First BanCorp: A Contrarian Buy as Credit Stabilization and Capital Discipline Fuel Recovery

Amid volatile market conditions, First BanCorp (NASDAQ: FBP) has emerged as a compelling contrarian investment opportunity. Its Q1 2025 results reveal a strategic pivot toward asset quality stabilization, cost optimization, and disciplined capital allocation—catalysts that position the bank for recovery in a year marked by economic uncertainty. Here’s why investors should act now.

Credit Metrics Stabilize Amid Selective Challenges

While total nonperforming loans (NPLs) rose to $98.4 million from $87.4 million in Q4 2024, the increase was largely attributable to a single $12.6 million commercial mortgage loan in Florida’s hospitality sector. This outlier, however, does not overshadow the bank’s robust credit management:
- The Allowance for Credit Losses (ACLL) surged to $247.3 million, or 1.95% of total loans, up from 1.91% in Q4 2024. This buffer now exceeds NPLs by a 150% coverage ratio, shielding against potential losses.
- Key credit drivers, such as improved housing price projections and recoveries from consumer loan sales, demonstrate management’s proactive risk mitigation.

The takeaway? First BanCorp’s credit metrics are stabilizing—not deteriorating. The ACLL’s upward trajectory, coupled with a deliberate focus on high-quality loan renewals, signals confidence in its portfolio’s resilience.

Cost Discipline Fuels Efficiency Gains

The bank’s efficiency ratio dropped to 49.58% in Q1 2025 from 51.57% in Q4 2024, marking a 2% improvement in operational efficiency. This was achieved through:
- Reduced non-interest expenses: Lower business promotion costs and credit/debit card processing fees, offsetting higher compensation expenses.
- Strategic cost containment: A focus on core markets like Puerto Rico and the Virgin Islands, where deposit growth outpaced Florida’s decline.

This trend positions First BanCorp to sustain profitability even in a low-growth environment. With costs under control, the path to higher margins is clearer.

Deposit Mix Shift Lowers Funding Costs

First BanCorp’s deposit strategy is paying off:
- Core deposits (excluding government funds) grew by $29.0 million to $12.9 billion, driven by strong inflows in Puerto Rico (+$75 million) and the Virgin Islands (+$38.9 million).
- Non-interest-bearing deposits rose by $69.8 million, reducing reliance on expensive wholesale funding.

The decline in government deposits (down $82.1 million) reflects a deliberate pivot toward cheaper, stable funding. This shift, combined with a 4.52% net interest margin (NIM)—up from 4.33%—signals a structural improvement in profitability.

Capital Allocation: A Win-Win for Shareholders

With a CET1 capital ratio of 16.62%, First BanCorp has ample room to return capital to shareholders while maintaining regulatory buffers. Recent actions include:
- $21.8 million in stock repurchases and $29.6 million in dividends, boosting shareholder returns.
- $50.6 million in junior subordinated debentures redeemed, reducing interest expenses and enhancing flexibility.

These moves underscore management’s commitment to maximizing shareholder value—a stark contrast to peers prioritizing growth over returns.

Risks vs. Rewards: A Calculated Bet

Critics will point to risks such as:
- Loan charge-offs tied to Florida’s hospitality sector.
- The transient nature of bank-owned life insurance (BOLI) gains, which contributed to Q1’s earnings.

However, these risks are mitigated by:
- A 150% ACLL coverage ratio, which absorbs potential Florida-related losses.
- Structural margin expansion driven by lower deposit costs and higher-yielding assets.

The long-term story is clear: First BanCorp’s focus on disciplined credit, cost control, and capital returns creates a multi-year catalyst for growth.

Conclusion: A Contrarian Buy at Current Levels

First BanCorp trades at a P/B ratio of 0.9x, below its five-year average of 1.2x and well below peers. With $247 million in ACLL, a 49.6% efficiency ratio, and a 16.6% CET1 buffer, this is a bank primed to capitalize on 2025’s recovery themes.

Investors seeking a defensive play with offensive potential should act now: Buy FBP shares and hold for the long-term rewards of margin expansion, capital returns, and regional market dominance. The risks are manageable, and the upside—powered by disciplined execution—is compelling.