First BanCorp. New

Good morning and welcome to the first Bancorp Q1 2026 Financial Results Conference Call. All participants are in a listen-only mode. After the speaker's remarks, we will conduct a question and answer session. To ask a question at this time, you will need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Germán Rodríguez, Corporate Strategy and Investor Relations. Thank you. Please go ahead.

Thank you, Julian. Good morning, everyone. Thank you for joining First Bank Corp's conference call and webcast to discuss the company's financial results for the first quarter of 2026. I'm here with Aurelio Alemán, President and Chief Executive Officer, and Orlando Vérez, 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 fbbinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman.

Thank you, Ramon. Good morning. Good morning, everyone, and thanks for joining our call today. We started 2026 with very strong momentum, generating $89 million in net income, or $0.57 per share. That is actually up 21% when compared to same quarter last year. Core operating trends remain also very strong during the quarter, with pre-tax preparation income reaching all-time high of $131 million. That is 5% from a year ago. This performance resulted in a 1.9% return on average assets. This marks our 17 consecutive ROAs above 1.5%. Definitely demonstrating our commitment to sustain profitability. Moving to the balance sheet, total loans declined slightly to $13.1 billion. That is actually consistent to prior year seasonality. and accounts for expected softening in credit demand within the consumer lending segment that we mentioned before. That said, you know, still better than pre-pandemic levels when we look at consumer demand. On the other hand, core deposit for the quarter were strong, other than broker and public funds, which we don't call core. We're up by 4.9%, 4.9% on a lean quarter on one basis. reinforcing the strength of the relationship during franchise while allowing us to practically manage funding costs. Driving core client deposit growth is a key priority for us, and we're very encouraged by the execution during the quarter in terms of new clients and accounts. Credit performance remain a key strength for the franchise during the quarter with, you know, charge-off very stable. record low levels of non-performing assets and very encouraging early stage delinquency trends, which actually declined 24% from the prior quarter. And finally, our consistent approach to capital deployment resulted in a net payout of 92% during the quarter, a gift through buybacks and dividends. Even after this action, the quarter, we ended the quarter with a 16.9 CETE1 ratio. Let's turn to slide five to talk about the environment and highlights of the franchise. You know, we're pleased to say that business activity and economic conditions across the markets continue stable and progressing in line with our expectation. The labor market continues to show resilience. Other economic indicators in the main markets, such as economic activity index, continue to be stabilized, and recent credit delinquency indicates consumer stability. We are encouraged by what we see around, you know, in addition to the restructuring of, I'm sorry, reconstruction activities, reshoring activity, and expanded U.S. military presence in the island while, you know, the disaster recovery efforts remain in place. Expanding on a consumer, first quarter industrial auto sales declined 19% when compared to the first quarter last year, definitely evidencing the expected reduction. in consumer credit demand for auto. That said, it is important to know that retail auto sales continue to be 6.5% above the pre-pandemic 10-year average. So we're still better than the prior cycle. We're definitely prepared to serve our customers in this environment very, very, you know, many, many, many parts moving regarding, you know, potential impact of oil costs, which you are monitoring, which could be, you know, rising energy costs and other potential impact on inflation, which could impact, you know, consumer activity and commercial activity more broadly in the future. Hopefully that ends soon. And while the macroeconomic environment continues to be dynamic, we remain focused on money and what we can control. in housing the service delivery platform, technology investments to be more agile and efficient, and focusing on providing the best quality of service that we could. When we look at business highlights, total loan originations were up by 6% when compared to prior years, seasonally adjusted. Commercial loan pilots actually remain healthy. Actually, if I compare pipelines today with same time prior year, we are actually in a better position. So we sustain our long growth guidance of 3% to 5% that we initiated, that we mentioned in the last call. In terms of omni-channel strategy, active users continue to grow year over year. Data transaction volumes continue to grow. Self-service payments continue to increase. Sustaining, you know, demonstrating sustained engagement of clients in the platforms. We are spending time and effort on AI, understanding what we can do to improve internal processes and also improve, you know, the way we service our clients. We continue to also, you know, do franchise investment in our brand channels to continue to optimize how we service our clients. We believe that AI will definitely play a key role in the execution of this strategy, providing clients with faster, more personalized service offerings and enabling our colleagues to spend more time in value-added customer interaction rather than dealing with routine transactions and processes. We're working very close to our key vendors to ensure that we adopt what's coming in this new venture. Overall, capital allocation priority remain unchanged also. This includes supporting organic growth, which is a priority, and paying a competitive common stock dividend and returning excess capital through share pre-purchase. As always, we thank you for your interest in First Bank and your support. And with that, I'll turn the call to Orlando. We'll come back for questions later. Thank you.

Good morning, everyone. So, Aurelio mentioned this quarter we earned $88.8 million, that's $0.57 per share, which compares to $87.1 million or $0.55 a share last quarter. Adyosha said pre-tax, pre-provision income reached an all-time high of $131 million, which is almost 2% higher than last quarter and 5% higher than the first quarter of last year. The return on average assets for the quarter was 189. That compares to 181 last quarter, so we had an improvement there. The provision for the quarter was lower. We had some macroeconomic indicators, such as the unemployment rate and the CRE price index continue to show better trends, and that leads to some other reduction. Also, we had reductions in delinquency, as Aurelio mentioned, and some of the consumer portfolios, the size of some of the consumer portfolios was down. On the other hand, we had an increase in qualitative reserves to account for the current geopolitical uncertainty in the Middle East. Income tax expense for the quarter was $25 million, which is $5 million higher than prior quarter, mostly related to the higher pre-tax income. But also at the end of last year, in the fourth quarter, we booked an adjustment to the effective tax rate for the final results for 2025. The estimated effective tax rate as of now, it's just slightly higher. It's 21.9%. compares to 21.6% we had in 2025. In terms of net interest income, we had a reduction of 1.8 million in the quarter. The net interest income amounted to 221 million. That's 2.7 million related to two less days in the quarter. But net interest income compared to same quarter last year is 4% higher. Yeah, interest income on loans is 6.5 million lower than last quarter, which 3.8 million, it's due to the two last days in the quarter. And 2.8 million relates to the market interest rate reductions that affected the commercial portfolio pricing, specifically the floating rate components. Yields on the commercial portfolio declined 18 basis points. On the other hand, interest income on investment securities increased 2.8 million. mostly due to a 22 basis points improvement in yields as we have continued to reinvest cash flows from maturing securities into higher yielding instruments. On the expense side, overall funding cost was 3.5 million, which is 1.3 million related, 1.3 million of that reduction relates to the two less days in the quarter, and 1.2 million relates to rate reductions. The cost of interest-bearing checking and savings accounts came down four basis points for the quarter to 1.21%, which is mostly driven by government deposit cost reductions. But also, you know, the cost of time deposits came down five basis points, and the cost of broker deposits came down seven basis points. The size of the broker deposit portfolio was also down in the quarter. Net interest margin expanded seven basis points for the quarter to 475, which is slightly higher than our original guidance of two to three basis points per quarter. Even though the interest rate environment remains uncertain, particularly in terms of the timing and magnitude of future rate adjustments, our balance sheet continues to be well positioned for additional NIEM expansion in line with our original guidance. In terms of noninterest income, we reached 37.7 million, which is 3.3 million higher than last quarter. Most of the change was related to a 3.6 million collected on seasonal continued commissions that we usually get in the first quarter of each year. Operating expenses for the quarter were $127.1 million, very much in line, only an increase of $200,000 from last quarter. If we exclude the gains from OREA operation, expenses for the quarter were $128 million, which it's about the same kind of adjustment of an increase of $300,000, which compared to the $127.7 we had last quarter. Expenses were on the lower end of our guidance. Payroll expenses for this quarter were $2.1 million higher. That relates to a seasonal increase in payroll taxes. And also, we had an increase in share-based compensation expense for stock grants that were issued during the quarter. The portion of these grants that are attributable to retirement-eligible employees is charged to expense in the quarter. This increase in payroll expenses was offset by a decrease in business promotion. Typically, business promotion efforts are lower during the first quarter and pick up on the second and fourth quarter of the year. The efficiency ratio for the quarter was 49.1%, which is slightly below the 49.3 we had in the fourth quarter. As we have mentioned before, based on our projected expense trends for ongoing technology projects and the pickup on business promotion efforts that happen later in the year, we rate our quarterly expense base for 26 will be in that range of 128 to 130 million as we had previously mentioned. This is excluding OREO gains or losses. Our patiency ratio we estimated will still be in that range of 50% to 52% considering the changes in expense and income components for the year. In terms of asset quality, credit quality continued to improve in the quarter. Non-performing assets came down by $5.3 million. That includes $4.8 million reduction in non-accrual loans. That was across all business lines. Oreo balance has also decreased by 1.2 million, but we did have a 700,000 increase in repossessed autos in the quarter. Inflows to non-accrual were 34.3 million, which is 12 million lower than last quarter, and that's mostly related to a 10 million commercial loan inflow that was recorded last quarter, fourth quarter of 25. Most importantly, loans in early delinquency decreased by 34.5 million or 24% during the quarter, which is mostly 31 million decrease in consumer loans delinquency, specifically auto loans, most of it. We have seen some stability in the consumer delinquencies, and we continue to monitor closely the behavior of the different vintages that were issued over that few years. In terms of the allowance for credit losses, the allowance is $3.9 million lower. They reached $245 million, which represents 1.87% of loans. This is likely down from the 1.9% of loans we had at the end of last quarter. Similarly to what I mentioned regarding the reduction in the provision for credit losses, the decrease in the allowance, was mostly related to the improvement in some of the projected macroeconomic variables, specifically the unemployment rate and the CRE price index, combined with a reduction in delinquencies and the size of the consumer loan portfolios. However, the ACL includes a higher qualitative loan loss reserve, as I mentioned, in order to account for this wider range of potential macroeconomic outcomes that could come out of the unrest in the Middle East. Net charge-offs for the quarter were 21.1 million or 65 basis points of average loans, slightly higher than the 63 basis points we had in the prior quarter. This is mostly related to reduced appraised value of the collateral of a commercial non-performing loan that led to a $600,000 charge-off for the quarter on the commercial side. On the capital front, as Aurelio mentioned, strong profitability has allowed us to repurchase the $50 million in shares this quarter and declare the $31.5 million in dividends. Regulatory capital ratios continue to grow a little bit as the capital actions were offset by the earnings generated in the quarter. Tangible book value per share grew to $12.45, and then tangible common equity ratio expanded to 10.11%. Again, we still have approximately $2.28 intangible book value per share and about 160 basis points intangible commodity ratio, which is related to the other comprehensive loss adjustments that are related to the investment portfolio. Aurelio mentioned already, but we remain focused on supporting our client and growing our business while delivering close to 100% of earnings to shareholders in the form of buybacks and dividends. With this, I would like to open the call for questions, operator.

Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Again, to ask a question, please press star followed by one. Our first question comes from Brett Rabaton from Stonex. Please go ahead. Your line is open.

Hey, good morning, everyone. I wanted to start on loan growth. I know that auto sales are still strong, but they've obviously come back in a little bit. The guidance for the 3% to 5% loan growth is unchanged. What needs to happen for you guys to get to that 3% to 5% number? Are you expecting consumer payoffs to slow from here? Any thoughts on the pipeline relative to payoffs and how you see the balance sheet getting to that number?

Well, you know, it's going to take to the end of the year to, you know, consumer payoff and originations to settle. So some of that additional contraction in the consumer portfolio is a reality. On the other hand, we expect, you know, additional commercial growth both in Puerto Rico and Florida based on what we have at hand in the five months to date. And we do expect some additional growth in the mortgage portfolio, which, you know, demands continue strong. So that's how it's playing. Obviously, you know, if we go back to how many years we grew the consumer book, you know, mostly driven by auto sales and demand, you know, we're still, you know, performing pretty well in terms of our market share in that sector. But it's just sales are lower, still better than pre-pandemic. I believe stabilizing, you know, compared to last year, it's a little bit unfair, too, because the first quarter of last year's in auto, March was a very strong month, because it was a pre-tariff, people knowing that prices were going to increase. So, that number is a little bit, the 19% that we saw in the quarter on an adjusted basis, you know, it should be, you know, about 10%. So that, you know, we're assuming about 95,000 new units, which is still better than, you know, many, many years back. So, again, it's just a price. We understand it's a price issue. You know, I think there are still distributors considering, you know, lowering prices and adjusting, and that could flow through the economy and change that number. But that is what we're assuming right now.

Okay.

That's helpful.

And then your securities portfolio has been a source of strength in terms of improving yields as you've had cash flow to reinvest 269 yield in the first quarter. Can you just refresh me on what you guys have coming up and how big of an opportunity that is maybe relative to the margin and then Just any thoughts on the margin pace in the rest of the year?

On the lower yielding securities, we still have about $600 million in cash flows coming from securities yielding on average $165. That changes a little bit per quarter, but it's about $250 million in the second quarter. And then we have the other $350 million. It's in the second half of the year. The average yield, it's fairly consistent. It's a little bit lower on the third quarter, a little bit higher on the fourth quarter. But overall, it's at 165. That's what we were looking at. We had an additional about $236 million or so that mature during the first quarter. And, you know, we did take advantage of a little bit of the, you know, second half of March where rates changed, behavior changed a bit and increased. So we try to advance a little bit of cash flows into that. So that should help on the numbers going forward. But think about that 600 plus a little bit of the 200 that we had in the first quarter. that clearly is being replaced with, you know, things going from 250 to about 380 basis points higher. I'm sorry, 280 basis points higher. That's what I meant.

Okay. That's really helpful. And then just lastly, you know, you guys commented on the economic backdrop and oil prices being higher. Puerto Rico economy seems pretty stable. I was just curious here in the past month or so how you were seeing the commercial pipeline in terms of people maybe making decisions or not, just given some uncertainty. And then just as you guys see it, the health of the consumer, if there's been any been any impact from the inflationary stuff?

You know, definitely, you know, we're watchful on the impact on oil. You know, latest numbers that the government published, energy in Puerto Rico now is below 20% dependent on oil. So that's good. They have been converting, you know, generation to LNG and they still have a carbon facility and then some renewables. So less than 20% is less impact in terms of oil, in terms of the final bill on the electricity side. On the other hand, you know, the gas stations is immediately. So that impacts more the consumer, I will say, which is what we've been seeing, you know, and we've been commenting about it. On the other hand, you know, we've been proactively managing, you know, our risk in that segment. So we're pretty good on the asset quality trends and how we have, you know, practically managed that. Commercial activity remains strong. Tourism is strong. Puerto Rico is very attractive, you know, for U.S. visitors that probably not going to Europe or Mexico at this time and coming more here. You know, when we look at hotel occupancy, airport, you know, we feel pretty good about that. There's still a few projects. on hotels that are moving through the pipelines. You know, in terms of overall activity, construction continues very active and the supply chain that relates to that. So we haven't seen any softening on that piece. And, you know, distribution, expansion and distribution and other infrastructure projects are moving. So, you know, we feel pretty good about the commercial pipeline and obviously looking forward to, you know, faster closing of what we have at hand so we can deliver the growth that we promised.

Okay.

That's great, Karelio. Thanks for all the color. Thank you, Brett.

Our next question comes from Erin Suganovich from Truro Securities. Please go ahead. Your line is open.

Thanks. The credit quality, obviously, quite solid this quarter, and you commented on the early-stage delinquencies improving. What's the expectation for credit for the rest of the year? Is it still more stability, or do you think that the early-stage delinquencies may help lower some of the credit losses in the later part of the year?

Well, yeah, we're expecting stability. You know, you always have a little bit of benefits on the first quarter from tax refunds. But when, you know, as we have mentioned in the past, we monitor vintages. And based on adjustments we did on credit policies way back in 23 and 24, and we have seen how the behavior of the vintages are much better than what they used to be. At this point, based on expectations on the market, we don't see any factors that could change dramatically. It always could be a little bit down here and there, but overall, we expect stability on the delinquency side.

Okay. Then on capital return, I appreciate the keeping a steady amount of capital return buybacks have definitely helped over the past several quarters. You're still operating with quite a high level of CT1. I know that that's your intention, but are you giving any thought, particularly with seeing peers in the mainland talk about lower capital and and some of your competitors on the island also having a bit lower capital than you do in terms of increasing some of that capital return?

Well, that is a discussion that we constantly have. As we move, you know, the pieces, the moving parts are obviously the macro, things that we don't control, obviously, you know, other opportunities that we could, So we would like to have, you know, have the power to execute if come to play, obviously competitive dividend and, you know, and obviously the component of the buyback. So, you know, it's a constant discussion that we will continue to have and we, with the board, with the management, and we would try to be opportunistic and consistent. That's what we try to achieve. So taking all those other pieces into consideration. Got it.

Okay, thank you.

Our next question comes from Kelly Mota from KBW. Please go ahead. Your line is open.

Hey, good morning. Thanks for the question. Good morning, Kate. Maybe circling back to capital, I think a couple quarters ago you mentioned – potentially looking in Florida for transactions that would make sense. Just wondering where that appetite stands today and any kind of additional thoughts here on M&A, given your high levels of capital and multiple.

Well, you know, I think the answer is, you know, it's always part of the optionality that we keep have to be, you know, something that makes sense. and something that yielded returns that are our threshold of returns. So not necessarily easy to find something that qualifies for all of it, but we cannot discard. If a good opportunity comes to the table, we will not discard. That's really the way we look at it. Not aggressive about it, balanced and realistic, Which obviously in mind, you know, what is the bottom line from both a strategic perspective and financial perspective? Both really go together.

Got it. That's helpful. Maybe on expenses, I appreciate you reiterated the guide here with the expectation that there might be some increase later on in the year for, I believe, some marketing and technology initiatives, and your commentary hit on some work you're doing on AI. I'm wondering if you could share additional color as to, you know, the use cases you see today and what you're looking at. Thanks.

Well, you know, I'd say we're working together. Definitely, you know, AI is here to stay. And I think the industry is in a learning stage of, you know, make sure that you have the size and the scale to make sure the use cases are financially justifiable. In the back of our site, obviously, you have internal processes, you know, related to education and other analytics that are the use cases that come to play for management and those. But also, we're working with our key vendors. You know, we don't have any applications, so it's all, vendor-driven and they have a roadmap and, you know, we are, you know, getting into the train in the early stages so we can benefit out of it. But, you know, I think there is a common understanding of scales. It's not only, you know, how you move. You have to move with the right governance and the right oversight as any other technology brings risk. that you have to have commensurate policies and processes to cover. So I think at the end, we will all benefit of it. I think the larger the institution is, the more the benefit and the more easy to justify the use cases because of the investment. On the other hand, you know, one important investment this year, which is a foundation, is really data. You know, where the data resides, data analytics, everything, you know, all the efforts are moving to, to be fully cloud-based, which is halfway through already in our infrastructure, and including the main applications already there. So, you know, it's a journey, and it would require, you know, investments that we are, and obviously, are an important component of the expense guidance that Orlando has been mentioning.

Got it. That's really helpful. Alicia Reinhard, Last question for me if I can speak one last nitty gritty one, and I appreciate, I believe you reiterated your expectations around margin which last quarter was about two to three basis points of expansion per quarter but office is higher base. Alicia Reinhard, One thing looking at your average balance sheet that stuck out was residential mortgage yields were were a bit higher linked quarter wondering if. You could provide any color around that if there was any sort of one-time loan fees or anything that may have impacted that. Wondering if that's run rateable. Thanks.

Not any large ones. We typically, you know, typically get some movements on on what's in and out of non-performing. And so we collect some things that were out there, but nothing major. I mean, remember that for quite a while we, you know, when rates were low, we were originating almost all or substantially all of the originations were conforming paper. So we didn't have a lot of lower yielding things on the portfolio. And we were not putting too much in the portfolio. We've been putting things into non-conforming kind of paper now for the last couple of years, a year and a half. And those are higher yielding. So as you get repayments on some of the lower yielding ones, you're going to get some pickup. This quarter was a bit higher. Also, it's a function of being 3360 kind of component. But other than that, we expect that portfolio to, as long as rates stay here, new originations will continue to come in a bit higher than what's going out of the portfolio with repayment.

Amazing. Thank you so much. Great quarter.

I'll step back.

Thank you.

Our next question comes from Steve Moss from Raymond James. Please go ahead. Your line is open.

Good morning. Good morning, Steve. Morning. Maybe just starting Orlando on the 5% margin here. Curious on your funding cost expectations going forward. Notice that your public funds have continued to head lower. Just kind of curious maybe if there's a little bit more give on your liability side for the margin here.

I mean, you have to divide it by components. The clear ones are the time deposits. New time deposits on the books are lower rates than some of the older ones that are maturing. So that's where you saw the five basis points pick up on the time deposits. Broker deposits, even though it's not a large portfolio, it's also being repriced at a lower rate. So we had that seven basis points. We'll continue to see some small reductions. At the end, the deposits, you have to divide it. The typical interest-bearing checking account or savings account, With limited movement in rates, the same way they only went up 14% kind of beta when rates were going up, we won't see significant rate reductions on those accounts. Some of the reductions are seen on the government deposit accounts that are part of the interest-bearing component because some of them are indexed, and as some of the market rates have come down, they will come down. You know, it all depends on what happens with market rates. I would say that, you know, with current expectations, we would see some reductions on time deposits, not so much on some of the other deposit accounts.

Okay, maybe we should phrase it this way. So, in other words, just it's fair to assume like your public funds will be roughly stable around the $3 billion-ish or close to $3 billion level? Is your expectation?

Yeah, we don't expect major changes on those numbers.

Okay. Appreciate that, Collar. And then in terms of, you know, the other thing that I was just wondering about here, you know, the Puerto Rican, originations of Puerto Rico were very strong year over year, up almost 11%. Just curious, you know, are you guys thinking that's market share gains or just, you know, overall economic activity that you're seeing on the market here?

Yeah, I think it's a little bit of both. It's a little bit of both, but I think overall economic activity and deal timing is really the primary. Some of these deals are being working, are being a lot of years in the making, especially related to infrastructure or construction or permits, things like that. So it's also the timing of economic activity.

Okay.

Got it.

And then just in terms of Florida, you know, I realize it tends to be seasonally weak, but just kind of any, you know, you've had some expansion there in the Florida market. Just any updated thoughts as to, you know, where, you know, we continue. Yeah.

Yeah. It's an important piece of the franchise and it's an important strategy. A very healthy portfolio. We, we opened in the last quarter of last year, as we mentioned, you know, a new office in, in Boca. We just announced reposition of a branch in Miami, Canada, that we are looking to close and move to some other areas. We're really focused on repositioning to where commercial activity is more active. Definitely going north is showing additional opportunities, meaning northeast. which is of the corridor of Broward County. And we're taking those. We already have the teams engaged and executing and producing. So, you know, it's an important piece of our franchise. Obviously, we all know that deposit gathering in Florida, it's somewhat more challenging than other markets.

Right. Okay. Well, I appreciate all the color there. A very nice quarter. Thank you very much, guys.

Thank you.

Thank you.

Our next question comes from Manuel Navas from Piper Sandler. Please go ahead. Your line is open.

Hey. I wanted to dive back into the name for a moment. I just want to confirm. You're shooting for that two to three basis points per quarter increase from SEER?

Yes. That's what we're shooting at based on expectation of rate movements and portfolio movements.

OK. Good. funding costs improve if your core deposits continue to grow?

Yes, assuming, you know, because if our core deposits grow on a typical mix, that would mean that those are more on the savings and interest-bearing checking accounts. And that assumes that as we mentioned, we just mentioned that would be a stability on the government side. So that would mean that those deposits are lower cost deposits and definitely that mix could improve.

And what initiatives are in that area that are helping kind of drive? Because there was some nice core deposit growth this quarter.

Well, you know, I have to say, you know, a lot of coordination, sales efforts, products, marketing, you know, across, you know, both retail, small business is an important piece of the puzzle, which we continue to penetrate. We also have in the year, as we announced before, a couple of branch expansions in the west coast of the island, which are, you know, up in the mid-year. You know, 4,000 new clients. between retail and small business. So that, you know, it really excels focus on execution. You know, it requires, you know, a lot of coordination and effort.

Okay. So that kind of means to summarize, like, you know, loan yields are generally stable. Securities could reprice higher as you laid out. And deposit costs, hard to decline them, but if there's good mix and growth in the right areas, that's where you get this steady increase in NIM that could have upside if the deposit growth exceeds expectations.

Yes, the only, that's correct. The only thing I would add, keep in mind that one of the things we are considering, we have included assumption is that the consumer market in Puerto Rico is still going to come down a bit in size, and those are higher-yielding assets. So that's part of the assumption here, that some higher-yielding assets might come down a bit. Okay. The commercial side, it's very good, but the average yield on our consumer portfolios is above 10%. Obviously, that's not the kind of yield on the commercial side.

Perfect. I appreciate that. And how would rate cuts impact this kind of forward guidance, if there were any? You know, there's none in forward curve at the moment, but just if there was a rate cut, how would that shift your kind of expectations?

The two through three basis points included some rate cuts start at the end of the year. The impact, depending on the size, is obviously the investment portfolio reinvestment component. You know, rate cuts are more. It's going to be a smaller rate. But on the other hand, we also get some repricing on some of the deposit side. So that assumption includes some expectation of reductions towards the latter part of 2026. Remember that also that the floating rate component of the commercial side, it's, you know, about 50% just under that. And obviously, if rates are not cut, then we wouldn't have repricing on those. That's part of the assumption also that there is going to be some repricing if rates are cut do happen.

Broadening out for a moment, in the economic commentary, you discussed, but the potential, and we've discussed about this, but of military activity on the island and how it could impact the economy. Not that it increases activity, but can you kind of talk about how that makes Puerto Rico perhaps a increase in the floor of economic activity or reconstruction fund safety? Can you just speak to that military activity that you are seeing on the island?

You know, what we're seeing is active use of some of the facilities with, you know, more people coming in, more actually, you know, military personnel. There's also expansions in capacity, you know, to where they live in these facilities within actually hotels. This is outside the metro area primarily. This is in the in the east side of the island, the south part of the island, and the airport in Ovadilla, which is the northwest of the island. So it's outside the metro area. So, you know, hotels that are being, you know, fully occupied, small hotels, fully occupied by military personnel for long-term contracts, obviously they buy and consume merchandise and they go to places and So we see more of that. There is some construction in the Ceiba area. This has been kept fairly confidential in terms of how much more is coming. But we're seeing it, and we're getting commentary from our clients on this happening in our branch representatives in the areas that this is happening.

And this strategic importance increase also makes the reconstruction funds a little bit safer, the deployment of them as well. But this is my last question.

And definitely, and that's been also a contribution in the energy transformation of production because, you know, the Department of Energy has also been very involved working with the local authorities on this because it's part of safety.

Thank you for the commentary. I appreciate it.

Thanks.

Our last question will come from Robert Rutschow from Wells Fargo. Please go ahead. Your line is open.

Hi. Good morning. Thanks for taking my question. Good morning. I just wanted to follow up on the tech commentary. We can see relatively high growth rates in the outsourced tech spend and the professional expense. How much of the expense base would you consider to be tech spend? Is the growth rate of, say, the outsourced services indicative of the overall tech spend? And is it possible to segment your tech spend between, like, back office maintenance, you know, efficiency initiatives and anything that's geared towards revenue growth? Thank you.

At this point, there is a lot that has to do, as we have mentioned, we started a migration of our centers, our data centers, from a managed facility structure we had within our facilities to a service-provided structure. We use FIS as a service provider. We've also been migrating with what we have in other cloud applications where they are managing and we'll fully manage some of those applications, some of those cloud applications for us. So we continue to see a lot of investments, which is part of the data migration process, which is included in the professional service and the outsourcing costs?

Yeah, I think just to add, everything that is coming new is coming into cloud, it's coming as software as a service, rather than in-house developed applications or more physical servers in our facility. So we don't have, we cannot answer specifically the distribution of the expenses, something to look into, We haven't made that data public, so we consider your questions for how much more detail we can provide in future presentations, yeah.

Okay, great. If I could just follow up on that. Do you think your tech spend growth rate is sort of at a peak level, or is it possible it can decline, or should we think about it sort of staying at these levels?

I think it will sustain for probably another 18 to 24 months and then should decline.

Okay, great. Thank you.

We have no further questions. I would like to turn the call back over to Ramon Rodriguez for closing remarks.

Thanks to everyone for participating in today's call. We will be attending Wells Fargo Financial Services Conference in Chicago on May 13th and Truist Financial Services Conference in New York on May 19th. We look forward to seeing a number of you at these events, and we greatly appreciate your continued support. Have a great day. Thank you.

Thank you all. This concludes today's conference call. Thank you for your participation. You may now disconnect.