First BanCorp. (NYSE:FBP) Q4 2022 Earnings Call Transcript

First BanCorp. (NYSE:FBP) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Good morning. Thank you for attending today’s First BanCorp 4Q 2022 financial results conference call. My name is Alexis, and I’ll be your moderator for today’s call. . I’ll now like to pass the conference over to the Corporate Strategy and Investor Relations Officer. Ramon Rodriguez. You may proceed.

Ramon Rodriguez: Thank you, Alexis. Good morning, everyone and thank you for joining First Bancorp’s conference call and webcast to discuss the company’s financial results for the fourth quarter and full year 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.

Aurelio Aleman: Thanks, Ramon. Good morning to everyone and thanks for joining our earnings call today. Please turn to page four to discuss the highlight for the quarter. We got a solid return of 158%. We earned $73.2 million or $0.40 per share in net income achieve, or $122.2 million in pretax provision income and reached an efficiency ratio of 48% even lower than the prior quarter. The margin expanded by 6 basis points, while on the other hand, net interest income decreased by $2.3 million primarily related to increasing in the interest expense portion. A stable credit trends continue, supporting asset quality improvement with non-performing assets decreasing by $14.1 million to $129.2, which is a decade low at 69 basis point of total assets.

Also good news from the early delinquency side which also improved during the quarter and still below pre pandemic levels. In terms of capital deployment, we continue our plan. During the fourth quarter we repurchased 3.5 million shares of common stock for the total purchase price of $50 million and paid $22 million in common stock dividends. Our consistent earning generation capacity discipline and sales management have definitely allowed us to continue returning capital while allocating resources to organically grow. Let’s move on to the balance sheet Page 5, to discuss on deposit trends. On the asset side, total loan leases grew by $254 million. Now the portfolio stands at $11.6 billion during the quarter. And this really happened across all business segments commercial consumer and actually residential.

This was actually our strongest quarter in terms of loan portfolio performance. Excluding PPP belongs which are almost finished now. Commercial and construction grew by $141 million or 3% linked quarter. Total originations, including renewals and credit card related activities was very healthy at $1.4 billion up 15% versus the prior quarter. That is our priority deployed capital to achieve profitable loan growth and capitalize on market share across all the lending segments, is really the core principle of our plan. We’re encouraged by the trends that we see in the main market and also by the pipeline that we have today for 2023. In line with industry trends, core deposits decreased by $250 million or 2.3% during the quarter, which was actually slightly better than the local market trend for the quarter.

I suspect that we continue to see excess liquidity gradually tapering off within household balance sheet. However, our deposit balances for both retail and commercial customer remain above pre pandemic levels. We are focused on leveraging our expanded sales distribution channels and digital channel to grow our market share on the deposit market and the products and services related to it. That said, liquidity levels remain high with a ratio of cash plus liquid securities to total assets above 19%. Let’s move to page six to discuss the high level the full year. You know, we’re really very proud of the work that the team performed during 2022, over the course of 2022 that teams work very hard to deliver outstanding results for the franchise. We raised our organic loan growth of $762 million when we have two PPP loans on the strategic reduction of residential mortgage, earned 5 million in net income and achieved a record pretax pre-provision income of 475.3 which is up 21% when compared to 2021.

And reach a decade low non-performing asset ratio of 0.69%. In terms of the franchise, we continue our investments in people, technology, process improvement. We made great progress by moving forward our omni channel outreach strategy with investment in data service self-service platforms to optimize the execution capabilities and products. When we look at some of the metrics, continue to improve data engagement, retail banking, registration were up 4% during the quarter, 17% during the year. Offshore of our newly launched business digital banking applications continue to increase. Our new Visa digital lending functionality has improved our penetration to a smaller medium business and SBA segments. And also we continue to capture over 40% of all deposits to this channel.

All these milestones have been achieved within the context of a more efficient traditional branch network. During 2022 we also consolidated five additional branches, including two during the fourth quarter. Moreover, our efficiency ratio reached a historic low of 48.3 during the year, highlighting our ability to execute ongoing capital investments in technology, improve digital channels, best in class talent, all without compromising the operating leverage of the organization. Definitely these all translated into one of our best performing years on record for the franchise, while you know strongly supporting our communities, our colleagues, and returning approximately 363 million or 119% of €˜22 earnings to our shareholders, to both common stock buybacks and the payment of a very competitive common dividend.

Our strong capital position enable us to continue delivering value to our shareholders while at the same time providing poor loss absorption capacity in the event of an economic downturn. Please, let’s move to Page seven, to discuss some highlights on the outlook of our macroeconomic environment? Definitely, global expectations points to our economic slowdown in the U.S. But we remain cautiously optimistic on economic conditions in our main market in Puerto Rico. Labor market performance continue to sustain on our trend based on employment reaching a decade high in November 22 or 4% year over year. And economic activity index, our only indicator of that tracks the economy closest a quarter 2021 levels, even when accounted for the impact of in September, which disrupted the market for a couple of weeks.

Most importantly, our growth thesis continued to be sustained by the large amount of Federal disaster relief funds, still planning to be disbursed. Over 45 billion disburse obligated funds have been earmarked to support broad based economic development and rebuilding initiative designed to improve the airline infrastructure and overall capital stock. Public data showed that disbursement reached $3.2 billion during the 11-month period ending in November. With this actually 96% above what was raised during 2021. The rollout respond of the fund is expected to gradually increase over the next decade, with the most recent estimates reflecting approximately 5 billion are the estimates for 2023. That will be great. The timely disbursement of these funds coupled with a government improvement fiscal position.

A focus on economic development is really what is driving the tailwind that we’re seeing. Finally, and most importantly, this year we commemorate our 75th anniversary for the institution, proud of our people and all that we have accomplished over this period. I look forward to many more years of collaborating to protect our clients and communities and growing their franchise. We do have multiple initiatives to celebrate this accomplishment and show our gratitude to the community’s employees customers. I will now turn the call to Orlando to go more detail on the financials results. Thanks to all for your support.

Photo by engin akyurt on Unsplash

Orlando Berges: Thanks, Aurelio. And good morning, everyone. As Aurelio mentioned net income for the quarter was 73.2 million. That compares with 74.6 million last quarter. Our earnings per share in the quarter were $0.40, which is the same as we had last quarter. What we saw in the quarter its benefit on interest income from the increase associated with the award repricing or variable rate loans, along with the higher average balances in the loan portfolios for the quarter. But as anticipated, we have also continued to see an acceleration on deposit betas, which is driving deposit costs higher. In addition, we did increase the level of wholesale funding in the quarter, which combined with an increase in the cost, it’s ultimately resulted in a reduction in net interest income.

The provision for credit losses in the quarter was 15.7 billion, which is basically the same that we had last quarter. But our allowance for credit losses increased by 2.5 million. And I will touch upon that a little bit later. Just to mention for allowance, we continue — for determining the allowance we continue to use two scenarios, we weighed them baseline scenario, and a downside economic . In terms of net interest income, which as you all know it’s a challenge this time with interest rate movement. The net interest income was down 2.3 million from 207.9 million in the third quarter to 205.6 million this quarter. Interest income was up $11 million, but interest expense grew by $13 million. In interest income, commercial loan interest income grew $8.2 million, $8 million resulted from repricing during the quarter and we also had about $1.1 million associated with higher loan balances.

But on the other hand, we had a $20 million reduction in average balance on PPP loans, which resulted in a reduction of $1.3 million on interest income on loans. The yield on the commercial and construction loans grew by 63 basis points in the quarter. In the case of the consumer portfolio, interest income grew by $3.7 million, mostly related to the increase of average balances, we had $111 million increase in average balances. The yield on this portfolio grew 11 basis points as you know that it’s basically a fixed portfolio. So yield improvement comes in — pricing on new originations. On interest expense. Just looking at the balance sheet, interest expense grew $11 million, 45 basis points increase from 37 basis points we had last quarter to 82 basis points this quarter.

Approximately 60% of this increase in interest expense was related to public fund, deposit costs increases. Deposit betas for the quarter for the dollar portfolio was approximately 32%. Core deposits was about 18%, but this increase in betas was mostly driven by the betas on public deposits, which was about 75% for the quarter. We do expect that betas on public deposits to remain high. And these rates obviously are going to move up or down depending on where the market is moving. In addition, in the quarter we did have $2 million increase in cost of borrowings, $700,000 relates to repricing of loan great debentures and the other 1.4 million it’s basically increasing and the size of the borrowing portfolio FHLB advances and repose. Margin increased six basis points in the quarter from 431 to 437.

The change was primarily a change in asset mix. The average balance of cash and investment securities which are lowered yielding decreased by $600 million. While loans increased $146 million for the quarter. Looking forward, we see interest income growing from the repricing of loans that will happen during the year and from loan growth. For example, you look at balance as at the end of the year loans were $187 million higher than the average balances for the quarter. So that should give us a pickup in the first quarter on interest income. And we also have approximately $130 million in commercial loans that reprice now in January. Some of them are quarterly repricing loans. However, we do expect net interest income pressure to continue in the near term as rates on deposits continue to increase.

With some normalization later in the year based on the expectation that rates will start to come down towards the middle of the year. If you just look at our current balance sheet structure, our expectation is that net interest income for the next couple of quarters should remain at close to current levels, with improvements in net interest income coming from the growth in future growth in the loan portfolios. In terms of non-interest income, it remained relatively similar to last quarter. The improvement — we had improvements in credit and debit card transaction fee based on seasonality, but that was offset by lower mortgage banking income. We also during the quarter — we also reverse our $700,000 of previously recognized fees on non-sufficient funds as far as some changes on fee structure that are being implemented just towards the end of the year.

In terms of expenses for the quarter $112.9 million which compared to $115.2 million in the third quarter, a $2.3 million decrease. The decrease primarily reflects a $1.5 million increase in net gains on OREO operation. Excluding OREO expenses for the quarter were $115.5 million which compared to $116.3 million last quarter, also excluding the OREO impact. This reduction includes reduction — $700,000 reduction in occupancy, mainly energy costs, and $700,000 decrease in payroll expenses as all bonus accruals and incentives were finalized based on results. These reductions were partly offset by some increase — $500,000 increase in business promotion, sponsorship and public relation activities that we had during the quarter. The expenses in the quarter were very much in line with our estimates of $115 million and $116 million, which excluding OREO obviously.

And our efficiency ratio, the efficiency ratio continues to be very low at 48%. Looking at the first quarter, we do expect some increases in expenses. Payroll taxes go up in the first quarter as all limits are reset. That increases payroll expenses by good clip in the first quarter. Also, during the quarter we during the at the end of the year, we have seen significant increases in — or some increases in contract renewals, with inflation glasses, some of the removals are coming up. And there are several technology improvement projects that we have on the way that are picking up speed in this quarter. Based on this, if we exclude OREO expenses, we believe expenses for the quarter for the first couple of quarters should be closer to the $120 million range.

In terms of asset quality, as Aurelio made reference, we continue with a very stable asset quality, non-performing decrease $14 million in the quarter, stand at $129 million which is 69 basis points of assets. That reduction, included $9.3 million non-accrual commercial loan reductions, $5 million loans that was restored to accrual status. And we also had a $7 million, that’s what drove mostly the reduction in the commercial side. And we had a $5 million reduction in OREO properties based on increase in sales of repossessed residential properties in the Puerto Rico market. Inflows for the quarter increased $3.8 million to $24 million, mostly consumer portfolio that grew $2.6 million based on size. Early delinquencies, again defined as 30 to 89 days continues to be good by $9 million in the quarter with reductions across all portfolios, basically.

In terms of net charge offs for the quarter were $13 million, which is 46 basis points of loans compared to 31 basis points last quarter, mostly related to a consumer portfolio. We also had a $1.7 million charge off that we took on in the fourth quarter on the sale of anniversary classified commercial loan participation in the quarter. Consumer loan charge offs were 144 basis points of loans in the quarter, and 107 basis points for the year and this figures are significantly lower than pre pandemic levels. As you can see on prior filings. The allowance for credit losses at the end of 2022, was $273 million, which is $2.5 million higher than the third quarter. And it’s about $7 million lower — I mean, I meant to say $2.5 million lower than the third quarter — higher than the third quarter and $7 million lower from last year.

I’m sorry about that. The ACL was — on just loans was $260 million, which is $2.6 million higher than last quarter. The ACL reflects the increase in the portfolio’s we had in the quarter as well as some less favorable outlook that we have on the models for several macroeconomic components. The ratio of the allowance for credit losses on loans and finance leases to total loans held for investment was 2.25% as of the end of the year compared to 2.28% on the third quarter. On the capital just stay with what Aurelio mentioned already. We continue with the execution of the plan. We repurchase during the year 19.4 million shares for $275 million and we paid during the year $88 million in dividends. Our capital ratios continue to be very strong again, basically a small reduction in Tier-1 and an improvement in the leverage ratio.

Tangible book value per common share increase from 6.46 to 6.93 in the fourth quarter related to $60 million or so improvement in the other comprehensive loss adjustments as the fair value of the investment portfolio improved in the quarter. And our tangible common equity ratio stands at 6.81 compared to 6.55 last quarter. If we were to adjust for the OCI impact, our non-GAAP tangible book value per share would be about 11.30. And tangible common equity ratio would be approximately 10.6%. So, those were — those are strong numbers. And again, as we have mentioned in the past, we believe this impact is temporary since we do have the ability to hold the securities through the end of the maturity process. Securities continue at similar pace, we have approximately $40 million to $50 million cash flow coming from the investment portfolio.

So we will continue to see some of that cash flow redeployed to the lending side or compensating for funding needs. With that, I would like to open the call for questions.

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Q&A Session

Operator: . The first question comes from the line of Timur Braziler with Wells Fargo. You may proceed.

Timur Braziler : Hi, good morning. Thanks for the questions. I wanted to follow up on the NII guidance, just to make sure I got it clear. Did you say that you’re expecting some level of pressure here in the near term, but for to remain your current levels?

Aurelio Aleman: Yes, there will be some pressure is still on deposit pricing. And that’s going to offset some of the impact from loan growth and or loan already on the portfolio and repricing of loans already in the portfolio. So with those two components, we were expecting net interest income to be sort of similar to this quarter, and improvements will come from the movement in the loan portfolio going forward for the growth on the portfolio. That’s what’s going to drive improvements in net interest income in the near term.

Timur Braziler: Okay, understood. And then just looking again at the balance sheet in the third quarter securities, cash flows were used to fund deposit outflows and some loan growth in the fourth quarter, you opted to go with borrowings and assets actually increase for the first time and over a year. How should we think about the funding of future deposit outflows to the extent that there’s any and the funding of 2023 loan growth? Are you going to be looking to lean on borrowings a little bit more heavily in support of the balance sheet? Or should we still expect much of that funding to come from the bond books?

Aurelio Aleman: Well, again, the securities portfolio, it’s given us somewhere approximately $150 million per quarter in cash flows. So that clearly it’s going to be used for funding growth and or deposit implications. We — during the fourth quarter, we lost deposits at a higher clip than the $150 million. And we did grow the loan portfolio so we ended up taking some additional funding. So clearly, it’s a function of what happens on those two components, how much we originate with based on the pipeline, we feel strong about it. And the trends in deposits going forward, which have been a little bit more inconsistent, we — obviously we see rates, changes in 2023 probably being or we expect them to be less than the significant 2022.

So that is create some stability on deposit movement. But there is still volatility in the market that we need to be cautious. So there could be some increases in wholesale funding based on that. I’m sorry, sorry, I can see you’re saying that. We do have the cash flow coming from the management portfolio, but we also can use the portfolio for repos or advances.

Timur Braziler : Right. Okay. And then just looking at deposits and understanding that it’s hard to put a number on the remaining balances of commercial accounts or dollars that are potentially at risk for leaving for higher rates, but can you try and kind of ring fence, the remaining deposits that are still at risk? And then as we think about the overall size of the balance sheet, are you expecting to keep it here at current levels, again using a wholesale to kind of bridge the gap? Or could we still see some decline in the balance sheet here over the first half of 2023?

Aurelio Aleman: No, we feel the balance sheet, it should stay at similar levels. In reality, we do expect growth in the loan portfolios going forward. And again, that’s going to be offset with some reductions on the investment portfolio side. We don’t it’s tough to answer that one of the positives. Clearly there was excess liquidity that has been redeployed for different things people are using, and obviously the market rate movement, move some, disposable money into very high cost kind of treasury or high yielding kind of treasury securities. And so, with rate expectations movements are being lower now for the first half of the year. That should slow down. But it’s tough to say.

Timur Braziler : Great, thanks for the color.

Operator: Thank you for your question. The next question comes from the line of Kelly Motta with KBW. You may proceed.

Kelly Motta: Thanks for the question. Good morning. Are there any pick up on the loan side? We’ve had really strong growth this quarter. And that seems to be one of the factors that helps offset some of the other areas of pressure that we’ve been talking about. Can you speak to your pipeline how demand has been holding up as we’ve gotten quite a few rate hikes now and kind of the outlook for growth and color around categories would be helpful?

Aurelio Aleman: Yes, if you look at by segment obviously residential mortgage, we don’t expect any growth, I started with the portfolio thing called being. And if we saw last quarter, we have a slight growth, it’s really a mix of repayments and origination at the end of the day, because you know how the market — the currency market is performing, obviously, the more conforming rates go down, we’ll be moving a little bit better, the non-government body will move to that. So we’re forecasting that segment to remain flat. We continue to see strong demand for the consumer in auto businesses, credit card, and we continue — and the pipeline for construction and commercial remains very strong, actually probably very similar to the prior quarter that we started.

Some of the Delta, one quarter versus the other depends on the consumer, what we did last year close to 10%. While within the commercial was less than that, it depends on the more chunky deals. I will say it on a blended basis, for the year, we should think about 5% to 6% mid-single digits, as a closest estimate, based on what we see today, what we have, and that could be some larger chunky deals that we’re not including here, that could be participation in some of the public private partnerships that the government is structuring, to be able to refine the timing of those, it’s quite complex in terms of predicting when they will be finished and close, but some of those are floating around are part of the fiscal plan, and they’ve been in the negotiation with different bidder.

So some of that could help banks to which I’m sure, most of the bank locally will participate as part of our support to the infrastructure and the economy. So that I will say, Kelly, the closest estimates are all mid-single digits here.

Kelly Motta: Got it, that’s helpful. And to circle back on NII and NIM, as we — you think about it potentially expanding in the latter part of the year, how should we be thinking about the churn in threshold of NII reaching the bottom? Or should we be anticipating a similar level of deposit pricing pressures this quarter, is a potentially heating up. And if you could give any numbers around the core deposit base, excluding the government deposits and how betas are trending on that that would be helpful in understanding this?

Aurelio Aleman: Okay. This quarter, we do expect, still some pressure. Remember that obviously, you were seeing average impact in the last quarter of what happened with rates movement throughout the quarter. But obviously, the ending number in the quarter is higher than the average that we had, because of it. Clearly a lot of — it’s a push on a more volatile government component that had a very large beta. And that we expect that to have some impact in the second quarter, although future impact because of rates, expectations are not necessarily going to be at the same pace. On the rest of the path. As I mentioned, the average cost of all the other deposits was 40 basis points in September and the September quarter, it was about 66 basis points in the fourth quarters.

The beta there was a little bit over 18%. And we’re not seeing dramatic movement, it’s probably going to be somewhere between 18% and 22%. It’s what I expect from that portfolio. Obviously, the government side will stayed at similar levels that we saw, or what I mean government public deposits in general, that we saw there in the quarter.

Kelly Motta: Got it. Thank you. I turn to the expenses and then step back. I appreciate the guidance of about $120 million of expenses? I understand you had some OREO gains this quarter, excluding that it looks like you would have been more around like $115 million so that implies a $5 million step up. Just in terms of the cadence do you think, in the next quarter or two, there’s going to be a build towards that one funny or should we anticipate with the moving parts you laid out in your prepared remarks, that we’re going to enter 2023 with 120 and kind of build on that number?

Aurelio Aleman: Well, you have — a large components what I mentioned on payroll taxes, all the all the thresholds are reset, we see immediate impact on that, on the first couple of quarters, that tapers down towards the end of the year as some of the limits are reached. So we do see lower impact on that one. But on the other hand, we do have federal technology projects going on that we’re trying to get to completion during the year, and that kind of compensate. That’s why the 121 20 it’s the number we’re expecting based on the immediate impact from that payroll implication. And we’ve also seen, because of the of the inflation components of some of the contract renewals, obviously, are yielding higher increases that we saw a couple of years ago in terms of a contract renewals.

So we’re starting to see that — we saw that in the last quarter, and we had several — and we are seeing that in the first quarter. So that’s why we feel that 120 should be like a benchmark on going — on the next couple of quarters.

Kelly Motta: Got it. I appreciate the color. I’ll step back.

Operator: The next question comes from the line of Alex Twerdahl with Piper Sandler. You may proceed.

Alex Twerdahl: Good morning, guys. Just going back to deposits quickly. Can you just remind us if there’s any seasonality that we should be thinking about over the next couple quarters, or if you have any line of sight on some deposit wins, maybe early in ’23, related to taxes or anything along those lines?

Aurelio Aleman: Well, you always have a little bit of movement at that season, by people using the money, but it’s never going to — it’s never been a significant component on the movement of deposits under bank — at the institution. So it wouldn’t — I wouldn’t say any seasonality, it’s going to drive a lot of movement over the year. It’s more of the other factors.

Alex Twerdahl: And then, with respect to the buyback, you get the $125 million, which I think is good until June, if I’m not mistaken. How are you thinking about using that today? Some banks are saying they’re seeing more uncertainty, and other banks are saying they’re getting back in the market. So I’m just curious how you’re thinking of things. And if we should expect additional commentary in April, which had been your cadence over the last two years for capital return?

Orlando Berges: Yes, the answer — question number one, definitely. As we said, before, we would like to give the optionality. And we’ve been doing that and we adjust, how much we do a recorder based on several factors while we see including macro uncertainty. At this stage, we continue to execute, we probably, I will say the most probable number for this quarter is similar to last quarter, based on what we see today, that can be adjusted, things that they became a concern to the market. On the other hand, we don’t have a limit to when to use a 125. So, we can do it now, or do it in three quarters or do in two quarters, there’s no expiration. On the other hand, answer to the question number two, yes, our cycle two to three, basically, the capital plan, we’re on a three step. See the numbers and decide finally, how much more we’re going to do forward? It’s going to be April. So yes, we do expect to make an updated announcement on capitals during April, that is correct.

Alex Twerdahl: Okay, great. Thanks for clarifying that. And then, as you think about credit and net charge offs and provisioning, I think we’re all trying to figure out what the new level of a normalized level of charge offs are for you guys. I’m just curious, if you have any more insights, clearly charge offs have been running much lower than what you had probably thought would be a normalized range and if whether or not 46 basis points kind of getting closer to what you consider normalized or how you see that shaking out.

Aurelio Aleman: We are — I think there’s levels of normalization, we use pre pandemic as a metric, but things have change. The unemployment rate is better is lower. We see more activity in the economy in different sectors. So, we — when we say normalize, to be honest, it has to be a number between where we are today, and where we were in 2019, not sure, if we’re going to reach the 2019, it doesn’t look like based on early indications. So, obviously, early delinquencies is a great indicator or classified asset is a great indicator. And NPAs are a great indicator, you know, so far, so good. And it’s something that we monitor very, very closely, especially performance. We have a large consumer segment, we have a material portfolio, and a diversify commercial portfolio.

I don’t, — all of them are performing well, and you see the asset quality metrics. We are very disciplined in not accumulating classify assets. And every time we see something that we’re like, we got to take too long to solve, as we did this quarter, we’re moving out so that create some noise in the charger rate, but not necessarily it’s a trend.

Orlando Berges: The key components as Aurelio mentioned Alex that are very stable at this point. So we don’t proceed as early unless there is a dramatic change on expectations that trends will change too much from the most recent ones.

Alex Twerdahl: Okay. Can you give us some color on?

Aurelio Aleman: We have — I will say we have very good coverage in our revenues , yes.

Alex Twerdahl: Can you give us some color on the pricing that you’re seeing on new loan generation?

Aurelio Aleman: Pricing, I think it’s reasonable is being adjusted by the funding costs and by the curve and by the forward curve. Commercial CRE in the mid-six. And when you go to other large segment or multivariable, you move to mid 7s, when you go to the middle market, probably closer to eight. And when you do look at a blender consumer products are already approaching mid-9. So, I think competition has been fair adjusting what we’re all suffering from, which is definitely increasing the cost of funding. So, obviously, the timing is like, some of this, but, I think — we don’t see pressure, we see more competitive pressure on deposit pricing now within the loan pricing.

Alex Twerdahl: Okay. And then just final question for me on fees. You alluded to some change in the fee structure during the fourth quarters, is that something that’s going to have a material impact in ’23?

Orlando Berges: No, because of the different changes don’t create — some are coming down and some are going up. So at the end, the end result, it’s more of a normal kind of fee based on deposits, it’s a function on deposit size, more than anything.

Alex Twerdahl: Great. Thanks for taking my questions.

Operator: Thank you for your question. The next question comes from the line of Brett Rabatin with Hovde Group. You may proceed.

Brett Rabatin: Hey, good morning. I wanted to follow back on credit for a second and just talk about auto and it seems like auto is really continuing to perform fairly well but your charge offs related to consumer or up can you maybe strip a part in the consumer bucket, the auto net charge offs, and then how you kind of think about the normalization, if you want to call it that in auto net charge offs over the next year?

Orlando Berges: I don’t have a specifically order here, but the reality — there is a relationship with size. The portfolio has continued to come up Bret, and we have grown the portfolio by a good clip over the last couple of years. So you start seeing some increases in charge off, which we know are going to happen. The auto portfolio typical charge offs in the market, remember, the deals in the market are much higher, we’re on the low 2s to meet 2s, way back. That number is less than half of that today. And we don’t see dramatic changes on those numbers at this point. Again, remember that in Puerto Rico, we still have a very poor public transportation system, and the auto becomes a very big necessity.

Brett Rabatin: Okay. And then wanted to circle back on the securities portfolio and see if you had any color, Orlando, maybe on how much in maturity you’re expecting this year to, to give you some flexibility with either loan growth funding or the deposit base? Thanks.

Orlando Berges: The cash flow has been fairly consistent over the last few months, it’s — we are expecting, like $45 million a quarter between 40 and 50, it’s would we have seen — a month I’m sorry. So we’re talking about somewhere between $500 million and $600 million of cash flow coming from the investment portfolio that can be used or will be used for loan funding. We don’t perceive doing any movement on the portfolio right now. But it’s been fairly consistent over the last few quarters. And we don’t see any significant change on that.

Brett Rabatin: And then lastly, for me, you mentioned in the Q&A briefly, technology spending, and it seems like all three of the Puerto Rico banks are spending money on technology, digital channels, et cetera. Can you talk maybe a little bit more about the tech spend that you have going on and what you hope that to accomplish in the next year or so?

Aurelio Aleman: Well, some of the some of that is competitive data, but from an investment amount basically moving more things to the cloud — is similar to prior year levels, probably a little bit higher this year is, which some of these things amortize, so you don’t see the full investment in one year. We continue to move things to the cloud more digital processes internally, more of that processes to the client. So, those are the three categories. Reducing the size of any data centers that we have, in house, and moving to a more efficient hardware environment with less maintenance on operating risk. So, that is in general, it’s being a priority, which for our last five years, it was a little bit this interrupted by making by the integration that we have to focus on that, but we never stop doing it, it’s just the speed and we did very well rollout, very important products during 2022.

And we continue to adding functionality to these products, as we call it is an omni channel strategy, the branch is important, the call center is important, and that is the channel is very important. So we continue to invest in all channels to optimize and improve the level of services that we can provide to our clients.

Brett Rabatin: Okay, that’s helpful. Thanks for all the color.

Operator: Thank you for your question. We now have a follow-up question from the line of Kelly Motta with KBW. You may proceed.

Kelly Motta: Hi, my question was asked and answered. So I’m stepping back. Thank you.

Aurelio Aleman: Thank you.

Operator: Thank you. We now have a follow up question from the line of Timur Braziler with Wells Fargo, you may proceed.

Timur Braziler : Hi, thanks for the follow-up. Again, on the security book, it seems like for the last couple of quarters now, the average balances have been pretty meaningfully higher than the period end balances. I’m just wondering what’s driving that dynamic mid quarter.

Orlando Berges: Well, you have to be careful because of valuation. The reality is that the balances have been coming down. But obviously the OCI valuation has changed. And for example, if you look at balances this quarter, they came down by over 140 something million, but it went up by about 60 million of the valuation. The other component that you have in there is that as we draw on Federal Home Loan Bank advances, we are required to invest in Federal Home Loan Bank stock. That’s part of the requirements. So that was about $40 million in the quarter. So if you segregate that, in reality that portfolio was down 140 something million during the quarter.

Timur Braziler : Got it. Thank you for the color. Make sense.

Operator: Thank you for your question. There are currently no further questions waiting at this time. . There are no further questions. So I’ll now pass the line back to Ramon Rodriguez for closing remarks.

Ramon Rodriguez: Thanks to everyone for participating in today’s call. We will be attending Bank of America’s financial services conference in New York on February 14, and KBW’s conference in Boca on February 16. We look forward to seeing a number of you at these events and we greatly appreciate your continued support. At this point, we will end the call. Thank you.

Operator: That concludes the conference call. Thank you for your participation, you may now disconnect your lines.