10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

20549

____________

FORM

10-Q

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

June 30, 2023

or

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ___________________ to

___________________

COMMISSION FILE NUMBER

001-14793

FIRST BANCORP

.

(EXACT NAME OF REGISTRANT AS SPECIFIED

IN ITS CHARTER)

Puerto Rico

66-0561882

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1519 Ponce de León Avenue

,

Stop 23

San Juan

,

Puerto Rico

(Address of principal executive offices)

00908

(Zip Code)

(

787

)

729-8200

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock ($0.10 par value per share)

FBP

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed

all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the

preceding 12 months (or for such shorter period that the registrant

was required to file such reports), and (2) has been subject

to such filing requirements for the past 90

days.

Yes

☑

No

Indicate by check mark whether the registrant has submitted

electronically every Interactive Data File required to be submitted

pursuant to Rule 405 of Regulation S-T

(§ 232.405 of this chapter) during the preceding 12 months (or for

such shorter period that the registrant was required

to submit such files).

Yes

☑

No

Indicate by check mark whether the registrant is a large accelerated

filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging

growth company.

See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”

in Rule 12b-2 of

the Exchange Act.

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to

use the extended transition period for complying with any

new or revised

financial accounting standards provided pursuant to Section 13(a)

of the Exchange Act.

Indicate by check mark whether the registrant is a shell company

(as defined in Rule 12b-2 of the Exchange Act).

Yes

☐

No

☑

Indicate the number of shares outstanding of each of the

issuer’s classes of common stock, as of the latest practicable date.

Common stock:

178,298,443

shares outstanding as of August 1, 2023.

2

FIRST BANCORP.

INDEX PAGE

PART

I. FINANCIAL INFORMATION

PAGE

Item 1. Financial Statements:

Consolidated Statements of Financial Condition (Unaudited) as of June

30, 2023 and December 31, 2022

5

Consolidated Statements

of Income

(Unaudited) –

Quarters and

Six-Month Periods

ended June

30, 2023

and 2022

6

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited) – Quarters and Six-Month Periods

ended June 30, 2023 and 2022

7

Consolidated Statements of Cash Flows (Unaudited) – Six-Month Periods

ended June 30, 2023 and 2022

8

Consolidated

Statements

of

Changes

in

Stockholders’

Equity

(Unaudited)

–

Quarters

and

Six-Month

Periods ended June 30, 2023 and 2022

9

Notes to Consolidated Financial Statements (Unaudited)

10

Item 2. Management’s Discussion

and Analysis of Financial Condition and Results of Operations

78

Item 3. Quantitative and Qualitative Disclosures About Market Risk

135

Item 4. Controls and Procedures

Item 5. Other Information

135

135

PART

II. OTHER INFORMATION

Item 1.

Legal Proceedings

136

Item 1A. Risk Factors

136

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

138

Item 6.

Exhibits

139

SIGNATURES

3

Forward-Looking Statements

This Quarterly Report on Form 10-Q

(“Form 10-Q”) contains forward-looking statements

within the meaning of Section 27A

of the

Securities Act

of 1933,

as amended (the

“Securities Act”),

and Section

21E of

the Securities Exchange

Act of 1934,

as amended (the

“Exchange Act”), which are subject

to the safe harbor created by

such sections. When used in this

Form 10-Q or future filings by

First

BanCorp.

(the

“Corporation,”

“we,”

“us,”

or

“our”)

with

the

U.S.

Securities

and

Exchange

Commission

(the

“SEC”),

in

the

Corporation’s press

releases or in other public or

stockholder communications made by

the Corporation, or in oral statements

made on

behalf of the Corporation by,

or with the approval of, an

authorized executive officer,

the words or phrases “would,” “intends,”

“will,”

“expect,” “should,”

“plans,” “forecast,”

“anticipate,” “look forward,”

“believes,” and other

terms of similar

meaning or import,

or the

negatives of

these terms

or variations

of them,

in connection

with any

discussion of

future operating,

financial or

other performance

are meant to identify “forward-looking statements.”

The Corporation cautions readers

not to place undue reliance on

any such “forward-looking statements,” which

speak only as of the

date

hereof,

and

advises

readers

that

any

such

forward-looking

statements

are

not

guarantees

of

future

performance

and

involve

certain risks,

uncertainties,

estimates, and

assumptions by

us that

are difficult

to predict.

Various

factors, some

of which

are beyond

our control, could cause actual results to differ materially from

those expressed in, or implied by,

such forward-looking statements.

Factors that could

cause results to

differ from

those expressed in

the Corporation’s

forward-looking statements

include, but

are not

limited to, risks

described or

referenced in

Part I, Item

1A, “Risk Factors,”

in the Corporation’s

Annual Report

on Form 10-K

for the

year

ended

December

31,

2022

(the

“2022

Annual

Report

on

Form

10-K”),

Part

II,

Item

1A,

“Risk

Factors”

in

the

Corporation’s

Quarterly Report on Form 10-Q for the quarterly period ended March

31, 2023, and the following:

●

the impacts of rising interest

rates and inflation on

the Corporation, including a

decrease in demand for new

loan originations

and refinancings,

increased competition

for borrowers,

attrition in deposits,

a reduction

in the fair

value of the

Corporation’s

debt securities portfolio, and adverse effects on the Corporation’s

results of operations and its liquidity position;

●

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, including

Federal Deposit Insurance

Corporation (“FDIC”)

special assessments, which could result in, among other things, bank deposit

runoffs and liquidity constraints;

●

the

effect

of

continued

changes

in

the

fiscal

and

monetary

policies

and

regulations

of

the

United

States

(“U.S.”)

federal

government,

the Puerto

Rico government

and other governments,

including those

determined by

the Board

of the Governors

of the Federal Reserve System (the

“Federal Reserve Board”),

the Federal Reserve Bank of New York

(the “New York

FED”

or

the

“FED”),

the

FDIC,

government-sponsored

housing

agencies

and

regulators

in

Puerto

Rico,

the

U.S.,

and

the

U.S.

Virgin Islands

(the “USVI) and British Virgin

Islands (the “BVI”);

●

uncertainty as

to the

ability of

the Corporation’s

banking subsidiary,

FirstBank Puerto

Rico (“FirstBank”

or the

“Bank”), to

retain its core

deposits and

generate sufficient

cash flow through

its wholesale funding

sources, such as

securities sold under

agreements

to

repurchase,

Federal

Home

Loan

Bank

(“FHLB”)

advances,

and

brokered

certificates

of

deposit

(“brokered

CDs”), which may require us to sell investment securities at a loss;

●

adverse

changes

in general

economic

conditions

in Puerto

Rico, the

U.S., and

the USVI

and

BVI, including

in the

interest

rate

environment,

unemployment

rates,

market

liquidity,

housing

absorption

rates,

real

estate

markets,

and

U.S.

capital

markets,

which

may

affect

funding

sources,

loan

portfolio

performance

and

credit

quality,

market

prices

of

investment

securities,

and

demand

for

the Corporation’s

products

and services,

and which

may

reduce

the

Corporation’s

revenues and

earnings and the value of the Corporation’s

assets;

●

the impact

of government

financial assistance

for hurricane

recovery and

other disaster

relief on

economic activity

in Puerto

Rico, and the timing and pace of disbursements of funds earmarked for disaster

relief;

●

the ability

of the

Corporation,

FirstBank,

and

third-party

service providers

to identify

and prevent

cyber-security

incidents,

such

as

data

security

breaches,

ransomware,

malware,

“denial

of

service”

attacks,

“hacking,”

identity

theft,

and

state-

sponsored

cyberthreats,

and

the

occurrence

of

and

response

to

any

incidents

that

occur,

such

as

an

April

2023

security

incident

at

one

of

our

third-party

vendors,

which

may

result

in

misuse

or

misappropriation

of

confidential

or

proprietary

information, disruption,

or damage

to our

systems or

those of

third-party service

providers, increased

costs and

losses or

an

adverse effect to our reputation;

●

general competitive

factors and other

market risks as

well as the

implementation of

strategic growth opportunities,

including

risks, uncertainties, and other factors or events related to any business acquisitions

or dispositions;

4

●

uncertainty as

to the

implementation of

the debt

restructuring plan

of Puerto

Rico (“Plan

of Adjustment”

or “PoA”)

and the

fiscal plan

for Puerto

Rico as

certified

on April

3, 2023

(the “2023

Fiscal Plan”)

by the

oversight

board

established

by the

Puerto Rico

Oversight, Management,

and Economic

Stability Act

(“PROMESA”),

or any

revisions to

it, on

our clients

and

loan portfolios, and any potential impact from future economic or political

developments and tax regulations in Puerto Rico;

●

the

impact

of

changes

in

accounting

standards,

or

assumptions

in

applying

those

standards,

on

forecasts

of

economic

variables considered for the determination of the allowance for credit

losses (“ACL”);

●

the ability of FirstBank to realize the benefits of its net deferred tax assets;

●

environmental, social, and governance matters, including our climate-related

initiatives and commitments;

●

the impacts

of natural

or man-made

disasters, widespread

health emergencies,

geopolitical conflicts

(including

the ongoing

conflict

in

Ukraine),

terrorist

attacks,

or

other

catastrophic

external

events,

including

impacts

of

such

events

on

general

economic conditions and on the Corporation’s

assumptions regarding forecasts of economic variables;

●

the effect of

changes in the interest

rate environment, including

any adverse change

in the Corporation’s

ability to attract and

retain

clients

and

gain

acceptance

from

current

and

prospective

customers

for

new

products

and

services,

including

those

related to the offering of digital banking and financial services;

●

the

risk

that

additional

portions

of

the

unrealized

losses in

the

Corporation’s

debt

securities portfolio

are

determined

to

be

credit-related,

or

the

need

of additional

credit

losses that

could

emerge

from

the

recent

downgrade

of

the

United

States of

America’s

Long-Term

Foreign-Currency

Issuer

Default

Rating

(“IDR”)

to

‘AA+’

from

‘AAA’,

resulting

in

additional

charges to the provision for credit losses on the Corporation’s

debt securities portfolio;

●

the impacts of applicable legislative, tax, or regulatory changes on

the Corporation’s financial condition

or performance;

●

the

risk

of

possible

failure

or

circumvention

of

the

Corporation’s

internal

controls

and

procedures

and

the

risk

that

the

Corporation’s risk management

policies may not be adequate;

●

the risk that the FDIC may

further increase the deposit insurance

premium and/or require further special assessments,

causing

an additional increase in the Corporation’s

non-interest expenses;

●

any need to recognize impairments on the Corporation’s

financial instruments, goodwill, and other intangible assets;

●

residual impacts of the transition away from the London Interbank Offered

Rate (“LIBOR”);

●

the risk

that the

impact

of the

occurrence

of any

of these

uncertainties on

the Corporation’s

capital would

preclude

further

growth of FirstBank and preclude the Corporation’s

Board of Directors (the “Board”) from declaring dividends; and

●

uncertainty as

to whether

FirstBank will

be able

to continue

to satisfy

its regulators

regarding,

among other

things, its

asset

quality,

liquidity

plans,

maintenance

of

capital

levels,

and

compliance

with

applicable

laws,

regulations

and

related

requirements.

The Corporation does not undertake, and

specifically disclaims any obligation to update any

“forward-looking statements” to reflect

occurrences

or

unanticipated

events

or

circumstances

after

the

date

of

such

statements,

except

as

required

by

the

federal

securities

laws.

5

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

June 30, 2023

December 31, 2022

(In thousands, except for share information)

ASSETS

Cash and due from banks

$

1,046,534

$

478,480

Money market investments:

Time deposits with other financial institutions

300

300

Other short-term investments

700

1,725

Total money market investments

1,000

2,025

Available-for-sale debt securities, at fair value:

Securities pledged with creditors’ rights to repledge

79,909

81,103

Other available-for-sale debt securities

5,353,460

5,518,417

Total available-for-sale debt securities, at fair value (amortized cost of $

6,199,630

as of June 30, 2023, and

$

6,398,197

as of December 31, 2022; ACL of $

433

as of June 30, 2023 and $

458

as of December 31, 2022)

5,433,369

5,599,520

Held-to-maturity debt securities, at amortized cost, net of ACL

of $

8,401

as of June 30, 2023 and $

8,286

as of December 31, 2022 (fair value of $

410,181

as of June 30, 2023 and $

427,115

as of December 31, 2022)

416,325

429,251

Equity securities

48,101

55,289

Total investment securities

5,897,795

6,084,060

Loans, net of ACL of $

267,058

as of June 30, 2023 and $

260,464

as of December 31, 2022

11,452,257

11,292,361

Mortgage loans held for sale, at lower of cost or market

14,295

12,306

Total loans, net

11,466,552

11,304,667

Accrued interest receivable on loans and investments

70,368

69,730

Premises and equipment, net

146,640

142,935

Other real estate owned (“OREO”)

31,571

31,641

Deferred tax asset, net

153,925

155,584

Goodwill

38,611

38,611

Other intangible assets

17,092

21,118

Other assets

282,367

305,633

Total assets

$

19,152,455

$

18,634,484

LIABILITIES

Non-interest-bearing deposits

$

5,874,261

$

6,112,884

Interest-bearing deposits

10,945,431

10,030,583

Total deposits

16,819,692

16,143,467

Short-term securities sold under agreements to repurchase

73,934

75,133

Advances from the FHLB:

Short-term

-

475,000

Long-term

500,000

200,000

Total advances from the FHLB

500,000

675,000

Other long-term borrowings

161,700

183,762

Accounts payable and other liabilities

199,130

231,582

Total liabilities

17,754,456

17,308,944

Commitments and contingencies (See Note 22)

(nil)

(nil)

STOCKHOLDERS’ EQUITY

Common stock, $

0.10

par value,

2,000,000,000

shares authorized;

223,663,116

shares issued;

179,756,622

shares outstanding as of June 30, 2023 and

182,709,059

as of December 31, 2022

22,366

22,366

Additional paid-in capital

962,229

970,722

Retained earnings, includes legal surplus reserve of $

168,484

1,733,497

1,644,209

Treasury stock (at cost),

43,906,494

shares as of June 30, 2023 and

40,954,057

shares as of December 31, 2022

(547,706)

(506,979)

Accumulated other comprehensive loss, net of tax of $

8,468

(772,387)

(804,778)

Total stockholders’ equity

1,397,999

1,325,540

Total liabilities and stockholders’ equity

$

19,152,455

$

18,634,484

The accompanying notes are an integral part of these statements.

6

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands, except per share information)

Interest and dividend income:

Loans

$

218,066

$

179,261

$

428,702

$

353,048

Investment securities

26,258

26,491

53,368

49,738

Money market investments and interest-bearing cash accounts

7,880

2,873

12,530

3,693

Total interest and dividend income

252,204

208,625

494,600

406,479

Interest expense:

Deposits

41,604

7,694

71,489

15,346

Securities sold under agreements to repurchase:

Short-term

1,328

-

2,397

-

Long-term

-

1,972

-

4,154

Advances from the FHLB:

Short-term

435

-

4,776

-

Long-term

5,613

1,075

8,448

2,138

Other long-term borrowings

3,409

1,698

6,790

3,031

Total interest expense

52,389

12,439

93,900

24,669

Net interest income

199,815

196,186

400,700

381,810

Provision for credit losses - expense (benefit):

Loans and finance leases

20,770

12,665

37,026

(4,324)

Unfunded loan commitments

721

812

616

634

Debt securities

739

(3,474)

90

(109)

Provision for credit losses - expense (benefit)

22,230

10,003

37,732

(3,799)

Net interest income after provision for credit losses

177,585

186,183

362,968

385,609

Non-interest income:

Service charges and fees on deposit accounts

9,287

9,466

18,828

18,829

Mortgage banking activities

2,860

4,082

5,672

9,288

Gain on early extinguishment of debt

1,605

-

1,605

-

Insurance commission income

2,747

2,946

7,594

8,221

Card and processing income

11,135

10,300

22,053

19,981

Other non-interest income

8,637

4,147

13,037

7,480

Total non-interest income

36,271

30,941

68,789

63,799

Non-interest expenses:

Employees’ compensation and benefits

54,314

51,304

110,736

100,858

Occupancy and equipment

21,097

21,505

42,283

43,891

Business promotion

4,167

4,042

8,142

7,505

Professional service fees

11,596

12,036

23,569

22,630

Taxes, other than income taxes

5,124

4,689

10,236

9,707

FDIC deposit insurance

2,143

1,466

4,276

3,139

Net gain on OREO operations

(1,984)

(1,485)

(3,980)

(2,205)

Credit and debit card processing expenses

6,540

5,843

11,858

9,964

Communications

1,992

1,978

4,208

4,129

Other non-interest expenses

7,928

6,948

16,857

15,367

Total non-interest expenses

112,917

108,326

228,185

214,985

Income before income taxes

100,939

108,798

203,572

234,423

Income tax expense

30,284

34,103

62,219

77,128

Net income

$

70,655

$

74,695

$

141,353

$

157,295

Net income attributable to common stockholders

$

70,655

$

74,695

$

141,353

$

157,295

Net income per common share:

Basic

$

0.39

$

0.38

$

0.79

$

0.80

Diluted

$

0.39

$

0.38

$

0.78

$

0.80

The accompanying notes are an integral part of these statements.

7

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(LOSS)

(Unaudited)

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands)

Net income

$

70,655

$

74,695

$

141,353

$

157,295

Other comprehensive (loss) income, net of tax:

Available-for-sale debt securities:

Net unrealized holding (losses) gains on debt securities

(1)

(54,837)

(175,923)

32,391

(507,757)

Other comprehensive (loss) income for the period, net of tax

(54,837)

(175,923)

32,391

(507,757)

Total comprehensive income (loss)

$

15,818

$

(101,228)

$

173,744

$

(350,462)

(1)

Net unrealized holding (losses) gains on available-for-sale

debt securities have no tax effect because securities

are either tax-exempt, held by an International Banking Entity (“IBE”),

or

have a full deferred tax asset valuation allowance.

The accompanying notes are an integral part of these statements.

8

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six-Month Period Ended June 30,

2023

2022

(In thousands)

Cash flows from operating activities:

Net income

$

141,353

$

157,295

Adjustments to reconcile net income to net cash provided by operating

activities:

Depreciation and amortization

10,071

11,291

Amortization of intangible assets

4,026

4,510

Provision for credit losses - expense (benefit)

37,732

(3,799)

Deferred income tax expense

2,419

41,483

Stock-based compensation

3,997

2,580

Gain on early extinguishment of debt

(1,605)

-

Unrealized gain on derivative instruments

(291)

(864)

Net gain on disposals or sales, and impairments of premises

and equipment and other assets

(235)

(900)

Net gain on sales of loans and loans held-for-sale valuation adjustments

(989)

(3,965)

Net amortization of discounts, premiums, and deferred loan fees

and costs

686

(5,486)

Originations and purchases of loans held for sale

(88,696)

(143,692)

Sales and repayments of loans held for sale

85,398

157,098

Amortization of broker placement fees

128

64

Net amortization of premiums and discounts on investment securities

2,117

1,389

Decrease (increase) in accrued interest receivable

1,849

(3,555)

Increase (decrease) in accrued interest payable

9,369

(1,252)

Increase in other assets

(5,566)

(4,235)

(Decrease) increase in other liabilities

(35,307)

11,646

Net cash provided by operating activities

166,456

219,608

Cash flows from investing activities:

Net disbursements on loans held for investment

(226,714)

(186,902)

Proceeds from sales of loans held for investment

3,183

37,565

Proceeds from sales of repossessed assets

26,360

19,941

Purchases of available-for-sale debt securities

(961)

(512,327)

Proceeds from principal repayments and maturities of available-for-sale

debt securities

217,745

354,853

Purchases of held-to-maturity debt securities

-

(260,082)

Proceeds from principal repayments and maturities of held-to-maturity

debt securities

13,832

934

Additions to premises and equipment

(16,211)

(11,841)

Proceeds from sales of premises and equipment and other assets

578

1,138

Net redemptions (purchases) of other investments securities

7,219

(971)

Net cash provided by (used in) investing activities

25,031

(557,692)

Cash flows from financing activities:

Net increase (decrease) in deposits

675,911

(645,417)

Net repayments of short-term borrowings

(476,199)

-

Repayments of long-term borrowings

(19,795)

(100,000)

Proceeds from long-term borrowings

300,000

-

Repurchase of outstanding common stock

(53,217)

(152,713)

Dividends paid on common stock

(51,158)

(43,321)

Net cash provided by (used in) financing activities

375,542

(941,451)

Net increase (decrease) in cash and cash equivalents

567,029

(1,279,535)

Cash and cash equivalents at beginning of year

480,505

2,543,058

Cash and cash equivalents at end of period

$

1,047,534

$

1,263,523

Cash and cash equivalents include:

Cash and due from banks

$

1,046,534

$

1,261,590

Money market investments

1,000

1,933

$

1,047,534

$

1,263,523

The accompanying notes are an integral part of these statements.

9

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

EQUITY

(Unaudited)

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands, except per share information)

Common Stock

$

22,366

$

22,366

$

22,366

$

22,366

Additional Paid-In Capital:

Balance at beginning of period

959,912

966,771

970,722

972,547

Stock-based compensation expense

1,922

1,398

3,997

2,580

Common stock reissued under stock-based compensation plan

-

(23)

(13,139)

(7,003)

Restricted stock forfeited

395

71

649

93

Balance at end of period

962,229

968,217

962,229

968,217

Retained Earnings:

Balance at beginning of period

1,688,176

1,489,995

1,644,209

1,427,295

Impact of adoption of Accounting Standards Update (“ASU”) 2022-02 (See

Note 1)

-

-

(1,357)

-

Net income

70,655

74,695

141,353

157,295

Dividends on common stock ($

0.14

per share and $

0.12

per share for the quarters ended

June 30,

2023 and 2022, respectively; $

0.28

per share and $

0.22

for the

for the six-month periods ended June 30,

2023 and 2022, respectively)

(25,334)

(23,356)

(50,708)

(43,256)

Balance at end of period

1,733,497

1,541,334

1,733,497

1,541,334

Treasury Stock (at cost):

Balance at beginning of period

(547,311)

(282,197)

(506,979)

(236,442)

Common stock repurchases (See Note 14)

-

(100,000)

(53,217)

(152,713)

Common stock reissued under stock-based compensation plan

-

23

13,139

7,003

Restricted stock forfeited

(395)

(71)

(649)

(93)

Balance at end of period

(547,706)

(382,245)

(547,706)

(382,245)

Accumulated Other Comprehensive Loss, net

of tax:

Balance at beginning of period

(717,550)

(415,833)

(804,778)

(83,999)

Other comprehensive (loss) income, net of tax

(54,837)

(175,923)

32,391

(507,757)

Balance at end of period

(772,387)

(591,756)

(772,387)

(591,756)

Total stockholders’ equity

$

1,397,999

$

1,557,916

$

1,397,999

$

1,557,916

The accompanying notes are an integral part of these statements.

10

FIRST BANCORP.

INDEX TO NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

PAGE

Note 1 –

Basis of Presentation and Significant Accounting Policies

11

Note 2 –

Debt Securities

13

Note 3 –

Loans Held for Investment

23

Note 4

–

Allowance for Credit Losses for Loans and Finance Leases

40

Note 5 –

Other Real Estate Owned

43

Note 6

–

Goodwill and Other Intangibles

44

Note 7 –

Non-Consolidated Variable Interest Entities (“VIEs”) and Servicing Assets

45

Note 8 –

Deposits

49

Note 9 –

Securities Sold Under Agreements to Repurchase (Repurchase

Agreements)

50

Note 10 –

Advances from the Federal Home Loan Bank (“FHLB”)

51

Note 11 –

Other Long-Term Borrowings

51

Note 12 –

Earnings per Common Share

52

Note 13 –

Stock-Based Compensation

53

Note 14 –

Stockholders’ Equity

56

Note 15 –

Accumulated Other Comprehensive Loss

58

Note 16 –

Employee Benefit Plans

58

Note 17 –

Income Taxes

59

Note 18

–

Fair Value

61

Note 19

–

Revenue from Contracts with Customers

66

Note 20 –

Segment Information

69

Note 21 –

Supplemental Statement of Cash Flows Information

72

Note 22 –

Regulatory Matters, Commitments, and Contingencies

73

Note 23 –

First BanCorp. (Holding Company Only) Financial Information

76

11

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS

(Unaudited)

NOTE 1 – BASIS

OF PRESENTATION AND

SIGNIFICANT

ACCOUNTING

POLICIES

The

Consolidated

Financial

Statements

(unaudited)

for

the

quarter

and

six-month

period

ended

June

30,

2023

(the

“unaudited

consolidated financial

statements”) of

First BanCorp.

(the “Corporation”)

have been

prepared in

conformity with

the accounting

policies

stated

in

the

Corporation’s

Audited

Consolidated

Financial

Statements

for

the

fiscal

year

ended

December

31,

2022

(the

“audited

consolidated financial

statements”) included

in the

2022 Annual

Report on

Form 10-K,

as updated

by the

information contained

in this

report.

Certain

information

and

note

disclosures

normally

included

in

the

financial

statements

prepared

in

accordance

with

generally

accepted accounting principles in the United States of America

(“GAAP”) have been condensed or omitted from these statements pursuant

to

the

rules

and

regulations

of

the

SEC

and,

accordingly,

these

financial

statements

should

be

read

in

conjunction

with

the

audited

consolidated financial statements, which are included in the 2022 Annual Report on Form 10-K. All adjustments (consisting only of normal

recurring adjustments) that are, in the opinion of management,

necessary for a fair presentation of the statement of

financial position, results

of operations and cash flows

for the interim periods have

been reflected. All significant

intercompany accounts and transactions

have been

eliminated in consolidation.

The results

of operations

for the

quarter and

six-month period

ended June

30, 2023

are not

necessarily indicative

of the

results to

be

expected

for the

entire year.

Adoption of New Accounting Requirements

ASU 2022-02,

“Financial

Instruments

– Credit Losses

(Topic 326): Troubled

Debt Restructurings

(“TDR”) and

Vintage Disclosures”

Effective

January

1,

2023,

the

Corporation

adopted

ASU

2022-02,

which

removed

the

existing

measurement

and

disclosure

requirements

for

TDR

loans,

added

additional

disclosure

requirements

related

to

modifications

provided

to

borrowers

experiencing

financial difficulty regardless of

whether the modification

is accounted for

as a new

loan, and amends

the guidance on vintage

disclosures

to

require

disclosure

of

gross

charge-offs

by

year

of

origination.

Prior

to

adoption,

a

change

in

contractual

terms

of

a

loan

where

a

borrower was experiencing

financial difficulty and

received a concession

not available through other

sources was required

to be disclosed

as a

TDR, whereas now

a borrower that

is experiencing financial

difficulty and there

has been a

direct change

to the timing

or amount of

contractual

cash

flows

in

the

form

of

principal

forgiveness,

interest

rate

reduction,

an

other-than-insignificant

payment

delay,

a

term

extension, or any combination of these types of loan modifications in the current period needs to be disclosed. ASU 2022-02 did not amend

the definition

of financial

difficulty.

Modifications of

receivables are

within the

scope of

ASU 2022-02 if

they are

accounted for

in accordance

with Accounting

Standards

Codification

(“ASC”)

310-20.

As

such,

finance

leases

are

not

within

the

scope

of

ASU

2022-02.

Such

modifications

are

evaluated

following

the

requirements

in

ASC

310-20

to

determine

whether

they

should

be

accounted

for

as

a

new

loan

or

a

continuation

of

the

existing loan.

ASU 2022-02

also eliminated

the requirement

to use a

discounted cash

flow method for

TDRs for

the determination of

the ACL,

and

allows

the

option

of

a

non-discounted

cash

flow

portfolio-based

approach

for

modified

loans

to

borrowers

experiencing

financial

difficulties.

The

Corporation

elected

to

apply

a

non-discounted

cash

flow,

portfolio-based

ACL

approach

for

modified

loans

to

borrowers

experiencing financial difficulties for all portfolios,

using a modified retrospective transition method. The adoption

resulted in a net increase

to

the

ACL

of

approximately

$

2.1

million

and

a

decrease

to

retained

earnings

of

approximately

$

1.3

million,

after

tax,

predominantly

driven by residential mortgage loans. The amount of defined modifications given to borrowers experiencing financial difficulty is disclosed

in Note 3 – Loans Held

for Investment, along with the financial impact of those

modifications.

The Corporation was not impacted by the adoption

of the following ASUs during 2023:

●

ASU 2022-01, “Derivatives and Hedging

(Topic 815): Fair Value Hedging – Portfolio Layer Method”

●

ASU 2021-08, “Business

Combinations (Topic 805):

Accounting for

Contract Assets and

Contract Liabilities

From Contracts

With Customers”

12

Recently

Issued

Accounting

Standards

Not

Yet

Effective

or

Not

Yet

Adopted

Standard

Description

Effective Date

Effect on the financial statements

ASU 2023-02, "Investments -

Equity Method and Joint Ventures

(Topic 323): Accounting for

Investments in Tax Credit

Structures Using the Proportional

Amortization Method"

In March 2023, the FASB issued

ASU 2023-02 which, among other

things, allows tax equity

investments, regardless of the tax

credit program from which the

income tax credits are received, to

be accounted for using the

proportional amortization method if

certain conditions are met and

requires specific disclosures of

such investments. The election

needs to be made on a tax-credit-

program-by-tax-credit-program

basis.

January 1, 2024. Early adoption is

permitted in any interim period.

The Corporation does not expect to

be impacted by the amendments of

this ASU since it does not hold tax

equity investments.

ASU 2023-01, "Leases (Topic

842): Common Control

Arrangements"

In March 2023, the FASB issued

ASU 2023-01 which, among other

things, generally requires a lessee

in a common-control lease

arrangement to amortize leasehold

improvements over the useful life

regardless of the lease term, subject

to certain exceptions. In addition, a

lessee that no longer controls the

use of the underlying asset will

account for the transfer of the

underlying asset as an adjustment

to equity.

January 1, 2024. Early adoption is

permitted for both interim and

annual financial statements that

have not yet been made available

for issuance.

The Corporation does not expect to

be materially impacted by the

adoption of this ASU during the first

quarter of 2024.

For

other

issued

accounting

standards

not

yet

effective

or

not

yet

adopted,

see

Note

1

–

Nature

of

Business

and

Summary

of

Significant Accounting Policies, to the audited consolidated financial

statements included in the 2022 Annual Report on Form 10-K.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

13

NOTE 2 – DEBT SECURITIES

Available-for-Sale

Debt Securities

The amortized

cost, gross

unrealized gains

and losses,

ACL, estimated

fair value,

and weighted-average

yield of

available-for-sale

debt securities by contractual maturities as of June 30, 2023 were as follows:

June 30, 2023

Amortized cost

(1)

Gross

ACL

Fair value

Unrealized

Weighted-

Gains

Losses

average yield%

(Dollars in thousands)

U.S. Treasury securities:

Due within one year

$

27,671

$

-

$

705

$

-

$

26,966

0.61

After 1 to 5 years

120,787

-

8,084

-

112,703

0.69

U.S. government-sponsored entities (“GSEs”) obligations:

Due within one year

224,161

-

5,089

-

219,072

0.42

After 1 to 5 years

2,344,874

56

209,839

-

2,135,091

0.85

After 5 to 10 years

11,267

4

871

-

10,400

3.16

After 10 years

10,844

22

1

-

10,865

5.38

Puerto Rico government obligations:

After 10 years

(2)

3,254

-

794

349

2,111

-

United States and Puerto Rico government obligations

2,742,858

82

225,383

349

2,517,208

0.83

Mortgage-backed securities (“MBS”):

Residential MBS:

Freddie Mac (“FHLMC”) certificates:

After 1 to 5 years

20,047

-

1,191

-

18,856

1.97

After 5 to 10 years

171,682

-

17,242

-

154,440

1.58

After 10 years

1,038,513

-

180,505

-

858,008

1.41

1,230,242

-

198,938

-

1,031,304

1.44

Ginnie Mae (“GNMA”) certificates:

Due within one year

1

-

-

-

1

2.53

After 1 to 5 years

20,426

-

1,257

-

19,169

1.25

After 5 to 10 years

32,172

-

2,952

-

29,220

1.70

After 10 years

219,768

7

26,660

-

193,115

2.63

272,367

7

30,869

-

241,505

2.42

Fannie Mae (“FNMA”) certificates:

After 1 to 5 years

22,434

-

1,399

-

21,035

1.72

After 5 to 10 years

338,605

-

31,862

-

306,743

1.75

After 10 years

1,102,263

38

178,364

-

923,937

1.37

1,463,302

38

211,625

-

1,251,715

1.46

Collateralized mortgage obligations (“CMOs”) issued

or guaranteed by the FHLMC, FNMA, and GNMA:

After 10 years

288,194

-

58,267

-

229,927

1.48

Private label:

After 10 years

7,498

-

2,168

84

5,246

7.61

Total Residential MBS

3,261,603

45

501,867

84

2,759,697

1.55

Commercial MBS:

After 1 to 5 years

44,311

-

7,308

-

37,003

2.15

After 5 to 10 years

25,656

-

3,430

-

22,226

2.13

After 10 years

125,202

-

27,967

-

97,235

1.40

Total Commercial MBS

195,169

-

38,705

-

156,464

1.67

Total MBS

3,456,772

45

540,572

84

2,916,161

1.56

Total available-for-sale debt securities

$

6,199,630

$

127

$

765,955

$

433

$

5,433,369

1.23

(1)

Excludes accrued interest receivable on available-for-sale debt securities that totaled $

10.7

million as of June 30, 2023 reported as part of accrued interest receivable on loans and investment securities in the

consolidated statements of financial condition, and excluded from the estimate of credit losses.

(2)

Consists of a residential pass-through MBS issued by the Puerto Rico Housing Finance Authority (“PRHFA”) that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico

government in 2010 and is in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

14

The amortized

cost, gross

unrealized gains

and losses,

ACL, estimated

fair value,

and weighted-average

yield of

available-for-sale

debt securities by contractual maturities as of December 31, 2022

were as follows:

December 31, 2022

Amortized cost

(1)

Gross

ACL

Fair value

Unrealized

Weighted-

Gains

Losses

average yield%

(Dollars in thousands)

U.S. Treasury securities:

Due within one year

$

7,493

$

-

$

309

$

-

$

7,184

0.22

After 1 to 5 years

141,366

-

9,675

-

131,691

0.70

U.S. GSEs’ obligations:

Due within one year

129,018

-

4,036

-

124,982

0.32

After 1 to 5 years

2,395,273

22

227,724

-

2,167,571

0.83

After 5 to 10 years

56,251

13

7,670

-

48,594

1.54

After 10 years

12,170

36

-

-

12,206

4.62

Puerto Rico government obligations:

After 10 years

(2)

3,331

-

755

375

2,201

-

United States and Puerto Rico government obligations

2,744,902

71

250,169

375

2,494,429

0.83

MBS:

Residential MBS:

FHLMC certificates:

After 1 to 5 years

4,235

-

169

-

4,066

2.33

After 5 to 10 years

201,072

-

18,709

-

182,363

1.55

After 10 years

1,092,289

-

186,558

-

905,731

1.38

1,297,596

-

205,436

-

1,092,160

1.41

GNMA certificates:

Due within one year

5

-

-

-

5

1.73

After 1 to 5 years

15,508

-

622

-

14,886

2.00

After 5 to 10 years

45,322

1

3,809

-

41,514

1.31

After 10 years

232,632

51

27,169

-

205,514

2.47

293,467

52

31,600

-

261,919

2.27

FNMA certificates:

After 1 to 5 years

9,685

-

521

-

9,164

1.76

After 5 to 10 years

358,346

-

31,620

-

326,726

1.68

After 10 years

1,186,635

124

186,757

-

1,000,002

1.38

1,554,666

124

218,898

-

1,335,892

1.45

CMOs issued or guaranteed by the FHLMC, FNMA,

and GNMA:

After 10 years

302,232

-

56,539

-

245,693

1.44

Private label:

After 10 years

7,903

-

2,026

83

5,794

6.83

Total Residential MBS

3,455,864

176

514,499

83

2,941,458

1.52

Commercial MBS:

After 1 to 5 years

30,578

-

4,463

-

26,115

2.43

After 5 to 10 years

44,889

-

5,603

-

39,286

1.89

After 10 years

121,464

-

23,732

-

97,732

1.23

Total Commercial MBS

196,931

-

33,798

-

163,133

1.56

Total MBS

3,652,795

176

548,297

83

3,104,591

1.52

Other

Due within one year

500

-

-

-

500

0.84

Total available-for-sale debt securities

$

6,398,197

$

247

$

798,466

458

$

5,599,520

1.22

(1)

Excludes accrued interest receivable on available-for-sale debt securities that totaled $

11.1

million as of December 31, 2022 reported as part of accrued interest receivable on loans and investment securities in the

consolidated statements of financial condition, and excluded from the estimate of credit losses.

(2)

Consists of a residential pass-through MBS issued by the PRHFA that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in 2010 and is in nonaccrual

status based on the delinquency status of the underlying second mortgage loans collateral.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

15

Maturities

of

available-for-sale

debt

securities

are

based

on

the

period

of

final

contractual

maturity.

Expected

maturities

might

differ

from

contractual

maturities

because

they

may

be

subject

to

prepayments

and/or

call

options.

The

weighted-average

yield

on

available-for-sale

debt

securities

is

based

on

amortized

cost

and,

therefore,

does

not

give

effect

to

changes

in

fair

value.

The

net

unrealized

gain

or

loss

on

available-for-sale

debt

securities

is

presented

as

part

of

accumulated

other

comprehensive

loss

in

the

consolidated statements of financial condition.

The

following

tables

present

the

fair

value

and

gross

unrealized

losses

of

the

Corporation’s

available-for-sale

debt

securities,

aggregated by

investment category

and length of

time that individual

securities have

been in a

continuous unrealized

loss position, as

of June 30, 2023 and December 31, 2022. The tables also include debt securities for

which an ACL was recorded.

As of June 30, 2023

Less than 12 months

12 months or more

Total

Unrealized

Unrealized

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(In thousands)

U.S. Treasury and U.S. GSEs’

obligations

$

2,887

$

4

$

2,496,214

$

224,585

$

2,499,101

$

224,589

Puerto Rico government obligations

-

-

2,111

794

(1)

2,111

794

MBS:

Residential MBS:

FHLMC

19,638

959

1,011,666

197,979

1,031,304

198,938

GNMA

50,543

1,335

189,454

29,534

239,997

30,869

FNMA

42,650

2,361

1,204,127

209,264

1,246,777

211,625

CMOs issued or guaranteed by the FHLMC,

FNMA, and GNMA

378

10

229,549

58,257

229,927

58,267

Private label

-

-

5,246

2,168

(1)

5,246

2,168

Commercial MBS

15,403

370

141,061

38,335

156,464

38,705

$

131,499

$

5,039

$

5,279,428

$

760,916

$

5,410,927

$

765,955

(1)

Unrealized losses do not include the credit loss component recorded

as part of the ACL. As of June 30, 2023, the PRHFA

bond and private label MBS had an ACL of $

0.4

million and

$

0.1

million, respectively.

As of December 31, 2022

Less than 12 months

12 months or more

Total

Unrealized

Unrealized

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(In thousands)

U.S. Treasury and U.S. GSEs’

obligations

$

298,313

$

18,057

$

2,174,724

$

231,357

$

2,473,037

$

249,414

Puerto Rico government obligations

-

-

2,201

755

(1)

2,201

755

MBS:

Residential MBS:

FHLMC

260,524

45,424

831,637

160,012

1,092,161

205,436

GNMA

74,829

3,433

179,854

28,167

254,683

31,600

FNMA

405,977

49,479

920,200

169,419

1,326,177

218,898

CMOs issued or guaranteed by the FHLMC,

FNMA, and GNMA

45,370

6,735

200,323

49,804

245,693

56,539

Private label

-

-

5,794

2,026

(1)

5,794

2,026

Commercial MBS

30,179

2,215

132,953

31,583

163,132

33,798

$

1,115,192

$

125,343

$

4,447,686

$

673,123

$

5,562,878

$

798,466

(1)

Unrealized losses do not include the credit loss component recorded

as part of the ACL. As of December 31, 2022, the

PRHFA bond and private label MBS

had an ACL of $

0.4

million

and $

0.1

million, respectively.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

16

Assessment for Credit Losses

Debt securities

issued by

U.S. government

agencies,

U.S. GSEs,

and

the U.S.

Treasury,

including

notes and

MBS, accounted

for

substantially

all

of

the

total

available-for-sale

portfolio

as

of

June

30,

2023,

and

the

Corporation

expects

no

credit

losses

on

these

securities,

given

the

explicit

and

implicit

guarantees

provided

by

the

U.S.

federal

government.

Because

the

decline

in

fair

value

is

attributable

to

changes

in

interest

rates,

and

not

credit

quality,

and

because,

as

of

June

30,

2023,

the

Corporation

did

not

have

the

intent to

sell these

U.S. government

and agencies

debt securities

and determined

that it

was likely

that it

will not

be required

to sell

these

securities

before

their

anticipated

recovery,

the

Corporation

does

not

consider

impairments

on

these

securities

to

be

credit

related. The Corporation’s

credit loss assessment was

concentrated mainly on

private label MBS and

on Puerto Rico government

debt

securities, for which credit losses are evaluated on a quarterly basis.

Private label MBS

held as part

of the Corporation’s

available for sale

portfolio consist of

trust certificates issued

by an unaffiliated

party

backed

by

fixed-rate,

single-family

residential

mortgage

loans

in

the

U.S.

mainland

with

original

FICO

scores

over

700

and

moderate loan-to-value

ratios (under

80

%), as well as

moderate delinquency levels.

Upon the discontinuance

of LIBOR after

June 30,

2023,

and

following

the

provisions

of

the

Adjustable

Interest

Rate

Act

(the

“LIBOR

Act”)

and

Regulation

ZZ,

the

interest

rate

on

these private

label MBS

will transition

during

the third

quarter of

2023 from

3-month LIBOR

plus a

spread to

3-month CME

Term

Secured

Overnight

Financing

Rate

(“SOFR”)

plus

a

tenor

spread

adjustment

of

0.26161

%

and

the

original

spread

limited

to

the

weighted-average

coupon of

the underlying

collateral. The

Corporation

determined

the ACL

for private

label MBS

based on

a risk-

adjusted

discounted

cash

flow

methodology

that

considers

the

structure

and

terms

of

the

instruments.

The

Corporation

utilized

probability of

default (“PDs”)

and loss

given default

(“LGDs”) that

considered, among

other things,

historical payment

performance,

loan-to-value attributes, and relevant

current and forward-looking macroeconomic

variables, such as regional unemployment

rates and

the housing price

index. Under this approach,

expected cash flows (interest

and principal) were discounted

at the Treasury

yield curve

as of the reporting

date. See Note

18 – Fair

Value

for the significant

assumptions used in

the valuation of

the private label

MBS as of

June 30, 2023 and December 31, 2022.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

17

For the residential

pass-through MBS issued by

the PRHFA

held as part of

the Corporation’s

available-for-sale portfolio

backed by

second

mortgage

residential

loans

in

Puerto

Rico,

the

ACL

was

determined

based

on

a

discounted

cash

flow

methodology

that

considered

the structure

and terms

of the

debt security.

The expected

cash flows

were discounted

at the

Treasury

yield curve

plus a

spread as

of the

reporting date

and compared

to the

amortized cost.

The Corporation

utilized PDs

and LGDs

that considered,

among

other

things,

historical

payment

performance,

loan-to-value

attributes,

and

relevant

current

and

forward-looking

macroeconomic

variables, such as

regional unemployment

rates, the housing

price index,

and expected recovery

from the PRHFA

guarantee. PRHFA,

not the

Puerto Rico

government, provides

a guarantee

in the event

of default

and subsequent

foreclosure of

the properties underlying

the second

mortgage loans

and its

ability to

honor such

guarantee will

depend on,

among other

factors, its

financial condition

at the

time such obligation

becomes due and payable.

Deterioration of the Puerto

Rico economy or fiscal

health of the PRHFA

could impact

the value of this security,

resulting in additional losses to the Corporation.

The following tables

present a roll-forward

by major security

type for the

quarters and six-month

periods ended June

30, 2023 and

2022 of the ACL on available-for-sale debt

securities:

Quarter Ended

June 30,

2023

Six-Month Period Ended June 30,

2023

Private label

MBS

Puerto Rico

Government

Obligations

Total

Private label

MBS

Puerto Rico

Government

Obligations

Total

(In thousands)

Beginning balance

$

83

$

366

$

449

$

83

$

375

$

458

Provision for credit losses - benefit

-

(16)

(16)

-

(25)

(25)

ACL on available-for-sale debt securities

$

83

$

350

$

433

$

83

$

350

$

433

Quarter Ended June 30,

2022

Six-Month Period Ended June 30,

2022

Private label

MBS

Puerto Rico

Government

Obligations

Total

Private label

MBS

Puerto Rico

Government

Obligations

Total

(In thousands)

Beginning balance

$

403

$

308

$

711

$

797

$

308

$

1,105

Provision for credit losses - (benefit) expense

(113)

78

(35)

(501)

78

(423)

Net charge-offs

-

-

-

(6)

-

(6)

ACL on available-for-sale debt securities

$

290

$

386

$

676

$

290

$

386

$

676

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

18

Held-to-Maturity Debt Securities

The

amortized

cost,

gross

unrecognized

gains

and

losses,

estimated

fair

value,

ACL,

weighted-average

yield

and

contractual

maturities of held-to-maturity debt securities as of June 30, 2023

and December 31, 2022 were as follows

:

June 30, 2023

Amortized cost

(1)

Gross Unrecognized

Fair value

Weighted-

Gains

Losses

ACL

average yield%

(Dollars in thousands)

Puerto Rico municipal bonds:

Due within one year

$

1,205

$

-

$

29

$

1,176

$

26

5.90

After 1 to 5 years

42,736

661

1,360

42,037

689

6.93

After 5 to 10 years

56,160

2,733

446

58,447

3,209

7.44

After 10 years

66,023

-

2,023

64,000

4,477

8.54

Total Puerto Rico municipal bonds

166,124

3,394

3,858

165,660

8,401

7.74

MBS:

Residential MBS:

FHLMC certificates:

After 5 to 10 years

18,836

-

1,203

17,633

-

3.03

After 10 years

18,936

-

906

18,030

-

4.33

37,772

-

2,109

35,663

-

3.68

GNMA certificates:

After 10 years

17,765

-

1,046

16,719

-

3.35

FNMA certificates:

After 10 years

69,956

-

3,161

66,795

-

4.17

CMOs issued or guaranteed by

FHLMC, FNMA, and GNMA

After 10 years

30,197

-

1,658

28,539

-

3.49

Total Residential MBS

155,690

-

7,974

147,716

-

3.83

Commercial MBS:

After 1 to 5 years

9,533

-

479

9,054

-

3.48

After 10 years

93,379

-

5,628

87,751

-

3.15

Total Commercial MBS

102,912

-

6,107

96,805

-

3.18

Total MBS

258,602

-

14,081

244,521

-

3.57

Total held-to-maturity debt securities

$

424,726

$

3,394

$

17,939

$

410,181

$

8,401

5.20

(1)

Excludes accrued interest receivable on held-to-maturity debt securities that totaled $

6.8

million as of June 30, 2023 reported as part of accrued interest receivable on loans and investment securities in the

consolidated statements of financial condition, and excluded from the estimate of credit losses.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

19

December 31, 2022

Amortized cost

(1)

Gross Unrecognized

Fair value

Weighted-

Gains

Losses

ACL

average yield%

(Dollars in thousands)

Puerto Rico municipal bonds:

Due within one year

$

1,202

$

-

$

15

$

1,187

$

2

5.20

After 1 to 5 years

42,530

886

1,076

42,340

656

6.34

After 5 to 10 years

55,956

3,182

360

58,778

3,243

6.29

After 10 years

66,022

-

1,318

64,704

4,385

7.10

Total held-to-maturity debt securities

165,710

4,068

2,769

167,009

8,286

6.62

MBS:

Residential MBS:

FHLMC certificates:

After 5 to 10 years

21,443

-

746

20,697

-

3.03

After 10 years

19,362

-

888

18,474

-

4.21

40,805

-

1,634

39,171

-

3.59

GNMA certificates:

After 10 years

19,131

-

943

18,188

-

3.35

FNMA certificates:

After 10 years

72,347

-

3,155

69,192

-

4.14

CMOs issued or guaranteed by

FHLMC, FNMA, and GNMA

After 10 years

34,456

-

1,424

33,032

-

3.49

Total Residential MBS

166,739

-

7,156

159,583

-

3.78

Commercial MBS:

After 1 to 5 years

9,621

-

396

9,225

-

3.48

After 10 years

95,467

-

4,169

91,298

-

3.15

Total Commercial MBS

105,088

-

4,565

100,523

-

3.18

Total MBS

271,827

-

11,721

260,106

-

3.55

Total held-to-maturity debt securities

$

437,537

$

4,068

$

14,490

$

427,115

$

8,286

4.71

(1)

Excludes accrued interest receivable on held-to-maturity debt securities that totaled $

5.5

million as of December 31, 2022 reported as part of accrued interest receivable on loans and investment securities in the

consolidated statements of financial condition, and excluded from the estimate of credit losses.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

20

The

following

tables

present

the

Corporation’s

held-to-maturity

debt

securities’

fair

value

and

gross

unrecognized

losses,

aggregated by

category and

length of

time that

individual securities

had been

in a

continuous unrecognized

loss position,

as of

June

30, 2023 and December 31, 2022, including debt securities for which

an ACL was recorded:

As of June 30, 2023

Less than 12 months

12 months or more

Total

Unrecognized

Unrecognized

Unrecognized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(In thousands)

Puerto Rico municipal bonds

$

-

$

-

$

107,673

$

3,858

$

107,673

$

3,858

MBS:

Residential MBS:

FHLMC certificates

35,663

2,109

-

-

35,663

2,109

GNMA certificates

16,719

1,046

-

-

16,719

1,046

FNMA certificates

66,795

3,161

-

-

66,795

3,161

CMOs issued or guaranteed by FHLMC,

FNMA, and GNMA

28,539

1,658

-

-

28,539

1,658

Commercial MBS

9,054

479

87,751

5,628

96,805

6,107

Total held-to-maturity debt securities

$

156,770

$

8,453

$

195,424

$

9,486

$

352,194

$

17,939

As of December 31, 2022

Less than 12 months

12 months or more

Total

Unrecognized

Unrecognized

Unrecognized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(In thousands)

Puerto Rico municipal bonds

$

-

$

-

$

98,797

$

2,769

$

98,797

$

2,769

MBS:

Residential MBS:

FHLMC certificates

39,171

1,634

-

-

39,171

1,634

GNMA certificates

18,188

943

-

-

18,188

943

FNMA certificates

69,192

3,155

-

-

69,192

3,155

CMOs issued or guaranteed by FHLMC,

FNMA, and GNMA

33,032

1,424

-

-

33,032

1,424

Commercial MBS

100,523

4,565

-

-

100,523

4,565

Total held-to-maturity debt securities

$

260,106

$

11,721

$

98,797

$

2,769

$

358,903

$

14,490

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

21

The

Corporation

classifies

the

held-to-maturity

debt

securities

portfolio

into

the

following

major

security

types:

MBS

issued

by

GSEs and

Puerto Rico

municipal bonds.

The Corporation

does not

recognize an

ACL for MBS

issued by

GSEs since

they are

highly

rated by major rating agencies

and have a long history

of no credit losses. In the

case of Puerto Rico municipal bonds,

the Corporation

determines

the

ACL

based

on

the

product

of

a

cumulative

PD

and

LGD,

and

the

amortized

cost

basis

of

the

bonds

over

their

remaining expected

life as

described in

Note 1

– Nature

of Business and

Summary of

Significant Accounting

Policies, to

the audited

consolidated financial statements included in the 2022 Annual Report on

Form 10-K.

The Corporation

performs periodic

credit quality

reviews on

these issuers.

All of

the Puerto

Rico municipal

bonds were

current as

to scheduled contractual payments as of June 30, 2023.

A security is considered to be past due once it is 30 days contractually

past due

under the

terms of the

agreement. The

ACL of Puerto

Rico municipal

bonds increased

to $

8.4

million as of

June 30, 2023,

from $

8.3

million as of December 31, 2022, mostly driven by updated financial information

of certain bond issuers received during 2023.

The following tables present

the activity in the

ACL for held-to-maturity debt

securities by major security

type for the quarters

and

six-month periods ended June 30, 2023 and 2022:

Puerto Rico Municipal Bonds

Quarter Ended

Six-Month Period Ended

June 30,

2023

June 30,

2023

(In thousands)

Beginning Balance

$

7,646

$

8,286

Provision for credit losses - expense

755

115

ACL on held-to-maturity debt securities

$

8,401

$

8,401

Puerto Rico Municipal Bonds

Quarter Ended

Six-Month Period Ended

June 30,

2022

June 30,

2022

(In thousands)

Beginning Balance

$

12,324

$

8,571

Provision for credit losses - (benefit) expense

(3,439)

314

ACL on held-to-maturity debt securities

$

8,885

$

8,885

During the

second quarter

of 2019,

the oversight

board established

by PROMESA

announced

the designation

of Puerto

Rico’s

78

municipalities

as

covered

instrumentalities

under

PROMESA.

Municipalities

may

be

affected

by

the

negative

economic

and

other

effects

resulting

from

expense,

revenue,

or

cash

management

measures

taken

by

the

Puerto

Rico

government

to

address

its

fiscal

situation, or measures included

in its fiscal plan or

fiscal plans of other

government entities. Given the inherent

uncertainties about the

fiscal situation of the Puerto

Rico central government and

the measures taken, or to

be taken, by other government

entities in response

to

economic

and

fiscal

challenges,

the

Corporation

cannot be

certain

whether

future charges

to

the ACL

on

these

securities will

be

required.

From

time

to

time,

the

Corporation

has

held-to-maturity

securities

with

an

original

maturity

of

three

months

or

less

that

are

considered

cash

and

cash

equivalents

and

are

classified

as

money

market

investments

in

the

consolidated

statements

of

financial

condition. As

of

June

30,

2023

and

December

31,

2022,

the

Corporation

had

no

outstanding

held-to-maturity

securities

that

were

classified as cash and cash equivalents.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

22

Credit Quality Indicators:

The

held-to-maturity

debt

securities

portfolio

consisted

of

MBS

issued

by

GSEs

and

financing

arrangements

with

Puerto

Rico

municipalities

issued

in

bond

form.

As

previously

mentioned,

the

Corporation

expects

no

credit

losses

on

GSEs

MBS.

The

Puerto

Rico municipal bonds are accounted

for as securities but are underwritten

as loans with features that are typically

found in commercial

loans. Accordingly,

the Corporation monitors the credit quality of these

municipal bonds through the use of internal

credit-risk ratings,

which are

generally updated

on a

quarterly basis.

The Corporation

considers a

municipal bond

as a

criticized asset

if its

risk rating

is

Special

Mention,

Substandard,

Doubtful,

or

Loss.

Puerto

Rico

municipal

bonds

that

do

not

meet

the

criteria

for

classification

as

criticized

assets

are

considered

to

be

Pass-rated

securities.

For

the

definitions

of

the

internal

credit-risk

ratings,

see

Note

3

–

Debt

Securities, to the audited consolidated financial statements included

in the 2022 Annual Report on Form 10-K.

The

Corporation

periodically

reviews

its Puerto

Rico

municipal

bonds

to

evaluate

if

they are

properly

classified,

and to

measure

credit losses on

these securities. The

frequency of these

reviews will depend

on the amount

of the aggregate

outstanding debt, and

the

risk rating classification of the obligor.

The

Corporation

has

a

Loan

Review

Group

that

reports

directly

to

the

Corporation’s

Risk

Management

Committee

and

administratively

to

the

Chief

Risk

Officer.

The

Loan

Review

Group

performs

annual

comprehensive

credit

process

reviews

of

the

Bank’s

commercial

loan

portfolios,

including

the

above-mentioned

Puerto

Rico

municipal

bonds

accounted

for

as

held-to-maturity

debt

securities.

The objective

of

these

loan

reviews is

to

assess accuracy

of the

Bank’s

determination

and

maintenance

of

loan

risk

rating

and

its

adherence

to

lending

policies,

practices

and

procedures.

The

monitoring

performed

by

this

group

contributes

to

the

assessment

of

compliance

with

credit

policies

and

underwriting

standards,

the

determination

of

the

current

level

of

credit

risk,

the

evaluation of

the effectiveness

of the credit

management process,

and the identification

of any deficiency

that may arise

in the credit-

granting process. Based

on its findings, the

Loan Review Group recommends

corrective actions, if

necessary,

that help in maintaining

a sound credit process. The Loan Review Group reports the results of the credit

process reviews to the Risk Management Committee.

As of June 30, 2023 and December 31, 2022, all Puerto Rico municipal bonds

classified as held-to-maturity were classified as Pass.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

23

NOTE 3 – LOANS HELD FOR INVESTMENT

The

following table

provides information

about

the

loan

portfolio held

for

investment by

portfolio segment

and

disaggregated by

geographic locations

as of the indicated

dates:

As of June 30,

As of December 31,

2023

2022

(In thousands)

Puerto Rico and Virgin Islands region:

Residential mortgage loans, mainly secured by first mortgages

$

2,352,310

$

2,417,900

Construction loans

69,219

34,772

Commercial mortgage loans

1,800,289

1,834,204

Commercial and Industrial ("C&I") loans

2,011,774

1,860,109

Consumer loans

3,487,454

3,317,489

Loans held for investment

$

9,721,046

$

9,464,474

Florida region:

Residential mortgage loans, mainly secured by first mortgages

$

441,480

$

429,390

Construction loans

94,779

98,181

Commercial mortgage loans

519,780

524,647

C&I loans

934,427

1,026,154

Consumer loans

7,803

9,979

Loans held for investment

$

1,998,269

$

2,088,351

Total:

Residential mortgage loans, mainly secured by first mortgages

$

2,793,790

$

2,847,290

Construction loans

163,998

132,953

Commercial mortgage loans

2,320,069

2,358,851

C&I loans

(1)

2,946,201

2,886,263

Consumer loans

3,495,257

3,327,468

Loans held for investment

(2)

11,719,315

11,552,825

ACL on loans and finance leases

(267,058)

(260,464)

Loans held for investment, net

$

11,452,257

$

11,292,361

(1)

As of June 30, 2023 and December 31, 2022, includes

$

821.4

million and $

838.5

million, respectively, of commercial loans that were secured by real estate and the

primary source of repayment at origination was not dependent

upon the real estate.

(2)

Includes accretable fair value net purchase discounts of $

27.1

million and $

29.3

million as of June 30, 2023 and December 31, 2022, respectively.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

24

The Corporation’s

aging of

the loan

portfolio held

for investment,

as well

as information

about nonaccrual

loans with

no ACL,

by

portfolio classes as of June 30, 2023 and December 31, 2022 are as follows:

As of June 30, 2023

Days Past Due and Accruing

Current

30-59

60-89

90+

(1) (2) (3)

Nonaccrual

(4)

Total loans held

for investment

Nonaccrual

Loans with no

ACL

(5)

(In thousands)

Residential mortgage loans, mainly secured by first mortgages:

FHA/VA government-guaranteed

loans

(1) (3) (6)

$

69,242

$

-

$

1,605

$

34,038

$

-

$

104,885

$

-

Conventional residential mortgage loans

(2) (6)

2,613,464

-

29,274

12,915

33,252

2,688,905

1,861

Commercial loans:

Construction loans

(6)

161,248

1,062

11

-

1,677

163,998

973

Commercial mortgage loans

(2) (6)

2,287,864

4,551

565

5,553

21,536

2,320,069

11,834

C&I loans

2,928,957

1,827

1,186

5,037

9,194

2,946,201

1,816

Consumer loans:

Auto loans

1,803,442

44,425

8,281

-

11,311

1,867,459

3,464

Finance leases

778,649

8,015

1,564

-

2,483

790,711

496

Personal loans

359,898

4,363

1,985

-

1,353

367,599

-

Credit cards

305,434

3,734

2,620

5,668

-

317,456

-

Other consumer loans

147,419

2,191

1,207

-

1,215

152,032

35

Total loans held for investment

$

11,455,617

$

70,168

$

48,298

$

63,211

$

82,021

$

11,719,315

$

20,479

(1)

It is the Corporation's policy to report delinquent Federal Housing Authority (“FHA”)/Veterans Affairs (“VA”)

government-guaranteed residential mortgage loans as past-due loans 90 days and still accruing as opposed

to nonaccrual loans. The Corporation continues accruing interest on these loans until they have passed the 15 months delinquency mark, taking into consideration the FHA interest curtailment process. These balances

include $

19.9

million of residential mortgage loans guaranteed by the FHA that were over 15 months delinquent as of June 30, 2023.

(2)

Includes purchased credit deteriorated ("PCD") loans previously accounted for under ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("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, amounting to $

9.5

million as of June 30, 2023 ($

8.5

million conventional residential mortgage loans and $

1.0

million commercial mortgage loans), is presented in the

loans past due 90 days or more and still accruing category in the table above.

(3)

Include rebooked loans, which were previously pooled into GNMA securities, amounting to $

6.5

million as of June 30, 2023. 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, these loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting

liability.

(4)

Nonaccrual loans in the Florida region amounted to $

9.8

million as of June 30, 2023, primarily nonaccrual residential mortgage loans and C&I loans.

(5)

Includes $

0.3

million of nonaccrual C&I loans with no ACL in the Florida region as of June 30, 2023.

(6)

According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required

by the Federal

Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA

government-guaranteed loans,

conventional residential mortgage loans, commercial mortgage loans, and construction loans past due 30-59 days, but less than two payments in arrears, as of June 30, 2023 amounted to $

6.6

million, $

62.9

million, $

1.9

million, and $

0.2

million, respectively.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

25

As of December 31, 2022

Days Past Due and Accruing

Current

30-59

60-89

90+

(1)(2)(3)

Nonaccrual

(4)

Total loans held

for investment

Nonaccrual

Loans with no

ACL

(5)

(In thousands)

Residential mortgage loans, mainly secured by first mortgages:

FHA/VA government-guaranteed

loans

(1) (3) (6)

$

67,116

$

-

$

2,586

$

48,456

$

-

$

118,158

$

-

Conventional residential mortgage loans

(2) (6)

2,643,909

-

25,630

16,821

42,772

2,729,132

2,292

Commercial loans:

Construction loans

130,617

-

-

128

2,208

132,953

977

Commercial mortgage loans

(2) (6)

2,330,094

300

2,367

3,771

22,319

2,358,851

15,991

C&I loans

2,868,989

1,984

1,128

6,332

7,830

2,886,263

3,300

Consumer loans:

Auto loans

1,740,271

40,039

7,089

-

10,672

1,798,071

2,136

Finance leases

707,646

7,148

1,791

-

1,645

718,230

330

Personal loans

346,366

3,738

1,894

-

1,248

353,246

-

Credit cards

301,013

3,705

2,238

4,775

-

311,731

-

Other consumer loans

141,687

1,804

1,458

-

1,241

146,190

-

Total loans held for investment

$

11,277,708

$

58,718

$

46,181

$

80,283

$

89,935

$

11,552,825

$

25,026

(1)

It is the Corporation's policy to report delinquent FHA/VA government-guaranteed residential mortgage loans as past-due loans 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 $

28.2

million of residential mortgage loans

guaranteed by the FHA that were over 15 months delinquent as of December 31, 2022.

(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, amounting to $

12.0

million as of December 31, 2022 ($

11.0

million conventional

residential mortgage loans and $

1.0

million commercial mortgage loans), is presented in the loans past due 90 days or more and still accruing category in the table above.

(3)

Include rebooked loans, which were previously pooled into GNMA securities, amounting to $

10.3

million as of December 31, 2022. 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, these loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting

liability.

(4)

Nonaccrual loans in the Florida region amounted to $

8.3

million as of December 31, 2022, primarily nonaccrual residential mortgage loans.

(5)

Includes $

0.3

million of nonaccrual C&I loans with no ACL in the Florida region as of December 31, 2022.

(6)

According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required

by the Federal

Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA

government-guaranteed loans,

conventional residential mortgage loans, and commercial mortgage loans past due 30-59 days, but less than two payments in arrears, as of December 31, 2022 amounted to $

6.1

million, $

65.2

million, and $

1.6

million,

respectively.

When

a

loan

is placed

in

nonaccrual

status,

any

accrued

but uncollected

interest

income

is reversed

and

charged

against interest

income

and the

amortization of

any net

deferred fees

is suspended.

The amount

of accrued

interest reversed

against interest

income

totaled

$

0.5

million

and

$

1.1

million

for

the

quarter

and

six-month

period

ended

June

30,

2023,

respectively,

compared

with

$

0.3

million and $

0.7

million for the quarter

and six-month period ended

June 30, 2022, respectively.

For the quarter and

six-month period

ended

June

30,

2023,

the

cash

interest

income

recognized

on

nonaccrual

loans

amounted

to

$

0.5

million

and

$

1.0

million,

respectively, compared

to $

0.3

million and $

0.7

million for the quarter and six-month period ended June 30, 2022, respectively.

As of

June

30,

2023,

the recorded

investment

on

residential

mortgage

loans collateralized

by

residential

real

estate property

that

were in

the process

of foreclosure

amounted to

$

50.9

million, including

$

21.5

million of

FHA/VA

government-guaranteed

mortgage

loans, and

$

7.2

million of

PCD loans

acquired prior

to the

adoption, on

January 1,

2020, of

CECL.

The Corporation

commences the

foreclosure

process

on

residential

real

estate

loans

when

a

borrower

becomes

120

days

delinquent.

Foreclosure

procedures

and

timelines

vary

depending

on

whether

the

property

is

located

in

a

judicial

or

non-judicial

state.

Occasionally,

foreclosures

may

be

delayed due to, among other reasons, mandatory mediations, bankruptcy,

court delays, and title issues.

Credit Quality Indicators:

The Corporation

categorizes loans

into risk

categories based

on relevant

information

about the

ability of

the borrowers

to service

their debt

such as

current financial

information, historical

payment experience,

credit documentation,

public information,

and current

economic

trends,

among

other

factors.

The

Corporation

analyzes

non-homogeneous

loans,

such

as commercial

mortgage,

C&I,

and

construction

loans

individually

to

classify

the

loans’

credit

risk.

As

mentioned

above,

the

Corporation

periodically

reviews

its

commercial

and

construction

loans

to

evaluate

if

they

are

properly

classified.

The

frequency

of

these

reviews

will

depend

on

the

amount of

the aggregate

outstanding debt,

and the

risk rating

classification of

the obligor.

In addition,

during the

renewal and

annual

review process of

applicable credit facilities, the

Corporation evaluates the

corresponding loan grades.

The Corporation uses

the same

definition

for

risk

ratings

as

those

described

for

Puerto

Rico

municipal

bonds

accounted

for

as

held-to-maturity

debt

securities,

as

discussed in

Note 3

– Debt

Securities, to

the audited

consolidated financial

statements included

in the

2022 Annual

Report on

Form

10-K.

For residential mortgage and consumer loans, the Corporation also evaluates

credit quality based on its interest accrual status.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

26

Based on

the most

recent analysis

performed, the

amortized cost

of commercial

and construction

loans by portfolio

classes and by

origination

year based

on the

internal credit

-risk category

as of

June 30,

2023, the

gross charge

-offs for

the six-month

period ended

June 30,

2023 by

portfolio classes

and by

origination year,

and the

amortized cost

of commercial

and construction

loans by

portfolio

classes based on the internal credit-risk category as of December 31,

2022, were as follows:

As of June 30,

2023

Puerto Rico and Virgin Islands region

Term Loans

As of December 31, 2022

Amortized Cost Basis by Origination Year

(1)

2023

2022

2021

2020

2019

Prior

Revolving

Loans

Amortized

Cost Basis

Total

Total

(In thousands)

CONSTRUCTION

Risk Ratings:

Pass

$

29,645

$

22,238

$

11,093

$

-

$

-

$

3,887

$

-

$

66,863

$

31,879

Criticized:

Special Mention

-

-

-

-

-

-

-

-

-

Substandard

-

7

-

-

-

2,349

-

2,356

2,893

Doubtful

-

-

-

-

-

-

-

-

-

Loss

-

-

-

-

-

-

-

-

-

Total construction loans

$

29,645

$

22,245

$

11,093

$

-

$

-

$

6,236

$

-

$

69,219

$

34,772

Charge-offs on construction loans

$

-

$

-

$

-

$

-

$

-

$

38

$

-

$

38

COMMERCIAL MORTGAGE

Risk Ratings:

Pass

$

94,161

$

385,980

$

139,699

$

322,212

$

283,938

$

381,556

$

427

$

1,607,973

$

1,655,728

Criticized:

Special Mention

-

4,487

-

33,698

-

118,636

-

156,821

145,415

Substandard

-

129

-

-

2,847

32,519

-

35,495

33,061

Doubtful

-

-

-

-

-

-

-

-

-

Loss

-

-

-

-

-

-

-

-

-

Total commercial mortgage loans

$

94,161

$

390,596

$

139,699

$

355,910

$

286,785

$

532,711

$

427

$

1,800,289

$

1,834,204

Charge-offs on commercial mortgage loans

$

-

$

-

$

-

$

-

$

-

$

106

$

-

$

106

C&I

Risk Ratings:

Pass

$

113,567

$

297,329

$

193,851

$

178,144

$

299,435

$

222,553

$

649,354

$

1,954,233

$

1,789,572

Criticized:

Special Mention

-

-

-

-

508

12,709

22,537

35,754

43,224

Substandard

-

-

389

634

13,797

6,682

285

21,787

27,313

Doubtful

-

-

-

-

-

-

-

-

-

Loss

-

-

-

-

-

-

-

-

-

Total C&I loans

$

113,567

$

297,329

$

194,240

$

178,778

$

313,740

$

241,944

$

672,176

$

2,011,774

$

1,860,109

Charge-offs on C&I loans

$

-

$

-

$

-

$

-

$

-

$

211

$

55

$

266

(1) Excludes accrued interest receivable.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

27

As of June 30,

2023

Term Loans

As of December 31, 2022

Florida region

Amortized Cost Basis by Origination Year

(1)

2023

2022

2021

2020

2019

Prior

Revolving

Loans

Amortized

Cost Basis

Total

Total

(In thousands)

CONSTRUCTION

Risk Ratings:

Pass

$

32

$

47,557

$

47,190

$

-

$

-

$

-

$

-

$

94,779

$

98,181

Criticized:

Special Mention

-

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

-

-

-

-

Doubtful

-

-

-

-

-

-

-

-

-

Loss

-

-

-

-

-

-

-

-

-

Total construction loans

$

32

$

47,557

$

47,190

$

-

$

-

$

-

$

-

$

94,779

$

98,181

Charge-offs on construction loans

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

COMMERCIAL MORTGAGE

Risk Ratings:

Pass

$

6,258

$

184,611

$

69,659

$

40,608

$

51,005

$

122,449

$

19,642

$

494,232

$

503,184

Criticized:

Special Mention

-

-

-

-

13,156

11,224

-

24,380

20,295

Substandard

-

-

-

1,168

-

-

-

1,168

1,168

Doubtful

-

-

-

-

-

-

-

-

-

Loss

-

-

-

-

-

-

-

-

-

Total commercial mortgage loans

$

6,258

$

184,611

$

69,659

$

41,776

$

64,161

$

133,673

$

19,642

$

519,780

$

524,647

Charge-offs on commercial mortgage loans

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

C&I

Risk Ratings:

Pass

$

45,172

$

272,282

$

153,401

$

74,535

$

173,170

$

56,918

$

117,134

$

892,612

$

979,151

Criticized:

Special Mention

-

-

19,580

-

5,976

11,403

-

36,959

17,905

Substandard

-

-

-

652

193

2,825

300

3,970

29,098

Doubtful

-

-

-

-

-

886

-

886

-

Loss

-

-

-

-

-

-

-

-

-

Total C&I loans

$

45,172

$

272,282

$

172,981

$

75,187

$

179,339

$

72,032

$

117,434

$

934,427

$

1,026,154

Charge-offs on C&I loans

$

-

$

-

$

-

$

-

$

-

$

6,202

$

-

$

6,202

(1) Excludes accrued interest receivable.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

28

As of June 30,

2023

Total

Term Loans

As of December 31, 2022

Amortized Cost Basis by Origination Year (1)

2023

2022

2021

2020

2019

Prior

Revolving

Loans

Amortized

Cost Basis

Total

Total

(In thousands)

CONSTRUCTION

Risk Ratings:

Pass

$

29,677

$

69,795

$

58,283

$

-

$

-

$

3,887

$

-

$

161,642

$

130,060

Criticized:

Special Mention

-

-

-

-

-

-

-

-

-

Substandard

-

7

-

-

-

2,349

-

2,356

2,893

Doubtful

-

-

-

-

-

-

-

-

-

Loss

-

-

-

-

-

-

-

-

-

Total construction loans

$

29,677

$

69,802

$

58,283

$

-

$

-

$

6,236

$

-

$

163,998

$

132,953

Charge-offs on construction loans

$

-

$

-

$

-

$

-

$

-

$

38

$

-

$

38

COMMERCIAL MORTGAGE

Risk Ratings:

Pass

$

100,419

$

570,591

$

209,358

$

362,820

$

334,943

$

504,005

$

20,069

$

2,102,205

$

2,158,912

Criticized:

Special Mention

-

4,487

-

33,698

13,156

129,860

-

181,201

165,710

Substandard

-

129

-

1,168

2,847

32,519

-

36,663

34,229

Doubtful

-

-

-

-

-

-

-

-

-

Loss

-

-

-

-

-

-

-

-

-

Total commercial mortgage loans

$

100,419

$

575,207

$

209,358

$

397,686

$

350,946

$

666,384

$

20,069

$

2,320,069

$

2,358,851

Charge-offs on commercial mortgage loans

$

-

$

-

$

-

$

-

$

-

$

106

$

-

$

106

C&I

Risk Ratings:

Pass

$

158,739

$

569,611

$

347,252

$

252,679

$

472,605

$

279,471

$

766,488

$

2,846,845

$

2,768,723

Criticized:

Special Mention

-

-

19,580

-

6,484

24,112

22,537

72,713

61,129

Substandard

-

-

389

1,286

13,990

9,507

585

25,757

56,411

Doubtful

-

-

-

-

-

886

-

886

-

Loss

-

-

-

-

-

-

-

-

-

Total C&I loans

$

158,739

$

569,611

$

367,221

$

253,965

$

493,079

$

313,976

$

789,610

$

2,946,201

$

2,886,263

Charge-offs on C&I loans

$

-

$

-

$

-

$

-

$

-

$

6,413

$

55

$

6,468

(1) Excludes accrued interest receivable.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

29

The following

tables present the

amortized cost of

residential mortgage

loans by portfolio

classes and by

origination year

based on

accrual

status

as

of

June

30,

2023,

the

gross

charge-offs

for

the

six-month

period

ended

June

30,

2023

by portfolio

classes

and

by

origination year,

and the amortized

cost of residential

mortgage loans by

portfolio classes

based on

accrual status as

of December

31,

2022:

As of June 30,

2023

As of

December 31,

2022

Term Loans

Amortized Cost Basis by Origination Year

(1)

2023

2022

2021

2020

2019

Prior

Revolving

Loans

Amortized

Cost Basis

Total

Total

(In thousands)

Puerto Rico and Virgin Islands Region:

FHA/VA government-guaranteed loans

Accrual Status:

Performing

$

118

$

691

$

689

$

782

$

1,117

$

100,760

$

-

$

104,157

$

117,416

Non-Performing

-

-

-

-

-

-

-

-

-

Total FHA/VA

government-guaranteed loans

$

118

$

691

$

689

$

782

$

1,117

$

100,760

$

-

$

104,157

$

117,416

Conventional residential mortgage loans:

Accrual Status:

Performing

$

61,153

$

170,239

$

73,033

$

30,819

$

45,799

$

1,841,296

$

-

$

2,222,339

$

2,265,013

Non-Performing

-

-

35

-

171

25,608

-

25,814

35,471

Total conventional residential mortgage loans

$

61,153

$

170,239

$

73,068

$

30,819

$

45,970

$

1,866,904

$

-

$

2,248,153

$

2,300,484

Total:

Accrual Status:

Performing

$

61,271

$

170,930

$

73,722

$

31,601

$

46,916

$

1,942,056

$

-

$

2,326,496

$

2,382,429

Non-Performing

-

-

35

-

171

25,608

-

25,814

35,471

Total residential mortgage loans in Puerto Rico

and Virgin Islands Region

$

61,271

$

170,930

$

73,757

$

31,601

$

47,087

$

1,967,664

$

-

$

2,352,310

$

2,417,900

Charge-offs on residential mortgage loans

$

-

$

-

$

-

$

3

$

-

$

2,126

$

-

$

2,129

(1)

Excludes accrued interest receivable.

As of June 30,

2023

As of

December 31,

2022

Term Loans

Amortized Cost Basis by Origination Year

(1)

2023

2022

2021

2020

2019

Prior

Revolving

Loans

Amortized

Cost Basis

Total

Total

(In thousands)

Florida Region:

FHA/VA government-guaranteed loans

Accrual Status:

Performing

$

-

$

-

$

-

$

-

$

-

$

728

$

-

$

728

$

742

Non-Performing

-

-

-

-

-

-

-

-

-

Total FHA/VA

government-guaranteed loans

$

-

$

-

$

-

$

-

$

-

$

728

$

-

$

728

$

742

Conventional residential mortgage loans:

Accrual Status:

Performing

$

37,150

$

80,115

$

48,955

$

30,517

$

28,459

$

208,118

$

-

$

433,314

$

421,347

Non-Performing

-

-

-

-

259

7,179

-

7,438

7,301

Total conventional residential mortgage loans

$

37,150

$

80,115

$

48,955

$

30,517

$

28,718

$

215,297

$

-

$

440,752

$

428,648

Total:

Accrual Status:

Performing

$

37,150

$

80,115

$

48,955

$

30,517

$

28,459

$

208,846

$

-

$

434,042

$

422,089

Non-Performing

-

-

-

-

259

7,179

-

7,438

7,301

Total residential mortgage loans in Florida region

$

37,150

$

80,115

$

48,955

$

30,517

$

28,718

$

216,025

$

-

$

441,480

$

429,390

Charge-offs on residential mortgage loans

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

(1)

Excludes accrued interest receivable.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

30

As of June 30,

2023

As of

December 31,

2022

Term Loans

Amortized Cost Basis by Origination Year

(1)

2023

2022

2021

2020

2019

Prior

Revolving

Loans

Amortized

Cost Basis

Total

Total

(In thousands)

Total:

FHA/VA government-guaranteed loans

Accrual Status:

Performing

$

118

$

691

$

689

$

782

$

1,117

$

101,488

$

-

$

104,885

$

118,158

Non-Performing

-

-

-

-

-

-

-

-

-

Total FHA/VA

government-guaranteed loans

$

118

$

691

$

689

$

782

$

1,117

$

101,488

$

-

$

104,885

$

118,158

Conventional residential mortgage loans:

Accrual Status:

Performing

$

98,303

$

250,354

$

121,988

$

61,336

$

74,258

$

2,049,414

$

-

$

2,655,653

$

2,686,360

Non-Performing

-

-

35

-

430

32,787

-

33,252

42,772

Total conventional residential mortgage loans

$

98,303

$

250,354

$

122,023

$

61,336

$

74,688

$

2,082,201

$

-

$

2,688,905

$

2,729,132

Total:

Accrual Status:

Performing

$

98,421

$

251,045

$

122,677

$

62,118

$

75,375

$

2,150,902

$

-

$

2,760,538

$

2,804,518

Non-Performing

-

-

35

-

430

32,787

-

33,252

42,772

Total residential mortgage loans

$

98,421

$

251,045

$

122,712

$

62,118

$

75,805

$

2,183,689

$

-

$

2,793,790

$

2,847,290

Charge-offs on residential mortgage loans

$

-

$

-

$

-

$

3

$

-

$

2,126

$

-

$

2,129

(1)

Excludes accrued interest receivable.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

31

The

following

tables present

the

amortized

cost

of

consumer

loans

by

portfolio

classes

and

by origination

year

based on

accrual

status as of

June 30, 2023,

the gross charge

-offs for

the six-month period

ended June 30,

2023 by portfolio

classes and by

origination

year, and the amortized cost of consumer

loans by portfolio classes based on accrual status as of December 31, 2022:

As of June 30,

2023

As of

December 31,

2022

Term Loans

Amortized Cost Basis by Origination Year

(1)

2023

2022

2021

2020

2019

Prior

Revolving

Loans

Amortized

Cost Basis

Total

Total

(In thousands)

Puerto Rico and Virgin Islands Region:

Auto loans:

Accrual Status:

Performing

$

326,746

$

604,040

$

445,754

$

214,692

$

167,480

$

95,343

$

-

$

1,854,055

$

1,783,782

Non-Performing

199

2,234

2,530

1,341

2,702

2,255

-

11,261

10,596

Total auto loans

$

326,945

$

606,274

$

448,284

$

216,033

$

170,182

$

97,598

$

-

$

1,865,316

$

1,794,378

Charge-offs on auto loans

$

174

$

3,355

$

2,287

$

886

$

1,205

$

745

$

-

$

8,652

Finance leases:

Accrual Status:

Performing

$

159,308

$

270,541

$

172,697

$

76,249

$

66,859

$

42,574

$

-

$

788,228

$

716,585

Non-Performing

-

619

490

525

380

469

-

2,483

1,645

Total finance leases

$

159,308

$

271,160

$

173,187

$

76,774

$

67,239

$

43,043

$

-

$

790,711

$

718,230

Charge-offs on finance leases

$

11

$

656

$

485

$

228

$

341

$

428

$

-

$

2,149

Personal loans:

Accrual Status:

Performing

$

88,877

$

148,554

$

43,113

$

22,164

$

39,809

$

23,410

$

-

$

365,927

$

351,664

Non-Performing

8

713

222

68

220

122

-

1,353

1,248

Total personal loans

$

88,885

$

149,267

$

43,335

$

22,232

$

40,029

$

23,532

$

-

$

367,280

$

352,912

Charge-offs on personal loans

$

24

$

3,414

$

1,435

$

662

$

1,180

$

834

$

-

$

7,549

Credit cards:

Accrual Status:

Performing

$

-

$

-

$

-

$

-

$

-

$

-

$

317,456

$

317,456

$

311,731

Non-Performing

-

-

-

-

-

-

-

-

-

Total credit cards

$

-

$

-

$

-

$

-

$

-

$

-

$

317,456

$

317,456

$

311,731

Charge-offs on credit cards

$

-

$

-

$

-

$

-

$

-

$

-

$

8,447

$

8,447

Other consumer loans:

Accrual Status:

Performing

$

49,470

$

52,078

$

14,386

$

7,261

$

8,060

$

5,348

$

8,932

$

145,535

$

139,116

Non-Performing

40

527

192

50

65

201

81

1,156

1,122

Total other consumer loans

$

49,510

$

52,605

$

14,578

$

7,311

$

8,125

$

5,549

$

9,013

$

146,691

$

140,238

Charge-offs on other consumer loans

$

89

$

3,530

$

1,262

$

305

$

600

$

235

$

221

$

6,242

Total:

Performing

$

624,401

$

1,075,213

$

675,950

$

320,366

$

282,208

$

166,675

$

326,388

$

3,471,201

$

3,302,878

Non-Performing

247

4,093

3,434

1,984

3,367

3,047

81

16,253

14,611

Total consumer loans in Puerto Rico and Virgin

Islands region

$

624,648

$

1,079,306

$

679,384

$

322,350

$

285,575

$

169,722

$

326,469

$

3,487,454

$

3,317,489

Charge-offs on total consumer loans

$

298

$

10,955

$

5,469

$

2,081

$

3,326

$

2,242

$

8,668

$

33,039

(1)

Excludes accrued interest receivable.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

32

As of June 30,

2023

As of

December 31,

2022

Term Loans

Amortized Cost Basis by Origination Year

(1)

2023

2022

2021

2020

2019

Prior

Revolving

Loans

Amortized

Cost Basis

Total

Total

(In thousands)

Florida Region:

Auto loans:

Accrual Status:

Performing

$

-

$

-

$

-

$

-

$

220

$

1,873

$

-

$

2,093

$

3,617

Non-Performing

-

-

-

-

-

50

-

50

76

Total auto loans

$

-

$

-

$

-

$

-

$

220

$

1,923

$

-

$

2,143

$

3,693

Charge-offs on auto loans

$

-

$

-

$

-

$

-

$

23

$

198

$

-

$

221

Finance leases:

Accrual Status:

Performing

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Non-Performing

-

-

-

-

-

-

-

-

-

Total finance leases

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Charge-offs on finance leases

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Personal loans:

Accrual Status:

Performing

$

244

$

-

$

71

$

4

$

-

$

-

$

-

$

319

$

334

Non-Performing

-

-

-

-

-

-

-

-

-

Total personal loans

$

244

$

-

$

71

$

4

$

-

$

-

$

-

$

319

$

334

Charge-offs on personal loans

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Credit cards:

Accrual Status:

Performing

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Non-Performing

-

-

-

-

-

-

-

-

-

Total credit cards

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Charge-offs on credit cards

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Other consumer loans:

Accrual Status:

Performing

$

-

$

48

$

227

$

455

$

-

$

2,389

$

2,163

$

5,282

$

5,833

Non-Performing

-

-

-

-

-

21

38

59

119

Total other consumer loans

$

-

$

48

$

227

$

455

$

-

$

2,410

$

2,201

$

5,341

$

5,952

Charge-offs on other consumer loans

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Total:

Performing

$

244

$

48

$

298

$

459

$

220

$

4,262

$

2,163

$

7,694

$

9,784

Non-Performing

-

-

-

-

-

71

38

109

195

Total consumer loans in Florida region

$

244

$

48

$

298

$

459

$

220

$

4,333

$

2,201

$

7,803

$

9,979

Charge-offs on total consumer loans

$

-

$

-

$

-

$

-

$

23

$

198

$

-

$

221

(1)

Excludes accrued interest receivable.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

33

As of June 30,

2023

As of

December 31,

2022

Term Loans

Amortized Cost Basis by Origination Year

(1)

2023

2022

2021

2020

2019

Prior

Revolving

Loans

Amortized

Cost Basis

Total

Total

(In thousands)

Total:

Auto loans:

Accrual Status:

Performing

$

326,746

$

604,040

$

445,754

$

214,692

$

167,700

$

97,216

$

-

$

1,856,148

$

1,787,399

Non-Performing

199

2,234

2,530

1,341

2,702

2,305

-

11,311

10,672

Total auto loans

$

326,945

$

606,274

$

448,284

$

216,033

$

170,402

$

99,521

$

-

$

1,867,459

$

1,798,071

Charge-offs on auto loans

$

174

$

3,355

$

2,287

$

886

$

1,228

$

943

$

-

$

8,873

Finance leases:

Accrual Status:

Performing

$

159,308

$

270,541

$

172,697

$

76,249

$

66,859

$

42,574

$

-

$

788,228

$

716,585

Non-Performing

-

619

490

525

380

469

-

2,483

1,645

Total finance leases

$

159,308

$

271,160

$

173,187

$

76,774

$

67,239

$

43,043

$

-

$

790,711

$

718,230

Charge-offs on finance leases

$

11

$

656

$

485

$

228

$

341

$

428

$

-

$

2,149

Personal loans:

Accrual Status:

Performing

$

89,121

$

148,554

$

43,184

$

22,168

$

39,809

$

23,410

$

-

$

366,246

$

351,998

Non-Performing

8

713

222

68

220

122

-

1,353

1,248

Total personal loans

$

89,129

$

149,267

$

43,406

$

22,236

$

40,029

$

23,532

$

-

$

367,599

$

353,246

Charge-offs on personal loans

$

24

$

3,414

$

1,435

$

662

$

1,180

$

834

$

-

$

7,549

Credit cards:

Accrual Status:

Performing

$

-

$

-

$

-

$

-

$

-

$

-

$

317,456

$

317,456

$

311,731

Non-Performing

-

-

-

-

-

-

-

-

-

Total credit cards

$

-

$

-

$

-

$

-

$

-

$

-

$

317,456

$

317,456

$

311,731

Charge-offs on credit cards

$

-

$

-

$

-

$

-

$

-

$

-

$

8,447

$

8,447

Other consumer loans:

Accrual Status:

Performing

$

49,470

$

52,126

$

14,613

$

7,716

$

8,060

$

7,737

$

11,095

$

150,817

$

144,949

Non-Performing

40

527

192

50

65

222

119

1,215

1,241

Total other consumer loans

$

49,510

$

52,653

$

14,805

$

7,766

$

8,125

$

7,959

$

11,214

$

152,032

$

146,190

Charge-offs on other consumer loans

$

89

$

3,530

$

1,262

$

305

$

600

$

235

$

221

$

6,242

Total:

Performing

$

624,645

$

1,075,261

$

676,248

$

320,825

$

282,428

$

170,937

$

328,551

$

3,478,895

$

3,312,662

Non-Performing

247

4,093

3,434

1,984

3,367

3,118

119

16,362

14,806

Total consumer loans

$

624,892

$

1,079,354

$

679,682

$

322,809

$

285,795

$

174,055

$

328,670

$

3,495,257

$

3,327,468

Charge-offs on total consumer loans

$

298

$

10,955

$

5,469

$

2,081

$

3,349

$

2,440

$

8,668

$

33,260

(1)

Excludes accrued interest receivable.

As of June 30, 2023 and December 31, 2022, the balance of revolving loans

converted to term loans was

no

t material.

Accrued

interest

receivable

on

loans

totaled

$

52.8

million

as

of

June

30,

2023

($

53.1

million

as

of

December

31,

2022),

was

reported as

part of accrued

interest receivable on

loans and investment

securities in the

consolidated statements

of financial

condition

and is excluded from the estimate of credit losses.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

34

The

following

tables

present

information

about

collateral

dependent

loans

that

were

individually

evaluated

for

purposes

of

determining the ACL as of June 30, 2023 and December 31, 2022

:

As of June 30, 2023

Collateral Dependent Loans -

With Allowance

Collateral Dependent

Loans - With No

Related Allowance

Collateral Dependent Loans - Total

Amortized Cost

Related

Allowance

Amortized Cost

Amortized Cost

Related

Allowance

(In thousands)

Residential mortgage loans:

Conventional residential mortgage loans

$

31,199

$

2,026

$

-

$

31,199

$

2,026

Commercial loans:

Construction loans

-

-

956

956

-

Commercial mortgage loans

6,590

1,016

52,447

59,037

1,016

C&I loans

2,563

418

10,601

13,164

418

Consumer loans:

Personal loans

-

-

-

-

-

Other consumer loans

173

17

-

173

17

$

40,525

$

3,477

$

64,004

$

104,529

$

3,477

As of December 31, 2022

Collateral Dependent Loans -

With Allowance

Collateral Dependent

Loans - With No

Related Allowance

Collateral Dependent Loans - Total

Amortized Cost

Related

Allowance

Amortized Cost

Amortized Cost

Related

Allowance

(In thousands)

Residential mortgage loans:

Conventional residential mortgage loans

$

36,206

$

2,571

$

-

$

36,206

$

2,571

Commercial loans:

Construction loans

-

-

956

956

-

Commercial mortgage loans

2,466

897

62,453

64,919

897

C&I loans

1,513

322

17,590

19,103

322

Consumer loans:

Personal loans

56

1

64

120

1

Other consumer loans

207

29

-

207

29

$

40,448

$

3,820

$

81,063

$

121,511

$

3,820

The allowance related

to collateral dependent loans

reported in the tables

above includes qualitative

adjustments applied to

the loan

portfolio

that

consider

possible

changes

in

circumstances

that

could

ultimately

impact

credit

losses

and

might

not

be

reflected

in

historical

data

or

forecasted

data

incorporated

in

the

quantitative

models.

The

underlying

collateral

for

residential

mortgage

and

consumer

collateral

dependent

loans

consisted

of

single-family

residential

properties,

and

for

commercial

and

construction

loans

consisted

primarily

of

office

buildings,

multifamily

residential

properties,

and

retail

establishments.

The

weighted-average

loan-to-

value coverage

for collateral

dependent loans

as of

June 30,

2023 was

68

%, compared

to

70

% as

of December

31, 2022,

which was

not considered a significant change in the extent to which collateral secured these loans.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

35

Purchases and Sales of Loans

In

the

ordinary

course

of

business,

the

Corporation

enters

into

securitization

transactions

and

whole

loan

sales

with

GNMA

and

GSEs, such

as FNMA

and FHLMC.

During the

first six

months of

2023, loans

pooled into

GNMA MBS

amounted to

approximately

$

66.4

million, compared to

$

79.7

million during the

first six months

of 2022, for

which the Corporation

recognized a net

gain on sale

of

$

1.4

million

and

$

2.3

million,

respectively.

Also, during

the

first

six

months

of 2023,

the

Corporation

sold

approximately

$

22.8

million of performing residential mortgage loans to FNMA, for

which the Corporation recognized a net gain on sale of $

0.6

million. In

addition,

during

the

first

six

months

of

2022,

the

Corporation

sold

approximately

$

75.2

million

and

$

3.2

million

of

performing

residential

mortgage

loans

to

FNMA

and

FHLMC,

respectively,

for

which

the

Corporation

recognized

a

net

gain

on

sale

of

$

3.3

million

and

$

0.1

million,

respectively.

The

Corporation’s

continuing

involvement

with

the

loans

that

it

sells

consists

primarily

of

servicing

the

loans.

In

addition,

the

Corporation

agrees

to

repurchase

loans

if

it breaches

any

of

the

representations

and

warranties

included

in the

sale agreement.

These

representations

and warranties

are

consistent with

the

GSEs’

selling

and

servicing

guidelines

(i.e., ensuring that the mortgage was properly underwritten according

to established guidelines).

For loans

pooled into

GNMA MBS,

the Corporation,

as servicer,

holds an

option to

repurchase individual

delinquent loans

issued

on or

after January 1,

2003 when certain

delinquency criteria are

met. This option

gives the Corporation

the unilateral ability,

but not

the obligation, to

repurchase the delinquent

loans at par without

prior authorization from

GNMA. Since the

Corporation is considered

to

have

regained

effective

control

over

the

loans,

it

is

required

to

recognize

the

loans

and

a

corresponding

repurchase

liability

regardless of

its intent

to repurchase

the loans.

As of

June 30,

2023 and

December 31,

2022, rebooked

GNMA delinquent

loans that

were included in the residential mortgage loan portfolio amounted to $

6.5

million and $

10.4

million, respectively.

During the first

six months of 2023

and 2022, the Corporation

repurchased, pursuant to

the aforementioned repurchase

option, $

1.9

million

and

$

6.2

million,

respectively,

of

loans

previously

pooled

into

GNMA

MBS.

The

principal

balance

of

these

loans

is

fully

guaranteed,

and the

risk of

loss related

to the

repurchased loans

is generally

limited to

the difference

between the

delinquent interest

payment advanced

to GNMA, which

is computed at

the loan’s

interest rate, and

the interest payments

reimbursed by FHA,

which are

computed

at a

pre-determined

debenture

rate.

Repurchases

of GNMA

loans allow

the

Corporation,

among

other

things, to

maintain

acceptable

delinquency

rates

on

outstanding

GNMA

pools

and

remain

as

a

seller

and

servicer

in

good

standing

with

GNMA.

Historically, losses

on these repurchases of

GNMA delinquent loans have

been immaterial and no provision has

been made at the time

of sale.

Loan sales to FNMA and FHLMC are without recourse in relation

to the future performance of the loans.

The Corporation’s risk of

loss

with

respect

to

these

loans

is

also

minimal

as

these

repurchased

loans

are

generally

performing

loans

with

documentation

deficiencies.

During

the

first

six

months

of

2023

and

2022,

the

Corporation

purchased

C&I

loan

participations

in

the

Florida

region

totaling

$

28.0

million and $

76.4

million, respectively.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

36

Loan Portfolio Concentration

The Corporation’s

primary

lending area

is Puerto

Rico. The

Corporation’s

banking subsidiary,

FirstBank, also

lends in

the USVI

and BVI markets

and in the

United States (principally

in the state of

Florida). Of the

total gross loans

held for investment

portfolio of

$

11.7

billion as

of June

30, 2023,

credit risk

concentration

was approximately

79

% in

Puerto Rico,

17

% in

the U.S.,

and

4

% in

the

USVI and BVI.

As

of

June

30,

2023,

the

Corporation

had

$

174.9

million

outstanding

in

loans

extended

to

the

Puerto

Rico

government,

its

municipalities

and

public

corporations,

compared

to

$

169.8

million

as

of

December

31,

2022.

As

of

June

30,

2023,

approximately

$

105.2

million

consisted

of

loans

extended

to

municipalities

in

Puerto

Rico

that

are

general

obligations

supported

by

assigned

property

tax

revenues,

and $

28.1

million

of

loans which

are supported

by one

or

more

specific sources

of municipal

revenues. The

vast

majority

of

revenues

of the

municipalities

included

in

the

Corporation’s

loan

portfolio

are

independent

of

budgetary

subsidies

provided

by

the

Puerto

Rico

central

government.

These

municipalities

are

required

by

law

to

levy

special

property

taxes

in

such

amounts

as

are

required

to

satisfy

the

payment

of

all

of

their

respective

general

obligation

bonds

and

notes.

In

addition

to

loans

extended

to municipalities,

the Corporation’s

exposure

to the

Puerto

Rico government

as of

June 30,

2023 included

$

9.5

million

in

loans granted

to an affiliate

of the

Puerto

Rico Electric

Power Authority

(“PREPA”)

and $

32.1

million in loans

to agencies or

public

corporations of the Puerto Rico government.

In addition, as of

June 30, 2023, the Corporation

had $

81.1

million in exposure to

residential mortgage loans that

are guaranteed by

the PRHFA,

a government

instrumentality that

has been designated

as a covered

entity under PROMESA,

compared to

$

84.7

million

as

of

December

31,

2022.

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 Corporation

also has

credit exposure

to USVI government

entities. As

of June

30, 2023,

the Corporation

had

$

78.9

million in

loans to

USVI government

public corporations,

compared to

$

38.0

million as

of December

31, 2022.

As of

June 30,

2023, all

loans

were currently performing and up to date on principal and interest payments.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

37

Loss Mitigation Program for Borrowers Experiencing

Financial Difficulty

Effective January 1, 2023, the Corporation

adopted ASU 2022-02. For additional information on the adoption,

see Note 1 – Basis of

Presentation and Significant Accounting Policies.

The Corporation

provides

homeownership

preservation

assistance to

its customers

through

a loss

mitigation

program.

Depending

upon the nature

of a borrower’s financial

condition, restructurings or

loan modifications through

this program are provided,

as well as

other restructurings of

individual C&I, commercial

mortgage, construction, and

residential mortgage

loans. The Corporation

may also

modify contractual terms to comply with regulations regarding the treatment

of certain bankruptcy filings and discharge situations.

The

loan

modifications

granted

to

borrowers

experiencing

financial

difficulty

that

are

associated

with

payment

delays

typically

include the following:

-

Forbearance plans –

Payments of either interest

and/or principal are

deferred for a pre-established

period of time, generally

not

exceeding

six

months

in

any

given

year.

The

deferred

interest

and/or

principal

is

repaid

as

either

a

lump

sum

payment

at

maturity date or by extending the loan’s

maturity date by the number of forbearance months granted.

-

Payment

plans

–

Borrowers

are

allowed

to

pay

the

regular

monthly

payment

plus

the

pre-established

delinquent

amounts

during a period generally not exceeding

six months.

At the end of the payment plan, the

borrower is required to resume making

its regularly scheduled loan payments.

-

Trial modifications

– These types of loan

modifications are granted for

residential mortgage loans. Borrower

s

continue making

reduced monthly payments during

the trial period, which is

generally of up to six

months. The reduced payments

that are made

by the

borrower during

the trial

period will

result in

a payment

delay with

respect to

the original

contractual terms

of the

loan

since

the

loan

has

not

yet

been

contractually

modified.

After

successful

completion

of

the

trial

period,

the

mortgage

loan

is

contractually modified.

Modifications

in

the

form

of

a

reduction

in

interest

rate,

term

extension,

an

other-than-insignificant

payment

delay,

or

any

combination

of

these

types

of

loan

modifications

that

have

occurred

in

the

current

reporting

period

for

a

borrower

experiencing

financial difficulty are disclosed in the tables below.

The

below

disclosures

relate

to

loan

modifications

granted

to

borrowers

experiencing

financial

difficulty

in

which

there

was

a

change

in

the

timing

and/or

amount

of

contractual

cash

flows

in

the

form

of

any

of

the

aforementioned

types

of

modifications,

including

restructurings

that

resulted

in

a

more-than-insignificant

payment

delay.

These

disclosures

exclude

$

1.6

million

and

$

2.5

million in restructured residential

mortgage loans that are

government-guaranteed (e.g.,

FHA/VA

loans) and were modified

during the

quarter and six-month period ended June 30, 2023, respectively.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

38

The following tables present the amortized cost basis as of June 30,

2023 of loans modified to borrowers experiencing financial

difficulty during the quarter and six-month period ended

June 30,

2023, by portfolio classes and type of modification granted, and

the percentage of these modified loans relative to the total period-end amortized

cost basis of receivables in the portfolio class:

Quarter Ended June 30,

2023

Payment Delay Only

Forbearance

Payment

Plan

Trial

Modification

Interest

Rate

Reduction

Term

Extension

Combination of

Interest Rate

Reduction and

Term Extension

Forgiveness

of principal

and/or

interest

Other

Total

Percentage of

Total by

Portfolio

Classes

(In thousands)

Conventional residential mortgage loans

$

-

$

-

$

210

$

-

$

73

$

-

$

-

$

-

$

283

0.01%

Construction loans

-

-

-

-

-

-

-

-

-

-

Commercial mortgage loans

-

-

-

-

-

30,170

-

-

30,170

1.30%

C&I loans

-

-

-

-

187

-

-

-

187

0.01%

Consumer loans:

Auto loans

-

-

-

-

82

69

-

678

(1)

829

0.04%

Personal loans

-

-

-

-

41

71

-

-

112

0.03%

Credit cards

-

-

-

486

(2)

-

-

-

-

486

0.15%

Other consumer loans

-

-

-

-

146

40

-

10

(1)

196

0.13%

Total modifications

$

-

$

-

$

210

$

486

$

529

$

30,350

$

-

$

688

$

32,263

Six-Month Period Ended June 30,

2023

Payment Delay Only

Forbearance

Payment

Plan

Trial

Modification

Interest

Rate

Reduction

Term

Extension

Combination of

Interest Rate

Reduction and

Term Extension

Forgiveness

of principal

and/or

interest

Other

Total

Percentage of

Total by

Portfolio

Classes

(In thousands)

Conventional residential mortgage loans

$

-

$

-

$

542

$

-

$

503

$

94

$

-

$

-

$

1,139

0.04%

Construction loans

-

-

-

-

-

-

-

-

-

-

Commercial mortgage loans

-

-

-

-

-

30,170

-

-

30,170

1.30%

C&I loans

-

-

-

-

187

-

-

-

187

0.01%

Consumer loans:

Auto loans

-

-

-

-

167

103

-

1,155

(1)

1,425

0.08%

Personal loans

-

-

-

-

68

83

-

-

151

0.04%

Credit cards

-

-

-

732

(2)

-

-

-

-

732

0.23%

Other consumer loans

-

-

-

-

273

99

-

32

(1)

404

0.27%

Total modifications

$

-

$

-

$

542

$

732

$

1,198

$

30,549

$

-

$

1,187

$

34,208

(1)

Modification consists of court mandated reduction to 0% interest rate for remaining loan term to borrowers in bankruptcy proceedings unless dismissal occurs.

(2)

Modification consists of reduction in interest rate and revocation of revolving line privileges.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

39

The

following

tables

present

by

portfolio

classes

the

financial

effects

of

the

modifications

granted

to

borrowers

experiencing

financial difficulty,

other than those

associated to payment

delay,

during the

quarter and six-month

period ended June

30, 2023.

The

financial effects

of the modifications

associated to

payment delay

were discussed

above, and

as such,

were excluded

from the

tables

below:

Quarter Ended June 30,

2023

Combination of Interest Rate Reduction

and Term Extension

Weighted-Average

Interest Rate

Reduction (%)

Weighted-Average

Term Extension (in

months)

Weighted-Average

Interest Rate

Reduction (%)

Weighted-Average

Term Extension (in

months)

Forgiveness of

Principal and/or

Interest Amount

(In thousands)

Conventional residential mortgage loans

-

%

239

-

%

-

$

-

Construction loans

-

%

-

-

%

-

-

Commercial mortgage loans

-

%

-

0.25

%

64

-

C&I loans

-

%

72

-

%

-

-

Consumer loans:

Auto loans

-

%

27

3.96

%

30

-

Personal loans

-

%

37

5.41

%

26

-

Credit cards

16.26

%

-

-

%

-

-

Other consumer loans

-

%

28

1.87

%

22

-

Six-Month Period Ended June 30,

2023

Combination of Interest Rate Reduction

and Term Extension

Weighted-Average

Interest Rate

Reduction (%)

Weighted-Average

Term Extension (in

months)

Weighted-Average

Interest Rate

Reduction (%)

Weighted-Average

Term Extension (in

months)

Forgiveness of

Principal and/or

Interest Amount

(In thousands)

Conventional residential mortgage loans

-

%

118

2.40

%

157

$

-

Construction loans

-

%

-

-

%

-

-

Commercial mortgage loans

-

%

-

0.25

%

64

-

C&I loans

-

%

72

-

%

-

-

Consumer loans:

Auto loans

-

%

25

3.64

%

30

-

Personal loans

-

%

34

5.11

%

24

-

Credit cards

16.15

%

-

-

%

-

-

Other consumer loans

-

%

27

1.92

%

24

-

The following table presents by portfolio classes the performance of loans modified

during the six-month period ended June 30,

2023 that were granted to borrowers experiencing financial difficulty:

Six-Month Period Ended June 30,

2023

30-59

60-89

90+

Total

Delinquency

Current

Total

(In thousands)

Conventional residential mortgage loans

$

-

$

-

$

-

$

-

$

1,139

$

1,139

Construction loans

-

-

-

-

-

-

Commercial mortgage loans

-

-

-

-

30,170

30,170

C&I loans

-

-

-

-

187

187

Consumer loans:

Auto loans

10

-

-

10

1,415

1,425

Personal loans

-

-

-

-

151

151

Credit cards

40

40

-

80

652

732

Other consumer loans

22

-

-

22

382

404

Total modifications

$

72

$

40

$

-

$

112

$

34,096

$

34,208

There

were

no

loans

modified

to

borrowers

experiencing

financial

difficulty

on

or

after

January

1,

2023,

which

had

a

payment

default (failure by

the borrower to make

payments of either principal,

interest, or both for

a period of 90

days or more) during

the six-

month period ended June 30, 2023.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

40

NOTE 4 – ALLOWANCE

FOR CREDIT LOSSES FOR LOANS AND FINANCE LEASES

The following tables present the activity in the ACL on loans and finance leases by portfolio

segment for the indicated periods:

Residential Mortgage

Loans

Construction

Loans

Commercial

Mortgage

Commercial &

Industrial Loans

Consumer Loans

Total

Quarter Ended June 30, 2023

(In thousands)

ACL:

Beginning balance

$

64,403

$

3,231

$

36,460

$

31,235

$

130,238

$

265,567

Provision for credit losses - (benefit) expense

(3,500)

1,202

5,999

2,997

14,072

20,770

Charge-offs

(1,146)

(38)

(88)

(6,350)

(16,462)

(24,084)

Recoveries

757

409

56

132

3,451

4,805

Ending balance

$

60,514

$

4,804

$

42,427

$

28,014

$

131,299

$

267,058

Residential Mortgage

Loans

Construction

Loans

Commercial

Mortgage

Commercial &

Industrial Loans

Consumer Loans

Total

Six-Month Period Ended June 30,

2023

(In thousands)

ACL:

Beginning balance

$

62,760

$

2,308

$

35,064

$

32,906

$

127,426

$

260,464

Impact of adoption of ASU 2022-02

2,056

-

-

7

53

2,116

Provision for credit losses - (benefit) expense

(3,427)

2,062

7,245

1,347

29,799

37,026

Charge-offs

(2,129)

(38)

(106)

(6,468)

(33,260)

(42,001)

Recoveries

1,254

472

224

222

7,281

9,453

Ending balance

$

60,514

$

4,804

$

42,427

$

28,014

$

131,299

$

267,058

Residential Mortgage

Loans

Construction

Loans

Commercial

Mortgage

Commercial &

Industrial Loans

Consumer Loans

Total

Quarter Ended June 30,

2022

(In thousands)

ACL:

Beginning balance

$

68,820

$

1,842

$

30,138

$

36,784

$

107,863

$

245,447

Provision for credit losses - (benefit) expense

(2,797)

151

1,265

(1,102)

15,148

12,665

Charge-offs

(2,079)

(16)

(2)

(68)

(10,427)

(12,592)

Recoveries

1,287

43

1,218

589

3,495

6,632

Ending balance

$

65,231

$

2,020

$

32,619

$

36,203

$

116,079

$

252,152

Residential Mortgage

Loans

Construction

Loans

Commercial

Mortgage

Commercial &

Industrial Loans

Consumer Loans

Total

Six-Month Period Ended June 30,

2022

(In thousands)

ACL:

Beginning balance

$

74,837

$

4,048

$

52,771

$

34,284

$

103,090

$

269,030

Provision for credit losses - (benefit) expense

(7,668)

(2,063)

(21,375)

653

26,129

(4,324)

Charge-offs

(4,607)

(60)

(39)

(358)

(20,243)

(25,307)

Recoveries

2,669

95

1,262

1,624

7,103

12,753

Ending balance

$

65,231

$

2,020

$

32,619

$

36,203

$

116,079

$

252,152

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

41

The

Corporation

estimates

the

ACL

following

the

methodologies

described

in

Note

1

–

Nature

of

Business

and

Summary

of

Significant Accounting

Policies, to

the audited

consolidated financial

statements included

in the

2022 Annual

Report on

Form 10-K,

for each portfolio segment.

The Corporation applies

probability weights to

the baseline and

alternative downside economic

scenarios to estimate

the ACL with

the baseline scenario carrying

the highest weight. During

the second quarter of 2023,

the Corporation applied the

baseline scenario for

the commercial

mortgage and

construction loan

portfolios as

deterioration in

the CRE

price index

in these

portfolios is

expected at

a

lower extent

than projected

in the

alternative downside

scenario, particularly

in the Puerto

Rico region.

The economic

scenarios used

in

the

ACL

determination

contained

assumptions

related

to

economic

uncertainties

associated

with

geopolitical

instability,

the

commercial

real estate

price index

(“CRE price

index”), high

inflation levels,

and the

expected path

of interest

rate increases

by the

FED.

As of June

30, 2023, the

ACL for loans

and finance

leases was $

267.1

million, an increase

of $

6.6

million, from $

260.5

million as

of December 31, 2022. The ACL for

commercial and construction loans increased

by $

5.0

million, mainly due to a deterioration

in the

forecasted CRE price

index to account for

an increased uncertainty

in the CRE market

at a national level

that could potentially impact

the

markets

served

by

the

Corporation

coupled

with

the

growth

in

the

commercial

and

construction

loan

portfolios.

The

ACL

for

consumer loans increased by $

3.9

million, primarily reflecting the effect

of the increase in the size of

the consumer loan portfolios and

historical

charge-off

levels,

partially

offset

by

updated

macroeconomic

variables,

such

as

the

unemployment

rate,

which

are

now

forecasted to deteriorate at a slower pace than previously

expected. The ACL for residential mortgage loans

decreased by $

2.3

million,

mainly

driven

by

a

more

favorable

economic

outlook

in

the

projection

of

certain

forecasted

macroeconomic

variables,

such

as

the

Regional Home

Price Index,

partially offset

by a

$

2.1

million cumulative

increase in

the ACL,

due to

the adoption

of ASU 2022-02,

for which

the Corporation

elected to

discontinue the

use of

a discounted

cash flow

methodology for

restructured accruing

loans. See

Note 1

– Basis of Presentation

and Significant Accounting

Policies for additional

information related to

the adoption of ASU

2022-02

during 2023.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

42

The tables below

present the ACL

related to loans

and finance leases

and the carrying

values of loans

by portfolio segment

as of

June 30,

2023 and December 31, 2022:

As of June 30,

2023

Residential Mortgage

Loans

Construction

Loans

Commercial Mortgage

Loans

Commercial and

Industrial Loans

Consumer Loans

Total

(Dollars in thousands)

Total loans held for investment:

Amortized cost of loans

$

2,793,790

$

163,998

$

2,320,069

$

2,946,201

$

3,495,257

$

11,719,315

Allowance for credit losses

60,514

4,804

42,427

28,014

131,299

267,058

Allowance for credit losses to

amortized cost

2.17

%

2.93

%

1.83

%

0.95

%

3.76

%

2.28

%

As of December 31, 2022

Residential Mortgage

Loans

Construction

Loans

Commercial Mortgage

Loans

Commercial and

Industrial Loans

Consumer Loans

Total

(Dollars in thousands)

Total loans held for investment:

Amortized cost of loans

$

2,847,290

$

132,953

$

2,358,851

$

2,886,263

$

3,327,468

$

11,552,825

Allowance for credit losses

62,760

2,308

35,064

32,906

127,426

260,464

Allowance for credit losses to

amortized cost

2.20

%

1.74

%

1.49

%

1.14

%

3.83

%

2.25

%

In

addition,

the

Corporation

estimates

expected

credit

losses

over

the

contractual

period

in

which

the

Corporation

is

exposed

to

credit

risk

via

a

contractual

obligation

to

extend

credit,

such

as

unfunded

loan

commitments

and

standby

letters

of

credit

for

commercial and construction

loans, unless the

obligation is unconditionally

cancellable by the Corporation.

See Note 22 –

Regulatory

Matters,

Commitments,

and

Contingencies

for

information

on

off-balance

sheet

exposures

as

of

June

30,

2023

and

December

31,

2022.

The

Corporation

estimates

the

ACL

for

these

off-balance

sheet

exposures

following

the

methodology

described

in

Note

1

–

Nature of Business and Summary of Accounting Policies,

to the audited consolidated financial statements included in the

2022 Annual

Report

on

Form

10-K.

As

of

June

30,

2023,

the

ACL

for

off-balance

sheet

credit

exposures

increased

to

$

4.9

million,

from

$

4.3

million as of December 31,

2022, driven by the deterioration

in the forecasted CRE price

index and its effect

in construction unfunded

loan commitments.

The following

table presents

the activity

in the

ACL for

unfunded loan

commitments and

standby letters

of credit

for the

quarters

and six-month periods ended June 30, 2023 and 2022:

Quarter Ended

Six-Month Period Ended

June 30,

June 30,

2023

2022

2023

2022

(In thousands)

Beginning Balance

$

4,168

$

1,359

$

4,273

$

1,537

Provision for credit losses - expense

721

812

616

634

Ending balance

$

4,889

$

2,171

$

4,889

$

2,171

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

43

NOTE 5

–

OTHER REAL ESTATE

OWNED

The following table presents the OREO inventory as of the indicated dates:

June 30, 2023

December 31, 2022

(In thousands)

OREO balances, carrying value:

Residential

(1)

$

23,621

$

24,025

Construction

1,892

1,764

Commercial

6,058

5,852

Total

$

31,571

$

31,641

(1)

Excludes $

20.9

million and $

23.5

million as

of June 30,

2023 and December

31, 2022, respectively,

of foreclosures that

met the

conditions of ASC

Subtopic 310-40

“Reclassification of

Residential Real

Estate Collateralized

Consumer Mortgage

Loans upon

Foreclosure,” and

are presented

as a

receivable as

part of

other assets

in the

consolidated statements

of financial

condition.

See Note

18 -

Fair Value

for information

on write-downs

recorded on

OREO properties

during the

quarters and

six-month periods

ended June 30, 2023 and 2022.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

44

NOTE 6 – GOODWILL AND OTHER INTANGIBLES

Goodwill

Goodwill

as of

each

of

June 30,

2023

and

December

31,

2022

amounted

to

$

38.6

million.

The Corporation’s policy is to assess

goodwill and other intangibles for impairment on an annual basis during the fourth quarter of each year, and more frequently if events

or circumstances lead management to believe that the values of goodwill or other intangibles may be impaired. During the fourth

quarter of 2022, management performed a qualitative analysis over the carrying amount of each relevant reporting units’ goodwill and

concluded that it is more-likely-than-not that the fair value of the reporting units exceeded their carrying value. This assessment

involved identifying the inputs and assumptions that most affect fair value, including evaluating significant and relevant events

impacting each reporting entity, and evaluating such factors to determine if a positive assertion can be made that it is more-likely-

than-not that the fair value of the reporting units exceeded their carrying amount. As of December 31, 2022, the Corporation

concluded that it is more-likely-than-not that the fair value of the reporting units exceeded their carrying value. The Corporation

determined that there have been no significant events since the last annual assessment that could indicate potential goodwill

impairment on reporting units for which the goodwill is allocated. As a result, no impairment charges for goodwill were recorded

during the first six months of 2023.

There were

no

changes in the carrying amount of goodwill during the quarter and six-month

period ended June 30, 2022.

Other Intangible Assets

The

following

table

presents

the

gross

amount

and

accumulated

amortization

of

the

Corporation’s

intangible

assets

subject

to

amortization as of the indicated dates:

As of

As of

June 30,

December 31,

2023

2022

(Dollars in thousands)

Core deposit intangible:

Gross amount

$

87,544

$

87,544

Accumulated amortization

(70,469)

(66,644)

Net carrying amount

$

17,075

$

20,900

Remaining amortization period (in years)

6.5

7.0

Purchased credit card relationship intangible:

Gross amount

$

3,800

$

3,800

Accumulated amortization

(3,783)

(3,595)

Net carrying amount

$

17

$

205

Remaining amortization period (in years)

0.2

0.7

Insurance customer relationship intangible:

Gross amount

$

-

$

1,067

Accumulated amortization

-

(1,054)

Net carrying amount

$

-

$

13

Remaining amortization period (in years)

-

0.1

During

the

quarter

and

six-month

period

ended

June

30,

2023,

the

Corporation

recognized

$

2.0

million

and

$

4.0

million,

respectively,

in amortization

expense

on its

other intangibles

subject to

amortization,

compared to

$

2.2

million

and $

4.5

million for

the same periods in 2022, respectively.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

45

The Corporation amortizes core deposit intangibles and customer relationship intangible based on the projected useful lives of the

related deposits in the case of core deposit intangibles, and over the projected useful lives of the related client relationships in the case

of the customer relationship intangible. As mentioned above, the Corporation analyzes core deposit intangibles and the customer

relationship intangible annually for impairment, or sooner if events and circumstances indicate possible impairment. Factors that may

suggest impairment include customer attrition and run-off. Management is unaware of any events and/or circumstances that would

indicate a possible impairment to the core deposit intangibles or the customer relationship intangible as of June 30, 2023.

The estimated

aggregate annual

amortization expense

related to the

intangible assets

subject to amortization

for future periods

was

as follows as of June 30, 2023:

(In thousands)

Remaining 2023

$

3,710

2024

6,416

2025

3,509

2026

872

2027

872

2028 and after

1,713

NOTE 7 – NON-CONSOLIDATED

VARIABLE

INTEREST ENTITIES (“VIEs”) AND SERVICING

ASSETS

The Corporation

transfers residential

mortgage loans

in sale

or securitization

transactions in

which it

has continuing

involvement,

including

servicing

responsibilities

and

guarantee

arrangements.

All

such

transfers

have

been

accounted

for

as

sales

as

required

by

applicable accounting guidance.

When

evaluating

the

need

to

consolidate

counterparties

to

which

the

Corporation

has

transferred

assets,

or

with

which

the

Corporation has

entered into

other transactions,

the Corporation

first determines

if the

counterparty is

an entity

for which

a variable

interest

exists.

If

no

scope

exception

is

applicable

and

a

variable

interest

exists,

the

Corporation

then

evaluates

whether

it

is

the

primary beneficiary of the VIE and whether the entity should be consolidated

or not.

Below is a summary of transactions with VIEs for which the Corporation has retained

some level of continuing involvement:

Trust-Preferred

Securities (“TRuPs”)

In April 2004,

FBP Statutory Trust

I, a financing

trust that is wholly

owned by the

Corporation, sold to

institutional investors $

100

million of its variable

-rate TRuPs. FBP Statutory

Trust I used

the proceeds of the

issuance, together with the

proceeds of the purchase

by

the

Corporation

of

$

3.1

million

of

FBP

Statutory

Trust

I

variable-rate

common

securities, to

purchase

$

103.1

million

aggregate

principal

amount

of

the

Corporation’s

Junior

Subordinated

Deferrable

Debentures.

In

September

2004,

FBP

Statutory

Trust

II,

a

financing

trust that

is wholly

owned by

the Corporation,

sold to

institutional investors

$

125

million of

its variable-rate

TRuPs. FBP

Statutory Trust

II used

the proceeds of

the issuance,

together with

the proceeds of

the purchase by

the Corporation

of $

3.9

million of

FBP Statutory

Trust

II variable-rate

common securities,

to purchase

$

128.9

million aggregate

principal amount

of the

Corporation’s

Junior

Subordinated

Deferrable

Debentures.

The

debentures,

net

of

related

issuance

costs,

are

presented

in

the

Corporation’s

consolidated statements

of financial condition

as other long-term borrowings.

Upon the discontinuance of

LIBOR after June 30, 2023,

and

following

the

provisions

of

the

LIBOR

Act

and

Regulation

ZZ,

the

interest

rate

on

the

TRuPs

will

transition

during

the

third

quarter of

2023 from

3-month LIBOR

plus a

spread to

3-month CME

Term

SOFR plus

a tenor

spread adjustment

of

0.26161

%.

The

Junior Subordinated Deferrable Debentures mature on June 17, 2034, and September 20, 2034, respectively; however, under certain

circumstances, the maturity of Junior Subordinated Deferrable Debentures may be shortened (such shortening would result in a

mandatory redemption of the variable-rate TRuPs).

During the second quarter of 2023, the Corporation

completed the repurchase of $

21.4

million of TRuPs of FBP Statutory Trust I as

part

of

a

privately-negotiated

transaction

with

investors,

resulting

in

a

commensurate

reduction

in

the

related

floating

rate

junior

subordinated

debentures.

The

purchase

price

paid

by

the

Corporation

equated

to

92.5

%

of

the

$

21.4

million

par

value.

The

7.5

%

discount resulted

in a

gain of

approximately

$

1.6

million, which

is reflected

in the

consolidated statements

of income

as a

“Gain on

early

extinguishment

of

debt.”

As

of

June

30,

2023

and

December

31,

2022,

these

Junior

Subordinated

Deferrable

Debentures

amounted to $

161.7

million and $

183.8

million, respectively.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

46

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

June

30,

2023,

the

Corporation was current on all interest payments due on its subordinated

debt.

Private Label MBS

During

2004

and

2005,

an unaffiliated

party,

referred

to in

this subsection

as the

seller,

established

a

series of

statutory

trusts

to

effect

the

securitization

of

mortgage

loans

and

the

sale

of

trust

certificates

(“private

label

MBS”).

The

seller

initially

provided

the

servicing for

a fee, which

is senior to

the obligations to

pay private label

MBS holders. The

seller then entered

into a sales

agreement

through

which

it sold

and

issued

the

private

label

MBS in

favor

of

the

Corporation’s

banking

subsidiary,

FirstBank.

Currently,

the

Bank is

the sole

owner of

these private

label MBS;

the servicing

of the

underlying

residential mortgages

that generate

the principal

and

interest

cash

flows

is

performed

by

another

third

party,

which

receives

a

servicing

fee.

As

mentioned

above,

upon

the

discontinuance of LIBOR

after June 30,

2023, and following

the provisions of

the LIBOR Act and

Regulation ZZ, the

interest rate on

these private

label MBS

will transition

during

the third

quarter of

2023 from

3-month LIBOR

plus a

spread to

3-month CME

Term

SOFR plus

a tenor

spread adjustment

of

0.26161

% and

the original

spread limited

to the

weighted-average coupon

of the

underlying

collateral. The

principal payments

from the

underlying loans

are remitted

to a paying

agent (servicer),

who then remits

interest to

the

Bank. Interest

income is shared

to a certain

extent with the

FDIC, which has

an interest only

strip (“IO”) tied

to the cash

flows of the

underlying loans

and is entitled

to receive

the excess

of the interest

income less

a servicing

fee over

the variable

rate income

that the

Bank earns on the securities. The FDIC became the owner of

the IO upon its intervention of the seller,

a failed financial institution. No

recourse agreement

exists, and

the Bank,

as the

sole holder

of the

securities, absorbs

all risks

from losses

on non-accruing

loans and

repossessed collateral. As of June

30, 2023, the amortized cost and fair

value of these private label MBS

amounted to $

7.5

million and

$

5.2

million,

respectively,

with

a

weighted

average

yield

of

7.6

%,

which

is included

as part

of

the

Corporation’s

available-for-sale

debt securities portfolio. As described in Note 2 – Debt

Securities, the ACL on these private label MBS amounted to

$

0.1

million as of

June 30, 2023.

Servicing Assets (MSRs)

The

Corporation

typically

transfers

first

lien

residential

mortgage

loans in

conjunction

with

GNMA

securitization

transactions

in

which the

loans are

exchanged for

cash or

securities that

are readily

redeemed for

cash proceeds

and servicing

rights. The

securities

issued

through

these

transactions

are

guaranteed

by

GNMA

and,

under

seller/servicer

agreements,

the

Corporation

is

required

to

service

the

loans

in

accordance

with

the

issuers’

servicing

guidelines

and

standards.

As of

June

30,

2023,

the Corporation

serviced

loans

securitized

through

GNMA

with

a

principal

balance

of

$

2.1

billion.

Also,

certain

conventional

conforming

loans

are

sold

to

FNMA

or

FHLMC

with

servicing

retained.

The

Corporation

recognizes

as

separate

assets

the

rights

to

service

loans

for

others,

whether those servicing

assets are originated or

purchased. MSRs are included

as part of other

assets in the consolidated

statements of

financial condition.

The changes in MSRs are shown below for the indicated periods:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands)

Balance at beginning of period

$

28,431

$

30,753

$

29,037

$

30,986

Capitalization of servicing assets

706

828

1,238

1,958

Amortization

(1,102)

(1,273)

(2,230)

(2,603)

Recoveries

1

9

5

64

Other

(1)

(2)

(40)

(16)

(128)

Balance at end of period

$

28,034

$

30,277

$

28,034

$

30,277

(1)

Mainly represents adjustments related to the repurchase

of loans serviced for others.

Impairment

charges

are

recognized

through

a

valuation

allowance

for

each

individual

stratum

of

servicing

assets.

The

valuation

allowance

is adjusted

to reflect

the amount,

if any,

by which

the cost

basis of

the servicing

asset for

a given

stratum of

loans being

serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing

asset for a given stratum is not recognized.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

47

Changes in the impairment allowance were as follows for the indicated periods:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands)

Balance at beginning of period

$

8

$

23

$

12

$

78

Recoveries

(1)

(9)

(5)

(64)

Balance at end of period

$

7

$

14

$

7

$

14

The components

of net servicing

income, included as

part of mortgage

banking activities in

the consolidated statements

of income,

are shown below for the indicated periods:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands)

Servicing fees

$

2,660

$

2,821

$

5,378

$

5,640

Late charges and prepayment penalties

211

219

410

413

Adjustment for loans repurchased

(2)

(40)

(16)

(128)

Servicing income, gross

2,869

3,000

5,772

5,925

Amortization and impairment of servicing assets

(1,101)

(1,264)

(2,225)

(2,539)

Servicing income, net

$

1,768

$

1,736

$

3,547

$

3,386

The Corporation’s

MSRs are subject

to prepayment

and interest rate

risks. Key economic

assumptions used

in determining

the fair

value at the time of sale of the related mortgages for the indicated periods

ranged as follows:

Weighted Average

Maximum

Minimum

Six-Month Period Ended June 30,

2023

Constant prepayment rate:

Government-guaranteed mortgage loans

6.7

%

11.6

%

4.8

%

Conventional conforming mortgage loans

7.4

%

16.0

%

3.8

%

Conventional non-conforming mortgage loans

5.9

%

9.0

%

2.1

%

Discount rate:

Government-guaranteed mortgage loans

11.5

%

11.5

%

11.5

%

Conventional conforming mortgage loans

9.5

%

9.5

%

9.5

%

Conventional non-conforming mortgage loans

12.9

%

14.0

%

11.5

%

Six-Month Period Ended June 30,

2022

Constant prepayment rate:

Government-guaranteed mortgage loans

6.7

%

18.3

%

4.8

%

Conventional conforming mortgage loans

6.6

%

18.4

%

3.4

%

Conventional non-conforming mortgage loans

6.3

%

21.9

%

4.5

%

Discount rate:

Government-guaranteed mortgage loans

11.9

%

12.0

%

11.5

%

Conventional conforming mortgage loans

9.9

%

10.0

%

9.5

%

Conventional non-conforming mortgage loans

12.4

%

14.5

%

11.5

%

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

48

The weighted

averages of the

key economic

assumptions that the

Corporation used

in its valuation

model and the

sensitivity of the

current

fair

value

to

immediate

10

%

and

20

%

adverse

changes

in

those

assumptions

for

mortgage

loans

as

of

June

30,

2023

and

December 31, 2022 were as follows:

June 30,

December 31,

2023

2022

(In thousands)

Carrying amount of servicing assets

$

28,034

$

29,037

Fair value

$

44,420

$

44,710

Weighted-average

expected life (in years)

7.79

7.80

Constant prepayment rate (weighted-average annual

rate)

6.28

%

6.40

%

Decrease in fair value due to 10% adverse change

$

1,025

$

1,048

Decrease in fair value due to 20% adverse change

$

2,008

$

2,054

Discount rate (weighted-average annual rate)

10.71

%

10.69

%

Decrease in fair value due to 10% adverse change

$

1,902

$

1,925

Decrease in fair value due to 20% adverse change

$

3,660

$

3,704

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10%

variation in assumptions generally cannot be extrapolated because the relationship between the change in assumption and the change

in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSR is

calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example,

increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities

.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

49

NOTE 8 – DEPOSITS

The following table summarizes deposit balances as of the indicated dates:

June 30, 2023

December 31, 2022

(In thousands)

Type of account and interest rate:

Non-interest-bearing deposit accounts

$

5,874,261

$

6,112,884

Interest-bearing saving accounts

3,642,728

3,902,888

Interest-bearing checking accounts

4,258,871

3,770,993

Certificates of deposit (“CDs”)

2,680,250

2,250,876

Brokered CDs

363,582

105,826

Total

$

16,819,692

$

16,143,467

The following table presents the contractual maturities of CDs, including brokered CDs, as of June 30,

2023:

Total

(In thousands)

Three months or less

$

685,606

Over three months to six months

511,428

Over six months to one year

752,768

Over one year to two years

783,288

Over two years to three years

139,807

Over three years to four years

41,543

Over four years to five years

122,471

Over five years

6,921

Total

$

3,043,832

The following were the components of interest expense on deposits for the

indicated periods:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands)

Interest expense on deposits

$

41,553

$

7,757

$

71,477

$

15,574

Accretion of premiums from

acquisitions

(33)

(92)

(116)

(292)

Amortization of broker placement fees

84

29

128

64

Total

$

41,604

$

7,694

$

71,489

$

15,346

Total

U.S. time

deposits with

balances

of more

than $250,000

amounted

to $

1.3

billion and

$

1.0

billion

as of

June 30,

2023

and

December 31,

2022, respectively.

This amount does

not include brokered

CDs that are

generally participated

out by brokers

in shares

of less

than the

FDIC insurance

limit. As

of June

30, 2023

and December

31, 2022,

unamortized broker

placement fees

amounted to

$

0.4

million and

$

0.3

million, respectively,

which are

amortized over

the contractual

maturity of

the brokered

CDs under

the interest

method.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

50

NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO

REPURCHASE (REPURCHASE AGREEMENTS)

Repurchase agreements as of the indicated dates consisted of the following:

June 30, 2023

December 31, 2022

(In thousands)

Short-term Fixed-rate repurchase agreements

(1)

$

73,934

$

75,133

(1)

Weighted-average interest rate

of

5.35

% and

4.55

% as of June 30, 2023 and December 31, 2022, respectively.

Repurchase agreements mature as follows as of the indicated date:

June 30,

2023

(In thousands)

Within one month

$

23,934

Over one month to three months

$

50,000

Total

$

73,934

As of

June 30,

2023 and

December 31,

2022, the

securities underlying

such agreements

were delivered

to the

dealers with

which

the repurchase

agreements were transacted.

In accordance with

the master agreements,

in the

event of

default, repurchase agreements

have a right

of set-off

against the other

party for amounts owed

under the related

agreement and any

other amount or

obligation owed

with respect to any other

agreement or transaction between them.

As of June 30, 2023 and December

31, 2022, repurchase agreements

were fully collateralized and not offset in the consolidated

statements of financial condition.

Repurchase agreements as of June 30, 2023, grouped by counterparty,

were as follows:

Weighted-Average

Counterparty

Amount

Maturity (In Months)

(Dollars in thousands)

JP Morgan Chase

$

73,934

1

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

51

NOTE 10 – ADVANCES

FROM THE FEDERAL HOME LOAN BANK (“FHLB

”)

The following is a summary of the advances from the FHLB as of the indicated dates:

June 30, 2023

December 31, 2022

(In thousands)

Short-term

Fixed

-rate advances from the FHLB

(1)

$

-

$

475,000

Long-term

Fixed

-rate advances from the FHLB

(2)

500,000

200,000

$

500,000

$

675,000

(1)

Weighted-average interest rate of

4.56

% as of December 31, 2022.

(2)

Weighted-average interest rate of

4.45

% and

4.25

% as of June 30,

2023 and December 31, 2022, respectively.

Advances from the FHLB mature as follows as of the indicated date:

June 30, 2023

(In thousands)

Over one to five years

$

500,000

During

the

six-month

period

ended

June

30,

2023,

the

Corporation

added

$

300.0

million

of

long-term

FHLB

advances

at

an

average cost of

4.59

%, and repaid its short-term FHLB advances.

NOTE 11 – OTHER LONG-TERM

BORROWINGS

Junior Subordinated Debentures

Junior subordinated debentures, as of the indicated dates, consisted of:

June 30,

December 31,

(In thousands)

2023

2022

Floating rate junior subordinated debentures (FBP Statutory Trust

I)

(1)

(3)

$

43,143

$

65,205

Floating rate junior subordinated debentures (FBP Statutory Trust

II)

(2) (3)

118,557

118,557

$

161,700

$

183,762

(1)

Amount represents junior subordinated interest-bearing debentures

due in 2034 with a floating interest rate of

2.75

% over

3-month LIBOR

(

8.26

% as of June 30, 2023 and

7.49

% as of

December 31, 2022).

(2)

Amount represents junior subordinated interest-bearing debentures

due in 2034 with a floating interest rate of

2.50

% over

3-month LIBOR

(

8.01

% as of June 30,

2023 and

7.25

% as of

December 31, 2022).

(3)

See Note 7 - Non-Consolidated Variable

Interest Entities

(“VIEs”) and Servicing Assets, for additional information on the nature

and terms of these debentures, the LIBOR transition of

these contracts, and the Corporation’s repurchase

in the second quarter of 2023 of $

21.4

million in TRuPs associated with FBP Statutory Trust

I.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

52

NOTE 12 – EARNINGS PER COMMON

.

SHARE

The calculations of earnings per common share for the quarters and six-month periods

ended June 30,

2023 and 2022 are as follows:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands, except per share information)

Net income attributable to common stockholders

$

70,655

$

74,695

$

141,353

$

157,295

Weighted-Average

Shares:

Average common

shares outstanding

178,926

194,405

179,567

196,257

Average potential

dilutive common shares

351

961

686

1,184

Average common

shares outstanding - assuming dilution

179,277

195,366

180,253

197,441

Earnings per common share:

Basic

$

0.39

$

0.38

$

0.79

$

0.80

Diluted

$

0.39

$

0.38

$

0.78

$

0.80

Earnings

per

common

share

is

computed

by

dividing

net

income

attributable

to

common

stockholders

by

the

weighted-average

number of common shares issued and outstanding. Net income attributable

to common stockholders represents net income adjusted for

any preferred

stock dividends,

including any

dividends declared

but not

yet paid,

and any cumulative

dividends related

to the

current

dividend period

that have

not been

declared as

of the

end of

the period.

Basic weighted-average

common shares

outstanding exclude

unvested shares of restricted stock that do not contain non-forfeitable

dividend rights.

Potential dilutive

common

shares consist

of unvested

shares of

restricted

stock and

performance

units (if

any

of the

performance

conditions

are

met

as of

the end

of

the reporting

period),

that

do

not contain

non-forfeitable

dividend

or dividend

equivalent

rights

using the

treasury stock

method. This

method assumes

that proceeds

equal to

the amount

of compensation

cost attributable

to future

services

is

used

to

repurchase

shares

on

the

open

market

at

the

average

market

price

for

the

period.

The

difference

between

the

number

of

potential

dilutive

shares

issued

and

the

shares

purchased

is

added

as

incremental

shares

to

the

actual

number

of

shares

outstanding

to

compute

diluted

earnings

per

share.

Unvested

shares

of

restricted

stock

outstanding

during

the

period

that

result

in

lower potentially

dilutive shares issued

than shares purchased

under the

treasury stock method

are not included

in the computation

of

dilutive

earnings

per

share

since

their

inclusion

would

have an

antidilutive

effect

on

earnings

per

share.

There

were

no

antidilutive

shares of common stock during the quarters and six-month periods

ended June 30, 2023 and 2022.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

53

NOTE 13 – STOCK-BASED

.

COMPENSATION

The First Bancorp

Omnibus Incentive

Plan (the “Omnibus

Plan”), which is

effective until

May 24, 2026,

provides for equity-based

and non

equity-based compensation

incentives (the

“awards”). The

Omnibus Plan

authorizes the

issuance of

up to

14,169,807

shares

of

common

stock, subject

to adjustments

for

stock splits,

reorganizations

and

other

similar events.

As of

June 30,

2023,

there

were

3,174,889

authorized

shares

of

common

stock

available

for

issuance

under

the

Omnibus

Plan.

The

Board,

based

on

the

recommendation of

the Compensation

and Benefits

Committee of

the Board,

has the

power and

authority to

determine those

eligible

to receive

awards and

to establish the

terms and conditions

of any

awards, subject to

various limits and

vesting restrictions

that apply

to individual and aggregate awards.

Restricted Stock

Under the

Omnibus Plan,

the Corporation

may grant

restricted stock

to plan

participants, subject

to forfeiture

upon the

occurrence

of certain

events until

the dates

specified in

the participant’s

award agreement.

While the

restricted stock

is subject

to forfeiture

and

does

not

contain

non-forfeitable

dividend

rights,

participants

may

exercise

full

voting

rights

with

respect

to

the

shares

of

restricted

stock

granted

to

them.

The

fair

value

of

the

shares

of

restricted

stock

granted

was

based

on

the

market

price

of

the

Corporation’s

common

stock on

the date

of the

respective grant.

The shares

of restricted

stocks granted

to employees

are subject

to the

following

vesting period:

fifty percent

(

50

%) of

those shares

vest on

the two-year

anniversary of

the grant

date and

the remaining

50

% vest

on

the three-year

anniversary of

the grant

date. The

shares of

restricted stock

granted to

directors are

generally subject

to vesting

on the

one-year

anniversary

of the

grant

date.

The Corporation

issued

495,891

shares during

the six-month

period ended

June 30,

2023

in

connection with restricted stock awards, which were reissued from

treasury shares.

The following table summarizes the restricted stock activity under the Omnibus

Plan during the six-month periods ended June 30,

2023 and 2022:

Six-Month Period Ended

Six-Month Period Ended

June 30,

2023

June 30,

2022

Number of

Weighted-

Number of

Weighted-

shares of

Average

shares of

Average

restricted

Grant Date

restricted

Grant Date

stock

Fair Value

stock

Fair Value

Unvested shares outstanding at beginning of year

938,491

$

9.14

1,148,775

$

6.61

Granted

(1)

495,891

11.99

301,440

13.15

Forfeited

(57,491)

11.29

(10,364)

8.82

Vested

(481,536)

5.93

(487,198)

5.72

Unvested shares outstanding at end of period

895,355

$

12.31

952,653

$

9.11

(1)

Includes for the six-month period ended June 30, 2023,

3,502

shares of restricted stock awarded to independent directors and

492,389

shares of restricted stock awarded to employees, of

which

33,718

shares were granted to retirement-eligible employees and

thus charged to earnings as of the grant date. Includes

for the six-month period ended June 30, 2022,

3,048

shares

of restricted stock awarded to independent directors and

298,392

shares of restricted stock awarded to employees, of which

6,084

shares were granted to retirement-eligible employees

and thus charged to earnings as of the grant date.

For the quarter and

six month-periods ended June

30, 2023, the Corporation

recognized $

1.4

million and $

3.0

million, respectively,

of

stock-based

compensation

expense

related

to

restricted

stock

awards,

compared

to

$

0.9

million

and

$

1.8

million

for

the

same

periods in 2022, respectively.

As of June 30, 2023,

there was $

6.4

million of total unrecognized

compensation cost related to

unvested

shares of restricted stock that the Corporation expects to recognize over a weighted

average period of

1.9

years.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

54

Performance Units

Under the Omnibus Plan, the Corporation may award

performance units to participants, with each unit representing

the value of one

share

of

the

Corporation’s

common

stock.

These awards, which are granted to executives, do not contain non-forfeitable rights to

dividend equivalent amounts and can only be settled in shares of the Corporation’s common stock.

On March 16, 2023, the Corporation granted 216,876 performance units to executives. Performance units granted on or after March

16, 2023 will vest on the third anniversary of the effective date of the award based on actual achievement of two performance metrics

weighted equally: relative total shareholder return (“Relative TSR”), compared to companies that comprise the KBW Nasdaq

Regional Banking Index, and the achievement of a tangible book value per share (“TBVPS”) goal, which is measured based upon the

growth in the tangible book value during the performance cycle, adjusted for certain allowable non-recurring transactions. The

participant may earn 50% of their target opportunity for threshold-level performance and up to 150% of their target opportunity for

maximum-level performance, based on the achievement of the performance goals during a three-year performance cycle. Amounts

between threshold, target and maximum performance will vest in a proportional amount. Performance units granted prior to March 16,

2023 vest subject only to achievement of a TBVPS goal and the participant may earn only up to 100% of their target opportunity.

The following

table summarizes

the performance

units activity

under the

Omnibus Plan

during

the six-month

periods ended

June

30, 2023 and 2022:

Six-Month Period Ended

Six-Month Period Ended

June 30,

2023

June 30,

2022

Number

Weighted -

Number

Weighted -

of

Average

of

Average

Performance

Grant Date

Performance

Grant Date

Units

Fair Value

Units

Fair Value

Performance units at beginning of year

791,923

7.36

814,899

7.06

Additions

(1)

216,876

12.24

166,669

13.15

Vested

(2)

(474,538)

4.08

(189,645)

11.16

Performance units at end of period

534,261

12.25

791,923

7.36

(1)

Units granted during the six-month periods ended June

30,

2023 are subject to the achievement of the Relative TSR and TBVPS

performance goals during a three-year performance cycle

beginning January 1, 2023 and ending on December 31, 2025.

Units granted during the six-month period ended June 30,

2022 are subject to the achievement of the TBVPS performance

goal during a three-year performance cycle beginning January 1,

2022 and ending on December 31, 2024.

(2)

Units vested during the six-month period ended June 30,

2023 are related to performance units granted in 2020 that met certain pre-established

targets and were settled with shares of

common stock reissued from treasury shares. Units

vested during the six-month period ended June 30,

2022 are related to performance units granted in 2019 that met certain

pre-

established targets and were settled with shares

of common stock reissued from treasury shares.

The fair value of the performance units awarded during the six-month periods ended June 30, 2023 and 2022, that was based on the

TBVPS goal component, was calculated based on the market price of the Corporation’s common stock on the respective date of the

grant and assuming attainment of 100% of target opportunity. As of June 30, 2023, there have been no changes in management’s

assessment of the probability that the pre-established TBVPS goal will be achieved; as such, no cumulative adjustment to

compensation expense has been recognized. The fair value of the performance units awarded during the six-month period ended June

30, 2023, that was based on the Relative TSR component, was calculated using a Monte Carlo simulation. Since the Relative TSR

component is considered a market condition, the fair value of the portion of the award based on Relative TSR is not revised

subsequent to grant date based on actual performance.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

55

The following

table summarizes

the valuation

assumptions used

to calculate

the fair

value of

the Relative

TSR component

of the

performance units granted under the Omnibus Plan during the six-month

period ended June 30, 2023:

Six-Month Period Ended

June 30,

2023

Risk-free interest rate

(1)

3.98

%

Correlation coefficient

77.16

Expected dividend yield

(2)

-

Expected volatility

(3)

41.37

Expected life (in years)

2.79

(1)

Based on the yield on zero-coupon U.S. Treasury

STRIPS as of the grant date.

(2)

Assumes that dividends are reinvested at each ex-dividend date.

(3)

Calculated based on the historical volatility of the Corporation's

stock price with a look-back period equal to the simulation

term using daily stock prices.

For the

quarter

and

six-month

periods

ended

June 30,

2023 and

2022,

the Corporation

recognized

$

0.5

million

and

$

1.0

million,

respectively,

of

stock-based

compensation

expense

related

to

performance

units,

compared

to

$

0.5

million

and

$

0.8

million

for

the

same periods

in 2022,

respectively.

As of

June 30,

2023,

there was

$

4.1

million

of total

unrecognized

compensation cost

related

to

unvested performance units that the Corporation expects to recognize

over a weighted average period of

2.2

years.

Shares withheld

During

the first

six

months

of 2023,

the Corporation

withheld

287,835

shares (first

six

months

of

2022 –

201,930

shares)

of the

restricted

stock

that vested

during

such period

to cover

the officers’

payroll

and

income tax

withholding

liabilities; these

shares

are

held

as

treasury

shares.

The

Corporation

paid

in

cash

any

fractional

share

of

salary

stock

to

which

an

officer

was

entitled.

In

the

consolidated financial statements, the Corporation presents shares

withheld for tax purposes as common stock repurchases.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

56

NOTE 14 –

STOCKHOLDERS’

EQUITY

Stock Repurchase Programs

On April

27, 2022,

the Corporation

announced that

its Board

approved a

stock repurchase

program

that provides

authorization

to

repurchase

up

to

$

350

million

of

its

outstanding

common

stock,

which

commenced

in

the

second

quarter

of

2022.

As

of

June

30,

2023, the

Corporation had

remaining authorization

to repurchase

approximately $

75

million of

common stock.

Furthermore, on

July

24,

2023,

the

Corporation

announced

that

its

Board

of

Directors

approved

a

new

stock

repurchase

program,

under

which

the

Corporation may

repurchase up

to $

225

million of

its outstanding

common stock,

which it

expects to

execute through

the end

of the

third quarter

of 2024.

The Corporation

expects to

repurchase approximately

$

150

million in

common stock

during the

second half

of

2023,

of which

$

75

million

relates to

the remaining

amount of

the aforementioned

$

350

million

stock repurchase

program

that was

resumed in July 2023.

Repurchases under

the programs

may be

executed through

open market

purchases, accelerated

share repurchases,

and/or privately

negotiated transactions or

plans, including under plans

complying with Rule 10b5-1

under the Exchange Act.

The Corporation’s

stock

repurchase program

s

are subject

to various

factors, including

the Corporation’s

capital position,

liquidity,

financial performance

and

alternative

uses of

capital,

stock

trading

price,

and

general

market

conditions.

The

Corporation’s

stock

repurchase

programs

do

not

obligate

it

to

acquire

any

specific

number

of

shares

and

do

not

have

an

expiration

date.

The

stock

repurchase

programs

may

be

modified, suspended, or terminated at any time at the Corporation’s

discretion. The Parent Company has no operations and depends on

dividends,

distributions

and

other

payments

from

its

subsidiaries

to

fund

dividend

payments,

stock

repurchases,

and

to

fund

all

payments on its obligations, including debt obligations.

Common Stock

The following table shows the change in shares of common stock outstanding for

the six-month periods ended June 30,

2023 and

2022:

Total

Number of Shares

Six-Month Period Ended June 30,

2023

2022

Common stock outstanding, beginning balance

182,709,059

201,826,505

Common stock repurchased

(1)(2)

(3,865,375)

(10,680,890)

Common stock reissued under stock-based compensation plan

970,429

491,085

Restricted stock forfeited

(57,491)

(10,364)

Common stock outstanding, ending balances

179,756,622

191,626,336

(1)

For the six-month periods

ended June 30,

2023 includes

3,577,540

shares of common stock

repurchased in the

open market during the

first quarter of 2023

at an average

price of $

13.98

for a

total

purchase

price

of $

50

million

under

the

$

350

million

stock

repurchase

program

announced

on

April

27,

2022.

For the

six-month

period

ended

June

30,

2022

included

7,069,263

shares of common stock repurchased

in the open market at an

average price of $

14.15

per share for a total purchase

price of approximately $

100

million under the $

350

million

stock repurchase

program and

3,409,697

shares of

common stock

repurchased in

the open

market at

an average

price of

$

14.66

for a

total purchase

price of

approximately $

50

million

under a prior publicly-announced $

300

million stock repurchase program which was completed during

the first quarter of 2022.

(2)

For the six-month periods ended June 30,

2023 and 2022 also includes

287,835

and

201,930

shares, respectively, of common

stock surrendered to cover officers’ payroll and

income

taxes.

For the

quarter and

six-month period

ended June

30, 2023,

total cash

dividends declared

on shares

of common

stock amounted

to

$

25.3

million

and

$

50.7

million,

respectively,

compared

to

$

23.4

million

and

$

43.3

million,

respectively,

for

the

same

periods

of

2022. On

July 24, 2023

, the Corporation

announced that its

Board had declared

a quarterly cash

dividend of $

0.14

per common share

payable

on

September 8, 2023

to

shareholders

of

record

at

the

close

of

business

on

August 24, 2023

.

The

Corporation

intends

to

continue

to

pay

quarterly

dividends

on

common

stock.

However,

the

Corporation’s

common

stock

dividends,

including

the

declaration,

timing,

and

amount,

remain

subject

to

consideration

and

approval

by

the

Corporation’s

Board

Directors

at

the

relevant

times.

Preferred Stock

The Corporation

has

50,000,000

authorized shares of

preferred stock with

a par value

of $

1.00

, subject to

certain terms. This

stock

may be issued

in series and

the shares of

each series have

such rights and

preferences as are

fixed by the

Board when authorizing

the

issuance of

that particular

series and

are redeemable

at the Corporation’s

option.

No

shares of preferred

stock were

outstanding as

of

June 30, 2023 and December 31, 2022.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

57

Treasury Stock

The following table shows the change in shares of treasury stock for the six-month

periods ended June 30,

2023 and 2022.

Total

Number of Shares

Six-Month Period Ended June 30,

2023

2022

Treasury stock, beginning balance

40,954,057

21,836,611

Common stock repurchased

3,865,375

10,680,890

Common stock reissued under stock-based compensation plan

(970,429)

(491,085)

Restricted stock forfeited

57,491

10,364

Treasury stock, ending balances

43,906,494

32,036,780

FirstBank Statutory Reserve (Legal Surplus)

The

Puerto

Rico

Banking

Law

of

1933,

as

amended

(the

“Puerto

Rico

Banking

Law”),

requires

that

a

minimum

of

10

%

of

FirstBank’s

net income

for

the year

be transferred

to a

legal surplus

reserve

until such

surplus

equals the

total of

paid-in-capital

on

common and preferred

stock. Amounts transferred

to the legal surplus

reserve from retained

earnings are not available

for distribution

to the Corporation without

the prior consent of the

Puerto Rico Commissioner of Financial

Institutions.

The Puerto Rico Banking Law

provides that, when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over

receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the legal

surplus reserve, as a reduction thereof. If the legal surplus reserve is not sufficient to cover such balance in whole or in part, the

outstanding amount must be charged against the capital account and the Bank cannot pay dividends until it can replenish the legal

surplus reserve to an amount of at least 20% of the original capital contributed.

FirstBank’s

legal surplus

reserve, included

as part

of

retained earnings

in the

Corporation’s

consolidated statements

of financial

condition, amounted

to $

168.5

million as

of each

June 30,

2023 and December 31, 2022. There were

no

transfers to the legal surplus reserve during the first half of 2023.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

58

NOTE 15 – ACCUMULATED

OTHER COMPREHENSIVE LOSS

The following table presents the changes in accumulated other comprehensive

loss for the quarters and six-month periods ended

June 30, 2023 and 2022:

Changes in Accumulated Other Comprehensive

Loss by Component

(1)

Quarter ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands)

Unrealized net holding losses on available-for-sale

debt securities:

Beginning balance

$

(718,744)

$

(419,224)

$

(805,972)

$

(87,390)

Other comprehensive (loss) income

(2)

(54,837)

(175,923)

32,391

(507,757)

Ending balance

$

(773,581)

$

(595,147)

$

(773,581)

$

(595,147)

Adjustment of pension and postretirement

benefit plans:

Beginning balance

$

1,194

$

3,391

$

1,194

$

3,391

Other comprehensive (loss) income

-

-

-

-

Ending balance

$

1,194

$

3,391

$

1,194

$

3,391

____________________

(1)

All amounts presented are net of tax.

(2)

Net unrealized holding (losses) gains on available-for-sale debt securities have no tax effect because securities are either tax-exempt, held by an IBE, or have a full deferred tax asset valuation allowance.

NOTE 16 – EMPLOYEE BENEFIT PLANS

The Corporation

maintains two frozen

qualified noncontributory

defined benefit pension

plans (the “Pension

Plans”), and

a related

complementary

post-retirement

benefit

plan

(the

“Postretirement

Benefit

Plan”)

covering

medical

benefits

and

life

insurance

after

retirement

that

it

obtained

in

the

Banco

Santander

Puerto

Rico

(“BSPR”)

acquisition

on

September

1,

2020.

One

defined

benefit

pension

plan covers

substantially all

of BSPR’s

former

employees who

were active

before January

1, 2007,

while

the other

defined

benefit pension plan covers personnel of an institution previously acquired

by BSPR. Benefits are based on salary and years of service.

The accrual of benefits under the Pension Plans is frozen to all participants.

The

Corporation

requires

recognition

of

a

plan’s

overfunded

and

underfunded

status

as

an

asset

or

liability

with

an

offsetting

adjustment to accumulated other comprehensive loss pursuant

to the ASC Topic 715,

“Compensation-Retirement Benefits.”

The following table presents the components of net periodic cost (benefit) for

the indicated periods:

Affected Line Item

in the Consolidated

Quarter Ended June 30,

Six-Month Period Ended June

30,

Statements of Income

2023

2022

2023

2022

(In thousands)

Net periodic cost (benefit), pension

plans:

Interest cost

Other expenses

$

950

$

654

$

1,900

$

1,308

Expected return on plan assets

Other expenses

(885)

(1,040)

(1,771)

(2,079)

Net periodic cost (benefit), pension plans

65

(386)

129

(771)

Net periodic cost, postretirement plan

Other expenses

6

2

12

3

Net periodic cost (benefit)

$

71

$

(384)

$

141

$

(768)

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

59

NOTE 17 –

INCOME TAXES

Income

tax

expense

includes

Puerto

Rico

and

USVI

income

taxes,

as

well

as

applicable

U.S.

federal

and

state

taxes.

The

Corporation is subject

to Puerto Rico income

tax on its income

from all sources.

As a Puerto Rico

corporation, FirstBank is

treated as

a foreign corporation for U.S. and

USVI income tax purposes and, accordingly,

is generally subject to U.S. and USVI

income tax only

on its income from

sources within the U.S.

and USVI or income

effectively connected with

the conduct of a

trade or business in

those

jurisdictions. Any

such tax

paid in

the U.S.

and USVI

is also

creditable against

the Corporation’s

Puerto Rico

tax liability,

subject to

certain conditions and limitations.

Under the Puerto Rico

Internal Revenue Code of

2011 PR (the

“2011 PR Code”),

the Corporation and its subsidiaries

are treated as

separate

taxable

entities

and

are

not

entitled

to

file

consolidated

tax

returns

and,

thus,

the

Corporation

is

generally

not

entitled

to

utilize

losses

from

one

subsidiary

to

offset

gains

in

another

subsidiary.

Accordingly,

in

order

to

obtain

a

tax

benefit

from

a

net

operating

loss

(“NOL”),

a

particular

subsidiary

must

be

able

to

demonstrate

sufficient

taxable

income

within

the

applicable

NOL

carry-forward

period.

Pursuant

to

the

2011

PR

Code,

the

carry-forward

period

for

NOLs

incurred

during

taxable

years

that

commenced

after

December

31,

2004

and

ended

before

January

1,

2013

is

12

years;

for

NOLs

incurred

during

taxable

years

commencing after December 31,

2012, the carryover period is

10 years. The 2011

PR Code provides a dividend

received deduction of

100

% on

dividends

received

from

“controlled”

subsidiaries

subject

to

taxation

in

Puerto

Rico

and

85

% on

dividends

received

from

other taxable domestic corporations.

The

Corporation

has

maintained

an

effective

tax

rate

lower

than

the

Puerto

Rico

maximum

statutory

rate

of

37.5

%

mainly

by

investing

in

government

obligations

and

MBS

exempt

from

U.S.

and

Puerto

Rico

income

taxes

and

by

doing

business

through

an

international banking

entity (an

“IBE”) unit

of the

Bank, and

through the

Bank’s

subsidiary,

FirstBank Overseas

Corporation, whose

interest income

and gains

on sales

are exempt

from Puerto

Rico income

taxation. The

IBE unit

and FirstBank

Overseas Corporation

were created

under the

International Banking

Entity

Act of

Puerto

Rico, which

provides for

total Puerto

Rico tax

exemption on

net

income derived by

IBEs operating in

Puerto Rico on the

specific activities identified

in the IBE Act.

An IBE that operates

as a unit of

a bank

pays income

taxes at

the corporate

standard rates

to the

extent that

the IBE’s

net income

exceeds

20

% of

the bank’s

total net

taxable income.

For the second

quarter of 2023,

the Corporation recorded

an income tax

expense of $

30.3

million compared to

$

34.1

million in the

second quarter

of 2022.

For the first

six months of

2023, the

Corporation recorded

an income tax

expense of

$

62.2

million compared

to

$

77.1

million

for

the

same

period

in

2022.

The

decrease

in

income

tax

expense

for

the

quarter

and

first

six

months

of

2023,

as

compared

to the

same period

a year

ago,

was related

to lower

pre-tax

income

and a

higher proportion

of exempt

to taxable

income

resulting

in

a

lower

effective

tax

rate.

The

Corporation’s

estimated

annual

effective

tax

rate,

excluding

entities

with

pre-tax

losses

from which a

tax benefit cannot

be recognized and

discrete items, was

30.1

% for the

first six months

of 2023, compared

to

31.7

% for

the first six months of 2022.

As of

June

30,

2023,

the

Corporation

had

a

deferred

tax

asset of

$

153.9

million,

net

of a

valuation

allowance

of

$

184.2

million

against the deferred tax

asset, compared to a

deferred tax asset of $

155.6

million, net of a valuation

allowance of $

185.5

million, as of

December 31,

2022. The

net deferred

tax asset of

the Corporation’s

banking subsidiary,

FirstBank, amounted

to $

153.9

million as

of

June

30,

2023,

net

of

a

valuation

allowance

of

$

147.0

million,

compared

to

a

net

deferred

tax

asset

of

$

155.6

million,

net

of

a

valuation allowance of $

149.5

million, as of December 31, 2022.

The Corporation maintains a full valuation

allowance for its deferred

tax assets associated with capital losses carry forward and unrealized

losses of available-for-sale debt securities.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

60

In

2017,

the

Corporation

completed

a

formal

ownership

change

analysis

within

the

meaning

of

Section

382

of

the

U.S.

Internal

Revenue Code

(“Section 382”)

covering a

comprehensive period

and concluded

that an

ownership

change had

occurred during

such

period.

The

Section

382

limitation

has

resulted

in

higher

U.S.

and

USVI

income

tax

liabilities

that

we

would

have

incurred

in

the

absence of such limitation. The Corporation has mitigated

to an extent the adverse effects associated with the

Section 382 limitation as

any

such

tax

paid

in

the

U.S.

or

USVI

can

be

creditable

against

Puerto

Rico

tax

liabilities

or

taken

as

a

deduction

against

taxable

income. However,

our ability

to reduce

our Puerto

Rico tax

liability through

such a

credit or

deduction depends

on our

tax profile

at

each

annual

taxable

period,

which

is

dependent

on

various

factors.

For

the

quarter

and

six-month

period

ended

June

30,

2023,

the

Corporation

incurred

current

income

tax

expense

of

approximately

$

1.5

million

and

$

4.0

million,

respectively,

related

to

its

U.S.

operations, compared to

$

2.5

million and $

4.1

million, respectively,

for comparable periods in 2022.

The limitation did not impact

the

USVI operations in the quarters and six-month periods ended June

30, 2023 and 2022.

The Corporation

accounts for uncertain

tax positions under

the provisions of

ASC Topic

740. The Corporation’s

policy is to

report

interest

and

penalties

related

to

unrecognized

tax

positions

in

income

tax

expense.

As

of

June

30,

2023,

the

Corporation

had

$

0.2

million of

accrued interest

and penalties

related to

uncertain tax

positions in

the amount

of $

1.0

million that

it acquired

from BSPR,

which,

if recognized,

would decrease

the

effective

income tax

rate in

future

periods.

The amount

of

unrecognized

tax benefits

may

increase

or

decrease

in

the

future

for

various

reasons,

including

adding

amounts

for

current

tax

year

positions,

expiration

of

open

income

tax returns

due

to the

statute of

limitations,

changes

in management’s

judgment about

the level

of uncertainty,

the status

of

examinations,

litigation

and

legislative activity,

and

the addition

or elimination

of uncertain

tax positions.

The statute

of

limitations

under the 2011

PR Code is four

years after a

tax return is

due or filed,

whichever is later;

the statute of

limitations for U.S.

and USVI

income

tax

purposes

is

three

years

after

a

tax

return

is

due

or

filed,

whichever

is

later.

The

completion

of

an

audit

by

the

taxing

authorities

or

the

expiration

of

the

statute

of

limitations

for

a

given

audit

period

could

result

in

an

adjustment

to

the Corporation’s

liability for

income taxes. Any

such adjustment could

be material to

the results of

operations for any

given quarterly

or annual period

based, in part, upon

the results of operations

for the given period.

For U.S. and USVI

income tax purposes,

all tax years subsequent

to

2018 remain open to examination. For Puerto Rico tax purposes, all tax years

subsequent to 2017 remain open to examination.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

61

NOTE 18 –

FAIR VALUE

Fair Value

Measurement

ASC Topic

820, “Fair

Value

Measurement,”

defines fair

value as

the exchange

price that

would be

received for

an asset

or paid

to

transfer

a

liability

(an

exit

price)

in

the

principal

or

most

advantageous

market

for

the

asset

or

liability

in

an

orderly

transaction

between market

participants on

the measurement

date. This

guidance also

establishes a

fair value

hierarchy for

classifying assets

and

liabilities, which is based on

whether the inputs to

the valuation techniques used

to measure fair value are

observable or unobservable.

One of three levels of inputs may be used to measure fair value:

Level 1

Valuations

of

Level

1

assets

and

liabilities

are

obtained

from

readily-available

pricing

sources

for

market

transactions involving identical assets or liabilities in active markets.

Level 2

Va

luations of

Level 2 assets

and liabilities

are based on

observable inputs

other than Level

1 prices, such

as quoted

prices for similar assets or liabilities, or other inputs that

are observable or can be corroborated by observable market

data for substantially the full term of the assets or liabilities.

Level 3

Va

luations of Level 3 assets and

liabilities are based on unobservable

inputs that are supported by

little or no market

activity and

are significant to

the fair value

of the assets

or liabilities. Level

3 assets and

liabilities include financial

instruments

whose value

is determined

by using

pricing models

for

which

the determination

of fair

value

requires

significant management judgment as to the estimation.

See Note 25

– Fair Value

,

to the audited

consolidated financial

statements included

in the 2022

Annual Report

on Form

10-K for

a

description of the valuation methodologies used to measure financial

instruments at fair value on a recurring basis.

Assets and liabilities measured at fair value on a recurring basis are summarized below as of

June 30, 2023 and December 31, 2022:

As of June 30,

2023

As of December 31, 2022

Fair Value Measurements Using

Fair Value Measurements Using

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

(In thousands)

Assets:

Debt securities available for sale:

U.S. Treasury securities

$

139,669

$

-

$

-

$

139,669

$

138,875

$

-

$

-

$

138,875

Noncallable U.S. agencies debt securities

-

475,295

-

475,295

-

389,787

-

389,787

Callable U.S. agencies debt securities

-

1,900,133

-

1,900,133

-

1,963,566

-

1,963,566

MBS

-

2,910,915

5,246

(1)

2,916,161

-

3,098,797

5,794

(1)

3,104,591

Puerto Rico government obligations

-

-

2,111

2,111

-

-

2,201

2,201

Other investments

-

-

-

-

-

-

500

500

Equity securities

4,891

-

-

4,891

4,861

-

-

4,861

Derivative assets

-

494

-

494

-

633

-

633

Liabilities:

Derivative liabilities

-

357

-

357

-

476

-

476

(1) Related to private label MBS.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

62

The table below presents a reconciliation of the beginning and ending balances

of all assets measured at fair value on a recurring

basis using significant unobservable inputs (Level 3) for the quarters

and six-month periods ended June 30, 2023 and 2022:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

Level 3 Instruments Only

Securities Available for

Sale

(1)

Securities Available for

Sale

(1)

Securities Available for

Sale

(1)

Securities Available for

Sale

(1)

(In thousands)

Beginning balance

$

7,605

$

10,647

$

8,495

$

11,084

Total (losses)/gains:

Included in other comprehensive loss (unrealized)

(19)

(106)

(181)

(393)

Included in earnings (unrealized)

(2)

16

35

25

423

Principal repayments and amortization

(245)

(396)

(982)

(3)

(934)

Ending balance

$

7,357

$

10,180

$

7,357

$

10,180

___________________

(1)

Amounts mostly related to private label MBS.

(2)

Changes in unrealized gains included in earnings were recognized within

provision for credit losses - expense (benefit) and

relate to assets still held as of the reporting date.

(3)

Includes a $

0.5

million repayment of a matured debt security.

The tables below present quantitative information for significant assets measured at fair

value on a recurring basis using significant

unobservable inputs (Level 3) as of June 30,

2023 and December 31, 2022:

June 30,

2023

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted

Average

Minimum

Maximum

(Dollars in thousands)

Available-for-sale

debt securities:

Private label MBS

$

5,246

Discounted cash flows

Discount rate

16.7%

16.7%

16.7%

Prepayment rate

1.2%

12.0%

8.9%

Projected cumulative loss rate

0.2%

15.5%

5.6%

Puerto Rico government obligations

$

2,111

Discounted cash flows

Discount rate

13.4%

13.4%

13.4%

Projected cumulative loss rate

18.5%

18.5%

18.5%

December 31, 2022

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted

Average

Minimum

Maximum

(Dollars in thousands)

Available-for-sale

debt securities:

Private label MBS

$

5,794

Discounted cash flows

Discount rate

16.2%

16.2%

16.2%

Prepayment rate

1.5%

15.2%

11.8%

Projected cumulative loss rate

0.3%

15.6%

5.6%

Puerto Rico government obligations

$

2,201

Discounted cash flows

Discount rate

12.9%

12.9%

12.9%

Projected cumulative loss rate

19.3%

19.3%

19.3%

Information about Sensitivity to Changes in Significant Unobservable Inputs

Private label

MBS: The

significant unobservable

inputs in

the valuation

include probability

of default,

the loss

severity

assumption,

and prepayment

rates. Shifts

in those

inputs would

result in different

fair value

measurements. Increases

in the probability

of default,

loss

severity

assumptions,

and

prepayment

rates

in

isolation

would

generally

result

in

an

adverse

effect

on

the

fair

value

of

the

instruments. The Corporation modeled meaningful and possible

shifts of each input to assess the effect on the fair value estimation.

Puerto Rico

Government Obligations:

The significant

unobservable input

used in

the fair value

measurement is

the assumed

loss rate

of the

underlying

residential

mortgage

loans that

collateralize

these obligations,

which

are guaranteed

by the

PRHFA.

A significant

increase

(decrease)

in

the

assumed

rate

would

lead

to

a

(lower)

higher

fair

value

estimate.

See

Note

2

–

Debt

Securities

for

information

on the methodology used to calculate the fair value of these debt securities.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

63

Additionally, fair value

is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP.

As of June 30, 2023, the Corporation recorded losses or valuation adjustments

for assets recognized at fair value on a non-recurring

basis and still held at June 30, 2023, as shown in the following table:

Carrying value as of June 30, 2023

Related to (losses) gains

recorded for the Quarter

Ended June 30, 2023

Related to (losses) gains

recorded for the Six-

Month Period Ended

June 30, 2023

(Losses) gains recorded

for the Quarter Ended

June 30, 2023

(Losses) gains recorded

for the Six-Month Period

Ended June 30, 2023

(In thousands)

Level 3:

Loans receivable

(1)

$

8,011

$

8,920

$

(6,515)

$

(6,744)

OREO

(2)

1,471

2,038

45

12

Level 2:

Loans held for sale

(3)

$

14,295

$

14,295

$

(73)

$

(73)

(1)

Consists mainly of

collateral dependent

commercial and construction

loans. The

Corporation generally

measured losses

based on the

fair value of

the collateral.

The Corporation derived

the fair values from

external appraisals that

took into consideration

prices in observed

transactions involving similar

assets in similar

locations but adjusted

for specific characteristics

and

assumptions of the collateral (e.g., absorption rates), which are

not market observable.

(2)

The Corporation

derived the

fair values

from appraisals

that took

into consideration

prices in

observed transactions

involving

similar assets

in similar

locations but

adjusted for

specific

characteristics and assumptions of

the properties (e.g., absorption

rates and net operating

income of income producing

properties), which are

not market observable. Losses

were related to

market valuation adjustments after the transfer of the loans to

the OREO portfolio.

(3)

The Corporation derived the fair value of these loans based

on secondary market prices of instruments with similar characteristics.

As of June 30,

2022, the Corporation recorded losses or valuation adjustments for assets recognized

at fair value on a non-recurring

basis and still held at June 30, 2022, as shown in the following table:

Carrying value as of June 30, 2022

Related to (losses) gains

recorded for the Quarter

Ended June 30, 2022

Related to losses

recorded for the Six-

Month Period Ended

June 30, 2022

(Losses) gains recorded

for the Quarter Ended

June 30, 2022

Losses recorded for the

Six-Month Period Ended

June 30, 2022

(In thousands)

Level 3:

Loans receivable

(1)

$

5,422

$

29,967

$

(817)

$

(3,848)

OREO

(2)

2,140

2,741

35

(38)

Premises and equipment

(3)

-

1,242

-

(218)

(1)

Consists mainly of

collateral dependent

commercial and construction

loans. The

Corporation generally

measured losses

based on the

fair value of

the collateral.

The Corporation derived

the fair values from

external appraisals that

took into consideration

prices in observed

transactions involving similar

assets in similar locations

but adjusted for

specific characteristics

and

assumptions of the collateral (e.g., absorption rates), which are

not market observable.

(2)

The Corporation

derived the

fair values

from appraisals

that took

into consideration

prices in

observed transactions

involving similar

assets in

similar locations

but adjusted

for specific

characteristics and assumptions of

the properties (e.g., absorption

rates and net operating

income of income producing

properties), which are not

market observable. Losses

were related to

market valuation adjustments after the transfer of the loans to the

OREO portfolio.

(3)

Relates to a banking facility reclassified to held-for-sale

and measured at the fair value of the collateral.

See Note

25 –

Fair Value,

to the

audited consolidated

financial statements

included in

the 2022

Annual Report

on Form

10-K for

qualitative information regarding the

fair value measurements for Level 3 financial

instruments measured at fair value on nonrecurring

basis.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

64

The following tables present the carrying value, estimated fair value and estimated

fair value level of the hierarchy of financial

instruments as of June 30, 2023 and December 31, 2022:

Total Carrying Amount

in Statement of

Financial Condition as

of June 30, 2023

Fair Value Estimate as

of

June 30, 2023

Level 1

Level 2

Level 3

(In thousands)

Assets:

Cash and due from banks and money market investments (amortized

cost)

$

1,047,534

$

1,047,534

$

1,047,534

$

-

$

-

Available-for-sale debt

securities (fair value)

5,433,369

5,433,369

139,669

5,286,343

7,357

Held-to-maturity debt securities (amortized cost)

424,726

Less: ACL on held-to-maturity debt securities

(8,401)

Held-to-maturity debt securities, net of ACL

$

416,325

410,181

-

244,521

165,660

Equity securities (amortized cost)

43,210

43,210

-

43,210

(1)

-

Other equity securities (fair value)

4,891

4,891

4,891

-

-

Loans held for sale (lower of cost or market)

14,295

14,295

-

14,295

-

Loans held for investment (amortized cost)

11,719,315

Less: ACL for loans and finance leases

(267,058)

Loans held for investment, net of ACL

$

11,452,257

11,256,830

-

-

11,256,830

MSRs (amortized cost)

28,034

44,420

-

-

44,420

Derivative assets (fair value)

(2)

494

494

-

494

-

Liabilities:

Deposits (amortized cost)

$

16,819,692

$

16,820,272

$

-

$

16,820,272

$

-

Short-term securities sold under agreements to repurchase (amortized

cost)

73,934

74,030

-

74,030

-

Advances from the FHLB (amortized cost):

Long-term

500,000

495,589

-

495,589

-

Other long-term borrowings (amortized cost)

161,700

162,983

-

-

162,983

Derivative liabilities (fair value)

(2)

357

357

-

357

-

(1) Includes FHLB stock with a carrying value of $

34.7

million, which are considered restricted.

(2) Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

65

Total Carrying

Amount in Statement

of Financial Condition

as of December 31,

2022

Fair Value Estimate as

of

December 31, 2022

Level 1

Level 2

Level 3

(In thousands)

Assets:

Cash and due from banks and money market investments (amortized

cost)

$

480,505

$

480,505

$

480,505

$

-

$

-

Available-for-sale debt

securities (fair value)

5,599,520

5,599,520

138,875

5,452,150

8,495

Held-to-maturity debt securities (amortized cost)

437,537

Less: ACL on held-to-maturity debt securities

(8,286)

Held-to-maturity debt securities, net of ACL

$

429,251

427,115

-

260,106

167,009

Equity securities (amortized cost)

50,428

50,428

-

50,428

(1)

-

Other equity securities (fair value)

4,861

4,861

4,861

-

-

Loans held for sale (lower of cost or market)

12,306

12,306

-

12,306

-

Loans held for investment (amortized cost)

11,552,825

Less: ACL for loans and finance leases

(260,464)

Loans held for investment, net of ACL

$

11,292,361

11,106,809

-

-

11,106,809

MSRs (amortized cost)

29,037

44,710

-

-

44,710

Derivative assets (fair value)

(2)

633

633

-

633

-

Liabilities:

Deposits (amortized cost)

$

16,143,467

$

16,139,937

$

-

$

16,139,937

$

-

Short-term securities sold under agreements to repurchase (amortized

cost)

75,133

75,230

-

75,230

-

Advances from the FHLB (amortized cost)

Short-term

475,000

474,731

-

474,731

-

Long-term

200,000

199,865

-

199,865

-

Other long-term borrowings (amortized cost)

183,762

187,246

-

-

187,246

Derivative liabilities (fair value)

(2)

476

476

-

476

-

(1) Includes FHLB stock with a carrying value of $

42.9

million, which are considered restricted.

(2) Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.

The short-term nature

of certain assets and

liabilities result in their

carrying value approximating

fair value. These include

cash and

cash

due

from

banks

and

other

short-term

assets,

such

as

FHLB

stock.

Certain

assets,

the

most

significant

being

premises

and

equipment,

goodwill

and

other

intangible

assets, are

not

considered

financial

instruments

and

are

not

included

above. Accordingly,

this fair

value

information

is not

intended

to, and

does not,

represent

the Corporation’s

underlying

value.

Many of

these assets

and

liabilities that

are subject

to the

disclosure requirements

are not

actively traded,

requiring management

to estimate

fair values.

These

estimates

necessarily

involve

the

use

of

assumptions

and

judgment

about

a

wide

variety

of

factors,

including

but

not

limited

to,

relevancy of market prices of comparable instruments, expected future cash flows,

and appropriate discount rates.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

66

NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue Recognition

In accordance with

ASC Topic

606, “Revenue from

Contracts with Customers” (“ASC

Topic

606”), revenues are

recognized when

control

of

promised

goods

or

services

is

transferred

to

customers

and

in

an

amount

that

reflects

the

consideration

to

which

the

Corporation expects to be

entitled in exchange for those

goods or services. At contract

inception, once the contract

is determined to be

within the

scope of

ASC Topic

606, the

Corporation assesses

the goods

or services

that are

promised within

each contract,

identifies

the

respective

performance

obligations,

and

assesses

whether

each

promised

good

or

service

is

distinct.

The

Corporation

then

recognizes

as revenue

the amount

of the

transaction price

that is

allocated to

the respective

performance obligation

when (or

as) the

performance obligation is satisfied.

Disaggregation of Revenue

The following

tables summarize

the Corporation’s

revenue, which

includes net

interest income

on financial

instruments and

non-

interest income,

disaggregated by

type of

service and

business segment

for the

quarters and

six-month periods

ended June

30, 2023

and 2022:

Quarter ended June 30, 2023

Mortgage

Banking

Consumer

(Retail)

Banking

Commercial

and Corporate

Treasury and

Investments

United States

Operations

Virgin Islands

Operations

Total

(In thousands)

Net interest income

(1)

$

21,360

$

142,597

$

12,933

$

(2,789)

$

19,690

$

6,024

$

199,815

Service charges and fees on deposit accounts

-

5,087

3,326

-

172

702

9,287

Insurance commissions

-

2,464

-

-

79

204

2,747

Merchant-related income

-

2,035

-

-

39

385

2,459

Credit and debit card fees

-

8,117

28

-

10

521

8,676

Other service charges and fees

33

1,508

1,094

-

660

207

3,502

Not in scope of ASC Topic

606

(1)

3,029

1,010

3,697

1,680

195

(11)

9,600

Total non-interest income

3,062

20,221

8,145

1,680

1,155

2,008

36,271

Total Revenue

$

24,422

$

162,818

$

21,078

$

(1,109)

$

20,845

$

8,032

$

236,086

Quarter ended June 30, 2022

Mortgage

Banking

Consumer

(Retail)

Banking

Commercial

and Corporate

Treasury and

Investments

United States

Operations

Virgin Islands

Operations

Total

(In thousands)

Net interest income

(1)

$

26,335

$

102,397

$

31,379

$

11,466

$

18,688

$

5,921

$

196,186

Service charges and fees on deposit accounts

-

5,495

3,069

-

157

745

9,466

Insurance commissions

-

2,724

-

-

20

202

2,946

Merchant-related income

-

1,711

381

-

17

327

2,436

Credit and debit card fees

-

7,391

21

-

3

449

7,864

Other service charges and fees

59

2,066

876

-

485

157

3,643

Not in scope of ASC Topic

606

(1)

4,108

396

101

(51)

(4)

36

4,586

Total non-interest

income

4,167

19,783

4,448

(51)

678

1,916

30,941

Total Revenue

$

30,502

$

122,180

$

35,827

$

11,415

$

19,366

$

7,837

$

227,127

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

67

Six-Month Period Ended June 30, 2023

Mortgage

Banking

Consumer

(Retail)

Banking

Commercial and

Corporate

Treasury and

Investments

United States

Operations

Virgin Islands

Operations

Total

(In thousands)

Net interest income

(1)

$

43,148

$

280,341

$

27,873

$

(3,447)

$

40,620

$

12,165

$

400,700

Service charges and fees on deposit accounts

-

10,573

6,480

-

337

1,438

18,828

Insurance commissions

-

7,104

-

-

107

383

7,594

Merchant-related income

-

4,298

-

-

68

853

5,219

Credit and debit card fees

-

15,755

50

-

12

1,017

16,834

Other service charges and fees

194

2,660

1,948

-

1,243

551

6,596

Not in scope of ASC Topic

606

(1)

5,942

1,865

3,842

1,840

235

(6)

13,718

Total non-interest income

6,136

42,255

12,320

1,840

2,002

4,236

68,789

Total Revenue

$

49,284

$

322,596

$

40,193

$

(1,607)

$

42,622

$

16,401

$

469,489

Six-Month Period Ended June 30, 2022

Mortgage

Banking

Consumer

(Retail)

Banking

Commercial and

Corporate

Treasury and

Investments

United States

Operations

Virgin Islands

Operations

Total

(In thousands)

Net interest income

(1)

$

52,114

$

191,943

$

71,794

$

18,875

$

35,170

$

11,914

$

381,810

Service charges and fees on deposit accounts

-

11,034

6,045

-

295

1,455

18,829

Insurance commissions

-

7,691

-

-

49

481

8,221

Merchant-related income

-

3,533

754

-

22

716

5,025

Credit and debit card fees

-

14,062

37

-

(4)

859

14,954

Other service charges and fees

202

3,176

1,989

-

984

314

6,665

Not in scope of ASC Topic

606

(1)

9,217

750

177

(163)

76

48

10,105

Total non-interest income

9,419

40,246

9,002

(163)

1,422

3,873

63,799

Total Revenue

$

61,533

$

232,189

$

80,796

$

18,712

$

36,592

$

15,787

$

445,609

(1)

Most of the Corporation's revenue is not within the scope of ASC Topic 606. The guidance explicitly excludes net interest income from financial assets and liabilities, as well as other non-interest income from loans,

leases, investment securities and derivative financial instruments.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

68

For the quarters

and six-month periods

ended June 30,

2023 and 2022,

most of the

Corporation’s

revenue within

the scope of

ASC

Topic 606 was related

to performance obligations satisfied at a point in time.

See

Note

26

–

Revenue

from

Contracts

with

Customers,

to

the

audited

consolidated

financial

statements

included

in

the

2022

Annual Report on Form 10-K for a discussion of major revenue streams under

the scope of ASC Topic 606.

Contract Balances

A

contract

liability

is

an

entity’s

obligation

to

transfer

goods

or

services

to

a

customer

in

exchange

for

consideration

from

the

customer.

FirstBank

participates

in

a

merchant

revenue-sharing

agreement

with

another

entity

to

which

the

Bank

sold

its

merchant

contracts portfolio and related point-of-sale terminals,

and a growth agreement with an international

card service association to expand

the

customer

base

and

enhance

product

offerings.

FirstBank

recognizes

the

revenue

under

these

agreements

over

time, as

the

Bank

completes its performance obligations.

The following table shows the activity of contract liabilities for the quarters

and six-month periods ended June 30, 2023 and 2022:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands)

Beginning balance

$

760

$

1,154

$

841

$

1,443

Revenue recognized

(152)

(105)

(233)

(394)

Ending balance

$

608

$

1,049

$

608

$

1,049

As of June 30, 2023 and 2022, there were no contract assets recorded on the

Corporation’s consolidated financial

statements.

Other

Except for the

contract liabilities noted above,

the Corporation did not

have any other performance

obligations as of

June 30, 2023.

The Corporation

also did

not have

any material contract

acquisition costs

and did

not make

any significant

judgments or

estimates in

recognizing revenue for financial reporting purposes.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

69

NOTE 20 – SEGMENT INFORMATION

Based upon

the Corporation’s

organizational

structure and

the information

provided to

the Chief

Executive

Officer,

the operating

segments

are

based

primarily

on

the

Corporation’s

lines

of

business

for

its

operations

in

Puerto

Rico,

the

Corporation’s

principal

market,

and

by geographic

areas for

its operations

outside

of

Puerto

Rico.

As of

June 30,

2023,

the

Corporation

had

six

reportable

segments:

Mortgage

Banking;

Consumer

(Retail)

Banking;

Commercial

and

Corporate

Banking;

Treasury

and

Investments;

United

States

Operations;

and

Virgin

Islands

Operations.

Management

determined

the

reportable

segments

based

on

the

internal

structure

used to

evaluate performance

and to

assess where

to allocate

resources. Other

factors, such

as the

Corporation’s

organizational chart,

nature

of

the

products,

distribution

channels,

and

the

economic

characteristics

of

the

products,

were

also

considered

in

the

determination of the reportable segments.

The

Mortgage

Banking

segment

consists

of

the

origination,

sale,

and

servicing

of

a

variety

of

residential

mortgage

loans.

The

Mortgage Banking

segment also

acquires and

sells mortgages

in the

secondary markets.

In addition,

the Mortgage

Banking segment

includes mortgage loans purchased from

other local banks and mortgage bankers.

The Consumer (Retail) Banking segment

consists of

the Corporation’s

consumer lending

and deposit-taking

activities conducted

mainly through

its branch

network and

loan centers.

The

Commercial and

Corporate Banking

segment consists of

the Corporation’s

lending and other

services for

large customers

represented

by specialized

and middle-market

clients and

the public

sector.

The Commercial

and Corporate

Banking segment

offers commercial

loans,

including

commercial

real

estate

and

construction

loans,

and

floor

plan

financings,

as

well

as

other

products,

such

as

cash

management

and

business

management

services.

The

Treasury

and

Investments

segment

is

responsible

for

the

Corporation’s

investment

portfolio

and

treasury

functions

that

are

executed

to

manage

and

enhance

liquidity.

This

segment

lends

funds

to

the

Commercial

and

Corporate

Banking,

the

Mortgage

Banking,

the

Consumer

(Retail)

Banking,

and

the

United

States

Operations

segments

to

finance

their

lending

activities

and

borrows

from

those

segments.

The

Consumer

(Retail)

Banking

segment

also

lends

funds to

other segments.

The interest

rates charged

or credited

by the

Treasury

and Investments

and the

Consumer (Retail)

Banking

segments are

allocated based

on market

rates. The

difference between

the allocated

interest income

or expense

and the Corporation’s

actual

net

interest income

from

centralized

management

of funding

costs is

reported

in the

Treasury

and Investments

segment.

The

United States

Operations segment

consists of

all banking

activities conducted

by FirstBank

in the

United States

mainland,

including

commercial and consumer banking

services. The Virgin

Islands Operations segment consists of

all banking activities conducted by the

Corporation in the USVI and BVI, including commercial and consumer banking

services.

The

accounting

policies

of

the

segments

are

the

same

as

those

referred

to

in

Note

1

–

Nature

of

Business

and

Summary

of

Significant Accounting Policies, to the audited consolidated financial

statements included in the 2022 Annual Report on Form 10-K.

The

Corporation

evaluates

the

performance

of

the

segments

based

on

net

interest

income,

the

provision

for

credit

losses,

non-

interest

income

and

direct

non-interest

expenses.

The

segments

are

also

evaluated

based

on

the

average

volume

of

their

interest-

earning assets less the ACL.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

70

The following tables present information about the reportable segments for

the indicated periods:

Mortgage

Banking

Consumer

(Retail) Banking

Commercial and

Corporate

Banking

Treasury and

Investments

United States

Operations

Virgin Islands

Operations

Total

(In thousands)

Quarter ended June 30, 2023:

Interest income

$

31,605

$

86,989

$

65,356

$

29,528

$

32,098

$

6,628

$

252,204

Net (charge) credit for transfer

of funds

(10,245)

86,144

(52,423)

(22,739)

(737)

-

-

Interest expense

-

(30,536)

-

(9,578)

(11,671)

(604)

(52,389)

Net interest income (loss)

21,360

142,597

12,933

(2,789)

19,690

6,024

199,815

Provision for credit losses - (benefit) expense

(3,829)

13,669

7,675

(16)

4,017

714

22,230

Non-interest income

3,062

20,221

8,145

1,680

1,155

2,008

36,271

Direct non-interest expenses

5,533

41,814

9,340

923

8,502

6,731

72,843

Segment income (loss)

$

22,718

$

107,335

$

4,063

$

(2,016)

$

8,326

$

587

$

141,013

Average earnings assets

$

2,144,340

$

3,241,768

$

3,770,463

$

6,364,024

$

2,038,621

$

371,685

$

17,930,901

Mortgage

Banking

Consumer

(Retail) Banking

Commercial and

Corporate

Banking

Treasury and

Investments

United States

Operations

Virgin Islands

Operations

Total

(In thousands)

Quarter ended June 30, 2022:

Interest income

$

33,205

$

73,487

$

47,513

$

27,143

$

21,081

$

6,196

$

208,625

Net (charge) credit for transfer of funds

(6,870)

34,039

(16,134)

(10,705)

(330)

-

-

Interest expense

-

(5,129)

-

(4,972)

(2,063)

(275)

(12,439)

Net interest income

26,335

102,397

31,379

11,466

18,688

5,921

196,186

Provision for credit losses - (benefit) expense

(3,605)

15,055

(470)

(35)

(1,678)

736

10,003

Non-interest income (loss)

4,167

19,783

4,448

(51)

678

1,916

30,941

Direct non-interest expenses

5,681

40,546

9,048

905

8,237

6,765

71,182

Segment income

$

28,426

$

66,579

$

27,249

$

10,545

$

12,807

$

336

$

145,942

Average earnings assets

$

2,243,188

$

2,860,086

$

3,624,176

$

7,769,754

$

2,036,108

$

370,590

$

18,903,902

Mortgage

Banking

Consumer (Retail)

Banking

Commercial

and Corporate

Banking

Treasury and

Investments

United States

Operations

Virgin Islands

Operations

Total

(In thousands)

Six-Month Period Ended June 30, 2023

Interest income

$

63,512

$

170,163

$

127,699

$

56,994

$

63,212

$

13,020

$

494,600

Net (charge) credit for transfer of funds

(20,364)

163,879

(99,826)

(42,278)

(1,411)

-

-

Interest expense

-

(53,701)

-

(18,163)

(21,181)

(855)

(93,900)

Net interest income

43,148

280,341

27,873

(3,447)

40,620

12,165

400,700

Provision for credit losses - (benefit) expense

(4,335)

28,893

5,139

(25)

8,672

(612)

37,732

Non-interest income

6,136

42,255

12,320

1,840

2,002

4,236

68,789

Direct non-interest expenses

10,620

83,441

18,705

1,870

16,806

13,556

144,998

Segment income

$

42,999

$

210,262

$

16,349

$

(3,452)

$

17,144

$

3,457

$

286,759

Average earnings assets

$

2,157,626

$

3,208,146

$

3,742,205

$

6,290,669

$

2,053,154

$

369,026

$

17,820,826

Mortgage

Banking

Consumer (Retail)

Banking

Commercial

and Corporate

Banking

Treasury and

Investments

United States

Operations

Virgin Islands

Operations

Total

(In thousands)

Six-Month Period Ended June 30, 2022

Interest income

$

66,276

$

143,924

$

94,540

$

49,327

$

39,938

$

12,474

$

406,479

Net (charge) credit for transfer of funds

(14,162)

58,321

(22,746)

(20,654)

(759)

-

-

Interest expense

-

(10,302)

-

(9,798)

(4,009)

(560)

(24,669)

Net interest income

52,114

191,943

71,794

18,875

35,170

11,914

381,810

Provision for credit losses - (benefit) expense

(7,308)

26,199

(17,092)

(423)

(5,225)

50

(3,799)

Non-interest income (loss)

9,419

40,246

9,002

(163)

1,422

3,873

63,799

Direct non-interest expenses

12,587

79,817

17,907

1,790

16,716

13,738

142,555

Segment income

$

56,254

$

126,173

$

79,981

$

17,345

$

25,101

$

1,999

$

306,853

Average earnings assets

$

2,268,279

$

2,810,062

$

3,662,720

$

7,931,699

$

2,050,791

$

374,358

$

19,097,909

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

71

The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands)

Net income:

Total income for segments

$

141,013

$

145,942

$

286,759

$

306,853

Other operating expenses

(1)

40,074

37,144

83,187

72,430

Income before income taxes

100,939

108,798

203,572

234,423

Income tax expense

30,284

34,103

62,219

77,128

Total consolidated net income

$

70,655

$

74,695

$

141,353

$

157,295

Average assets:

Total average earning assets for segments

$

17,930,901

$

18,903,902

$

17,820,826

$

19,097,909

Average non-earning assets

857,677

820,924

852,680

890,043

Total consolidated average assets

$

18,788,578

$

19,724,826

$

18,673,506

$

19,987,952

(1)

Expenses pertaining to corporate administrative functions that support

the operating segment, but are not specifically attributable to

or managed by any segment, are not included in the

reported financial results of the operating segments. The

unallocated corporate expenses include certain general and administrative

expenses and related depreciation and amortization

expenses.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

72

NOTE 21 – SUPPLEMENTAL

STATEMENT

OF CASH FLOWS INFORMATION

Supplemental statement of cash flows information is as follows for the

indicated periods:

Six-Month Period Ended June 30,

2023

2022

(In thousands)

Cash paid for:

Interest on borrowings

$

84,530

$

26,148

Income tax

82,215

15,295

Operating cash flow from operating leases

8,630

9,156

Non-cash investing and financing activities:

Additions to OREO

10,738

10,698

Additions to auto and other repossessed assets

29,720

20,575

Capitalization of servicing assets

1,238

1,958

Loan securitizations

65,092

78,397

Loans held for investment transferred to held for sale

2,962

2,443

Payable related to unsettled purchases of investment securities

4,502

20,202

ROU assets obtained in exchange for operating lease liabilities

2,263

1,158

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

73

NOTE 22 – REGULATORY

MATTERS, COMMITMENTS,

AND CONTINGENCIES

Regulatory Matters

The

Corporation

and

FirstBank

are

each

subject

to

various

regulatory

capital

requirements

imposed

by

the

U.S.

federal

banking

agencies. Failure

to meet

minimum capital

requirements can

result in

certain mandatory

and possibly

additional discretionary

actions

by regulators

that, if

undertaken, could

have a

direct material

adverse effect

on the

Corporation’s

financial statements

and activities.

Under

capital

adequacy

guidelines

and

the

regulatory

framework

for

prompt

corrective

action,

the

Corporation

must

meet

specific

capital

guidelines

that

involve

quantitative

measures

of

the Corporation’s

and

FirstBank’s

assets,

liabilities,

and

certain

off-balance

sheet items

as calculated

under regulatory

accounting practices.

The Corporation’s

capital amounts

and classification

are also

subject

to qualitative judgments and

adjustment by the regulators with respect

to minimum capital requirements, components,

risk weightings,

and

other

factors.

As

of

June

30,

2023

and

December

31,

2022,

the

Corporation

and

FirstBank

exceeded

the

minimum

regulatory

capital

ratios

for

capital

adequacy

purposes

and

FirstBank

exceeded

the

minimum

regulatory

capital

ratios

to

be

considered

a

well

capitalized

institution

under

the

regulatory

framework

for

prompt

corrective

action.

As

of

June

30,

2023,

management

does

not

believe that any condition has changed or event has occurred that would have

changed the institution’s status.

The Corporation and FirstBank

compute risk-weighted assets

using the standardized approach

required by the U.S.

Basel III capital

rules (“Basel III rules”).

The

Basel

III

rules

require

the

Corporation

to

maintain

an

additional

capital

conservation

buffer

of

2.5

%

on

certain

regulatory

capital

ratios

to

avoid

limitations

on

both

(i)

capital

distributions

(

e.g.

,

repurchases

of

capital

instruments,

dividends

and

interest

payments on capital instruments) and (ii) discretionary bonus payments

to executive officers and heads of major business lines.

As part

of its

response to

the impact

of COVID-19,

on March

31, 2020,

the federal

banking agencies

issued an

interim final

rule

that

provided

the

option

to

temporarily

delay

the

effects

of

CECL

on

regulatory

capital

for

two

years,

followed

by

a

three-year

transition

period.

The

interim

final

rule

provides

that,

at

the

election

of

a

qualified

banking

organization,

the

day

one

impact

to

retained earnings plus

25

% of the change in

the ACL (as defined

in the final rule) from

January 1, 2020 to

December 31, 2021 will

be

delayed

for

two

years

and

phased-in

at

25

%

per

year

beginning

on

January

1,

2022

over

a

three-year

period,

resulting

in

a

total

transition

period

of

five

years.

Accordingly,

as

of

June

30,

2023,

the

capital

measures

of

the

Corporation

and

the

Bank

included

$

32.4

million associated

with the

CECL day

one impact

to retained

earnings plus

25

% of

the increase

in the

ACL (as

defined in

the

interim

final

rule)

from

January

1,

2020

to

December

31,

2021,

and

$

32.4

million

remains

excluded

to

be

phase-in

during

the

remainder of

the three-year

transition period.

The federal

financial regulatory

agencies may

take other

measures affecting

regulatory

capital to

address macroeconomic

conditions, as

well as

the effect

of recent

regional bank

failures in

the U.S.

mainland, although

the

nature and impact of such actions cannot be predicted at this time.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

74

The regulatory capital position of

the Corporation and the FirstBank

as of June 30, 2023 and

December 31, 2022, which reflects

the

delay in the full effect of CECL on regulatory capital,

were as follows:

Regulatory Requirements

Actual

For Capital Adequacy Purposes

To be Well

-Capitalized

Thresholds

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in thousands)

As of June 30, 2023

Total Capital (to Risk-Weighted

Assets)

First BanCorp.

$

2,396,564

19.15

%

$

1,001,189

8.0

%

N/A

N/A

%

FirstBank

$

2,326,581

18.59

%

$

1,001,046

8.0

%

$

1,251,307

10.0

%

CET1 Capital (to Risk-Weighted Assets)

First BanCorp.

$

2,082,843

16.64

%

$

563,169

4.5

%

N/A

N/A

%

FirstBank

$

2,069,732

16.54

%

$

563,088

4.5

%

$

813,350

6.5

%

Tier I Capital (to Risk-Weighted

Assets)

First BanCorp.

$

2,082,843

16.64

%

$

750,892

6.0

%

N/A

N/A

%

FirstBank

$

2,169,732

17.34

%

$

750,784

6.0

%

$

1,001,046

8.0

%

Leverage ratio

First BanCorp.

$

2,082,843

10.73

%

$

776,742

4.0

%

N/A

N/A

%

FirstBank

$

2,169,732

11.18

%

$

776,431

4.0

%

$

970,539

5.0

%

As of December 31, 2022

Total Capital (to Risk-Weighted

Assets)

First BanCorp.

$

2,385,866

19.21

%

$

993,405

8.0

%

N/A

N/A

%

FirstBank

$

2,346,093

18.90

%

$

993,264

8.0

%

$

1,241,580

10.0

%

CET1 Capital (to Risk-Weighted Assets)

First BanCorp.

$

2,052,333

16.53

%

$

558,790

4.5

%

N/A

N/A

%

FirstBank

$

2,090,832

16.84

%

$

558,711

4.5

%

$

807,027

6.5

%

Tier I Capital (to Risk-Weighted

Assets)

First BanCorp.

$

2,052,333

16.53

%

$

745,054

6.0

%

N/A

N/A

%

FirstBank

$

2,190,832

17.65

%

$

744,948

6.0

%

$

993,264

8.0

%

Leverage ratio

First BanCorp.

$

2,052,333

10.70

%

$

767,075

4.0

%

N/A

N/A

%

FirstBank

$

2,190,832

11.43

%

$

766,714

4.0

%

$

958,392

5.0

%

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

75

Commitments

The Corporation enters

into financial instruments

with off-balance sheet

risk in the normal

course of business to

meet the financing

needs

of

its

customers.

These

financial

instruments

may

include

commitments

to

extend

credit

and

standby

letters

of

credit.

Commitments to extend credit are agreements

to lend to a customer as long

as there is no violation of any conditions

established in the

contract. Commitments

generally have fixed

expiration dates or

other termination clauses.

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.

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.

As

of June

30, 2023,

commitments to

extend credit

amounted to

approximately $

2.0

billion, of

which $

1.0

billion relates

to retail

credit

card

loans.

In

addition,

commercial

and

financial

standby

letters

of

credit

as

of

June

30,

2023

amounted

to

approximately

$

66.0

million.

Contingencies

As

of

June

30,

2023,

First

BanCorp.

and

its

subsidiaries

were

defendants

in

various

legal

proceedings,

claims

and

other

loss

contingencies

arising

in

the

ordinary

course

of

business.

On

at

least

a

quarterly

basis,

the

Corporation

assesses

its

liabilities

and

contingencies in connection

with threatened and

outstanding legal proceedings,

claims and other

loss contingencies utilizing

the latest

information

available. For

legal proceedings,

claims and

other loss

contingencies

where it

is both

probable that

the Corporation

will

incur

a

loss

and

the

amount

can

be

reasonably

estimated,

the

Corporation

establishes

an

accrual

for

the

loss.

Once

established,

the

accrual

is

adjusted

as

appropriate

to

reflect

any

relevant

developments.

For

legal

proceedings,

claims

and

other

loss

contingencies

where a loss is not probable or the amount of the loss cannot be estimated, no accrual

is established.

Any estimate

involves significant

judgment, given

the varying

stages of

the proceedings

(including the

fact that

some of

them are

currently in

preliminary stages),

the existence

in some

of the

current proceedings

of multiple

defendants whose

share of

liability has

yet

to

be

determined,

the

numerous

unresolved

issues

in

the

proceedings,

and

the

inherent

uncertainty

of

the

various

potential

outcomes of such

proceedings. Accordingly,

the Corporation’s

estimate will change

from time to time,

and actual losses

may be more

or less than the current estimate.

While

the

final

outcome

of

legal

proceedings,

claims,

and

other

loss

contingencies

is

inherently

uncertain,

based

on

information

currently

available,

management

believes

that

the

final

disposition

of

the

Corporation’s

legal

proceedings,

claims

and

other

loss

contingencies,

to

the

extent

not

previously

provided

for,

will

not

have

a

material

adverse

effect

on

the

Corporation’s

consolidated

financial position as a whole.

If management believes that, based on available information,

it is at least reasonably possible that a material loss (or material

loss in

excess

of

any

accrual)

will

be

incurred

in

connection

with

any

legal

contingencies,

the

Corporation

discloses

an

estimate

of

the

possible loss or

range of loss,

either individually or

in the aggregate,

as appropriate, if

such an estimate can

be made, or

discloses that

an estimate cannot be made. Based on the Corporation’s

assessment as of June 30, 2023, no such disclosures were necessary.

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

76

NOTE 23- FIRST BANCORP.

(HOLDING COMPANY

ONLY) FINANCIAL

INFORMATION

The following

condensed financial information

presents the financial

position of

First BanCorp.

at the holding

company level only

as of

June 30,

2023 and

December 31,

2022, and

the results

of its

operations

for the

quarters and

six-month periods

ended June

30,

2023 and 2022:

Statements of Financial Condition

As of June 30,

As of December 31,

2023

2022

(In thousands)

Assets

Cash and due from banks

$

54,625

$

19,279

Other investment securities

735

735

Investment in First Bank Puerto Rico, at equity

1,484,887

1,464,026

Investment in First Bank Insurance Agency,

at equity

22,024

28,770

Investment in FBP Statutory Trust I

1,289

1,951

Investment in FBP Statutory Trust II

3,561

3,561

Dividends receivable

700

624

Other assets

542

430

Total assets

$

1,568,363

$

1,519,376

Liabilities and Stockholders’ Equity

Liabilities:

Long-term borrowings

$

161,700

$

183,762

Accounts payable and other liabilities

8,664

10,074

Total liabilities

170,364

193,836

Stockholders’ equity

1,397,999

1,325,540

Total liabilities and stockholders’

equity

$

1,568,363

$

1,519,376

FIRST BANCORP.

NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS-(Continued)

77

Statements of Income

Quarter Ended

Six-Month Period Ended

June 30,

June 30,

2023

2022

2023

2022

(In thousands)

Income

Interest income on money market investments

$

57

$

10

$

110

$

14

Dividend income from banking subsidiaries

78,932

178,679

157,802

242,272

Dividend income from nonbanking subsidiaries

12,000

-

12,000

-

Gain on early extinguishment of debt

1,605

-

1,605

-

Other income

101

51

203

91

Total income

92,695

178,740

171,720

242,377

Expense

Other long-term borrowings

3,409

1,698

6,790

3,031

Other non-interest expenses

462

434

872

873

Total expense

3,871

2,132

7,662

3,904

Income before income taxes and equity in undistributed

earnings of subsidiaries

88,824

176,608

164,058

238,473

Income tax expense

783

793

1,861

1,899

Distribution in excess of earnings of subsidiaries

(17,386)

(101,120)

(20,844)

(79,279)

Net income

$

70,655

$

74,695

$

141,353

$

157,295

Other comprehensive (loss) income, net of tax

(54,837)

(175,923)

32,391

(507,757)

Comprehensive income (loss)

$

15,818

$

(101,228)

$

173,744

$

(350,462)

78

ITEM

2.

MANAGEMENT’S

DISCUSSION

AND

ANALYSIS

OF

FINANCIAL

CONDITION

AND

RESULTS

OF

OPERATIONS (“MD&A”)

The

following

MD&A

relates

to

the

accompanying

unaudited

consolidated

financial

statements

of

First

BanCorp.

(the

“Corporation,” “we,” “us,”

“our,” or “First

BanCorp.”) and should be

read in conjunction with

such financial statements and

the notes

thereto,

and our Annual Report on

Form 10-K for the year

ended December 31, 2022 (the “2022

Annual Report on Form 10-K”).

This

section also

presents certain

financial measures

that are not

based on

generally accepted

accounting principles

in the

United States

of

America

(“GAAP”).

See

“Non-GAAP

Financial

Measures

and

Reconciliations”

below

for

information

about

why

non-GAAP

financial measures are

presented, reconciliations

of non-GAAP financial

measures to the

most comparable GAAP

financial measures,

and references to non-GAAP financial measures reconciliations presented

in other sections.

EXECUTIVE SUMMARY

First BanCorp.

is a diversified

financial holding

company headquartered

in San Juan,

Puerto Rico offering

a full range

of financial

products to

consumers and

commercial customers

through various

subsidiaries. First

BanCorp.

is the

holding company

of FirstBank

Puerto

Rico

(“FirstBank”

or the

“Bank”)

and

FirstBank

Insurance

Agency.

Through

its wholly

-owned

subsidiaries,

the Corporation

operates

in

Puerto

Rico,

the

United

States

Virgin

Islands

(“USVI”),

the

British

Virgin

Islands

(“BVI”),

and

the

state

of

Florida,

concentrating on

commercial banking,

residential mortgage loans,

credit cards, personal

loans, small loans,

auto loans and

leases, and

insurance agency activities.

Recent Developments

Economy and Market Volatility

During

the

second

quarter

of

2023,

inflation

has

continued

to

trend

lower

but

remaining

at

elevated

levels

above

the

Federal

Reserve

(“FED”)

target.

In

July

2023,

the

FED

raised

interest

rates

by

an

additional

25 basis

points,

thereby

increasing

the

federal

funds rate

to a

target range

of 5.25%

to 5.50%,

bringing borrowing

costs to

the highest

level since

January 2001.

This represents

the

eleventh

time

in

17

months

that

the

FED

has

raised

rates

in

an

effort

to

significantly

reduce

liquidity

in

the

financial

markets

and

continue

to reduce

inflation. The

FED resumed

the tightening

campaign after

a pause

in June,

while noticing

the economy

has been

expanding

at

a

moderate

pace,

job

gains

have

been

robust

in

recent

months,

and

the

unemployment

rate

has

remained

low

while

inflation remains elevated.

The Corporation remains vigilant as to the potential impacts

that monetary policy or a potential slowdown in the U.S. economy

may

have on

credit and

loan demand.

Notwithstanding, it

is encouraged

by the

ongoing business

activity and

economic growth

in Puerto

Rico over the

short and medium

term. For example,

strong auto and

retail sales reported

during the first

half of 2023

suggest growing

consumer confidence in Puerto Rico. The economic

backdrop in Puerto Rico continues to be supported

by strong labor markets, which

have led to unemployment remaining stable, and a consistent flow of

federal disaster funds and foreign investment.

Our

quarterly

results

reflected

continued

execution

of

our

strategy

and

strength

of

our

balance

sheet,

reflected

through

deposit

growth and increased

capital levels driven

by earnings and

capital optimization. Although

total net interest

income remains stable,

the

overall higher

interest rate environment

resulted in a

lower interest margin

for the second

quarter of

2023. The

overall higher

interest

rate environment

should continue

to benefit

our interest

income as

variable loans

and cash

held at

the FED

will reprice

accordingly

and

projected

loan

growth

will occur

at

higher

yields.

Interest

expense,

on

the

other

hand,

is also

expected

to

increase

as maturing

deposits and

government deposits

will reprice

at higher

rates and

non-interest-bearing

and other

low-cost deposits

could continue

to

shift to higher

cost deposits, resulting

in margin

pressures. Credit continues

to perform well

and our liquidity

position remains strong.

With

our

disciplined

and

proactive

approach,

we

believe

the

Corporation

is

positioned

to

continue

growing

the

franchise

and

supporting our people and the communities we serve while enhancing shareholder

value.

79

Stock Repurchase Programs

On July

24, 2023,

the Corporation

announced that

its Board

of Directors

approved a

new stock

repurchase program,

under which

the Corporation

may repurchase

up to

$225 million

of its

outstanding common

stock, which

it expects

to execute

through the

end of

the third quarter of 2024.

The Corporation

expects to repurchase

approximately $150 million

in common stock

during the second

half of 2023,

of which $75

million relates to

the remaining amount

of the $350

million stock repurchase

program announced on

April 27, 2022

that was resumed

in July 2023.

The Corporation expects

to fully utilize this

remaining authorization during

the third quarter of

2023. From July 1,

2023

through August

1, 2023, the

Corporation repurchased

approximately 1.5

million shares

of common

stock for a

total purchase price

of

$19.5 million.

Repurchases under

the stock repurchase

programs may be

executed through

open market purchases,

accelerated share

repurchases,

and/or

privately

negotiated

transactions

or

plans,

including

under

plans

complying

with

Rule

10b5-1

under

the

Exchange

Act.

The

Corporation’s

stock

repurchase

programs

are

subject

to

various

factors,

including

the

Corporation’s

capital

position,

liquidity,

financial

performance

and

alternative

uses

of

capital,

stock

trading

price,

and

general

market

conditions.

The

Corporation’s

stock

repurchase

programs

do

not

obligate

it

to

acquire

any

specific

number

of

shares

and

do

not

have

an

expiration

date.

The

stock

repurchase programs may be modified, suspended, or terminated

at any time at the Corporation’s discretion.

Repurchase of Trust

-

Preferred Securities (“TRuPs”)

During the second quarter

of 2023, the Corporation completed

the repurchase of $21.4 million

of TRuPs of the FBP Statutory

Trust

I as

part of

a privately

-negotiated

transaction,

resulting

in a

commensurate

reduction

in the

related

floating

rate junior

subordinated

debentures. The purchase

price equated to 92.5%

of the $21.4 million

par value of the

TRuPs. The 7.5% discount

resulted in a gain

of

approximately $1.6 million, which is reflected in the consolidated statement

s

of income as “Gain on early extinguishment of debt.”

Release of Corporate Sustainability Report

On June 26, 2023,

the Corporation announced

the release of its Corporate

Sustainability Report for

2022, which is its second

report

on Environmental,

Social and

Governance

(“ESG”)

and sustainability

matters. This

report

highlights

the Corporation’s

strategy

and

development relating to ESG matters and covers the progress of the Corporation’s

ESG program during 2022.

London Interbank Offered Rate (“LIBOR”)

Transition

On June

30, 2023,

the US

dollar (“USD”) LIBOR

panel ended,

and USD

LIBOR rates

are no

longer considered

representative of

the

market.

For

the

transition

of

residual

exposures

tied

to

USD

LIBOR

as

of

June

30,

2023,

the

Corporation

will

continue

to

follow

the

provisions

of

the

Adjustable

Interest

Rate

Act

(the

“LIBOR

Act”)

and

Regulation

ZZ.

As

of

June

30,

2023,

the

Corporation’s

risk

exposure

to

USD

LIBOR

that

mature

after

June

30,

2023

consisted

of

the

following:

(i)

$0.8

billion

of

variable-rate

commercial

and

construction loans

(including unused commitments),

(ii) $39.4

million of U.S.

agencies debt

securities and

private label mortgage-backed

securities (“MBS”)

held as

part of

the available-for-sale debt

securities portfolio,

(iii) $122.3

million of

Puerto Rico

municipalities bonds

held as

part of

the held-to-maturity

debt securities

portfolio, and

(iv) $161.7

million of

junior subordinated

debentures reported

as other

long-term borrowings in the consolidated statements

of financial condition.

Source systems have been updated to

support alternative reference rates. As

such, we have developed a SOFR-enabled

interest rate risk

monitoring framework and a strategy for managing interest

rate risk during the transition from LIBOR to SOFR.

80

Other Recent Developments

Following the recent failure of two

U.S. regional banks and resulting

losses to the FDIC’s

Deposit Insurance Fund (“DIF”), on

May 11,

2023, the

FDIC approved

a notice of

proposed rulemaking

that would

implement a special

assessment at an

annual rate of

approximately

12.5 basis

points over

eight quarterly

periods, commencing

with the

first quarter

of 2024,

to recover

the cost

associated with

protecting

uninsured depositors

as part

of those

financial institution

failures. The

assessment base

for the

special assessment

would be

equal to

an

insured depository

institution’s estimated

uninsured deposits

reported as

of December

31, 2022,

adjusted to

exclude the

first $5

billion in

estimated

uninsured

deposits.

Notwithstanding,

the

special

assessment

could

be

subject

to

change

depending

on

whether

there

are

any

shortfalls on

amounts collected.

If the

final rule

is issued

as proposed,

the estimated

impact of

the special

assessment on

the Corporation

would be an increase in non-interest expense

by approximately $6 million that would need to be

accrued once the proposed rule is finalized.

CRITICAL ACCOUNTING POLICIES AND PRACTICES

The

accounting

principles

of

the

Corporation

and

the

methods

of

applying

these

principles

conform

to

GAAP.

In

preparing

the

consolidated

financial

statements,

management

is

required

to

make

estimates,

assumptions,

and

judgments

that

affect

the

amounts

recorded for assets,

liabilities and contingent

liabilities as of

the date of

the financial statements

and the reported

amounts of revenues

and

expenses

during

the

reporting

periods.

Note

1

of

the Notes

to

Consolidated

Financial

Statements

included

in

our

2022

Annual

Report

on

Form

10-K,

as

supplemented

by

this

Quarterly

Report

on

Form

10-Q,

including

this

MD&A,

describes

the

significant

accounting policies we used in our consolidated financial statements.

Not all significant

accounting policies require

management to make

difficult, subjective

or complex judgments.

Critical accounting

estimates

are

those

estimates

made

in

accordance

with

GAAP

that

involve

a

significant

level

of

uncertainty

and

have

had

or

are

reasonably

likely

to

have

a

material

impact

on

the

Corporation’s

financial

condition

and

results

of

operations.

The

Corporation’s

critical accounting

estimates that

are particularly

susceptible

to significant

changes include,

but are

not limited

to, the

following:

(i)

the allowance for credit losses (“ACL”);

(ii) valuation of financial instruments;

and (iii) income taxes. For more

information regarding

valuation of financial

instruments and income taxes

policies, assumptions, and

judgments, see “Critical Accounting

Estimates” in Part

II,

Item

7,

“Management’s

Discussion

and

Analysis

of

Financial

Condition

and

Results

of

Operations

(“MD&A”),”

in

the

2022

Annual

Report

on

Form

10-K.

The

“Risk

Management

–

Credit

Risk

Management”

section

of

this

MD&A

details

the

policies,

assumptions, and

judgments related

to the

ACL. Actual

results could

differ

from estimates

and assumptions

if different

outcomes or

conditions prevail.

81

Overview of Results of Operations

First

BanCorp.'s

results

of

operations

depend

primarily

on

its

net

interest

income,

which

is

the

difference

between

the

interest

income

earned

on

its

interest-earning

assets,

including

investment

securities

and

loans,

and

the

interest

expense

incurred

on

its

interest-bearing

liabilities,

including

deposits

and

borrowings.

Net

interest

income

is

affected

by

various

factors,

including

the

following:

(i)

the

interest

rate

environment;

(ii)

the

volumes,

mix,

and

composition

of

interest-earning

assets,

and

interest-bearing

liabilities; and

(iii) the

repricing

characteristics of

these assets

and liabilities.

The Corporation

’s

results of

operations also

depend on

the provision

for credit

losses, non-interest

expenses (such

as personnel,

occupancy,

the FDIC

deposit insurance

premium

and other

costs), non-interest

income (mainly

service charges

and fees

on deposits,

cards and

processing income,

and insurance

income), gains

(losses) on sales of investments, gains (losses) on mortgage banking activities, and

income taxes.

For

the

quarter

and

six-month

period

ended

June

30,

2023,

the

Corporation

had

net

income

of

$70.7

million

($0.39

per

diluted

common

share)

and

$141.4

million

($0.78

per

diluted

common

share),

respectively,

compared

to

$74.7

million

($0.38

per

diluted

common

share)

and

$157.3

million

($0.80

per

diluted

common

share),

for

the

comparable

periods

in

2022.

Other

relevant

selected

financial indicators for the periods presented are included below:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

Key Performance Indicator:

(1)

Return on Average

Assets

(2)

1.51

%

1.52

%

1.53

%

1.59

%

Return on Average

Common Equity

(3)

19.66

17.82

20.31

17.18

Efficiency Ratio

(4)

47.83

47.69

48.60

48.25

(1)

These financial ratios are used by management to monitor the Corporation’s

financial performance and whether it is using its assets

efficiently.

(2)

Indicates how profitable the Corporation is in relation to its total assets

and is calculated by dividing net income on an annualized basis

by its average total assets.

(3)

Measures the Corporation’s performance

based on its average stockholders’ equity and is calculated

by dividing net income on an annualized basis by its average

total stockholders’ equity.

(4)

Measures how much the Corporation incurred to generate a

dollar of revenue and is calculated by dividing non-interest expenses

by total revenue.

The key drivers of the Corporation’s

GAAP financial results for the quarter ended

June 30, 2023, compared to the second

quarter of

2022, include the following:

●

Net

interest

income

for

the

quarter

ended

June

30,

2023

increased

to

$199.8

million,

compared

to

$196.2

million

for

the

second

quarter of

2022, mainly

driven by

the effect

in the

commercial

loan

portfolio of

higher

market interest

rates on

the

upward repricing of variable-rate

loans and on new

loan originations, the growth

in consumer loans, and

the impact of higher

market interest rates on

interest-bearing cash balances, partially

offset by an increase

in interest expense mainly

due to higher

rates paid on interest-bearing deposits.

See "Net Interest Income" below for additional information.

●

The provision for credit

losses on loans, finance

leases, unfunded loan commitments

and debt securities for the

quarter ended

June

30,

2023 was

$22.2

million,

compared

to $10.0

million

for

the second

quarter of

2022.

The increase

in the

provision

expense reflects

a $9.9

million increase

in the

provision for

the commercial

and construction

loan portfolio

resulting from

a

deterioration in the forecasted commercial real estate price index (“CRE price

index”).

Net charge-offs

totaled $19.3 million

for the quarter

ended June 30,

2023, or 0.67%

of average loans

on an annualized

basis,

compared to $6.0 million,

or 0.21% of average

loans,

for the second quarter

of 2022, mainly driven

by a $6.2 million charge-

off

recorded

on

a commercial

and

industrial

participated

loan

in

the

Florida

region

in

the power

generation

industry

and a

$6.1 million

increase in

consumer

loans net

charge-offs.

See “Provision

for

Credit Losses”

and

“Risk Management”

below

for analyses of the ACL and non-performing assets and related ratios.

●

The

Corporation

recorded

non-interest

income

of

$36.3

million

for

the

quarter

ended

June

30,

2023,

compared

to

$30.9

million

for

the

second

quarter

of

2022.

Non-interest

income

for

the

second

quarter

of

2023

includes

a

$3.6

million

gain

recognized

from

a

legal

settlement

and

the

$1.6

million

gain

on

the

repurchase

of

$21.4

million

in

junior

subordinated

debentures.

On

a

non-GAAP

basis,

excluding

the

effect

of

these

Special

Items

(as

defined

below),

adjusted

non-interest

income

increased

by

$0.2

million.

See

“Non-Interest

Income”

and

“Non-GAAP

Financial

Measures

and

Reconciliations”

below for additional information.

●

Non-interest expenses

for the quarter

ended June

30, 2023

increased by $4.6

million to $112.9

million. The

increase in non-

interest

expenses

mainly

reflects

a

$3.0

million

increase

in

employees’

compensation

and

benefits

expenses

due

to

annual

salary

merit

increases

as

well

as

higher

stock-based

compensation

expense

and

medical

insurance

premium

costs.

The

efficiency ratio

for the

second quarter

of 2023

was 47.83%,

as compared

to 47.69%

for the

same period

in 2022.

On a

non-

82

GAAP basis,

excluding

the

aforementioned

Special Items

,

the adjusted

efficiency

ratio for

the second

quarter of

2023 was

48.91%.

See

“Non-Interest

Expenses”

and

“Non-GAAP

Financial

Measures

and

Reconciliations”

below

for

additional

information.

●

Income tax expense decreased to

$30.3 million for the second quarter of

2023, compared to $34.1 million for

the same period

in 2022 driven

by a lower

pre-tax income

and a higher

proportion of exempt

to taxable income

resulting in

a lower effective

tax rate. The Corporation’s

estimated effective tax rate,

excluding entities with pre-tax losses from

which a tax benefit cannot

be recognized

and discrete

items, decrease

d

to 30.1

%

for

the first

six months

of 2023,

compared

to 31.7%

for

the first

six

months of 2022.

See “Income Taxes”

below and Note

17 – Income

Taxes,

to the unaudited

consolidated financial statements

herein for additional information.

●

As of

June 30,

2023, total

assets were

approximately

$19.2 billion,

an increase

of $518.0

million from

December 31,

2022,

primarily

due

to

a

$567.0

million

increase

in

cash

and

cash

equivalents

mainly

attributable

to

the

overall

increase

in

total

deposits,

and

a

$168.5

million

increase

in

total

loans,

partially

offset

by

a

$186.3

million

decrease

in

total

investment

securities. See “Financial Condition and Operating Data Analysis” below for

additional information.

●

As

of

June

30,

2023,

total

liabilities

were

$17.8

billion,

an

increase

of

$445.5

million

from

December

31,

2022,

mainly

driven

by

the

overall

increase

in

total

deposits,

including

brokered

CDs,

partially

offset

by

a

$198.3

million

decrease

in

borrowings.

See

“Risk

Management

–

Liquidity

Risk”

below

for

additional

information

about

the

Corporation’s

funding

sources and strategy.

●

The Bank’s

primary sources of funding

are consumer and commercial

core deposits, which exclude

government deposits and

brokered certificates of deposit (“CDs”). As of June 30, 2023,

these core deposits, amounting to $13.0 billion, funded 67.99%

of total

assets. Approximately

$4.7 billion,

or 28.79%

of such deposits,

are uninsured

deposits. In

addition to

approximately

$3.2 billion

in cash

and free

high quality

liquid assets,

the Bank

maintains borrowing

capacity at

the FHLB

and the

FED’s

Discount

Window.

As

of

June

30,

2023,

the

Corporation

had

approximately

$1.4

billion

available

for

funding

under

the

FED’s

Discount

Window

and $980.9

million available

for additional

borrowing

capacity on

FHLB lines

of credit

based on

collateral pledged

at these

entities. On

a combined

basis, as

of June

30, 2023,

the Corporation

had $5.6

billion available

to

meet

liquidity

needs.

See

“Risk

Management

–

Liquidity

Risk”

below

for

additional

information

about

the

Corporation’s

funding sources and strategy.

●

As

of

June

30,

2023,

the

Corporation’s

total

stockholders’

equity

was

$1.4

billion,

an

increase

of

$72.5

million

from

December 31,

2022. The

increase was driven

by the earnings

generated in

the first half

of 2023 and

a $32.4 million

increase

in

the

fair

value

of

available-for-sale

debt

securities

recorded

as

part

of

accumulated

other

comprehensive

loss

in

the

consolidated statements of financial condition

as a result of changes in market

interest rates. This increase was partially offset

by $50.7 million

in dividends declared

to common stock

shareholders during

the first six

months of 2023

and the repurchase

of

approximately

3.6

million

shares

of

common

stock

for

a

total

purchase

price

of

approximately

$50.0

million.

The

Corporation’s

CET1

capital,

tier

1

capital,

total

capital,

and

leverage

ratios

were

16.64%,

16.64%,

19.15%,

and

10.73%,

respectively,

as

of

June

30,

2023,

compared

to

CET1

capital,

tier

1

capital,

total

capital,

and

leverage

ratios

of

16.53%,

16.53%,

19.21%,

and

10.70%,

respectively,

as

of

December

31,

2022.

See

“Risk

Management

–

Capital”

below

for

additional information.

●

Total

loan

production,

including

purchases,

refinancings,

renewals,

and

draws

from

existing

revolving

and

non-revolving

commitments, decreased

by $274.9 million

to $1.2 billion

for the quarter

ended June 30,

2023. See “Financial

Condition and

Operating Data Analysis” below for additional information.

●

Total

non-performing assets

were $121.1

million as

of June

30, 2023,

a decrease

of $8.1

million, from

December 31,

2022.

The

net

decrease

was

driven

by

a

$9.5

million

reduction

in

nonaccrual

residential

mortgage

loans

mainly

due

to

loans

restored to

accrual status, partially

offset by

a $1.5 million

increase in nonaccrual

consumer loans.

See “Risk Management

–

Nonaccrual Loans and Non-Performing Assets” below for additional information.

●

Adversely

classified

commercial

and

construction

loans

decreased

by

$27.9

million

to

$65.7

million

as

of

June

30,

2023,

compared to

December 31, 2022,

mainly driven by

the payoff of

a $24.3 million

commercial and

industrial participated loan

in the Florida region in the leisure and hospitality industry.

83

NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS

The Corporation

has included

in this

Quarterly Report

on Form

10-Q (“Form

10-Q”) the

following financial

measures that

are not

recognized under GAAP,

which are referred to as non-GAAP financial measures:

Net Interest Income,

Interest Rate Spread,

and Net Interest Margin, Excluding

Valuations

,

and on a Tax

-Equivalent Basis

Net interest

income, interest

rate spread,

and net

interest margin,

excluding the

changes in

the fair

value of

derivative instruments

and on

a tax-equivalent

basis, are

reported in

order to

provide to

investors additional

information about

the Corporation’s

net interest

income

that management

uses and

believes should

facilitate comparability and

analysis of

the periods

presented.

The changes

in the

fair value

of derivative

instruments have

no effect

on interest

due or

interest earned

on interest-bearing

liabilities or

interest-earning

assets, respectively.

The tax-equivalent

adjustment to

net interest

income recognizes

the income

tax savings

when comparing

taxable

and

tax-exempt

assets

and

assumes

a

marginal

income

tax

rate.

Income

from

tax-exempt

earning

assets

is

increased

by

an

amount

equivalent to

the taxes

that would

have been

paid if

this income

had been

taxable at

statutory rates.

Management believes

that it

is a

standard

practice

in

the banking

industry

to

present

net

interest

income,

interest

rate

spread,

and

net

interest

margin

on

a

fully

tax-

equivalent basis. This adjustment

puts all earning assets, most notably

tax-exempt securities and tax-exempt

loans, on a common basis

that facilitates comparison of results to the results of peers.

See “Result of Operations

– Net Interest Income”

below, for

the table that reconciles

net interest income

in accordance with GAAP

to

the

non-GAAP

financial

measure

of

net

interest

income,

excluding

valuations,

and

on

a

tax-equivalent

basis

for

the

indicated

periods. The table also reconciles

net interest spread and

net interest margin on

a GAAP basis to these items

excluding valuations, and

on a tax-equivalent basis.

Tangible

Common Equity Ratio and Tangible

Book Value

Per Common Share

The tangible

common equity

ratio and

tangible book

value per

common share

are non-GAAP

financial measures

that management

believes are generally

used by the financial

community to evaluate

capital adequacy.

Tangible

common equity is total

common equity

less

goodwill

and

other

intangibles.

Similarly,

tangible

assets

are

total

assets

less

goodwill

and

other

intangibles.

Management

and

many

stock

analysts

use

the

tangible

common

equity

ratio

and

tangible

book

value

per

common

share

in

conjunction

with

more

traditional bank capital

ratios to compare

the capital adequacy

of banking organizations

with significant

amounts of goodwill

or other

intangible assets,

typically stemming

from the

use of

the purchase

method of

accounting for

mergers

and acquisitions.

Accordingly,

the Corporation

believes that

disclosures of

these financial

measures may

be useful to

investors. Neither

tangible common

equity nor

tangible assets, or the related measures,

should be considered in isolation or

as a substitute for stockholders’ equity,

total assets, or any

other measure

calculated in

accordance with

GAAP.

Moreover,

the manner

in which

the Corporation

calculates its

tangible common

equity, tangible assets, and

any other related measures may differ from that of other companies reporting

measures with similar names.

See “Risk

Management –

Capital” below

for the

table that

reconciles the

Corporation’s

total equity

and total

assets in

accordance

with GAAP to

the tangible common

equity and tangible

assets figures used

to calculate the

non-GAAP financial measures

of tangible

common equity ratio and tangible book value per common share.

Adjusted Net Income,

Adjusted Non-Interest Income, and Adjusted Efficiency

Ratio

To

supplement the

Corporation’s

financial statements

presented in

accordance with

GAAP,

the Corporation

uses, and believes

that

investors

benefit from

disclosure

of, non-GAAP

financial measures

that reflect

adjustments to

net income,

non-interest income,

and

the efficiency ratio

to exclude items that management

believes are not reflective

of core operating performance

(“Special Items”). The

financial results for

the quarter and

six-month period ended

June 30, 2022

did not include any

significant Special Items.

The financial

results for the quarter and six-month period ended June 30, 2023

included the following Special Items:

Quarter and Six-Month Period Ended June 30, 2023

-

A

$3.6

million

($2.3

million

after-tax)

gain

recognized

from

a

legal

settlement

reflected

in

the

consolidated

statements

of

income as part of other non-interest income.

-

A

$1.6

million

gain

on

the

repurchase

of

$21.4

million

in

junior

subordinated

debentures

reflected

in

the

consolidated

statements

of

income

as

“Gain

on

early

extinguishment

of

debt.”

The

junior

subordinated

debentures

are

reflected

in

the

consolidated statements

of financial condition

as “Other long-term

borrowings.” The

purchase price

equated to

92.5% of the

$21.4

million

par

value

of

the

TRuPs.

The

7.5%

discount

resulted

in

the

gain

of

$1.6

million.

The

gain,

realized

at

the

holding company level, had no effect on the income tax expense in 2023.

84

The following

table reconciles

for

the quarter

and six-month

period ended

June 30,

2023 the

reported

net income

to adjusted

net

income, a non-GAAP financial measure that excludes the Special Items identified

above:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2023

(In thousands)

Net income, as reported (GAAP)

$

70,655

$

141,353

Adjustments:

Gain recognized from a legal settlement

(3,600)

(3,600)

Gain on early extinguishment of debt

(1,605)

(1,605)

Income tax impact of adjustments

(1)

1,350

1,350

Adjusted net income (Non-GAAP)

$

66,800

$

137,498

(1)

See "Adjusted Net Income, Adjusted Non-Interest Income, and

Adjusted Efficiency Ratio" above for the individual tax

impact related to the above adjustments, which were

based on the

Puerto Rico statutory tax rate of 37.5%, as applicable.

85

RESULTS

OF OPERATIONS

Net Interest Income

Net interest

income is

the excess of

interest earned

by First BanCorp.

on its interest-earning

assets over

the interest

incurred on its

interest-bearing

liabilities.

First

BanCorp.’s

net

interest

income

is

subject

to

interest

rate

risk

due

to

the

repricing

and

maturity

mismatch

of

the

Corporation’s

assets

and

liabilities.

In

addition,

variable

sources

of

interest

income,

such

as

loan

fees,

periodic

dividends, and

collection of

interest in

nonaccrual loans,

can fluctuate

from period

to period.

Net interest

income for

the quarter

and

six-month period

ended June

30, 2023

was $199.8

million and

$400.7 million,

respectively,

compared to

$196.2 million

and $381.8

million

for

the

comparable

periods

in

2022.

On

a

tax-equivalent

basis

and

excluding

the

changes

in

the

fair

value

of

derivative

instruments,

net

interest

income

for

the

quarter

and

six-month

period

ended

June

30,

2023

was

$205.4

million

and

$412.6

million,

respectively, compared

to $205.6 million and $398.4 million for the comparable periods in 2022.

The

following

tables

include a

detailed

analysis

of net

interest income

for

the indicated

periods.

Part I

presents

average volumes

(based

on

the

average

daily

balance)

and

rates

on

an

adjusted

tax-equivalent

basis

and

Part

II

presents,

also

on

an

adjusted

tax-

equivalent basis,

the extent

to which

changes in

interest rates

and changes

in the

volume of

interest-related assets

and liabilities

have

affected

the Corporation’s

net interest

income. For

each category

of interest-earning

assets and

interest-bearing

liabilities, the

tables

provide

information

on

changes

in

(i)

volume

(changes

in

volume

multiplied

by

prior

period

rates),

and

(ii)

rate

(changes

in

rate

multiplied by

prior period

volumes). The

Corporation has

allocated rate-volume

variances (changes

in rate

multiplied by

changes in

volume) to either the changes in volume or the changes in rate based upon the

effect of each factor on the combined totals.

Net

interest

income

on

an

adjusted

tax

equivalent

basis and

excluding

the

change

in

the fair

value

of derivative

instruments

is a

non-GAAP

financial

measure.

For

the

definition

of

this

non-GAAP

financial

measure,

refer

to

the

discussion

in

“Non-GAAP

Measures and Reconciliations” above.

Part I

Average volume

Interest income

(1)

/ expense

Average rate

(1)

Quarter ended June 30,

2023

2022

2023

2022

2023

2022

(Dollars in thousands)

Interest-earning assets:

Money market and other short-term investments

$

617,356

$

1,530,353

$

7,880

$

2,873

5.12

%

0.75

%

Government obligations

(2)

2,909,204

2,922,226

10,973

10,090

1.51

%

1.38

%

MBS

3,757,425

4,081,573

17,087

22,804

1.82

%

2.24

%

FHLB stock

36,265

21,275

780

251

8.63

%

4.73

%

Other investments

13,739

12,595

58

12

1.69

%

0.38

%

Total investments

(3)

7,333,989

8,568,022

36,778

36,030

2.01

%

1.69

%

Residential mortgage loans

2,808,465

2,891,403

39,864

40,573

5.69

%

5.63

%

Construction loans

149,783

124,070

2,903

1,768

7.77

%

5.72

%

Commercial and industrial ("C&I") and commercial mortgage loans

5,191,040

5,054,223

89,290

64,500

6.90

%

5.12

%

Finance leases

769,316

617,399

14,714

11,410

7.67

%

7.41

%

Consumer loans

2,672,912

2,415,215

74,192

63,724

11.13

%

10.58

%

Total loans

(4)(5)

11,591,516

11,102,310

220,963

181,975

7.65

%

6.57

%

Total interest-earning assets

$

18,925,505

$

19,670,332

$

257,741

$

218,005

5.46

%

4.45

%

Interest-bearing liabilities:

Time deposits

$

2,511,504

$

2,202,228

$

15,667

$

3,838

2.50

%

0.70

%

Brokered certificates of deposit ("CDs")

333,557

76,790

3,761

404

4.52

%

2.11

%

Other interest-bearing deposits

7,517,995

8,704,448

22,176

3,452

1.18

%

0.16

%

Securities sold under agreements to repurchase

101,397

200,000

1,328

1,972

5.25

%

3.95

%

Advances from the FHLB

534,231

200,000

6,048

1,075

4.54

%

2.16

%

Other long-term borrowings

177,701

183,762

3,409

1,698

7.69

%

3.71

%

Total interest-bearing liabilities

$

11,176,385

$

11,567,228

$

52,389

$

12,439

1.88

%

0.43

%

Net interest income on a tax-equivalent basis and excluding

valuations - non-GAAP

$

205,352

$

205,566

Interest rate spread

3.58

%

4.01

%

Net interest margin

4.35

%

4.19

%

86

Part I

Average volume

Interest income

(1)

/ expense

Average rate

(1)

Six-Month Period Ended June 30,

2023

2022

2023

2022

2023

2022

(Dollars in thousands)

Interest-earning assets:

Money market and other short-term investments

$

511,392

$

1,682,216

$

12,530

$

3,693

4.94

%

0.44

%

Government obligations

(2)

2,909,587

2,829,675

21,738

18,322

1.51

%

1.31

%

MBS

3,810,491

4,061,883

36,483

42,224

1.93

%

2.10

%

FHLB stock

38,539

21,370

1,201

538

6.28

%

5.08

%

Other investments

13,441

12,193

197

33

2.96

%

0.55

%

Total investments

(3)

7,283,450

8,607,337

72,149

64,810

2.00

%

1.52

%

Residential mortgage loans

2,821,779

2,926,236

79,658

81,260

5.69

%

5.60

%

Construction loans

147,923

119,427

5,579

3,292

7.61

%

5.56

%

C&I and commercial mortgage loans

5,179,448

5,078,910

175,175

126,504

6.82

%

5.02

%

Finance leases

752,501

602,880

28,523

22,322

7.64

%

7.47

%

Consumer loans

2,654,008

2,377,118

145,406

124,875

11.05

%

10.59

%

Total loans

(4)(5)

11,555,659

11,104,571

434,341

358,253

7.58

%

6.51

%

Total interest-earning assets

$

18,839,109

$

19,711,908

$

506,490

$

423,063

5.42

%

4.33

%

Interest-bearing liabilities:

Time deposits

$

2,427,399

$

2,282,192

$

26,449

$

8,259

2.20

%

0.73

%

Brokered CDs

250,588

84,210

5,348

881

4.30

%

2.11

%

Other interest-bearing deposits

7,531,374

8,419,880

39,692

6,206

1.06

%

0.15

%

Securities sold under agreements to repurchase

96,229

220,442

2,397

4,154

5.02

%

3.80

%

Advances from the FHLB

581,436

200,000

13,224

2,138

4.59

%

2.16

%

Other long-term borrowings

180,715

183,762

6,790

3,031

7.58

%

3.33

%

Total interest-bearing liabilities

$

11,067,741

$

11,390,486

$

93,900

$

24,669

1.71

%

0.44

%

Net interest income on a tax-equivalent basis and excluding

valuations - non-GAAP

$

412,590

$

398,394

Interest rate spread

3.71

%

3.89

%

Net interest margin

4.42

%

4.08

%

(1)

On an adjusted tax-equivalent basis. The Corporation estimated the

adjusted tax-equivalent yield by dividing the interest rate

spread on exempt assets by 1 less the Puerto Rico statutory

tax rate of 37.5% and adding to it the cost of interest-bearing liabilities.

The tax-equivalent adjustment recognizes the income tax savings when

comparing taxable and tax-exempt assets.

Management believes that it is a standard practice in the banking industry

to present net interest income, interest rate spread and net

interest margin on a fully tax-equivalent basis.

Therefore, management believes these measures provide useful information

to investors by allowing them to make peer comparisons.

The Corporation excludes changes in the fair value

of derivatives from interest income and interest expense

because the changes in valuation do not affect interest received

or paid. See "Non-GAAP Financial Measures and

Reconciliations"

below.

(2)

Government obligations include debt issued by government-sponsored

agencies.

(3)

Unrealized gains and losses on available-for-sale debt securities

are excluded from the average volumes.

(4)

Average loan balances include

the average of nonaccrual loans.

(5)

Interest income on loans includes $2.9 million and $3.0 million for

the quarters ended June 30, 2023 and 2022, respectively,

and $6.0 million and $5.6 million for the six-month periods

ended June 30, 2023 and 2022, respectively,

of income from prepayment penalties and late fees related to the Corporation’s

loan portfolio.

87

Part II

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023 Compared to 2022

2023 Compared to 2022

Variance due to:

Variance due to:

Volume

Rate

Total

Volume

Rate

Total

(In thousands)

Interest income on interest-earning assets:

Money market and other short-term investments

$

(6,709)

$

11,716

$

5,007

$

(15,795)

$

24,632

$

8,837

Government obligations

(48)

931

883

530

2,886

3,416

MBS

(1,710)

(4,007)

(5,717)

(2,523)

(3,218)

(5,741)

FHLB stock

244

285

529

511

152

663

Other investments

1

45

46

4

160

164

Total investments

(8,222)

8,970

748

(17,273)

24,612

7,339

Residential mortgage loans

(1,173)

464

(709)

(2,943)

1,341

(1,602)

Construction loans

415

720

1,135

899

1,388

2,287

C&I and commercial mortgage loans

1,790

23,000

24,790

2,551

46,120

48,671

Finance leases

2,893

411

3,304

5,660

541

6,201

Consumer loans

7,037

3,431

10,468

15,003

5,528

20,531

Total loans

10,962

28,026

38,988

21,170

54,918

76,088

Total interest income

$

2,740

$

36,996

$

39,736

$

3,897

$

79,530

$

83,427

Interest expense on interest-bearing liabilities:

Time deposits

$

1,234

$

10,595

$

11,829

$

558

$

17,632

$

18,190

Brokered CDs

2,502

855

3,357

2,927

1,540

4,467

Other interest-bearing deposits

(953)

19,677

18,724

(2,830)

36,316

33,486

Securities sold under agreements to repurchase

(1,132)

488

(644)

(2,733)

976

(1,757)

Advances from the FHLB

2,992

1,981

4,973

6,967

4,119

11,086

Other borrowings

(86)

1,797

1,711

(99)

3,858

3,759

Total interest expense

4,557

35,393

39,950

4,790

64,441

69,231

Change in net interest income

$

(1,817)

$

1,603

$

(214)

$

(893)

$

15,089

$

14,196

Portions of the Corporation’s

interest-earning assets, mostly investments

in obligations of some U.S.

government agencies and U.S.

government-sponsored

entities (“GSEs”),

generate interest

that is

exempt from

income tax,

principally in

Puerto Rico.

Also, interest

and gains

on sales of

investments held by

the Corporation’s

international banking

entities (“IBEs”) are

tax-exempt under

Puerto Rico

tax

law

(see

Note

17

-

Income

Taxes,

to

the

unaudited

consolidated

financial

statements

herein

for

additional

information).

Management

believes

that

the

presentation

of

interest

income

on

an

adjusted

tax-equivalent

basis

facilitates

the

comparison

of

all

interest data

related to

these assets. The

Corporation estimated

the tax

equivalent yield

by dividing

the interest

rate spread

on exempt

assets

by

1

less

the

Puerto

Rico

statutory

tax

rate

(37.5%)

and

adding

to

it

the

average

cost

of

interest-bearing

liabilities.

The

computation considers the interest expense disallowance required

by Puerto Rico tax law.

Management

believes

that

the

presentation

of

net

interest

income,

excluding

the

effects

of

the

changes

in

the

fair

value

of

the

derivative

instruments,

provides additional

information about

the Corporation’s

net interest

income and

facilitates comparability

and

analysis from

period to

period. The

changes in

the fair

value of

the derivative

instruments have

no effect

on interest

due on

interest-

bearing liabilities or interest earned on interest-earning assets.

88

The following

table reconciles

net interest

income in

accordance with

GAAP to

net interest

income, excluding

valuations, and

net

interest

income

on

an

adjusted

tax-equivalent

basis

for

the

indicated

periods.

The

table

also

reconciles

net

interest

spread

and

net

interest margin on a GAAP basis to these items excluding valuations, and

on an adjusted tax-equivalent basis:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(Dollars in thousands)

Interest income - GAAP

$

252,204

$

208,625

$

494,600

$

406,479

Unrealized (gain) loss on derivative instruments

(3)

(9)

3

(24)

Interest income excluding valuations - non-GAAP

252,201

208,616

494,603

406,455

Tax-equivalent adjustment

5,540

9,389

11,887

16,608

Interest income on a tax-equivalent basis

and excluding valuations - non-GAAP

$

257,741

$

218,005

$

506,490

$

423,063

Interest expense - GAAP

$

52,389

$

12,439

$

93,900

$

24,669

Net interest income - GAAP

$

199,815

$

196,186

$

400,700

$

381,810

Net interest income excluding valuations - non-GAAP

$

199,812

$

196,177

$

400,703

$

381,786

Net interest income on a tax-equivalent basis

and excluding valuations - non-GAAP

$

205,352

$

205,566

$

412,590

$

398,394

Average Balances

Loans and leases

$

11,591,516

$

11,102,310

$

11,555,659

$

11,104,571

Total securities, other short-term investments and interest-bearing

cash balances

7,333,989

8,568,022

7,283,450

8,607,337

Average Interest-Earning Assets

$

18,925,505

$

19,670,332

$

18,839,109

$

19,711,908

Average Interest-Bearing Liabilities

$

11,176,385

$

11,567,228

$

11,067,741

$

11,390,486

Average Yield/Rate

Average yield on interest-earning assets - GAAP

5.35%

4.25%

5.29%

4.16%

Average rate on interest-bearing liabilities - GAAP

1.88%

0.43%

1.71%

0.44%

Net interest spread - GAAP

3.47%

3.82%

3.58%

3.72%

Net interest margin - GAAP

4.23%

4.00%

4.29%

3.91%

Average yield on interest-earning assets excluding valuations

• non-GAAP

5.35%

4.25%

5.29%

4.16%

Average rate on interest-bearing liabilities

1.88%

0.43%

1.71%

0.44%

Net interest spread excluding valuations

• non-GAAP

3.47%

3.82%

3.58%

3.72%

Net interest margin excluding valuations - non-GAAP

4.23%

4.00%

4.29%

3.91%

Average yield on interest-earning assets on a tax-equivalent

basis and excluding

valuations - non-GAAP

5.46%

4.45%

5.42%

4.33%

Average rate on interest-bearing liabilities

1.88%

0.43%

1.71%

0.44%

Net interest spread on a tax-equivalent basis

and excluding valuations - non-GAAP

3.58%

4.01%

3.71%

3.89%

Net interest margin on a tax-equivalent basis and excluding

valuations - non-GAAP

4.35%

4.19%

4.42%

4.08%

89

Net interest income amounted to

$199.8 million for the quarter

ended June 30, 2023, an increase

of $3.6 million, when compared

to

$196.2 million for same period in 2022. The $3.6 million increase in net

interest income was primarily due to:

●

A $38.8 million increase in interest income on loans including:

-

A $25.5 million increase in interest

income on commercial and construction

loans, of which approximately $24.

4

million

was related

to the

effect of

higher market

interest rates

on the

upward repricing

of variable-rate

loans and

on new

loan

originations,

and

approximately

$2.9

million

was

related

to

the

$229.9

million

increase

in

the

average

balance

of

this

portfolio (excluding

Small Business Administration

Paycheck Protection

Program (“SBA PPP”)

loans). These

variances

were partially

offset by

a reduction

in interest

income from

SBA PPP

loans. The

interest income

recognized from

SBA

PPP loans for the quarters ended June 30, 2023 and 2022, amounted to $0.1

million and $2.0 million, respectively.

As of June 30, 2023, the

interest rate on approximately 54% of

the Corporation’s

commercial and construction loans was

tied to variable

rates, with 29%

based upon LIBOR

or SOFR of

3 months or

less, 13% based

upon the Prime

rate index,

and

12%

based

on

other

indexes.

For

the

second

quarter

of

2023,

the

average

one-month

LIBOR

increased

410

basis

points,

the

average

three-month

LIBOR increased

388

basis points,

the

average

Prime

rate increased

422

basis points,

and the average three-month SOFR increased

382 basis points, compared to the

average rates for such indexes during

the

second quarter of 2022.

-

A $13.8 million increase in interest

income on consumer loans and finance

leases, primarily driven by the $409.6

million

increase in the average balance

of this portfolio, which

increased interest income by approximately

$10.1 million, and an

approximately $3.7 million

increase in interest income

associated with the positive

effects of higher market

interest rates

on new consumer loan originations and the repricing of the credit cards portfolio.

Partially offset by:

-

A $0.5 million

decrease in interest

income on residential

mortgage loans, primarily

related to an

$82.9 million reduction

in

the

average

balance

of this

portfolio,

which

resulted

in an

approximate

decrease

of

$1.1

million

in

interest income,

partially offset by the positive effect of new loan

originations at higher current market interest rates.

●

A

$4.8 million increase in interest income from interest-bearing cash

balances and investment securities, including:

-

A

$5.0

million

increase

in

interest

income

from

interest-bearing

cash

balances,

which

consisted

primarily

of

cash

balances deposited at

the FED, mainly due

to the effect

of higher market interest

rates, partially offset

by the impact of a

$913.0 million decrease in the average volume of interest-bearing

cash balances.

-

A

$1.3

million

increase

in

interest

income

on

Puerto

Rico

municipal

bonds,

mainly

due

to

the

upward

repricing

of

variable-rate bonds.

-

A $0.3

million

increase

in

interest income

on

U.S. government

and

agencies

debt

securities, mainly

driven

by

higher-

yielding securities purchased late in the second quarter of 2022.

-

A $0.5 million increase in dividends received from the FHLB during the second quarter

of 2023.

Partially offset by:

-

A $2.4

million decrease

in interest

income on

U.S. agencies

MBS, of

which $1.5

million was

associated with

a $324.1

million decrease

in the

average balance

of this

portfolio, and

the remaining

variance to

a higher

level of

U.S. agencies’

MBS premium amortization expense associated with changes in anticipated

prepayments.

90

Partially offset by:

●

A $33.9 million increase

in interest expense on interest-bearing deposits, including:

-

An $18.7 million

increase in interest expense

on interest-bearing checking

and saving accounts,

driven by an

increase of

approximately

$20.5

million

associated

with

higher

interest

rates

paid

in

the

second

quarter

of

2023

as

a

result

of

the

overall

higher

interest

rate

environment,

partially

offset

by

a

decrease

of

approximately

$1.8

million

resulting

from

a

$1.2

billion decline

in the

average balance

of these

deposits. The

average

cost of

interest-bearing

checking

and

saving

accounts increased by

102 basis points to

1.18% in the

second quarter of

2023 as compared

to 0.16% in

the same period

in

2022.

Excluding

public

sector

deposits,

the

average

cost

of

interest-bearing

checking

and

saving

accounts

for

the

second quarter of 2023 was 0.67%, compared to 0.17% for the same period

a year ago.

-

An $11.8

million increase

in interest

expense on

time deposits,

excluding brokered

CDs, mainly

associated with

higher

rates

paid

in

the

second

quarter

of

2023

on

new

issuances

and

renewals

also

associated

with

the

higher

interest

rate

environment.

The average

cost of

time deposits

in the

second quarter

of 2023,

excluding brokered

CDs, increased

180

basis points to 2.50% when compared to the same period in 2022

.

-

A $3.4

million increase

in interest

expense on

brokered CDs,

of which

$2.5 million

was associated

with the

increase of

$256.8 million in the average balance.

●

A

$6.0 million net increase in interest expense on borrowings, including:

-

A $5.0

million increase

in interest

expense on

advances from

the FHLB,

of which

$3.0 million

was associated

with an

increase

of

$334.2

million

in

the

average

balance

to

increase

available

cash

as

a

precautionary

measure

in

the

first

quarter of 2023, and $2.0 million was associated with new FHLB advances

at higher interest rates.

-

A

$1.7

million

increase

in

interest

expense

on

other

long-term

borrowings,

driven

by

the

upward

repricing

of

junior

subordinated debentures tied to the increase in the three-month LIBOR index.

-

A

$0.7

million

decrease

in

interest

expense

on

repurchase

agreements,

mainly

driven

by

a

reduction

in

the

average

balance of $98.6 million, partially offset by a higher average cost of

funds in the second quarter of 2023.

91

Net interest

income amounted

to $400.7

million for

the six-month

period ended

June 30, 2023,

an increase

of $18.9

million, when

compared to $381.8 million for same period in 2022. The $18.9 million

increase in net interest income was primarily due to:

●

A $75.7 million increase in interest income on loans including:

-

A $50.1 million increase in

interest income on commercial and

construction loans, of which approximately

$49.5 million

was related

to

the effect

of higher

market

interest

rates

in the

upward repricing

of variable-rate

loans

and

in new

loan

originations,

and

approximately

$5.4

million

was

related

to

the

$220.6

million

increase

in

the

average

balance

of

this

portfolio (excluding

SBA PPP

loans). These

variances were

partially offset

by a

reduction in

interest income

from SBA

PPP

loans.

The

interest

income

recognized

from

SBA

PPP

loans

for

the

six-month

periods

ended

June

30,

2023

and

2022, amounted to $0.3 million and $5.1 million, respectively.

As of June 30, 2023, the

interest rate on approximately 54% of

the Corporation’s

commercial and construction loans was

tied to variable

rates, with 29%

based upon LIBOR

or SOFR of

3 months or

less, 13% based

upon the Prime

rate index,

and

12%

based

on

other

indexes.

For

the

six-month

period

ended

June

30,

2023,

the

average

one-month

LIBOR

increased 424

basis points,

the average

three-month LIBOR

increased 414

basis points,

the average

three-month SOFR

increased 413 basis points,

and the average Prime

rate increased 431 basis points,

compared to the average

rates for such

indexes during the same period of the prior year.

-

A $26.8 million increase in interest

income on consumer loans and finance

leases, primarily driven by the $426.5

million

increase

in the

average

balance of

this portfolio,

which

increased interest

income

by approximately

$20.6

million,

and

the approximately

$6.1 million

increase in

interest income

associated with

the positive

effects of

higher market

interest

rates on new consumer loan originations and the repricing of the credit cards portfolio

.

Partially offset by:

-

A

$1.2

million

decrease

in

interest

income

on

residential

mortgage

loans,

primarily

related

to

the

$104.5

million

reduction in

the average

balance of

this portfolio,

which resulted

in an

approximate

decrease of

$2.7 million

in interest

income,

partially

offset

by

the

positive

effect

of

new

loan

originations

at

higher

current

market

interest

rates,

which

resulted in an approximate increase of $1.6 million in the first six months of

2023.

●

A $8.8

million

increase

in interest

income

from

interest-bearing

cash balances,

which

consisted primarily

of

cash balances

deposited at

the FED,

mainly due

to the

effect of

higher market

interest rates,

partially offset

by the

impact of

a $1.2

billion

decrease in the average balance of interest-bearing cash.

●

A

$3.6 million increase in interest income on investment securities, mainly driven

by:

-

A

$2.7

million

increase

in

interest

income

on

Puerto

Rico

municipal

bonds,

mainly

due

to

the

upward

repricing

of

variable-rate bonds, partially offset by the impact of

a $12.3 million reduction in the average balance.

-

A $1.5

million

increase

in

interest income

on

U.S. government

and

agencies

debt

securities, mainly

driven

by

higher-

yielding securities purchased late in the second quarter of 2022.

-

A $0.8

million increase

in dividend

income from

FHLB stock,

mainly driven

by a

higher average

balance tied

with the

increase in FHLB advances taken as a precautionary measure in the

first quarter of 2023.

Partially offset by:

-

A $1.4

million decrease

in interest

income on

U.S. agencies

MBS, of

which $2.4

million was

associated with

a $251.4

million

decrease

in

the

average

balance

of

this

portfolio,

partially

offset

by

a

$1.0

million

increase

associated

with

a

lower

level

of premium

amortization

expense

due

to changes

in

anticipated

prepayments

and

the positive

effects

from

higher-yielding U.S. agencies MBS purchased in the second quarter of

2022.

92

Partially offset by:

●

A $56.1 million increase in interest expense on interest-bearing deposits, including:

-

A $33.5

million increase

in interest

expense on

interest-bearing checking

and saving

accounts, driven

by an

increase of

approximately

$35.7 million

associated with

higher interest

rates paid

in the

first half

of 2023

as a

result of

the overall

higher interest

rate environment,

partially offset

by a decrease

of approximately

$2.2 million

resulting from

a decline of

approximately $888.5 million in the average balance of these deposits.

-

An $18.1

million increase

in interest

expense on

time deposits,

excluding brokered

CDs, mainly

associated with

higher

rates

paid

in

the

first

half

of

2023

on

new

issuances

and

renewals

also

associated

with

the

higher

interest

rate

environment.

The average

cost of

time deposits

in the

first

half of

2023,

excluding

brokered CDs,

increased

147

basis

points to 2.20% when compared to the same period in 2022.

-

A $4.5

million increase

in interest

expense on

brokered CDs,

of which

$2.9 million

was associated

with the

increase of

$166.4 million in the average balance and $1.6 million was associated to the overall

higher interest rate environment.

●

A $13.1 million net increase in interest expense on borrowings, including:

-

An $11.1

million increase in interest

expense on advances from

the FHLB, of which $7.0

million was associated with

an

increase

of

$381.4

million

in

the

average

balance

to

increase

available

cash

as

a

precautionary

measure

in

the

first

quarter of 2023, and $4.1 million was associated with new FHLB advances

at higher interest rates.

-

A

$3.8

million

increase

in

interest

expense

on

other

long-term

borrowings,

driven

by

the

upward

repricing

of

junior

subordinated debentures tied to the increase in the three-month LIBOR index.

Partially offset by:

-

A

$1.8

million

decrease

in

interest

expense

on

repurchase

agreements,

mainly

driven

by

a

reduction

in

the

average

balance of $124.2 million,

which resulted in an approximate

reduction of $2.7 million in

interest expense, partially offset

by a $0.9

million increase in

interest expense associated

with new short

-term repurchase agreements

entered into during

2023 at higher interest rates.

Net interest

margin for

the second

quarter of

2023 increased

to 4.23%,

compared to

4.00% for

the same

period in

2022, and

by 38

basis

points

to

4.29%

for

the

first

six

months

of

2023,

compared

to

3.91%

for

the

same

period

of

2022.

The

net

interest

margin

increase

primarily

reflects

the

upward

repricing

of

variable-rate

commercial

loans,

the

growth

in

higher

yielding

loans,

primarily

consumer loans, and the change in asset mix, reflecting a higher

proportion of higher-yielding assets in the 2023

periods. These factors

were partially offset by an increase in the average cost of interest-bearing

liabilities.

93

Provision for Credit Losses

The provision

for credit

losses consists of

provisions for

credit losses on

loans and

finance leases,

unfunded loan

commitments, as

well as the debt securities portfolio. The principal changes in the provision for

credit losses by main categories follow:

Provision for credit losses for

loans and finance leases

The provision

for credit

losses for

loans and

finance leases

was $20.8

million for

the second

quarter of

2023, compared

to $12.7

million for the second quarter of 2022. The variances by major portfolio

category were as follows:

●

Provision

for

credit

losses

for

the

commercial

and

construction

loan

portfolio

was

$10.2

million

for

the

second

quarter

of

2023,

compared to

$0.3 million

for the

second quarter

of 2022.

The expense

recognized during

the second

quarter of

2023

was mainly due to a deterioration in the forecasted CRE price index and the

increase in size of this portfolio.

●

Provision

for

credit

losses for

the

consumer

loans

and finance

leases portfolio

was

$14.1

million

for

the second

quarter

of

2023,

compared

to

$15.2

million

for

the

second

quarter

of

2022.

The

decrease

was

primarily

related

to

updates

in

macroeconomic variables, such as the unemployment rate.

●

Provision for

credit losses for

the residential

mortgage loan portfolio

was a net

benefit of $3.5

million for the

second quarter

of

2023,

compared

to

a net

benefit

of

$2.8

million

for

the second

quarter

of 2022.

The higher

net

benefit

recorded

for the

second quarter of 2023

was primarily related to updates in the projection

of certain forecasted macroeconomic variables, such

as the Regional Home Price Index.

The provision for credit losses

for loans and finance leases was an

expense of $37.0 million for

the first half of 2023, compared to

a

net benefit of $4.3 million for the same period in 2022. The variances by major

portfolio category were as follows:

●

Provision

for credit

losses for

the commercial

and

construction loan

portfolio

was an

expense of

$10.7

million for

the first

half of 2023, compared

to a net benefit

of $22.8 million for

the same period of

2022. The expense

recognized during the first

half

of

2023

was mainly

due

to

a

deterioration

in the

forecasted

CRE price

index,

a

$6.2

million

charge

associated

with

a

nonaccrual commercial

and industrial participated

loan in the Florida

region in the

power generation industry

and, to a

lesser

extent, portfolio growth.

Meanwhile, the net benefit recorded during the

first six months of 2022 mainly reflects reductions

in

qualitative

reserves

associated

with

reduced

COVID-19

uncertainties,

partially

offset

by

reserve

builds

related

to

uncertainties regarding the macroeconomic outlook.

●

Provision

for

credit losses

for

the

residential

mortgage

loan portfolio

was a

net

benefit

of $3.4

million

for

the

first half

of

2023,

compared to

a net

benefit of

$7.7 million

for the

same period

of 2022.

The net

benefit recorded

for both

periods was

primarily related to

a continued favorable

economic outlook in

the projection of

certain forecasted macroeconomic

variables,

such as the Regional Home Price Index.

●

Provision

for

credit losses

for

the consumer

loans and

finance leases

portfolio

was $29.7

million

for

the first

half of

2023,

compared

to

$26.2

million

for

the

same

period

of

2022.

The

increase

primarily

reflects

the

increase

in

the

size

of

the

consumer

loan

portfolios

and

the

increase

in

historical

charge-off

levels

in

all

major

portfolio

classes,

partially

offset

by

updates in macroeconomic variables, such as the unemployment rate.

94

Provision for credit losses for

unfunded loan commitments

The provision

for credit losses

for unfunded

commercial and construction

loan commitments and

standby letters of

credit was $0.7

million

and

$0.6

million

for

the second

quarter

and

the

first half

of

2023,

respectively,

compared

to $0.8

million

and

$0.7

million,

respectively, for the

same periods in 2022.

Provision for credit losses for

held-to-maturity and available-for-sale debt

securities

The provision for credit losses

for held-to-maturity debt securities was

$0.8 million and $0.1 million

for the second quarter and first

half of 2023, respectively,

compared to a net benefit

of $3.4 million and an

expense of $0.3 million,

respectively, for

the same periods

of

2022.

The

increase

in

the

provision

recorded

during

the

second

quarter

and

the

first

half

of

2023

was

mostly

driven

by

higher

exposure risk associated with the rising interest rate environment.

The

provision

for

credit

losses

for

available-for-sale

debt

securities

was

a

net

benefit

of

$16

thousand

and

$25

thousand

for

the

second quarter

and first

half of

2023, respectively,

compared to

a net

benefit of

$35 thousand

and $0.4

million, respectively,

for the

same periods in 2022.

95

Non-Interest Income

Non-interest

income amounted

to $36.3

million for

the second

quarter of

2023, compared

to $30.9

million for

the same

period in

2022.

Non-interest income

for the second

quarter of

2023 includes the

$3.6 million

gain recognized

from a legal

settlement,

included

as part

of other

non-interest income

,

and the

$1.6 million

gain on

the repurchase

of $21.4

million in

junior subordinated

debentures,

included as part of gain on early extinguishment of debt.

See “Non-GAAP Financial Measures and Reconciliations” in this MD&A for

further information. On a non-GAAP basis, excluding the effect

of these Special Items, adjusted non-interest income increased by

$0.2

million primarily due to:

●

A $1.0

million

net increase

in adjusted

other non

-interest income

including:

(i) a

$0.8 million

benefit

recognized

during

the second

quarter of

2023

in relation

to purchased

income tax

credits realized;

(ii) $0.3

million

in debit

card incentives

collected during

the second

quarter of

2023; (iii)

a $0.3

million increase

related to

higher unused

loan commitment

fees;

and (v) a $0.6 million decrease in net gains on fixed assets.

●

A $0.8

million

increase

in card

and

processing

income

mainly

related

to higher

interchange

income

received

during

the

second quarter of 2023.

Partially offset by:

●

A $1.2 million decrease

in revenues from mortgage

banking activities, mainly driven

by a decrease in

the net realized gain

on sales

of residential

mortgage loans

in the

secondary market

due to

a lower

volume of

sales and

lower margins.

During

the second quarters of

2023 and 2022, net realized

gains of $0.9 million

and $2.2 million, respectively,

were recognized as

a

result

of

GNMA

securitization

transactions

and

whole

loan

sales to

U.S.

GSEs

amounting

to

$51.8

million

and

$64.2

million, respectively.

●

A $0.2 million decrease in insurance commission income.

●

A$0.2 million decrease in service in charges and fees on deposits accounts

.

Non-interest

income for

the six-month

period ended

June 30,

2023 amounted

to $68.8

million, compared

to $63.8

million for

the

same period

in 2022.

On a

non-GAAP basis,

excluding the

effect of

the aforementioned

Special Items,

adjusted non-interest

income

decreased by $0.2 million primarily due to:

●

A $3.6 million decrease

in revenues from mortgage

banking activities, mainly driven

by a decrease in

the net realized gain

on sales

of residential

mortgage loans

in the

secondary market

due to

a lower

volume of

sales and

lower margins.

During

the first six months

of 2023 and

2022, net gains

of $2.0 million

and $5.7 million,

respectively,

were recognized as

a result

of GNMA

securitization transactions

and whole

loan sales

to U.S.

GSEs amounting

to $89.2

million and

$158.1 million,

respectively.

●

A

$0.6

million

decrease

in

insurance

commission

income,

mainly

due

to

lower

contingent

commissions

recognized

in

2023.

Partially offset by:

●

A

$2.1

million

increase

in

card

and

processing

income

mainly

related

to

higher

interchange

income

during

the

first

six

months of 2023.

●

A $1.9

million

net

increase

in

adjusted

other

non-interest

income

including:

(i)

a $1.0

million

increase

related

to higher

benefit recognized in relation to

purchased income tax credits realized

;

(ii) a $0.6

million increase related to higher

unused

loan commitment

fees; (iii)

$0.3 million

in debit

card incentives

collected during

the second

quarter of

2023; (iv)

a $0.3

million

increase

in

unrealized

gains

on

marketable

equity

securities;

and

(v)

a

$0.2

million

increase

in

fees

and

commissions from insurance referrals;

partially offset by a $0.7 million decrease in net gains on fixed

assets.

96

Non-Interest Expenses

Non-interest

expenses for

the quarter

ended June

30, 2023

amounted

to $112.9

million, compared

to $108.3

million for

the same

period in

2022. The

efficiency ratio

for the

second quarter of

2023 was

47.83%, compared

to 47.69% for

the second

quarter of

2022.

On a

non-GAAP basis,

excluding the

aforementioned Special

Items,

the adjusted

efficiency ratio

for the

second quarter

of 2023

was

48.91%. The $4.6 million increase in non-interest expenses was primarily due

to:

●

A

$3.0

million

increase

in

employees’

compensation

and

benefits

expenses,

mainly

driven

by

annual

salary

merit

increases,

higher stock-based compensation expense, and higher medical insurance

premium costs.

●

A

$1.0

million

increase

in

other

non-interest

expenses,

in

part

due

to

an

increase

in

charges

for

legal

and

operational

reserves and an increase of $0.5 million in net periodic cost of pension plans.

●

A

$0.7 million increase in credit and debit card processing fees, mainly

due to higher credit card assessment fees.

●

A

$0.6 million

increase in

the FDIC deposit

insurance expense,

driven by

the two basis

points increase

on the initial

base

deposit insurance assessment rate that came into effect during the

first quarter of 2023.

●

A $0.4 million increase in taxes, other than income taxes, primarily related

to higher license fees.

Partially offset by:

●

A

$0.5 million

increase in

net gains

on OREO

operations,

mainly driven

by an

increase in

net realized

gains on

sales of

OREO properties, primarily residential properties in the Puerto Rico region

.

●

A

$0.4

million

decrease

in

occupancy

and

equipment

expenses,

primarily

reflecting

reductions

in

depreciation

charges,

energy costs, and maintenance charges.

●

A $0.4 million decrease in professional service fees, mainly due

to a decrease in outsourced technology service fees.

Non-interest expenses for

the first six months

of 2023 amounted

to $228.2 million, compared

to $215.0 million for

the same period

in 2022.

The efficiency ratio

for the first

six months of

2023 was 48.60%,

compared to 48.25%

for the first

six months of

2022. On a

non-GAAP

basis,

excluding

the

aforementioned

Special

Items,

the

adjusted

efficiency

ratio

for

the

first

six

months

of

2023

was

49.15%. The $13.2 million increase in non-interest expenses was primarily

due to:

●

A

$9.9 million increase in employees’

compensation and benefits expenses, mainly driven

by annual salary merit increases

and

an

increase

in

bonuses,

medical

insurance

premium

costs,

stock-based

compensation

expense,

and

payroll

taxes,

partially offset by higher deferral of loan origination costs.

●

A

$1.9 million increase in credit and debit card processing expenses.

●

A

$1.5

million

increase

in

other

non-interest

expenses,

in

part

due

to

an

increase

in

charges

for

legal

and

operational

reserves and an increase of $0.9 million in net periodic cost of pension plans

.

●

A

$1.2 million

increase in

the FDIC deposit

insurance expense,

driven by

the two basis

points increase

on the initial

base

deposit insurance assessment rate that came into effect during the

first quarter of 2023.

●

A

$0.9 million increase in professional service fees, driven by an increase

in outsourced technology service fees.

●

A

$0.6 million increase

in business promotion

expenses, mainly resulting

from higher advertising

and marketing expenses

associated with the commemoration of the 75th anniversary of the

Bank.

●

A $0.5 million

increase in taxes,

other than income

taxes, primarily

related to higher

license fees, sales

and use taxes,

and

property taxes.

97

Partially offset by:

●

A

$1.8 million

increase in

net gains

on OREO

operations,

mainly driven

by an

increase in

net realized

gains on

sales of

OREO properties,

primarily residential properties in the Puerto Rico region.

●

A

$1.6

million

decrease

in

occupancy

and

equipment

expenses,

primarily

reflecting

reductions

in

depreciation

charges,

rental expenses, and energy costs.

Income Taxes

For the second quarter of 2023, the Corporation recorded an income

tax expense of $30.3 million, compared to $34.1 million for the

same period in

2022. For the

first six months of

2023, the Corporation

recorded an income

tax expense of

$62.2 million, compared

to

$77.1

million

for

the

same

period

in

2022.

The

decrease

in

income

tax

expense

for

the

quarter

and

first

six

months

of

2023,

as

compared

to the

same periods

a year

ago, was

mainly related

to lower

pre-tax income

and a

higher proportion

of exempt

to taxable

income resulting in a lower effective tax rate.

The Corporation’s

estimated annual

effective

tax rate

in the

first six

months of

2023,

excluding entities

from

which a

tax benefit

cannot be recognized and discrete items, was 30.1%, compared

to 31.7% for the first six months of 2022. See Note 17 - Income

Taxes,

to the unaudited consolidated financial statements herein

for additional information.

As of

June

30,

2023,

the

Corporation

had

a

deferred

tax

asset of

$153.9

million,

net

of a

valuation

allowance

of

$184.2

million

against the deferred tax

asset, compared to a

deferred tax asset of $155.6

million, net of a valuation

allowance of $185.5 million,

as of

December

31,

2022.

Income

tax

paid

for

the

six-month

period

ended

June

30,

2023

amounted

to

$82.2

million

compared

to

$15.3

million for

the same

period in

2022. The

increase is related

to the

full utilization

during 2022

of certain

deferred tax

assets related

to

NOLs that were available for regular income tax which decreased the amount due

for income taxes.

98

FINANCIAL CONDITION AND OPERATING

ANALYSIS

Assets

The Corporation’s

total assets

were $19.2

billion as of

June 30, 2023,

an increase of

$518.0 million

from December

31, 2022. The

increase was primarily related to a $567.0 million

increase in cash and cash equivalents,

primarily interest-bearing deposits maintained

at

the

FED

aligned

with

the

overall

increase

in

government

and

time

deposits.

In

addition,

as

further

discussed

below,

total

loans

increased by $168.5 million. These variances were partially offset

by a $186.3 million decrease in total investment securities.

Loans Receivable, including Loans Held for Sale

As of June 30, 2023,

the Corporation’s

total loan portfolio before

the ACL amounted to $11.7

billion, an increase of

$168.5 million

compared to

December 31, 2022.

In terms of

geography,

the growth consisted

of increases of

$220.7 million and

$37.9 million in

the

Puerto Rico

and Virgin

Islands regions,

respectively,

partially offset

by a $90.1

million decrease

in the

Florida region. On

a portfolio

basis, the

growth consi

sted of

increases of

$167.8 million

in consumer

loans, including

a $141.9

million increase

in auto

loans and

leases,

and

$52.2

million

in commercial

and

construction

loans,

partially

offset

by

a $51.5

million

decrease

in residential

mortgage

loans.

As of

June 30,

2023, the

loans in

the Corpo

ration’s

held-for-investment

portfolio was

comprised

of commercial

and construction

loans

(46%),

residential

real

estate

loans

(24%),

and

consumer

and

finance

leases

(30%).

Of

the

total

gross

loan

portfolio

held

for

investment of $11.7 billion as of June 30,

2023, the Corporation had credit risk concentration of approximately 79% in

the Puerto Rico

region, 17% in the United States region (mainly in

the state of Florida), and 4% in the Virgin

Islands region, as shown in the following

table:

As of June 30, 2023

Puerto Rico

Virgin Islands

United States

Total

(In thousands)

Residential mortgage loans

$

2,179,539

$

172,771

$

441,480

$

2,793,790

Construction loans

65,427

3,792

94,779

163,998

Commercial mortgage loans

1,734,514

65,775

519,780

2,320,069

Commercial and Industrial loans

1,902,803

108,971

934,427

2,946,201

Total commercial loans

3,702,744

178,538

1,548,986

5,430,268

Consumer loans and finance leases

3,421,376

66,078

7,803

3,495,257

Total loans held for investment,

gross

$

9,303,659

$

417,387

$

1,998,269

$

11,719,315

Loans held for sale

14,094

201

-

14,295

Total loans, gross

$

9,317,753

$

417,588

$

1,998,269

$

11,733,610

As of December 31, 2022

Puerto Rico

Virgin Islands

United States

Total

(In thousands)

Residential mortgage loans

$

2,237,983

$

179,917

$

429,390

$

2,847,290

Construction loans

30,529

4,243

98,181

132,953

Commercial mortgage loans

1,768,890

65,314

524,647

2,358,851

Commercial and Industrial loans

1,791,235

68,874

1,026,154

2,886,263

Total commercial loans

3,590,654

138,431

1,648,982

5,378,067

Consumer loans and finance leases

3,256,070

61,419

9,979

3,327,468

Total loans held for investment,

gross

$

9,084,707

$

379,767

$

2,088,351

$

11,552,825

Loans held for sale

12,306

-

-

12,306

Total loans, gross

$

9,097,013

$

379,767

$

2,088,351

$

11,565,131

99

Residential Real Estate Loans

As of

June 30,

2023, the

Corporation’s

total residential

mortgage loan

portfolio, including

loans held

for sale,

decreased by

$51.5

million, as compared

to the balance as

of December 31, 2022.

The decline in the

residential mortgage loan portfolio

reflects decreases

of $56.7 million in the Puerto Rico region and

$6.9 million in the Virgin

Islands region, partially offset by an increase of

$12.1 million

in the Florida region.

The decline was driven by

repayments, foreclosures, and charge

-offs, which more

than offset the volume

of new

loan originations kept on the balance sheet.

The

majority

of

the

Corporation’s

outstanding

balance

of

residential

mortgage

loans

in

the

Puerto

Rico

and

the

Virgin

Islands

regions

as of

June 30,

2023 consisted

of fixed-rate

loans that

traditionally

carry higher

yields than

residential mortgage

loans in

the

Florida region. In

the Florida region,

approximately 42% of

the residential mortgage

loan portfolio consisted

of hybrid adjustable-rate

mortgages. In

accordance with

the Corporation’s

underwriting guidelines,

residential mortgage

loans are

primarily fully

documented

loans, and the Corporation does not originate negative amortization loans.

Commercial and Construction Loans

As of June

30, 2023, the

Corporation’s

commercial and construction

loan portfolio increased

by $52.2 million,

as compared to

the

balance as of December 31, 2022.

In

the

Puerto

Rico

region,

commercial

and

construction

loans

increased

by

$112.1

million,

as

compared

to

the

balance

as

of

December

31,

2022.

This

increase

was

driven

by

the

origination

of

several

loans,

including

five

commercial

relationships,

each

in

excess of $10

million, that increased

the portfolio amount

by $66.0 million

and a $60.3

million increase in

the outstanding balance

of

floor plan lines of credit.

In

the

Virgin

Islands

region,

commercial

and

construction

loans

increased

by

$40.1

million,

as

compared

to

the

balance

as

of

December 31, 2022. The increase was driven by the

utilization of $47.0 million of a new $100.0 million line

of credit facility extended

to a government public corporation.

In the Florida

region, commercial and

construction loans decreased

by $100.0 million,

as compared to

the balance as

of December

31, 2022. This decrease

reflected $90.4 million in

payoffs and paydowns of

five commercial and industrial

relationships in the Florida

region, each

in excess

of $10

million, including

the aforementioned

payoff of

a $24.3

million commercial

and industrial

participated

loan in the leisure and hospitality industry.

As

of

June

30,

2023,

the

Corporation

had

$174.9

million

outstanding

in

loans

extended

to

the

Puerto

Rico

government,

its

municipalities,

and

public

corporations,

compared

to

$169.8

million

as

of

December

31,

2022.

See

“Exposure

to

Puerto

Rico

Government” below for additional information.

The Corporation

also has credit

exposure to USVI

government entities.

As of June

30, 2023, the

Corporation had $78.9

million in

loans to

USVI government

public corporations,

compared to

$38.0 million

as of

December 31,

2022. The

increase in

loans to

USVI

government

public

corporations

was

driven

by

the

aforementioned

$47.0

million

line

of

credit

utilization.

See

“Exposure

to

USVI

Government” below for additional information.

As

of

June

30,

2023,

the

Corporation’s

total

commercial

mortgage

loan

exposure

amounted

to

$2.3

billion,

or

43%

of

the

total

commercial

loan

portfolio.

The commercial

mortgage

loan

portfolio

includes

an

exposure

to

office

real

estate amount

ing

to

$428.3

million ($384.3 million

and $44.0 million

in the Puerto Rico

and Florida regions,

respectively), of which

approximately $76.1 million

matures during the remainder of 2023 and 2024.

As

of

June

30,

2023,

the

Corporation’s

total

exposure

to

shared

national

credit

(“SNC”)

loans

(including

unused

commitments)

amounted to

$1.1 billion

as of each

of June

30, 2023

and December

31, 2022.

As of

June 30,

2023, approximately

$206.2 million

of

the

SNC

exposure

is

related

to

the

portfolio

in

the

Puerto

Rico

region

and

$847.4

million

is

related

to

the

portfolio

in

the

Florida

region.

Consumer Loans and Finance Leases

As of

June 30,

2023,

the Corporation’s

consumer

loan

and finance

lease portfolio

increased by

$167.8

million

to $3.5

billion,

as

compared

to

the

portfolio

balance

of

$3.3

billion

as

of

December

31,

2022.

This

increase

was

mainly

related

to

increases

of

$72.5

million

and

$69.4

million

in

the

finance

leases

and

auto

loans

portfolios,

respectively.

The

growth

in

consumer

loans

was

mainly

reflected in the Puerto Rico region across all portfolio classes.

100

Loan Production

First

BanCorp.

relies

primarily

on

its

retail

network

of

branches

to

originate

residential

and

consumer

loans.

The

Corporation

may

supplement

its residential

mortgage originations

with wholesale

servicing released

mortgage loan

purchases from

mortgage bankers.

The

Corporation

manages

its

construction

and

commercial

loan

originations

through

centralized

units

and

most

of

its

originations

come

from

existing

customers,

as

well

as

through

referrals

and

direct

solicitations.

Auto

loans

and

finance

leases

originations

rely

primarily on relationships with auto dealers and dedicated sales professionals who

serve selected locations to facilitate originations.

The

following

table

provides

a

breakdown

of

First

BanCorp.’s

loan

production,

including

purchases,

refinancings,

renewals

and

draws from existing revolving and non-revolving commitments, for

the indicated periods:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands)

Residential mortgage

$

115,251

$

126,532

$

192,553

$

249,045

Construction

47,006

46,880

82,505

66,866

Commercial mortgage

42,384

205,720

131,076

333,705

Commercial and Industrial

550,574

622,714

1,106,456

1,113,010

Consumer

454,005

482,252

889,323

908,719

Total loan production

$

1,209,220

$

1,484,098

$

2,401,913

$

2,671,345

During the quarter

and six-month period

ended June 30,

2023, total loan

originations, including

purchases, refinancings, and

draws

from

existing

revolving

and

non-revolving

commitments,

amounted

to

approximately

$1.2

billion

and

$2.4

billion,

respectively,

compared to $1.5 billion and $2.7 billion, respectively,

for the comparable periods in 2022.

Residential mortgage

loan originations

for the

quarter and

six-month period

ended June

30, 2023

amounted to

$115.3 million

and

$192.6

million, respectively

,

compared

to $126.5

million

and $249.0

million, respectively,

for the

comparable periods

in 2022.

The

decrease of

$11.2

million in

the second

quarter of

2023, as

compared to

the same

period in

2022, reflects

declines of

$9.1 million

in

the

Puerto

Rico

region,

$1.3

million

in

the

Virgin

Islands

region,

and

$0.8

million

in

the

Florida

region.

For

the

six-month

period

ended June 30, 2023, the decrease

of $56.4 million consisted of declines

of $51.4 million in the Puerto Rico

region, $3.3 million in the

Florida

region,

and

$1.7

million

in

the

Virgin

Islands

region.

Approximately

58%

of

the

$150.0

million

residential

mortgage

loan

originations in the

Puerto Rico region during

the first half of

2023 consisted of

conforming loans, compared

to 59% of $201.4

million

for the

first half

of 2022.

The decrease

during the

first half

of 2023

is related

to a

lower volume

of conforming

loan originations

and

refinancings, in part due to a higher interest rate environment.

Commercial and

construction loan

originations (excluding

government loans)

for the

quarter and

six-month period

ended June

30,

2023

amounted

to

$563.6

million

and

$1.2

billion,

respectively,

compared

to

$860.9

million

and

$1.5

billion,

respectively,

for

the

comparable periods

in 2022.

The decrease

of $297.3

million in

the second

quarter of

2023, as

compared to

the same

period in

2022,

reflects

declines

of

$158.2

million

in

the

Florida

region,

$124.8

million

in

the

Puerto

Rico

region,

and

$14.3

million

in

the

Virgin

Islands

region.

Commercial

loan

originations

for

the

second

quarter

of

2022

include

three

commercial

mortgage

loans

over

$10

million originated

in the Puerto Rico

region totaling $53.8

million and two

commercial mortgage loans

over $10 million

originated in

the Florida

region

totaling

$37.3 million.

For the

first six

months

of 2023,

the decrease

of $258.2

million

consisted

of decreases

of

$213.3 million in the Florida region, $31.1 million in the Puerto Rico region, and

$13.8 million in the Virgin

Islands region.

Government

loan

originations

for

the

quarter

and

six-month

period

ended

June

30,

2023

amounted

to

$76.3

million

and

$83.6

million, respectively,

compared to $14.4 million and $18.9 million, respectively,

for the comparable periods in 2022. Government loan

originations

during

the

first

half

of

2023

were

mainly

related

to

the

aforementioned

line

of

credit

utilization

in

the

Virgin

Islands

region,

a

loan

to

an

agency

of

the

Puerto

Rico

government

for

a

low-income

housing

project,

and

the

utilization

of

an

arranged

overdraft line of credit of a government entity

in the Virgin

Islands region. On the other hand, government loan

originations during the

first half

of 2022 were mainly

related to

the renewal

of a

municipal loan

in the

Puerto Rico

region and

the utilization

of the

arranged

overdraft line of credit of a government entity in the Virgin

Islands region.

101

Originations of auto

loans (including finance

leases) for the quarter

and six-month period

ended June 30,

2023 amounted to

$250.3

million and

$495.4 million,

respectively,

compared to

$269.5 million

and $530.8

million, respectively,

for the

comparable periods

in

2022. The

decrease in

the second

quarter of

2023, as

compared to

the same

quarter of

2022, consisted

of a

$21.2 million

decrease in

the Puerto

Rico region,

partially offset

by a $2.0

million increase in

the Virgin

Islands region.

The decrease

in the first

six months

of

2023, as

compared to

the same

period of

the previous

year, consisted

of a

$38.7 million

decrease in

the Puerto

Rico region,

partially

offset by a $3.3

million increase in the Virgin

Islands region. Other consumer

loan originations,

other than credit cards,

for the quarter

and six-month period ended June

30, 2023 amounted to $77.7 million

and $149.6 million, respectively,

compared to $87.2 million and

$142.8 million,

respectively,

for the

comparable periods

in 2022.

The utilization

activity on

the outstanding

credit card

portfolio

for

the

quarter

and

six-month

period

ended

June

30,

2023

amounted

to

$125.9

million

and

$244.3

million,

respectively,

compared

to

$125.6 million and $235.0 million, respectively,

for the comparable periods in 2022.

102

Investment Activities

As

part

of

its

liquidity,

revenue

diversification,

and

interest

rate

risk

management

strategies,

First

BanCorp.

maintains

a

debt

securities portfolio classified as available for sale or held to maturity.

The Corporation’s

total available-for

-sale debt

securities portfolio

as of

June 30,

2023 amounted

to $5.4

billion, a

$166.2 million

decrease from

December 31, 2022

.

The decrease was

mainly driven

by repayments of

approximately $200.4

million of U.S.

agencies

MBS and

debentures,

partially

offset

by a

$32.4

million increase

in fair

value attributable

to changes

in market

interest rates.

As of

June 30, 2023, the

Corporation had a net

unrealized loss on available-for-sale

debt securities of $765.8

million. This unrealized loss

is

attributable to

instruments on book

s

carrying a lower

interest rate than

market rates. The

Corporation expects

that this unrealized

loss

will reverse over time and it is likely that it will not be required

to sell the securities before their anticipated recovery.

The Corporation

expects the portfolio will

continue to decrease and

the accumulated other comprehensive

loss will decrease accordingly,

excluding the

impact of market interest rates.

As

of

June

30,

2023,

substantially

all

of

the

Corporation’s

available-for-sale

debt

securities

portfolio

was

invested

in

U.S.

government and agencies

debentures and fixed-rate

GSEs’ MBS. In

addition, as of

June 30, 2023,

the Corporation held

a bond issued

by the

PRHFA,

classified as

available

for sale,

specifically a

residential pass-through

MBS in

the aggregate

amount of

$3.3 million

(fair

value

-

$2.1

million).

This

residential

pass-through

MBS

issued

by

the

PRHFA

is

collateralized

by

certain

second

mortgages

originated under a program

launched by the Puerto

Rico government in 2010

and had an unrealized

loss of $1.1 million

as of June 30,

2023,

of which

$0.3

million

is due

to credit

deterioration.

During

2021,

the Corporation

placed

this instrument

in nonaccrual

status

based on the delinquency status of the underlying second mortgage loans

collateral.

As

of

June

30,

2023,

the

Corporation’s

held-to-maturity

debt

securities

portfolio,

before

the

ACL,

decreased

to

$424.7

million,

compared

to

$437.5

million

as

of

December

31,

2022.

Held-to-maturity

debt

securities

consisted

of

fixed-rate

GSEs’

MBS

and

financing

arrangements

with

Puerto

Rico

municipalities

issued

in

bond

form,

which

the

Corporation

accounts

for

as securities,

but

which were

underwritten

as loans

with features

that are

typically found

in commercial

loans. Puerto

Rico municipal

bonds typically

are

not

issued

in

bearer

form,

are

not

registered

with

the

SEC,

and

are

not

rated

by

external

credit

agencies.

These

bonds

have

seniority to the payment of operating costs and expenses of the

municipality and, in most cases, are supported by assigned

property tax

revenues. As of June 30, 2023, approximately

74% of the Corporation’s

municipal bonds consisted of obligations issued by four

of the

largest

municipalities

in

Puerto

Rico.

The

municipalities

are

required

by

law

to

levy

special

property

taxes

in

such

amounts

as

are

required for the

payment of all of

their respective general

obligation bonds and

loans. Given the

uncertainties as to the

effects that the

fiscal position

of the

Puerto Rico

central government,

and the measures

taken, or

to be

taken, by other

government entities

may have

on municipalities,

and the

higher interest

rate environment,

the Corporation

cannot be

certain whether

future charges

to the

ACL on

these securities will be required.

As of June 30, 2023, the ACL

for held-to-maturity debt securities was

$8.4 million, compared to

$8.3

million as of December 31, 2022.

See

“Risk Management

–

Exposure

to Puerto

Rico

Government”

below

for

information

and

details

about

the Corporation’s

total

direct

exposure

to the

Puerto Rico

government,

including municipalities

,

and

“Credit

Risk Management”

below

for the

ACL of

the

exposure to Puerto Rico municipal bonds.

103

The following table presents the carrying values of investments as of the indicated dates:

June 30, 2023

December 31, 2022

(In thousands)

Money market investments

$

1,000

$

2,025

Available-for-sale

debt securities, at fair value:

U.S. government and agencies obligations

2,515,097

2,492,228

Puerto Rico government obligations

2,111

2,201

MBS:

Residential

2,759,697

2,941,458

Commercial

156,464

163,133

Other

-

500

Total available-for-sale

debt securities, at fair value

5,433,369

5,599,520

Held-to-maturity debt securities, at amortized cost:

MBS:

Residential

155,690

166,739

Commercial

102,912

105,088

Puerto Rico municipal bonds

166,124

165,710

ACL for held-to-maturity Puerto Rico municipal bonds

(8,401)

(8,286)

Total held-to-maturity

debt securities

416,325

429,251

Equity securities, including $34.7 million and $42.9 million of FHLB stock

as of June 30,

2023 and December 31, 2022, respectively

48,101

55,289

Total money market

investments and investment securities

$

5,898,795

$

6,086,085

The carrying values of debt securities as of June 30, 2023 by contractual maturity

(excluding MBS), are shown below:

Carrying Amount

Weighted-Average

Yield %

(Dollars in thousands)

U.S. government and agencies obligations:

Due within one year

$

246,038

0.44

Due after one year through five years

2,247,794

0.84

Due after five years through ten years

10,400

3.16

Due after ten years

10,865

5.38

2,515,097

0.83

Puerto Rico government and municipalities obligations:

Due within one year

1,205

5.90

Due after one year through five years

42,736

6.93

Due after five years through ten years

56,160

7.44

Due after ten years

68,134

8.14

168,235

7.59

MBS

3,174,763

1.70

ACL on held-to-maturity debt securities

(8,401)

-

Total debt securities

$

5,849,694

1.48

104

Net

interest

income

in

future

periods

could

be

affected

by

prepayments

of

MBS.

Any

acceleration

in

the

prepayments

of

MBS

purchased

at

a

premium

would

lower

yields

on

these

securities,

since

the

amortization

of

premiums

paid

upon

acquisition

would

accelerate. Conversely,

acceleration of the

prepayments of MBS would

increase yields on

securities purchased at

a discount, since

the

amortization

of

the

discount

would

accelerate.

These

risks

are

directly

linked

to

future

period

market

interest

rate

fluctuations.

Net

interest income in future periods might also be affected

by the Corporation’s investment

in callable securities. As of June 30, 2023, the

Corporation had

approximately $1.9

billion in

callable debt securities

(U.S. agencies

debt securities)

with an

average yield

of 0.78%,

of which

approximately 60%

were purchased

at a discount

and 3% at

a premium.

See “Risk Management”

below for

further analysis

of the

effects of

changing interest

rates on

the Corporation’s

net interest

income and

the Corporation’s

interest rate

risk management

strategies. Also,

refer to

Note 2 –

Debt Securities to

the unaudited

consolidated financial

statements herein

for additional

information

regarding the Corporation’s debt securities

portfolio.

RISK MANAGEMENT

General

Risks

are

inherent

in

virtually

all

aspects

of

the

Corporation’s

business

activities

and

operations.

Consequently,

effective

risk

management

is

fundamental

to

the

success

of

the

Corporation.

The

primary

goals

of

risk

management

are

to

ensure

that

the

Corporation’s risk-taking

activities are consistent with

the Corporation’s

objectives and risk

tolerance, and that

there is an appropriate

balance between risks and rewards in order to maximize stockholder value.

The

Corporation

has

in

place

a

risk

management

framework

to

monitor,

evaluate

and

manage

the

principal

risks

assumed

in

conducting its activities. First BanCorp.’s

business is subject to eleven

broad categories of risks: (i) liquidity

risk; (ii) interest rate risk;

(iii) market risk; (iv)

credit risk; (v) operational

risk; (vi) legal and

regulatory risk; (vii)

reputational risk; (viii) model

risk; (ix) capital

risk; (x)

strategic risk;

and (xi)

information technology

risk. First

BanCorp. has

adopted policies

and procedures

designed to

identify

and manage the risks to which the Corporation is exposed.

The

Corporation’s

risk

management

policies

are

described

below,

as

well

as

in

Part

II,

Item

7,

“Management’s

Discussion

and

Analysis of Financial Condition and Results of Operations,” in the 2022 Annual

Report on Form 10-K.

Liquidity Risk

Liquidity

risk

involves

the

ongoing

ability

to

accommodate

liability

maturities

and

deposit

withdrawals,

fund

asset growth

and

business operations,

and meet

contractual obligations

through unconstrained

access to funding

at reasonable

market rates. Liquidity

management

involves

forecasting

funding

requirements

and

maintaining

sufficient

capacity

to

meet

liquidity

needs

and

accommodate

fluctuations

in

asset

and

liability

levels

due

to

changes

in

the

Corporation’s

business

operations

or

unanticipated

events.

The Corporation

manages liquidity

at two

levels. The

first is

the liquidity

of the

parent company,

or First

Bancorp., which

is the

holding

company

that

owns

the

banking

and

non-banking

subsidiaries.

The

second

is

the

liquidity

of

the

banking

subsidiary,

FirstBank.

The Asset

and Liability

Committee of

the Board

is responsible

for overseeing

management’s

establishment of

the Corporation’s

liquidity

policy,

as

well

as

approving

operating

and

contingency

procedures

and

monitoring

liquidity

on

an

ongoing

basis.

The

Management’s

Investment

and

Asset

Liability

Committee

(“MIALCO”),

which

reports

to

the

Board’s

Asset

and

Liability

Committee,

uses

measures

of

liquidity

developed

by

management

that

involve

the

use

of

several

assumptions

to

review

the

Corporation’s

liquidity

position

on

a

monthly

basis.

The

MIALCO

oversees

liquidity

management,

interest

rate

risk,

market

risk,

and other related matters.

The MIALCO is composed of

senior management officers, including

the Chief Executive Officer,

the Chief Financial Officer,

the

Chief

Risk

Officer,

the

Corporate

Strategic

and

Business

Development

Director,

the

Business

Group

Director,

the

Treasury

and

Investments Risk

Manager,

the Financial

Planning and

Asset and

Liability Management

(“ALM”) Director,

and the

Treasurer.

The

Treasury

and

Investments

Division

is

responsible

for

planning

and

executing

the

Corporation’s

funding

activities

and

strategy,

monitoring liquidity availability on

a daily basis, and reviewing

liquidity measures on a weekly

basis. The Treasury

and Investments

Accounting and

Operations area

of the

Corporate Controller’s

Department is

responsible for

calculating the

liquidity measurements

used

by

the

Treasury

and

Investment

Division

to

review

the

Corporation’s

liquidity

position

on

a

weekly

basis.

The

Financial

Planning and ALM Division is responsible for estimating the liquidity

gap for longer periods.

105

To

ensure

adequate liquidity

through the

full range

of potential

operating

environments and

market conditions,

the

Corporation

conducts

its

liquidity

management

and

business

activities

in

a

manner

that

is

intended

to

preserve

and

enhance

funding

stability,

flexibility,

and

diversity.

Key

components

of

this

operating

strategy

include

a

strong

focus

on

the

continued

development

of

customer-based

funding, the

maintenance

of direct

relationships with

wholesale

market funding

providers, and

the maintenance

of

the ability to liquidate certain assets when, and if, requirements warrant.

The

Corporation

develops

and

maintains

contingency

funding

plans.

These

plans

evaluate

the

Corporation’s

liquidity

position

under various

operating circumstances

and are

designed to

help ensure

that the

Corporation will

be able

to operate

through periods

of stress when

access to normal

sources of funds

is constrained. The

plans project funding

requirements during

a potential period

of

stress, specify and quantify sources of liquidity,

outline actions and procedures for effectively managing liquidity

through a period of

stress, and

define roles

and responsibilities

for the

Corporation’s

employees. Under

the contingency

funding plans,

the Corporation

stresses the

balance sheet

and the

liquidity position

to critical levels

that mimic

difficulties in

generating funds

or even maintaining

the current

funding position

of the

Corporation and

the Bank

and are

designed to

help ensure

the ability

of the

Corporation and

the

Bank to honor

their respective commitments.

The Corporation has

established liquidity

triggers that the

MIALCO monitors in

order

to maintain the

ordinary funding of

the banking business.

The MIALCO has

developed contingency funding

plans for the

following

three

scenarios:

a

credit rating

downgrade,

an

economic

cycle downturn

event,

and

a

concentration

event.

The

Board’s

Asset and

Liability Committee reviews and approves these plans on an annual basis.

The

Corporation

manages

its

liquidity

in

a

proactive

manner

and

in

an

effort

to

maintain

a

sound

liquidity

position.

It

uses

multiple measures

to monitor

its liquidity

position, including

core liquidity,

basic liquidity,

and time-based

reserve measures.

Cash

and cash equivalents

amounted to $1.0 billion

as of June 30, 2023,

compared to $480.5 million

as of December 31,

2022. Free high-

quality liquid

securities that

could be

liquidated or

pledged within

one day

amounted to

$2.2 billion

as of

June 30,

2023, compared

to $3.1 billion as of December 31, 2022.

As of June 30, 2023, the estimated core liquidity

reserve (which includes cash and free high

quality

liquid

assets such

as U.S.

government

and GSEs

obligations

that could

be liquidated

or pledged

within one

day)

was $3.2

billion, or

16.70% of

total assets,

compared to

$3.5 billion,

or 19.02%

of total

assets as

of December

31, 2022.

The basic

liquidity

ratio

(which

adds

available

secured

lines

of

credit

to

the

core

liquidity)

was

approximately

21.82%

of

total

assets

as

of

June

30,

2023,

compared to 22.48% of total assets as of December 31, 2022.

As of June 30, 2023, in

addition to the aforementioned $3.2

billion in cash and free high

quality liquid assets, the Corporation

had

$980.9

million

available

for credit

with the

FHLB based

on

the value

of loan

collateral pledged

with the

FHLB. The

Corporation

also maintains

borrowing

capacity at

the FED

Discount

Window.

The Corporation

does not

consider borrowing

capacity from

the

FED Discount

Window

as a

primary

source of

liquidity but

had approximately

$1.4 billion

available for

funding under

the FED’s

Borrower-in-Custody (“BIC”) Program as of June 30, 2023

as an additional contingent source of liquidity.

Total loans pledged

to the

FED Discount Window

amounted to $2.4 billion as of

June 30, 2023. The Corporation also

does not rely on uncommitted inter-bank

lines of

credit (federal

funds lines)

to fund

its operations

and does

not include

them in

the basic

liquidity measure.

On a

combined

basis,

as

of

June

30,

2023,

the

Corporation

had

$5.6

billion

of

total

available

liquidity,

or

1.17x

of

uninsured

deposits

excluding

government deposits, to meet liquidity needs,

while maintaining a strong capital position.

Liquidity

at

the Bank

level

is highly

dependent

on

bank deposits,

which

fund

88.2%

of the

Bank’s

assets (or

86.3%

excluding

brokered CDs).

In addition,

as further

discussed below,

the Corporation

maintains a

diversified base

of readily

available wholesale

funding

sources,

including

advances

from

the

FHLB

through

pledged

borrowing

capacity,

securities

sold

under

agreements

to

repurchase,

and

access

to

CDs

through

brokers.

Funding

through

wholesale

funding

may

continue

to

increase

the

overall

cost

of

funding for the Corporation and impact the net interest margin.

As

a

provider

of

financial

services,

the

Corporation

routinely

enters

into

commitments

with

off-balance

sheet

risk

to

meet

the

financial

needs

of

its

customers.

These

financial

instruments

may

include

loan

commitments

and

standby

letters

of

credit.

These

commitments

are

subject

to

the

same

credit

policies

and

approval

processes

used

for

on-balance

sheet

instruments.

These

instruments involve, to varying degrees,

elements of credit and interest rate risk

in excess of the amount recognized in the

statements

of financial condition. As of June 30, 2023,

the Corporation’s commitments to

extend credit amounted to approximately $2.0

billion.

Commitments to

extend credit

are agreements

to lend

to a

customer as

long as

there is

no violation

of any

condition established

in

the contract.

Since certain

commitments

are expected

to expire

without being

drawn upon,

the total

commitment

amount does

not

necessarily

represent

future

cash

requirements.

For

most

of

the

commercial

lines

of

credit,

the

Corporation

has

the

option

to

reevaluate

the

agreement

prior

to

additional

disbursements.

There

have

been

no

significant

or

unexpected

draws

on

existing

commitments.

In the

case

of credit

cards

and personal

lines of

credit,

the Corporation

can

cancel the

unused credit

facility at

any

time and without cause.

106

The following table summarizes commitments to extend credit and standby letters of

credit as of the indicated dates:

June 30,

2023

December 31, 2022

(In thousands)

Financial instruments whose contract amounts represent credit risk:

Commitments to extend credit:

Construction undisbursed funds

$

189,458

$

170,639

Unused credit card lines

955,292

936,231

Unused personal lines of credit

40,346

41,988

Commercial lines of credit

795,820

761,634

Letters of credit:

Commercial letters of credit

57,732

68,647

Standby letters of credit

8,267

9,160

The

Corporation

engages

in

the ordinary

course

of business

in

other

financial

transactions

that

are not

recorded

on the

balance

sheet,

or

may

be

recorded

on

the

balance

sheet

in

amounts

that

are

different

from

the

full

contract

or

notional

amount

of

the

transaction

and, thus,

affect

the Corporation’s

liquidity position.

These transactions

are designed

to (i)

meet the

financial needs

of

customers, (ii) manage the

Corporation’s credit,

market and liquidity risks, (iii)

diversify the Corporation’s

funding sources, and (iv)

optimize capital.

In addition to the

aforementioned off-balance

sheet debt obligations

and unfunded commitments

to extend credit, the

Corporation

has obligations

and commitments

to make

future payments

under contracts,

amounting to

approximately $3.9

billion as

of June

30,

2023.

Our

material

cash

requirements

comprise

primarily

of

contractual

obligations

to

make

future

payments

related

to

time

deposits,

short-term

borrowings,

long-term

debt,

and

operating

lease

obligations.

We

also

have

other

contractual

cash

obligations

related

to

certain

binding

agreements

we

have

entered

into

for

services

including

outsourcing

of

technology

services,

security,

advertising and

other services

which are

not material

to our

liquidity needs.

We

currently anticipate

that our

available funds,

credit

facilities, and cash flows from operations will be sufficient

to meet our operational cash needs for the foreseeable future.

Off-balance sheet

transactions are continuously

monitored to consider

their potential impact

to our liquidity

position and changes

are applied to the balance between sources and uses of funds, as deemed appropriate,

to maintain a sound liquidity position.

Sources of Funding

The

Corporation

utilizes

different

sources

of

funding

to

help

ensure

that

adequate

levels

of

liquidity

are

available

when

needed.

Diversification of

funding sources is

of great importance

to protect the

Corporation’s

liquidity from

market disruptions. The

principal

sources of short-term

funding are deposits,

including brokered CDs.

Additional funding is

provided by short-

and long-term securities

sold under agreements

to repurchase and

lines of credit with

the FHLB. Consistent with

its strategy,

the Corporation has been

seeking

to add core deposits.

The

Asset and

Liability

Committee

reviews

credit availability

on a

regular basis.

The

Corporation

also

sells mortgage

loans

as a

supplementary source of

funding and has obtained

long-term funding in the past

through the issuance of

notes and long-term brokered

CDs. In

addition, the

Corporation also

maintains as

additional contingent

sources borrowing

capacity at

the FED’s

BIC Program

and

is enrolled in the FED’s Bank Term

Funding Program (“BTFP”).

While

liquidity

is

an

ongoing

challenge

for

all

financial

institutions,

management

believes

that

the

Corporation’s

available

borrowing capacity and

efforts to grow

core deposits will be

adequate to provide

the necessary funding

for the Corporation’s

business

plans in the foreseeable future.

107

The Corporation’s principal

sources of funding are discussed below:

Retail

core

deposits

–

The

Corporation’s

deposit

products

include

regular

savings

accounts,

demand

deposit

accounts,

money

market

accounts,

and

retail

CDs.

As

of

June

30,

2023,

the

Corporation’s

core

deposits,

which

exclude

government

deposits

and

brokered CDs, decreased by $247.0

million to $13.0 billion from $13.3 billion

as of December 31, 2022. The decrease was

primarily

related

to saving

and

checking

accounts

primarily

in the

Puerto

Rico and

Florida

regions. Notwithstanding,

these

reductions

were

partially offset

by an

increase in

time deposits,

including a

shift from

non-interest bearing

or low-interest

bearing products

to time

deposits,

driven

by

higher

rates

offered.

Over

the

last

year,

the

FED’s

policies

to

control

the

inflationary

economic

environment,

including

repeated

market

interest

rate

increases,

have

resulted

in

excess

liquidity

gradually

tapering

off

and

impacting

the

Corporation’s

core

deposit

balances

as

customers

continued

to

reallocate

cash

into

higher

yielding

alternatives.

Further

shift

may

continue

to

increase

the

overall

cost

of

funding

for

the

Corporation

and

impact

the net

interest

margin.

For

the

second

quarter

of

2023, the average balance per retail core deposit account was $26 thousand.

Government

deposits

–

As of

June 30,

2023,

the

Corporation had

$2.9

billion

of Puerto

Rico

public

sector deposits

($2.8

billion

in

transactional

accounts

and

$140.1

million

in

time

deposits),

compared

to

$2.3

billion

as

of

December

31,

2022.

The

increase

was

related

to

higher

balances

of

interest-bearing

transactional

accounts.

Government

deposits

are

insured

by

the

FDIC

up

to

the

applicable

limits and

the

uninsured

portions

is fully

collateralized.

Approximately

21%

of

the

public

sector

deposits

as of

June

30,

2023 were from municipalities and

municipal agencies in Puerto Rico

and 79% were from public corporations,

the central government

and agencies, and U.S. federal government agencies in Puerto Rico.

In addition, as of June 30, 2023, the Corporation

had $524.5 million of government deposits in the Virgin

Islands region (December

31, 2022 - $442.8 million) and $12.1 million in the Florida region (December

31, 2022 - $11.6 million).

The uninsured

portions

of government

deposits were

collateralized

by securities

and

loans with

an amortized

cost of

$3.7

billion

and

$3.1

billion

as

of

June

30,

2023

and

December

31,

2022,

respectively,

and

an

estimated

market

value

of

$3.3

billion

and

$2.7

billion,

respectively.

In

addition

to

securities

and

loans,

as of

June

30,

2023

and

December

31,

2022,

the

Corporation

used

$225.0

million and $200.0 million, respectively,

in letters of credit issued by the FHLB as pledges for public deposits in the Virgin

Islands.

Estimate of Uninsured

Deposits –

As of June

30, 2023 and December

31, 2022, the

estimated amount of

uninsured deposits totaled

$8.0

billion

and

$7.6

billion,

respectively,

generally

representing

the

portion

of

deposits

that

exceed

the

FDIC

insurance

limit

of

$250,000

and amounts

in any

other uninsured

deposit account.

The balances

presented as

of June

30, 2023

and December

31, 2022

include

the

uninsured

portion

of

fully

collateralized

government

deposits

which

amounted

to

$3.3

billion

and

$2.6

billion,

respectively.

Excluding

fully

collateralized

deposits,

$4.7

billion

of

these

deposits

are

uninsured,

which

represent

28.79%

of

total

deposits,

excluding brokered CDs, as of June 30, 2023, compared

to $4.9 billion, or 30.65% of total deposits,

excluding brokered CDs,

as

of

December

31,

2022.

The

increase

is

mostly

related

to

government

deposits,

which

are

fully

collateralized

as

previously

mentioned.

The

amount of

uninsured

deposits is

calculated

based on

the

same

methodologies

and assumptions

used for

our bank

regulatory

reporting requirements adjusted for cash held by wholly-owned subsidiaries

at the Bank.

The following table presents by contractual maturities the amount of U.S. time

deposits in excess of FDIC insurance limits (over

$250,000) and other time deposits that are otherwise uninsured as of June 30, 2023:

(In thousands)

3 months or

less

3 months to

6 months

6 months to

1 year

Over 1 year

Total

U.S. time deposits in excess of FDIC insurance

limits

$

254,158

$

108,835

$

225,068

$

357,972

$

946,033

Other uninsured time deposits

$

16,675

$

10,763

$

10,277

$

6,546

$

44,261

Brokered CDs

– Total brokered

CDs increased by $257.8 million to $363.6 million as of June

30, 2023, compared to $105.8 million as

of

December

31,

2022.

The increase

reflects

the

effect

of new

issuances

amounting

to $475.6

million

with

an all-in

cost

of

4.97%,

partially offset by

approximately $217.8 million

of maturing brokered

CDs, with an all-in

cost of 4.92%, that

were paid off during

the

first six months of 2023.

The average remaining term to maturity of the brokered CDs outstanding

as of June 30, 2023 was approximately 1 year.

The increased

use of

brokered CDs

was primar

ily related

to short-term

funding in

our Florida

region, The

future use

of brokered

CDs

will

depend

on

multiple

factors

including

excess

liquidity

at

each

of

the

regions,

future

cash

needs

and

any

tax

implications.

Brokered CDs are insured by the FDIC up to regulatory limits and can be obtained

faster than regular retail deposits.

108

Refer to

“Net Interest

Income” above

for information

about average

balances of

interest-bearing deposits

and the

average interest

rate paid on deposits, for the quarters and six-month periods ended

June 30, 2023 and 2022.

Securities

sold

under

agreements

to

repurchase

-

The

Corporation’s

investment

portfolio

is

funded

in

part

with

repurchase

agreements.

The Corporation’s

outstanding

short-term

securities sold

under repurchase

agreements

amounted

to $73.9

million

as of

June 30,

2023, compared

to $75.1

million as

of December

31, 2022.

In addition

to these

repurchase agreements,

the Corporation

has

been

able to

maintain

access to

credit by

using

cost-effective

sources such

as FHLB

advances.

See

Note 9

– Securities

Sold

Under

Agreements

to

Repurchase

(Repurchase

Agreements)

to

the

unaudited

consolidated

financial

statements

herein

for

further

details

about repurchase agreements outstanding by counterparty and maturities.

Under the Corporation’s

repurchase agreements, as

is the case with

derivative contracts, the

Corporation is required

to pledge cash

or qualifying securities to meet margin requirements.

To the extent that the value of

securities previously pledged as collateral declines

due to changes in interest

rates, a liquidity crisis or

any other factor, the

Corporation is required to deposit

additional cash or securities

to meet

its margin

requirements, thereby

adversely affecting

its liquidity.

Given the

quality of

the collateral

pledged, the

Corporation

has not experienced margin calls from counterparties

arising from credit-quality-related write-downs in valuations.

Advances

from

the

FHLB

–

The

Bank

is

a

member

of

the

FHLB

system

and

obtains

advances

to

fund

its

operations

under

a

collateral

agreement

with

the

FHLB

that

requires

the

Bank

to

maintain

qualifying

mortgages

and/or

investments

as

collateral

for

advances taken.

As of

June 30,

2023, the

outstanding balance

of fixed-rate

FHLB advances

was $500.0

million, compared

to $675.0

million as

of December

31, 2022.

During the

six-month period

ended June

30, 2023,

the Corporation

added $300.0

million of

long-

term FHLB advances at an

average cost of 4.59%, and

repaid its short-term FHLB advances. Of

the $500.0 million in FHLB advances

as of June 30, 2023, $400.0 million were pledged

with investment securities and $100.0 million were pledged

with mortgage loans. As

of

June

30,

2023,

the

Corporation

had

$980.9

million

available

for

additional

credit

on

FHLB

lines

of

credit

based

on

collateral

pledged at the FHLB of New York.

Trust

Preferred

Securities –

In 2004,

FBP Statutory

Trusts I

and II,

statutory trusts

that are

wholly-owned by

the Corporation

and

not consolidated in

the Corporation’s

financial statements, sold

to institutional investors

variable-rate TRuPs and

used the proceeds of

these issuances, together

with the proceeds

of the purchases by

the Corporation of

variable rate common

securities, to purchase

junior

subordinated

deferrable

debentures.

The

subordinated

debentures

are

presented

in

the

Corporation’s

consolidated

statements

of

financial condition as

other long-term borrowings.

Under the indentures,

the Corporation has the

right, from time

to time, and without

causing an

event of

default, to defer

payments of

interest on the

Junior Subordinated

Deferrable Debentures

by extending the

interest

payment

period

at

any

time

and

from

time

to

time

during

the

term

of

the

subordinated

debentures

for

up

to

twenty

consecutive

quarterly periods.

During the second quarter

of 2023, the Corporation completed

the repurchase of $21.4 million

of TRuPs of the FBP Statutory

Trust

I as

part of

a privately

-negotiated

transaction,

resulting

in a

commensurate

reduction

in the

related

floating

rate junior

subordinated

debentures. The purchase

price equated to 92.5%

of the $21.5 million

par value of the

TRuPs. The 7.5% discount

resulted in a gain

of

approximately $1.6 million, which

is reflected in the consolidated

statements of income as “Gain on

early extinguishment of debt.” As

of June 30,

2023 and December

31, 2022, the

Corporation had junior

subordinated debentures outstanding

in the aggregate amount

of

$161.7 million

and $183.8

million, respectively,

with maturity

dates ranging

from June

17, 2034

through September

20, 2034.

As of

June

30, 2023,

the Corporation

was current

on

all interest

payments

due

on its

subordinated

debt.

See

Note 11

–

Other Long-Term

Borrowings

and

Note

7

–

Non-Consolidated

Variable

Interest

Entities

(“VIEs”)

and

Servicing

Assets

to

unaudited

consolidated

financial statements herein for additional information.

Other Sources

of Funds and

Liquidity

• The Corporation’s

principal uses of

funds are for

the origination of

loans, the repayment

of

maturing deposits

and borrowings,

and deposits

withdrawals. In

connection with

its mortgage

banking activities,

the Corporation

has

invested in technology and personnel to enhance the Corporation’s

secondary mortgage market capabilities.

The enhanced

capabilities improve

the Corporation’s

liquidity profile

as they

allow the

Corporation to

derive liquidity,

if needed,

from the sale

of mortgage loans

in the secondary

market. The U.S. (including

Puerto Rico) secondary

mortgage market is

still highly-

liquid, in

large part

because of

the sale

of mortgages

through guarantee

programs of

the FHA,

VA,

U.S. Department

of Housing

and

Urban Development (“HUD”), FNMA

and FHLMC. During the first

six months of 2023, loans

pooled into GNMA MBS amounted

to

approximately

$66.4

million.

Also,

during

the

first

six

months

of

2023,

the

Corporation

sold

approximately

$22.8

million

of

performing residential mortgage loans to FNMA.

The

FED

Discount

Window

is

a

cost-efficient

contingent

source

of

funding

for

the

Corporation

in

highly-volatile

market

conditions.

As

previously

mentioned,

although

currently

not

in

use,

as

of

June

30,

2023,

the

Corporation

had

approximately

$1.4

billion available for funding under the FED’s

Discount Window based on collateral pledged at the FED.

109

The FED’s

BTFP was

established

by the

Federal Reserve

Board in

March 2023

as an

additional source

of funding

for depository

institutions

to

borrow

up

to

the

par

value

of

eligible

collateral

for

terms

of

up

to

one

year.

The

BTFP

eliminates

the

need

for

depository

institutions

to

sell their

debt

securities

in

times

of

stress. Eligible

collateral

includes

high-quality

securities such

as U.S.

Treasuries, U.S.

agency securities, and

U.S. agency MBS.

Borrowers that are

eligible for primary

credit under the

BIC Program, such

as FirstBank,

are eligible

to borrow

under the

BTFP.

In addition,

any eligible

collateral pledged

to the

discount window

can be

used

under the

BTFP.

The rate

for term

advances will

be the one

-year overnight

index swap

rate plus

10 basis points

and will be

fixed for

the term

of the

advance on

the day

the advance

is made.

As previously

mentioned, the

Corporation enrolled

in the

BTFP during

the

first quarter

of 2023

to further

diversify its

contingency funding

sources and

has approximately

$2.2 million

available for

funding as

of June 30, 2023.

Effect of Credit Ratings on Access to Liquidity

The

Corporation’s

liquidity

is

contingent

upon

its

ability

to

obtain

external

sources

of

funding

to

finance

its

operations.

The

Corporation’s

current credit

ratings and any

downgrade in credit

ratings can hinder

the Corporation’s

access to new

forms of external

funding

and/or

cause

external

funding

to

be

more

expensive,

which

could,

in

turn,

adversely

affect

its

results

of

operations.

Also,

changes in

credit ratings

may further

affect the

fair value

of unsecured

derivatives whose

value takes

into account

the Corporation’s

own credit risk.

The Corporation

does not

have any

outstanding debt

or derivative

agreements that

would be

affected by

credit rating

downgrades.

Furthermore, given the Corporation’s

non-reliance on corporate debt or

other instruments directly linked in

terms of pricing or volume

to credit

ratings, the

liquidity of

the Corporation

has not been

affected in

any material

way by downgrades.

The Corporation’s

ability

to access new non-deposit sources of funding, however,

could be adversely affected by credit downgrades.

As of

the date

hereof, the

Corporation’s

credit as

a long-term

issuer is

rated BB+

by S&P

and BB

by Fitch.

As of

the date

hereof,

FirstBank’s

credit

ratings

as

a

long-term

issuer

are

BB+

by

S&P,

one

notch

below

S&P’s

minimum

BBB-

level

required

to

be

considered investment

grade; and BB by

Fitch, two notches

below Fitch’s

minimum BBB- level

required to be

considered investment

grade.

The

Corporation’s

credit

ratings

are

dependent

on

a

number

of

factors,

both

quantitative

and

qualitative,

and

are

subject

to

change

at any

time. The

disclosure of

credit ratings

is not

a recommendation

to buy,

sell or

hold

the Corporation’s

securities. Each

rating should be evaluated independently of any other rating.

110

Cash Flows

Cash and

cash equivalents

were $1.0

billion as

of June

30, 2023,

an increase

of $567.0

million

when compared

to December

31,

2022.

The following

discussion highlights

the major

activities and

transactions that

affected the

Corporation’s

cash flows

during

the

first six months of 2023 and 2022:

Cash Flows from Operating Activities

First BanCorp.’s

operating assets and

liabilities vary significantly

in the normal course

of business due to

the amount and timing

of

cash flows.

Management believes

that cash

flows from

operations, available

cash balances,

and the

Corporation’s

ability to

generate

cash through

short and long-term

borrowings will be

sufficient to

fund the Corporation’s

operating liquidity

needs for the

foreseeable

future.

For

the

first

six

months

of

2023

and

2022,

net

cash

provided

by

operating

activities

was

$166.5

million

and

$219.6

million,

respectively.

Net cash

generated from

operating activities

was higher

than reported

net income

largely as

a result

of adjustments

for

non-cash items such

as depreciation and

amortization, deferred income

tax expense and

the provision for credit

losses, as well as cash

generated from sales and repayments of loans held for sale.

Cash Flows from Investing Activities

The Corporation’s

investing activities primarily

relate to originating

loans to be

held for investment,

as well as

purchasing, selling,

and repaying available

-for-sale and held-to-maturity

debt securities. For

the six-month period

ended June 30,

2023, net cash

provided

by

investing

activities

was

$25.0 million,

primarily

due

to repayments

of available

-for-sale

and

held-to-maturity debt

securities

and

proceeds from sales of repossessed assets, partially offset

by net disbursements on loans held for investment.

For the six-month

period ended June

30, 2022, net

cash used in

investing activities

was $557.7

million, primarily

due to purchases

of U.S.

agencies

debentures

and

MBS,

and

net

disbursements

on

loans

held

for

investment,

partially

offset

by

repayments

of

U.S.

agencies MBS.

Cash Flows from Financing Activities

The Corporation’s

financing activities

primarily

include the

receipt of

deposits and

the issuance

of brokered

CDs, the

issuance of

and payments

on long-term

debt, the

issuance of

equity instruments,

return of

capital, and

activities related

to its

short-term funding.

For

the

six-month

period

ended

June

30,

2023,

net

cash

provided

by

financing

activities

was

$375.5

million,

mainly

reflecting

a

$675.9 million

net increase

in deposits,

partially offset

by a

$196.0 million

net decrease

in borrowings

and $104.4

million of

capital

returned to stockholders.

For

the

first

six

months

of

2022,

net

cash

used

in

financing

activities

was

$941.5

million,

mainly

reflecting

a

net

decrease

in

deposits, the repayment at maturity of a $100 million repurchase agreement,

and $196.0 million of capital returned to stockholders.

111

Capital

As of June 30, 2023, the Corporation’s

stockholders’ equity was $1.4 billion, an increase of $72.5

million from December 31, 2022.

The growth was

driven by the earnings

generated in the first

half of 2023

and the $32.4

million increase in

the fair value of

available-

for-sale debt securities recorded as

part of accumulated other comprehensive

loss in the consolidated statements of

financial condition,

as a

result of

changes in

market interest

rates, partially

offset by

common stock

dividends

declared in

the first

half of

2023 totaling

$50.7

million

or

$0.28

per

common

share,

the

repurchase

of

3.6

million

shares

of

common

stock

for

a

total

purchase

price

of

approximately $50.0 million,

and the $1.3 million impact to retained

earnings related to the adoption of

Accounting Standards Update

(“ASU”)

2022-02,

“Financial

Instruments

–

Credit

Losses

(Topic

326):

Troubled

Debt

Restructurings

and

Vintage

Disclosures”

during

the

first

quarter

of

2023.

See

Note

1

–

Basis

of

Presentation

and

Significant

Accounting

Policies

for

additional

information

related to the adoption of ASU 2022-02.

On July 24,

2023, the Corporation’s

Board declared a

quarterly cash dividend

of $0.14 per common

share payable on

September 8,

2023

to

shareholders

of

record

at

the

close

of

business

on

August

24,

2023.

The

Corporation

intends

to

continue

to

pay

quarterly

dividends

on

common

stock.

The

Corporation’s

common

stock

dividends,

including

the

declaration,

timing

and

amount,

remain

subject to the consideration and approval by the Corporation’s

Board at the relevant times.

On July

24, 2023,

the Corporation

announced that

its Board

of Directors

approved a

new stock

repurchase program,

under which

the Corporation

may repurchase

up to

$225 million

of its

outstanding common

stock, which

it expects

to execute

through the

end of

the third quarter of 2024.

The Corporation

expects to repurchase

approximately $150 million

in common stock

during the second

half of 2023,

of which $75

million relates to

the remaining amount

of the $350

million stock repurchase

program announced

on April 27,

2022 that was resumed

in July 2023.

The Corporation expects

to fully utilize this

remaining authorization during

the third quarter of

2023. From July

1, 2023

through August

1, 2023, the

Corporation repurchased

approximately 1.5

million shares of

common stock

for a total

purchase price

of

$19.5 million.

Repurchases under

the programs

may be

executed through

open market

purchases, accelerated

share repurchases,

and/or privately

negotiated transactions or

plans, including under plans

complying with Rule 10b5-1

under the Exchange Act.

The Corporation’s

stock

repurchase program

s

are subject

to various

factors, including

the Corporation’s

capital position,

liquidity,

financial performance

and

alternative

uses of

capital,

stock

trading

price,

and

general

market

conditions.

The

Corporation’s

stock

repurchase

programs

do

not

obligate

it

to

acquire

any

specific

number

of

shares

and

do

not

have

an

expiration

date.

The

stock

repurchase

programs

may

be

modified,

suspended, or terminated at any time at the Corporation’s

discretion. The Parent Company has no operations and depends on

dividends,

distributions

and

other

payments

from

its

subsidiaries

to

fund

dividend

payments,

stock

repurchases,

and

to

fund

all

payments

on its obligations, including debt obligations.

The tangible common

equity ratio and

tangible book value

per common share

are non-GAAP financial

measures generally used

by

the

financial

community

to

evaluate

capital

adequacy.

Tangible

common

equity

is

total

common

equity

less

goodwill

and

other

intangible

assets.

Tangible

assets

are

total

assets

less

the

previously

mentioned

intangible

assets.

See

“Non-GAAP

Financial

Measures and Reconciliations” above for additional information.

112

The

following

table

is

a

reconciliation

of

the

Corporation’s

tangible

common

equity

and

tangible

assets,

non-GAAP

financial

measures, to total equity and total assets, respectively,

as of June 30, 2023 and December 31, 2022, respectively:

June 30,

2023

December 31, 2022

(In thousands, except ratios and per share information)

Total equity

• GAAP

$

1,397,999

$

1,325,540

Goodwill

(38,611)

(38,611)

Purchased credit card relationship intangible

(17)

(205)

Core deposit intangible

(17,075)

(20,900)

Insurance customer relationship intangible

-

(13)

Tangible common

equity - non-GAAP

$

1,342,296

$

1,265,811

Total assets - GAAP

$

19,152,455

$

18,634,484

Goodwill

(38,611)

(38,611)

Purchased credit card relationship intangible

(17)

(205)

Core deposit intangible

(17,075)

(20,900)

Insurance customer relationship intangible

-

(13)

Tangible assets -

non-GAAP

$

19,096,752

$

18,574,755

Common shares outstanding

179,757

182,709

Tangible common

equity ratio - non-GAAP

7.03%

6.81%

Tangible book

value per common share - non-GAAP

$

7.47

$

6.93

See Note

22 -

Regulatory Matters,

Commitments and

Contingencies, to

the unaudited

consolidated financial

statements herein

for

the regulatory capital positions of the Corporation and FirstBank as of June

30, 2023 and December 31, 2022, respectively.

The

Puerto

Rico

Banking

Law

of

1933,

as

amended

(the

“Puerto

Rico

Banking

Law”)

requires

that

a

minimum

of

10%

of

FirstBank’s

net income

for

the year

be transferred

to a

legal surplus

reserve

until such

surplus

equals the

total of

paid-in-capital

on

common and preferred

stock. Amounts transferred

to the legal surplus

reserve from retained

earnings are not available

for distribution

to the Corporation without the

prior consent of the Puerto

Rico Commissioner of Financial Institutions.

The Puerto Rico Banking

Law

provides that,

when the

expenditures of

a Puerto

Rico commercial

bank are

greater than

receipts, the

excess of

the expenditures

over

receipts

must

be

charged

against

the

undistributed

profits

of

the

bank,

and

the

balance,

if

any,

must

be

charged

against

the

legal

surplus

reserve,

as

a

reduction

thereof.

If

the

legal

surplus

reserve

is

not

sufficient

to

cover

such

balance

in

whole

or

in

part,

the

outstanding

amount

must

be charged

against

the

capital

account

and

the

Bank

cannot

pay

dividends

until

it

can

replenish

the

legal

surplus reserve

to an

amount of

at least

20% of

the original

capital contributed.

FirstBank’s

legal surplus

reserve, included

as part

of

retained earnings

in the

Corporation’s

consolidated statements

of financial

condition, amounted

to $168.5

million as

of each

of June

30, 2023 and December 31, 2022, respectively.

There were no transfers to the legal surplus reserve during the first half of 2023.

113

Interest Rate Risk Management

First

BanCorp

manages

its

asset/liability

position

to

limit

the

effects

of

changes

in

interest

rates

on

net

interest

income

and

to

maintain stability

of profitability

under varying

interest rate

scenarios. The

MIALCO oversees

interest rate

risk and

monitors, among

other things, current

and expected conditions

in global financial

markets, competition

and prevailing rates

in the local

deposit market,

liquidity,

loan

originations

pipeline,

securities

market

values,

recent

or

proposed

changes

to

the

investment

portfolio,

alternative

funding sources

and related costs,

hedging and the

possible purchase of

derivatives such as

swaps and caps,

and any tax

or regulatory

issues which may be

pertinent to these areas.

The MIALCO approves funding

decisions in light of

the Corporation’s

overall strategies

and objectives.

On at least a quarterly basis, the Corporation performs a

consolidated net interest income simulation analysis to estimate the

potential

change

in

future

earnings

from

projected

changes

in

interest

rates.

These

simulations

are

carried

out

over

a

one-to-five-year

time

horizon. The

rate scenarios

considered in

these simulations

reflect gradual

upward or

downward interest

rate movements

in the

yield

curve,

for

gradual

(ramp)

parallel

shifts

in

the

yield

curve

of

200

basis

points

(“bps”)

during

a

twelve-month

period,

or

immediate

upward or downward

changes in interest

rate movements of 200

bps, for interest

rate shock scenarios.

The Corporation carries

out the

simulations in two ways:

(1) Using a static balance sheet, as the Corporation had on the simulation date,

and

(2) Using a dynamic balance sheet based on recent patterns and current strategies.

The balance

sheet is

divided into

groups of

assets and

liabilities by

maturity or

re-pricing structure

and their

corresponding interest

yields and

costs. As interest

rates rise or

fall, these

simulations incorporate

expected future

lending rates,

current and

expected future

funding sources

and costs,

the possible

exercise of

options, changes

in prepayment

rates, deposit

decay and

other factors,

which may

be important in projecting net interest income.

The Corporation uses

a simulation model

to project future movements

in the Corporation’s

balance sheet and

income statement. The

starting point of the projections

corresponds to the actual

values on the balance

sheet on the date of the

simulations. These simulations

are

highly

complex

and

are

based

on

many

assumptions

that

are

intended

to

reflect

the

general

behavior

of

the

balance

sheet

components over

the modeled

periods. It

is unlikely

that actual

events will

match these

assumptions in

all cases.

For this

reason, the

results of

these forward-looking

computations are

only approximations

of the

sensitivity of

net interest

income to

changes in

market

interest rates. Several

benchmark and market

rate curves were

used in the modeling

process, primarily the

LIBOR/Swap curve, SOFR

curve,

Prime

Rate,

U.S.

Treasury

yield

curve,

FHLB

rates,

brokered

CDs

rates,

repurchase

agreements

rates,

and

the

mortgage

commitment rate of 30 years.

As of June 30, 2023, the Corporation forecasted the 12-month

net interest income assuming June 30, 2023 interest

rate curves remain

constant. Then, net interest income was estimated under rising and

falling rates scenarios. For the rising rate scenario, a gradual (ramp)

parallel

upward

shift

of

the

yield

curve

is

assumed

during

the

first

twelve

months

(the

“+200

ramp”

scenario).

Conversely,

for

the

falling rate scenario,

a gradual (ramp)

parallel downward shift

of the yield

curve is assumed

during the first

twelve months (the

“-200

ramp” scenario).

The SOFR

curve for

June 30,

2023, as

compared to

December 31,

2022, reflects

an increase

of 60

bps on

average in

the short-term

sector of

the curve,

or between

one to

twelve months;

37 bps in

the medium-term

sector of

the curve,

or between

2 to

5 years;

and 5

bps

in

the

long-term

sector

of the

curve,

or

over

5-year

maturities.

A

similar

increase

in

market

rates

changes

was observed

in

the

Treasury

(CMT) yield

curve with

an increase

of 88

bps in

the short-term

sector,

29 bps

in the

medium-term sector,

and 6

bps in

the

long-term sector.

114

The following table presents the results of the simulations as of June 30,

2023 and December 31, 2022. Consistent with prior years,

these exclude non-cash changes in the fair value of derivatives:

Net Interest Income Risk

(% Change Projected for the next 12 months)

Static Simulation

Growing Balance Sheet

June 30,

2023

December 31, 2022

June 30,

2023

December 31, 2022

Gradual Change in Interest Rates:

• 200 bps ramp

0.94

%

0.96

%

1.01

%

1.37

%

• 200 bps ramp

-1.38

%

-1.61

%

-1.42

%

-2.03

%

Immediate Change in Interest Rates:

• 200 bps shock

3.76

%

2.35

%

3.18

%

2.56

%

• 200 bps shock

-5.43

%

-4.71

%

-4.77

%

-5.02

%

The Corporation

continues to

manage its

balance sheet

structure to

control and

limit the

overall interest

rate risk

by managing

its

asset composition

while maintaining

a sound

liquidity

position. See

“Risk Management

– Liquidity

Risk” above

for liquidity

ratios.

As of

June 30,

2023 and

December 31,

2022, the

simulations showed

that the

Corporation

continues to

have a

slight asset-sensitive

position.

As of

June 30,

2023, the

net interest

income for

the next

twelve months

under a

non-static balance

sheet scenario

is estimated

to

increase by

1.01% in

the rising rate

scenario, when

compared against

the base

simulation. When

compared with

December 31,

2022,

the net interest income

sensitivity for the +200

bps ramp scenario decreased

by 36 bps. The

reduction in sensitivity was

mainly driven

by

the

migration

from

non-interest-bearing

and

other

low-cost

deposits

to

higher

cost

deposits,

such

as

time

deposits,

as

well

as

increases in

government

deposits which

have

a higher

beta, partially

offsetting

the growth

in the

loan portfolio

at higher

yields,

the

repricing of variable rate loans and overall higher yields in other interest

earning assets such as cash balances held at the FED.

Under a falling rate scenario,

as of June 30, 2023,

the net interest income on

the non-static balance sheet scenario

is estimated to

decrease

by

1.42%,

when

compared

against

the

base

simulation.

When

compared

to

December

31,

2022.

the

net

interest

income

sensitivity decreases for the -200-bps ramp scenario by approximately

61 bps in the non-static balance sheet driven by a higher

deposit

beta assumed in the June 30, 2023 simulation for non-maturity deposits,

and the aforementioned migration to higher cost deposits.

As discussed

above, the

Corporation evaluates

other scenarios

such as

immediate upward

or downward

changes in

interest rate

movements of 200 bps, for

interest rate shock scenarios. As

of June 30, 2023

and December 31, 2022,

the simulations showed that the

Corporation continues to have an asset-sensitive position.

Credit Risk Management

First BanCorp.

is subject

to

credit

risk

mainly

with

respect to

its portfolio

of loans

receivable

and

off-balance-sheet

instruments,

principally

loan

commitments.

Loans

receivable

represents

loans

that

First

BanCorp.

holds

for

investment

and,

therefore,

First

BanCorp. is at risk for

the term of the loan.

Loan commitments represent commitments

to extend credit, subject

to specific conditions,

for specific amounts

and maturities. These commitments

may expose the Corporation

to credit risk and

are subject to the

same review

and

approval

process

as

for

loans

made

by

the

Bank.

See

“Liquidity

Risk”

above

for

further

details.

The

Corporation

manages

its

credit risk through its credit policy,

underwriting, monitoring of loan concentrations and

related credit quality,

counterparty credit risk,

economic and

market conditions, and

legislative or regulatory

mandates. The Corporation

also performs independent

loan review

and

quality

control

procedures,

statistical

analysis,

comprehensive

financial

analysis,

established

management

committees,

and

employs

proactive collection

and loss

mitigation efforts.

Furthermore, personnel

performing structured

loan workout

functions are

responsible

for

mitigating

defaults

and

minimizing

losses

upon

default

within

each

region

and

for

each

business

segment.

In

the

case

of

the

commercial

and

industrial,

commercial

mortgage

and

construction

loan

portfolios,

the

Special

Asset

Group

(“SAG”)

focuses

on

strategies for the

accelerated reduction of

non-performing assets through

note sales, short sales,

loss mitigation programs,

and sales of

OREO. In addition to

the management of the

resolution process for problem

loans, the SAG oversees collection

efforts for all

loans to

prevent migration to the nonaccrual and/or adversely classified

status. The SAG utilizes relationship officers,

collection specialists and

attorneys.

115

The

Corporation

may

also

have

risk

of

default

in

the

securities

portfolio.

The

securities

held

by

the

Corporation

are

principally

fixed-rate U.S. agencies

MBS and U.S. Treasury

and agencies securities. Thus,

a substantial portion

of these instruments is

backed by

mortgages, a guarantee of a U.S. GSE or the full faith and credit of the U.S. government.

Management, consisting of the

Corporation’s Commercial

Credit Risk Officer,

Retail Credit Risk Officer,

Chief Credit Officer,

and

other

senior

executives,

has

the

primary

responsibility

for

setting

strategies

to

achieve

the

Corporation’s

credit

risk

goals

and

objectives. Management has documented these goals and objectives in the Corporation’s

Credit Policy.

116

Allowance for Credit Losses and Non-performing Assets

Allowance for Credit Losses for Loans and

Finance Leases

The ACL

for loans

and finance

leases represents

the estimate

of the

level of

reserves appropriate

to absorb

expected credit

losses

over the estimated life of the

loans. The amount of the allowance

is determined using relevant available

information, from internal and

external sources, relating

to past events, current

conditions, and reasonable

and supportable forecasts.

Historical credit loss experience

is

a

significant

input

for

the

estimation

of

expected

credit

losses,

as

well

as

adjustments

to

historical

loss

information

made

for

differences in current loan-specific

risk characteristics, such as differences

in underwriting standards, portfolio mix,

delinquency level,

or

term.

Additionally,

the

Corporation’s

assessment

involves

evaluating

key

factors,

which

include

credit

and

macroeconomic

indicators,

such as

changes in

unemployment

rates, property

values, and

other relevant

factors to

account for

current and

forecasted

market conditions

that are

likely to

cause estimated

credit losses over

the life

of the

loans to differ

from historical

credit losses.

Such

factors are

subject to

regular review

and may

change to

reflect updated

performance trends

and expectations,

particularly in

times of

severe

stress.

The

process

includes

judgments

and

quantitative

elements

that

may

be

subject

to

significant

change.

Further,

the

Corporation periodically considers the need for qualitative

reserves to the ACL. Qualitative adjustments may be related

to and include,

but are

not limited

to, factors

such as

the following:

(i) management’s

assessment of

economic forecasts

used in

the model

and how

those

forecasts

align

with

management’s

overall

evaluation

of

current

and

expected

economic

conditions;

(ii)

organization

specific

risks such

as credit

concentrations,

collateral

specific risks,

nature

and

size of

the portfolio

and

external

factors that

may

ultimately

impact credit quality,

and (iii) other

limitations associated with

factors such as

changes in underwriting

and loan resolution

strategies,

among others.

The ACL

for loans

and finance

leases is

reviewed at

least on

a quarterly

basis as

part of

the Corporation’s

continued

evaluation of its asset quality.

The Corporation applies

probability weights to

the baseline and

alternative downside economic

scenarios to estimate

the ACL with

the baseline scenario carrying

the highest weight. During

the second quarter of 2023,

the Corporation applied the

baseline scenario for

the commercial

mortgage and

construction loan

portfolios as

deterioration in

the CRE

price index

in these

portfolios is

expected at

a

lower extent

than projected

in the

alternative downside

scenario, particularly

in the Puerto

Rico region.

The economic

scenarios used

in the

ACL determination

contained

assumptions

related

to economic

uncertainties associated

with geopolitical

instability,

the CRE

price index,

high inflation

levels, and

the expected

path of

interest rate

increases by

the FED.

As of

June 30, 2023,

the Corporation’s

ACL model considered the following assumptions for key economic variables

in the probability-weighted economic scenarios:

●

Average

CRE price

index at

the national

level is

forecasted to

contract by

4.08% for

the remainder

of 2023

and 6.24%

for

2024.

●

Average Regiona

l

Home Price Index forecasts

in Puerto Rico (purchase only prices) shows a growth of 8.58%

and 6.36%, for

the

remainder

of

2023

and

2024,

respectively,

when

compared

to

the

previous

quarter

forecast.

For

the

Florida

region,

average Home

Price Index

forecasts shows

a growth

of 3.74%

and 2.24%

for the

remainder of

2023 and

2024, respectively,

when compared to the previous quarter forecast.

●

Average

regional

unemployment

in

Puerto

Rico

of

6.84%

for

the

remainder

of

2023

and

8.12%

for

2024.

For

the

Florida

region and the

U.S. mainland, average

unemployment rate of

3.60% and 4.13%,

respectively,

for the remainder

of 2023, and

4.37% and 4.79%, respectively,

for 2024.

●

Average

annualized change in real

gross domestic product (“GDP”)

in the U.S. mainland

of 1.07% for the

remainder of 2023

and 1.18% for 2024.

It is difficult to estimate how potential changes

in one factor or input might affect the overall ACL because

management considers a

wide variety of

factors and inputs in

estimating the ACL.

Changes in the

factors and inputs considered

may not occur

at the same rate

and may not be consistent

across all geographies or product

types, and changes in factors

and inputs may be directionally

inconsistent,

such that improvement

in one factor

or input may

offset deterioration

in others. However,

to demonstrate the

sensitivity of credit

loss

estimates

to

macroeconomic

forecasts

as

of

June

30,

2023,

management

compared

the

modeled

estimates

under

the

probability-

weighted

economic

scenarios

against

a

more

adverse

scenario.

Under

this

more

adverse

scenario,

as

an

example,

average

unemployment rate

for the Puerto

Rico region

increases to 7.64%

for the

remainder of

2023, compared

to 6.84%

for the same

period

on the probability-weighted economic scenario projections.

117

To

demonstrate

the

sensitivity

to

key

economic

parameters

used

in

the

calculation

of

the

ACL

at

June

30,

2023,

management

calculated

the

difference

between

the

quantitative

ACL

and

this

more

adverse

scenario.

Excluding

consideration

of

qualitative

adjustments,

this

sensitivity

analysis

would

result

in

a

hypothetical

increase

in

the

ACL

of

approximately

$53

million

at

June

30,

2023.

This analysis

relates only

to the

modeled credit

loss estimates

and is

not intended

to estimate

changes in

the overall

ACL as

it

does

not

reflect

any

potential

changes

in

other

adjustments

to

the

qualitative

calculation,

which

would

also

be

influenced

by

the

judgment

management

applies

to

the

modeled

lifetime

loss

estimates

to

reflect

the

uncertainty

and

imprecision

of

these

estimates

based

on

current

circumstances

and

conditions.

Recognizing

that

forecasts

of

macroeconomic

conditions

are

inherently

uncertain,

particularly in

light of

recent economic

conditions and

challenges, which

continue to

evolve, management

believes that

its process

to

consider the

available information

and associated

risks and

uncertainties is

appropriately governed

and that

its estimates

of expected

credit losses were reasonable and appropriate for the period ended

June 30, 2023.

As of June

30, 2023, the

ACL for loans

and finance

leases was $267.1

million, an increase

of $6.6 million,

from $260.5 million

as

of December 31, 2022. The ACL for

commercial and construction loans increased

by $5.0 million, mainly due to a

deterioration in the

forecasted CRE price

index to account for

an increased uncertainty

in the CRE market

at a national level

that could potentially

impact

the

markets

served

by

the

Corporation

coupled

with

the

growth

in

the

commercial

and

construction

loan

portfolios.

The

ACL

for

consumer loans increased by $3.9

million, primarily reflecting the effect

of the increase in the size of

the consumer loan portfolios and

historical

charge-off

levels,

partially

offset

by

updated

macroeconomic

variables,

such

as

the

unemployment

rate,

which

are

now

forecasted to deteriorate at a slower pace than

previously expected. The ACL for residential mortgage

loans decreased by $2.3 million,

mainly

driven

by

a

more

favorable

economic

outlook

in

the

projection

of

certain

forecasted

macroeconomic

variables,

such

as

the

Regional Home

Price Index,

partially offset

by a

$2.1 million

cumulative increase

in the

ACL due

to the

adoption of

ASU 2022-02,

for which

the Corporation

elected to

discontinue the

use of

a discounted

cash flow

methodology for

restructured accruing

loans. See

Note

1

–

Basis

of

Presentation

and

Significant

Accounting

Policies

to

the

unaudited

consolidated

financial

statements

herein

for

additional information related to the adoption of ASU 2022-02 during

2023.

The

ratio

of

the

ACL

for

loans

and

finance

leases

to

total

loans

held

for

investment

increased

to

2.28%

as

of

June

30,

2023,

compared to 2.25% as of December 31, 2022. An explanation for the change

for each portfolio follows:

●

The

ACL

to

total

loans

ratio

for

the

residential

mortgage

portfolio

decreased

from

2.20%

as

of

December

31,

2022

to

2.17% as of

June 30,

2023, primarily

reflecting a

more favorable

economic outlook

in the projection

of certain

forecasted

macroeconomic

variables,

such

as

the

Regional

Home

Price

Index,

partially

offset

by

the

aforementioned

$2.1

million

cumulative

increase in the ACL due to the adoption of ASU 2022-02 during the first quarter

of 2023.

●

The ACL

to total

loans ratio

for the

construction loan

portfolio increased

from 1.74%

as of

December 31,

2022 to

2.93%

as of June 30, 2023 mainly due to the aforementioned deterioration

in the forecasted CRE price index.

●

The

ACL

to

total

loans

ratio for

the

commercial

mortgage

portfolio

increased

from

1.49%

as

of

December

31,

2022

to

1.83% as of June 30, 2023 mainly due to the aforementioned deterioration

in the forecasted CRE price index.

●

The ACL to total loans ratio

for the commercial and industrial portfolio

decreased from 1.14% as of December

31, 2022 to

0.95% as of June

30, 2023,

mainly due to reserve

decreases associated with

the receipt of updated

financial information of

certain borrowers and

the repayment of

a $24.3 million

adversely classified commercial

and industrial

participated loan in

the Florida region, partially offset by higher exposure

risk associated with the rising interest rate environment.

●

The ACL to

total loans ratio

for the consumer

loan portfolio decreased

from 3.83% as

of December

31, 2022

to 3.76% as

of June 30, 2023 mainly due to updates in macroeconomic variables, such as the

unemployment rate.

The ratio

of the

total ACL

for loans

and finance

leases to

nonaccrual loans

held for

investment was

325.60% as

of June

30, 2023,

compared to 289.61% as of December 31, 2022.

Substantially all of

the Corporation’s

loan portfolio is

located within the

boundaries of the

U.S. economy.

Whether the collateral

is

located in

Puerto Rico,

the U.S.

and British

Virgin

Islands, or

the U.S.

mainland (mainly

in the

state of

Florida), the

performance of

the Corporation’s

loan portfolio and

the value of

the collateral supporting

the transactions are

dependent upon the

performance of and

conditions

within each

specific area’s

real estate

market. The

Corporation believes

it sets

adequate loan-to-value

ratios following

its

regulatory and credit policy standards.

118

As shown in

the following

tables, the ACL

for loans

and finance

leases amounted

to $267.1

million as of

June 30,

2023, or 2.28%

of total loans, compared with $260.5 million, or 2.25%

of total loans, as of December 31, 2022. See “Results of Operations

• Provision

for Credit Losses” above for additional information.

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(Dollars in thousands)

ACL for loans and finance leases, beginning of year

$

265,567

$

245,447

$

260,464

$

269,030

Impact of adoption of ASU 2022-02

-

-

2,116

-

Provision for credit losses - (benefit) expense:

Residential mortgage

(3,500)

(2,797)

(3,427)

(7,668)

Construction

1,202

151

2,062

(2,063)

Commercial mortgage

5,999

1,265

7,245

(21,375)

Commercial and industrial

2,997

(1,102)

1,347

653

Consumer and finance leases

14,072

15,148

29,799

26,129

Total provision for credit losses

• expense (benefit)

20,770

12,665

37,026

(4,324)

Charge-offs:

Residential mortgage

(1,146)

(2,079)

(2,129)

(4,607)

Construction

(38)

(16)

(38)

(60)

Commercial mortgage

(88)

(2)

(106)

(39)

Commercial and industrial

(6,350)

(68)

(6,468)

(358)

Consumer and finance leases

(16,462)

(10,427)

(33,260)

(20,243)

Total charge offs

(24,084)

(12,592)

(42,001)

(25,307)

Recoveries:

Residential mortgage

757

1,287

1,254

2,669

Construction

409

43

472

95

Commercial mortgage

56

1,218

224

1,262

Commercial and industrial

132

589

222

1,624

Consumer and finance leases

3,451

3,495

7,281

7,103

Total recoveries

4,805

6,632

9,453

12,753

Net charge-offs

(19,279)

(5,960)

(32,548)

(12,554)

ACL for loans and finance leases, end of period

$

267,058

$

252,152

$

267,058

$

252,152

ACL for loans and finance leases to period-end total loans

held for investment

2.28%

2.25%

2.28%

2.25%

Net charge-offs (annualized) to average loans

outstanding during the period

0.67%

0.21%

0.56%

0.23%

Provision for credit losses - expense (benefit) for loans and finance

leases to net charge-

offs during the period

1.08x

2.13x

1.14x

-0.34x

119

The following tables set forth information concerning the composition of the

Corporation's loan portfolio and related ACL by

loan category, and the percentage

of loan balances in each category to the total as such loans as of the indicated dates:

As of June 30,

2023

Residential

Mortgage

Loans

Commercial

Mortgage

Loans

C&I Loans

Consumer and

Finance

Leases

Construction

Loans

(Dollars in thousands)

Total

Total loans held for investment:

Amortized cost of loans

$

2,793,790

$

163,998

$

2,320,069

$

2,946,201

$

3,495,257

$

11,719,315

Percent of loans in each category to total loans

24

%

1

%

20

%

25

%

30

%

100

%

Allowance for credit losses

60,514

4,804

42,427

28,014

131,299

267,058

Allowance for credit losses to amortized cost

2.17

%

2.93

%

1.83

%

0.95

%

3.76

%

2.28

%

As of December 31, 2022

Residential

Mortgage

Loans

Commercial

Mortgage

Loans

C&I Loans

Consumer and

Finance Leases

Construction

Loans

(Dollars in thousands)

Total

Total loans held for investment:

Amortized cost of loans

$

2,847,290

$

132,953

$

2,358,851

$

2,886,263

$

3,327,468

$

11,552,825

Percent of loans in each category to total loans

25

%

1

%

20

%

25

%

29

%

100

%

Allowance for credit losses

62,760

2,308

35,064

32,906

127,426

260,464

Allowance for credit losses to amortized cost

2.20

%

1.74

%

1.49

%

1.14

%

3.83

%

2.25

%

Allowance for Credit Losses for Unfunded Loan

Commitments

The Corporation estimates

expected credit losses

over the contractual

period in which

the Corporation is

exposed to credit

risk as a

result

of

a

contractual

obligation

to

extend

credit,

such as

pursuant

to unfunded

loan

commitments

and

standby

letters of

credit

for

commercial and

construction loans,

unless the

obligation is

unconditionally cancellable

by the

Corporation. The

ACL for

off-balance

sheet

credit

exposures

is adjusted

as a

provision

for

credit loss

expense.

As of

June 30,

2023,

the

ACL for

off-balance

sheet

credit

exposures

increased

by

$0.6

million

to

$4.9

million,

when

compared

to

December

31,

2022,

driven

by

the

deterioration

in

the

forecasted CRE price index and its effect in construction unfunded

loan commitments.

Allowance for Credit Losses for Held-to-Maturity

Debt Securities

As of

June 30,

2023, the

ACL for

held-to-maturity

securities portfolio

was entirely

related to

financing arrangements

with Puerto

Rico municipalities

issued in bond

form, which

the Corporation accounts

for as securities,

but which

were underwritten as

loans with

features

that

are

typically

found

in

commercial

loans.

As

of

June

30,

2023,

the

ACL

for

held-to-maturity

debt

securities

was

$8.4

million, compared to $8.3

million as of December 31, 2022.

Allowance for Credit Losses for Available

-for-Sale Debt Securities

The

ACL

for

available-for-sale

debt

securities,

which

is

associated

with

private

label

MBS

and

a

residential

pass-through

MBS

issued by the PRHFA, was $0.4

million as of June 30, 2023, compared to $0.5 million as of December 31, 2022.

120

Nonaccrual Loans and Non-performing Assets

Total

non-performing

assets

consist

of

nonaccrual

loans

(generally

loans

held

for

investment

or

loans

held

for

sale

in

which

the

recognition of

interest income

was discontinued

when the

loan became

90 days

past due

or earlier

if the

full and

timely collection

of

interest or principal

is uncertain), foreclosed

real estate and

other repossessed properties,

and non-performing

investment securities, if

any.

When a

loan is placed

in nonaccrual

status, any

interest previously

recognized and

not collected

is reversed

and charged

against

interest

income.

Cash

payments

received

are

recognized

when

collected

in

accordance

with

the

contractual

terms

of

the

loans.

The

principal

portion

of the

payment is

used to

reduce

the principal

balance

of the

loan,

whereas the

interest portion

is recognized

on a

cash basis

(when collected).

However,

when management

believes that

the ultimate

collectability of

principal is

in doubt,

the interest

portion

is

applied

to

the

outstanding

principal.

The

risk

exposure

of

this

portfolio

is

diversified

as

to

individual

borrowers

and

industries, among other factors. In addition, a large portion

is secured with real estate collateral.

Nonaccrual Loans Policy

Residential Real Estate Loans

— The Corporation generally classifies real estate loans in

nonaccrual status when it has not received

interest and principal for a period of 90 days or more.

Commercial

and

Construction

Loans

—

The

Corporation

classifies

commercial

loans

(including

commercial

real

estate

and

construction loans) in nonaccrual

status when it has not

received interest and principal

for a period of 90

days or more or when

it does

not expect to collect all of the principal or interest due to deterioration in the financial condition

of the borrower.

Finance Leases

— The Corporation

classifies finance leases

in nonaccrual status

when it has not

received interest and

principal for

a period of 90 days or more.

Consumer Loans

— The Corporation

classifies consumer

loans in nonaccrual

status when it

has not received

interest and

principal

for a period of 90 days or more. Credit card loans continue to accrue finance

charges and fees until charged-off at 180

days delinquent.

Purchased

Credit Deteriorated

Loans (“PCD”)

— For

PCD loans,

the nonaccrual

status is

determined in

the same

manner as

for

other loans,

except for

PCD loans

that prior

to the

adoption of

CECL were

classified as

purchased credit

impaired (“PCI”)

loans and

accounted

for

under

ASC

Subtopic

310-30,

“Receivables

–

Loans

and

Debt

Securities

Acquired

with

Deteriorated

Credit

Quality”

(“ASC

Subtopic

310-30”).

As

allowed

by

CECL,

the

Corporation

elected

to

maintain

pools

of

loans

accounted

for

under

ASC

Subtopic 310-30

as “units

of accounts,”

conceptually treating

each pool

as a

single asset.

Regarding interest

income recognition,

the

prospective

transition

approach

for

PCD loans

was applied

at

a

pool

level, which

froze

the

effective

interest

rate of

the pools

as of

January

1, 2020.

According

to regulatory

guidance,

the determination

of nonaccrual

or accrual

status for

PCD loans

with respect

to

which the Corporation has made

a policy election to maintain previously

existing pools upon adoption of CECL

should be made at the

pool level, not the individual

asset level. In addition, the guidance

provides that the Corporation can continue

accruing interest and not

report

the PCD

loans as

being

in nonaccrual

status if

the following

criteria are

met: (i)

the Corporation

can reasonably

estimate the

timing and amounts of

cash flows expected to

be collected; and (ii)

the Corporation did not

acquire the asset primarily

for the rewards

of ownership

of the

underlying collateral,

such as

the use

in operations

or improving

the collateral

for resale.

Thus, the

Corporation

continues to exclude these pools of PCD loans from nonaccrual loan statistics.

Other Real Estate Owned

OREO

acquired

in

settlement

of

loans

is

carried

at

fair

value

less

estimated

costs

to

sell

the

real

estate

acquired.

Appraisals

are

obtained periodically,

generally on an annual basis.

Other Repossessed Property

The

other

repossessed

property

category

generally

includes

repossessed

boats

and

autos

acquired

in

settlement

of

loans.

Repossessed boats and autos are recorded at the lower of cost or estimated fair value.

Other Non-Performing Assets

This

category

consists

of a

residential

pass-through

MBS

issued

by

the

PRHFA placed

in

non-performing

status

in

the

second

quarter of 2021 based on the delinquency status of the underlying second

mortgage loans.

121

Loans Past-Due 90 Days and Still Accruing

These are accruing loans

that are contractually delinquent

90 days or more. These

past-due loans are either

current as to interest but

delinquent as to the

payment of principal (i.e.,

well secured and in proc

ess of collection) or are

insured or guaranteed under

applicable

FHA,

VA,

or

other

government-guaranteed

programs

for

residential

mortgage

loans.

Furthermore,

as

required

by

instructions

in

regulatory

reports,

loans

past

due

90

days

and

still

accruing

include

loans

previously

pooled

into

GNMA

securities

for

which

the

Corporation

has

the

option

but

not

the

obligation

to

repurchase

loans

that

meet

GNMA’s

specified

delinquency

criteria

(e.g.,

borrowers

fail

to

make

any

payment

for

three

consecutive

months).

For

accounting

purposes,

these

GNMA

loans

subject

to

the

repurchase option are required to be reflected in

the financial statements with an offsetting liability.

In addition, loans past due 90 days

and

still

accruing

include

PCD

loans,

as

mentioned

above,

and

credit

cards

that

continue

accruing

interest

until

charged-off

at

180

days.

The following table presents non-performing assets as of the indicated dates:

June 30, 2023

December 31, 2022

(Dollars in thousands)

Nonaccrual loans held for investment:

Residential mortgage

$

33,252

$

42,772

Construction

1,677

2,208

Commercial mortgage

21,536

22,319

Commercial and Industrial

9,194

7,830

Consumer and finance leases

16,362

14,806

Total nonaccrual loans held for investment

82,021

89,935

OREO

31,571

31,641

Other repossessed property

5,404

5,380

Other assets

(1)

2,111

2,202

Total non-performing assets

$

121,107

$

129,158

Past due loans 90 days and still accruing

(2) (3) (4)

$

63,211

$

80,517

Non-performing assets to total assets

0.63

%

0.69

%

Nonaccrual loans held for investment to total loans held for investment

0.70

%

0.78

%

ACL for loans and finance leases

$

267,058

$

260,464

ACL for loans and finance leases to total nonaccrual loans held

for investment

325.60

%

289.61

%

ACL for loans and finance leases to total nonaccrual loans held

for investment, excluding residential real estate loans

547.60

%

552.26

%

(1)

Residential pass-through MBS issued by the PRHFA

held as part of the available-for-sale debt securities

portfolio.

(2)

Includes PCD loans previously accounted for under ASC Subtopic 310-30

for which the Corporation made the accounting policy

election of maintaining pools of loans as “units of

account” both at the time of adoption of CECL on January

1, 2020 and on an ongoing basis for credit loss measurement.

These loans will continue to be excluded from nonaccrual loan

statistics as long as the Corporation can reasonably estimate the

timing and amount of cash flows expected to be collected

on the loan pools. The portion of such loans contractually past due

90 days or more amounted to $9.5 million and $12.0 million as of

June 30, 2023 and December 31, 2022, respectively.

(3)

Includes FHA/VA

government-guaranteed residential mortgage as

loans past-due 90 days and still accruing as opposed

to nonaccrual loans. The Corporation continues accruing interest on

these loans until they have passed the 15 months delinquency mark,

taking into consideration the FHA interest curtailment process.

These balances include $19.9 million and $28.2 million

of FHA government guaranteed residential mortgage loans that were

over 15 months delinquent as of June 30, 2023 and December

31, 2022, respectively.

(4)

Includes rebooked loans, which were previously pooled into

GNMA securities, amounting to $6.5 million and $10.3 million as

of June 30, 2023 and December 31, 2022, respectively.

Under the GNMA program, the Corporation has the option but not

the obligation to repurchase loans that meet GNMA’s

specified delinquency criteria. For accounting purposes,

the loans

subject to the repurchase option are required to be reflected

on the financial statements with an offsetting liability.

122

Total

nonaccrual loans were $82.0

million as of June

30, 2023. This represents

a net decrease of $7.9

million from $89.9 million

as

of December

31, 2022.

The net

decrease

was primarily

related to

a $9.5

million reduction

in nonaccrua

l

residential mortgage

loans,

partially

offset

by

increases

of

$1.5

million

and

$0.1

million

in

nonaccrual

consumer

loans

and

nonaccrual

commercial

and

construction loans, respectively.

The following

table shows non-performing assets by geographic segment as of the indicated dates:

June 30, 2023

December 31, 2022

(In thousands)

Puerto Rico:

Nonaccrual loans held for investment:

Residential mortgage

$

20,047

$

28,857

Construction

703

831

Commercial mortgage

13,337

14,341

Commercial and Industrial

5,808

5,859

Consumer and finance leases

15,874

14,142

Total nonaccrual loans held for investment

55,769

64,030

OREO

27,107

28,135

Other repossessed property

5,226

5,275

Other assets

2,111

2,202

Total non-performing assets

$

90,213

$

99,642

Past due loans 90 days and still accruing

$

60,964

$

76,417

Virgin Islands:

Nonaccrual loans held for investment:

Residential mortgage

$

5,767

$

6,614

Construction

974

1,377

Commercial mortgage

8,199

7,978

Commercial and Industrial

1,119

1,179

Consumer

379

469

Total nonaccrual loans held for investment

16,438

17,617

OREO

4,464

3,475

Other repossessed property

168

76

Total non-performing assets

$

21,070

$

21,168

Past due loans 90 days and still accruing

$

2,108

$

4,100

United States:

Nonaccrual loans held for investment:

Residential mortgage

$

7,438

$

7,301

Commercial and Industrial

2,267

792

Consumer

109

195

Total nonaccrual loans held for investment

9,814

8,288

OREO

-

31

Other repossessed property

10

29

Total non-performing assets

$

9,824

$

8,348

Past due loans 90 days and still accruing

$

139

$

-

123

Nonaccrual commercial

and industrial

loans increased

by $1.4

million to $9.2

million as of

June 30,

2023, from

$7.8 million

as of

December 31, 2022.

Nonaccrual

commercial mortgage

loans decreased

by $0.8

million to

$21.5 million

as of

June 30,

2023, from

$22.3 million

as of

December 31, 2022.

Nonaccrual construction loans

decreased by $0.5 million

to $1.7 million as of

June 30, 2023, from

$2.2 million as of

December 31,

2022.

The following tables present the activity of commercial and construction

nonaccrual loans held for investment for the indicated

periods:

Construction

Commercial

Mortgage

Commercial &

Industrial

Total

(In thousands)

Quarter Ended June 30, 2023

Beginning balance

$

1,794

$

21,598

$

13,404

$

36,796

Plus:

Additions to nonaccrual

-

439

2,691

3,130

Less:

Loans returned to accrual status

-

-

(374)

(374)

Nonaccrual loans transferred to OREO

-

(61)

-

(61)

Nonaccrual loans charge-offs

-

(88)

(6,350)

(6,438)

Loan collections

(117)

(352)

(177)

(646)

Ending balance

$

1,677

$

21,536

$

9,194

$

32,407

Construction

Commercial

Mortgage

Commercial &

Industrial

Total

(In thousands)

Six-Month Period Ended June 30, 2023

Beginning balance

$

2,208

$

22,319

$

7,830

$

32,357

Plus:

Additions to nonaccrual

127

983

10,161

11,271

Less:

Loans returned to accrual status

-

(361)

(526)

(887)

Nonaccrual loans transferred to OREO

(332)

(223)

(183)

(738)

Nonaccrual loans charge-offs

-

(106)

(6,468)

(6,574)

Loan collections

(326)

(1,082)

(1,620)

(3,028)

Reclassification

-

6

-

6

Ending balance

$

1,677

$

21,536

$

9,194

$

32,407

124

Construction

Commercial

Mortgage

Commercial &

Industrial

Total

(In thousands)

Quarter Ended June 30, 2022

Beginning balance

$

2,543

$

26,576

$

18,129

$

47,248

Plus:

Additions to nonaccrual

18

53

579

650

Less:

Loans returned to accrual status

(48)

(157)

(255)

(460)

Nonaccrual loans transferred to OREO

(67)

(88)

(273)

(428)

Nonaccrual loans charge-offs

(16)

(2)

(37)

(55)

Loan collections

(55)

(1,629)

(1,064)

(2,748)

Ending balance

$

2,375

$

24,753

$

17,079

$

44,207

Construction

Commercial

Mortgage

Commercial &

Industrial

Total

(In thousands)

Six-Month Period Ended June 30, 2022

Beginning balance

$

2,664

$

25,337

$

17,135

$

45,136

Plus:

Additions to nonaccrual

18

2,934

2,158

5,110

Less:

Loans returned to accrual status

(48)

(358)

(464)

(870)

Nonaccrual loans transferred to OREO

(80)

(549)

(273)

(902)

Nonaccrual loans charge-offs

(56)

(39)

(327)

(422)

Loan collections

(123)

(2,170)

(1,552)

(3,845)

Reclassification

-

(402)

402

-

Ending balance

$

2,375

$

24,753

$

17,079

$

44,207

125

Nonaccrual residential mortgage loans decreased by $9.5

million to $33.3 million as of June 30, 2023, compared

to $42.8 million as

of December

31, 2022.

The decrease

was primarily

related

to $

6.6 million

of loans

restored to

accrual status,

$4.3 million

of loans

transferred to OREO, and $3.1 million in collections, partially offset

by inflows of $5.1 million.

The following table presents the activity of residential nonaccrual loans held for investment

for the indicated periods:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(In thousands)

Beginning balance

$

36,410

$

48,818

$

42,772

$

55,127

Plus:

Additions to nonaccrual

3,009

4,403

5,090

9,731

Less:

Loans returned to accrual status

(2,714)

(5,332)

(6,651)

(8,781)

Nonaccrual loans transferred to OREO

(1,549)

(1,185)

(4,259)

(2,122)

Nonaccrual loans charge-offs

(401)

(515)

(621)

(950)

Loan collections

(1,503)

(1,601)

(3,073)

(8,417)

Reclassification

-

-

(6)

-

Ending balance

$

33,252

$

44,588

$

33,252

$

44,588

The amount of nonaccrual consumer

loans, including finance leases, increased

by $1.5 million to $16.3 million

as of June 30, 2023,

compared to $14.8 million as of December 31, 2022. The increase was mainly reflected

in the auto loans and finance leases portfolio.

As of June 30, 2023, approximately $18.5 million of

the loans placed in nonaccrual status, mainly commercial loans, and residential

loans,

were current, or had

delinquencies of less than

90 days in their interest

payments.

Collections on these loans

are being recorded

on a cash basis through earnings, or on a cost-recovery basis, as conditions

warrant.

During the six-month

period ended June

30, 2023, interest income

of approximately $0.2 million

related to nonaccrual

loans with a

carrying

value of

$24.1 million

as of

June 30,

2023,

mainly nonaccrual

commercial

and construction

loans, was

applied against

the

related principal balances under the cost-recovery method.

Total loans in early

delinquency (

i.e.

, 30-89 days past due loans, as defined in regulatory reporting

instructions) amounted to $118.5

million

as of

June 30,

2023, an

increase

of $13.6

million, compared

to $104.9

million

as of

December

31, 2022.

The variances

by

major portfolio categories are as follows:

●

Consumer loans in early delinquency increased by $7.5 million to $78.4 million,

mainly in the auto loans portfolio.

●

Commercial

and

construction

loans

in

early

delinquency

increased

by

$3.4

million

to

$9.2

million,

mainly

due

to

a

$4.5

million commercial

mortgage loan

in the

Puerto Rico

region that

matured and

is in

the process of

renewal but

for which

the

Corporation continues to receive interest and principal payments from

the borrower.

●

Residential mortgage loans in early delinquency increased by $2.7

million to $30.9 million.

In addition,

the Corporation

provides

homeownership

preservation

assistance to

its customers

through

a loss

mitigation

program.

Depending

upon

the

nature

of

a

borrower’s

financial

condition,

restructurings

or

loan

modifications

through

this

program

are

provided,

as well

as other

restructurings

of individual

C&I, commercial

mortgage, construction,

and residential

mortgage loans.

See

Note

1

–

Basis

of

Presentation

and

Significant

Accounting

Policies,

to

the

unaudited

consolidated

financial

statements

herein

for

additional information

related to

the accounting

policies of

loan modifications

granted to

borrowers experiencing

financial difficulty.

In

addition,

see

Note

3

-

Loans

Held

for

Investment,

to

the

unaudited

consolidated

financial

statements

herein

for

additional

information and statistics about the Corporation’s

modified loans.

126

The OREO portfolio,

which is part of

non-performing assets, amounted

to $31.6 million as

of each of June

30, 2023 and December

31, 2022.

The following

tables show

the composition

of the

OREO portfolio

as of

June 30,

2023 and

December 31,

2022, as

well as

the activity of the OREO portfolio by geographic area during the six-month

period ended June 30, 2023:

OREO Composition by Region

As of June 30, 2023

(In thousands)

Puerto Rico

Virgin Islands

Florida

Consolidated

Residential

$

22,026

$

1,595

$

-

$

23,621

Construction

1,833

59

-

1,892

Commercial

3,248

2,810

-

6,058

$

27,107

$

4,464

$

-

$

31,571

As of December 31, 2022

(In thousands)

Puerto Rico

Virgin Islands

Florida

Consolidated

Residential

$

23,388

$

606

$

31

$

24,025

Construction

1,705

59

-

1,764

Commercial

3,042

2,810

-

5,852

$

28,135

$

3,475

$

31

$

31,641

OREO Activity by Region

Six-Month Period Ended June 30, 2023

(In thousands)

Puerto Rico

Virgin Islands

Florida

Consolidated

Beginning Balance

$

28,135

$

3,475

$

31

$

31,641

Additions

9,442

1,295

-

10,737

Sales

(9,820)

(306)

(31)

(10,157)

Write-downs and other adjustments

(650)

-

-

(650)

Ending Balance

$

27,107

$

4,464

$

-

$

31,571

127

Net Charge-offs and Total

Credit Losses

Net charge-offs

totaled $19.3

million for

the second

quarter of

2023, or

0.67% of

average loans

on an

annualized basis,

compared

to

$6.0

million,

or an

annualized

0.21%

of

average

loans,

for

the

second

quarter

of 2022.

For

the

six-month

period

ended

June 30,

2023,

net

charge-offs

totaled

$32.5

million,

or

an

annualized

0.56%

of

average

loans,

compared

to $12.6

million,

or an

annualized

0.23% of average loans,

for the same period in 2022.

Consumer loans

and finance

leases net

charge-offs

for the

second quarter

of 2023

were $13.0

million, or

an annualized

1.51% of

related average

loans, compared to

$6.9 million, or

an annualized 0.91%

of related average

loans, for the

second quarter of

2022. Net

charge-offs

of

consumer

loans

and

finance

leases

for

the

six-month

period

ended

June

30,

2023

were

$26.0

million,

or

1.53%

of

related average loans, compared to $13.2 million, or an annualized

0.88% of related average loans, for the same period in 2022.

Commercial

and

industrial

loans

net

charge-offs

for

the

second

quarter

of

2023

were

$6.2

million,

or

an

annualized

0.87%

of

related

average

loans,

compared

to

net

recoveries

of

$0.5

million,

or

an

annualized

0.07%

of

related

average

loans,

for

the

second

quarter of

2022. Commercial

and industrial

loans net

charge-offs for

the six-month

period

ended June

30, 2023

were $6.2

million, or

0.44% of

related average

loans,

compared to

net recoveries

of $1.3

million, or

an annualized

0.09% of

related average

loans, for

the

same

period

in

2022.

The

net

charge-offs

for

the

second

quarter

and

first

six

months

of

2023

included

a

$6.2

million

charge-off

recorded on a commercial and industrial participated loan in the Florida

region in the power generation industry.

Residential

mortgage

loans

net

charge-offs

for

the

second

quarter

of

2023

were

$0.5

million,

or

an

annualized

0.06%

of

related

average loans,

compared to $0.8

million, or an

annualized 0.11%

of related average

loans, for the

second quarter of

2022. Residential

mortgage

loans net

charge-offs

for

the six-month

period ended

June 30,

2023 were

$0.8 million,

or an

annualized

0.06% of

related

average loans, compared to $1.9 million, or an annualized

0.13% of related average loans, for the same period of

2022. Approximately

$0.3

million of charge-offs

for the second quarter of

2023 and $0.5 million for

the first six months of

2023 resulted from valuations

of

collateral

dependent

residential

mortgage

loans,

compared

to

$0.5

million

and

$0.9

million

for

the

comparable

periods

in

2022.

Charge-offs

on residential

mortgage loans

also included

$0.3

million and

$0.8 million

related to

foreclosures recorded

in the

second

quarter and

first six

months of 2023,

respectively,

compared to

$0.5 million

and $1.8

million, recorded

for the

comparable periods

in

2022,

respectively.

Commercial mortgage

loans net

charge-offs

for the

second quarter

of 2023

were $32

thousand, or

an annualized

0.01% of

related

average loans,

compared to

net recoveries

of $1.2

million, or

an annualized

0.22% of

related average

loans, for

the second

quarter

of

2022.

Commercial mortgage

loans net

recoveries for

the six-month

period ended

June 30,

2023 were

$0.1 million,

or an

annualized

0.01%

of related

average

loans, compared

to

$1.2

million,

or

an

annualized

0.11%

or related

average

loans,

for

the same

period

in

2022.

Construction

loans

net

recoveries

for

the

second

quarter

of

2023

were

$0.4

million,

or

an

annualized

0.99%

of

related

average

loans, compared to $27 thousand, or an annualized 0.09%

of related average loans, for the same period in 2022. Construction

loans net

recoveries

for

the

six-month

period

ended

June

30,

2023

were

$0.4

million,

or

an

annualized

0.59%

of

related

average

loans,

compared to $35 thousand, or an annualized 0.06% of related

average loans, for the same period in 2022.

128

The following table presents annualized net charge-offs

(recoveries) to average loans held-in-portfolio for the indicated periods:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

Residential mortgage

0.06

%

0.11

%

0.06

%

0.13

%

Construction

(0.99)

%

(0.09)

%

(0.59)

%

(0.06)

%

Commercial mortgage

0.01

%

(0.22)

%

(0.01)

%

(0.11)

%

Commercial and industrial

0.87

%

(0.07)

%

0.44

%

(0.09)

%

Consumer and finance leases

1.51

%

0.91

%

1.53

%

0.88

%

Total loans

0.67

%

0.21

%

0.56

%

0.23

%

The following table presents annualized net charge-offs

(recoveries) to average loans held in various portfolios by geographic

segment for the indicated periods:

Quarter Ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

PUERTO RICO:

Residential mortgage

0.08

%

0.13

%

0.09

%

0.16

%

Construction

(3.04)

%

(0.14)

%

(1.86)

%

(0.03)

%

Commercial mortgage

0.02

%

(0.16)

%

0.01

%

(0.08)

%

Commercial and industrial

0.01

%

(0.12)

%

0.01

%

(0.14)

%

Consumer and finance leases

1.51

%

0.93

%

1.47

%

0.88

%

Total loans

0.56

%

0.30

%

0.57

%

0.29

%

VIRGIN ISLANDS:

Residential mortgage

(0.02)

%

0.16

%

(0.05)

%

0.13

%

Construction

3.93

%

-

%

1.93

%

-

%

Commercial mortgage

(0.23)

%

(0.22)

%

(0.22)

%

(0.22)

%

Commercial and industrial

-

%

-

%

(0.01)

%

(0.01)

%

Consumer and finance leases

2.02

%

0.59

%

2.10

%

1.18

%

Total loans

0.34

%

0.12

%

0.31

%

0.19

%

FLORIDA:

Residential mortgage

(0.04)

%

(0.05)

%

(0.02)

%

(0.03)

%

Construction

(0.06)

%

(0.06)

%

(0.05)

%

(0.08)

%

Commercial mortgage

-

%

(0.40)

%

(0.04)

%

(0.21)

%

Commercial and industrial

2.67

%

-

%

1.31

%

-

%

Consumer and finance leases

(1.16)

%

(2.32)

%

(0.45)

%

(0.43)

%

Total loans

1.23

%

(0.13)

%

0.60

%

(0.06)

%

The above ratios are

based on annualized charge

-offs and are not

necessarily indicative of the

results expected for the

entire year or

in subsequent periods.

Total net charge

-offs plus gains on OREO operations for the

first half of 2023 amounted to $28.6 million, or

a loss rate of 0.25% on

an

annualized

basis

of

average

loans

and

repossessed

assets,

compared

to

losses

of

$10.3

million,

or

a

loss

rate

of

0.19%

on

an

annualized basis, for the first half of 2022.

129

The following table presents information about the OREO inventory

and credit losses for the indicated periods:

Quarter ended June 30,

Six-Month Period Ended June 30,

2023

2022

2023

2022

(Dollars in thousands)

OREO

OREO balances, carrying value:

Residential

$

23,621

$

31,780

$

23,621

$

31,780

Construction

1,892

2,657

1,892

2,657

Commercial

6,058

7,269

6,058

7,269

Total

$

31,571

$

41,706

$

31,571

$

41,706

OREO activity (number of properties):

Beginning property inventory

344

442

344

418

Properties acquired

44

41

103

109

Properties disposed

(68)

(52)

(127)

(96)

Ending property inventory

320

431

320

431

Average holding period (in days)

Residential

524

658

524

658

Construction

2,178

2,162

2,178

2,162

Commercial

2,580

2,041

2,580

2,041

Total average holding period (in days)

1,018

995

1,018

995

OREO operations gain (loss):

Market adjustments and gains (losses) on sale:

Residential

$

2,553

$

1,988

$

5,043

$

2,980

Construction

7

11

47

114

Commercial

-

(62)

(67)

(79)

Total net gain

2,560

1,937

5,023

3,015

Other OREO operations expenses

(576)

(452)

(1,043)

(810)

Net Gain on OREO operations

$

1,984

$

1,485

$

3,980

$

2,205

(CHARGE-OFFS) RECOVERIES

Residential charge-offs, net

$

(389)

$

(792)

$

(875)

$

(1,938)

Construction recoveries, net

371

27

434

35

Commercial (charge-offs) recoveries, net

(6,250)

1,737

(6,128)

2,489

Consumer and finance leases charge-offs, net

(13,011)

(6,932)

(25,979)

(13,140)

Total charge-offs,

net

(19,279)

(5,960)

(32,548)

(12,554)

TOTAL CREDIT LOSSES

(1)

$

(17,295)

$

(4,475)

$

(28,568)

$

(10,349)

(GAIN) LOSS RATIO PER CATEGORY

(2)

Residential

(0.31)

%

(0.16)

%

(0.15)

%

(0.07)

%

Construction

(1.00)

%

(0.12)

%

(0.32)

%

(0.24)

%

Commercial

0.48

%

(0.13)

%

0.12

%

(0.09)

%

Consumer

1.51

%

0.91

%

0.76

%

0.88

%

TOTAL CREDIT LOSS RATIO

(3)

0.60

%

0.16

%

0.25

%

0.19

%

(1)

Equal to net gain on OREO operations plus charge-offs,

net.

(2)

Calculated as net charge-offs plus market adjustment

and gains (losses) on sale of OREO divided by average loans and

repossessed assets.

(3)

Calculated as net charge-offs plus net gain on OREO

operations divided by average loans and repossessed

assets.

130

Operational Risk

The

Corporation

faces

ongoing

and

emerging

risk

and

regulatory

pressure

related

to

the

activities

that

surround

the

delivery

of

banking

and

financial

products.

Coupled

with

external

influences,

such

as

market

conditions,

security

risks,

and

legal

risks,

the

potential for

operational and

reputational loss

has increased.

To

mitigate and

control operational

risk, the

Corporation has

developed,

and continues

to enhance, specific

internal controls,

policies and procedures

that are designed

to identify and

manage operational

risk

at

appropriate

levels

throughout

the

organization.

The

purpose

of

these

mechanisms

is

to

provide

reasonable

assurance

that

the

Corporation’s business operations

are functioning within the policies and limits established by management.

The

Corporation

classifies operational

risk

into

two

major

categories:

business-specific

and

corporate-wide

affecting

all business

lines.

For

business

specific

risks,

a

risk

assessment

group

works

with

the

various

business

units

to

ensure

consistency

in

policies,

processes

and

assessments.

With

respect

to

corporate-wide

risks,

such

as

information

security,

business

recovery,

and

legal

and

compliance, the

Corporation has specialized

groups, such

as the Legal

Department, Information

Security,

Corporate Compliance,

and

Operations. These groups

assist the lines of

business in the

development and implementation

of risk management

practices specific to

the needs of the business groups.

Legal and Compliance Risk

Legal and compliance risk includes

the risk of noncompliance with applicable

legal and regulatory requirements,

the risk of adverse

legal

judgments

against

the

Corporation,

and

the

risk

that

a

counterparty’s

performance

obligations

will

be

unenforceable.

The

Corporation

is

subject

to

extensive

regulation

in

the

different

jurisdictions

in

which

it

conducts

its

business,

and

this

regulatory

scrutiny has

been significantly

increasing over

the years.

The Corporation

has established,

and continues

to enhance,

procedures that

are designed

to ensure

compliance with

all applicable

statutory,

regulatory

and any

other legal

requirements.

The Corporation

has a

Compliance

Director

who

reports

to

the

Chief

Risk

Officer

and

is

responsible

for

the

oversight

of

regulatory

compliance

and

implementation

of an

enterprise-wide compliance

risk assessment

process.

The Compliance

division

has officer

roles in

each major

business area with direct reporting responsibilities to the Corporate Compliance

Group.

Concentration Risk

The Corporation conducts

its operations in

a geographically concentrated

area, as its main

market is Puerto

Rico. Of the total

gross

loan portfolio

held for

investment of

$11.7

billion as

of June

30, 2023,

the Corporation

had credit

risk of

approximately 79%

in the

Puerto Rico region,

17% in the United States region, and 4% in the Virgin

Islands region.

131

Update on the Puerto Rico Fiscal and Economic Situation

A significant

portion of

the Corporation’s

business activities

and credit

exposure is

concentrated in

the Commonwealth

of Puerto

Rico, which

has experienced

economic and

fiscal distress

over the

last decade.

Since declaring

bankruptcy and

benefitting from

the

enactment of the federal Puerto

Rico Oversight, Management and

Economic Stability Act (“PROMESA”) in

2016, the Government of

Puerto

Rico

has

made

progress

on

fiscal

matters

primarily

by

restructuring

a

large

portion

of

its

outstanding

public

debt

and

identifying funding sources for its unfunded pension system.

Economic Indicators

On

June

15,

2023,

the

Puerto

Rico

Planning

Board

(“PRPB”)

presented

the

updated

Economic

Report

to

the

Governor,

which

provides

an

analysis

of

Puerto

Rico’s

economy

during

fiscal

year

2022

and

a

short-term

forecast

for

fiscal

years

2023

and

2024.

According

to

the

PRPB,

Puerto

Rico’s

real

gross

national

product

(“GNP”)

expanded

by

3.7%

in

fiscal

year

2022,

which

was

the

highest annual real GNP

growth registered in Puerto

Rico since fiscal year 1999.

The growth was primarily driven

by a sharp increase

in personal consumption expenditures reflecting an increase of

approximately 8.5% when compared to fiscal year 2021, increase

in net

exports of 4.8%, and growth in fixed capital investments of 12.6%.

There

are

other

indicators

that

gauge

economic

activity

and

are

published

with

greater

frequency,

for

example,

the

Economic

Development

Bank

for

Puerto

Rico’s

Economic

Activity

Index

(“EDB-EAI”).

Although

not

a

direct

measure

of

Puerto

Rico’s

real

GNP,

the

EDB-EAI

is

correlated

to

Puerto

Rico’s

real

GNP.

For

May

2023,

preliminary

estimates

showed

that

the

EDB-EAI

increased

0.8% on

a month-over-month

basis and

1.8% higher

than May

2022.

Over the

12-month

period ended

May 31,

2023,

the

EDB-EAI averaged 124.8, approximately 0.2% above the comparable

figure a year earlier.

Labor

market

trends

remain

positive.

Data

published

by

the

Bureau

of

Labor

Statistics

show

June

2023

payroll

employment

in

Puerto

Rico

increased

by

2.4%

when

compared

to

June

2022,

supported

by

a

year-over-year

increase

of

8.6%

in

Leisure

and

Hospitality

payroll employment and a 12.0%

year-over-year increase

in

Construction

-related payroll employment

.

The unemployment

rate stood at 6.1% as of June 2023.

Fiscal Plan

On April

3, 2023,

the PROMESA

oversight board

certified the

2023 Fiscal

Plan for

Puerto Rico

(the “2023

Fiscal Plan”).

Unlike

previous versions

of the

fiscal plan,

the PROMESA

oversight board

segregated the

2023 Fiscal Plan

into three

different volumes.

As

the first fiscal plan

certified in a pos

t-bankruptcy environment, Volume

1 presents a

Transformation Plan

that highlights priority

areas

to cement fiscal responsibility,

accelerate economic growth in a sustainable manner,

and restore market access to Puerto Rico. Volume

2 provides additional details

on economic trends and

financial projections, and Volume

3 maps out the supplementary

implementation

details to

guide

the government’s

implementation

of the

requirements

of the

2023 Fiscal

Plan, as

well as

additional

initiatives

from

prior fiscal plans which remain mandatory and are still pending to be implemented.

The

2023

Fiscal

Plan

prioritizes

resource

allocation

across

three

major

pillars:

(i)

entrenching

a

legacy

of

strong

financial

management

through

the

implementation

of

a

comprehensive

financial

management

agenda,

(ii)

instilling

a

culture

of public

-sector

performance

and excellence

to properly

delivery quality

public services,

and (iii)

investing for

economic growth

to ensure

sufficient

revenues are

generated to

support the delivery

of services. According

to the Transformation

Plan, the fiscal

and economic turnaround

of Puerto Rico cannot

be accomplished without the implementation

of structural economic reforms

that promote sustainable economic

development.

These

reforms

include

power/energy

sector

reform

to

improve

availability,

reliability

and

affordability

of

energy,

education

reform

to

expand

opportunity

and

prepare

the

workforce

to

compete

for

jobs

of

the

future,

and

an

infrastructure

reform

aimed

at

improving

the

efficiency

of

the

economy

and

facilitating

investment.

The

2023

Fiscal

Plan

projects

that

these

reforms,

if

implemented

successfully,

will contribute

0.75% in

GNP growth

by fiscal

year

2026.

Additionally,

the

2023 Fiscal

Plan

provides

a

roadmap

for

a

tax

reform

directed

towards

establishing

a

tax

regime

that

is

more

competitive

for

investors

and

more

equitable

for

individuals.

The

2023

Fiscal

Plan

notes

that

Puerto

Rico

has

had

a

strong

recovery

in

the

aftermath

of

the

COVID-19

pandemic

crisis

with

labor

participation

trending

positively

and

unemployment

at

historically

low

levels.

However,

it

recognizes

that

such

recovery

has

been

primarily

fueled

by

the

unprecedented

influx

of

federal

funds

which

have

an

outsized

and

temporary

impact

that

may

mask

underlying structural

weaknesses in

the economy.

As such,

the 2023

Fiscal Plan

projects a

0.7% decline

in real

GNP for

the current

fiscal year

2023, followed

by a

period of

near-zero

real growth

in fiscal

years 2024

through 2026.

Also, the

fiscal plan

projects that

Puerto Rico’s

population will continue the long-term

trend of steady decline. Notwithstanding,

the Transformation Plan depicts

that, if

managed properly,

these non-recurring federal funds can be leveraged into sustainable longer-term

growth and opportunity.

132

The 2023

Fiscal Plan projects

that approximately

$81 billion in

total disaster relief

funding, from

federal and

private sources,

will

be disbursed

as part

of the

reconstruction

efforts over

a span

of 18

years (fiscal

years 2018

through 2035).

These funds

will benefit

individuals, the

public (e.g.,

reconstruction of

major infrastructure,

roads, and

schools), and

will cover

part of

Puerto Rico’s

share of

the cost of disaster relief funding.

Also, the 2023 Fiscal Plan projects

accelerated deployment of the remaining

COVID-19 relief funds

in fiscal

year 2023

through 2025,

with approximately

$9.3 billion

expected to

be disbursed,

compared to

$4.5 billion

projected in

the

previous fiscal

plan. Additionally,

the 2023

Fiscal Plan

continues to

account for

$2.3 billion

in federal

funds to

Puerto Rico

from the

Bipartisan Infrastructure Law directed towards improving

Puerto Rico’s infrastructure over fiscal years

2022 through 2026.

Debt Restructuring

Over

80%

of

Puerto

Rico’s

outstanding

debt

has

been

restructured

to

date.

On

March

15,

2022,

the

Plan

of

Adjustment

of

the

central

government’s

debt

became

effective

through

the

exchange

of more

than

$33

billion

of

existing

bonds

and

other

claims

into

approximately

$7

billion

of

new

bonds,

saving

Puerto

Rico

more

than

$50

billion

in

debt

payments

to

creditors.

Also,

the

restructurings

of

the

Puerto

Rico

Sales

Tax

Financing

Corporation

(“COFINA”),

the

Highways

and

Transportation

Authority

(“HTA”),

and

the

Puerto

Rico

Aqueducts

and

Sewers

Authority

(“PRASA”)

are

expected

to

yield

savings

of

approximately

$17.5

billion, $3.0

billion, and

$400 million,

respectively,

in future

debt service

payments. The

main restructurings

pending include

that of

the Puerto Rico Electric Power Authority (“PREPA”)

and the Puerto Rico Industrial Company (“PRIDCO”).

On June 23, 2023,

the Fiscal Oversight and

Management Board for

Puerto Rico certified a new

fiscal plan for PREPA

which included

the most

recent projections

of energy

consumption in

Puerto Rico

and consequently

reflected a

significant reduction

in the

projected

revenues for

PREPA

over the

next years.

As such,

PREPA

concluded

that its

ability to

repay its

outstanding debt

was significantly

less

than

what

was

previously

stated.

On

June

26,

2023,

Judge

Laura

Taylor

Swain

resolved

that

PREPA’s

bondholders

have

an

unsecured claim

of $2.4 billion

against PREPA

and not

the approximately

$9.0 billion

that bondholders

were claiming. This

decision

could

result

in a

75% haircut

on

PREPA’s

outstanding

debt

and

may

reduce

the ability

of

bondholders

to impose

higher

electricity

rates to consumers to pay for debt service.

Other Developments

Notable

progress

continues

to

be

made

as

part

of

the

ongoing

efforts

of

prioritizing

the

restoration,

improvement,

and

modernization of Puerto Rico’s

infrastructure, particularly in the aftermath of

Hurricane Maria in 2017. During the first five months

of

2023, over

$1.8 billion

in disaster relief

funds have

been disbursed

through FEMA

Public Assistance

program and

the Department

of

Housing and

Urban Development’s

“Community Development

Block Grant”

program, a

117%

increase when

compared to

the same

period

in

2022,

and

the

Fiscal

Oversight

and

Management

Board

for

Puerto

Rico

is

currently

projecting

over

$5

billion

in

total

disbursements to

take place during

2023.

These funds will

continue to play

a key role

in supporting Puerto

Rico’s economic

stability

and are expected to have a positive impact on the Island’s

infrastructure.

On June

21, 2023,

Fitch Ratings

issued a

credit rating

research note

highlighting the

government’s

commitment

to improving

its

continuing

disclosure

practices and

the release

of

the 2021

audited

financial

statements.

The

government

has

made

great strides

in

recent years

with regards

to its

financial transparency

and its

on target

to release

its audited

financial statements

on time

and in

line

with regulatory expectations.

133

Exposure to Puerto Rico Government

As of

June 30,

2023, the

Corporation had

$344.3 million

of direct

exposure to

the Puerto

Rico government,

its municipalities

and

public corporations,

compared to $338.9

million as

of December

31, 2022.

As of June

30, 2023,

approximately $186.2

million of

the

exposure consisted

of loans and

obligations of municipalities

in Puerto Rico

that are supported

by assigned property

tax revenues

and

for which,

in most

cases, the

good faith,

credit and

unlimited taxing

power of

the applicable

municipality have

been pledged

to their

repayment, and

$113.2

million of

loans and

obligations which

are supported

by one

or more

specific sources

of municipal

revenues.

Approximately

72%

of

the

Corporation’s

exposure

to

Puerto

Rico

municipalities

consisted

primarily

of

senior

priority

loans

and

obligations

concentrated

in four

of

the largest

municipalities

in

Puerto

Rico.

The

municipalities

are

required

by law

to

levy

special

property

taxes

in

such

amounts

as

are

required

for

the

payment

of

all

of

their

respective

general

obligation

bonds

and

notes.

Furthermore, municipalities

are also likely

to be affected

by the negative

economic and other

effects resulting

from expense, revenue,

or cash management measures

taken to address the Puerto

Rico government’s

fiscal problems and measures included

in fiscal plans of

other government

entities. In

addition to

municipalities, the

total direct

exposure also

included $9.5

million in

loans to

an affiliate

of

PREPA,

$32.1 million

in loans

to agencies

or public

corporations of

the Puerto

Rico government,

and obligations

of the

Puerto Rico

government,

specifically

a

residential

pass-through

MBS

issued

by

the

PRHFA,

at

an

amortized

cost

of

$3.3

million

as

part

of

its

available-for-sale debt securities portfolio (fair value of $2.1 million as of

June 30, 2023).

The

following

table

details

the

Corporation’s

total

direct

exposure

to

Puerto

Rico

government

obligations

according

to

their

maturities:

As of June 30, 2023

Investment

Portfolio

(Amortized

cost)

Loans

Total

Exposure

(In thousands)

Puerto Rico Housing Finance Authority:

After 10 years

$

3,254

$

-

$

3,254

Total

Puerto Rico Housing Finance Authority

3,254

-

3,254

Agencies and public corporation of the Puerto Rico government:

After 1 to 5 years

-

6,160

6,160

After 5 to 10 years

-

25,979

25,979

Total agencies and public

corporation of the Puerto Rico government

-

32,139

32,139

Affiliate of the Puerto Rico Electric Power Authority:

Due within one year

-

9,519

9,519

Total Puerto Rico government

affiliate

-

9,519

9,519

Total

Puerto Rico public corporations and government affiliate

-

41,658

41,658

Municipalities:

Due within one year

1,205

10,600

11,805

After 1 to 5 years

42,736

55,909

98,645

After 5 to 10 years

56,160

66,717

122,877

After 10 years

66,023

-

66,023

Total

Municipalities

166,124

133,226

299,350

Total

Direct Government Exposure

$

169,378

$

174,884

$

344,262

134

In addition, as of

June 30, 2023, the Corporation

had $81.1 million in exposure

to residential mortgage loans

that are guaranteed by

the

PRHFA,

a

governmental

instrumentality

that

has

been

designated

as

a

covered

entity

under

PROMESA

(December

31,

2022

–

$84.7

million).

Residential

mortgage

loans

guaranteed

by

the

PRHFA

are

secured

by

the

underlying

properties

and

the

guarantees

serve to

cover shortfalls

in collateral in

the event

of a borrower

default. The

Puerto Rico government

guarantees up

to $75 million

of

the

principal

for

all

loans

under

the

mortgage

loan

insurance

program.

According

to

the

most

recently

released

audited

financial

statements of the PRHFA,

as of June 30, 2021, the PRHFA’s

mortgage loans insurance program covered

loans in an aggregate amount

of approximately $473 million. The regulations adopted by

the PRHFA require the establishment

of adequate reserves to guarantee the

solvency of the mortgage

loans insurance program. As

of June 30, 2021,

the most recent date

as of which information

is available, the

PRHFA had a liability

of approximately $5 million as an estimate of the losses inherent in the portfolio.

As

of

June

30,

2023,

the

Corporation

had

$2.9

billion

of

public

sector

deposits

in

Puerto

Rico,

compared

to

$2.3

billion

as

of

December

31,

2022.

Approximately

21%

of the

public

sector deposits

as of

June 30,

2023

were from

municipalities

and

municipal

agencies in

Puerto Rico

and 79%

were from

public corporations,

the Puerto

Rico central

government and

agencies, and

U.S. federal

government agencies in Puerto Rico.

Exposure to USVI Government

The Corporation has operations in the USVI and has credit exposure

to USVI government entities.

For many years, the

USVI has been experiencing

several fiscal and economic

challenges that have deteriorated

the overall financial

and

economic

conditions

in

the

area.

However,

on

May

22,

2023,

the

United

States

Bureau

of

Economic

Analysis

(the

“BEA”)

released its

estimates of

real gross domestic

product (“GDP”)

for 2021.

According to

the BEA,

the USVI’s

real GDP

increased 2.8%

in

2021

after

decreasing

1.9%

in

2020.

The

increase

in

real

GDP

reflected

increases

in

exports

and

personal

consumption

expenditures.

These

increases

were

partly

offset

by

decreases

in

private

inventory

investment,

private

fixed

investment,

and

government spending. Imports, a subtraction item in the calculation of

GDP,

also decreased.

Over the

past two

years, the

USVI has

been recovering

from the

adverse impact

caused by

COVID-19 and

has continued

to make

progress on

its rebuilding

efforts related

to Hurricanes

Irma and

Maria, which

occurred in

2017. According

to data

published by

the

government, over

$4.7 billion

in disaster

recovery funds

were disbursed

as of

2023 and

$3.4 billion

were remaining

obligated funds

waiting to

be disbursed.

On the

fiscal front,

revenues have

trended

positively and

the USVI

government

successfully completed

the

restructuring

of the

government employee

retirement system.

Moreover,

labor market

trends are

stable with

payroll employment

for

the month of June 2023, up 3.2% when compared to June 2022.

Finally, PROMESA

does not apply to

the USVI and, as such,

there is currently no federal

legislation permitting the restructuring

of

the debts of the USVI and

its public corporations and instrumentalities.

To the

extent that the fiscal condition of the

USVI government

deteriorates

again,

the

U.S.

Congress

or

the

government

of

the

USVI

may

enact

legislation

allowing

for

the

restructuring

of

the

financial

obligations

of

the

USVI

government

entities

or

imposing

a

stay

on

creditor

remedies,

including

by

making

PROMESA

applicable to the USVI.

As

of

June

30,

2023,

the

Corporation

had

$78.9

million

in

loans

to

USVI

public

corporations,

compared

to

$38.0

million

as

of

December

31,

2022.

The

increase

in

loans

to

USVI

public

corporations

was

driven

the aforementioned

$47.0

million

line

of

credit

utilization.

As of June 30, 2023, all loans were currently performing and up to date on principal

and interest payments.

135

ITEM 3. QUANTITATIVE

AND QUALITATIVE DISCLOSURES

ABOUT MARKET

RISK

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.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

First

BanCorp.’s

management,

including

its

Chief

Executive

Officer

and

Chief

Financial

Officer,

evaluated

the

effectiveness

of

First BanCorp.’s

disclosure controls and

procedures (as defined

in Rules 13a-15(e)

and 15d-15(e) under

the Exchange Act)

as of June

30, 2023 the

end of the

period covered by

this Quarterly Report

on Form 10-Q.

Based on this

evaluation, the

Chief Executive Officer

and

Chief Financial

Officer

concluded that

the Corporation’s

disclosure

controls

and

procedures were

effective

as of

June 30,

2023

and provide reasonable

assurance that the information

required to be disclosed

by the Corporation

in reports that the

Corporation files

or submits

under the

Exchange Act

is recorded,

processed, summarized

and reported

within the

time periods

specified in

SEC rules

and

forms

and

is

accumulated

and

reported

to

the

Corporation’s

management,

including

the

Chief

Executive

Office

and

Chief

Financial Officer, as appropriate,

to allow timely decisions regarding required disclosures.

Internal Control over Financial Reporting

There were

no changes

to the

Corporation’s

internal control

over financial

reporting (as

defined

in Rules

13a-15(f) and

15d-15(f)

under the Exchange

Act) during our

most recent quarter

ended June 30,

2023 that have materially

affected, or are

reasonably likely to

materially affect, the Corporation’s

internal control over financial reporting.

ITEM 5.

OTHER INFORMATION

No director

or officer

(as defined

in Rule

16a-1(f) of

the Exchange

Act) of

the Corporation

adopted

, modified,

or

terminated

any

Rule 10b5-1 trading arrangement or

any

non-Rule

10b5-1

trading arrangement (as such terms are defined

in Item 408 of Regulation S-

K under the Exchange Act) during the quarter ended June 30, 2023.

136

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.

ITEM 1.

LEGAL PROCEEDINGS

For a

discussion of

legal proceedings,

see Note

22 –

Regulatory Matters,

Commitments and

Contingencies, to

the unaudited

consolidated

financial

statements

herein, which is incorporated by reference in this Part II, Item 1.

ITEM 1A.

RISK FACTORS

The Corporation’s business, operating results and/or the market price of our common stock may be significantly affected by a number of

factors. A detailed

discussion of certain

risk factors that

could affect

the Corporation’s future

operations, financial

condition or results

for

future periods is set forth in Part I, Item

1A., “Risk Factors,” in the 2022 Annual Report on Form

10-K. These risk factors, and others, could

cause actual

results to

differ materially

from historical

results or

the results

contemplated by

the forward-looking

statements contained

in

this report. Also,

refer to

the discussion in

“Forward Looking Statements”

and Part I,

Item 2.

“Management’s Discussion

and Analysis of

Financial Condition and Results

of Operations,” in this Quarterly

Report on Form 10-Q for

additional information that may supplement

or

update the discussion of risk factors in the

2022 Annual Report on Form 10-K.

Other than as described below, there have been

no material changes from those risk factors previously

disclosed in Part I, Item 1A. “Risk

Factors,” in the 2022 Annual Report on Form

10-K.

Cyber-attacks,

system risks

and data

protection breaches

to our

computer systems

and networks

or those

of third-party

service

providers could

adversely affect

our ability to

conduct business, manage

our exposure to

risk or expand

our business, result

in the

disclosure

or

misuse

of

confidential

or

proprietary

information,

increase

our

costs

to

maintain

and

update

our

operational

and

security systems and infrastructure, and present significant reputational, legal

and regulatory costs

.

Our

business

is

highly

dependent

on

the

security,

controls

and

efficacy

of

our

infrastructure,

computer

and

data

management

systems,

as

well

as

those

of

our

customers,

suppliers,

and

other

third

parties.

To

access

our

network,

products

and

services,

our

employees,

customers, suppliers,

and other

third parties,

including downstream

service providers,

the financial

services industry

and

financial

data

aggregators,

with

whom

we

interact,

on

whom

we

rely

or

who

have

access

to

our

customers

’

personal

or

account

information, increasingly

use personal mobile

devices or computing

devices that are

outside of our

network and control

environments

and

are

subject

to

their

own

cybersecurity

risks.

Our

business

relies

on

effective

access

management

and

the

secure

collection,

processing,

transmission,

storage and

retrieval

of confidential,

proprietary,

personal and

other

information

in our

computer

and data

management systems and networks, and in the computer and data management

systems and networks of third parties.

Information

security

risks

for

financial

institutions

have

significantly

increased

in

recent

years,

especially

given

the

increasing

sophistication and activities

of organized

computer criminals, hackers,

and terrorists and

our expansion of

online and digital

customer

services to

better meet

our

customer’s

needs.

These threats

may

derive

from fraud

or malice

on the

part of

our employees

or third-

party

providers

or

may

result

from

human

error

or

accidental

technological

failure.

These

threats

include

cyber-attacks,

such

as

computer viruses,

malicious or

destructive code,

phishing attacks,

denial of

service attacks,

or other

security breach

tactics that

could

result

in

the

unauthorized

release,

gathering,

monitoring,

misuse,

loss,

destruction,

or

theft

of

confidential,

proprietary,

and

other

information, including

intellectual property,

of ours, our

employees, our

customers, or third

parties, damages to

systems, or otherwise

material

disruption

to

our

or

our

customers’

or

other

third

parties’

network

access

or

business

operations,

both

domestically

and

internationally.

While

we

maintain

an

Information

Security

Program

that

continuously

monitors

cyber-related

risks

and

ultimately

ensures

protection

for

the

processing,

transmission,

and

storage

of confidential,

proprietary,

and other

information

in our

computer

systems

and networks, as

well as a vendor

management program to

oversee third party

and vendor risks, there

is no guarantee

that we will not

be exposed to

or be affected

by a cybersecurity

incident. For example,

as previously disclosed,

one of our

third-party vendors was

the

victim

of

a

security

incident

in

April

2023

involving

a

set

of

data

that

included

some

information

on

FirstBank’s

mortgage

loan

business. In

response to learning

of the incident,

we promptly launched

our own internal

investigation, which

confirmed that our

own

systems

were

not

compromised,

and

any

operational

and

financial

impact

was minimal.

Our

vendor

has

indicated

(and

we

have

no

evidence

to the

contrary)

that to

date there

is no

evidence that

there

has been

any

actual or

attempted

misuse of

information.

As of

June 30, 2023, the Corporation has not incurred any material expenses related

to the incident and does not expect any future impact.

137

Cyber threats are rapidly

changing, and future attacks or

breaches could lead to

other security breaches of

the networks, systems, or

devices that

our customers

use to

access our

integrated products

and services,

which, in

turn, could

result in

unauthorized disclosure,

release, gathering,

monitoring, misuse,

loss or

destruction of

confidential, proprietary,

and other

information (including

account data

information) or

data security

compromises. As

cyber threats

continue to

evolve, we

may be

required to

expend significant

additional

resources

to

modify

or

enhance

our

protective

measures,

investigate,

and

remediate

any

information

security

vulnerabilities

or

incidents

and

develop

our

capabilities

to

respond

and

recover.

The

full

extent

of

a

particular

cyberattack,

and

the

steps

that

the

Corporation may

need to take

to investigate

such attack, may

not be immediately

clear, and

it could take

considerable additional

time

for

us

to

determine

the complete

scope

of information

compromised,

at which

time

the impact

on the

Corporation

and

measures

to

recover and restore to

a business-as-usual state may

be difficult to assess.

These factors may also

inhibit our ability to provide

full and

reliable information about the cyberattack to our customers, third-party

vendors, regulators, and the public.

A successful penetration or circumvention of our system security,

or the systems of our customers, suppliers, and other third parties,

could cause us serious negative consequences, including significant

operational, reputational, legal, and regulatory costs and concerns.

Any of these

adverse consequences could

adversely impact our

results of operations,

liquidity,

and financial condition.

In addition,

our

insurance

policies

may

not

be

adequate

to

compensate

us

for

the

potential

costs

and

other

losses

arising

from

cyber-attacks,

failures of

information technology

systems, or

security breaches,

and such

insurance policies

may not

be available

to us in

the future

on

economically

reasonable

terms, or

at

all.

Insurers

may

also

deny

us

coverage

as to

any

future

claim.

Any of

these

results

could

harm our growth prospects, financial condition, business, and reputation.

The

volatility

in

the

financial

services

industry,

including

failures

or

rumored

failures

of

other

depository

institutions,

and

actions taken by governmental

agencies to stabilize the financial

system, could result in,

among other things, bank deposit

runoffs,

liquidity constraints,

and new capital requirements.

The closure and

placement into receivership

with the FDIC

of certain large

U.S. regional banks with

assets over $100 billion

in March

and May

2023, and

adverse developments

affecting other

banks, resulted

in heightened

levels of

market volatility

and consequently

have

negatively impacted customer confidence in the safety and soundness of financial

institutions. These developments have resulted in certain

regional banks experiencing higher than normal

deposit outflows and an elevated

level of competition for available

deposits in the market.

Although we

have not

been materially

impacted by

these recent

bank failures,

the resulting

speed at

which news,

including social

media

outlets, led

depositors to

withdraw funds

from these

and other

financial institutions,

as well

as the

volatile impact

to stock

prices, could

have a

material effect

on operations.

The impact

of market

volatility from

the adverse

developments in

the banking

industry, along

with

continued high

inflation and

rising interest

rates on

our business

and related

financial results,

will depend

on future

developments, which

are highly uncertain and difficult to predict.

In the

aftermath of

these recent

bank failures,

the banking

agencies could

propose certain

actions that

may impact

capital ratios

or the

FDIC deposit

insurance premium.

For example,

on May

11, 2023,

the FDIC

issued a

proposed rule

to recover

the losses

to the

Deposit

Insurance Fund

(“DIF”) associated with

protecting uninsured depositors

as part of

the aforementioned

financial institution failures.

Under

the proposed

rule, the

FDIC would

collect a

special assessment

at an

annual rate

of approximately

12.5 basis

points over

eight quarterly

periods,

commencing with the first quarter of 2024. The assessment

base for the special assessment would be equal to an

insured depository

institution’s estimated uninsured deposits reported as

of December 31, 2022, adjusted

to exclude the first $5

billion in estimated uninsured

deposits.

Notwithstanding, the

special assessment

could be

subject to

change depending

on whether

there are

any shortfalls

on amounts

collected.

If the final rule

is issued as proposed, the

estimated impact of the special

assessment on the Corporation would

be an increase in

non-interest expense by approximately $6

million that would need to be accrued once the

proposed rule is finalized.

138

ITEM 2.

UNREGISTERED

SALES OF

EQUITY SECURITIES

AND USE OF

PROCEEDS

The Corporation did not have any unregistered sales

of equity securities during the quarter ended June

30, 2023.

Issuer Purchases of Equity Securities

There were

no

repurchases of

common stock

during the

quarter ended

June

30,

2023.

As

of

June

30,

2023,

the

Corporation

has

remaining authorization to repurchase $75 million under the $350 million

stock repurchase program announced on April 27, 2022.

139

ITEM 6.

EXHIBITS

See the Exhibit Index below, which is incorporated by

reference herein:

EXHIBIT INDEX

Exhibit No.

Description

31.1

CEO

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of

2002

32.2

CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of

2002

101.INS

Inline XBRL Instance Document, filed herewith. The

instance document does not appear in the interactive

data file because

its XBRL tags are embedded within the inline XBRL

document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document, filed herewith

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document, filed herewith

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith

101.DEF

Inline XBRL Taxonomy Extension Definitions Linkbase Document, filed herewith

104

The cover page of First BanCorp. Quarterly Report on Form 10-Q

for the quarter ended June 30, 2023, formatted in Inline

XBRL (included within the Exhibit 101 attachments)

140

SIGNATURES

Pursuant to

the requirements

of the

Securities Exchange

Act of

1934, the

Corporation has

duly caused

this report

to be

signed on

its

behalf by the undersigned hereunto duly authorized:

First BanCorp.

Registrant

Date:

August 8, 2023

By:

/s/ Aurelio Alemán

Aurelio Alemán

President and Chief Executive Officer

Date: August 8, 2023

By:

/s/ Orlando Berges

Orlando Berges

Executive Vice President and Chief Financial Officer

exhibit311

1

EXHIBIT

31.1

I, Aurelio Alemán, certify that:

1.

I have reviewed this Form 10-Q of First BanCorp.;

2.

Based on

my knowledge,

this report

does not

contain any

untrue statement

of a

material fact

or omit

to state

a material

fact

necessary to make the statements made, in light of the

circumstances under which such statements were made, not

misleading

with respect to the period covered by this report;

3.

Based on my

knowledge, the financial

statements, and other

financial information included

in this report,

fairly present in all

material

respects

the

financial

condition,

results

of

operations

and

cash

flows

of

the

registrant

as

of,

and

for,

the

periods

presented in this report;

4.

The

registrant's

other

certifying

officer

and

I

are

responsible

for

establishing

and

maintaining

disclosure

controls

and

procedures

(as

defined

in

Exchange

Act

Rules

13a-15(e)

and

15d-15(e))

and

internal

control

over

financial

reporting

(as

defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure

controls and procedures,

or caused such disclosure

controls and procedures

to be designed

under

our

supervision,

to

ensure

that

material

information

relating

to

the

registrant,

including

its

consolidated

subsidiaries, is

made known

to us by

others within

those entities, particularly

during the

period in

which this

report

is being prepared;

(b)

Designed such internal control over

financial reporting, or caused such

internal control over financial reporting to

be

designed under our supervision, to

provide reasonable assurance regarding

the reliability of financial

reporting and the

preparation of financial statements

for external purposes in accordance

with generally accepted accounting

principles;

(c)

Evaluated

the

effectiveness

of

the

registrant's

disclosure

controls

and

procedures,

and

presented

in

this

report

our

conclusions about the

effectiveness of the

disclosure controls and

procedures, as of the

end of the period

covered by

this report based on such evaluation; and

(d)

Disclosed in

this report

any change

in the

registrant’s

internal control

over financial

reporting that

occurred during

the registrant’s

most recent

fiscal quarter

(the registrant’s

fourth

fiscal quarter

in the

case of

an annual

report) that

has

materially

affected,

or

is

reasonably

likely

to

materially

affect,

the

registrant’s

internal

control

over

financial

reporting; and

5.

The

registrant's

other

certifying

officer

and

I

have

disclosed,

based

on

our

most

recent

evaluation

of

internal

control

over

financial

reporting,

to

the

registrant's

auditors

and

the

audit

committee

of

the

registrant's

board

of

directors

(or

persons

performing the equivalent functions):

(a)

All

significant

deficiencies

and

material

weaknesses

in

the

design

or

operation

of

internal

control

over

financial

reporting

which

are reasonably

likely

to

adversely

affect

the registrant's

ability

to

record,

process,

summarize

and

report financial information; and

(b)

Any fraud, whether

or not material, that

involves management or other

employees who have

a significant role in

the

registrant's internal control over financial reporting.

Date: August 8, 2023

By:

/s/ Aurelio Alemán

Aurelio Alemán

President and Chief Executive Officer

exhibit312

1

EXHIBIT

31.2

I, Orlando Berges, certify that:

1.

I have reviewed this Form 10-Q of First BanCorp.;

2.

Based on

my knowledge,

this report

does not

contain any

untrue statement

of a

material fact

or omit

to state

a material

fact

necessary to make the statements made, in light of the

circumstances under which such statements were made, not

misleading

with respect to the period covered by this report;

3.

Based on my

knowledge, the financial

statements, and other

financial information included

in this report,

fairly present in all

material

respects

the

financial

condition,

results

of

operations

and

cash

flows

of

the

registrant

as

of,

and

for,

the

periods

presented in this report;

4.

The

registrant's

other

certifying

officer

and

I

are

responsible

for

establishing

and

maintaining

disclosure

controls

and

procedures

(as

defined

in

Exchange

Act

Rules

13a-15(e)

and

15d-15(e))

and

internal

control

over

financial

reporting

(as

defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure

controls and procedures,

or caused such disclosure

controls and procedures

to be designed

under

our

supervision,

to

ensure

that

material

information

relating

to

the

registrant,

including

its

consolidated

subsidiaries, is

made known

to us

by others

within those

entities, particularly

during the

period in

which this

report

is being prepared;

(b)

Designed such internal control over

financial reporting, or caused such

internal control over financial reporting to

be

designed under our supervision, to

provide reasonable assurance regarding

the reliability of financial

reporting and the

preparation of financial statements

for external purposes in accordance

with generally accepted accounting

principles;

(c)

Evaluated

the

effectiveness

of

the

registrant's

disclosure

controls

and

procedures,

and

presented

in

this

report

our

conclusions about the

effectiveness of the

disclosure controls and

procedures, as of the

end of the period

covered by

this report based on such evaluation; and

(d)

Disclosed in

this report

any change

in the

registrant’s

internal control

over financial

reporting that

occurred during

the

registrant’s

most

recent

fiscal

quarter

(the

registrant’s

fourth

quarter

in

the

case

of

an

annual

report)

that

has

materially

affected,

or

is

reasonably

likely

to

materially

affect,

the

registrant’s

internal

control

over

financial

reporting; and

5.

The

registrant's

other

certifying

officer

and

I

have

disclosed,

based

on

our

most

recent

evaluation

of

internal

control

over

financial

reporting,

to

the

registrant's

auditors

and

the

audit

committee

of

the

registrant's

board

of

directors

(or

persons

performing the equivalent functions):

(a)

All

significant

deficiencies

and

material

weaknesses

in

the

design

or

operation

of

internal

control

over

financial

reporting

which

are reasonably

likely

to

adversely

affect

the registrant's

ability

to

record,

process,

summarize

and

report financial information; and

(b)

Any fraud, whether

or not material, that

involves management or other

employees who have a

significant role in the

registrant's internal control over financial reporting.

Date: August 8, 2023

By:

/s/ Orlando Berges

Orlando Berges

Executive Vice President

and

Chief Financial Officer

exhibit321

1

CERTIFICATION

EXHIBIT

32.1

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 Title 18,

United States Code)

Pursuant to

Section 906 of

the Sarbanes-Oxley

Act of 2002

(subsections (a) and

(b) of Section

1350, Chapter 63

of Title

18,

United

States Code),

the undersigned

officer

of First

BanCorp.,

a Puerto

Rico corporation

(the “Company”),

does hereby

certify,

to

such officer’s knowledge, that:

The Quarterly

Report on

Form 10-Q

for the

quarter ended

June 30,

2023 (the

“Form l0-Q”)

of the

Company fully

complies

with the

requirements of

section l3(a)

or 15(d)

of the

Securities Exchange

Act of

1934 and

information contained

in the

Form 10-Q

fairly presents, in all material respects, the financial condition and results of

operations of the Company.

Date: August 8, 2023

/s/ Aurelio Alemán

Name: Aurelio Alemán

Title: President and Chief Executive Officer

exhibit322

1

CERTIFICATION

EXHIBIT

32.2

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 Title 18,

United States Code)

Pursuant to

Section 906 of

the Sarbanes-Oxley

Act of 2002

(subsections (a) and

(b) of Section

1350, Chapter 63

of Title

18,

United

States Code),

the undersigned

officer

of First

BanCorp.,

a Puerto

Rico corporation

(the “Company”),

does hereby

certify,

to

such officer’s knowledge, that:

The Quarterly

Report on

Form 10-Q

for the

quarter ended

June 30,

2023 (the

“Form l0-Q”)

of the

Company fully

complies

with the

requirements of

section l3(a)

or 15(d)

of the

Securities Exchange

Act of

1934 and

information contained

in the

Form 10-Q

fairly presents, in all material respects, the financial condition and results

of operations of the Company.

Date: August 8, 2023

/s/ Orlando Berges

Name: Orlando Berges

Title: Executive Vice

President and Chief Financial Officer