Hello and welcome to today's First BanCorp 2Q 2022 financial results. My name is Elliot, and I'll be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing Star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. I'd now like to turn the call over to Ramón Rodríguez, Corporate Strategy and Investor Relations Officer. The floor is yours. Please go ahead.
Thank you, Elliot. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the second quarter of 2022. Joining you today from First BanCorp are Aurelio 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.
Thank you, Ramón, and good morning, everyone, and thanks for joining us today for the earnings call. Let's please move to slide four to discuss the highlights of the quarter. As we reported, you know, we continued to perform exceptionally well during the second quarter. We earned $74.7 million in net income, or $0.38 per share, and delivered our fifth consecutive increase in adjusted pre-tax pre-provision income by reaching a record of $118.8 million during the quarter. This result were achieved under a quite challenging global economic backdrop and definitely demonstrate our capacity to execute and responsibly grow regardless of the operating environment. I would like to thank all our teams in Puerto Rico, Florida, and the USVI for the commitment and execution during the first half of the year.
Net interest income increased 5.7% linked quarter to $196.2 million, and the margin expanded by 21 basis points to 4.02%. We recorded a provision for credit losses of $10 million, primarily reflecting an overall increase in the loan portfolio and increased uncertainty that is reflected in the forecast of certain macroeconomic variables and the impact on quantitative reserve. Asset quality continued to improve during the quarter, with non-performing assets decreasing by $9 million, now to $147 million, driven by reductions in non-accrual residential mortgage loans and paydowns of non-accrual commercial loans. The ratio of the ACL for loans and finance leases to loans held for investment slightly increased to 2.25% during the quarter.
On the capital front, we continue to execute on our capital deployment plan and repurchase approximately 7 million shares of common stock for a total purchase price of $100 million. This was done under the previously announced $350 million stock repurchase program. We ended the second quarter with a 17.2% Common Equity Tier 1, quite strong, leaving, you know, room to execute on our established capital plan over the next quarters, obviously, you know, taking into consideration any change in market conditions. Let's move to slide five to review deposits and loan performance. We continued to register loan growth across our targeted business segment during the quarter. These are consumer and commercial.
Loan portfolio balances other than PPP loans grew by $144 million when compared to first quarter, driven by increases of $131 million in consumer loans and $59 million in construction and commercial loans, offset by a decrease of $45 million in residential mortgages. Total loan originations for the quarter were strong, which excluding credit card utilization activities, reached $1.4 billion , an increase of $281 million when compared to the first quarter. This is primarily attributed to higher commercial and consumer loan originations. I have to say that now, quarterly loan origination activity is above pre-pandemic levels, and we expect that this continue to be sustained under the current market conditions, which should result in additional loan growth to the second half of the year.
Core deposits, net of government and broker, decreased by $260 million when compared to the first quarter. On the other hand, government deposits increased $176 million. Deposit market growth in Puerto Rico, I will say, decelerated during the first half of the year after, you know, 2020 and 2021 significant increases. However, when we look at average deposit balance, they're still 31% above pre-pandemic levels. Yeah, let's move to slide five to some additional, you know, outlook.
Well, definitely when we look at, you know, there's uncertainty in the global market conditions when we consider all, you know, geopolitical tensions, inflation, what's gonna happen with future path of interest rates. And obviously that impact any operating backdrop, notwithstanding our enhanced capital position and liquidity profile, coupled with, I have to say, strong economic tailwinds in the main market in Puerto Rico, continue to support our growth thesis. In Puerto Rico, labor market improve again, with labor force above pre-pandemic levels and the unemployment rate reaching a multi-decade low of 6.2% in May. The economic activity index, which is the indicator that is highly correlated to GNP, has continued to sustain an upward trend and already surpassed pre-pandemic levels.
The resolution of the government debt process definitely will allow government officials to shift their efforts toward facilitating the deployment of the $50 billion still obligated disaster and pandemic relief funds still pending to be dispersed. The adequate use of these funds will be key to resolve the long-standing structural issues and will support economy going forward. Our strategic focus remains centered on providing the best omnichannel experience to our clients. During the quarter, we continue our investment in our digital tools and services. Digital engagement across all our platforms continue to improve. Retail banking users grew by 3.8% linked quarter, and mobile banking business digital banking users increased by 50% since the application was launched in April. We continue to capture over 40% of all deposit transactions to digital and self-service channels.
In addition, this quarter, we're in a partnership with an established fintech firm to provide a fully digital commercial lending platform for small business loans. We now can process consumer mortgages, small business loan applications to self-service digital platforms. All this digital investment have allowed us to expand our distribution reach beyond physical infrastructure, while still optimizing our existing branch network, which will include the execution of two additional branch consolidation opportunities during the second half of 2022. In summary, we're very pleased. We continue to make great strides advancing the franchise and achieving our strategic objectives. Our fortress balance sheet, complemented by positive tailwinds in our main market, should contribute to mitigate the rising market challenges across the globe and should allow us to continue supporting our clients and delivering value to shareholders.
You know, with that, I would like to turn the call over to Orlando to provide more details on our result. Thanks to all.
Good morning, everyone. As Aurelio mentioned, results for the quarter were strong. We reached $74.7 million, $0.38 a share. Slightly down from the $82.6 million we achieved last quarter. There were two major components in the quarter. First, the impact of the rising market interest rates on the loan growth led to an increase of $10.6 million in net interest income. We also had a provision for the quarter. The provision for credit losses this quarter was an expense of $10 million, which compares with a net benefit of $13.8 million.
The provision reflects obvious increase on the portfolio as well as the increased uncertainty that is included as part of the forecasted economic macro variables that we use for the calculation of reserves and provisioning. Charge-offs in the quarter were better than last quarter, and that helped on the other hand. The net interest income totaled $196 million in the quarter, which is an increase of $10.6 million I just mentioned, as compared to $185 million we had last quarter. Margin expanded 19 basis points from 3.81% to 4%, 5% growth in the quarter.
If we look at components, loan repricing in the quarter represent approximately $3.5 million of the increase in interest income for the quarter. The increase in the portfolio balances, if we exclude the PPP reduction, represent an additional $1.9 million in interest income. Reduction in PPP decreased interest income by $1.2 million in the quarter. The investment securities and cash based on repricing and investments at higher rates improved by $5.3 million, interest income improved by $5.3 million, you know, leading to an increase in yields obviously, and a reduced premium amortization as prepayments have come down on the portfolio. This quarter also had one more day than last quarter.
That adds about $1.5 million in net interest income for the quarter. As I mentioned, the overall yield on earning assets improved. Yield on earning assets went from 4.06% last quarter to 4.25% in this second quarter. While the cost of interest-bearing liabilities decreased one basis point from 44 basis points to 43 basis points.
The deposit cost for the quarter was fairly consistent, but we are expecting some increases in the third quarter, tied to the Fed adjustments, rate of interest rate adjustments that happened in June and the ones that are expected to happen in July, once the Fed meets. However, overall, we do expect to achieve some additional margin improvements in the third and fourth quarter of the year. Looking at net interest income, it shows a reduction in the second quarter, mainly to resolve the collection of annual contingent commissions that happened in the first quarter of the year.
However, the other large component is that we have seen decreases in the mortgage banking income as the level of originations of conforming mortgages that are being sold in the market have come down, driven by obviously the higher conforming mortgage interest rates, has led to a shift on originations. On the expense side, non-interest expenses for the quarter were $108.3 million, which compares with $106.7 million in the first quarter. Expense levels continue to benefit from the gains that are being achieved on the OREO disposition. This quarter, we had a $1.5 million gain on OREO properties, net of operating expenses of OREOs.
As we have mentioned in prior quarters, we expect that eventually this will revert to having a net expense from handling repossessed properties rather than having these gains. Still we have some properties on the OREO portfolio that were moved at lower values than what they're being sold today, so that there is some still positive impact expected in the next quarter. During that quarter, in this second quarter, we had $1.7 million in expense reductions associated with resolution of matters that had been previously accrued, which improved the expense base. Looking at some of the other large components, we saw employee compensation and benefit increase $1.7 million this quarter.
We expect some additional increases in the third quarter as we continue to fill vacant positions and execute the salary merit increases that we have planned for the third quarter of the year. In reality, we're still running at a higher level of vacancies, and normally it's taking longer than we had anticipated in filling those positions. We continue to pursue that. The other component is that we had professional service fees increases by $600,000 in the quarter. Definitely, as we mentioned in the past, we expect some additional increases in both technology costs and professional fees as we continue to execute and implement some ongoing technology projects that are on the way.
We have discussed this, as we have discussed in the past and looking at expense trends. If we exclude OREO and the other two items I mentioned on expense adjustments for the second quarter, expenses would have been about $111.5 million in the quarter. Adding projected compensation and technology costs, expenses for the third quarter, we expect them, excluding OREO, to be around $113 million range. Obviously, any benefit on OREO would offset some of that. For the fourth quarter, we see expenses excluding the OREOs in a range of $114-$115, slightly lower than we had originally mentioned to you on the last call. You know, we continue to pursue options on improving the cost base.
As you saw, we have a couple of branches that are on their way. Benefit of those is not large, but it's mostly gonna start happening next year, not this year. On efficiency ratio for the quarter was extremely good at 47.7%, which is lower than last quarter, and a lot has to do with improvement in the revenue components. If we look at the normalized expense levels I just mentioned and the possible improvements in revenue components, we believe by the end of the year, we'll be closer to the 50% as opposed to the 52% guidance target we had given last quarter based on the combination of the expense base and the revenue components. In terms of asset quality, trends continue to be positive.
Non-performing assets decreased $9 million in the quarter to $147 million, compared to $156 million in the first quarter. NPA now stand at 76 basis points of assets. We had reductions in OREOs from sales. We have reductions in commercial and residential from collections, so it's been pretty consistent. Inflows to non-performing loans decreased in the quarter by $5.2 million. Last quarter we had $21.6 million in inflows. This quarter was only $16.4 million on the overall portfolio.
Early delinquency, which is defined as the 30-89 days past due, also decreased by, in the quarter, they were lower by $8.2 million, primarily for commercial relationships that ended up being renewed, that matured last quarter and were renewed this quarter. They were all, you know, consistently current in terms of payment. Net charge-offs, as I mentioned for the quarter, were lower. They stood at 21 basis points. That includes a $1.2 million in commercial loan recoveries, compared to 24 basis points we had in the first quarter.
The allowance for credit losses at the end of the second quarter was $264 million. It's $4 million higher than last quarter. The allowance on just loans is $252 million. It's up $7 million, which you know reflects basically the increase in portfolio balances as well as the additional uncertainty that has been reflected as part of the forecasted economic variables that I mentioned before. You know, large component was on the consumer portfolio, where we had a $131 million increase, as Aurelio mentioned, and obviously sensitive, very sensitive to any changes on unemployment rates that it's part of the macroeconomic variables. The ratio of the allowance was 2.25%, which compares to 2.21% last quarter.
On the capital front, Aurelio mentioned that we have continued with the execution of the capital plan. Capital ratios continue to be very strong. As you can see on the chart, the Tier 1 common as an example only decreased five basis points from 17.7% last quarter to 17.2%. The impact on the other capital ratios was similar. Tangible book value continued to be affected by the OCI adjustment. It came down from $8.63 to $7.80. The $176 million adjustments we had on the OCI this quarter impacted most of it combined with the repurchase obviously, and the dividends. OCI now represents approximately just over $3 a share on tangible book value.
As we have mentioned, we believe this impact will reverse over time as we have the liquidity and we have the ability to hold the securities until maturity. With that, I would like to open the call for questions.
Thank you. For our Q&A, if you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Brett Rabatin from Hovde Group. Your line is open. Please go ahead.
Hey, good morning, everyone.
Morning. Morning, Brett. How are you?
Wanted to first just ask about the commercial strength and originations and maybe whatever additional color you could provide on the Fintech partnership and what that entails and what that might mean for loan growth going forward.
Okay. I'll take it separately. You know, I think over the year we've been discussing about, you know, the pipeline being building. You know, there's a lot happening, you know, in the island in terms of even M&A activity, you know, companies buying other companies, new investors coming in, some private deals, some privatization deals, public-private partnerships, some hotels, you know, moving from one hand to the other. You know, deal flow, it's very active and we continue to see, you know, new capital coming in. I think that obviously for me is the primary source of it. Secondly, you know, commercial activity continues, construction activity continues.
You know, I think if we look at the first five months of the year, some of the funds deployed were close to $900 million, if you look at the public data. You know, we believe this is in five months, so that should reach over $2 billion if we look at the remainder of the year. That is contributing. We continue to see requests for line of credit supporting the contractors, obviously. Everywhere in the world, you know, things are delayed because of supply chain. You know, materials don't necessarily came on time. Timing is always a consideration. We feel, you know, in our main market in the U.S., which is Florida, you know, the pipeline flows also very strong. Florida continue to see inflows.
You know, look at the public demographics, you know, demand for office, which is not happening anywhere else, it's happening in Florida. Obviously, you know, companies moving their headquarters or residents looking for homes. You know, we think it's stable. We, you know, we're not talking about double-digit growth. We're talking about prudent growth. That's what we continue to support. Remember last year we also, you know, during the acquisition, we also achieved some, you know, selective, you know, renewal of the portfolio in certain cases just to make sure it fits our risk profile targets. That obviously that is past, that will happen in 2021, which definitely impacted, you know, our volumes in that.
We feel, you know, optimistic about what we have at hand today on the commercial side. Secondly, we've been working with this Fintech for some time and, you know, we just launched the small business lending, which is gonna be supported by the clients, very similar platform that we use for PPP loans, which was, you know, broadly used by clients, supported by, you know, a lot of good feedback from clients in terms of the self-service capabilities. Definitely that will increase our capacity to penetrate the small, you know, lending small business segment, which, you know, we're pretty good in the metro area based on the branch, you know, concentration. We believe we have opportunities in the other regions of the island.
That's rolling out here and it's rolling out in the USVI.
Okay.
That answer the question?
That's great.
Yeah.
Yeah, that's helpful. Wanted to make sure I understood the guidance. I think I heard $113 million and $114 million, $215 million for the fourth quarter in expenses, 3Q, 4Q. The efficiency ratio maybe to tick back up towards 50%, going forward or maybe for the back half of the year. Given the additional NIM expansion, it would seem like it would stay under 50%. Is there anything I'm missing with the balance sheet or the income that, you know, makes that number move up a little bit?
No, you're right. The NIM expansion with the component of the expenses that are expected should take us somewhere close to the 50%, maybe just under the 50%. Just to clarify one thing, the only component on that guidance, it's the volatility that we have seen on the OREO results, which has been positive obviously, and we like it. That one I'm trying to exclude because of in the expectation at some point was not there. We still see some opportunities in the third quarter to offset some of those costs. Maybe not at the level of gains that we saw in the second quarter, but that would offset some expenses.
Clearly, you're correct that with the expectation of NIM expansion and those expense levels, we feel that we'll be just under the 50% or very close to it.
Okay. Maybe just one last one, for me. You know, I like the chart in the deck with the EAI index, and it's something I've been tracking, and it's, you know, it's a little higher than it was pre-pandemic. You know, I'm curious if you guys feel like the economy is at this point better than pre-pandemic. You know, what's your sense of the funds flowing to the island kind of continuing to improve the local market in Puerto Rico?
You know, I think there are sectors that are better than pre-pandemic. When you look at the construction sector and those all benefit from that supply chain and suppliers and engineers and everything that is related to construction is more advanced. Obviously, the employment market is stronger when you look at the unemployment, but also when you look at the workforce, the numbers that we have reached in terms of workforce in the island. Obviously, when I say strong, everybody's hiring still. Obviously, the impact of inflation in oil and we still see excess liquidity compared to average balances, which they are still over 30% from pre-pandemic.
There's some excess liquidity there to support, that should support to mitigate inflation. You know, today conditions, I have to say, look better than where we were in pre-pandemic. You know, how long they're gonna remain or not is really the uncertainty. How hard is the impact of inflation or not continues to be the uncertainty. Today conditions, when we look at, you know, balances and even asset quality, even the overall metrics that we're showing today are better than pre-pandemic, yeah.
Okay. Great. Appreciate all the color.
Our next question comes from Timur Braziler from Wells Fargo. Your line is open.
Hi. Good morning, gentlemen.
Hi. Good morning.
Good morning, Timur.
Maybe just starting on the funding side. Can you talk through the expectation for funding second half loan growth? Should we see additional usage of the bond books and cash to fund that growth? Or is the expectation that deposit growth resumes here in the back end of the year?
Well, it's a combination. We have a high level of investment portfolio at this point. There is a normal cash flow component coming out of that portfolio that we believe it's gonna be offsetting any cash needs for the lending side. As Aurelio mentioned, we believe that in the second half the deposit growth it's not gonna be like we saw in 2021 or 2020. We're seeing some reductions already and some movement to other sources. That's part of what's reflected in the quarter. Having need for wholesale funding would be very limited at this point.
We don't foresee that based on current liquidity levels and the existing liquidity that we get every month from the investment portfolio. It's a function of how much ends up in investment versus loans at the end.
Okay. It looks like Florida government deposits had a nice quarter. I guess what's the outlook there? Is that the effort there to kind of self-fund Florida production on the loan side? As you expect deposit betas to increase in the back of the year, I'm just wondering what the driver of that expectation is, because the results so far seem very strong, and it doesn't seem like your competitors are really pushing the envelope as far as deposit costs yet.
Well, first, let's clarify that the government deposit growth was really in Puerto Rico and USVI, not in Florida. Just to make sure you saw that's where we have the large government business. Florida, we have small government business. You know, we see that as a stable source that, you know, we remember that what we have mentioned in the past, there are some funds deposited here that are the typical operating funds from municipalities, and so that we believe are gonna be stable funding.
We do have some funding from some of the reconstruction activity that happens with the Energy Authority and so, that those would be, you know, sort of more volatile depending on what kind of the status of the different projects they have on their way. Government funding, it's gonna be there, it's stable. I think that the betas that I mentioned under deposit is that, you know, the market came down dramatically like it happened in the States that after seeing the 75 basis points, you know, increase last month and expecting another one. You know, we are seeing the market options on Treasuries and other options competing there. We do compete also with credit unions.
We foresee that some of that will put some pressure on interest rates. There is a customer retention component that we have to be conscious of and customer relationships that we have. That's why we see the higher the Fed moves, the more reaction we're just gonna start seeing from customers. We feel it's reasonable to assume that betas will start moving in the market based on what's happened over the last month or so and what's expected to happen now at the end of this month.
Okay. Thank you for that clarification. Then just I guess lastly for me on credit, maybe just talk through a little bit about the tick-up in auto delinquencies on the early stage. Is that at all indicative of us kind of reaching the bottom here for how good credit has been? As you look at, you know, your allowance ratio, I think you had, you know, guided well that we're gonna see a positive provision here in the second quarter. We saw a positive provision here in the second quarter. As we look at the allowance ratio here, assuming the environment doesn't change, can we expect further reductions going forward, or is this a level that you'd like to maintain?
The first question you had, we feel we're at a very low level of delinquencies in the market. Have we reached the bottom? Maybe we have. You know, the market has been very stable for a while. We've seen, you know, keep in mind that some of the dollar increase also on the delinquency side, it's related to the portfolio size increase, not necessarily percentage-wise. But you know, the provisioning and the reserves on the consumer side reflect the growth, as I mentioned, but also reflects some expectations on deterioration that could happen on the unemployment rates and a couple of other key macro indicators for the consumer portfolios.
Assuming that nothing happened, yeah, eventually, maybe we don't need as much in reserves. But we cannot assume that there won't be any impact related to the inflation component on the market. That's why we you know continue to include environmental components and qualitative components, as well as looking at some of the more stress economic scenarios as part of the calculation of our reserves to make sure that we're reflecting any trends that the market might show going forward.
Great. Thank you for that color.
Our next question comes from Alex Twerdahl from Piper Sandler. Your line is open.
Hey, good morning, guys.
Good morning, Alex.
I'm just wondering, you know, it's made a lot of sense. Mortgage banking has been a pretty big driver in the fee income, and it's made a lot of sense to sell all the production with rates being where they were over the last couple of years. Now with rates, you know, kind of pushing above 5%, I'm just wondering if the thought process around mortgage changes and if potentially that could go from being a drag on overall balances to maybe even, you know, flat or contributory in the next couple of quarters.
You know, obviously in this quarter, you saw some positive trends on prepayments also in the portfolio. When we look at the activity being originated, the reality, you know, yes, when the conforming rates are somewhat, you know, paired to the portfolio rates.
That tends to happen, it's happening in the recent months. I would not say, you know, we're in line to achieve growth in the mortgage portfolio, but I think the contraction that we have experienced on the portfolio should be reduced. I'm not sure when is the point that we're gonna reach, you know, full coverage of the full prepayment, repayment and prepayment on the portfolio. We can get back to you on that later.
Keep in mind, Alex, that the overall originations, the market originations of mortgages have come down. It's a shift in the mix of what's being originated, but it's also a lower level of originations. We don't have the level of refinancings we saw over the last couple of years with rates being so low. That's part of it in terms of not only the mix, but the overall level of originations in the market.
Okay, thanks. Just to be clear, the tick-up in the ACL and the consumer portfolio, that's not being driven by anything you're specifically seeing. That's just trying to get ahead of some of the concerns in the market and maybe putting a little bit more away in an otherwise good quarter. Is that the right way to think about that?
Yeah, if you look at the uptake, it's basically two components. The reserve went up by about $6 million related on the consumer side related to growth. It went up about $3 million related to macroeconomic assumptions. Other than that, you know, it's the normal movement when depending on what gets repaid and what comes in. Clearly we haven't seen anything other than the projected macroeconomics that are relevant in the portfolio. You know, any changes in projections of unemployment on the consumer side that moves the needle on the reserves.
Okay. Then just a final question from me. I think, Aurelio, you alluded to a projection of around $2 billion of federal money by the end of the year, going down to the island. Can you help us sort of connect the dots on sort of how that will actually impact loan growth or how it could potentially impact loan growth at FirstBank?
You know, difficult correlation, but it's just economic activity not only support our loan growth, it support the economy itself. You know, as I said, in eight months, I think the right number, the number that is public, in five months, they have done $160 million of disbursements. The goal is to reach $2 billion, which we think is gonna happen. You know, it's just additional support in the economy overall. Difficult to say how much that translated to a specific loan numbers. You know, for us, the expectation is that we're gonna achieve growth in the commercial book through the remainder of the year.
Okay, great. Thanks for taking my questions.
Thank you, Alex.
Our next question comes from Kelly Motta from KBW. Your line is open. Please go ahead.
Hi, good morning. Thank you so much for the questions.
Hi, Kelly.
Kelly.
Maybe turning to the balance sheet, you had a nice deployment of cash once again this quarter. Just wondering any updated thoughts on what a normalized level of cash looks like at this point in the cycle and where you may be comfortable taking it given the puts and takes of the macro backdrop. Thanks.
The normal levels of cash will be what, on a normalized scenario, would be what we expect, what we'd need only for purpose of reserve requirements. Other than that, you know, we're just leaving money on the table. Clearly there was too much liquidity. The investment options were not there, so we were keeping a much higher level than what we would typically keep. As you mentioned, you saw a reduction from one quarter to the other was significant. We came down from $1.7 to $1.3 or so at the end of this quarter. Probably that number, normalized basis is gonna be more on the $800 million than anything else, considering all components.
It all depends on the options that we have available and what we see in terms of deposit movement or so. Keep in mind that some of the government deposits are collateralized, you know, we don't, you know, we use the cash typically to move any needs. It hasn't been much, we do keep some amounts associated with that as part of our liquidity components.
Got it. It seems like you're still running pretty high there. You mentioned you expect deposit betas to kind of pick up from here. Fair to say that, you know, we're gonna still see some nice NIM expansion from here, but maybe at a slower rate than what we saw in second quarter. Is that a fair assumption as we look ahead?
It is a fair assumption. We would have, you know, assuming whatever it's at the end, but assuming the 75 basis points of Fed, that also would put some. Remember that there was some of the increases in June start reflecting in July. We definitely expect some expansion in there. Even with changes in the-
Got it. Thank you so much. Thank you so much for the questions. I appreciate it.
Okay.
You have a follow-up question from Brett Rabatin. Your line is open. Please go ahead.
Hey, guys. Just wanted to ask on the tax rate, what's a good number going forward, just kinda given the movement in the past few quarters?
I mean, the tax rate reduction is because we've been implementing some strategies to in terms of the shift from taxable to exempt income on the investment side, and we've been doing that. Overall, it's still with the growth in the portfolio. Remember that if the loan portfolio grow, that most of it is gonna be taxable components, so it depends on that number. So the rate that we are now in that 30% overall effective, because remember that in Puerto Rico you're taxed by legal entity, and depends on the shift of earnings between the subsidiaries that we have.
That 32%-33% should be more or less the average that we see for the rest of the year.
Okay. Wanted to follow up on the balance sheet in general. You know, my presumption is we'll see more of what we saw in the second quarter and the third and fourth quarter, where you use liquidity to fund loan growth, and so maybe the balance sheet stays the same or maybe shrinks a little bit depending on the deposits. Is that a fair assumption, or do you think you'll actually grow the balance sheet?
No, that is a fair assumption, Brett. We're seeing it the same way.
Okay. Great. Appreciate the additional color.
Thanks.
Thanks.
This concludes our Q&A session and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.