KBRA assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 to San Juan, Puerto Rico-based First BanCorp. (NASDAQ:FBP) ("the company"). KBRA also assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 to its primary bank subsidiary, FirstBank Puerto Rico. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

FBP's ratings principally reflect its solid franchise within Puerto Rico which supports a granular, relatively low-cost deposit base and a better-than-peer average net interest margin (NIM). Despite the rising interest rate environment during the 2022 to 2023 Fed tightening cycle, FBP's NIM was comparatively resilient, as it was able to lag deposit pricing substantially. And while the company remains spread dependent with fee revenue making up 12%-15% of total revenues historically, the company's deposit pricing power and efficient operations should remain supportive of its overall earnings power even as policy rates fall.

FBP's capitalization profile has proven to be durable in the midst of economic volatility on and off the island of Puerto Rico. The CET1 ratio has resided in the ~16%-17% range since the company's acquisition of Santander's Puerto Rican operations in 2020, even with ongoing capital deployment strategies, including organic growth and business investments (both revenue and non-revenue producing) as well as paying out around 100% of earnings in any given quarter (~35%-40% dividend payout ratio with the balance in buybacks or the redemption of trust preferred securities). Capital could also be deployed through inorganic measures, particularly an acquisition in Florida. That said, FBP's ratings reflect our view that the company has meaningful loss absorbing capacity, with a CET1 ratio likely to be managed above mainland peers over time coupled with a higher than average loan loss reserve.

Ratings are further supported by our view of the company's risk management which has significantly evolved and improved. Credit risk limits are reasonable and informed by the Board's risk appetite and with the lessons learned during the GFC. This, along with an improving Puerto Rican economy, aided by low unemployment relative to historical measures and a steady flow of federal aid to be used for infrastructure development projects, has resulted in the company's ongoing improvement in asset quality. Nonperforming assets (NPAs) have come down meaningfully over the last number of years and compare favorably to the other two main banks on the island. We note a modest "normalization" in net charge-offs (NCOs) to the 50-75 bps range coming off of historically low credit losses during the pandemic which were aided by stimulus payments. Still, we expect any uptick in credit losses to be manageable in the context of strong earnings power and high capital levels.

That said, Puerto Rico has historically reflected a more challenged economic environment compared to the mainland United States. While federal aid and improving infrastructure serve as potential mitigants to the impact of natural disasters (i.e., hurricanes), the economic risks associated with such events modestly constrain the company's ratings in the near term. This headwind could lessen over time as the company diversifies onto mainland U.S. through organic and/or inorganic measures.

Rating Sensitivities

Positive rating momentum would most likely be tied to the continued maintenance of above-peer regulatory capital ratios and earnings performance, potentially in conjunction with further geographic diversification. Although not expected, the ratings would most likely come under pressure if loan quality were to deteriorate beyond expectations that would lead to higher-than-expected loan losses (or provision expense) and lower earnings.

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Methodologies

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA), one of the major credit rating agencies (CRA), is a full-service CRA registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a Designated Rating Organization (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan's Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.

Doc ID: 1012063

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Analytical Contacts

Bain Rumohr, Managing Director (Lead Analyst)

+1 312-680-4166

bain.rumohr@kbra.com

Shannon Servaes, Managing Director

+1 301-969-3247

shannon.servaes@kbra.com

Ian Jaffe, Senior Managing Director (Rating Committee Chair)

+1 646-731-3302

ian.jaffe@kbra.com

Business Development Contact

Justin Fuller, Managing Director

+1 312-680-4163

justin.fuller@kbra.com

KBRA Assigns Ratings to First BanCorp.