First BanCorp. New

Good morning. Thank you for attending today's first Bancorp 4Q 2022 Financial Results Conference Call. My name is Alexis, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to the Corporate Strategies and Vestor Relations Officer, Ramon Rodriguez. You may proceed.

Thank you, Alexis. Good morning, everyone, and thank you for joining First Bank Corp'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 Bank Corp are Aurelio Aleman, President and Chief Executive Officer, and Orlando Verges, Executive Vice President and Chief Financial Officer. Before we begin today's calls, it is my responsibility to inform you that this call may involve certain poor-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 fppinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman.

Thanks, Ramon. Good morning to everyone, and thanks for joining our earnings call today. Please turn to page four to discuss the highlights of the quarter. We close out by offering a solid return asset of 158%. We earned 73.2 million, or 40 cents per share in net income, achieved 122.2 million in pre-tax, pre-provision income, and reached an efficiency ratio of 48%, even lower than prior quarter. The margin expanded by six basis points, while on the other hand, net interest income decreased by 2.3 million, primarily related to an increase in the interest expense portion. Stable credit trends continue. supporting asset quality improvement with non-performing asset decreasing by 14.1 million to 129.2, which is a decade low at 69 basis point of total assets. Also good news on 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 the project. Let's move on to the balance sheet page five to discuss loan and deposit trends. On the asset side, total loan and 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 loans, which are almost finished now. Commercial and construction grew by 141 million on 3% linked quarter. Total originations, including renewals and credit card utilization activity, was very healthy at 1.4 billion, up 16% versus the prior quarter. That is our priority, deployed capital to achieve profitable loan growth and capture additional market share across all the lending segments. It's really the core principle of our plan. and we're encouraged by the trends that we see in the main market and also by the pipelines 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. As expected, you know, we continue to see excess liquidity gradually tapering off within household balance sheets. However, Our deposit balances for both retail and commercial customers remain above pre-pandemic levels. We are focused on leveraging our expanded sales, distribution channels, and digital channels to grow our market share on the deposit market and the products and services related to it. That said, you know, liquidity levels remain high with a ratio of cash plus liquid securities to total assets above 19% still. Please let's move to page six to discuss the highlights of the full year. You know, we're really very proud of the work that the team performed during 2022. Over the course, you know, of 2022, the teams were very hard to deliver outstanding results for the franchise. We raised the organic loan growth of $762 million when we excluded PPP loans and the strategic reduction of residential mortgage, earned $305 million in net income, achieved a record pre-tax preparation 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 only channel outreach strategy with the investment in digital self-service platforms to optimize the distribution capabilities and products. When we look at some of the metrics, we continue to improve digital engagement. Retail banking registration were up 4% during the quarter, 17% during the year. Adoption of our newly launched business digital banking applications continue to increase. Our new business digital lending functionality has improved our penetration to the small and medium business and SBA segments. And also, we continue to capture over 40% of all deposits through the service channels. All these milestones have been achieved within the context of our more efficient traditional branch network. During 2022, we also consolidated five additional branches, including two during the first 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 distribution channels, best-in-class talent, all without compromising the operating leverage of the organization. Definitely, this result 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 enables us to continue delivering value to our shareholders while at the same time providing ample 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, you know, global expectations point to an economic slowdown in the U.S. But we remain cautiously optimistic on economic conditions in our main market in Puerto Rico. Labor market performance continues to sustain an upward trend, paid-out employment reaching a decade high in November 22 of 4% year-over-year, and the Economic Activity Index, our monthly indicator that tracks the economy, closes the quarter of 22 above 2021 levels. Even when accounting for the impact of hurricane fuel in September, which disrupted the market for a couple of weeks. Most importantly, our growth thesis continues to be sustained by the large amount of federal disaster relief funds still pending to be disbursed. Over $45 billion in disbursed obligated funds has been earmarked to support broad-based economic development and rebuilding initiatives designed to improve the island infrastructure and overall capital stock. Public data shows that the experiment reached $3.2 billion during the 11-month period ending in November, which is actually 96% above what was registered in 2021. The rollout of these funds is expected to gradually increase over the next decade, with the most recent estimates reflecting approximately $5 billion are the estimates for 2023. That would be great. The timely development of these funds coupled with the government improvement fiscal position and focus on economic development is really what is driving the tailwinds 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 and look forward to many more years of collaborating, supporting our clients and the communities. and growing the franchise. We do have multiple initiatives to celebrate this accomplishment and show our gratitude to the communities, employees, customers. I will now turn the call to Orlando to go into more detail on the financial results.

Thanks to all for your support. Thanks, Aurelio, and good morning, everyone. Aurelio mentioned that income for the quarter was $73.2 million. That compares with $74.6 million last quarter. Earnings per share on the quarter were 40 cents, which is the same as we had last quarter. What we saw in the quarter, it's a benefit on interest income from the increase associated with the upward repricing of 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 deposits ultimately resulted in a reduction in net interest income. The provision for credit losses in the quarter was $15.7 million, 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 determining the allowance, we continue to use two scenarios. We weight them, a baseline scenario and a downside economic scenario. In terms of net interest income, which, as you all know, it's a challenge these times 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, it's basically a fixed portfolio, so yield improvement comes in on pricing on new originations. On interest expense, just looking at deposits, interest expense grew $11 million. For 45 basis points increase, from 37 basis points we had last quarter to 82 basis points this quarter. Approximately 60 percent of this increase in interest expense was related to public fund deposit cost increases. Deposit betas for the quarter for the total portfolio was approximately 32 percent. Core deposits was about 18 percent. But this increase in betas was mostly driven by the betas on public deposits, which was about 75 percent 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 a $2 million increase in cost of borrowing. $700,000 relates to repricing of floating rate debentures, and the other $1.4 million is basically increasing the size of the borrowing portfolio, FHLB advances and repos. Margin increased six basis points in the quarter from $4.31 to $4.37. The change was primarily a change in asset mix. as the average balance of cash and investment securities, which are lower yielding, decreased by $600 million, while loans increased about $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, If you look at balances 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 $830 million in commercial loans that we price 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 we 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 that interest income coming from the future growth in the loan portfolios. In terms of non-interest income, it remained relatively similar to last quarter. 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 reversed about $700,000 of previously recognized fees on non-sufficient funds as part of 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, $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 700,000 reduction in occupancy, mainly energy costs, and 700,000 decreasing payroll expenses as all bonus accruals and incentives were finalized based on results. These reductions were partly offset by some increases, 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 to $116 million, excluding ORE, obviously. And our 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 a good clip in the first quarter. Also, during the quarter, at the end of the year, we have seen significant increases in, or some increases in contract renewals. You know, with inflation, some of the renewals are coming up. And there are several technology improvement projects that we have underway that are picking up speed in this quarter. Based on this, if we exclude OREO expenses, we believe expenses 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 decreased $14 million in the quarter. Standard $129 million, which is 69 basis points of assets. The reduction included $9.3 million non-accrual commercial loan reductions, $5 million loan 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 $7 million reduction in OREO properties based on increasing 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 delinquency, again, defined as 30 to 89 days, continues to be good, decreased by 9 million in the quarter, with reductions across all portfolios, basically. In terms of net charge-offs for the quarter, we're at $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 in the fourth quarter on the sale of an adversely 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 these 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 on just loans was $260 million, which is $2.6 million higher than last quarter. The ACL reflects the increase in the portfolios we had in the quarter, as well as some less favorable outlook that we have on the models for several microeconomic 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 228 on the third quarter. On the capital front, just state what Aurelio mentioned already, we continue with the execution of the plan. We repurchased during the year 19.4 million chairs for $275 million, and we paid during the year $88 million in dividends. Our capital ratios continue to be very strong. Again, you know, basically small reduction in Tier 1 and an improvement in the leverage ratio. Tangible book value per common share increase from 646 to 693 in the fourth quarter related to 60 million or so improvement in the other comprehensive loss adjustments as a fair value of the investment portfolio improved in the quarter. And our tangible commodity equity ratio stands at 681 compared to 655 last quarter. If we were to adjust for the OCI impact, Non-GAAP tangible book value per share would be about $11.30, and tangible common equity ratio would be approximately 10.6%. So 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. have approximately 40 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 compensated for funding needs. With that, I would like to open the call for questions.

Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. The first question comes from the line of Timur Bazileer with Wells Fargo. You may proceed.

Hi, good morning. Thanks for the question. Good morning. 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 it to remain near current levels?

Yes, there will be some pressure still on deposit pricing, and that's going to offset some of the impact from loan growth or loan already on the portfolio. and repricing of loans already in the portfolio. So with those two components, we're 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, from the growth in the portfolio. That's what's going to drive improvements in net interest income in the near term.

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 increased for the first time in 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?

Well, again, the securities portfolio is giving us somewhere approximately $150 million per quarter in cash flows. So that clearly is going to be used for funding growth and all the deposit implications. 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 based on the pipeline, we feel strong about it, and the trends in deposits going forward. which have been a little bit more inconsistent. Obviously we see rates changes in 2023 probably being, or we expect them to be less than the significant change in 2022. So that creates some stability on the positive movement, but there is still a volatility on the market that we need to be conscious. So there could be some increases in wholesale funding based on that. Remember, the investment, I'm sorry, I'm just saying that we do have the cash flow coming from the investment portfolio, but we also can use the portfolio for repos or advances.

Right, okay. And then just looking at deposits and understanding that it's hard to you know, 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 sense 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 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?

No, we feel the balance sheet 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 the one on deposits. Clearly, there was excess liquidity that has been redeployed for different things people are using. And obviously, the market rate movements 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 lowered now for the first half of the year. That should slow down. But it's tough to say.

Great. Thanks for the call. Thank you.

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

Hi. Thanks for the question. Good morning. I thought I would pick up on the loan side. You 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? kind of the outlook for growth and the color around categories would be helpful.

Yeah, you know, if you look at it by segment, obviously residential mortgage, we don't expect any growth. Actually, the portfolio has been holding, and if we saw last quarter, we have a slight growth. You know, it's really a mix of repayments and origination at the end of the day because you know how the market, how the market, the currency market is performing. Obviously, the more conforming rates go down, which they've been moving a little bit better, some of the non-conforming volume will move to that. So we're forecasting that segment to remain flat. We continue to see strong demand from the consumer and 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. You know, some of the deltas, you know, one quarter versus the other depends on the consumer. You know, what we did last year was, you know, close to 10%. What we did in the commercial was less than that. It depends on the more chunky deals. I would say on a blended basis, you know, for the year, we should think about 5% to 6%, you know, mixing of digits as the closest estimate based on what we see today, what we have. And there 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 define the timing of those. It's quite complex in terms of predicting when they will be finished and closed, but some of those are floating around, are part of the fiscal plan, and they're being in the negotiation with different you know, be there. So some of that could help actually some of the banks, too, which I'm sure, you know, most of the banks locally will participate as part of our support to the infrastructure and the economy. So I will say, Kelly, you know, the closest estimate is about mid-single digits, yeah.

Got it. That's helpful. And to circle back on NII and NIM as we think about it, you know, potentially, you know, expanding in the latter part of the year. How should we be thinking about the turn and threshold of NAI reaching a bottom? Or should we be anticipating a similar level of deposit pricing pressure this quarter? Is it 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.

Okay. This quarter we do expect still some pressure. Remember that obviously you are seeing average impact in the last quarter of what happened with rate 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 is the push on the more volatile government component that had a very large beta. And we expect that to have some impact in the second quarter, although a future impact because of rates expectations are not necessarily going to be at the same pace. On the rest of the deposit, as I mentioned, the average cost of all the other deposits was 40 basis points in September, in the September quarter. It was about 66 basis points in the fourth quarter. The beta there was a little bit over 18%. And we're not seeing a dramatic movement. It's probably going to be somewhere between 18%, 22% is what I expect on that portfolio. Obviously the government side will state at similar levels that we saw, but I mean government, public deposits in general that we saw during the quarter.

Got it, thank you. I'll 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, you know, in the next quarter or two, there's going to be a build towards that 120? 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 off that number?

Well, you have a large component, what I mentioned on payroll taxes, all the thresholds are reset. We see immediate impact on the first couple of quarters. That tapers down towards the end of the year. Some of the limits are reached. So we do see lower impact on that one. But on the other hand, we do have several technology projects going on that we're trying to to get to completion during the year, and that's going to compensate. That's why the 120, 120 is the number we're expecting based on the immediate impact from that payroll implication. And we've also seen, you know, because 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 contract renewals. So we're starting to see that. We saw that in the last quarter, but 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 ongoing on the next couple of quarters.

Got it. Appreciate the color. I'll step back.

Thank you.

Thank you for your question. The next question comes from the line of Alex Twirtle with Piper Sandler. You may proceed.

Hey, good morning, guys. Good morning, Alex. Good morning, Alex. Hey, 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 the in 23 related to taxes or anything along those lines?

Well, you always have a little bit of movement at tax season with people using the money, but it's never been a significant component on the movement of deposits at the institution. So I wouldn't say in seasonality it's going to drive a lot. movement over the year. It's more of the other factors.

Okay. 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 has been your cadence over the last two years for capital return.

Yeah, the answer, question number one, definitely, you know, as we said before, you know, we like to keep the optionality, and we've been doing that, and we adjust, you know, how much we do every quarter based on, you know, several factors, what we see, including market uncertainty. At this stage, we continue to execute. 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 if things became a concern to the market. On the other hand, we don't have a limit to when to use a 125. do it now or do it in three quarters or do it in two quarters. There's no expiration. On the other hand, answer to the question number two, yes, our cycle to revisit the capital plan, run a stress test, see the numbers, and decide finally how much more we're going to do forward, it's going to be April. So, yeah, we do expect to make an updated announcement on capital during April. That is correct, yeah.

Okay, great. Thanks for clarifying that. And then, you know, as you think about credit and net charge-offs and provisioning, you know, 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, you know, if you have any more insights, you know, 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 is kind of getting closer to what you consider normalized or how you see that shaking out?

I think there's levels of normalization. We use pre-pandemic as a metric, but things have changed. Unemployment is better, it's lower. We see more activity in the economy in different sectors. When we say normalized, 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, you know, the end of 2019. It doesn't look like based on early indications. So, obviously, early delinquencies is a great indicator. Classified assets is a great indicator. And MPAs are a great indicator. You know, so far, so good. And it's something that, you know, we monitor very, very closely, especially performance. You know, we have a large consumer segment. portfolio and a diversified commercial portfolio. All of them are performing well, and you see the asset quality metrics. We are very disciplined in not accumulating classified assets, and every time we see something that we don't like, it's going to take too long to solve. As we did this quarter, we're moving out, so that created some noise in the charge of rate, but it's not necessarily a trend.

The key components, as Aurelio mentioned, Alex, are very stable at this point, so we don't foresee necessarily, unless there is a dramatic change on expectations that trends will change too much from the most recent ones.

Okay.

Can you give us some color on... You know, we have, you know, I would say we have, you know, very good coverage in our research.

Agreed. Can you give us some color on the pricing that you're seeing on new loan generation?

You know, pricing, I think it's reasonable. It's being adjusted by the funding cost and by the curve and by the forward curve. You know, you know, commercial CRE in the mid-six, and when you go to other large segment or mostly variable, you move to mid-sevens when you go to the middle market, probably closer to eight. And when you look at the blended consumer products are already approaching mid-nines. So I think competition has been fair adjusting, you know, what we're all suffering from, which is definitely, you know, the increasing the cost of funding. So, obviously, you know, it's a timing effect, some of this, but, you know, I think we don't see pressure, you know, we see more competitive pressure on deposit pricing than we see in the loan pricing.

Okay. And then just a final question for me on fees. You alluded to some change in the fee structure during the fourth quarter. Is that something that's going to have a material impact in 23?

No, because of the different changes don't create a – 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 base on deposits. It's a function on deposit size more than anything.

Great. Thanks for taking my questions.

Thanks, Alex.

Thanks, Alex.

Thank you for your question. The next question comes from the line of Brett Rabidin with Hockey Group. You may proceed.

Hey, good morning. Wanted to follow back on credit for a second and just talk about Otto. And it seems like Otto is really continuing to perform fairly well, but you're charge-offs related to consumer were up. Can you maybe strip apart in the consumer bucket the auto net charge-offs and how you kind of think about the normalization, if you want to call it that, in auto net charge-offs over the next year?

I don't have the data.

I don't have it specifically auto here, but the reality, there is a relationship with size, the portfolio size. has continued to come up, Brad. And we have grown the portfolio by a good clip over the last couple of years. So you start seeing some increases in charge of which we know are going to happen. The auto portfolio, typical charge-offs in the market, remember the yields in the market are much higher, were on the low twos to mid twos way back. That number, it's 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.

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

The cash flow has been fairly consistent over the last few months. We are expecting like 45 million a quarter. Between 40 and 50, it's what we have seen a month. I'm sorry. So we're talking about somewhere between 500 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 foresee, you know, 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. Okay.

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?

Well, you know, some of that is competitive data, but from an investment amount, you know, we're basically moving more things to the cloud. It's similar to prior year levels, probably a little bit higher this year, you know, which, you know, some of these things amortize, so you don't see the full investment, you know, in one year. You know, we continue to move things to the cloud, you know, more digital processes internally and more digital processes to the client, so... So those are the three categories, you know, reducing the size of any data centers that we have in-house and, you know, moving to a more efficient, you know, hardware environment with less maintenance, you know, and less, you know, operating risk. So that is in general, you know, it's being a priority, which for our last five years, it was a little bit interrupted by making, you know, by the integration that we have to focus on that. But we never stopped doing it. It's just the speed. And we did very well roll out very important products during 2022. And we continue to add enhanced functionality to these products. As we call it, it's an omni-channel strategy. The branch is important. The call center is important. And the digital 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.

Okay, that's helpful. Thanks for all the cover. Thank you.

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

Hi, my question was asked and answered, so I'm stepping back. Thank you, though.

Thank you. Thank you.

Thank you. We now have a follow-up question from the line of Timur Berzalir with Wells Fargo. You may proceed.

Hi, thanks for the follow-up. Again, on the securities 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.

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 you, for example, if you look at balances this quarter, They came down by about 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 requirement. So that was about $40 million in the quarter. So if you segregate that, in reality, the portfolio was down 140 something million during the quarter.

Got it. Thank you for the call. That makes sense.

Thank you for your question. There are currently no further questions waiting at this time. If you would like to ask a question, please press star followed by one. There are no further questions, so I'll now pass the line back to Ramon Rodriguez for closing remarks.

Thanks to everyone for participating in today's call. We'll be attending Bank of America's Financial Services Conference in New York on February 14th and KBW's Conference in Boca on February 16th. 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. Thank you.

Thank you.

And that concludes the conference call. Thank you for your participation. You may now disconnect your line.