# First Bancorp: Form 10-Q for the period ended Jun 30, 2023 - Company: [First Bancorp](/companies/fbp.md) (CIK 1057706) - Form: 10-Q - Filed: 2023-08-08 - Accepted by EDGAR: Aug 8, 2023, 17:21 ET - Period: 2023-06-30 - Accession: 0001057706-23-000006 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1057706/000105770623000006/fbp20230630Q2.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1057706/000105770623000006/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2023-06-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2023-04-01 to 2023-06-30 | $236.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Revenue | 6 months, 2023-01-01 to 2023-06-30 | $469.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $52.4m | us-gaap:InterestExpense | | Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $93.9m | us-gaap:InterestExpense | | Income tax | 3 months, 2023-04-01 to 2023-06-30 | $30.3m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 6 months, 2023-01-01 to 2023-06-30 | $62.2m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2023-04-01 to 2023-06-30 | $70.7m | us-gaap:NetIncomeLoss | | Net income | 6 months, 2023-01-01 to 2023-06-30 | $141.4m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.39 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.78 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.39 | us-gaap:EarningsPerShareBasic | | Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.79 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 179,277,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 180,253,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $166.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $16.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $51.2m | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $53.2m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Total assets | at 2023-06-30 | $19.15bn | us-gaap:Assets | | Total liabilities | at 2023-06-30 | $17.75bn | us-gaap:Liabilities | | Shareholders' equity | at 2023-06-30 | $1.40bn | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 197,422 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, reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures, and references to non-GAAP financial measures reconciliations presented in other sections. ### 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 During the second quarter of 2023, inflation has continued to trend lower but remaining at elevated levels above the Federal Reserve (“FED”) target. In July 2023, the FED raised interest rates by an additional 25 basis points, thereby increasing the federal funds rate to a target range of 5.25% to 5.50%, bringing borrowing costs to the highest level since January 2001. This represents the eleventh time in 17 months that the FED has raised rates in an effort to significantly reduce liquidity in the financial markets and continue to reduce inflation. The FED resumed the tightening campaign after a pause in June, while noticing the economy has been expanding at a moderate pace, job gains have been robust in recent months, and the unemployment rate has remained low while inflation remains elevated. The Corporation remains vigilant as to the potential impacts that monetary policy or a potential slowdown in the U.S. economy may have on credit and loan demand. Notwithstanding, it is encouraged by the ongoing business activity and economic growth in Puerto Rico over the short and medium term. For example, strong auto and retail sales reported during the first half of 2023 suggest growing consumer confidence in Puerto Rico. The economic backdrop in Puerto Rico continues to be supported by strong labor markets, which have led to unemployment remaining stable, and a consistent flow of federal disaster funds and foreign investment. Our quarterly results reflected continued execution of our strategy and strength of our balance sheet, reflected through deposit growth and increased capital levels driven by earnings and capital optimization. Although total net interest income remains stable, the overall higher interest rate environment resulted in a lower interest margin for the second quarter of 2023. The overall higher interest rate environment should continue to benefit our interest income as variable loans and cash held at the FED will reprice accordingly and projected loan growth will occur at higher yields. Interest expense, on the other hand, is also expected to increase as maturing deposits and government deposits will reprice at higher rates and non-interest-bearing and other low-cost deposits could continue to shift to higher cost deposits, resulting in margin pressures. Credit continues to perform well and our liquidity position remains strong. With our disciplined and proactive approach, we believe the Corporation is positioned to continue growing the franchise and supporting our people and the communities we serve while enhancing shareholder value. #### Stock Repurchase Programs On July 24, 2023, the Corporation announced that its Board of Directors approved a new stock repurchase program, under which the Corporation may repurchase up to $225 million of its outstanding common stock, which it expects to execute through the end of the third quarter of 2024. The Corporation expects to repurchase approximately $150 million in common stock during the second half of 2023, of which $75 million relates to the remaining amount of the $350 million stock repurchase program announced on April 27, 2022 that was resumed in July 2023. The Corporation expects to fully utilize this remaining authorization during the third quarter of 2023. From July 1, 2023 through August 1, 2023, the Corporation repurchased approximately 1.5 million shares of common stock for a total purchase price of $19.5 million. Repurchases under the stock repurchase programs may be executed through open market purchases, accelerated share repurchases, and/or privately negotiated transactions or plans, including under plans complying with Rule 10b5-1 under the Exchange Act. The Corporation’s stock repurchase programs are 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. The Corporation’s stock repurchase programs do not obligate it to acquire any specific number of shares and do not have an expiration date. The stock repurchase programs may be modified, suspended, or terminated at any time at the Corporation’s discretion. #### Repurchase of Trust - Preferred Securities (“TRuPs”) During the second quarter of 2023, the Corporation completed the repurchase of $21.4 million of TRuPs of the FBP Statutory Trust I as part of a privately -negotiated transaction, resulting in a commensurate reduction in the related floating rate junior subordinated debentures. The purchase price equated to 92.5% of the $21.4 million par value of the TRuPs. The 7.5% discount resulted in a gain of approximately $1.6 million, which is reflected in the consolidated statement s of income as “Gain on early extinguishment of debt.” #### Release of Corporate Sustainability Report On June 26, 2023, the Corporation announced the release of its Corporate Sustainability Report for 2022, which is its second report on Environmental, Social and Governance (“ESG”) and sustainability matters. This report highlights the Corporation’s strategy and development relating to ESG matters and covers the progress of the Corporation’s ESG program during 2022. #### London Interbank Offered Rate (“LIBOR”) Transition On June 30, 2023, the US dollar (“USD”) LIBOR panel ended, and USD LIBOR rates are no longer considered representative of the market. For the transition of residual exposures tied to USD LIBOR as of June 30, 2023, the Corporation will continue to follow the provisions of the Adjustable Interest Rate Act (the “LIBOR Act”) and Regulation ZZ. As of June 30, 2023, the Corporation’s risk exposure to USD LIBOR that mature after June 30, 2023 consisted of the following: (i) $0.8 billion of variable-rate commercial and construction loans (including unused commitments), (ii) $39.4 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) $122.3 million of Puerto Rico municipalities bonds held as part of the held-to-maturity debt securities portfolio, and (iv) $161.7 million of junior subordinated debentures reported as other long-term borrowings in the consolidated statements of financial condition. Source systems have been updated to support alternative reference rates. As such, we have developed a SOFR-enabled interest rate risk monitoring framework and a strategy for managing interest rate risk during the transition from LIBOR to SOFR. #### Other Recent Developments Following the recent failure of two U.S. regional banks and resulting losses to the FDIC’s Deposit Insurance Fund (“DIF”), on May 11, 2023, the FDIC approved a notice of proposed rulemaking that would implement a special assessment at an annual rate of approximately 12.5 basis points over eight quarterly periods, commencing with the first quarter of 2024, to recover the cost associated with protecting uninsured depositors as part of those financial institution failures. The assessment base for the special assessment would be equal to an insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. Notwithstanding, the special assessment could be subject to change depending on whether there are any shortfalls on amounts collected. If the final rule is issued as proposed, the estimated impact of the special assessment on the Corporation would be an increase in non-interest expense by approximately $6 million that would need to be accrued once the proposed rule is finalized. ### 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 Quarterly Report on Form 10-Q, 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 of this MD&A 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. For the quarter and six-month period ended June 30, 2023, the Corporation had net income of $70.7 million ($0.39 per diluted common share) and $141.4 million ($0.78 per diluted common share), respectively, compared to $74.7 million ($0.38 per diluted common share) and $157.3 million ($0.80 per diluted common share), for the comparable periods in 2022. Other relevant selected financial indicators for the periods presented are included below: ### Quarter Ended June 30, ### Six-Month Period Ended June 30, ### 2023 ### 2022 ### 2023 ### 2022 ### Key Performance Indicator: (1) Return on Average Assets (2) 1.51 1.52 1.53 1.59 Return on Average Common Equity (3) 19.66 17.82 20.31 17.18 Efficiency Ratio (4) 47.83 47.69 48.60 48.25 (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 June 30, 2023, compared to the second quarter of 2022, include the following: Net interest income for the quarter ended June 30, 2023 increased to $199.8 million, compared to $196.2 million for the second quarter of 2022, mainly driven by the effect in the commercial loan portfolio of higher market interest rates on the upward repricing of variable-rate loans and on new loan originations, the growth in consumer loans, and the impact of higher market interest rates on interest-bearing cash balances, partially offset by an increase in interest expense mainly due to higher rates paid on interest-bearing deposits. 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 June 30, 2023 was $22.2 million, compared to $10.0 million for the second quarter of 2022. The increase in the provision expense reflects a $9.9 million increase in the provision for the commercial and construction loan portfolio resulting from a deterioration in the forecasted commercial real estate price index (“CRE price index”). Net charge-offs totaled $19.3 million for the quarter ended June 30, 2023, or 0.67% of average loans on an annualized basis, compared to $6.0 million, or 0.21% of average loans, for the second quarter of 2022, mainly driven by a $6.2 million charge- off recorded on a commercial and industrial participated loan in the Florida region in the power generation industry and a $6.1 million increase in consumer loans net charge-offs. 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 $36.3 million for the quarter ended June 30, 2023, compared to $30.9 million for the second quarter of 2022. Non-interest income for the second quarter of 2023 includes a $3.6 million gain recognized from a legal settlement and the $1.6 million gain on the repurchase of $21.4 million in junior subordinated debentures. On a non-GAAP basis, excluding the effect of these Special Items (as defined below), adjusted non-interest income increased by $0.2 million. See “Non-Interest Income” and “Non-GAAP Financial Measures and Reconciliations” below for additional information. Non-interest expenses for the quarter ended June 30, 2023 increased by $4.6 million to $112.9 million. The increase in non- interest expenses mainly reflects a $3.0 million increase in employees’ compensation and benefits expenses due to annual salary merit increases as well as higher stock-based compensation expense and medical insurance premium costs. The efficiency ratio for the second quarter of 2023 was 47.83%, as compared to 47.69% for the same period in 2022. On a non- GAAP basis, excluding the aforementioned Special Items , the adjusted efficiency ratio for the second quarter of 2023 was 48.91%. See “Non-Interest Expenses” and “Non-GAAP Financial Measures and Reconciliations” below for additional information. Income tax expense decreased to $30.3 million for the second quarter of 2023, compared to $34.1 million for the same period in 2022 driven by a lower pre-tax income and a higher proportion of exempt to taxable income resulting in a lower effective tax rate. 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 d to 30.1 % for the first six months of 2023, compared to 31.7% for the first six months of 2022. See “Income Taxes” below and Note 17 – Income Taxes, to the unaudited consolidated financial statements herein for additional information. As of June 30, 2023, total assets were approximately $19.2 billion, an increase of $518.0 million from December 31, 2022, primarily due to a $567.0 million increase in cash and cash equivalents mainly attributable to the overall increase in total deposits, and a $168.5 million increase in total loans, partially offset by a $186.3 million decrease in total investment securities. See “Financial Condition and Operating Data Analysis” below for additional information. As of June 30, 2023, total liabilities were $17.8 billion, an increase of $445.5 million from December 31, 2022, mainly driven by the overall increase in total deposits, including brokered CDs, partially offset by a $198.3 million decrease in borrowings. 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 certificates of deposit (“CDs”). As of June 30, 2023, these core deposits, amounting to $13.0 billion, funded 67.99% of total assets. Approximately $4.7 billion, or 28.79% of such deposits, are uninsured deposits. 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’s Discount Window. As of June 30, 2023, the Corporation had approximately $1.4 billion available for funding under the FED’s Discount Window and $980.9 million available for additional borrowing capacity on FHLB lines of credit based on collateral pledged at these entities. On a combined basis, as of June 30, 2023, the Corporation had $5.6 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 June 30, 2023, the Corporation’s total stockholders’ equity was $1.4 billion, an increase of $72.5 million from December 31, 2022. The increase was driven by the earnings generated in the first half of 2023 and a $32.4 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. This increase was partially offset by $50.7 million in dividends declared to common stock shareholders during the first six months of 2023 and the repurchase of approximately 3.6 million shares of common stock for a total purchase price of approximately $50.0 million. The Corporation’s CET1 capital, tier 1 capital, total capital, and leverage ratios were 16.64%, 16.64%, 19.15%, and 10.73%, respectively, as of June 30, 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, decreased by $274.9 million to $1.2 billion for the quarter ended June 30, 2023. See “Financial Condition and Operating Data Analysis” below for additional information. Total non-performing assets were $121.1 million as of June 30, 2023, a decrease of $8.1 million, from December 31, 2022. The net decrease was driven by a $9.5 million reduction in nonaccrual residential mortgage loans mainly due to loans restored to accrual status, partially offset by a $1.5 million increase in nonaccrual consumer loans. See “Risk Management – Nonaccrual Loans and Non-Performing Assets” below for additional information. Adversely classified commercial and construction loans decreased by $27.9 million to $65.7 million as of June 30, 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. #### Adjusted Net Income, Adjusted Non-Interest Income, and Adjusted Efficiency Ratio To supplement the Corporation’s financial statements presented in accordance with GAAP, the Corporation uses, and believes that investors benefit from disclosure of, non-GAAP financial measures that reflect adjustments to net income, non-interest income, and the efficiency ratio to exclude items that management believes are not reflective of core operating performance (“Special Items”). The financial results for the quarter and six-month period ended June 30, 2022 did not include any significant Special Items. The financial results for the quarter and six-month period ended June 30, 2023 included the following Special Items: Quarter and Six-Month Period Ended June 30, 2023 A $3.6 million ($2.3 million after-tax) gain recognized from a legal settlement reflected in the consolidated statements of income as part of other non-interest income. A $1.6 million gain on the repurchase of $21.4 million in junior subordinated debentures reflected in the consolidated statements of income as “Gain on early extinguishment of debt.” The junior subordinated debentures are reflected in the consolidated statements of financial condition as “Other long-term borrowings.” The purchase price equated to 92.5% of the $21.4 million par value of the TRuPs. The 7.5% discount resulted in the gain of $1.6 million. The gain, realized at the holding company level, had no effect on the income tax expense in 2023. The following table reconciles for the quarter and six-month period ended June 30, 2023 the reported net income to adjusted net income, a non-GAAP financial measure that excludes the Special Items identified above: ### Quarter Ended June 30, ### Six-Month Period Ended June 30, ### 2023 ### 2023 (In thousands) Net income, as reported (GAAP) 70,655 141,353 Adjustments: Gain recognized from a legal settlement (3,600) (3,600) Gain on early extinguishment of debt (1,605) (1,605) Income tax impact of adjustments (1) 1,350 1,350 Adjusted net income (Non-GAAP) 66,800 137,498 (1) See "Adjusted Net Income, Adjusted Non-Interest Income, and Adjusted Efficiency Ratio" above for the individual tax impact related to the above adjustments, which were based on the Puerto Rico statutory tax rate of 37.5%, as applicable. ### 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 in nonaccrual loans, can fluctuate from period to period. Net interest income for the quarter and six-month period ended June 30, 2023 was $199.8 million and $400.7 million, respectively, compared to $196.2 million and $381.8 million for the comparable periods in 2022. On a tax-equivalent basis and excluding the changes in the fair value of derivative instruments, net interest income for the quarter and six-month period ended June 30, 2023 was $205.4 million and $412.6 million, respectively, compared to $205.6 million and $398.4 million for the comparable periods in 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 interest 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 June 30, ### 2023 ### 2022 ### 2023 ### 2022 ### 2023 ### 2022 (Dollars in thousands) Interest-earning assets: Money market and other short-term investments 617,356 1,530,353 7,880 2,873 5.12 0.75 Government obligations (2) 2,909,204 2,922,226 10,973 10,090 1.51 1.38 MBS 3,757,425 4,081,573 17,087 22,804 1.82 2.24 FHLB stock 36,265 21,275 780 251 8.63 4.73 Other investments 13,739 12,595 58 12 1.69 0.38 Total investments (3) 7,333,989 8,568,022 36,778 36,030 2.01 1.69 Residential mortgage loans 2,808,465 2,891,403 39,864 40,573 5.69 5.63 Construction loans 149,783 124,070 2,903 1,768 7.77 5.72 Commercial and industrial ("C&I") and commercial mortgage loans 5,191,040 5,054,223 89,290 64,500 6.90 5.12 Finance leases 769,316 617,399 14,714 11,410 7.67 7.41 Consumer loans 2,672,912 2,415,215 74,192 63,724 11.13 10.58 Total loans (4)(5) 11,591,516 11,102,310 220,963 181,975 7.65 6.57 Total interest-earning assets 18,925,505 19,670,332 257,741 218,005 5.46 4.45 Interest-bearing liabilities: Time deposits 2,511,504 2,202,228 15,667 3,838 2.50 0.70 Brokered certificates of deposit ("CDs") 333,557 76,790 3,761 404 4.52 2.11 Other interest-bearing deposits 7,517,995 8,704,448 22,176 3,452 1.18 0.16 Securities sold under agreements to repurchase 101,397 200,000 1,328 1,972 5.25 3.95 Advances from the FHLB 534,231 200,000 6,048 1,075 4.54 2.16 Other long-term borrowings 177,701 183,762 3,409 1,698 7.69 3.71 Total interest-bearing liabilities 11,176,385 11,567,228 52,389 12,439 1.88 0.43 Net interest income on a tax-equivalent basis and excluding valuations - non-GAAP 205,352 205,566 Interest rate spread 3.58 4.01 Net interest margin 4.35 4.19 ### Part I ### Average volume ### Interest income (1) ### / expense ### Average rate (1) ### Six-Month Period Ended June 30, ### 2023 ### 2022 ### 2023 ### 2022 ### 2023 ### 2022 (Dollars in thousands) Interest-earning assets: Money market and other short-term investments 511,392 1,682,216 12,530 3,693 4.94 0.44 Government obligations (2) 2,909,587 2,829,675 21,738 18,322 1.51 1.31 MBS 3,810,491 4,061,883 36,483 42,224 1.93 2.10 FHLB stock 38,539 21,370 1,201 538 6.28 5.08 Other investments 13,441 12,193 197 33 2.96 0.55 Total investments (3) 7,283,450 8,607,337 72,149 64,810 2.00 1.52 Residential mortgage loans 2,821,779 2,926,236 79,658 81,260 5.69 5.60 Construction loans 147,923 119,427 5,579 3,292 7.61 5.56 C&I and commercial mortgage loans 5,179,448 5,078,910 175,175 126,504 6.82 5.02 Finance leases 752,501 602,880 28,523 22,322 7.64 7.47 Consumer loans 2,654,008 2,377,118 145,406 124,875 11.05 10.59 Total loans (4)(5) 11,555,659 11,104,571 434,341 358,253 7.58 6.51 Total interest-earning assets 18,839,109 19,711,908 506,490 423,063 5.42 4.33 Interest-bearing liabilities: Time deposits 2,427,399 2,282,192 26,449 8,259 2.20 0.73 Brokered CDs 250,588 84,210 5,348 881 4.30 2.11 Other interest-bearing deposits 7,531,374 8,419,880 39,692 6,206 1.06 0.15 Securities sold under agreements to repurchase 96,229 220,442 2,397 4,154 5.02 3.80 Advances from the FHLB 581,436 200,000 13,224 2,138 4.59 2.16 Other long-term borrowings 180,715 183,762 6,790 3,031 7.58 3.33 Total interest-bearing liabilities 11,067,741 11,390,486 93,900 24,669 1.71 0.44 Net interest income on a tax-equivalent basis and excluding valuations - non-GAAP 412,590 398,394 Interest rate spread 3.71 3.89 Net interest margin 4.42 4.08 (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 Financial Measures and Reconciliations" below. (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 $2.9 million and $3.0 million for the quarters ended June 30, 2023 and 2022, respectively, and $6.0 million and $5.6 million for the six-month periods ended June 30, 2023 and 2022, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio. ### Part II ### Quarter Ended June 30, ### Six-Month Period Ended June 30, ### 2023 Compared to 2022 ### 2023 Compared to 2022 ### Variance due to: ### Variance due to: ### Volume ### Rate ### Total ### Volume ### Rate ### Total (In thousands) Interest income on interest-earning assets: Money market and other short-term investments (6,709) 11,716 5,007 (15,795) 24,632 8,837 Government obligations (48) 931 883 530 2,886 3,416 MBS (1,710) (4,007) (5,717) (2,523) (3,218) (5,741) FHLB stock 244 285 529 511 152 663 Other investments 1 45 46 4 160 164 Total investments (8,222) 8,970 748 (17,273) 24,612 7,339 Residential mortgage loans (1,173) 464 (709) (2,943) 1,341 (1,602) Construction loans 415 720 1,135 899 1,388 2,287 C&I and commercial mortgage loans 1,790 23,000 24,790 2,551 46,120 48,671 Finance leases 2,893 411 3,304 5,660 541 6,201 Consumer loans 7,037 3,431 10,468 15,003 5,528 20,531 Total loans 10,962 28,026 38,988 21,170 54,918 76,088 Total interest income 2,740 36,996 39,736 3,897 79,530 83,427 Interest expense on interest-bearing liabilities: Time deposits 1,234 10,595 11,829 558 17,632 18,190 Brokered CDs 2,502 855 3,357 2,927 1,540 4,467 Other interest-bearing deposits (953) 19,677 18,724 (2,830) 36,316 33,486 Securities sold under agreements to repurchase (1,132) 488 (644) (2,733) 976 (1,757) Advances from the FHLB 2,992 1,981 4,973 6,967 4,119 11,086 Other borrowings (86) 1,797 1,711 (99) 3,858 3,759 Total interest expense 4,557 35,393 39,950 4,790 64,441 69,231 Change in net interest income (1,817) 1,603 (214) (893) 15,089 14,196 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 June 30, ### Six-Month Period Ended June 30, ### 2023 ### 2022 ### 2023 ### 2022 (Dollars in thousands) Interest income - GAAP 252,204 208,625 494,600 406,479 Unrealized (gain) loss on derivative instruments (3) (9) 3 (24) Interest income excluding valuations - non-GAAP 252,201 208,616 494,603 406,455 Tax-equivalent adjustment 5,540 9,389 11,887 16,608 Interest income on a tax-equivalent basis and excluding valuations - non-GAAP 257,741 218,005 506,490 423,063 Interest expense - GAAP 52,389 12,439 93,900 24,669 Net interest income - GAAP 199,815 196,186 400,700 381,810 Net interest income excluding valuations - non-GAAP 199,812 196,177 400,703 381,786 Net interest income on a tax-equivalent basis and excluding valuations - non-GAAP 205,352 205,566 412,590 398,394 ### Average Balances Loans and leases 11,591,516 11,102,310 11,555,659 11,104,571 Total securities, other short-term investments and interest-bearing cash balances 7,333,989 8,568,022 7,283,450 8,607,337 Average Interest-Earning Assets 18,925,505 19,670,332 18,839,109 19,711,908 Average Interest-Bearing Liabilities 11,176,385 11,567,228 11,067,741 11,390,486 ### Average Yield/Rate Average yield on interest-earning assets - GAAP 5.35% 4.25% 5.29% 4.16% Average rate on interest-bearing liabilities - GAAP 1.88% 0.43% 1.71% 0.44% Net interest spread - GAAP 3.47% 3.82% 3.58% 3.72% Net interest margin - GAAP 4.23% 4.00% 4.29% 3.91% Average yield on interest-earning assets excluding valuations - non-GAAP 5.35% 4.25% 5.29% 4.16% Average rate on interest-bearing liabilities 1.88% 0.43% 1.71% 0.44% Net interest spread excluding valuations - non-GAAP 3.47% 3.82% 3.58% 3.72% Net interest margin excluding valuations - non-GAAP 4.23% 4.00% 4.29% 3.91% Average yield on interest-earning assets on a tax-equivalent basis and excluding valuations - non-GAAP 5.46% 4.45% 5.42% 4.33% Average rate on interest-bearing liabilities 1.88% 0.43% 1.71% 0.44% Net interest spread on a tax-equivalent basis and excluding valuations - non-GAAP 3.58% 4.01% 3.71% 3.89% Net interest margin on a tax-equivalent basis and excluding valuations - non-GAAP 4.35% 4.19% 4.42% 4.08% Net interest income amounted to $199.8 million for the quarter ended June 30, 2023, an increase of $3.6 million, when compared to $196.2 million for same period in 2022. The $3.6 million increase in net interest income was primarily due to: A $38.8 million increase in interest income on loans including: A $25.5 million increase in interest income on commercial and construction loans, of which approximately $24. 4 million was related to the effect of higher market interest rates on the upward repricing of variable-rate loans and on new loan originations, and approximately $2.9 million was related to the $229.9 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 June 30, 2023 and 2022, amounted to $0.1 million and $2.0 million, respectively. As of June 30, 2023, the interest rate on approximately 54% of the Corporation’s commercial and construction loans was tied to variable rates, with 29% based upon LIBOR or SOFR of 3 months or less, 13% based upon the Prime rate index, and 12% based on other indexes. For the second quarter of 2023, the average one-month LIBOR increased 410 basis points, the average three-month LIBOR increased 388 basis points, the average Prime rate increased 422 basis points, and the average three-month SOFR increased 382 basis points, compared to the average rates for such indexes during the second quarter of 2022. A $13.8 million increase in interest income on consumer loans and finance leases, primarily driven by the $409.6 million increase in the average balance of this portfolio, which increased interest income by approximately $10.1 million, and an approximately $3.7 million increase in interest income associated with the positive effects of higher market interest rates on new consumer loan originations and the repricing of the credit cards portfolio. Partially offset by: A $0.5 million decrease in interest income on residential mortgage loans, primarily related to an $82.9 million reduction in the average balance of this portfolio, which resulted in an approximate decrease of $1.1 million in interest income, partially offset by the positive effect of new loan originations at higher current market interest rates. A $4.8 million increase in interest income from interest-bearing cash balances and investment securities, including: A $5.0 million increase in interest income from interest-bearing cash balances, which consisted primarily of cash balances deposited at the FED, mainly due to the effect of higher market interest rates, partially offset by the impact of a $913.0 million decrease in the average volume of interest-bearing cash balances. A $1.3 million increase in interest income on Puerto Rico municipal bonds, mainly due to the upward repricing of variable-rate bonds. A $0.3 million increase in interest income on U.S. government and agencies debt securities, mainly driven by higher- yielding securities purchased late in the second quarter of 2022. A $0.5 million increase in dividends received from the FHLB during the second quarter of 2023. Partially offset by: A $2.4 million decrease in interest income on U.S. agencies MBS, of which $1.5 million was associated with a $324.1 million decrease in the average balance of this portfolio, and the remaining variance to a higher level of U.S. agencies’ MBS premium amortization expense associated with changes in anticipated prepayments. Partially offset by: A $33.9 million increase in interest expense on interest-bearing deposits, including: An $18.7 million increase in interest expense on interest-bearing checking and saving accounts, driven by an increase of approximately $20.5 million associated with higher interest rates paid in the second quarter of 2023 as a result of the overall higher interest rate environment, partially offset by a decrease of approximately $1.8 million resulting from a $1.2 billion decline in the average balance of these deposits. The average cost of interest-bearing checking and saving accounts increased by 102 basis points to 1.18% in the second quarter of 2023 as compared to 0.16% in the same period in 2022. Excluding public sector deposits, the average cost of interest-bearing checking and saving accounts for the second quarter of 2023 was 0.67%, compared to 0.17% for the same period a year ago. An $11.8 million increase in interest expense on time deposits, excluding brokered CDs, mainly associated with higher rates paid in the second quarter of 2023 on new issuances and renewals also associated with the higher interest rate environment. The average cost of time deposits in the second quarter of 2023, excluding brokered CDs, increased 180 basis points to 2.50% when compared to the same period in 2022 . A $3.4 million increase in interest expense on brokered CDs, of which $2.5 million was associated with the increase of $256.8 million in the average balance. A $6.0 million net increase in interest expense on borrowings, including: A $5.0 million increase in interest expense on advances from the FHLB, of which $3.0 million was associated with an increase of $334.2 million in the average balance to increase available cash as a precautionary measure in the first quarter of 2023, and $2.0 million was associated with new FHLB advances at higher interest rates. A $1.7 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 $0.7 million decrease in interest expense on repurchase agreements, mainly driven by a reduction in the average balance of $98.6 million, partially offset by a higher average cost of funds in the second quarter of 2023. Net interest income amounted to $400.7 million for the six-month period ended June 30, 2023, an increase of $18.9 million, when compared to $381.8 million for same period in 2022. The $18.9 million increase in net interest income was primarily due to: A $75.7 million increase in interest income on loans including: A $50.1 million increase in interest income on commercial and construction loans, of which approximately $49.5 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 $5.4 million was related to the $220.6 million increase in the average balance of this portfolio (excluding 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 six-month periods ended June 30, 2023 and 2022, amounted to $0.3 million and $5.1 million, respectively. As of June 30, 2023, the interest rate on approximately 54% of the Corporation’s commercial and construction loans was tied to variable rates, with 29% based upon LIBOR or SOFR of 3 months or less, 13% based upon the Prime rate index, and 12% based on other indexes. For the six-month period ended June 30, 2023, the average one-month LIBOR increased 424 basis points, the average three-month LIBOR increased 414 basis points, the average three-month SOFR increased 413 basis points, and the average Prime rate increased 431 basis points, compared to the average rates for such indexes during the same period of the prior year. A $26.8 million increase in interest income on consumer loans and finance leases, primarily driven by the $426.5 million increase in the average balance of this portfolio, which increased interest income by approximately $20.6 million, and the approximately $6.1 million increase in interest income associated with the positive effects of higher market interest rates on new consumer loan originations and the repricing of the credit cards portfolio . Partially offset by: A $1.2 million decrease in interest income on residential mortgage loans, primarily related to the $104.5 million reduction in the average balance of this portfolio, which resulted in an approximate decrease of $2.7 million in interest income, partially offset by the positive effect of new loan originations at higher current market interest rates, which resulted in an approximate increase of $1.6 million in the first six months of 2023. A $8.8 million increase in interest income from interest-bearing cash balances, which consisted primarily of cash balances deposited at the FED, mainly due to the effect of higher market interest rates, partially offset by the impact of a $1.2 billion decrease in the average balance of interest-bearing cash. A $3.6 million increase in interest income on investment securities, mainly driven by: A $2.7 million increase in interest income on Puerto Rico municipal bonds, mainly due to the upward repricing of variable-rate bonds, partially offset by the impact of a $12.3 million reduction in the average balance. A $1.5 million increase in interest income on U.S. government and agencies debt securities, mainly driven by higher- yielding securities purchased late in the second quarter of 2022. A $0.8 million increase in dividend income from FHLB stock, mainly driven by a higher average balance tied with the increase in FHLB advances taken as a precautionary measure in the first quarter of 2023. Partially offset by: A $1.4 million decrease in interest income on U.S. agencies MBS, of which $2.4 million was associated with a $251.4 million decrease in the average balance of this portfolio, partially offset by a $1.0 million increase associated with a lower level of premium amortization expense due to changes in anticipated prepayments and the positive effects from higher-yielding U.S. agencies MBS purchased in the second quarter of 2022. Partially offset by: A $56.1 million increase in interest expense on interest-bearing deposits, including: A $33.5 million increase in interest expense on interest-bearing checking and saving accounts, driven by an increase of approximately $35.7 million associated with higher interest rates paid in the first half of 2023 as a result of the overall higher interest rate environment, partially offset by a decrease of approximately $2.2 million resulting from a decline of approximately $888.5 million in the average balance of these deposits. An $18.1 million increase in interest expense on time deposits, excluding brokered CDs, mainly associated with higher rates paid in the first half of 2023 on new issuances and renewals also associated with the higher interest rate environment. The average cost of time deposits in the first half of 2023, excluding brokered CDs, increased 147 basis points to 2.20% when compared to the same period in 2022. A $4.5 million increase in interest expense on brokered CDs, of which $2.9 million was associated with the increase of $166.4 million in the average balance and $1.6 million was associated to the overall higher interest rate environment. A $13.1 million net increase in interest expense on borrowings, including: An $11.1 million increase in interest expense on advances from the FHLB, of which $7.0 million was associated with an increase of $381.4 million in the average balance to increase available cash as a precautionary measure in the first quarter of 2023, and $4.1 million was associated with new FHLB advances at higher interest rates. A $3.8 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. Partially offset by: A $1.8 million decrease in interest expense on repurchase agreements, mainly driven by a reduction in the average balance of $124.2 million, which resulted in an approximate reduction of $2.7 million in interest expense, partially offset by a $0.9 million increase in interest expense associated with new short -term repurchase agreements entered into during 2023 at higher interest rates. Net interest margin for the second quarter of 2023 increased to 4.23%, compared to 4.00% for the same period in 2022, and by 38 basis points to 4.29% for the first six months of 2023, compared to 3.91% for the same period of 2022. The net interest margin increase primarily reflects the upward repricing of variable-rate commercial loans, the growth in higher yielding loans, primarily consumer loans, and the change in asset mix, reflecting a higher proportion of higher-yielding assets in the 2023 periods. These factors were partially offset by an 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 $20.8 million for the second quarter of 2023, compared to $12.7 million for the second quarter of 2022. The variances by major portfolio category were as follows: Provision for credit losses for the commercial and construction loan portfolio was $10.2 million for the second quarter of 2023, compared to $0.3 million for the second quarter of 2022. The expense recognized during the second quarter of 2023 was mainly due to a deterioration in the forecasted CRE price index and the increase in size of this portfolio. Provision for credit losses for the consumer loans and finance leases portfolio was $14.1 million for the second quarter of 2023, compared to $15.2 million for the second quarter of 2022. The decrease was primarily related to updates in macroeconomic variables, such as the unemployment rate. Provision for credit losses for the residential mortgage loan portfolio was a net benefit of $3.5 million for the second quarter of 2023, compared to a net benefit of $2.8 million for the second quarter of 2022. The higher net benefit recorded for the second quarter of 2023 was primarily related to updates in the projection of certain forecasted macroeconomic variables, such as the Regional Home Price Index. The provision for credit losses for loans and finance leases was an expense of $37.0 million for the first half of 2023, compared to a net benefit of $4.3 million for the same period in 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 $10.7 million for the first half of 2023, compared to a net benefit of $22.8 million for the same period of 2022. The expense recognized during the first half of 2023 was mainly due to a deterioration in the forecasted CRE price index, a $6.2 million charge associated with a nonaccrual commercial and industrial participated loan in the Florida region in the power generation industry and, to a lesser extent, portfolio growth. Meanwhile, the net benefit recorded during the first six months of 2022 mainly reflects reductions in qualitative reserves associated with reduced COVID-19 uncertainties, partially offset by reserve builds related to uncertainties regarding the macroeconomic outlook. Provision for credit losses for the residential mortgage loan portfolio was a net benefit of $3.4 million for the first half of 2023, compared to a net benefit of $7.7 million for the same period of 2022. The net benefit recorded for both periods was primarily related to a continued favorable economic outlook in the projection of certain forecasted macroeconomic variables, such as the Regional Home Price Index. Provision for credit losses for the consumer loans and finance leases portfolio was $29.7 million for the first half of 2023, compared to $26.2 million for the same period 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, partially offset by updates in macroeconomic variables, such as the unemployment rate. #### 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 $0.7 million and $0.6 million for the second quarter and the first half of 2023, respectively, compared to $0.8 million and $0.7 million, respectively, for the same periods in 2022. #### Provision for credit losses for held-to-maturity and available-for-sale debt securities The provision for credit losses for held-to-maturity debt securities was $0.8 million and $0.1 million for the second quarter and first half of 2023, respectively, compared to a net benefit of $3.4 million and an expense of $0.3 million, respectively, for the same periods of 2022. The increase in the provision recorded during the second quarter and the first half of 2023 was mostly driven by higher exposure risk associated with the rising interest rate environment. The provision for credit losses for available-for-sale debt securities was a net benefit of $16 thousand and $25 thousand for the second quarter and first half of 2023, respectively, compared to a net benefit of $35 thousand and $0.4 million, respectively, for the same periods in 2022. ### Non-Interest Income Non-interest income amounted to $36.3 million for the second quarter of 2023, compared to $30.9 million for the same period in 2022\. Non-interest income for the second quarter of 2023 includes the $3.6 million gain recognized from a legal settlement, included as part of other non-interest income , and the $1.6 million gain on the repurchase of $21.4 million in junior subordinated debentures, included as part of gain on early extinguishment of debt. See “Non-GAAP Financial Measures and Reconciliations” in this MD&A for further information. On a non-GAAP basis, excluding the effect of these Special Items, adjusted non-interest income increased by $0.2 million primarily due to: A $1.0 million net increase in adjusted other non -interest income including: (i) a $0.8 million benefit recognized during the second quarter of 2023 in relation to purchased income tax credits realized; (ii) $0.3 million in debit card incentives collected during the second quarter of 2023; (iii) a $0.3 million increase related to higher unused loan commitment fees; and (v) a $0.6 million decrease in net gains on fixed assets. A $0.8 million increase in card and processing income mainly related to higher interchange income received during the second quarter of 2023. Partially offset by: A $1.2 million decrease in revenues from mortgage banking activities, mainly driven by a decrease in the net realized gain on sales of residential mortgage loans in the secondary market due to a lower volume of sales and lower margins. During the second quarters of 2023 and 2022, net realized gains of $0.9 million and $2.2 million, respectively, were recognized as a result of GNMA securitization transactions and whole loan sales to U.S. GSEs amounting to $51.8 million and $64.2 million, respectively. A $0.2 million decrease in insurance commission income. A$0.2 million decrease in service in charges and fees on deposits accounts . Non-interest income for the six-month period ended June 30, 2023 amounted to $68.8 million, compared to $63.8 million for the same period in 2022. On a non-GAAP basis, excluding the effect of the aforementioned Special Items, adjusted non-interest income decreased by $0.2 million primarily due to: A $3.6 million decrease in revenues from mortgage banking activities, mainly driven by a decrease in the net realized gain on sales of residential mortgage loans in the secondary market due to a lower volume of sales and lower margins. During the first six months of 2023 and 2022, net gains of $2.0 million and $5.7 million, respectively, were recognized as a result of GNMA securitization transactions and whole loan sales to U.S. GSEs amounting to $89.2 million and $158.1 million, respectively. A $0.6 million decrease in insurance commission income, mainly due to lower contingent commissions recognized in 2023. Partially offset by: A $2.1 million increase in card and processing income mainly related to higher interchange income during the first six months of 2023. A $1.9 million net increase in adjusted other non-interest income including: (i) a $1.0 million increase related to higher benefit recognized in relation to purchased income tax credits realized ; (ii) a $0.6 million increase related to higher unused loan commitment fees; (iii) $0.3 million in debit card incentives collected during the second quarter of 2023; (iv) a $0.3 million increase in unrealized gains on marketable equity securities; and (v) a $0.2 million increase in fees and commissions from insurance referrals; partially offset by a $0.7 million decrease in net gains on fixed assets. ### Non-Interest Expenses Non-interest expenses for the quarter ended June 30, 2023 amounted to $112.9 million, compared to $108.3 million for the same period in 2022. The efficiency ratio for the second quarter of 2023 was 47.83%, compared to 47.69% for the second quarter of 2022. On a non-GAAP basis, excluding the aforementioned Special Items, the adjusted efficiency ratio for the second quarter of 2023 was 48.91%. The $4.6 million increase in non-interest expenses was primarily due to: A $3.0 million increase in employees’ compensation and benefits expenses, mainly driven by annual salary merit increases, higher stock-based compensation expense, and higher medical insurance premium costs. A $1.0 million increase in other non-interest expenses, in part due to an increase in charges for legal and operational reserves and an increase of $0.5 million in net periodic cost of pension plans. A $0.7 million increase in credit and debit card processing fees, mainly due to higher credit card assessment fees. A $0.6 million increase in the FDIC deposit insurance expense, 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. A $0.4 million increase in taxes, other than income taxes, primarily related to higher license fees. Partially offset by: A $0.5 million increase in net gains on OREO operations, mainly driven by an increase in net realized gains on sales of OREO properties, primarily residential properties in the Puerto Rico region . A $0.4 million decrease in occupancy and equipment expenses, primarily reflecting reductions in depreciation charges, energy costs, and maintenance charges. A $0.4 million decrease in professional service fees, mainly due to a decrease in outsourced technology service fees. Non-interest expenses for the first six months of 2023 amounted to $228.2 million, compared to $215.0 million for the same period in 2022. The efficiency ratio for the first six months of 2023 was 48.60%, compared to 48.25% for the first six months of 2022. On a non-GAAP basis, excluding the aforementioned Special Items, the adjusted efficiency ratio for the first six months of 2023 was 49.15%. The $13.2 million increase in non-interest expenses was primarily due to: A $9.9 million increase in employees’ compensation and benefits expenses, mainly driven by annual salary merit increases and an increase in bonuses, medical insurance premium costs, stock-based compensation expense, and payroll taxes, partially offset by higher deferral of loan origination costs. A $1.9 million increase in credit and debit card processing expenses. A $1.5 million increase in other non-interest expenses, in part due to an increase in charges for legal and operational reserves and an increase of $0.9 million in net periodic cost of pension plans . A $1.2 million increase in the FDIC deposit insurance expense, 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. A $0.9 million increase in professional service fees, driven by an increase in outsourced technology service fees. A $0.6 million increase in business promotion expenses, mainly resulting from higher advertising and marketing expenses associated with the commemoration of the 75th anniversary of the Bank. A $0.5 million increase in taxes, other than income taxes, primarily related to higher license fees, sales and use taxes, and property taxes. Partially offset by: A $1.8 million increase in net gains on OREO operations, mainly driven by an increase in net realized gains on sales of OREO properties, primarily residential properties in the Puerto Rico region. A $1.6 million decrease in occupancy and equipment expenses, primarily reflecting reductions in depreciation charges, rental expenses, and energy costs. ### Income Taxes For the second quarter of 2023, the Corporation recorded an income tax expense of $30.3 million, compared to $34.1 million for the same period in 2022. For the first six months of 2023, the Corporation recorded an income tax expense of $62.2 million, compared to $77.1 million for the same period in 2022. The decrease in income tax expense for the quarter and first six months of 2023, as compared to the same periods a year ago, 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 six months of 2023, excluding entities from which a tax benefit cannot be recognized and discrete items, was 30.1%, compared to 31.7% for the first six months of 2022. See Note 17 - Income Taxes, to the unaudited consolidated financial statements herein for additional information. As of June 30, 2023, the Corporation had a deferred tax asset of $153.9 million, net of a valuation allowance of $184.2 million against the deferred tax asset, compared to a deferred tax asset of $155.6 million, net of a valuation allowance of $185.5 million, as of December 31, 2022. Income tax paid for the six-month period ended June 30, 2023 amounted to $82.2 million compared to $15.3 million for the same period in 2022. The increase is related to the full utilization during 2022 of certain deferred tax assets related to NOLs that were available for regular income tax which decreased the amount due for income taxes. ### FINANCIAL CONDITION AND OPERATING ANALYSIS ### Assets The Corporation’s total assets were $19.2 billion as of June 30, 2023, an increase of $518.0 million from December 31, 2022. The increase was primarily related to a $567.0 million increase in cash and cash equivalents, primarily interest-bearing deposits maintained at the FED aligned with the overall increase in government and time deposits. In addition, as further discussed below, total loans increased by $168.5 million. These variances were partially offset by a $186.3 million decrease in total investment securities. ### Loans Receivable, including Loans Held for Sale As of June 30, 2023, the Corporation’s total loan portfolio before the ACL amounted to $11.7 billion, an increase of $168.5 million compared to December 31, 2022. In terms of geography, the growth consisted of increases of $220.7 million and $37.9 million in the Puerto Rico and Virgin Islands regions, respectively, partially offset by a $90.1 million decrease in the Florida region. On a portfolio basis, the growth consi sted of increases of $167.8 million in consumer loans, including a $141.9 million increase in auto loans and leases, and $52.2 million in commercial and construction loans, partially offset by a $51.5 million decrease in residential mortgage loans. As of June 30, 2023, the loans in the Corpo ration’s held-for-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 $11.7 billion as of June 30, 2023, the Corporation had credit risk concentration of approximately 79% in the Puerto Rico region, 17% in the United States region (mainly in the state of Florida), and 4% in the Virgin Islands region, as shown in the following table: ### As of June 30, 2023 ### Puerto Rico ### Virgin Islands ### United States ### Total (In thousands) Residential mortgage loans 2,179,539 172,771 441,480 2,793,790 Construction loans 65,427 3,792 94,779 163,998 Commercial mortgage loans 1,734,514 65,775 519,780 2,320,069 Commercial and Industrial loans 1,902,803 108,971 934,427 2,946,201 Total commercial loans 3,702,744 178,538 1,548,986 5,430,268 Consumer loans and finance leases 3,421,376 66,078 7,803 3,495,257 Total loans held for investment, gross 9,303,659 417,387 1,998,269 11,719,315 Loans held for sale 14,094 201 14,295 Total loans, gross 9,317,753 417,588 1,998,269 11,733,610 ### 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 June 30, 2023, the Corporation’s total residential mortgage loan portfolio, including loans held for sale, decreased by $51.5 million, as compared to the balance as of December 31, 2022. The decline in the residential mortgage loan portfolio reflects decreases of $56.7 million in the Puerto Rico region and $6.9 million in the Virgin Islands region, partially offset by an increase of $12.1 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 June 30, 2023 consisted of fixed-rate loans that traditionally carry higher yields than residential mortgage loans in the Florida region. In the Florida region, approximately 42% 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 June 30, 2023, the Corporation’s commercial and construction loan portfolio increased by $52.2 million, as compared to the balance as of December 31, 2022. In the Puerto Rico region, commercial and construction loans increased by $112.1 million, as compared to the balance as of December 31, 2022. This increase was driven by the origination of several loans, including five commercial relationships, each in excess of $10 million, that increased the portfolio amount by $66.0 million and a $60.3 million increase in the outstanding balance of floor plan lines of credit. In the Virgin Islands region, commercial and construction loans increased by $40.1 million, as compared to the balance as of December 31, 2022. The increase was driven by the utilization of $47.0 million of a new $100.0 million line of credit facility extended to a government public corporation. In the Florida region, commercial and construction loans decreased by $100.0 million, as compared to the balance as of December 31, 2022. This decrease reflected $90.4 million in payoffs and paydowns of five commercial and industrial relationships in the Florida region, each in excess of $10 million, including the aforementioned payoff of a $24.3 million commercial and industrial participated loan in the leisure and hospitality industry. As of June 30, 2023, the Corporation had $174.9 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 June 30, 2023, the Corporation had $78.9 million in loans to USVI government public corporations, compared to $38.0 million as of December 31, 2022. The increase in loans to USVI government public corporations was driven by the aforementioned $47.0 million line of credit utilization. See “Exposure to USVI Government” below for additional information. As of June 30, 2023, the Corporation’s total commercial mortgage loan exposure amounted to $2.3 billion, or 43% of the total commercial loan portfolio. The commercial mortgage loan portfolio includes an exposure to office real estate amount ing to $428.3 million ($384.3 million and $44.0 million in the Puerto Rico and Florida regions, respectively), of which approximately $76.1 million matures during the remainder of 2023 and 2024. As of June 30, 2023, the Corporation’s total exposure to shared national credit (“SNC”) loans (including unused commitments) amounted to $1.1 billion as of each of June 30, 2023 and December 31, 2022. As of June 30, 2023, approximately $206.2 million of the SNC exposure is related to the portfolio in the Puerto Rico region and $847.4 million is related to the portfolio in the Florida region. #### Consumer Loans and Finance Leases As of June 30, 2023, the Corporation’s consumer loan and finance lease portfolio increased by $167.8 million to $3.5 billion, as compared to the portfolio balance of $3.3 billion as of December 31, 2022. This increase was mainly related to increases of $72.5 million and $69.4 million in the finance leases and auto loans portfolios, respectively. The growth in consumer loans was 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 June 30, ### Six-Month Period Ended June 30, ### 2023 ### 2022 ### 2023 ### 2022 (In thousands) Residential mortgage 115,251 126,532 192,553 249,045 Construction 47,006 46,880 82,505 66,866 Commercial mortgage 42,384 205,720 131,076 333,705 Commercial and Industrial 550,574 622,714 1,106,456 1,113,010 Consumer 454,005 482,252 889,323 908,719 Total loan production 1,209,220 1,484,098 2,401,913 2,671,345 During the quarter and six-month period ended June 30, 2023, total loan originations, including purchases, refinancings, and draws from existing revolving and non-revolving commitments, amounted to approximately $1.2 billion and $2.4 billion, respectively, compared to $1.5 billion and $2.7 billion, respectively, for the comparable periods in 2022. Residential mortgage loan originations for the quarter and six-month period ended June 30, 2023 amounted to $115.3 million and $192.6 million, respectively , compared to $126.5 million and $249.0 million, respectively, for the comparable periods in 2022. The decrease of $11.2 million in the second quarter of 2023, as compared to the same period in 2022, reflects declines of $9.1 million in the Puerto Rico region, $1.3 million in the Virgin Islands region, and $0.8 million in the Florida region. For the six-month period ended June 30, 2023, the decrease of $56.4 million consisted of declines of $51.4 million in the Puerto Rico region, $3.3 million in the Florida region, and $1.7 million in the Virgin Islands region. Approximately 58% of the $150.0 million residential mortgage loan originations in the Puerto Rico region during the first half of 2023 consisted of conforming loans, compared to 59% of $201.4 million for the first half of 2022. The decrease during the first half 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 and six-month period ended June 30, 2023 amounted to $563.6 million and $1.2 billion, respectively, compared to $860.9 million and $1.5 billion, respectively, for the comparable periods in 2022. The decrease of $297.3 million in the second quarter of 2023, as compared to the same period in 2022, reflects declines of $158.2 million in the Florida region, $124.8 million in the Puerto Rico region, and $14.3 million in the Virgin Islands region. Commercial loan originations for the second quarter of 2022 include three commercial mortgage loans over $10 million originated in the Puerto Rico region totaling $53.8 million and two commercial mortgage loans over $10 million originated in the Florida region totaling $37.3 million. For the first six months of 2023, the decrease of $258.2 million consisted of decreases of $213.3 million in the Florida region, $31.1 million in the Puerto Rico region, and $13.8 million in the Virgin Islands region. Government loan originations for the quarter and six-month period ended June 30, 2023 amounted to $76.3 million and $83.6 million, respectively, compared to $14.4 million and $18.9 million, respectively, for the comparable periods in 2022. Government loan originations during the first half of 2023 were mainly related to the aforementioned line of credit utilization in the Virgin Islands region, 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. On the other hand, government loan originations during the first half of 2022 were mainly related to the renewal of a municipal loan in the Puerto Rico region and the utilization of the arranged overdraft line of credit of a government entity in the Virgin Islands region. Originations of auto loans (including finance leases) for the quarter and six-month period ended June 30, 2023 amounted to $250.3 million and $495.4 million, respectively, compared to $269.5 million and $530.8 million, respectively, for the comparable periods in 2022\. The decrease in the second quarter of 2023, as compared to the same quarter of 2022, consisted of a $21.2 million decrease in the Puerto Rico region, partially offset by a $2.0 million increase in the Virgin Islands region. The decrease in the first six months of 2023, as compared to the same period of the previous year, consisted of a $38.7 million decrease in the Puerto Rico region, partially offset by a $3.3 million increase in the Virgin Islands region. Other consumer loan originations, other than credit cards, for the quarter and six-month period ended June 30, 2023 amounted to $77.7 million and $149.6 million, respectively, compared to $87.2 million and $142.8 million, respectively, for the comparable periods in 2022. The utilization activity on the outstanding credit card portfolio for the quarter and six-month period ended June 30, 2023 amounted to $125.9 million and $244.3 million, respectively, compared to $125.6 million and $235.0 million, respectively, for the comparable periods 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 June 30, 2023 amounted to $5.4 billion, a $166.2 million decrease from December 31, 2022 . The decrease was mainly driven by repayments of approximately $200.4 million of U.S. agencies MBS and debentures, partially offset by a $32.4 million increase in fair value attributable to changes in market interest rates. As of June 30, 2023, the Corporation had a net unrealized loss on available-for-sale debt securities of $765.8 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 and it is likely that it will not be required to sell the securities before their anticipated recovery. The Corporation expects the portfolio will continue to decrease and the accumulated other comprehensive loss will decrease accordingly, excluding the impact of market interest rates. As of June 30, 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 June 30, 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 - $2.1 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 June 30, 2023, of which $0.3 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 June 30, 2023, the Corporation’s held-to-maturity debt securities portfolio, before the ACL, decreased to $424.7 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 SEC, 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 June 30, 2023, approximately 74% of the Corporation’s municipal 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, and the higher interest rate environment, the Corporation cannot be certain whether future charges to the ACL on these securities will be required. As of June 30, 2023, the ACL for held-to-maturity debt securities was $8.4 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: ### June 30, 2023 ### December 31, 2022 (In thousands) Money market investments 1,000 2,025 Available-for-sale debt securities, at fair value: U.S. government and agencies obligations 2,515,097 2,492,228 Puerto Rico government obligations 2,111 2,201 MBS: Residential 2,759,697 2,941,458 Commercial 156,464 163,133 Other 500 Total available-for-sale debt securities, at fair value 5,433,369 5,599,520 Held-to-maturity debt securities, at amortized cost: MBS: Residential 155,690 166,739 Commercial 102,912 105,088 Puerto Rico municipal bonds 166,124 165,710 ACL for held-to-maturity Puerto Rico municipal bonds (8,401) (8,286) Total held-to-maturity debt securities 416,325 429,251 Equity securities, including $34.7 million and $42.9 million of FHLB stock as of June 30, 2023 and December 31, 2022, respectively 48,101 55,289 Total money market investments and investment securities 5,898,795 6,086,085 The carrying values of debt securities as of June 30, 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 246,038 0.44 Due after one year through five years 2,247,794 0.84 Due after five years through ten years 10,400 3.16 Due after ten years 10,865 5.38 2,515,097 0.83 Puerto Rico government and municipalities obligations: Due within one year 1,205 5.90 Due after one year through five years 42,736 6.93 Due after five years through ten years 56,160 7.44 Due after ten years 68,134 8.14 168,235 7.59 MBS 3,174,763 1.70 ACL on held-to-maturity debt securities (8,401) Total debt securities 5,849,694 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 June 30, 2023, the Corporation had approximately $1.9 billion in callable debt securities (U.S. agencies debt securities) with an average yield of 0.78%, of which approximately 60% were purchased at a discount and 3% 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, 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 Business Group 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 weekly basis. The Financial Planning and ALM Division is responsible for estimating 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 has 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 $1.0 billion as of June 30, 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 $2.2 billion as of June 30, 2023, compared to $3.1 billion as of December 31, 2022. As of June 30, 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 16.70% 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 21.82% of total assets as of June 30, 2023, compared to 22.48% of total assets as of December 31, 2022. As of June 30, 2023, in addition to the aforementioned $3.2 billion in cash and free high quality liquid assets, the Corporation had $980.9 million available for credit with the FHLB based on the value of loan 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 Borrower-in-Custody (“BIC”) Program as of June 30, 2023 as an additional contingent source of liquidity. Total loans pledged to the FED Discount Window amounted to $2.4 billion as of June 30, 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 June 30, 2023, the Corporation had $5.6 billion of total available liquidity, or 1.17x of uninsured deposits excluding government deposits, to meet liquidity needs, while maintaining a strong capital position. Liquidity at the Bank level is highly dependent on bank deposits, which fund 88.2% of the Bank’s assets (or 86.3% excluding brokered CDs). In addition, as further discussed below, the Corporation maintains 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 CDs through brokers. Funding through wholesale funding may continue to increase the overall cost of funding for the Corporation and impact the net interest margin. 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 June 30, 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: ### June 30, 2023 ### December 31, 2022 (In thousands) Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Construction undisbursed funds 189,458 170,639 Unused credit card lines 955,292 936,231 Unused personal lines of credit 40,346 41,988 Commercial lines of credit 795,820 761,634 Letters of credit: Commercial letters of credit 57,732 68,647 Standby letters of credit 8,267 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 $3.9 billion as of June 30, 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 funding 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 is 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 June 30, 2023, the Corporation’s core deposits, which exclude government deposits and brokered CDs, decreased by $247.0 million to $13.0 billion from $13.3 billion as of December 31, 2022. The decrease was primarily related to saving and checking accounts primarily in the Puerto Rico and Florida regions. 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. 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 continued to reallocate cash into higher yielding alternatives. Further shift may continue to increase the overall cost of funding for the Corporation and impact the net interest margin. For the second quarter of 2023, the average balance per retail core deposit account was $26 thousand. #### Government deposits - As of June 30, 2023, the Corporation had $2.9 billion of Puerto Rico public sector deposits ($2.8 billion in transactional accounts and $140.1 million in time deposits), compared to $2.3 billion as of December 31, 2022. The increase was related to higher balances of interest-bearing transactional accounts. Government deposits are insured by the FDIC up to the applicable limits and the uninsured portions is fully collateralized. Approximately 21% of the public sector deposits as of June 30, 2023 were from municipalities and municipal agencies in Puerto Rico and 79% were from public corporations, the central government and agencies, and U.S. federal government agencies in Puerto Rico. In addition, as of June 30, 2023, the Corporation had $524.5 million of government deposits in the Virgin Islands region (December 31, 2022 - $442.8 million) and $12.1 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 $3.7 billion and $3.1 billion as of June 30, 2023 and December 31, 2022, respectively, and an estimated market value of $3.3 billion and $2.7 billion, respectively. In addition to securities and loans, as of June 30, 2023 and December 31, 2022, the Corporation used $225.0 million and $200.0 million, respectively, in letters of credit issued by the FHLB as pledges for public deposits in the Virgin Islands. #### Estimate of Uninsured Deposits – As of June 30, 2023 and December 31, 2022, the estimated amount of uninsured deposits totaled $8.0 billion and $7.6 billion, respectively, generally representing the portion of deposits that exceed the FDIC insurance limit of $250,000 and amounts in any other uninsured deposit account. The balances presented as of June 30, 2023 and December 31, 2022 include the uninsured portion of fully collateralized government deposits which amounted to $3.3 billion and $2.6 billion, respectively. Excluding fully collateralized deposits, $4.7 billion of these deposits are uninsured, which represent 28.79% of total deposits, excluding brokered CDs, as of June 30, 2023, compared to $4.9 billion, or 30.65% of total deposits, excluding brokered CDs, as of December 31, 2022. The increase is mostly related to government deposits, which are fully collateralized as previously mentioned. 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 June 30, 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 254,158 108,835 225,068 357,972 946,033 Other uninsured time deposits 16,675 10,763 10,277 6,546 44,261 #### Brokered CDs - Total brokered CDs increased by $257.8 million to $363.6 million as of June 30, 2023, compared to $105.8 million as of December 31, 2022. The increase reflects the effect of new issuances amounting to $475.6 million with an all-in cost of 4.97%, partially offset by approximately $217.8 million of maturing brokered CDs, with an all-in cost of 4.92%, that were paid off during the first six months of 2023. The average remaining term to maturity of the brokered CDs outstanding as of June 30, 2023 was approximately 1 year. The increased use of brokered CDs was primar ily related to short-term funding in our Florida region, The future use of brokered CDs will depend on multiple factors including excess liquidity at each of the regions, future cash needs and any tax implications. 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 and six-month periods ended June 30, 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 $73.9 million as of June 30, 2023, compared to $75.1 million as of December 31, 2022. 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 June 30, 2023, the outstanding balance of fixed-rate FHLB advances was $500.0 million, compared to $675.0 million as of December 31, 2022. During the six-month period ended June 30, 2023, the Corporation added $300.0 million of long- term FHLB advances at an average cost of 4.59%, and repaid its short-term FHLB advances. Of the $500.0 million in FHLB advances as of June 30, 2023, $400.0 million were pledged with investment securities and $100.0 million were pledged with mortgage loans. As of June 30, 2023, the Corporation had $980.9 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. 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. During the second quarter of 2023, the Corporation completed the repurchase of $21.4 million of TRuPs of the FBP Statutory Trust I as part of a privately -negotiated transaction, resulting in a commensurate reduction in the related floating rate junior subordinated debentures. The purchase price equated to 92.5% of the $21.5 million par value of the TRuPs. The 7.5% discount resulted in a gain of approximately $1.6 million, which is reflected in the consolidated statements of income as “Gain on early extinguishment of debt.” As of June 30, 2023 and December 31, 2022, the Corporation had junior subordinated debentures outstanding in the aggregate amount of $161.7 million and $183.8 million, respectively, with maturity dates ranging from June 17, 2034 through September 20, 2034. As of June 30, 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 Variable 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 six months of 2023, loans pooled into GNMA MBS amounted to approximately $66.4 million. Also, during the first six months of 2023, the Corporation sold approximately $22.8 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 June 30, 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 BIC Program, such as FirstBank, 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 BTFP during the first quarter of 2023 to further diversify its contingency funding sources and has approximately $2.2 million available for funding as of June 30, 2023. #### 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 $1.0 billion as of June 30, 2023, an increase of $567.0 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 six months 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 six months of 2023 and 2022, net cash provided by operating activities was $166.5 million and $219.6 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 and repayments 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 six-month period ended June 30, 2023, net cash provided by investing activities was $25.0 million, primarily due to repayments of available -for-sale and held-to-maturity debt securities and proceeds from sales of repossessed assets, partially offset by net disbursements on loans held for investment. For the six-month period ended June 30, 2022, net cash used in investing activities was $557.7 million, primarily due to purchases of U.S. agencies debentures and MBS, and net disbursements on loans held for investment, partially offset by repayments of U.S. agencies 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 six-month period ended June 30, 2023, net cash provided by financing activities was $375.5 million, mainly reflecting a $675.9 million net increase in deposits, partially offset by a $196.0 million net decrease in borrowings and $104.4 million of capital returned to stockholders. For the first six months of 2022, net cash used in financing activities was $941.5 million, mainly reflecting a net decrease in deposits, the repayment at maturity of a $100 million repurchase agreement, and $196.0 million of capital returned to stockholders. ### Capital As of June 30, 2023, the Corporation’s stockholders’ equity was $1.4 billion, an increase of $72.5 million from December 31, 2022. The growth was driven by the earnings generated in the first half of 2023 and the $32.4 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, partially offset by common stock dividends declared in the first half of 2023 totaling $50.7 million or $0.28 per common share, the repurchase of 3.6 million shares of common stock for a total purchase price of approximately $50.0 million, 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” during the first quarter of 2023. See Note 1 – Basis of Presentation and Significant Accounting Policies for additional information related to the adoption of ASU 2022-02. On July 24, 2023, the Corporation’s Board declared a quarterly cash dividend of $0.14 per common share payable on September 8, 2023 to shareholders of record at the close of business on August 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 July 24, 2023, the Corporation announced that its Board of Directors approved a new stock repurchase program, under which the Corporation may repurchase up to $225 million of its outstanding common stock, which it expects to execute through the end of the third quarter of 2024. The Corporation expects to repurchase approximately $150 million in common stock during the second half of 2023, of which $75 million relates to the remaining amount of the $350 million stock repurchase program announced on April 27, 2022 that was resumed in July 2023. The Corporation expects to fully utilize this remaining authorization during the third quarter of 2023. From July 1, 2023 through August 1, 2023, the Corporation repurchased approximately 1.5 million shares of common stock for a total purchase price of $19.5 million. Repurchases under the programs may be executed through open market purchases, accelerated share repurchases, and/or privately negotiated transactions or plans, including under plans complying with Rule 10b5-1 under the Exchange Act. The Corporation’s stock repurchase program s are 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. The Corporation’s stock repurchase programs do not obligate it to acquire any specific number of shares and do not have an expiration date. The stock repurchase programs may be modified, suspended, or terminated at any time at the Corporation’s discretion. 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 June 30, 2023 and December 31, 2022, respectively: ### June 30, 2023 ### December 31, 2022 (In thousands, except ratios and per share information) Total equity - GAAP 1,397,999 1,325,540 Goodwill (38,611) (38,611) Purchased credit card relationship intangible (17) (205) Core deposit intangible (17,075) (20,900) Insurance customer relationship intangible (13) ### Tangible common equity - non-GAAP ### 1,342,296 ### 1,265,811 Total assets - GAAP 19,152,455 18,634,484 Goodwill (38,611) (38,611) Purchased credit card relationship intangible (17) (205) Core deposit intangible (17,075) (20,900) Insurance customer relationship intangible (13) ### Tangible assets - non-GAAP ### 19,096,752 ### 18,574,755 ### Common shares outstanding ### 179,757 ### 182,709 ### Tangible common equity ratio - non-GAAP ### 7.03% ### 6.81% ### Tangible book value per common share - non-GAAP ### 7.47 ### 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 June 30, 2023 and December 31, 2022, respectively. The Puerto Rico Banking Law of 1933, as amended (the “Puerto Rico Banking Law”) 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 June 30, 2023 and December 31, 2022, respectively. There were no transfers to the legal surplus reserve during the first half 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. The rate scenarios considered in these simulations reflect gradual upward or downward interest rate movements in the yield curve, for gradual (ramp) parallel shifts in the yield curve of 200 basis points (“bps”) during a twelve-month period, or immediate upward or downward changes in interest rate movements of 200 bps, for interest rate shock scenarios. 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 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 June 30, 2023, the Corporation forecasted the 12-month net interest income assuming June 30, 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 SOFR curve for June 30, 2023, as compared to December 31, 2022, reflects an increase of 60 bps on average in the short-term sector of the curve, or between one to twelve months; 37 bps in the medium-term sector of the curve, or between 2 to 5 years; and 5 bps in the long-term sector of the curve, or over 5-year maturities. A similar increase in market rates changes was observed in the Treasury (CMT) yield curve with an increase of 88 bps in the short-term sector, 29 bps in the medium-term sector, and 6 bps in the long-term sector. The following table presents the results of the simulations as of June 30, 2023 and December 31, 2022. Consistent with prior years, these exclude non-cash changes in the fair value of derivatives: ### Net Interest Income Risk ### (% Change Projected for the next 12 months) ### Static Simulation ### Growing Balance Sheet ### June 30, 2023 ### December 31, 2022 ### June 30, 2023 ### December 31, 2022 Gradual Change in Interest Rates: \+ 200 bps ramp 0.94 0.96 1.01 1.37 \- 200 bps ramp -1.38 -1.61 -1.42 -2.03 Immediate Change in Interest Rates: \+ 200 bps shock 3.76 2.35 3.18 2.56 \- 200 bps shock -5.43 -4.71 -4.77 -5.02 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 June 30, 2023 and December 31, 2022, the simulations showed that the Corporation continues to have a slight asset-sensitive position. As of June 30, 2023, the net interest income for the next twelve months under a non-static balance sheet scenario is estimated to increase by 1.01% in the rising rate scenario, when compared against the base simulation. When compared with December 31, 2022, the net interest income sensitivity for the +200 bps ramp scenario decreased by 36 bps. The reduction in sensitivity was mainly driven by the migration from non-interest-bearing and other low-cost deposits to higher cost deposits, such as time deposits, as well as increases in government deposits which have a higher beta, partially offsetting the growth in the loan portfolio at higher yields, the repricing of variable rate loans and overall higher yields in other interest earning assets such as cash balances held at the FED. Under a falling rate scenario, as of June 30, 2023, the net interest income on the non-static balance sheet scenario is estimated to decrease by 1.42%, when compared against the base simulation. When compared to December 31, 2022. the net interest income sensitivity decreases for the -200-bps ramp scenario by approximately 61 bps in the non-static balance sheet driven by a higher deposit beta assumed in the June 30, 2023 simulation for non-maturity deposits, and the aforementioned migration to higher cost deposits. As discussed above, the Corporation evaluates other scenarios such as immediate upward or downward changes in interest rate movements of 200 bps, for interest rate shock scenarios. As of June 30, 2023 and December 31, 2022, the simulations showed that the Corporation continues to have an asset-sensitive position. ### 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 applies probability weights to the baseline and alternative downside economic scenarios to estimate the ACL with the baseline scenario carrying the highest weight. During the second quarter of 2023, the Corporation applied the baseline scenario for the commercial mortgage and construction loan portfolios as deterioration in the CRE price index in these portfolios is expected at a lower extent than projected in the alternative downside scenario, particularly in the Puerto Rico region. The economic scenarios used in the ACL determination contained assumptions related to economic uncertainties associated with geopolitical instability, the CRE price index, high inflation levels, and the expected path of interest rate increases by the FED. As of June 30, 2023, the Corporation’s ACL model considered the following assumptions for key economic variables in the probability-weighted economic scenarios: Average CRE price index at the national level is forecasted to contract by 4.08% for the remainder of 2023 and 6.24% for 2024. Average Regiona l Home Price Index forecasts in Puerto Rico (purchase only prices) shows a growth of 8.58% and 6.36%, for the remainder of 2023 and 2024, respectively, when compared to the previous quarter forecast. For the Florida region, average Home Price Index forecasts shows a growth of 3.74% and 2.24% for the remainder of 2023 and 2024, respectively, when compared to the previous quarter forecast. Average regional unemployment in Puerto Rico of 6.84% for the remainder of 2023 and 8.12% for 2024. For the Florida region and the U.S. mainland, average unemployment rate of 3.60% and 4.13%, respectively, for the remainder of 2023, and 4.37% and 4.79%, respectively, for 2024. Average annualized change in real gross domestic product (“GDP”) in the U.S. mainland of 1.07% for the remainder of 2023 and 1.18% 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 June 30, 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 7.64% for the remainder of 2023, compared to 6.84% 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 June 30, 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 hypothetical increase in the ACL of approximately $53 million at June 30, 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 period ended June 30, 2023. As of June 30, 2023, the ACL for loans and finance leases was $267.1 million, an increase of $6.6 million, from $260.5 million as of December 31, 2022. The ACL for commercial and construction loans increased by $5.0 million, mainly due to a deterioration in the forecasted CRE price index to account for an increased uncertainty in the CRE market at a national level that could potentially impact the markets served by the Corporation coupled with the growth in the commercial and construction loan portfolios. The ACL for consumer loans increased by $3.9 million, primarily reflecting the effect of the increase in the size of the consumer loan portfolios and historical charge-off levels, partially offset by updated macroeconomic variables, such as the unemployment rate, which are now forecasted to deteriorate at a slower pace than previously expected. The ACL for residential mortgage loans decreased by $2.3 million, mainly driven by a more favorable economic outlook in the projection of certain forecasted macroeconomic variables, such as the Regional Home Price Index, partially offset by 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. See Note 1 - Basis of Presentation and Significant Accounting Policies to the unaudited consolidated financial statements herein for additional information related to the adoption of ASU 2022-02 during 2023. The ratio of the ACL for loans and finance leases to total loans held for investment increased to 2.28% as of June 30, 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 decreased from 2.20% as of December 31, 2022 to 2.17% as of June 30, 2023, primarily reflecting a more favorable economic outlook in the projection of certain forecasted macroeconomic variables, such as the Regional Home Price Index, partially offset by 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 2.93% as of June 30, 2023 mainly due to the aforementioned deterioration in the forecasted CRE price index. The ACL to total loans ratio for the commercial mortgage portfolio increased from 1.49% as of December 31, 2022 to 1.83% as of June 30, 2023 mainly due to the aforementioned deterioration in the forecasted CRE price index. The ACL to total loans ratio for the commercial and industrial portfolio decreased from 1.14% as of December 31, 2022 to 0.95% as of June 30, 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 higher exposure risk associated with the rising interest rate environment. The ACL to total loans ratio for the consumer loan portfolio decreased from 3.83% as of December 31, 2022 to 3.76% as of June 30, 2023 mainly due to updates in macroeconomic variables, such as the unemployment rate. The ratio of the total ACL for loans and finance leases to nonaccrual loans held for investment was 325.60% as of June 30, 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 $267.1 million as of June 30, 2023, or 2.28% 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 June 30, ### Six-Month Period Ended June 30, ### 2023 ### 2022 ### 2023 ### 2022 (Dollars in thousands) ACL for loans and finance leases, beginning of year 265,567 245,447 260,464 269,030 Impact of adoption of ASU 2022-02 2,116 Provision for credit losses - (benefit) expense: Residential mortgage (3,500) (2,797) (3,427) (7,668) Construction 1,202 151 2,062 (2,063) Commercial mortgage 5,999 1,265 7,245 (21,375) Commercial and industrial 2,997 (1,102) 1,347 653 Consumer and finance leases 14,072 15,148 29,799 26,129 Total provision for credit losses - expense (benefit) 20,770 12,665 37,026 (4,324) Charge-offs: Residential mortgage (1,146) (2,079) (2,129) (4,607) Construction (38) (16) (38) (60) Commercial mortgage (88) (2) (106) (39) Commercial and industrial (6,350) (68) (6,468) (358) Consumer and finance leases (16,462) (10,427) (33,260) (20,243) Total charge offs (24,084) (12,592) (42,001) (25,307) Recoveries: Residential mortgage 757 1,287 1,254 2,669 Construction 409 43 472 95 Commercial mortgage 56 1,218 224 1,262 Commercial and industrial 132 589 222 1,624 Consumer and finance leases 3,451 3,495 7,281 7,103 Total recoveries 4,805 6,632 9,453 12,753 Net charge-offs (19,279) (5,960) (32,548) (12,554) ACL for loans and finance leases, end of period 267,058 252,152 267,058 252,152 ACL for loans and finance leases to period-end total loans held for investment 2.28% 2.25% 2.28% 2.25% Net charge-offs (annualized) to average loans outstanding during the period 0.67% 0.21% 0.56% 0.23% Provision for credit losses - expense (benefit) for loans and finance leases to net charge- offs during the period 1.08x 2.13x 1.14x -0.34x 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 June 30, 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 2,793,790 163,998 2,320,069 2,946,201 3,495,257 11,719,315 Percent of loans in each category to total loans 24 1 20 25 30 100 Allowance for credit losses 60,514 4,804 42,427 28,014 131,299 267,058 Allowance for credit losses to amortized cost 2.17 2.93 1.83 0.95 3.76 2.28 ### 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 June 30, 2023, the ACL for off-balance sheet credit exposures increased by $0.6 million to $4.9 million, when compared to December 31, 2022, driven by the deterioration in the forecasted CRE price index and its effect in construction unfunded loan commitments. #### Allowance for Credit Losses for Held-to-Maturity Debt Securities As of June 30, 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 June 30, 2023, the ACL for held-to-maturity debt securities was $8.4 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 June 30, 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 consists 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 proc ess 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 in 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: ### June 30, 2023 ### December 31, 2022 (Dollars in thousands) Nonaccrual loans held for investment: Residential mortgage 33,252 42,772 Construction 1,677 2,208 Commercial mortgage 21,536 22,319 Commercial and Industrial 9,194 7,830 Consumer and finance leases 16,362 14,806 Total nonaccrual loans held for investment 82,021 89,935 OREO 31,571 31,641 Other repossessed property 5,404 5,380 Other assets (1) 2,111 2,202 Total non-performing assets 121,107 129,158 Past due loans 90 days and still accruing (2) (3) (4) 63,211 80,517 Non-performing assets to total assets 0.63 0.69 Nonaccrual loans held for investment to total loans held for investment 0.70 0.78 ACL for loans and finance leases 267,058 260,464 ACL for loans and finance leases to total nonaccrual loans held for investment 325.60 289.61 ACL for loans and finance leases to total nonaccrual loans held for investment, excluding residential real estate loans 547.60 552.26 (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 $9.5 million and $12.0 million as of June 30, 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 $19.9 million and $28.2 million of FHA government guaranteed residential mortgage loans that were over 15 months delinquent as of June 30, 2023 and December 31, 2022, respectively. (4) Includes rebooked loans, which were previously pooled into GNMA securities, amounting to $6.5 million and $10.3 million as of June 30, 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 $82.0 million as of June 30, 2023. This represents a net decrease of $7.9 million from $89.9 million as of December 31, 2022. The net decrease was primarily related to a $9.5 million reduction in nonaccrua l residential mortgage loans, partially offset by increases of $1.5 million and $0.1 million in nonaccrual consumer loans and nonaccrual commercial and construction loans, respectively. The following table shows non-performing assets by geographic segment as of the indicated dates: ### June 30, 2023 ### December 31, 2022 (In thousands) ### Puerto Rico: Nonaccrual loans held for investment: Residential mortgage 20,047 28,857 Construction 703 831 Commercial mortgage 13,337 14,341 Commercial and Industrial 5,808 5,859 Consumer and finance leases 15,874 14,142 Total nonaccrual loans held for investment 55,769 64,030 OREO 27,107 28,135 Other repossessed property 5,226 5,275 Other assets 2,111 2,202 Total non-performing assets 90,213 99,642 Past due loans 90 days and still accruing 60,964 76,417 ### Virgin Islands: Nonaccrual loans held for investment: Residential mortgage 5,767 6,614 Construction 974 1,377 Commercial mortgage 8,199 7,978 Commercial and Industrial 1,119 1,179 Consumer 379 469 Total nonaccrual loans held for investment 16,438 17,617 OREO 4,464 3,475 Other repossessed property 168 76 Total non-performing assets 21,070 21,168 Past due loans 90 days and still accruing 2,108 4,100 ### United States: Nonaccrual loans held for investment: Residential mortgage 7,438 7,301 Commercial and Industrial 2,267 792 Consumer 109 195 Total nonaccrual loans held for investment 9,814 8,288 OREO 31 Other repossessed property 10 29 Total non-performing assets 9,824 8,348 Past due loans 90 days and still accruing 139 Nonaccrual commercial and industrial loans increased by $1.4 million to $9.2 million as of June 30, 2023, from $7.8 million as of December 31, 2022. Nonaccrual commercial mortgage loans decreased by $0.8 million to $21.5 million as of June 30, 2023, from $22.3 million as of December 31, 2022. Nonaccrual construction loans decreased by $0.5 million to $1.7 million as of June 30, 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 June 30, 2023 Beginning balance 1,794 21,598 13,404 36,796 Plus: Additions to nonaccrual 439 2,691 3,130 Less: Loans returned to accrual status (374) (374) Nonaccrual loans transferred to OREO (61) (61) Nonaccrual loans charge-offs (88) (6,350) (6,438) Loan collections (117) (352) (177) (646) Ending balance 1,677 21,536 9,194 32,407 ### Construction ### Commercial ### Mortgage ### Commercial & ### Industrial ### Total (In thousands) ### Six-Month Period Ended June 30, 2023 Beginning balance 2,208 22,319 7,830 32,357 Plus: Additions to nonaccrual 127 983 10,161 11,271 Less: Loans returned to accrual status (361) (526) (887) Nonaccrual loans transferred to OREO (332) (223) (183) (738) Nonaccrual loans charge-offs (106) (6,468) (6,574) Loan collections (326) (1,082) (1,620) (3,028) Reclassification 6 6 Ending balance 1,677 21,536 9,194 32,407 ### Construction ### Commercial ### Mortgage ### Commercial & ### Industrial ### Total (In thousands) ### Quarter Ended June 30, 2022 Beginning balance 2,543 26,576 18,129 47,248 Plus: Additions to nonaccrual 18 53 579 650 Less: Loans returned to accrual status (48) (157) (255) (460) Nonaccrual loans transferred to OREO (67) (88) (273) (428) Nonaccrual loans charge-offs (16) (2) (37) (55) Loan collections (55) (1,629) (1,064) (2,748) Ending balance 2,375 24,753 17,079 44,207 ### Construction ### Commercial ### Mortgage ### Commercial & ### Industrial ### Total (In thousands) ### Six-Month Period Ended June 30, 2022 Beginning balance 2,664 25,337 17,135 45,136 Plus: Additions to nonaccrual 18 2,934 2,158 5,110 Less: Loans returned to accrual status (48) (358) (464) (870) Nonaccrual loans transferred to OREO (80) (549) (273) (902) Nonaccrual loans charge-offs (56) (39) (327) (422) Loan collections (123) (2,170) (1,552) (3,845) Reclassification (402) 402 Ending balance 2,375 24,753 17,079 44,207 Nonaccrual residential mortgage loans decreased by $9.5 million to $33.3 million as of June 30, 2023, compared to $42.8 million as of December 31, 2022. The decrease was primarily related to $ 6.6 million of loans restored to accrual status, $4.3 million of loans transferred to OREO, and $3.1 million in collections, partially offset by inflows of $5.1 million. The following table presents the activity of residential nonaccrual loans held for investment for the indicated periods: ### Quarter Ended June 30, ### Six-Month Period Ended June 30, ### 2023 ### 2022 ### 2023 ### 2022 (In thousands) Beginning balance 36,410 48,818 42,772 55,127 Plus: Additions to nonaccrual 3,009 4,403 5,090 9,731 Less: Loans returned to accrual status (2,714) (5,332) (6,651) (8,781) Nonaccrual loans transferred to OREO (1,549) (1,185) (4,259) (2,122) Nonaccrual loans charge-offs (401) (515) (621) (950) Loan collections (1,503) (1,601) (3,073) (8,417) Reclassification (6) Ending balance 33,252 44,588 33,252 44,588 The amount of nonaccrual consumer loans, including finance leases, increased by $1.5 million to $16.3 million as of June 30, 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 June 30, 2023, approximately $18.5 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 six-month period ended June 30, 2023, interest income of approximately $0.2 million related to nonaccrual loans with a carrying value of $24.1 million as of June 30, 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 $118.5 million as of June 30, 2023, an increase of $13.6 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 increased by $7.5 million to $78.4 million, mainly in the auto loans portfolio. Commercial and construction loans in early delinquency increased by $3.4 million to $9.2 million, mainly due to a $4.5 million commercial mortgage loan in the Puerto Rico region that matured and is in the process of renewal but for which the Corporation continues to receive interest and principal payments from the borrower. Residential mortgage loans in early delinquency increased by $2.7 million to $30.9 million. 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, amounted to $31.6 million as of each of June 30, 2023 and December 31, 2022. The following tables show the composition of the OREO portfolio as of June 30, 2023 and December 31, 2022, as well as the activity of the OREO portfolio by geographic area during the six-month period ended June 30, 2023: ### OREO Composition by Region ### As of June 30, 2023 (In thousands) ### Puerto Rico ### Virgin Islands ### Florida ### Consolidated Residential 22,026 1,595 23,621 Construction 1,833 59 1,892 Commercial 3,248 2,810 6,058 27,107 4,464 31,571 ### 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 ### Six-Month Period Ended June 30, 2023 (In thousands) ### Puerto Rico ### Virgin Islands ### Florida ### Consolidated Beginning Balance 28,135 3,475 31 31,641 Additions 9,442 1,295 10,737 Sales (9,820) (306) (31) (10,157) Write-downs and other adjustments (650) (650) Ending Balance 27,107 4,464 31,571 #### Net Charge-offs and Total Credit Losses Net charge-offs totaled $19.3 million for the second quarter of 2023, or 0.67% of average loans on an annualized basis, compared to $6.0 million, or an annualized 0.21% of average loans, for the second quarter of 2022. For the six-month period ended June 30, 2023, net charge-offs totaled $32.5 million, or an annualized 0.56% of average loans, compared to $12.6 million, or an annualized 0.23% of average loans, for the same period in 2022. Consumer loans and finance leases net charge-offs for the second quarter of 2023 were $13.0 million, or an annualized 1.51% of related average loans, compared to $6.9 million, or an annualized 0.91% of related average loans, for the second quarter of 2022. Net charge-offs of consumer loans and finance leases for the six-month period ended June 30, 2023 were $26.0 million, or 1.53% of related average loans, compared to $13.2 million, or an annualized 0.88% of related average loans, for the same period in 2022. Commercial and industrial loans net charge-offs for the second quarter of 2023 were $6.2 million, or an annualized 0.87% of related average loans, compared to net recoveries of $0.5 million, or an annualized 0.07% of related average loans, for the second quarter of 2022. Commercial and industrial loans net charge-offs for the six-month period ended June 30, 2023 were $6.2 million, or 0.44% of related average loans, compared to net recoveries of $1.3 million, or an annualized 0.09% of related average loans, for the same period in 2022. The net charge-offs for the second quarter and first six months of 2023 included a $6.2 million charge-off recorded on a commercial and industrial participated loan in the Florida region in the power generation industry. Residential mortgage loans net charge-offs for the second quarter of 2023 were $0.5 million, or an annualized 0.06% of related average loans, compared to $0.8 million, or an annualized 0.11% of related average loans, for the second quarter of 2022. Residential mortgage loans net charge-offs for the six-month period ended June 30, 2023 were $0.8 million, or an annualized 0.06% of related average loans, compared to $1.9 million, or an annualized 0.13% of related average loans, for the same period of 2022. Approximately $0.3 million of charge-offs for the second quarter of 2023 and $0.5 million for the first six months of 2023 resulted from valuations of collateral dependent residential mortgage loans, compared to $0.5 million and $0.9 million for the comparable periods in 2022. Charge-offs on residential mortgage loans also included $0.3 million and $0.8 million related to foreclosures recorded in the second quarter and first six months of 2023, respectively, compared to $0.5 million and $1.8 million, recorded for the comparable periods in 2022, respectively. Commercial mortgage loans net charge-offs for the second quarter of 2023 were $32 thousand, or an annualized 0.01% of related average loans, compared to net recoveries of $1.2 million, or an annualized 0.22% of related average loans, for the second quarter of 2022\. Commercial mortgage loans net recoveries for the six-month period ended June 30, 2023 were $0.1 million, or an annualized 0.01% of related average loans, compared to $1.2 million, or an annualized 0.11% or related average loans, for the same period in 2022. Construction loans net recoveries for the second quarter of 2023 were $0.4 million, or an annualized 0.99% of related average loans, compared to $27 thousand, or an annualized 0.09% of related average loans, for the same period in 2022. Construction loans net recoveries for the six-month period ended June 30, 2023 were $0.4 million, or an annualized 0.59% of related average loans, compared to $35 thousand, or an annualized 0.06% of related average loans, for the same period in 2022. The following table presents annualized net charge-offs (recoveries) to average loans held-in-portfolio for the indicated periods: ### Quarter Ended June 30, ### Six-Month Period Ended June 30, ### 2023 ### 2022 ### 2023 ### 2022 Residential mortgage 0.06 0.11 0.06 0.13 Construction (0.99) (0.09) (0.59) (0.06) Commercial mortgage 0.01 (0.22) (0.01) (0.11) Commercial and industrial 0.87 (0.07) 0.44 (0.09) Consumer and finance leases 1.51 0.91 1.53 0.88 Total loans 0.67 0.21 0.56 0.23 The following table presents annualized net charge-offs (recoveries) to average loans held in various portfolios by geographic segment for the indicated periods: ### Quarter Ended June 30, ### Six-Month Period Ended June 30, ### 2023 ### 2022 ### 2023 ### 2022 ### PUERTO RICO: Residential mortgage 0.08 0.13 0.09 0.16 Construction (3.04) (0.14) (1.86) (0.03) Commercial mortgage 0.02 (0.16) 0.01 (0.08) Commercial and industrial 0.01 (0.12) 0.01 (0.14) Consumer and finance leases 1.51 0.93 1.47 0.88 Total loans 0.56 0.30 0.57 0.29 ### VIRGIN ISLANDS: Residential mortgage (0.02) 0.16 (0.05) 0.13 Construction 3.93 1.93 Commercial mortgage (0.23) (0.22) (0.22) (0.22) Commercial and industrial (0.01) (0.01) Consumer and finance leases 2.02 0.59 2.10 1.18 Total loans 0.34 0.12 0.31 0.19 ### FLORIDA: Residential mortgage (0.04) (0.05) (0.02) (0.03) Construction (0.06) (0.06) (0.05) (0.08) Commercial mortgage (0.40) (0.04) (0.21) Commercial and industrial 2.67 1.31 Consumer and finance leases (1.16) (2.32) (0.45) (0.43) Total loans 1.23 (0.13) 0.60 (0.06) 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 half of 2023 amounted to $28.6 million, or a loss rate of 0.25% on an annualized basis of average loans and repossessed assets, compared to losses of $10.3 million, or a loss rate of 0.19% on an annualized basis, for the first half of 2022. The following table presents information about the OREO inventory and credit losses for the indicated periods: ### Quarter ended June 30, ### Six-Month Period Ended June 30, ### 2023 ### 2022 ### 2023 ### 2022 (Dollars in thousands) ### OREO OREO balances, carrying value: Residential 23,621 31,780 23,621 31,780 Construction 1,892 2,657 1,892 2,657 Commercial 6,058 7,269 6,058 7,269 Total 31,571 41,706 31,571 41,706 OREO activity (number of properties): Beginning property inventory 344 442 344 418 Properties acquired 44 41 103 109 Properties disposed (68) (52) (127) (96) Ending property inventory 320 431 320 431 Average holding period (in days) Residential 524 658 524 658 Construction 2,178 2,162 2,178 2,162 Commercial 2,580 2,041 2,580 2,041 Total average holding period (in days) 1,018 995 1,018 995 OREO operations gain (loss): Market adjustments and gains (losses) on sale: Residential 2,553 1,988 5,043 2,980 Construction 7 11 47 114 Commercial (62) (67) (79) Total net gain 2,560 1,937 5,023 3,015 Other OREO operations expenses (576) (452) (1,043) (810) ### Net Gain on OREO operations 1,984 1,485 3,980 2,205 ### (CHARGE-OFFS) RECOVERIES Residential charge-offs, net (389) (792) (875) (1,938) Construction recoveries, net 371 27 434 35 Commercial (charge-offs) recoveries, net (6,250) 1,737 (6,128) 2,489 Consumer and finance leases charge-offs, net (13,011) (6,932) (25,979) (13,140) Total charge-offs, net (19,279) (5,960) (32,548) (12,554) ### TOTAL CREDIT LOSSES (1) (17,295) (4,475) (28,568) (10,349) ### (GAIN) LOSS RATIO PER CATEGORY (2) Residential (0.31) (0.16) (0.15) (0.07) Construction (1.00) (0.12) (0.32) (0.24) Commercial 0.48 (0.13) 0.12 (0.09) Consumer 1.51 0.91 0.76 0.88 ### TOTAL CREDIT LOSS RATIO (3) 0.60 0.16 0.25 0.19 (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 $11.7 billion as of June 30, 2023, the Corporation had credit risk of approximately 79% in the Puerto Rico region, 17% in the United States region, and 4% 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 June 15, 2023, the Puerto Rico Planning Board (“PRPB”) presented the updated Economic Report to the Governor, which provides an analysis of Puerto Rico’s economy during fiscal year 2022 and a short-term forecast for fiscal years 2023 and 2024. According to the PRPB, Puerto Rico’s real gross national product (“GNP”) expanded by 3.7% in fiscal year 2022, which was the highest annual real GNP growth registered in Puerto Rico since fiscal year 1999. The growth was primarily driven by a sharp increase in personal consumption expenditures reflecting an increase of approximately 8.5% when compared to fiscal year 2021, increase in net exports of 4.8%, and growth in fixed capital investments of 12.6%. 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 May 2023, preliminary estimates showed that the EDB-EAI increased 0.8% on a month-over-month basis and 1.8% higher than May 2022. Over the 12-month period ended May 31, 2023, the EDB-EAI averaged 124.8, approximately 0.2% above the comparable figure a year earlier. Labor market trends remain positive. Data published by the Bureau of Labor Statistics show June 2023 payroll employment in Puerto Rico increased by 2.4% when compared to June 2022, supported by a year-over-year increase of 8.6% in #### Leisure and #### Hospitality payroll employment and a 12.0% year-over-year increase in #### Construction -related payroll employment The unemployment rate stood at 6.1% as of June 2023. #### 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 pos t-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 to properly delivery 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 power/energy sector reform to improve availability, reliability and affordability of energy, 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 facilitating 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 COVID-19 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 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 Puerto Rico’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 Puerto Rico’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”). On June 23, 2023, the Fiscal Oversight and Management Board for Puerto Rico certified a new fiscal plan for PREPA which included the most recent projections of energy consumption in Puerto Rico and consequently reflected a significant reduction in the projected revenues for PREPA over the next years. As such, PREPA concluded that its ability to repay its outstanding debt was significantly less than what was previously stated. On June 26, 2023, Judge Laura Taylor Swain resolved that PREPA’s bondholders have an unsecured claim of $2.4 billion against PREPA and not the approximately $9.0 billion that bondholders were claiming. This decision could result in a 75% haircut on PREPA’s outstanding debt and may reduce the ability of bondholders to impose higher electricity rates to consumers to pay for debt service. #### 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, particularly in the aftermath of Hurricane Maria in 2017. During the first five months of 2023, over $1.8 billion in disaster relief funds have been disbursed through FEMA Public Assistance program and the Department of Housing and Urban Development’s “Community Development Block Grant” program, a 117% increase when compared to the same period in 2022, and the Fiscal Oversight and Management Board for Puerto Rico is currently projecting over $5 billion in total disbursements to take place during 2023. These funds will continue to play a key role in supporting Puerto Rico’s economic stability and are expected to have a positive impact on the Island’s infrastructure. On June 21, 2023, Fitch Ratings issued a credit rating research note highlighting the government’s commitment to improving its continuing disclosure practices and the release of the 2021 audited financial statements. The government has made great strides in recent years with regards to its financial transparency and its on target to release its audited financial statements on time and in line with regulatory expectations. ### Exposure to Puerto Rico Government As of June 30, 2023, the Corporation had $344.3 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 June 30, 2023, approximately $186.2 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 $113.2 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 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 $9.5 million in loans to an affiliate of PREPA, $32.1 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 $2.1 million as of June 30, 2023). The following table details the Corporation’s total direct exposure to Puerto Rico government obligations according to their maturities: ### As of June 30, 2023 ### Investment ### Portfolio ### (Amortized ### cost) ### Loans ### Total ### Exposure (In thousands) Puerto Rico Housing Finance Authority: After 10 years 3,254 3,254 ### Total Puerto Rico Housing Finance Authority 3,254 3,254 Agencies and public corporation of the Puerto Rico government: After 1 to 5 years 6,160 6,160 After 5 to 10 years 25,979 25,979 Total agencies and public corporation of the Puerto Rico government 32,139 32,139 Affiliate of the Puerto Rico Electric Power Authority: Due within one year 9,519 9,519 Total Puerto Rico government affiliate 9,519 9,519 ### Total Puerto Rico public corporations and government affiliate 41,658 41,658 Municipalities: Due within one year 1,205 10,600 11,805 After 1 to 5 years 42,736 55,909 98,645 After 5 to 10 years 56,160 66,717 122,877 After 10 years 66,023 66,023 ### Total Municipalities 166,124 133,226 299,350 ### Total Direct Government Exposure ### 169,378 ### 174,884 ### 344,262 In addition, as of June 30, 2023, the Corporation had $81.1 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 June 30, 2023, the Corporation had $2.9 billion of public sector deposits in Puerto Rico, compared to $2.3 billion as of December 31, 2022. Approximately 21% of the public sector deposits as of June 30, 2023 were from municipalities and municipal agencies in Puerto Rico and 79% 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 several fiscal and economic challenges that have deteriorated the overall financial and economic conditions in the area. However, on May 22, 2023, the United States Bureau of Economic Analysis (the “BEA”) released its estimates of real gross domestic product (“GDP”) for 2021. According to the BEA, the USVI’s real GDP increased 2.8% in 2021 after decreasing 1.9% in 2020. The increase in real GDP reflected increases in exports and personal consumption expenditures. These increases were partly offset by decreases in private inventory investment, private fixed investment, and government spending. Imports, a subtraction item in the calculation of GDP, also decreased. 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, which occurred in 2017. According to data published by the government, over $4.7 billion in disaster recovery funds were disbursed as of 2023 and $3.4 billion were remaining obligated funds waiting to be disbursed. On the fiscal front, revenues have trended positively and the USVI government successfully completed the restructuring of the government employee retirement system. Moreover, labor market trends are stable with payroll employment for the month of June 2023, up 3.2% when compared to June 2022. Finally, 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 deteriorates again, 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 June 30, 2023, the Corporation had $78.9 million in loans to USVI public corporations, compared to $38.0 million as of December 31, 2022. The increase in loans to USVI public corporations was driven the aforementioned $47.0 million line of credit utilization. As of June 30, 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, 1,438 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 June 30, 2023 the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2023 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 June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. ## Risk factors As filed, 9,810 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, as previously disclosed, 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. 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. As of June 30, 2023, the Corporation has not incurred any material expenses related to the incident and does not expect any future impact. 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, ### liquidity constraints, and new capital requirements. 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. For example, on May 11, 2023, the FDIC issued a proposed rule to recover the losses to the Deposit Insurance Fund (“DIF”) associated with protecting uninsured depositors as part of the aforementioned financial institution failures. Under the proposed rule, the FDIC would collect a special assessment at an annual rate of approximately 12.5 basis points over eight quarterly periods, commencing with the first quarter of 2024. The assessment base for the special assessment would be equal to an insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. Notwithstanding, the special assessment could be subject to change depending on whether there are any shortfalls on amounts collected. If the final rule is issued as proposed, the estimated impact of the special assessment on the Corporation would be an increase in non-interest expense by approximately $6 million that would need to be accrued once the proposed rule is finalized. Filed Aug 8, 2023. Source: SEC EDGAR, the filing index for accession 0001057706-23-000006. Last ingested by Listed: Nov 6, 2026, 13:17 ET. No prices; not investment advice.