Thank you for standing by, and welcome to the First BanCorp 3Q 2022 financial results call. My name is Sam, and I'll be your moderator for today's call. 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 star one on your telephone keypad at any time. I'll now turn the call over to our host, Ramón Rodriguez, Corporate Strategy Investor Relations Officer. Ramón.
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 Alemán, 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 Alemán.
Thanks, Ramón. Good morning to everyone, and thanks for joining our earnings call today. Before we discuss the highlights, you know, 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 caused flooding, property damage, mostly on the south and the western parts of the island, as well as power outages and, you know, I would say minor businesses. We were able to continue supporting our clients through the event by leveraging our digital and third-party channels while gradually resuming bank operations the following day. Our headquarters and main buildings remained 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 week.
However, you know, we provided certain payment deferral programs to our clients that were affected by this disaster with the hurricane. I like to take this opportunity to thank all our colleagues for their dedication and response to our client needs. You know, we're highly encouraged by the strength and resiliency showed by all during this natural disaster. You know, once again, we continue to practice our contingency plans. You know, with that, please let's move to slide 4 to discuss some of the highlights of the quarter. During the quarter, you know, we stay on course and are very pleased to report another strong quarter for our franchise. We earned $74.6 million or 40 cents per share during the quarter. I think most importantly, reached another record pre-provision income of $102.4 million.
This was our sixth consecutive quarter, increasing in pre-tax pre-provision 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 $207.9 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, you know, an overall increase in portfolio balances, mainly in consumer loans, and slight deterioration in the long-term outlook of certain forecasted macroeconomic variables. Asset quality continued to improve, with non-performing assets decreasing by $4.2 million to $143.3 million during the quarter. NPA ratio now stands at 78 basis points.
You know, even though the economic backdrop on our main market continues to benefit from improved consumer confidence and a strong labor market, we keep, you know, very close monitoring of our portfolio trends, asset quality, and obviously, we sustain, you know, very healthy levels of allowance. Finally, our strong capital liquidity profiles did enable us to continue executing our established capital deployment plan, and we 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 stock repurchase program. 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 five. The balance sheet dynamics continue to evolve in line with our strategic goals. I think we talk about, you know, where we wanna take the portfolios and record. Loan 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 residential mortgage. Year-to-date loan portfolio growth has behaved as expected. We target against some commercial and consumer, while, you know, recent reductions in residential mortgage. Year-to-date commercial growth is about 4% and consumer is about 11%.
We expect to continue capitalizing on rising market opportunities in the commercial, construction, and consumer segments to gain market share, during the upcoming quarters, obviously closely monitoring asset quality. I have to say that the loan pipelines coming into the first quarter continue at healthy levels. In core deposits, the wholesale government and broker decreased by $530 million during the quarter, primarily driven by reductions in Puerto Rico and Florida. You know, deposit market trends in Puerto Rico continue to gradually taper off as high-balance depositors search for higher-yielding deposit alternatives, I will say particularly in the U.S. Treasury market and other non-bank deposit options. However, our retail and commercial clients in Puerto Rico still remain, you know, above pre-pandemic levels. Please let's move to slide six to discuss some of the operating environment highlights.
The macro trends in Puerto Rico continue to show, you know, good signs. We continue to see improvement. It's evidenced by, you know, stronger labor market and consumer confidence metrics. Payroll employment reached a decade high in August and was 4.6% year-over-year. The economic activity index, which is a considered indicator of economic conditions, maintained its growth trajectory and registered a 1.7% increase in July compared to the same month last year. Most importantly, economic conditions in our market are expected to be supported by the development and deployment of disaster relief projects during the upcoming years, which will help mitigate a potential slowdown in the U.S. economic activity.
Public data shows that the pace of disaster relief funding spending continues to improve, reaching $1.3 billion during the first eight months of 2022. This positive trend is critical for economic development in the island going forward. It's important for forward lending activity in that sector. Our strategic objective of leveraging an in-market acquisition to improve our breadth of scale in the markets we operate is paying off and has allowed us to continue investing in the franchise who are delivering shareholder value. We have been able to timely invest in digital business-enabling technologies that have allowed us to process loans, capture deposits through self-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 activities continue to improve.
Users are up 6.7% year-over-year, and we continue to capture over 4% of deposit transactions through digital and self-service channels. Additional branch rationalization initiatives have been identified and will be executed during the fourth quarter as we continue to optimize our existing physical channels, sales, and distribution capabilities. All these initiatives, coupled with our expense management discipline, contribute to support, you know, 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. 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. Pre-tax provision, however, grew $3.6 million and now stands at a hundred and twenty-two point four 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 and are 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 a portfolio since December, the consumer portfolios have grown $332 million. 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 allowance determination and the provision, we continue to weigh two scenarios that we have disclosed in the past, a baseline scenario and a downside economic scenario to reflect what could be an economic impact. In terms of the hurricane, the financial impact Aurelio mentioned was mostly 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. The hurricane also resulted in about $600,000 reduction in fee income and $400,000 increase in expenses for the quarter. Looking at that interest income, it increased by $11.7 million from $186 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.
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 balances. 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, you know, it's part of the new loan originations at higher rates. Interest expense on interest-bearing deposits grew $2.4 million, 10 basis points increase. Overall, however, interest expense grew by the same amount, since during the quarter, we had a $200 million FHLB advance that matured and was repaid.
That reduction offset the increasing cost we had on the junior subordinated debentures that are floating rate notes. That offset one with the other. The average cost of total interest-bearing liabilities grew ten basis points in the quarter, also ten basis points, which is from 43 basis points last quarter to 53 basis points this quarter. Margin increased 31 basis points from 4%- 4.31%. The improvement in the margin, it's a combination of the impact of the rates and a little bit of a change in mix on the assets as cash balances that are lower yielding have decreased. In terms of non-interest income, it came down $1.2 million during the quarter.
$600,000 of that is related to mortgage banking, resulting from the lower gains on mortgage sales in the secondary market. The level of originations of conforming mortgages that are sold in the market have come down. 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 waive fees we provided to customers on ATM and other fee 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 for the quarter were $115.2 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 during 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 about $111.5 million. That would compare to about $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 about $400,000. $300,000 of that, it's related to some donations that were made to nonprofit organizations in communities that were mostly affected by the hurricane. We launched a new brand marketing campaign that added to about $400,000 more than anticipated. The quarter had one extra day in payroll. We had the renewal of the medical plan that came in much higher than we had anticipated before. The electricity cost came in higher than we had.
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 that come in and out, we expect that expenses for the fourth quarter would be at the same range, the $116 million range that we had this quarter. It's the most recent estimate we had on expenses. Looking at efficiency, however, even with the increase in expenses, our efficiency ratio continues to be very low at 48.5%. In part also, of course, driven by revenue increases.
We still estimate that we will be under the 50% efficiency ratio for the end of the year. Asset quality trends, looking at them, continue to be very positive. Non-performing assets decreased by $4.2 million in the quarter, $243 million, as compared to the $147 million we had last quarter. As also Aurelio mentioned, the NPAs are 78 basis points of assets. The reduction on NPAs was generally includes, one point six million decrease in residential mortgage non-performing, $2.5 million in commercial, in basically pay downs and payoff of some non-performing, $3 million decrease in OREO.
The only portfolios that went up, it's the consumer side that went up $2.5 million, and obviously there is a size component associated with that. As you see on the inflow side, that went up $3.9 million, which was basically the same thing. Most of it was related on the consumer portfolio. Early delinquency in the quarter, which is defined as 30-89 days, did go up by $20 million, but there was a significant impact on the portfolio from the payment streams that were affected on the second half of September. Large chunk of the cycles on some of the auto portfolios mature on the second half of the month of each month. That affected the numbers.
We have seen some improvements on that coming down now into October. We deem that as being temporary, most of it. Net charge-off 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 allowance, 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 2.28 as of the end of the quarter, compared to 2.25 as of the end of the second quarter. On the capital front, Aurelio mentioned we continue with the execution of our capital plan. We have repurchased 15.9 million shares this year for $225 million, which has been basically offset by the $232 million in earnings we've had year to date. Capital reductions have mostly come from repurchases and the $66 million or so of dividends we've paid over the first nine months. Capital ratios continue to be very strong.
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%, both very healthy ranges. Tangible book value per share decreased from $7.80 to $6.45 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 5% at the end of the quarter.
As we have mentioned in the past, we believe this is gonna reverse over time since we have the intent and also based on the liquidity, we have the ability to hold securities through maturity. As you probably have seen on the numbers, securities portfolio has not been growing. We have monthly repayments somewhere between $40 million and $50 million, which lower the portfolio and obviously lower the impact from OCI adjustments. If we were to exclude the OCI on a non-GAAP basis, obviously tangible 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 star one on your telephone keypad. If for any reason you'd like to remove that question, you may press star two. As a reminder, if you are 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, your line is now open.
Hi, good morning, everyone.
Good morning.
Good morning, Timur.
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? You know, 68% loan-to-deposit ratio, 33%+ securities to assets. You guys have plenty of on-balance sheet liquidity. Should we expect you guys to continue using some of that liquidity to fund future loan growth? There's the expectation here that loan growth going forward is gonna be more or less funded by deposits.
Yeah. You know, as Orlando mentioned, you know, securities portfolio, you know, it's bringing about $40 million-$50 million liquidity for months. You know, we expect, you know, to grow that, you know, at least move that, use that liquidity to continue growing the loan portfolio. That's the plan. Net-net, you know, we expect commercial to continue to grow, consumer to continue to grow and you know, a slight reduction, if you look at the last quarter on the resi side, the contraction trends.
Have also been reduced because obviously the repayment, prepayment on the portfolio and refinancing activity is lower.
Okay. Then I guess on the deposit side, just given some of the broader pressures and, you know, you made comment that some of the deposits are tapering off in Puerto Rico and customers are going into either treasuries or other products. Is the expectation there that we should still continue seeing some modest deposit reductions until there's a broader point of stability? Or do you think we're getting closer to a bottom here on balance sheet stability size, at least as far as deposits go?
Yeah. To be honest, it's the most difficult, you know, trend to predict. You know, when you look at it from the average balance perspective, you know, we're still above pre-pandemic, and that's remained, you know, and there's still inflow of funds coming in. On the other hand, you know, when you look at large depositors, yes, we're competing with non-banks. I think, you know, we expect, you know, 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. We're trying to mitigate and offset, you know, some of that, you know, average balance contraction that should happen, you know, with bringing, you know, some of additional market share into it.
I think the net-net, you know, we should expect some additional contraction.
Okay. Maybe just looking at the Puerto Rican consumer, would love to get your thoughts around just more broadly, the Puerto Rican consumer and then just the amount of consumer growth that you continue to experience. You know, what's your appetite for consumer growth in 2023 as we're heading into this period of more broad kind of economic uncertainty here on the mainland at least? 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, you know, the behavior of the portfolio from a delinquency level across the consumer sector, I would say personal loans and auto are still, you know, below pre-pandemic levels. Credit card, it's levels. That's what we're seeing. You know, the consumer was not using during 2021, you know, up to the second quarter, the consumer was not necessarily using, you know, the additional liquidity on the lending side. Obviously, the auto lending continues very strong and, you know, we link that to the reduction in unemployment. If people need a car in Puerto Rico, there's no public transportation, and if you're working, you need a car. So we expect sales to continue healthy. You know, the year is turning out 110,000 units-120,000 units on new vehicles.
We expect that trend to continue, not necessarily increase. You know, at that level, you know, we have today about a 21% market share, and we continue to increase share. You know, why not 25? Why not 30? You know, it doesn't happen overnight, but we expect to continue our, you know, consistent growth over the last three years in that segment. On the consumer lending side, you know, we probably are, you know, more conservative, you know, in terms of the maximum loan amount, and our credit parameter. We have been able to achieve, you know, some growth in that sector over the last most recent quarters. The consumer is back, you know, taking consumer loans. The credit card, you know, activity continues healthy.
It's not, you know, significant growth, but some, you know, positive trends in the portfolio. You know, the delinquencies, you know, the models also include our forecasting, you know, some of the macro trends already embedded in the model. Yes, you know, we could expect some slight increase in delinquencies, but we still believe are gonna remain, you know, below pre-pandemic levels because of, you know, the health of the consumer here, you know, when compared to what was the economy before. Today's economy, minimum salaries are better. There's more activity. There's, you know, less unemployment. All that should result in, you know, having a better quality consumer portfolio than the prior cycle under economic stress.
Great. Thank you for the color. I'll step back.
Thank you for your 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.
Uh, let me see if-
I-
Let me see what happens right here.
I don't have it here, Alex, I'm sorry.
Yeah.
Uh, I, I-
Okay. I guess.
Would have to get that.
Okay. Let me make sure we follow around.
We'll make sure we follow up with you on the queue, if not, so that you can have that information.
Okay. I mean, when I look at the unfunded construction loan commitments, are those? Would you say that those are somehow associated with the hurricane relief, some of the projects, you know, part of some of the government programs? Or is this separate building activity? Just kind of, you know, where are we in terms of, you know, some of these projects? I know that there's, you know, money that's waiting to be dispersed on the island. Some of it's been obligated, some of it hasn't. You know, just when you think about the construction flows over the next couple quarters, you know, is that growing unfunded commitment indicative that maybe some of these construction projects are picking up right now?
Yeah. The majority is not related to government activity. It is related to, you know, private commercial, you know, residential construction, some of it. I think it's pretty good, you know, distributed. We have some hotels that are. Actually, there's one hotel that is, you know, it was pending, you know, completion after Hurricane Maria. Finally, they got settled with insurance. There's another hotel that was purchased by new investors, and there's money coming in to improve, modernize the facilities. It's related. There's some commercial activity, there's warehouse. It's pretty well distributed in different, you know, 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.
You know, some of it is there, too. But, you know, I will say, but, you know, we'll disclose the specific number when we disclose it to you.
Okay. Then one of your competitors a couple of days ago alluded to just excess liquidity on customer balance sheets, both commercial and consumer, as sort of a hindrance to loan growth right now. Just, you know, customers are very healthy and don't need loans. Would you agree with that sentiment? Are you seeing similar, you know, I guess, resistance or lack of appetite for some of these loans for loan growth to continue?
You know, I have to say, you know, we're coming into the quarter with what I consider a healthy pipeline. Some of it were, you know, the last two weeks of the quarter were disrupted and some of the closings didn't happen. You know, now coming into the fourth quarter, they're happening. Because of the disruption of the storm, you know, 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, Aurelio Alemán. Thanks. As you think about the capital return strategy, and just given the run-up in the stock price recently, which is obviously great, but you know, how do you think about the buyback, you know, 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. You know, we don't do ASR. We haven't done ASRs. We have executed on a quarter-by-quarter basis, taking into consideration, you know, internal matters and external matters, market conditions. As we move on into this path, obviously, the better we can execute, you know, the better return we have. You know, we assess that every quarter. We did $50 million the first quarter, $100 million the second quarter, $75 million this past quarter, and we're going through that process right away. There is still, you know, as you well know, you know, some $175 million approved to execute.
Obviously, you know, market conditions are important, how we use the capital. You know, we try to be prudent and take into consideration both the macro and, you know, not only the trading level of the shares. You know, we're going through that exercise right now, but, you know, we have all the optionalities in our hands.
Great. Now, when you think about the trading level of the shares, are you thinking about it relative to stated tangible book value or relative to the tangible book value excluding the AOCI?
We tend to look at our, as compared to excluding the AOCI.
Okay, great. Just final question from me. Just, I think you mentioned in the press release that cash and liquid is 18.6%, which is obviously well lower than the total securities portfolio. We can see what actual cash is on the balance sheet. Can you just talk a little bit about the liquidity position that's, I guess, not straight cash, and not necessarily long term, just so we can make sure that, or just get a sense for your ability to use some of that for funding balance sheet growth with, or loan growth, I guess, over the next several quarters?
That number would makes it up. It's the cash that we have on hand in the institution for operation, plus the cash that we have at the Fed, plus the securities at fair value that are available to be pledged if we wanted to pledge them. That's what's in there. That combination of the components as a percentage of the total balance sheet total assets. On top of that, obviously we do have the Federal Home Loan Bank lines, which is the second major wholesale kind of funding that we use that is available. We have deposited in there about $1 billion or slightly under that that we could use for funding.
That's in there. And obviously, you know that there are always other sources that can be tapped in, but we don't see that being a need now. Those are the functions, what's included on that liquidity component.
Okay.
The Federal Home Loan Bank 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. I think you said earlier that there's $40 million-$50 million of cash flows from the securities portfolio on a monthly basis. Is that correct?
That is correct.
Okay
repayment of the portfolio, it's been averaging in that range, $40 million-$50 million.
Okay, perfect. All right. Thanks for taking my questions.
Remember that duration on our portfolio. It's below four, so it's not a long term portfolio.
Okay. That's helpful. Thank you.
Thank you, Alex. The next question comes from the line of Kelly Motta with KBW. Kelly, your line is now open.
Hi. Good morning. Thank you so much for the question.
Good morning.
Good morning, Kelly.
I thought maybe I would circle back again, I 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 base and beta.
Well, government 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 happening 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 betas are less than 10%. The high yielding kind of accounts, betas could be somewhere between 30%-40%. It all depends on the combination. Aurelio mentioned we've seen some movement into Treasuries. That is part of what's happening out there.
The yields are pretty high there, so we don't necessarily compete in there. 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. The fourth quarter, we'll see that, some more acceleration of the betas.
Got it. 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 floors right now, but any considerations for the repricing of the loan book going forward, given where we are in the rate cycle?
Yeah. We have about 58% of the commercial portfolio that floats. It's about 15% prime, and the other either LIBOR or SOFR. It's mostly three-month LIBOR or SOFR, but there is also one-month and some, you know, a little bit here and there on Treasuries. What you have seen in the numbers, if you take September rate hike, obviously prime loans got repriced in September, but it was only a part of the month impact. The most recent repricing components associated with LIBOR and SOFR, especially in the three months, we did not see that repricing until October. Most of those cases do reprice at the beginning of each quarter.
Obviously any future repricing, I mean, rate hikes, like for example, as you know, the expected rate hike for November, we're expecting immediate impact on prime-based loans. LIBOR, one-month LIBOR or one-month SOFR-based loans, we'll see some impact in the quarter. The three months will probably won't see the impact until the following quarter. That's a combination. No, 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 SOFR versus the prime.
Got it. I'll check that out and I'll step back now. Thank you.
Okay.
Thank you, Kelly. We have no further questions waiting at this time. As a final reminder, to ask a question, it is star one. We have a follow-up from Alex Twerdahl with Piper Sandler. Alex, your line is now open.
Yeah. Just one follow-up question on expenses. I think in the slide deck it says that the efficiency ratio should trend towards 50%, I think, in the fourth quarter. You alluded to the efficiency ratio being a little bit below 50% in the fourth quarter. 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?
Yeah, I wouldn't say full 23%, but clearly, Alex, with this revenue components, and how the net interest income has grown because of the repricing, we don't foresee expenses growing that fast to go to. At one point in time, you remember we had spoken about being on a 52% expectation based on current numbers. But we don't see that in the near term based on the expense we are forecasting and the revenue growth. That combination would keep us in that 50% level in the next two or three quarters.
Just for clarifying purpose, Alex, it should be below 50 through the year, through this year.
Yeah, this year, yes. Definitely.
Yeah. Yeah.
Okay. The expense, you know, obviously there's inflation and other things you can't predict heading into next year. 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. All those things are affecting some of the expense components.
Okay.
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. Then just to kind of tie it all together on the NIM, you know, 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. There's clearly a lot of momentum behind or I guess interest income and then expenses have been moving higher. If you tie it all together, the NIM, we should have at least a couple more quarters of NIM expansion, I would think, you know, as we head into the middle of 2023. I'm just curious, you know, how you're thinking about it and if you have any other color that you wanna project upon us.
No, I agree with your statement. However, you know, 31 basis points pick up was a lot. We won't see that same level of pick up on margin. We are expecting some margin expansion definitely with the expectation on rates.
Okay. Thank you.
Just to clarify one more thing, Alex, the 42% does include some one-month LIBOR or one-month SOFR loans that they reprice before the quarter. But the other ones, the three-month are the ones that would require a reprice at the beginning of each quarter.
Okay. Thank you for taking my follow-ups.
Thank you.
Thank you, Alex Twerdahl. 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 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 have you said on the hurricane?
You pointed out.
Oh, our fees. You said the fees?
On how our fees hit. Yeah.
Okay. Yeah. Oh, yeah, definitely. We obviously with the wave component that obviously it's not happening now, and also it's transaction-related. You know, business has come back to normal, we see higher transactions. We definitely will see that pick up on the fourth quarter.
Got it. Thanks for taking the follow-up.
Thank you.
Thank you.
Thank you, Kelly. We have no further questions waiting at this time. 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.