First BanCorp. Q2 2026 Earnings Call

Good morning, and welcome to the First BanCorp second quarter 2026 financial results conference call. All participants are in a listen-only mode. After the speaker's remarks, we will conduct a question and answer session. To ask a question at this time, you will need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Ramón Rodríguez, First BanCorp's Corporate Strategy and Investor Relations Officer. Thank you. Please go ahead.

Thank you, Julianne. Good morning, everyone. 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 Alemán, 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 Alemán.

Thank you, Ramón. Good morning to everyone. 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, or $0.62 per share. That is up 24% when compared to the same quarter last year. Underlying revenue trends, I have to say, remained very strong during the quarter, with pre-tax 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 reinforces 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 environment deposit, also we have a slight increase in the core customer deposit. Credit performance remains sound with lower net charge-off and non-performing assets remaining near historical lows.

That said, early stage delinquency came up during the quarter, essentially when we look at it over the same period last year, was flat to prior year in June and was actually below in December 2025. We continue to monitor the seasonal 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 five, 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 stands at 5.6%, which is pretty good for our market considering trends. Pre-construction activity continues to provide economic support, and the island continues to benefit from encouraging reshoring and manufacturing investments announcements that represent actually future benefit. While on the other hand, industry-wide sales continue to reflect the impact of tariffs, the recent trends for the last quarter suggest that the market is beginning to normalize with June industry-wide auto sales down 3%, only 3% year-over-year. We believe sales are stabilizing. Again, this backdrop, core business continued to perform really well. Loan growth is accelerating in the second half of the year as business activity in Puerto Rico continues, and also Florida is having a really good pipeline also.

That said, we're sustaining our loan growth guidance target of 3%-5% for the year, obviously looking forward to achieve that in the second half of the year. We also continue deepening the customer engagement through the multi-channel strategy. Active digital users continue to grow with 6% versus prior year, we continue to increase to 95% now deposit transaction captured through digital and virtual service channels. As we look ahead, the priorities really remain unchanged, very focused on our execution, focused on selectively growing the market share in our core business. Confident and are willing to grow organically through disciplined execution while evaluating potential alternative strategy 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. We're encouraged by the opportunities that we see. It's about how you can service the customer better, how you can improve processes, short-term life cycle, and what is most important is consistent execution across our different cycles. As always, I really thank you for your interest in FirstBank. We appreciate your continued support. I will turn the call to Zaire, our recently appointed CFO. Welcome, Zaire, to the call to go over the financial results in more detail. Zaire? Thanks, Aurelio. Good morning, everyone.

As Aurelio mentioned, for the second quarter of 2026, we earned $96.1 million or $0.62 per diluted shares, which compared to $88 million or $0.57 per share last quarter. Pretax pre-provision 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 our assets was 2.02% for the quarter, compared to 1.89% on the previous quarter. Results for the quarter did include additional interest income on approximately $3.4 million related to two refinancings during the quarter, commercial loan, and a municipal bond, which resulted in accelerated recognition of deferred fees or discounts. 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 charges of approximately $5 million, primarily in the auto portfolio. This was offset by loan growth, particularly in the commercial and residential portfolio. The macro, as Aurelio mentioned, continues to show slight improvements in the unemployment projection and the home price index, but at a lower degree than on the previous quarter. Income tax expense for the quarter was $24 million, compared to $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-exempt income to taxable 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 eight.

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 refinancings, of which $1.8 was included as part of interest income of investment securities and $1.6 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 initial day in the quarter. Interest income on investments and cash increased by $4.5 million. Excluding the aforementioned refinancing, the yield on the investment portfolio continued to increase. It 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 costs declining by two basis points versus the prior quarter. The cost of time deposits, excluding broker deposits and public funds, decreased by eight basis points to 326. On the other hand, cost of interest-bearing checking and savings accounts increased by five basis points to 126%, driven by higher rates on certain government accounts. Additionally, the cost of broker deposits decreased by nine basis points, and the average balance in the quarter was down by approximately $27 million. Our net interest margin on a GAAP basis was 47, a 12 basis points 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 480, reflecting a five basis points increase when compared to the prior quarter.

It was slightly higher than the two to three basis points per quarter guidance we have provided at the beginning of the year. As you know, the rate environment has continued to evolve, 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 three to five basis points per quarter out of the 480 base. Shifting to other income and operating expenses on page nine. Our income was up. It amounted to $35.7 million versus $37.7 million in the previous quarter. The decrease was mostly related to seasonal continuing 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-$130 million, as many increase take effect during the third quarter, combined with a pickup in business promotions and project and expense trends on our technology products. We believe that our efficiency ratio levels for 2026 will be closer to the lower end of our 50%-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. Non-performing assets grew to $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. This loan is well collateralized. Excluding this relationship, non-performing assets decreased by $9.7 million, as we did see reductions in the residential mortgage portfolio, consumer portfolio, and repossessed autos. Inflows to unaccrual were $40.7 million, which is $6.4 million higher than last quarter. Excluding the aforementioned inflow in the Florida region, inflows to unaccruals were $8.4 million lower than the 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 auto finance leases portfolio.

In the first quarter, we did see a reduction in early delinquency as consumers typically receive 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 and 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 the previous quarter. In general, the allowance increased due to loan growth, particularly in the commercial and residential portfolios, and higher delinquency in the auto finance leases portfolios just mentioned.

Such increase was offset by multiple factors, including improvement in the macroeconomic projections, particularly on employment and HPI, combined with improvements in delinquency in the consumer unsecured portfolio. Net charge-off 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-off, mainly the auto portfolio. Capital remains strong and our healthy and consistent profitability levels have enabled us to repurchase $15 million shares of common stocks and declare $31 million in dividends. Our regulatory capital ratios continue to exceed regulatory levels and remain relatively unchanged against the prior quarter as earnings have offset capital deployment actions and growth in RWA.

Tangible book value per share grew to $12.68, while tangible common equity ratio decreased three 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 dividends. This concludes our prepared remarks. Operator, please open the call for questions. Thank you. Thank you. As a reminder, to ask a question, please press star, followed by the number one on your telephone keypad.

To withdraw any questions, press star one again. Our first question comes from Arren Cyganovich from Truist Securities. Please go ahead. Your line is open.

Aaron, good morning. Aaron, you may be on mute.

Sorry about that. Loan growth, very solid this quarter, and sounds like your pipelines are going well both in Puerto Rico and in 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.

Yeah. As I said before, obviously, the growth this quarter primarily was commercial. On the other hand, better stability on the other consumer portfolios than we have anticipated. There was a little slight 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. It's a good mix of assets around development of warehousing, hotels, actually a small piece on the healthcare part of it. It's all, I will say, commercial activity, not necessarily focused on the very large, but for the middle market. There was some transaction in the government of significant size, which was the refinancing of debt, restructuring of debt, which will increase our exposure on a very solid municipality in terms of financials.

There was some infrastructure refinancing, too, which led to an increase. I think if we look for diversification of risk and where we position our capital in terms of the asset classes that are embedded.

Thanks. 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.

As I mentioned before, we look into things like potential activity. There's not much we can say about that, 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. There's not much we can say other than that. It's opportunistic. In the meantime, we continue to execute our buyback and deliver a competitive dividend. Obviously, primary organic growth. We're seeing good activity in our new region in Florida that we opened in the last quarter of last year, the Boca Raton office. We continue to see pretty good activity there, too. The organic play continues to lead the front of our efforts.

Okay. Thank you. Our next question comes from Kelly Motta from KBW.

Please go ahead. Your line is open.

Hi. Thank you so much for the question. Great quarter. Thank you, Kelly.

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 sounds like some expansion ahead. Can you walk through, remind us the repricing dynamics of the securities stock? Clearly that's a big driver here.

Okay. I'm going to make a few comments and pass it to Zaid. I think it's important that obviously the yield curve has to do with this versus our projection. Rates continue to be better in the investment portfolio on those maturities that Zaid will talk about. Also, loan activity on the commercial book, which a significant portion of our book is variable. Those two components are important in understanding how our margin continues to get better, which is good to say that it's better than anticipated. That's why we revisit the forward guidance to a higher range. Obviously, this quarter, we did have what we consider non-recurring items regarding these two loans that were renewed and have some benefits underneath. Zaid? Yeah. Yeah. 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%. Looking at 2027, there are about $100 million coming in of securities yielding about 1.73%. All in the next 18 months, it's about $1.2 billion of repricing coming in.

Okay. That's helpful. Then I apologize if you hit on this, with the deposit growth, looks like about two-thirds of that was on the government deposits. Can you help us out with the expectations around flows on that side, as well as any commentary on how competitive pricing dynamics are holding up for the core portfolio? Thank you. Yeah. When you look at deposit growth, it's almost flat.

Obviously, there is a portion of government deposits that are linked to an index 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 funds come in, go out, and some other time deposits that we negotiate with our core relationships that are transactional based. I will say, just think about core government deposits staying around this average that we have for the last years. Liquidity is very solid and still funding coming in through both CDBG and FEMA for different purpose. Under construction, even PREPA 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 in some of the large customers, we lose some of the deposits. Net was positive. We start to see a little bit of that noise, and we start to compete to retain better. I will say, deposit cost 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 aggressiveness in a very specific component that you can actually play and not really impact the franchise. I will say stability in both government deposits and obviously we continue to target growing our core franchise.

Great. I'll step back. Nice quarter again. Thank you so much. Thank you.

Thank you. Our next question comes from Steve Moss from Raymond James.

Please go ahead. Your line is open.

Good morning. Morning, Steve. Nice quarter here, guys.

Thank you. Morning. Maybe just thinking about expenses here and the efficiency ratio longer term.

Obviously, healthy business trends here. I know you guys are still guiding towards the 50%, or being at the low end of the 50% efficiency ratio range. Just kind of curious, longer term, do you think you can go a little lower here, just kind of given balance sheet dynamics, just better growth on the island or 50% is still kind of where you think it'll shake out in longer term?

Yeah. If you see, the absolute number on expense is very close to the guidance that we provided.

We're making investments in both the technology and actually some of the branch expansion that we talk about in the early part of the year. One of the new branches just opened last week, and there's another one opening in a couple of weeks. That continues. The technology transformation to cloud and the AI investment is there. Again, I think it's always like to see efficiency ratio going down by more revenue, and that's what happened this year. Obviously, again, I think being asset sensitive still, there is a part we're doing really good growth on loans, but also there is a contribution coming from the rate environment that is helping every bank. That was asset sensitive. Yes, there's always an opportunity to move below 50%.

We're there today, if revenues continue at the pace and there is a simple relationship of revenue and expense, we'll be there. Obviously we still have significant investments ahead that we will continue doing either way without the new revenue opportunity or not. That's why we are placed in that 50% target. Yeah. Great. That's helpful there.

Then just kind of thinking about business activity on the island, it's quite the step up here year-over-year in originations. I realize there's onshoring, obviously federal dynamics with the government. As you look at business activity here, just kind of curious what you think are the biggest drivers maybe versus a year ago? Obviously healthy pipeline. It's good to hear the outlook for the second half of the year.

I think I have to highlight one sector, which is hospitality. Hospitality sector in Puerto Rico continues to show significant trends, better trends than the prior cycles, sustainable in both ADRs, occupancy, visitors. There's still hotel projects coming around, some of them are ongoing. I think investor confidence, this investment continue to show a very positive investor confidence in the island.

For whatever political and macro challenges are out there, both in Puerto Rico and the U.S., the economies continue to sustain these trends and investors are looking to place some of their excess liquidity projects. We benefit out of that. I think the island is being a positive place for that for some years now.

Got you. On capital deployment here, I know you guys generally target a 100% payout ratio. Obviously earnings have been strong and run ahead of your planned buyback. Should we expect a catch up with the buyback or special dividend later this year?

As you know, we keep the optionality and every quarter we sit down. That will happen now in almost September. In October, we will publish again our capital plan, which is a cycle that we do. Definitely that is our strategic goal. We haven't concluded on how we're going to get there. We'll probably talk about that in the next call in more detail.

Okay. Aurelio, I appreciate all the color here. Thank you very much. Thank you.

For any additional questions, please press star followed by the number one. Our next question comes from Manuel Navas from Piper Sandler. Please go ahead. Your line is open.

A lot of my questions have been asked and answered. I just wanted to circle back on the early delinquency rise. You had some commentary around it. Is there anything more specific in the auto portfolio we should be watching? Is there any particular FICO scores that are rising more than others? Anything you could add on that delinquency rise.

To be honest, obviously, I say seasonal because when we compare to prior periods, we saw a significant improvement in the first quarter that we attribute to a lot of liquidity that came in the island for tax benefits and other matters. We're back to what I could say, a more normal level, normalized level. We don't expect significant upticks from here in those delinquency levels. When we look at the charge off going through, it's really focused on the early delinquency buckets. We don't see anything that tells us that this is going to continue at this stage. Yeah. It's actually better than December and in line with prior years. Yeah. Okay. Most other credit metrics were pretty solid.

I just wanted to ask about that one.

Yeah. No, I heard. Additionally, as we look at this new, can we reset on the margin your sensitivities to hikes or potential declines?

I appreciate the new go forward guidance with the kind of flat rates. What would happen in either increases or decreases from here?

Well, we just closed out on the 10-Q, those of NB Cups, and it's going to be similar, consistent with what has been disclosed in the Q on NII, right? 2%-3%, and you have the breakdowns there by each of the scenarios that we evaluate.

Okay. Thank you. Thank you, Manuel.

Our next question comes from Arren Cyganovich from Truist Securities. Please go ahead. Your line is open.

Thanks for the follow-up. I just wanted to just clarify on the NIM guidance. You are not assuming any rate increases through the end of the year?

Correct. Okay. Thank you. Yeah.

Mm-hmm. If we have no further questions, this will conclude today's conference call.

Thank you for your participation.