First BanCorp. (FBP) Earnings Call Transcript & Summary

Hello, and welcome, everyone, to the First Bancorp 4Q 2025 and Full Year 2025 Financial Results. My name is Becky, and I will be your operator today. [Operator Instructions] I will now hand over to your host, Ramon Rodriguez, Investor Relations Officer, to begin. Please go ahead.

Thank you, Becky. Good morning, everyone, and thank you for joining First Bancorp's conference call and webcast to discuss the company's financial results for the fourth quarter and full year 2025. 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 fbpinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman.

Thanks, Ramon, and good morning to everyone, and thank you for joining our call today. Our results for this quarter represent a strong capstone to a year of outstanding performance and disciplined execution, highlighted by record revenues, positive operating leverage and stable credit performance. We did deliver top-performing bank across multiple metrics. We produced $87 million in net income or $0.55 per share, generated a top quartile return on assets of 1.8% and prudently managed our expense base, resulting in a 49% efficiency ratio for the quarter. Turning to the balance sheet. We continue to, first and foremost, deploy our capital to support our client by facilitating a $1.4 billion in loan origination during the quarter. Total loans grew by $80 million, mainly reflecting growth across the commercial segments. Growth was slightly impacted by elevated commercial loan payoffs and slightly lower consumer loan production. Core customer deposits increased by $267 million, and more importantly, we achieved this while proactively continuing to reduce total deposit costs. In addition, government deposit decreased during the quarter as we continue to look for efficiencies in higher-cost deposits in this part of the cycle. That said, we also see a pickup -- a 3.2% pickup in core noninterest-bearing deposit during the quarter. On the asset quality side, the ratio of nonperforming assets to total asset continued to decrease, reaching an all-time low level of 60 basis points during the quarter. Consumer credit continued to stabilize, net charge-off to average loans at 63 basis points, essentially flat to the prior quarter. And finally, this quarter, we repurchased $50 million in shares of common stock and declared $28 million in dividends. I think to put in perspective, since we began the buyback program in 2021, we have repurchased over 28% of shares outstanding. Still, given our excess capital position and meaningful capital generation, we are well positioned to further increase our return of capital to shareholders in 2026. As such, we were very pleased that our Board approved an 11% increase to the quarterly common stock dividend to $0.20 per share starting in the first quarter of 2026. Please let's move to Slide 5 to provide some highlights of the full year. Definitely, 2025 was a year of changes, geopolitical and the macro. But again, significant progress as we demonstrated the investments we're making are driving strong operating performance. We crossed $1 billion in total revenues, generated a record net income of $345 million, grew earnings per share by 19% and posted a strong 1.8% return on asset for the year, all while improving our capital and liquidity levels. Our strong profitability allows us to continue returning approximately 95% of earnings to shareholders while increasing tangible book value per share by 24%. Our consistent investments to advance our omnichannel strategy and improve our interaction with customers with -- across multiple channels, meaning digital, branch, continue to show encouraging results. In both channels, digital and personalized branch contact, results were improved. Active retail digital users were up 5% when compared to last year, 95% of deposit transactions were captured through self-service channels and our branch sales and service delivery efforts continue to pay off. In terms of the macro, I think the second half of the year show a slightly lower economy in our main market. In spite of this, we do remain constructive on the underlying trend to the economy for 2026. On one side, we do expect consumer confidence to moderate somewhat. Impact of tariff-related pricing, inflationary pressures and geopolitical tensions will continue to develop through the year. On the other hand, we see multiple developments that will serve as important driver of stability in the future -- for the future for the growth of the economy, both in Puerto Rico and actually our second market, Florida. Resilient labor market here, unemployment rate hovering about 5.7%. Another year with strong tourism activity, passenger traffic at the airport up 3%, reaching a record high of 13.6 million passengers. Already over $2.2 billion in announced investment to expand manufacturing capacity in the island driven by the offshoring efforts. And the consistent flow of federal disaster relief funds that will support critical infrastructure development for the year to come. There's still $40 billion in the year, we don't have final numbers yet on the last quarter, but it seems it was basically flat to prior year in terms of disbursements of the federal fund programs. Looking ahead to 2026, again, we have ample experience navigating dynamic environments, and we are definitely well positioned to continue growing within our markets and deliver consistent returns to our shareholders. Our guidance remains largely unchanged. We are focused on delivering 3% to 5% organic loan growth, sustaining 52% or better efficiency ratio, maintaining a strong profitability metrics and returning close to 100% of annual earnings back to shareholders. Asset quality is expected to remain stable with consumer credit quality gradually returning to the pandemic levels that we have seen, driven by basically inflationary pressure to the consumer, even though compensation is better and there is a stable unemployment. We are in great capital position, continue to make the right investments to modernize and help our franchise to drive both growth and efficiencies and deliver strong performance in 2026. With that, I thank you for your continued trust. I thank our clients. And we are very grateful to our dedicated employees for their commitment and support, and we're looking forward to another exceptional year for our institution. With that, I will now turn the call over to Orlando.

Thanks, Aurelio, and good morning, everyone. As you saw in the release this quarter, we earned $87.1 million, $0.55 per share, which compares to the $100.5 million or $0.63 a share we had in the third quarter. Last quarter results included the reversal of $16.6 million valuation allowance on deferred tax assets related to net operating losses at the holding company. And we also had a $2.3 million employee tax credit that if we exclude, represent -- both of them represent about $0.12 per share for the quarter. Comparing the quarters, excluding these items, earnings per share was 8% higher this quarter from the amounts in the third quarter. Adjusted pretax preprovision income was $129.2 million, which compares to $121.5 million in the third quarter. For the full year '25, net income was $344.9 million, which represents $2.15 per share. And adjusted pretax preprovision income reached an all-time high of $499.2 million, which is 10% higher than 2024. On a non-GAAP basis, adjusting for the items I mentioned before, net income reached $325.3 million for the year which is $2.02 per share, which is 8.6% higher than 2024. Return on average assets for 2025 was 1.81%, which compares to 1.58% in 2024. And on a non-GAAP adjusted basis, return on assets was 1.71% for the year. 2025 marks the fourth consecutive year that we surpassed our return on average asset target of 1.50%. Again, a strong year, and we are pleased -- very pleased with that. In terms of net interest income for the quarter, we have an increase of $4.9 million, reaching $222.8 million. This includes $800,000 we collected on a nonaccrual loan that was paid off as well as $500,000 collected on a prepayment penalty on a loan that also was paid out in the Florida region. Net interest margin for the quarter was 4.68%, but adjusted for these items would have been 4.65% or 8 basis points higher than last quarter. If you recall, we were expecting that margin would be sort of flat for the quarter, but we were able to achieve a $2.2 million reduction in interest expense on deposits, largely due to a 31 basis point reduction in the cost of government deposits. This was higher than we had anticipated. We were able to reprice some of the accounts based on market rates and the reduction we had in government deposits that Aurelio mentioned, was mostly seen on the higher-cost accounts. Also, the cost of other interest-bearing checking and savings account decreased 4 basis points during the quarter. We combined all of these items with the fact that we grew noninterest-bearing deposits by about $170 million in the quarter. This helped reduce the overall funding cost for the quarter by 5 basis points. Meanwhile, we continue to see that pickup in the investment portfolio yields through the reinvestment of cash flows that we have been mentioning. During the quarter, we registered a $4 million increase in income from investments as we continue to replace lower-yielding maturing securities with higher-yielding ones. This resulted in a 33 basis points improvement in the yield, a little bit offset by a $2.4 million decrease in income from cash accounts due to the reduction on the Fed funds rate and lower average balances in the quarter. On the lending side, the yield on the C&I portfolio came down 27 basis points compared to last quarter as the floating rate portion of the portfolio reprice, tied to the reduction in prime rate and the reduction in SOFR. But the yields on the other loan portfolios remain at very similar levels, resulting in an overall reduction of the loan portfolios of only 7 basis points. This reduction in yields was, in fact, partially compensated by an increase of $155 million in the average balance of loan portfolios. What we expect, it's some of the same dynamics in 2026, some of the same dynamics that drove margin for 2025. We have approximately $848 million in cash flows during 2026 coming from securities that have an average yield of 1.65%. That would definitely be repriced at higher rates. Out of this amount, $494 million are expected in the first half of the year, benefiting the second part of the year. Based on current expectations that we have for interest rate changes in the year and 2026 and our projected loan and deposit movements, we expect that margin will grow 2 to 3 basis points per quarter during 2026. Other income items, we had a $3.5 million increase against prior quarter. Part of it was related to a $1.8 million gain from purchased income tax credits, and we also had an increase of $1.6 million in mortgage banking revenues and card-processing income based on volumes of sales and transactions. Operating expenses for the quarter were $126.9 million, which is $2 million higher than last quarter. Employee compensation was $3.4 million higher, but this was related to the $2.3 million employee retention credit that was recorded during the third quarter. Our actual increase was $1.1 million, which was due in part to the full quarter effect of [ merit ] increases that were granted in the third quarter. We also saw in the quarter an increase of $2.1 million in business promotion, which -- it's mostly related to seasonal marketing efforts. These increases were partially compensated by an improvement in OREO operations since we -- during the -- you might remember that during the third quarter, we booked a $2.8 million valuation allowance on a repossessed property that we didn't have this quarter. And we also had this quarter a reversal of $1.1 million of part of the accrual for the FDIC special assessment. Expenses before OREO results and the reversal of the accrual of the FDIC special assessment was $128.8 million for the quarter, which compares to $126.2 million in the third quarter, adding back the employee retention credit. This is slightly higher than our guidance and reflects some of the investments we're doing in technology, but the efficiency ratio remained strong, coming down to 49% in the quarter. At this point, based on the projected trend for ongoing technology projects and some of the business promotion efforts we were undertaking at the beginning of the year. We expect that quarterly expense base for 2026 will be in the range of $128 million to $130 million excluding the OREO losses -- gains or losses, I mean. However, we do believe that our efficiency ratio will still be in that range of 50% to 52%, considering the changes on the expense side, but also on the income component. In terms of asset quality, we saw a stable quarter. NPAs decreased by $5.3 million. Basically, we had two commercial cases, nonaccrual cases that amounted to $15 million that were collected in the quarter. And we had a reduction of $1.8 million in OREO, other real estate owned assets, as a result of sales we achieved during the quarter. On the other hand, we had two C&I loan cases amounting to $12 million that migrated to nonperforming in the quarter. Overall, nonaccrual loans represent 70 basis points of total loans compared to 74 basis points at the end of the third quarter. In terms of inflows to nonaccrual, they were $14 million higher this quarter, $46 million, but it's related to these two cases that I mentioned that went into nonperforming, the two C&I loan cases. In terms of delinquency, we saw loans in early delinquency, which we define as 30 to 89 days past due, increase $2.1 million. It was mostly on the auto portfolio that increased $7 million, but we had some reductions of $6 million in the Florida C&I loan delinquencies. The allowance for credit losses on loans increased $2 million in the quarter to $249 million and represent 1.9% of loans compared to 1.89% in the third quarter. This increase mostly relates to the growth we had in the commercial and residential mortgage portfolios. Net charge-offs for the quarter were $20.4 million or 63 basis points of average loans, fairly in line with the 62 basis points we had in the prior quarter. On the capital front, we -- obviously, our strong profitability allowed us to repurchase -- continue the repurchase. We did $50 million in repurchase of shares in the quarter, and we declared $28 million in dividends. Regulatory capital ratios continue to build up as these capital actions were offset by the earnings we generated in the quarter. We also registered a 4% increase in tangible book value per share to $12.29 and the TCE ratio expanded to 10%, mostly due to the $38 million improvement in the fair value of available-for-sale investment securities. The remaining ACL now represent $2.22 in tangible book value per share and slightly over 160 basis points in our tangible common equity ratio. Again, this year, we sustained our commitment to deliver close to 100% of earnings, as Aurelio mentioned. Through capital actions, we repurchased -- this year, we repurchased $150 million in common shares. We paid $150 million in dividends and redeem the remaining $62 million in subordinated debentures, while growing our tangible book value per share by 24%. So we announced yesterday, our Board of Directors approved an increase of $0.02 per share quarterly dividend. And again, our intention is to continue the approach of executing our capital actions based on market circumstances with our base assumption of repurchasing approximately $50 million in shares per quarter through the end of 2026. But again, as we have done so far, we will continue to deploy our excess capital in a thoughtful manner, always looking for the long-term best interest of the franchise and our shareholders. This concludes our prepared remarks. Operator, please open up the call for questions.

[Operator Instructions] Our first question comes from Brett Rabatin from Hovde Group.

This is Anya Pelshaw speaking on behalf of Brett. We were just wondering if you feel there's any more mix shift change with lower liquidity? And any other levers that might aid the NIM going forward from here?

The levers would be similar. I think it's going to come from these cash flows on the investment portfolio. We still have those low-yielding securities that are coming due. And again, as Aurelio mentioned, we see the loan pipeline on the commercial side and residential being really strong, not so much on the consumer side, which are higher-yielding assets, but still the mix of these items with the options to reprice some of the deposit components as rates come down, those would be the key drivers. That's -- the mix -- the 2 to 3 basis points, we just mentioned, it's that mix that we expect happening. Right now, we're assuming there is going to be probably 2 more rates toward the end of the year and -- 2 more cuts, I mean. And that would have some impact. But clearly, the repricing of the commercial portfolio, the floating side does have some impact, and that's included in our numbers that the rate reduction we had in mid-December, obviously, it's going to reflect more on that portfolio now in the first quarter. But the overall, we still feel that there should be an improvement in margin.

And what are you guys seeing as far as competition goes, how much more do you think the cost of funds could be lower with lower rates? Yes, I mean, what are you seeing as far as the competitive front?

Well, we haven't set a specific number, but you have to look at components. Number one, we do have still some wholesale funding through broker cities mostly. Those are repricing with market. And we don't have long-term issues of brokers. Mostly they were originally issued somewhere between 9 months and 18 months. So those are coming due and are being reissued to fund our Florida operation at lower rates. The other component, it's the time deposit side. Obviously, with rates coming down, we are seeing some of the ones that were issued at higher rates, now being repriced at slightly lower rates. And as rates come down, some of the other government deposit accounts will have some repricing those -- some of them are tied to market indexes. So those are where we see most of it. The regular transaction accounts, they could come down a little bit, but not so much. If you go back, you'll see that they didn't go up as much either when rates were going up. So we'll -- we expect similar trends. Those accounts had like a 14% beta. So we don't see that changing that much, but the other components are expected to come down.

And you guys touched on credit quality a little bit during your talk, but I was just wondering if you could expand on -- it's obviously fairly stable, but is there anything that you see might change that for better or for worse?

No. In reality, we believe there is stability. We don't see any specific noise. We saw some deterioration on the consumer delinquencies, which is normalized, also charge-off. So I think we call it stable when you look at the mix of assets, mortgages at its lowest-ever point and commercial similar to that. So we don't see potential disruptors on that and closely monitoring the unsecured market and the consumer, but we're encouraged by the recent trends that we see in the portfolios.

Our next question comes from Steve Moss from Raymond James.

Maybe just starting here with -- maybe just on the loan growth front, just curious with regard to auto, if you have any updated thoughts about what you're seeing in that market? I heard earlier -- your tariff comments earlier, but just kind of curious, any new thoughts or incremental color you may have.

Yes. When we look at what happened last year, the overall market retail -- on the retail side, was down 10%. And also, that contraction happened after the tariffs were implemented. So if you consider that, it's actually the second half of the year, the reduction was over 15% compared to prior year. So we are -- we believe we have seen months of stabilization at a level that will be around an additional 5% this year, contraction, considering the normalization in the last quarter, unless there is some reversion on the pricing. It's very fluid because some of the manufacturers are still looking to adjust pricing down. Some of them implemented the tariff immediately, others didn't. The ones that didn't, obviously, regained some of the share, the other lost share. So this is -- the percentage that I provided you is a combination of all of the industry. So we saw the quarter, we saw a contraction in the portfolio of about $6 million overall in the two segments, a little bit -- probably $7 million, in that range. So obviously, we're looking forward to stable the portfolio -- to stabilize the portfolio and recuperate that contraction, but we don't expect any growth in the segment, so -- unless there is adjustments on tariff or excise tax in the island that could help that industry. Still a pretty good year for the auto sector. We're just coming from exceptional years. So everything is relative to the prior period. But it will be stable if we compare it to other cycles of the auto sector. And then the consumer demand on the other products is kind of stable, but we don't expect -- we don't see growth as we continue to focus on underwriting in a sound manner.