name is Sam, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question please press *1 on your telephone keypad at any time. I'll now turn the call over to our host, Ramon Rodriguez, Corporate Strategy, 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 later part of the quarter. The storm primarily cost flooding property damage, mostly on the south and western parts of the island as well as power outages. And I would say, minor businesses. We were able to continue supporting our clients through the event by leveraging our digital and service channels while gradually resuming bank operations the following day. Our headquarters and main buildings remain fully operational during the event and no major interruptions were registered. Most of the business environment resumed their ordinary course of business during the following weeks. However, we provide certain payment defer programs to our clients are affected by the part. 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 showed by all of this natural disaster. Once again, we continue 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 $12.4 million. This was our sixth consecutive quarter increasing in pretax preprovision income. Up 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 $27.9 million, and the margin expanded by 31 basis points to 4.31%. Orlando will provide more detail on this later. We recorded a provision of $15.8 million for the quarter, reflecting an overall increase in portfolio variances, mainly in consumer loans, a slight deterioration in the long-term outlook of certain forecasted macroeconomic variables. Asset quality continued to improve with nonperforming assets decreasing by $4.2 million to $143.3 million during the quarter. NPA ratio now stands at 78 basis points. Even though the economic backdrop in our main market continues to benefit from improved consumer confidence and strong labor market. We keep very close monitoring of our portfolio trend asset quality. And obviously, we sustained very, very, very healthy levels of hours. Finally, our strong capital liquidity profiles did enable us to continue executing our established capital employment 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 shares for approximately $175 million under the previously announced $350 million of 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 Slide 5.

The balance sheet dynamics continue to evolve in line with our goals. I think we talk about where we want to take the portfolios we call, no portfolio balances other than PPP loans grew by $112 million when compared to the second quarter, primarily driven by increases in consumer and some commercial loans, partially offset by a decrease in residual. Year-to-date loan portfolio growth has behaved as expected with targeted case of commercial and consumer while raised the reductions in prescamortgage. -- 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, consumer segment the market share during the upcoming quarters, obviously, closely monitoring asset quality. And to say that the loan pipelines coming into the fourth quarter continue at healthy levels. In core deposits, net of government and broker decreased by $530 million during the quarter, primarily driven by Rochas in Puerto Rico and Florida. Deposit market trends in Puerto Rico continued to gradually taper off as high balance depositors search for higher yielding deposits alternative, I will say, particularly in the U.S. treasury market and other nonbank deposit options. However, our and commercial clients in Puerto Rico still remains above prepandemic levels. Please let's move to Slide 6 to discuss some of the operating environment highlights, the macro dress in Puerto Rico continued to show good signs, we continue to see improvement. It's evidenced by stronger labor market and consumer confidence metrics. Payroll employment reached at high in August and was 4.6% year-over-year. The economic activity index, which is a confident indicator of economic conditions, maintaining growth trajectory and registered a 1.7% increase in July compared to the same month last year. But most importantly, on conditions in our market are expected to be supported by the deployment of the release projects during the upcoming years, which should help mitigate a potential slowdown in the U.S. economic activity.

If public data shows that the pace of disaster release funding spending continues to improve, reaching $1.3 billion during the first 8 months of 2022. This positive trend is critical for economic development in the island work forward and is important for forward-activity in that sector. Our strategic objective of leveraging a market acquisition to improve our broad scale in the markets we operate is paying off and has allowed us to continue investing in the franchise while delivering shareholder value. We have been able to digital business any technologies that have allowed us to process loans, capture deposits to serve service platforms. To this end, we continue experiencing increased adoption of the recently launched mobile business digital 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 self-channels. Additional branch rationalization initiatives have been identified and will be executed during the fourth quarter as we continue to optimize our existing physical channel, sales and distribution capabilities. All these initiatives, coupled with our expense management discipline contributed 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 a share, which compares with $74.7 million, which was the same last quarter, but at $0.38 a share, some of the impact of the repurchases that have been achieved over the year. Pretax provision, however, grew $3.6 million and now stands at $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 increase in Fed Funds Rate. Also, as we had anticipated, we have started to see some acceleration on deposit betas, which have led to increases in 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 compared 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 our 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 an allowance, the termination and the provision, we continue to weight 2 scenarios that we have disclosed in the past. A baseline downside economic scenario to reflect what could be an economic impact. In terms of Hurricane, the financial impact, Sabrelio mentioned was mostly with 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 our $600,000 reduction in fee income and a $400,000 increase in 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 is part of the new 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 of FHLB advance that matured and was repaid. And that reduction offset the increase in costs we had on the Uninor subordinated debentures that are floating rate 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 is 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 noninterest 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. 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 wave fees we provided to customers on ATM and other type of transactions as well as our $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 under $15.2 million, which compares with $108.3 million, which is $6.9 million higher than last quarter. If we split this out a bit, as we discussed in the second quarter call, expenses in the second quarter had a benefit of $1.7 million from reversals that are 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 the second quarter were at $111.5 million. That would compare to out $116 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 over $400,000, $300,000 of that is related to some donations that were made to a number of the organizations 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 ended up being higher than the guidance we had provided. If we look at the fourth quarter and the things have 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. Nonperforming assets decreased by $4.2 million in the quarter to $143 million as compared to the $147 million we had last quarter. And as also Aurelio mentioned, the NPAs are 78 basis points of assets. The reduction in NPAs was generally includes a $1.6 million decrease in residential mortgage nonperforming, $2.5 million in commercial and basically pay downs and payoffs of some nonperforming, $3 million decrease in OREO. The only portfolio that went up, it's the consumer side, it went up $100 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 to 89 days, did go up by $20 million, but there was a significant impact on the portfolio from the payment streams that were affected in the second half of September. A large chunk of the cycles on some of the auto portfolios mature in that second half of the one 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 were 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 one the allowance on the second quarter ended up at $271 million, which is $7 million higher than last quarter for all 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 the end of the second quarter. On the capital front, Aurelio mentioned, we continue with the execution of our capital plan. We have repurchased 15.9 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 dividends we've paid over the first 9 months. But capital ratios continue to be very strong. As you can see on the chart, the Tier 1 common ratio came down just from 17 to 16.7. So it's only 3 basis points. While the leverage ratio went up from 10.2% to 10.4%, so both very healthy rates. Tangible book value per share did come down, decreased from $780 million to $645 million related to the $271 million in additional OCI adjustments from the decrease in the fair value of the securities our tangible common equity ratio 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, security portfolio has not been growing. And we have monthly repayment somewhere between $40 million and $50 million, which lowered the portfolio and obviously lower the impact from OCI adjustments. If we were to exclude the OCI on a non-GAAP basis, obviously, tangible book 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.

Certainly. We will now begin the Q&A session. If you'd like to ask a question, you may press *1 on your telephone keypad any reason you'd like to remove that question you may press *2. As a reminder, if you're using a speaker phone, please remember to pick up your handset before asking your question. Our first question today comes from the line of Timur Braziler with Wells Fargo, Timur, the 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 security asset, 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 is the expectation here that loan growth going forward is going to be more or less funded by deposits.

Yes. as Orlando mentioned, the securities portfolio is bringing about $40 million, $50 million liquidity per month. We expect to grow that, at least move that use the liquidity to continue growing the loan portfolio thats 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 lending side, the contraction trends have also been reduced because, obviously, the prepayment on the portfolio and refinancing activities 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 there 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 going?

Yes. To be honest, it's the most difficult trend to predict. When you look at it from the average balance perspective, we still above prepandemic and that's 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 nonbanks. I think we expect a 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 value construction that should happen, we're bringing some additional market share into it. But I think the net-net, we should expect some additional contraction.

Okay. And then maybe just looking at the Puerto Rican consumer. I 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 portfolio from a delinquency level across the consumer sector, I would say, personal loans and auto are still below prepandemic levels. Credit card,it's(technical difficulty)

levels, that's what we're seeing. The consumer was not using during 2021 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 linked 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 is turning out of 110,000, 120,000 units on new vehicles. We expect that trend to continue to 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 3 years in that segment. On the consumer lending side, we probably are more conservative in terms of the maximum loan amount on our credit parameters, 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 the credit card activity continues healthy it's not significant growth, but some positive trends in the portfolio. Delinquencies -- the models also include our forecasting some of the macro trends already embedded in the model. So yes, we could expect some slight increase in delinquency, but we still believe are going to remain below prepandemic levels because of the health of the consumer here when compared to what was the economy before. Today's economy, minimal 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.

Thank you for the call,i'll step back.

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

Hey good morning.

Hey Alex, good morning.

I wanted to start on the unfunded construction loan commitments. I think it was the increase of $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 if we have it right here.

I don't have it here, Alex. I'm sorry.

(inaudible)

-- we'll make sure we pull it around for you on the Q, if not, so that you can have that information.

Okay. I mean when I look at the unfunded construction loan commitments, would you say that those are somehow associated with the Hurricane relief, some of the projects as 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 going activity. It is related to private commercial cost 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. So it's pretty well distributed in different lines of the portfolio. I think a very limited number is related to -- there are 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 get -- when we disclose it.

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 of 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're coming into the quarter when I consider a healthy pipeline. Some of it were the last 2 weeks of the quarter were disrupted and some of the closures didn't happen. Now coming into the fourth quarter, they're happening. So because of the disruption of the storm, I have to say that we -- what we have at hand today for the quarter is what I consider a healthy pipeline in both the commercial and the consumer side.

Okay. That's great color. 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. But how do you think about the buyback when you weigh it against obviously, still very elevated levels of Tier 1 common capital versus where the shares are trading relative to tangible book value?

It's been clear in our execution of the buyback is that we keep ourselves the optionality. We don't do ASRs. We haven't non-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 in the first quarter, $100 million in 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 an exercise right now, but we have all the optionality on 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 it as compared to -- excluding the AOCI

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 -- just get a sense for your ability to use some of that for funding balance sheet growth of loan growth, I guess, over the next couple of quarters?

That number would make it up. It's the cash that we have on hand and 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 Holon bank lines, which is the second major wholesale kind of funding that we use that it's 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 turned in,but we don't see that being a head now. So those are the function what's included on that liquidity component. The final a line 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 4 So it's not a long term portfolio.

Okay. That's helpful.

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 think 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 pace and beta.

Well, gamma deposits, it's about $2 billion in deposits. The beta, it's not quite 100%, but clearly, it's much higher than a typical account. It's been moving. Most of the impact it's had been in the latter part of the quarter and going into the fourth quarter. The other accounts, you have to split it. It's like the regular savings account and so small balances, the beta are less than 10%. The high-yielding kind of accounts, 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 continuing 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 repricing 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 floats right now, but any consideration for the repricing of the loan book going forward, given where we are in the right 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 so far. And it's mostly 3-month LIBOR or so forth, but there is also 1 month and some -- a little bit there here and there on treasuries. So what you have seen in the numbers, it's -- 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 3 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 are expecting immediate impact on prime-based loans, LIBOR, 1 month LIBOR or 1-month software-based loans, we'll see some impact in the quarter. The 3 months will probably won't see the impact until the following quarter. But that's a combination. I believe I'm sure on the release, we included that breakdown, Kelly. So you can see what's the breakdown on the LIBOR versus LIBOR or so for Berstein.

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

Thank you, Kelly. We have no further questions waiting at this time. So as a final reminder to ask a question, it is *1. 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, then 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 reno 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 2 or 3 quarters.

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

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

Okay. And 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 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. 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 the 42% of commercial loans that are tied to LIBOR that don't reset until October and 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 at the NIM, we should have at least a couple of 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.

I agree with your statement. However, just to 31 basis points pickup was a lot. We won't see that same level of pickup on margin, but we are expecting some margin expansion, definitely with the expectation on rates. And remember that the -- Just to clarify one more thing, Alex, the 42% does include some 1-month LIBOR or 1-month topper loans that they reprice before the quarter. But the other ones, the 3 months are the ones that that would require a reprice at the beginning of each quarter.

Okay. Thank you for taking my calls.

Thank you Alex.

We have a follow-up from Kelly Motta with KBW. Kelly?

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 would be helpful.

We missed the first part of the question, what did you said on the hurricane?

Definitely. We obviously was a wave component that obviously it's not happening now. And also, it's a transaction-related business has come back to normal, we see higher transactions. So we definitely will see that pick up in 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.

Thank you.