Good morning, everyone. My name is Kiki, and I will be your conference operator today. I would like to welcome everyone to the First BanCorp's Second Quarter 2024 Financial Results Call. [Operator Instructions]. I will now hand you over to Ramon Rodriguez Corporate Strategy and Investor Relations for First BanCorp to begin. Ramon please go ahead.

Thank you, operator. 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 2024. Joining you today from First BanCorp are Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at fbpinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman.

Thank you, Ramon. Good morning to everyone and thanks for joining today. Let's turn to Page 4 to go over the highlights of the quarter. We posted another solid quarter for the franchise of strong profitability and positive operating leverage, earning $76 million in net income and delivering a strong return on assets of 1.61%. Adjusted pre-tax pre-provision income moved upward, reaching $113 million, up 2.4% versus the prior quarter, mostly driven by net interest income and lower expenses. In terms of the balance sheet, total loans grew by 2.4% in quarter, annualized driven by growth actually across all business segments. We've seen a slight delay in some of the construction funding during the year, in the first half of the year and we do expect to close this gap during the back end of the year. Loan pipeline remain healthy and are mostly supported by the stable environment that we continue to experience in our operating regions and we do continue to sustain our mid-single digit loan growth guidance for the year, primarily due to a commercial construction on auto loan activity that we continue to experience. In terms of deposit franchise, we had a positive quarter. We were very pleased to see improvement in the core deposit flow during the quarter, particularly in the non-interest bearing account, which now represent 34% of our total deposits. Core deposit ordered and broker and government deposits were up $132 million raised during growth across all the 3 regions. We are highly encouraged by the accretive nature of our balance sheet position for the remainder of the year, as definitely it will benefit from the sizable bond book repricing opportunities coupled with the expected gradual easing in deposit costs. The credit environment continues to play out as expected, even though NPA decreased…

Good morning to everyone. As Aurelio mentioned, we reported net income of $75.8 million for the second quarter. That's $0.46 a share, which compares with $73.5 million last quarter or $0.44 per share. We're extremely pleased with the results as we have continued to generate strong return on assets, which reached 1.61% this quarter. The result for this quarter have been very consistent with the discussions with many of the discussions we've had with the market. NIM for the quarter expanded 6 basis points and net interest income grew $3 million and expenses have been within the guidelines that we have provided. Provision for the quarter was similar to last quarter with $11.6 million, which compares to $12.2 million. The provision for this quarter reflects benefits from the lower recent historical loss levels on the residential mortgage portfolio as well as lower projected losses on the commercial real estate portfolios. These ones have been driven by macroeconomic variables being -- actual macroeconomic variables being better than they have been previously forecasted. The two combined have offset the impact of the level of -- the higher level of charge offs we've had on the consumer portfolio, which have affected the provision for those portfolios. Effective tax rate for the quarter was 24.1%, very similar to last quarter and we have continued to work on the tax positioning. As I mentioned, net interest income for the quarter improved $3 million with $199.6 for the quarter. Total interest income grew $3.7 million which includes a $2.8 million interest income growth in the loan portfolios, while interest expense only grew $600,000. The yield on total earning assets grew 7 basis points in the quarter, which is a combination of a 5 basis points growth in the loan portfolio yields and higher level of interest…

[Operator Instructions]. The first question is from Brett Rabatin from Hovde Group. Brett your line in now open please go ahead.

Hey. Good morning, everyone. Wanted to start with just the macro in Puerto Rico, and it sounded to me like you were kind of intimating that, you know, it's kinda steady state was what you were seeing most recently, but you mentioned the $2.5 billion distribution, and then I saw Core 3 had actually distributed a $1 billion here so far this year and when I look at the GDB-EAI index, it's down actually in April a little under 124, but that looks to be mostly concrete and gasoline. As you guys think about the back half of the year from an economic perspective, is there anything that you would point out as drivers for either growth or maybe some atrophy in the economy?

Well, we continue to see I think the $2.5 billion is the 5 months, the beginning of the year, and that is actually higher than last year and you can see in that the bulk part of that is actually CDBG construction elements, which is primarily there's significant projects in the -- what they call the light tech line, low income housing. We have some of those in the books. Obviously, they're being approved and initial disbursement, but we expect that to show in the second half of the year as we originally have planned. We continue to see foreign investors bringing capital to Puerto Rico, by incorporations, more and more deals with those. Some of them are being published in the newspapers. Some of them have required financing. There are more projects in the pipeline regarding the IPG funds. They include additional hotels, they include additional housing, which when you look at the middle income segment, there's still high demand for that. Unemployment continues stable and labor participation better. So we do not expect any decrease. We actually see more opportunities for improvement. Obviously, take into consideration that the excess liquidity that was brought by the pandemic was already utilized and obviously, there is an impact, but when you look at sales tax, it's not really shown there. It's probably in some other type of consumption. So we do expect when you look at the fiscal plan that was recently published, there is positive GDP growth in the scenarios. So I think when we add all that, actually Ramon, you could comment on the specific analysis of the indicator of the indicator, which is volatile and has some quarterly variances historically.

Yes, Brett, most of the reduction that you mentioned with regards to the economic activity index is related to gas consumption, which been trending down over the last few quarters. But when you look at the other three components, payroll employment in particularly, it's reaching decade highs in April, it was up, I believe, 2% up year-over-year. So when you look at the other components, we remain fully encouraged with the economic activity index going forward.

Okay. That's great color on that and then, maybe Orlando on the margin, you know, it would seem like with what you have, coming with securities portfolio and kind of your stabilization of funding costs in the Q2 that the margin should continue to move higher at some magnitude. Any thoughts on the pace of the margin from here and just how you see that playing out?

Well, we I mean, we haven't provided any a very specific margin number, but clearly we have said that our margin will continue to go up. Again, if you only think about the $700 million or so or some $720 million of cash flows that are now yielding about 1.5% on a GAAP basis that number would be replaced with something would be close to loan yields, average loan yields or at worst of the investment portfolio yields. So we would be picking up 4 to 5 basis points easily on that portfolio. So that should start to translate into a higher margin coming next year. The funding cost side has seen the stability -- we're starting to see the stability. The increase, as I mentioned, on the time deposits has a lot to do with all the things maturing and being renewed at current rates, but the Puerto Rico market is not as high as the U.S. market. We still continue to see some pressure in Florida. We are seeing less pressure in Puerto Rico and exception pricing would be low force, but in reality, most of the time deposit numbers are not generated at those rates in Puerto Rico. So that's going to slowly start to pick up and again, some of the loan portfolios as we originate new things are also coming in at current rates, which are slightly higher. That's why we ended up with that 5 basis points pickup on the yields on the loan portfolios on average. So the expectation in our numbers is continue trend increases on time deposits -- I'm sorry, on net interest margin for the next few quarters.

Okay. Fair enough, and then if I could sneak in one last one, just on the reduction of the commercial real estate reserve due to macro factors. Would that be mostly or entirely just the term structure of interest rates, or would there be other factors that would have reduced your commercial real estate or improved your commercial real estate outlook?

It's a bit of I mean the CRE price index deterioration that we to some extent our modeling is based on national information and the reality is Puerto Rico is behaving significantly better. So what we are seeing as we adjust for the market on those numbers, the CRE price index, it's not suffering the impact that some markets in the States have suffered and that has been adjusting the projection going forward for the Puerto Rico market. So that's part of the reason we're seeing those improvements on the macro -- on the CRE side.

Okay, great. Very helpful. Thanks for all the color.

The next question we've got is Steve Moss from Raymond James. Steve, your line is now open. Please go ahead.

Hi. Good morning.

Good morning, Steve, and welcome to the call.

Thank you, Aurelio. Appreciate it. Maybe just starting with the -- continuing with the loan loss reserve, I was just curious here with regard to the decline in the residential mortgage reserve quarter over quarter, was that just kind of a component of historical charge-offs have declined with the primary driver? And could we see a further maybe reduction in that reserve here, over time?

It is driven by the updated information on charge-offs on that portfolio. We've seen significantly low trends. The mortgage portfolio is longer lived portfolio. Therefore, we use longer lives in estimating some of the factors and as you have seen, the loss ratios on the recent years have been very low and that has continued to replace all their information on charge-off ratios. So we have continued to see some improvements and assuming we see we stay where we are now, I do expect that eventually we'll see some additional improvements in that reserve, assuming the current size of the portfolio. Obviously, we the portfolio for quite a while also was coming down. It's been more stable recently as the mix of conforming and nonconforming has changed a bit based on market rates. But clearly, the losses on the portfolio has been much lower. We've seen values significantly more consistent in the market. They have stayed high and that helps in any kind of disposition of property. So that's why we have seen this trend of reduced losses, which is translating into lower reserve requirements.

Okay. Appreciate that and then just with regard to the loan growth this quarter, I saw in the text that floor plan growth was one of the drivers. Just curious if that if there's a seasonal dynamic or just any reasons for that growth and how to think about do we continue to see this pace of CRE growth as well?

Well, there's a couple of considerations. We did sign new relationships on the floor plan. So most part of the increase came from a large new relationship that was acquired by First Bank. There's also some seasonality, I will say. Auto sales have contracted from prior year as expected, but they are actually they're a little better than we actually forecasted. So market continues very active in that sense, yes.

Okay. And then on the commercial real estate side, you guys had another good quarter of growth here. Just kind of curious, do we expect that cadence to continue? I know you guys sound construction, but that would likely pick up in the second half. Just curious on CRE.

Yes. Actually, on the CRE, some of the increase was conversion from construction. So that's why the timing of reduction in construction is shown this quarter because some of the cases were compared to permanent loans and yes, we do have any sort of conversions coming through the end of the year, but we also have expected disbursements on the construction loan to pick up with the projects normal cycle of the construction project showing some delays is not a surprise.

Okay. Appreciate that, and one last one for me. Just on the non-forming commercial loan here in the restaurant or food sector, just curious, any color you could give around that credit, whether it's a shared national credit or things along those lines?

No, no. It's a relationship that we have. We do expect resolution of that relationship. Some initiatives in the development of relationships have delayed, but we do expect that to recover sometime in the future.

And that has two components, one in construction and the other in the commercial side.

Okay. Great. Appreciate all the color and a nice quarter. Thank you.

Thank you. The next question we've got from Timur Braziler from Wells Fargo. Timur, your line is now open. Please go ahead.

Hi, good morning. I'm just wondering on the securities cash flows. It looks like it's accelerating in the back end of the year. Just your appetite for either putting that right back into the bond book, waiting to invest that into loans, I guess how quickly are you anticipating those bonds to be reinvested or those bond cash flows to be reinvested?

Well, reinvestment can be different ways. Obviously, we based on the pipelines on the lending portfolio and the liquidity composition of the institution, that's where it drives the decisions. Based on pipelines, we do see some amounts of the Fed account, which obviously at this point it's yielding 540, which is still significantly higher than the portfolio. If we don't foresee that to be the case, we do two things, either we let some wholesale funding that mature go or we go back to the investment portfolio. That would be the order. First, the lending and the lending, it's going to be the key factor here, and if we see it's longer term, we'll just move back to the market. So it's a mix, Timur. It's going to be based on how we see the different components, mainly pipelines and liquidity that we decide where to move the money to. The effect would be immediate. As it comes in, obviously, you're just leaving it for a while at the Fed account or you're eliminating some hotel funding, while the loans come in. So that's some of that pickup, won't go immediately to loan yields, but clearly would go to kind of market investment or cash yields.

Okay. That makes sense. And then just looking at the incremental Board authorization at 250 for the reduction some of the prefs, I guess, what does that portend to future buybacks? Is that a hindrance maybe? Or do you kind of use the capital for the redemption and then that puts buybacks on hold? Or can those go on kind of in line with one another?

Well, right now, this quarter, we will focus on exclusively on the debt securities -- redeeming the debt security this quarter. Starting with that, we again, we have the same number in mind in terms of the plan achieving 100% capital return, which it would be probably $50 million per quarter similar to what we did in the first half of the year. So and obviously that gave us that is an immediate accretion and immediate improvement on revenues, no EPS dilutions. So we are going to prioritize that activity in this half of the year, but we always have the optionality. We're keeping the optionality and I think that is the important thing to do some of the buybacks anytime too. We're just sharing what is our priority right now.

Got it. So priority near term is on the redemption and then buybacks are still potentially on the table. Is that fair?

Yes, that's correct.

Okay, great. Thanks for the questions.

[Operator Instructions]. We've now got a question from Kelly Motta from KBW Kelly. Kelly, your line is now open. Please go ahead.

Hi. Good morning. Thanks for the question. You've continued to have, like a pipeline of OREO gains here that's really, you know, to the benefit of expenses. I think you reiterated your guide of $120 million to $122 million, ex these gains, but just wondering, based on the activity we've seen so far, what are you seeing in the pipeline in terms of the potential for further OREO gains to reduce that overall expense number?

This quarter we had a large case, that is commercial OREO that we had that was -- we don't have too many of those, that was sold at a good profit for the quarter but we on the commercial side, there is not that many. However, we continue to see residential mortgages being disposed that market prices have been steady and that has allowed pricing on these OREOs on the residential side to continue to be there. At this point, it's I think we have mentioned this before, it's been longer than we expected, but we'll take it, and our group continues to see better offers regarding as compared to appraisals based on what's out there. Again, that's some of the things we think it's a higher employment levels in the island, need for properties and so for a long time, we didn't have much in terms of construction of residential construction in Puerto Rico. So all of that that combined. In the near term, we still feel that the numbers won't be as large as what we saw this quarter definitely, but we do expect that operating costs would be definitely offset by the sales at least for the next couple of quarters, but it's very difficult to say, Kelly, how long it's going to be. I don't think it's going to last forever definitely.

Got it. I keep putting in zero there, and you guys keep beating me. On the on the deposit side, it was really encouraging to see, you know, noninterest bearing stabilize that actually up slightly this quarter. Just wondering, provided we're obviously done with rate hikes like, what you guys are seeing on the deposit side and the pipeline for deposits, especially, you know, with the relief money picking up year to year to date. Fair to say that, you know, continued modest growth off this number? How are you guys thinking of that? What are you guys seeing?

Well, it's the number one priority of the franchise to continue growing the core deposits. So it's a combination of products, digital functionality and I will say commercial activity and the commercial products that we have focused on and made investments over the past year. So it's really our main priority to continue growing that. It's very difficult to predict the trends in the market. Market data is flat in terms of the overall market data and trends. Obviously, there's a lot of analytics behind how to execute, but our goal is really to continue to do that number. So staying in the 34% is a challenge on noninterest bearing, but continue to be the focus also. Government deposit is a different strategy. It's more opportunistic and transactional, but we do have a core business, which is providing all type of transaction banking services to the government entities, not only the large corporations but municipalities. So with those two stayed at similar levels, we don't expect growth in that area. We do expect to continue making progress on the commercial and retail side.

Got it. That's helpful. Maybe last one for me. Given your outlook for expenses to hold in to this level and margin expansion, you know, you've been -- you've been on the efficiency ratio consistently in the low 50s and kind of below, longer term mid, I think, 50 range. Given that you expect margin expansion, would it be fair to expect that efficiency could continue to run, you know, potentially lower here at least in in the near term based on, kind of your outlook for investing in the franchise and kind of NII growth outstripping that? Just or, you know, could you potentially up your expenses and reinvest some of those gains as you think about it? I realize it's a little early to start talking about 2025, but just from a high level, how you guys are viewing that would be really helpful.

Yes. Investments will continue. Technologies is a key component of the investment priorities. Also, facilities have been a key component that we continue to invest. So it's really I think we guided the 52% for 2024, and I think we should stay -- we're going to stay around that. Very difficult, sometimes you go lower, sometimes a little bit like these past two quarters. There's opportunities among timers that go into the equation, but when you look at the overall, I think 52% is probably the best number we can provide at this stage.

Obviously, the margin expansion could help in terms of that relationship and offset any additional investments we might make clearly, but the 52% is where we feel it's going to stand at based on the level of investments we're currently doing.

Great. Thank you.

Thank you, Kelly.

Thank you. We currently have no further questions. [Operator Closing Remarks].