# First Bancorp: Form 10-Q for the period ended Mar 31, 2023 - Company: [First Bancorp](/companies/fbp.md) (CIK 1057706) - Form: 10-Q - Filed: 2023-05-10 - Accepted by EDGAR: May 10, 2023, 11:23 ET - Period: 2023-03-31 - Accession: 0001057706-23-000004 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1057706/000105770623000004/fbp20230331Q1.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1057706/000105770623000004/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2023-03-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2023-01-01 to 2023-03-31 | $233.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $41.5m | us-gaap:InterestExpense | | Income tax | 3 months, 2023-01-01 to 2023-03-31 | $31.9m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2023-01-01 to 2023-03-31 | $70.7m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.39 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.39 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 181,236,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $115.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $25.1m | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $53.2m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Total assets | at 2023-03-31 | $18.98bn | us-gaap:Assets | | Total liabilities | at 2023-03-31 | $17.57bn | us-gaap:Liabilities | | Shareholders' equity | at 2023-03-31 | $1.41bn | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 171,288 characters. ### OPERATIONS (“MD&A”) The following MD&A relates to the accompanying unaudited consolidated financial statements of First BanCorp. (the “Corporation,” “we,” “us,” “our,” or “First BanCorp.”) and should be read in conjunction with such financial statements and the notes thereto, and our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”). This section also presents certain financial measures that are not based on generally accepted accounting principles in the United States of America (“GAAP”). See “Non-GAAP Financial Measures and Reconciliations” below for information about why non-GAAP financial measures are presented and references to reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures. ### EXECUTIVE SUMMARY First BanCorp. is a diversified financial holding company headquartered in San Juan, Puerto Rico offering a full range of financial products to consumers and commercial customers through various subsidiaries. First BanCorp. is the holding company of FirstBank Puerto Rico (“FirstBank” or the “Bank”) and FirstBank Insurance Agency. Through its wholly -owned subsidiaries, the Corporation operates in Puerto Rico, the United States Virgin Islands (“USVI”), the British Virgin Islands (“BVI”), and the state of Florida, concentrating on commercial banking, residential mortgage loans, credit cards, personal loans, small loans, auto loans and leases, and insurance agency activities. ### Recent Developments #### Economy and Market Volatility Growth in economic activity and demand for goods and services, alongside labor shortages, supply chain complications and geopolitical matters, have contributed to rising inflation. In response, the Federal Reserve has raised interest rates and has begun reducing the size of its balance sheet. In March and May 2023, certain large U.S. regional banks with assets over $100 billion were closed and placed into receivership with the FDIC. The closures of those banks and adverse developments affecting other banks resulted in heightened levels of market volatility that has negatively impacted customer confidence in the safety and soundness of financial institutions. These developments have resulted in certain regional banks experiencing higher than normal deposit outflows and an elevated level of competition for available deposits in the market. The impact of market volatility from the adverse developments in the banking industry, along with continued high inflation and rising interest rates on our business and related financial results, will depend on future developments, which are highly uncertain and difficult to predict. Our results this quarter reflect continued discipline expense management, stable credit quality metrics, a sound liquidity position, and solid capital levels, despite the market disruption. With our disciplined and proactive approach, the Corporation is well positioned to manage through the uncertain economic outlook on the horizon. As of March 31, 2023, the Corporation had approximately $5.5 billion of unused available liquidity, representing 114% of total estimated uninsured deposits, excluding fully collateralized deposits, of $4.8 billion, and a strong capital position with a common equity tier 1 (“CET1”) ratio of 16.33%. In the aftermath of the recent bank failures, the banking agencies could propose certain actions that may impact capital ratios or the FDIC deposit insurance premium. See “Risk Management – Liquidity Risk” below for additional information about the Corporation’s funding sources and strategy. #### Return of Capital to Shareholders In the first quarter of 2023, the Corporation returned approximately $75.1 million, or 106% of first quarter 2023 earnings, to its shareholders through $50.0 million in repurchases of common stock and the payment of $25.1 million in common stock dividends, which reflects an increase in the common stock dividend by 17%, from $0.12 for the fourth quarter of 2022 to $0.14 per share for the first quarter of 2023. As of March 31, 2023, the Corporation has remaining authorization to repurchase approximately $75 million of common stock. Due to recent market events, the Corporation intends to temporarily pause common stock repurchases during the second quarter of 2023 and expects to resume such repurchases during the third quarter of 2023 subject to various factors, including the Corporation’s capital position, liquidity, financial performance and alternative uses of capital, stock trading price, and general market conditions. #### London Interbank Offered Rate (“LIBOR”) Transition On January 1, 2022, the publication of certain U.S. Dollar (“USD”) LIBOR settings ceased. The publication of the most commonly used overnight, one-month, three-month, six-month and twelve-month USD LIBOR will cease immediately after June 30, 2023, except that per the UK Financial Conduct Authority (the “FCA”) proposal, the one-, three-, and six-month tenors will continue to be published on a “non-representative,” synthetic basis until September 30, 2024. The Adjustable Interest Rate Act (the “LIBOR Act”), that was enacted in March 2022, provides a statutory framework to replace USD LIBOR for contracts governed by U.S. law that do not have clear and practicable provisions for replacing USD LIBOR after June 30, 2023 (“tough legacy contracts”). On December 16, 2022, the FED adopted Regulation ZZ, which identifies replacement benchmark rates based on the Secured Overnight Financing Rate (“SOFR”) to replace the aforementioned USD LIBOR settings that will cease after June 30, 2023 in contracts subject to the LIBOR Act. Under Regulation ZZ, tough legacy contracts will be converted by operation of law to various forms of SOFR, along with a spread adjustment, upon a LIBOR replacement date (i.e., the first London banking day after June 30, 2023). The spread adjustment was designed to compensate for USD LIBOR being higher than SOFR in two regards. First, USD LIBOR is an unsecured rate while SOFR is a secured rate. Second, USD LIBOR includes term premia. In addition, Regulation ZZ codifies safe harbor protections for selection or use of SOFR as a replacement benchmark and clarifies who would be considered a “determining person” able to elect a replacement benchmark when USD LIBOR ceases to be published as representative on June 30, 2023. As of March 31, 2023, the Corporation’s risk exposure to USD LIBOR that mature after June 30, 2023 consisted of the following: (i) $1.2 billion of variable-rate commercial and construction loans (including unused commitments), (ii) $40.7 million of U.S. agencies debt securities and private label mortgage-backed securities (“MBS”) held as part of the available-for-sale debt securities portfolio, (iii) $124.7 million of Puerto Rico municipalities bonds held as part of the held-to-maturity debt securities portfolio, and (iv) $183.8 million of junior subordi nated debentures reported as other long-term borrowings in the consolidated statements of financial condition. Most of these contracts contain adequate features to convert to an alternative interest rate; however, as of March 31, 2023, contracts totaling approximately $338.4 million do not contain fallback language mainly consisting of the aforementioned Puerto Rico municipalities bonds held as part of the held-to-maturity debt securities portfolio and the junior subordinated debentures. Following the provisions of the LIBOR Act and Regulation ZZ, the LIBOR reference on the junior subordinated debentures will automatically transition by operation of law to 3-month CME Term SOFR, plus a spread adjustment of 0.26161% on the first reset date after USD LIBOR ceases publication in June 2023. In addition, for the transition of any residual exposure after June 30, 2023, the Corporation expects to follow the provisions of the LIBOR Act and Regulation ZZ. The Corporation continues to execute its LIBOR transition workplan. Source systems have been updated to support alternative reference rates. At this time alternative reference rates are predominantly SOFR based. In addition, the Corporation continues working with its interest rate risk monitoring framework and a strategy for managing interest rate risk during the transition from LIBOR to SOFR. We continue to monitor market developments and legislative and regulatory updates, with additional updates expected through the remainder of 2023. ### CRITICAL ACCOUNTING POLICIES AND PRACTICES The accounting principles of the Corporation and the methods of applying these principles conform to GAAP. In preparing the consolidated financial statements, management is required to make estimates, assumptions, and judgments that affect the amounts recorded for assets, liabilities and contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Note 1 of the Notes to Consolidated Financial Statements included in our 2022 Annual Report on Form 10-K, as supplemented by this report including this MD&A, describes the significant accounting policies we used in our Consolidated Financial Statements. Not all significant accounting policies require management to make difficult, subjective or complex judgments. Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of uncertainty and have had or are reasonably likely to have a material impact on the Corporation’s financial condition and results of operations. The Corporation’s critical accounting estimates that are particularly susceptible to significant changes include, but are not limited to, the following: (i) the allowance for credit losses (“ACL”); (ii) valuation of financial instruments; and (iii) income taxes. For more information regarding valuation of financial instruments and income taxes policies, assumptions, and judgments, see “Critical Accounting Estimates” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”),” in the 2022 Annual Report on Form 10-K. The “Risk Management – Credit Risk Management” section below details the policies, assumptions, and judgments related to the ACL. Actual results could differ from estimates and assumptions if different outcomes or conditions prevail. ### Overview of Results of Operations First BanCorp.'s results of operations depend primarily on its net interest income, which is the difference between the interest income earned on its interest-earning assets, including investment securities and loans, and the interest expense incurred on its interest-bearing liabilities, including deposits and borrowings. Net interest income is affected by various factors, including the following: (i) the interest rate environment; (ii) the volumes, mix, and composition of interest-earning assets, and interest-bearing liabilities; and (iii) the repricing characteristics of these assets and liabilities. The Corporation ’s results of operations also depend on the provision for credit losses, non-interest expenses (such as personnel, occupancy, the FDIC deposit insurance premium and other costs), non-interest income (mainly service charges and fees on deposits, cards and processing income, and insurance income), gains (losses) on sales of investments, gains (losses) on mortgage banking activities, and income taxes. The Corporation had net income of $70.7 million, or $0.39 per diluted common share, for the quarter ended March 31, 2023, compared to $82.6 million, or $0.41 per diluted common share, for the quarter ended March 31, 2022. Other relevant selected financial indicators for the periods presented are included below: ### Quarter Ended March 31, ### 2023 ### 2022 ### Key Performance Indicator: (1) Return on Average Assets (2) 1.55 1.65 Return on Average Total Equity (3) 21.00 16.64 Efficiency Ratio (4) 49.39 48.82 (1) These financial ratios are used by Management to monitor the Corporation’s financial performance and whether it is using its assets efficiently. (2) Indicates how profitable the Corporation is in relation to its total assets and is calculated by dividing net income on an annualized basis by its average total assets. (3) Measures the Corporation’s performance based on its average stockholders’ equity and is calculated by dividing net income on an annualized basis by its average total stockholders’ equity. (4) Measures how much the Corporation incurred to generate a dollar of revenue and is calculated by dividing non-interest expenses by total revenue. The key drivers of the Corporation’s GAAP financial results for the quarter ended March 31, 2023, compared to the first quarter of 2022, include the following: Net interest income for the quarter ended March 31, 2023 increased to $200.9 million, compared to $185.6 million for the first quarter of 2022, mainly driven by the effect in the commercial loan portfolio of higher market interest rates in the upward repricing of variable -rate loans and in new loan originations, and the growth in consumer loans, partially offset by an increase in interest expense due to the increase in borrowings and a 110 basis point increase in the average cost of interest-bearing liabilities. See "Net Interest Income" below for additional information. The provision for credit losses on loans, finance leases, unfunded loan commitments and debt securities for the quarter ended March 31, 2023 was an expense of $15.5 million, compared to a net benefit of $13.8 million for the first quarter of 2022, mainly due to the $4.7 million increase in the provision for the consumer loan portfolios and the net benefit of $23.1 million recorded in the first quarter of 2022 for the commercial and construction loan portfolio as a result of reductions in qualitative reserves as a result of reduced uncertainty regarding COVID-19. Net charge-offs totaled $13.3 million for the quarter ended March 31, 2023, or 0.46% of average loans on an annualized basis, compared to net charge-offs of $6.6 million, or 0.24% of average loans, for the first quarter of 2022. The increase in net charge-offs was mainly in consumer loans. See “Provision for Credit Losses” and “Risk Management” below for analyses of the ACL and non-performing assets and related ratios. The Corporation recorded non-interest income of $32.5 million for the quarter ended March 31, 2023, compared to $32.9 million for the first quarter of 2022. See “Non-Interest Income” below for additional information. Non-interest expenses for the quarter ended March 31, 2023 increased by $8.6 million to $115.3 million, mainly driven by a $6.9 million increase in employees’ compensation and benefits expenses due to annual salary merit increases and an increase in bonuses, stock-based compensation expense of retirement-eligible employees, payroll taxes, and medical insurance premium costs. The efficiency ratio for the first quarter of 2023 was 49.39%, as compared to 48.82% for the same period in 2022\. See “Non-Interest Expenses” below for additional information. Income tax expense decreased to $31.9 million for the first quarter of 2023, compared to $43.0 million for the same period in 2022 driven by a lower pre-tax income. The Corporation’s estimated effective tax rate, excluding entities with pre-tax losses from which a tax benefit cannot be recognized and discrete items, decrease to 31.2% for the first quarter of 2023, compared to 32.9% for the first quarter of 2022, reflecting a higher proportion of exempt to taxable income. See “Income Taxes” below and Note 17 – Income Taxes , to the unaudited consolidated financial statements herein for additional information. As of March 31, 2023, total assets were approximately $19.0 billion, an increase of $342.6 million from December 31, 2022, primarily due to a $343.1 million increase in cash and cash equivalents, which was mainly attributable to a $347.8 million addition to borrowings to increase available cash as a precautionary measure in light of recent instability in the banking sector and a $28.0 million increase in total loans, partially offset by the $4.3 million decrease in total investment securities. See “Financial Condition and Operating Data Analysis” below for additional information. As of March 31, 2023, total liabilities were $17.6 billion, an increase of $262.5 million from December 31, 2022, mainly driven by the $347.8 million increase in borrowings, partially offset by an overall decrease in total deposits. See “Risk Management – Liquidity Risk” below for additional information about the Corporation’s funding sources and strategy. The Bank’s primary sources of funding are consumer and commercial core deposits, which exclude government deposits and brokered CDs. As of March 31, 2023, these core deposits amounting to $13.1 billion funded 69.17% of total assets. In addition to approximately $3.2 billion in cash and free high quality liquid assets, the Bank maintains borrowing capacity at the FHLB and the FED Discount Window. As of March 31, 2023, the Corporation had approximately $1.4 billion available for funding under the FED’s Discount Window and $882.5 million available for additional borrowing capacity on FHLB lines of credit based on collateral pledged at these entities. On a combined basis, as of March 31, 2023, the Corporation had $5.5 billion available to meet liquidity needs. See “Risk Management – Liquidity Risk” below for additional information about the Corporation’s funding sources and strategy. As of March 31, 2023, the Corporation’s total stockholders’ equity was $1.4 billion, an increase of $80.1 million from December 31, 2022. The increase was driven by an $87.2 million increase in the fair value of available-for-sale debt securities recorded as part of accumulated other comprehensive loss in the consolidated statements of financial condition, as a result of changes in market interest rates, and the earnings generated during the first quarter of 2023. These increases were partially offset by the repurchase of approximately 3.6 million shares of common stock for a total purchase price of approximately $50.0 million and $25.4 million in dividends declared to common stock shareholders during the first quarter of 2023. The Corporation’s CET1 capital, tier 1 capital, total capital, and leverage ratios were 16.33%, 16.33%, 19.02%, and 10.57%, respectively, as of March 31, 2023, compared to CET1 capital, tier 1 capital, total capital, and leverage ratios of 16.53%, 16.53%, 19.21%, and 10.70%, respectively, as of December 31, 2022. See “Risk Management – Capital” below for additional information. Total loan production, including purchases, refinancings, renewals, and draws from existing revolving and non-revolving commitments, increased by $5.5 million to $1.2 billion for the quarter ended March 31, 2023. See “Financial Condition and Operating Data Analysis” below for additional information. Total non-performing assets were $129.0 million as of March 31, 2023, a decrease of $0.2 million, from December 31, 2022. The net decrease was driven by a $6.3 million reduction in nonaccrual residential mortgage loans, mostly due to loans restored to accrual status, collections and foreclosures; partially offset by a $4.4 million increase in nonaccrual commercial and construction loans, mainly related to the inflow of a $7.1 million commercial and industrial participated loan in the Florida region related to a borrower engaged in the power generation industry . See “Risk Management – Nonaccrual Loans and Non- Performing Assets” below for additional information. Adversely classified commercial and construction loans decreased by $23.6 million to $70.0 million as of March 31, 2023, compared to December 31, 2022, mainly driven by the payoff of a $24.3 million commercial and industrial participated loan in the Florida region in the leisure and hospitality industry. ### NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS The Corporation has included in this Quarterly Report on Form 10-Q (“Form 10-Q”) the following financial measures that are not recognized under GAAP, which are referred to as non-GAAP financial measures: #### Net Interest Income, Interest Rate Spread, and Net Interest Margin, Excluding Valuations , and on a Tax -Equivalent Basis Net interest income, interest rate spread, and net interest margin, excluding the changes in the fair value of derivative instruments and on a tax-equivalent basis, are reported in order to provide to investors additional information about the Corporation’s net interest income that management uses and believes should facilitate comparability and analysis of the periods presented. The changes in the fair value of derivative instruments have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively. The tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a marginal income tax rate. Income from tax-exempt earning assets is increased by an amount equivalent to the taxes that would have been paid if this income had been taxable at statutory rates. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread, and net interest margin on a fully tax- equivalent basis. This adjustment puts all earning assets, most notably tax-exempt securities and tax-exempt loans, on a common basis that facilitates comparison of results to the results of peers. See “Result of Operations – Net Interest Income” below, for the table that reconciles net interest income in accordance with GAAP to the non-GAAP financial measure of net interest income, excluding valuations, and on a tax-equivalent basis for the indicated periods. The table also reconciles net interest spread and net interest margin on a GAAP basis to these items excluding valuations, and on a tax-equivalent basis. #### Tangible Common Equity Ratio and Tangible Book Value Per Common Share The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures that management believes are generally used by the financial community to evaluate capital adequacy. Tangible common equity is total common equity less goodwill and other intangibles. Similarly, tangible assets are total assets less goodwill and other intangibles. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase method of accounting for mergers and acquisitions. Accordingly, the Corporation believes that disclosures of these financial measures may be useful to investors. Neither tangible common equity nor tangible assets, or the related measures, should be considered in isolation or as a substitute for stockholders’ equity, total assets, or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets, and any other related measures may differ from that of other companies reporting measures with similar names. See “Risk Management – Capital” below for the table that reconciles the Corporation’s total equity and total assets in accordance with GAAP to the tangible common equity and tangible assets figures used to calculate the non-GAAP financial measures of Tangible Common Equity Ratio and Tangible Book Value per Common Share. ### RESULTS OF OPERATIONS ### Net Interest Income Net interest income is the excess of interest earned by First BanCorp. on its interest-earning assets over the interest incurred on its interest-bearing liabilities. First BanCorp.’s net interest income is subject to interest rate risk due to the repricing and maturity mismatch of the Corporation’s assets and liabilities. In addition, variable sources of interest income, such as loan fees, periodic dividends, and collection of interest on nonaccrual loans, can fluctuate from period to period. Net interest income for the quarter ended March 31, 2023 was $200.9 million, compared to $185.6 million for the first quarter of 2022. On a tax-equivalent basis and excluding the changes in the fair value of derivative instruments, net interest income for the quarter ended March 31, 2023 was $207.2 million compared to $192.8 million for the quarter ended March 31, 2022. The following tables include a detailed analysis of net interest income for the indicated periods. Part I presents average volumes (based on the average daily balance) and rates on an adjusted tax-equivalent basis and Part II presents, also on an adjusted tax- equivalent basis, the extent to which changes in interest rates and changes in the volume of interest-related assets and liabilities have affected the Corporation’s net intere st income. For each category of interest-earning assets and interest-bearing liabilities, the tables provide information on changes in (i) volume (changes in volume multiplied by prior period rates), and (ii) rate (changes in rate multiplied by prior period volumes). The Corporation has allocated rate-volume variances (changes in rate multiplied by changes in volume) to either the changes in volume or the changes in rate based upon the effect of each factor on the combined totals. Net interest income on an adjusted tax equivalent basis and excluding the change in the fair value of derivative instruments is a non-GAAP financial measure. For the definition of this non-GAAP financial measure, refer to the discussion in “Non-GAAP Measures and Reconciliations” above. ### Part I ### Average volume ### Interest income (1) ### / expense ### Average rate (1) ### Quarter ended March 31, ### 2023 ### 2022 ### 2023 ### 2022 ### 2023 ### 2022 (Dollars in thousands) Interest-earning assets: Money market and other short-term investments 404,249 1,835,766 4,650 820 4.67 0.18 Government obligations (2) 2,909,976 2,736,095 10,765 8,232 1.50 1.22 MBS 3,864,145 4,041,975 19,396 19,420 2.04 1.95 FHLB stock 40,838 21,465 421 287 4.18 5.42 Other investments 13,139 11,786 139 21 4.29 0.72 Total investments (3) 7,232,347 8,647,087 35,371 28,780 1.98 1.35 Residential mortgage loans 2,835,240 2,961,456 39,794 40,687 5.69 5.57 Construction loans 146,041 114,732 2,676 1,524 7.43 5.39 Commercial and industrial ("C&I") and commercial mortgage loans 5,167,727 5,103,870 85,885 62,004 6.74 4.93 Finance leases 735,500 588,200 13,809 10,912 7.61 7.52 Consumer loans 2,634,891 2,338,597 71,214 61,151 10.96 10.60 Total loans (4)(5) 11,519,399 11,106,855 213,378 176,278 7.51 6.44 Total interest-earning assets 18,751,746 19,753,942 248,749 205,058 5.38 4.21 Interest-bearing liabilities: Time deposits 2,342,360 2,363,045 10,782 4,421 1.87 0.76 Brokered certificates of deposit ("CDs") 166,698 91,713 1,587 477 3.86 2.11 Other interest-bearing deposits 7,544,901 8,132,149 17,516 2,754 0.94 0.14 Securities sold under agreements to repurchase 91,004 241,111 1,069 2,182 4.76 3.67 Advances from the FHLB 629,167 200,000 7,176 1,063 4.63 2.16 Other long-term borrowings 183,762 183,762 3,381 1,333 7.46 2.94 Total interest-bearing liabilities 10,957,892 11,211,780 41,511 12,230 1.54 0.44 Net interest income on a tax-equivalent basis and excluding valuations 207,238 192,828 Interest rate spread 3.84 3.77 Net interest margin 4.48 3.96 (1) On an adjusted tax-equivalent basis. The Corporation estimated the adjusted tax-equivalent yield by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate of 37.5% and adding to it the cost of interest-bearing liabilities. The tax-equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax-equivalent basis. Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. The Corporation excludes changes in the fair value of derivatives from interest income and interest expense because the changes in valuation do not affect interest received or paid. See “Non-GAAP Measures and Reconciliations” above. (2) Government obligations include debt issued by government-sponsored agencies. (3) Unrealized gains and losses on available-for-sale debt securities are excluded from the average volumes. (4) Average loan balances include the average of nonaccrual loans. (5) Interest income on loans includes $3.1 million and $2.6 million for the quarters ended March 31, 2023 and 2022, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio. ### Part II ### Quarter ended March 31, ### 2023 compared to 2022 ### Variance due to: ### Volume ### Rate ### Total (In thousands) Interest income on interest-earning assets: Money market and other short-term investments (8,698) 12,528 3,830 Government obligations 549 1,984 2,533 MBS (885) 861 (24) FHLB stock 232 (98) 134 Other investments 3 115 118 Total investments (8,799) 15,390 6,591 Residential mortgage loans (1,771) 878 (893) Construction loans 482 670 1,152 C&l and commercial mortgage loans 785 23,096 23,881 Finance leases 2,764 133 2,897 Consumer loans 7,953 2,110 10,063 Total loans 10,213 26,887 37,100 Total interest income 1,414 42,277 43,691 Interest expense on interest-bearing liabilities: Time deposits (67) 6,428 6,361 Brokered CDs 551 559 1,110 Other interest-bearing deposits (573) 15,335 14,762 Securities sold under agreements to repurchase (1,561) 448 (1,113) Advances from the FHLB 3,985 2,128 6,113 Other borrowings 2,048 2,048 Total interest expense 2,335 26,946 29,281 Change in net interest income (921) 15,331 14,410 Portions of the Corporation’s interest-earning assets, mostly investments in obligations of some U.S. government agencies and U.S. government-sponsored entities (“GSEs”), generate interest that is exempt from income tax, principally in Puerto Rico. Also, interest and gains on sales of investments held by the Corporation’s international banking entities (“IBEs”) are tax-exempt under Puerto Rico tax law (see Note 17 - Income Taxes, to the unaudited consolidated financial statements herein for additional information). Management believes that the presentation of interest income on an adjusted tax-equivalent basis facilitates the comparison of all interest data related to these assets. The Corporation estimated the tax equivalent yield by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate (37.5%) and adding to it the average cost of interest-bearing liabilities. The computation considers the interest expense disallowance required by Puerto Rico tax law. Management believes that the presentation of net interest income, excluding the effects of the changes in the fair value of the derivative instruments, provides additional information about the Corporation’s net interest income and facilitates comparability and analysis from period to period. The changes in the fair value of the derivative instruments have no effect on interest due on interest- bearing liabilities or interest earned on interest-earning assets. The following table reconciles net interest income in accordance with GAAP to net interest income, excluding valuations, and net interest income on an adjusted tax-equivalent basis for the indicated periods. The table also reconciles net interest spread and net interest margin on a GAAP basis to these items excluding valuations, and on an adjusted tax-equivalent basis: ### Quarter Ended March 31, ### 2023 ### 2022 (Dollars in thousands) Interest income - GAAP 242,396 197,854 Unrealized loss (gain) on derivative instruments 6 (15) Interest income excluding valuations 242,402 197,839 Tax-equivalent adjustment 6,347 7,219 Interest income on a tax-equivalent basis and excluding valuations 248,749 205,058 Interest expense - GAAP 41,511 12,230 Net interest income - GAAP 200,885 185,624 Net interest income excluding valuations 200,891 185,609 Net interest income on a tax-equivalent basis and excluding valuations 207,238 192,828 ### Average Balances Loans and leases 11,519,399 11,106,855 Total securities, other short-term investments and interest-bearing cash balances 7,232,347 8,647,087 Average Interest-Earning Assets 18,751,746 19,753,942 Average Interest-Bearing Liabilities 10,957,892 11,211,780 ### Average Yield/Rate Average yield on interest-earning assets - GAAP 5.24% 4.06% Average rate on interest-bearing liabilities - GAAP 1.54% 0.44% Net interest spread - GAAP 3.70% 3.62% Net interest margin - GAAP 4.34% 3.81% Average yield on interest-earning assets excluding valuations 5.24% 4.06% Average rate on interest-bearing liabilities 1.54% 0.44% Net interest spread excluding valuations 3.70% 3.62% Net interest margin excluding valuations 4.34% 3.81% Average yield on interest-earning assets on a tax-equivalent basis and excluding valuations 5.38% 4.21% Average rate on interest-bearing liabilities 1.54% 0.44% Net interest spread on a tax-equivalent basis and excluding valuations 3.84% 3.77% Net interest margin on a tax-equivalent basis and excluding valuations 4.48% 3.96% Net interest income amounted to $200.9 million for the quarter ended March 31, 2023, an increase of $15.3 million, when compared to $185.6 million for same period in 2022. The $15.3 million increase in net interest income was primarily due to: A $36.9 million increase in interest income on loans including: A $24.6 million increase in interest income on commercial and construction loans, of which approximately $25.1 million was related to the effect of higher market interest rates in the upward repricing of variable-rate loans and in new loan originations, and approximately $2.5 million was related to the $210.9 million increase in the average balance of this portfolio (excluding Small Business Administration Paycheck Protection Program (“SBA PPP”) loans). These variances were partially offset by a reduction in interest income from SBA PPP loans. The interest income recognized from SBA PPP loans for the quarters ended March 31, 2023 and 2022 amounted to $0.2 million and $3.2 million, respectively. The interest rate on approximately 55% of the Corporation’s commercial and construction loans is variable, 42% is based upon LIBOR, SOFR and other indexes and 13% is based upon the Prime rate index. For the first quarter of 2023, the average one-month LIBOR increased 439 basis points, the average three-month LIBOR increased 440 basis points, the average Prime rate increased 440 basis points, and the average three-month SOFR increased 444 basis points, compared to the average rates for such indexes during the first quarter of 2022. A $13.0 million increase in interest income on consumer loans and finance leases, primarily driven by the $443.6 million increase in the average balance of this portfolio, which increased interest income by approximately $10.5 million, and approximately $2.5 million increase in interest income associated to the positive effects of higher market interest rates on the consumer portfolio yields, primarily in the credit cards portfolio. A $0.7 million decrease in the residential mortgage loans portfolio interest income, primarily related to the $126.2 million reduction in the average balance of this portfolio, which resulted in an approximate decrease of $1.7 million in interest income, partially offset by the positive effect of new loan originations at higher current market interest rates. A $3.8 million increase in interest income from interest-bearing cash balances, which consisted primarily of cash balances deposited at the Federal Reserve Bank (“FED”), mainly due to the effect of higher market interest rates, partially offset by the $1.4 billion decrease in the average balance of interest-bearing cash. A $3.8 million increase in interest income on investment securities, mainly driven by: A $1.3 million increase in interest income on U.S. government and agencies debt securities, mainly driven by higher- yielding securities purchased in the first quarter of 2022. A $1.3 million increase in interest income on Puerto Rico municipal bonds, mainly due to the upward repricing of variable-rate bonds. A $1.0 million increase in interest income on U.S. agencies MBS, mainly driven by a decrease in the premium amortization expense associated with lower prepayments and the positive effects from higher-yielding U.S. agencies MBS purchased in the second quarter of 2022. These variances were partially offset by a $177.8 million decrease in the average balance of this portfolio, which resulted in an approximate reduction of $0.9 million in interest income. Partially offset by: A $22.2 million increase in interest expense on interest-bearing deposits, including : A $14.7 million increase in interest expense on interest-bearing checking and saving accounts, driven by an increase of $15.3 million in average rates paid in the first quarter of 2023 as a result of the overall higher interest rate environment, partially offset by a reduction of $587.2 million in the average balance of these deposits, which resulted in a decrease of approximately $0.6 million in interest expense. A $6.4 million increase in interest expense on time deposits, excluding brokered CDs, mainly associated with higher rates being paid in the first quarter of 2023 on new issuances and renewals also associated with the higher interest rate environment. The average cost of time deposits in the first quarter of 2023, excluding brokered CDs, increased 111 basis points to 1.87% when compared to the same period in 2022. A $1.1 million increase in interest expense on brokered CDs, driven by new issuances at current higher market interest rates that resulted in an increase of $75.0 million in the average balance, which resulted in additional interest expense of approximately $0.5 million. A $7.0 million net increase in interest expense on borrowings, including: A $6.1 million increase in interest expense on advances from the FHLB mainly associated with an increase in the average balance of $429.2 million to increase available cash, which resulted in additional interest expense of approximately $4.0 million, and the effect of approximately $2.1 million associated with new FHLB advances at higher interest rates. A $2.0 million increase in interest expense on other long-term borrowings, driven by the upward repricing of junior subordinated debentures tied to the increase in the three-month LIBOR index. A $1.1 million decrease in interest expense on repurchase agreements, mainly driven by a reduction in the average balance of $150.1 million. Net interest margin for the first quarter of 2023 increased to 4.34%, compared to 3.81% for the same period in 2022, reflecting, among other things, the upward repricing of variable-rate commercial loans, the growth in higher yielding loans, primarily consumer loans, and the change in asset mix, reflecting an increase of higher -yielding assets. These factors were partially offset by the increase in borrowings in the first quarter of 2023 and a 11 0 basis points increase in the average cost of interest-bearing liabilities. ### Provision for Credit Losses The provision for credit losses consists of provisions for credit losses on loans and finance leases, unfunded loan commitments, as well as the debt securities portfolio. The principal changes in the provision for credit losses by main categories follow: #### Provision for credit losses for loans and finance leases The provision for credit losses for loans and finance leases was an expense of $16.3 million for the first quarter of 2023, compared to a net benefit of $17.0 million for the first quarter of 2022. The variances by major portfolio category were as follows: Provision for credit losses for the commercial and construction loan portfolio was an expense of $0.5 million the first quarter of 2023, compared to a net benefit of $23.1 million for the first quarter of 2022. The expense recognized during the first quarter of 2023 was impacted by the following factors: reserve increases of $5.0 million for a new nonacccrual commercial and industrial participated loan in the Florida region in the power generation industry, and $1.1 million due to a less favorable economic outlook in the projection of certain forecasted macroeconomic variables, such as the commercial real estate price index (“CRE price index”); partially offset by reserve decreases of $6.1 million associated with the receipt of updated financial information of certain borrowers. Meanwhile, the net benefit recorded in the first quarter of 2022 mainly reflects reductions in qualitative reserves mostly associated with a continued positive long-term outlook of forecasted macroeconomic variables, primarily in the commercial real estate price index, as a result of the reduced uncertainty regarding COVID-19, particularly on loans in the hotel, transportation and entertainment industries and, to a lesser extent, improvements in updated financial information received from borrowers during the first quarter of 2022. Provision for credit losses for the residential mortgage loan portfolio was an expense of $0.1 million for the first quarter of 2023, compared to a net benefit of $4.9 million for the first quarter of 2022. The net benefit recorded for the first quarter of 2022 was primarily related to the overall decrease in the size of the residential mortgage loan portfolio and continued improvements in the long-term outlook of forecasted macroeconomic variables, such as the housing price index. Provision for credit losses for the consumer loans and finance leases portfolio was $15.7 million for the first quarter of 2023, compared to $11.0 million for the first quarter of 2022. The increase primarily reflects the increase in the size of the consumer loan portfolios and the increase in historical charge-off levels in all major portfolio classes. #### Provision for credit losses for unfunded loan commitments The provision for credit losses for unfunded commercial and construction loan commitments and standby letters of credit was a net benefit of $0.1 million for each of the first quarters of 2023 and 2022. #### Provision for credit losses for held-to-maturity and available-for-sale debt securities The provision for credit losses for held-to-maturity securities was a net benefit of $0.6 million for the first quarter of 2023, compared to an expense of $3.7 million for the first quarter of 2022. The net benefit recorded during the first quarter of 2023 was mostly related to a reduction in qualitative reserves driven by updated financial information of certain bond issuers. ### Non-Interest Income Non-interest income amounted to $32.5 million for the first quarter of 2023, compared to $32.9 million for the same period in 2022. The $0.4 million decrease in non-interest income was primarily due to: A $2.4 million decrease in revenues from mortgage banking activities, mainly driven by a decrease in net realized gain on sales of residential mortgage loans in the secondary market mainly due to a lower volume of sales. During the first quarters of 2023 and 2022, net gains of $1.1 million and $3.5 million, respectively, were recognized as a result of GNMA securitization transactions and whole loan sales to U.S. GSEs amounting to $37.4 million and $93.9 million, respectively. A $0.4 million decrease in insurance commission income, mainly in contingent commissions. Partially offset by: A $1.2 million increase in card and processing income mainly related to higher interchange income and merchant-related referral fees received during the first quarter of 2023. A $1.1 million increase in other sources of non-interest income including: (i) a $0.3 million increase related to higher unused commitment fees; (ii) a $0.2 million increase related to higher benefit recognized in relation to purchased income tax credits realized; (iii) a $0.2 million increase in unrealized gains on marketable equity securities; and (iii) a $0.2 million increase in fees and commissions from insurance referrals. ### Non-Interest Expenses Non-interest expenses for the quarter ended March 31, 2023 amounted to $115.3 million, compared to $106.7 million for the same period in 2022. The efficiency ratio for the first quarter of 2023 was 49.39%, compared to 48.82% for the first quarter of 2022. The $8.6 million increase in non-interest expenses was primarily due to: A $6.9 million increase in employees’ compensation and benefits expenses, mainly driven by annual salary merit increases and an increase in bonuses, stock-based compensation expense of retirement-eligible employees, payroll taxes, and medical insurance premium costs. A $1.4 million increase in professional service fees, driven by a $1.2 million increase in outsourcing technology service fees. A $1.2 million increase in credit and debit card processing fees. A $0.5 million increase in business promotion expenses, mainly related to a $0.7 million increase in credit card loyalty rewards expense, partially offset by a $0.3 million decrease in sponsorship activities. A $0.5 million increase in FDI C deposit insurance cost, driven by the two basis points increase on the initial base deposit insurance assessment rate that came into effect during the first quarter of 2023. Partially offset by: A $1.3 million increase in net gains on OREO operations, mainly driven by a $1.4 million increase in net realized gains on sales of OREO properties, primarily residential properties in the Puerto Rico region. A $1.2 million decrease in occupancy and equipment expenses, primarily related to a reduction in rental expenses and equipment-related depreciation charges. ### Income Taxes For the first quarter of 2023, the Corporation recorded an income tax expense of $31.9 million compared to $43.0 million for the same period in 2022. The decrease in income tax expense was mainly related to lower pre-tax income and a higher proportion of exempt to taxable income resulting in a lower effective tax rate. The Corporation’s estimated annual effective tax rate in the first quarter of 2023, excluding entities from which a tax benefit cannot be recognized and discrete items, was 31.2%, compared to 32.9% for the first quarter of 2022. See Note 17 - Income Taxes, to the unaudited consolidated financial statements herein for additional information. ### FINANCIAL CONDITION AND OPERATING ANALYSIS ### Assets The Corporation’s total assets were $19.0 billion as of March 31, 2023, an increase of $342.6 million from December 31, 2022. The increase was primarily related to a $343.1 million increase in cash and cash equivalents mainly attributable to the $347.8 million increase in borrowings to enhance available cash as a precautionary measure in light of recent instability in the banking sector. In addition, as further discussed below, total loans increased by $28.0 million. These variances were partially offset by a $4.3 million decrease in total investment securities. ### Loans Receivable, including Loans Held for Sale As of March 31, 2023, the Corporation’s total loan portfolio before the ACL amounted to $11.6 billion, an increase of $28.0 million compared to December 31, 2022. The increase consisted of a $141.5 million growth in the Puerto Rico region, partially offset by decreases of $108.6 million in the Florida region and $4.9 million in the Virgin Islands region. On a portfolio basis, the increase consisted of a $79.5 million growth in consumer loans, including a $72.0 million increase in auto and leases, partially offset by decreases of $32.9 million in residential mortgage loans and $18.6 million in commercial and construction loans. As of March 31, 2023, the loans held for the Corporation’s investment portfolio was comprised of commercial and construction loans (46%), residential real estate loans (24%), and consumer and finance leases (30%). Of the total gross loan portfolio held for investment of $11.6 billion as of March 31, 2023, the Corporation had credit risk concentration of approximately 80% in the Puerto Rico region, 17% in the United States region (mainly in the state of Florida), and 3% in the Virgin Islands region, as shown in the following table: ### As of March 31, 2023 ### Puerto Rico ### Virgin Islands ### United States ### Total (In thousands) Residential mortgage loans 2,205,659 176,123 429,746 2,811,528 Construction loans 44,297 3,898 95,469 143,664 Commercial mortgage loans 1,766,479 62,694 524,486 2,353,659 Commercial and Industrial loans 1,872,215 69,013 920,961 2,862,189 Total commercial loans 3,682,991 135,605 1,540,916 5,359,512 Consumer loans and finance leases 3,335,014 63,231 8,700 3,406,945 Total loans held for investment, gross 9,223,664 374,959 1,979,362 11,577,985 Loans held for sale 14,830 353 15,183 Total loans, gross 9,238,494 374,959 1,979,715 11,593,168 ### As of December 31, 2022 ### Puerto Rico ### Virgin Islands ### United States ### Total (In thousands) Residential mortgage loans 2,237,983 179,917 429,390 2,847,290 Construction loans 30,529 4,243 98,181 132,953 Commercial mortgage loans 1,768,890 65,314 524,647 2,358,851 Commercial and Industrial loans 1,791,235 68,874 1,026,154 2,886,263 Total commercial loans 3,590,654 138,431 1,648,982 5,378,067 Consumer loans and finance leases 3,256,070 61,419 9,979 3,327,468 Total loans held for investment, gross 9,084,707 379,767 2,088,351 11,552,825 Loans held for sale 12,306 12,306 Total loans, gross 9,097,013 379,767 2,088,351 11,565,131 #### Residential Real Estate Loans As of March 31, 2023, the Corporation’s total residential mortgage loan portfolio, including loans held for sale, decreased by $32.9 million, as compared to the balance as of December 31, 2022. The decline in the residential mortgage loan portfolio reflects decreases of $29.8 million in the Puerto Rico region and $3.8 million in the Virgin Islands region, partially offset by an increase of $0.7 million in the Florida region. The decline was driven by repayments, foreclosures, and charge -offs, which more than offset the volume of new loan originations kept on the balance sheet. The majority of the Corporation’s outstanding balance of residential mortgage loans in the Puerto Rico and the Virgin Islands regions as of March 31, 2023 consisted of fixed-rate loans that traditionally carry higher yields than residential mortgage loans in the Florida region. In the Florida region, approximately 44% of the residential mortgage loan portfolio consisted of hybrid adjustable-rate mortgages. In accordance with the Corporation’s underwriting guidelines, residential mortgage loans are primarily fully documented loans, and the Corporation does not originate negative amortization loans. #### Commercial and Construction Loans As of March 31, 2023, the Corporation’s commercial and construction loan portfolio decreased by $18.6 million, as compared to the balance as of December 31, 2022. In the Florida region, commercial and construction loans decreased by $108.1 million, as compared to the balance as of December 31, 2022. This decrease reflected $93.3 million in payoffs and paydowns of five commercial and industrial relationships in the Florida region, each in excess of $10 million, including the payoff of a $24.3 million commercial and industrial participated loan in the leisure and hospitality industry. In the Virgin Islands region, commercial and construction loans decreased by $2.8 million, as compared to the balance as of December 31, 2022. In the Puerto Rico region, commercial and construction loans increased by $92.3 million, as compared to the balance as of December 31, 2022. This increase was driven by the origination of several loans, including four commercial relationships, each in excess of $10 million, that increased the portfolio amount by $54.2 million. As of March 31, 2023, the Corporation had $170.9 million outstanding in loans extended to the Puerto Rico government, its municipalities, and public corporations, compared to $169.8 million as of December 31, 2022. See “Exposure to Puerto Rico Government” below for additional information. The Corporation also has credit exposure to USVI government entities. As of March 31, 2023, the Corporation had $38.7 million in loans to USVI government public corporations, compared to $38.0 million as of December 31, 2022. See “Exposure to USVI Government” below for additional information. As of March 31, 2023, the Corporation’s total commercial mortgage loan exposure amounted to $2.4 billion, or 44% of the total commercial loan portfolio. Of this total, $379 million and $38 million is in office real estate in the Puerto Rico and Florida regions, respectively. Total office real estate maturing during the remainder of 2023 and 2024 amounted to $107 million. As of March 31, 2023, the Corporation’s total exposure to shared national credit (“SNC”) loans (including unused commitments) amounted to $1.1 billion as of each of March 31, 2023 and December 31, 2022. As of March 31, 2023, approximately $207.6 million of the SNC exposure is related to the portfolio in Puerto Rico and $858.3 million is related to the portfolio in the Florida region. #### Consumer Loans and Finance Leases As of March 31, 2023, the Corporation’s consumer loan and finance lease portfolio increased by $79.5 million to $3.4 billion, as compared to the portfolio balance of $3.3 billion as of December 31, 2022. This increase was mainly related to increases of $34.8 million and $37.2 million in the auto loans and finance leases portfolios, respectively. The growth in consumer loans is mainly reflected in the Puerto Rico region across all portfolio classes. ### Loan Production First BanCorp. relies primarily on its retail network of branches to originate residential and consumer loans. The Corporation may supplement its residential mortgage originations with wholesale servicing released mortgage loan purchases from mortgage bankers. The Corporation manages its construction and commercial loan originations through centralized units and most of its originations come from existing customers, as well as through referrals and direct solicitations. Auto loans and finance leases originations rely primarily on relationships with auto dealers and dedicated sales professionals who serve selected locations to facilitate originations. The following table provides a breakdown of First BanCorp.’s loan production, including purchases, refinancings, renewals and draws from existing revolving and non-revolving commitments, for the indicated periods: ### Quarter Ended March 31, ### 2023 ### 2022 (In thousands) Residential mortgage 77,302 122,513 Construction 35,499 19,986 Commercial mortgage 88,692 127,985 Commercial and Industrial 555,882 490,296 Consumer 435,318 426,467 Total loan production 1,192,693 1,187,247 During the quarter ended March 31, 2023, total loan originations, including purchases, refinancings, and draws from existing revolving and non-revolving commitments, amounted to approximately $1.2 billion, an increase of $5.5 million, compared to the first quarter of 2022. Residential mortgage loan originations for the quarter ended March 31, 2023 amounted to $77.3 million, compared to $122.5 million for the first quarter of 2022. The decrease of $45.2 million in the first quarter of 2023, as compared to the same period in 2022, reflects declines of $42.2 million in the Puerto Rico region, $2.5 million in the Florida region, and $0.5 million in the Virgin Islands region. Approximately 60% of the $61.5 million residential mortgage loan originations in the Puerto Rico region during the first quarter of 2023 were of conforming loans, compared to 67% of $103.7 million for the first quarter of 2022. The decrease during the first quarter of 2023 is related to a lower volume of conforming loan originations and refinancings, in part due to a higher interest rate environment. Commercial and construction loan originations (excluding government loans) for the quarter ended March 31, 2023 amounted to $672.8 million, compared to $633.8 million for the first quarter of 2022. The increase of $39.0 million in the first quarter of 2023 consisted of increases of $93.7 million and $0.5 million in the Puerto Rico and the Virgin Islands regions, respectively, partially offset by a decrease of $55.2 million in the Florida region. Government loan originations for the quarter ended March 31, 2023 amounted to $7.2 million, an increase of $2.8 million, compared to $4.4 million for the first quarter of 2022. Government loan originations during the first quarter of 2023 were mainly related to the origination of a loan to an agency of the Puerto Rico government for a low-income housing project and the utilization of an arranged overdraft line of credit of a government entity in the Virgin Islands region. Government loan originations during the first quarter of 2022 were related to the utilization of an arranged overdraft line of credit of a government entity in the Virgin Islands region. Originations of auto loans (including finance leases) for the quarter ended March 31, 2023 amounted to $245.1 million, compared to $261.3 million for the first quarter of 2022. The decrease in the first quarter of 2023, as compared to the same quarter of 2022, consisted of a $17.5 million decrease in the Puerto Rico region, partially offset by a $1.3 million increase in the Virgin Islands region. Other consumer loan originations, other than credit cards, for the quarter ended March 31, 2023 amounted to $71.9 million, compared to $55.7 million for the first quarter of 2022. Most of the increase in other consumer loan originations for the first quarter of 2023, as compared with the same period in 2022, was in the Puerto Rico region. The utilization activity on the outstanding credit card portfolio for the quarter ended March 31, 2023 amounted to $118.4 million, compared to $109.5 million for the same period in 2022. ### Investment Activities As part of its liquidity, revenue diversification, and interest rate risk management strategies, First BanCorp. maintains a debt securities portfolio classified as available for sale or held to maturity. The Corporation’s total available-for-sale debt securities portfolio as of March 31, 2023 amounted to $5.6 billion, a $10.3 million decrease from December 31, 2022. The decrease was mainly driven by repayments of approximately $95.9 million of U.S. agencies and MBS, partially offset by an $87.2 million increase in fair value attributable to changes in market interest rates. As of March 31, 2023, the Corporation had a net unrealized loss on available-for-sale debt securities of $711.0 million. This unrealized loss is attributable to instruments on book s carrying a lower interest rate than market rates. The Corporation expects that this unrealized loss will reverse over time. The Corporation expects the portfolio to continue to decrease as repayments are received over the next two years and further expects that the accumulated other comprehensive loss will decrease accordingly, excluding the impact of market interest rates. As of March 31, 2023, substantially all of the Corporation’s available-for-sale debt securities portfolio was invested in U.S. government and agencies debentures and fixed-rate GSEs’ MBS. In addition, as of March 31, 2023, the Corporation held a bond issued by the PRHFA, classified as available for sale, specifically a residential pass-through MBS in the aggregate amount of $3.3 million (fair value - $2.2 million). This residential pass-through MBS issued by the PRHFA is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in 2010 and had an unrealized loss of $1.1 million as of March 31, 2023, of which $0.4 million is due to credit deterioration. During 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral. As of March 31, 2023, the Corporation’s held-to-maturity debt securities portfolio, before the ACL, decreased to $431.4 million, compared to $437.5 million as of December 31, 2022. Held-to-maturity debt securities consisted of fixed-rate GSEs’ MBS and financing arrangements with Puerto Rico municipalities issued in bond form, which the Corporation accounts for as securities, but which were underwritten as loans with features that are typically found in commercial loans. Puerto Rico municipal bonds typically are not issued in bearer form, are not registered with the Securities and Exchange Commission, and are not rated by external credit agencies. These bonds have seniority to the payment of operating costs and expenses of the municipality and, in most cases, are supported by assigned property tax revenues. As of March 31, 2023, approximately 74% of the Corporation’s municipality bonds consisted of obligations issued by four of the largest municipalities in Puerto Rico. The municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and loans. Given the uncertainties as to the effects that the fiscal position of the Puerto Rico central government, and the measures taken, or to be taken, by other government entities may have on municipalities, the Corporation cannot be certain whether future charges to the ACL on these securities will be required. As of March 31, 2023, the ACL for held-to-maturity debt securities was $7.6 million, compared to $8.3 million as of December 31, 2022. See “Risk Management – Exposure to Puerto Rico Government” below for information and details about the Corporation’s total direct exposure to the Puerto Rico government, including municipalities and “Credit Risk Management” below for the ACL of the exposure to Puerto Rico municipal bonds. The following table presents the carrying values of investments as of the indicated dates: ### March 31, 2023 ### December 31, 2022 (In thousands) Money market investments 1,059 2,025 Available-for-sale debt securities, at fair value: U.S. government and agencies obligations 2,531,632 2,492,228 Puerto Rico government obligations 2,203 2,201 MBS: Residential 2,896,655 2,941,458 Commercial 158,766 163,133 Other 500 Total available-for-sale debt securities, at fair value 5,589,256 5,599,520 Held-to-maturity debt securities, at amortized cost: MBS: Residential 161,587 166,739 Commercial 104,008 105,088 Puerto Rico municipal bonds 165,800 165,710 ACL for held-to-maturity Puerto Rico municipal bonds (7,646) (8,286) Total held-to-maturity debt securities 423,749 429,251 Equity securities, including $54.2 million and $42.9 million of FHLB stock as of March 31, 2023 and December 31, 2022, respectively 66,714 55,289 Total money market investments and investment securities 6,080,778 6,086,085 The carrying values of debt securities as of March 31, 2023 by contractual maturity (excluding MBS), are shown below: ### Carrying Amount ### Weighted-Average Yield % (Dollars in thousands) U.S. government and agencies obligations: Due within one year 210,928 0.44 Due after one year through five years 2,272,126 0.83 Due after five years through ten years 36,926 1.64 Due after ten years 11,652 5.15 2,531,632 0.83 Puerto Rico government and municipalities obligations: Due within one year 1,204 5.70 Due after one year through five years 42,633 6.74 Due after five years through ten years 55,940 7.10 Due after ten years 68,226 7.73 168,003 7.26 MBS 3,321,016 1.68 ACL on held-to-maturity debt securities (7,646) Total debt securities 6,013,005 1.48 Net interest income in future periods could be affected by prepayments of MBS. Any acceleration in the prepayments of MBS purchased at a premium would lower yields on these securities, since the amortization of premiums paid upon acquisition would accelerate. Conversely, acceleration of the prepayments of MBS would increase yields on securities purchased at a discount, since the amortization of the discount would accelerate. These risks are directly linked to future period market interest rate fluctuations. Net interest income in future periods might also be affected by the Corporation’s investment in callable securities. As of March 31, 2023, the Corporation had approximately $2.0 billion in callable debt securities (U.S. agencies debt securities) with an average yield of 0.84%, of which approximately 59% were purchased at a discount and 5% at a premium. See “Risk Management” below for further analysis of the effects of changing interest rates on the Corporation’s net interest income and the Corporation’s interest rate risk management strategies. Also, refer to Note 2 – Debt Securities to the unaudited consolidated financial statements herein for additional information regarding the Corporation’s debt securities portfolio. ### RISK MANAGEMENT ### General Risks are inherent in virtually all aspects of the Corporation’s business activities and operations. Consequently, effective risk management is fundamental to the success of the Corporation. The primary goals of risk management are to ensure that the Corporation’s risk-taking activities are consistent with the Corporation’s objectives and risk tolerance, and that there is an appropriate balance between risks and rewards in order to maximize stockholder value. The Corporation has in place a risk management framework to monitor, evaluate and manage the principal risks assumed in conducting its activities. First BanCorp.’s business is subject to eleven broad categories of risks: (i) liquidity risk; (ii) interest rate risk; (iii) market risk; (iv) credit risk; (v) operational risk; (vi) legal and regulatory risk; (vii) reputational risk; (viii) model risk; (ix) capital risk; (x) strategic risk; and (xi) information technology risk. First BanCorp. has adopted policies and procedures designed to identify and manage the risks to which the Corporation is exposed. The Corporation’s risk management policies are described below, as well as in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the 2022 Annual Report on Form 10-K. ### Liquidity Risk Liquidity risk involves the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet liquidity needs and accommodate fluctuations in asset and liability levels due to changes in the Corporation’s business operations or unanticipated events. The Corporation manages liquidity at two levels. The first is the liquidity of the parent company, or First Bancorp., which is the holding company that owns the banking and non-banking subsidiaries. The second is the liquidity of the banking subsidiary, or FirstBank. The Asset and Liability Committee of the Board is responsible for overseeing management’s establishment of the Corporation’s liquidity policy, as well as approving operating and contingency procedures and monitoring liquidity on an ongoing basis. The Management’s Investment and Asset Liability Committee (“MIALCO”), which reports to the Board’s Asset and Liability Committee, uses measures of liquidity developed by management that involve the use of several assumptions to review the Corporation’s liquidity position on a monthly basis. The MIALCO oversees liquidity management, interest rate risk, market risk, and other related matters. The MIALCO is composed of senior management officers, including the Chief Executive Officer, the Chief Financial Officer, the Chief Risk Officer, the Corporate Strategic and Business Development Director, the Treasury and Investments Risk Manager, the Financial Planning and Asset and Liability Management (“ALM”) Director, and the Treasurer. The Treasury and Investments Division is responsible for planning and executing the Corporation’s funding activities and strategy, monitoring liquidity availability on a daily basis, and reviewing liquidity measures on a weekly basis. The Treasury and Investments Accounting and Operations area of the Corporate Controller’s Department is responsible for calculating the liquidity measurements used by the Treasury and Investment Division to review the Corporation’s liquidity position on a monthly basis. The Financial Planning and ALM Division is responsible to estimate the liquidity gap for longer periods. To ensure adequate liquidity through the full range of potential operating environments and market conditions, the Corporation conducts its liquidity management and business activities in a manner that is intended to preserve and enhance funding stability, flexibility, and diversity. Key components of this operating strategy include a strong focus on the continued development of customer-based funding, the maintenance of direct relationships with wholesale market funding providers, and the maintenance of the ability to liquidate certain assets when, and if, requirements warrant. The Corporation develops and maintains contingency funding plans. These plans evaluate the Corporation’s liquidity position under various operating circumstances and are designed to help ensure that the Corporation will be able to operate through periods of stress when access to normal sources of funds is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, outline actions and procedures for effectively managing liquidity through a period of stress, and define roles and responsibilities for the Corporation’s employees. Under the contingency funding plans, the Corporation stresses the balance sheet and the liquidity position to critical levels that mimic difficulties in generating funds or even maintaining the current funding position of the Corporation and the Bank and are designed to help ensure the ability of the Corporation and the Bank to honor their respective commitments. The Corporation has established liquidity triggers that the MIALCO monitors in order to maintain the ordinary funding of the banking business. The MIALCO developed contingency funding plans for the following three scenarios: a credit rating downgrade, an economic cycle downturn event, and a concentration event. The Board’s Asset and Liability Committee reviews and approves these plans on an annual basis. The Corporation manages its liquidity in a proactive manner and in an effort to maintain a sound liquidity position. It uses multiple measures to monitor its liquidity position, including core liquidity, basic liquidity, and time-based reserve measures. Cash and cash equivalents amounted to $823.6 million as of March 31, 2023, compared to $480.5 million as of December 31, 2022. Free high-quality liquid securities that could be liquidated or pledged within one day amounted to $2.4 billion as of March 31, 2023, compared to $3.1 billion as of December 31, 2022. As of March 31, 2023, the estimated core liquidity reserve (which includes cash and free high quality liquid assets such as U.S. government and GSEs obligations that could be liquidated or pledged within one day) was $3.2 billion, or 16.77% of total assets, compared to $3.5 billion, or 19.02% of total assets as of December 31, 2022. The basic liquidity ratio (which adds available secured lines of credit to the core liquidity) was approximately 21.42% of total assets as of March 31, 2023, compared to 22.48% of total assets as of December 31, 2022. As of March 31, 2023, in addition to the aforementioned $3.2 billion in cash and free high quality liquid assets, the Corporation had $882.5 million available for credit with the FHLB based on the value of collateral pledged with the FHLB. The Corporation also maintains borrowing capacity at the FED Discount Window. The Corporation does not consider borrowing capacity from the FED Discount Window as a primary source of liquidity but had approximately $1.4 billion available for funding under the FED’s BIC Program as of March 31, 2023 as an additional contingent source of liquidity. Total loans pledged to the FED Discount Window amounted to $2.3 billion as of March 31, 2023. The Corporation also does not rely on uncommitted inter-bank lines of credit (federal funds lines) to fund its operations and does not include them in the basic liquidity measure. On a combined basis, as of March 31, 2023, the Corporation had $5.5 billion available to meet liquidity needs , while maintaining a strong capital position. The Bank had $252.9 million in brokered CDs as of March 31, 2023, of which approximately $180.9 million mature over the next twelve months. Liquidity at the Bank level is highly dependent on bank deposits, which fund 84.9% of the Bank’s assets (or 83.5% excluding brokered CDs). Historically, the use of brokered CDs has been an additional source of funding for the Corporation as it provides an additional efficient channel for funding diversification and can be obtained faster than regular retail deposits. Funding through brokered CDs may continue to increase the overall cost of funding for the Corporation and impact the net interest margin. In addition, as further discussed below, the Corporation maintain a large, stable core deposit base and a diversified base of readily available wholesale funding sources, including advances from the FHLB through pledged borrowing capacity, securities sold under agreements to repurchase, and access to certificates of deposit issued through brokers. Funding through wholesale funding may continue to increase the overall cost of funding for the Corporation and impact the net interest margin. Over the last year, the FED’s policies to control the inflationary economic environment, including repeated market interest rate increases, have resulted in excess liquidity gradually tapering off and impacting the Corporation’s core deposit balances as customers have allocated cash into higher yielding options. During the first quarter of 2023, the banking industry in the U.S. mainland experienced deposit runoff that led to the collapse of certain financial institutions. As a precautionary measure, during the first quarter of 2023, the Corporation increased the use of advances from the FHLB, repurchase agreements, and other sources, such as wholesale funding brokers, to increase cash and cash equivalents. Increased use of long-term FHLB advances has been part of the Corporation’s interest rate risk management strategy to mitigate the impact of market interest rate increases. The additional use and future levels of these sources of funding are dependent on factors such as the loan portfolio future pipeline and customers continuing to allocate more cash into higher yielding alternatives, among other factors. The Corporation believes that as uncertainty in the banking industry eases certain short-term borrowings will be repaid and not renewed. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These financial instruments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval processes used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. As of March 31, 2023, the Corporation’s commitments to extend credit amounted to approximately $2.0 billion. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. There have been no significant or unexpected draws on existing commitments. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause. The following table summarizes commitments to extend credit and standby letters of credit as of the indicated dates: ### March 31, 2023 ### December 31, 2022 (In thousands) Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Construction undisbursed funds 200,105 170,639 Unused credit card lines 949,701 936,231 Unused personal lines of credit 41,639 41,988 Commercial lines of credit 772,240 761,634 Letters of credit: Commercial letters of credit 84,724 68,647 Standby letters of credit 8,886 9,160 The Corporation engages in the ordinary course of business in other financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different from the full contract or notional amount of the transaction and, thus, affect the Corporation’s liquidity position. These transactions are designed to (i) meet the financial needs of customers, (ii) manage the Corporation’s credit, market and liquidity risks, (iii) diversify the Corporation’s funding sources, and (iv) optimize capital. In addition to the aforementioned off-balance sheet debt obligations and unfunded commitments to extend credit, the Corporation has obligations and commitments to make future payments under contracts, amounting to approximately $4.0 billion as of March 31, 2023\. Our material cash requirements comprise primarily of contractual obligations to make future payments related to time deposits, short-term borrowings, long-term debt, and operating lease obligations. We also have other contractual cash obligations related to certain binding agreements we have entered into for services including outsourcing of technology services, security, advertising and other services which are not material to our liquidity needs. We currently anticipate that our available funds, credit facilities, and cash flows from operations will be sufficient to meet our operational cash needs for the foreseeable future. Off-balance sheet transactions are continuously monitored to consider their potential impact to our liquidity position and changes are applied to the balance between sources and uses of funds, as deemed appropriate, to maintain a sound liquidity position. #### Sources of Funding The Corporation utilizes different sources of funding to help ensure that adequate levels of liquidity are available when needed. Diversification of funding sources is of great importance to protect the Corporation’s liquidity from market disruptions. The principal sources of short-term funds are deposits, including brokered CDs. Additional funding is provided by short- and long-term securities sold under agreements to repurchase and lines of credit with the FHLB. Consistent with its strategy, the Corporation has been seeking to add core deposits. The Asset and Liability Committee reviews credit availability on a regular basis. The Corporation also sells mortgage loans as a supplementary source of funding and has obtained long-term funding in the past through the issuance of notes and long-term brokered CDs. In addition, the Corporation also maintains as additional contingent sources borrowing capacity at the FED’s BIC Program and recently enrolled in the FED’s Bank Term Funding Program (“BTFP”). While liquidity is an ongoing challenge for all financial institutions, management believes that the Corporation’s available borrowing capacity and efforts to grow core deposits will be adequate to provide the necessary funding for the Corporation’s business plans in the foreseeable future. The Corporation’s principal sources of funding are discussed below: #### Retail core deposits - The Corporation’s deposit products include regular savings accounts, demand deposit accounts, money market accounts, and retail CDs. As of March 31, 2023, the Corporation’s core deposits, which exclude government deposits and brokered CDs, decreased by $142.7 million to $13.1 billion from $13.3 billion as of December 31, 2022. The decrease was primarily related to saving and checking accounts in the Florida region used for loan repayments, as well as customers continuing to reallocate cash into higher-yielding alternatives. Notwithstanding, these reductions were partially offset by an increase in time deposits, including a shift from non-interest bearing or low-interest bearing products to time deposits, driven by higher rates offered, as well as certain large commercial deposit inflows in the Puerto Rico region. The average balance per retail core deposit account is $26 thousand. #### Government deposits - As of March 31, 2023, the Corporation had $2.2 billion of Puerto Rico public sector deposits ($2.0 billion in transactional accounts and $161.9 million in time deposits), compared to $2.3 billion as of December 31, 2022. The decrease was primarily related to reductions in the balance of operational accounts of a public corporation. These deposits are insured by the FDIC up to the applicable limits and the uninsured portions is fully collateralized. Approximately 25% of the public sector deposits as of March 31, 2023 were from municipalities and municipal agencies in Puerto Rico and 75% were from public corporations, the central government and agencies, and U.S. federal government agencies in Puerto Rico. In addition, as of March 31, 2023, the Corporation had $462.0 million of government deposits in the Virgin Islands region (December 31, 2022 - $442.8 million) and $11.3 million in the Florida region (December 31, 2022 - $11.6 million). The uninsured portions of government deposits were collateralized by securities and loans with an amortized cost of $3.1 billion as of each of March 31, 2023 and December 31, 2022, and an estimated market value of $2.8 billion and $2.7 billion, respectively. In addition to securities and loans, as of each of March 31, 2023 and December 31, 2022, the Corporation used $200.0 million in letters of credit issued by the FHLB as pledges for public deposits in the Virgin Islands. #### Estimate of Uninsured Deposits – As of March 31, 2023 and December 31, 2022, the estimated amount of uninsured deposits totaled $7.2 billion and $7.6 billion, respectively, generally representing the portion of deposits in domestic offices that exceed the FDIC insurance limit of $250,000 and amounts in any other uninsured deposit account. The balances presented as of March 31, 2023 and December 31, 2022, include the uninsured portion of government deposits, which are fully collateralized as previously mentioned. Excluding fully collateralized deposits, $4.8 billion of these deposits are uninsured, which represent 30.13% of total deposits, excluding brokered CDs, as of March 31, 2023, compared to $4.9 billion, or 30.65% of total deposits, excluding brokered CDs, as of December 31, 2022. The amount of uninsured deposits is calculated based on the same methodologies and assumptions used for our bank regulatory reporting requirements adjusted for cash held by wholly-owned subsidiaries at the Bank. The following table presents by contractual maturities the amount of U.S. time deposits in excess of FDIC insurance limits (over $250,000) and other time deposits that are otherwise uninsured as of March 31, 2023: (In thousands) ### 3 months or ### less ### 3 months to ### 6 months ### 6 months to ### 1 year ### Over 1 year ### Total U.S. time deposits in excess of FDIC insurance limits 125,162 84,861 217,846 341,507 769,376 Other uninsured time deposits 18,814 10,058 9,864 5,647 44,383 #### Brokered CDs - Total brokered CDs increased by $147.1 million to $252.9 million as of March 31, 2023, compared to $105.8 million as of December 31, 2022. The increase reflects the effect of new issuances amounting to $189.7 million with an all-in cost of 4.70%, partially offset by approximately $42.6 million of maturing brokered CDs, with an all-in cost of 4.06%, that were paid off during the first quarter of 2023. The average remaining term to maturity of the brokered CDs outstanding as of March 31, 2023 was approximately 1.1 years. The use of brokered CDs provides an efficient channel for funding diversification and interest rate management. Brokered CDs are insured by the FDIC up to regulatory limits and can be obtained faster than regular retail deposits. Refer to “Net Interest Income” above for information about average balances of interest-bearing deposits and the average interest rate paid on deposits, for the quarters ended March 31, 2023 and 2022. #### Securities sold under agreements to repurchase - The Corporation’s investment portfolio is funded in part with repurchase agreements. The Corporation’s outstanding short-term securities sold under repurchase agreements amounted to $173.0 million as of March 31, 2023, compared to $75.1 million as of December 31, 2022. During the first quarter of 2023, the Corporation added $173.0 million of short-term repurchase agreements at an average cost of 5.08% reflecting precautionary measures taken by management in light of recent instability in the banking sector, and repaid upon maturity $75.1 million of short-term repurchase agreements at an average cost of 4.55%. In addition to these repurchase agreements, the Corporation has been able to maintain access to credit by using cost-effective sources such as FHLB advances. See Note 9 – Securities Sold Under Agreements to Repurchase (Repurchase Agreements) to the unaudited consolidated financial statements herein for further details about repurchase agreements outstanding by counterparty and maturities. Under the Corporation’s repurchase agreements, as is the case with derivative contracts, the Corporation is required to pledge cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines due to changes in interest rates, a liquidity crisis or any other factor, the Corporation is required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Given the quality of the collateral pledged, the Corporation has not experienced margin calls from counterparties arising from credit-quality-related write-downs in valuations. #### Advances from the FHLB – The Bank is a member of the FHLB system and obtains advances to fund its operations under a collateral agreement with the FHLB that requires the Bank to maintain qualifying mortgages and/or investments as collateral for advances taken. As of March 31, 2023, the outstanding balance of fixed-rate FHLB advances was $925.0 million, compared to $675.0 million as of December 31, 2022. During the first quarter of 2023, the Corporation added $425.0 million of short-term FHLB advances at an average cost of 5.04% and $300.0 million of long-term FHLB advances at an average cost of 4.59%, and repaid upon maturity $475.0 million of short-term FHLB advances at an average cost of 4.56%. Of the $925.0 million in FHLB advances as of March 31, 2023, $700.0 million were pledged with investment securities and $225.0 million were pledged with mortgage loans. As of March 31, 2023, the Corporation had $882.5 million available for additional credit on FHLB lines of credit based on collateral pledged at the FHLB of New York. #### Trust Preferred Securities – In 2004, FBP Statutory Trusts I and II, statutory trusts that are wholly-owned by the Corporation and not consolidated in the Corporation’s financial statements, sold to institutional investors variable-rate TRuPs and used the proceeds of these issuances, together with the proceeds of the purchases by the Corporation of variable rate common securities, to purchase junior subordinated deferrable debentures. The subordinated debentures are presented in the Corporation’s consolidated statements of financial condition as other long-term borrowings. As of each of March 31, 2023 and December 31, 2022, the Corporation had subordinated debentures outstanding in the aggregate amount of $183.8 million with maturity dates from June 17, 2034 through September 20, 2034. Under the indentures, the Corporation has the right, from time to time, and without causing an event of default, to defer payments of interest on the Junior Subordinated Deferrable Debentures by extending the interest payment period at any time and from time to time during the term of the subordinated debentures for up to twenty consecutive quarterly periods. As of March 31, 2023, the Corporation was current on all interest payments due on its subordinated debt. See Note 11 – Other Long-Term Borrowings and Note 7 – Non-Consolidated Var iable Interest Entities (“VIEs”) and Servicing Assets to unaudited consolidated financial statements herein for additional information. #### Other Sources of Funds and Liquidity \- The Corporation’s principal uses of funds are for the origination of loans, the repayment of maturing deposits and borrowings, and deposits withdrawals. In connection with its mortgage banking activities, the Corporation has invested in technology and personnel to enhance the Corporation’s secondary mortgage market capabilities. The enhanced capabilities improve the Corporation’s liquidity profile as they allow the Corporation to derive liquidity, if needed, from the sale of mortgage loans in the secondary market. The U.S. (including Puerto Rico) secondary mortgage market is still highly- liquid, in large part because of the sale of mortgages through guarantee programs of the FHA, VA, U.S. Department of Housing and Urban Development (“HUD”), FNMA and FHLMC. During the first quarter of 2023, loans pooled into GNMA MBS amounted to approximately $29.4 million. Also, during the first quarter of 2023, the Corporation sold approx imately $8.0 million of performing residential mortgage loans to FNMA. The FED Discount Window is a cost-efficient contingent source of funding for the Corporation in highly-volatile market conditions. As previously mentioned, although currently not in use, as of March 31, 2023, the Corporation had approximately $1.4 billion available for funding under the FED’s Discount Window based on collateral pledged at the FED. The FED’s BTFP was established by the Federal Reserve Board in March 2023 as an additional source of funding for depository institutions to borrow up to the par value of eligible collateral for terms of up to one year. The BTFP eliminates the need for depository institutions to sell their debt securities in times of stress. Eligible collateral includes high-quality securities such as U.S. Treasuries, U.S. agency securities, and U.S. agency MBS. Borrowers that are eligible for primary credit under the Borrower-in- Custody Program (“BIC”) are eligible to borrow under the BTFP. In addition, any eligible collateral pledged to the discount window can be used under the BTFP. The rate for term advances will be the one-year overnight index swap rate plus 10 basis points and will be fixed for the term of the advance on the day the advance is made. As previously mentioned, the Corporation enrolled in the BTF P during the first quarter of 2023 to further diversify its contingency funding sources. #### Effect of Credit Ratings on Access to Liquidity The Corporation’s liquidity is contingent upon its ability to obtain external sources of funding to finance its operations. The Corporation’s current credit ratings and any downgrade in credit ratings can hinder the Corporation’s access to new forms of external funding and/or cause external funding to be more expensive, which could, in turn, adversely affect its results of operations. Also, changes in credit ratings may further affect the fair value of unsecured derivatives whose value takes into account the Corporation’s own credit risk. The Corporation does not have any outstanding debt or derivative agreements that would be affected by credit rating downgrades. Furthermore, given the Corporation’s non-reliance on corporate debt or other instruments directly linked in terms of pricing or volume to credit ratings, the liquidity of the Corporation has not been affected in any material way by downgrades. The Corporation’s ability to access new non-deposit sources of funding, however, could be adversely affected by credit downgrades. As of the date hereof, the Corporation’s credit as a long-term issuer is rated BB+ by S&P and BB by Fitch. As of the date hereof, FirstBank’s credit ratings as a long-term issuer are BB+ by S&P, one notch below S&P’s minimum BBB- level required to be considered investment grade; and BB by Fitch, two notches below Fitch’s minimum BBB- level required to be considered investment grade. The Corporation’s credit ratings are dependent on a number of factors, both quantitative and qualitative, and are subject to change at any time. The disclosure of credit ratings is not a recommendation to buy, sell or hold the Corporation’s securities. Each rating should be evaluated independently of any other rating. #### Cash Flows Cash and cash equivalents were $823.6 million as of March 31, 2023, an increase of $343.1 million when compared to December 31, 2022. The following discussion highlights the major activities and transactions that affected the Corporation’s cash flows during the first quarters of 2023 and 2022: #### Cash Flows from Operating Activities First BanCorp.’s operating assets and liabilities vary significantly in the normal course of business due to the amount and timing of cash flows. Management believes that cash flows from operations, available cash balances, and the Corporation’s ability to generate cash through short and long-term borrowings will be sufficient to fund the Corporation’s operating liquidity needs for the foreseeable future. For the first quarters of 2023 and 2022, net cash provided by operating activities was $115.4 million and $114.8 million, respectively. Net cash generated from operating activities was higher than reported net income largely as a result of adjustments for non-cash items such as depreciation and amortization, deferred income tax expense and the provision for credit losses, as well as cash generated from sales of loans held for sale. #### Cash Flows from Investing Activities The Corporation’s investing activities primarily relate to originating loans to be held for investment, as well as purchasing, selling, and repaying available-for-sale and held-to-maturity debt securities. For the first quarter of 2023, net cash provided by investing activities was $50.5 million, primarily due to repayments of U.S. agencies MBS, partially offset by net disbursements on loans held for investment. For the first quarter of 2022, net cash used in investing activities was $333.0 million, primarily due to purchases of U.S. agencies and MBS, and net disbursements on loans held for investment, partially offset by repayments of U.S. agencies and MBS. #### Cash Flows from Financing Activities The Corporation’s financing activities primarily include the receipt of deposits and the issuance of brokered CDs, the issuance of and payments on long-term debt, the issuance of equity instruments, return of capital, and activities related to its short-term funding. For the quarter ended March 31, 2023, net cash provided by financing activities was $177.1 million, mainly reflecting net proceeds of $347.8 million from borrowings, partially offset by a decrease in total deposits and capital returned to stockholders. For the first quarter of 2022, net cash used in financing activities was $628.7 million, mainly reflecting a decrease in government deposits, the repayment at maturity of a $100 million repurchase agreement and capital returned to stockholders. ### Capital As of March 31, 2023, the Corporation’s stockholders’ equity was $1.4 billion, an increase of $80.1 million from December 31, 2022\. The growth was driven by the $87.2 million increase in the fair value of available-for-sale debt securities recorded as part of accumulated other comprehensive loss in the consolidated statements of financial condition, as a result of changes in market interest rates, and the earnings generated in the first quarter of 2023, partially offset by the repurchase of 3.6 million shares of common stock for a total purchase price of approximately $50.0 million, common stock dividends declared in the first quarter of 2023 totaling $25.4 million or $0.14 per common share, and the $1.3 million impact to retained earnings related to the adoption of Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” See Note 1 – Basis of Presentation and Significant Accounting Policies and Note 4 – Allowance for Credit Losses for Loans and Finance Leases, for additional information related to the adoption of ASU 2022-02. On April 27, 2023, the Corporation’s Board declared a quarterly cash dividend of $0.14 per common share payable on June 9, 2023 to shareholders of record at the close of business on May 24, 2023. The Corporation intends to continue to pay quarterly dividends on common stock. The Corporation’s common stock dividends, including the declaration, timing and amount, remain subject to the consideration and approval by the Corporation’s Board at the relevant times. On April 27, 2022, the Corporation announced that its Board approved a stock repurchase program, under which the Corporation may repurchase up to $350 million of its outstanding common stock, which commenced in the second quarter of 2022. The Corporation’s stock repurchase program does not obligate it to acquire any specific number of shares and does not have an expiration date. As of March 31, 2023, the Corporation has repurchased approximately 19.6 million shares of common stock for a total purchase price of $275 million under this stock repurchase program. Considering the industry-wide uncertain environment, the Corporation decided to pause share buybacks during the second quarter of 2023 and it expects to resume shares repurchases during the third quarter of 2023. The Parent Company has no operations and depends on dividends, distributions and other payments from its subsidiaries to fund dividend payments, stock repurchases, and to fund all payments on its obligations, including debt obligations. The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures generally used by the financial community to evaluate capital adequacy. Tangible common equity is total common equity less goodwill and other intangible assets. Tangible assets are total assets less the previously mentioned intangible assets. See “Non-GAAP Financial Measures and Reconciliations” above for additional information. The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets, non-GAAP financial measures, to total equity and total assets, respectively, as of March 31, 2023 and December 31, 2022, respectively: ### March 31, 2023 ### December 31, 2022 (In thousands, except ratios and per share information) Total equity - GAAP 1,405,593 1,325,540 Goodwill (38,611) (38,611) Purchased credit card relationship intangible (86) (205) Core deposit intangible (18,987) (20,900) Insurance customer relationship intangible (13) ### Tangible common equity ### 1,347,909 ### 1,265,811 Total assets - GAAP 18,977,114 18,634,484 Goodwill (38,611) (38,611) Purchased credit card relationship intangible (86) (205) Core deposit intangible (18,987) (20,900) Insurance customer relationship intangible (13) ### Tangible assets ### 18,919,430 ### 18,574,755 ### Common shares outstanding ### 179,789 ### 182,709 ### Tangible common equity ratio ### 7.12% ### 6.81% ### Tangible book value per common share ### 7.50 ### 6.93 See Note 22 - Regulatory Matters, Commitments and Contingencies, to the unaudited consolidated financial statements herein for the regulatory capital positions of the Corporation and FirstBank as of March 31, 2023 and December 31, 2022, respectively. The Banking Law of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be transferred to a legal surplus reserve until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts transferred to the legal surplus reserve from retained earnings are not available for distribution to the Corporation without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law provides that, when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the legal surplus reserve, as a reduction thereof. If the legal surplus reserve is not sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the capital account and the Bank cannot pay dividends until it can replenish the legal surplus reserve to an amount of at least 20% of the original capital contributed. FirstBank’s legal surplus reserve, included as part of retained earnings in the Corporation’s consolidated statements of financial condition, amounted to $168.5 million as of each of March 31, 2023 and December 31, 2022, respectively. There were no transfers to the legal surplus reserve during the first quarter of 2023. ### Interest Rate Risk Management First BanCorp manages its asset/liability position to limit the effects of changes in interest rates on net interest income and to maintain stability of profitability under varying interest rate scenarios. The MIALCO oversees interest rate risk and monitors, among other things, current and expected conditions in global financial markets, competition and prevailing rates in the local deposit market, liquidity, loan originations pipeline, securities market values, recent or proposed changes to the investment portfolio, alternative funding sources and related costs, hedging and the possible purchase of derivatives such as swaps and caps, and any tax or regulatory issues which may be pertinent to these areas. The MIALCO approves funding decisions in light of the Corporation’s overall strategies and objectives. On at least a quarterly basis, the Corporation performs a consolidated net interest income simulation analysis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a one-to-five-year time horizon, assuming upward and downward yield curve shifts. The rate scenarios considered in these simulations reflect gradual upward and downward interest rate movements of 200 basis points (“bps”) during a twelve-month period. The Corporation carries out the simulations in two ways: (1) Using a static balance sheet, as the Corporation had on the simulation date, and (2) Using a dynamic balance sheet based on recent patterns and current strategies. The balance sheet is divided into groups of assets and liabilities by maturity or re-pricing structure and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposit decay and other factors, which may be important in projecting net interest income. The Corporation uses a simulation model to project future movements in the Corporation’s balance sheet and income statement. The starting point of the projections corresponds to the actual values on the balance sheet on the date of the simulations. These simulations are highly complex and are based on many assumptions that are intended to reflect the general behavior of the balance sheet components over the modeled periods. It is unlikely that actual events will match these assumptions in all cases. For this reason, the results of these forward-looking computations are only approximations of the true sensitivity of net interest income to changes in market interest rates. Several benchmark and market rate curves were used in the modeling process, primarily the LIBOR/Swap curve, SOFR curve, Prime Rate, U.S. Treasury yield curve, FHLB rates, brokered CDs rates, repurchase agreements rates, and the mortgage commitment rate of 30 years. As of March 31, 2023, the Corporation forecasted the 12-month net interest income assuming March 31, 2023 interest rate curves remain constant. Then, net interest income was estimated under rising and falling rates scenarios. For the rising rate scenario, a gradual (ramp) parallel upward shift of the yield curve is assumed during the first twelve months (the “+200 ramp” scenario). Conversely, for the falling rate scenario, a gradual (ramp) parallel downward shift of the yield curve is assumed during the first twelve months (the “-200 ramp” scenario). The LIBOR/Swap rates for March 31, 2023, as compared to the January 31, 2023, rates used for the December 31, 2022 sensitivity analysis, reflected an increase in the short-term sector of the curve, or between one to twelve months, of 18 basis points (“bps”) on average; while market rates decreased in the medium-term sector of the curve, or between 2 to 5 years, by 37 bps, and in the long-term sector of the curve, or over 5-year maturities, by 36 bps. A similar increase in market rates changes were observed in the Treasury and the SOFR curve of 29 and 13 bps in the short -term sector, respectively; while market rates decreased in the medium-term sector by 38 and 40 bps, respectively, and by 36 and 37 bps in the long-term sector, respectively. The following table presents the results of the simulations as of March 31, 2023 and December 31, 2022. Consistent with prior years, these exclude non-cash changes in the fair value of derivatives: ### March 31, 2023 ### December 31, 2022 ### Net Interest Income Risk ### Net Interest Income Risk ### (Projected for the next 12 months) ### (Projected for the next 12 months) ### Static Simulation ### Growing Balance Sheet ### Static Simulation ### Growing Balance Sheet (Dollars in millions) ### $ Change ### % Change ### $ Change ### % Change ### $ Change ### % Change ### $ Change ### % Change \+ 200 bps ramp 9.4 1.15 9.7 1.14 7.8 0.96 11.5 1.37 \- 200 bps ramp (12.6) (1.54) (12.7) (1.49) (13.1) (1.61) (17.0) (2.03) The Corporation continues to manage its balance sheet structure to control and limit the overall interest rate risk by managing its asset composition while maintaining a sound liquidity position. See “Risk Management – Liquidity Risk” above for liquidity ratios. As of March 31, 2023 and December 31, 2022, the simulations showed that the Corporation continues to have an asset-sensitive position. As of March 31, 2023, the net interest income for the next twelve months under a non-static balance sheet scenario is estimated to increase by $9.7 million in the rising rate scenario, when compared against the base simulation. The decrease in net interest income sensitivity for the +200 bps ramp scenario, as compared to December 31, 2022, is primarily driven by the changes in the overall funding mix, including decreases in average non-interest deposits to total deposits and customers reallocating to higher yielding alternatives, partially offset by decreases in lower yielding assets, such as the investment portfolio being repaid, and being replaced by higher yielding assets due to the growth on the loan portfolio. As of March 31, 2023, under a falling rate, non-static balance sheet scenario, the net interest income is estimated to decrease by $12.7 million, when compared against the base simulation. The change in net interest income sensitivity for the -200 bps ramp scenario, when compared to December 31, 2022, was driven by a higher deposit beta assumed in the March 31, 2023 simulation for non-maturity deposits, which under the falling rate scenario would reprice and consequently impact net interest income at a faster pace than the previous simulation. ### Credit Risk Management First BanCorp. is subject to credit risk mainly with respect to its portfolio of loans receivable and off-balance-sheet instruments, principally loan commitments. Loans receivable represents loans that First BanCorp. holds for investment and, therefore, First BanCorp. is at risk for the term of the loan. Loan commitments represent commitments to extend credit, subject to specific conditions, for specific amounts and maturities. These commitments may expose the Corporation to credit risk and are subject to the same review and approval process as for loans made by the Bank. See “Liquidity Risk” above for further details. The Corporation manages its credit risk through its credit policy, underwriting, monitoring of loan concentrations and related credit quality, counterparty credit risk, economic and market conditions, and legislative or regulatory mandates. The Corporation also performs independent loan review and quality control procedures, statistical analysis, comprehensive financial analysis, established management committees, and employs proactive collection and loss mitigation efforts. Furthermore, personnel performing structured loan workout functions are responsible for mitigating defaults and minimizing losses upon default within each region and for each business segment. In the case of the commercial and industrial, commercial mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of OREO. In addition to the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the nonaccrual and/or adversely classified status. The SAG utilizes relationship officers, collection specialists and attorneys. The Corporation may also have risk of default in the securities portfolio. The securities held by the Corporation are principally fixed-rate U.S. agencies MBS and U.S. Treasury and agencies securities. Thus, a substantial portion of these instruments is backed by mortgages, a guarantee of a U.S. GSE or the full faith and credit of the U.S. government. Management, consisting of the Corporation’s Commercial Credit Risk Officer, Retail Credit Risk Officer, Chief Credit Officer, and other senior executives, has the primary responsibility for setting strategies to achieve the Corporation’s credit risk goals and objectives. Management has documented these goals and objectives in the Corporation’s Credit Policy. ### Allowance for Credit Losses and Non-performing Assets #### Allowance for Credit Losses for Loans and Finance Leases The ACL for loans and finance leases represents the estimate of the level of reserves appropriate to absorb expected credit losses over the estimated life of the loans. The amount of the allowance is determined using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience is a significant input for the estimation of expected credit losses, as well as adjustments to historical loss information made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term. Additionally, the Corporation’s assessment involves evaluating key factors, which include credit and macroeconomic indicators, such as changes in unemployment rates, property values, and other relevant factors to account for current and forecasted market conditions that are likely to cause estimated credit losses over the life of the loans to differ from historical credit losses. Such factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress. The process includes judgments and quantitative elements that may be subject to significant change. Further, the Corporation periodically considers the need for qualitative reserves to the ACL. Qualitative adjustments may be related to and include, but are not limited to, factors such as the following: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions; (ii) organization specific risks such as credit concentrations, collateral specific risks, nature and size of the portfolio and external factors that may ultimately impact credit quality, and (iii) other limitations associated with factors such as changes in underwriting and loan resolution strategies, among others. The ACL for loans and finance leases is reviewed at least on a quarterly basis as part of the Corporation’s continued evaluation of its asset quality. The Corporation applie s probability weights to the baseline and alternative downside economic scenarios to estimate the ACL with the baseline scenario carrying the highest weight. The economic scenarios used in the ACL determination contained assumptions related to economic uncertainties associated with geopolitical instability, high inflation levels, and the expected path of interest rate increases by the FED. As of March 31, 2023, the Corporation’s ACL model considered the following assumptions for key economic variables in the probability-weighted economic scenarios: Average Commercial Real Estate (“CRE”) Price Index at the national level is forecasted to contract by 2.55% for the remainder of 2023 and grow by 0.74% for 2024. Average Regional Home Price Index forecasts in Puerto Rico and Florida (purchase only prices) are expected to remain relatively flat for the remainder of 2023 and 2024. Average regional unemployment in Puerto Rico of 7.53% for the remainder of 2023 and 8.57% for 2024. For the Florida region and the U.S. mainland, average unemployment rate of 3.59% and 4.19%, respectively, for the remainder of 2023, and 4.23% and 4.62%, respectively, for 2024. Average annualized change in real gross domestic product (“GDP”) in the U.S. mainland of 0.89% for the remainder of 2023 and 1.52% for 2024. It is difficult to estimate how potential changes in one factor or input might affect the overall ACL because management considers a wide variety of factors and inputs in estimating the ACL. Changes in the factors and inputs considered may not occur at the same rate and may not be consistent across all geographies or product types, and changes in factors and inputs may be directionally inconsistent, such that improvement in one factor or input may offset deterioration in others. However, to demonstrate the sensitivity of credit loss estimates to macroeconomic forecasts as of March 31, 2023, management compared the modeled estimates under the probability- weighted economic scenarios against a more adverse scenario. Under this more adverse scenario, as an example, average unemployment rate for the Puerto Rico region increases to 8.04% for the remainder of 2023, compared to 7.53% for the same period on the probability-weighted economic scenario projections. To demonstrate the sensitivity to key economic parameters used in the calculation of the ACL at March 31, 2023, management calculated the difference between the quantitative ACL and this more adverse scenario. Excluding consideration of qualitative adjustments, this sensitivity analysis would result in a hypothetic al increase in the ACL of approximately $34 million at March 31, 2023\. This analysis relates only to the modeled credit loss estimates and is not intended to estimate changes in the overall ACL as it does not reflect any potential changes in other adjustments to the qualitative calculation, which would also be influenced by the judgment management applies to the modeled lifetime loss estimates to reflect the uncertainty and imprecision of these estimates based on current circumstances and conditions. Recognizing that forecasts of macroeconomic conditions are inherently uncertain, particularly in light of recent economic conditions and challenges, which continue to evolve, management believes that its process to consider the available information and associated risks and uncertainties is appropriately governed and that its estimates of expected credit losses were reasonable and appropriate for the quarter ended March 31, 2023. As of March 31, 2023, the ACL for loans and finance leases was $265.6 million, an increase of $5.1 million from $260.5 million as of December 31, 2022. The ACL for commercial and construction loans remained relatively flat when compared to the previous quarter as a result of the following offsetting factors: reserve increases of $5.0 million for a new nonaccrual commercial and industrial loan in the Florida region in the power generation industry; and $1.1 million due to a less favorable economic outlook in the projection of certain forecasted macroeconomic variables, such as the CRE price index; partially offset by reserve decreases of $6.1 million associated with the receipt of updated financial information of certain borrowers and the repayment of a $24.3 million adversely classified commercial and industrial participated loan in the Florida region. The ACL for consumer loans increased by $2.9 million, primarily reflecting the effect of the increase in the size of the consumer loan portfolios and the increase in historical charge-off levels. The ACL for residential mortgage loans increased by $1.6 million, in part to a $2.1 million cumulative increase in the ACL due to the adoption of ASU 2022-02, for which the Corporation elected to discontinue the use of a discounted cash flow methodology for restructured accruing loans. This adjustment had a corresponding decrease, net of applicable taxes, in beginning retained earnings as of January 1, 2023. See Note 1 - Basis of Presentation and Significant Accounting Policies, to the unaudited consolidated financial statements herein for information related to the adoption of ASU 2022 -02 during the first quarter of 2023. The ratio of the ACL for loans and finance leases to total loans held for investment increased to 2.29% as of March 31, 2023, compared to 2.25% as of December 31, 2022. An explanation for the change for each portfolio follows: The ACL to total loans ratio for the residential mortgage portfolio increased from 2.20% as of December 31, 2022 to 2.29% as of March 31, 2023, primarily due to the aforementioned $2.1 million cumulative increase in the ACL due to the adoption of ASU 2022-02 during the first quarter of 2023. The ACL to total loans ratio for the construction loan portfolio increased from 1.74% as of December 31, 2022 to 2.25% as of March 31, 2023 as a result of new loan originations which have a longer duration and ultimately result in higher loss rates. The ACL to total loans ratio for the commercial mortgage portfolio increased from 1.49% as of December 31, 2022 to 1.55% as of March 31, 2023, primarily reflecting a less favorable economic outlook in the projection of certain forecasted macroeconomic variables, such as the CRE price index, partially offset by reserve decreases associated with the receipt of updated financial information of certain borrowers. The ACL to total loans ratio for the commercial and industrial portfolio decreased from 1.14% as of December 31, 2022 to 1.09% as of March 31, 2023, mainly due to reserve decreases associated with the receipt of updated financial information of certain borrowers and the repayment of a $24.3 million adversely classified commercial and industrial participated loan in the Florida region, partially offset by the aforementioned reserve increase of $5.0 million for a new nonaccrual commercial and industrial participated loan in the Florida region in the power generation industry. The ACL to total loans ratio for the consumer loan portfolio was 3.82% as of March 31, 2023, compared to 3.83% as of December 31, 2022. The ratio of the total ACL for loans and finance leases to nonaccrual loans held for investment was 297.91% as of March 31, 2023, compared to 289.61% as of December 31, 2022. Substantially all of the Corporation’s loan portfolio is located within the boundaries of the U.S. economy. Whether the collateral is located in Puerto Rico, the U.S. and British Virgin Islands, or the U.S. mainland (mainly in the state of Florida), the performance of the Corporation’s loan portfolio and the value of the collateral supporting the transactions are dependent upon the performance of and conditions within each specific area’s real estate market. The Corporation believes it sets adequate loan-to-value ratios following its regulatory and credit policy standards. As shown in the following tables, the ACL for loans and finance leases amounted to $265.6 million as of March 31, 2023, or 2.29% of total loans, compared with $260.5 million, or 2.25% of total loans, as of December 31, 2022. See “Results of Operations - Provision for Credit Losses” above for additional information. ### Quarter Ended March 31, ### 2023 ### 2022 (Dollars in thousands) ACL for loans and finance leases, beginning of year 260,464 269,030 Impact of adoption of ASU 2022-02 2,116 Provision for credit losses - expense (benefit): Residential mortgage 73 (4,871) Construction 860 (2,214) Commercial mortgage 1,246 (22,640) Commercial and industrial (1,650) 1,755 Consumer and finance leases 15,727 10,981 Total provision for credit losses - expense (benefit) 16,256 (16,989) Charge-offs: Residential mortgage (983) (2,528) Construction (44) Commercial mortgage (18) (37) Commercial and industrial (118) (290) Consumer and finance leases (16,798) (9,816) Total charge offs (17,917) (12,715) Recoveries: Residential mortgage 497 1,382 Construction 63 52 Commercial mortgage 168 44 Commercial and industrial 90 1,035 Consumer and finance leases 3,830 3,608 Total recoveries 4,648 6,121 Net charge-offs (13,269) (6,594) ACL for loans and finance leases, end of period 265,567 245,447 ACL for loans and finance leases to period-end total loans held for investment 2.29% 2.21% Net charge-offs (annualized) to average loans outstanding during the period 0.46% 0.24% Provision for credit losses - expense (benefit) for loans and finance leases to net charge-offs during the period 1.23x -2.58x The following tables set forth information concerning the composition of the Corporation's loan portfolio and related ACL by loan category, and the percentage of loan balances in each category to the total as such loans as of the indicated dates: ### As of March 31, 2023 ### Residential ### Mortgage ### Loans ### Commercial ### Mortgage ### Loans ### C&I Loans ### Consumer and ### Finance ### Leases ### Construction ### Loans (Dollars in thousands) ### Total Total loans held for investment: Amortized cost of loans 2,811,528 143,664 2,353,659 2,862,189 3,406,945 11,577,985 Percent of loans in each category to total loans 24 1 20 25 30 100 Allowance for credit losses 64,403 3,231 36,460 31,235 130,238 265,567 Allowance for credit losses to amortized cost 2.29 2.25 1.55 1.09 3.82 2.29 ### As of December 31, 2022 ### Residential ### Mortgage ### Loans ### Commercial ### Mortgage ### Loans ### C&I Loans ### Consumer and ### Finance Leases ### Construction ### Loans (Dollars in thousands) ### Total Total loans held for investment: Amortized cost of loans 2,847,290 132,953 2,358,851 2,886,263 3,327,468 11,552,825 Percent of loans in each category to total loans 25 1 20 25 29 100 Allowance for credit losses 62,760 2,308 35,064 32,906 127,426 260,464 Allowance for credit losses to amortized cost 2.20 1.74 1.49 1.14 3.83 2.25 #### Allowance for Credit Losses for Unfunded Loan Commitments The Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk as a result of a contractual obligation to extend credit, such as pursuant to unfunded loan commitments and standby letters of credit for commercial and construction loans, unless the obligation is unconditionally cancellable by the Corporation. The ACL for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. As of March 31, 2023, the ACL for off-balance sheet credit exposures decreased by $0.1 million to $4.2 million, when compared to December 31, 2022. #### Allowance for Credit Losses for Held-to-Maturity Debt Securities As of March 31, 2023, the ACL for held-to-maturity securities portfolio was entirely related to financing arrangements with Puerto Rico municipalities issued in bond form, which the Corporation accounts for as securities, but which were underwritten as loans with features that are typically found in commercial loans. As of March 31, 2023, the ACL for held-to-maturity debt securities was $7.6 million, compared to $8.3 million as of December 31, 2022. #### Allowance for Credit Losses for Available -for-Sale Debt Securities The ACL for available-for-sale debt securities, which is associated with private label MBS and a residential pass-through MBS issued by the PRHFA, was $0.4 million as of March 31, 2023, compared to $0.5 million as of December 31, 2022. ### Nonaccrual Loans and Non-performing Assets Total non-performing assets consist of nonaccrual loans (generally loans held for investment or loans held for sale in which the recognition of interest income was discontinued when the loan became 90 days past due or earlier if the full and timely collection of interest or principal is uncertain), foreclosed real estate and other repossessed properties, and non-performing investment securities, if any. When a loan is placed in nonaccrual status, any interest previously recognized and not collected is reversed and charged against interest income. Cash payments received are recognized when collected in accordance with the contractual terms of the loans. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized on a cash basis (when collected). However, when management believes that the ultimate collectability of principal is in doubt, the interest portion is applied to the outstanding principal. The risk exposure of this portfolio is diversified as to individual borrowers and industries, among other factors. In addition, a large portion is secured with real estate collateral. #### Nonaccrual Loans Policy #### Residential Real Estate Loans - The Corporation generally classifies real estate loans in nonaccrual status when it has not received interest and principal for a period of 90 days or more. #### Commercial and Construction Loans - The Corporation classifies commercial loans (including commercial real estate and construction loans) in nonaccrual status when it has not received interest and principal for a period of 90 days or more or when it does not expect to collect all of the principal or interest due to deterioration in the financial condition of the borrower. #### Finance Leases - The Corporation classifies finance leases in nonaccrual status when it has not received interest and principal for a period of 90 days or more. #### Consumer Loans - The Corporation classifies consumer loans in nonaccrual status when it has not received interest and principal for a period of 90 days or more. Credit card loans continue to accrue finance charges and fees until charged-off at 180 days delinquent. #### Purchased Credit Deteriorated Loans (“PCD”) - For PCD loans, the nonaccrual status is determined in the same manner as for other loans, except for PCD loans that prior to the adoption of CECL were classified as purchased credit impaired (“PCI”) loans and accounted for under ASC Subtopic 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality” (ASC Subtopic 310 -30). As allowed by CECL, the Corporation elected to maintain pools of loans accounted for under ASC Subtopic 310-30 as “units of accounts,” conceptually treating each pool as a single asset. Regarding interest income recognition, the prospective transition approach for PCD loans was applied at a pool level, which froze the effective interest rate of the pools as of January 1, 2020. According to regulatory guidance, the determination of nonaccrual or accrual status for PCD loans with respect to which the Corporation has made a policy election to maintain previously existing pools upon adoption of CECL should be made at the pool level, not the individual asset level. In addition, the guidance provides that the Corporation can continue accruing interest and not report the PCD loans as being in nonaccrual status if the following criteria are met: (i) the Corporation can reasonably estimate the timing and amounts of cash flows expected to be collected; and (ii) the Corporation did not acquire the asset primarily for the rewards of ownership of the underlying collateral, such as the use in operations or improving the collateral for resale. Thus, the Corporation continues to exclude these pools of PCD loans from nonaccrual loan statistics. ### Other Real Estate Owned OREO acquired in settlement of loans is carried at fair value less estimated costs to sell the real estate acquired. Appraisals are obtained periodically, generally on an annual basis. ### Other Repossessed Property The other repossessed property category generally includes repossessed boats and autos acquired in settlement of loans. Repossessed boats and autos are recorded at the lower of cost or estimated fair value. ### Other Non-Performing Assets This category consisted of a residential pass-through MBS issued by the PRHFA placed in non-performing status in the second quarter of 2021 based on the delinquency status of the underlying second mortgage loans. ### Loans Past-Due 90 Days and Still Accruing These are accruing loans that are contractually delinquent 90 days or more. These past-due loans are either current as to interest but delinquent as to the payment of principal (i.e., well secured and in process of collection) or are insured or guaranteed under applicable FHA, VA, or other government-guaranteed programs for residential mortgage loans. Furthermore, as required by instructions in regulatory reports, loans past due 90 days and still accruing include loans previously pooled into GNMA securities for which the Corporation has the option but not the obligation to repurchase loans that meet GNMA’s specified delinquency criteria (e.g., borrowers fail to make any payment for three consecutive months). For accounting purposes, these GNMA loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting liability. In addition, loans past due 90 days and still accruing include PCD loans, as mentioned above, and credit cards that continue accruing interest until charged-off at 180 days. The following table presents non-performing assets as of the indicated dates: ### March 31, 2023 ### December 31, 2022 (Dollars in thousands) Nonaccrual loans held for investment: Residential mortgage 36,410 42,772 Construction 1,794 2,208 Commercial mortgage 21,598 22,319 Commercial and Industrial 13,404 7,830 Consumer and finance leases 15,936 14,806 Total nonaccrual loans held for investment 89,142 89,935 OREO 32,862 31,641 Other repossessed property 4,743 5,380 Other assets (1) 2,203 2,202 Total non-performing assets 128,950 129,158 Past due loans 90 days and still accruing (2) (3) (4) 74,380 80,517 Non-performing assets to total assets 0.68 0.69 Nonaccrual loans held for investment to total loans held for investment 0.77 0.78 ACL for loans and finance leases 265,567 260,464 ACL for loans and finance leases to total nonaccrual loans held for investment 297.91 289.61 ACL for loans and finance leases to total nonaccrual loans held for investment, excluding residential real estate loans 503.62 552.26 (1) Residential pass-through MBS issued by the PRHFA held as part of the available-for-sale debt securities portfolio. (2) Includes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans as “units of account” both at the time of adoption of CECL on January 1, 2020 and on an ongoing basis for credit loss measurement. These loans will continue to be excluded from nonaccrual loan statistics as long as the Corporation can reasonably estimate the timing and amount of cash flows expected to be collected on the loan pools. The portion of such loans contractually past due 90 days or more amounted to $10.4 million and $12.0 million as of March 31, 2023 and December 31, 2022, respectively. (3) Includes FHA/VA government-guaranteed residential mortgage as loans past-due 90 days and still accruing as opposed to nonaccrual loans. The Corporation continues accruing interest on these loans until they have passed the 15 months delinquency mark, taking into consideration the FHA interest curtailment process. These balances include $25.9 million and $28.2 million of FHA government guaranteed residential mortgage loans that were over 15 months delinquent as of March 31, 2023 and December 31, 2022, respectively. (4) Includes rebooked loans, which were previously pooled into GNMA securities, amounting to $7.1 million and $10.3 million as of March 31, 2023 and December 31, 2022, respectively. Under the GNMA program, the Corporation has the option but not the obligation to repurchase loans that meet GNMA’s specified delinquency criteria. For accounting purposes, the loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting liability. Total nonaccrual loans were $89.1 million as of March 31, 2023. This represents a net decrease of $0.8 million from $89.9 million as of December 31, 2022. The net decrease was primarily related to a $6.3 million reduction in nonaccrual residential mortgage loans, partially offset by increases of $4.4 million and $1.1 million in nonaccrual commercial and construction loans and nonaccrual consumer loans, respectively. The following table shows non-performing assets by geographic segment as of the indicated dates: ### March 31, 2023 ### December 31, 2022 (In thousands) ### Puerto Rico: Nonaccrual loans held for investment: Residential mortgage 22,924 28,857 Construction 737 831 Commercial mortgage 13,677 14,341 Commercial and Industrial 4,589 5,859 Consumer and finance leases 15,483 14,142 Total nonaccrual loans held for investment 57,410 64,030 OREO 28,323 28,135 Other repossessed property 4,620 5,275 Other assets 2,203 2,202 Total non-performing assets 92,556 99,642 Past due loans 90 days and still accruing 72,000 76,417 ### Virgin Islands: Nonaccrual loans held for investment: Residential mortgage 6,069 6,614 Construction 1,057 1,377 Commercial mortgage 7,921 7,978 Commercial and Industrial 1,163 1,179 Consumer 306 469 Total nonaccrual loans held for investment 16,516 17,617 OREO 4,539 3,475 Other repossessed property 112 76 Total non-performing assets 21,167 21,168 Past due loans 90 days and still accruing 2,380 4,100 ### United States: Nonaccrual loans held for investment: Residential mortgage 7,417 7,301 Commercial and Industrial 7,652 792 Consumer 147 195 Total nonaccrual loans held for investment 15,216 8,288 OREO 31 Other repossessed property 11 29 Total non-performing assets 15,227 8,348 Nonaccrual commercial and industrial loans increased by $5.6 million to $13.4 million as of March 31, 2023, from $7.8 million as of December 31, 2022. The increase was primarily driven by the migration to nonaccrual status of a $7.1 million commercial and industrial participated loan in the Florida region related to a borrower engaged in the power generation industry, partially offset by collections, including the payoff of an individual commercial and industrial loan of approximately $1.0 million in the Puerto Rico region. Nonaccrual commercial mortgage loans decreased by $0.8 million to $21.5 million as of March 31, 2023, from $22.3 million as of December 31, 2022. Nonaccrual construction loans decreased by $0.4 million to $1.8 million as of March 31, 2023, from $2.2 million as of December 31, 2022. The following tables present the activity of commercial and construction nonaccrual loans held for investment for the indicated periods: ### Construction ### Commercial ### Mortgage ### Commercial & ### Industrial ### Total (In thousands) ### Quarter Ended March 31, 2023 Beginning balance 2,208 22,319 7,830 32,357 Plus: Additions to nonaccrual 127 544 7,470 8,141 Less: Loans returned to accrual status (361) (152) (513) Nonaccrual loans transferred to OREO (332) (162) (183) (677) Nonaccrual loans charge-offs (18) (118) (136) Loan collections (209) (730) (1,443) (2,382) Reclassification 6 6 Ending balance 1,794 21,598 13,404 36,796 ### Construction ### Commercial ### Mortgage ### Commercial & ### Industrial ### Total (In thousands) ### Quarter Ended March 31, 2022 Beginning balance 2,664 25,337 17,135 45,136 Plus: Additions to nonaccrual 2,881 1,579 4,460 Less: Loans returned to accrual status (201) (209) (410) Nonaccrual loans transferred to OREO (13) (461) (474) Nonaccrual loans charge-offs (40) (37) (290) (367) Loan collections (68) (541) (488) (1,097) Reclassification (402) 402 Ending balance 2,543 26,576 18,129 47,248 Nonaccrual residential mortgage loans decreased by $6.3 million to $36.5 million as of March 31, 2023, compared to $42.8 million as of December 31, 2022. The decrease was primarily related to $3.9 million loans restored to accrual status, $2.7 million of loans transferred to OREO, and $1.6 million in collections, partially offset by inflows of $2.1 million. The following table presents the activity of residential nonaccrual loans held for investment for the indicated periods: ### Quarter Ended March 31, ### 2023 ### 2022 (In thousands) Beginning balance 42,772 55,127 Plus: Additions to nonaccrual 2,081 5,328 Less: Loans returned to accrual status (3,937) (3,449) Nonaccrual loans transferred to OREO (2,710) (937) Nonaccrual loans charge-offs (220) (435) Loan collections (1,570) (6,816) Reclassification (6) Ending balance 36,410 48,818 The amount of nonaccrual consumer loans, including finance leases, increased by $1.1 million to $15.9 million as of March 31, 2023, compared to $14.8 million as of December 31, 2022. The increase was mainly reflected in the auto loans and finance leases portfolio. As of March 31, 2023, approximately $22.7 million of the loans placed in nonaccrual status, mainly commercial loans, and residential loans, were current, or had delinquencies of less than 90 days in their interest payments. Collections on these loans are being recorded on a cash basis through earnings, or on a cost-recovery basis, as conditions warrant. During the quarter ended March 31, 2023, interest income of approximately $0.1 million related to nonaccrual loans with a carrying value of $29.5 million as of March 31, 2023, mainly nonaccrual commercial and construction loans, was applied against the related principal balances under the cost-recovery method. Total loans in early delinquency ( #### i.e. , 30-89 days past due loans, as defined in regulatory reporting instructions) amounted to $94.5 million as of March 31, 2023, a decrease of $10.4 million, compared to $104.9 million as of December 31, 2022. The variances by major portfolio categories are as follows: Consumer loans in early delinquency decreased by $4.5 million to $66.4 million, mainly in the auto loans portfolio. Residential mortgage loans in early delinquency decreased by $3.0 million to $25.2 million. Commercial and construction loans in early delinquency decreased by $2.9 million, mainly due to the migration to past due 90 days and still accruing of a $2.3 million commercial mortgage loan that matured and is in the process of renewal but for which the Corporation continues to receive interest and principal payments from the borrower. In addition, the Corporation provides homeownership preservation assistance to its customers through a loss mitigation program. Depending upon the nature of a borrower’s financial condition, restructurings or loan modifications through this program are provided, as well as other restructurings of individual C&I, commercial mortgage, construction, and residential mortgage loans. See Note 1 – Basis of Presentation and Significant Accounting Policies, to the unaudited consolidated financial statements herein for additional information related to the accounting policies of loan modifications granted to borrowers experiencing financial difficulty. In addition, see Note 3 - Loans Held for Investment, to the unaudited consolidated financial statements herein for additional information and statistics about the Corporation’s modified loans. The OREO portfolio, which is part of non-performing assets, increased to $32.9 million as of March 31, 2023, compared to $31.6 million as of December 31, 2022. The following tables show the composition of the OREO portfolio as of March 31, 2023 and December 31, 2022, as well as the activity of the OREO portfolio by geographic area during the quarter ended March 31, 2023: ### OREO Composition by Region ### As of March 31, 2023 (In thousands) ### Puerto Rico ### Virgin Islands ### Florida ### Consolidated Residential 23,314 1,670 24,984 Construction 1,705 59 1,764 Commercial 3,304 2,810 6,114 28,323 4,539 32,862 ### As of December 31, 2022 (In thousands) ### Puerto Rico ### Virgin Islands ### Florida ### Consolidated Residential 23,388 606 31 24,025 Construction 1,705 59 1,764 Commercial 3,042 2,810 5,852 28,135 3,475 31 31,641 ### OREO Activity by Region ### Quarter Ended March 31, 2023 (In thousands) ### Puerto Rico ### Virgin Islands ### Florida ### Consolidated Beginning Balance 28,135 3,475 31 31,641 Additions 5,351 1,064 6,415 Sales (4,409) (31) (4,440) Write-downs and other adjustments (754) (754) Ending Balance 28,323 4,539 32,862 #### Net Charge-offs and Total Credit Losses Net charge-offs totaled $13.3 million for the first quarter of 2023, or 0.46% of average loans on an annualized basis, compared to $6.6 million, or an annualized 0.24% of average loans for the first quarter of 2022. Residential mortgage loans net charge-offs for the first quarter of 2023 were $0.5 million, or an annualized 0.07% of related average loans, compared to $1.2 million, or an annualized 0.15% of related average loans, for the first quarter of 2022. Approximately $0.2 million in charge-offs recorded during the first quarter of 2023 resulted from valuations of collateral dependent residential mortgage loans, compared to $0.4 million in for the same period in 2022. Net charge-offs on residential mortgage loans for the first quarter of 2023 also included $0.5 million related to foreclosures recorded during the first quarter of 2023, compared to $1.3 million recorded for the same period in 2022. Construction loans net recoveries for the first quarter of 2023 were $0.1 million, or an annualized 0.17% of related average loans, compared to $8 thousand, or an annualized 0.03% of related average loans, for the same period in 2022. Commercial mortgage loans net recoveries for the first quarter of 2023 were $0.1 million, or an annualized 0.03% of average commercial mortgage loans, compared to $7 thousand for the first quarter of 2022. Commercial and industrial loans net charge-offs for the first quarter of 2023 were $28 thousand, compared to net recoveries of $0.8 million, or an annualized 0.10% of related average loans for the first quarter of 2022. For the first quarter of 2022, a $0.9 million recovery was recorded in the Puerto Rico region in connection with a nonaccrual commercial loan that was paid off during the quarter. Net charge-offs of consumer loans and finance leases for the first quarter of 2023 were $13.0 million, or 1.54% of related average loans, compared to $6.1 million, or 0.85% of related average loans, for the first quarter of 2022. The following table presents annualized net charge-offs (recoveries) to average loans held-in-portfolio for the indicated periods: ### Quarter Ended March 31, ### 2023 ### 2022 Residential mortgage 0.07 0.15 Construction (0.17) (0.03) Commercial mortgage (0.03) Commercial and industrial (0.10) Consumer loans and finance leases 1.54 0.85 Total loans 0.46 0.24 The following table presents net charge-offs (recoveries) to average loans held in various portfolios by geographic segment for the indicated periods: ### Quarter Ended March 31, ### 2023 ### 2022 ### PUERTO RICO: Residential mortgage 0.10 0.19 Construction (0.47) 0.08 Commercial mortgage 0.01 Commercial and industrial 0.01 (0.16) Consumer and finance leases 1.53 0.83 Total loans 0.58 0.29 ### VIRGIN ISLANDS: Residential mortgage (0.08) 0.10 Commercial mortgage (0.21) (0.22) Commercial and industrial (0.01) (0.01) Consumer and finance leases 2.19 1.78 Total loans 0.29 0.25 ### FLORIDA: Construction (0.05) (0.09) Commercial mortgage (0.09) Consumer and finance leases 0.17 1.31 Total loans (0.03) 0.01 The above ratios are based on annualized charge -offs and are not necessarily indicative of the results expected for the entire year or in subsequent periods. Total net charge -offs plus gains on OREO operations for the first quarter of 2023 amounted to $11.3 million, or a loss rate of 0.37% on an annualized basis of average loans and repossessed assets, compared to losses of $5.9 million, or a loss rate of 0.21% on an annualized basis, for the first quarter of 2022. The following table presents information about the OREO inventory and credit losses for the indicated periods: ### Quarter ended March 31, ### 2023 ### 2022 (Dollars in thousands) ### OREO OREO balances, carrying value: Residential 24,984 32,208 Construction 1,764 3,458 Commercial 6,114 7,228 Total 32,862 42,894 OREO activity (number of properties): Beginning property inventory 344 418 Properties acquired 59 68 Properties disposed (59) (44) Ending property inventory 344 442 Average holding period (in days) Residential 533 656 Construction 2,266 1,979 Commercial 2,468 2,011 Total average holding period (in days) 986 991 OREO operations gain (loss): Market adjustments and gains (losses) on sale: Residential 2,490 992 Construction 40 103 Commercial (67) (17) Total net gain 2,463 1,078 Other OREO operations expenses (467) (358) ### Net Gain on OREO operations 1,996 720 ### (CHARGE-OFFS) RECOVERIES Residential charge-offs, net (486) (1,146) Construction recoveries, net 63 8 Commercial recoveries, net 122 752 Consumer and finance leases charge-offs, net (12,968) (6,208) Total charge -offs, net (13,269) (6,594) ### TOTAL CREDIT LOSSES (1) (11,273) (5,874) ### LOSS RATIO PER CATEGORY (2) Residential (0.28) 0.02 Construction (0.28) (0.37) Commercial (0.06) Consumer 1.54 0.85 ### TOTAL CREDIT LOSS RATIO (3) 0.37 0.21 (1) Equal to net gain on OREO operations plus charge-offs, net. (2) Calculated as net charge-offs plus market adjustment and gains (losses) on sale of OREO divided by average loans and repossessed assets. (3) Calculated as net charge-offs plus net gain on OREO operations divided by average loans and repossessed assets. ### Operational Risk The Corporation faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products. Coupled with external influences, such as market conditions, security risks, and legal risks, the potential for operational and reputational loss has increased. To mitigate and control operational risk, the Corporation has developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these mechanisms is to provide reasonable assurance that the Corporation’s business operations are functioning within the policies and limits established by management. The Corporation classifies operational risk into two major categories: business-specific and corporate-wide affecting all business lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, and legal and compliance, the Corporation has specialized groups, such as the Legal Department, Information Security, Corporate Compliance, and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the business groups. ### Legal and Compliance Risk Legal and compliance risk includes the risk of noncompliance with applicable legal and regulatory requirements, the risk of adverse legal judgments against the Corporation, and the risk that a counterparty’s performance obligations will be unenforceable. The Corporation is subject to extensive regulation in the different jurisdictions in which it conducts its business, and this regulatory scrutiny has been significantly increasing over the years. The Corporation has established, and continues to enhance, procedures that are designed to ensure compliance with all applicable statutory, regulatory and any other legal requirements. The Corporation has a Compliance Director who reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and implementation of an enterprise-wide compliance risk assessment process. The Compliance division has officer roles in each major business area with direct reporting responsibilities to the Corporate Compliance Group. ### Concentration Risk The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. Of the total gross loan portfolio held for investment of $11.6 billion as of March 31, 2023, the Corporation had credit risk of approximately 80% in the Puerto Rico region, 17% in the United States region, and 3% in the Virgin Islands region. ### Update on the Puerto Rico Fiscal and Economic Situation A significant portion of the Corporation’s business activities and credit exposure is concentrated in the Commonwealth of Puerto Rico, which has experienced economic and fiscal distress over the last decade. Since declaring bankruptcy and benefitting from the enactment of the federal Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) in 2016, the Government of Puerto Rico has made progress on fiscal matters primarily by restructuring a large portion of its outstanding public debt and identifying funding sources for its unfunded pension system. #### Economic Indicators On November 10, 2022, the Puerto Rico Planning Board (“PRPB”) presented the Economic Report to the Governor, which provides an analysis of Puerto Rico’s economy during fiscal year 2021 and a short-term forecast for fiscal years 2022 and 2023. According to the PRPB, Puerto Rico’s real gross national product (“GNP”) expanded by 1.0% in fiscal year 2021, significantly above the PRPB’s original baseline projection of a 2.0% contraction. According to the report, real GNP growth was primarily driven by a sharp increase in personal consumption expenditures reflecting the relaxation of COVID-related restrictions, as well as the impact of the substantial disaster relief funding deployed over the period. To a lesser extent, growth in fiscal year 2021 was also driven by a higher level of investments in machinery, equipment, and construction. These favorable variances were partially offset by an increase in imports, a reduction in exports, and a negative change in the level of inventories. Although no official GNP data has been released to date for fiscal year 2022, the 2023 Fiscal Plan model estimates that Puerto Rico’s real GNP expanded by 2.0% in fiscal year 2022. There are other indicators that gauge economic activity and are published with greater frequency, for example, the Economic Development Bank for Puerto Rico’s Economic Activity Index (“EDB-EAI”). Although not a direct measure of Puerto Rico’s real GNP, the EDB-EAI is correlated to Puerto Rico’s real GNP. For February 2023, preliminary estimates showed that the EDB-EAI increased 0.3% on a month-over-month; however, it stood 0.2% lower on a year-over-year basis. Over the 12-month period ended February 28, 2023, the EDB-EAI averaged 124.5, approximately 0.9% above the comparable figure a year earlier. #### Fiscal Plan On April 3, 2023, the PROMESA oversight board certified the 2023 Fiscal Plan for Puerto Rico (the “2023 Fiscal Plan”). Unlike previous versions of the fiscal plan, the PROMESA oversight board segregated the 2023 Fiscal Plan into three different volumes. As the first fiscal plan certified in a post-bankruptcy environment, Volume 1 presents a Transformation Plan that highlights priority areas to cement fiscal responsibility, accelerate economic growth in a sustainable manner, and restore market access to Puerto Rico. Volume 2 provides additional details on economic trends and financial projections, and Volume 3 maps out the supplementary implementation details to guide the government’s implementation of the requirements of the 2023 Fiscal Plan, as well as additional initiatives from prior fiscal plans which remain mandatory and are still pending to be implemented. The 2023 Fiscal Plan prioritizes resource allocation across three major pillars: (i) entrenching a legacy of strong financial management through the implementation of a comprehensive financial management agenda, (ii) instilling a culture of public -sector performance and excellence in order to properly deliver quality public services, and (iii) investing for economic growth to ensure sufficient revenues are generated to support the delivery of services. According to the Transformation Plan, the fiscal and economic turnaround of Puerto Rico cannot be accomplished without the implementation of structural economic reforms that promote sustainable economic development. These reforms include the power/energy sector reform to improve availability, reliability and affordability of energy, the K-12 and higher education reform to expand opportunity and prepare the workforce to compete for jobs of the future, and an infrastructure reform aimed at improving the efficiency of the economy and facilitate investment. The 2023 Fiscal Plan projects that these reforms, if implemented successfully, will contribute 0.75% in GNP growth by fiscal year 2026. Additionally, the 2023 Fiscal Plan provides a roadmap for a tax reform directed towards establishing a tax regime that is more competitive for investors and more equitable for individuals. The 2023 Fiscal Plan notes that Puerto Rico has had a strong recovery in the aftermath of the pandemic crisis with labor participation trending positively and unemployment at historically low levels. However, it recognizes that such recovery has been primarily fueled by the unprecedented influx of federal funds, which have an outsized and temporary impact that may mask underlying structural weaknesses in the economy. As such, the 2023 Fiscal Plan projects a 0.7% decline in real GNP for the current fiscal year 2023, followed by a period of near-zero real growth in the coming fiscal years 2024 through 2026. Also, the fiscal plan projects that Puerto Rico’s population will continue the long-term trend of steady decline. Notwithstanding, the Transformation Plan depicts that, if managed properly, these non-recurring federal funds can be leveraged into sustainable longer-term growth and opportunity. The 2023 Fiscal Plan projects that approximately $81 billion in total disaster relief funding, from federal and private sources, will be disbursed as part of the reconstruction efforts over a span of 18 years (fiscal years 2018 through 2035). These funds will benefit individuals, the public (e.g., reconstruction of major infrastructure, roads, and schools), and will cover part of the Commonwealth’s share of the cost of disaster relief funding. Also, the 2023 Fiscal Plan projects accelerated deployment of the remaining COVID-19 relief funds in fiscal year 2023 through 2025, with approximately $9.3 billion expected to be disbursed, compared to $4.5 billion projected in the previous fiscal plan. Additionally, the 2023 Fiscal Plan continues to account for $2.3 billion in federal funds to Puerto Rico from the Bipartisan Infrastructure Law directed towards improving the Island’s infrastructure over fiscal years 2022 through 2026. #### Debt Restructuring Over 80% of Puerto Rico’s outstanding debt has been restructured to date. On March 15, 2022, the Plan of Adjustment of the central government’s debt became effective through the exchange of more than $33 billion of existing bonds and other claims into approximately $7 billion of new bonds, saving Puerto Rico more than $50 billion in debt payments to creditors. Also, the restructurings of the Puerto Rico Sales Tax Financing Corporation (“COFINA”), the Highways and Transportation Authority (“HTA”), and the Puerto Rico Aqueducts and Sewers Authority (“PRASA”) are expected to yield savings of approximately $17.5 billion, $3.0 billion, and $400 million, respectively, in future debt service payments. The main restructurings pending include that of the Puerto Rico Electric Power Authority (“PREPA”) and the Puerto Rico Industrial Company (“PRIDCO”). According to the PROMESA oversight board, the filed PREPA Plan of Adjustment (“PREPA-POA”) reduces PREPA’s legacy financial and general unsecured debt by approximately 40% as it contemplates the issuance of $5.7 billion in new bonds that will be exchanged for the discharge of approximately $10.0 billion in outstanding debt. The new bonds are expected to be paid from revenues generated by a “Legacy Charge”, which consists of a fixed and volumetric charge on customers’ bills that will vary based on the category of customer and level of usage. This Legacy Charge is expected to generate sufficient revenue to pay down the new bonds in 35 years based on the projections presented in PREPA’s 2022 certified fiscal plan. For pensions, the PREPA -POA provides PREPA’s pension system with treatment substantially similar to the treatment of the Commonwealth’s pensions. The PREPA -POA closes the pension system to new entrants, preserves the benefits of current retirees, eliminates any future cost of living adjustments, and ensures all benefits accrued to date by active participants are protected. On March 23, 2022, the Title III Court issued a ruling that upholds the PROMESA oversight board’s position that PREPA bondholders’ collateral security is limited to the money PREPA deposits in accounts established pursuant to the trust agreement governing the issuance of the bonds. The court also rejected the bondholders’ contention that they have a general unsecured claim for the full amount of their principal and interest. As such, the court limited their unsecured claim to future net revenues for the remainder of the terms of the bonds. According to the PROMESA oversight board, this decision of the court was a significant win for Puerto Rico and its path to reliable electricity and economic growth. Although PREPA’s overall mediation process has been slower than expected, PREPA’s Title III confirmation process is underway, a confirmation hearing has been set for mid-July 2023 and, according to the 2023 Fiscal Plan, the plan is expected to go effective by the second quarter of 2024. #### Other Developments Notable progress continues to be made as part of the ongoing efforts of prioritizing the restoration, improvement, and modernization of Puerto Rico’s infrastructure. According to the Central Office for Recovery, Reconstruction, and Resiliency (“COR3”), progress is evidenced by the significant increase in permanent work projects that have already started executing the reconstruction efforts with FEMA obligated funding. As of December 31, 2022, there were a total of 6,286 active permanent work projects reported, more than twice the comparable amount reported as of December 31, 2021, of 2,650 projects. ### Exposure to Puerto Rico Government As of March 31, 2023, the Corporation had $340.0 million of direct exposure to the Puerto Rico government, its municipalities and public corporations, compared to $338.9 million as of December 31, 2022. As of March 31, 2023, approximately $183.4 million of the exposure consisted of loans and obligations of municipalities in Puerto Rico that are supported by assigned property tax revenues and for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment, and $113.1 million of loans and obligations which are supported by one or more specific sources of municipal revenues. Approximately 72% of the Corporation’s exposure to Puerto Rico municipalities consisted primarily of senior priority loans and obligations concentrated in four of the largest municipalities in Puerto Rico. The municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and notes. Furthermore, municipalities are also likely to be affected by the negative economic and other effects resulting from as expense, revenue, or cash management measures taken to address the Puerto Rico government’s fiscal problems and measures included in fiscal plans of other government entities. In addition to municipalities, the total direct exposure also included $10.2 million in loans to an affiliate of PREPA, $30.0 million in loans to agencies or public corporations of the Puerto Rico government, and obligations of the Puerto Rico government, specifically a residential pass-through MBS issued by the PRHFA, at an amortized cost of $3.3 million as part of its available-for-sale debt securities portfolio (fair value of $2.2 million as of March 31, 2023). The following table details the Corporation’s total direct exposure to Puerto Rico government obligations according to their maturities: ### As of March 31, 2023 ### Investment ### Portfolio ### Total ### (Amortized ### cost) ### Loans ### Exposure (In thousands) Puerto Rico Housing Finance Authority: After 10 years 3,302 3,302 ### Total Puerto Rico Housing Finance Authority 3,302 3,302 Agencies and public corporation of the Puerto Rico government: After 1 to 5 years 3,313 3,313 After 5 to 10 years 26,671 26,671 Total agencies and public corporation of the Puerto Rico government 29,984 29,984 Affiliate of the Puerto Rico Electric Power Authority: Due within one year 10,184 10,184 Total Puerto Rico government affiliate 10,184 10,184 ### Total Puerto Rico public corporations and government affiliate 40,168 40,168 Municipalities: Due within one year 1,204 18,148 19,352 After 1 to 5 years 42,633 55,905 98,538 After 5 to 10 years 55,940 56,652 112,592 After 10 years 66,023 66,023 ### Total Municipalities 165,800 130,705 296,505 ### Total Direct Government Exposure ### 169,102 ### 170,873 ### 339,975 In addition, as of March 31, 2023, the Corporation had $82.9 million in exposure to residential mortgage loans that are guaranteed by the PRHFA, a governmental instrumentality that has been designated as a covered entity under PROMESA (December 31, 2022 – $84.7 million). Residential mortgage loans guaranteed by the PRHFA are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. The Puerto Rico government guarantees up to $75 million of the principal for all loans under the mortgage loan insurance program. According to the most recently released audited financial statements of the PRHFA, as of June 30, 2021, the PRHFA’s mortgage loans insurance program covered loans in an aggregate amount of approximately $473 million. The regulations adopted by the PRHFA require the establishment of adequate reserves to guarantee the solvency of the mortgage loans insurance program. As of June 30, 2021, the most recent date as of which information is available, the PRHFA had a liability of approximately $5 million as an estimate of the losses inherent in the portfolio. As of March 31, 2023, the Corporation had $2.2 billion of public sector deposits in Puerto Rico, compared to $2.3 billion as of December 31, 2022. Approximately 25% of the public sector deposits as of March 31, 2023 were from municipalities and municipal agencies in Puerto Rico and 75% were from public corporations, the Puerto Rico central government and agencies, and U.S. federal government agencies in Puerto Rico. ### Exposure to USVI Government The Corporation has operations in the USVI and has credit exposure to USVI government entities. For many years, the USVI has been experiencing a number of fiscal and economic challenges that have deteriorated the overall financial and economic conditions in the area. On March 4, 2022, the United States Bureau of Economic Analysis (the “BEA”) released its estimates of GDP for 2020. According to the BEA, the USVI’s real GDP decreased 2.2%. Also, the BEA revised its previously published real GDP growth estimate for 2019 from 2.2% to 2.8%. According to the BEA, the decline in real GDP for 2020 reflected decreases in exports of services, private fixed investment, personal consumption expenditures, and government spending primarily as a result of the effects of the COVID-19 pandemic. These decreases were partially offset by an increase in private inventory investment, reflecting an increase in crude oil and other petroleum products imported and stored in the islands. In addition, there were reductions in imports of goods including consumer goods and equipment, and in imports of services. According to the BEA, expenditures funded by the various federal grants and transfer payments are reflected in the GDP estimates; however, the full effects of the pandemic cannot be quantified in the GDP statistics for the USVI because the impacts are generally embedded in source data and cannot be separately identified. Nonetheless, over the past two years, the USVI has been recovering from the adverse impact caused by COVID-19 and has continued to make progress on its rebuilding efforts related to Hurricanes Irma and Maria in 2017. According to data published by the government, over $1.4 billion in disaster recovery funds were disbursed during 2021 and 2022, up 22% from the preceding 2-year period. On the fiscal front, revenues have trended positively and the USVI Government successfully completed the restructuring of the government employee retirement system. Although no official GDP data has been released for 2021 and/or 2022, the aforementioned developments, as well as the positive trend reflected by key economic indicators such as visitor arrivals, non-farm payrolls and unemployment rate potentially indicate that the territory has experienced an overall economic recovery since 2020. PROMESA does not apply to the USVI and, as such, there is currently no federal legislation permitting the restructuring of the debts of the USVI and its public corporations and instrumentalities. To the extent that the fiscal condition of the USVI government continues to deteriorate, the U.S. Congress or the government of the USVI may enact legislation allowing for the restructuring of the financial obligations of the USVI government entities or imposing a stay on creditor remedies, including by making PROMESA applicable to the USVI. As of March 31, 2023, the Corporation had $38.7 million in loans to USVI public corporations, compared to $38.0 million as of December 31, 2022. As of March 31, 2023, all loans were currently performing and up to date on principal and interest payments. ## Market risk As filed, 270 characters. For information regarding market risk to which the Corporation is exposed, see the information contained in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management” in this Quarterly Report on Form 10-Q. ## Controls and procedures As filed, 1,646 characters. ### Disclosure Controls and Procedures First BanCorp.’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of First BanCorp.’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2023. Based on this evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective and provide reasonable assurance that the information required to be disclosed by the Corporation in reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and reported to the Corporation’s management, including the Chief Executive Office and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. ### Internal Control over Financial Reporting There were no changes to the Corporation’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. ### PART II - OTHER INFORMATION In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable, or the information has been previously reported. ## Risk factors As filed, 9,079 characters. The Corporation’s business, operating results and/or the market price of our common stock may be significantly affected by a number of factors. A detailed discussion of certain risk factors that could affect the Corporation’s future operations, financial condition or results for future periods is set forth in Part I, Item 1A., “Risk Factors,” in the 2022 Annual Report on Form 10-K. These risk factors, and others, could cause actual results to differ materially from historical results or the results contemplated by the forward-looking statements contained in this report. Also, refer to the discussion in “Forward Looking Statements” and Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Quarterly Report on Form 10-Q for additional information that may supplement or update the discussion of risk factors in the 2022 Annual Report on Form 10-K. Other than as described below, there have been no material changes from those risk factors previously disclosed in Part I, Item 1A. “Risk Factors,” in the 2022 Annual Report on Form 10-K. ### Cyber-attacks, system risks and data protection breaches to our computer systems and networks or those of third-party service ### providers could adversely affect our ability to conduct business, manage our exposure to risk or expand our business, result in the ### disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and ### security systems and infrastructure, and present significant reputational, legal and regulatory costs Our business is highly dependent on the security, controls and efficacy of our infrastructure, computer and data management systems, as well as those of our customers, suppliers, and other third parties. To access our network, products and services, our employees, customers, suppliers, and other third parties, including downstream service providers, the financial services industry and financial data aggregators, with whom we interact, on whom we rely or who have access to our customers personal or account information, increasingly use personal mobile devices or computing devices that are outside of our network and control environments and are subject to their own cybersecurity risks. Our business relies on effective access management and the secure collection, processing, transmission, storage and retrieval of confidential, proprietary, personal and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. Information security risks for financial institutions have significantly increased in recent years, especially given the increasing sophistication and activities of organized computer criminals, hackers, and terrorists and our expansion of online and digital customer services to better meet our customer’s needs. These threats may derive from fraud or malice on the part of our employees or third- party providers or may result from human error or accidental technological failure. These threats include cyber-attacks, such as computer viruses, malicious or destructive code, phishing attacks, denial of service attacks, or other security breach tactics that could result in the unauthorized release, gathering, monitoring, misuse, loss, destruction, or theft of confidential, proprietary, and other information, including intellectual property, of ours, our employees, our customers, or third parties, damages to systems, or otherwise material disruption to our or our customers’ or other third parties’ network access or business operations, both domestically and internationally. While we maintain an Information Security Program that continuously monitors cyber-related risks and ultimately ensures protection for the processing, transmission, and storage of confidential, proprietary, and other information in our computer systems and networks, as well as a vendor management program to oversee third party and vendor risks, there is no guarantee that we will not be exposed to or be affected by a cybersecurity incident. For example, we recently learned that one of our third-party vendors was the victim of a security incident in April 2023 involving a set of data that included some information on FirstBank’s mortgage loan business. In response to learning of the incident, we promptly launched our own internal investigation, which confirmed that our own systems were not compromised, and any operational and financial impact was minimal. We are working with cybersecurity experts and legal counsel to fully assess the impact of the security incident reported by our third-party vendor and any required disclosures to the applicable regulatory authorities and impacted customers. Our vendor has indicated (and we have no evidence to the contrary) that to date there is no evidence that there has been any actual or attempted misuse of information. We may incur expenses related to the incident, including expenses to remediate and investigate this matter. Additionally, we remain subject to risks and uncertainties as a result of the incident, including legal, reputational and financial risks. Cyber threats are rapidly changing, and future attacks or breaches could lead to other security breaches of the networks, systems, or devices that our customers use to access our integrated products and services, which, in turn, could result in unauthorized disclosure, release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary, and other information (including account data information) or data security compromises. As cyber threats continue to evolve, we may be required to expend significant additional resources to modify or enhance our protective measures, investigate, and remediate any information security vulnerabilities or incidents and develop our capabilities to respond and recover. The full extent of a particular cyberattack, and the steps that the Corporation may need to take to investigate such attack, may not be immediately clear, and it could take considerable additional time for us to determine the complete scope of information compromised, at which time the impact on the Corporation and measures to recover and restore to a business-as-usual state may be difficult to assess. These factors may also inhibit our ability to provide full and reliable information about the cyberattack to our customers, third-party vendors, regulators, and the public. A successful penetration or circumvention of our system security, or the systems of our customers, suppliers, and other third parties, could cause us serious negative consequences, including significant operational, reputational, legal, and regulatory costs and concerns. Any of these adverse consequences could adversely impact our results of operations, liquidity, and financial condition. In addition, our insurance policies may not be adequate to compensate us for the potential costs and other losses arising from cyber-attacks, failures of information technology systems, or security breaches, and such insurance policies may not be available to us in the future on economically reasonable terms, or at all. Insurers may also deny us coverage as to any future claim. Any of these results could harm our growth prospects, financial condition, business, and reputation. ### The volatility in the financial services industry, including failures or rumored failures of other depository institutions, and ### actions taken by governmental agencies to stabilize the financial system, could result in, among other things, bank deposit runoffs ### and liquidity constraints. The closure and placement into receivership with the FDIC of certain large U.S. regional banks with assets over $100 billion in March and May 2023, and adverse developments affecting other banks, resulted in heightened levels of market volatility and consequently have negatively impacted customer confidence in the safety and soundness of financial institutions. These developments have resulted in certain regional banks experiencing higher than normal deposit outflows and an elevated level of competition for available deposits in the market. Although we have not been materially impacted by these recent bank failures, the resulting speed at which news, including social media outlets, led depositors to withdraw funds from these and other financial institutions, as well as the volatile impact to stock prices, could have a material effect on operations. The impact of market volatility from the adverse developments in the banking industry, along with continued high inflation and rising interest rates on our business and related financial results, will depend on future developments, which are highly uncertain and difficult to predict. In the aftermath of these recent bank failures, the banking agencies could propose certain actions that may impact capital ratios or the FDIC deposit insurance premium. Filed May 10, 2023. Source: SEC EDGAR, the filing index for accession 0001057706-23-000004. Last ingested by Listed: Nov 6, 2026, 13:17 ET. No prices; not investment advice.