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First BanCorp (FBP -0.18%)
Q2 2022 Earnings Call
Jul 22, 2022, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, and welcome to today's First Bancorp 2Q 2022 financial results. My name is Elliot, and I will be coordinating your call today. [Operator instructions] I'd now like to turn the call over to Ramon Rodriguez, corporate strategy and investor relations officer. The floor is yours.

Please go ahead.

Ramon Rodriguez -- Head of Investor Relations

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 2022. Joining you today from First Bancorp are Aurelio Aleman, president and chief executive officer; and Orlando Berges, executive vice president and chief financial officer. Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure as well as statements on the plans and objectives of the company's business.

The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at fbbinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman.

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Aurelio Aleman -- President and Chief Executive Officer

Thank you, Ramon, and good morning, everyone, and thanks for joining us today for the earnings call. Let's please move to Slide 4 to discuss the highlights of the quarter. As we reported, we continue 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.

These results 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 ECR 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%. Also, 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 qualitative reserve.

Asset quality continued to improve during the quarter, with nonperforming assets decreasing by $9 million now to $147 million, driven by reductions in nonaccrual residential mortgage loans and pay downs of nonaccrual commercial loans. The ratio of the ACL for loans and finance leases to loans held for investments slightly increased to 2.25% in the quarter. On the capital front, we continue to execute on our capital deployment plan and repurchased 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 room to execute on our established capital plan over the next quarters obviously, taking into consideration any change in market conditions. Let's move to Slide 5 to review deposits and loan performance. We continue 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 residual mortgages. Total loan originations for the quarter were strong, which excluding credit card utilization activities reached of $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 continues 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 deposit increased $176 million. Deposit market grow in Puerto Rico, I will say, decelerated during the first half of the year after 2020 and 2021, significant increases. However, when we look at average deposit balance, there's still 31% above pre-pandemic levels.

Let's move to Slide 5 to some additional outlook. Well, definitely, when we look at -- there is uncertainty in the global market conditions when we consider all geopolitical tensions, inflation, what's going to happen with future part 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 improved again with labor force above pre-pandemic levels and unemployment rate reaching a multi-decade low of 6.2% in May.

The economic activity index, which is the indicator that it's highly correlated to GMP, 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 fund still pending to be disbursed. The adequate use of this one 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 service channels. In addition, this quarter, we began 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 serve digital platforms. All this digital has allowed us to expand our distribution reach infrastructure while still optimizing our existing which will include 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.

With that, I would like to turn the call over to Orlando to provide more details on our results. Thanks to all.

Orlando Berges -- Executive Vice President and Chief Financial Officer

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, but there were two major components in the quarter. First, the impact of the rising market interest rates and the loan growth led to an increase of $10.6 million in net interest income, but we also had an [Inaudible] provision [Inaudible] 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 obviously 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 -- $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. And the increasing 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, 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 -- the yield on earning assets improved.

Yield of earning assets went from 4.06% last quarter to 4.25% in the -- this second quarter, while the cost of interest-bearing liabilities decreased one basis point from 44 basis points to 43 basis points. Deposit cost for the quarter was fairly consistent, but we are expecting some increases in the third quarter tied to the Fed adjustments -- interest rate adjustments that happened in June and the ones that are expected to happen in July once the Fed made. However, overall, we do expect to achieve some additional margin improvements in the third and fourth quarter of the year. Looking at noninterest income.

It shows a reduction in the second quarter, mainly as a result of 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, noninterest expenses for the quarter were $109.3 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 position.

This quarter, we had a $1.5 million gain on OREO properties net of operating expenses of OREOs. And 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. But still, we have some properties on the OREO portfolio that were moved at lower values than what they are being sold today. So that there is some still positive impact expected in the next quarter.

During the quarter, we also had -- this second quarter, we also had a $1.7 million in expense reductions associated with the 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 increased $1.7 million this quarter. And 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 are still running at a higher level of vacancies than normal.

It's taking longer than we had anticipated in filling those positions, but we continue to pursue that. The other component is that we saw -- we had professional service fees increased by $600,000 in the quarter. And 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 underway. We have discussed -- 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. And for the fourth quarter, we see expenses excluding the OREOs in a range of $114 million to $115 million, slightly lower than we had originally mentioned to you on the last call. And we continue to pursue options on improving the cost base.

As you saw, we have a couple of branches that are underway. Benefit of those is not large, but it's mostly going to start happening next year, not this year. On efficiency, efficiency ratio for the quarter was extremely good at 47.7%, which is lower than last quarter, and a lot has to do with the 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 more closer to the 50% as opposed to the 52% 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. Nonperforming assets decreased $9 million in the quarter to $147 million compared to $156 million in the first quarter, and NPA now stand at 76 basis points of assets. We had reductions in OREOs from sales. We have reductions in commercial and residential from collection.

So it's been pretty consistent. And inflows to nonperforming loans decreased in the quarter by $5.2 million. Last quarter was -- we had $21.6 million in inflows. This quarter was only $16.4 million on the overall portfolio.

Early delinquency, which is defined as 30, 29 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 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 these loans, it's $252 million. It's up $7 million, which 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.

A large component was on the consumer portfolio where we had $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 allowances stand at 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%. And 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 adjustment we had on the OCI this quarter impacted most of it, combined with the repurchase, obviously, on the dividends. OCI now represents approximately just over $3 a share on tangible book value. But as we have mentioned, we believe this impact will reverse over time as we have the liquidity and we have the ability to hold these securities until maturity. With that, I would like to open the call for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Brett Rabatin from Hovde Group. The line is open. Please go ahead.

Brett Rabatin -- Hovde Group -- Analyst

Hey. Good morning, everyone. I wanted to first just ask about the commercial strength in 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?

Aurelio Aleman -- President and Chief Executive Officer

OK. I'll take it separately. I think over the other -- over the year, we've been discussing about the pipeline being building. And there's a lot happening in the island in terms of even M&A activity, companies buying other companies, do investors coming in, some private deals -- some privatization deals, public-private partnerships, some hotels moving from one hand to the other.

So deal flow, it's very active, and we continue to see new capital coming in. So I think that, obviously, for me, is the primary source of it. Secondly, commercial activity continues. Construction activity continues.

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. And we believe by -- and this is in five months, so that should reach over $2 billion when we -- if we look at the remainder of the year. So that is contributing. We continue to see requests for line of credit supporting the contractors.

Obviously, as everywhere in the world, things are delayed because of the supply chain. Materials don't necessarily came on time. So timing is always a consideration. So we feel in our main market in the U.S., which is Florida, the pipelines are also very strong.

Florida continue to see inflows. If we look at the public demographics, demand for office, which is not happening anywhere else, it's happening in Florida. So obviously, companies moving their headquarters or looking for homes. So we think it's stable.

We're not talking about double-digit growth. We're talking about prudent growth. So -- and that's why we continue to support. Remember, last year, we also -- after the -- during the acquisition, we also achieved some selective renewal of the portfolio in certain cases just to make sure it fits our risk profile targets.

That -- obviously, that is passed, that will happen in 2021, which definitely impacted our volumes in that. So we feel optimistic about what we have at hand today on the commercial side. Secondly, we've been working with this fintech for some time. And we just launched the small business lending, which is going to be supported by the clients, very similar platform that we use for PPP loans, which was broadly used by clients, supported by a lot of good feedback from clients in terms of the self-service capabilities.

And definitely, that will that increase our capacity to penetrate the small lending -- small business segment which we're pretty good in the metro area based on the branch concentration. But I think we believe we have opportunities in the other regions of the island. So that's rolling out here and is rolling out in this year. That answered the question?

Brett Rabatin -- Hovde Group -- Analyst

OK. That's great. Yes, that's helpful. And I wanted to make sure I understood the guidance.

I think I heard $113 million and $114 million to $115 million for the fourth quarter in expenses 3Q, 4Q and then the efficiency ratio maybe to tick back up toward 50% going forward or maybe for the back half of the year. And 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 makes that number move up a little bit?

Orlando Berges -- Executive Vice President and Chief Financial Officer

No. We -- you're right, the NIM expansion with the component of the expenses that are expected, it should take us somewhere close to the 50%, maybe just under the 50%. Just to clarify one thing, the only component that on that guidance, it's the volatility that we have seen on the OREO results, which has been positive, obviously, and we like it. But that one I'm trying to exclude because of the expectation at some point was not there.

And 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. But 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.

Brett Rabatin -- Hovde Group -- Analyst

OK. And then maybe just one last one for me. If you look -- I like the chart in the deck with the EAI index, and it's something I've been tracking. And it's a little higher than it was pre-pandemic.

I'm curious if you guys feel like the economy is at this point better than pre-pandemic and what's your sense of the funds flow into the island kind of continuing to improve the local market in Puerto Rico?

Aurelio Aleman -- President and Chief Executive Officer

I think there are sectors that are better than pre-pandemic when you look at the construction sector and those all benefit on 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. And obviously, when you look at the -- when I say strong, everybody is hiring still.

So obviously, the impact of inflation in oil, and we still see excess liquidity compared to average balances, which there are still over 30% on pre-pandemic. So there's some excess liquidity there to support -- that should support in mitigate the inflation. So -- but today, conditions, I have to say, look better than where we were in pre-pandemic. How long they're going to remain or not is really the uncertainty.

How hard is the impact of the inflation or not, continues to be the uncertainty. But today, conditions when we look at balances and even asset quality, even the metrics -- all the metrics that we're showing today are better than pre-pandemic, yes.

Brett Rabatin -- Hovde Group -- Analyst

OK. Great. Appreciate all the color.

Operator

Our next question comes from Timur Braziler from Wells Fargo. Your line is open.

Timur Braziler -- Wells Fargo Securities -- Analyst

Hi. Good morning, gentlemen. 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 book and cash upon that growth? Or is the expectation that deposit growth resumes here in the back end of the year?

Orlando Berges -- Executive Vice President and Chief Financial Officer

Well, we -- it's a combination. We are -- 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 going to be offsetting any cash needs for the lending side. The -- as Aurelio mentioned, we believe that a second half the deposit growth, it's going to be -- it's not going to be like we saw in 2021 or 2020.

We're seeing some reductions already and some movement to other sources. So that's part of what was reflected in the quarter. But having need for wholesale funding would be very limited at this point. We don't foresee that based on current liquidity levels and the excess and 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.

Timur Braziler -- Wells Fargo Securities -- Analyst

OK. And then 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? And then 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?

Orlando Berges -- Executive Vice President and Chief Financial Officer

Well, first, let's clarify that the government deposit growth was really in Puerto Rico and VI, not in Florida, just to make sure you saw that, which -- that's where we have the large government business. Florida, we have a small government business. So we see that as a stable source. 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 going to be stable funding.

But we do have some funding from some of the reconstruction activity that happens with the energy authority and so that those would be sort of more volatile depending on what kind of the status of the different projects they have underway. So government funding, it's going to be there. It's stable. I think that the that I mentioned on the deposit is that we -- the market came down dramatically like it happened in the states after seeing the 75 basis points increase last month and expecting another one.

We are seeing the market options on treasuries and other options competing there. We do compete also with credit unions. So 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 going to start seeing from customers. So 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 going to -- is expected to happen now at the end of this month.

Timur Braziler -- Wells Fargo Securities -- Analyst

OK. And 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? And as you look at your allowance ratio, I think you had guided well that we're going to 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?

Orlando Berges -- Executive Vice President and Chief Financial Officer

Well, the first question you had, we feel we are at a very low level of delinquencies in the market. Have we reached the bottom? Maybe we have. The market has been very stable for a while. We've seen -- 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 the provisioning and the reserves on the consumer side reflect the big 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. So assuming that nothing happened, yes, 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 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.

Timur Braziler -- Wells Fargo Securities -- Analyst

Right. Thank you for that color.

Operator

Our next question comes from Alex Twerdahl from Piper Sandler. Your line is open.

Alex Twerdahl -- Piper Sandler -- Analyst

Good morning, guys. I'm just wondering, it's made a lot of sense. Our mortgage banking has been a pretty big driver in the fee income. It's made a lot of sense to sell all the production with rates being where they were over the last couple of years.

But now with rates kind of pushing above 5%, I'm just wondering if the thought process around mortgage changes and potentially that could go from being a drag on overall balances to maybe even flat or contributory in the next couple of quarters.

Aurelio Aleman -- President and Chief Executive Officer

As you've seen this quarter, you saw some positive trends on prepayments also in the portfolio. And when we look at the activity being originated, the reality, yes, when the conforming rates are somewhat par to the portfolio rates that tends to happen and it's happening in the recent months. So I would not say 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 a point that we're going to reach full coverage or the full repayment and prepayment of the portfolio, but we can get back to you on that later.

Orlando Berges -- Executive Vice President and Chief Financial Officer

Keep in mind, Alex, that the overall originations, the market originations of mortgages have come down. So it's a shift on the mix of what's been 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. So that's part of it in terms of not only the mix but the overall level of originations in the market.

Alex Twerdahl -- Piper Sandler -- Analyst

OK. And then 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?

Orlando Berges -- Executive Vice President and Chief Financial Officer

Yes. We -- there -- if you look at the uptake, it's basically two components that we -- the reserve went up by about $6 million related -- on the consumer side related to growth. And it went up about $3 million related to macroeconomic assumptions. Other than that, it's a normal movement when -- depending on what gets repaid and what comes in.

But clearly, we haven't seen anything other than the projected macroeconomics that are relevant in the portfolio. Any changes in projections of unemployment on the consumer side that moves the needle on the reserves.

Alex Twerdahl -- Piper Sandler -- Analyst

OK. And then just a final question for me. I think really, you alluded to the 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 and sort of how that will actually impact loan growth or how does that potentially impact loan growth at First Bancorp?

Aurelio Aleman -- President and Chief Executive Officer

Difficult correlation, but it's just economic activity not only support our loan growth, it support the economy itself. As I said, in eight months, they the right number -- the number that is public. In five months, they have done $860 million of disbursements, and the goal is to reach $2 billion, which we think is going to happen. So it's just additional support in the economy overall.

Difficult to say how much that translated to a specific loan numbers. But for us, the expectation is that we're going to achieve growth in the commercial book through the remainder of the year.

Alex Twerdahl -- Piper Sandler -- Analyst

Great. Thanks for taking my questions.

Aurelio Aleman -- President and Chief Executive Officer

Thank you, Alex.

Operator

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

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

Hi. Good morning. Thank you so much for the question. 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?

Orlando Berges -- Executive Vice President and Chief Financial Officer

The normal levels of cash will be what -- on a normalized scenario would be what we expect what would need only for purpose of reserve requirements. Other than that, we're just leaving money on the table. But 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 on a normalized basis is going to be more on the $800 million than anything else, considering all components, but 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, but we don't -- we use the cash typically to move any needs. It hasn't been much, but we do keep some amounts associated with that as part of our liquidity components.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

Got it. So it seems like you're still running pretty high there, and you mentioned you expect deposit betas to kind of pick up from here. It's fair to say that we're going to still see some nice NIM expansion from here, albeit maybe at a slower rate than what we saw in second quarter. Is that a fair assumption as we look ahead?

Orlando Berges -- Executive Vice President and Chief Financial Officer

It is a fair assumption. We would have -- assuming what I see at the end, but assuming the 75 basis points of Fed, that also would put some. And remember that there were some of the increases in June reflects in July. So we definitely expect some expansion in there.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

Thank you so much for the questions. I appreciate it.

Operator

We have a follow-up question from Brett Rabatin. Your line is open. Please go ahead.

Brett Rabatin -- Hovde Group -- Analyst

Hey, guys. I just wanted to ask on the tax rate. What's a good number going forward, just kind of given the movement in the past few quarters?

Orlando Berges -- Executive Vice President and Chief Financial Officer

The -- 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 going to be taxable component. So it depends on that number.

So the rate that we are now in that 30% overall effect because remember that in Puerto Rico, you're taxed by legal entity and depends on the shift of earnings between the subs that we have. But that 32% to 33% should be more or less the average that we see for the rest of the year.

Brett Rabatin -- Hovde Group -- Analyst

OK. And then I wanted to follow up on the balance sheet in general. And my presumption is we'll see more of what we saw in the third -- 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 shrink a little bit depending on deposits.

Is that a fair assumption? Or do you think you'll actually grow the balance sheet?

Orlando Berges -- Executive Vice President and Chief Financial Officer

No, that is a fair assumption, Brett. We're seeing it the same way.

Brett Rabatin -- Hovde Group -- Analyst

Great. Appreciate the additional color, and thanks.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Ramon Rodriguez -- Head of Investor Relations

Aurelio Aleman -- President and Chief Executive Officer

Orlando Berges -- Executive Vice President and Chief Financial Officer

Brett Rabatin -- Hovde Group -- Analyst

Timur Braziler -- Wells Fargo Securities -- Analyst

Alex Twerdahl -- Piper Sandler -- Analyst

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

More FBP analysis

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