First BanCorp - Earnings Call - Q2 2025

Executive Summary

• Q2 delivered EPS of $0.50, up sequentially and year/year; EPS beat Wall Street ($0.457) while “revenue” (net interest income after provision + non-interest income) of $226.2M missed consensus ($251.7M). Bold: EPS beat; revenue miss. Drivers: margin expansion (+4 bps to 4.56%), lower provision, but non-interest income normalization after seasonal insurance commissions in Q1. Values retrieved from S&P Global.*
• Net interest income reached a record $215.9M; ROAA improved to 1.69% and efficiency ratio held ~50%, underscoring disciplined expense control and asset mix benefits.
• Core loan growth accelerated (+$189.7M QoQ to $12.87B), led by C&I in Puerto Rico and Florida; non-interest-bearing deposits fell $262.7M driven by a handful of large commercial accounts (five customers = ~$120M).
• Management reaffirmed margin expansion guidance of 5–7 bps per quarter for the next two quarters and guided base OpEx to $125–$126M (ex-OREO) in H2; effective tax rate ~23% for FY25.
• Capital deployment remains aggressive: $28.2M buybacks, $11.1M TruPS redemption, and a $0.18 quarterly dividend declared on common stock for payment on Sept 12, 2025.

What Went Well and What Went Wrong

• What Went Well

  • Record net interest income and NIM expansion to 4.56% on lower funding costs and redeployment into higher-yield assets; ROAA rose to 1.69% and efficiency remained ~50%.
  • Strong core loan growth (+$189.7M), with $156.1M increase in C&I (PR + FL), and total originations of $1.3B; pipelines “continue to be strong” for H2.
  • Management quote: “We posted another strong return on average assets of 1.69% driven by record net interest income, solid loan production, stable credit trends, and disciplined expense management” — Aurelio Alemán (CEO).

• What Went Wrong

  • Non-interest income fell $4.8M QoQ to $30.9M due to absence of seasonal insurance commissions and lower realized gains from purchased tax credits, pressuring “revenue” vs consensus.
  • Deposit outflows concentrated in large commercial accounts drove a $268.5M total deposit decline QoQ; non-interest-bearing deposits down $262.7M (PR: -$212.0M; FL: -$48.8M).
  • Revenue consensus miss; while provision fell, “revenue” measure incorporates provision and normalized fees; consensus likely overestimated non-interest income or lower provisions. Bold: Revenue miss. Values retrieved from S&P Global.*

Transcript

Speaker 3

Hello and welcome, everyone, to the First BanCorp 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 *1 on your keypad. If you change your mind, please press *2. I will now hand over to your host, Ramon Rodríguez, IR Officer, to begin. Please go ahead.

Speaker 0

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 second quarter of 2025. Joining you today from First BanCorp are Aurelio Alemán, President and Chief Executive Officer, and Orlando Berges-González, 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.

Speaker 5

Thank you, Ramon. 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 underscore the strength of the franchise and the ability to deliver a 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 pre-provision income was slightly below prior quarter, but up 9% when compared to the prior year. 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 loan origination 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 the 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 fluctuation 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-balanced large commercial customers. For example, five customers accounted for $120 million of that reduction.

In terms of asset quality, the environment continues stable. I would 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-offs 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. We definitely feel this action best suits the long-term interests of the franchise and our shareholders.

Let's turn to page five to provide some highlights on the macro. Talking about the main market, we believe the economic conditions and business activity in Puerto Rico and Florida are trending, continue to trend favorably. Obviously, there are economic concerns and uncertainty around tariffs and changes in U.S. policies and the potential effect this represents. It creates a degree of uncertainty for both retail and commercial customers, but we continue to see investments and commitments moving forward. The labor market remains strong, resilient, reflecting the lowest unemployment rate in decades. 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. Those projects, which we also participate as they relate 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 while also contributing to deliver our best-in-class efficiency ratio. The franchise investment remains improving our interaction with customers and provides them with a seamless experience through our multiple channels. The successful execution of our omnichannel 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 across our market is the main priority, lending to both consumer and corporations.

If we break down our loan 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 broader market uncertainty, and our outlook for improving consumer health in Puerto Rico, we remain confident that we can achieve our mid-single-digit loan growth guidance for the full year. We still have half of the year to catch up. The corporation track record speaks for itself. We continue to be return-focused and allocate our capital where it makes more sense to our customers and shareholders. As we do 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 annual 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 results in more detail. Orlando.

Speaker 1

Good morning to everyone. As Aurelio mentioned, we had a strong second quarter that was highlighted by a net income of $80 million, which is $0.50 a share. The return on assets that he mentioned increased to 1.69% and an expansion of the net interest 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 net charge-offs of consumer loans 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 a tax contingency accrual, but also the effective tax rate is 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 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. 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 6.7% when considering normalization of the second quarter yield or 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, as auto is a lower yield than 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 4.78%.

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 maturing Home Loan Bank advances that were higher costs of funding. As a result, the overall cost of interest-bearing liabilities decreased $2.3 million for the quarter, and the average cost was $2.14, which is nine basis points lower. In the case of deposits, even though at the end of the quarter they were down, as Aurelio Alemán mentioned, on average, interest-bearing deposits, excluding broker, were $110 million higher than last quarter. The cost of interest-bearing transaction accounts was $1.38, which is six basis points lower than last quarter, and the cost of the time deposits was $3.36, which is three basis points lower.

All of this translates into a net interest margin of $4.56, which is four basis points higher than the $4.52 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 $4.48, 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 two quarters, as we mentioned during the first quarter call. Assuming the normal flow of deposits, we're confident that 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 $1 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 $30.99 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 to $2.1 million, driven by bonuses and stock-based compensation that was recognized during 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 debit card processing expenses due to expense reimbursements we received from the networks in the first quarter. 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 million. It's $133.9 million, which compares to $124.2 million in the first quarter. The efficiency ratio, as Aurelio Alemán 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 million to $126 million 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 repurchased assets.

On the other hand, we had a $4 million migration to non-performing in the construction loan portfolio in the Puerto Rico region. The NPA ratio remained flat at 68 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 loans 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 about $2.8 million to $134 million, mostly in the auto portfolio. As Aurelio Alemán 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 million, 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 points in the first quarter. Keep in mind that the first quarter net charge-offs 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-offs for the first quarter would have been 76 basis points.

We had a 16 basis point reduction as compared to that number. On the capital front, as Aurelio Alemán commented, we executed on our capital deployment strategy 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. During the first quarter, we redeemed the $50 million of the debentures, 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. We completed the second quarter with the $28 million to reach the $50 million. On top of that, we redeemed the remaining $11 million or so of the remaining debentures. In terms of the tangible book value per share, it increased 5% during the quarter to $11.16.

The TCE ratio expanded to 9.6%, mostly due to a $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 ALCL that we have on the books represents about $2.69 in tangible book value and over 200 basis points on the tangible common equity ratio. Again, we will continue to deploy our excess capital in a thoughtful manner, always looking for the best interests of the franchise and the shareholders. This concludes our prepared remarks. Operator, please open the call for questions.

Speaker 3

Thank you. If you wish to ask a question, please press *1 on your telephone keypad now. If for any reason you want to remove your question from the queue, please press *2. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Brett Rabatin from Hovde Group. Your line is now open. Please go ahead.

Speaker 2

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 2025?

Speaker 1

For the full year, Brett, that would be the estimated tax rate, effective tax rate, based on the forecasted mix of exempt and taxable income, and some of the other components for the year.

Speaker 2

Okay.

Speaker 1

Keep in mind that we do have just one comment.

Speaker 2

Go ahead.

Speaker 1

Keep in mind that one of the benefits of the redemption of the drops is that they were sitting at the holding company level, and the interest expense there, because we don't have a profit at the holding company level, was really not getting any tax benefit. That's part of the reason we're getting some of the effective tax rate improvements.

Speaker 2

Okay. That's helpful. 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?

Speaker 5

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 are even settlements. There's a significant number of those balances that we saw this quarter we believe are non-recurring in nature. There are some high-yielding seeking behaviors too in that very high balances segment. When you look at it, it was highly concentrated. As I mentioned, top five customers represented 120%. Twenty-five customers, the overall variance is around 25 customers overall, in front of the commercial segment itself. From the retail side, very stable. Net, net, net customers are growing and net accounts are growing, which is an important metric that we follow.

Speaker 2

Okay. Just on credit, credit outside of the consumer 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?

Speaker 5

We believe it's sustainable to improve the trend on the charge-offs for the consumer portfolios.

Speaker 2

Okay. Great. Thanks. Appreciate all the color, guys.

Speaker 5

Thank you.

Speaker 1

Thanks, Brett.

Speaker 3

Thank you. Our next question comes from Timur Braziler from Wells Fargo. Your line is now open. Please go ahead.

Speaker 2

Hi, good morning.

Speaker 1

Back on the deposit commentary, I think last quarter, the comments were that the deposit stability, you're seeing more deposit stability versus the last couple of years. Were these outflows surprising? Is this kind of excess liquidity that you were expecting to leave at some point, and it just culminated in 2Q? 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?

Speaker 5

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 altogether. Some of them were surprised because the movement took place, but some of them are just recurring business purposes that it just, you know, a lot of things that happened at the same time in the same quarter. Also, tax events of tax payments on the April booth, we saw some of that. We believe most of them are not recurring. Obviously, you combine that with the higher for longer rates, that high-yielding behavior, as long as rates are high, that high-yielding behavior will continue. We do have certain parameters up to which point we compete also.

Speaker 1

Got it. 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?

Speaker 5

The second half, we believe stability, that we're going to achieve a stability in the deposits. There are some deltas on the government side that are difficult to predict when they come in and out. There are 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 minimal. We will say stability. Obviously, a lot of the liquidity that you're going to see coming in the second half, which Orlando Berges-González mentioned, is more than $1 billion from the cash flows on the investment portfolios. The primary objective is to deploy that in loans, not necessarily securities, but the excess will go back to securities.

Speaker 1

Got it. Okay. That's good color. 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?

Speaker 5

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

Speaker 1

Great. Thanks for the color.

Speaker 5

Okay.

Speaker 3

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.

Speaker 1

Good morning.

I was just curious what loan yields have been coming in these days.

Could you repeat that question? We couldn't hear you well.

Sorry, I was just curious where loan yields have been coming in these days.

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 unsecured personal loans in that 13% range, and the small loans under special legislation in Puerto Rico are closer to 30%. The auto portfolio, it's on the 8% range. We've seen some reductions on the commercial side, not so much on the consumer side. Mortgage, it's a market function. It's similar to what you see in the States. We're seeing that, you know, 6.5% to 6.75% kind of yields in general, depending on the type of product.

Gotcha. Thanks for that color. 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 used 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. There are some opportunities. In reality, the Federal Home Loan Bank advances, what matures within the next three months, it's only $30 million.

We'll probably, you know, pay those down. There's about $90 million on the six months to a year timeframe that we'll see based on the funding mix. The idea is to get those costs down, eliminating some of it or just repricing some of it.

All right. Thanks for the color. That's all my questions. Thank you so much.

Thanks.

Speaker 3

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

Speaker 6

Hey, good morning. Thanks for the question.

Speaker 1

Morning.

Speaker 6

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 C&I. 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, how your expectations are. Do you feel better about it than you did maybe the same time three months ago? Just wondering your overall level of confidence in the mid-single digit loan growth and any utilization rate factors that we should be considering here.

Speaker 5

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

Speaker 6

Got it. That's helpful. 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 drive longer-term efficiencies that we should be considering when building out a longer-term expense run rate here?

Speaker 5

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 functionality in the applications, the digital applications across different businesses and products, including mortgage, auto, and deposits, will continue. It's been a significant amount of the expense base for some time, so it will continue to be some obviously process automation related as the new tools bring some AI components into it.

I will say we don't expect a big peak of those because we continue to sustain the levels that we've been doing, being very active in those investments. Like last year, the Encino platform implementation was one of them, some of the process automation and the risk management tools.

Speaker 6

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

Thanks, Kelly.

Speaker 1

Thanks.

Speaker 3

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

Speaker 0

Thanks to everyone for participating in today's call. We will be attending the 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.

Speaker 5

Thank you all.

Speaker 3

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