# First Bancorp: Form 10-Q for the period ended Jun 30, 2024 - Company: [First Bancorp](/companies/fbp.md) (CIK 1057706) - Form: 10-Q - Filed: 2024-08-09 - Accepted by EDGAR: Aug 8, 2024, 18:09 ET - Period: 2024-06-30 - Accession: 0001057706-24-000009 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1057706/000105770624000009/fbp-20240630.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1057706/000105770624000009/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2024-06-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2024-04-01 to 2024-06-30 | $231.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Revenue | 6 months, 2024-01-01 to 2024-06-30 | $462.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $72.6m | us-gaap:InterestExpense | | Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $144.6m | us-gaap:InterestExpense | | Income tax | 3 months, 2024-04-01 to 2024-06-30 | $25.5m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 6 months, 2024-01-01 to 2024-06-30 | $49.5m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2024-04-01 to 2024-06-30 | $75.8m | us-gaap:NetIncomeLoss | | Net income | 6 months, 2024-01-01 to 2024-06-30 | $149.3m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.46 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | $0.90 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.46 | us-gaap:EarningsPerShareBasic | | Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | $0.90 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 165,543,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 166,670,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | $189.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 6 months, 2024-01-01 to 2024-06-30 | $5.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 6 months, 2024-01-01 to 2024-06-30 | $53.5m | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 6 months, 2024-01-01 to 2024-06-30 | $101.6m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Total assets | at 2024-06-30 | $18.88bn | us-gaap:Assets | | Total liabilities | at 2024-06-30 | $17.39bn | us-gaap:Liabilities | | Shareholders' equity | at 2024-06-30 | $1.49bn | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 189,848 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 fiscal year ended December 31, 2023 (the “2023 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 Update The U.S. economy grew faster than expected for the second quarter of 2024 with a growth in Gross Domestic Product (“GDP”) of 2.8% driven by solid gains in consumer spending and business investment. Inflation continues to show progress towards the Federal Reserve (the “FED”) inflation target of 2%. The Commerce Department’s Bureau of Economic Analysis reported on July 26, 2024 that the Personal Consumption Expenditure (“PCE”) price index for the month of June 2024, edged up just 0.1% from the previous month, putting the year-over-year increase at 2.5%, after a rise of 2.6% in May. The FED voted to leave the federal funds rate unchanged in its July 2024 meeting, but market expectations are for the FED to start cutting rates in the second half of 2024 as the inflation rate seems to be moving steadily towards the FED’s 2% target. As it relates to Puerto Rico, our main operating market, the economy continues to benefit from a high level of federal support for reconstruction activities. The labor market remains strong with unemployment reaching 5.8% for the month of May 2024 and passenger activity through June 2024 up 10% year-to-date when compared to 2023. The Corporation closed the first half of the year with another quarter of solid operating performance across most franchise metrics and remain s highly encouraged by its loan growth prospects throughout the rest of the year. Assuming current interest rates, the net interest margin reached its inflection point in the first quarter of 2024 and, as such, the Corporation expects the net interest margin to continue to increase for the remainder of the year. The Corporation believes it should continue to benefit from sizable repricing opportunities, such as the ability to redeploy cash inflows from repayments into loans or into higher yielding securities, which will fully materialize in the first quarter of 2025, coupled with the expected gradual easing in deposit costs. Moreover, loans continued to grow in the second quarter of 2024 driven by growth across all business segments. Even though asset quality remained stable, the Corporation continues to see early delinquency and charge-off trends within the consumer loans and finance leases portfolio returning to historical levels. #### Return of Capital to Shareholders In the second quarter of 2024, the Corporation returned approximately $76.3 million, or over 100% of second quarter 2024 earnings, to its shareholders through $50.0 million in repurchases of common stock and the payment of $26.3 million in common stock dividends. As of June 30, 2024, the Corporation has remaining authorization to repurchase approximately $50.0 million of common stock. Furthermore, on July 22, 2024, the Corporation announced that its Board of Directors approved a new repurchase program, under which the Corporation may repurchase up to an additional $250 million that could include repurchases of common stock or junior subordinated debentures, which it expects to execute through the end of the fourth quarter of 2025. The repayment of its junior subordinated debentures will represent an immediate earnings per share accretion opportunity and will result in a simplified capital structure. ### 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 2023 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 tax 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 2023 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 The Corporation’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, professional service fees, the FDIC 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 mortgage banking activities, and income taxes. For the quarter and six-month period ended June 30, 2024, the Corporation had net income of $75.8 million ($0.46 per diluted common share) and $149.3 million ($0.90 per diluted common share), respectively, compared to $70.7 million ($0.39 per diluted common share) and $141.4 million ($0.78 per diluted common share), respectively, for the comparable periods in 2023. Other relevant selected financial indicators for the periods presented are included below: ### Quarter Ended June 30, ### Six-Month Period Ended June 30, ### 2024 ### 2023 ### 2024 ### 2023 ### Key Performance Indicator: (1) Return on Average Assets (2) 1.61 1.51 1.59 1.53 Return on Average Common Equity (3) 20.80 19.66 20.17 20.31 Efficiency Ratio (4) 51.23 47.83 51.84 48.60 (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 common stockholders’ equity and is calculated by dividing net income on an annualized basis by its average total common 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, 2024, compared to the second quarter of 2023, include the following: Net interest income for the quarter ended June 30, 2024 remained relatively flat at $199.6 million, compared to $199.8 million for the second quarter of 2023, mainly driven by an increase in interest expense due to higher rates paid on interest- bearing deposits given the higher interest rate environment and change in deposit mix, almost entirely offset by a change in asset mix resulting from the deployment of cash flows from lower-yielding investment securities to fund loan growth as well as the effect of the higher interest rate environment on commercial and consumer loans yields. See “Results of Operations – 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, 2024 was $11.6 million, compared to $22.0 million for the second quarter of 2023. The decrease in the provision expense was driven by a reduction in the provision for the commercial and construction loan portfolio due to an improvement on the economic outlook of certain macroeconomic variables, particularly in variables associated with commercial real estate property performance, and a reduction in the provision for the residential mortgage loan portfolio associated with updated historical loss experience, partially offset by increases in delinquency levels in the consumer loans and finance leases portfolio. Net charge-offs totaled $21.0 million for the quarter ended June 30, 2024, or 0.69% of average loans on an annualized basis, compared to $19.3 million, or an annualized 0.67% of average loans, for the second quarter of 2023. The increase in net charge-offs was mainly due to an increase in consumer loans and finance leases net charge-offs, partially offset by the effect during the second quarter of 2023 of a $6.2 million charge-off recorded on a C&I participated loan in the Florida region in the power generation industry. See “Results of Operations – Provision for Credit Losses” and “Risk Management” below for analyses of the ACL and non-performing assets and related ratios. The Corporation recorded non-interest income of $32.0 million for the quarter ended June 30, 2024, compared to $36.3 million for the second quarter of 2023. Non-interest income for the second quarter of 2023 included the following Special Items: a $3.6 million gain recognized from a legal settlement and a $1.6 million gain on the repurchase of $21.4 million in junior subordinated debentures. See “Results of Operations – Non-Interest Income” below for additional information. Non-interest expenses for the quarter ended June 30, 2024 increased by $5.8 million to $118.7 million reflecting, among other things, a $3.1 million increase in employees’ compensation and benefits expenses mainly driven by annual salary merit increases, a $1.1 million increase in credit and debit card processing fees due to higher transactional volumes, and a $1.1 million increase in charges for legal and operational reserves, partially offset by a $1.6 million increase in net gains on other real estate owned (“OREO”) operations, mainly driven by a $2.3 million realized gain on the sale of a commercial real estate OREO property in the Puerto Rico region. See “Results of Operations – Non-Interest Expenses” below for additional information. Income tax expense decreased to $25.5 million for the second quarter of 2024, compared to $30.3 million for the same period in 2023, driven by a lower estimated 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, decreased to 24.1% for the first half 2024, compared to 30.1% for the same period of 2023, due to the Corporation engaging in certain business activities with preferential tax treatment under the PR Tax Code during the fourth quarter of 2023 which resulted in a lower effective tax rate for the year 2023. See “Income Taxes” below and Note 16 – “Income Taxes,” to the unaudited consolidated financial statements herein for additional information. As of June 30, 2024, total assets were approximately $18.9 billion, a decrease of $28.2 million from December 31, 2023, primarily related to repayments of investment securities and a decrease in cash and cash equivalents in part due to a decrease in total deposits, partially offset by an increase in total loans. As of June 30, 2024, total liabilities were $17.4 billion, a decrease of $22.0 million from December 31, 2023, which reflects a $27.0 million decrease in total deposits. See “Risk Management – Liquidity Risk” below for additional information about the Corporation’s funding sources and strategy. The Bank’s primary sources of funding are consumer and commercial core deposits, which exclude government deposits and brokered CDs. As of June 30, 2024 , these core deposits, amounting to $12.7 billion, funded 67.30% of total assets. Excluding fully collateralized government deposits, estimated uninsured deposits amounted to $4.5 billion as of June 30, 2024. In addition to approximately $1.9 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, 2024, the Corporation had approximately $2.5 billion available for funding under the FED’s Discount Window and $ 968.1 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, 2024, the Corporation had $6.0 billion, or 132% of estimated uninsured deposits, 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, 2024, the Corporation’s total stockholders’ equity was $1.5 billion, a decrease of $6.1 million from December 31, 2023. The decrease was driven by $100.0 million in common stock repurchases under the 2023 stock repurchase program, common stock dividends declared in the first half of 2024 totaling $53.4 million or $0.32 per common share, and a $4.5 million decrease 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. These variances were partially offset by the net income generated in the first half of 2024. The Corporation’s CET1 capital, tier 1 capital, total capital, and leverage ratios were 15.77%, 15.77%, 18.21%, and 10.63%, respectively, as of June 30, 2024, compared to CET1 capital, tier 1 capital, total capital, and leverage ratios of 16.10%, 16.10%, 18.57%, and 10.78%, respectively, as of December 31, 2023. See “Risk Management – Capital” below for additional information. Total loan production, including purchases, refinancings, renewals, and draws from existing revolving and non-revolving commitments, increased by $51.0 million to $1.3 billion for the quarter ended June 30, 2024, as compared to the second quarter of 2023, driven by a higher volume of commercial and construction loan originations in the Puerto Rico region. See “Results of Operations – Loan Production” below for additional information. Total non-performing assets were $126.9 million as of June 30, 2024, an increase of $1.0 million, from December 31, 2023, driven by a $12.5 million increase in total nonaccrual loans held for investment mainly due to the inflow of a $16.5 million commercial relationship in the food retail industry in the Puerto Rico region, partially offset by an $11.0 million decrease in the OREO portfolio balance in the Puerto Rico region, mainly attributable to the sale of a $5.3 million commercial real estate OREO property and sales of residential OREO properties. See “Risk Management – Nonaccrual Loans and Non-Performing Assets” below for additional information. Adversely classified commercial and construction loans increased by $19.3 million to $86.8 million as of June 30, 2024, compared to December 31, 2023, also driven by the aforementioned inflow to nonaccrual status of a $16.5 million commercial relationship in the Puerto Rico region and the downgrade of a $5.1 million commercial mortgage loan in the Puerto Rico region. ### NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS The Corporation has included in this Quarterly Report on 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 are reported excluding the changes in the fair value of derivative instruments and on a tax-equivalent basis 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 “Results 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. Tangible common equity ratio is tangible common equity divided by tangible assets. Tangible book value per common share is tangible assets divided by the number of common shares outstanding. 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 Non-Interest Expenses 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 non-interest expenses to exclude items that management believes are not reflective of core operating performance (“Special Items”). The financial results for the quarters and six-month periods ended June 30, 2024 and 2023 included the following Special Items: Quarter and Six-Month Period Ended June 30, 2024 Charges of $0.2 million ($0. 1 million after-tax, calculated based on the statutory tax rate of 37.5%) and $1.1 million ($0. 7 million after-tax, calculated based on the statutory tax rate of 37.5%) were recorded in the quarter and six-month period ended June 30, 2024, respectively, to increase the initial estimated FDIC special assessment resulting from the FDIC’s updates related to the loss estimate in connection with losses to the Deposit Insurance Fund associated with protecting uninsured deposits following the failures of certain financial institutions during the first half of 2023. The aforementioned charges increased the estimated FDIC special assessment for a total of $7.4 million, which was the revised estimated loss reflected in the FDIC invoice for the first quarterly collection period with a payment date of June 28, 2024. The FDIC special assessment is reflected in the consolidated statements of income as part of “FDIC deposit insurance” expenses. Quarter and Six-Month Period Ended June 30, 2023 A $3.6 million ($2.3 million after-tax, calculated based on the statutory tax rate of 37.5%) 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 trust preferred securities. 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. Adjusted Net Income – The following table reconciles for the quarters and six-month periods ended June 30, 2024 and 2023, 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, ### 2024 ### 2023 ### 2024 ### 2023 (In thousands) Net income, as reported (GAAP) 75,838 70,655 149,296 141,353 Adjustments: FDIC special assessment expense 152 1,099 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) (57) 1,350 (412) 1,350 Adjusted net income (Non-GAAP) 75,933 66,800 149,983 137,498 (1) See “Adjusted Net Income, Adjusted Non-Interest Income, and Adjusted Non-Interest Expenses” 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, 2024 was $199.6 million and $396.1 million, respectively, compared to $199.8 million and $400.7 million for the comparable periods in 2023, respectively. 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, 2024 was $204.5 million and $405.8 million, respectively, compared to $205.4 million and $412.6 million for the comparable periods in 2023, respectively. 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 changes 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 Financial Measures and Reconciliations” above. ### Part I ### Average volume ### Interest income (1) ### / expense ### Average rate (1) ### Quarter ended June 30, ### 2024 ### 2023 ### 2024 ### 2023 ### 2024 ### 2023 (Dollars in thousands) Interest-earning assets: Money market and other short-term investments 667,564 617,356 9,060 7,880 5.44 5.12 Government obligations (2) 2,619,778 2,909,204 8,947 10,973 1.37 1.51 MBS 3,359,598 3,757,425 14,339 17,087 1.71 1.82 FHLB stock 34,032 36,265 818 780 9.64 8.63 Other investments 17,637 13,739 244 58 5.55 1.69 Total investments (3) 6,698,609 7,333,989 33,408 36,778 2.00 2.01 Residential mortgage loans 2,807,639 2,808,465 40,686 39,864 5.81 5.69 Construction loans 245,219 149,783 4,955 2,903 8.10 7.77 C&I and commercial mortgage loans 5,528,607 5,191,040 100,919 89,290 7.32 6.90 Finance leases 873,908 769,316 17,255 14,714 7.92 7.67 Consumer loans 2,817,443 2,672,912 79,888 74,192 11.37 11.13 Total loans (4)(5) 12,272,816 11,591,516 243,703 220,963 7.96 7.65 Total interest-earning assets 18,971,425 18,925,505 277,111 257,741 5.86 5.46 Interest-bearing liabilities: Time deposits 3,002,159 2,511,504 26,588 15,667 3.55 2.50 Brokered certificates of deposit (“CDs”) 676,421 333,557 8,590 3,761 5.09 4.52 Other interest-bearing deposits 7,528,378 7,517,995 28,493 22,176 1.52 1.18 Securities sold under agreements to repurchase 101,397 1,328 5.25 Advances from the FHLB 500,000 534,231 5,610 6,048 4.50 4.54 Other borrowings 161,700 177,701 3,336 3,409 8.27 7.69 Total interest-bearing liabilities 11,868,658 11,176,385 72,617 52,389 2.45 1.88 Net interest income on a tax-equivalent basis and excluding valuations - non-GAAP 204,494 205,352 Interest rate spread 3.41 3.58 Net interest margin 4.32 4.35 ### Part I ### Average volume ### Interest income (1) ### / expense ### Average rate (1) ### Six-Month Period Ended June 30, ### 2024 ### 2023 ### 2024 ### 2023 ### 2024 ### 2023 (Dollars in thousands) Interest-earning assets: Money market and other short-term investments 600,655 511,392 16,314 12,530 5.45 4.94 Government obligations (2) 2,651,974 2,909,587 18,000 21,738 1.36 1.51 MBS 3,405,445 3,810,491 29,577 36,483 1.74 1.93 FHLB stock 34,334 38,539 1,672 1,201 9.77 6.28 Other investments 17,094 13,441 310 197 3.64 2.96 Total investments (3) 6,709,502 7,283,450 65,873 72,149 1.97 2.00 Residential mortgage loans 2,808,972 2,821,779 81,159 79,658 5.79 5.69 Construction loans 232,036 147,923 9,492 5,579 8.20 7.61 C&I and commercial mortgage loans 5,516,695 5,179,448 199,993 175,175 7.27 6.82 Finance leases 868,796 752,501 34,382 28,523 7.94 7.64 Consumer loans 2,813,829 2,654,008 159,528 145,406 11.37 11.05 Total loans (4)(5) 12,240,328 11,555,659 484,554 434,341 7.94 7.58 Total interest-earning assets 18,949,830 18,839,109 550,427 506,490 5.83 5.42 Interest-bearing liabilities: Time deposits 2,947,257 2,427,399 50,998 26,449 3.47 2.20 Brokered CDs 713,091 250,588 18,270 5,348 5.14 4.30 Other interest-bearing deposits 7,531,361 7,531,374 57,428 39,692 1.53 1.06 Securities sold under agreements to repurchase 96,229 2,397 5.02 Advances from the FHLB 500,000 581,436 11,220 13,224 4.50 4.59 Other borrowings 161,700 180,715 6,686 6,790 8.29 7.58 Total interest-bearing liabilities 11,853,409 11,067,741 144,602 93,900 2.45 1.71 Net interest income on a tax-equivalent basis and excluding valuations - non-GAAP 405,825 412,590 Interest rate spread 3.38 3.71 Net interest margin 4.29 4.42 (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 because the changes in valuation do not affect interest received. See "Non-GAAP Financial Measures and Reconciliations" above. (2) Government obligations include debt issued by government-sponsored agencies. (3) Unrealized gains and losses on available-for-sale debt securities are excluded from the average volumes. (4) Average loan balances include the average of nonaccrual loans. (5) Interest income on loans includes $3.1 million and $2.9 million for the quarters ended June 30, 2024 and 2023, respectively, and $6.3 million and $6.0 million for the six-month periods ended June 30, 2024 and 2023, 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, ### 2024 Compared to 2023 ### 2024 Compared to 2023 ### 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 664 516 1,180 2,333 1,451 3,784 Government obligations (1,039) (987) (2,026) (1,841) (1,897) (3,738) MBS (1,739) (1,009) (2,748) (3,690) (3,216) (6,906) FHLB stock (51) 89 38 (168) 639 471 Other investments 21 165 186 60 53 113 Total investments (2,144) (1,226) (3,370) (3,306) (2,970) (6,276) Residential mortgage loans (12) 834 822 (366) 1,867 1,501 Construction loans 1,923 129 2,052 3,394 519 3,913 C&I and commercial mortgage loans 5,990 5,639 11,629 11,813 13,005 24,818 Finance leases 2,053 488 2,541 4,547 1,312 5,859 Consumer loans 4,074 1,622 5,696 8,944 5,178 14,122 Total loans 14,028 8,712 22,740 28,332 21,881 50,213 Total interest income 11,884 7,486 19,370 25,026 18,911 43,937 Interest expense on interest-bearing liabilities: Time deposits 3,469 7,452 10,921 6,576 17,973 24,549 Brokered CDs 4,301 528 4,829 11,609 1,313 12,922 Other interest-bearing deposits 31 6,286 6,317 17,736 17,736 Securities sold under agreements to repurchase (1,328) (1,328) (2,397) (2,397) Advances from the FHLB (384) (54) (438) (1,823) (181) (2,004) Other borrowings (319) 246 (73) (750) 646 (104) Total interest expense 5,770 14,458 20,228 13,215 37,487 50,702 Change in net interest income 6,114 (6,972) (858) 11,811 (18,576) (6,765) 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 16 – “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 (“valuations”), 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 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 ### Six-Month Period Ended ### June 30, ### June 30, ### 2024 ### 2023 ### 2024 ### 2023 (Dollars in thousands) Interest income - GAAP 272,245 252,204 540,750 494,600 Unrealized (gain) loss on derivative instruments (3) (2) 3 Interest income excluding valuations - non-GAAP 272,245 252,201 540,748 494,603 Tax-equivalent adjustment 4,866 5,540 9,679 11,887 Interest income on a tax-equivalent basis and excluding valuations - non-GAAP 277,111 257,741 550,427 506,490 Interest expense - GAAP 72,617 52,389 144,602 93,900 Net interest income - GAAP 199,628 199,815 396,148 400,700 Net interest income excluding valuations - non-GAAP 199,628 199,812 396,146 400,703 Net interest income on a tax-equivalent basis and excluding valuations - non-GAAP 204,494 205,352 405,825 412,590 ### Average Balances Loans and leases 12,272,816 11,591,516 12,240,328 11,555,659 Total securities, other short-term investments and interest-bearing cash balances 6,698,609 7,333,989 6,709,502 7,283,450 Average Interest-Earning Assets 18,971,425 18,925,505 18,949,830 18,839,109 Average Interest-Bearing Liabilities 11,868,658 11,176,385 11,853,409 11,067,741 Average Assets (1) 18,884,431 18,788,578 18,871,365 18,673,506 Average Non-Interest-Bearing Deposits 5,351,308 5,968,892 5,329,920 5,983,896 ### Average Yield/Rate Average yield on interest-earning assets - GAAP 5.76% 5.35% 5.72% 5.29% Average rate on interest-bearing liabilities - GAAP 2.45% 1.88% 2.45% 1.71% Net interest spread - GAAP 3.31% 3.47% 3.27% 3.58% Net interest margin - GAAP 4.22% 4.23% 4.19% 4.29% Average yield on interest-earning assets excluding valuations - non-GAAP 5.76% 5.35% 5.72% 5.29% Average rate on interest-bearing liabilities 2.45% 1.88% 2.45% 1.71% Net interest spread excluding valuations - non-GAAP 3.31% 3.47% 3.27% 3.58% Net interest margin excluding valuations - non-GAAP 4.22% 4.23% 4.19% 4.29% Average yield on interest-earning assets on a tax-equivalent basis and excluding valuations - non-GAAP 5.86% 5.46% 5.83% 5.42% Average rate on interest-bearing liabilities 2.45% 1.88% 2.45% 1.71% Net interest spread on a tax-equivalent basis and excluding valuations - non-GAAP 3.41% 3.58% 3.38% 3.71% Net interest margin on a tax-equivalent basis and excluding valuations - non-GAAP 4.32% 4.35% 4.29% 4.42% (1) Includes, among other things, the ACL on loans and finance leases and debt securities, as well as unrealized gains and losses on available-for-sale debt securities. Net interest income amounted to $199.6 million for the quarter ended June 30, 2024, a decrease of $0.2 million, when compared to $199.8 million for same period in 2023. The $0.2 million decrease in net interest income was primarily due to: A $20.2 million increase in interest expense on interest-bearing liabilities, consisting of: A $10.9 million increase in interest expense on time deposits, excluding brokered CDs, of which $7.4 million was related to higher rates paid on new issuances and renewals, mainly on non-government deposits, given the overall higher interest rate environment , and $3.5 million was driven by a $490.7 million increase in the average balance. The average cost of time deposits in the second quarter of 2024, excluding brokered CDs, increased 105 basis points (“bps”) to 3.55% when compared to the same period in 2023. A $6.3 million increase in interest expense on interest-bearing checking and saving accounts, also driven by the higher interest rate environment and primarily reflected on public sector deposits. The average cost of interest-bearing checking and saving accounts increased by 34 bps to 1.52% in the second quarter of 2024 as compared to 1.18% in the same period in 2023. Excluding public sector deposits, the average cost of interest-bearing checking and saving accounts for the second quarter of 2024 was 0.75%, compared to 0.70% for the same period a year ago. A $4.8 million increase in interest expense on brokered CDs, mainly driven by a $342.9 million increase in the average balance. Partially offset by: A $1.8 million decrease in interest expense on borrowings, mainly due to a $1.3 million decrease on short-term repurchase agreements, since they were not used as a funding source in the second quarter of 2024. A $1.8 million decrease in interest income from total investments, consisting of a $3.0 million net decrease in interest income from investment securities, of which $3.5 million was associated with a $687.3 million decrease in the average balance of the debt securities portfolio, partially offset by a $1.2 million increase in interest income from interest-bearing cash balances, which consisted primarily of cash balances deposited at the FED, of which $0.6 million was driven by a $50.2 million increase in the average balance, and $0.6 million was due to the effect of higher market interest rates. Partially offset by: A $21.8 million increase in interest income on loans including: A $12.8 million increase in interest income on commercial and construction loans, driven by an $8.3 million increase associated with a $433.0 million increase in the average balance, and a $4.5 million increase related to the effect of higher market interest rates on the upward repricing of variable-rate loans and on new loan originations. As of June 30, 2024, the interest rate on approximately 54% of the Corporation’s commercial and construction loans was tied to variable rates, with 32% based upon SOFR of 3 months or less, 13% based upon the Prime rate index, and 9% based on other indexes. For the second quarter of 2024, the average one-month SOFR increased 29 bps, the average three-month SOFR increased 23 bps, and the average Prime rate increased 34 bps, compared to the average rates for such indexes during the second quarter of 2023. An $8.2 million increase in interest income on consumer loans and finance leases, primarily associated with a $249.1 million increase in the average balance of this portfolio, mainly auto loans and finance leases, under a higher interest rate environment. Net interest income amounted to $396.1 million for the six-month period ended June 30, 2024, a decrease of $4.6 million, when compared to $400.7 million for same period in 2023. The $4.6 million decrease in net interest income was primarily due to: A $50.7 million increase in interest expense on interest-bearing liabilities, consisting of: A $24.6 million increase in interest expense on time deposits, excluding brokered CDs, of which $18.0 million was related to higher rates paid in the first half of 2024 on new issuances and renewals, mainly on non-government deposits, also associated with the higher interest rate environment, and $6.6 million was driven by a $519.9 million increase in the average balance. The average cost of time deposits for the first half of 2024, excluding brokered CDs, increased 127 bps to 3.47% when compared to the same period in 2023. A $17.7 million increase in interest expense on interest-bearing checking and saving accounts, also related to the overall higher interest rate environment. The average cost of interest-bearing checking and saving accounts increased by 47 bps to 1.53% for the first half of 2024 as compared to 1.06% for 2023, mostly driven by government deposits in the Puerto Rico region. Excluding government deposits, the average cost of interest-bearing checking and savings accounts for the first half of 2024 was 0.75%, compared to 0.65% for 2023. A $12.9 million increase in interest expense on brokered CDs, driven by an increase of $462.5 million in the average balance. Partially offset by: A $4.5 million decrease in interest expense on borrowings, mainly due to a $2.4 million decrease on short-term repurchase agreements since they were not used as a funding source in the first half of 2024, and a $2.0 million decrease on advances from the FHLB, mainly associated with a decrease of $81.4 million in the average balance. A $2.2 million decrease in interest income from total investments, consisting of a $6.0 million net decrease in interest income on investment securities, of which $7.0 million was driven by a $662.7 million decrease in the average balance of the debt securities portfolio , partially offset by a $3.8 million increase in interest income from interest-bearing cash balances, which consisted primarily of cash balances deposited at the FED, of which $2.3 million was driven by a $89.3 million increase in the average balance, and $1.5 million was due to the effect of higher market interest rates. Partially offset by: A $48.3 million increase in interest income on loans including: A $26.8 million increase in interest income on commercial and construction loans, driven by a $16.3 million increase associated with a $421.4 million increase in the average balance of this portfolio, and a $10.5 million increase related to the effect of higher market interest rates on the upward repricing of variable -rate loans and on new loan originations. A $20.0 million increase in interest income on consumer loans and finance leases, primarily due to an increase of $276.1 million in the average balance of this portfolio, mainly auto loans and finance leases, under a higher interest rate environment. Net interest margin for the second quarter of 2024 remained relatively flat at 4.22%, compared to 4.23% for the same period in 2023\. For the six-month period ended June 30, 2024, net interest margin decreased by 10 bps to 4.19%, compared to 4.29% for the same period in 2023. The decrease in the net interest margin was driven by the higher cost of funds associated with the higher interest rate environment combined with a change in deposit mix reflecting a continued migration from non -interest-bearing and other low- cost deposits to higher-cost deposits. These variances were partially offset by a change in asset mix resulting from the deployment of cash flows from lower-yielding investment securities to fund loan growth as well as the effect of the higher interest rate environment on commercial and consumer loans yields. ### 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 $11.9 million for the second quarter of 2024, compared to $20.8 million for the second quarter of 2023. The variances by major portfolio category were as follows: Provision for credit losses for the residential mortgage loan portfolio was a net benefit of $10.6 million for the second quarter of 2024, compared to a net benefit of $3.5 million for the second quarter of 2023. The net benefit recorded during the second quarter of 2024 was mainly driven by updated historical loss experience used for determining the ACL estimate resulting in a downward revision of estimated loss severities and lower required reserve levels. See Note 3 – “Loans Held for Investment” to the unaudited consolidated financial statements herein for additional information on the review of the credit models completed by the Corporation during the second quarter of 2024. Provision for credit losses for the commercial and construction loan portfolio was a net benefit of $4.2 million for the second quarter of 2024, compared to an expense of $10.2 million for the second quarter of 2023. The net benefit recorded during the second quarter of 2024 was mainly driven by an improvement on the economic outlook of certain macroeconomic variables, particularly in variables associated with commercial real estate property performance , and $1.2 million in recoveries of two commercial loans in the Florida region. Meanwhile, the net expense recorded during the second quarter of 2023 was mainly due to a deterioration in the forecasted commercial real estate (“CRE”) price index and the increase in size of this portfolio. Provision for credit losses for the consumer loans and finance leases portfolio was an expense of $26.7 million for the second quarter of 2024, compared to an expense of $14.1 million for the second quarter of 2023. The increase in provision expense was mainly driven by increases in delinquency levels and, to a lesser extent, updated historical loss experience used for determining the ACL estimate resulting in an upward revision of estimated loss severities and higher required reserve levels in the auto loans and finance leases portfolios. The provision for credit losses for loans and finance leases was $24.8 million for the first half of 2024, compared to $37.0 million for the same period of 2023. The variances by major portfolio category were as follows: Provision for credit losses for the residential mortgage loan portfolio was a net benefit of $11.1 million for the first half of 2024, compared to a net benefit of $3.4 million for the same period of 2023. The increase in net benefit recorded during the first half of 2024 was mainly driven by the aforementioned updated historical loss experience, partially offset by newly originated loans that have a longer life. Provision for credit losses for the commercial and construction loan portfolios was a net benefit of $7.0 million for the first half of 2024, compared to an expense of $10.7 million for the same period of 2023. The net benefit recorded during the first six months of 2024 was mainly driven by recoveries of $5.0 million associated with a C&I loan in the Puerto Rico region and the aforementioned $1.2 million in recoveries in the Florida region, partially offset by increased volume. Meanwhile, the expense recorded during the first six months of 2023 was mainly due to a deterioration in the forecasted CRE price index, a $6.2 million charge associated with a nonaccrual C&I participated loan in the Florida region and, to a lesser extent, portfolio growth. Provision for credit losses for the consumer loan and finance leases portfolio was an expense of $42.9 million for the first half of 2024, compared to an expense of $29.7 million for the same period of 2023. The increase in provision expense was mainly driven by increases in delinquency levels, the aforementioned updated historical loss experience, and increases in portfolio volumes, partially offset by a $9.5 million recovery associated with the aforementioned bulk sale of fully charged- off loans recorded during the first six months of 2024. #### 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 for the second quarter and the first half of 2024 was a net benefit of $0.4 million and $0.1 million, respectively, compared to an expense of $0.7 million and $0.6 million, respectively, for the same periods in 2023. #### 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 an expense of $32 thousand and a net benefit $0.9 million for the second quarter and first half of 2024, respectively, compared to an expense of $0.8 million and $0.1 million, respectively, for the same periods in 2023. The net benefit recorded during the first half of 2024 was mostly driven by improvements in the underlying updated financial information of a Puerto Rico municipal bond issuer. Meanwhile, 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 for the second quarter and first half of 2024 was an expense of $60 thousand and a net benefit of $9 thousand, respectively, compared to a net benefit of $16 thousand and $25 thousand, respectively, for the same periods in 2023. ### Non-Interest Income Non-interest income amounted to $32.0 million for the second quarter of 2024, compared to $36.3 million for the same period in 2023\. Non-interest income for the second quarter of 2023 included the following Special Items: 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” above for additional information. On a non-GAAP basis, excluding the effect of these Special Items, adjusted non-interest income increased by $0.9 million primarily due to a $0.6 million increase in revenues from mortgage banking activities, driven by an increase in the net realized gain on sales of residential mortgage loans in the secondary market due to higher margins. During the second quarters of 2024 and 2023, net realized gains of $1. 5 million and $0.9 million, respectively, were recognized as a result of GNMA securitization transactions and whole loan sales to U.S. GSEs amounting to $43.5 million and $51.8 million, respectively. Non-interest income for the six-month period ended June 30, 2024 amounted to $66.0 million, compared to $68.8 million for the same period in 2023. On a non-GAAP basis, excluding the effect of the aforementioned Special Items, adjusted non-interest income increased by $2.4 million primarily due to: A $0.7 million increase in card and processing income, mainly in merchant-related fees due to higher transactional volumes. A $0.7 million increase in insurance commission income, mainly related to higher contingent commissions. A $0.6 million increase in revenues from mortgage banking activities, driven by an increase in the net realized gain on sales of residential mortgage loans in the secondary market due to higher margins. During the first six months of 2024 and 2023, net realized gains of $2.6 million and $2.0 million, respectively, were recognized as a result of GNMA securitization transactions and whole loan sales to U.S. GSEs amounting to $75.0 million and $89.2 million, respectively. A $0.6 million increase in service charges and fees on deposits accounts, in part due to an increase in the number of cash management transactions of commercial clients. ### Non-Interest Expenses Non-interest expenses for the quarter ended June 30, 2024 amounted to $118.7 million, compared to $11 2.9 million for the same period in 2023. The efficiency ratio for the second quarter of 2024 was 51.23%, compared to 47.83% for the second quarter of 2023. Non-interest expenses for the second quarter of 2024 include the $0.2 million additional FDIC special assessment expense. See “Non- GAAP Financial Measures and Reconciliations” above for additional information. On a non-GAAP basis, excluding the effect of this Special Item, adjusted non-interest expenses increased by $5.6 million primarily due to: A $3.1 million increase in employees’ compensation and benefits expenses, driven by annual salary merit increases and medical insurance premium costs. A $1.1 million increase in credit and debit card processing fees, driven by higher transactional volumes. A $0.8 million increase in professional service fees, due to increases of $0.5 million in consulting fees driven by information technology infrastructure enhancements and $0.4 million in outsourced technology service fees. A $0.8 million increase in occupancy and equipment expenses, mainly due to increases in maintenance charges, partially offset by a decrease in depreciation charges. A $0.7 million increase in other non-interest expenses, mainly due to a $1.1 million increase in charges for legal and operational reserves, partially offset by a $0.2 million decrease in net periodic cost of pension plans. A $0.3 million increase in taxes, other than income taxes, primarily related to higher municipal license taxes. A $0.3 million increase in communication expenses. Partially offset by: A $1.6 million increase in net gains on OREO operations, driven by the aforementioned $2.3 million realized gain on the sale of a commercial real estate OREO property in the Puerto Rico region, which more than offset the decrease in net realized gains on sales of residential OREO properties in the Puerto Rico region. Non-interest expenses for the six-month period ended June 30, 2024 amounted to $239.6 million, compared to $228.2 million for the same period in 2023. The efficiency ratio for the first six months of 2024 was 51.84%, compared to 48.60% for the first six months of 2023. Non-interest expenses for the six-month period ended June 30, 2024 include the $1.1 million additional FDIC special assessment expense. See “Non-GAAP Financial Measures and Reconciliations” above for additional information. On a non-GAAP basis, excluding the effect of this Special Item, adjusted non-interest expenses increased by $10.3 million primarily due to: A $6.2 million increase in employees’ compensation and benefits expenses, driven by annual salary merit increases and increases in stock-based compensation expense of retirement-eligible employees, medical insurance premium costs, and higher matching contributions to the employees’ retirement plan. A $1.5 million increase in professional service fees, due to increases of $1.4 million in consulting fees driven by information technology infrastructure enhancements and $0.4 million in collections, appraisals, and other credit-related fees, partially offset by a decrease of $0.3 million in outsourced technology service fees. A $1.5 million increase in credit and debit card processing fees, driven by higher transactional volumes. A $0.9 million increase in occupancy and equipment expenses, mainly related to an increase in maintenance charges, partially offset by a decrease in depreciation charges. A $0.6 million increase in other non-interest expenses, mainly due to a $1.0 million increase in charges for legal and operational reserves, partially offset by a $0.3 million decrease in net periodic cost of pension plans. A $0.3 million increase in taxes, other than income taxes, primarily related to higher municipal license taxes. Partially offset by: A $1.1 million increase in net gains on OREO operations, driven by the aforementioned $2.3 million realized gain on the sale of a commercial real estate OREO property in the Puerto Rico region, which more than offset the decrease in net realized gains on sales of residential OREO properties in the Puerto Rico region. ### Income Taxes For the second quarter of 2024, the Corporation recorded an income tax expense of $25.5 million, compared to $30.3 million for the same period in 2023. For the first six months of 2024, the Corporation recorded an income tax expense of $49.5 million, compared to $62.2 million for the same period in 2023. The decrease in income tax expense for the second quarter and first six months of 2024 was mainly driven by a lower effective tax rate as a result of the Corporation engaging in certain business activities with preferential tax treatment under the PR Tax Code during the fourth quarter of 2023 which resulted in a lower effective tax rate for the second half of 2023 and for the year 2024. The Corporation’s annual estimated effective tax rate for the first six months of 2024, excluding entities from which a tax benefit cannot be recognized and discrete items, was 24.1%, compared to 30.1% for the same period in 2023. Based on current strategies, the Corporation expects that the effective tax rate for the year 2024 will be around 24%. The estimated effective tax rate of the Corporation is impacted by, among other things, the composition and source of its taxable income. See Note 16 – “Income Taxes, ” to the unaudited consolidated financial statements herein for additional information. As of June 30, 2024, the Corporation had a net deferred tax asset of $142.7 million, net of a valuation allowance of $141.1 million against the deferred tax asset, compared to a net deferred tax asset of $150.1 million, net of a valuation allowance of $139.2 million, as of December 31, 2023. The decrease in the net deferred tax asset was mainly related to the usage of alternative minimum tax credits and the decrease in the ACL. Meanwhile, the increase in the valuation allowance was related primarily to changes in the market value of available-for-sale debt securities which resulted in an equal change in the net deferred tax asset without impacting earnings. ### Assets The Corporation’s total assets were $18.9 billion as of June 30, 2024, a decrease of $28.2 million from December 31, 2023, primarily related to repayments of investment securities and a decrease in cash and cash equivalents, partially offset by an increase in total loans. ### Loans Receivable, including Loans Held for Sale As of June 30, 2024, the Corporation’s total loan portfolio before the ACL amounted to $12.4 billion, an increase of $203.0 million compared to December 31, 2023. In terms of geography, the growth consisted of increases of $98.5 million in the Florida region, $97.7 million in the Puerto Rico region, and $6.8 million in the Virgin Islands region. On a portfolio basis, the growth consisted of increases of $157.7 million in commercial and construction loans and $54.3 million in consumer loans, primarily auto loans and finance leases, partially offset by a $9.0 million decrease in residential mortgage loans. As of June 30, 2024, the Corporation’s loans held-for-investment portfolio was comprised of commercial and construction loans (48%), consumer and finance leases (29%), and residential real estate loans (23%). Of the total gross loan portfolio held for investment of $12.4 billion as of June 30, 2024, the Corporation had credit risk concentration of approximately 80% in the Puerto Rico region, 17% in the United States region (mainly in the state of Florida), and 3% in the Virgin Islands region, as shown in the following table: ### As of June 30, 2024 ### Puerto Rico ### Virgin Islands ### United States ### Total (In thousands) Residential mortgage loans 2,163,245 161,057 485,364 2,809,666 Construction loans 160,093 3,681 22,183 185,957 Commercial mortgage loans 1,697,939 62,821 662,549 2,423,309 C&I loans 2,176,489 135,456 942,632 3,254,577 Total commercial loans 4,034,521 201,958 1,627,364 5,863,843 Consumer loans and finance leases 3,635,389 68,540 8,070 3,711,999 Total loans held for investment, gross 9,833,155 431,555 2,120,798 12,385,508 Loans held for sale 10,392 10,392 Total loans, gross 9,843,547 431,555 2,120,798 12,395,900 ### As of December 31, 2023 ### Puerto Rico ### Virgin Islands ### United States ### Total (In thousands) Residential mortgage loans 2,187,875 168,131 465,720 2,821,726 Construction loans 111,664 3,737 99,376 214,777 Commercial mortgage loans 1,725,325 65,312 526,446 2,317,083 C&I loans 2,130,368 119,040 924,824 3,174,232 Total commercial loans 3,967,357 188,089 1,550,646 5,706,092 Consumer loans and finance leases 3,583,272 68,498 5,895 3,657,665 Total loans held for investment, gross 9,738,504 424,718 2,022,261 12,185,483 Loans held for sale 7,368 7,368 Total loans, gross 9,745,872 424,718 2,022,261 12,192,851 #### Residential Real Estate Loans As of June 30, 2024, the Corporation’s total residential mortgage loan portfolio, including loans held for sale, decreased by $9.0 million, as compared to the balance as of December 31, 2023. The decline in the residential mortgage loan portfolio reflects decreases of $21.6 million in the Puerto Rico region and $7.0 million in the Virgin Islands region, partially offset by an increase of $19.6 million in the Florida region. The decline was driven by repayments, which more than offset the volume of new loan originations kept on the balance sheet. Approximately 50% of the $160.3 million residential mortgage loan originations in the Puerto Rico region during the first six months of 2024 consisted of conforming loans, compared to 58% of the $150.0 million originated for the first six months of 2023. As of June 30, 2024, the majority of the Corporation’s outstanding balance of residential mortgage loans in the Puerto Rico and the Virgin Islands regions consisted of fixed-rate loans that traditionally carry higher yields than residential mortgage loans in the Florida region. In the Florida region, approximately 37% 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, 2024, the Corporation’s commercial and construction loans portfolio increased by $157.7 million, as compared to the balance as of December 31, 2023. The growth included an increase of $76.7 million in the Florida region, reflecting, among other things, the effect of the origination of various commercial and construction relationships, each in excess of $10 million, of which $52.3 million are related to three commercial mortgage relationships and $40.0 million are related to two C&I relationships, and higher utilization of C&I lines of credit, including a $14.1 million line of credit utilization. These variances were partially offset by payoffs and paydowns of three C&I relationships totaling $47.7 million. The Puerto Rico region also grew by $67.1 million, when compared to the balance as of December 31, 2023. This increase was driven by a $48.4 million increase in construction loans; a $33.7 million increase in floor plan loans; higher utilization of C&I lines of credit, including two lines of credit with utilization over $10 million totaling $33.3 million; and the origination of a $13.6 million C&I loan to a municipality in Puerto Rico that is supported by assigned property tax revenues. These variances were partially offset by multiple payoffs and paydowns, including payoffs of four commercial and construction relationships totaling $52.7 million. In the Virgin Islands region, commercial and construction loans increased by $13.9 million, as compared to the balance as of December 31, 2023, mainly associated with loans to government entities. See “Risk Management – Exposure to Puerto Rico Government” and “Risk Management – Exposure to USVI Government” below for information on the Corporation’s credit exposure to PR and USVI government entities. As of June 30, 2024, the Corporation’s total commercial mortgage loan exposure amounted to $2.4 billion, or 20% of the total loan portfolio. In terms of geography, $1.7 billion of the exposure was in the Puerto Rico region, $0.6 billion of the exposure was in the Florida region, and $0.1 billion of the exposure was in the Virgin Islands region. The $1.7 billion exposure in the Puerto Rico region was comprised mainly of 42% in the retail industry, 26% in office real estate, and 20% in the hotel industry. The $0.6 billion exposure in the Florida region was comprised mainly of 33% in the retail industry, 23% in the hotel industry, and 8% in office real estate. Of the Corporation’s total commercial mortgage loan exposure of $2.4 billion, $573.8 million matures within the next 12 months and has a weighted-average interest rate of approximately 6.74%. Commercial mortgage loan exposure in the office real estate industry, which matures within the next 12 months, amounted to $127.0 million and has a weighted-average interest rate of approximately 6.56%. As of each of June 30, 2024 and December 31, 2023, the Corporation’s total exposure to shared national credit (“SNC”) loans (including unused commitments) amounted to $1.2 billion. As of June 30, 2024, approximately $386.6 million of the SNC exposure is related to the portfolio in the Puerto Rico region and $803.5 million is related to the portfolio in the Florida region. #### Consumer Loans and Finance Leases As of June 30, 2024, the Corporation’s consumer loans and finance leases portfolio increased by $54.3 million to $3.7 billion, mainly in the Puerto Rico region, reflecting growth of $45.8 million and $23.5 million in the auto loans and finance leases portfolios, respectively. ### 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 by geographic segment, for the indicated periods: ### Quarter Ended June 30, ### Six-Month Period Ended June 30, ### 2024 ### 2023 ### 2024 ### 2023 (In thousands) ### Puerto Rico: Residential mortgage 92,624 88,485 160,267 149,965 Construction 38,459 33,829 74,110 57,267 Commercial mortgage 83,852 28,704 101,754 96,691 C&I 337,347 365,796 742,566 814,977 Consumer 404,645 442,213 798,551 866,686 Total loan production 956,927 959,027 1,877,248 1,985,586 ### Virgin Islands: Residential mortgage 696 843 2,122 1,769 Construction 162 2 162 6 Commercial mortgage 298 3,859 423 3,859 C&I 12,351 65,215 23,460 74,614 Consumer 8,897 11,408 16,793 21,608 Total loan production 22,404 81,327 42,960 101,856 ### Florida: Residential mortgage 28,884 25,923 47,985 40,819 Construction 9,609 13,175 20,655 25,232 Commercial mortgage 20,304 9,821 77,933 30,526 C&I 219,086 119,563 391,253 216,865 Consumer 2,970 384 3,427 1,029 Total loan production 280,853 168,866 541,253 314,471 ### Total: Residential mortgage 122,204 115,251 210,374 192,553 Construction 48,230 47,006 94,927 82,505 Commercial mortgage 104,454 42,384 180,110 131,076 C&I 568,784 550,574 1,157,279 1,106,456 Consumer 416,512 454,005 818,771 889,323 Total loan production 1,260,184 1,209,220 2,461,461 2,401,913 Commercial and construction loan originations (excluding government loans) for the quarter and six-month period ended June 30, 2024 amounted to $708.4 million and $1.4 billion, respectively, compared to $563.6 million and $1.2 billion, respectively, for the comparable periods in 2023. The increase of $144.8 million in the second quarter of 2024, as compared to the same period in 2023, reflects growth of $106.5 million in the Florida region and $40.5 million in the Puerto Rico region, partially offset by a $2.2 million decrease in the Virgin Islands regions. For the first six months of 2024, the increase of $157.1 million consisted of growth of $217.3 million in the Florida region, partially offset by decreases of $54.5 million in the Puerto Rico region and $5.7 million in the Virgin Islands region. The growth in the Florida region for the first six months of 2024 includes the effect of the origination of seven C&I relationships, each in excess of $10 million, with an aggregate balance of $116.4 million, increased utilization of C&I lines of credit, and an increase in the commercial mortgage loan portfolio by $47.4 million. Meanwhile, the decline in the Puerto Rico region for the first six months of 2024 was mainly driven by a decrease of $76.0 million in the C&I loan portfolio, partially offset by increases of $16.4 million in the construction loan portfolio and $5.1 million in the commercial mortgage loan portfolio. Government loan originations for the quarter and six-month period ended June 30, 2024 amounted to $13.1 million and $38.8 million, respectively, compared to $76.3 million and $83.6 million, respectively, for the comparable periods in 2023. Government loan originations during the first six months of 2024 were mainly related to the aforementioned origination of a $13.6 million loan to a municipality in Puerto Rico that is supported by assigned property tax revenues and the utilization of a line of credit of a government entity in the Virgin Islands region. On the other hand, government loan originations during the first six months of 2023 were mainly related to the 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. Originations of auto loans (including finance leases) for the quarter and six-month period ended June 30, 2024 amounted to $233.9 million and $462.0 million, respectively, compared to $250.3 million and $495.4 million, respectively, for the comparable periods in 2023\. The decrease in the second quarter of 2024, as compared to the same quarter of 2023, consisted of declines of $14.7 million in the Puerto Rico region and $1.7 million in the Virgin Islands region. The decrease in the first six months of 2024, as compared to the same period of the previous year, consisted of declines of $30.4 million in the Puerto Rico region and $3.0 million in the Virgin Islands region. Other consumer loan originations , other than credit cards, for the quarter and six-month period ended June 30, 2024 amounted to $64.6 million and $124.5 million, respectively, compared to $77.7 million and $149.6 million, respectively, for the comparable periods in 2023. Most of the decrease in other consumer loan originations for the first six months of 2024, as compared with the same period in 2023, was in the Puerto Rico region. The utilization activity on the outstanding credit card portfolio for the quarter and six-month period ended June 30, 2024 amounted to $118.0 million and $232.3 million, respectively, compared to $125.9 million and $244.3 million, respectively, for the comparable periods in 2023. ### 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, 2024 amounted to $5.0 billion, a $272.7 million decrease from December 31, 2023 . The decrease was mainly driven by repayments of approximately $178.8 million of U.S. agencies mortgage-backed securities (“MBS”) and debentures, repayments of $115.1 million associated to matured securities, and a $4.5 million decrease in fair value attributable to changes in market interest rates. These variances were partially offset by $28.0 million in purchases of Community Reinvestment Act qualified debt securities during the second quarter of 2024. As of June 30, 2024, the Corporation had a net unrealized loss on available-for-sale debt securities of $637.3 million. This net unrealized loss is attributable to instruments on books 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, 2024, approximately $500 million in cash inflows, which are expected to be received during the second half of 2024 from contractual maturities of the available-for-sale debt securities portfolio, are expected to be redeployed to fund loan growth, reinvested into higher-yielding securities, or used to repay maturing brokered CDs. As of June 30, 2024, 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, 2024, the Corporation held a bond issued by the Puerto Rico Housing Finance Authority (“PRHFA”), classified as available for sale, specifically a residential pass-through MBS in the aggregate amount of $3.1 million (fair value - $1.5 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 $1.6 million as of June 30, 2024, of which $0.4 million is due to credit deterioration. During 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral. As of June 30, 2024, the Corporation’s held-to-maturity debt securities portfolio, before the ACL, decreased to $344.4 million, compared to $354.2 million as of December 31, 2023, mainly driven by repayments of approximately $10.5 million of U.S. agencies MBS. Held-to-maturity debt securities include fixed-rate GSEs’ MBS with a carrying value of $237.0 million (fair value of $222.4 million) as of June 30, 2024, compared to $247.1 million as of December 31, 2023. Held-to-maturity debt securities also include 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, 2024, approximately 54% of the Corporation’s municipal bonds consisted of obligations issued by three 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. 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 “Risk Management – Credit Risk Management” below and Note 2 – “Debt Securities” to the unaudited consolidated financial statements herein 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, 2024 ### December 31, 2023 (In thousands) Money market investments 4,439 1,239 Available-for-sale debt securities, at fair value: U.S. government and agencies obligations 2,352,500 2,443,790 Puerto Rico government obligations 1,532 1,415 MBS: Residential 2,430,965 2,633,161 Commercial 171,314 151,618 Other 1,000 Total available-for-sale debt securities, at fair value 4,957,311 5,229,984 Held-to-maturity debt securities, at amortized cost: MBS: Residential 138,615 146,468 Commercial 98,370 100,670 Puerto Rico municipal bonds 107,450 107,040 ACL for held-to-maturity Puerto Rico municipal bonds (1,267) (2,197) Total held-to-maturity debt securities 343,168 351,981 Equity securities, including $34.0 million and $34.6 million of FHLB stock as of June 30, 2024 and December 31, 2023 51,037 49,675 Total money market investments and investment securities 5,355,955 5,632,879 The carrying values of debt securities as of June 30, 2024 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 864,132 0.88 Due after one year through five years 1,472,025 0.82 Due after five years through ten years 8,100 2.64 Due after ten years 8,243 5.69 2,352,500 0.86 Puerto Rico government and municipalities obligations: Due within one year 3,178 9.30 Due after one year through five years 51,424 7.72 Due after five years through ten years 36,253 7.03 Due after ten years 18,127 7.40 108,982 7.48 MBS 2,839,264 1.72 ACL on held-to-maturity debt securities (1,267) Total debt securities 5,300,479 1.47 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, 2024, the Corporation had approximately $1.7 billion in callable debt securities (U.S. agencies debt securities) with an average yield of 0.80% of which approximately 64% were purchased at a discount and 2% 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 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 2023 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 Corporation’s Board of Directors 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 Financial Planning and ALM Division is responsible for estimating the liquidity gap. 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. #### Liquidity Risk Management 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 $586.3 million as of June 30, 2024, compared to $663.2 million as of December 31, 2023. When adding $1.9 billion of free high-quality liquid securities that could be liquidated or pledged within one day (which includes assets such as U.S. government and GSEs obligations), the total core liquidity amounted to $2.5 billion as of June 30, 2024, or 13.37% of total assets, compared to $2.8 billion, or 14.93% of total assets as of December 31, 2023. In addition to the aforementioned $1.9 billion in cash and free high quality liquid assets, the Corporation had $968.1 million available for credit with the FHLB based on the value of loan collateral pledged with the FHLB. As such, the basic liquidity ratio (which adds such available secured lines of credit to the core liquidity) was approximately 18.50% of total assets as of June 30, 2024, compared to 19.82% of total assets as of December 31, 2023. Further, the Corporation also maintains borrowing capacity at the FED Discount Window and had approximately $2.5 billion available for funding under the FED’s Borrower-in-Custody (“BIC”) Program as of June 30, 2024 as an additional source of liquidity. Total loans pledged to the FED BIC Program amounted to $3.2 billion as of June 30, 2024. The Corporation also does not rely on uncommitted inter-bank lines of credit (federal funds lines) to fund its operations. On a combined basis, as of June 30, 2024, the Corporation had $6.0 billion available to meet liquidity needs, or 132% of estimated uninsured deposits , excluding fully collateralized government deposits. Liquidity at the Bank level is highly dependent on bank deposits, which fund 87.8% of the Bank’s assets (or 84.4% 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 brokered CDs. Funding through wholesale funding may continue to increase the overall cost of funding for the Corporation and adversely affect the net interest margin. #### Commitments to extend credit and standby letters of credit 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, 2024, the Corporation’s commitments to extend credit amounted to approximately $2.1 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, 2024 ### December 31, 2023 (In thousands) Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Construction undisbursed funds 294,782 234,974 Unused credit card lines 868,739 882,486 Unused personal lines of credit 38,326 38,956 Commercial lines of credit 863,711 862,963 Letters of credit: Commercial letters of credit 61,109 69,543 Standby letters of credit 19,359 8,313 The Corporation engages in the ordinary course of business in other financial transactions that are not recorded on the balance sheet or may be recorded on the balance sheet in amounts that are different from the full contract or notional amount of the transaction and, thus, affect the Corporation’s liquidity position. These transactions are designed to (i) meet the financial needs of customers, (ii) manage the Corporation’s credit, market and liquidity risks, (iii) diversify the Corporation’s funding sources, and (iv) optimize capital. In addition to the aforementioned off-balance sheet debt obligations and unfunded commitments to extend credit, the Corporation has obligations and commitments to make future payments under contracts, amounting to approximately $4.4 billion as of June 30, 2024\. Our material cash requirements comprise primarily of contractual obligations to make future payments related to time deposits, long-term borrowings, 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 and support loan growth and capital plan execution 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 securities sold under agreements to repurchase and lines of credit with the FHLB. In addition, the Corporation also maintains as additional sources borrowing capacity at the FED’s BIC Program , as discussed above. The Asset and Liability Committee reviews credit availability on a regular basis. The Corporation may also sell mortgage loans as a supplementary source of funding and obtain long-term funding through the issuance of notes and long-term brokered CDs. 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 next 12 months and beyond. #### Retail and commercial core deposits – The Corporation’s deposit products include regular saving accounts, demand deposit accounts, money market accounts, and retail CDs. As of June 30, 2024, the Corporation’s core deposits, which exclude government deposits and brokered CDs, increased by $105.9 million to $12.7 billion from $12.6 billion as of December 31, 2023. The $105.9 million increase in such deposits was primarily related to increases of $71.7 million in the Puerto Rico region, $21.1 million in the Virgin Islands region, and $13.1 million in the Florida region. This increase includes a $162.4 million increase in time deposits. #### Government deposits (fully collateralized) - As of June 30, 2024, the Corporation had $2.7 billion of Puerto Rico public sector deposits ($2.5 billion in transactional accounts and $159.2 million in time deposits), relatively unchanged compared to the balance as of December 31, 2023. Government deposits are insured by the FDIC up to the applicable limits and the uninsured portions are fully collateralized. Approximately 23% of the public sector deposits as of June 30, 2024 were from municipalities and municipal agencies in Puerto Rico and 77% were from public corporations, the central government and its agencies, and U.S. federal government agencies in Puerto Rico. In addition, as of June 30, 2024, the Corporation had $491.8 million of government deposits in the Virgin Islands region, as compared to $449.4 million as of December 31, 2023, and $19.0 million in the Florida region as compared to $10.2 million as of December 31, 2023. The uninsured portions of government deposits were collateralized by securities and loans with an amortized cost of $3.4 billion and $3.5 billion as of June 30, 2024 and December 31, 2023, respectively, and an estimated market value of $3.1 billion as of each of such periods. In addition to securities and loans, as of each of June 30, 2024 and December 31,2023, the Corporation used $175.0 million in letters of credit issued by the FHLB as pledges for a portion of public deposits in the Virgin Islands. #### Estimate of Uninsured Deposits – As of June 30, 2024 and December 31, 2023, the estimated amounts of uninsured deposits totaled $7.5 billion and $7.4 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. As of each of June 30, 2024 and December 31, 2023, the uninsured portion of fully collateralized government deposits amounted to $3.0 billion. Excluding fully collateralized government deposits, the estimated amounts of uninsured deposits amounted to $4.5 billion, which represent 28.46% of total deposits (excluding brokered CDs), as of June 30, 2024, compared to $4.4 billion, or 28.13%, as of December 31, 2023. 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 30,2024: (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 370,764 212,827 372,052 128,489 1,084,132 Other uninsured time deposits 10,947 16,493 18,906 1,644 47,990 #### Brokered CDs - Total brokered CDs decreased by $158.5 million to $624.8 million as of June 30, 2024, compared to $783.3 million as of December 31, 2023. The decline reflects maturing short-term brokered CDs amounting to $370.1 million with an all-in cost of 5.46% that were paid off during the first six months of 2024, partially offset by $211.7 million of new issuances with original average maturities of approximately 2 years and an all-in cost of 4.92%. The average remaining term to maturity of the brokered CDs outstanding as of June 30, 2024 was approximately 1.1 years. 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. Also, depending on lending or other investment opportunities available, cash inflows from repayments of investment securities may be used as well to repay brokered CDs. Brokered CDs are insured by the FDIC up to regulatory limits and can be obtained faster than regular retail deposits. The following table presents the remaining contractual maturities of brokered CDs as of June 30, 2024: ### Total (In thousands) Three months or less 170,272 Over three months to six months 173,892 Over six months to one year 83,839 Over one year to three years 123,732 Over three years to five years 57,603 Over five years 15,441 Total 624,779 Refer to “Net Interest Income” above for information about average balances of interest-bearing deposits and the average interest rate paid on such deposits for the quarters and six-month periods ended June 30, 2024 and 2023. #### Securities sold under agreements to repurchase – From time to time, the Corporation enters into repurchase agreements as an additional source of funding. As of June 30, 2024 and December 31, 2023, there were no outstanding repurchase agreements. When the Corporation enters into 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 each of June 30, 2024 and December 31, 2023, the outstanding balance of long-term fixed-rate FHLB advances was $500.0 million. Of the $500.0 million in FHLB advances as of June 30, 2024, $400.0 million were pledged with investment securities and $100.0 million were pledged with mortgage loans. As of June 30, 2024, the Corporation had $968.1 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. As of each of June 30, 2024 and December 31, 2023, the Corporation had junior subordinated debentures outstanding in the aggregate amount of $161.7 million, with maturity dates ranging from June 17, 2034 through September 20, 2034. As of June 30, 2024, the Corporation was current on all interest payments due on its subordinated debt. See Note 10 – “Other Long-Term Borrowings” and Note 7 – “Non-Consolidated Variable Interest Entities (“VIEs”) and Servicing Assets” to the unaudited consolidated financial statements herein for additional information. Also, see Note 13 – “Stockholders’ Equity” to the unaudited consolidated financial statements herein for additional details of capital actions that include the approval of a new repurchase program of $250 million that could include repurchases of common stock or junior subordinated debentures. #### 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. Over the years, in connection with its mortgage banking activities, the Corporation has invested in technology and personnel to enhance the Corporation’s secondary mortgage market capabilities. These 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 Federal Housing Authority (“FHA”), U.S. Department of Veterans Affairs (“VA”), U.S. Department of Housing and Urban Development (“HUD”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corp. (“FHLMC”). During the first six months of 2024, loans pooled into Government National Mortgage Association (“GNMA”) MBS amounted to approximately $59.9 million. Also, during the first six months of 2024, the Corporation sold approximately $15.1 million of performing residential mortgage loans to FNMA. The FED Discount Window is a cost-efficient source of short-term funding for the Corporation in highly-volatile market conditions. As previously mentioned, as of June 30, 2024, the Corporation had approximately $2.5 billion fully available for funding under the FED’s Discount Window based on collateral pledged at the FED. #### Effect of Credit Ratings on Access to Liquidity The Corporation’s liquidity is contingent upon its ability to obtain deposits and other 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 and Fitch, one notch below the 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 $586.3 million as of June 30, 2024, a decrease of $76.9 million when compared to December 31, 2023\. The following discussion highlights the major activities and transactions that affected the Corporation’s cash flows during the first six months of 2024 and 2023: #### 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 June 30, 2024 and 2023, net cash provided by operating activities was $189.4 million and $166.5 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, 2024, net cash provided by investing activities was $11.3 million, primarily due to repayments of U.S. agencies MBS and debentures; proceeds from sales of repossessed assets; and proceeds from sales of loans, mainly driven by the bulk sale of fully charged-off consumer loans during the first half of 2024; partially offset by net disbursements on loans held for investment and purchases of Community Reinvestment Act qualified debt securities during the second quarter of 2024. For the six-month period ended June 30, 2023, net cash provided by investing activities was $25.0 million, primarily due to repayments of U.S. agencies MBS and debentures and proceeds from sales of repossessed assets, partially offset by net disbursements on loans held for investment. #### 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, 2024, net cash used in financing activities was $277.6 million, mainly reflecting capital returned to stockholders and a decrease in total deposits. For the first six months of 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. ### Capital As of June 30, 2024, the Corporation’s stockholders’ equity was $1.5 billion, a decrease of $6.1 million from December 31, 2023. The decrease was driven by $100.0 million in common stock repurchases under the 2023 stock repurchase program, common stock dividends declared in the first half of 2024 totaling $53.4 million or $0.32 per common share, and a $4.5 million decrease 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. These variances were partially offset by the net income generated in the first half of 2024. On July 22, 2024, the Corporation’s Board declared a quarterly cash dividend of $0.16 per common share. The dividend is payable on September 13, 2024 to shareholders of record at the close of business on August 29, 2024. The Corporation intends to continue to pay quarterly dividends on common stock. However, 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 stock repurchase program, under which the Corporation may repurchase up to $225 million of its outstanding common stock, which commenced in the fourth quarter of 2023. During the first half of 2024, the Corporation repurchased approximately 5.8 million shares of common stock for a total cost of $100.0 million, of which approximately 2.8 million shares of common stock for a total cost of $50.0 million were repurchased during the second quarter of 2024. As of June 30, 2024, the Corporation has remaining authorization to repurchase approximately $50.0 million of common stock. For more information, see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds,” of this Quarterly Report on Form 10-Q. Furthermore, on July 22, 2024, the Corporation announced that its Board of Directors approved a new repurchase program, under which the Corporation may repurchase up to an additional $250 million that could include repurchases of common stock or junior subordinated debentures, which it expects to execute through the end of the fourth quarter of 2025. Repurchases under the programs may be executed through open market purchases, accelerated share repurchases, privately negotiated transactions or plans, including plans complying with Rule 10b5-1 under the Exchange Act, and/or redemption of junior subordinated debentures, and will be conducted in accordance with applicable legal and regulatory requirements. The Corporation’s 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 repurchase programs do not obligate it to acquire any specific number of shares and do not have an expiration date. The repurchase programs may be modified, suspended, or terminated at any time at the Corporation’s discretion. The Corporation’s holding 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, 2024 and December 31, 2023, respectively: ### June 30, 2024 ### December 31, 2023 (In thousands, except ratios and per share information) Total common equity - GAAP 1,491,460 1,497,609 Goodwill (38,611) (38,611) Other intangible assets (9,700) (13,383) ### Tangible common equity - non-GAAP 1,443,149 1,445,615 Total assets - GAAP 18,881,374 18,909,549 Goodwill (38,611) (38,611) Other intangible assets (9,700) (13,383) ### Tangible assets - non-GAAP 18,833,063 18,857,555 ### Common shares outstanding 163,865 169,303 ### Tangible common equity ratio - non-GAAP 7.66% 7.67% ### Tangible book value per common share - non-GAAP 8.81 8.54 See Note 21 – “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, 2024 and December 31, 2023, 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 $199.6 million as of each of June 30, 2024 and December 31, 2023, respectively. There were no transfers to the legal surplus reserve during the first half of 2024. ### 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 and 300 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 repricing 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 simulation date. 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, 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, 2024, the Corporation forecasted the 12-month net interest income assuming June 30, 2024 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) and immediate (shock) parallel upward shift of the yield curve is assumed during the first twelve months (the “+300 ramp”, “+200 ramp” and “+200 shock” scenarios). Conversely, for the falling rate scenario, a gradual (ramp) and immediate (shock) parallel downward shift of the yield curve is assumed during the first twelve months (the “-300 ramp”, “-200 ramp” and “-200 shock” scenarios). The SOFR curve for June 30, 2024, as compared with December 31, 2023, reflects an increase of 10 bps on average in the short- term sector of the curve, or between one to twelve months; an increase of 52 bps in the medium-term sector of the curve, or between 2 to 5 years; and an increase of 50 bps in the long-term sector of the curve, or over 5-year maturities. A similar behavior in market rates changes was observed in the Constant Maturity Treasury yield curve with an increase of 8 bps in the short-term sector, an increase of 49 bps in the medium-term sector, and an increase of 46 bps in the long-term sector. The following table presents the results of the static simulations as of June 30,2024 and December 31, 2023. 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) ### June 30, 2024 ### December 31, 2023 Gradual Change in Interest Rates: \+ 300 bps ramp 1.38 1.08 \+ 200 bps ramp 0.93 0.73 \- 300 bps ramp -3.06 -3.09 \- 200 bps ramp -1.95 -2.02 Immediate Change in Interest Rates: \+ 200 bps shock 1.90 2.45 \- 200 bps shock -4.94 -5.67 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 Management” above for liquidity ratios. As of June 30, 2024, and December 31, 2023, the net interest income simulations show that the Corporation continues to have an asset sensitive position for the next twelve months under a static balance sheet simulation. Under gradual rising scenarios, the net interest income simulation shows a slight increase in interest rate sensitivity, when compared with December 31, 2023, due to lower sensitivity in the liabilities side. The decrease in sensitivity in the liabilities side was mainly driven by an increase in repricing lag, mainly in public sector non -maturity deposits, partially offset by higher sensitivity in saving accounts and time deposits as a result of higher balances. On the assets side, the sensitivity remained flat. The increase in sensitivity from the investment securities portfolio due to the level of scheduled maturities of U.S. agencies debentures over the next twelve months and an increase in the prepayment rate assumptions of MBS was offset by lower sensitivity due to lower cash balances. Gradual falling rates scenarios show a slight decrease in interest rate sensitivity, when compared with December 31, 2023, due to lower sensitivity in the assets side. The decrease in sensitivity due to lower cash balances was partially offset by the aforementioned increase in sensitivity from the investment securities portfolio. On the liabilities side, the sensitivity resulted in a minor decrease driven by the aforementioned increase in repricing lag, partially offset by higher sensitivity in time deposits as a result of higher balances. Under the static simulation, the Corporation assumes that maturing instruments are replaced with similar instruments at the repricing rate upon maturity. The Corporation’s results may vary significantly from the ones presented above under alternative balance sheet compositions, such as a dynamic balance sheet scenario which, for example, would assume that cash flows from the investment securities portfolio and loan repayments will be redeployed into higher yielding alternatives. ### 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 “Risk Management – Liquidity Risk” and “Risk Management – Capital” 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 C&I, 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 Chief Risk Officer, 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 generally applies probability weights to the baseline and alternative downside economic scenarios to estimate the ACL with the baseline scenario carrying the highest weight. The scenarios that are chosen each quarter and the weighting given to each scenario for the different loan portfolio categories depend on a variety of factors including recent economic events, leading national and regional economic indicators, and industry trends. As of June 30, 2024 and December 31, 2023, the Corporation applied the baseline scenario for the commercial mortgage and construction loan portfolios since it expects a more favorable economic outlook of certain macroeconomic variables associated with commercial real estate property performance, 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, unemployment rate, inflation levels, and expected future interest rate adjustments in the Federal Reserve Board’s funds rate. As of June 30, 2024, the Corporation’s ACL model considered the following assumptions for key economic variables in the probability-weighted economic scenarios: CRE price index at the national level with an average projected contraction of 7.58% for the remainder of 2024 and an average projected appreciation of 0.81% for the year 2025, compared to an average projected contraction of 6.88% for the remainder of 2024 and an average projected appreciation of 2.01% for the year 2025 as of December 31, 2023. Regional Home Price Index forecast in Puerto Rico (purchase only prices) is projected to remain relatively flat for the remainder of 2024 and for the year 2025, when compared to the same period projection as of December 31, 2023. For the Florida region, the Home Price Index forecast shows an improvement of 6.42% and 6.39% for the remainder of 2024 and for the year 2025, respectively, when compared to the same period as of December 31, 2023. Average regional unemployment rate in Puerto Rico is forecasted at 6.08% for the remainder of 2024 and 6.27% for 2025, compared to 7.53% for the remainder of 2024 and 8.08% for the year 2025 as of December 31, 2023. For the Florida and the U.S. mainland, average unemployment rate is forecasted at 4.03% and 4.45%, respectively, for the remainder of 2024, and - 4.44% and 4.84%, respectively, for the year 2025, compared to 4.42% and 4.87%, respectively, for the remainder of 2024, and 4.12% and 4.52%, respectively, for the year 2025 as of December 31, 2023. Annualized change in GDP in the U.S. mainland of 1.66% for the remainder of 2024 and 1.13% for the year 2025, compared to 0.48% for the remainder of 2024 and 1.64% for the year 2025 as of December 31, 2023. 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, 2024, management compared the modeled estimates under the probability- weighted economic scenarios against a more adverse scenario. Such scenario incorporates an additional adverse scenario and decreases the weight applied to the baseline scenario. Under this more adverse scenario, as an example, average unemployment rate for the Puerto Rico region increases to 6.40% for the remainder of 2024, compared to 6.08% 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, 2024, 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 $44 million at June 30, 2024\. 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, 2024. As of June 30, 2024, the ACL for loans and finance leases was $254.5 million, a decrease of $7.3 million, from $261.8 million as of December 31, 2023. The ACL for residential mortgage loans decreased by $11.3 million, mainly driven by updated historical loss experience used for determining the ACL estimate resulting in a downward revision of estimated loss severities and lower required reserve levels, partially offset by newly originated loans that have a longer life. The ACL for commercial and construction loans decreased by $1.3 million, mainly due to an improvement on the economic outlook of certain macroeconomic variables, particularly in variables associated with commercial real estate property performance, partially offset by increased volume. Meanwhile, the ACL for consumer loans increased by $5.3 million mainly driven by increases in historical charge-off and delinquency levels, mainly in credit cards; increases in portfolio volumes in auto loan portfolio; and updated historical loss experience used for determining the ACL estimate resulting in an upward revision of estimated loss severities and higher required reserve levels in the auto loan and finance lease portfolios. See Note 3 – “Loans Held for Investment” to the unaudited consolidated financial statements herein for additional information on the review of the credit models completed by the Corporation during the second quarter of 2024. The ratio of the ACL for loans and finance leases to total loans held for investment decreased to 2.06% as of June 30, 2024, compared to 2.15% as of December 31, 2023. An explanation for the change for each portfolio follows: The ACL to total loans ratio for the residential mortgage loan portfolio decreased from 2.03% as of December 31, 2023 to 1.64% as of June 30, 2024, mainly due to the aforementioned updated historical loss experience , partially offset by newly originated loans that have a longer life. The ACL to total loans ratio for the construction loan portfolio increased from 2.61% as of December 31, 2023 to 3.04% as of June 30, 2024, mainly due to newly originated loans which have a longer life. The ACL to total loans ratio for the commercial mortgage loan portfolio decreased from 1.41% as of December 31, 2023 to 1.24% as of June 30, 2024, mainly driven by an improvement on the economic outlook of certain macroeconomic variables. The ACL to total loans ratio for the C&I loan portfolio remained relatively flat at 1.06% as of June 30, 2024, compared to 1.05% as of December 31, 2023. The ACL to total loans ratio for the consumer loan portfolio increased from 3.64% as of December 31, 2023 to 3.73% as of June 30, 2024, mainly driven by increases in delinquency levels and the aforementioned updated historical loss experience. The ratio of the total ACL for loans and finance leases to nonaccrual loans held for investment was 264.66% as of June 30, 2024, compared to 312.81% as of December 31, 2023. 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 $254.5 million as of June 30, 2024, or 2.06% of total loans, compared with $261.8 million, or 2.15% of total loans, as of December 31, 2023. See “Results of Operations - Provision for Credit Losses” and Note 4 – “Allowance for Credit Losses for Loans and Finance Leases” above for additional information. ### Quarter Ended June 30, ### Six-Month Period Ended June 30, ### 2024 ### 2023 ### 2024 ### 2023 (Dollars in thousands) ACL for loans and finance leases, beginning of year 263,592 265,567 261,843 260,464 Impact of adoption of ASU 2022-02 2,116 Provision for credit losses - (benefit) expense: Residential mortgage (10,593) (3,500) (11,057) (3,427) Construction (554) 1,202 17 2,062 Commercial mortgage (2,976) 5,999 (2,986) 7,245 C&I (668) 2,997 (4,028) 1,347 Consumer and finance leases 26,721 14,072 42,901 29,799 Total provision for credit losses - expense 11,930 20,770 24,847 37,026 Charge-offs: Residential mortgage (491) (1,146) (1,007) (2,129) Construction (38) (38) Commercial mortgage (88) (106) C&I (332) (6,350) (791) (6,468) Consumer and finance leases (25,591) (16,462) (53,955) (33,260) Total charge offs (26,414) (24,084) (55,753) (42,001) Recoveries: Residential mortgage 446 757 718 1,254 Construction 14 409 24 472 Commercial mortgage 393 56 433 224 C&I 958 132 6,077 222 Consumer and finance leases 3,613 3,451 16,343 (1) 7,281 Total recoveries 5,424 4,805 23,595 (1) 9,453 Net charge-offs (20,990) (19,279) (32,158) (32,548) ACL for loans and finance leases, end of period 254,532 267,058 254,532 267,058 ACL for loans and finance leases to period-end total loans held for investment 2.06% 2.28% 2.06% 2.28% Net charge-offs (annualized) to average loans outstanding during the period 0.69% 0.67% 0.53% (2) 0.56% Provision for credit losses - expense for loans and finance leases to net charge-offs during the period 0.57x 1.08x 0.77x 1.14x (1) For the six-month period ended June 30, 2024 includes a recovery totaling $9.5 million associated with the bulk sale of fully charged-off consumer loans and finance leases. (2) The recovery associated with the aforementioned bulk sale reduced the ratio of total net charge-offs to related average loans by 15 basis points. 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 of such loans as of the indicated dates: ### As of June 30, 2024 ### 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 2,809,666 185,957 2,423,309 3,254,577 3,711,999 12,385,508 Percent of loans in each category to total loans 23 2 20 26 29 100 Allowance for credit losses 46,051 5,646 30,078 34,448 138,309 254,532 Allowance for credit losses to amortized cost 1.64 3.04 1.24 1.06 3.73 2.06 ### As of December 31, 2023 ### Residential ### Mortgage ### Loans ### Commercial ### Mortgage ### Loans ### C&I Loans ### Consumer and ### Finance Leases ### Construction ### Loans (Dollars in thousands) ### Total Total loans held for investment: Amortized cost of loans 2,821,726 214,777 2,317,083 3,174,232 3,657,665 12,185,483 Percent of loans in each category to total loans 23 2 19 26 30 100 Allowance for credit losses 57,397 5,605 32,631 33,190 133,020 261,843 Allowance for credit losses to amortized cost 2.03 2.61 1.41 1.05 3.64 2.15 #### 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, 2024, the ACL for off-balance sheet credit exposures decreased by $0.1 million to $4.5 million, when compared to December 31, 2023. #### Allowance for Credit Losses for Held-to-Maturity Debt Securities As of June 30, 2024, 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, 2024, the ACL for held-to-maturity debt securities was $1.3 million, compared to $2.2 million as of December 31, 2023. The decrease was mostly driven by improvements in the underlying updated financial information of a Puerto Rico municipal bond issuer. #### 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 $0.5 million as of each of June 30, 2024 and December 31, 2023. ### Nonaccrual Loans and Non-Performing Assets Total non-performing assets consist of nonaccrual loans (generally loans held for investment or loans held for sale for 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 autos acquired in settlement of loans. Repossessed 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 process of collection) or are insured or guaranteed under applicable FHA, VA, or other government-guaranteed programs for residential mortgage loans. Furthermore, as required by instructions in regulatory reports, loans past due 90 days and still accruing include loans previously pooled into GNMA securities for which the Corporation has the option but not the obligation to repurchase loans that meet GNMA’s specified delinquency criteria ( #### e.g. borrowers fail to make any payment for three consecutive months). For accounting purposes, these GNMA loans subject to the repurchase option are required to be reflected 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, 2024 ### December 31, 2023 (Dollars in thousands) Nonaccrual loans held for investment: Residential mortgage 31,396 32,239 Construction 4,742 1,569 Commercial mortgage 11,736 12,205 C&I 27,661 15,250 Consumer and finance leases 20,638 22,444 Total nonaccrual loans held for investment 96,173 83,707 OREO 21,682 32,669 Other repossessed property 7,513 8,115 Other assets (1) 1,532 1,415 Total non-performing assets 126,900 125,906 Past due loans 90 days and still accruing (2) (3) (4) 47,173 59,452 Non-performing assets to total assets 0.67 0.67 Nonaccrual loans held for investment to total loans held for investment 0.78 0.69 ACL for loans and finance leases 254,532 261,843 ACL for loans and finance leases to total nonaccrual loans held for investment 264.66 312.81 ACL for loans and finance leases to total nonaccrual loans held for investment, excluding residential real estate loans 392.94 508.75 (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 $7.4 million and $8.3 million as of June 30, 2024 and December 31, 2023, 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 $11.0 million and $15.4 million of FHA government guaranteed residential mortgage loans that were over 15 months delinquent as of June 30, 2024 and December 31, 2023, respectively. (4) These includes rebooked loans, which were previously pooled into GNMA securities, amounting to $6.8 million and $7.9 million as of June 30, 2024 and December 31, 2023, 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 non-performing assets increased by $1.0 million to $126.9 million as of June 30, 2024, compared to $125.9 million as of December 31, 2023. The increase in non-performing assets was driven by a $12.5 million increase in total nonaccrual loans held for investment, partially offset by an $11.0 million decrease in the OREO portfolio balance in the Puerto Rico region, mainly attributable to the sale of a $5.3 million commercial real estate OREO property and sales of residential OREO properties. Total nonaccrual loans were $96.2 million as of June 30, 2024. This represents a net increase of $12.5 million from $83.7 million as of December 31, 2023, consisting of increases of $15.1 million in nonaccrual commercial and construction loans, partially offset by decreases of $1.8 million in nonaccrual consumer loans and $0.8 million in nonaccrual residential mortgage loans. The increase in nonaccrual commercial and construction loans was primarily driven by the inflow of a $16.5 million commercial relationship in the Puerto Rico region in the food retail industry. The following table shows non-performing assets by geographic segment as of the indicated dates: ### June 30, 2024 ### December 31, 2023 (In thousands) ### Puerto Rico: Nonaccrual loans held for investment: Residential mortgage 16,895 18,324 Construction 3,776 595 Commercial mortgage 2,865 3,106 C&I 26,387 13,414 Consumer and finance leases 20,276 21,954 Total nonaccrual loans held for investment 70,199 57,393 OREO 17,413 28,382 Other repossessed property 7,330 7,857 Other assets 1,532 1,415 Total non-performing assets 96,474 95,047 Past due loans 90 days and still accruing 44,028 53,308 ### Virgin Islands: Nonaccrual loans held for investment: Residential mortgage 6,446 6,688 Construction 966 974 Commercial mortgage 8,871 9,099 C&I 1,274 1,169 Consumer 326 419 Total nonaccrual loans held for investment 17,883 18,349 OREO 4,202 4,287 Other repossessed property 183 252 Total non-performing assets 22,268 22,888 Past due loans 90 days and still accruing 3,145 6,005 ### United States: Nonaccrual loans held for investment: Residential mortgage 8,055 7,227 C&I 667 Consumer 36 71 Total nonaccrual loans held for investment 8,091 7,965 OREO 67 Other repossessed property 6 Total non-performing assets 8,158 7,971 Past due loans 90 days and still accruing The following tables present the activity of commercial and construction nonaccrual loans held for investment for the indicated periods: ### Construction ### Commercial ### Mortgage ### C&I ### Total (In thousands) ### Quarter Ended June 30, 2024 Beginning balance 1,498 11,976 25,067 38,541 Plus: Additions to nonaccrual 3,300 7 14,800 18,107 Less: Loans returned to accrual status (35) (77) (9,226) (1) (9,338) Nonaccrual loans transferred to OREO (684) (684) Nonaccrual loans charge-offs (332) (332) Loan collections (21) (170) (1,964) (2,155) Ending balance 4,742 11,736 27,661 44,139 (1) Mainly related to the restoration to accrual status of a C&I loan in the Florida region in the power generation industry that entered in nonaccrual status during the first quarter of 2024. ### Construction ### Commercial ### Mortgage ### C&I ### 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 ### C&I ### Total (In thousands) ### Six-Month Period Ended June 30, 2024 Beginning balance 1,569 12,205 15,250 29,024 Plus: Additions to nonaccrual 3,300 7 25,841 29,148 Less: Loans returned to accrual status (35) (77) (9,226) (1) (9,338) Nonaccrual loans transferred to OREO (48) (684) (732) Nonaccrual loans charge-offs (791) (791) Loan collections (44) (399) (2,729) (3,172) Ending balance 4,742 11,736 27,661 44,139 (1) Mainly related to the restoration to accrual status of a C&I loan in the Florida region in the power generation industry that entered in nonaccrual status during the first quarter of 2024. ### Construction ### Commercial ### Mortgage ### C&I ### 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 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, ### 2024 ### 2023 ### 2024 ### 2023 (In thousands) Beginning balance 32,685 36,410 32,239 42,772 Plus: Additions to nonaccrual 3,397 3,009 7,993 5,090 Less: Loans returned to accrual status (2,137) (2,714) (4,970) (6,651) Nonaccrual loans transferred to OREO (743) (1,549) (1,147) (4,259) Nonaccrual loans charge-offs (153) (401) (278) (621) Loan collections (1,653) (1,503) (2,441) (3,073) Reclassification (6) Ending balance 31,396 33,252 31,396 33,252 The amount of nonaccrual consumer loans, including finance leases, decreased by $1.8 million to $20.6 million as of June 30, 2024, compared to $22.4 million as of December 31, 2023. The decrease was mainly reflected in the auto loan and finance lease portfolios. As of June 30, 2024, approximately $29.7 million of the loans placed in nonaccrual status, mainly commercial and residential mortgage 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, 2024, interest income of approximately $0.2 million related to nonaccrual loans with a carrying value of $40.3 million as of June 30, 2024, 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 $147.4 million as of June 30, 2024, a decrease of $3.4 million, compared to $150.8 million as of December 31, 2023. The variances by major portfolio categories are as follows: Residential mortgage loans in early delinquency decreased by $4.2 million to $32.3 million. Consumer loans in early delinquency decreased by $0.3 million to $111.7 million, mainly reflected in the auto loan portfolio. Commercial and construction loans in early delinquency increased by $1.1 million to $3.4 million, mainly due to a commercial mortgage loan that matured and is in the process of renewal but for which the Corporation continues to receive interest and principal payments from the borrower. In addition, the Corporation provides homeownership preservation assistance to its customers through a loss mitigation program. Depending upon the nature of a borrower’s financial condition, restructurings or loan modifications through this program are provided, as well as other modifications of individual C&I, commercial mortgage, construction, and residential mortgage loans. For the quarter and six-month period ended June 30, 2024, loans modified to borrowers experiencing financial difficulty had an amortized cost basis of $118.9 million and $121.4 million, respectively, which included $110.9 million related to a relationship that had been previously reported as a troubled debt restructuring under ASC 310-40. 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 $21.7 million as of June 30, 2024 and $32.7 million as of December 31, 2023. The following tables show the composition of the OREO portfolio as of June 30, 2024 and December 31, 2023, as well as the activity of the OREO portfolio by geographic area during the six-month period ended June 30, 2024: ### OREO Composition by Region ### As of June 30, 2024 (In thousands) ### Puerto Rico ### Virgin Islands ### Florida ### Consolidated Residential 14,035 1,366 67 15,468 Construction 1,632 26 1,658 Commercial 1,746 2,810 4,556 17,413 4,202 67 21,682 ### As of December 31, 2023 (In thousands) ### Puerto Rico ### Virgin Islands ### Florida ### Consolidated Residential 18,809 1,452 20,261 Construction 1,576 25 1,601 Commercial 7,997 2,810 10,807 28,382 4,287 32,669 ### OREO Activity by Region ### Six-Month Period Ended June 30, 2024 (In thousands) ### Puerto Rico ### Virgin Islands ### Florida ### Consolidated Beginning Balance 28,382 4,287 32,669 Additions 4,532 67 4,599 Sales (14,690) (85) (14,775) Subsequent measurement adjustments (169) (169) Other adjustments (642) (642) Ending Balance 17,413 4,202 67 21,682 #### Net Charge-offs and Total Credit Losses Net charge-offs totaled $21.0 million for the second quarter of 2024, or 0.69% of average loans on an annualized basis, compared to $19.3 million, or an annualized 0.67% of average loans, for the second quarter of 2023. For the six-month period ended June 30, 2024, net charge-offs totaled $32.2 million, or an annualized 0.53% of average loans, compared to $32.5 million, or an annualized 0.56% of average loans, for the same period in 2023. Net charge -offs for the six-month period ended June 30, 2024 include a $9.5 million recovery associated with the bulk sale of fully charged-off consumer loans and finance leases, which reduced by 15 basis points the ratio of total net charge-offs to average loans for such period. Consumer loans and finance leases net charge-offs for the second quarter of 2024 were $22.0 million, or an annualized 2.38% of related average loans, compared to net charge-offs of $13.0 million, or an annualized 1.51% of related average loans, for the second quarter of 2023. Net charge-offs of consumer loans and finance leases for the six-month period ended June 30, 2024 were $37.6 million, or 2.04% of related average loans, compared to net charge-offs of $26.0 million, or an annualized 1.53% of related average loans, for the same period in 2023. The increase for the second quarter and first six months of 2024 was mainly driven by an increase in charge-offs across all major portfolio classes which have been trending higher towards historical loss experience, partially offset by the recovery associated with the aforementioned bulk sale, which reduced by 52 basis points the ratio of consumer loans and finance leases net charge-offs to related average loans for the first six months of 2024. C&I loans net recoveries for the second quarter of 2024 were $0.6 million, or an annualized 0.08% of related average loans, compared to net charge-offs of $6.2 million, or an annualized 0.87% of related average loans, for the second quarter of 2023. C&I loans net recoveries for the six-month period ended June 30, 2024 were $5.3 million, or an annualized 0.33% of related average loans, compared to net charge-offs of $6.2 million, or an annualized 0.44% of related average loans, for the same period in 2023. The net recoveries for the second quarter and first six months of 2024 include a $0.8 million recovery associated with a C&I loan in the Florida region. The net recoveries for the first six months of 2024 also include a $5.0 million recovery associated with a C&I loan in the Puerto Rico region. Meanwhile, the net charge -offs for the second quarter and first six months of 2023 included a $6.2 million charge-off recorded on a C&I participated loan in the Florida region in the power generation industry. Commercial mortgage loans net recoveries for the second quarter and six-month period ended June 30, 2024 were $0.4 million, or an annualized 0.07% and 0.04%, respectively, of related average loans, compared to net charge-offs of $32 thousand and net recoveries of $0.1 million, or an annualized 0.01% of related average loans, for the comparable periods in 2023. The net charge-offs for the second quarter and first six months of 2024 include a $0.4 million recovery recorded on a commercial real estate loan in the Florida region. 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, ### 2024 ### 2023 ### 2024 ### 2023 Residential mortgage 0.01 0.06 0.02 0.06 Construction (0.02) (0.99) (0.02) (0.59) Commercial mortgage (0.07) 0.01 (0.04) (0.01) C&I (0.08) 0.87 (0.33) 0.44 Consumer and finance leases 2.38 1.51 2.04 (1) 1.53 Total loans 0.69 0.67 0.53 (1) 0.56 (1) The $9.5 million recovery associated with the bulk sale of fully charged-off consumer loans and finance leases during the first six months of 2024 reduced the ratios of consumer loans and finance leases and total net charge-offs to related average loans by 52 basis points and 15 basis points, respectively. 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, ### 2024 ### 2023 ### 2024 ### 2023 ### PUERTO RICO: Residential mortgage 0.01 0.08 0.03 0.09 Construction (3.04) (1.86) Commercial mortgage 0.02 0.01 C&I 0.04 0.01 (0.44) 0.01 Consumer and finance leases 2.39 1.51 2.03 (1) 1.47 Total loans 0.90 0.56 0.66 (1) 0.57 ### VIRGIN ISLANDS: Residential mortgage (0.02) (0.05) Construction 3.93 1.93 Commercial mortgage (0.23) (0.23) (0.04) (0.22) C&I (0.01) Consumer and finance leases 2.49 2.02 0.42 2.10 Total loans 0.36 0.34 0.06 0.31 ### FLORIDA: Residential mortgage (0.04) (0.02) Construction (0.07) (0.06) (0.06) (0.05) Commercial mortgage (0.23) (0.12) (0.04) C&I (0.37) 2.67 (0.13) 1.31 Consumer and finance leases (3.57) (1.16) (1.69) (0.45) Total loans (0.25) 1.23 (0.10) 0.60 (1) The recovery associated with the aforementioned bulk sale reduced the ratios of consumer loans and finance leases and total net charge-offs to related average loans for the six-month period ended June 30, 2024 by 53 basis points and 20 basis points, respectively. The following table presents information about the OREO inventory and related gains and losses for the indicated periods: ### Quarter ended June 30, ### Six-Month Period Ended June 30, ### 2024 ### 2023 ### 2024 ### 2023 (Dollars in thousands) ### OREO OREO balances, carrying value: Residential 15,468 23,621 15,468 23,621 Construction 1,658 1,892 1,658 1,892 Commercial 4,556 6,058 4,556 6,058 Total 21,682 31,571 21,682 31,571 OREO activity (number of properties): Beginning property inventory 247 344 277 344 Properties acquired 33 44 49 103 Properties disposed (58) (68) (104) (127) Ending property inventory 222 320 222 320 Average holding period (in days) Residential 512 524 512 524 Construction 2,541 2,178 2,541 2,178 Commercial 3,342 2,580 3,342 2,580 Total average holding period (in days) 1,262 1,018 1,262 1,018 OREO operations (gain) loss: Market adjustments and (gains) losses on sale: Residential (1,918) (2,553) (3,744) (5,043) Construction (10) (7) (19) (47) Commercial (2,241) (2,222) 67 Total net gain (4,169) (2,560) (5,985) (5,023) Other OREO operations expenses 560 576 924 1,043 ### Net Gain on OREO operations (3,609) (1,984) (5,061) (3,980) ### 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, Enterprise Risk Management 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, Operations and Enterprise Risk Management. 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 $12.4 billion as of June 30, 2024, the Corporation had credit risk of approximately 80% in the Puerto Rico region, 17% in the United States region, and 3% in the Virgin Islands region. ### Update on the Puerto Rico Fiscal and Economic Situation A significant portion of the Corporation’s business activities and credit exposure is concentrated in the Commonwealth of Puerto Rico, which has experienced economic and fiscal distress over the last decade. See “Risk Management — Exposure to Puerto Rico Government” below. 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 underfunded pension system. #### Economic Indicators On March 18, 2024, the Puerto Rico Planning Board (“PRPB”) published an analysis of the Puerto Rico’s economy during fiscal year 2023, as well as a short-term forecast for fiscal years 2024 and 2025. According to the preliminary estimates issued by the PRPB, Puerto Rico’s real gross national product (“GNP”) grew by 0.7% in fiscal year 2023, the third consecutive year with a positive year- over-year variance. The main drivers behind growth in fiscal year 2023 were personal consumption expenditures and fixed investments in both construction, and machinery and equipment. The PRPB also revised previously published real GNP growth estimates for fiscal years 2022 and 2021 from 3.7% to 3.8% and from 0.9% to 1.4%, respectively. 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 April 2024, estimates showed that the EDB-EAI stood at 123.9, down 2.0% on a year-over-year basis. Over the 12-month period ended April 30, 2024, the EDB-EAI averaged 126.7, the highest level since April 2015 and approximately 2.0% above the comparable figure a year earlier. Labor market trends remain positive. Data published by the Bureau of Labor Statistics showed that non-farm payrolls as of June 2024 in Puerto Rico increased by 2.0% when compared to June 2023, supported by a year-over-year increase of 8.5% in Leisure and Hospitality payroll employment and a 5.8% year-over-year increase in construction-related payroll employment. The unemployment rate remained relatively at a near-record low of 5.8%. #### Fiscal Plan On June 5, 2024, the PROMESA oversight board certified the 2024 Fiscal Plan for Puerto Rico (the “2024 Fiscal Plan”), updated with the most recent data and projections for revenues and expenses, and renewed roadmap for Puerto Rico to achieve fiscal responsibility. The 2024 Fiscal Plan is made up of four parts: (i) progress made in stabilizing government finances, (ii) Puerto Rico’s current financial conditions and risks, (iii) details of the actions required to achieve fiscal responsibility and adequate access to credit markets, and (iv) description of the actions the PROMESA oversight board and the Government must take to complete PROMESA’s mandate. The 2024 Fiscal Plan outlines eight areas of focus to achieve long-term fiscal responsibility: (i) improved economic and revenue forecasting, (ii) adoption of budget best practices, (iii) comprehensive capital delivery program, (iv) improved management of education resources, (v) improved government service delivery and labor relations, (vi) outcome-based, data-driven, and controlled healthcare spending, (vii) improved, transparent financial reporting, and (viii) optimized municipal fiscal management. Success in these areas, which aim to address the most crucial financial management challenges that Puerto Rico faces, is critical for Puerto Rico to fully recover from bankruptcy and to fulfill the mandate of PROMESA to achieve fiscal responsibility. As the debt restructurings come to an end, a significant portion of the uncertainty that has plagued the economy over the past ten years has faded away. To generate revenues that are resilient even when the unprecedented influx of federal funding subsides, fiscal stability alone will not suffice. The 2024 Fiscal Plan describes an effort to develop an integrated plan that will serve as a roadmap to unlock future growth. While that plan is developed, the PROMESA oversight board and the Government will continue to support specific priorities through a first wave of economic growth initiatives that aim to address the most crucial challenges that Puerto Rico faces. The list of focus areas outlined in the 2024 Fiscal Plan to promote economic growth include: (i) integrated framework for economic growth, (ii) human capital, focused on robust, highly-skilled, and health workforce, (iii) economic strategies, focused on improved ease of doing business, (iv) economic policies, focused on reforms of Puerto Rico’s tax system, and (v) infrastructure, focused on reduced cost and increased reliability of energy, transportation, and internet connectivity. Similar to previous fiscal plans, the 2024 Fiscal Plan includes an updated macroeconomic forecast reflecting the impact of fiscal and structural measures, natural disasters, COVID-19, and federal funding in response to natural disasters and the pandemic on the baseline economic trajectory. The 2024 Fiscal Plan projects Puerto Rico GNP growth in fiscal year 2024 to be 1.0%, followed by declines of 0.8% and 0.1% in fiscal year 2025 and fiscal year 2026, respectively. On average, Puerto Rico’s GNP is projected to grow approximately 0.4% between fiscal year 2023 and fiscal year 2026. Contrary to previous fiscal plans where Puerto Rico’s population was projected to decline, the 2024 Fiscal Plan includes a stable population projection through 2029 mainly due to the offset between a negative natural population decline and positive net migration. Specifically, the revised fiscal plan projections contemplate a net inflow of over 20,000 people annually through 2029, compared to an average of less than 5,000 people in the 2023 fiscal plan. The 2024 Fiscal Plan projects that approximately $54.5 billion in total disaster relief funding, from federal and private sources, will be disbursed as part of the reconstruction efforts over a span of 9 years (fiscal years 2024 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 2024 Fiscal Plan projects the $5.9 billion in remaining COVID-19 relief funds to be deployed in fiscal years 2024 and 2025. Additionally, the 2024 Fiscal Plan continues to account for $2.1 billion in federal funds to Puerto Rico from the Bipartisan Infrastructure Law directed towards improving Puerto Rico’s infrastructure over fiscal years 2024 through 2026. Overall, Puerto Rico’s economic growth is highly dependent on the Government’s ability to efficiently deploy these federal funds. #### 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 restructuring pending is that of the Puerto Rico Electric Power Authority (“PREPA”). On February 23, 2024, the PROMESA oversight board filed the fourth amended Plan of Adjustment to reduce more than $10 billion of total asserted claims by various creditors against PREPA by approximately 80% to $2.5 billion, excluding pension liabilities. According to the PROMESA oversight board, bondholders who support the plan would recover 12.5% of their original asserted claim, while bondholders who do not agree to the proposed plan would recover 3.5% of their asserted claim. On June 12, 2024, the Court of Appeals for the First Circuit (the “First Circuit”) issued its opinion in the appeal of the Amended Lien & Recourse Challenge whereby it ruled that PREPA’s bondholders are secured by a perfected security interest in PREPA’s “Net Revenues” (as defined in the Trust Agreement) and that they hold non-recourse claims secured by the Net Revenues and do not hold any unsecured claims. As a result of the First Circuit’s ruling, the PROMESA oversight board expressed its intention of requesting a reopening of the confirmation hearing record for the limited purpose of valuing the non-settling bondholders’ share of the bonds’ collateral, namely PREPA’s net revenues and showing the court how such value as determined by the court will be paid. Recognizing that parties’ views of appropriate next steps may vary, on July 10, 2024, the Court held a conference to address what further submissions or proceedings are necessary regarding or related to the pending motion for confirmation of the PREPA Plan. Following the conference, Judge Taylor Swain issued an order whereby all PREPA confirmation and bond-related litigation is stayed for at least sixty days, through and including September 8, 2024, unless otherwise ordered by the court. In addition, the court ordered all parties to begin working with the mediation team throughout the duration of the stay period. #### 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 12-month period ended May 31, 2024, over $3.5 billion in disaster relief funds were disbursed through the Federal Emergency Management Agency (“FEMA”) Public Assistance program and the HUD Community Development Block Grant (“CDBG”) program, a 20% increase when compared to the same period in 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. For example, approximately 86% of the projects that FEMA has obligated to address damage caused by Hurricane Maria have resources to reinforce their infrastructure, among other hazard mitigation measures, that will prepare these facilities for future weather events. As of July 15, 2024, over 3,170 projects had already been completed under FEMA’s Public Assistance programs while over 20,800 projects were active across different stages of execution for a total cost of $10.6 billion, equivalent to approximately 30% of the agency’s $35.7 billion obligation, according to the Central Office for Recovery, Reconstruction and Resiliency (“COR3”). ### Exposure to Puerto Rico Government As of June 30, 2024, the Corporation had $316.7 million of direct exposure to the Puerto Rico government, its municipalities and public corporations, compared to $297.9 million as of December 31, 2023. The $18.8 million increase was mainly due to the origination of a $13.6 million loan to a municipality in Puerto Rico that is supported by assigned property tax revenues and $6.1 million in disbursements on a construction loan to a public corporation of the Puerto Rico government. As of June 30, 2024, approximately $203.1 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 $59.4 million consisted of loans and obligations which are supported by one or more specific sources of municipal revenues. Approximately 69% 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. In addition to municipalities, the total direct exposure also included $8.8 million in a loan extended to an affiliate of PREPA, $42.3 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 $3.1 million as part of its available-for-sale debt securities portfolio (fair value of $1.5 million as of June 30, 2024). The following table details the Corporation’s total direct exposure to Puerto Rico government obligations according to their maturities: ### As of June 30,2024 ### Investment ### Portfolio ### (Amortized ### cost) ### Loans ### Total ### Exposure (In thousands) Puerto Rico Housing Finance Authority: After 10 years 3,084 3,084 ### Total Puerto Rico Housing Finance Authority 3,084 3,084 Agencies and public corporation of the Puerto Rico government: After 1 to 5 years 18,973 18,973 After 5 to 10 years 23,352 23,352 Total agencies and public corporation of the Puerto Rico government 42,325 42,325 Affiliate of the Puerto Rico Electric Power Authority: After 1 to 5 years 8,849 8,849 Total Puerto Rico government affiliate 8,849 8,849 ### Total Puerto Rico public corporations and government affiliate 51,174 51,174 Municipalities: Due within one year 3,178 40,410 43,588 After 1 to 5 years 51,424 43,264 94,688 After 5 to 10 years 36,253 71,346 107,599 After 10 years 16,595 16,595 ### Total Municipalities 107,450 155,020 262,470 ### Total Direct Government Exposure ### 110,534 ### 206,194 ### 316,728 In addition, as of June 30, 2024, the Corporation had $74.9 million in exposure to residential mortgage loans that are guaranteed by the PRHFA, a governmental instrumentality that has been designated as a covered entity under PROMESA (December 31, 2023 – $77.7 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, 2023, the PRHFA’s mortgage loans insurance program covered loans in an aggregate amount of approximately $388 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, 2023, the most recent date as of which information is available, the PRHFA had a liability of approximately $1.3 million as an estimate of the losses inherent in the portfolio. As of each of June 30, 2024 and December 31, 2023, the Corporation had $2.7 billion of public sector deposits in Puerto Rico. Approximately 23% of the public sector deposits as of June 30, 2024 were from municipalities and municipal agencies in Puerto Rico and 77% 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. On June 17, 2024, the United States Bureau of Economic Analysis (the “BEA”) released its estimates of GDP for 2022. According to the BEA, the USVI’s real GDP decreased 1.3% in 2022 after increasing 3.7% in 2021. The decrease in real GDP reflected declines in exports, private fixed investment, government spending, and personal consumption expenditures. These negative variances were partly offset by an increase in inventory investment, while imports, a subtraction item in the calculation of GDP, decreased. Over the past three 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 September 2017. According to data published by FEMA, over $5.2 billion in disaster recovery funds had been disbursed through May 2024 and nearly $10 billion were remaining obligated funds pending to be disbursed. Moreover, labor market trends remain stable with non-farm payrolls as of May 2024 in line with the comparable figure for the first quarter of 2024 and up 0.1% when compared to the fourth quarter of 2023. On December 14, 2023, Fitch Ratings announced that it withdrew the ratings of the U.S. Virgin Islands Water and Power Authority (“WAPA”) primarily due to limited availability of the authority’s operating and financial information from public sources or from WAPA’s management. 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, 2024 and December 31, 2023, the Corporation had $105.0 million and $90.5 million, respectively, in loans to USVI public corporations, of which $69.9 million and $57.2 million, respectively, were fully collateralized by cash balances held at the Bank. As of June 30, 2024, 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, 1,671 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, 2024 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, 2024 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, 2024 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. ### PART II - OTHER INFORMATION In accordance with the instructions to Part II of Form 10-Q, the other specified items in this part have been omitted because they are not applicable, or the information has been previously reported. ## Risk factors As filed, 3,415 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 2023 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 2023 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 2023 Annual Report on Form 10-K. ### 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 increased regulatory requirements and costs. 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 negatively impacted customer confidence in the safety and soundness of financial institutions. These developments resulted in certain regional banks experiencing higher than normal deposit outflows and an elevated level of competition for available deposits in the market. The impact of market volatility from the adverse developments in the banking industry, along with continued elevated 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 have increased regulatory requirements and costs that may impact capital ratios or the FDIC deposit insurance premium. For example, in 2023, the FDIC issued a final rule to impose a special assessment to recover certain estimated losses to the Deposit Insurance Fund (“DIF”) arising from the closures of Silicon Valley Bank and Signature Bank. The estimated losses will be recovered through quarterly special assessments collected from certain insured depository institutions, including the Bank, and collection began during the quarter ended June 30, 2024. In connection with updates made by the FDIC to the initial estimated losses to the DIF, the Corporation recorded charges of $0.2 million and $1.1 million during the quarter and six-month period ended June 30, 2024, respectively, in the consolidated statements of income as part of “FDIC deposit insurance” expenses, which increased the estimated FDIC special assessment to $7.4 million. The Corporation continues to monitor the FDIC’s estimated loss to the DIF, which could affect the amount of its accrued liability. Filed Aug 9, 2024. Source: SEC EDGAR, the filing index for accession 0001057706-24-000009. Last ingested by Listed: Nov 6, 2026, 13:17 ET. No prices; not investment advice.