Executive Summary / Key Takeaways

• First BanCorp. delivered a strong first quarter in 2025, marked by significant net interest margin expansion driven by strategic asset mix shifts and lower funding costs, alongside positive operating leverage.
• The company is actively deploying capital, returning over 100% of Q1 earnings through dividends, share repurchases, and the redemption of higher-cost junior subordinated debentures, with further buybacks planned for the remainder of 2025.
• Strategic investments in technology, including core system cloud migration and commercial lending platform enhancements, are aimed at improving operational efficiency, customer experience, and supporting future organic growth.
• Credit quality remains relatively stable, with consumer credit trends showing normalization as expected, although the company is monitoring specific commercial exposures and maintaining qualitative adjustments to the allowance for credit losses amidst economic uncertainty.
• Management guidance points to continued net interest margin improvement throughout 2025, supported by significant cash flows from the investment portfolio available for redeployment into higher-yielding assets, alongside targeted mid-single-digit loan growth and stable efficiency ratios despite ongoing technology investments.

Setting the Scene: A Regional Powerhouse Leveraging Balance Sheet and Tech

First BanCorp. (NYSE:FBP) stands as a diversified financial holding company deeply rooted in Puerto Rico, with significant operations extending to the U.S. Virgin Islands, British Virgin Islands, and the state of Florida. Since its founding in 1948, the company has evolved to offer a comprehensive suite of financial products and services to consumers and commercial customers through its primary subsidiary, FirstBank Puerto Rico, and other specialized units like FirstBank Insurance Agency. This long history has cemented its position within its core markets, providing a foundational understanding of the local economic and competitive dynamics that inform its strategy today.

The company's overarching strategy centers on disciplined execution, leveraging the inherent strengths of its balance sheet, capitalizing on the prevailing interest rate environment, and making targeted strategic investments to enhance its franchise value. This includes a strong focus on organic growth opportunities, particularly in lending and core deposit gathering, while simultaneously optimizing its operational efficiency and returning excess capital to shareholders.

A critical component of FBP's strategic response to the evolving financial landscape is its commitment to technological differentiation and innovation. Recognizing the importance of digital capabilities and streamlined processes, the company has undertaken significant initiatives to modernize its infrastructure and enhance customer interaction. A very important step was achieved with the conversion of core systems to the centralized FIS cloud, aiming to improve operational efficiency and scalability. Furthermore, the company launched its nCino platform in September 2024, specifically targeting the commercial lending workflow to provide a completely digital experience. This platform is designed to offer a more seamless interaction with commercial clients and support additional growth in the business by potentially enabling faster loan processing. On the consumer front, FBP has enhanced digital payment options by launching Samsung Pay and Google Pay for Mastercard debit, with the Apple Pay project currently ongoing and expected to launch during 2025. These technological advancements are not merely operational upgrades; they are strategic tools intended to strengthen FBP's competitive moat by improving customer experience, reducing costs through efficiency gains, and supporting the company's growth objectives across its diverse segments. The "so what" for investors is clear: these investments, while contributing to the expense base in the near term, are foundational to FBP's long-term strategy for profitable growth and maintaining relevance in an increasingly digital banking environment.

Within its operating regions, FBP faces a dynamic competitive landscape. In Puerto Rico, key rivals include larger institutions like Banco Popular de Puerto Rico (BPOP) and OFG Bancorp (OFG). BPOP, with its larger scale and extensive branch network, holds a significant market share lead over FBP in retail and commercial banking. While BPOP demonstrates higher profitability efficiency (e.g., higher net margins), FBP strategically positions itself through its diversified segment offerings and targeted tech investments like nCino, which aims to provide a competitive edge in commercial loan processing speed. OFG competes strongly in consumer and commercial lending, focusing on digital transformation and cost leadership in certain areas. FBP's technological enhancements, such as the nCino platform, are intended to narrow the gap in operational efficiency and enhance its lending capabilities against OFG's streamlined processes. In the U.S. mainland (primarily Florida), FBP competes with large national banks like JPMorgan Chase (JPM) and Bank of America (BAC). These institutions possess vast scale, advanced technology, and extensive networks, giving them a significant advantage in market share and digital offerings. FBP's strategy in Florida focuses on commercial and consumer banking services, leveraging its regional expertise and relationship-based approach, but it operates at a smaller scale with higher operating costs compared to the efficiency derived from the sheer size of national players. FBP's unique value proposition is further bolstered by its established presence in the U.S. and British Virgin Islands, offering tailored services in these niche markets, a differentiator not shared by all competitors. Overall, FBP's competitive standing is characterized by leveraging regional strengths and targeted tech investments to compete effectively against larger, more scaled rivals, while actively managing its balance sheet and capital to drive shareholder value.

Financial Performance: Margin Expansion Fuels Strong Start to 2025

First BanCorp. commenced 2025 with a robust financial performance in the first quarter, demonstrating the positive impact of its strategic focus. The company reported net income of $77.1 million, translating to $0.47 per diluted common share, an increase from $73.5 million ($0.44 per diluted share) in the first quarter of 2024. This performance resulted in a solid return on average assets of 1.64%.

A key driver of the improved profitability was the significant expansion in net interest income and margin. Net interest income for the quarter ended March 31, 2025, increased by $15.9 million year-over-year, reaching $212.4 million. This growth propelled the net interest margin to 4.52%, a notable increase of 36 basis points compared to 4.16% in the prior year period. Management attributed this expansion primarily to a favorable change in asset mix, as cash flows from lower-yielding investment securities were strategically redeployed into higher-yielding interest-earning assets. Additionally, a decrease in the cost of interest-bearing liabilities contributed to the margin improvement, reflecting lower interest expense on deposits and borrowings, including the impact of junior subordinated debenture redemptions.

Non-interest income for the first quarter of 2025 amounted to $35.7 million, an increase of $1.7 million from the same period in 2024. This rise was mainly driven by higher realized gains from purchased income tax credits, partially offset by lower insurance proceeds collected in the prior year related to Hurricane Fiona property damage.

Non-interest expenses saw a modest increase, totaling $123.0 million for the quarter, up $2.1 million year-over-year. This was primarily due to higher employee compensation and benefits expenses, notably an increase in bonuses and stock-based compensation. However, this increase was partially offset by a decrease in professional service fees and expense reimbursements for card processing. Despite the rise in absolute expenses, the stronger revenue performance resulted in an improved efficiency ratio of 49.58% for the quarter, down from 52.46% in the first quarter of 2024, indicating positive operating leverage.

Looking at the balance sheet as of March 31, 2025, total assets were approximately $19.1 billion, a slight decrease of $185.9 million from December 31, 2024. This change was primarily influenced by cash inflows from investment securities and loan repayments being utilized for the repayment of long-term borrowings, funding a decrease in total deposits, and supporting capital deployment actions, partially offset by an increase in the fair value of available-for-sale debt securities due to changes in market interest rates. Total liabilities decreased by $296.0 million to $17.3 billion, mainly driven by a $230.6 million decrease in borrowings and a $48.8 million decrease in total deposits, predominantly in government deposits. Total stockholders' equity increased by $110.1 million to $1.8 billion, fueled by the $84.1 million increase in the fair value of available-for-sale debt securities recognized in accumulated other comprehensive loss and the net income generated in the quarter, partially offset by common stock dividends and repurchases.

The total loan portfolio before the allowance for credit losses amounted to $12.7 billion as of March 31, 2025, a decrease of $71.7 million from the prior quarter. This included a decrease in commercial and construction loans in the Puerto Rico region, offset by increases in the Florida and Virgin Islands regions. The portfolio composition remained diversified, with commercial and construction loans representing 49%, consumer loans and finance leases 29%, and residential real estate loans 22%. Geographically, the credit risk concentration was approximately 78% in the Puerto Rico region, 18% in the United States region (mainly Florida), and 4% in the Virgin Islands region.

The investment securities portfolio saw a decrease in available-for-sale debt securities to $4.3 billion (down $252.4 million QoQ), driven by maturities and principal repayments, partially offset by an increase in fair value and new purchases. Held-to-maturity debt securities also decreased slightly to $312.0 million. As of March 31, 2025, the company held a net unrealized loss on available-for-sale debt securities of $475.5 million, primarily due to lower market interest rates on existing instruments, but management expects this to reverse over time and does not anticipate being required to sell before recovery.

Total deposits decreased slightly to $16.8 billion. However, core customer deposits (excluding government and brokered CDs) increased by $29.0 million to $12.9 billion, including a $70.0 million increase in non-interest-bearing deposits. Estimated uninsured deposits, excluding fully collateralized government deposits, amounted to $4.6 billion. The company maintained strong liquidity coverage, with available sources (cash, liquid securities, FHLB lines, FED Discount Window capacity) totaling $6.2 billion, representing 133% of estimated uninsured deposits.

Credit Quality and Risk Management: Monitoring Trends and Maintaining Reserves

First BanCorp.'s approach to credit risk management is a cornerstone of its operations, particularly given its geographic concentrations and the inherent uncertainties in the economic environment. The company's provision for credit losses for loans, finance leases, unfunded commitments, and debt securities totaled $24.8 million for the first quarter of 2025, an increase from $12.2 million in the prior year period. This increase was influenced by a decrease in recoveries from bulk sales of fully charged-off consumer loans and finance leases compared to the prior year, a significant CI loan recovery in the first quarter of 2024 that did not recur, and a $2.7 million increase in qualitative adjustments to the allowance reflecting uncertainty in the economic environment.

Net charge-offs for the quarter amounted to $21.4 million, or an annualized 0.68% of average loans, compared to $11.2 million (0.37% annualized) for the first quarter of 2024. The increase was primarily driven by the aforementioned lower recoveries from bulk sales of charged-off consumer loans and finance leases and the impact of the prior year's CI loan recovery. Management noted that consumer credit trends continue to show normalization as expected, with early delinquency trends decreasing compared to the prior quarter.

The allowance for credit losses (ACL) for loans and finance leases stood at $247.3 million as of March 31, 2025, an increase of $3.4 million from December 31, 2024. The ratio of ACL to total loans held for investment increased slightly to 1.95% from 1.91%. The increase in the ACL for commercial and construction loans was influenced by renewals of lines of credit, updated financial information of certain commercial borrowers, and a deterioration in the economic outlook of the forecasted commercial real estate (CRE) price index. The ACL for residential mortgage loans increased due to newly originated loans carrying a higher loss rate, partially offset by improvements in macroeconomic variables like the unemployment rate and Housing Price Index. Conversely, the ACL for consumer loans decreased due to improvements in macroeconomic variables, mainly the projection of the unemployment rate. Management emphasized that while macroeconomic forecasts are inherently uncertain, their process for estimating expected credit losses is appropriately governed, and estimates were deemed reasonable for the period.

Total non-performing assets (NPAs) increased by $11.1 million to $129.4 million as of March 31, 2025, compared to $118.3 million at the end of 2024. This increase was mainly due to the inflow to nonaccrual status of a $12.6 million commercial mortgage loan in the Florida region's hospitality industry. Management noted that this specific loan did not trigger additional ACL based on its collateral value. Adversely classified commercial and construction loans also increased, driven by downgrades of two commercial mortgage loans in the Florida region, including the aforementioned nonaccrual inflow and another loan in the hotel industry.

The company's credit exposure is concentrated geographically, with 78% of the loan portfolio in Puerto Rico, 18% in the U.S. (primarily Florida), and 4% in the USVI and BVI. Exposure to the Puerto Rico government, its municipalities, and public corporations totaled $288.1 million, with municipal loans largely supported by assigned property tax revenues and taxing power. Exposure to USVI government entities amounted to $116.0 million, with a portion fully collateralized by cash balances. The company acknowledges the fiscal challenges in the USVI and the potential for future legislative actions impacting debt.

Interest rate risk is actively managed, with static simulations indicating an asset-sensitive position for the next twelve months. This sensitivity is influenced by factors such as interest-bearing cash balances, earlier scheduled maturities of U.S. agencies debentures, and a lower balance of variable-rate junior subordinated debentures and FHLB advances. Liquidity risk is managed proactively through diversified funding sources, including core deposits and wholesale funding, supported by contingency funding plans and ample borrowing capacity at the FHLB and FED Discount Window. The company's credit ratings are monitored, as downgrades could impact access and cost of funding, though management believes its non-reliance on corporate debt directly linked to ratings mitigates this impact. Other risks, including operational, legal, regulatory, cyber, and geopolitical, are also monitored as part of the comprehensive risk management framework.

Outlook and Strategic Trajectory: Capitalizing on Momentum

First BanCorp.'s outlook for the remainder of 2025 is anchored in leveraging its current momentum and executing on key strategic initiatives. Management projects that the net interest margin will continue its upward trajectory throughout the year, with an estimated improvement of approximately five to seven basis points per quarter. This positive outlook is contingent on the timing and extent of potential Federal Reserve rate cuts in the second half of the year but is primarily driven by the anticipated redeployment of significant cash flows from the investment portfolio. The company expects to receive approximately $1.5 billion in cash flows from maturities and expected prepayments of its investment securities over the next twelve months, which currently yield around 1.21%. These funds are slated for reinvestment into higher-yielding assets, including new loan originations, higher-rate securities, or potentially used to reduce higher-cost borrowings, thereby enhancing overall asset yields.

The company maintains its guidance for achieving mid-single-digit growth in the commercial, construction, and residential mortgage loan portfolios for the year. This target is supported by a healthy and building loan pipeline and reflects management's confidence in the underlying demand within its operating markets and the company's ability to originate loans under its disciplined underwriting standards. Organic loan growth remains the first priority for capital deployment.

Despite ongoing strategic investments, management expects the expense base for the next couple of quarters, excluding OREO gains, to remain within the range of $125 million to $126 million. These investments include significant spending on technology initiatives aimed at improving operational efficiency and enhancing the customer experience, such as the core system cloud migration and the rollout of the nCino commercial lending platform. The company projects that its efficiency ratio will remain around 50% to 52%, indicating an expectation of continued positive operating leverage as revenue growth offsets the investment-related expenses.

On the credit front, management anticipates an improvement in the consumer charge-off rate year over year in 2025, following the expected normalization trends. They also expect stability in the overall performance of the consumer portfolio, with some potential for delinquency and loss improvement over the year. The balance sheet size is expected to remain relatively flat to slightly higher over 2025, influenced by the interplay of investment portfolio cash flows, loan growth, and deposit trends.

Capital deployment remains a key focus, with the company committed to a 100% net payout ratio goal. This is executed through a combination of common stock dividends and capital actions. The company recently declared a quarterly cash dividend of $0.18 per common share and has remaining authorization of approximately $100.0 million under its stock repurchase program as of May 5, 2025, which it expects to execute during the remainder of the year. In the near term, the company has prioritized the redemption of outstanding junior subordinated debentures, viewing this as an opportunity for immediate EPS accretion and balance sheet optimization.

Conclusion

First BanCorp. has demonstrated a strong start to 2025, effectively leveraging its balance sheet strength and strategic investments to drive financial performance. The significant net interest margin expansion in the first quarter underscores the success of its asset mix strategy and disciplined funding management. The company's ongoing investments in technology, such as the FIS cloud migration and the nCino platform, are foundational to its long-term vision of enhanced efficiency and customer experience, positioning it to compete more effectively in its diverse markets, including against larger rivals like BPOP and OFG in Puerto Rico and national banks in Florida.

While navigating the competitive landscape and monitoring credit trends, particularly the expected normalization in the consumer portfolio and specific commercial exposures, FBP's management has provided a clear outlook for continued margin improvement, targeted loan growth, and stable efficiency. The commitment to returning capital through dividends and share repurchases, alongside the strategic redemption of higher-cost debt, highlights a focus on shareholder value creation. With a solid capital position and a clear strategic roadmap, First BanCorp. appears well-positioned to capitalize on the opportunities presented by the current economic and interest rate environment, supporting a compelling investment thesis centered on profitable growth and disciplined execution.