First Bank

Hello and welcome everyone to the First Bank Corp 2Q 2025 financial results. My name is Becky and I'll be your operator today. During the presentation, you can register a question by pressing star followed by one on your keypad. If you change your mind, please press star followed by two. I will now hand over to our host, Ramon Rodriguez, IR officer, to begin. Please go ahead.

Thank you, Becky. Good morning, everyone, and thank you for joining First Bank Corp's conference call and webcast to discuss the company's financial results for the second quarter of 2025. Joining you today from First Bank Corp are Aurelio Aleman, President and Chief Executive Officer, and Orlando Bergez, 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 Alemán.

Thank you, Ramón. Good morning to everyone, and thanks for joining our earnings call today. As usual, I will begin with discussing our financial performance for the second quarter and then provide some high-level macro observations and also share some business highlights for the franchise. We are very pleased to report another strong quarter. The financial results underscored the strength of the franchise and ability to deliver consistent return to our shareholders. We earned 80 million in net income, which translated into a strong return on assets of 1.69%, driven by record net interest income, solid loan production, and well-managed expense growth. Pre-tax preprovision income was likely below prior quarter, but up 9% when compared to prior year. And more importantly, we did sustain our top quartile efficiency ratio at 50%, actually in the low end range of our range of 50 to 52%. Turning to the balance sheet, we were very encouraged to see commercial long-ordination activity pick up during the quarter, a clear indication of a stable macro across our markets, and obviously the successful execution of our teams. We grew total loans by 6% in quarter annualized, mostly driven by strong commercial loan production in Puerto Rico and Florida. Commercial lending pipelines actually continue to be strong as we enter the second half of the year, which is crucial for our strategy. Moving on to deposits, we did see a reduction in customer deposits during the quarter, mostly driven by frustration in a few large commercial accounts while retail deposit accounts remain fairly stable. When we actually look at the detail of this decline, it was concentrated on very high-balance large commercial customers. As an example, five customers accounted for $120 million of that reduction. In terms of asset quality, the environment continues stable. I will say stable to improving from a credit standpoint, with most recent metrics moving in the right direction. Recent vintages performing better than prior vintages. Non-performing assets remain flat at 68 basis points of total assets and net charge-off came down during the quarter. This highlights the benefit of prior year's credit policy calibration and the improvement in the consumer vintages. Finally, our capital continues to build quite nicely even though we continue to execute on our capital deployment plan during the first half of the year. Consistent with the strategy that we announced, year-to-date we have deployed over 107% of earnings in the form of dividend buybacks and relational drops. And we definitely feel this action best suits the long-term interest of the franchise and our shareholders. So let's turn to page five to provide some highlights on the macro. You know, talking about main market, we believe the economic conditions and business activity in Puerto Rico and Florida are trending, continue to trend favorably. Obviously, there's economic concerns and uncertainty around tariffs and changes in U.S. policies, and the potential effect this represents obviously creates a degree of uncertainty for both retail and commercial customers, but we continue to see investment and commitment moving forward. The labor market remains strong, resilient, reflecting the lowest unemployment rate in decades. And after a few months of government transition, we're seeing some encouraging trends in disaster relief inflow, which continue to support economic activity and infrastructure development in the island. So those projects, which we also participate as it relates to affordable housing. In terms of the franchise, our key investments are technology, and we continue to increase that investment to achieve long-term growth for our business. We're also contributing to deliver our basic class efficiency ratio. Definitely, the franchise investment remains. improving our interaction with customers and provide them with a seamless experience through our multiple channels. The successful execution of our omni-channel strategy has been evidenced by the actually 8% annual rise in digital active customers achieved consistently over the past five years, coupled with a steady reduction in branch active customers over the same period. When we look at our strategic priorities for the franchise, supporting economic development, of course, our market is a main priority, lending to both consumer and corporations. If we break down our long growth for the first half of the year, commercial credit demand has been very strong, while residential mortgage has slightly increased, and consumer credit demand has been relatively steady. Based on current lending pipelines, reduction in in brother market uncertainty and our outlook for improving consumer health in puerto rico we remain confident that we can achieve our mid single digit long road guidance for the full year we still have you know half of the year to catch up the corporation track record speak for itself will continue to be return focus and allocate our capital where it makes more sense to our customers and shareholders as we do you know Every year we are reviewing our capital plan, and we will provide an update when we report third quarter results in October. Remember that we still have $100 million left of our 2024 buyback authorization, which we expect to opportunistically execute over the next two quarters, aiming to achieve our target of deploying 100% of our earnings to shareholders in the form of capital actions. Thank you for your interest and support, and thanks to our colleagues for their collective achievement supporting our customers. I will now turn the call to Orlando to go over financial resources in more detail. Orlando.

Good morning to everyone. So Aurelio mentioned we had a strong second quarter highlighted by an income of $80 million, which is $0.50 a share. The return on asset that he mentioned that increased to $169 and an expansion of the net increase margin to $4.56 for the quarter. The provision for the quarter decreased $4 million from $24.8 million in the first quarter, which was driven by reductions in consumer net charge-offs and improvements in the macroeconomic forecast, specifically the projected unemployment rate in Puerto Rico, which has an impact on projected losses. The income tax expense for the quarter includes a benefit of $500,000 related to a reversal of tax contingency accrual, but also the effective tax rate, it's coming in lower based on a higher proportion of exempt income. Considering the projected consolidated income for the year, we believe that the effective tax rate for the year should be around the 23%. In terms of net interest income, it increased to 215.9 million in the quarter, 3.5 million higher than last quarter. This quarter includes a 1.6 million improvement for an extra day in the quarter. However, as we discussed in the previous quarter earnings call, the net interest income for the first quarter included 1.2 million in fees and penalties that were collected on the early cancellation of a 74 million commercial mortgage loan. and this quarter we didn't have anything similar to that. On average, the commercial and construction loan portfolios grew 100 million this quarter, but yields were down four basis points to 67 when considering normalization of the first quarter yields based on the 1.2 million in fees collected, as I just mentioned. In the case of the consumer portfolios, the average balances were slightly down $2 million, basically on the unsecured lending. Auto and leasing portfolios grew $24 million on average. The yields on the overall consumer portfolios were down from $10.68 to $10.57, in part due to a change in the mix of auto, lower yielding, and some of the other unsecured lending portfolios. Regarding the investment securities portfolio, we're starting to see the pickup in yields. We saw a growth of six basis points in the quarter as we continue to reinvest the lower yielding maturing cash flows into higher yielding instruments. This quarter, we purchased 397 million in securities at an average yield of 478. On the funding side, we completed the redemption of the remaining junior subordinated debentures. and paid down at the end of the first quarter, $180 million in mature and federal home loan bank advances that were higher-cost funding. As a result, the overall cost of interest-bearing liabilities increased $2.3 million for the quarter, and the average cost was $214 million, which is nine basis points lower. In the case of deposits, even though at the end of the quarter they were down, as Aurelio mentioned, on average, interest-bearing deposits, excluding broker, 110 million higher than last quarter. The cost of interest-bearing transaction accounts was 138, which is six basis points lower than last quarter. And the cost of the time deposits was 336, which is three basis points lower. All of this translates into an net interest margin of 456, which is four basis points higher than the 452 reported last quarter on a GAAP basis. However, as we discussed in the prior earnings call, If we exclude the items I mentioned before, the fees on the loan that was canceled, the normalized margin for the first quarter was really 448, thus resulting in an eight basis points increase in margin this quarter as compared to the first quarter. In terms of guidance, we continue to sustain the five to seven basis points pickup in the margin in each of the next quarter, as we mentioned during the first quarter call. Assuming the normal flow of deposits, we're confident we'll be able to continue to reinvest in common cash flows from lower yielding securities into higher yielding assets over the coming months and into 2026. Investment portfolio cash flows are expected to reach just over a billion in the second half of 2025, about $460 million of that in the third quarter and $600 million in the fourth quarter. In terms of the other income, it was $30.9 million, which is down $4.8 million versus the prior quarter. But most of the increase was related to seasonal contingent insurance commissions we received in the first quarter and lower realized gains on purchase of income tax credits. On the other hand, we were slightly better in service charges on deposit accounts and mortgage banking fees for the quarter. Operating expenses. were $123.3 million, relatively in line with the $123 million we had last quarter. Compensation expense was down $2.1 million, driven by bonuses and stock-based compensation that was recognized in the first quarter, and also the decrease in the payroll taxes as employees reached the maximum taxable amounts. On the other hand, we had an increase in credit card and dividend credit card processing expenses, due to expense reimbursements we received from the networks in the first quarter. And this quarter, we also had a reduction of $500,000 in the gains on OREO operations. Excluding OREO, expenses would have been about almost $124. It's $133.9 million, which compares to $124.2 million in the first quarter. The efficiency ratio, as Aurelio mentioned, was 50%, pretty much in line with last quarter. Expenses for the quarter were below the guidance range we had provided in the prior earnings call, but based on projected expense trends for ongoing technology projects and business promotion efforts that are geared towards the second half of the year, we do expect that our base for the next couple of quarters will be closer to the guidance that we provided before, that 125 to 126 range, excluding the OREO gains or losses. The efficiency ratio, we still believe it's going to be between that 50 to 52 range, considering the expenses changes and the income changes that are being forecasted. In asset quality, NPAs decreased $1.4 million in the quarter. We had a $2.5 million reduction in non-accrual consumer loans and a $3 million reduction on OREO and other repossessed assets. On the other hand, we had a $4 million migration to non-performing and construction loan portfolio in the Puerto Rico region. The NPA ratio remained flat at CCA basis points of assets. Inflows to non-accrual were $34.4 million, which is down $9 million versus the prior quarter. Mostly $12.6 million commercial mortgage loan that went into non-accrual in the first quarter in Florida. Inflows for consumer and residential mortgage loans combined were down about $400,000 this quarter. In general, as we mentioned before, credit metrics seem to be holding up well. Loans in early delinquency registered a slight increase of $2.8 million to $134 million, mostly in the auto portfolio. And as Aurelio mentioned, we continue to monitor consumer credit closely, and we're seeing improvement in recent vintages, which is a result of the credit policy adjustment that was done back in 2023. The allowance for the quarter increased $1.3 million. to $248.6 million. Mostly, the allowance increased based on the growth in the commercial portfolio during the quarter, but we did have reductions in the allowance for consumer loans resulting from the improved unemployment rate forecast in Puerto Rico. The ratio of the allowance, the overall allowance, decreased two basis points to 193, but it's mostly due to a six basis points reduction in the allowance for the consumer portfolio. Net charge-offs for the quarter were 19.1 million, 60 basis points of average loans, which is down from 68 basis loans in the first quarter. But keep in mind that the first quarter net charge-off included 2.4 million in recoveries that were related to the bulk sale of consumer charge-off loans. If we were to exclude that sale, the net charge-off for the first quarter would have been 76 basis points. So we had a 16 basis points reduction as compared to that number. On the capital front, as Aurelio commented, we executed on our capital deployment strategies during the quarter by redeeming the remaining subordinated debentures, declaring the $29 million in dividends and repurchasing $28 million in stock. Just to clarify there, you remember we had a plan of $50 million per quarter, and during the first quarter, we redeemed the $50 million of the drops But also, based on the way the market was moving, we accelerated some repurchases of the second quarter amounts, and we repurchased $22 million in the first quarter. So we completed the second quarter at $28 million to reach the $50 million, and on top of that, we redeemed the remaining $11 million or so of the remaining drops. In terms of the tangible book value per share, it increased 5%. percent during the quarter to $11.16, and the PCE ratio expanded to 9.6 percent, mostly due to $41 million increase in the fair value of the investment portfolio. So far this year, the fair value has improved $125 million. The remaining valuation allowance, AOCL, that we have in the books represent our $2.69 intangible book value. and over 200 basis points on the tangible community reach. Again, we will continue to deploy our excess capital in a thoughtful manner, always looking for the best interest of the franchise and the shareholders. This concludes our prepared remarks. Operator, please open the call for questions.

Thank you. If you wish to ask a question, please press star followed by one on your telephone keypad now. If for any reason you want to remove your question from the queue, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Brett Rabaton from Hovday Group. Your line is now open. Please go ahead.

Hey, good morning, gentlemen. I wanted to just make sure from a...

housekeeping perspective the tax rate that you guys expected i thought i heard 23 is that for the full year or was that for the back half of 25 for the full year of red that would be the the estimated um tax rate effective tax rate based on the forecasted mix of exempt and taxable income and some of the other components for the year okay keep in mind that we do have uh Just one comment. Keep in mind that one of the benefits of the redemption of the props is that they were sitting at the holding company level, and the expense, the interest expense there, because we don't have a profit at the holding company level, was really not getting any tax benefit. So that's part of the reason we're getting some of the effective tax rate improvements.

Oh, okay. That's helpful. And then just the comments on the deposit decline that seemed to be kind of high net worth or commercial, any additional color there? Do you think that migration has run its course, or can you give us any other color around what you're seeing on larger deposits?

You know, there is a lot of moving parts primarily It's really recurring business purpose, actually, capital investments. There are some tax payments that took place. There is even settlements. You know, there's a significant number of those variances that we saw this quarter we believe are non-recurring in nature. And there is some, you know, high yielding seeking behaviors, too, in that, you know, very high balances segment. So... You know, but, you know, when you look at it, it was highly concentrated. As I mentioned, you know, top five customers represented 120%. And, you know, 25 customers, the overall variance is around 25 customer overall. So, from the commercial segment itself. So, from the retail side, you know, very stable. Net, you know, net customers are growing and net accounts are growing. which is an important metric that we follow.

Okay. And then just on credit, I mean, credit, you know, outside of the, you know, kind of the consumer, you know, is just really, really good. Would you guys expect the level of charge-offs to increase from here, or do you think this is a sustainable level for the overall portfolio?

is you know we believe is sustainable to improving the trend on the charger for the consumer portfolios okay great thanks appreciate all the color guys thank you thanks rick thank you our next question comes from tamar brazilia from wells fargo your line is now open please go ahead hi good morning

Robert Marlayson, Or back on the back on the deposit commentary, I think, last quarter, the comments were that the deposit stability. Robert Marlayson, you're seeing more deposit stability versus the last couple of years, what were these outflows surprising is this kind of. Robert Marlayson, excess liquidity that you were expecting to leave at some point and it just culminated into Q and then the comment on the 25. customers overall. Is that the total in this larger commercial segment or is that the total that made up the composition of the 2Q decline?

No, it's the total that made it the composition of the decline. We have a lot more customers on that segment. It's just, you know, top customers that show variances all together. You know, some of them were surprised because of the movement took place, but, you know, some of them are just, you know, recurring business purposes that it just, you know, a lot of things that happened in the same time, in the same quarter. Also, tax events of tax payments on the April 2, we saw some of that. We believe, you know, most of them are not recurring. But obviously, you combine that with, you know, the higher for longer rates, you know, that high yielding behavior, as long as rates are high, that high yielding behavior will continue. And we do have certain parameters up to which point we compete also.

Got it. And I guess as we look into 3Q specifically with your comments around maintaining the mid-single-digit loan guide, that implies some accelerating on the loan growth front. If I'm not mistaken, I think 3Q is a little bit more challenging from a deposit standpoint, from seasonality. Can you just give us some parameters on what the expectation is internally for funding the second half loan growth?

You know, the second half, we believe stability, you know, that we're going to achieve stability in the deposits. Again, there's some, you know, deltas on the government side that are difficult to predict when they come in and out. There's some variances sometimes on the government accounts, on the large accounts, money flowing in and flowing out in terms of some of the payments that come in from different funds. No tax deltas should happen in the second half or minimum. We will say stability. Obviously, a lot of the liquidity that you're going to see coming in the second half, which Orlando mentioned earlier, It's more than a billion dollars from the cash flows on the investment portfolios that the primary objective is to deploy that in loans, not necessarily securities, but the excess will go back to securities.

Got it. Okay. That's good color there. And then just lastly for me on the loan growth, it's been a good start to the year out of the mainland. Just the composition that you're expecting in the second half of the year, is that going to be more so from Puerto Rico on the commercial side, or is the expectation still here that the mainland is going to drive much of the near-term loan growth?

It's a combination. It's a combination. Florida will continue to contribute, you know, as well as, you know, the Puerto Rico commercial sector is where we see most of the growth, stability in the consumer. and actually some growth in the residential mortgage, which we already have achieved some this year.

Great. Thanks for the call, Eric. Okay.

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

Hey, this is Chase on for Steve. Good morning.

Good morning. So first, I was curious where loan yields have been coming in these days. Could you repeat that question? We couldn't hear you well. Oh, sorry. I was just curious where loan yields have been coming in these days.

Well, as I was saying, if you look at the yields on the CNI portfolio, it came down four basis points. The yield on the consumer portfolios are very much similar. The difference has been more than anything the change on mix. As you know, credit cards are based out of prime. Personal loans, we have two components, typical and secure personal loans. 13% range, and the small loans under special legislation in Puerto Rico are closer to the 30%. The auto portfolio, it's on the 8% range. So we've seen some reductions on the commercial side, not so much on the consumer side. And mortgage, it's a market function. It's similar to what you see in the States. We're seeing that, you know, 6 1⁄2 to 6 3⁄4 kind of yields in general, depending on the type of product.

Gotcha.

Thanks for that color. And one last one for me. How much room do you think there is to continue pushing down funding costs? And do you expect to pay down your remaining FHLB advances as they mature?

I mean, there are a few components. What we have in broker deposits that we use to fund the Florida operation, or part of the Florida operation, those will continue to come down as the market is lower than what some of the things have matured. Time deposits, there's a little bit of space, but it's coming, as it's been coming down, clearly rates staying at These levels consistently will stop that a little bit. The federal home loan bank advances would be a function of needs at the time and funding timeframes management. As you saw, we paid down the 180 million in the first quarter. We didn't need the funding with the cash flows coming in from the investment portfolio. We might have some opportunities. So there is... There is some opportunities. In reality, the Federal Home Loan Bank advances, what matures within the next three months, it's only $30 million. So we will probably pay those down. But there is about $90 million on the six months to a year time frame that we'll see based on the funding mix. But yeah, the idea is to get those costs down, eliminating some of it or just repricing some of it.

All right. Thanks, Akelar. That's all my questions. Thank you so much. Thanks.

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

Hey, good morning. Thanks for the question. I think maybe going back to the loan growth and the mid-single digits, you guys had some nice loan growth this quarter, it looks like. As you called out, a lot of it was in commercial and CNI. Just wondering if you were seeing any changes in the utilization rate and in terms of the loan growth in the back half of the year. um how your expectations are do you feel better about it than you did maybe the same time three months ago just wondering kind of your overall level of confidence in the mid single digit loan growth and and kind of um any utilization rate factors that we should be considering here you know i i can tell you you know the the pilot looks pretty good

We look at it today actually a little better when we look at it at the beginning of this year or the end of the last year. So from that standpoint, we're pretty confident on the continuous movement of that pipeline into closing. Regarding line utilization, I don't have the data. you know, just do it from the top of my head, you know, we can get back to you on that or the overall, you know, in our investor presentation when we update.

Got it. That's helpful. And then just on a high level on the efficiency, you continue to kind of target that, I think, 52% efficiency ratio. For the past several quarters now, you've been coming in quite below that. As we look ahead to next year, are there any significant investments in technology or things you're looking at to, you know, drive longer-term efficiencies that we should be considering when building out a longer-term expense run right here?

Well, you know, we've been doing, we're making those investments for some time, and those will continue. I think we provided some highlights earlier in the year of completing important steps in our cloud migration and eliminating the mainframe that existed in Puerto Rico until the first quarter, as an example. The adoption of cloud-based technology, the movement of everything that we still have in the open environment here will continue. Investment in additional self-service tools and and functionality in the applications, the digital applications across different businesses and products, including mortgage, auto, and deposits, will continue. You know, it's been a significant amount of the expense base for some time, so it will continue to be, you know, obviously process automation related as the new tools bring, you know, some AI components into it. So I will say, you know, we don't expect a big peak of those because we continue to sustain, you know, the levels that we've been doing, being very active in those investments. Like last year, Densino platform implementation was one of them, some of the process automation and the risk management, you know, tools.

Got it. Thanks so much. I'll step back.

Thanks, Kelly. Thanks.

Thank you. We currently have no further questions, so I'll hand back to Ramon Rodriguez for closing remarks.

Thanks to everyone for participating in today's call. We will be attending Raymond James Financial Services Conference in Chicago on September 3. We look forward to seeing a number of you at this event, and we greatly appreciate your continued support. Have a great day, and thank you. Thank you all.

This concludes today's call. Thank you for joining. You may now disconnect your lines.