First Bancorp /Pr/ Q1 FY2022 Earnings Call

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

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

Thanks, Ramon, and good morning to everyone, and thanks for joining our call today. Please let's move to Slide four to discuss the highlights of the quarter. We are very pleased to begin 2022 on a high note with another record quarter, with exceptional results for the franchise. We generated $82.6 million in net income or $0.41 per share. More importantly, a record $111.8 million in adjusted pre-tax, pre-provision income. We clearly see the benefits of scale from being a larger organization. Sequential increases in pre-tax, pre-provision income over the last five quarters are attributed to our disciplined approach to execute on identified operational efficiencies related to the acquisition, as well as additional business rationalization opportunities identified during the integration process. I want to congratulate and thank my teams for this consistent performance during what we can call a challenging operating cycle. Net interest income slightly increased to $185.6 million, and the margin expanded by 20 basis points to 3.81%. Our economic backdrop continues to benefit credit performance, as we can see in improving asset quality and low delinquency rates. We can see an improved long-term economic outlook in Puerto Rico, which prompted the recognition of a provision benefit of $13.8 million during the quarter. Asset quality continued to improve, non-performing assets decreased by $1.6 million to $156.5 million, primarily driven by the reduction in non-accrual residential mortgages, and the ratio of the ACL to loans and finance leases decreased to 2.21%. On the capital front, during the quarter, we continued to execute on our plan to return capital. We completed the 2021 approved share repurchase program, repurchasing 3.4 million shares of common stock amounting to approximately $50 million, completing the program announced back in April 2021. We ended the first quarter with a 17.7% common equity Tier 1 ratio, leaving ample room for further capital deployment initiatives to be discussed later in the call. Let’s move to Slide five to review some highlights on deposit and loan performance. We achieved some growth in the loan portfolio, which we’ve been looking for some time. Linked-quarter growth margin inflection point to the balance sheet as balances, other than PPP loans, increased by $85 million compared to the fourth quarter. The growth was driven by a $91 million increase in commercial loans, an $88 million increase in consumer loans, partially offset by a $94 million decrease in residential loans. Total loan originations were healthy, though a bit lower than the fourth quarter, primarily driven by the number of dollars in commercial refinancing and renewals completed this first quarter. We expect loan growth to continue accelerating during the year. Loan balances are healthy and should continue to close, driven by a combination of different projects, initiatives, and acquisitions, including the government investment in disaster recovery funds. Loan portfolio balances remain impacted by asset liquidity, with ongoing paydowns and loan utilizations not at their peak level. However, loan originations are strong as we continue to focus on increasing both the consumer and commercial loan books. We remain committed to originating conforming residential mortgages while sustaining the size of the residential portfolio and generating gains on the sale of the mortgage book. On the deposit front, we experienced a nice increase, excluding broker and government deposits. Our preferred measure of core raised showed an increase of $55 million during the quarter. Let's move on to Slide six to cover additional highlights. We recognize that there is a potential negative impact from global geopolitical conditions, such as rising oil prices and supply chain disruptions, in addition to labor cost inflation. Despite this, there are many economic levers supporting our growth outlook and objectives in our main market. In Puerto Rico, consistent economic indicators continue to improve and are above 2019 pre-pandemic levels. The labor market continues to pick up, and total employment rates reached their highest level in recent history in February and continued through March. The labor participation rate improved to 44.7%, compared to 40% pre-pandemic, and the unemployment rate decreased to an all-time low of 6.5% in March, which is unprecedented. Economic activity, highly correlated to GMP, has reached pre-pandemic levels. The recent resolution of government debt restructuring will allow officials to focus resources and efforts on key economic growth initiatives. There is still a significant amount of obligated funds pending dispersion, especially public disaster relief funds that should support vital structural improvements, including the critical modernization of our energy grid. Puerto Rico continues to benefit from a high vaccination rate, resulting in eased COVID-related restrictions and a full reopening of the economy. Sustained increases in retail, auto sales, and both new and existing home sales indicate improved consumer confidence. Tourism remains active, with passenger activity at our main airport 3.2% above pre-pandemic levels, and average daily rates for hotel rooms are rising due to higher occupancy rates. Positive demographic trends are reinforced by new residential housing construction and available tax benefits, making Puerto Rico an attractive destination for investors. Regarding our top priorities, we continue progressing on our omni-channel strategy. During the quarter, we executed branch rationalization opportunities identified during the integration phase. This effort bolstered increased digital engagement, with registered digital banking users rising by 5% quarter-over-quarter, now accounting for over 42% of deposit transactions through digital and self-service channels. We aim to launch a digital enhancement product or service every quarter. This quarter, we introduced a new mobile business digital application enabling small, medium, and large businesses to perform transactions with capabilities such as remote deposit capture. We will maintain sustained investments in further digital functionalities throughout the year, enhancing our omni-channel customer experience. The franchise demonstrated the strength of the quarter's balance sheet, capitalizing on the improving operating backdrop. After concluding our 2022 capital planning process, I'm pleased to announce the approval of another $350 million share repurchase program to be executed over the next quarters, along with a 20% increase in our quarterly common dividend. We're committed to preserving shareholder value and improving our competitive position in the market while pursuing growth opportunities.

Good morning, everyone. As Aurelio mentioned, we had a very strong quarter. As seen in the release, earnings reached $82.6 million, or $0.41 a share, compared to $73.6 million last quarter or $0.36 a share. Looking at specifics, the quarter showed improvements of $1.5 million in net interest income, $2.5 million in other income, and expenses were $4.8 million lower than last quarter. The provision for the quarter was a net benefit of $13.8 million, similar to the $12.2 million benefit we had in the fourth quarter of 2021, driven by a positive outlook on macroeconomic variables, despite uncertainties such as the war in Ukraine. Pre-tax, pre-provision was again very strong at $111.8 million, $7 million higher than last quarter. The net interest income for the quarter was $185.6 million, reflecting a $1.5 million increase with the margin expanding by 20 basis points to 3.81%. We experienced increases in interest income on investment securities due to improved reinvestment yields, and we’ve seen significant reductions in prepayments on the existing portfolio, reducing premium amortizations. The overall yield on cash and investments increased 22 basis points. The cost of interest-bearing liabilities improved by 5 basis points, primarily due to cash usage for other purposes. The quarter also had two days less than last quarter, which impacted net interest income by about $2.4 million, while a collection of $1.1 million on non-accrual loans offset some of this decline. Moving forward, we anticipate a pickup in margin due to the repricing of variable-rate loans that typically adjust at the start of each quarter. We expect some higher reinvestment yields from normal cash flows coming back from our portfolio. However, deposit pricing will happen at a slower pace than loan repricing, depending on future interest rate hikes. Non-interest income aligned with last quarter, but we collected $3 million in seasonal contingent insurance commission this quarter. Mortgage refinancing volumes have declined, thus impacting packaged and sold transactions towards mainly new purchases. On the expense side, total expenses were nearly $107 million, down from $111 million in the last quarter. Last quarter included $1.9 million in merger and integration expenses that we did not incur this quarter. When excluding those items, expenses for the quarter were $2.9 million lower than the fourth quarter of 2021. We have continued maximizing efficiencies post-integration of our acquired operations and identified further opportunities. Nonetheless, expenses for the quarter were lower than anticipated, reflecting a higher level of vacancies due to post-pandemic labor market dynamics. We had mentioned that hiring trends improved but did not sustain throughout the quarter, resulting in a higher vacancy level. OREO property disposals offset OREO-related expenses, with a $720,000 gain, which is traditionally lower than expected. We also experienced $2.3 million lower business promotion expenses compared to last quarter due to the timing of marketing campaigns. Moreover, we secured $1 million in credit card network expense reimbursements based on prior year volumes to offset some current quarter credit costs. We're seeing global supply chain delays impacting the timing of some expenses. We believe some of these factors will persist beyond 2022. We've been identifying other efficiencies and closed three branches during the quarter, with three other potential closures planned for later this year. We anticipate a normalized expense level adjustment to $114 million to $116 million range, with the second quarter slightly below that range. Our efficiency ratio for the quarter was low at 48.8%, lower than anticipated. Based on projected normalized expenses, we expect an efficiency ratio around the 52% mark instead of previously anticipated 55%. Asset quality trends continue to improve, with non-performing assets down $1.6 million to 0.79% of total assets, mainly due to reductions in residential mortgages. Although inflows of new non-performing loans reached $21.6 million this quarter, we maintain that migration is significantly better than historically. Delinquencies (loans 30-89 days delinquent) increased by $10 million this quarter, mainly related to $17.2 million in loans maturing that are in the process of renewal, indicating no substantial risk. The allowance for the quarter was $260 million, down $20 million compared to the last quarter, with the ratio on loans at 2.2%, down from 2.5%. As for capital strategy execution, we repurchased $3.4 million in shares and paid $19.9 million in dividends, maintaining our capital ratios well above the well-capitalized threshold. Our Tier 1 common equity ratio decreased slightly to 17.7%. Despite share repurchases, we still have significant liquidity and do not foresee immediate risk. We are executing announced capital deployment strategies, including the new repurchase plan and an increased common dividend.

Hey, good morning, everyone.

Good morning, Brett.

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

Yes. Obviously, to clarify, the way we report is on Page 6 of the deck. The consumer segment has continued to show increases over the last several quarters. When looking at the commercial side, the timing of renewals is impacting these numbers. Comparing the first quarter of this year to last, new money is higher. We expect growth in the construction portfolio as we’ve been surprised by the number of construction loans, although they tend to be repaid quickly due to market absorption. The pipeline this year is better than last year for both commercial and construction, with increased applications across consumer businesses. The residential mortgage segment does differ due to the current rate environment causing refinancing volumes to decrease. Some of the remaining PPP loans will also impact overall usage as liquidity returns, which may contribute to portfolio growth.

Okay, that's helpful. I appreciate that. I wanted to clarify some aspects regarding the margin, especially with the less premium that benefited the securities portfolio and the lower government deposits. From a static perspective, your filing indicates 4% in net interest income with 200 basis points. I want to ensure I understand the outlook on the margin and what steps you might take to optimize the balance sheet going forward. It seems you've indicated that the margin should increase, and I'm trying to grasp the moving pieces and the potential magnitude of that increase.

Okay. So from the commercial lending perspective, we have a floating side of the portfolio tied to LIBOR or prime, mostly based on three-month LIBOR. This generally reprices at the start of each quarter, so we anticipate improvements now in April compared to January due to recent increases. We are observing better reinvestment deals in the investment portfolio, allowing reinvestment of cash flows from the normal repayment of agency paper, which compound our considerations. While we’ve seen cash levels decrease, part of this is due to long-term borrowing reactions and outflows from government deposits. Regarding deposit pricing, we believe it will move slower than anticipated but dependent upon interest rate hikes. Non-interest income has remained in line with the previous quarter, though we recently collected $3 million in a seasonal commission. We also note the decline in mortgage refinancing volumes is presently affecting new transactions.

Okay, that's helpful, Orlando. I want to clarify the revised guidance you mentioned, which is between $114 million and $116 million, with expectations slightly lower for the second quarter. What factors contribute to this? What further spending is necessary? I'm trying to gain a clearer understanding of the situation with Puerto Rican banks. Overall, it seems like expenses in their guidance have been lower, possibly because you intend to make some hires and invest in business promotion, which was seasonally low in the first quarter. I just want to ensure I grasp the elements driving the increase from this point onward.

Yes. The compensation side is lower than anticipated due to vacancy levels. We continue to push for hiring, which long-term will help reflect positively on service. Additionally, there are salary adjustments planned for the second half of the year based on market dynamics. The OREO component typically does not provide profit, but we’ve been experiencing temporary gains due to previous lower market conditions. Marketing expenses related to new campaigns contribute to some of our projections. Other projects based on technology and facilities have seen delays due to material availability and overall execution plans. Because of these factors, we believe the anticipated expense range of $114 million to $116 million reflects a more practical adjustment compared to our previous $117 million to $119 million expectation post-integration.

Orlando, good morning.

Good morning, Ebrahim.

Hi, Ebrahim.

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

Yes, we have not provided that guidance yet. Some institutions may have, but my concern is that I can give you a number based on keeping everything else equal, which in reality, I expect some changes to occur on the deposit repricing component. The 5% number you refer to in the 10-K included some of those deposit reprice impacts, which I believe will reflect differently moving forward. Hence, we haven’t provided that range.

Got it. And remind me again, did public fund deposits decline this quarter? Additionally, as we look out, do you still expect deposits to run off from here or do you expect deposit growth?

On the government side, we expect slight reductions since there exist certain usage components. There are remaining funds from energy authority related to reconstruction that will eventually be utilized. But we perceive the operational account funds from municipalities remain steady. Thus, we do predict slight reductions from the government side. On the retail side, we don't expect significant growth, but we don’t expect reductions either, so we anticipate stability in our core deposits.

Okay. The government loans are relatively stable. Lastly, regarding credit quality, I heard your earlier comments; how much further do we have to go before reserves reach their lowest point? Can you share your thoughts on what the initial CECL day one reserve was, keeping in mind the surrounding circumstances at that time? What do you consider a normal reserve level going forward? Is it about 50 basis points less from here? Any insights would be appreciated.

As we discussed, when CECL was adopted, that reserve ratio was 2.6%. Post that, the transaction with Santander did not acquire any non-performing assets, which improved our reserve mix. Our qualitative reserve assessments have led to subsequent declines, historically, and as indicated, we expect some provisioning in future quarters. Our residential portfolio typically consumes higher reserves due to loan life cycle. While many qualitative impacts and improvements bring down the ratio, dollar-wise there may still exist provisioning, but not at the same levels experienced in prior years.

Hi, good morning.

Hi, good morning.

Good morning. How are you?

Good. Thank you. Just following up on the last line of questioning, looking at the commercial allowance levels, there was a sizable reduction this quarter. I'm assuming that was all qualitative in nature. Is that largely why you're assuming provisioning from here as a more stable allowance? How much room remains on the commercial side for additional qualitative adjustments down, or could you see the reserve level on the commercial book increase if trends deteriorate?

Your observation is correct that a number of modifications during the pandemic under the CARES Act, which had moratoriums, resulted in several qualitative reserves tied to specific loans and macroeconomic expectations. As these loans have demonstrated improved financial standings, it has impacted the reductions mentioned, primarily seen in the CRE segment. Should economic conditions stabilize, there could be adjustments to further qualitative components, but otherwise, changes will mostly depend on volumes. With indications of PPP loans decreasing significantly, those had minimal reserve requirements, contrasting new loans going through standard processes.

Okay. That’s good color. I appreciate that. Perhaps switching to expenses, if I can ask a follow-up question, how much of the updated $114 million to $116 million guidance is dependent on new hiring versus earmarked projects and spending that’s more formulaic?

It's a combination of new hires alongside several anticipated salary adjustments as part of our plans for the latter half of the year. That makes up about half of the increase. Other components regarding seasonality in business promotion contribute around $1.5 million, while remaining project delays in facilities account for the other adjustments.

Orlando, good morning.

Good morning, Ebrahim.

Hi, Ebrahim.

Sure. Just wanted to follow up on asset sensitivity. So I heard you in terms of you mentioned the margins could benefit. If I heard you correctly, your loans tend to reprice at the end of the quarter. I’m looking at your asset sensitivity in the 10-K, and the positive 200 bps ramp is noted to be about 5% NII upside. Could you give us a better framework based on a potential 100 basis points of hikes from the Fed in May and June for margin expectations and how that might unfold?

We haven't provided specifics for that yet. I understand other institutions may, but there are concerns about behavior shifts, especially with deposit repricing. The mentioned 5% from the 10-K accounted for these factors, so we haven't made predictions about future potential changes.

Got it. And what about public fund deposits? Did they show a decline this quarter? Additionally, do you still foresee a runoff in deposits from here or expect some growth?

Regarding government deposits, we predict slight reductions in the future. These funds are operational accounts for municipalities. The earlier-moving funds related to debt settlement have already left. On the customer side, we don't expect much change in deposits, aiming for stability.

Okay, so the government loan scenario remains steady. Lastly, regarding credit quality, you mentioned earlier some favorable trends. Can you advise how much room remains before reserves could hit a bottom? Can you clarify the CECL day one situation and what the steady-state reserve levels could look like?

Yes, the reserve ratio was 2.6% upon CECL adoption. It improved post-transaction with Santander since no non-performing loans were acquired. We see provisioning trends continuing, particularly as the residential market often requires higher reserves. Projections suggest a decrease in reserve levels – while provisioning may occur, it won't return to the levels experienced back in 2019 or previously.

Hi, good morning.

Hi, good morning.

Good morning. How are you?

Good. Thank you. Just following up on the last line of questioning, looking at the commercial allowance levels, there was a sizable reduction this quarter. I'm assuming that was all qualitative in nature. Is that largely why you're assuming provisioning from here as a more stable allowance? How much room remains on the commercial side for additional qualitative adjustments down, or could you see the reserve level on the commercial book increase if trends deteriorate?

Your observation is correct regarding modifications made during the pandemic under the CARES Act, which led to many qualitative reserves tied to specific loans alongside the economic expectations. As these loans progress, we expect reductions primarily in the CRE sector; however, further qualitative adjustments would depend largely on overarching economic conditions.

Okay. That’s good color. I appreciate that. I wanted to move to expenses; if I can ask a follow-up question on the updated guidance of $114 million to $116 million. How much of that is contingent on new hiring versus earmarked projects?

It's a mix of new hires and anticipated salary adjustments for the second half of the year. Hiring contributes to around half of that change. The other part reflects changes in marketing and ongoing project expenses.

Orlando, good morning.

Good morning, Ebrahim.

Hi, Ebrahim.

Sure. Just wanted to follow up on asset sensitivity. So I heard you in terms of you mentioned the margins could benefit. If I heard you correctly, your loans tend to reprice at the end of the quarter. I’m looking at your asset sensitivity in the 10-K, and the positive 200 bps ramp is noted to be about 5% NII upside. Could you give us a better framework based on a potential 100 basis points of hikes from the Fed in May and June for margin expectations and how that might unfold?

We haven't provided specifics for that yet. I understand other institutions may, but there are concerns about behavior shifts, especially with deposit repricing. The mentioned 5% from the 10-K accounted for these factors, so we haven't made predictions about future potential changes.

Got it. And what about public fund deposits? Did they show a decline this quarter? Additionally, do you still foresee a runoff in deposits from here or expect some growth?

Regarding government deposits, we predict slight reductions in the future. These funds are operational accounts for municipalities. The earlier-moving funds related to debt settlement have already left. On the customer side, we don't expect much change in deposits, aiming for stability.

Okay, so the government loan scenario remains steady. Lastly, regarding credit quality, you mentioned earlier some favorable trends. Can you advise how much room remains before reserves could hit a bottom? Can you clarify the CECL day one situation and what the steady-state reserve levels could look like?

Yes, the reserve ratio was 2.6% upon CECL adoption. It improved post-transaction with Santander since no non-performing loans were acquired. We see provisioning trends continuing, particularly as the residential market often requires higher reserves. Projections suggest a decrease in reserve levels – while provisioning may occur, it won't return to the levels experienced back in 2019 or previously.

Hi, good morning.

Hi, good morning.

Good morning. How are you?

Good. Thank you. Just following up on the last line of questioning, looking at the commercial allowance levels, there was a sizable reduction this quarter. I'm assuming that was all qualitative in nature. Is that largely why you're assuming provisioning from here as a more stable allowance? How much room remains on the commercial side for additional qualitative adjustments down, or could you see the reserve level on the commercial book increase if trends deteriorate?

Your observation is correct regarding modifications made during the pandemic under the CARES Act, which led to many qualitative reserves tied to specific loans alongside the economic expectations. As these loans progress, we expect reductions primarily in the CRE sector; however, further qualitative adjustments would depend largely on overarching economic conditions.

Okay. That’s good color. I appreciate that. I wanted to move to expenses; if I can ask a follow-up question on the updated guidance of $114 million to $116 million. How much of that is contingent on new hiring versus earmarked projects?

It's a mix of new hires and anticipated salary adjustments for the second half of the year. Hiring contributes to around half of that change. The other part reflects changes in marketing and ongoing project expenses.

Orlando, good morning.

Good morning, Ebrahim.

Hi, Ebrahim.

Sure. Just wanted to follow up on asset sensitivity. So I heard you in terms of you mentioned the margins could benefit. If I heard you correctly, your loans tend to reprice at the end of the quarter. I’m looking at your asset sensitivity in the 10-K, and the positive 200 bps ramp is noted to be about 5% NII upside. Could you give us a better framework based on a potential 100 basis points of hikes from the Fed in May and June for margin expectations and how that might unfold?

We haven't provided specifics for that yet. I understand other institutions may, but there are concerns about behavior shifts, especially with deposit repricing. The mentioned 5% from the 10-K accounted for these factors, so we haven't made predictions about future potential changes.

Got it. And what about public fund deposits? Did they show a decline this quarter? Additionally, do you still foresee a runoff in deposits from here or expect some growth?

Regarding government deposits, we predict slight reductions in the future. These funds are operational accounts for municipalities. The earlier-moving funds related to debt settlement have already left. On the customer side, we don't expect much change in deposits, aiming for stability.

Okay, so the government loan scenario remains steady. Lastly, regarding credit quality, you mentioned earlier some favorable trends. Can you advise how much room remains before reserves could hit a bottom? Can you clarify the CECL day one situation and what the steady-state reserve levels could look like?

Yes, the reserve ratio was 2.6% upon CECL adoption. It improved post-transaction with Santander since no non-performing loans were acquired. We see provisioning trends continuing, particularly as the residential market often requires higher reserves. Projections suggest a decrease in reserve levels – while provisioning may occur, it won't return to the levels experienced back in 2019 or previously.

Hi, good morning.

Hi, good morning.

Good morning. How are you?

Good. Thank you. Just following up on the last line of questioning, looking at the commercial allowance levels, there was a sizable reduction this quarter. I'm assuming that was all qualitative in nature. Is that largely why you're assuming provisioning from here as a more stable allowance? How much room remains on the commercial side for additional qualitative adjustments down, or could you see the reserve level on the commercial book increase if trends deteriorate?

Your observation is correct regarding modifications made during the pandemic under the CARES Act, which led to many qualitative reserves tied to specific loans alongside the economic expectations. As these loans progress, we expect reductions primarily in the CRE sector; however, further qualitative adjustments would depend largely on overarching economic conditions.

Okay. That’s good color. I appreciate that. I wanted to move to expenses; if I can ask a follow-up question on the updated guidance of $114 million to $116 million. How much of that is contingent on new hiring versus earmarked projects?

It's a mix of new hires and anticipated salary adjustments for the second half of the year. Hiring contributes to around half of that change. The other part reflects changes in marketing and ongoing project expenses.

Orlando, good morning.

Good morning, Ebrahim.

Hi, Ebrahim.

Sure. Just wanted to follow up on asset sensitivity. So I heard you in terms of you mentioned the margins could benefit. If I heard you correctly, your loans tend to reprice at the end of the quarter. I’m looking at your asset sensitivity in the 10-K, and the positive 200 bps ramp is noted to be about 5% NII upside. Could you give us a better framework based on a potential 100 basis points of hikes from the Fed in May and June for margin expectations and how that might unfold?

We haven't provided specifics for that yet. I understand other institutions may, but there are concerns about behavior shifts, especially with deposit repricing. The mentioned 5% from the 10-K accounted for these factors, so we haven't made predictions about future potential changes.

Got it. And what about public fund deposits? Did they show a decline this quarter? Additionally, do you still foresee a runoff in deposits from here or expect some growth?

Regarding government deposits, we predict slight reductions in the future. These funds are operational accounts for municipalities. The earlier-moving funds related to debt settlement have already left. On the customer side, we don't expect much change in deposits, aiming for stability.

Okay, so the government loan scenario remains steady. Lastly, regarding credit quality, you mentioned earlier some favorable trends. Can you advise how much room remains before reserves could hit a bottom? Can you clarify the CECL day one situation and what the steady-state reserve levels could look like?

Yes, the reserve ratio was 2.6% upon CECL adoption. It improved post-transaction with Santander since no non-performing loans were acquired. We see provisioning trends continuing, particularly as the residential market often requires higher reserves. Projections suggest a decrease in reserve levels – while provisioning may occur, it won't return to the levels experienced back in 2019 or previously.

Hi, good morning.

Hi, good morning.

Good morning. How are you?

Good. Thank you. Just following up on the last line of questioning, looking at the commercial allowance levels, there was a sizable reduction this quarter. I'm assuming that was all qualitative in nature. Is that largely why you're assuming provisioning from here as a more stable allowance? How much room remains on the commercial side for additional qualitative adjustments down, or could you see the reserve level on the commercial book increase if trends deteriorate?

Your observation is correct regarding modifications made during the pandemic under the CARES Act, which led to many qualitative reserves tied to specific loans alongside the economic expectations. As these loans progress, we expect reductions primarily in the CRE sector; however, further qualitative adjustments would depend largely on overarching economic conditions.

Okay. That’s good color. I appreciate that. I wanted to move to expenses; if I can ask a follow-up question on the updated guidance of $114 million to $116 million. How much of that is contingent on new hiring versus earmarked projects?

It's a mix of new hires and anticipated salary adjustments for the second half of the year. Hiring contributes to around half of that change. The other part reflects changes in marketing and ongoing project expenses.

Hi, good morning. Thanks for the question.

Welcome, welcome to the call, Kelly.

Very happy to be joining. Most of mine have been asked and answered already. But circling back to the discussion of credit, you obviously had a large release, and things have been looking up in Puerto Rico, with charge-offs being quite insignificant. I'm wondering if you can provide some sense of sort of the normalized level of charge-offs could look like for you. I know there were some reserve releases. I also wanted to discuss more on the loan loss component of that when thinking about the provision.

At this stage, for 2022, I don't see significant changes in current charge-off trends. We’re not observing that in the data. The commercial side typically shouldn’t see more than 50 basis points in charge-offs, while mortgage delinquency in Puerto Rico is traditionally low, around 10 basis points. Overall, I don’t foresee changes in the near term.

We have leading indicators that will help us answer that question as we continue to move forward. Right now, delinquencies are at the lowest we've seen for some time. We mentioned in the last call that some liquidity run-off on consumer loans after stimulus may have an impact, but we haven't reached that point yet. Factors such as stimulus and unemployment improvements have improved the economic indicators that support our expectations.

Got it. That's really helpful. I appreciate all the color. If I could, I wanted to ask a kind of a nitpicky question on the 52% efficiency guidance. I appreciate your conservatism and the discussion around increasing expenses due to the issues you've pointed out. However, if I take the high end, the $116 million over your FTE NII and fees, I have you between 51% and 52% efficiency. Is that guidance based on FTE or should we be using GAAP NII? I'm just struggling to see how you can hit 52% while increasing expenses.

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

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

Thank you, Kelly.

Thank you.

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