First BanCorp. (FBP) Earnings Call Transcript & Summary

Good morning, and welcome to the First BanCorp. Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Ramon Rodriguez, First BanCorp's Corporate Strategy and Investor Relations Officer. Thank you. Please go ahead.

Thank you, Julian. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the second quarter of 2026. I'm here with Aurelio Aleman, President and Chief Executive Officer; and Said Ortiz, CFO, 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 SEC filings. The company assumes no obligations 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.

Thank you, Ramon. Good morning to everyone, and thanks for joining our earnings call again. We concluded the first half of the year with another quarter of strong core performance, delivering growth across the franchise and generating very attractive returns for our shareholders. We earned $96 million in net income, $0.62 per share. That is up 24% when compared to same quarter last year. Underlying revenue trends, I have to say, remained very strong during the quarter, with pretax pre-provision income reaching an all-time high of $138 million, which is actually up 11% from a year ago. This translates into a 2% return on average assets, and this is our 18th consecutive ROA above 1.5%, continuing the strongest and most consistent period of financial performance in our actual history. Moving to the balance sheet, very pleased on how loan growth accelerated during the quarter driven primarily by commercial activity in Puerto Rico, reaching $13.3 billion in total loans. That is up 5% on a linked quarter annualized basis. Total loan originations for the quarter were very encouraging, reaching $1.7 billion during the quarter, reflecting a 21% year-over-year increase. Given what we see in our pipeline, we do expect this level of activity to continue for the remainder of the year. This actually reinforce our path to achieve our full year growth objective for 2026. Total deposits grew by $274 million during the quarter primarily driven by an increase in the government deposit, but also we have a slight increase in the core customer deposits. Credit performance remains sound with lower net charge-off and nonperforming as the remaining near historical lows. That said, early delinquency -- early sale delinquency came up during the quarter, but essentially when we look at it over the same period last year was flat to prior year, June and it was actually below in December 2025. So we continue to monitor the [indiscernible] delinquency trends and broader consumer market conditions. Regarding capital deployment, consistent with prior quarters, we completed our $50 million of share buybacks, and we paid a $0.20 per share dividend. Even after these actions, we ended the quarter with a very strong CET1 of 17%, which leaves ample room to continue investing strategically in our franchise technology enhance competitiveness and improve the customer experience, which is our primary objective. Moving to Slide 5. Happy to see that in spite of the global noise and war, we continue to see an environment that is positive and stable, supportive of the loan activity that we see. If we look at the main market, unemployment, it stands at 5.6%, which is pretty good for our market, considering trends, preconstruction activity continues to provide economic support and the [indiscernible] continue to benefit from encouraging reshoring and manufacturing investments announcements that will -- that represent actually a future benefit. While industry -- on the other hand, industrial sales continue to reflect the impact of tariffs. The recent trends for the last quarter suggests that the market is beginning to normalize with June industry-wide auto sales down 3%, only 3% year-over-year. So we believe sales are stabilizing. Again, against this backdrop, core business continued to perform really well, loan growth accelerating in the second half of the year as business activity in Puerto Rico continues and [indiscernible], Florida is having a really good pipeline also. That said, we sustain our loan growth guidance target of 3% to 5% for the year, obviously, looking forward to achieve that in the second half of the year. We also continue depending to customer engagement through the multichannel strategy. Active EBITDA users continue to grow with 6% versus prior year. And we continue to increase to 95% now deposit transaction captured to digital asset service channels. As we look ahead, the priorities really remain unchanged, very focused on our execution, focus on selectively growing the market share in our core business, confident in our ability to grow organically to disciplined execution while evaluating potential alternative strategic opportunities as they arise, maximizing the significant organic growth opportunities that we see in front of us. At the same time, continue to invest in the franchise, technology, leveraging AI to automate routine processes and enhance the client experience. I think we all are in the early innings of this AI journey, and we're encouraged by the opportunity that we see. At the end is about how you can service the customer better, how can improve processes, short-term life cycle and improve the management of potential fraud. This quarter reflect what has become a hallmark in our franchise from profitability, disciplined risk management, robust capital generation and at what is most important is consistent execution across our different cycles. As always, I really thank you for your interest in First BanCorp. We appreciate your continued support. Now I will turn the call to Said, our recently appointed CFO, to go welcome side to the call to go over the financial results in more detail. Said?

Thanks, Aurelio, and good morning, everyone. As Aurelio mentioned, for the second quarter of 2026, we earned $96.1 million or $0.62 per diluted share which compared to $88 million or $0.57 per share last quarter. Pretax preprovision income increased by $6 million or 5% when compared to the previous quarter and reached an all-time high of $138 million. The return on average assets was 2.02% for the quarter compared to 1.89% in the previous quarter. Results for the quarter did include additional interest income of approximately $3.4 million related to 2 refinancings during the quarter, commercial loan and municipal bonds, which resulted in accelerated recognition of deferred fees or [indiscernible]. If we exclude this impact, net income would have amounted to $93 million or about $0.60 per diluted share. The provision for the quarter was relatively flat. The provision did benefit from a reduction in charge-offs of approximately $5 million, primarily in the auto portfolio. This was offset by loan growth, particularly in the commercial residential portfolio. The macro, as Aurelio mentioned, continues to show slight improvements in the unemployment projection and the home price index at a lower degree than on the previous quarter. Income tax expense for the quarter was $24 million compared to 25 in the previous -- $25 million in the previous quarter. Results included about $1.3 million benefit from a lower estimated tax rate for the year as a result of the proportion of tax expense income deducible income. The estimated annual effective tax rate is expected to be closer to 21% compared to 21.6% in the previous quarter. Moving on to Slide 8. Looking at net interest income, it grew about 3.7% quarter-over-quarter and amounted to $229.1 million compared to $221 million in the previous quarter. The increase of $8.1 million in net interest income includes the $3.4 million of additional interest income related to the aforementioned refinancing, of which $1.8 million was included as part of interest income of investment securities and $1.16 million was included as interest income on loans. Excluding the impact of the fee acceleration, interest income on loans grew by $1.7 million, primarily due to the additional day in the quarter. Interest income and investments and cash increased by $4.5 million. Excluding the aforementioned refinancing, the yield on the investment portfolio continued to increase and increased by 18 basis points as we have continued to reinvest cash flows from maturing securities into higher-yielding instruments. Looking at the interest expense side, we continue to proactively manage our funding costs with overall deposit cost declining by 2 basis points versus the prior quarter. The cost of [indiscernible] deposits, excluding brokered deposits and public funds, decreased by 8 basis points to 3.26%. On the other hand, cost of interest-bearing checking and savings accounts increased by 5 basis points to 126%, driven by higher rates on certain government accounts. Additionally, the cost of brokered deposits decreased by 9 basis points, and the average balance in the quarter was down by approximately [ $20 ] million. Our net interest margin on a GAAP basis was 4.87%, a 12 basis point increase when compared to the previous quarter. If we exclude the acceleration of fee discounts recognized in the quarter, our net interest margin would have been closer to 4.80%, reflecting a 5 basis point increase when compared to the prior quarter. It was slightly higher than the 2 to 3 basis points per quarter guidance we provided at the beginning of the year. As you know, the rate environment has continued to evolve and absent any rate cuts in the second half of the year, we believe our asset-sensitive balance sheet position continues to be well positioned for additional NIM expansion. We expect for the remainder of 2026 our margin to expand by 3 to 5 basis points per quarter out of the 4.80% base. Shifting to other income and operating expenses on Page 9. Other income was up -- it amounted to $35.7 million versus -- I'm sorry, it was down. It amounted to $35.7 million versus $37.7 million in the previous quarter. The decrease was mostly related to seasonal contingent commissions, which are typically received in the first quarter. Operating expenses for the quarter were relatively flat when compared to the previous quarter, reaching $127.3 million. If we exclude the gains from OREO operations, expenses amounted to $128.2 million and were on the lower end of our guidance. The efficiency ratio was 48.1%, slightly lower than the 49.1% on the previous quarter associated to the higher levels of income we saw this quarter. We expect our quarterly expense base for the remainder of 2026, excluding OREO gains or losses, to range between $128 million to $130 million as may increase take effect during the third quarter, combined with pickup in business promotions and [indiscernible] trends on our technology price. We believe that our efficiency ratio levels for 2026 will be closer to the lower end of our 50% to 52% range as the changes in expenses and income components continue to play out in the future. Moving to Slide 10 to discuss asset quality. Nonperforming assets grew $5.1 million when compared to the previous quarter, mainly related to the inflow of a C&I loan in the Florida region of approximately $14.8 million, which is -- which [indiscernible] is well collateralized. Excluding this relationship, nonperforming assets decreased by $9.7 million as we did see reductions in the residential mortgage portfolio, consumer portfolio and [indiscernible]. Inflows from [indiscernible] were $40.7 million which is $6.4 million higher than last quarter. Excluding the aforementioned inflow in the employer region, inflows to non accruals were $8.4 million lower than prior quarter, mostly driven by a $4.6 million decrease on the auto finance lease portfolio. On the other hand, we did see early stage delinquency up in the quarter by approximately $32.9 million when compared to the previous quarter, mainly due to a $20.7 million increase in the [indiscernible] final leases portfolio. In the first quarter, we did see a reduction in early delinquency as consumer typically received tax refunds early in the year. Early delinquency in the consumer portfolio if we compare it to December 2025 is actually lower by approximately $10.3 million. We continue to see stability in the overall delinquency trends and credit quality and continue to closely monitor consumer behaviors more broadly. Moving on to the allowance on capital on Slide 11. In terms of the allowance, it amounted to $245 million, which represents 1.85% of total loans, and was relatively flat when compared to previous quarter. In general, the allowance increased due to loan growth, particularly in the commercial and residential portfolios and higher delinquency in the auto and final leases portfolio I just mentioned. Such increase was offset by multiple factors, including improvement in the macroeconomic projections, particularly unemployment and HPI, combined with improvements in delinquency in the consumer unsecured portfolio. Net charges for the quarter were approximately $60 million or 49 basis points of average loans, significantly lower than 65 basis points we had in the prior quarter. This improvement was mostly due to a decrease of $4.7 million in consumer and finance leases, net charge-offs, mainly the auto portfolio. Capital remains strong, and our healthy and consistent profitability levels have enabled us to repurchase $15 million shares of common stock and the [indiscernible] $31 million in dividends. Our regulatory capital ratios continue to exceed regulatory levels and remain relatively unchanged against prior quarter as earnings offset capital deployment actions and growth in RWA. Annual book value per share grew to $12.68 while tangible common equity ratio decreased 3 basis points to 10.08%, mainly related to growth in tangible assets. We still hold about $2.36 in tangible book value per share and about 166 basis points in tangible common equity ratio related to the other comprehensive loss adjustments from the investment portfolio. Overall, we're very satisfied with the results for the second quarter and remain focused on supporting our clients and growing our business while delivering close to 100% of earnings to shareholders in the form of buybacks and dividend. This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] Our first question comes from Arren Cyganovich from Truist Securities.

Loan growth, very solid this quarter, and it sounds like your pipelines are going well, both in Puerto Rico and Florida. Maybe you could talk a little bit about what types of originations you're doing, what kind of spreads you're seeing in the competitive environment there?

Yes. As I said before, obviously, the growth this quarter primarily was commercial. On the other hand, better stability on the auto consumer portfolio than we have anticipated. So there was a little slightly growth there too, not a contraction, which is very positive. On the commercial side, I think it's a good mix of some acquisitions by the larger player, some CRE, some construction, C&I. So it's a good mix of assets around development of warehousing, hotels, actually small piece on the health care part of it. But it's all I would say, commercial activity, not necessarily focused on the very large but for the middle market. And there was some transaction in the government of significant size, which was the refinancing of debt -- restructure of debt, which we increased our exposure in a very solid municipality in terms of financials. So overall, that -- and there was some infrastructure refinancing too which led to an increase. So I think if we look for diversification of risk and where we position our capital in terms of the asset classes that are embedded.

In just around 17% of CET1, what are you seeing on maybe M&A front, something that you might be able to utilize all that excess capital?

I mentioned -- as I mentioned before, we look into things and potential activity. There's not much we can say about that, but we're active participants in looking at what could be a strategic fit for our franchise that could follow our same operating model and could deliver the consistent results that we have, but there's not much we can say other than that, it's opportunistic. In the meantime, we continue to deliver execute our buyback and deliver a competitive dividend, and obviously, primary organic growth. So we're seeing good activity in our new region in Florida that we opened in the last quarter last year, the Boca Raton office. So we continue to see pretty good activity there, too. So though the organic play continues to lead the front of our efforts.

Our next question comes from Kelly Motta from KBW.

Great quarter. Maybe to kick it off, the margin clearly a highlight even if you exclude those loan fees, definitely came in well above where we had expected with what it helped like some expansion ahead. Can you walk through some -- remind us the repricing dynamics of the securities book because clearly that's a big driver here.

Okay. I'm going to make a few comments and pass it to Said. I think it's important, there's -- obviously, the yield curve has to do with this versus our projection, rates continue to be better in the investment portfolio, those maturities as Said will talk about but also loan activity on the commercial book, which is a significant portion of our book is variable. So we -- those 2 components are important in understanding how our margin continues to get better, which is good to say that it's better than anticipated. And that's why we revisit the forward guidance to a higher range. Obviously, this quarter, we did have what we consider nonrecurring items regarding these 2 loans that were renewed and have some benefits underneath. Said?

In terms of repricing in the investment portfolio, we expect about $400 million on the second half of the year, those are yielding around 1.92%. So -- and looking at 2027, there are about $100 million coming in of securities yielding about 1.73%. So all in, in the next 18 months, it's about $1.2 billion of repricing coming.

Okay. That's helpful. And then I apologize if you hit on this, but with the deposit growth, it looks like about 2/3 of that was on the government deposits. Can you help us out with your expectations around flows on that side as well as any commentary on how competitive pricing dynamics are holding up for the core portfolio?

Yes. When you look at deposit cost, it's almost flat. Obviously, there's a portion of government deposits that are linked to an index. And there's always been volatility on that government book in terms of large chunks moving in or out in a specific quarter based on key relationships that receive funds primarily from reconstruction and once come in, go out and some other time deposits that we negotiate with our core relationships that are transactional basis. I will say just think about for [indiscernible] deposits staying around this average that we have for the last years, liquidity is very solid in still funding coming in through both CDBG and FEMA for different purposes -- under construction, even prep our or some of the other entities that we have in the portfolio. I think in the core customer, we're seeing again obviously linked to money market rates and treasury rates, you start to see again high balances that need to be retained in the quarter, we, for example, increased customers in both retail and commercial on the deposits. But if some of the large customers will lose some of the deposits, net-net was positive, but we start to see a little bit of that noise and we start to compete to retain better. So I will say deposit costs will continue to be in the same place that we are because it's a very large deposit base. And when you look at the aggressivity in a very specific component that you can actually play and not really impact the franchise. So I will say stability in both government deposits and obviously, we continue to target growing our core franchise.

Our next question comes from Steve Moss from Raymond James.