First BanCorp.
Annual Report 2021

Plain-text annual report

Positioned for Growth and Excellence 2021 Annual Report 2 About FirstBank First chartered in 1948, FirstBank was the first Savings & Loan institution established in Puerto Rico. Since its inception the bank played a fundamental role in improving the quality of life in Puerto Rico, by helping thousands of citizens to acquire their first home, thus enhancing their social and economic status. First Federal Savings and Loans Association was founded on October 29, 1948 with a $200,000.00 capital investment. In 1962, First Federal opens its first branch in St. Thomas, becoming the first Puerto Rican savings and loans institution to instate operations in the U.S. Virgin Islands. It converted to a commercial bank charter and changed its name to First Federal Savings Bank in 1983. By 1987, First Federal became a stockholder-owned savings bank and went public, trading on NYSE, under the symbol FBP. In 1994, the name changes to FirstBank Puerto Rico, and four years later the Bank reorganized into a holding company under the name of First BanCorp. In 2002, FirstBank acquired Chase Manhattan Bank operations in the U.S. Virgin Islands, and in 2004 First BanCorp launched a loan origination office in Miami. After the acquisition of UniBank (Ponce General Corporation) and its subsidiaries in Florida in 2005, FirstBank established its presence with 10 new branches changing its name to FirstBank Florida the following year. The Corporation’s growth continued with the purchase in 2008 of the Virgin Islands Community Bank, becoming the leading financial institution with the largest number of branches in the region. In 2015, FirstBank completed the FDIC assisted acquisition of 10 branches and $500+ million in deposits of Doral Bank Puerto Rico solidifying its presence in key Puerto Rico markets. During 2020, FirstBank acquired Banco Santander Puerto Rico with $5.5 billion in assets consolidating its leadership position as the second largest financial institution in the Island. Financial Highlights (As of December 31) (In thousands, except per share amounts and financial ratios) Condensed Income Statements Net interest income Provision for credit losses (benefit) expense Non-interest income Non-interest expenses Income before income taxes Income tax expense Net income Net income attributable to common stockholders Per Common Share Results Net earnings per share - basic Net earnings per share - diluted Cash dividends declared Average shares outstanding Average shares outstanding diluted Book value per common share Tangible book value per common share Profitability Return on Average Assets Net Interest Margin Return on Average Common Equity Total capital Common equity Tier 1 capital Tier 1 capital Leverage Dividend payout ratio Efficiency ratio Asset Quality 2021 Annual Report 2021 729,929 (65,698) 121,164 488,974 427,817 $ $ $ $ $ $ (146,792) $ $ $ $ $ $ $ 281,025 277,338 1.32 1.31 0.31 210,122 211,300 10.41 10.07 2020 600,322 170,985 111,226 424,240 116,323 (14,050) 102,273 99,597 0.46 0.46 0.20 216,904 217,668 10.26 9.90 $ $ $ $ $ $ $ $ $ $ $ $ $ 1.38 % 3.85 % 12.58 % 20.50% 17.80% 17.80% 10.14% 23.49 % 57.45 % 0.67 % 4.29 % 4.54 % 20.37 % 17.31 % 17.61 % 11.26 % 43.56 % 59.62 % Non-performing assets to total assets 0.76 % 1.56 % Other Information Common Stock Price: End of period $ 13.78 $ 9.22 1 First BanCorp Dear Fellow Shareholders, Clients, and Colleagues: We have built a diversified franchise well positioned for growth in our core markets, while reinforcing our unwavering commitment of delivering sustainable shareholder value. Roberto R. Herencia Chairman of the Board 2021 was an exceptional year for First BanCorp. (the “Company”) in terms of financial and operational performance as we were able to achieve our financial and strategic goals while addressing the day-to- day challenges posed by the COVID-19 pandemic. We are inspired by the resiliency and determination demonstrated by our employees, clients, and affected communities in the second year of the pandemic. This stamina is emblematic of how our institution adapts swiftly to changing market conditions and maintains consistent strength in the face of economic headwinds, particularly in our main market. This year marked the completion of the successful integration of the Banco Santander Puerto Rico operations acquired in September 2020. As originally disclosed, the Company generated the planned cost savings and achieved the established financial targets. This transaction marked a major milestone in our Aurelio Alemán President and Chief Executive Officer 2 capital deployment plan and allowed for an expansion of the Company’s footprint and sales capacity, while strengthening our leadership position in the Puerto Rico market. We would like to thank our colleagues for their determined and conscientious efforts during the conversion and integration period, and our new clients for allowing us to serve and introduce them to an improved banking experience. Franchise Performance In 2021, we generated $281.0 million in net income, or $1.31 per diluted share, compared to $102.3 million, or $0.46 per diluted share, in 2020. The financial benefits of our expanded organization are well underway as our adjusted pre-tax pre-provision income grew by 31% to $391.5 million during the year. The Company continued to benefit from ongoing stimulus programs and grew the core deposit franchise, excluding brokered and government deposits, by $1.4 billion, or 11% when compared to 2020. Even though loan portfolio balances decreased by 6%, mainly driven by excess liquidity in the market and the ongoing forgiveness of PPP loans, loan origination activity was strong at $5.4 billion compared to $4.6 billion in 2020. Asset quality continued to improve, with non-performing assets reaching a decade low of 0.76% of total assets, primarily driven by the repayment of several nonaccrual loans and REO sales. Improved digital engagement was evident during 2021. Our retail digital banking platform reached approximately 300,000 active users, a 77% increase when compared to 2020, and interactions with our corporate portal were up by 39% when compared to the previous year. Several new digital offerings were launched during the year including 1) the release of the retail credit cards functionality within our existing digital banking platform, 2) the deployment of a 2021 Annual Report new processing and digital banking platform for our commercial credit cards clients, and 3) the launch of a new mortgage servicing digital platform. In addition, our commercial clients were able to benefit from a completely digital self-servicing platform to manage their SBA-PPP loan forgiveness process, providing a seamless customer experience. Also, we expanded the eContracting digital platform to auto dealership clients. This solution overhauled the traditional auto lending origination process through the deployment of an innovative digital platform in our dealer network, becoming the first financial institution to provide a fully 3 First BanCorp Capital Ratios 17.8% 17.3% 17.8% 17.6% 10.1% Progress on Our Strategic Pillars Our focus in 2021 was centered around strengthening our post-integration corporate culture while taking major steps forward in our corporate social responsibility profile. In terms of community engagement, the Company continued to play an 11.3% important role in making a positive impact on the social, economic, and environmental well-being of the communities and customers it serves. We live our motto of “together we are one” by supporting these communities through employee volunteerism, financial services orientation, grants, and active participation across a broad range of not-for-profit organizations. During the year, the Company’s financial literacy program assisted more than 7,000 individuals 2021 2020 2021 2020 2021 2020 Common Equity Tier 1 Tier 1 Leverage in improving their financial literacy skills. Through participation in over 25 non-profit organizations, our colleagues partnered with groups that provided financial education, economic development, affordable digitalized contract management system in Puerto Rico. housing, and educational and social services for at-risk The adoption of our digital capabilities for consumer populations. As the pandemic continued to impact our loans sales continued show progress during the year clients and the communities we serve, the Company and approximately 40% of all deposit transactions were provided relief efforts through different initiatives and captured through self-service channels. A positive market environment continued to drive economic activity across the Company’s operating regions. We believe that Puerto Rico is currently entering the initial stages of a growth cycle supported by an improved fiscal situation and strong economic tailwinds. Our Florida and Eastern Caribbean regional franchises continued to serve as an important source of revenue and funding diversification. Our franchise is well positioned for growth across our three regions contributed approximately $1 million in total donations to over 130 not-for-profit organizations across our three operating regions, while supporting our commercial clients with over $280 million in additional SBA-PPP loans during the first half of the year. In addition, our community development investment program continued to address short and long-term needs of underserved populations, leading to a 156% increase in qualified CRA commitments, which now total $192 million or 0.92% of bank assets, as of December 2021. while we continue to enhance the quality of products During 2021, the Company continued evolving its and services provided to our clients. Environmental, Social, and Governance (“ESG”) program by formally adopting an ESG framework that will establish and communicate our ESG 4 2021 Annual Report Loan Originations ($ Billions) $5.4 $4.6 strategy and overarching governance policy going forward. The Corporate Governance and Nominating Committee of the Board of Directors will have direct oversight of ESG policies, practices, and disclosures, while a management-level ESG Committee will be responsible for driving the Company’s ESG policies and strategy and report regularly to the aforementioned committee. The ESG Committee will align priorities and strategic goals in any given year and lead the reporting process on ESG related topics, with anticipated plans to publish our inaugural ESG Report during the second quarter of 2022. The Company strives to be a top employer in its operating markets to achieve the needed loyalty within the organization to enable the achievement of our strategic goals. The core of our “Employer Value 2021 2020 Proposition”, “The Experience of Being 1”, embodies the Company’s commitment to our colleagues’ wellbeing, success, and professional development. As labor dynamics shifted in the post-pandemic environment, the Company established a plan to enhance the employee value proposition focused on enhancing talent engagement. We increased the minimum wage and reviewed all compensation levels to align with current market trends across the three regions. Furthermore, we established a flexible dress code policy, upgraded employee facilities, and maintained a safe and comfortable work environment through office restacking and implementation of COVID-19 safety protocols. Our corporate mission is grounded in the principle that investing in our people, supporting the communities we serve, and providing an outstanding banking experience for our customers is essential for success over the long term and to deliver value to our shareholders. This mindset has allowed us to build a profitable franchise, properly manage our capital position, and adequately deploy it over the last few years. Adjusted Pre-Tax Pre-Provision Income $391mm $299mm 2021 2020 5 First BanCorp 2021 was unlike any other year in terms of capital Additional investments in technology are planned for deployment and preserving shareholder value. Our 2022 in order to continue improving our competitive stock price appreciated over 50% compared to a 33% position in this regard. We are fortunate to be able to count on the counsel, leadership, and guidance of our Board of Directors. There were two important changes to the composition of the Board of Directors in the past year. During our 2021 Annual Meeting, we welcomed two new directors to our boardroom: Mrs. Patricia Eaves, who brings more than 25 years of experience in the telecommunications industry in Puerto Rico, and Mr. Félix Villamil, who has more than 35 years of experience in the finance and technology sectors. Both have already proven to be excellent additions to our Board of Directors. While we don’t manage the Company on the basis of short-term stock price fluctuations, we do believe that over the long term our stock price is a clear reflection of the progress we’ve made over the last decade, and we would like to thank our leadership team, colleagues, and fellow Board members for their unwavering commitment to providing the best banking experience to our customers and delivering sustainable shareholder value. Sincerely, Roberto Herencia Chairman of the Board Aurelio Alemán President and Chief Executive Officer appreciation registered by our regional benchmark index. The Company returned 112% of 2021 earnings to shareholders through the repurchase of $214 million in common shares, the redemption of $36 million in outstanding preferred stock, and the payment of $65 million in common stock dividends which now stand at $0.40 cents per share, a 43% increase when compared to 2020. The earnings power of our franchise is evident. These capital actions had no meaningful impact to capital ratios which remain the highest among our Puerto Rico peers. An ample capital position will allow the Company to continue growing the franchise, while delivering value to our shareholders in the future. Positioned for Profitable Growth The outlook for banks in 2022 is more uncertain than usual. While the likelihood of rising short-term interest rates is expected to be positive for earnings, the unfortunate conflict in Ukraine coupled with the remaining post-pandemic supply chain dislocations could materially impact our operating environment in the near term. Notwithstanding, our realigned organization is now positioned for growth. Our key priorities for 2022 will be centered around growing market share across all products and services, retaining the best talent in the industry, accelerating our innovation path, and most importantly, improving customer experience. Our “Omnichannel Value Proposition” is based on the ability to process loans, capture deposits, and receive payments digitally, while providing an expanded branch footprint to service relationships that prefer a physical presence. We believe that physical scale will still matter for an institution that wants to be recognized as the provider of the overall best banking experience for our clients. 6 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year EndedDecember 31, 2021 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 NUMBER001-14793 FIRST BANCORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Puerto Rico (State or other jurisdiction of incorporation or organization) 1519 Ponce de León Avenue, Stop 23 Santurce, Puerto Rico (Address of principal executive office) 66-0561882 (I.R.S. Employer Identification No.) 00908 (Zip Code) Registrant’s telephone number, including area code: (787) 729-8200 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) FBP New York Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☑ 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 ☑ Non-accelerated filer ☐ ☐ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑ The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2021 (the last trading day of the registrant’s most recently completed second fiscal quarter) was $ 2,418,491,241 based on the closing price of $11.92 per share of the registrant’s common stock on the New York Stock Exchange on June 30, 2021. The registrant had no nonvoting common equity outstanding as of June 30, 2021. For the purposes of the foregoing calculation only, the registrant has defined affiliates to include (a) the executive officers named in Part III of this Annual Report on Form 10-K; (b) all directors of the registrant; and (c) each shareholder, including the registrant’s employee benefit plans but excluding shareholders that file on Schedule 13G, known to the registrant to be the beneficial owner of 5% or more of the outstanding shares of common stock of the registrant as of June 30, 2021. The registrant’s response to this item is not intended to be an admission that any person is an affiliate of the registrant for any purposes other than this response. Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 198,414,429 shares as of February 15, 2022. Documents incorporated by reference: Portions of the definitive proxy statement relating to the registrant’s annual meeting of stockholders scheduled to be held on May 20, 2022 are incorporated by reference in response to Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. FIRST BANCORP. 2021 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART I PART II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities [Reserved] Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Item 9. Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Item 9C. Disclosure regarding Foreign Jurisdictions that Prevent Inspections Directors, Executive Officers and Corporate Governance Executive Compensation PART III Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services PART IV Exhibits and Financial Statement Schedules Form 10-K Summary Item 10. Item 11. Item 12. Item 13. Item 14. Item 15. Item 16. Exhibit Index SIGNATURES 6 25 40 40 40 40 41 45 46 132 133 273 273 273 273 274 274 274 274 275 275 275 2 Forward-Looking Statements This Form 10-K 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-K 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 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 made, and advises readers that these 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,” and the following: ● ● ● ● ● ● ● ● uncertainties relating to the impact of the ongoing COVID-19 pandemic or any future regional or global health crisis, including new variants and mutations of the virus, such as the Omicron variant, and the efficacy and acceptance of various vaccines and treatments for the disease, on the Corporation’s business, operations, employees, credit quality, financial condition and net income, including because of uncertainties as to the extent and duration of the pandemic and the impact of the pandemic on consumer spending, borrowing and saving habits, the underemployment and unemployment rates, which can adversely affect repayment patterns, the Puerto Rico economy and the global economy, as well as the risk that the COVID-19 pandemic may exacerbate any other factor that could cause our actual results to differ materially from those expressed in or implied by any forward-looking statements; risks related to the effect on the Corporation and its customers of governmental, regulatory or central bank responses to the COVID-19 pandemic and the Corporation’s participation in any such responses or programs, such as the Small Business Administration Paycheck Protection Program (“SBA PPP”) established by the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act of 2020”), including any judgments, claims, damages, penalties, fines or reputational damage resulting from claims or challenges against the Corporation by governments, regulators, customers or otherwise, relating to the Corporation’s participation in any such responses or programs; risks, uncertainties and other factors related to the Corporation’s acquisition of Banco Santander Puerto Rico (“BSPR”), including the risks that the Corporation’s may not realize, either fully or on a timely basis, the cost savings and any other synergies from the acquisition that the Corporation expected, because of deposit attrition, customer loss and/or revenue loss as a result of unexpected factors or events, including those that are outside of our control following the acquisition, and the impact on the Corporation’s results of operations and financial condition of other business acquisitions, or dispositions; uncertainty as to the ultimate outcomes of the recently approved Puerto Rico’s debt restructuring plan (“Plan of Adjustment” or “PoA”) and its 2022 fiscal plan, or any revisions to it, on our clients and loan portfolios, and any potential impact from future economic or political developments in Puerto Rico; the impact that a resumption of a slowing economy and unemployment or underemployment may have on the performance of our loan and lease portfolio, the market price of our investment securities, the availability of sources of funding and the demand for our products; uncertainty as to the availability of wholesale funding sources, such as securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances and brokered certificates of deposit (“brokered CDs”); the effect of a resumption of deteriorating economic conditions in the real estate markets and the consumer and commercial sectors and their impact on the credit quality of the Corporation’s loans and other assets, which may contribute to, among other things, higher than targeted levels of non-performing assets, charge-offs and provisions for credit losses, and may subject the Corporation to further risk from loan defaults and foreclosures; the impact of changes in accounting standards or assumptions in applying those standards, including the impact of the ongoing COVID-19 pandemic on forecasted economic variables considered for the determination of the allowance for credit losses (“ACL”) required by the current expected credit losses (“CECL”) accounting standard; 3 ● ● ● ● ● ● ● ● ● ● ● ● the ability of the Corporation’s banking subsidiary FirstBank Puerto Rico (“FirstBank” or the “Bank”) to realize the benefits of its net deferred tax assets; the ability of FirstBank to generate sufficient cash flow to make dividend payments to the Corporation; the impact of rising interest rates and inflation on the Corporation, including a decrease in demand for new mortgage loan originations and refinancings and increased competition for borrowers, which would likely pressure the Corporation’s margins and have an adverse impact on origination volumes and financial performance; adverse changes in general economic conditions in Puerto Rico, the United States (“U.S.”), the U.S. Virgin Islands (the “USVI”), and the British Virgin Islands (the “BVI”), including the interest rate environment, market liquidity, housing absorption rates, real estate prices, and disruptions in the U.S. capital markets, including as a result of the ongoing COVID-19 pandemic, which may further reduce interest margins, affect funding sources and demand for all of the Corporation’s products and services, and reduce the Corporation’s revenues and earnings and the value of the Corporation’s assets; the effect of changes in the interest rate environment, including the cessation of the London Interbank Offered Rate (“LIBOR”), which could adversely affect the Corporation’s results of operations, cash flows and liquidity; an adverse change in the Corporation’s ability to attract new clients and retain existing ones; the risk that additional portions of the unrealized losses in the Corporation’s investment portfolio are determined to be credit- related, including additional charges to the provision for credit losses on the Corporation’s remaining exposure to the Puerto Rico government’s debt securities held as part of the available-for -sale securities portfolio with a fair value of $2.9 million ($3.6 million amortized cost) and an ACL of $0.3 million; uncertainty about legislative, tax or regulatory changes that affect financial services companies in Puerto Rico, the U.S. and the USVI and BVI, which could affect the Corporation’s financial condition or performance and could cause the Corporation’s actual results for future periods to differ materially from prior results and anticipated or projected results; changes in the fiscal and monetary policies and regulations of the U.S. federal government and the Puerto Rico 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”, “FED” or “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), government-sponsored housing agencies, and regulators in Puerto Rico, and the USVI and BVI; 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 Corporation’s ability to identify and prevent cyber-security incidents, such as data security breaches, ransomware, malware, “denial of service” attacks, “hacking” and identity theft, and the occurrence of any of which may result in misuse or misappropriation of confidential or proprietary information, and could result in the disruption or damage to our systems, increased costs and losses or an adverse effect to our reputation; the risk that the FDIC may increase the deposit insurance premium and/or require special assessments to replenish its insurance fund, causing an additional increase in the Corporation’s non-interest expenses; 4 ● ● ● ● a need to recognize impairments on the Corporation’s financial instruments, goodwill and other intangible assets relating to business acquisitions, including as a result of the ongoing COVID-19 pandemic; the effect of changes in the interest rate environment on the global economy, on the Corporation’s businesses, business practices, and results of operations, including the impact of rising interest rates and inflation on the Corporation and a decrease in demand for new mortgage loan originations and refinancings and increased competition for borrowers, which could pressure the Corporation’s margins and have an adverse impact on origination volumes and financial performance; the risk that the impact of the occurrence of any of these uncertainties on the Corporation’s capital would preclude further growth of the Bank and preclude the Corporation’s Board of Directors from declaring dividends; 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; and ● general competitive factors and industry consolidation. 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 Item 1. Business GENERAL PART I First BanCorp. is a publicly owned financial holding company that is subject to regulation, supervision and examination by the Federal Reserve Board. The Corporation was incorporated under the laws of the Commonwealth of Puerto Rico to serve as the bank holding company for FirstBank. The Corporation is a full-service provider of financial services and products with operations in Puerto Rico, the U.S., the USVI and the BVI. As of December 31, 2021, the Corporation had total assets of $20.8 billion, total deposits of $17.8 billion, and total stockholders’ equity of $2.1 billion. The Corporation provides a wide range of financial services for retail, commercial and institutional clients. The Corporation has two wholly-owned subsidiaries: FirstBank and FirstBank Insurance Agency, Inc. (“FirstBank Insurance Agency”). FirstBank is a Puerto Rico-chartered commercial bank, and FirstBank Insurance Agency is a Puerto Rico-chartered insurance agency. FirstBank is subject to the supervision, examination and regulation of both the Office of the Commissioner of Financial Institutions of Puerto Rico (“OCIF”) and the FDIC. Deposits are insured through the FDIC Deposit Insurance Fund (the “DIF”). In addition, within FirstBank, the Bank’s USVI operations are subject to regulation and examination by the United States Virgin Islands Banking Board; its BVI operations are subject to regulation by the British Virgin Islands Financial Services Commission; and its operations in the state of Florida are subject to regulation and examination by the Florida Office of Financial Regulation. The Consumer Financial Protection Bureau (“CFPB”) regulates FirstBank’s consumer financial products and services. FirstBank Insurance Agency is subject to the supervision, examination and regulation of the Office of the Insurance Commissioner of the Commonwealth of Puerto Rico and the Division of Banking and Insurance Financial Regulation in the USVI. FirstBank conducts its business through its main office located in San Juan, Puerto Rico, 64 banking branches in Puerto Rico, eight banking branches in the USVI and the BVI, and 11 banking branches in the state of Florida (USA). FirstBank has four wholly owned subsidiaries with operations in Puerto Rico: First Federal Finance Corp. (d/b/a Money Express La Financiera), a finance company specializing in the origination of small loans with 28 offices in Puerto Rico; First Management of Puerto Rico, a Puerto Rico corporation, which holds tax-exempt assets; FirstBank Overseas Corporation, an international banking entity (an “IBE”) organized under the International Banking Entity Act of Puerto Rico; and one dormant company formerly engaged in the operation of certain other real estate owned (“OREO”) property. For a discussion of certain significant events that have occurred in 2021, please refer to “Significant Events” included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K. BUSINESS SEGMENTS The Corporation has six reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments; United States Operations; and Virgin Islands Operations. These segments are described below, as well as in Note 36 - “Segment Information,” to the consolidated financial statements for the year ended December 31, 2021 included in Item 8 of this Form 10-K. Commercial and Corporate Banking 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 government sector in the Puerto Rico region. FirstBank has developed expertise in a wide variety of industries. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, as well as other products, such as cash management and business management services. A substantial portion of the commercial and corporate banking portfolio is secured by the underlying real estate collateral and the personal guarantees of the borrowers. Mortgage Banking The Mortgage Banking operations consist of the origination, sale and servicing of a variety of residential mortgage loan products and related hedging activities in the Puerto Rico region. Originations are sourced through different channels, such as FirstBank branches and purchases from mortgage bankers, and in association with new project developers. focuses on originating residential real estate loans, some of which conform to the U.S. Federal Housing Administration (the “FHA”), U.S. Veterans Administration (the “VA”) and the U.S. Department of Agriculture Rural Development (the “RD”) standards. 6 The Mortgage Banking segment Originated loans that meet the FHA’s standards qualify for the FHA’s insurance program whereas loans that meet the standards of the VA or RD are guaranteed by those respective federal agencies. Mortgage loans that do not qualify under the FHA, VA or RD programs are referred to as conventional loans. Conventional real estate loans can be conforming or non-conforming. Conforming loans are residential real estate loans that meet the standards for sale under the U.S. Federal National Mortgage Association (“FNMA”) and the U.S. Federal Home Loan Mortgage Corporation (“FHLMC”) programs. Loans that do not meet FNMA or FHLMC standards are referred to as non-conforming residential real estate loans. The Corporation’s strategy is to penetrate markets by providing customers with a variety of high-quality mortgage products to serve their financial needs through a faster and simpler process and at competitive prices. The Mortgage Banking segment also acquires and sells mortgages in the secondary markets. Residential real estate conforming loans are sold to investors like FNMA and FHLMC. Most of the Corporation’s residential mortgage loan portfolio consists of fixed-rate, fully amortizing, full documentation loans. The Corporation has commitment authority to issue Government National Mortgage Association (“GNMA”) mortgage-backed securities (“MBS”). Under this program, the Corporation has been selling FHA/VA mortgage loans into the secondary market since 2009. Consumer (Retail) Banking The Consumer (Retail) Banking segment consists of the Corporation’s consumer lending and deposit-taking activities conducted mainly through FirstBank’s branch network in the Puerto Rico region. Loans to consumers include auto loans, finance leases, boat and personal loans, credit card loans, and lines of credit. Deposit products include interest-bearing and non-interest-bearing checking and savings accounts, Individual Retirement Accounts (“IRAs”) and retail certificates of deposit (“re tail CDs”). Retail deposits gathered through each branch of FirstBank’s retail network serve as one of the funding sources for the lending and investment activities. This segment also includes the Corporation’s insurance agency activities in the Puerto Rico region. Treasury and Investments The Treasury and Investments segment is responsible for the Corporation’s treasury and investment management functions. The treasury function, which includes funding and liquidity management, lends funds to the Commercial and Corporate Banking, Mortgage Banking, the Consumer (Retail) Banking and the United States operations segments to finance their respective lending activities and borrows from those segments. The Treasury and Investment segment also obtains funding through brokered deposits, advances from the FHLB, and repurchase agreements involving investment securities, among other possible funding sources. United States Operations The United States Operations segment consists of all banking activities conducted by FirstBank on the U.S. mainland. FirstBank provides a wide range of banking services to individual and corporate customers, primarily in southern Florida through 11 banking branches. The United States Operations segment offers an array of both consumer and commercial banking products and services. Consumer banking products include checking, savings and money market accounts, retail CDs, internet banking services, residential mortgages, home equity loans, and lines of credit. Retail deposits, as well as FHLB advances and brokered CDs assigned to this segment, serve as funding sources for its lending activities. The commercial banking services include checking, savings and money market accounts, retail CDs, internet banking services, cash management services, remote deposit capture, and automated clearing house, or ACH, transactions. Loan products include the traditional commercial and industrial and commercial real estate products, such as lines of credit, term loans and construction loans. Virgin Islands Operations The Virgin Islands Operations segment consists of all banking activities conducted by FirstBank in the USVI and BVI regions, including consumer and commercial banking services, with a total of eight banking branches serving the islands in the USVI of St. Thomas, St. Croix, and St. John, and the island of Tortola in the BVI. The Virgin Islands Operations segment is driven by its consumer, commercial lending and deposit -taking activities. Loans to consumers include auto and boat loans, lines of credit, and personal and residential mortgage loans. Deposit products include interest-bearing and non-interest-bearing checking and savings accounts, IRAs, and retail CDs. Retail deposits gathered through each branch serve as the funding sources for its own lending activities. 7 ENVIRONMENTAL , SOCIAL AND GOVERNANCE (ESG) PROGRAM OVERVIEW The Corporation is committed to supporting our clients, employees, shareholders and communities in which we serve. With oversight from our Board of Directors, the Corporation is focused on implementing ESG practices to support environmental and social sustainability with an effective governance framework. During 2021, the Corporation made progress towards formally establishing our ESG Program by adopting an ESG framework through which we will establish and communicate the Corporation’s ESG strategy and overarching governance policy, with anticipated plans to publish an ESG report during 2022. The Corporate Governance and Nominating Committee of the Board of Directors has direct oversight of ESG policies, practices and disclosures. Additionally, during 2021, the Corporation established an ESG Committee at the management level, which primarily is responsible for driving the Corporation’s ESG policies and strategy and reporting regularly to the Corporate Governance and Nominating Committee. The ESG Committee will align priorities and initiatives for the year, provide strategy recommendations and lead the reporting process on ESG related topics. The ESG Committee is composed of a core, cross-functional group of senior management, with representatives from our Investor Relations, Corporate Affairs, Corporate Communications, Human Resources, Risk, Credit and Finance functions. The Corporation intends to report to shareholders and other key stakeholders regarding these efforts with an ESG Report that will align with leading standards and frameworks, including the Sustainability Accounting Standards Board and the United Nations Sustainable Development Goals. The Corporation expects to publish the Corporation’s inaugural 2021 ESG Report during the second quarter of 2022. HUMAN CAPITAL MANAGEMENT First BanCorp. strives to be recognized as a leading and diversified financial institution, offering a superior experience to our clients and employees. We believe that the key to our success is caring about our team as much as we care about our customers. Our goal is to be an “Employer of Choice” within our primary operating regions, which we believe can be achieved and sustained by adding value to our employees’ lives and providing the right work experience. The core of our Employer Value Proposition, “The Experience of Being 1”, is our commitment to our employees’ wellbeing, success, professional development, and work environment. Structure As of December 31, 2021, the Corporation and its subsidiaries had 3,075 regular employees, nearly all of whom are full-time. The Corporation had 2,722 employees in the Puerto Rico region, 200 employees in the Florida region, and 153 employees in the Virgin Islands region. As of December 31, 2021, approximately 67% of the total employees and 57% of the top and middle management, are women. The overall headcount was 7.45% lower than as of December 31, 2020, primarily as a result of the completion of the integration of BSPR operations. The Human Resources Division reports to the Corporation’s Chief Risk Officer and manages all aspects related to the Corporation’s human capital, including talent recruiting and engagement, training and development, and compensation and benefits. The Human Resources Division efforts are overseen by the Corporation’s Chief Executive Officer (CEO) and the executive management team through regular work-related interactions. Our leaders focus on strengthening employee management and engagement, and maximizing collaboration between departments and talents by promoting an open-door culture that stimulates frequent communication between employees and management. This provides more opportunities to identify employees' needs, obtain feedback about work experience, and adapt our employee engagement as we believe is appropriate. In addition, the Corporation’s Board of Directors and the Board’s Compensation and Benefits Committee monitor and are regularly updated on the Corporation’s human capital management strategies. Recruitment and Retention First BanCorp. is an equal opportunity employer, which considers qualified candidates for employment to fill its available positions. Our efforts are focused on attracting and retaining the best talent for the Corporation, including college graduates. The attraction and selection process includes: ● Building our employer brand by participating in professional events and job fairs and maintaining a relationship with universities through internship programs and career forums. 8 ● A partnership with hiring managers to ensure an accurate match between role and candidate and reasonably speed up the recruitment process to secure top candidates. ● A robust management information system to enhance the effectiveness of the recruitment process and provide candidates with a unique experience. ● A robust on-boarding process to engage and support the new employee’s induction process, including our mentorship program for new hires, “FirstPal”. Our commitment to employee engagement continues throughout the employee’s time with the Corporation. Therefore, we have talent management processes to attract and engage the best talent and promote professional development and career growth, including, promoting internal career opportunities, performance management processes, annual talent review, and robust succession planning, among other practices. We also promote our commitment to our communities through our volunteer and community reinvestment programs. In 2021, despite the COVID-19 pandemic, we supported 14 organizations with volunteer work and over 80 others through donations. We believe that financial security is critical for our employees. Our goal is to maintain compensation levels that are competitive with comparable job categories in similar organizations. Our salary administration program is designed to provide compensation that is consistent with our employees’ assigned duties and responsibilities in order to recognize differences in individual performance levels and to attract the right talent for each job. In addition to salary, some job positions are eligible to participate in variable pay programs. The Corporation has different incentive programs for most of the business units. These incentive programs are periodically reviewed to align them to business strategies and ensure sound risk management. Further, the Corporation’s Management Award Program is used to recognize and reward outstanding performance for exempt employees who do not participate in other variable pay programs. The Corporation also has a Long-Term Incentive Plan for top-performing leaders and employees with high potential. These programs provide awards based upon the Corporation’s and individual’s performance and are key for the attraction and engagement of the best talent Corporation’s investment in its employees has resulted in a stable-tenured workforce, with an average tenure of 10 years of service. In 2021, employee’s voluntary turnover increased globally affecting most industries. Our employee voluntary turnover rate for 2021 was 18.4%, mostly related to hourly employees in call centers and branches. Voluntary turnover for all other positions was 9.5%, for high performers employees’ turnover was relatively low at 7.5%. . The Talent Development First BanCorp. believes that a culture of learning and development maximizes the talent of human capital and is the foundation for sustained business success. The Corporation provides face-to-face, online and virtual training, development activities, special projects, and partial tuition reimbursement to complete a bachelor’s or master's degree. Training is offered on various subjects that are classified into the following five main areas: fundamentals, compliance and corporate governance, specialized technical subjects, professional development, and leadership development. Our training and development programs strives to reflect both the employees’ and the organization’s needs. We offer more than 7,000 training opportunities through online courses and in-person or virtual classes. In 2021, due to the COVID-19 pandemic, we provided over 70 training opportunities (both internal and external) through virtual and online modalities. This action allowed our employees to keep learning even when they were working remotely. For 2021, we delivered more than 119,000 hours of training. Furthermore, employees each completed on average 32.21 training hours. Every year around 100 new and existing supervisors and managers receive training. For new supervisors, we offer a program intended to train in basic supervision, leadership and communication skills, and our human resources policies and practices. We have delivered more than 9,000 hours of supervision and management-related training over the last three years. In addition, our program for active supervisors and managers encourages leaders to review their leadership skills with feedback received from instructors and coworkers. In the past five years, the program has been delivered to 60% of our current leaders, including new leaders from the acquired BSPR business, accounting for over 20,000 training hours since the program was launched. 9 Health & Wellness Health and wellness programs are a strong component of the benefits we provide to our employees. First BanCorp. provides competitive benefits programs that are intended to address even the most pressing needs of our employees and their families to promote physical, emotional, and financial health. Our comprehensive benefits package includes health, dental and vision insurance offered through different insurance company options that enable an employee to choose the one that best accommodates their needs and those of their family. We also offer life insurance and disability plans; and a retirement-defined contribution plan option where both employee and employer contribute. To promote work-life balance, we grant a variety of paid time off for vacation, illness, maternity and paternity leave, bereavement leave, marriage and personal days, in-house health services, and a complete wellness program, including nutrition, fitness, health fairs, personal finance education, and preventive healthcare activities, among others. The Corporation contributes a substantial portion towards the costs of all these benefits. Initiatives for the safety and security of employees have always been an important priority. In 2021, in response to the COVID-19 pandemic, over 60% of the Corporation’s employees were able to work remotely. Additional activities implemented by the Corporation to support employees included: ● COVID-19 monitoring, and contact tracing processes. ● Free testing for all employees. ● Paid leave for employees affected by the virus and special leave of absence without pay for unique needs. ● Enhanced cleaning activities, installed barriers (plexiglass or similar materials) to comply with social distance guidelines and protect customers and employees, provided face masks, hand sanitizers and cleaning materials, and implemented the taking of the temperature of all employees and customers who enter the Corporation’s facilities. ● Training activities related to COVID-19, safety measures, stress management, and remote work. ● Implemented a COVID-19 vaccination mandate to protect our workforce. ● Offered multiple onsite vaccination clinics, including vaccination booster clinics. 10 WEBSITE ACCESS TO REPORT The Corporation makes available annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports, and proxy statements on Schedule 14A, filed or furnished pursuant to section 13(a), 14(a) or 15(d) of the Exchange Act, free of charge on or through its internet website at www.1firstbank.com (under “Investor Relations”), as soon as reasonably practicable after the Corporation electronically files such material with, or furnishes it to, the SEC. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Corporation also makes available the Corporation’s corporate governance guidelines and principles, the charters of the audit, asset/liability, compensation and benefits, credit, risk, trust, corporate governance and nominating committees and the codes of conduct and independence principles mentioned below, free of charge on or through its internet website at www.1firstbank.com (under “Investor Relations”): • Code of Ethics for CEO and Senior Financial Officers • Code of Ethics applicable to all employees • Corporate Governance Guidelines and Principles • Independence Principles for Directors The corporate governance guidelines and principles and the aforementioned charters and codes may also be obtained free of charge by sending a written request to Mrs. Sara Alvarez Cabrero, Executive Vice President, General Counsel and Secretary of the Board, PO Box 9146, San Juan, Puerto Rico 00908. Website addresses referenced in this Annual Report on Form 10-K are provided for convenience only, and the content on the referenced websites does not constitute a part of this Annual Report on Form 10-K. 11 MARKET AREA AND COMPETITION Puerto Rico, where the banking market is highly competitive, is the main geographic service area of the Corporation. As of December 31, 2021, the Corporation also had a presence in the state of Florida and in the USVI and BVI. Puerto Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions in the United States mainland. Competitors include other banks, insurance companies, mortgage banking companies, small loan companies, automobile financing companies, leasing companies, brokerage firms with retail operations, credit unions and certain retailers that operate in Puerto Rico, the Virgin Islands and the state of Florida, as well as Fintechs and emerging competition from digital platforms. The Corporation’s businesses compete with these other firms with respect to the range of products and services offered and the types of clients, customers and industries served. The Corporation’s ability to compete effectively depends on the relative performance of its products, the degree to which the features of its products appeal to customers, and the extent to which the Corporation meets clients’ needs and expectations. The Corporation’s ability to compete also depends on its ability to attract and retain professional and other personnel, and on its reputation. The Corporation encounters intense competition in attracting and retaining deposits and in its consumer and commercial lending activities. The Corporation competes for loans with other financial institutions, some of which are larger and have greater resources available than those of the Corporation. Management believes that the Corporation has been able to compete effectively for deposits and loans by offering a variety of account products and loans with competitive features, by pricing its products at competitive interest rates, by offering convenient branch locations, and by emphasizing the quality of its service. The Corporation’s ability to originate loans depends primarily on the rates and fees charged and the service it provides to its borrowers in making prompt credit decisions. There can be no assurance that in the future the Corporation will be able to continue to increase its deposit base or originate loans in the manner or on the terms on which it has done so in the past. SUPERVISION AND REGULATION The Corporation and FirstBank, its bank subsidiary, are subject to comprehensive federal and Puerto Rican supervision and regulation. These supervisory and regulatory requirements apply to all aspects of the Corporation’s and the Bank’s activities, including commercial and consumer lending, deposit taking, management, governance and other activities. As part of this regulatory framework, the Corporation and the Bank are subject to extensive consumer financial regulatory legal and supervisory requirements. Further, U.S. financial supervision and regulation is dynamic in nature, and supervisory and regulatory requirements are subject to change as new legislative and regulatory actions are taken. Future legislation may increase the regulation and oversight of the Corporation and the Bank. Any change in applicable laws or regulations, however, may have a material adverse effect on the business of commercial banks and bank holding companies, including the Bank and the Corporation. Bank Holding Company Activities and Other Limitations The Corporation is registered under, and subject to, supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). The Corporation is subject to ongoing regulation, supervision, and examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic and annual reports and other information concerning its own business operations and those of its subsidiaries. The Bank Holding Company Act also permits a bank holding company to elect to become a financial holding company and engage in a broad range of activities that are financial in nature. The Corporation elected to be a financial holding company under the Bank Holding Company Act. Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Bank Holding Company Act specifically provides that the following activities have been determined to be “financial in nature”: (i) lending, trust and other banking activities; (ii) insurance activities; (iii) financial or economic advice or services; (iv) pooled investments; (v) securities underwriting and dealing; (vi) domestic activities permitted for an existing bank holding company; (vii) foreign activities permitted for an existing bank holding company; and (viii) merchant banking activities. A financial holding company that ceases to meet certain standards is subject to a variety of restrictions, depending on the circumstances, including precluding the undertaking of new financial activities or the acquisition of shares or control of other companies. Until compliance is restored, the Federal Reserve Board has broad discretion to impose appropriate limitations on the financial holding company’s activities. If compliance is not restored within 180 days, the Federal Reserve Board may ultimately require the financial holding company to divest its depository institutions or, in the alternative, to discontinue or divest any activities that are not permitted to non-financial holding companies. The Corporation and FirstBank must be well-capitalized and well-managed 12 for regulatory purposes, and FirstBank must earn “satisfactory” or better ratings on its periodic Community Reinvestment Act (“CRA”) examinations for the Corporation to preserve its financial holding company status. Under federal law and Federal Reserve Board policy, a bank holding company such as the Corporation is expected to act as a source of financial and managerial strength to its banking subsidiaries and to commit required levels of support to them. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks must be subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. As of December 31, 2021, and the date hereof, FirstBank was and is the only depository institution subsidiary of the Corporation. Federal law directs the Federal Reserve Board to adopt regulations implementing the statutory source-of-strength requirements; how ever, such regulations have not yet been proposed. Regulatory Capital Requirements The federal banking agencies have implemented rules for U.S. banks that establish minimum regulatory capital requirements, the components of regulatory capital, and the risk-based capital treatment of bank assets and off-balance sheet exposures. These rules currently apply to the Corporation and FirstBank, and generally are intended to align U.S. regulatory capital requirements with international regulatory capital standards adopted by the Basel Committee on Banking Supervision (“Basel Committee”), in particular, the most recent international capital accord adopted in 2010 (and revised in 2011) known as “Basel III.” The current rules increase the quantity and quality of capital required by, among other things, establishing a minimum common equity capital requirement and an additional common equity Tier 1 capital conservation buffer. In addition, the current rules revise and harmonize the bank regulators’ rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses that have been identified, by applying a variation of the Basel III “Standardized Approach” for the risk-weighting of bank assets and off-balance sheet exposures to all U.S. banking organizations other than large internationally active banks. International regulatory developments also can affect the regulation and supervision of U.S. banking organizations, including the Corporation and FirstBank. Both the Basel Committee and the Financial Stability Board (established in April 2009 by the Group of Twenty Finance Ministers and Central Bank Governors) have agreed to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation, and transparency, including the adoption of Basel III and a commitment to raise capital standards and liquidity buffers within the banking system under Basel III. In addition, 12 U.S.C. 5371 (the Preferred “Collins Amendment”), among other things, eliminates certain trust-preferred securities (“TRuPs”) from Tier 1 capital. securities issued under the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) are exempt from this change. Bank holding companies, such as the Corporation, were required to fully phase out these instruments from Tier 1 capital by January 1, 2016; however, these instruments may remain in Tier 2 capital until the instruments are redeemed or mature. As of December 31, 2021, the Corporation had $178.3 million in TRuPs that were subject to a full phase-out from Tier 1 capital under the final regulatory capital rules discussed above. Consistent with Basel Committee actions noted above, the Federal Reserve Board has adopted risk-based and leverage capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Corporation and FirstBank became subject to the U.S. Basel III capital rules beginning on January 1, 2015, and compute risk-weighted assets using the Standardized Approach required by these rules. The Basel III rules require the Corporation to maintain an additional capital conservation buffer of 2.5% 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. Under the fully phased-in Basel III rules, in order to be considered adequately capitalized and not subject to the above-described limitations, the Corporation is required to maintain: (i) a minimum common equity Tier 1 Capital (“CET1”) to risk-weighted assets ratio of at least 4.5%, plus the 2.5% “capital conservation buffer,” resulting in a required minimum CET1 ratio of at least 7%; (ii) a minimum ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5%; (iii) a minimum ratio of total Tie r 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum total capital ratio of 10.5%; and (iv) a required minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets. The Basel III rules have increased our regulatory capital requirements and require us to hold more capital against certain of our assets and off -balance sheet exposures. The Corporation’s CET1 capital ratio, Tier 1 capital ratio, total capital ratio, and the leverage ratio under the Basel III rules, as of December 31, 2021, were 17. 80%, 17.80%, 20.50%, and 10.14%, respectively. 13 Further, as part of its response to the impact of COVID-19, on March 31, 2020, 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 initial impact of the adoption of CECL on retained earnings plus 25% of the change in the ACL (excluding PCD loans) 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. The Corporation and the Bank elected to phase in the full effect of CECL on regulatory capital over the five-year transition period. The Corporation and the Bank compute risk-weighted assets using the Standardized Approach required by the Basel III rules. The Standardized Approach for risk-weightings has expanded the risk-weighting categories from the four major risk-weighting categories under the previous regulatory capital rules (0%, 20%, 50%, and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets. In a number of cases, the Standardized Approach resulted in higher risk weights for a variety of asset categories. Specific changes to the risk-weightings of assets included, among other things: (i) applying a 150% risk weight instead of a 100% risk weight for high volatility commercial real estate acquisition, development and construction loans, (ii) assigning a 150% risk weight to exposures that are 90 days past due (other than qualifying residential mortgage exposures, which remain at an assigned risk-weighting of 100%), (iii) establishing a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable, in contrast to the 0% risk-weighting under the prior rules and (iv) requiring capital to be maintained against on-balance-sheet and off-balance-sheet exposures that result from certain cleared transactions, guarantees and credit derivatives, and collateralized transactions (such as repurchase agreement transactions). 14  Set forth below are the Corporation's and FirstBank's capital ratios as of December 31, 2021 based on Federal Reserve and FDIC guidelines: Banking Subsidiary First BanCorp. FirstBank Well- Capitalized Minimum 20.50% 17.80% 17.80% 10.14% 20.23% 18.12% 19.03% 10.85% 10.00% 6.50% 8.00% 5.00% As of December 31, 2021 Total capital (Total capital to risk-weighted assets) CET1 Capital (CET1 capital to risk-weighted assets) Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) Leverage ratio (1) _______________ (1) Tier 1 capital to average assets. Consumer Financial Protection Bureau The CFPB has primary examination and enforcement authority over FirstBank and other banks with over $10 billion in assets with respect to consumer financial products and services. CFPB regulations issued over the past few years implement 2010 amendments to the Equal Credit Opportunity Act, the Truth in Lending Act (“TILA”), and the Real Estate Settlement Procedures Act (“RESPA”). In general, among other changes, these regulations collectively: (i) require lenders to make a reasonable, good faith determination of a prospective residential mortgage borrower’s ability to repay based on specific underwriting criteria and set standards related to the determination by mortgage lenders of a consumer’s ability to repay the mortgage; (ii) require stricter underwriting of “qualified mortgages,” discussed below, that presumptively satisfy the ability to pay requirement (thereby providing the lender a safe harbor from non-compliance claims); (iii) specify new limitations on loan originator compensation and establish criteria for the qualifications of, and registration or licensing of, loan originators; (iv) expand the coverage of the Home Ownership and Equity Protections Act of 1994 to high-cost mortgage loans; (v) expand mandated loan escrow accounts for certain loans; (vi) establish appraisal requirements under the Equal Credit Opportunity Act and require lenders to provide a free copy of all appraisals to applicants for first lien loans; (vii) establish appraisal standards for most “higher-risk mortgages” under TILA; (viii) combine in a single form required loan disclosures under TILA and RESPA; (ix) define a “qualified mortgage” ; and (x) afford safe harbor legal protections for lenders making qualified loans that are not “higher priced.” The CFPB also has issued regulations setting forth new mortgage servicing rules that apply to the Bank. The regulations affect notices given to consumers as to delinquency, foreclosure alternatives and loss mitigation, modification applications, interest rate adjustments and options for avoiding “force-placed” insurance. Further, the CFPB has adopted rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the TILA and the RESPA. Consistent with this requirement, the CFPB amended Regulation X (RESPA) and Regulation Z (TILA) to establish disclosure requirements and forms in Regulation Z for most closed -end consumer credit transactions secured by real property. In addition to combining the existing disclosure requirements and implementing new requirements imposed by federal law, the rule provides extensive guidance regarding compliance with those requirements. Stress-Testing and Capital Planning Requirements Federal regulations currently do not impose formal stress-testing requirements on banking organizations with total assets of less than $100 billion, such as the Corporation and FirstBank. The federal banking agencies have indicated through interagency guidance that the capital planning and risk management practices of institutions with total of assets of less than $100 billion will continue to be reviewed through the regular supervisory process. Although the Corporation will continue to monitor its capital consistent with the safety and soundness expectations of the federal regulators, the Corporation will no longer conduct company-run stress testing as a result of the legislative and regulatory amendments. However, the Corporation continues to use customized stress testing to support the business and as part of its capital planning process. 15 The Volcker Rule Section 13 of the Bank Holding Company Act (commonly known as the Volcker Rule) , subject to important exceptions, generally prohibits a banking entity such as the Corporation or the Bank from acquiring or retaining any ownership in, or acting as sponsor to, a hedge fund or private equity fund (“covered fund”). The Volcker Rule also prohibits these entities from engaging, for their own account, in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments. Final regulations implementing the Volcker Rule have been adopted by the financial regulatory agencies and are now generally effective. The Corporation and the Bank are not engaged in “proprietary trading” as defined in the Volcker Rule. In addition, the Corporation undertook a review of its investments to determine if any meet the Volcker Rule’s definition of “covered funds”. Based on that review, the Corporation concluded that its investments are not considered covered funds under the Volcker Rule. Community Reinvestment Act and Home Mortgage Disclosure Act Regulations The CRA encourages banks to help meet the credit needs of the local communities in which a bank offers their services, including low- and moderate-income individuals, consistent with the safe and sound operation of the bank. The CRA requires the federal supervisory agencies, as part of the general examination of supervised banks, to assess a bank’s record of meeting the credit needs of its community, assign a performance rating, and take such record and rating into account in their evaluation of certain applications by such bank. The CRA also requires all institutions to make public disclosure of their CRA ratings. FirstBank received a “satisfactory” CRA rating in its most recent examination by the FDIC. Failure to adequately serve the communities could result in the denial by the regulators of proposals to merge, consolidate or acquire new assets, as well as expand or relocate branches. The federal bank regulatory agencies have amended their respective CRA regulations primarily to conform to changes made by the CFPB to Regulation C, which implements the Home Mortgage Disclosure Act. The Home Mortgage Disclosure Act requires many financial institutions to maintain, report, and publicly disclose loan-level information about mortgages. USA PATRIOT Act and Other Anti-Money Laundering Requirements As a regulated depository institution, FirstBank is subject to the Bank Secrecy Act, which imposes a variety of reporting and other requirements, including the requirement to file suspicious activity and currency transaction reports that are designed to assist in the detection and prevention of money laundering, terrorist financing and other criminal activities. In addition, under Title III of the USA PATRIOT Act of 2001, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions are required to, among other things, identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. On January 1, 2021, major legislative amendments to U.S. anti-money laundering requirements became effective through the enactment of Division F of the National Defense Authorization Act for fiscal year 2021, otherwise known as the Anti-Money Laundering Act of 2020 (“AML Act”). The new legislation includes a variety of provisions that are designed to modernize the anti- money laundering regulatory regime and remediate gaps in the U.S.’s approach to anti-money laundering and countering the financing of terrorism, including the creation of a national database of absence corporate beneficial ownership along with significantly enhanced reporting requirements, increased penalties for Bank Secrecy Act violations, clarification of Suspicious Activity Report filing and sharing requirements, and provisions addressing the adverse consequences of “de-risking,” namely, the practice of financial institutions’ termination or limitation of business relationships with clients or classes of clients in order to manage the risks associated with such clients. Regulations implementing the Bank Secrecy Act and the USA PATRIOT Act are published and primarily enforced by the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Treasury. Failure of a financial institution, such as the Corporation or the Bank, to comply with the requirements of the Bank Secrecy Act or the USA PATRIOT Act could have serious legal and reputational consequences for the institution, including the possibility of regulatory enforcement or other legal actions, such as significant civil monetary penalties. The Corporation is also required to comply with federal economic and trade sanctions requirements enforced by the Office of Foreign Assets Control (“OFAC”), a bureau of the U.S. Treasury. 16 The Corporation believes it has adopted appropriate policies, procedures and controls to address compliance with the Bank Secrecy Act, USA PATRIOT Act and economic/trade sanctions requirements, and to implement banking agency, FinCEN, OFAC and other U.S. Treasury regulations. Further, FinCEN is expected to propose regulations in the near future that implement the requirements of the AML Act, and the Corporation will adjust its policies, procedures and controls accordingly upon the adoption of any final regulations. State Chartered Non-Member Bank and Banking Laws and Regulations in General FirstBank is subject to regulation and examination by the OCIF, the CFPB and the FDIC, and is subject to comprehensive federal and state (Commonwealth of Puerto Rico) regulations that regulate, among other things, the scope of their businesses, their investments, their reserves against deposits, the timing and availability of deposited funds, and the nature and amount of collateral for certain loans. The OCIF, the CFPB and the FDIC periodically examine FirstBank to test the Bank’s conformance to safe and sound banking practices and compliance with various statutory and regulatory requirements. This regulation and supervision establish a comprehensive framework and oversight of activities in which the Bank can engage. The regulation and supervision by the FDIC also are intended for the protection of the FDIC’s insurance fund and depositors. The regulatory structure gives the regulatory authorities discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. This enforcement authority includes, among other things, the ability to assess civil monetary penalties, issue cease-and-desist or removal orders, and initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and for engaging in unsafe or unsound practices. In addition, certain bank actions are required by statute and implementing regulations. Other actions or failure to act may provide the basis for enforcement action, including the filing of misleading or untimely reports with regulatory authorities. Dividend Restrictions The Federal Reserve Board’s “Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies” (the “Supervisory Letter”) discusses the ability of bank holding companies to declare dividends and to repurchase equity securities. The Supervisory Letter is generally consistent with prior Federal Reserve supervisory policies and guidance, although it places greater emphasis on discussions with the regulators prior to dividend declarations and redemption or repurchase decisions even when not explicitly required by the regulations. The Federal Reserve Board provides that the principles discussed in the Supervisory Letter are applicable to all bank holding companies. The Supervisory Letter also includes a policy statement that, as a matter of prudent banking, a bank holding company should generally not maintain a given rate of cash dividends unless its net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the organization’s capital needs, asset quality, and overall current and prospective financial condition. The Corporation is subject to certain restrictions generally imposed on Puerto Rico corporations with respect to the declaration and payment of dividends ( i.e., that dividends may be paid out only from the Corporation’s capital surplus or, in the absence of such excess, from the Corporation’s net earnings for such fiscal year and/or the preceding fiscal year). Furthermore, the Federal Reserve Board’s regulatory capital rule (Regulation Q) limits the amount of capital a bank holding company may distribute under certain circumstances. Regulation Q helps ensure banks maintain strong capital positions that will enable them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturn. A banking organization must maintain a capital conservation buffer of CET1 capital in an amount greater than 2.5% of total risk weighted assets to avoid being subject to limitations on capital distributions. The principal source of funds for the Corporation’s parent holding company is dividends declared and paid by its subsidiary, FirstBank. The ability of FirstBank to declare and pay dividends on its capital stock is regulated by the Puerto Rico Banking Law, the Federal Deposit Insurance Act (the “FDIA”), and FDIC regulations. In general terms, the Puerto Rico Banking Law provides that when the expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be charged against undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If the reserve fund is not sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the bank’s capital account. The Puerto Rico Banking Law provides that, until said capital has been restored to its original amount and the reserve fund to 20% of the original capital, the bank may not declare any dividends. In general, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is undercapitalized (as discussed in Prompt Corrective Action below), when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding such bank. Refer to Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Annual Report on Form 10-K for further information on the Corporation’s distribution of dividends and repurchases of equity securities. 17 Financial Privacy and Cybersecurity The federal financial institution regulations limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is used in diversified financial companies and conveyed to outside vendors. The federal banking regulators regularly issue guidance regarding cybersecurity intended to enhance cyber risk management standards among financial institutions. A financial institution is expected to establish multiple lines of defense and to ensure their risk management processes address the risk posed by potential threats to the institution. A financial institution’s management is expected to maintain sufficient processes to effectively respond and recover the institution’s operations after a cyber-attack. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations if a critical service provider of the institution falls victim to this type of cyber-attack. The Corporation’s Information Security Program reflects these requirements. Limitations on Transactions with Affiliates and Insiders Certain transactions between FDIC-insured banks financial institutions such as FirstBank and its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and by Federal Reserve Regulation W. An affiliate of a bank is, in general, any corporation or entity that controls, is controlled by, or is under common control with the bank. In a holding company context, the parent bank holding company and any companies that are controlled by such parent bank holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act (i) limit the extent to which the bank or its subsidiaries may engage in “covered transactions” (defined below) with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such bank’s capital stock and surplus and (ii) require that all “covered transactions” be on terms that are substantially the same, or at least as favorable to the bank or affiliate, as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee, credit derivatives, securities lending and other similar transactions entailing the provision of financial support by the bank to an affiliate. In addition, loans or other extensions of credit by the bank to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act. In addition, Sections 22(h) and (g) of the Federal Reserve Act, implemented through Regulation O, place restrictions on commercial bank loans to executive officers, directors, and principal stockholders of the bank and its affiliates. Under Section 22(h) of the Federal Reserve Act, bank loans to a director, an executive officer, a greater than 10% stockholder of the bank, and certain related interests of these persons, may not exceed, together with all other outstanding loans to such persons and affiliated interests, the bank’s limit on loans to one borrower, which is generally equal to 15% of the bank’s unimpaired capital and surplus in the case of loans that are not fully secured, and an additional 10% of the bank's unimpaired capital and unimpaired surplus in the case of loans that are fully secured by readily marketable collateral having a market value at least equal to the amount of the loan. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers, and principal stockholders be made on terms that are substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a bank to insiders cannot exceed the bank’s unimpaired capital and surplus. Furthermore, Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers. Executive Compensation The federal banking agencies have adopted interagency guidance governing incentive-based compensation programs, which applies to all banking organizations regardless of asset size. This guidance uses a principles-based approach to ensure that incentive-based compensation arrangements appropriately tie rewards to longer-term performance and do not undermine the safety and soundness of banking organizations or create undue risks to the financial system. The interagency guidance is based on three major principles: (i) balanced risk-taking incentives; (ii) compatibility with effective controls and risk management; and (iii) strong corporate governance. The guidance further provides that, where appropriate, the banking agencies will take supervisory or enforcement action to ensure that material deficiencies that pose a threat to the safety and soundness of the organization are promptly addressed. In May 2016, the federal banking agencies, along with other federal regulatory agencies, proposed regulations (first proposed in 2011) governing incentive-based compensation practices at covered banking institutions, which would include, among others, all banking organizations with assets of $1 billion or greater. These proposed rules are intended to better align the financial rewards for covered employees with an institution’s long-term safety and soundness. Portions of these proposed rules would apply to the Corporation and FirstBank. Those applicable provisions would generally (i) prohibit types and features of incentive-based compensation arrangements that encourage inappropriate risk because they are “excessive” or “could lead to material financial loss” at the banking institution; (ii) require incentive-based compensation arrangements to adhere to three basic principles: (1) a balance 18 between risk and reward; (2) effective risk management and controls; and (3) effective governance; and (iii) require appropriate board of directors (or committee) oversight and recordkeeping and disclosures to the banking institution’s primary regulatory agency. The nature and substance of any final action to adopt these proposed rules, and the timing of any such action, are not known at this time. Prompt Corrective Action The Prompt Corrective Action (“PCA”) provisions of the FDIA require the federal bank regulatory agencies to take prompt corrective action against any insured depository institution (“institutions”) that are undercapitalized. The FDIA establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Well-capitalized institutions significantly exceed the required minimum level for each relevant capital measure. A bank’s capital category, as determined by applying the prompt corrective action provisions of the law, may not constitute an accurate representation of the overall financial condition or prospects of a bank, such as the Bank, and should be considered in conjunction with other available information regarding the financial condition and results of operations of the bank. Deposit Insurance The increase in deposit insurance coverage to up to $250,000 per customer, the FDIC’s expanded authority to increase insurance premiums, as well as the increase in the number of bank failures after the 2008 financial crisis, resulted in an increase in deposit insurance assessments for all banks, including FirstBank. The FDIA further requires that the designated reserve ratio for the DIF for any year not be less than 1.35% of estimated insured deposits or the comparable percentage of the new deposit assessment base. In addition, the FDIC must take the necessary actions for the reserve ratio to reach 1.35% of estimated insured deposits by September 30, 2020. The FDIC managed to reach the goal early, achieving a reserve ratio of 1.36% in September 2018. However, in the third quarter of 2020, the FDIC announced that the reserve ratio of the DIF fell 9 basis points between the first and second quarters of 2020, from 1.39% to 1.30%. The decline was attributed to an unprecedented surge in deposits. The FDIC approved a plan that is expected to restore the DIF to at least 1.35% within eight years, as required by the FDIA. Under the plan, the FDIC will maintain the current schedules of assessment rates for all banks; monitor deposit balance trends, potential losses and other factors that affect the reserve ratio; and provide updates to its loss and income projections at least twice a year. The FDIC has also adopted a final rule raising its industry target ratio of reserves to insured deposits to 2%, 65 basis points above the statutory minimum, but the FDIC has indicated that it does not project that goal to be met for several years. FDIC Insolvency Authority Under Puerto Rico banking laws (discussed below), the OCIF may appoint the FDIC as conservator or receiver of a failed or failing FDIC-insured Puerto Rican bank, such as the Bank, and the FDIA authorizes the FDIC to accept such an appointment. In addition, the FDIC has broad authority under the FDIA to appoint itself as conservator or receiver of a failed or failing state bank, including a Puerto Rican bank. If the FDIC is appointed conservator or receiver of a bank upon the bank’s insolvency or the occurrence of other events, the FDIC may sell or transfer some, part or all of a bank’s assets and liabilities to another bank, or liquidate the bank and pay out insured depositors, as well as uninsured depositors and other creditors to the extent of the closed bank’s available assets. As part of its insolvency authority, the FDIC has the authority, among other things, to take possession of and administer the receivership estate, pay out estate claims, and repudiate or disaffirm certain types of contracts to which the bank was a party if the FDIC believes such contract is burdensome and its disaffirmance will aid in the administration of the receivership. In resolving the estate of a failed bank, the FDIC, as receiver, will first satisfy its own administrative expenses. The claims of holders of U.S. deposit liabilities also have priority over those of other general unsecured creditors. Activities and Investments The activities as “principal” of FDIC-insured, state-chartered banks, such as FirstBank, are generally limited to those that are permissible for national banks. Similarly, under regulations dealing with equity investments, an insured state-chartered bank generally may not directly or indirectly acquire or retain any equity investments of a type, or in an amount, that is not permissible for a national bank. Federal Home Loan Bank System FirstBank is a member of the FHLB system. The FHLB system consists of eleven regional FHLBs governed and regulated by the Federal Housing Finance Agency. The FHLBs serve as reserve or credit facilities for member institutions within their assigned regions. FirstBank is a member of the FHLB of New York and, as such, is required to acquire and hold shares of capital stock in the FHLB of New York in an amount calculated in accordance with the requirements set forth in applicable laws and regulations. FirstBank is in compliance with the stock ownership requirements of the FHLB of New York. All loans, advances and other extensions of credit 19 made by the FHLB to FirstBank are secured by a portion of FirstBank’s mortgage loan portfolio, certain other investments and the capital stock of the FHLB held by FirstBank. Ownership and Control Because of FirstBank’s status as an FDIC-insured bank, as defined in the Bank Holding Company Act, the Corporation, as the owner of FirstBank’s common stock, is subject to certain restrictions and disclosure obligations under various federal laws, includin g the Bank Holding Company Act and the Change in Bank Control Act (the “CBCA”). Regulations adopted pursuant to the Bank Holding Company Act and the CBCA generally require prior Federal Reserve Board or other federal banking agency approval or non- objection for an acquisition of control of an “insured institution” (as defined in the Act) or holding company thereof by any person (or persons acting in concert). Control is deemed to exist if, among other things, a person (or group of persons acting in concert) acquires 25% or more of any class of voting stock of an insured institution or holding company thereof. Under the CBCA, control is presumed to exist subject to rebuttal if a person (or group of persons acting in concert) acquires 10% or more of any class of voting stock and either (i) the corporation has registered securities under Section 12 of the Exchange Act, or (ii) no person (or group of persons acting in concert) will own, control or hold the power to vote a greater percentage of that class of voting securities immediately after the transaction. The concept of acting in concert is very broad and is subject to certain rebuttable presumptions, including, among others, that relatives, business partners, management officials, affiliates and others are presumed to be acting in concert with each other and their businesses. The regulations of the FDIC implementing the CBCA are generally similar to those described above. The Puerto Rico Banking Law requires the approval of the OCIF for changes in control of a Puerto Rico bank. See “Puerto Rico Banking Law” below for further detail. Standards for Safety and Soundness The FDIA requires the FDIC and the other federal bank regulatory agencies to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation, and compensation. The implementing regulations and guidelines of the FDIC and the other federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the regulations and guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The regulations and guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. Failure to comply with these standards can result in administrative enforcement or other adverse actions against the bank. Brokered Deposits FDIC regulations adopted under the FDIA govern the receipt of brokered deposits by banks. Well -capitalized institutions are not subject to limitations on brokered deposits, while adequately-capitalized institutions are able to accept, renew or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the interest paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. In October 2020, the FDIC adopted revisions to its brokered deposit regulations that became effective on April 1, 2021, with full compliance extended for financial institutions to put in place systems to implement the new regulatory regime and to allow the FDIC to develop internal processes and systems to ensure a consistent and robust review process until January 1, 2022. The Coronavirus Aid, Relief and Economic Security Act (the “ CARES Act of 2020”) In response to the economic effects of the COVID-19 pandemic, on March 27, 2020, the U.S. Government enacted the CARES Act of 2020, as amended by the Consolidated Appropriations Act, 2021. The CARES Act of 2020, as amended, includes numerous provisions applicable to financial institutions, including (i) permitting banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19, provided that such loans were not more than 30 days past due as of December 31, 2019, that would otherwise result in a loan’s classification as TDR or evaluation for impairment, until the earlier of 60 days after the termination date of the pandemic emergency or January 1, 2022 (as amended and extended), (ii) permitting borrowers whose loans are federally backed to request a forbearance for up to 180 days, which can be extended for up to an additional 180 days at the borrower’s timely request, without incurring fees, penalties or interest beyond those the borrower would have incurred had the borrower made all scheduled payments, and without exposing the lender to adverse supervisory action, (iii) as discussed further above, permitting financial institutions that implement CECL during the 2020 calendar year the option to delay for two years an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period, and (iv) creation of the SBA PPP program under which small businesses may obtain loans guaranteed by the SBA to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest and other qualifying expenses. The SBA fully-guarantees SBA PPP loans, and SBA PPP loans may be forgiven by the SBA so long as, during the applicable loan forgiveness covered period, employee and compensation levels of the business are maintained and 60% of the loan 20 proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. SBA PPP loans carry an interest rate of 1% and have a two-year term (or five years for loans originated after June 5, 2020). For loans originated under the SBA’s PPP loan program, interest and principal payment on these loans were originally deferred for six months following the funding date, during which time interest would continue to accrue. On October 7, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) extended the deferral period for borrower payments of principal, interest, and fees on all SBA PPP loans to the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period). The extension of the deferral period under the Flexibility Act automatically applied to all SBA PPP loans. The Corporation has chosen to support its customers and the communities it serves by participating in the SBA PPP loan program and loan modifications in compliance with the provisions of the CARES Act of 2020. COVID-Related Regulatory Activities During 2020, the federal banking agencies took several actions to mitigate the stress on regulated banks resulting from the COVID- 19 pandemic. These actions were generally designed to facilitate the ability of banks to provide responsible credit and liquidity to businesses and individuals affected by the COVID-19 pandemic, and mitigate the distorting effects under regulatory capital and other requirements resulting from the pandemic. In addition to the CECL regulatory capital relief discussed above, the banking agencies adopted regulations that, among other things: neutralized the regulatory capital and liquidity effects of banks participating in certain COVID-related Federal Reserve liquidity facilities; deferred appraisal and valuation requirements after the closing of certain residential and commercial real estate transactions; provided temporary relief for banks from the FDIC’s audit and reporting requirements for banks that experienced large cash inflows resulting from participation in the SBA’s PPP and other COVID-related facilities, or otherwise resulting from the effects of government stimulus efforts. These regulatory actions were taken in conjunction with federal financial regulatory efforts to encourage banks and other depositories to provide responsible credit and other financial assistance to consumers and small businesses in response to the pandemic. Puerto Rico Banking Law As a commercial bank organized under the laws of the Commonwealth of Puerto Rico, FirstBank is subject to supervision, examination and regulation by the commissioner of OCIF (the “Commissioner”) pursuant to the Puerto Rico Banking Law of 1933, as amended (the “Banking Law”). The Banking Law contains various provisions relating to FirstBank and its affairs, including its incorporation and organization, the rights and responsibilities of its directors, officers and stockholders and its corporate powers, lending limitations, capital requirements, and investment requirements. In addition, the Commissioner is given extensive rule-making power and administrative discretion under the Banking Law. The Banking Law requires every bank to maintain a legal reserve, which shall not be less than 20% of its demand liabilities, except government deposits (federal, state and municipal) that are secured by actual collateral. The reserve is required to be composed of any of the following securities or a combination thereof: (i) legal tender of the United States; (ii) checks on banks or trust companies located in any part of Puerto Rico that are to be presented for collection during the day following the day on which they are received; (iii) money deposited in other banks provided said deposits are authorized by the Commissioner and subject to immediate collection; (iv) federal funds sold to any Federal Reserve Bank and securities purchased under agreements to resell executed by the bank with such funds that are subject to be repaid to the bank on or before the close of the next business day; and (v) any other asset that the Commissioner identifies from time to time. Section 17 of the Banking Law permits Puerto Rico commercial banks to make loans to any one person, firm, partnership or corporation in an aggregate amount of up to 15% of the sum of: (i) the bank’s paid-in capital; (ii) the bank’s reserve fund; (iii) 50% of the bank’s retained earnings, subject to certain limitations; and (iv) any other components that the Commissioner may determine from time to time. If such loans are secured by collateral worth at least 25% of the amount of the loan, the aggregate maximum amount may reach 33.33% of the sum of the bank’s paid-in capital, reserve fund, 50% of retained earnings, subject to certain limitations, and such other components that the Commissioner may determine from time to time. There are no restrictions under the Banking Law on the amount of loans that may be wholly secured by bonds, securities and other evidences of indebtedness of the government of the United States, or of the Commonwealth of Puerto Rico, or by bonds, not in default, of municipalities or instrumentalities of the Commonwealth of Puerto Rico. The Banking Law requires that Puerto Rico commercial banks prepare each year a balance summary of their operations and submit such balance summary for approval at a regular meeting of stockholders, together with an explanatory report thereon. The Banking Law also requires that at least 10% of the yearly net income of a Puerto Rico commercial bank be credited annually to a reserve fund until such reserve fund is in amount equal to the total paid-in-capital of the bank. 21 The Banking Law also provides that when the expenditures of a Puerto Rico commercial bank are greater than its receipts, the excess of the expenditures over receipts must be charged against the undistributed profits of the bank, and the balance, if any, charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the capital account and no dividend may be declared until said capital has been restored to its original amount and the amount in the reserve fund equals 20% of the original capital. The Finance Board, which is composed of nine members from enumerated Puerto Rico Government agencies, instrumentalities and public corporations, including the Commissioner, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in Puerto Rico. The current regulations of the Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses, including real estate development loans but excluding certain other personal and commercial loans secured by mortgages on real estate properties, is to be determined by free competition. Accordingly, the regulations do not set a maximum rate for charges on retail installment sales contracts, small loans, and credit card purchases. Furthermore, there is no maximum rate set for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and insurance premiums. International Banking Center Regulatory Act of Puerto Rico (“IBE Act 52”) The business and operations of FirstBank International Branch (“FirstBank IBE” or the “IBE division of FirstBank”) and FirstBank Overseas Corporation (the IBE subsidiary of FirstBank) are subject to supervision and regulation by the Commissioner. FirstBank and FirstBank Overseas Corporation were created under Puerto Rico Act 52-1989, as amended, known as the “International Banking Center Regulatory Act” (the IBE Act 52), which provides for total Puerto Rico tax exemption on net income derived by an IBE operating in Puerto Rico on the specific activities identified in the IBE Act 52. 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. Under the IBE Act 52, certain sales, encumbrances, assignments, mergers, exchanges or transfers of shares, interests or participation(s) in the capital of an IBE may not be initiated without the prior approval of the Commissioner. The IBE Act 52 and the regulations issued thereunder by the Commissioner (the “IBE Regulations”) limit the business activities that may be carried out by an IBE. Such activities are limited in part to persons and assets located outside of Puerto Rico. Pursuant to the IBE Act 52 and the IBE Regulations, each of FirstBank IBE and FirstBank Overseas Corporation must maintain in Puerto Rico books and records of its transactions in the ordinary course of business. FirstBank IBE and FirstBank Overseas Corporation are also required thereunder to submit to the Commissioner quarterly and annual reports of their financial condition and results of operations, including annual audited financial statements. The IBE Act 52 empowers the Commissioner to revoke or suspend, after notice and hearing, a license issued thereunder if, among other things, the IBE fails to comply with the IBE Act 52, the IBE Regulations or the terms of its license, or if the Commissioner finds that the business or affairs of the IBE are conducted in a manner that is not consistent with the public interest. In 2012, the Puerto Rico government approved Act Number 273 (“Act 273”). Act 273 replaces, prospectively, IBE Act 52 with the objective of improving the conditions for conducting international financial transactions in Puerto Rico. An IBE existing on the date of approval of Act 273, such as FirstBank IBE and FirstBank Overseas Corporation, can continue operating under IBE Act 52, or, it can voluntarily convert to an International Financial Entity (“IFE”) under Act 273 so it may broaden its scope of Eligible IFE Activities, as defined below, and obtain a grant of tax exemption under Act 273. IFEs are licensed by the Commissioner, and authorized to conduct certain Act 273 specified financial transactions (“Eligible IFE Activities”). Once licensed, an IFE can request a grant of tax exemption (“Tax Grant”) from the Puerto Rico Department of Economic Development and Commerce, which will enumerate and secure the following tax benefits provided by Act 273 as contractual rights (i.e., regardless of future changes in Puerto Rico law) for a 15-year period: (i) to the IFE: ● ● a fixed 4% Puerto Rico income tax rate on the net income derived by the IFE from its Eligible IFE Activities; and full property and municipal license tax exemptions on such activities. (ii) to its shareholders: ● ● 6% income tax rate on distributions to Puerto Rico resident shareholders of earnings and profits derived from the Eligible IFE Activities; and full Puerto Rico income tax exemption on such distributions to non -Puerto Rico resident shareholders. 22 The primary purpose of IFEs is to attract Unites States and foreign investors to Puerto Rico. Consequently, Act 273 authorizes IFEs to engage in traditional banking and financial transactions, principally with non-residents of Puerto Rico. Furthermore, the scope of Eligible IFE Activities encompasses a wider variety of transactions than those previously authorized to IBEs. Act 187, as amended, enacted on November 17, 2015, requires an IBE to obtain from the Commissioner a Certificate of Compliance every two years that certifies its compliance with the provisions of IBE Act 52. As of the date of the issuance of this Annual Report on Form 10-K, FirstBank IBE and FirstBank Overseas Corporation are operating under IBE Act 52. Future Legislation and Regulation Financial legislation and regulation is dynamic in nature, and is subject to regular changes. With the change in presidential administrations and the assumption by the Democratic party of control of Congress, legislative and regulatory action of a “regulatory” nature is possible, although the agenda of the Biden administration on financial services legislative and regulatory matters has not been specifically outlined at this time. Additional consumer protection laws may be enacted, and the FDIC, Federal Reserve, and CFPB have adopted, and may adopt in the future, new regulations that address, among other things, banks’ credit card, overdraft, collection, privacy and mortgage lending practices. Similarly, changes in Puerto Rico law or actions by the Commissioner may have an impact on FirstBank’s financial condition and activities. Additional consumer protection regulatory activity is possible in the future. Any proposals and legislation, if finally adopted and implemented, could change banking laws and our operating environment and that of our subsidiaries in ways that would be substantial and unpredictable. We cannot determine whether such proposals and legislation will be adopted, or the ultimate effect that such proposals and legislation, if enacted, or regulations issued to implement the same, would have upon our financial condition or results of operations. Puerto Rico Income Taxes Under the Puerto Rico Internal Revenue Code of 2011, as amended (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, 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. 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 maximum statutory rate in Puerto Rico, which has resulted mainly from investments in government obligations and MBS exempt from U.S. and Puerto Rico income taxes and from doing business through an IBE unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest income and gain on sales is exempt from Puerto Rico income taxation. United States Income Taxes As a Puerto Rico corporation, First BanCorp. 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. Insurance Operations Regulation FirstBank Insurance Agency is registered as an insurance agency with the Insurance Commissioner of Puerto Rico and is subject to regulations issued by the Insurance Commissioner and the Division of Banking and Insurance Financial Regulation in the USVI relating to, among other things, the licensing of employees and sales and solicitation and advertising practices, and by the Federal Reserve as to certain consumer protection provisions mandated by the Gramm-Leach-Bliley Act and its implementing regulations. Mortgage Banking Operations In addition to FDIC and CFPB regulations, FirstBank is subject to the rules and regulations of the FHA, VA, FNMA, FHLMC, GNMA, and the U.S. Department of Housing and Urban Development (“HUD”) with respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of MBS. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines that include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and, with respect to VA loans, fix maximum interest rates. Moreover, lenders such as FirstBank are required annually to submit audited financial statements to the FHA, VA, FNMA, FHLMC, GNMA and HUD and each regulatory entity has its own financial requirements. FirstBank’s affairs are also subject to supervision and examination by the FHA, 23 VA, FNMA, FHLMC, GNMA and HUD at all times to assure compliance with applicable regulations, policies and procedures. Mortgage origination activities are subject to, among other requirements, the Equal Credit Opportunity Act, TILA and the RESPA and the regulations promulgated thereunder that, among other things, prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. FirstBank is licensed by the Commissioner under the Puerto Rico Mortgage Banking Law, and, as such, is subject to regulation by the Commissioner, with respect to, among other things, licensing requirements and the establishment of maximum origination fees on certain types of mortgage loan products. 24 Item 1A. Risk Factors There follows a discussion about material risks and uncertainties that could impact the Corporation’s businesses, results of operations and financial condition, including by causing the Corporation’s actual results to differ materially from those projected in any forward-looking statements. Other risks and uncertainties, including those not currently known to the Corporation or its management and those that the Corporation or its management currently deems to be immaterial, could also affect the Corporation in a materially adverse way in future periods. Thus, the following should not be considered a complete discussion of all of the risks and uncertainties the Corporation may face. See the discussion under “Forward-Looking Statements,” in this Annual Report on Form 10-K. RISKS RELATING TO THE CORPORATION’S BUSINESS Our level of non-performing assets may adversely affect our future results from operations. As of December 31, 2021, we continued to have a relevant amount of nonaccrual loans, even though nonaccrual loans decreased by $94.4 million to $110.7 million as of December 31, 2021, or 46%, from $205.1 million as of December 31, 2020. Our nonaccrual loans represent approximately 1% of our $11.1 billion loan portfolio as of December 31, 2021. Non-performing assets decreased by $135.4 million to $158.1 million as of December 31, 2021, or 46%, from $293.5 million as of December 31, 2020. If we are unable to effectively maintain the quality of our loan portfolio, our financial condition and results of operations may be materially and adversely affected. Certain funding sources may not be available to us and our funding sources may prove insufficient and/or costly to replace. FirstBank relies primarily on customer deposits, the issuance of brokered CDs, and advances from the FHLB of New York to maintain its lending activities and to replace certain maturing liabilities. As of December 31, 2021, we had $100.4 million in brokered CDs outstanding, representing approximately 1% of our total deposits, and a reduction of $115.8 million from the year ended December 31, 2020. Approximately $63.6 million in brokered CDs mature over the twelve months ending December 31, 202 2, and the average term to maturity of the brokered CDs outstanding as of December 31, 2021 was approximately 1.2 years. None of these CDs are callable at the Corporation’s option. In addition, the Corporation had $200 million of FHLB advances outstanding as of December 31, 2021 that are scheduled to mature during 2022. Although FirstBank has historically been able to replace maturing deposits and advances, we may not be able to replace these funds in the future if our financial condition or general market conditions change. If we are unable to maintain access to funding sources, our results of operations and liquidity would be adversely affected. Alternate sources of funding may carry higher costs than sources currently utilized. If we are required to rely heavily on more expensive funding sources, profitability would be adversely affected. We may determine to seek debt financing in the future to achieve our long-term business objectives. Additional borrowings, if sought, may not be available to us, or if available, may not be on acceptable terms. The availability of additional financing will depend on a variety of factors, such as market conditions, the general availability of credit, our credit ratings and our credit capacity. In addition, FirstBank may seek to sell loans as an additional source of liquidity. If additional financing sources are unavailable or are not available on acceptable terms, our profitability and future prospects could be adversely affected. We depend on cash dividends from FirstBank to meet our cash obligations. As a holding company, dividends from FirstBank, our banking subsidiary, have provided a substantial portion of our cash flow used to service the interest payments on our TRuPs and other obligations. FirstBank is limited by law in its ability to make dividend payments and other distributions to us based on its earnings and capital position. A failure by FirstBank to generate sufficient cash flow to make dividend payments to us may have a negative impact on our results of operation and financial condition. Also, a failure by the bank holding company to access sufficient liquidity resources to meet all projected cash needs in the ordinary course of business may have a detrimental impact on our financial condition and ability to compete in the market. Our allowance for credit losses may not be adequate to cover actual losses, and we may be required to materially increase our allowance, which may adversely affect our capital ratios, financial condition and results of operations. We are subject, among other things, to the risk of loss from loan defaults and foreclosures with respect to the loans we originate and purchase. We recognize periodic credit loss expenses on loans, which leads to reductions in our income from operations, in order to maintain our ACL on loans at a level that our management deems to be appropriate based upon an assessment of the quality of the loan and lease portfolios. Management may fail to accurately estimate the level of loan and lease losses or may have to increase our credit loss expense on loans in the future as a result of new information regarding existing loans, future increase in nonaccrual loans beyond what was forecasted, foreclosure actions and loan modifications, changes in current and expected economic and other 25 conditions affecting borrowers or for other reasons beyond our control. In addition, the bank regulatory agencies periodically review the adequacy of our ACL on loans and may require an increase in the credit loss expense on loans or the recognition of additional classified loans and loan charge-offs, based on judgments that differ from those of management. The level of the allowance reflects management’s estimates based upon various assumptions and judgments as to specific credit risks, its evaluation of industry concentrations, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, unidentified losses inherent in the current loan portfolio and, since the beginning of 2020, reasonable and supportable forecasts. The determination of the appropriate level of the ACL on loans inherently involves a high degree of subjectivity and requires management to make significant estimates and judgments regarding current credit risks and future trends, all of which may undergo material changes. If our estimates prove to be incorrect, our ACL on loans may not be sufficient to cover losses in our loan portfolio and our credit loss expense on loans could increase substantially. In addition, any increases in our credit loss expense on loans or any loan losses in excess of our ACL on loans could have a material adverse effect on our future capital ratios, financial condition and results of operations. The Corporation’s force-placed insurance policies could be disputed by the customer. The Corporation maintains force-placed insurance policies that have been put into place when a borrower’s insurance policy on a property has been canceled, lapsed or was deemed insufficient and the borrower did not secure a replacement policy. A borrower may make a claim against the Corporation under such force -placed insurance policy and the failure of the Corporation to resolve such a claim to the borrower’s satisfaction may result in a dispute between the borrower and the Corporation, which if not adequately resolved, could have an adverse effect on the Corporation . Downgrades in our credit ratings could further increase the cost of borrowing funds. The Corporation’s ability to access new non-deposit sources of funding could be adversely affected by downgrades in our credit ratings. The Corporation’s liquidity is to a certain extent contingent upon its ability to obtain external sources of funding to finance its operations. The Corporation’s current credit ratings and any downgrades in such 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 results of operations. Defective and repurchased loans may harm our business and financial condition. In connection with the sale and securitization of loans, we are required to make a variety of customary representations and warranties relating to the loans sold or securitized. Our obligations with respect to these representations and warranties are generally outstanding for the life of the loan, and relate to, among other things: (i) compliance with laws and regulations; (ii) underwriting standards; (iii) the accuracy of information in the loan documents and loan files; and (iv) the characteristics and enforceability of the loan. A loan that does not comply with the representations and warranties made may take longer to sell, may impact our ability to obtain third-party financing for the loan, and may not be saleable or may be saleable only at a significant discount. If such a loan is sold before we detect non-compliance, we may be obligated to repurchase the loan and bear any associated loss directly, or we may be obligated to indemnify the purchaser against any loss, either of which could reduce our cash available for operations and liquidity. Management believes that it has established controls to ensure that loans are originated in accordance with the secondary market’s requirements, but certain employees may make mistakes or may deliberately violate our lending policies. Our controls and procedures may fail or be circumvented, our risk management policies and procedures may be inadequate and operational risks could adversely affect our consolidated results of operations. We may fail to identify and manage risks related to a variety of aspects of our business, including, but not limited to, operational risk, interest-rate risk, trading risk, fiduciary risk, legal and compliance risk, liquidity risk and credit risk. We have adopted and periodically improve various controls, procedures, policies and systems to monitor and manage risk. Any improvements to our controls, procedures, policies and systems, however, may not be adequate to identify and manage the risks in our various businesses. If our risk framework is ineffective, either because it fails to keep pace with changes in the financial markets or our businesses or for other reasons, we could incur losses, suffer reputational damage, or find ourselves out of compliance with applicable regulatory mandates or expectations. We may also be subject to disruptions from external events, such as natural disasters and cyber-attacks, which could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. In addition, our customers, vendors and counterparties could suffer from such events. Should these events affect us, or the customers, vendors or 26 counterparties with which we conduct business, our consolidated results of operations could be negatively affected. When we record balance sheet reserves for probable loss contingencies related to operational losses, we may be unable to accurately estimate our potential exposure, and any reserves we establish to cover operational losses may not be sufficient to cover our actual financial exposure, which may have a material impact on our consolidated results of operations or financial condition for the periods in which we recognize the losses. Our businesses may be adversely affected by litigation. We have, in the past, been party to claims and legal actions by our customers, or subject to regulatory supervisory actions by the government on behalf of customers, relating to our performance of fiduciary or contractual responsibilities. In the past, we have also been subject to securities class action litigation by our shareholders and we have also faced employment lawsuits and other legal claims. In any future claims or actions, demands for substantial monetary damages may be asserted against us, resulting in financial liability or an adverse effect on our reputation among investors or on customer demand for our products and services. A securities class action suit against us in the future could result in substantial costs, potential liabilities and the diversion of management’s attention and resources. We may be unable to accurately estimate our exposure to litigation risk when we record balance sheet reserves for probable loss contingencies. As a result, reserves we establish to cover any settlements or judgements may not be sufficient to cover our actual financial exposure, which has occurred in the past and may occur in the future, resulting in a material adverse impact on our consolidated results of operations or financial condition. In the ordinary course of our business, we are also subject to various regulatory, governmental and law enforcement inquiries, investigations and subpoenas. These may be directed generally to participants in the businesses in which we are involved or may be specifically directed at us. In regulatory enforcement matters, claims for disgorgement, the imposition of penalties and the imposition of other remedial sanctions are possible. The resolution of legal actions or regulatory matters, when unfavorable, has had, and could in the future have, a material adverse effect on our consolidated results of operations for the quarter in which such actions or matters are resolved or a reserve is established. Our businesses may be negatively affected by adverse publicity or other reputational harm. Our relationships with many of our customers are predicated upon our reputation as a fiduciary and a service provider that adheres to the highest standards of ethics, service quality and regulatory compliance. Adverse publicity, regulatory actions, litigation, operational failures, the failure to meet customer expectations and other issues with respect to one or more of our businesses could materially and adversely affect our reputation, or our ability to attract and retain customers or obtain sources of funding for the same or other businesses. Preserving and enhancing our reputation also depends on maintaining systems and procedures that address known risks and regulatory requirements, as well as our ability to identify and mitigate additional risks that arise due to changes in our businesses, the market places in which we operate, the regulatory environment and customer expectations. If we fail to promptly address matters that bear on our reputation, our reputation may be materially adversely affected and our business may suffer. Any impairment of our goodwill or other intangible assets may adversely affect our operating results. If our goodwill or other intangible assets become impaired, we may be required to record a significant charge to earnings. Goodwill is tested for impairment on an annual basis, and more frequently if events or circumstances lead management to believe the values of goodwill may be impaired. Other intangible assets are amortized over the projected useful lives of the related intangible asset, generally on a straight-line basis, and these assets are reviewed periodically for impairment when event or changes in circumstances indicate that the carrying amount may not exceed their fair value. Factors that may be considered a change in circumstances indicating that the carrying value of the goodwill or amortizable intangible assets may not be recoverable includes reduced future cash flow estimates, decreases in the current market price of our common shares, negative information concerning the terminal value of similarly situated insured depository institutions , and slower growth rates in the industry. The goodwill annual impairment evaluation process includes a qualitative assessment of events and circumstances that may affect the reporting unit's fair value to determine whether it was more likely than not that the fair value of any reporting unit was less than it’s carrying amount, including goodwill. If the result of the qualitative assessment indicates that it is more likely than not that the carrying value of goodwill exceed its fair value, a quantitative analysis is made to determine the amount of goodwill impairment. Analyzing goodwill includes consideration of various factors that continue to rapidly evolve and for which significant uncertainty remains, including the impact of the COVID-19 pandemic on the economy. Further weakening in the economic environment, such as decline in the performance of the reporting units or other factors, could cause the fair value of one or more of the reporting units to fall below their carrying value, resulting in a goodwill impairment charge. Actual values may differ significantly from this assessment. Such differences could result in future impairment of goodwill that would, in turn, negatively impact our results of operations and the reporting unit to which the goodwill relates. During the fourth quarter of 2021, management performed a qualitative analysis of the 27 carrying amount of goodwill, and concluded that it is more-likely-than-not that the fair value of the reporting units exceeded its carrying value. As of December 31, 2021, the book value of our goodwill was $38.6 million, which was recorded at FirstBank. If an impairment determination is made in a future reporting period, our earnings and book value of goodwill will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our Common Stock, or our regulatory capital levels, but such an impairment loss could significantly reduce FirstBanks’ earnings and thereby restrict FirstBank’s ability to make dividend payments to us without prior regulatory approval, because Federal Reserve policy states that the bank holding company dividends should be paid from current earnings. Recognition of deferred tax assets is dependent upon the generation of future taxable income by the Bank. As of December 31, 2021, the Corporation had a deferred tax asset of $208.5 million (net of a valuation allowance of $107.3 million, including a valuation allowance of $69.7 million against the deferred tax assets of FirstBank). Under Puerto Rico law, the Corporation and its subsidiaries, including FirstBank, are treated as separate taxable entities and are not entitled to file consolidated tax returns. Accordingly, to obtain a tax benefit from net operating losses (“NOLs”), a particular subsidiary must be able to demonstrate sufficient taxable income. To obtain the full benefit of the applicable deferred tax asset attributable to NOLs, FirstBank must have sufficient taxable income within the applicable carryforward period. Pursuant to the 2011 PR Code, the carryforward 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. Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is more likely than not to be realized. Due to significant estimates utilized in determining the valuation allowance and the potential for changes in facts and circumstances, in the future, the Corporation may not be able to reverse the remaining valuation allowance or may need to increase its current deferred tax asset valuation allowance. The Corporation’s judgments regarding tax accounting policies and the resolution of tax disputes may impact the Corporation’s earnings and cash flow, and changes in the tax laws of multiple jurisdictions can materially affect our operations, tax obligations, and effective tax rate. Significant judgment is required in determining the Corporation’s effective tax rate and in evaluating its tax positions. The Corporation provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement criteria prescribed by applicable GAAP. Fluctuations in federal, state, local, and foreign taxes or a change to uncertain tax positions, including related interest and penalties, may impact the Corporation’s effective tax rate. When particular tax matters arise, a number of years may elapse before such matters are audited and finally resolved. In addition, the Puerto Rico Department of Treasury (“PRTD”), the U.S. Internal Revenue Service (“IRS”), and the tax authorities in the jurisdictions in which we operate may challenge our tax positions and we may estimate and provide for potential liabilities that may arise out of tax audits to the extent that uncertain tax positions fail to meet the recognition standard under applicable GAAP. Unfavorable resolution of any tax matter could increase the effec tive tax rate and could result in a material increase in our tax expense. Resolution of a tax issue may require the use of cash in the year of resolution. First BanCorp. is subject to Puerto Rico income tax on its income from all sources. FirstBank is treated as a foreign corporation for U.S. and USVI income tax purposes and 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 regions. The USVI jurisdiction imposes income taxes based on the U.S. Internal Revenue Code under the “mirror system” established by the Naval Service Appropriations Act of 1922. However, the USVI jurisdiction also imposes an additional 10% surtax on the USVI tax liability, if any. These tax laws are complex and subject to different interpretations. We must make judgments and interpretations about the application of these inherently complex tax laws when determining our provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance. In addition, legislative changes, particularly changes in tax laws, could adversely impact our results of operations. Changes in applicable tax laws in Puerto Rico, the U.S., or other jurisdictions or tax authorities’ new interpretations could result in increases in our overall taxes and the Corporation’s financial condition or results of operations may be adversely impacted. Our ability to use our net operating loss (“NOL”) carryforwards may be limited. The Corporation has Puerto Rico, U.S. and USVI sourced NOL carryforwards. Section 382 of the U.S. Internal Revenue Code (“Section 382”) limits the ability to utilize U.S. and USVI NOLs for income tax purposes, respectively, at such jurisdictions following an event of an ownership change. Generally, an “ownership change” occurs when certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage over a three-year testing period. Section 28 1034.04(u) of the 2011 PR Code is significantly similar to Section 382. However, Act 60-2019 amended the PR Code to repeal the corporate NOL carryover limitations upon change in control for taxable years beginning after December 31, 2018. Upon the occurrence of a Section 382 ownership change, the use of NOLs attributable to the period prior to the ownership change is subject to limitations and only a portion of the U.S. and USVI NOLs, as applicable, may be used by the Corporation to offset the annual U.S. and USVI taxable income, if any. In 2017, the Corporation completed a formal ownership change analysis within the meaning of Section 382 covering a comprehensive period, and concluded that an ownership change, for U.S. and USVI purposes only, had occurred during such period. The Section 382 limitation has resulted in higher U.S. and USVI income tax liabilities than we would have incurred in the absence of such limitation. It is possible that the utilization of our U.S. and USVI NOLs could be further limited due to future changes in our stock ownership, as a result of either sales of our outstanding shares or issuances of new shares that could separately or cumulatively trigger an ownership change and, consequently, a Section 382 limitation. Any further Section 382 limitations may result in greater U.S. and USVI tax liabilities than we would incur in the absence of such a limitation and any increased liabilities could adversely affect our earnings and cash flow. We may be able to mitigate the adverse effects associated with a Section 382 limitation in the U.S. and USVI to the extent that we could credit any resulting additional U.S. and USVI tax liability against our tax liability in Puerto Rico. However, our ability to reduce our Puerto Rico tax liability through such a credit or deduction will depend on our tax profile at each annual taxable period, which is dependent on various factors. RISKS RELATED TO THE BSPR ACQUISITION We may not be able to realize the anticipated benefits of the BSPR acquisition. Our future growth and profitability depend, in part, on the ability to successfully manage the operations we acquired in the BSPR Acquisition. The success of the BSPR Acquisition will depend on, among other things, the accuracy of our assessment of the quality of the acquired assets, and our ability to realize anticipated cost savings and manage the acquired companies in a manner that permits growth opportunities and does not materially disrupt our or the acquired business’s existing customer relationships and service or result in decreased revenue resulting from any loss of customers. The loss of key employees in connection with the acquisition could adversely affect our ability to successfully conduct the combined operations. If we are not able to successfully achieve our objective to realize the anticipated benefits of the acquisition and fully integrate BSPR’s business, that could be a material adverse effect on our business or financial condition, results of operations, and future prospects. RISKS RELATING TO TECHNOLOGY AND CYBERSECURITY We must respond to rapid technological changes, and these changes may be more difficult or expensive than anticipated. We may also be negatively affected if we fail to identify and address operational risks associated with the introduction of or changes to products and services. Like most financial institutions, FirstBank significantly depends on technology to deliver its products and other services and to otherwise conduct business. To remain technologically competitive and operationally efficient, FirstBank invests in system upgrades, If competitors introduce new products and services embodying new new technological solutions, and other technology initiatives. technologies, or if new industry standards and practices emerge, our existing product and service offerings, technology and systems may become obsolete. Furthermore, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results of operations. The financial services industry is changing rapidly and, in order to remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. These changes may be more difficult or expensive to implement than we anticipate. When we launch a new product or service, introduce a new platform for the delivery or distribution of products or services (including mobile connectivity and cloud computing), or make changes to an existing product or service, we may not fully appreciate or identify new operational risks that may arise from those changes, or we may fail to implement adequate controls to mitigate the risks associated with those changes. Significant failure in this regard could diminish our ability to operate our business or result in potential liability to our customers and third parties, increased operating expenses, weaker competitive standing, and significant reputational, legal and regulatory costs. Any of the foregoing consequences could materially and adversely affect our businesses and results of operations. 29 Our operational or security systems or infrastructure, or those of third parties, could fail or be breached. Any such future incidents could potentially disrupt our business and adversely impact our results of operations, liquidity, and financial condition, as well as cause legal or reputational harm. The potential for operational risk exposure exists throughout our business and, as a result of our interactions with, and reliance on, third parties, is not limited to our own internal operational functions. Our operational and security systems and infrastructure, including our computer systems, data management, and internal processes, as well as those of third parties that perform key aspects of our business operations, such as data processing, information security, recording and monitoring transactions, online banking interfaces and services, internet connections, and network access are integral to our performance. We rely on our employees and third parties in our day-to-day and ongoing operations, who may, because of human error, misconduct, malfeasance, failure, or breach of our or of third-party systems or infrastructure, expose us to risk. Our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. In addition, our financial, accounting, data processing, backup, or other operating or security systems and infrastructure may fail to operate properly or become disabled, damaged, or otherwise compromised as a result of a number of factors, including events that are wholly or partially beyond our control. We may need to take our systems offline if they become infected with malware or a computer virus or because of another form of cyberattack. If backup systems are utilized, they may not process data as quickly as our primary systems and some data might not have been saved to backup systems, potentially resulting in a temporary or permanent loss of such data. We frequently update our systems to support our operations and growth and to remain compliant with applicable laws, rules, and regulations. In addition, we review and strengthen our security systems in response to any cyber incident. Such strengthening entails significant costs and risks associated with implementing new systems and integrating them with existing ones, including potential business interruptions and the risk that this strengthening may not be one-hundred percent effective. Implementation and testing of controls related to our computer systems, security monitoring, and retaining and training personnel required to operate our systems also entail significant costs. Such operational risk exposures could adversely impact our operations, liquidity, and financial condition, as well as cause reputational harm. In addition, we may not have adequate insurance coverage to compensate for losses from a major interruption. Cyber-attacks, system risks and data protection breaches 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 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 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. 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 30 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 Corporation is subject to stringent and changing privacy laws, regulations, and standards as well as policies, contracts, and other obligations related to data privacy and security. Our failure to comply with privacy laws and regulations, as well as other legal obligations, could have a material adverse effect on our business. State, federal, and foreign governments are increasingly enacting laws and regulations governing the collection, use, retention, sharing, transfer, and security of personally identifiable information and data. A variety of federal, state, local, and foreign laws and regulations, orders, rules, codes, regulatory guidance, and certain industry standards regarding privacy, data protection, consumer protection, information security, and the processing of personal information and other data apply to our business. State laws are changing rapidly, and new legislation proposed or enacted in a number of other states imposes, or has the potential to impose, additional obligations on companies that process confidential, sensitive and personal information, and will continue to shape the data privacy environment nationally. The U.S. federal government is also significantly focused on privacy matters. Any failure by us or any of our business partners to comply with applicable laws, rules, and regulations may result in investigations or actions against us by governmental entities, private claims and litigation, fines, penalties or other liabilities. Such events may increase our expenses, expose us to liabilities, and impair our reputation, which could have a material adverse effect on our business. While we aim to comply with applicable data protection laws and obligations in all material respects, there is no assurance that we will not be subject to claims that we have violated such laws and obligations, will be able to successfully defend against such claims, or will not be subject to significant fines and penalties in the event of non-compliance. Additionally, to the extent multiple state-level laws are introduced in the U.S. with inconsistent or conflicting standards and there is no federal law to preempt such laws, compliance with such laws could be difficult and costly to achieve, or impossible to achieve, and we could be subject to fines and penalties in the event of non- compliance. RISKS RELATING TO THE BUSINESS ENVIRONMENT AND OUR INDUSTRY The currently evolving situation related to the ongoing COVID-19 pandemic has had a material adverse effect and may continue to have a materially adverse effect on the Corporation’s business, financial condition and results of operations. The ongoing COVID-19 pandemic created a global public-health crisis that resulted in challenging economic conditions for our business and is likely to continue to do so. The economic impact of the COVID-19 pandemic has caused significant volatility and disruption in the financial markets of Puerto Rico and the other markets in which the Corporation operates. The uncertainty surrounding the future economic conditions has been a challenge to management's ability of estimating the pandemic's impact on credit quality, revenues, and assets values. While many areas of consumer spending have rebounded since the initial outbreak of the COVID-19 pandemic on March 11, 2020, new variants of the virus continue to emerge, such as the recent Omicron variant, which have resulted in a rapid increase in infections and disruptions in the economic recovery. As of December 31, 2021, certain guidelines and executives’ orders, issued by the governments in which the Corporation operates, remained in effect and continue to impact how individuals interact and how businesses and the governments operate. The operations and financial results of the Corporation have been and could continue to be adversely affected by some of these guidelines, executives’ orders, and any new strain of the virus. Considering the effects of the COVID-19 pandemic on the economy and market conditions, the U.S. government and local governments have enacted stimulus packages and other programs and forms of relief, such as the SBA PPP program established by the CARES Act of 2020. Loans that the Corporation grants under the SBA PPP are at below market interest rates. The Corporation’s participation in the SBA PPP, Main Street and any other such programs or stimulus packages may give rise to claims, including by governments, regulators, or customers or through class action lawsuits, or judgments against the Corporation that may result in the payment of damages or the imposition of fines, penalties or restrictions by regulatory authorities, or result in reputational harm. The 31 occurrence of any of the foregoing could have a material adverse effect on the Corporation’s results of operations or financial condition. The Company continues to follow all safety guidelines and government mandates regarding COVID-19 protocols and vaccinations, and announced that all employees, service providers, and consultants of the Corporation must have the booster shot of the COVID-19 vaccine by March 1, 2022, with few exceptions. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the pandemic . The Corporation’s credit quality and the value of our portfolio of Puerto Rico government securities has been and in the future may be adversely affected by Puerto Rico’s economic condition, and may be affected by actions taken by the Puerto Rico government or the PROMESA oversight board to address the ongoing fiscal and economic challenges in Puerto Rico. A significant portion of the Corporation’s business activities and credit exposure is concentrated in the Commonwealth of Puerto Rico, which has experienced an economic and fiscal crisis for more than a decade. In March 2020, on top of the hurricanes and earthquakes experienced in 2017 and 2020, respectively, Puerto Rico confronted the COVID-19 pandemic, which created an unprecedented public health crisis. The COVID-19 pandemic has been a devastating health crisis for the Island, causing over 4,000 deaths and spikes in unemployment due to impacts on the tourism industry and government lockdowns put in place to curb the spread of the disease. The shock of the pandemic on employment, and related local and federal stimulus funding, impacted Puerto Rico’s economy in a variety of ways. While economic activity was severely reduced, extraordinary unemployment insurance and other direct transfer programs more than offset the estimated income loss due to less activity. As a result, personal income has temporarily increased on a net basis. Puerto Rico also received additional federal support, with the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA) and American Rescue Plan (ARP) Act bringing around $7 and $18 billion, respectively, in federal funding to be available for recovery efforts in 2021. Significantly, the ARP Act created new and permanent economic support programs for Puerto Rico such as, an expanded Earned Income Tax Credit (EITC) program, with up to $600 million in federal support, and permanent expansion of eligibility criteria of the Child Tax Credit (CTC). Both are projected to have permanent effects on income and growth, and the EITC expansion is expected to support timely realization of the human capital and welfare structural reform benefits. Based on the most recent fiscal plan certified by the PROMESA oversight board on January 27, 2022, Puerto Rico’s real GNP decline in fiscal year 2020 will be followed by a forecasted rebound in fiscal year 2021 and fiscal year 2022 as the full impact of the federal economic support takes hold. However, there remains considerable uncertainty about the ultimate duration and magnitude of the pandemic with new variants of the virus emerging and expected to continue to emerge, and thus the size of the associated economic losses. The 2021 Certified Fiscal Plan accounted for the impact of federal funds granted through several government programs, including the CARES Act of 2020 and a $787 million local package of direct assistance to workers and businesses (the “Puerto Rico COVID-19 Stimulus Package”). Updates in the 2022 fiscal plan are limited in scope and do not revisit the broad range of forecasts and assumptions included in the 2021 fiscal plan. The 2022 fiscal plan also incorporates terms of the confirmed plan of adjustments, detail on the use of funds from the Municipal Revenue Collection Center (CRIM, by its Spanish acronym), and on the status of PayGo payments. Finally, the plan includes details on the LUMA transaction and costs related to the mobilization of certain previous Puerto Rico Electric Power Authority (“PREPA”) employees to Commonwealth agencies as well as certain budgetary decisions and adjustments that were part of the fiscal year 2022 budget. Furthermore, on January 18, 2022, U.S. District Court of Puerto Rico confirmed the Commonwealth Plan of Adjustment, which restructures approximately $35 billion of debt and other claims against the Commonwealth of Puerto Rico, the Public Buildings Authority (“PBA”), and the Employee Retirement System (“ERS”), as well as more than $50 billion of unfunded pension liabilities. The Plan of Adjustment saves Puerto Rico more than $50 billion in debt service and reduces outstanding obligations to just over $7 billion. In addition, the 2021 Certified Fiscal Plan also provides a roadmap for a series of fiscal and structural reforms in areas such as: (i) human capital and labor, (ii) ease of doing business, (iii) power sector reform, and (iv) infrastructure reform, and other fiscal measures; however, the certified fiscal plan provides a one-year delay in most categories of government rightsizing to allow the government to focus its efforts on implementation of efficiency reforms. Also, the Plan of Adjustment includes a mechanism to set aside resources to fund the Puerto Rico’s pension obligations, which has been historically neglected and underfunded. As of December 31, 2021, the Corporation had $360.1 million of direct exposure to the Puerto Rico government, its municipalities and public corporations, compared to $394.8 million as of December 31, 2020. As of December 31, 2021, approximately $187.8 million of the exposure consisted of loans and obligations of municip alities in Puerto Rico that are supported by assigned property tax 32 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 $122.8 million consisted of municipal revenue and special obligation bonds. Approximately 61% of the Corporation’s exposure to Puerto Rico’s government consisted primarily of senior priority obligations concentrated in four of the largest municipalities in Puerto Rico. The municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and notes. In addition, as of December 31, 2021, the Corporation had $92.8 million in exposure to residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (“PRHFA”), compared to $106.5 million as of December 31, 2020. 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, 2019, the PRHFA’s mortgage loans insurance program covered loans in an aggregate amount of approximately $557 million. The regulations adopted by the Authority require the establishment of adequate reserves to guarantee the solvency of the mortgage loans insurance program; as of June 30, 2019, the Authority was not in compliance with the regulations. At June 30, 2019, the Authority had an unrestricted deficit of approximately $5.2 million in the mortgage loans insurance program. As of December 31, 2021, the Corporation had $2.7 billion of public sector deposits in Puerto Rico, compared to $1.8 billion as of December 31, 2020. Approximately 19% of the public sector deposits as of December 31, 2021 is from municipalities and municipal agencies in Puerto Rico and 81% is from public corporations, the central government and agencies, and U.S. federal government agencies in Puerto Rico. Further deterioration in economic activity, delays in the receipt of disaster relief funds allocated to Puerto Rico, and the potential impact on asset values resulting from past or future natural disaster events, when added to Puerto Rico’s ongoing fiscal crisis, could materially adversely affect our business, financial condition, liquidity, results of operations and capital position. Difficult market conditions have affected the financial industry and may adversely affect us in the future. Given that most of our business is in Puerto Rico and the U.S. and given the degree of interrelation between Puerto Rico’s economy and that of the U.S., we are exposed to downturns in the U.S. economy, including factors such as employment levels in the U.S. and real estate valuations. The deterioration of these conditions adversely affected us in the past and, in the future could adversely affect the credit performance of mortgage loans, and result in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial banks and investment banks. In particular, we may face the following risks: ● Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite the loans become less predictive of future behaviors. ● The models used to estimate losses inherent in the credit exposure, particularly those under CECL, require difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of the borrowers to repay their loans, which may no longer be capable of accurate estimation and which may, in turn, impact the reliability of the models. ● Our ability to borrow from other financial institutions or to engage in sales of mortgage loans to third parties (including mortgage loan securitization transactions with government-sponsored entities and repurchase agreements) on favorable terms, or at all, could be adversely affected by further disruptions in the capital or credit markets or other events, including deteriorating investor expectations. ● Competitive dynamics in the industry could change as a result of consolidation of financial services companies in connection with current market conditions. ● Expected future regulation of our industry may increase our compliance costs and limit our ability to pursue business opportunities. ● There may be downward pressure on our stock price. Any future deterioration of economic conditions in the U.S. and disruptions in the financial markets could adversely affect our ability to access capital, our business, financial condition, and results of operations. 33 Additionally, the residential mortgage loan origination business is impacted by home values and has historically been cyclical, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. During periods of rising interest rates, the refinancing of many mortgage products tends to decrease as the economic incentives for borrowers to refinance their existing mortgage loans are reduced. The actual rates of delinquencies, foreclosures, and losses on loans have been higher during the economic slowdown in the U.S. in the late 2000s and early 2010s and in Puerto Rico since 2006. Unemployment, volatile interest rates, and declines in housing prices have had a negative effect on the ability of borrowers to repay their mortgage loans. Any sustained period of increased delinquencies, foreclosures, or losses could adversely affect our ability to sell loans, the prices we receive for loans, the values of mortgage loans held for sale, or residual interests in securitizations, which could adversely affect our financial condition and results of operations. In addition, any additional material decline in real estate values would further weaken the loan-to-value ratios and increase the possibility of loss if a borrower defaults. In such event, we will be subject to the risk of loss on such real estate arising from borrower defaults to the extent not covered by third-party credit enhancement. Continuation of the economic slowdown and decline in the U.S. Virgin Islands and British Virgin Islands could continue to harm our results of operations. For many years, the USVI has been experiencing a number of fiscal and economic challenges that have deteriorated the overall financial and economic conditions in the area. According to the United States Bureau of Economic Analysis (“BEA”), real gross domestic product (“GDP”) estimates show that the economy grew by 5.7% in 2021 in contrast to a decrease of 3.4 percent in 2020. Growth in 2021 reflected increases in all major subcomponents, led by personal consumption expenditures, nonresidential fixed investment, export, residential fixed investment and private inventory investment. Additionally, disaster-related insurance payouts and federal assistance supported the reconstruction and major repairs of businesses and homes that were destroyed or heavily damaged by two major hurricanes in 2017. Nevertheless, the COVID-19 pandemic has been an impactful and unprecedented health crisis for the USVI, causing numerous deaths and spikes in unemployment due to impacts on the tourism industry and government lockdowns put in place to curb the spread of the disease. As a result of the COVID-19 pandemic, similar to Puerto Rico, the USVI government has been processing stimulus checks and unemployment compensation checks. According to information published by the USVI government, as of January 4, 2022, the government had issued 53,684 unemployment insurance checks and an additional 29,451 Federal Pandemic Unemployment Compensation checks, totaling approximately $94 million. In addition, as of May 16, 2021, the government announced that 1,620 businesses from Virgin Islands have been approved for the SBA PPP, totaling more than $120.3 million. On December 8, 2021, Moody’s Investor Services (“Moody’s”) announced the completion of its periodic review of ratings of the Virgin Islands Water and Power Authority (“VI WAPA”). The Caa2 electric system revenue bonds rating is constrained by VI WAPA’s limited unrestricted liquidity sources, unsustainable debt load and capital expenditures, including its inability to file audited financial statements on a timely basis, according to the rating agency. On May 28, 2020, Moody’s announced the completion of its periodic rating review of the USVI government. Despite the recent improvement in the government’s liquidity and short-term financial position, the Caa3 rating reflects the risk that the reemergence of a significant structural deficit, combined with the expected insolvency of the Government Employees’ Retirement System (“GERS”), will lead the government to restructure its debt. PROMESA does not apply to the USVI and, as such, there is currently no federal legislation permitting the restructuring of the debts of the USVI and its public corporations and instrumentalities. To the extent that the fiscal condition of the USVI government continues to deteriorate, the U.S. Congress or the government of the USVI may enact legislation allowing for the restructuring of the financial obligations of the USVI government entities or imposing a stay on creditor remedies, including by making PROMESA applicable to the USVI. As of December 31, 2021, the Corporation had $39.2 million in loans to USVI government and public corporations, compared to $61.8 million as of December 31, 2020. As of December 31, 2021, all loans were currently performing and up to date on principal and interest payments. With respect to the BVI region, the government has indicated that the economic impact of the COVID-19 pandemic is felt most strongly in the tourism sector, which accounts for roughly one third of its GDP. Recent reports published by the BVI government projects a GDP decline of 13% to 17% in 2020, given the prevailing conditions in the tourism sector. In the BVI, the borders were closed to tourism for approximately nine months in 2020 and was among the last to reopen its border to commercial air traffic. On December 1, 2020, the government began its third phase in the border reopening process allowing international travel and the re- opening of the tourism industry albeit with strict restrictions in place, including multiple tests and a mandatory four-day quarantine. Additionally, seaports in the BVI reopened on April 5, 2021 for international travel. As of December 31, 2021, the Corporation had loans totaling $142.7 million with exposure to the BVI region, primarily residential mortgage and commercial mortgage loans, of which $15.4 million are in nonaccrual status. 34 Further deterioration in economic conditions in USVI and the BVI region could adversely affect our business, financial condition, liquidity, results of operations and capital position. Credit quality may result in additional losses. Our business depends on the creditworthiness of our customers and counterparties and the value of the assets securing our loans or underlying our investments. A material decrease in the credit quality of the customer base or material changes in the risk profile of a market, industry or group of customers could materially and adversely affect our business, financial condition, allowance levels, asset impairments, liquidity, capital and results of operations. We had a commercial and construction loan portfolio held for investment in the amount of $5.2 billion as of December 31, 2021. Due to their nature, these loans entail a higher credit risk than consumer and residential mortgage loans, since they are larger in size, concentrate more risk in a single borrower and are generally more sensitive to economic downturns. Furthermore, in the case of a slowdown in the real estate market, it may be difficult to dispose of the properties securing these loans upon any foreclosure of the properties. We may incur losses over the near term, either because of continued deterioration in the quality of loans or because of sales of problem loans, which would likely accelerate the recognition of losses. Any such losses could adversely impact our overall financial performance and results of operations. Changes in collateral values of properties located in stagnant or distressed economies may require increased reserves . Further deterioration of the value of real estate collateral securing our construction, commercial and residential mortgage loan portfolios, whether located in Puerto Rico or elsewhere, would result in increased credit losses. As of December 31, 2021, approximately 19% and 27% of our loan portfolio held for investment consisted of commercial mortgage and residential real estate loans, respectively. Whether the collateral that underlies our loans is located in Puerto Rico, the USVI, the BVI, or the U.S. mainland, the performance of our loan portfolio and the collateral value backing the transactions are dependent upon the performance of, and conditions within, each specific real estate market. Puerto Rico, where most of the collateral is located, has been through a period of sustained recession since 2006. Construction and commercial loans, mostly secured by commercial and residential real estate properties, entail a higher credit risk than consumer and residential mortgage loans since they are larger in size, may have less collateral coverage, concentrate more risk in a single borrower and are generally more sensitive to economic downturns. As of December 31, 2021, our commercial mortgage and construction real estate loans held for investment in Puerto Rico amounted to $1.7 billion, or 73% of the total $2.3 billion commercial mortgage and construction real estate loan portfolios, which constituted 21% of the total loan portfolio held for investment. We measure credit losses for collateral dependent loans based on the fair value of the collateral, which is generally obtained from appraisals, adjusted for undiscounted selling costs as appropriate. Updated appraisals are obtained when we determine that loans are collateral dependent and are updated annually thereafter. In addition, appraisals are also obtained for certain residential mortgage loans on a spot basis based on specific characteristics, such as delinquency levels, and age of the appraisal. The appraised value of the collateral may decrease, or we may not be able to recover collateral at its appraised value. A significant decline in collateral valuations for collateral dependent loans has required and, in the future, may require, increases in our credit loss expense on loans. Any such increase would have an adverse effect on our future financial condition and results of operations. Interest rate shifts, such as increases in interest rates that may reduce demand for mortgage and other loans, may reduce net interest income. Shifts in short-term interest rates have reduced net interest income in the past and, in the future, may reduce net interest income, which is the principal component of our earnings. Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. Differences in the re-pricing structure of our assets and liabilities may result in changes in our profits when interest rates change. For instance, higher interest rates increase the cost of mortgage and other loans to consumers and businesses and may reduce future demand for such loans, which may negatively impact our profits by reducing the amount of loan interest income due to declines in volume. Additionally, basis risk is the risk of adverse consequences resulting from unequal changes in the difference, also referred to as the “spread” or basis, between the rates for two or more different instruments with the same maturity and occurs when market rates for different financial instruments or the indices used to price assets and liabilities change at different times or by different amounts. For example, the interest expense for liability instruments might not change by the same amount as interest income received from loans or investments. To the extent that the interest rates on loans and borrowings change at different rates and by different amounts, the margin between our variable rate-based assets and the cost of the interest-bearing liabilities might be compressed and adversely affect net interest income. 35 Accelerated prepayments may adversely affect net interest income. In general, fixed-income portfolio yields decrease if pre-payment amounts are invested at lower rates. Net interest income could also be affected by prepayments of MBS. Acceleration in the prepayments of MBS would lower yields on these securities, as the amortization of premiums paid upon the acquisition of these securities would accelerate. Conversely, acceleration in the prepayments of MBS would increase yields on securities purchased at a discount, as the accretion of the discount would accelerate. These risks are directly linked to future period market interest rate fluctuations. Also, net interest income in future periods might be affected by our investment in callable securities because decreases in interest rates might prompt the early redemption of such securities. The discontinuation of LIBOR could adversely affect the interest rates we pay or receive, could prompt regulatory questions, result in costly disputes about relevant alternative interest rates and require costly systems and analytics changes. In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, officially announced that it intended to stop persuading or compelling banks to submit information to the administrator of LIBOR after 2021. In March 2021, the FCA confirmed that publication of the overnight and one month, three-month, six-month, and twelvemonth U.S. Dollar LIBOR settings will cease or become no longer representative of the market the rates seek to measure (i.e., non-representative) immediately after June 30, 2023, and all other U.S. Dollar LIBOR settings, including the one week and two-month U.S. Dollar LIBOR settings, became non-representative immediately after December 31, 2021. The Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC also released supervisory guidance encouraging banks to cease entering into new contracts that use U.S. Dollar LIBOR as reference rate as soon as practicable and in any event by December 31, 2021. Banking regulators in the U.S. and globally have increased regulatory scrutiny and intensified supervisory focus of financial institutions LIBOR transition plans, preparations, and readiness. Significant amounts of loans, mortgages, securities, derivatives, and other financial instruments are referenced to LIBOR, and any inability of market participants and regulators to successfully introduce benchmark rates to replace LIBOR and implement effective transitional arrangements to address the discontinuation of LIBOR could result in disruption in the financial markets. Therefore, regulators and market participants in various jurisdictions have been working to recommend alternative rates to LIBOR for each respective currency that are compliant with the International Organization of Securities Commission’s standards for transaction-based benchmarks. In the U.S. the Alternative Reference Rate Committee (“AARC”), a group of market participants convened by the Federal Reserve, identified the Secured Overnight Financing Rate (“SOFR”) as its recommended alternative to LIBOR. The Federal Reserve started publishing the SOFR in April 2018. The SOFR is a broad measure of the cost of overnight borrowings collateralized by Treasury securities in the repurchase agreement market. During 2021, the ARRC recommended using the Chicago Mercantile Exchange Group’s (“CME”) forward-looking Term SOFR rates for cash products and derivatives, limited to end-users hedging cash products. An end-user is described as any counterparty to the underlying cash product, such as a borrower, lender, or guarantor. These parties may enter into Term SOFR rates swaps, caps, swaptions, or other derivatives to hedge cash product exposures. The market transition away from LIBOR to an alternative reference rate is complex and could have a range of adverse effects on our business, financial condition, and results of operations. In particular, any such transition could: ● Adversely affect the interest rates received or paid on, the revenue and expenses associated with or the value of the Corporation’s LIBOR-based assets and liabilities, which include certain variable rate loans, primarily commercial and construction loans, private label MBSs, the Corporation’s junior subordinated debentures, and certain other financial arrangements such as derivatives. As of December 31, 2021, the most significant of the Corporation’s LIBOR-based assets and liabilities consists of $2.0 billion of commercial and construction loans, $134.4 million of Puerto Rico municipalities bonds held as part of the Corporation’s held-to-maturity investment securities portfolio, and $183.8 million of junior subordinated debentures; ● Prompt inquiries or other actions from regulators in respect of the Corporation’s preparation and readiness for the replacement of LIBOR with an alternative reference rate; and ● Result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based contracts. The transition away from LIBOR to an alternative reference rate will require the transition to, or development of, appropriate systems and analytics to effectively transition the Corporation’s risk management and other processes from LIBOR-based products to those based on the applicable alternative reference rate, such as SOFR. The Corporation has developed a LIBOR Transition Working Group (“LTWG”) to define the scope and potential impact that the replacement of LIBOR will have across the Corporation's LIBOR-based assets and liabilities outstanding overseen by the Corporation’s Management Investments & Asset-Liability Committee and the Board of Directors Asset-Liability Committee. The LTWG is composed by officers of the major areas affected, including: Treasury, Legal, Corporate Loans, Credit, Operations, Systems, Asset-Liability Management, Risk, Accounting, Financial Reporting, Public Relations, and Strategic Planning, which together, developed a LIBOR Transition workplan and timetable of their respective areas; identifying the systems, models, and applications impacted by the transition; and the resources necessary for the transition. As part of this transition plan, the Corporation started including fallback language on new and renewed contracts tied to LIBOR to provide for the determination of an ARR and had adhered to the LIBOR Fallbacks Protocol of the International Swaps and Derivatives Association. In addition, effective December 31, 2021 the 36 Corporation discontinued entering into new contracts that use U.S. Dollar LIBOR as the reference rate. Currently, the Corporation is primarily offering CME’s Term SOFR rate as the ARRs to LIBOR. The Bank may also offer other industry-accepted benchmark interest rates that can be supported for commercial transactions. The Corporation continues working with the update of systems, processes, documentation and models, with additional updates expected through 2023.There can be no guarantee that these efforts will successfully mitigate the operational risks associated with the transition away from LIBOR to an alternative reference rate. The manner and impact of the transition from LIBOR to an alternative reference rate, as well as the effect of these developments on our funding costs, loan and investment securities portfolios, asset-liability management, and business, is uncertain. We are subject to Environmental, Social and Governance (ESG) risks that could adversely affect our reputation and the market price of our securities. The Corporation is subject to a variety of risks arising from ESG matters. ESG matters include climate risk, hiring practices, the diversity of our work force, and racial and social justice issues involving our personnel, customers and third parties with whom we otherwise do business. Risks arising from ESG matters may adversely affect, among other things, our reputation and the market price of our securities. For example, we may be exposed to negative publicity based on the identity and activities of those to whom we lend and with which we otherwise do business and the public’s view of the approach and performance of our customers and business partners with respect to ESG matters. Any such negative publicity could arise from adverse news coverage in traditional media and could also spread through the use of social media platforms. The Corporation’s relationships and reputation with its existing and prospective customers and third parties with which we do business could be damaged if we were to become the subject of any such negative publicity. This, in turn, could have an adverse effect on our ability to attract and retain customers and employees and could have a negative impact on our business, financial condition and results of operations. Additionally, concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. The Corporation and its customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. Finally, shareholders, customers and other stakeholders have begun to consider how corporations are addressing ESG issues. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. Our results of operations could be adversely affected by natural disasters, political crises, negative global climate patterns or other catastrophic events. Natural disasters, which nature and severity may be impacted by climate change, such as hurricanes, floods, extreme cold events and other adverse weather conditions; political crises, such as terrorist attacks, war, labor unrest, other political instability, trade policies and sanctions, including the repercussions of the attack by Russia on Ukraine; negative global climate patterns, especially in water stressed regions; or other catastrophic events, such as fires or other disasters occurring at our locations, whether occurring in Puerto Rico, the U.S., or internationally, could cause a significant adverse effect on the economy and disrupt our operations. For example, Puerto Rico experienced hurricanes and earthquakes in 2017 and 2020, which had an adverse effect on our operations created by decreases in loan demand and deposit level. Further, climate change may increase both the frequency and severity of extreme weather conditions and natural disasters, which may affect our business operations, either in a particular region or globally, as well as the activities of our customers. The Corporation is also not able to predict the positive or negative effects that future events or changes to the U.S. or global economy, financial markets, or regulatory and business environment could have on our operations. Climate change may materially adversely affect the Corporation's business and results of operations. Concerns over the long-term effects of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may voluntarily change their behavior as a result of these concerns. The Corporation and its customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. The Corporation and its customers may face cost increases, asset value reductions and operating process changes. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in fossil fuel activities. Among the impacts to the Corporation, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. The Corporation’s efforts to take these risks into account in making lending and 37 other decisions, including by increasing our business with climate-responsible companies, may not be effective in protecting the Corporation from the negative impact of new laws and regulations or changes in consumer or business behavior. Labor shortages and constraints in the supply chain could adversely affect our clients’ operations as well as our operations. Many sectors in Puerto Rico, the United States, Virgin Islands and around the world are experiencing a shortage of workers. Many of our commercial clients have been impacted by this shortage along with disruptions and constraints in the supply chain, which could adversely impact their operations and could lead to reduced cash flow and difficulty in making loan repayments. The Corporation’s industry has also been affected by the shortage of workers, with respect to certain roles, as well as increasing wages for entry level and certain professional roles. This may lead to open positions remaining unfilled for longer periods of time, which may affect the level of service provided by the Corporation, or a need to increase wages to attract workers. The failure of other financial institutions could adversely affect us. Our ability to engage in routine financing transactions could be adversely affected by future failures of financial institutions and the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, investment companies and other institutional clients. In certain of these transactions, we are required to post collateral to secure the obligations to the counterparties. In the event of a bankruptcy or insolvency proceeding involving one of such counterparties, we may experience delays in recovering the assets posted as collateral, or we may incur a loss to the extent that the counterparty was holding collateral in excess of the obligation to such counterparty or under other circumstances. In addition, many of these transactions expose us to credit risk in the event of a default by our counterparty or client. The credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to us. Any losses resulting from our routine funding transactions may materially and adversely affect our financial condition and results of operations. RISK RELATING TO THE REGULATION OF OUR INDUSTRY We are subject to certain regulatory restrictions that may adversely affect our operations. We are subject to supervision and regulation by the Federal Reserve Board and the FDIC. We are a bank holding company and a financial holding company under the Bank Holding Company Act of 1956, as amended. The Bank is also subject to supervision and regulation by the Puerto Rico Office of the Commissioner of Financial Institutions. Under federal law, financial holding companies are permitted to engage in a broader range of “financial” activities than those permitted to bank holding companies that are not financial holding companies. A financial holding company that ceases to meet certain standards is subject to a variety of restrictions, depending on the circumstances, including the prohibition from undertaking new activities or acquiring shares or control of other companies. If we fail to comply with the requirements from our regulators, we may become subject to regulatory enforcement action and other adverse regulatory actions that might have a material and adverse effect on our operations. The FDIC insures deposits at FDIC-insured depository institutions up to certain limits (currently, $250,000 per depositor account). The FDIC charges insured depository institutions premiums to maintain the DIF. In the event of a bank failure, the FDIC takes control of a failed bank and, if necessary, pays all insured deposits up to the statutory deposit insurance limits using the resources of the DIF. The FDIC is required by law to maintain adequate funding of the DIF, and the FDIC may increase premium assessments to maintain such funding. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires the FDIC to increase the DIF’s reserves against future losses, which will require institutions with assets greater than $10 billion, such as FirstBank, to bear an increased responsibility for funding the prescribed reserve to support the DIF. The FDIC may increase FirstBank’s premiums or impose additional assessments or prepayment requirements in the future. The Dodd-Frank Act removed the statutory cap for the reserve ratio, leaving the FDIC free to set this cap going forward. Our compensation practices are subject to oversight by the Federal Reserve Board and the FDIC. Any deficiencies in our compensation practices may be incorporated into our supervisory ratings, which can affect our ability to make acquisitions or perform other actions. In addition, the regulation of our compensation practices may change in the future. Our compensation practices are subject to oversight by the Federal Reserve Board and the FDIC. As discussed above, the Corporation currently is subject to the 2010 interagency guidance governing the incentive compensation activities of regulated banks and bank holding companies. Our failure to satisfy these restrictions and guidelines could expose us to adverse regulatory criticism, 38 lowered supervisory ratings, and restrictions on our operations and acquisition activities. In addition, the federal banking agencies have proposed regulations under the Dodd-Frank Act that place restrictions on the incentive compensation practices of banking organizations with $1 billion or more in assets. The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the future. It cannot be determined at this time whether compliance with such policies will adversely affect the ability of the Corporation and its subsidiaries to hire, retain and motivate their key employees. We are subject to regulatory capital adequacy guidelines, and, if we fail to meet these guidelines, our business and financial condition will be adversely affected. We are subject to stringent regulatory capital requirements. Although the Corporation and FirstBank met general well-capitalized capital ratios as of December 31, 2021 and we expect both companies will continue to exceed the minimum risk-based and leverage capital ratio requirements for well-capitalized status under the current capital rules, we cannot assure that we will remain at such levels. If we fail to meet these minimum capital guidelines and other regulatory requirements, our business and financial condition will be materially and adversely affected. If we fail to maintain certain capital levels, or are deemed not well managed under regulatory exam procedures, or if we experience certain regulatory violations, our status as a financial holding company, and our ability to offer certain financial products will be compromised and our financial condition and results of operations could be adversely affected. Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations. In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements for bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations may be adverse. We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions. The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution's performance under the Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act or any of the other fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution's performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations. We face a risk of noncompliance and enforcement action related to the Bank Secrecy Act and other anti-money laundering statutes and regulations. The Bank Secrecy Act, the USA PATRIOT Act, and other laws and regulations require financial institutions to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate, among other duties. The Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice’s Drug Enforcement Administra tion. We are also subject to increased scrutiny of our compliance with trade and economic sanctions requirements and rules enforced by OFAC. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition and results of operations. 39 Item 1B. Unresolved Staff Comments None. Item 2. Properties As of January 13, 2022, First BanCorp. owned the following three main offices located in Puerto Rico: - - - Headquarters – Located at First Federal Building, 1519 Ponce de León Avenue, Santurce, Puerto Rico, a 16-story office building. Approximately 51% of the building, including 100,000 square feet underground three level parking garage and an adjacent parking lot are occupied by the Corporation. Service Center – a building located on 1130 Muñoz Rivera Avenue, Hato Rey, Puerto Rico. These facilities accommodate branch operations, First Mortgage, Collections and Loss Mitigation, data processing and administrative and certain headquarter offices. The building houses 180,000 square feet of modern facilities, over 1,000 employees from operations, the FirstBank Insurance Agency headquarters, and the customer service department. In addition, it has parking for 750 vehicles and 9 training rooms, including classrooms for training tellers and a computer room for interactive trainings, as well as a spacious cafeteria for employees and customers. This facility is fully occupied by the Corporation. Consumer Lending Center – A three-story building with 29,000 square feet and a three-level parking garage located at 876 Muñoz Rivera Avenue, Hato Rey, Puerto Rico. This facility is fully occupied by the Corporation. Other uses include a retail branch, Money Express, Auto Financing and Leasing and a First Insurance office, among other. The Corporation owns 20 retail branch es and 77 office premises and parking lots. It leases 96 branch premises, loan and office centers and other facilities. In certain situations, financial services such as mortgage and insurance businesses and commercial banking services are in the same building or branch. All these premises are in Puerto Rico, Florida, the USVI and the BVI. Management believes that the Corporation’s properties are well maintained and are suitable for the Corporation’s business as presently conducted. Item 3. Legal Proceedings Reference is made to Note 33, “Regulatory Matters, Commitments and Contingencies,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference. Item 4. Mine Safety Disclosure. Not applicable. 40 PART II Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities Information about Market and Holders The Corporation’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol FBP. On February 15, 2022, there were 307 holders of record of the Corporation’s common stock, not including beneficial owners whose shares are held in the name of brokers or other nominees. As of December 31, 2021 and December 31, 2020, the Corporation had 21,836,611 and 4,799,284 shares held as treasury stock, respectively. Refer to “Purchase of equity securities by the issuer and affiliated purchasers” section below for more information on common stock repurchases during 2021, also held as treasury stock. Information regarding transactions related to common stock and securities authorized for issuance under the Corporation’s equity compensation plan is set forth in Note 22 - “Stock-Based Compensation” of the Notes to Consolidated Financial Statements and in Part III, Item 12 of this Annual Report on Form 10-K. Dividends Since November 2018, the Corporation has been making quarterly cash dividend payments on its shares of common stock. On October 22, 2021 the Corporation announced that it had increased the quarterly cash dividend payment on common stocks, from $0.07 to $0.10 per share, commencing in the fourth quarter of 2021. On February 10, 2022 the Corporation announced that its Board of Directors declared a quarterly cash dividend, of $0. 10 per common share, payable on March 11, 2022 to shareholders of record at the close of business on February 25, 2022. 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. On November 30, 2021 (the “Redemption Date”) the Corporation redeemed all of its 1,444,146 outstanding shares of non-convertible, non-cumulative perpetual monthly income Series A through E Preferred Stock for its liquidation value of $25 per share or $36.1 million. Monthly dividend payments on non-convertible, non- cumulative perpetual monthly income preferred stock were paid by the Corporation until the Redemption Date. Information regarding restrictions on dividends, as required by this Item, is set forth in Item 1: “Business – Dividend Restrictions” and incorporated into this Item by reference. 41 The 2011 PR Code, as amended, requires the withholding of income taxes from dividend income sourced within Puerto Rico to be received by any individual, resident of Puerto Rico or not, trusts and estates and by non-resident custodians, partnerships, and corporations. Residents of Puerto Rico A special tax of 15% withheld at source is imposed, in lieu of a regular tax, on any eligible dividends paid to individuals, trusts, and estates. Eligible dividends include dividends paid by a domestic Puerto Rico corporation. However, the taxpayer can perform an election to be excluded from the 15% special tax and be taxed at regular rates. Once this election is made it is irrevocable. The election allows the taxpayer to include in ordinary income the eligible dividends received and take a credit for the amount of tax withheld in excess, if any. Individuals that are residents of Puerto Rico are subject to an alternative minimum tax (“AMT”) on the AMT Net Income if their regular tax liability is less than the alternative minimum tax liability. The AMT applies to individual taxpayers whose AMT Net taxable income exceeds $25,000. The individual AMT rate ranges from 1% to 24% depending on the AMT Net Income. The AMT Net Income includes various categories of tax-exempt income and income subject to preferential rates as provided by the PR Code, such as dividends on the Corporation’s common stock and long-term capital gains recognized on the disposition of the Corporation’s common stock. Nonresident U.S. Citizens Dividends paid to a U.S. citizen who is not a resident of Puerto Rico will be subject to a 15% income tax. Nonresident U.S. citizens have the right to partial or total exemptions when a Withholding Tax Exemption Certificate (PR Treasury Department Form AS 2732) is properly completed and filed with the Corporation. The Corporation, as withholding agent, is authorized to withhold a tax of 15% only from the excess of the income paid over the applicable tax-exempt amount. Nonresident individuals that are not US citizens Dividends paid to any individual who is not a citizen of the United States and who is not a resident of Puerto Rico will generally be subject to a 15% Puerto Rico income tax which will be withheld at source. Foreign Corporations and Partnerships Corporations and partnerships not organized under Puerto Rico laws that have not engaged in a trade or business in Puerto Rico during the taxable year in which the dividend, if any, is paid are subject to the 10% dividend tax withholding. Corporations or partnerships not organized under the laws of Puerto Rico that have engaged in a trade or business in Puerto Rico are not subject to the 10% withholding, but they must declare any dividend as ordinary income on their Puerto Rico income tax return. 42 Purchase of equity securities by the issuer and affiliated purchasers The following table provides information relating to the Corporation’s purchases of shares of its common stock and redemption of its preferred stock in the fourth quarter of 2021. Period Total number of shares purchased Average Price Paid October 1, 2021 to October 31, 2021: Common Stock November 1, 2021 to November 30, 2021: Common Stock Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E December 1, 2021 to December 31, 2021: Common Stock Total 498,917 $ 13.67 2,400,000 197,386 296,146 249,852 285,522 415,240 1,720,714 6,063,777 (2)(3) 14.21 25.00 25.00 25.00 25.00 25.00 13.35 Total Number of Shares Purchased as Part of Publicly Announced Plans Or Programs Approximate Dollar Value of Shares That May Yet be Purchased Under These Plans or Programs (In thousands) (1) 498,300 2,400,000 197,386 296,146 249,852 285,522 415,240 1,720,714 6,063,160 $ 50,000 (1) As of December 31, 2021, the Corporation was authorized to purchase up to $300 million of the Corporation’s stock under the program, that was publicly announced on April 26, 2021 and expires on June 30, 2022, of which $250 million had been utilized. The remaining $50 million in the table represents the amount available to repurchase shares under the program as of December 31, 2021. The program does not obligate the Corporation to acquire any specific number of shares. Under the program, shares may be repurchased through open market purchases, accelerated share repurchases and/or privately negotiated transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. (2) Includes 617 shares of common stock acquired by the Corporation to cover minimum tax withholding obligations upon the vesting of restricted stock and performance units. The Corporation intends to continue to satisfy statutory tax withholding obligations in connection with the vesting of outstanding restricted stock and performance units through the withholding of shares. (3) Includes 3,869,014 shares of common stock repurchased in the open market at an average price of $13.74 for a total purchase price of approximately $53.2 million, and 750,000 shares of common stock repurchased through privately negotiated transactions at an average price of $14.33 for a total purchase price of approximately $10.7 million. On April 26, 2021, the Corporation announced that its Board of Directors approved a stock repurchase program, under which the Corporation may repurchase up to $300 million of its outstanding stock, including common and preferred stock, commencing in the second quarter of 2021 through June 30, 2022. Repurchases under the program 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. During 2021, the Corporation repurchased 16,740,467 shares of its common stock for $213.9 million and, as mentioned above, Corporation redeemed all of its outstanding shares of non-convertible, non-cumulative perpetual monthly income Series A through E Preferred Stock for its liquidation value of $36.1 million. 43 STOCK PERFORMANCE GRAPH The following Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act (collectively, “the Acts”) or the Exchange Act, except to the extent that First BanCorp. specifically incorporates this information by reference, and shall not otherwise be deemed filed under these Acts. The graph below compares the cumulative total stockholder return of First BanCorp. during the measurement period with the cumulative total return, assuming reinvestment of dividends of the S&P 500 Index and the S&P Supercom Banks Index (the “Peer Group”). The Performance Graph assumes that $100 was invested on December 31, 2016 in each of First BanCorp. common stock, the S&P 500 Index and the Peer Group. The comparisons in this table are set forth in response to SEC disclosure requirements, and are therefore not intended to forecast or be indicative of future performance of First BanCorp.’s common stock. The cumulative total stockholder return was obtained by dividing (i) the cumulative amount of dividends per share, assuming dividend reinvestment since the measurement point, December 31, 2016 plus (ii) the change in the per share price since the measurement date, by the share price at the measurement date. 44 Item 6. [Reserved] 45 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) The following MD&A relates to the accompanying audited 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. This section also presents certain financial measures that are not based on generally accepted accounting principles in the United States (“GAAP”). See “Basis of Presentation” below for information about why the non-GAAP financial measures are being presented and the reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures for which the reconciliation is not presented earlier. The detailed financial discussion that follows focuses on 2021 results compared to 2020. For a discussion of 2020 results compared to 2019, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020, which is incorpora ted herein by reference. DESCRIPTION OF BUSINESS 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 and FirstBank Insurance Agency. Through its wholly -owned subsidiaries, the Corporation operates in Puerto Rico, the USVI, the BVI, and the state of Florida, concentrating on commercial banking, residential mortgage loans, finance leases, credit cards, personal loans, small loans, auto loans, and insurance agency activities. SIGNIFICANT EVENTS Stock Repurchase Program On April 26, 2021, the Corporation announced that its Board of Directors approved a stock repurchase program, under which the Corporation may repurchase up to $300 million of its outstanding stock, including common and preferred stock, commencing in the second quarter of 2021 through June 30, 2022. During the year ended December 31, 2021, the Corporation repurchased 16,740,467 shares of its common stock for $213.9 million. In addition, on November 30, 2021, the Corporation redeemed all of its outstanding shares of non-convertible, non-cumulative perpetual monthly income, Series A through E Preferred Stock for its liquidation value of $36.1 million. Furthermore, during the first quarter of 2022 the Corporation repurchased 3,409,697 million shares of common stock for the remaining $50 million authorized under the stock repurchase program. COVID-19 Pandemic and Economy The ongoing COVID-19 pandemic has caused unprecedented and continuing uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in worldwide, including in the markets in which the Corporation operates. In response, federal, state, and local governments have taken and continue to take actions designed to mitigate the effect of the virus on public health and to address the economic impact of the virus. As restrictive measures were eased during the end of 2020 and into 2021, based upon positive signs of recovery driven by vaccination and government stimulus programs, economic activity has improved. As of February 18, 2022, approximately 6.6 million vaccines of COVID-19 have been administered. Approximately 2.9 million people have received at least one dose of the COVID-19 vaccine and approximately 2.6 million people, or approximately 84.9% of Puerto Rico’s eligible population, have completed the vaccination process and 54.3% have received the booster shot. The Corporation continues to operate consistent with guidance from federal and local authorities. The Corporation’s banking branches are operating during regular hours following health and safety requirements to comply with federal and local health mandates, including, among other things, deep cleaning, face mask requirements , and strict social distancing measures. On February 8, 2022, the Corporation announced that as part of COVID-19 protocols, all employees, service providers and consultants of the Corporation must have the booster shot of the COVID-19 vaccine by March 1, 2022, with few exceptions. Additional vaccine mandates have been announced in jurisdictions in which our businesses operate. Adoption of electronic channels continues to grow significantly during the ongoing pandemic, with active digital banking users growing by 16% during 2021 while capturing over 40% of deposits through digital and self-service channels. Our results of operations for the year of 2021 continue to reflect an improvement from the disruption caused by the COVID-19 pandemic. However, we maintain a cautious view of the macroeconomic outlook due to continuing uncertainty regarding the pace of recovery in the economy and uncertainty related to the COVID-19 pandemic, including the emergence of new variants of the virus, such as the Omicron variant, which appears to be the most transmissible variant to date. Uncertainties associated with the pandemic include the duration of the COVID-19 outbreak and any related infections, including those from new variants of the virus, the 46 effectiveness of COVID-19 vaccines, vaccination rates among the population, the impact on our customers, employees, and vendors, and the impact to the economy as a whole. The CARES Act or “CARES Act of 2020”, as amended by the Consolidated Appropriations Act, 2021, included an allocation of $659 billion for SBA PPP loans. SBA PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10-month period. On December 27, 2020, President Trump signed another COVID-19 relief bill that extended and modified several provisions of the program. This included an additional allocation of $284 billion. The SBA reactivated the program on January 11, 2021 and the program ended on May 31, 2021. As of December 31, 2021, the Corporation’s SBA PPP loan portfolio amounted to $145.0 million, net of unearned fees of $7.9 million. As applicable, the unearned fees are accreted into income based on the contractual period of two or five years. Upon SBA forgiveness, unamortized fees are then recognized into interest income. During the years ended December 31, 2021 and 2020, the Corporation received forgiveness remittances and consumer payments related to approximately $543.6 million and $48.9 million, respectively, in principal balance of SBA PPP loans. As of December 31, 2021, we have processed forgiveness to approximately 80% of our customers. Forgiveness remittances in the year ended 2021 accelerated the fee income recognition by $13.2 million. Total deposits, excluding brokered deposits and government deposits, continued to increase and were $14.2 billion as of December 31, 2021, an increase of $1.4 billion from December 31, 2020. In addition, government deposits increased by $1.2 billion to $3.3 billion as of December 31, 2021, compared to $2.1 billion as of December 31, 2020. The strong growth in deposits continues to reflect the effect of government relief programs on the liquidity levels of our customers, including increases in the balance of transactional accounts of municipalities in Puerto Rico and the local government of the USVI in connection with the American Rescue Plan Act (“ARPA”) funding for states and local governments. Our liquidity levels and capital position remain strong, with capital ratios that are well above regulatory requirements. This robust liquidity and capital levels provide us with significant flexibility to maintain the strength of our balance sheet and return capital to shareholders through share repurchases and dividend payments, subject to regulatory considerations. During 2021 economic conditions started to show significant signs of recovery, which included improved consumer demand evidenced by rise in retail sales, auto and home sales and recovery in the payroll employment in Puerto Rico where it reached 98% of the pre-pandemic level. The early signs of economic recovery have impacted positively the Corporation which among other things, during 2021 grew total loan originations by approximately 17% when compared to 2020 and is reflecting a strong commercial loan pipeline. Additionally, on January 27, 2022, the PROMESA oversight board certified the 2022 Fiscal Plan for Puerto Rico (the “2022 Fiscal Plan”). The 2022 Fiscal Plan reflects the Commonwealth Plan of Adjustment recently confirmed by the U.S. District Court for the District of Puerto Rico. Relative to the previous fiscal plan, the 2022 Fiscal Plan incorporates a new set of expenditure projections that factor in the now-established debt service requirements pursuant to the Plan of Adjustment, as well as additional investments enabled by the increased resources available to the government. The 2022 Fiscal Plan prioritizes resource allocations across three major themes: (i) investing in the operational capacity of the government to deliver services with Civil Service Reform, (ii) prioritizing obligations to current and future retirees, and (iii) creating a fiscally responsible post-bankruptcy government. Integration of BSPR During the year ended December 31, 2021, the Corporation completed the conversion of all BSPR’s core systems into FirstBank’s systems. In conjunction with the conversion of BSPR’s core systems, the Corporation had consolidated a total of nine banking branches and the Corporation decided late during the fourth quarter of 2021 to consolidate four additional branches, which are expected to be completed during the first half of 2022. In addition, during the year ended December 31, 2021, the Corporation continued to execute in reducing personnel and service contract expenses and completing other business rationalization activities. Cumulative merger and restructuring expenses of $64.4 million have been incurred through December 31, 2021, of which $26.4 million was incurred during 2021. The total amount of merger and restructuring costs related to the BSPR acquisition was originally estimated to be approximately $65 million. The Corporation does not expect any additional significant merger and restructuring expenses during 2022. The Corporation also has estimated that the combined entities will achieve total annual pre-tax savings of approximately $49 million, which are expected to be fully realized during 2022. LIBOR Transition Following the 2017 announcement by the United Kingdom’s Financial Conduct Authority (the “FCA”) that it would no longer compel participating banks to submit rates for the London Interbank Offered Rate (LIBOR) after 2021, regulators and market 47 participants in various jurisdictions have identified recommended replacement rates for LIBOR, and many have published recommended conventions to allow new and existing products to incorporate fallbacks or that reference these Alternative Reference Rates (“ARRs”). In March 2021, the FCA confirmed that publication of the overnight and one month, three-month, six-month and twelve-month U.S. Dollar LIBOR settings will cease or become no longer representative of the market the rates seek to measure (i.e., non-representative) immediately after June 30, 2023, and all other U.S. Dollar LIBOR settings, including the one week and two-month U.S. Dollar LIBOR settings, became non-representative after December 31, 2021. The Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC also released supervisory guidance encouraging banks to cease entering into new contracts that use U.S. Dollar LIBOR as reference rate as soon as practicable and in any event by December 31, 2021. Banking regulators in the U.S. and globally have increased regulatory scrutiny and intensified supervisory focus of financial institutions LIBOR transition plans, preparations and readiness. Significant amounts of financial instruments in the market are referenced to U.S. Dollar LIBOR, and any inability of market participants and regulators to successfully introduce benchmark rates to replace LIBOR and implement effective transitional arrangements to address the discontinuation of LIBOR could result in disruption in the financial markets. In the U.S., the Alternative Reference Rates Committee (“ARRC”), a group of market participants convened by the Federal Reserve, recommended the Secured Overnight Financing Rate (“SOFR”) as a replacement index for U.S. Dollar LIBOR-indexed contracts. SOFR is an overnight interest rate based on U.S. Dollar Treasury repurchase agreements. On March 2, 2020 the New York Fed began daily publication of 30, 90, and 180-day compound historical averages of SOFR. In addition, the ARRC has developed a detailed supporting framework for using SOFR, including tools such as fallbacks and recommended conventions for new use of SOFR in various products. On July 29, 2021, the ARRC formally recommended the Chicago Mercantile Exchange Group’s (“CME”) forward-looking Term SOFR rates for one -, three-, six- and twelve-month tenors, marking the final step in the ARRC’s Paced Transition Plan it released in 2017. The ARRC recommended using the CME’s Term SOFR rates for cash products and derivatives, limited to end-users hedging cash products. An end-user is described as any counterparty to the underlying cash product, such as a borrower, lender, or guarantor. These parties may enter into Term SOFR rates swaps, caps, swaptions, or other derivatives to hedge cash product exposures. The Corporation may offset such exposure with an upstream dealer. The Corporation continues to execute its LIBOR Transition workplan. As part of this transition plan, the Corporation started including fallback language on new and renewed contracts tied to LIBOR to provide for the determination of an ARR and had adhered to the LIBOR Fallbacks Protocol of the International Swaps and Derivatives Association. In addition, effective December 31, 2021 the Corporation discontinued entering into new contracts that use the use U.S. Dollar LIBOR as reference rate. Currently, the Corporation is primarily offering CME’s Term SOFR rate as the ARRs to LIBOR. The Bank may also offer other industry-accepted benchmark interest rates that can be supported for commercial transactions. The Corporation continues working with the update of systems, processes, documentation, and models, with additional updates expected through 2023. As of December 31, 2021, the most significant of the Corporation’s LIBOR-based assets and liabilities consists of $2.0 billion of variable rate commercial and construction loans, approximately $58.4 million of U.S. agencies debt securities and private label MBS held as part of the Corporation’s available-for-sale investment securities portfolio, $134.4 million of Puerto Rico municipalities bonds held as part of the Corporation’s held-to-maturity investment securities portfolio, and $183.8 million of junior subordinated debentures. The Corporation is monitoring the development and adoption of SOFR and other credit sensitive ARRs and their liquidity in the market. The manner and impact of the transition from LIBOR to an ARR, as well as the effect of these developments on our loans and investment securities portfolios, asset-liability management, systems, processes, and business, is uncertain. 48 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: (i) the interest rate environment; (ii) the volumes, mix, and composition of interest-earning assets and (iii) interest-bearing liabilities; and the re-pricing 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 deposit insurance premium and other costs), non-interest income (mainly service charges and fees on deposits, and insurance income), gains (losses) on sales of investments, gains (losses) on mortgage banking activities, and income taxes. The Corporation had net income of $281.0 million, or $1.31 per diluted common share, for the year ended December 31, 2021, compared to $102.3 million, or $0.46 per diluted common share, for the year ended December 31, 2020. The Corporation completed the acquisition of BSPR effective September 1, 2020. The Corporation’s financial statements for the year ended December 31, 2020 include four months of BSPR’s operations, post-acquisition, which impacts the comparability of the fiscal year 2021 results to the fiscal year 2020 results. Other relevant selected financial data for the periods presented is included below: Key Performance Indicator: Return on Average Assets Return on Average Total Equity Efficiency Ratio December 31, 2021 December 31, 2020 1.38 12.56 57.45 0.67 4.59 59.62 49 The key drivers of the Corporation’s GAAP financial results for the year ended December 31, 202 1, compared to the year ended December 31, 2020, include the following: ● Net interest income for the year ended December 31, 2021 was $729.9 million, compared to $600.3 million for the year ended December 31, 2020. The increase was driven by a $5.1 billion increase in average interest-earning assets reflecting the late third-quarter 2020 acquisition of BSPR, as well as higher investment securities and interest-bearing cash balances and a lower cost of deposits. The increase in net interest income additionally includes the effect of approximately $13.2 million of accelerated deferred PPP loans fees recognized upon receipt of forgiveness payments from the SBA. partially offset by the effect of lower market interest rates on investment yields. These variances were The net interest margin decreased by 42 basis points to 3.73% for the year ended December 31, 2021, compared to 4.15% for the year ended December 31, 2020. The decrease reflected the impact of lower interest rates and changes in the balance sheet mix with a higher proportion of lower-yielding assets, such as interest-bearing cash deposited at the New York Fed and investment securities from continued strong deposit growth, to total interest-earning assets. The total average balance of interest-bearing cash balances and investment securities increased by $3.8 billion to 42% of total average interest-earning assets, compared to 30% in 2020. In addition, the proportion of average total loan portfolio balance to total average interest-earning assets in 2021 decreased to 58%, compared to 70% in 2020. See “Net Interest Income” below for additional information. ● The provision for credit losses on loans, finance leases, and debt securities decreased by $236.7 million to a net benefit, or provision recapture, of $65.7 million for the year ended December 31, 2021, compared to an expense of $171.0 million for 2020. The variance reflects the effect of reserve releases in 2021, primarily due to continued improvements in the outlook of certain macroeconomic variables and lower loans outstanding. The expense recorded in 2020 included the effects of significant reserve builds due to the deterioration of the macroeconomic outlook as a result of the impact of the COVID-19 pandemic, as well as a charge of $38.9 million related to the Day 1 reserves required by the current expected credit losses (“CECL”) methodology for non-PCD loans and unfunded lending commitments acquired in conjunction with the acquisition of BSPR. Net charge-offs totaled $55.1 million for the year ended December 31, 2021, or 0.48% of average loans, an increase of $7.2 million, compared to net charge-offs of $47.9 million, or 0.48% of average loans, for the year ended December 31, 2020. Total net charge-offs for the year ended December 31, 2021 included $23.1 million in net charge-offs related to a bulk sale of $52.5 million of residential mortgage nonaccrual loans and related servicing advance receivables. Adjusted for those net charge-offs, total net charge- offs in 2021 were $32.0 million, or 0.28% of average loans. analyses of the ACL and non-performing assets and related ratios. See “Provision for Credit Losses” and “Risk Management” below for ● The Corporation recorded non-interest income of $121.2 million for the year ended December 31, 2021, compared to $111.2 million for 2020. The increase was primarily related to: (i) a $21.6 million total increase in transactional fee income from service charges and fees on deposits, ATMs fees, credit, and debit cards and POS interchange fees, and merchant-related activities due to the effect of the BSPR acquisition as well as increased transaction volumes due to the adverse effect of the COVID-19 pandemic and related stay-at-home orders on economic activity in the first half of 2020; (ii) a $2.9 million increase in revenues from mortgage banking activities reflecting both a higher volume of loan sales and an increase in servicing fee income; and (iii) a $2.6 million increase in insurance commissions income driven by a higher volume of loan originations and higher sell of annuities and accidental death policies. These variances were partially offset by: (i) a $13.2 million gain on sales of investment securities recorded in 2020; and (ii) a $5.0 million benefit recorded in 2020 resulting from the final settlement of the Corporation’s business interruption insurance claim associated with lost profits caused by Hurricanes Irma and Maria in 2017. See “Non-Interest Income” below for additional information. ● Non-interest expenses for the year ended December 31, 2021 were $489.0 million, compared to $424.2 million in 2020. Non- interest expenses for 2021 included $26.4 million of merger and restructuring costs associated with the acquisition and integration of BSPR, compared to $26.5 million in 2020. Total non-interest expenses in 2021 also included $3.0 million of COVID-19 pandemic-related expenses, primarily related to additional cleaning, safety materials, and security measures, compared to $5.4 million in 2020. Total non-interest expenses in 2020 are also net of a $1.2 million benefit from hurricane- related expenses insurance recoveries. Adjusted for the above-mentioned merger, COVID-19 expenses, and hurricane-related expenses insurance recoveries, total non-interest expenses increased by $66.1 million compared to 2020, primarily related to incremental expenses associated with operations, personnel and branches acquired from BSPR. See “Non-Interest Expenses” below for additional information. ● For the year ended December 31, 2021, the Corporation recorded an income tax expense of $146.8 million, compared to $14.1 million for 2020. The increase was primarily related to higher pre-tax income driven by credit losses reserve releases in 2021, compared to significant charges to the provision recorded during 2020, and a higher level of taxable income. In addition, the income tax expense reported in 2020 was net of the effect of an $8.0 million partial reversal of the Corporation’s deferred tax asset valuation allowance. 50 ● As of December 31, 2021, total assets were approximately $20.8 billion, an increase of $2.0 billion from December 31, 2020. The increase was primarily related to a $1.8 billion increase in investment securities, driven by purchases of U.S. agencies MBS and U.S. agencies callable and bullet debentures, and an increase of $1.0 billion in cash and cash equivalents attributable to the liquidity obtained from the growth in deposits and loan repayments. These variances were partially offset by a decrease of $731.8 million in total loans, consisting of a $558.2 million decrease in residential mortgage loans (including as a result of the bulk sale of $52.5 million of nonaccrual loans), and a $452.0 million decrease in commercial and construction loans (including a $260.9 million decrease in the SBA PPP loan portfolio), partially offset by an increase of $278.4 million in consumer loans and finance leases. See “Financial Condition and Operating Data Analysis” below for additional information. ● As of December 31, 2021, total liabilities were $18.7 billion, an increase of $2.2 billion from December 31, 2020. The increase was mainly driven by a $2.6 billion growth in total deposits, excluding brokered deposits, partially offset by the repayment at maturity of $240.0 million of FHLB advances and a $93.8 million decrease in brokered deposits. The increase of $2.6 million in non-brokered deposits included a $1.6 billion growth in demand deposits, as well as a $1.2 billion growth in government deposits, partially offset by reductions in time deposits. Adequacy” below for additional information about the Corporation’s funding sources. See “Risk Management – Liquidity Risk and Capital ● As of December 31, 2021, the Corporation’s stockholders’ equity was $2.1 billion, a decrease of $173.4 million from December 31, 2020. The decrease was driven by the approximately $317.8 million of capital returned to the Corporation’s stockholders during 2021 consisting of: (i) the repurchase of 16.7 million shares of common stock for a total purchase price of approximately $213.9 million; (ii) common and preferred stock dividends totaling $67.8 million; and (iii) the redemption of all of its outstanding shares of Series A through E Preferred Stock for its total liquidation value of $36.1 million. The decrease in total stockholders’ equity also included the effect of a $139.5 million decrease in Other Comprehensive Income mostly attributable to the decrease in the fair value of available-for-sale investment securities. These variances were partially offset by earnings generated during 2021. The Corporation increased its common stock dividend twice during 2021, increasing the quarterly dividend rate from $0.05 in the fourth quarter of 2020 to $0.07 in the first quarter of 2021 and $0.10 in the fourth quarter of 2021. The Corporation’s common equity tier 1 (“CET1”) capital, tier 1 capital, total capital , and leverage ratios were 17.80%, 17.80%, 20.50%, and 10.14%, respectively, as of December 31, 2021, compared to CET1 capital, tier 1 capital, total capital, and leverage ratios of 17.31%, 17.61%, 20.37%, and 11.26%, respectively, as of December 31, 2020. See “Risk Management – Capital” below for additional information. ● ● Total loan production, including purchases, refinancings, renewals, and draws from existing revolving and non-revolving commitments, but excluding the utilization activity on outstanding credit cards, was $4.8 billion for the year ended December 31, 2021, compared to $4.2 billion for 2020. As mentioned above, the Corporation originated $283.6 million of SBA PPP loans during 2021, compared to $390.3 million in 2020. In addition, during the year ended December 31, 2020, the Corporation also participated in the Main Street Lending Program (“Main Street”) and originated approximately $184.4 million of Main Street loans. This program, authorized under the CARES Act of 2020 and established by the Federal Reserve, was designed to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Excluding SBA PPP and Main Street loan originations, total loan originations increased by $940.9 million to $4.5 billion in 2021, compared to $3.6 billion for 2020, consisting of: (i) a $510.9 million increase in commercial and construction loan originations, primarily in the Florida region; (ii) a $366.7 million increase in consumer loan originations, predominantly auto loans and finance leases, reflecting the effect of the disruptions caused by the COVID-19 pandemic-related lockdowns and quarantines; and (iii) a $63.3 million increase in residential mortgage loan originations, benefited from a larger volume of conforming loan originations and refinancings driven by the effect of lower mortgage loan interest rates and increased home purchase activity during 2021. Total non-performing assets were $158.1 million as of December 31, 2021, a decrease of $135.4 million, or 46%, from December 31, 2020. The decrease was primarily related to: (i) a $70.2 million decrease in nonaccrual residential mortgage loans, primarily as a result of the bulk sale of $52.5 million of nonaccrual loans; (ii) a $42.2 million decrease in the OREO portfolio balance, including the sale of two commercial OREO properties in the Puerto Rico region totaling $30.7 million; (iii) an $18.3 million decrease in nonaccrual commercial and construction loans; and (iv) a $5.8 million decrease in nonaccrual consumer loans and finance leases. See “Risk Management – Non-Accruing and Non-Performing Assets” below for additional information. ● Adversely classified commercial and construction loans increased by $22.1 million to $177.3 million as of December 31, 2021, compared to December 31, 2020. The increase was driven by the downgrade of four commercial relationships totaling $76.5 million. Partially offset by the upgrades of two commercial relationship in the Puerto Rico region totaling $31.3 million, the sale of $3.1 million construction loan in the Puerto Rico region and the sale of a $15.1 million classified commercial loan in the Florida region. The Corporation is closely monitoring its loan portfolio to identify potential at-risk segments, payment performance, the need for permanent modifications, and the performance of different sectors of the economy in all of the markets where the Corporation operates. 51 The Corporation’s financial results for 2021 and 2020 included the following items that management believes are not reflective of core operating performance, are not expected to reoccur with any regularity or may reoccur at uncertain times and in uncertain amounts (the “Special Items”): Year ended December 31, 2021 ● Merger and restructuring costs of $26.4 million ($16.5 million after-tax) in connection with the BSPR acquisition integration process and related restructuring initiatives. Merger and restructuring costs in 2021 included approximately $6.5 million related to the previously announced Employee Voluntary Separation Program (the “VSP”) as well as involuntary separation actions implemented in the Puerto Rico region. In addition, these costs included costs related to system conversions, accelerated depreciation charges related to planned closures and consolidation of branches in accordance with the Corporation’s integration and restructuring plan, and other integration related efforts. ● Costs of $3.0 million ($1.9 million after-tax) related to the COVID-19 pandemic response efforts, consisting primarily of costs related to additional cleaning, safety materials, and security measures. Year ended December 31, 2020 ● Merger and restructuring costs of $26.5 million ($16.6 million after-tax) in connection with the acquisition of BSPR and related restructuring initiatives. Merger and restructuring costs in 2020 primarily included consulting, legal, valuation, and other professional service fees associated with the acquisition, a VSP offered to eligible employees, retention and other compensation bonuses, and expenses related to system conversions and other integration-related efforts. ● Gain on sales of U.S. agencies MBS and U.S Treasury notes of $13.2 million. The gain on tax-exempt securities or realized at the tax-exempt international banking entity subsidiary level had no effect on the income tax expense recorded in 2020. ● Tax benefit of $8.0 million related to the partial reversal of the deferred tax asset valuation allowance. ● Costs of $5.4 million ($3.4 million after-tax) related to the COVID-19 pandemic response efforts, primarily costs related to additional cleaning, safety materials, and security measures. ● Gain of $0.1 million realized on the repurchase of $0.4 million of trust-preferred securities (“TRuPs”). The gain, realized at the holding company level, had no effect on the income tax expense in 2020. ● Benefit of $6.2 million ($3.8 million after-tax) from insurance recoveries. Insurance recoveries in 2020 included a $5.0 million benefit related to the final settlement of the Corporation’s business interruption insurance claim related to lost profits caused by Hurricanes Irma and Maria in 2017. 52 The following table reconciles for 2021 and 2020 the reported net income to adjusted net income, a non-GAAP financial measure that excludes the Special Items identified above: (In thousands) Net income, as reported (GAAP) Adjustments: Merger and restructuring costs Gain on sales of investment securities Partial reversal of deferred tax asset valuation allowance COVID-19 pandemic-related expenses Gain on early extinguishment of debt Benefit from hurricane-related insurance recoveries Income tax impact of adjustments (1) Adjusted net income (Non-GAAP) (1)See "Basis of Presentation" below for the individual tax impact related to reconciling items Year Ended December 31, 2021 2020 $ 281,025 $ 102,273 26,435 - - 2,958 - - (11,023) 299,395 $ 26,509 (13,198) (8,000) 5,411 (94) (6,153) (9,663) 97,085 $ 53 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. The Corporation’s critical accounting estimates that are particularly susceptible to significant changes include: (i) the ACL; (ii) valuation of financial instruments; (iii) acquired loans; and (iv) income taxes. Actual results could differ from estimates and assumptions if different outcomes or conditions prevail. Allowance for Credit Losses The Corporation maintains an ACL for loans and finance leases based upon management’s estimate of the lifetime expected credit losses in the loan portfolio, as of the balance sheet date, excluding loans held for sale. Additionally, the Corporation maintains an ACL for debt securities classified as either held-to-maturity or available-for-sale, and other off-balance sheet credit exposures (e.g., unfunded loan commitments). For loans and finance leases, unfunded loan commitments, and held-to-maturity debt securities, the estimate of lifetime credit losses includes the use of quantitative models that incorporate forward-looking macroeconomic scenarios that are applied over the contractual lives of the portfolios, adjusted, as appropriate, for prepayments and permitted extension options using historical experience. The ACL for available-for-sale debt securities is measured using a risk-adjusted discounted cash flow approach that also considers relevant current and forward-looking economic variables and the ACL is limited to the difference between the fair value of the security and its amortized cost. Judgment is specifically applied in the determination of economic assumptions, the length of the initial loss forecast period, the reversion of losses beyond the initial forecast period, historical loss expectations, usage of macroeconomic scenarios, and qualitative factors, which may not be adequately captured in the loss model, as further discussed below. The macroeconomic scenarios utilized by the Corporation include variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, unemployment rates, housing and commercial real estate prices, gross domestic product levels, retail sales, interest-rate forecasts, corporate bond spreads, and changes in equity market prices. The Corporation derives the economic forecasts it uses in its ACL model from Moody's Analytics. The latter has a large team of economists, data-base managers and operational engineers with a history of producing monthly economic forecasts for over 25 years. As of December 31, 2021, the Corporation used the base-case economic scenario from Moody’s Analytics in its estimation of credit losses. The Corporation has currently set an initial forecast period (“reasonable and supportable period”) of two years and a reversion period of up to three years, utilizing a straight-line approach and reverting back to the historical macroeconomic mean for Puerto Rico and the Virgin Islands regions. For the Florida region, the methodology considers a reasonable and supportable forecast period and an implicit reversion towards the historical trend that varies for each macroeconomic variable, achieving the steady state by year five. After the reversion period, a historical loss forecast period covering the remaining contractual life, adjusted for prepayments, is used based on the change in key historical economic variables during representative historical expansionary and recessionary periods. Changes in economic forecasts impact the probability of default (“PD”), loss-given default (“LGD”), and exposure at default (“EAD”) for each instrument, and therefore influence the amount of future cash flows for each instrument that the Corporation does not expect to collect. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, the Corporation has identified certain economic variables that have significant influence in the Corporation’s model for determining the ACL. As of December 31, 2021, the Corporation’s ACL model considered the following assumptions for key economic variables in the base-case scenario: ● Average Commercial Real Estate Price Index year-over-year appreciation of approximately 2.90% in the first quarter of 2022, followed by increases ranging from 0.52% – 5.16% during the remainder of 2022. The average projected commercial real estate price index appreciation for 2023 is forecasted at 8.68%. ● Regional Home Price Index in Puerto Rico (purchase only prices), year-over-year increase of approximately 1.59% in the first quarter of 2022, followed by estimates ranging from (0.53)% - 2.77% during the remainder of 2022 and 2023. For the Florida region (all transactions, including refinances), year-over-year increase of approximately 8.11%, in the first quarter of 2022, followed by estimates ranging from (2.42)% – 2.18% for the Florida region during the remainder of 2022 and 2023. ● Levels of regional unemployment in Puerto Rico at approximately 7.60% in the first quarter of 2022, followed by improvements throughout the remainder of 2022 to an approximate level of 7.32% by the end of 2022. For the Florida region and the U.S. mainland, unemployment rate of 3.71% and 4.07%, respectively, in the first quarter of 2022, followed by modest improvements throughout the remainder of 2022 to an approximate level of 2.81% in Florida and 3.51% in the 54 U.S. mainland by the end of 2022. The average unemployment for the Puerto Rico, Florida and the U.S. mainland regions for 2023 is forecasted at 7.60%, 2.88%, and 3.49%, respectively. ● A year-over-year increase in real gross domestic product (“GDP”) in the U.S. mainland of approximately 5.33% in the first quarter of 2022, followed by increasing levels of real GDP growth between 2.74% – 4.54% during the remainder of 2022 and 2023. Further, the Corporation periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (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 qualitative factors that carried the most significant weight as of December 31, 2021 were the economic uncertainty related to the recent strain of the COVID-19 virus and the potential lag of recovery in certain industries, such as the transportation and hospitality industries, and loan modifications related to commercial real estate loans as a result of the COVID-19 situation. The qualitative factors applied at December 31, 2021, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of ACL calculated by the model. The evaluation of qualitative factors is inherently imprecise and requires significant management judgment. The ACL can also be impacted by factors outside the Corporation’s control, which include unanticipated changes in asset quality of the portfolio, such as increases in risk rating downgrades in our commercial portfolio, deterioration in borrower delinquencies or credit scores in our residential real estate and consumer portfolio. Further, the current fair value of collateral is utilized to assess the expected credit losses when a financial asset is considered to be collateral dependent. It is difficult to estimate how potential changes in any 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 December 31, 2021, management compared the modeled estimates under the base scenario against a more adverse scenario. Under this adverse scenario, as an example, average unemployment rate for the Puerto Rico region increases to 8.75% for year 2022 and 8.24% dur ing 2023 compared to 7.38% and 7.60%, respectively for the same periods, on the base scenario projection. To demonstrate the sensitivity to key economic parameters used in the calculation of our ACL at December 31, 2021, management calculated the difference between our quantitative ACL and this adverse scenario. Excluding consideration of qualitative adjustments, this sensitivity analysis would result in a hypothetical increase in our ACL of approximately $40 million at December 31, 2021. 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 modeled lifetime loss estimates based on current circumstances and conditions. Recognizing that forecasts of macroeconomic conditions are inherently uncertain, particularly in light of the recent economic conditions, 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 December 31, 2021. As of December 31, 2021, the total ACL for loans, held-to-maturity and available-for-sale securities, and off-balance sheet credit exposure decreased to $280.2 million, from $401.1 million as of December 31, 2020. The ACL reduction of $120.9 million during the year ended December 31, 2021 consisted of net charge-offs of $55.2 million and a provision for credit losses net benefit of $65.7 million. The provision for credit losses net benefit recorded during 2021 primarily reflects an improvement in the outlook of macroeconomic variables to which the reserve is correlated, including improvements in the commercial real estate price index and unemployment rate forecasts, and the overall decrease in the size of the residential mortgage and the commercial and construction loan portfolios. Our process for determining the ACL is further discussed in Note 1 – Nature of Business and Summary of Significant Accounting Policies, to the accompanying audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. 55 Valuation of financial instruments The measurement of fair value is fundamental to the Corporation’s presentation of its financial condition and results of operations. The Corporation holds debt and equity securities, derivatives, and other financial instruments at fair value. The Corporation holds its investments and liabilities mainly to manage liquidity needs and interest rate risks. The Corporation’s significant assets reflected at fair value on the Corporation’s financial statements consisted of available-for-sale investment securities. The Corporation categorizes the fair value of its available-for-sale debt securities using a three-level hierarchy for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the Corporation (observable inputs) and the Corporation’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The hierarchy of inputs used in determining the fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. The hierarchy level assigned to each security in the Corporation’s investment portfolio was based on management’s assessment of the transparency and reliability of the inputs used to estimate the fair values at the measurement date. See Note 30 – Fair Value, to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10- K for additional information. The fair value of available-for-sale investment securities was the market value based on quoted market prices (as is the case with U.S. Treasury notes), when available (Level 1). If quoted market prices are unavailable, the fair value is based on market prices for identical or comparable assets (as is the case with MBS and callable U.S. agency debt) that are based on observable market parameters, including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers, and reference data, including market research operations (Level 2). Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon discounted cash flow models that use unobservable inputs due to the limited market activity of the instrument, as is the case with private label MBS held by the Corporation (Level 3). Private label MBS are collateralized by fixed-rate mortgages on single-family residential properties in the U.S.; the interest rate on the securities is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The market valuation represents the estimated net cash flows over the projected life of the pool of underlying assets applying a discount rate that reflects market observed floating spreads over LIBOR, with a widening spread based on a nonrated security. The market valuation is derived from a model that utilizes relevant assumptions such as the prepayment rate, default rate, and loss severity on a loan level basis. The Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow analysis according to collateral attributes of the underlying mortgage pool ( i.e., loan term, current balance, note rate, rate adjustment type, rate adjustment frequency, rate caps, and others) in combination with prepayment forecasts based on historical portfolio performance. The Corporation models the variable cash flow of the security using the 3-month LIBOR forward curve. Under ASC 326, adopted on January 1, 2020, declines in fair value that are credit-related are now recorded on the balance sheet through an ACL with a corresponding adjustment to earnings and declines that are noncredit-related are recognized through other comprehensive income/loss. If the Corporation intends to sell a debt security in an unrealized loss position or determines that it is more likely than not that the Corporation will be required to sell a debt security before it recovers its amortized cost basis, the debt security is impaired and it is written down to fair value with all losses recognized in earnings. As of December 31, 2021, the Corporation did not intend to sell any debt securities in an unrealized loss position and it is not more likely than not that the Corporation will be required to sell any debt securities before recovery of their amortized cost basis. For debt securities in an unrealized loss position for which the Corporation does not intend to sell the debt security and it is not more likely than not that the Corporation will be required to sell the debt security, the Corporation determines whether the loss is due to credit-related factors or noncredit-related factors. For debt securities in an unrealized loss position for which the losses are determined to be the result of both credit -related and noncredit-related factors, the credit loss is determined as the difference between the present value of the cash flows expected to be collected, and the amortized cost basis of the debt security. Available-for-sale debt securities held by the Corporation at year-end primarily consisted of securities issued by U.S. government- sponsored entities (“GSEs”), and the aforementioned private label MBS. Given the explicit and implicit guarantees provided by the U.S. federal government, the Corporation believes the credit risk in securities issued by the GSEs is low. For the year ended December 31, 2021, the Corporation determined the credit losses for private label MBS based on a risk-adjusted discounted cash flow methodology that considers qualitative and quantitative factors specific to the instruments, including PDs and LGDs that consider, 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 obtained from the economic scenarios described in the ACL discussion above. 56 The Corporation recognized a provision benefit on available-for-sale debt securities, of $0.1 million during the year ended December 31, 2021, compared to $1.6 million provision expense for the year ended December 31, 2020. Acquired Loans Loans acquired through a purchase or a business combination are recorded at their fair value as of the acquisition date. The acquisition method of accounting allows for a measurement period to make adjustments to an acquisition for up to one year after the acquisition date for new information that existed at the acquisition date but may not have been known or available at that time. The Corporation performs an assessment of acquired loans to first determine if such loans have experienced more than insignificant deterioration in credit quality since their origination and thus should be classified and accounted for as purchased credit deteriorated (“PCD”) loans. For loans that have not experienced more than insignificant deterioration in credit quality since origination, referred to as non-PCD loans, the Corporation records such loans at fair value, with any resulting discount or premium accreted or amortized into interest income over the remaining life of the loan using the interest method. Additionally, upon the purchase or acquisition of non- PCD loans, the Corporation measures and records an ACL based on the Corporation’s methodology for determining the ACL. The ACL for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans were purchased or acquired. Acquired loans that are classified as PCD are recognized at fair value. The ACL estimated for PCD loans as of the acquisition date is recorded as a gross -up of the loan balance and the ACL. Any remaining discount or premium after the gross-up is then recognized as an adjustment to yield over the remaining life of the loan. After the acquisition date, the accounting for acquired loans and leases, including PCD and non-PCD loans, follows the same accounting guidance as loans and leases originated by the Corporation. Characteristics relevant to the classification of PCD loans include: delinquency, payment history since origination, credit scores migration, and/or other factors the Corporation may become aware of through its initial analysis of acquired loans that may indicate there has been more than insignificant deterioration in credit quality since a loan’s origination. In connection with the BSPR acquisition on September 1, 2020, the Corporation acquired PCD loans and non-PCD loans with an aggregate fair value of approximately $752.8 million and $1.8 billion, respectively. The fair value of the loans acquired from BSPR was estimated based on a discounted cash flow method under which the present value of the contractual cash flows was calculated based on certain valuation assumptions such as default rates, loss severity, and prepayment rates, consistent with the Corporation’s CECL methodology, and discounted using a market rate of return that accounts for both the time value of money and investment risk factors. The discount rate utilized to analyze fair value considered the cost of funds rate, capital charge, servicing costs, and liquidity premium, mostly based on industry standards. For further information, refer to Note 2 – Business Combination to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information. 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, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC Subtopic 310-30”), the Corporation adopted CECL using the prospective transition approach. 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. As of December 31, 2021, such PCD loans consisted of $115.1 million of residential mortgage loans and $2.4 million of commercial mortgage loans acquired by the Corporation as part of previously completed asset acquisitions. As the Corporation elected to maintain pools of units of account for loans previously accounted for under ASC Subtopic 310-30, the Corporation is not able to remove loans from the pools until they are paid off, written off, or sold (consistent with the Corporation’s practice prior to adoption of CECL), but is required to follow CECL for purposes of the ACL. Regarding interest income recognition for PCD loans that existed at the time of adoption of CECL, the prospective transition approach for PCD loans required by CECL 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 that the Corporation has elected to maintain in previously existing pools pursuant to the policy election right 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 for use in operations or improving the collateral for resale. Thus, the Corporation continues to exclude these pools of PCD loans from nonaccrual loan statistics. In accordance with CECL, the Corporation did not reassess whether modifications to individual acquired loans accounted for within pools were TDR as of the date of adoption. Income Taxes The Corporation is required to estimate income taxes in preparing its consolidated financial statements. This involves the estimation of current income tax expense together with an assessment of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Corporation to assume certain positions based on its interpretation of 57 current tax regulations. Management assesses the relative benefits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial and regulatory guidance, and recognizes tax benefits only when deemed probable. Changes in assumptions affecting estimates may be required in the future and estimated tax liabilities may need to be increased or decreased accordingly. The Corporation adjusts the accrual of tax contingencies in light of changing facts and circumstances, such as the progress of tax audits, case law and emergi ng legislation. The Corporation’s effective tax rate includes the impact of tax contingencies and changes to such accruals, as considered appropriate by management. When particular tax matters arise, a number of years may elapse before such matters are audited by the taxing authorities and finally resolved. Favorable resolution of such matters or the expiration of the statute of limitations may result in the release of tax contingencies that the Corporation recognizes as a reduction to its effective tax rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective tax rate and may require the use of cash in the year of resolution. The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Corporation’s net deferred tax asset assumes that the Corporation will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change, the Corporation may be required to record valuation allowances against its deferred tax assets, resulting in additional income tax expense in the consolidated statements of income. Management evaluates its deferred tax assets on a quarterly basis and assesses the need for a valuation allowance, if any. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires the evaluation of positive and negative evidence that can be objectively verified. Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carryforward periods is available under the tax law. Consideration must be given to all sources of taxable income, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, and tax planning strategies. When negative evidence (e.g., cumulative losses in recent years, history of operating loss or tax credit carryforwards expiring unused) exists, more positive evidence than negative evidence will be necessary. The Corporation has concluded that based on the level of positive evidence, it is more likely than not that the deferred tax asset will be realized, net of the existing valuation allowances at December 31, 2021 and 2020. However, there is no guarantee that the tax benefits associated with the deferred tax assets will be fully realized. The positive evidence considered by management in arriving at its conclusion included factors such as: FirstBank’s four-year cumulative income position; sustained periods of profitability; management’s proven ability to forecast future income accurately and execute tax strategies; forecasts of future profitability under several potential scenarios that support the partial utilization of NOLs prior to their expiration from 2022 through 2024; and the utilization of NOLs over the past four-years. The negative evidence considered by management included: uncertainties about the state of the Puerto Rico economy, including considerations relating to the effect of hurricane and pandemic recovery funds together with Puerto Rico government debt restructuring and the ultimate sustainability of the latest fiscal plan certified by the PROMESA oversight board. Refer to Note 28 - Income Taxes, to the audited consolidated financial statements included in Item 8 of this Form 10-K for further information related to Income Taxes. OTHER ESTIMATES In addition to the critical accounting estimates we make in connection with the ACL, fair value measurements, and the accounting for income taxes, goodwill and identifiable intangible assets, pension and postretirement benefit obligations, and provisions for losses that may arise from litigation and regulatory proceedings (including governmental investigations) are also based on estimates and assumptions. Goodwill is assessed for impairment annually in the fourth quarter or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment. Identifiable intangible assets are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable. Judgment is required to evaluate whether indications of potential impairment have occurred, and to test intangible assets for impairment, if required. The amortization of identified intangible assets recognized in a business combination is based upon the estimated economic benefits to be received over their economic life, which is also subjective. Customer attrition rates that are based on historical experience are used to determine the estimated economic life of certain intangibles assets, including but not limited to, customers deposit intangible. See Note 1 – Nature of Business and Summary of Significant Accounting Policies, Note 2 – Business Combination , and Note 14 – Goodwill and Other Intangibles, to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10- K for further information about goodwill and identifiable intangible assets, including intangible assets recorded in connection with the acquisition of BSPR. 58 As part of the BSPR acquisition, the Corporation maintains two frozen qualified noncontributory defined benefit pension plans, and a related complementary post-retirements benefits plan covering medical benefits and life insurance after retirement. Calculation of the obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions, which are subject to management judgment and may differ if different assumptions are used. See Note 25 – Employee Benefit Plans, to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for disclosures related to the benefit plans. As necessary, we also estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. Judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total estimated liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case, proceeding or investigation, our experience and the experience of others in similar cases, proceedings or investigations, and the opinions and views of legal counsel. 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. Net interest income for the year ended December 31, 2021 was $729.9 million, compared to $600.3 million for 2020. On a tax-equivalent basis and excluding the changes in the fair value of derivative instruments, net interest income for the year ended December 31, 2021 was $753.7 million compared to $621.4 million for the year ended December 31, 2020. 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 "Basis of Presentation" below. 59 Average volume Interest income (1) / expense 2021 2020 2021 2020 Average rate (1) 2021 2020 Part I Year Ended December 31, (Dollars in thousands) Interest-earning assets: Money market and other short-term investments Government obligations (2) MBS FHLB stock Other investments Total investments (3) Residential mortgage loans Construction loans Commercial and Industrial and Commercial Mortgage loans Finance leases Consumer loans Total loans (4)(5) Total interest-earning assets Interest-bearing liabilities: Interest-bearing checking accounts Savings accounts Retail certificates of deposit ("CDs") Brokered CDs Interest-bearing deposits Loans payable Other borrowed funds FHLB advances Total interest-bearing liabilities $ Net interest income on a tax-equivalent basis and excluding valuations Interest rate spread Net interest margin $ 2,012,617 2,065,522 4,064,343 28,208 10,254 8,180,944 3,277,087 181,470 5,228,150 518,757 2,207,685 11,413,149 $ 19,594,093 $ 3,667,523 4,494,757 2,636,303 141,959 10,940,542 - 484,244 354,055 11,778,841 $ $ $ $ 1,258,683 878,537 2,236,262 32,160 6,238 4,411,880 3,119,400 168,967 4,387,419 440,796 1,952,120 10,068,702 14,480,582 2,197,980 3,190,743 2,741,388 357,965 8,488,076 8,415 475,492 505,478 9,477,461 $ $ $ $ $ 2,662 27,058 57,159 1,394 61 88,334 177,747 12,766 261,333 38,532 239,725 730,103 818,437 5,776 6,586 26,138 2,982 41,482 - 15,098 8,199 64,779 753,658 $ $ $ $ $ 3,388 21,222 48,683 1,959 41 75,293 166,019 9,094 214,830 32,515 216,263 638,721 714,014 5,933 11,116 43,350 7,989 68,388 21 13,000 11,251 92,660 621,354 0.13% 1.31% 1.41% 4.94% 0.59% 1.08% 5.42% 7.03% 5.00% 7.43% 10.86% 6.40% 4.18% 0.16% 0.15% 0.99% 2.10% 0.38% -% 3.12% 2.32% 0.55% 0.27% 2.42% 2.18% 6.09% 0.66% 1.71% 5.32% 5.38% 4.90% 7.38% 11.08% 6.34% 4.93% 0.27% 0.35% 1.58% 2.23% 0.81% 0.25% 2.73% 2.23% 0.98% 3.63% 3.85% 3.95% 4.29% (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. (2) Government obligations include debt issued by government-sponsored agencies. (3) Unrealized gains and losses on available-for-sale securities are excluded from the average volumes. (4) Average loan balances include the average of nonaccrual loans. (5) Interest income on loans includes $10.5 million and $7.3 million for the years ended December 31, 2021 and 2020, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio. 60 Part II (In thousands) Interest income on interest-earning assets: Money market and other short-term investments Government obligations MBS FHLB stock Other investments Total investments Residential mortgage loans Construction loans Commercial and Industrial and Commercial Mortgage loans Finance leases Consumer loans Total loans Total interest income Interest expense on interest-bearing liabilities: Brokered CDs Non-brokered interest-bearing deposits Loans Payable Other borrowed funds FHLB advances Total interest expense Change in net interest income 2021 Compared to 2020 Increase (decrease) Due to: Volume Rate Total $ $ $ $ 1,513 $ 22,111 32,753 (223) 25 56,179 8,509 713 41,940 5,789 28,032 84,983 141,162 $ (4,563) $ 14,669 (21) 243 (3,438) 6,890 134,272 $ (2,239) $ (16,275) (24,277) (342) (5) (43,138) 3,219 2,959 4,563 228 (4,570) 6,399 (36,739) $ (444) $ (36,568) - 1,855 386 (34,771) (1,968) $ (726) 5,836 8,476 (565) 20 13,041 11,728 3,672 46,503 6,017 23,462 91,382 104,423 (5,007) (21,899) (21) 2,098 (3,052) (27,881) 132,304 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 “Income Taxes” below for additional information). Management believes that the presentation of interest income on an adjusted tax-equivalent basis facilitates the comparison of all interest data related to these assets. The Corporation estimated the tax equivalent yield by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate (37.5%) and adding to it the average cost of interest-bearing liabilities. The computation considers the interest expense disallowance required by Puerto Rico tax law. Management believes that the presentation of net interest income excluding the effects of the changes in the fair value of the derivative instruments (“valuations”) provides additional information about the Corporation’s net interest income and facilitates comparability and analysis from period to period. The changes in the fair value of the derivative instruments have no effect on interest due on interest-bearing liabilities or interest earned on interest-earning assets. 61  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: Year Ended December 31, 2021 2020 $ $ $ $ $ $ $ (Dollars in thousands) Interest income - GAAP Unrealized gain on derivative instruments Interest income excluding valuations Tax-equivalent adjustment Interest income on a tax-equivalent basis and excluding valuations Interest expense - GAAP Net interest income - GAAP Net interest income excluding valuations Net interest income on a tax-equivalent basis and excluding valuations Average Balances Loans and leases Total securities, other short-term investments and interest-bearing cash balances Average Interest-Earning Assets Average Interest-Bearing Liabilities Average Yield/Rate Average yield on interest-earning assets - GAAP Average rate on interest-bearing liabilities - GAAP Net interest spread - GAAP Net interest margin - GAAP Average yield on interest-earning assets excluding valuations Average rate on interest-bearing liabilities Net interest spread excluding valuations Net interest margin excluding valuations Average yield on interest-earning assets on a tax-equivalent basis and excluding valuations Average rate on interest-bearing liabilities Net interest spread on a tax-equivalent basis and excluding valuations Net interest margin on a tax-equivalent basis and excluding valuations 794,708 (24) 794,684 23,753 818,437 64,779 729,929 729,905 753,658 11,413,149 8,180,944 19,594,093 11,778,841 $ $ $ $ $ $ $ 4.06% 0.55% 3.51% 3.73% 4.06% 0.55% 3.51% 3.73% 4.18% 0.55% 3.63% 3.85% 692,982 (27) 692,955 21,059 714,014 92,660 600,322 600,295 621,354 10,068,702 4,411,880 14,480,582 9,477,461 4.79% 0.98% 3.81% 4.15% 4.79% 0.98% 3.81% 4.15% 4.93% 0.98% 3.95% 4.29% 62 Interest income on interest-earning assets primarily represents interest earned on loans held for investment and investment securities. Interest expense on interest-bearing liabilities primarily represents interest paid on brokered CDs, retail deposits, repurchase agreements, advances from the FHLB, and junior subordinated debentures. Unrealized gains or losses on derivatives represent changes in the fair value of derivatives, primarily interest rate caps used for protection against rising interest rates. Net interest income amounted to $729.9 million for the year ended December 31, 2021, an increase of $129.6 million, when compared to $600.3 million for the year ended December 31, 2020. The $129.6 million increase in net interest income was primarily due to: ● A $47.4 million increase in interest income on commercial and construction loans, mainly due to an $853.2 million increase in the average balance of this portfolio that reflects the effect of both loans acquired in conjunction with the BSPR acquisition and SBA PPP loans originated through 2020 and 2021. Total discount accretion related to fair value marks on commercial and construction loans acquired in the BSPR acquisition amounted to $9.2 million in 2021, compared to $5.5 million in 2020. Additionally, interest income for 2021 includes $20.9 million earned on SBA PPP loans, including $13.2 million of accelerated PPP loan fees recognized upon receipt of forgiveness payments in 2021, compared to $7.5 million interest income on SBA PPP loans recorded in 2020. This variance also reflects the benefit of interest income of $2.9 million realized from deferred interest recognized on a construction loan paid-off in 2021. These variances were partially offset by lower interest rates. As of December 31, 2021, the interest rate on approximately 39% of the Corporation’s commercial and construction loans, excluding SBA PPP loans, was based upon LIBOR indices and 16% was based upon the Prime rate index. For the year ended December 31, 2021, the average one-month LIBOR rate declined 42 basis points, the average three-month LIBOR rate declined 49 basis points, and the average Prime rate declined 29 basis points compared to the average rate of such indices in 2020. ● A $29.5 million increase in interest income on consumer loans and finance leases, mainly due to a $333.5 million increase in the average balance of this portfolio, largely related to auto loans and finance leases. The increase in the average balance reflects the effect of both consumer loans acquired in connection with the BSPR acquisition and organic growth. ● A $27.9 million decrease in total interest expense, primarily due to: (i) a $21.9 million decrease in interest expense on interest- bearing checking, savings and non-brokered time deposits, primarily related to the effect of lower rates paid in response to the current level of the Federal Fund target rate that more than offset the effect of the $2.7 billion increase in average balance; (ii) a $5.0 million decrease in interest expense on brokered CDs, primarily related to the $216.0 million decrease in the average balance in related deposits; (iii) a $3.1 million decrease in interest expense on FHLB advances, primarily related to a $151.4 million decrease in the average balance of FHLB advances; and (iv) a $1.2 million decrease in interest expense related to the downward repricing of floating-rate junior subordinated debentures tied to the three-month LIBOR index. These variances were partially offset by a $3.3 million increase in interest expense on repurchase agreements primarily related to the upward repricing of $200 million repurchase agreements (flipper repos) for which its interest rate changed early in 2021 from variable rates tied to 3-month LIBOR to a fixed rate of 3.90%. ● A $11.3 million increase in interest income on residential mortgage loans, primarily related to a $157.7 million increase the average balance of this portfolio, primarily related to loans acquired in the BSPR acquisition. ● An $14.3 million increase in interest income on investment securities, driven by a $3.0 billion increase in the average balance, primarily U.S. agencies MBS and debt securities, partially offset by higher premium amortization expense related to higher prepayment rates of U.S. agencies MBS and lower reinvestment yields. Partially offset by: ● A $0.7 million decrease in interest income from interest-bearing cash balances, which consisted primarily of deposits maintained at the New York Fed. Balances at the New York Fed earned 0.13% during 2021, compared to 0.44% in 2020, a decrease attributable to declines in the Federal Funds target rate in the latter part of the first quarter of 2020. The adverse effect of lower rates was partially offset by a $753.9 million increase in the average balance of interest-bearing cash balances, primarily related to the strong growth in deposits. The net interest margin decreased by 42 basis points to 3.73% for 2021, compared to 4.15% for 2020. The decrease for the 2021 periods was primarily attributable to a higher proportion of lower-yielding assets, such as interest-bearing cash deposited at the New 63 York Fed and investment securities from continued strong deposit growth, to total interest-earning assets. The total average balance of interest-bearing cash balances and investment securities increased by $3.8 billion to 42% of total average interest-earning assets, compared to 30% for the same period of 2020. Provision for Credit Losses The provision for credit losses consists of provisions for credit losses on loans and finance leases, unfunded loan commitments, and held-to-maturity and available-for-sale debt securities. 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 decreased by $230.4 million to a net benefit of $61.7 million for the year ended December 31, 2021, compared to an expense of $168.7 million for 2020. The results for the year ended December 31, 2020 included a $37.5 million Day 1 provision for credit losses related to non-PCD loans acquired in conjunction with the BSPR acquisition. Meanwhile, the provision for credit losses for year 2020 do not include $28.7 million of reserves established at acquisition date for PCD loans acquired in conjunction with the BSPR acquisition. Unlike non-PCD loans, the initial ACL for PCD loans was established through an adjustment to the acquired loan balance and not through a charge to the provision for credit losses in the period in which the loans were acquired. The variances by major portfolio category are as follow: ● ● ● Provision for credit losses for the commercial and construction loans portfolio was a net benefit of $65.3 million for the year ended December 31, 2021, compared to an expense of $89.9 million for the year ended December 31, 2020. The net benefit recorded in 2021, reflects continued improvements in the long-term outlook of forecasted macroeconomic variables, primarily in the commercial real estate price index, and the overall decrease in the size of this portfolio in the Puerto Rico region. The significant reserve builds in the prior year were due to the deterioration in forecasted economic conditions due to the COVID-19 pandemic reflected across multiple sectors with higher increases in the ACL made for loans in the hospitality, office and retail real estate industries. The expense for the year 2020 included a $13.8 million Day 1 provision recorded for non-PCD commercial and construction loans acquired in conjunction with the BSPR acquisition. Provision for credit losses for the consumer loan and finance lease portfolio was $20.6 million for the year ended December 31, 2021, compared to $56.4 million for the year ended December 31, 2020. The charges to the provision in 2021 reflect the effect of increases in cumulative historical charge-off levels related to the credit card and personal loan portfolios, as well as charges to the provision for auto loans and finance leases that, among other things, accounted for the overall increase in the size of these portfolios. The significant reserve builds in the prior year were due to the deterioration of the macroeconomic outlook as a result of the COVID-19 pandemic primarily reflected in auto loans, finance leases, and credit card loans, as well as a $10.1 million Day 1 provision recorded for non-PCD consumer loans acquired in conjunction with the BSPR acquisition. Provision for credit losses for the residential mortgage loan portfolio was a net benefit of $17.0 million for the year ended December 31, 2021, compared to an expense of $22.4 million for the year ended December 31, 2020. The net benefit recorded in 2021 reflects the effect of both continued improvements in the long-term outlook of macroeconomic variables, such as regional unemployment rates and Home Price Index, and the overall portfolio decrease. The significant reserve builds in the prior year were due to the deterioration of the macroeconomic outlook as a result of the COVID-19 pandemic and a $13.6 million Day 1 provision recorded for non-PCD residential mortgage loans acquired in conjunction with the BSPR acquisition. See “Risk Management – Credit Risk Management” below for an analysis of the ACL, non-performing assets, and related information, and see “Financial Condition and Operating Data Analysis – Loan Portfolio and Risk Management — Credit Risk Management” below for additional information concerning the Corporation’s loan portfolio exposure in the geographic areas where the Corporation does business. 64 Provision for credit losses for unfunded loan commitments The provision for credit losses for unfunded commercial and construction loan commitments and standby letters of credit was a net benefit of $3.6 million for the year ended December 31, 2021, compared to a charge of $1.2 million recorded for the year 2020. The net benefit recorded in 2021 periods was mainly related to continued improvements in forecasted macroeconomic variables. The provision recorded in 2020 primarily consisted of a $1.3 million charge recorded in connection with unfunded loan commitments assumed in the BSPR acquisition. Provision for credit losses for held-to-maturity and available-for-sale debt securities As of December 31, 2021, the held-to-maturity debt securities portfolio consisted of Puerto Rico municipal bonds. The provision for credit losses for held-to-maturity securities was a net benefit of $0.2 million for the year ended December 31, 2021, compared to a benefit of $0.6 million for year ended December 31, 2020. The net benefit recorded in 2021 was mainly related to improvements in forecasted macroeconomic variables and the repayment of certain bonds, partially offset by changes in some issuers’ financial metrics based on their most recent financial statements. The net benefit recorded in 2020 was primarily related to the repayment of certain bonds. In the third quarter of 2020, the Corporation recorded a $1.3 million initial reserve for PCD debt securities acquired in conjunction with the BSPR acquisition. Similar to PCD loans, such initial reserve for PCD debt securities acquired in conjunction with the BSPR acquisition was not established through a charge to the provision for credit losses, but rather through an initial adjustment to the debt securities’ amortized cost basis. Meanwhile, the ACL for available-for-sale securities of $1.1 million as of December 31, 2021 remained relatively unchanged since the beginning of the year. The Corporation recorded charges to the provision for credit losses for available-for-sale securities of $1.6 million during 2020. These charges were in connection with private label MBS and a residential mortgage pass-through MBS issued by the PRHFA and resulted from a decline in the present value of expected cash flows based upon the performance of the underlying mortgages and the effect of a deterioration in forecasted economic conditions due to the COVID-19 pandemic. 65 Non-Interest Income The following table presents the composition of non-interest income for the indicated periods: (In thousands) Service charges on deposit accounts Mortgage banking activities Insurance income Other operating income Non-interest income before net gain on investment securities and gain on early extinguishment of debt Net gain on sale of investment securities Gain on early extinguishment of debt Total Year ended December 31, 2021 2020 $ $ 35,284 $ 24,998 11,945 48,937 121,164 - - 121,164 $ 24,612 22,124 9,364 41,834 97,934 13,198 94 111,226 Non-interest income primarily consists of income from service charges on deposit accounts, commissions derived from various banking and insurance activities, gains and losses on mortgage banking activities, interchange and other fees related to debit and credit cards, and net gains and losses on investment securities. Service charges on deposit accounts include monthly fees, overdraft fees, and other fees on deposit accounts, as well as corporate cash management fees. Income from mortgage banking activities includes gains on sales and securitizations of loans, revenues earned for administering residential mortgage loans originated by the Corporation and subsequently sold with servicing retained, and unrealized gains and losses on forward contracts used to hedge the Corporation’s securitization pipeline. In addition, lower-of-cost-or-market valuation adjustments to the Corporation’s residential mortgage loans held-for-sale portfolio and servicing rights portfolio, if any, are recorded as part of mortgage banking activities. Insurance income consists mainly of insurance commissions earned by the Corporation’s subsidiary, FirstBank Insurance Agency, Inc. The other operating income category is composed of miscellaneous fees such as debit, credit card and POS interchange fees, as well as contractual shared revenues from merchant contracts. The net gain (loss) on investment securities reflects gains or losses as a result of sales that are consistent with the Corporation’s investment policies. The gain on early extinguishment of debt is related to the repurchase in 2020 of $0.4 million in TRuPs of FBP Statutory Trust I. The Corporation repurchased TRuPs resulted in a commensurate reduction in the related amount of the floating rate junior subordinated debentures (“Subordinated Debt”). The Corporation’s purchase price equated to 75% of the $0.4 million par value. The 25% discount resulted in a gain of $0.1 million which is reflected in the consolidated statements of income as a Gain on early extinguishment of debt. As of December 31, 2021, the Corporation still had Subordinated Debt outstanding in the aggregate amount of $183.8 million. 66 Non-interest income amounted to $121.2 million for the year ended December 31, 2021, compared to $111 .2 million for 2020. The $10.0 million increase in non-interest income was primarily due to: ● A $10.7 million increase in service charges on deposits accounts, driven by the income generated by the acquired BSPR operations, primarily reflecting an increase in the number of cash management transactions of commercial clients, and an increase in the monthly service fee charged on certain checking and savings products. ● A $2.9 million increase in revenues from mortgage banking activities, driven by a $2.9 million incre ase in service fee income and a $1.8 million increase in realized gain on sales of residential mortgage loans in the secondary market, partially offset by a $1.1 million decrease related to the net change in mark-to-market gains and losses from both interest rate lock commitments and To-Be-Announced (“TBA”) MBS forward contracts and a $0.9 million increase in net amortization and impairment charges related to mortgage servicing rights. Total loans sold in the secondary market to U.S. GSEs during 2021 amounted to $519.6 million, with a related net gain of $20.0 million (net of realized losses of $0.9 million on TBA hedges, compared to total loans sold in the secondary market in 2020 of $476.4 million, with a related net gain of $18.1 million (net of realized losses of $2.0 million on TBA hedges). ● A $7.1 million increase in Other operating income in the table above, primarily reflecting: (i) a $10.9 million increase in transactional fee income from credit and debit cards, ATMs, POS, and merchant-related activity reflecting both the effect of the BSPR acquisition as well as increased transaction volumes due to the impact of the COVID-19 pandemic on economic activity in 2020; (ii) a $1.0 million increase in fees and commissions from other banking services such as wire transfers, insurance referrals, and official checks; and (iii) a $0.7 million increase in non-deferrable loan fees, such as unused commitment loan fees. These variances were partially offset by the effect of the $5.0 million benefit recorded in the second quarter of 2020 resulting from the final settlement of the Corporation’s business interruption insurance claim associated with lost profits caused by Hurricanes Irma and Maria in 2017. ● A $2.6 million increase in insurance income, driven by higher property insurance commissions, impacted by a higher volume of residential mortgage loan originations during 2021, when compared to 2020, and higher sells of annuities and accidental death policies. The above-described increases were partially offset by the effect in 2020 of a $13.2 million gain on sales of investment securities consisting of: (i) a $13.0 million gain on sales of approximately $392.2 million on available-for-sale U.S. agencies MBS; and (ii) a $0.2 million gain on sales of approximately $803.3 million of available -for-sale U.S. Treasury notes acquired in the BSPR acquisition. 67 Non-Interest Expenses The following table presents the components of non-interest expenses for the indicated periods: (In thousands) Employees' compensation and benefits Occupancy and equipment FDIC deposit insurance premium Taxes, other than income taxes Professional fees: Collections, appraisals and other credit-related fees Outsourced technology services Other professional fees Credit and debit card processing expenses Business promotion Communications Net (gain) loss on OREO and OREO operations expenses Merger and restructuring costs Other Total Year ended December 31, 2021 2020 $ $ 200,457 $ 93,253 6,544 22,151 4,715 41,106 14,135 22,169 15,359 9,387 (2,160) 26,435 35,423 488,974 $ 177,073 74,633 6,488 17,762 5,563 33,974 13,096 19,144 12,145 8,437 3,598 26,509 25,818 424,240 Non-interest expenses for the year ended December 31, 2021 were $489.0 million, compared to $424.2 million for the year ended December 31, 2020. Included in non-interest expenses are the following Special Items: ● Merger and restructuring costs associated with the acquisition of BSPR of $26.4 million in 2021, compared to $26.5 million for 2020. These costs in 2021 primarily included charges related to voluntary and involuntary employee separation programs implemented in the Puerto Rico region, as well as consulting fees, expenses related to system conversions, and other integration related efforts, such as service contracts cancellation penalties, accelerated depreciation charges related to planned closures, and consolidation of branches in accordance with the Corporation’s integration and restructuring plan. ● COVID-19 pandemic-related expenses of $3.0 million in 2021 , compared to $5.4 million in 2020. In 2021 these costs primarily consisted of: (i) expenses of $2.6 million associated with cleaning and security protocols, included as part of Occupancy and equipment costs in the table above; (ii) $0.3 million in sales and use taxes, included as part of Taxes, other than income taxes in the table above; and (iii) expenses of $0.1 million in connection with employee-related expenses such as expenses for the administration and referrals of COVID-19 tests, recorded as part of Employees’ compensation and benefits in the table above. For the year ended December 31, 2020, these costs primarily consisted of: (i) expenses of $1.8 million in connection with bonuses paid to branch personnel and other essential employees for working during the pandemic, as well as employee-related expenses such as expenses for the administration of COVID-19 tests, and purchases of personal protective materials, recorded as part of Employees’ compensation and benefits in the table above ; (ii) expenses of $2.7 million associated with cleaning and security protocols, included as part of Occupancy and equipment costs in the table above; (iii) expenses of $0.6 million related to communications established with customers, included as part of Business promotion expenses in the table above; (iv) $0.3 million in sales and use taxes, included as part of Taxes, other than income taxes in the table above; and (v) $0.1 million in other miscellaneous expenses, included as part of Other expenses in the table above. ● Benefit from hurricane-related expenses insurance recoveries recorded as contra-expense in 2020 amounting to $1.2 million, primarily related to repairs and maintenance expenses, included as a contra expense of Occupancy and equipment costs in the table above. On a non-GAAP basis, adjusted non-interest expenses, excluding the effect of the Special Items mentioned above, amounted to $459.6 million for 2021, compared to $393.5 million for 2020. The $66.1 million increase in adjusted non-interest expenses primarily reflects the effect of operations, personnel, and branches acquired from BSPR. Some of the most significant variances in adjusted non- interest expenses follows: ● A $25.1 million increase in adjusted employees’ compensation and benefit expenses, primarily driven by incremental expenses related to personnel retained from the acquisition of BSPR. 68 ● A $17.9 million increase in adjusted occupancy and equipment expenses, primarily related to incremental expenses associated with the BSPR acquired operations including, among others, depreciation, software maintenance, electricity, and rental expenses. ● A $7.2 million increase in adjusted professional service fees, including an increase of approximately $7.0 million related to temporary technology processing costs of the acquired BSPR operations up to the completion of system conversions early in the third quarter of 2021, and a $0.7 million increase in consulting and legal fees. These variances were, partially offset by a $0.5 million decrease in attorneys’ collection fees, appraisals, and other credit-related fees. ● A $ 9.6 million increase in adjusted Other non-interest expense, in the table above, including a $5.5 million increase in the amortization of intangible assets, primarily associated with the intangibles assets recognized in connection with the BSPR acquisition, and a $2.8 million increase in insurance and supervisory expenses, primarily associated with higher costs on insurance policies. ● A $4.4 million increase in adjusted taxes, other than income taxes expenses, primarily related to incremental municipal license taxes and property taxes of the acquired operations. ● A $3.6 million increase in adjusted business promotion expenses, primarily related to a $2.4 million increase in advertising, marketing, and public relations activities, and a $1.1 million increase in the cost of the credit card rewards program. ● A $3.0 million increase in credit and debit card processing expenses, primarily related to incremental expenses of the acquired operations and higher transaction volumes due to the effect of the COVID-19 pandemic on economic activity last year. ● A $1.0 million increase in communication expenses, primarily related to incremental expenses on telephone, data, and postage related to the acquired operations. The above-described increases were partially offset by a $5.8 million decrease in the net loss on OREO operations, primarily due to higher realized gains on sales of residential and commercial OREO properties. 69 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, First BanCorp. 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, as amended (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 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 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 (“IBE”) unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest income and gains on sales is 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. The CARES Act of 2020 includes several provisions to stimulate the U.S. economy in the midst of the COVID-19 pandemic. The CARES Act of 2020 includes tax provisions that temporarily modified the taxable income limitations for NOL usage to offset future taxable income, NOL carryback provisions and other related income and non-income based tax laws. Due to the fact that the COVID- 19 pandemic is still ongoing, the federal government extended some of the benefits and continued the economic stimulus from the CARES Act of 2020. The Corporation has evaluated such provisions and determined that the impact of the CARES Act on the income tax provision and deferred tax assets as of December 31, 2021 was not significant. For the year ended December 31, 2021, the Corporation recorded an income tax expense of $146.8 million compared to $14.1 million for 2020. The variances were primarily related to higher pre-tax income driven by credit losses reserve releases in the year ended December 31, 2021, compared to significant charges to the provision recorded during 2020, and a higher level of taxable income. The Corporation’s effective tax rate for 2021, excluding entities from which a tax benefit cannot be recognized and discrete items, increased to 33.9%, compared to 17% for 2020. The income tax expense reported in 2020 was net of the effect of an $8.0 million partial reversal of the Corporation’s deferred tax asset valuation allowance recorded after consideration of significant positive evidence on the utilization of NOLs due to the acquisition of BSPR. Total deferred tax assets of FirstBank, the banking subsidiary, amounted to $208.4 million as of December 31, 2021, net of a valuation allowance of $69.7 million, compared to total deferred tax asset of $329.1 million, net of a valuation allowance of $59.9 million, as of December 31, 2020. The decrease in deferred tax assets was mainly driven by the aforementioned credit losses reserve releases and the usage of net operating losses. The increase in the valuation allowance was primarily related to the change in the market value of available-for-sale securities. The Corporation maintains a full valuation allowance for its deferred tax assets associated with capital losses carry forward. Therefore, changes in the unrealized losses of available-for-sale securities result in a change in the deferred tax asset and an equal change in the valuation allowance without having an effect on earnings. After completion of the deferred tax asset valuation allowance analysis for the fourth quarter of 2021 management concluded that, as of December 31, 2021, it is more likely than not that FirstBank, will generate sufficient taxable income to realize $66.3 million of its deferred tax assets related to NOLs within the applicable carry-forward periods. The positive evidence considered by management in arriving at its conclusion includes factors such as: (i) FirstBank’s three-year cumulative income position; (ii) sustained periods of profitability; (iii) management’s proven ability to forecast future income accurately and execute tax strategies; (iv) forecasts of future profitability under several potential scenarios that support the partial utilization of NOLs prior to their expiration from 2022 through 2024; (v) and the utilization of NOLs over the past three-years. The negative evidence considered by management includes uncertainties around the state of the Puerto Rico economy, including considerations on the impact of the pandemic recovery funds together with the ultimate sustainability of the latest fiscal plan certified by the PROMESA oversight board. 70 Management’s estimate of future taxable income is based on internal projections that consider historical performance, multiple internal scenarios and assumptions, as well as external data that management believes is reasonable. If events are identified that affect the Corporation’s ability to utilize its deferred tax assets, the analysis will be updated to determine if any adjustments to the valuation allowance are required. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the remaining valuation allowance may need to be increased. Such an increase could have a material adverse effect on the Corporation’s financial condition and results of operations. Conversely, a higher than projected proportion of taxable income to exempt income could lead to a higher usage of available NOLs and a lower amount of disallowed NOLs from projected levels of tax-exempt income, per the 2011 PR code, which in turn could result in further releases to the deferred tax valuation allowance; any such decreases could have a material positive effect on the Corporation’s financial condition and results of operations. As of December 31, 2021, approxima tely $177.9 million of the deferred tax assets of the Corporation are attributable to temporary differences or tax credit carryforwards that have no expiration date, compared to $210.7 million in the year ended December 31, 2020. The valuation allowance attributable to FirstBank’s deferred tax assets of $69.7 million as of December 31, 2021 is related to the estimated NOL disallowance attributable to projected levels of tax-exempt income, NOLs attributable to the Virgin Islands jurisdiction, and capital losses. The remaining balance of $37.6 million of the Corporation’s deferred tax asset valuation allowance non-attributable to FirstBank is mainly related to NOLs and capital losses at the holding company level. The Corporation will continue to provide a valuation allowance against its deferred tax assets in each applicable tax jurisdiction until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Corporation determines that it is more likely than not the deferred tax assets will be realized. The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance will be evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize these deferred tax assets. The Corporation has U.S. and USVI sourced NOL carryforwards. Section 382 of the U.S. Internal Revenue Code (“Section 382”) limits the ability to utilize U.S. and USVI NOLs for income tax purposes in such jurisdictions following an event that is considered to be an “ownership change.” Generally, an “ownership change” occurs when certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage over a three-year testing period. Upon the occurrence of a Section 382 ownership change, the use of NOLs attributable to the period prior to the ownership change is subject to limitations and only a portion of the U.S. and USVI NOLs may be used by the Corporation to offset its annual U.S. and USVI taxable income, if any. In 2017, the Corporation completed a formal ownership change analysis within the meaning of 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 than 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 is 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 2021, 2020 and 2019, the Corporation incurred an income tax expense of approximately $6.8 million, $4.9 million, and $4.5 million, respectively, related to its U.S. operations. The limitation did not impact the USVI operations in 2021, 2020, and 2019. 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 benefits in income tax expense. As of December 31, 2021, 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; 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 2017 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2016 remain open to examination. 71 OPERATING SEGMENTS Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer of the Corporation, 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. Corporation had six reportable segments: Commercial and Corporate Banking; Consumer (Retail) Banking; Mortgage 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. 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. For additional information regarding First BanCorp.’s reportable segments, please refer to Note 36 - Segment Information, to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. As of December 31, 2021, the Other factors, such as the The accounting policies of the segments are the same as those described in Note 1 - Nature of Business and Summary of Significant Accounting Policies, to the audited consolidated financial statements included in Item 8 of this 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. For the years ended December 31, 2021 and 2020, other operating expenses not allocated to a particular segment amounted to $192.2 million and $165.4 million, respectively. 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. The Treasury and Investments segment lends funds to the Consumer (Retail) Banking, Mortgage Banking, Commercial and Corporate Banking and 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 Corporation allocates the interest rates charged or credited by the Treasury and Investment and the Consumer (Retail) Banking segments 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. Commercial and Corporate Banking 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. FirstBank has developed expertise in a wide variety of industries. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, as well as other products, such as cash management and business management services. A substantial portion of the commercial and corporate banking portfolio is secured by the underlying real estate collateral and the personal guarantees of the borrowers. Since commercial loans involve greater credit risk than a typical residential mortgage loan because they are larger in size and more risk is concentrated in a single borrower, the Corporation has and maintains a credit risk management infrastructure designed to mitigate potential losses associated with commercial lending, including underwriting and loan review functions, sales of loan participations, and continuous monitoring of concentrations within portfolios. The highlights of the Commercial and Corporate Banking segment’s financial results for the years ended December 31, 2021 and 2020 include the following: ● Segment income before taxes for the year ended December 31, 2021 increased to $239.3 million, compared to $45.0 million for 2020, for the reasons discussed below. ● Net interest income for the year ended December 31, 2021 was $191.9 million, compared to $135.6 million for 2020. The increase in net interest income was primarily attributable to the increase in the average balance of the loan portfolio, driven by the effect of commercial loans acquired in conjunction with the BSPR acquisition, and accelerated PPP loans fees recognized upon receipt of forgiveness payments from the SBA in 2021. ● For 2021, the provision for credit losses was a net benefit of $67.5 million net benefit, compared to a net charge of $74.6 million for 2020. The net benefit recorded in 2021 reflects continued improvements in the long-term outlook of forecasted macroeconomic variables, primarily in the commercial real estate price index, and the overall decrease in the size of this portfolio in the Puerto Rico region. The charge to the provision in 2020 included a $13.8 million charge related to the initial reserves required for non-PCD commercial loans acquired in conjunction with the BSPR acquisition and higher reserve builds reflecting the effect of the COVID-19 pandemic on forecasted macroeconomic variables used in the Corporation’s CECL model. 72 ● Total non-interest income for the year ended December 31, 2021 amounted to $16.0 million compared to $12.6 million for 2020. The increase was mainly related to a $4.2 million increase in service charges on deposits, primarily due to cash management fee income from corporate customers, partially offset by the effect in 2020 of fee income of $0.5 million recorded in connection with participation interests sold on Main Street loans originated in the Puerto Rico region, and a benefit of approxim ately $0.8 million related to the portion of the business interruption insurance recoveries allocated to this operating segment. ● Direct non-interest expenses for the year ended December 31, 2021 were $36.2 million, compared to $28.6 million for 2020. The increase primarily reflects the effect of incremental expenses related to the acquired commercial operations of BSPR, primarily employees’ compensation and professional service fees related to this operating segment. Consumer (Retail) Banking The Consumer (Retail) Banking segment consists of the Corporation’s consumer lending and deposit-taking activities conducted mainly through FirstBank’s branch network and loan centers in Puerto Rico. Loans to consumers include auto, boat, and personal loans, credit card loans, and lines of credit. Deposit products include interest-bearing and non-interest bearing checking and savings accounts, individual retirement accounts (“IRAs”), and retail CDs. Retail deposits gathered through each branch of FirstBank’s retail network serve as one of the funding sources for the lending and investment activities. Consumer lending historically has been mainly driven by auto loan originations. The Corporation follows a strategy of seeking to provide outstanding service to selected auto dealers that provide the channel for the bulk of the Corporation’s auto loan originations. Personal loans, credit cards, and, to a lesser extent, boat loans also contribute to interest income generated on consumer lending. Management plans to continue to be active in the consumer loan market, applying the Corporation’s strict underwriting standards. Other activities included in this segment are finance leases and insurance activities in Puerto Rico. The highlights of the Consumer (Retail) Banking segment’s financial results for the years ended December 31, 2021 and 2020 include the following: ● Segment income before taxes for the year ended December 31, 2021 increased to $165.8 million, compared to $86.4 million for 2020, for the reasons discussed below. ● Net interest income for the year ended December 31, 2021 was $281.7 million, compared to $220.7 million for 2020. The increase was mainly due to an increase in the average volume of consumer loans in Puerto Rico that reflects the effect of both consumer loans acquired in conjunction with the BSPR acquisition and organic growth, as well as higher income from funds loaned to other business segments due to the growth in non-brokered deposits, mainly demand deposits, that, among other things, served as a funding source for lending activities of other operating segments. The provision for credit losses for the year ended December 31, 2021 decreased by $33.8 million to $20.3 million, compared to $54.1 million for the year ended December 31, 2020. The decrease reflects the effect of significant reserve builds in 2020 due to the deterioration of the macroeconomic outlook as a result of the COVID-19 pandemic primarily reflected in auto loans, finance leases, and credit card loans, as well as the effect in 2020 of the $10.1 million Day 1 provision recorded for non-PCD consumer loans acquired in conjunction with the BSPR acquisition. ● ● Non-interest income for the year ended December 31, 2021 was $69.8 million, compared to $51.0 million for 2020. The increase was primarily related to a $6.4 million increase in service charges on deposits primarily related to the income generated by the acquired BSPR operations, as well as an increase in the monthly service fee charged on certain checking and savings products. In addition, transaction fee income from credit and debit cards and merchant-related activities increased by $9.9 million, and insurance commission income in Puerto Rico increased by $2.4 million, primarily related to an increased customer activity as compared to year 2020 that was adversely affected by pandemic stay-at-home orders and related interruptions. These variances were partially offset by the effect in 2020 of a benefit of approximately $2.4 million related to the portion of the business interruption insurance recoveries allocated to this operating segment. ● Direct non-interest expenses for the year ended December 31, 2021 were $165.4 million, compared to $131.1 million for 2020. The increase was primarily due to incremental expenses related to the acquired operations of BSPR, primarily employees’ compensation, occupancy and equipment, temporary technology processing costs, credit and debit cards processing fees, municipal taxes and core deposit intangible amortization related to this operating segment. 73 Mortgage Banking The Mortgage Banking segment conducts its operations mainly through FirstBank. The segment’s operations consist of the origination, sale, and servicing of a variety of residential mortgage loan products. Originations are sourced through different channels, such as FirstBank branches and purchases from mortgage bankers, and in association with new project developers. banking segment focuses on originating residential real estate loans, some of which conform to the Federal Housing Administration (the “FHA”), the Veterans Administration (the “ VA”), and U.S. Department of Agriculture Rural Development (“RD”) standards. Loans originated that meet the FHA’s standards qualify for the FHA’s insurance program whereas loans that meet the standards of the VA or the U.S. Department of Agriculture Rural Development (“RD”) are guaranteed by their respective federal agencies. The mortgage Mortgage loans that do not qualify under the FHA, VA, or RD programs are referred to as conventional loans. Conventional real estate loans can be conforming or non-conforming. Conforming loans are residential real estate loans that meet the standards for sale under the U.S. Federal National Mortgage Association (“FNMA”) and the U.S. Federal Home Loan Mortgage Corporation (“FHLMC”) programs. Loans that do not meet FNMA or FHLMC standards are referred to as non-conforming residential real estate loans. The Corporation’s strategy is to penetrate markets by providing customers with a variety of high quality mortgage products to serve their financial needs through a faster and simpler process and at competitive prices. The Mortgage Banking segment also acquires and sells mortgages in the secondary markets. Residential real estate conforming loans are sold to investors like FNMA and FHLMC. The Corporation has commitment authority to issue GNMA MBS. The highlights of the Mortgage Banking segment’s financial results for the years ended December 31, 2021 and 2020 include the following: ● Segment income before taxes for the year ended December 31, 2021 increased to $115.8 million, compared to $42.5 million for 2020, for the reasons discussed below. ● Net interest income for the year ended December 31, 2021 was $104.6 million, compared to $76.0 million for 2020. The increase in net interest income was mainly due to both the increase in the average balance of residential mortgage loans in the Puerto Rico region driven by residential mortgage loans acquired in conjunction with the BSPR acquisition, and a decrease in the cost of funds borrowed from other segments resulting from overall lower short-term market interest rates as compared to 2020 overall levels. ● The provision for credit losses for 2021 was a net benefit of $16.0 million, compared to an expense of $22.5 million for 2020. The net benefit recorded in 2021 reflects the effect of reserve releases associated with both continued improvements in the long-term outlook of macroeconomic variables, such as regional unemployment rates and Home Price Index, and the overall portfolio decrease. The significant reserve builds in the prior year were due to the deterioration of the macroeconomic outlook as a result of the COVID-19 pandemic and a $13.6 million Day 1 provision recorded for non-PCD residential mortgage loans acquired in conjunction with the BSPR acquisition. ● Non-interest income for the year ended December 31, 2021 was $24.3 million, compared to $22.1 million for 2020. The increase was mainly due to a $1.5 million increase in service fee income and a $1.9 million increase in realized gains from sales of residential mortgage loans. These variances were partially offset by the effect in 2020 of a benefit of $0.7 million related to the portion of the business interruption insurance recoveries allocated to this operating segment. ● Direct non-interest expenses for the year ended December 31, 2021 were $29.1 million, compared to $33.1 million for 2020. The decrease was mainly related to a $5.4 million decrease in losses on OREO operations, primarily related to higher gains realized on the sale of residential OREO properties, partially offset by the effect of incremental expenses related to the acquired operations of BSPR, primarily employees’ compensation related to this operating segment. Treasury and Investments The Treasury and Investments segment is responsible for the Corporation’s treasury and investment management functions. The treasury function, which includes funding and liquidity management, lends funds to the Commercial and Corporate Banking segment, the Mortgage Banking segment, the Consumer (Retail) Banking segment, and the United States operations segment to finance their respective lending activities and borrows from those segments. The Treasury function also obtains funds through brokered deposits, advances from the FHLB, and repurchase agreements involving investment securities, among other possible funding sources. The investment function is intended to implement a leverage strategy for the purposes of liquidity management, interest rate risk management and earnings enhancement. The interest rates charged or credited by Treasury and Investments are based on market rates. 74 The highlights of the Treasury and Investments segment’s financial results for the years ended December 31, 2021 and 2020 include the following: ● Segment income before taxes for the year ended December 31, 2021 decreased to $55.6 million, compared to $95.4 million for 2020, for the reasons discussed below. ● Net interest income for the year ended December 31, 2021 was $59. 3 million, compared to net interest income of $87.9 million for 2020. The decrease was mainly related to lower income from funds loaned to other business segments due to a higher proportion of the lending activities of other operating segments being funded by the growth in demand deposits of the Consumer (Retail) Banking operating segment, partially offset by the overall increase in the average balance of U.S. agencies MBS and debt securities. ● Non-interest income for the year ended December 31, 2021 amounted to $0.2 million, compared to non-interest income of $13.7 million for 2020. The variance primarily reflects the effect of the $13.2 million gain realized on sales of available-for-sale investment securities in 2020. ● Direct non-interest expenses for 2021 were $4.1 million, compared to $3.4 million for 2020. The increase was primarily reflected in employees’ compensation expense and professional service fees. United States Operations The United States Operations segment consists of all banking activities conducted by FirstBank on the U.S. mainland. FirstBank provides a wide range of banking services to individual and corporate customers primarily in southern Florida through 11 banking branches. The United States Operations segment offers an array of both consumer and commercial banking products, and services. Consumer banking products include checking, savings and money market accounts, retail CDs, internet banking services, residential mortgages, and home equity loans and lines of credit. Retail deposits, as well as FHLB advances and brokered CDs, allocated to this operation serve as funding sources for its lending activities. The commercial banking services include checking, savings and money market accounts, retail CDs, internet banking services, cash management services, remote data capture, and automated clearing house, or ACH, transactions. Loan products include the traditional commercial and industrial (“C&I”) and commercial real estate products, such as lines of credit, term loans, and construction loans. The highlights of the United States operations segment’s financial results for the years ended December 31, 2021 and 2020, include the following: ● Segment income before taxes for the year ended December 31, 2021 increased to $37.0 million, compared to $12.3 million for 2020, for the reasons discussed below. ● Net interest income for the year ended December 31, 2021 was $66.0 million, compared to $54.0 million for 2020. The increase was mainly due to a decrease in interest expense associated with lower average volumes of FHLB advances and brokered CDs allocated to this operating segment, as well as accelerated PPP loan fees recognized upon receipt of forgiveness payments from SBA in 2021. These variances more than offset the effect of the downward repricing of variable-rate commercial and construction loans due to lower prevailing market interest rates during 2021. ● ● For 2021, the provision for credit losses was a net benefit of $1.0 million, compared to a net charge of $12.6 million for 2020. The net benefit recorded in 2021, reflects continued improvements in the long-term outlook of forecasted macroeconomic variables, primarily in the commercial real estate price index, and the overall decrease in the size of the residential portfolio in this operating segment. The significant reserves builds in the prior year reflects the effect of the COVID-19 pandemic on forecasted macroeconomic variables used in the Corporation’s CECL model. Total non -interest income for the year ended December 31, 2021 amounted to $4.0 million, compared to $4.6 million for 2020. The decrease was primarily related to the effect in 2020 of fee income of $1.0 million recorded in connection with the sale of the 95% participation interests in Main Street loans originated in 2020, partially offset by a $0.3 million increase in service fee income. ● Direct non-interest expenses for the year ended December 31, 2021 were $33.9 million, compared to $33.8 million for 2020. The increase was mainly due to a decrease in deferred loan origination costs, including the effect of a lower volume of SBA PPP loans originated in 2021, partially offset by a decrease in professional service fees and in the FDIC insurance premium expense allocated to this segment. 75 Virgin Islands Operations The Virgin Islands Operations segment consists of all banking activities conducted by FirstBank in the USVI and BVI, including consumer and commercial banking services, with a total of eight banking branches currently serving the islands in the USVI of St. Thomas, St. Croix, and St. John, and the island of Tortola in the BVI. The Virgin Islands Operations segment is driven by its consumer, commercial lending, and deposit -taking activities. Loans to consumers include auto and boat loans, lines of credit, and personal and residential mortgage loans. Deposit products include interest-bearing and non-interest-bearing checking and savings accounts, IRAs, and retail CDs. Retail deposits gathered through each branch serve as the funding sources for its own lending activities. The highlights of the Virgin Islands operations’ financial results for the years ended December 31, 2021 and 2020 include the following: ● Segment income before taxes for the year ended December 31, 2021 increased to $6.5 million, compared to $0.2 million for 2020, for the reasons discussed below. ● Net interest income for the year ended December 31, 2021 was $26.4 million, compared to $26.1 million for 2020. The increase in net interest income was primarily related to the decrease in the interest rate paid on interest-bearing deposits attributed to lower market interest rates, and accelerated PPP loan fees recognized upon receipt of forgiveness payments from SBA in 2021, partially offset by a decrease in the average balance of residential mortgage loans in this operating segment. ● The Corporation recognized a provision for credit losses net benefit of $1.3 million for the year ended December 31, 2021, compared to a provision expense of $4.4 million for 2020. The variance was primarily related to reserve builds in 2020 in connection with the effect of the COVID-19 pandemic on macroeconomic variables employed in the Corporation’s CECL model, primarily for the commercial portfolios. ● Non-interest income for the year ended December 31, 2021 was $6.9 million, compared to $7.3 million for 2020. The decrease was mainly related to the effect in 2020 of a $1.0 million benefit recorded in connection with hurricane-related insurance recoveries, primarily due to the portion of the business interruption insurance recoveries allocated to this operating segment. This variance was partially offset by a $0.4 million increase in fee-based income from credit and debit cards as well as merchant-related activities, and a $0.1 million increase in service charges on deposits, both affected in 2020 by disruptions in business activities caused by the COVID-19 pandemic. ● Direct non -interest expenses for the year ended December 31, 2021 were $28.1 million compared to $28.8 million for 2020. The decrease was mainly due to a reduction of $1.1 million in net OREO losses, primarily related to higher realized gains on sales of residential OREO properties, and a decrease of $0.8 million in employees’ compensation and benefits. These variances were partially offset by accelerated depreciation charges related to the closing of branches in the Virgin Islands region and an increase in professional service fees. 76 FINANCIAL CONDITION AND OPERATING DATA ANALYSIS Financial Condition The following table presents an average balance sheet of the Corporation for the following years: (In thousands) ASSETS Interest-earning assets: Money market and other short-term investments U.S. and Puerto Rico government obligations MBS FHLB stock Other investments Total investments Residential mortgage loans Construction loans Commercial loans Finance leases Consumer loans Total loans Total interest-earning assets Total non-interest-earning assets (1) Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing checking accounts Savings accounts Retail CDs Brokered CDs Interest-bearing deposits Loans payable Other borrowed funds FHLB advances Total interest-bearing liabilities Total non-interest-bearing liabilities (2) Total liabilities $ $ $ Stockholders' equity: Preferred stock Common stockholders' equity Stockholders' equity Total liabilities and stockholders' equity _________ (1) Includes, among other things, the ACL on loans and finance leases and debt securities. (2) Includes, among other things, non-interest-bearing deposits. $ 2021 December 31, 2020 2019 $ $ $ 2,012,617 2,065,522 4,064,343 28,208 10,254 8,180,944 3,277,087 181,470 5,228,150 518,757 2,207,685 11,413,149 19,594,093 708,940 20,303,033 3,667,523 4,494,757 2,636,303 141,959 10,940,542 - 484,244 354,055 11,778,841 6,285,942 18,064,783 $ $ $ 1,258,683 878,537 2,236,262 32,160 6,238 4,411,880 3,119,400 168,967 4,387,419 440,796 1,952,120 10,068,702 14,480,582 752,064 15,232,646 2,197,980 3,190,743 2,741,388 357,965 8,488,076 8,415 475,492 505,478 9,477,461 3,525,101 13,002,562 649,065 632,959 1,382,589 40,661 3,403 2,708,677 3,043,672 97,605 3,731,499 370,566 1,738,745 8,982,087 11,690,764 761,370 12,452,134 1,320,458 2,377,508 2,540,289 500,766 6,739,021 - 294,798 715,433 7,749,252 2,542,708 10,291,960 32,938 2,205,312 2,238,250 20,303,033 $ 36,104 2,193,980 2,230,084 15,232,646 $ 36,104 2,124,070 2,160,174 12,452,134 77 The Corporation’s total average assets were $20.3 billion for the year ended December 31, 2021, compared to $15.2 billion for the year ended December 31, 2020, an increase of $5.1 billion. The variance primarily reflects: (i) an increase of $3.8 billion in the average balance of investment securities and interest-bearing cash balances, reflecting both increased purchases of investment securities and growth in cash balances supported by strong deposit growth during 2021; and (ii) a $1.3 billion increase in the average balance of total loans, reflecting the effect of loans acquired in conjunction with the BSPR acquisition, the volume of SBA PPP loans originated in 2020 and 2021, and organic growth of the Corporation’s consumer loan portfolio. The Corporation’s total average liabilities were $18.1 billion as of December 31, 2021, an increase of $5.1 billion compared to December 31, 2020. The increase was mainly related to a $2.7 billion increase in the average balance of non-brokered interest-bearing deposits and a $2.8 million increase in the average balance of non-interest-bearing deposits, primarily reflecting the effect of deposits assumed in conjunction with the BSPR acquisition, as well as the effect of government relief programs on the liquidity levels of our customers, including government entities. The aforementioned variances were partially offset by a $216.0 million decrease in the average balance of brokered CDs and a $151.4 million decrease in the average balance of FHLB advances. Assets The Corporation’s total assets were $20.8 billion as of December 31, 2021, an increase of $2.0 billion from December 31, 2020. The increase was primarily related to a $1.8 billion increase in investment securities, mainly driven by purchases of U.S. agencies MBS and U.S. agencies callable and bullet debentures and an increase of $1.0 billion in cash equivalents attributable to the liquidity obtained from the growth in deposits and loan repayments. These variances were partially offset by a decrease of $731.8 million in total loans, as further discussed below. Loans Receivable, including Loans Held for Sale The following table presents the composition of the Corporation's loan portfolio, including loans held for sale, as of the end of each of the last five years: (In thousands) Residential mortgage loans Commercial loans: Commercial mortgage loans Construction loans Commercial and Industrial loans (1) Total commercial loans Consumer loans and finance leases Total loans held for investment Less: Allowance for credit losses for loans and finance leases Total loans held for investment, net Loans held for sale 2021 2020 2019 2018 2017 $ 2,978,895 $ 3,521,954 $ 2,933,773 $ 3,163,208 $ 3,290,957 2,167,469 138,999 2,887,251 5,193,719 2,888,044 11,060,658 2,230,602 212,500 3,202,590 5,645,692 2,609,643 11,777,289 1,444,586 111,317 2,230,876 3,786,779 2,281,653 9,002,205 1,522,662 79,429 2,148,111 3,750,202 1,944,713 8,858,123 1,614,972 111,397 2,083,253 3,809,622 1,749,897 8,850,476 (269,030) 10,791,628 35,155 (385,887) 11,391,402 50,289 (155,139) 8,847,066 39,477 (196,362) 8,661,761 43,186 (231,843) 8,618,633 32,980 Total loans, net $ 10,826,783 $ 11,441,691 $ 8,886,543 $ 8,704,947 $ 8,651,613 (1) As of December 31, 2021 and 2020, includes $145.0 million and $406.0 million, respectively, of SBA PPP loans. 78 As of December 31, 2021, the Corporation’s total loan portfolio, before the ACL, amounted to $11.1 billion, a decrease of $731.8 million when compared to December 31, 2020. The decrease consisted of reductions of $611.6 million in the Puerto Rico region, $75.1 million in the Virgin Islands region, and $45.1 million in the Florida region. On a portfolio basis, the decrease consisted of reductions of $558.2 million in residential mortgage loans and $452.0 million in commercial and construction loans (including a $261.0 million decrease in the SBA PPP loan portfolio), partially offset by an increase of $278.4 million in consumer loans, including a $377.1 million increase in auto loans and leases. As further discussed below, the decrease in commercial and construction loans reflects, among other things, the effect of the payoff of loans related to six large commercial relationships totaling $211.1 million and the sale of four criticized commercial loan participations totaling $43.1 million in the Florida region. The decline in the residential mortgage loan portfolio reflects the $52.5 million bulk sale of nonaccrual loans, as well as repayments and charge -offs, which more than offset the volume of new loan originations kept on the balance sheet. As of December 31, 2021, the loans held for the Corporation’s investment portfolio was comprised of commercial and construction loans (47%), residential real estate loans (27%), and consumer and finance leases (26%). Of the total gross loan portfolio held for investment of $11.1 billion as of December 31, 2021, the Corporation had credit risk concentration of approximately 79% in the Puerto Rico region, 18% in the United States region (mainly in the state of Florida), and 3% in the Virgin Islands region, as shown in the following table: Puerto Rico Virgin Islands United States As of December 31, 2021 (In thousands) Residential mortgage loans Commercial mortgage loans Construction loans Commercial and Industrial loans (1) Total commercial loans Consumer loans and finance leases Total loans held for investment, gross Loans held for sale Total loans, gross (1) As of December 31, 2021, includes $145.0 million of SBA PPP loans consisting of $102.8 million in the Puerto Rico region, $8.2 million in the Virgin Islands region, and $34.0 million in the United States region. 429,322 $ 2,978,895 188,251 $ 2,167,469 465,238 67,094 138,999 95,866 4,344 2,887,251 940,654 79,515 5,193,719 1,501,758 150,953 52,282 2,888,044 15,660 391,486 $ 1,946,740 $ 11,060,658 35,155 391,663 $ 1,948,716 $ 11,095,813 $ 2,361,322 $ 1,635,137 38,789 1,867,082 3,541,008 2,820,102 $ 8,722,432 $ $ 8,755,434 $ 33,002 1,976 Total 177 As of December 31, 2020 (In thousands) Residential mortgage loans Commercial mortgage loans Construction loans Commercial and Industrial loans (1) Total commercial loans Consumer loans and finance leases Total loans held for investment, gross Loans held for sale Total loans, gross Puerto Rico Virgin Islands United States Total $ 2,788,827 $ 1,793,095 73,619 2,135,291 4,002,005 2,531,206 $ 9,322,038 $ 44,994 $ 9,367,032 $ 519,751 $ 3,521,954 213,376 $ 2,230,602 377,378 60,129 212,500 127,484 11,397 3,202,590 937,859 129,440 5,645,692 1,442,721 200,966 51,726 2,609,643 26,711 466,068 $ 1,989,183 $ 11,777,289 50,289 466,749 $ 1,993,797 $ 11,827,578 4,614 681 (1) As of December 31, 2020, includes $406.0 million of SBA PPP loans consisting of $301.1 million in the Puerto Rico region, $27.4 million in the Virgin Islands region, and $77.5 million in the United States region. First BanCorp. relies primarily on its retail network of branches to originate residential and consumer personal loans. 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. 79  The following table sets forth certain additional data (including loan production) related to the Corporation's loan portfolio net of the ACL on loans and finance leases as of and for the dates indicated: (Dollars in thousands) Beginning balance as of January 1 Residential real estate loans originated and purchased Construction loans originated C&I and commercial mortgage loans originated and purchased Finance leases originated Consumer loans originated Total loans originated and purchased Loans acquired from BSPR Sales of loans Repayments and prepayments Other increases (decreases) (1) Net (decrease) increase 2021 For the Year Ended December 31, 2019 2020 2018 2017 $ 11,441,691 $ 8,886,543 $ 8,704,947 $ 8,651,613 $ 8,731,276 623,290 102,538 560,012 126,499 491,210 69,440 531,971 65,243 549,147 58,103 2,994,893 240,419 1,287,487 5,248,627 - (620,227) (5,495,131) 251,823 2,751,058 152,254 915,107 4,504,930 2,514,700 (657,498) (3,661,289) (145,695) 2,411,863 178,986 1,194,650 4,346,149 - (433,079) (3,717,874) (13,600) 1,737,366 164,334 991,950 3,490,864 - (420,549) (2,959,438) (57,543) 1,729,659 93,670 785,516 3,216,095 - (375,754) (2,788,758) (131,246) (614,908) 2,555,148 181,596 53,334 (79,663) Ending balance as of December 31 $ 10,826,783 $ 11,441,691 $ 8,886,543 $ 8,704,947 $ 8,651,613 Percentage (decrease) increase (5.37)% 28.75% 2.09% 0.62% (0.91)% _____________ Includes, among other things, the change in the ACL on loans and finance leases and cancellation of loans due to the repossession of the collateral and loans repurchased (1) Residential Real Estate Loans As of December 31, 2021, the Corporation’s total residential mortgage loan portfolio, including held for sale, decreased by $558.2 million, as compared to the balance as of December 31, 2020. The decline reflects reductions in all regions driven by repayments and charge-offs, which more than offset the volume of new loan originations kept on the balance sheet. In addition, the decrease in the residential mortgage loan portfolio reflects the sale of $52.5 million of non-performing residential mortgage loans. Consistent with the Corporation’s strategies, the residential mortgage loan portfolio decreased by $439.5 million in the Puerto Rico region, $93.1 million in the Florida region, and $25.6 million in the Virgin Islands region. Approximately 88% of the $499.7 million in residential mortgage loan originations in the Puerto Rico region during 2021 consisted of conforming loan originations and refinancings. Conforming mortgage loans are generally originated with the intent to sell in the secondary market to GNMA and U.S. government-sponsored agencies. The majority of the Corporation’s outstanding balance of residential mortgage loans in the Puerto Rico and Virgin Islands regions consisted of fixed-rate loans that traditionally carry higher yields than residential mortgage loans in the Florida region. In the Florida region, approximately 55% 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. Residential mortgage loan originations for the year ended December 31, 2021 amounted to $623.3 million, compared to $560.0 million for 2020. The increase in residential mortgage loan originations of $63.3 million reflect increases of $96.0 million and $1.6 million, in the Puerto Rico and Virgin Islands regions, respectively, partially offset by a decrease of $34.3 million in the Florida region. The overall increase reflects the effect of a higher volume of refinanced loans and conforming loan originations driven by the effect of lower mortgage loan interest rates and increased home purchase activity, in particular during the first half of the year, and the effect in 2020 of disruptions in the loan underwriting and closing processes caused by the almost two-month lockdown related to the COVID-19 pandemic that was implemented in Puerto Rico on March 16, 2020. 80 Commercial and Construction Loans As of December 31, 2021, the Corporation’s commercial and construction loan portfolio decreased by $452.0 million (including a $261.0 million decrease in the SBA PPP loan portfolio), to $5.2 billion, as compared to the balance as of December 31, 2020. The decrease in commercial and construction loans was primarily reflected in the Puerto Rico region, which declined by $461.0 million (including a $198.3 million decrease in the SBA PPP loan portfolio), as compared to the balance as of December 31, 2020. Excluding the $198.3 million decrease in the SBA PPP loan portfolio, commercial and construction loans in the Puerto Rico region decreased by $262.7 million, driven by the payoff of five large commercial mortgage loan relationships totaling $156.8 million, a $22.9 million decrease in the outstanding balance of loans extended to municipalities and other government units, a $13.8 million decrease in the balance of floor plan lines of credit, several commercial and industrial term loans individually in excess of $3 million that were paid off during the 2021 and totaled approximately $26.5 million, principal repayments that reduced by $79.9 million the balance of revolving lines of credit related to ten commercial and industrial relationships , and additional repayments. In the Virgin Islands region, commercial and construction loans decreased by $50.0 million (including a $19.2 million decrease in the SBA PPP loan portfolio) as compared to the balance as of December 31, 2020. Excluding the $19.2 million decrease in the SBA PPP loan portfolio, commercial and construction loans in the Virgin Islands region decreased by $30.8 million primarily due to a $6.0 million repayment of a nonaccrual construction loan and the early payoff of a $23.2 million government loan. In the Florida region, commercial and construction loans increased by $59.0 million (net of a $43.5 million decrease in the SBA PPP loan portfolio). Excluding the $43.0 million decrease in the SBA PPP loan portfolio, commercial and construction loans in the Florida region increased by $102.5 million, driven by the origination of several commercial loans individually in excess of $10 million related to thirteen commercial and industrial relationships and totaling $249.5 million, partially offset by the sale of four criticized commercial loan participations totaling $43.1 million and the early payoff of a $54.3 million commercial loan. As mentioned above, the SBA reactivated the PPP in January 2021. The Corporation originated additional PPP loans up to the end of the program on May 31, 2021. As of December 31, 2021, SBA PPP loans, net of unearned fees of $7.9 million, totaled $145.0 million, compared to $406.0 million as of December 31, 2020. In 2021, the Corporation originated $283.6 million in PPP loans and received forgiveness remittances and customer payments of approximately $543.6 million in the principal balance of PPP loans. As of December 31, 2021, the Corporation had $178.4 million outstanding in loans extended to the Puerto Rico government, its municipalities and public corporations, compared to $201.3 million as of December 31, 2020. As of December 31, 2021, approximately $100.3 million consisted of loans extended to municipalities in Puerto Rico that are supported by assigned property tax revenues and $32.2 million consisted of municipal special obligation bonds. In addition to loans extended to municipalities, the Corporation’s exposure to the Puerto Rico government as of December 31, 2021 included $12.5 million in loans granted to an affiliate of PREPA and $33.4 million in loans to an agency of the Puerto Rico central government. The Corporation also has credit exposure to USVI government entities. As of December 31, 2021, the Corporation had $39.2 million in loans to USVI government and public corporations, compared to $61.8 million as of December 31, 2020. All the amount outstanding as of December 31, 2021, is owed by the public corporations of the USVI. As of December 31, 2021, all loans were currently performing and up to date on principal and interest payments. As of December 31, 2021, the Corporation’s total exposure to shared national credit (“SNC”) loans (including unused commitments) amounted to $918.6 million, compared to $882.9 million as of December 31, 2020. As of December 31, 2021, approximately $148.5 million of the SNC exposure related to the portfolio in Puerto Rico region and $770.1 million related to the portfolio in the Florida region. Commercial and construction loan originations (excluding government loans) amounted to $3.1 billion for the year ended December 31, 2021, compared to $2.8 billion for 2020. Total commercial and construction loan originations in 2021 include SBA PPP loan originations of $283.6 million, compared to $390.2 million in 2020. Excluding SBA PPP loans and the $184.4 million of Main Street loans originated in 2020, commercial and construction loan originations increased $510.9 million compared to 2020. The increase consisted of increases of $184.9 million, $302.6 million, and $23.4 million in the Puerto Rico, Florida, and the Virgin Islands regions, respectively. The increase in 2021 reflects an increase in the utilization of floor plan and other commercial lines of credit in the Puerto Rico region, as compared to 2020, as well as a higher volume of commercial and industrial loan originations in the Florida region. The increase also reflects the effect in 2020 of disruptions caused by the COVID-19 pandemic and related restrictive measures on economic activities. Government loan originations for 2021 amounted to $62.8 million, compared to $41.3 million for 2020. Government loan originations in both years primarily consisted of the refinancing and renewal of certain facilities in both the Virgin Islands and the Puerto Rico regions, as well as the utilization of an arranged overdraft line of credit of a government entity in the Virgin Islands region. 81 The composition of the Corporation’s construction loan portfolio held for investment as of December 31, 2021 and 2020 by category and geographic location follows: As of December 31, 2021 (In thousands) Loans for residential housing projects: Mid-rise (1) Single-family, detached Total for residential housing projects Construction loans to individuals secured by residential properties Loans for commercial projects Land loans – residential Land loans – commercial Total construction loan portfolio, gross ACL Total construction loan portfolio, net (1) Mid-rise relates to buildings of up to 7 stories. As of December 31, 2020 (In thousands) Loans for residential housing projects: Mid-rise (1) Single-family, detached Total for residential housing projects Construction loans to individuals secured by residential properties Loans for commercial projects Land loans – residential Land loans – commercial Total construction loan portfolio, gross ACL Total construction loan portfolio, net (1) Mid-rise relates to buildings of up to 7 stories. Puerto Rico Virgin Islands United States Total - 5,924 5,924 48 27,839 4,137 841 38,789 (942) 37,847 $ $ 956 - 956 - 2,251 1,137 - 4,344 (210) 4,134 $ $ - 8,621 8,621 - 86,348 897 - 95,866 (2,896) 92,970 $ $ 956 14,545 15,501 48 116,438 6,171 841 138,999 (4,048) 134,951 Puerto Rico Virgin Islands United States Total 116 14,685 14,801 48 48,185 5,685 4,900 73,619 (1,752) 71,867 $ $ 956 459 1,415 - 8,635 1,347 - 11,397 (880) 10,517 $ $ - 4,980 4,980 - 120,888 1,616 - 127,484 (2,748) 124,736 $ $ 1,072 20,124 21,196 48 177,708 8,648 4,900 212,500 (5,380) 207,120 $ $ $ $ The following table presents further information related to the Corporation’s construction portfolio as of and for the year ended December 31, 2021: (Dollars in thousands) Total undisbursed funds under existing commitments Construction loans held for investment in nonaccrual status Net recoveries - Construction loans ACL - Construction loans Nonaccrual construction loans to total construction loans ACL of construction loans to total construction loans held for investment Net recoveries to total average construction loans $ $ $ $ 197,917 2,664 76 4,048 1.92 % 2.91 % (0.04)% 82 Consumer Loans and Finance Leases As of December 31, 2021, the Corporation’s consumer loan and finance lease portfolio increased by $278.4 million to $2.9 billion, as compared to the portfolio balance of $2.6 billion as of December 31, 2020. The increase primarily reflects increases in auto loans, and finance leases which increased by $275.1 million and $102.0 million, respectively, partially offset by reductions in personal loans and credit cards loans of $61.8 million and $29.6 million, respectively. The growth in consumer loans is mainly reflected in the Puerto Rico region and was driven by an increased level of loan originations . Originations of auto loans (including finance leases) in 2021 amounted to $932.7 million, compared to $614.9 million for 2020. Personal loan originations in 2021, other than credit card loans, amounted to $172.7 million, compared to $123.8 million in 2020. Most of the increase in consumer loan originations in 2021, when compared to 2020, was in the Puerto Rico region, reflecting the effect in 2020 of quarantines and lockdowns of non-essential businesses in connection with the COVID-19 pandemic during 2020. The utilization activity on the outstanding credit card portfolio in 2021 amounted to approximately $422.5 million, compared to $328.7 million in 2020. Maturities of Loans Receivable The following table presents the loans held for investment portfolio as of December 31, 2021 by contractual maturities and interest rates: One Year or Less Through Five Years Through 15 Years After 15 Years Total Portfolio After One Year After Five Years 64,573 $ 119,177 821,786 1,156,946 873,285 3,035,767 $ 448,302 $ 17,262 1,135,248 1,389,138 1,800,464 4,790,414 $ 1,323,446 $ 1,907 203,547 333,884 213,330 2,076,114 $ 1,142,574 $ 653 6,888 7,283 965 1,158,363 $ 2,978,895 138,999 2,167,469 2,887,251 2,888,044 11,060,658 (In thousands) Residential mortgage Construction loans Commercial mortgage loans C&I loans Consumer loans Total loans(1) $ $ __ Amount due in one year or less at: Amount due after one year: Fixed Interest Rates Variable Interest Rates Fixed Interest Rates Variable Interest Rates Total Portfolio Residential mortgage Construction loans Commercial mortgage loans C&I loans Consumer loans Total loans(1) $ $ 57,846 $ 3,442 578,848 258,576 665,193 1,563,905 $ 6,727 $ 115,735 242,938 898,370 208,092 1,471,862 $ 2,670,020 $ 4,918 818,898 516,992 2,005,308 6,016,136 $ 244,302 $ 14,904 526,785 1,213,313 9,451 2,008,755 $ 2,978,895 138,999 2,167,469 2,887,251 2,888,044 11,060,658 (1) Scheduled repayments are included in the maturity category in which the payment is due. The amounts provided do not reflect prepayment assumptions related to the loan portfolio. 83 Investment Activities As part of its liquidity, revenue diversification, and interest rate risk strategies, First BanCorp. maintains an investment portfolio that is classified as available-for-sale or held to maturity. The Corporation’s total available-for-sale investment securities portfolio as of December 31, 2021 amounted to $6.5 billion, a $1.8 billion increase from December 31, 2020. The increase was mainly driven by purchases of approximately $3.4 billion of U.S. agencies MBS and U.S. agencies callable and bullet debentures, partially offset by prepayments of $1.1 billion of U.S. agencies MBS, approximately $267.8 million of U.S. agencies bonds that matured or were called prior to maturity during 2021, and a $143.1 million decrease in the fair value of available-for-sale investment securities attributable to changes in market interest rates. Long-term market interest remain at low levels but are expected to increase during 2022 and 2023, which could impact prepayment speed and valuation of the investment portfolio. These risks are directly linked to future period market interest rate fluctuations. As of December 31, 2021, approximately 99% of the Corporation’s available-for-sale securities portfolio was invested in U.S. government and agencies debentures and fixed-rate GSEs’ MBS (mainly GNMA, FNMA, and FHLMC fixed-rate securities). In addition, as of December 31, 2021, 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 $3.6 million (fair value - $2.9 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 $0.7 million as of December 31, 2021, of which $0.3 million is due to credit deterioration and was charged against earnings through an ACL during 2020. underlying second mortgage loans of this MBS issued by the PRHFA, the Corporation classified the investment in nonaccrual status in the second quarter of 2021. Due to deterioration in the delinquency status of the As of December 31, 2021, the Corporation’s held-to-maturity investment securities portfolio, before the ACL, amounted to $178.1 million, compared to $189.5 million as of December 31, 2020. As of December 31, 2021, the ACL for held-to-maturity debt securities was $8.6 million, down $0.2 million from $8.8 million as of December 31, 2020. Held-to-maturity investment securities consisted of 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. These obligations 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. Approximately 73% of the Corporation’s municipality bonds consisted of obligations issued by four of the largest municipalities in Puerto Rico. The municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and loans. Given the uncertainties as to the effects that the fiscal position of the Puerto Rico central government, the COVID-19 pandemic, and the measures taken, or to be taken, by other government entities may have on municipalities, the Corporation cannot be certain whether future charges to the ACL on these securities will be required. 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 . The following table presents the carrying values of investments as of the indicated dates: (In thousands) Money market investments Investment securities available for sale, at fair value: U.S. government and agencies obligations Puerto Rico government obligations MBS Other Total investment securities available for sale, at fair value Investment securities held to maturity, at amortized cost: Puerto Rico municipal bonds ACL for held-to-maturity debt securities December 31, 2021 December 31, 2020 $ 2,682 $ 60,572 2,405,468 2,850 4,044,443 1,000 6,453,761 178,133 (8,571) 169,562 1,187,674 2,899 3,455,796 650 4,647,019 189,488 (8,845) 180,643 Equity securities, including $21.5 million and $31.2 million of FHLB stock as of December 31, 2021 and 2020, respectively Total money market investments and investment securities 32,169 6,658,174 $ 37,588 4,925,822 $ 84 MBS as of the indicated dates consisted of: December 31, 2021 December 31, 2020 (In thousands) Available for sale: FHLMC certificates GNMA certificates FNMA certificates Collateralized mortgage obligations issued or guaranteed by FHLMC, FNMA or GNMA Private label MBS Total MBS $ $ 1,418,670 388,344 1,704,585 525,610 7,234 4,044,443 $ $ 1,149,871 699,492 1,320,281 277,724 8,428 3,455,796 The carrying values of investment securities classified as available for sale and held to maturity as of December 31, 2021 by contractual maturity (excluding MBS) are shown below: Carrying Amount Weighted-Average Yield % (In thousands) U.S. government and agencies obligations: Due after one year through five years Due after five years through ten years Due after ten years Puerto Rico government and municipalities obligations: Due within one year Due after one year through five years Due after five years through ten years Due after ten years Other investment securities Due within one year Due after one year through five years $ 1,996,352 393,104 16,012 2,405,468 2,995 14,785 90,584 72,619 180,983 500 500 1,000 Total MBS ACL on held-to-maturity debt securities Total investment securities available for sale and held to maturity 2,587,451 4,044,443 (8,571) 6,623,323 $ 0.61 0.90 0.63 0.66 5.39 2.35 4.25 3.87 3.96 0.72 0.84 0.78 0.89 1.26 - 1.11 Net interest income of future periods could be affected by prepayments of MBS. Any acceleration in the prepayments of MBS would lower yields on these securities, since the amortization of premiums paid upon acquisition of these securities 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. Also, net interest income in future periods might be affected by the Corporation’s investment in callable securities. As of December 31, 2021, the Corporation had approximately $2.0 billion in debt securities (U.S. agencies government securities) with embedded calls, primarily purchased at par or at a discount, and with an average yield of 0.66%. 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 5 – Investment Securities, to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, for additional information regarding the Corporation’s investment portfolio. 85 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 risk and reward 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 11 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. Risk Definition Liquidity Risk Liquidity risk is the risk to earnings or capital arising from the possibility that the Corporation will not have sufficient cash to meet its short-term liquidity demands, such as from deposit redemptions or loan commitments. See Liquidity Risk and Capital Adequacy below for further details. Interest Rate Risk Interest rate risk is the risk arising from adverse movements in interest rates. See Interest Rate Risk Management below for further details. Market Risk Market risk is the risk arising from adverse movements in market rates or prices, such as interest rates or equity prices. The Corporation evaluates market risk together with interest rate risk. Both changes in market values and changes in interest rates are evaluated and forecasted. See Interest Rate Risk Management below for further details. Credit Risk Credit risk is the risk arising from a borrower’s or a counterparty’s failure to meet the terms of a contract with the Corporation or otherwise to perform as agreed. See Credit Risk Management below for further details. Operational Risk Operational risk is the risk arising from problems with the delivery of services or products. This risk is a function of internal controls, information systems, employees and operating processes. It also includes risks associated with the Corporation’s preparedness for the occurrence of an unforeseen event. This risk is inherent across all functions, products, and services of the Corporation. See Operational Risk below for further details. Legal and Regulatory Risk Legal and regulatory risk is the risk arising from the Corporation’s failure to comply with laws or regulations that can adversely affect the Corporation’s reputation and/or increase its exposure to litigation or penalties. Reputational Risk Reputational risk is the risk arising from any adverse effect on the Corporation’s market value, capital, or earnings arising from negative public opinion, whether true or not. This risk affects the Corporation’s ability to establish new relationships or services, or to continue servicing existing relationships. Model Risk Model risk is the potential for adverse consequences from decisions based upon incorrect or misused model outputs and reports or based upon an incomplete or inaccurate model. The use of models exposes the Corporation to some level of model risk. Model errors 86 can contribute to incorrect valuations and lead to operational errors, inappropriate business decisions, or incorrect financial entries. The Corporation seeks to reduce model risk through rigorous model identification and validation. Capital Risk Capital risk is the risk that the Corporation may lose value on its capital or have an inadequate capital plan, which would result in insufficient capital resources to meet minimum regulatory requirements (the Corporation’s authority to operate as a bank is dependent upon the maintenance of adequate capital resources), support its credit rating, or support its growth and strategic options. Strategic Risk Strategic risk is the risk arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry, and operating environment. This risk is a function of the compatibility of the Corporation’s strategic goals, the business strategies developed to achieve those goals, the resources deployed against these goals, and the quality of implementation. Information Technology Risk Information technology risk is the risk arising from the loss of confidentiality, integrity, or availability of information systems and risk of cyber incidents or data breaches. It includes business risks associated with the use, ownership, operation, involvement, influence, and adoption of information technology within the Corporation. Risk Governance The following discussion highlights the roles and responsibilities of the key participants in the Corporation’s risk management framework: Board of Directors The Board of Directors oversees the Corporation’s overall risk governance program with the assistance of the Board committees discussed below. Risk Committee The Board of Directors of the Corporation appoints the Risk Committee to assist the Board in fulfilling its responsibility to oversee the Corporation’s management of its company-wide risk management framework. The committee’s role is one of oversight, recognizing that management is responsible for designing, implementing, and maintaining an effective risk management framework. The committee’s primary responsibilities are to: ● Review and discuss management’s assessment of the Corporation’s aggregate enterprise-wide profile and the alignment of the Corporation’s risk profile with the Corporation’s strategic plan, goals, and objectives; ● Review and recommend to the Board the parameters and establishment of the Corporation’s risk tolerance and risk appetite; ● Receive reports from management and, if appropriate, other Board committees, regarding the Corporation’s policies and procedures related to the Corporation’s adherence to risk limits and its established risk tolerance and risk appetite or on selected risk topics; ● Oversee the strategies, policies, procedures, and systems established by management to identify, assess, measure, and manage the major risks facing the Corporation, which may include an overview of the Corporation’s credit risk, operational risk, technology risk, compliance risk, interest rate risk, liquidity risk, market risk, and reputational risk, as well as management’s capital management, planning, and process; ● Oversee management’s activities with respect to capital planning, including stress testing and model risk; ● Review and discuss with management risk assessments for new products and services; and ● Oversee the Corporation’s regulatory compliance. 87 Asset and Liability Committee The Board of Directors appoints the Asset and Liability Committee to assist the Board in its oversight of the Corporation’s asset and liability management policies related to the management of the Corporation’s funds, investments, liquidity, and interest rate risk, and the use of derivatives. In doing so, the committee’s primary functions involve: ● ● ● The establishment of a process to enable the identification, assessment, and management of risks that could affect the Corporation’s assets and liabilities management; The identification of the Corporation’s risk tolerance levels for yield maximization relating to its assets and liabilities management; and The evaluation of the adequacy, effectiveness, and compliance with the Corporation’s risk management process relating to the Corporation’s assets and liabilities management, including management’s role in that process. Credit Committee The Board of Directors appoints the Credit Committee to assist the Board in its oversight of the Corporation’s policies related to the Corporation’s lending function, hereafter “Credit Management.” The committee’s primary responsibilities are to: ● Review the quality of the Corporation’s credit portfolio and the trends affecting that portfolio; ● Oversee the effectiveness and administration of credit-related policies; ● Approve loans as required by the lending authorities approved by the Board; and ● Report to the Board regarding Credit Management. Audit Committee The Board of Directors appoints the Audit Committee to assist the Board of Directors in fulfilling its responsibility to oversee management regarding: ● ● ● ● ● ● ● The conduct and integrity of the Corporation’s financial reporting to any governmental or regulatory body, stockholders, other users of the Corporation’s financial reports and the public; The performance of the Corporation’s internal audit function; The Corporation’s internal control over financial reporting and disclosure controls and procedures; The qualifications, engagement, compensation, independence, and performance of the Corporation’s independent auditors, their conduct of the annual audit of the Corporation’s financial statements, and their engagement to provide any other services; The application of the Corporation’s related parties transaction policy as established by the Board of Directors; The application of the Corporation’s code of business conduct and ethics as established by management and the Board of Directors; The preparation of the Audit Committee report required to be included in the proxy statement for the Corporation’s annual stockholders’ meeting by the rules of the SEC; and ● Oversee the Corporation’s legal risk. 88 Corporate Governance and Nominating Committee The Board of Directors appoints the Corporate Governance and Nominating Committee to develop, review, and assess corporate governance principles. The Corporate Governance and Nominating Committee is responsible for director succession, orientation and compensation, identifying and recommending new director candidates, overseeing the evaluation of the Board and management, recommending to the Board the designation of a candidate to hold the position of the Chairman of the Board, and directing and overseeing the Corporation’s executive succession plan. In addition, the Corporate Governance and Nominating Committee is responsible for overseeing the Corporation’s ESG policies. Compensation and Benefits Committee The Board of Directors appoints the Compensation and Benefits Committee to oversee compensation policies and practices including the evaluation and recommendation to the Board of the proper and competitive salaries and incentive compensation programs of the executive officers and key employees of the Corporation. The Committee recommends guidelines and principles for compensation programs of executive officers and key employees of the Corporation, including establishing a clear link between pay and performance and safeguards against the encouragement of excessive risk-taking. Trust Committee The Board of Directors of the Bank appoints the Trust Committee to assist the Board of Directors in fulfilling its oversight responsibilities with respect to the Trust Department and its fiduciary responsibilities. The Trust Committee’s main responsibilities are to ensure proper exercise of the fiduciary powers of the Bank and to review the activities of the Trust Department. The Trust Committee shall have jurisdiction over all aspects of the Trust Department and may act on behalf of the Board of Directors. Management Roles and Responsibilities While the Board of Directors has the responsibility to oversee the risk governance program, management is responsible for implementing the necessary policies and procedures, and internal controls. To carry out these responsibilities, the Corporation has a clearly defined risk governance culture. To ensure that risk management is communicated at all levels of the Corporation, and each area understands its specific role, the Corporation has established several management level committees to support risk oversight, as follows: Executive Risk Management Committee The Executive Risk Management Committee is responsible for exercising oversight of information regarding First BanCorp.’s enterprise risk management framework, including the significant policies, procedures, and practices employed to manage the identified risk categories (credit risk, operational risk, legal and regulatory risk, reputational risk, model risk, and capital risk). In carrying out its oversight responsibilities, each committee member is entitled to rely on the integrity and expertise of those people providing information to the committee and on the accuracy and completeness of such information, absent actual knowledge of an inaccuracy. The Chief Executive Officer appoints the Executive Risk Management Committee and members of the Corporation’s senior and executive management have the opportunity to share their insights about the types of risks that could impede the Corporation’s ability to achieve its business objectives. The Chief Risk Officer of the Corporation directs the agenda for the meetings and the Enterprise Risk Management (“ERM”) and Operational Risk Director serves as secretary of the committee and maintains the minutes on behalf of the committee. The General Auditor also participates of the committee as an observer. The committee provides assistance and support to the Chief Risk Officer to promote effective risk management throughout the Corporation. The Chief Risk Officer and the ERM and Operational Risk Director report to the Committee matters related to the enterprise risk management framework of the Corporation, including, but not limited to: ● ● ● ● The risk governance structure; The risk competencies of the Corporation; The Corporation’s risk appetite statement and risk tolerance; and The risk management strategy and associated risk management initiatives and how both support the business strategy and business model of the Corporation. 89 Other Management Committees As part of its governance framework, the Corporation has various additional risk management related-committees. These committees are jointly responsible for ensuring adequate risk measurement and management in their respective areas of authority. At the management level, these committees include: ● Management’s Investment and Asset Liability Committee (the “MIALCO”) – oversees interest rate and market risk, liquidity management and other related matters. Refer to Liquidity Risk and Capital Adequacy and below for further details. Interest Rate Risk Management ● Information Technology Steering Committee – oversees and counsels on matters related to information technology and cyber security, including the development of information management policies and procedures throughout the Corporation. ● Bank Secrecy Act Committee – oversees, monitors, and reports on the Corporation’s compliance with the Bank Secrecy Act. ● Credit Committees (consisting of a Credit Management Committee and a Delinquency Committee) – oversees and establishes standards for credit risk management processes within the Corporation. The Credit Management Committee is responsible for the approval of loans above an established size threshold. The Delinquency Committee is responsible for the periodic review of (i) past-due loans, (ii) overdrafts, (iii) non-accrual loans, (iv) OREO assets, and (v) the Bank’s internal credit-risk rating classification. ● Vendor Management Committee – oversees policies, procedures, and related practices related to the Corporation’s vendor management efforts. The Vendor Management Committee’s primary functions involve the establishment of processes and procedures to enable the recognition, assessment, management, and monitoring of vendor management risks. ● ● ESG Committee – primarily responsible for driving the Corporation’s ESG policies, strategy and reporting regularly to the Corporate Governance and Nominating Committee. The ESG Committee aligns priorities and initiatives for the year, provides strategy recommendations and leads the reporting process on ESG related topics. The Community Reinvestment Act Executive Committee – oversees, monitors, and reports on the Corporation’s compliance with Community Reinvestment Act regulatory requirements. The Bank is committed to developing and implementing programs and products that increase access to credit and create a positive impact on low and moderate income individuals and communities. ● Anti-Fraud Committee – oversees the Corporation’s policies, procedures and related practices relating to the Corporation’s anti-fraud measures. ● Regulatory Compliance Committee – oversees the Corporation’s Regulatory Compliance Management System. The Regulatory Compliance Committee reviews and discusses any regulatory compliance laws and regulations that impact performance of regulatory compliance policies, programs and procedures. The Regulatory Compliance Committee also ensures the coordination of regulatory compliance requirements throughout departments and business units. ● Regulatory Reporting Committee – oversees and assists the senior officers in fulfilling their responsibility for oversight of the accuracy and timeliness of the required regulatory reports and related policies and procedures, addresses changes and/or concerns communicated by the regulators, and addresses issues identified during the regulatory reporting process. The Regulatory Reporting Committee oversees, and updates, as necessary, the established controls and procedures designed to ensure that information in regulatory reports is recorded, processed, and accurately reported and on a timely basis. ● Complaints Management Committee – assists in overseeing the complaint management process implemented across the Corporation within the Corporation’s three marketplaces; Puerto Rico, the Virgin Islands, and Florida. The Complaints Management Committee supports the Corporation’s complaints management program relating to resolution of complaints within the lines of business. When appropriate, the Complaints Management Committee evaluates existing corrective actions within the lines of business related to complaints and complaint management practices within those business units. ● Project Portfolio Management Committee – reviews and oversees the performance of the portfolio and individual projects during the Project Management Cycle (Initiation, Planning, Execution, Control & Monitoring, and Closing). The Project Portfolio Management Committee balances conflicting demands between projects, decides on priorities assigned to each project based on organizational priorities and capacity, and oversees project budgets, risks, and actions taken to control and mitigate risks. 90 ● Current Expected Credit Losses (“CECL”) Committee – oversees the Corporation’s requirements for the calculation of CECL, including the implementation of new models, if necessary, selection of vendors and monitoring of the guidance from different regulatory agencies with regards to CECL requirements. The CECL Committee reviews estimated credit loss inputs, key assumptions, and qualitative overlays. In addition, the Committee approves the determination of reasonable and supportable periods used with respect to macroeconomic forecasts, and the historical loss reversion method and parameters. The CECL Committee reports to the Audit Committee the results of the ACL each reporting period. ● Capital Planning Committee – oversees the Capital Planning Process and is responsible for operating in accordance with the Capital Policy and ensuring compliance with its guidelines. The Capital Planning Committee develops and proposes to the Board changes to the Capital Policy and the capital plan targets, limits, performance metrics, internal stress testing and guidelines for Capital Management Activities. ● Business Continuity – responsible to create governance and planning structure that will enable FirstBank to craft an enterprise Business Continuity Management (BCM) program that ensures the Bank is able to continue business operations after a major disruption occurs. ● Emergency Committee – Responsible to activate and emergency or disaster recovery procedure to ensure the safety of Bank’s personnel and the continuity of critical Bank services. Officers As part of its governance framework, the following officers play a key role in the Corporation’s risk management process: ● The Chief Executive Officer (“CEO”) is responsible for the overall risk governance structure of the Corporation. The CEO is ultimately responsible for business strategies, strategic objectives, risk management priorities, and policies. ● The Chief Operating Officer (“COO”) manages the Corporation’s operational framework, including information technology (“IT”), facilities, banking operations, corporate security, and enterprise architecture. The COO oversees the effective and efficient execution of the various technology initiatives to support the Corporation’s growth and improve overall efficiency. ● The Chief Risk Officer (“CRO”) is responsible for the oversight of the risk management of the Corporation as well as the risk governance processes. The CRO, together with the ERM and Operational Risk Director, monitor key risks and manage the operational risk program. The CRO provides the leadership and strategy for the Corporation’s risk management and monitoring activities and is responsible for the oversight of regulatory compliance, loan review, model risk, and operational risk management. The CRO supervises talent management efforts, maintains adequate succession planning practices and promotes employee engagement. The Human Resources Director supports the CRO in the human capital and talent management efforts. ● Chief Credit Officer, Portfolio Risk Manager, Loan Review Manager and other Senior Executives are responsible for managing and executing the Corporation’s credit risk program. ● The Chief Financial Officer (“CFO”), together with the Corporation’s Treasurer and the Asset and Liability Management (“ALM”) Director, and Financial Risk Manager manage the Corporation’s interest rate and market and liquidity risk programs and, together with the Chief Accounting Officer and the Corporate Controller, are responsible for the implementation of accounting policies and practices in accordance with GAAP and applicable regulatory requirements. The ERM and Operational Risk Director assists the CFO in the review of the Corporation’s internal control over financial reporting and disclosure controls and procedures. ● The Chief Accounting Officer and the Corporate Controller is responsible for the development and implementation of the Corporation’s accounting policies and practices and the review and monitoring of critical accounts and transactions to ensure that they are reported in accordance with GAAP and applicable regulatory requirements. ● The Strategic Planning Director is responsible for the development of the Corporation’s strategic and business plan, by coordinating and collaborating with the executive team and all corporate bodies concerned with the strategic and business planning process. ● The Investors Relations and Capital Planning Officer is responsible for improving the effective communication with investors, while enhancing the Corporation’s capital plan based on the stress test processes and proactively managing capital. The Investor Relations and Capital Planning Officer works with the Treasury, ALM and Financial Analysis, Corporate Credit 91 Risk, and Strategic Planning units in order to follow a holistic approach to proactively manage risk and returns for shareholders under the stress testing framework. ● The ERM and Operational Risk Director is responsible for driving the identification, assessment, measurement, mitigation and monitoring of key risks throughout the Corporation. The ERM and Operational Risk Director promotes and instills a culture of risk control, identifies and monitors the resolution of major and critical operational risk issues across the Corporation, and serves as a key advisor to business executives with regards to risk exposure to the organization, corrective actions and corporate policies and best practices to mitigate risks. The Financial and Model Risk Manager, IT Risk Manager, Retail Quality Assurance Manager, Regulatory Affairs Manager and Corporate Risk Managers assist the ERM and Operational Risk Director in the monitoring of key risks and oversight of risk management practices. ● The Compliance Director is responsible for oversight of regulatory compliance. The Compliance Director maintains an inventory of applicable regulations, implements an enterprise-wide compliance risk assessment, and monitors compliance with significant regulations. The Compliance Director is responsible for building awareness of, and educating business units and subsidiaries on, regulatory risks. ● The General Counsel is responsible for the oversight of legal risks, including matters such as contract structuring, litigation risk, and all legal-related aspects. The Corporate Affairs Officer assists the General Counsel with various legal areas, including, but not limited, to SEC reporting matters, insurance coverage and liability, and contract structuring. ● The Chief Information Officer (“CIO”) is responsible for overseeing technology services provided by IT vendors including: (i) the fulfillment of contractual obligations and responsibilities; (ii) the development of policies and standards related to the technology; (iii) services provided; (iv) billing and invoice processing; (v) Service Level Agreement (SLA) metrics and compliance; and vi) the Business Continuity Strategy. ● The Corporate Security Officer (“CSO”) is responsible for the oversight of information security policies and procedures, and the ongoing monitoring of existing and new vendors’ due diligence for information security. In addition, the CSO identifies risk factors, and determines solutions to security needs. Liquidity Risk and Capital Adequacy, Interest Rate Risk, Credit Risk, Operational Risk, Legal and Compliance Risk and Concentration Risk Management The following discussion highlights First BanCorp.’s adopted policies and procedures for liquidity risk and capital adequacy, interest rate risk, credit risk, operational risk, legal and compliance risk, and concentration risk. Liquidity Risk and Capital Adequacy 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, which is the holding company that owns the banking and non-banking subsidiaries. The second is the liquidity of the banking subsidiary. During the year ended December 31, 2021, the Corporation continued to pay quarterly interest payments on the subordinated debentures associated with its TRuPs, the monthly dividend income on its non-cumulative perpetual monthly income preferred stock, and quarterly dividends on its common stock. In addition, since the inception of the $300 million stock repurchase program through December 31, 2021, the Corporation has repurchased 16.74 million shares at a cost of $213.9 million and redeemed all of its outstanding shares of Series A through E Preferred Stock for its liquidation value of $36.1 million. The Asset and Liability Committee of the Corporation’s Board of Directors is responsible for overseeing management’s establishment of the Corporation’s liquidity policy, as well as approving operating and contingency procedures and monitoring liquidity on an ongoing basis. The MIALCO, which reports to the Board of Directors’ 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, 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 Business Group Director, the Strategy Management Director, the Treasury and Investments Risk Manager, the Financial Planning and ALM Director , and the Treasurer. The Treasury and Investments Division is responsible for planning and 92 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 Comptroller’s Department is responsible for calculating the liquidity measurements used by the Treasury and Investment Division to review the Corporation’s liquidity position on a monthly basis. The Financial Planning and ALM Division is responsible to estimates the liquidity gap for longer periods. To ensure adequate liquidity through the full range of potential operating environments and market conditions, the Corporation conducts its liquidity management and business activities in a manner that is intended to preserve and enhance funding stability, flexibility, and diversity. Key components of this operating strategy include a strong focus on the continued development of customer-based funding, the maintenance of direct relationships with wholesale market funding providers, and the maintenance of the ability to liquidate certain assets when, and if, requirements warrant. The Corporation develops and maintains contingency funding plans. These plans evaluate the Corporation’s liquidity position under various operating circumstances and are designed to help ensure that the Corporation will be able to operate through periods of stress when access to normal sources of funds is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, outline actions and procedures for effectively managing liquidity through a difficult period, and define roles and responsibilities for the Corporation’s employees. Under the contingency funding plans, the Corporation stresses the balance sheet and the liquidity position to critical levels that mimic difficulties in generating funds or even maintaining the current funding position of the Corporation and the Bank and are designed to help ensure the ability of the Corporation and the Bank to honor their respective commitments. The Corporation has established liquidity triggers that the MIALCO monitors in order to maintain the ordinary funding of the banking business. The MIALCO developed contingency funding plans for the following three scenarios: a credit rating downgrade, an economic cycle downturn event, and a concentration event. The Board of Directors’ Asset and Liability Committee reviews and approves these plans on an annual basis. The Corporation manages its liquidity in a proactive manner, in an effort to maintain a sound liquidity position. It uses multiple measures to monitor the liquidity position, including core liquidity, basic liquidity, and time-based reserve measures. As of December 31, 2021, the estimated core liquidity reserve (which includes cash and free liquid assets) was $5.6 billion, or 27.0% of total assets, compared to $4.1 billion, or 21.6% of total assets as of December 31, 2020. The basic liquidity ratio (which adds available secured lines of credit to the core liquidity) was approximately 32.7% of total assets as of December 31, 2021, compared to 27.9% of total assets as of December 31, 2020. As of December 31, 2021, the Corporation had $1.2 billion available for additional credit from the FHLB. Unpledged liquid securities, mainly fixed-rate MBS and U.S. agency debentures, amounted to approximately $3.1 billion as of December 31, 2021. The Corporation 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. As of December 31, 2021, the holding company had $20.8 million of cash and cash equivalents. Cash and cash equivalents at the Bank level as of December 31, 2021 were approximately $2.5 billion. The Bank had $100.4 million in brokered CDs as of December 31, 2021, of which approximately $63.6 In addition, the Corporation had non-maturity brokered deposits totaling $247.5 million mature over the next twelve months. million as of December 31, 2021. Liquidity at the Bank level is highly dependent on bank deposits, which fund 86% of the Bank’s assets (or 85%, excluding brokered CDs). Furthermore, 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 December 31, 2021, the Corporation’s commitments to extend credit amounted to approximately $2.3 billion, of which $1.2 billion related to credit card loans. Commercial and financial standby letters of credit amounted to approximately $151.1 million. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. There have been no significant or unexpected draws on existing commitments. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause. The 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, affecting 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 $3.3 billion as of December 31, 2021. Our material cash requirements comprise primarily of contractual obligations to make future payments related to time 93 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 flow from operations will be sufficient to meet our operational cash needs for the foreseeable future. Off-balance sheet transactions are continuously monitored to consider their potential impact to our liquidity position and changes are applied to the balance between sources and uses of funds as deemed appropriate to maintain a sound liquidity position. Sources of Funding The Corporation utilizes different sources of funding to help ensure that adequate levels of liquidity are available when needed. Diversification of funding sources is of great importance to protect the Corporation’s liquidity from market disruptions. The principal sources of short-term funds are deposits, including brokered deposits, securities sold under agreements to repurchase, and lines of credit with the FHLB. The Asset and Liability Committee reviews credit availability on a regular basis. The Corporation has also sold mortgage loans as a supplementary source of funding and participates in the Borrower-in-Custody (“BIC”) Program of the FED. The Corporation has also obtained long-term funding in the past through the issuance of notes and long-term brokered CDs. As of December 31, 2021, the amounts of brokered CDs had decreased by $115.8 million to $100.4 million from brokered CDs of $216.2 million as of December 31, 2020. Non-maturity brokered deposits, such as money market accounts maintained by a deposit broker, increased in 2021 by $22.0 million to $247.5 million as of December 31, 2021. Consistent with its strategy, the Corporation has been seeking to add core deposits. As of December 31, 2021, the Corporation’s deposits, excluding brokered deposits and government deposits, increased by $1.4 billion to $14.2 billion, compared to $12.8 billion as of December 31, 2020. This increase was primarily reflected in both commercial and retail demand deposits, partially offset by a decrease in retail CDs. The Corporation continues to have access to financing through counterparties to repurchase agreements, the FHLB, and other agents, such as wholesale funding brokers. While liquidity is an ongoing challenge for all financial institutions, management believes that the Corporation’s available borrowing capacity and efforts to grow retail deposits will be adequate to provide the necessary funding for the Corporation’s business plans in the foreseeable future. 94 The Corporation’s principal sources of funding are discussed below: Deposits The following table presents the composition of total deposits as of the indicated dates: (Dollars in thousands) Interest-bearing savings accounts Interest-bearing checking accounts CDs Interest-bearing deposits Non-interest-bearing deposits Total Interest-bearing deposits: Average balance outstanding Non-interest-bearing deposits: Average balance outstanding Weighted average rate during Weighted Average Cost as of December 31, 2021 As of December 31, 2021 2020 0.14% 0.15% 0.86% 0.31% $ $ $ $ 4,729,387 3,492,645 2,535,349 10,757,381 7,027,513 17,784,894 10,940,542 6,063,715 $ $ $ $ 4,088,969 3,651,806 3,030,485 10,771,260 4,546,123 15,317,383 8,488,076 3,318,945 the period on interest-bearing deposits 0.38% 0.81% Estimate of Uninsured Deposits - At December 31, 2021 and 2020, the estimated amount of uninsured deposits totaled $8.9 billion and $6.8 billion, respectively, generally representing the portion of deposits in domestic offices that exceed the FDIC insurance limit of $250,000 and amounts in any other uninsured deposit account. The amount of uninsured deposits is calculated based on the same methodologies and assumptions used for our bank regulatory reporting requirements. 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 December 31, 2021: 3 months or less 3 months to 6 months 6 months to 1 year Over 1 year Total (In thousands) U.S. time deposits in excess of FDIC insurance limits (1) Other uninsured deposits 233,079 23,378 (1) Exclude $100.4 million of CDs issued to deposit brokers in the form of large certificates of deposits that are generally participated out by brokers in shares of less than the FDIC 104,043 9,911 184,501 14,881 179,085 4,917 700,708 53,087 $ $ $ $ $ $ $ $ $ $ insurance limit. Brokered CDs – Total brokered CDs decreased during 2021 by $115.8 million to $100.4 million as of December 31, 2021, compared to $216.2 million as of December 31, 2020. The average remaining term to maturity of the brokered CDs outstanding as of December 31, 2021 was approximately 1.2 years. The use of brokered CDs has historically been an additional source of funding for the Corporation. It provides an additional efficient channel for funding diversification and interest rate management. Brokered CDs are insured by the FDIC up to regulatory limits; and can be obtained faster than regular retail deposits. In addition, the Corporation may obtain funds from brokers deposited in non-maturity money market accounts tied to short-term money market rates such as the Federal funds rate. Government deposits – As of December 31, 2021, the Corporation had $2.7 billion of Puerto Rico public sector deposits ($2.5 billion in transactional accounts and $173.7 million in time deposits), compared to $1.8 billion as of December 31, 2020. Approximately 19% of the public sector deposits as of December 31, 2021 was from municipalities and municipal agencies in Puerto Rico and 81% was from public corporations, the central government and agencies, and U.S. federal government agencies in Puerto Rico. The increase was primarily related to the funding of certain operational reserve accounts of PREPA to operate Puerto Rico’s electric grid, as well as increases in the balance of transactional deposit accounts of certain municipalities in connection with the American Rescue Plan Act (“ARPA”) funding for states and local governments. 95 In addition, as of December 31, 2021, the Corporation had $568.4 million of government deposits in the Virgin Islands region (December 31, 2020 - $280.2 million) and $9.6 million in the Florida region. (December 31, 2020 - $9.7 million). The increase in government deposits in the Virgin Islands region also reflects the effect of ARPA federal funds received by the central government in the second quarter of 2021. Retail deposits – The Corporation’s deposit products also include regular savings accounts, demand deposit accounts, money market accounts, and retail CDs. Total deposits, excluding brokered deposits and government deposits, increased by $1.4 billion to $14.2 billion from a balance of $12.8 billion as of December 31, 2020, reflecting increases of $1.1 billion in the Puerto Rico region, $196.2 million in the Florida region, and $98.1 million in the Virgin Islands region. On a deposit type basis, the increase was primarily reflected in both commercial and retail demand deposits, partially offset by a decrease in retail CDs. The BSPR system conversion resulted in a net reclassification of approximately $724 million in balances from interest-bearing demand deposits, and certain saving products, to non-interest-bearing products at the time of conversion on July 12, 2021. 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 years ended December 31, 2021 and 2020. 96 Borrowings As of December 31, 2021, total borrowings amounted to $683.8 million, compared to $923.8 million as of December 31, 2020. The following table presents the composition of total borrowings as of the dates indicated: (Dollars in thousands) Securities sold under agreements to repurchase Advances from FHLB Other borrowings Total Weighted average rate during the period Weighted Average Rate as of December 31, 2021 As of December 31, 2021 2020 3.35% $ 2.16% 2.80% $ 300,000 200,000 183,762 683,762 $ $ 300,000 440,000 183,762 923,762 2.78% 2.47% Securities sold under agreements to repurchase - The Corporation’s investment portfolio is funded in part with repurchase agreements. The Corporation’s outstanding securities sold under repurchase agreements amounted to $300 million as of each of December 31, 2021 and 2020, respectively. One of the Corporation’s strategies has been the use of structured repurchase agreements and long-term repurchase agreements to reduce liquidity risk and manage exposure to interest rate risk by lengthening the final maturities of its liabilities while keeping funding costs at reasonable levels. 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 18 – Securities Sold Under Agreements to Repurchase, in the accompanying audited consolidated financial statements included in Item 8 of this Form 10-K, 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 December 31, 2021, the outstanding balance of long-term fixed rate FHLB advances was $200.0 million, compared to $440.0 million as of December 31, 2020. As of December 31, 2021, the Corporation had $1.2 billion available for additional credit on FHLB lines of credit. Trust-Preferred Securities – In 2004, FBP Statutory Trust I, a statutory trust that is wholly-owned by the Corporation and not consolidated in the Corporation’s financial statements, 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. Also in 2004, FBP Statutory Trust II, a statutory trust that is wholly-owned by the Corporation and not consolidated in the Corporation’s financial statements, 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 subordinated debentures are presented in the Corporation’s consolidated statements of financial condition as other borrowings. The variable-rate TRuPs are fully and unconditionally guaranteed by the Corporation. The $100 million junior subordinated deferrable debentures issued by the Corporation in April 2004 and the $125 million issued in September 2004 mature on June 17, 2034 and September 20, 2034, respectively; however, under certain circumstances, the maturity of the subordinated debentures may be 97 shortened (such shortening would result in a mandatory redemption of the variable-rate TRuPs). The Collins Amendment of the Dodd- Frank Act eliminated certain TRuPs from Tier 1 Capital. Bank holding companies, such as the Corporation, were required to fully phase out these instruments from Tier I capital by January 1, 2016; however, they may remain in Tier 2 capital until the instruments are redeemed or mature. As of each of December 31, 2021 and 2020, the Corporation had subordinated debentures outstanding in the aggregate amount of $183.8 million. As of December 31, 2021, the Corporation was current on all interest payments due related to its subordinated debentures. Other Sources of Funds and Liquidity - The Corporation’s principal uses of funds are for the origination of loans and the repayment of maturing deposits and borrowings. 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 year ended December 31, 2021, the Corporation sold approximately $191.4 million of FHA/VA mortgage loans to GNMA, which packages them into MBS. In addition, the FED has taken several steps to promote economic and financial stability in response to the significant economic disruption caused by the COVID-19 pandemic. These actions are intended to stimulate economic activity by reducing interest rates and provide liquidity to financial markets so that participants have access to needed funding. Federal funds target rate remained at a range of 0% to 0.25%, making the Primary Credit FED Discount Window Program a cost-efficient contingent source of funding for the Corporation given the highly-volatile market conditions. Although currently not in use, as of December 31, 2021, the Corporation had approximately $1.2 billion available for funding under the FED’s BIC Program. 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 B+ by S&P and BB by Fitch. As of the date hereof, FirstBank’s credit ratings as a long-term issuer are B1 by Moody’s, four notches below their definition of investment grade; BB by S&P, two notches below their definition of investment grade; and BB by Fitch, two notches below their definition of investment grade. The Corporation’s credit ratings are dependent on a number of factors, both quantitative and qualitative, and are subject to change at any time. The disclosure of credit ratings is not a recommendation to buy, sell, or hold the Corporation’s securities. Each rating should be evaluated independently of any other rating. Cash Flows Cash and cash equivalents were $2.5 billion as of December 31, 2021, an increase of $1.0 billion when compared to the balance as of December 31, 2020. The following discussion highlights the major activities and transactions that affected the Corporation’s cash flows during 2021 and 2020: 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 years ended December 31, 2021 and 2020, net cash provided by operating activities was $399.7 million and $297.7 million, respectively. Net cash generated from operating activities was higher than reported net income, largely as a result of adjustments for 98 items such as deferred income tax, depreciation, and amortization, as well as the cash generated from sales of loans held for sale, and, in 2020, the provision for credit losses expense. 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 investment securities. For the year ended December 31, 2021, net cash used in investing activities was $1.3 billion, primarily due to purchases of U.S. agencies investment securities and liquidity used to fund commercial and consumer loan originations, partially offset by principal collected on loans and U.S. agencies MBS prepayments, as well as proceeds from U.S. agencies bonds called prior to maturity, the bulk sale of residential mortgage nonaccrual loans, and the sale of criticized commercial and construction loans . For the year ended December 31, 2020, net cash used in investing activities was $1.2 billion, primarily resulting from purchases of U.S. agencies, MBS and the funding of commercial and consumer loan originations, partially offset by principal collected on loans and on U.S. agencies MBS prepayments, proceeds from U.S. agencies bonds that matured or were called prior to maturity, and the excess of cash acquired in the BSPR acquisition over the cash consideration paid at closing. 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 year ended December 31, 2021, net cash provided by financing activities was $1.9 billion, mainly reflecting an increase in non-brokered deposits, partially offset by dividends paid on common and preferred stock, repurchases of common and preferred stock, and repayment of matured FHLB advances and brokered CDs. For the year ended December 31, 2020, net cash provided by financing activities was $1.8 billion, mainly reflecting an increase in non-brokered deposits and, to a lesser extent, proceed from the early cancellation of long-term reverse repurchase agreements that were previously offset against variable-rate repurchase agreements, partially offset by dividends paid on common and preferred stock and repayment of matured FHLB advances. 99 Capital As of December 31, 2021, the Corporation’s stockholders’ equity was $2.1 billion, a decrease of $173.4 million from December 31, 2020. The decrease was driven by the approximately $317.8 million of capital returned to the Corporation’s stockholders during 2021 consisting of: (i) the repurchase of 16.7 million shares of common stock for a total purchase price of approximately $213.9 million; (ii) common and preferred stock dividends totaling $67.8 million; and (iii) the redemption of all of its outstanding shares of Series A through E Preferred Stock for its total liquidation value of $36.1 million. The decrease in total stockholders’ equity also included the effect of a $139.5 million decrease in Other Comprehensive Income mostly attributable to the decrease in the fair value of available- for-sale investment securities. These variances were partially offset by earnings generated during 2021. The Corporation increase its common stock dividend twice during 2021, increasing the quarterly dividend rate from $0.05 in the fourth quarter of 2020 to $0.07 in the first quarter of 2021 and $0.10 in the fourth quarter of 2021. 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 of Directors at the relevant times. On April 26, 2021, the Corporation announced that its Board of Directors approved a stock repurchase program, under which the Corporation may repurchase up to $300 million of its outstanding stock, commencing in the second quarter of 2021 through June 30, 2022. Repurchases under the program 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 will be 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 repurchase program may be modified, extended, suspended, or terminated at any time at the Corporation’s discretion and includes the redemption of the $36.1 million in outstanding shares of the Corporation’s Series A through E Noncumulative Perpetual Monthly Income Preferred Stock. The Corporation’s share repurchase program does not obligate it to acquire any specific number of shares. As of December 31, 2021, the Corporation had remaining authorization to repurchase approximately $50 million of common stock under the stock repurchase program. During the first quarter of 2022, the Corporation repurchased 3.4 million shares of common stock for the remaining $50 million authorized under the aforementioned $300 million stock repurchase program. 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. Set forth below are First BanCorp.'s and FirstBank's regulatory capital ratios as of December 31, 2021 and 2020: As of December 31, 2021 Total capital ratio (Total capital to risk-weighted assets) CET1 capital ratio (CET1 capital to risk-weighted assets) Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) Leverage ratio As of December 31, 2020 Total capital ratio (Total capital to risk-weighted assets) CET1 capital ratio (CET1 capital to risk-weighted assets) Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) Leverage ratio Banking Subsidiary First BanCorp. (1) FirstBank (1) To be well capitalized - thresholds 20.50% 17.80% 17.80% 10.14% 20.23% 10.00% 18.12% 19.03% 10.85% 6.50% 8.00% 5.00% Banking Subsidiary First BanCorp. (1) FirstBank (1) To be well capitalized - thresholds 20.37% 17.31% 17.61% 11.26% 19.91% 10.00% 16.05% 18.65% 11.92% 6.50% 8.00% 5.00% (1) As permitted by the regulatory capital framework, the Corporation elected to delay for two years the day-one impact related to the adoption of CECL on January 1, 2020 plus 25% of the change in the ACL from January 1, 2020 to December 31, 2021. Such effects, will be phased in at 25% per year beginning on January 1, 2022. 100 The Corporation and FirstBank compute risk-weighted assets using the standardized approach required by 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% of additional CET1 capital 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. Under the Basel III rules, in order to be considered adequately capitalized and not subject to the above noted limitations, the Corporation is required to maintain: (i) a minimum CET1 capital to risk-weighted assets ratio of at least 4.5%, plus the 2.5% “capital conservation buffer,” resulting in a required minimum CET1 capital ratio of at least 7%; (ii) a minimum ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5%; (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum total capital ratio of 10.5%; and (iv) a required minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets. 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 initial impact to retained earnings related to the adoption of CECL plus 25% of the change in the ACL (excluding PCD loans) 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 December 31, 2021, the capital measures of the Corporation and the Bank shown in the table above excluded $64.8 million that represents the initial 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. The federal financial regulatory agencies may take other measures affecting regulatory capital to address the COVID-19 pandemic, although the nature and impact of such measures cannot be predicted at this time. 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 equity less preferred equity, goodwill, core deposit intangibles, purchased credit card relationship intangible assets and insurance customer relationship intangible asset. Tangible assets are total assets less intangible assets such as goodwill, core deposit intangibles, purchased credit card relationships and insurance customer asset relationships. See “Basis of Presentation” below for additional information. 101 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 December 31, 2021 and 2020, respectively: (In thousands, except ratios and per share information) Total equity - GAAP Preferred equity Goodwill Purchased credit card relationship intangible Core deposit intangible Insurance customer relationship intangible Tangible common equity Total assets - GAAP Goodwill Purchased credit card relationship intangible Core deposit intangible Insurance customer relationship intangible Tangible assets Common shares outstanding Tangible common equity ratio Tangible book value per common share December 31, 2021 December 31, 2020 $ $ $ $ $ 2,101,767 - (38,611) (1,198) (28,571) (165) 2,033,222 20,785,275 (38,611) (1,198) (28,571) (165) 20,716,730 201,827 9.81% 10.07 $ $ $ $ $ 2,275,179 (36,104) (38,632) (4,733) (35,842) (318) 2,159,550 18,793,071 (38,632) (4,733) (35,842) (318) 18,713,546 218,235 11.54% 9.90 The Banking Law of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be transferred to a legal surplus reserve until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts transferred to the legal surplus reserve from retained earnings are not available for distribution to the Corporation, including for payment as dividends to the stockholders, 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. During the years ended December 31, 2021 and 2020, the Corporation transferred $28.3 million and $11.7 million, respectively, to the legal surplus reserve. FirstBank’s legal surplus reserve, included as part of retained earnings in the Corporation’s consolidated statements of financial condition, amounted to $137.6 and $109.3 million as of December 31, 2021 and 2020, respectively. 102  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 a stable level of profitability under varying interest rate scenarios. The MIALCO oversees interest rate risk, and, in doing so, the MIALCO assesses, among other things, current and expected conditions in world financial markets, competition and prevailing rates in the local deposit market, liquidity, the pipeline of loan originations, 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 a monthly and/or 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 and assumes upward and downward yield curve shifts. The rate scenarios considered in these simulations reflect gradual upward and downward interest rate movements of 200 basis points during a twelve-month period. The Corporation carries out the simulations in two ways: (1) Using a static balance sheet, as the Corporation had on the simulation date, and (2) Using a dynamic balance sheet based on recent patterns and current strategies. The balance sheet is divided into groups of assets and liabilities by maturity or re-pricing structure and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposit decay and other factors, which may be important in projecting net interest income. The Corporation uses a simulation model to project future movements in the Corporation’s balance sheet and income statement. The starting point of the projections corresponds to the actual values on the balance sheet on the date of the simulations. These simulations are highly complex and are based on many assumptions that are intended to reflect the general behavior of the balance sheet components over the period in question. It is unlikely that actual events will match these assumptions in most cases. For this reason, the results of these forward-looking computations are only approximations of the true sensitivity of net interest income to changes in market interest rates. The Corporation uses several benchmarks and market rate curves in the modeling process, primarily the LIBOR/SWAP curve, Prime Rate, Treasury, FHLB rates, brokered CDs rates, repurchase agreements rates and the 30 years mortgage commitment rate. As of December 31, 2021, the Corporation forecasted the 12-month net interest income assuming January 31, 2022 interest rate curves remain constant. Then, net interest income was estimated under rising and falling rates scenarios. For rising rates scenarios, the Corporation assumed a gradual (ramp) parallel upward shift of the yield curve during the first twelve months (the “+200 ramp” scenario). Conversely, for the falling rates scenario, it assumed a gradual (ramp) parallel downward shift of the yield curves during the first twelve months (the “-200 ramp” scenario). However, given the current low levels of interest rates and rate compression in the short term, along with the current yield curve slope, a full downward shift of 200 basis points would represent an unrealistic scenario. Therefore, under the falling rate scenario, rates move downward up to 200 basis points, but without reaching zero. The resulting scenario shows interest rates close to zero in most cases, reflecting a flattening yield curve instead of a parallel downward scenario. The Libor/Swap curve for January 2022, as compared to December 2020, reflected a 27 basis points increase in the short-term horizon, between one to 12 months, while market rates increased by 126 basis points in the medium term, that is between two to five years. In the long-term, that is over a five-year-time horizon, market rates increased by 93 basis points, as compared to December 31, 2020 levels. A similar pattern on market rates changes were observed in the Treasury curve for the short, medium, and long-term horizons mentioned above with a 26 basis points increase in the short-term horizon, 123 basis points increase in the medium term, and 65 basis points increase in the long-term horizon. 103  The following table presents the results of the simulations as of December 31, 2021 and 2020. Consistent with prior years, these exclude non-cash changes in the fair value of derivatives: December 31, 2021 Net Interest Income Risk (Projected for the next 12 months) December 31, 2020 Net Interest Income Risk (Projected for the next 12 months) (Dollars in millions) + 200 bps ramp - 200 bps ramp Static Simulation Change % Change Growing Balance Sheet % Change Change Static Simulation Change % Change $ $ 34.5 (12.2) 4.81 % $ (1.70)% $ 39.1 (13.5) 5.17 % $ (1.78)% $ 32.3 (12.1) 4.53 % $ (1.69)% $ Growing Balance Sheet % Change Change 4.96 % (1.91)% 36.0 (13.9) The Corporation continues to manage its balance sheet structure to control and limit the overall interest rate risk. As of December 31, 2021, the simulations showed that the Corporation continues to maintain an asset-sensitive position. The Corporation has continued repositioning the balance sheet and improving the funding mix, mainly driven by increasing the average balance of interest- bearing deposits with low-rate elasticity and non -interest-bearing deposits, and reductions in brokered CDs, time deposits, and FHLB Advances. The above-mentioned growth in deposits, along with proceeds from loan repayments, U.S. agency bonds that matured or were called prior to maturity and prepayments of US agency MBS, that have been reinvested contributed to fund the continued increase in the investment securities portfolio, while maintaining higher liquidity levels. The increased net interest income sensitivity for the +200bps ramp as compared to December 31, 2020 was driven by higher cash balances with short term repricing, an increase in the investment securities portfolio balance, lower prepayment cash flows in the investment securities portfolio due to the level of securities purchased during 2021 under a low interest rate environment as compared to the higher rates forecasted in the short, medium and long-term tenors, and lower balances in certificate of deposits. The decrease in net interest income sensitivity for the -200bps ramp under the growing balance sheet scenario was driven by the current low level of interest rates that resulted in reduced prepayments in the investment securities portfolio lower impact from short term repricing categories. Also, as a result of this lower rate environment, near floor levels, a full down parallel movement of -200bps will not be possible. Taking into consideration the above-mentioned facts for modeling purposes, as of December 31, 2021, the net interest income for the next 12 months under a growing balance sheet scenario was estimated to increase by $39.1 million in the rising rate scenario, compared to an estimated increase of $36.0 million as of December 31, 2020. Under the falling rate, growing balance sheet scenario, the net interest income was estimated to decrease by $13.5 million, compared to an estimated decrease of $13.9 million as of December 31, 2020, reflecting the effect of current low levels of market interest rates on the base scenario and the model assumptions for the falling rate scenarios described above (i.e., no negative interest rates modeled). 104 Derivatives First BanCorp. uses derivative instruments and other strategies to manage its exposure to interest rate risk caused by changes in interest rates beyond management’s control. The following summarizes major strategies, including derivative activities that the Corporation uses in managing interest rate risk: Interest Rate Cap Agreements - Interest rate cap agreements provide the right to receive cash if a referen ce interest rate rises above a contractual rate. The value of the interest rate cap increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates. Forward Contracts - Forward contracts are sales of TBA MBS that will settle over the standard delivery date and do not qualify as “regular-way” security trades. Regular-way security trades are contracts that have no net settlement provision and no market mechanism to facilitate net settlement and that provide for delivery of a security within the timeframe generally established by regulations or conventions in the market-place or exchange in which the transaction is being executed. The forward sales are considered derivative instruments that need to be marked-to-market. The Corporation uses these securities to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. The Corporation also reports as forward contracts the mandatory mortgage loan sales commitments entered into with GSEs that require or permit net settlement via a pair-off transaction or the payment of a pair-off fee. Unrealized gains (losses) are recognized as part of mortgage banking activities in the consolidated statements of income. Interest Rate Lock Commitments – Interest rate lock commitments are agreements under which the Corporation agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under each agreement, the Corporation commits to lend funds to a potential borrower generally on a fixed rate basis, regardless of whether interest rates change in the market. Interest rate swaps – The Corporation acquired interest rate swaps as a result of the BSPR acquisition. An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreements acquired from BSPR consist of the Corporation offering borrower-facing derivative products using a “back-to-back” structure in which the borrower-facing derivative transaction is paired with an identical, offsetting transaction with an approved dealer-counterparty. By using a back-to-back trading structure, both the commercial borrower and the Corporation are largely insulated from market risk and volatil ity. The agreements set the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. The fair value s of interest rate swaps are recorded as components of other assets in the Corporation’s consolidated statements of financial condition. Changes in the fair values of interest rate swaps, which occur due to changes in interest rates, are recorded in the consolidated statements of income as a component of interest income on loans. For detailed information regarding the volume of derivative activities ( e.g., notional amounts), location and fair values of derivative instruments in the consolidated statements of financial condition and the amount of gains and losses reported in the consolidated statements of income, see Note 34 - Derivative Instruments and Hedging Activities, to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. 105 The following tables summarize the fair value changes in the Corporation’s derivatives, as well as the sources of the fair values, as of or for the indicated dates or periods: (In thousands) Fair value of contracts outstanding at the beginning of the year Changes in fair value during the year Fair value of contracts outstanding as of December 31, 2021 $ $ Sources of Fair Value Asset Derivatives Year Ended December 31, 2021 Liability Derivatives Year Ended December 31, 2021 2,482 (977) 1,505 $ $ (1,920) 742 (1,178) (In thousands) As of December 31, 2021 Pricing from observable market inputs - Asset Derivatives Pricing from observable market inputs - Liability Derivatives Payment due by Period Maturity Less Than One Year Maturity 1-3 Years Maturity 3-5 Years Maturity in Excess of 5 Years Total Fair Value $ $ 399 (78) 321 $ $ 8 (8) - $ $ - - - $ $ 1,098 (1,092) 6 $ $ 1,505 (1,178) 327 Derivative instruments, such as interest rate caps, are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, in part, on the level of interest rates, as well as the expectations for rates in the future. As of December 31, 2021 and 2020, the Corporation considered all of its derivative instruments to be undesignated economic hedges. The use of derivatives involves market and credit risk. The market risk of derivatives stems principally from the potential for changes in the value of derivative contracts based on changes in interest rates. The credit risk of derivatives arises from the potential for default of the counterparty. To manage this credit risk, the Corporation deals with counterparties that it considers to be of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Master netting agreements incorporate rights of set-off that provide for the net settlement of contracts with the same counterparty in the event of default. 106 Credit Risk Management First BanCorp. is subject to credit risk mainly with respect to its portfolio of loans receivable and off-balance-sheet instruments, mainly 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 and Capital Adequacy” above for further details. The Corporation manages its credit risk through its credit policy, underwriting, independent loan review and quality control procedures, statistical analysis, comprehensive financial analysis, and established management committees. The Corporation also employs proactive collection and loss mitigation efforts. Furthermore, personnel performing structured loan workout functions are responsible for mitigating defaults and minimizing losses upon default within each region and for each business segment. In the case of the commercial and industrial, commercial mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of OREO. In addition to the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the nonaccrual and/or adversely classified status. The SAG utilizes relationship officers, collection specialists and attorneys. The Corporation may also have risk of default in the securities portfolio. The securities held by the Corporation are principally fixed-rate U.S. agencies MBS and U.S. Treasury and agencies securities. Thus, a substantial portion of these instruments is backed by mortgages, a guarantee of a U.S. GSE or the full faith and credit of the U.S. government. Management, consisting of the Corporation’s Commercial Credit Risk Officer, Retail Credit Risk Officer, Chief Credit Officer, and other senior executives, has the primary responsibility for setting strategies to achieve the Corporation’s credit risk goals and objectives. Management has documented these goals and objectives in the Corporation’s Credit Policy. Allowance for Credit Losses and Non-performing Assets Allowance for Credit Losses for Loans and Finance Leases The ACL for loans and finance leases represents the estimate of the level of reserves appropriate to absorb expected credit losses over the estimated life of the loans. The amount of the allowance is determined using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience is a significant input for the estimation of expected credit losses, as well as adjustments to historical loss information made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term. Additionally, the Corporation’s assessment involves evaluating key factors, which include credit and macroeconomic indicators, such as changes in unemployment rates, property values, and other relevant factors to account for current and forecasted market conditions that are likely to cause estimated credit losses over the life of the loans to differ from historical credit losses. Such factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress. The process includes judgments and quantitative elements that may be subject to significant change. 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. As of December 31, 2021, the ACL for loans and finance leases was $269.0 million, down $116.9 million from December 31, 2020. The decrease in the ACL for loans and finance leases primarily reflects an improvement in the outlook of macroeconomic variables to which the reserve is correlated, as well as charge-offs taken against the previously-established $20.9 million reserve for residential mortgage nonaccrual loans sold in the third quarter of 2021. Refer to Note 1 – Nature of Business and Summary of Significant Accounting Policies, in the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10- K, for additional information for description of the methodologies used by the Corporation to determine the ACL. The ratio of the ACL for loans and finance leases to total loans held for investment decreased to 2.43% as of December 31, 2021, compared to 3.28% as of December 31, 2020. On a non-GAAP basis, excluding SBA PPP loans, the ratio of the ACL for loans and finance leases to adjusted total loans held for investment was 2.46% as of December 31, 2021, compared to 3.39% as of December 31, 2020. For the definition and reconciliation of this non-GAAP financial measure, refer to the discussion in “Basis of Presentation” below. An explanation of the change for each portfolio follows: ● ● The ACL to total loans ratio for the residential mortgage portfolio decreased from 3.42% as of December 31, 2020 to 2.51% as of December 31, 2021. The reduction is mainly related to the bulk sale of residential mortgage nonaccrual in the third quarter, as well as reductions related to the improvement in the outlook of macroeconomic variables. The ACL to total loans ratio for the commercial mortgage portfolio decreased from 4.90% as of December 31, 2020 to 2.43% as of December 31, 2021, primarily reflecting an improvement in the outlook of macroeconomic variables to which 107 ● ● ● the reserve is correlated, including improvements in the commercial real estate price index and unemployment rate forecasts. The ACL to total loans ratio for the commercial and industrial portfolio increased slightly from 1.18% as of December 31, 2020 to 1.19% as of December 31, 2021. On a non-GAAP basis, excluding SBA PPP loans, the ratio of the ACL for commercial and industrial loans to adjusted total commercial and industrial loans held for investment was 1.25% as of December 31, 2021, compared to 1.36% as of December 31, 2020, primarily reflecting the effect of an improvement in the outlook of macroeconomic variables to which the reserve is correlated, including improvements in unemployment rate forecasts and overall continued growth of gross domestic product in the U.S. mainland. The ACL to total loans ratio for the construction loan portfolio increased from 2.53% as of December 31, 2020 to 2.91% as of December 31, 2021, primarily reflecting the effect of updated borrowers’ financial metrics, partially offset by the release of the reserve previously-established for the $6.0 million nonaccrual construction loan repaid in the first quarter of 2021. The ACL to total loans ratio for the consumer loan portfolio decreased from 4.33% as of December 31, 2020 to 3.57% as of December 31, 2021, primarily related to improvements in macroeconomic variables, as well as the shift in the composition of this portfolio that experienced increases in auto loans and finance leases and reductions in personal and small loan portfolios that carried a higher ACL coverage. The ratio of the total ACL for loans and finance leases to nonaccrual loans held for investment was 242.99% as of December 31, 2021, compared to 188.16% as of December 31, 2020. Substantially all of the Corporation’s loan portfolio is located within the boundaries of the U.S. economy. Whether the collateral is located in Puerto Rico, the U.S. and British Virgin Islands, or the U.S. mainland (mainly in the state of Florida), the performance of the Corporation’s loan portfolio and the value of the collateral supporting the transactions are dependent upon the performance of and conditions within each specific area’s real estate market. The Corporation believes it sets adequate loan-to-value ratios following its regulatory and credit policy standards. As shown in the following table, the ACL for loans and finance leases amounted to $269.0 million as of December 31, 2021, or 2.43% of total loans, compared with $385.9 million, or 3.28% of total loans, as of December 31, 2020. See “Results of Operation - Provision for Credit Losses” above for additional information. 108 The following table sets forth an analysis of the activity in the ACL for loans and finance leases during the periods indicated: Year Ended December 31, (Dollars in thousands) 2021 2020 2019 2018 2017 Allowance for credit losses for loans and finance leases, beginning of year $ 385,887 $ 155,139 $ 196,362 $ 231,843 $ 205,603 Impact of adopting CECL Initial allowance on PCD loans Provision for credit losses - (benefit) expense: Residential mortgage (1) Commercial mortgage (2) Commercial and Industrial (3) Construction (4) Consumer and finance leases (5) Total provision for credit losses - (benefit) expense (6) Charge-offs: Residential mortgage Commercial mortgage Commercial and Industrial Construction Consumer and finance leases Total charge offs Recoveries: Residential mortgage Commercial mortgage Commercial and Industrial Construction Consumer and finance leases Total recoveries Net charge-offs - - (16,957) (55,358) (8,549) (1,408) 20,552 (61,720) 81,165 28,744 22,427 81,125 6,627 2,105 56,433 168,717 (33,294) (11,017) (3,330) (3,634) (76) (46,483) (64,540) 1,519 1,936 3,192 184 9,831 (1,494) (1,887) (87) (43,948) (80,710) 4,777 281 6,776 163 13,576 25,573 (55,137) - - 14,091 (1,697) (13,696) (1,496) 43,023 40,225 (22,742) (15,088) (7,206) (391) (52,160) (97,587) 2,663 398 3,554 665 8,859 - - 13,202 23,074 (8,440) 7,032 24,385 59,253 (24,775) (23,911) (9,704) (8,296) (50,106) (116,792) 3,392 7,925 1,819 334 8,588 - - 50,744 30,054 1,018 4,835 57,603 144,254 (28,186) (39,092) (19,855) (3,607) (44,030) (134,770) 2,437 270 5,755 732 7,562 16,662 (47,878) 16,139 (81,448) 22,058 (94,734) 16,756 (118,014) Allowance for credit losses for loans and finance leases, end of year $ 269,030 $ 385,887 $ 155,139 $ 196,362 $ 231,843 Allowance for credit losses for loans and finance leases to year-end total loans held for investment Net charge-offs to average loans outstanding during the year Provision for credit losses - (benefit) expense for loans and finance leases to net charge-offs 2.43% 0.48% 3.28% 0.48% 1.72% 0.91% 2.22% 1.09% 2.62% 1.33% during the year -1.12x 3.52x 0.49x 0.63x 1.22x Provision for credit losses - (benefit) expense for loans and finance leases to net charge-offs during the year, excluding the effect of the hurricane-related reserve releases/charges in 2019, 2018 and 2017 (7) -1.12x 3.52x 0.57x 0.80x 0.62x (1) Net of a $0.4 million net loan loss reserve release for the year ended December 31, 2018 associated with revised estimates of the effects of Hurricanes Irma and Maria. For the year ended December 31, 2017, includes a charge to the provision of $14.6 million associated with the effects of Hurricanes Irma and Maria. (2) Net of a $1.9 million net loan loss reserve release for the year ended December 31, 2018 associated with revised estimates of the effects of Hurricanes Irma and Maria. For the year ended December 31, 2017, includes a charge to the provision of $12.1 million associated with the effects of Hurricanes Irma and Maria. (3) Net of loan loss reserve releases of $3.4 million and $5.5 million for the years ended December 31, 2019 and 2018, respectively, associated with revised estimates of the effects of Hurricanes Irma and Maria. For the year ended December 31, 2017, includes a charge to the provision of $15.9 million associated with the effects of Hurricanes Irma and Maria. (4) Net of a $0.7 million net loan loss reserve release for the year ended December 31, 2018 associated with revised estimates of the effects of Hurricanes Irma and Maria. For the year ended December 31, 2017, includes a charge to the provision of $3.7 million associated with the effects of Hurricanes Irma and Maria. (5) Net of loan reserve releases of $3.0 million and $8.4 million for the years ended December 31, 2019 and 2018, respectively, associated with revised estimates of the effects of Hurricanes Irma and Maria. For the year ended December 31, 2017, includes a charge to the provision of $25.0 million associated with the effects of Hurricanes Irma and Maria. (6) Net of loan reserve releases of $6.4 million and $16.9 million for the years ended December 31, 2019 and 2018, respectively, associated with revised estimates of the effects of Hurricanes Irma and Maria. For the year ended December 31, 2017, includes a provision of $71.3 million associated with the effects of Hurricanes Irma and Maria. (7) Non-GAAP financial measure, see "Basis of Presentation" below for a reconciliation of this measure. 109 The following table sets forth information concerning the allocation of the Corporation’s ACL for loans and finance leases by loan category and the percentage of loan balances in each category to the total of such loans as of the dates indicated: As of December 31, 2021 2020 2019 2018 2017 Loan portfolio to total loans Amount Loan portfolio to total loans Amount Loan portfolio to total loans Loan portfolio to total loans Amount Amount Loan portfolio to total loans Amount (Dollars in thousands) Residential mortgage loans $ 74,837 27% $ 120,311 30% $ 44,806 33% $ 50,794 36% $ 58,975 Commercial mortgage loans Construction loans Commercial and Industrial loans Consumer loans and finance leases 52,771 4,048 34,284 103,090 $ 269,030 20% 1% 26% 26% 109,342 5,380 37,944 112,910 19% 2% 27% 22% 39,194 2,370 15,198 53,571 16% 1% 25% 25% 55,581 3,592 32,546 53,849 17% 1% 24% 22% 48,493 4,522 48,871 70,982 100% $ 385,887 100% $ 155,139 100% $ 196,362 100% $ 231,843 100% 37% 18% 1% 24% 20% The following table sets forth information concerning the composition of the Corporation's loan portfolio and related ACL as of December 31, 2021 and 2020 by loan category: As of December 31, 2021 (Dollars in thousands) Total loans held for investment: Amortized cost of loans Allowance for credit losses Allowance for credit losses to amortized cost As of December 31, 2020 (Dollars in thousands) Total loans held for investment: Residential Mortgage Loans Commercial Mortgage Loans C&I Loans Construction Loans Consumer and Finance Leases Total $ 2,978,895 74,837 $ 2,167,469 52,771 $ 2.51 % 2.43 % 2,887,251 34,284 $ 1.19 % $ 138,999 4,048 2.91 % 2,888,044 103,090 $ 11,060,658 269,030 3.57 % 2.43 % Residential Mortgage Loans Commercial Mortgage Loans C&I Loans Construction Loans Consumer and Finance Leases Total Amortized cost of loans Allowance for credit losses Allowance for credit losses to amortized cost $ 3,521,954 120,311 $ 2,230,602 109,342 $ 3,202,590 37,944 $ 3.42 % 4.90 % 1.18 % 212,500 5,380 $ 2.53 % 2,609,643 112,910 $ 11,777,289 385,887 4.33 % 3.28 % 110 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 December 31, 2021, the ACL for off-balance sheet credit exposures was $1.5 million, down $3.6 million from $5.1 million as of December 31, 2020. The decrease was mainly related to improvements in forecasted macroeconomic variables. Allowance for Credit Losses for Held-to-Maturity Debt Securities As of December 31, 2021, the held-to-maturity securities portfolio consisted of Puerto Rico municipal bonds. As of December 31, 2021, the ACL for held-to-maturity debt securities was $8.6 million, down $0.2 million from $8.8 million as of December 31, 2020. The decrease was mainly related to improvements in forecasted macroeconomic variables and the repayment of certain bonds during 2021, partially offset by increases related to changes in some issuers’ financial metrics based on their most recent financial statements. Allowance for Credit Losses for Available-for-Sale Debt Securities As of December 31, 2021, the ACL for available-for-sale debt securities was $1.1 million, down $0.2 million from $1.3 million as of December 31, 2020. Nonaccrual Loans and Non-performing Assets Total non-performing assets consist of nonaccrual loans (generally loans held for investment or loans held for sale on 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 — 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. 111 Other Real Estate Owned OREO acquired in settlement of loans is carried at fair value less estimated costs to sell off the real estate. Appraisals are obtained periodically, generally on an annual basis. Other Repossessed Property The other repossessed property category generally included repossessed boats and autos acquired in settlement of loans. Repossessed boats and autos are recorded at the lower of cost or estimated fair value. Other Non-Performing Assets This category consisted of a residential pass-through MBS issued by the PRHFA placed in non-performing status in the second quarter of 2021 based on the delinquency status of the underlying second mortgage loans. Loans Past-Due 90 Days and Still Accruing These are accruing loans that are contractually delinquent 90 days or more. These past-due loans are either current as to interest but delinquent as to the payment of principal 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 fails to make any payment for three consecutive months). For accounting purposes, these GNMA loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting liability. TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual status and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six months, and there is evidence that such payments can and are likely to continue as agreed. The Corporation considers performance prior to the restructuring, or significant events that coincide with the restructuring, in assessing whether the borrower can meet the new terms, which may result in the loan being returned to accrual status at the time of the restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. For a discussion of permissible loan modifications under the amended CARES Act of 2020 for loans otherwise eligible for TDR, refer to Note 1 – Nature of Business and Summary of Significant Accounting Policies, to the audited consolidated financial statements included in Item 8 of this Form 10-K. 112 The following table presents non-performing assets as of the dates indicated: December 31, December 31, December 31, December 31, December 31, 2021 2020 2019 2018 2017 (Dollars in thousands) Nonaccrual loans held for investment: Residential mortgage Commercial mortgage (1) Commercial and Industrial (1) Construction (1) Consumer and finance leases Total nonaccrual loans held for investment (1) OREO Other repossessed property Other assets (2) Total non-performing assets, excluding nonaccrual loans held for sale Nonaccrual loans held for sale (1) Total non-performing assets, $ 55,127 $ 125,367 $ 121,408 $ 147,287 $ 25,337 17,135 2,664 10,454 110,717 40,848 3,687 2,850 158,102 - 29,611 20,881 12,971 16,259 205,089 83,060 5,357 - 293,506 - 40,076 18,773 9,782 20,629 210,668 101,626 5,115 - 317,409 - 109,536 30,382 8,362 20,406 315,973 131,402 3,576 - 450,951 16,111 including nonaccrual loans held for sale (3)(4) Past due loans 90 days and still accruing (5)(6) $ $ 158,102 115,448 $ $ 293,506 146,889 $ $ 317,409 $ 467,062 $ 135,490 $ 158,527 $ 178,291 156,493 85,839 52,113 16,818 489,554 147,940 4,802 - 642,296 8,290 650,586 160,725 Non-performing assets to total assets Nonaccrual loans held for investment to total loans held for investment Allowance for credit losses for loans and finance leases Allowance for credit losses for loans and finance leases 0.76 % 1.00 % 1.56 % 1.74 % 2.52 % 2.34 % 3.81 % 3.57 % 5.31 % 5.53 % $ 269,030 $ 385,887 $ 155,139 $ 196,362 $ 231,843 to total nonaccrual loans held for investment 242.99 % 188.16 % 73.64 % 62.15 % 47.36 % Allowance for credit losses for loans and finance leases to total nonaccrual loans held for investment, excluding residential real estate loans 483.95 % 484.04 % 173.81 % 116.41 % 74.48 % (1) During the first and third quarters of 2018, the Corporation transferred $74.4 million (net of fair value write-downs of $22.2 million recorded at the time of transfers) in nonaccrual loans to held for sale. Loans transferred to held for sale consisted of nonaccrual commercial mortgage loans totaling $39.6 million (net of fair value write-downs of $13.8 million), nonaccrual construction loans totaling $33.0 million (net of fair value write-downs of $6.7 million) and nonaccrual commercial and industrial loans totaling $1.8 million (net of fair value write-downs of $1.7 million). These loans were eventually sold or paid in full during 2019 and 2018. (2) Residential pass-through MBS issued by the PRHFA held as part of the available-for -sale investment securities portfolio with an amortized cost of $3.6 million recorded on the Corporation's books at its fair value of $2.9 million. (3) Excludes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans accounted for under ASC Subtopic 310-30 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 accrete interest income based on the effective interest rate of the loan pools determined at the time of adoption of CECL and 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 amortized cost of such loans as of December 31, 2021, 2020, 2019, 2018 and 2017 amounted to $117.5 million, $130.9 million, $136.7 million, $146.6 million and $158.2 million, respectively. (4) Nonaccrual loans exclude $363.4 million, $393.3 million, $398.3 million, $478.9 million and $374.7 million of TDR loans that were in compliance with the modified terms and in accrual status as of December 31, 2021, 2020, 2019, 2018 and 2017, respectively. (5) It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA, guaranteed by the VA, and other government-insured loans as loans past-due 90 days and still accruing as opposed to nonaccrual loans since the principal repayment is insured. 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 $46.6 million of residential mortgage loans insured by the FHA that were over 15 months delinquent as of December 31, 2021. (6) These include rebooked loans, which were previously pooled into GNMA securities, amounting to $7.2 million, $10.7 million, $35.3 million, $43.6 million, and $62.1 million as of December 31, 2021, 2020, 2019, 2018, and 2017, 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. 113 The following table shows non-performing assets by geographic segment as of the indicated dates: December 31, December 31, December 31, December 31, December 31, 2021 2020 2019 2018 2017 (Dollars in thousands) Puerto Rico: Nonaccrual loans held for investment: Residential mortgage Commercial mortgage (1) Commercial and Industrial (2) Construction (3) Consumer and finance leases Total nonaccrual loans held for investment OREO Other repossessed property Other assets (4) Total non-performing assets, excluding nonaccrual loans Nonaccrual loans held for sale (1) (2) (3) Total non-performing assets, including nonaccrual held for sale (5) Past-due loans 90 days and still accruing (6) Virgin Islands: Nonaccrual loans held for investment: Residential mortgage Commercial mortgage Commercial and Industrial Construction (7) Consumer Total nonaccrual loans held for investment OREO Other repossessed property Total non-performing assets Past-due loans 90 days and still accruing United States: Nonaccrual loans held for investment: Residential mortgage Commercial mortgage Commercial and Industrial Consumer Total nonaccrual loans held for investment OREO Other repossessed property Total non-performing assets Past-due loans 90 days and still accruing $ $ $ $ $ $ $ $ $ 39,256 15,503 14,708 1,198 10,177 80,842 36,750 3,456 2,850 123,898 - 123,898 114,001 8,719 9,834 1,476 1,466 144 21,639 3,450 187 25,276 1,265 7,152 - 951 133 8,236 648 44 8,928 182 $ $ $ $ $ $ $ $ $ 101,763 18,733 18,876 5,323 15,081 159,776 78,618 5,120 - 243,514 - 243,514 144,619 9,182 10,878 1,444 7,648 354 29,506 4,411 109 34,026 2,020 14,422 - 561 824 15,807 31 128 15,966 250 $ $ $ $ $ $ $ $ $ 97,214 23,963 16,155 2,024 19,483 158,839 96,585 4,810 - 260,234 - 260,234 129,463 10,903 16,113 2,303 7,758 467 37,544 4,909 146 42,599 5,898 13,291 - 315 679 14,285 132 159 14,576 129 $ $ $ $ $ $ $ $ $ 120,707 44,925 26,005 6,220 19,366 217,223 124,124 3,357 - 344,704 16,111 360,815 153,269 12,106 19,368 4,377 2,142 710 38,703 6,704 76 45,483 5,258 14,474 45,243 - 330 60,047 574 143 60,764 - $ $ $ $ $ $ $ $ $ 147,852 128,232 79,809 14,506 16,122 386,521 140,063 4,723 - 531,307 8,290 539,597 151,724 22,110 25,309 6,030 37,607 281 91,337 6,306 26 97,669 9,001 8,329 2,952 - 415 11,696 1,571 53 13,320 - (1) During 2018, the Corporation transferred to held for sale nonaccrual commercial mortgage loans in the Puerto Rico region totaling $39.6 million (net of fair value write-downs of $13.8 million recorded at the time of transfers). These loans were eventually sold or paid in full during 2019 and 2018. (2) During 2018, the Corporation transferred to held for sale nonaccrual commercial and industrial loans in the Puerto Rico region totaling $1.8 million (net of fair value write-downs of $1.7 million). The commercial and industrial loans transferred to held for sale were eventually sold during the first quarter of 2019. (3) During 2018, the Corporation transferred to held for sale a $3.0 million nonaccrual construction loan in the Puerto Rico region (net of $1.6 million fair value write-down). This loan was paid in full in 2019. (4) Residential pass-through MBS issued by the PRHFA held as part of the available-for-sale investment securities portfolio with an amortized cost of $3.6 million recorded on the Corporation's books at its fair value of $2.9 million. (5) Excludes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans accounted for under ASC Subtopic 310-30 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 accrete interest income based on the effective interest rate of the loan pools determined at the time of adoption of CECL and 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 amortized cost of such loans as of December 31, 2021, 2020, 2019, 2018 and 2017 amounted to $117.5 million, $130.9 million, $136.7 million, $146.6 million and $158.2 million, respectively. (6) These include rebooked loans, which were previously pooled into GNMA securities, amounting to $7.2 million, $10.7 million, $35.3 million, $43.6 million, and $62.1 million as of December 31, 2021, 2020, 2019, 2018, and 2017, 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. (7) During 2018, the Corporation transferred to held for sale a $30.0 million nonaccrual construction loan in the Virgin Islands region (net of a $5.1 million fair value write-down). The construction loans transferred to held for sale was eventually sold during the fourth quarter of 2018. 114 Total nonaccrual loans were $110.7 million as of December 31, 2021. This represents a decrease of $94.4 million from $205.1 million as of December 31, 2020. The decrease was primarily related to a $70.2 million reduction in nonaccrual residential mortgage loans, driven by the bulk sale of $52.5 million of nonaccrual residential mortgage loans during the third quarter of 2021 as further described below. In addition, there was an $18.3 million decrease in nonaccrual commercial and construction nonaccrual loans, including through the repayment of a $6.0 million construction loan relationship in the Virgin Islands region, the sale of a $3.1 million construction loans in the Puerto Rico region, and other large repayments as explained below, and a $5.8 million decrease in nonaccrual consumer loans. Nonaccrual commercial mortgage loans decreased by $4.3 million to $25.3 million as of December 31, 2021 from $29.6 million as of December 31, 2020. The decrease was primarily related to collections of approximately $4.3 million during 2021, including the payoff of two commercial mortgage loan in the Puerto Rico region amounting to $2.4 million, charge-offs and the transfer of loans to OREO, partially offset by inflows. Total inflows of nonaccrual commercial mortgage loans were $5.1 million for the year ended December 31, 2021, compared to $1.9 million for 2020. Nonaccrual commercial and industrial loans decreased by $3.8 million to $17.1 million as of December 31, 2021 from $20.9 million as of December 31, 2020. The decrease was mainly related to collections of approximately $6.5 million during 2021, including a paydown that reduced by $1.4 million the carrying value of a nonaccrual commercial and industrial loan in the Puerto Rico region, a $1.2 million nonaccrual commercial and industrial loan paid off in the Puerto Rico region, and the transfer of loans to OREO, partially offset by inflows. Total inflows of nonaccrual commercial and industrial loans were $4.4 million for the year ended December 31, 2021, compared to $11.4 million for 2020. Nonaccrual construction loans decreased by $10.3 million to $2.7 million as of December 31, 2021, compared to $13.0 million as of December 31, 2020. The decrease was primarily related to the aforementioned $6.0 million repayment of a construction loan relationship in the Virgin Islands region and the sale of a $3.1 million loan in the Puerto Rico region. 115  The following tables present the activity of commercial and construction nonaccrual loans held for investment for the indicated periods: (In thousands) Year ended December 31, 2021 Beginning balance Plus: Additions to nonaccrual Less: Loans returned to accrual status Nonaccrual loans transferred to OREO Nonaccrual loans charge-offs Loan collections and others Reclassification Nonaccrual loans sold, net of charge offs Ending balance $ Commercial Mortgage Commercial & Industrial Construction Total $ 29,611 $ 20,881 $ 12,971 $ 63,463 5,090 (2,376) (1,011) (1,433) (4,326) (218) - 25,337 $ 4,367 (752) (1,441) (629) (6,471) 1,180 - 17,135 $ 23 9,480 (319) (252) (86) (6,585) - (3,088) 2,664 $ (3,447) (2,704) (2,148) (17,382) 962 (3,088) 45,136 (In thousands) Year ended December 31, 2020 Beginning balance Plus: Additions to nonaccrual Less: Loans returned to accrual status Nonaccrual loans transferred to OREO Nonaccrual loans charge-offs Loan collections and others Reclassification Ending balance Commercial Mortgage Commercial & Industrial Construction Total $ 40,076 $ 18,773 $ 9,782 $ 68,631 1,875 11,367 3,691 16,933 (1,838) (126) (3,327) (6,373) (676) 29,611 $ (1,291) (263) (3,600) (4,781) 676 20,881 $ - - (75) (427) - 12,971 $ (3,129) (389) (7,002) (11,581) - 63,463 $ 116 Nonaccrual residential mortgage loans decreased by $70.3 million to $55.1 million as of December 31, 2021, compared to $125.4 million as of December 31, 2020. The decrease was driven by the aforementioned bulk sale of $52.5 million of nonaccrual loans, loans brought current and restored to accrual status, as well as collections, including the repayment of two large nonaccrual residential mortgage loans totaling $3.9 million, partially offset by inflows. The inflows of nonaccrual residential mortgage loans during 2021 were $33.5 million, a decrease of $0.2 million, compared to inflows of $33.7 million for 2020. During the third quarter of 2021, the Corporation sold $52.5 million of non-performing residential mortgage loans and related servicing advances of $2.0 million. The Corporation received $31.5 million, or 58% of book value before reserves, for the $54.5 million of non -performing loans and related servicing advances. Approximately $20.9 million of reserves had been allocated to the loans sold. The transaction resulted in total net charge-offs of $23.1 million and an additional loss of approximately $2.1 million recorded as a charge to the provision for credit losses in the third quarter. The Corporation's primary goal with respect to this transaction was to accelerate the disposition of non-performing assets. The following table presents the activity of residential nonaccrual loans held for investment for the indicated periods: (In thousands) Beginning balance Plus: Additions to nonaccrual Less: Loans returned to accrual status Nonaccrual loans transferred to OREO Nonaccrual loans charge-offs Loan collections and others Reclassification Nonaccrual loans sold, net of charge-offs Ending balance $ Year ended Year ended December 31, 2021 December 31, 2020 $ 125,367 $ 121,408 33,543 (15,918) (8,058) (26,735) (20,595) (962) (31,515) 55,127 $ 33,735 (12,719) (4,248) (7,206) (5,603) - - 125,367 The amount of nonaccrual consumer loans, including finance leases, decreased by $5.8 million to $10.5 million as December 31, 2021, compared to $16.2 million as of December 31, 2020. The decrease was primarily in auto loans, small loans, and finance leases, driven by collections and charge-offs recorded in 2021, partially offset by inflows. The inflows of nonaccrual consumer loans during the year ended December 31, 2021 amounted to $37.6 million compared to inflows of $42.1 million in 2020. As of December 31, 2021, approximately $23.8 million of the loans placed in nonaccrual status, mainly commercial loans, were current, or had delinquencies of less than 90 days in their interest payments, including $13.5 million of TDRs maintained in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and there is no doubt about full collectability. Collections on these loans are being recorded on a cash basis through earnings, or on a cost-recovery basis, as conditions warrant. During the year ended December 31, 2021, interest income of approximately $2.3 million related to nonaccrual loans with a carrying value of $37.3 million as of December 31, 2021, mainly nonaccrual construction and commercial loans, was applied against the related principal balances under the cost-recovery method. 117 Total loans in early delinquency ( i.e., 30-89 days past due loans, as defined in regulatory report instructions) amounted to $90.3 million as of December 31, 2021, a decrease of $58.5 million compared to $148.8 million as of December 31, 2020. The variances by major portfolio categories follow: ● Residential mortgage loans in early delinquency decreased by $32.3 million to $34.2 million as of December 31, 2021, and consumer loans in early delinquency decreased by $6.3 million to $49.4 million as of December 31, 2021. The decreases reflect the combination of loans brought current during the year ended December 31, 2021 and loans that migrated to nonaccrual status. ● Commercial and construction loans in early delinquency decreased by $19.2 million to $6.7 million as of December 31, 2021, the decrease was primarily related to the refinancing of two matured commercial loans. In addition, the Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico. Depending upon the nature of borrower’s financial condition, restructurings or loan modifications through this program, as well as other restructurings of individual commercial, commercial mortgage, construction, and residential mortgage loans fit the definition of a TDR. A restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include, among others, the extension of the maturity of the loan and modifications of the loan rate. See Note 8 – Loans Held for Investment, to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, for additional information and statistics about the Corporation’s TDR loans. TDR loans are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, a loan on nonaccrual status and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six months, and there is evidence that such payments can, and are likely to, continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Loan modifications increase the Corporation’s interest income by returning a nonaccrual loan to performing status, if applicable, increase cash flows by providing for payments to be made by the borrower, and limit increases in foreclosure and OREO costs. 118 The following table provides a breakdown between accrual and nonaccrual TDRs as of the indicated date: (In thousands) Conventional residential mortgage loans Construction loans Commercial mortgage loans Commercial and Industrial loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Consumer loans - Other Total Troubled Debt Restructurings As of December 31, 2021 Accrual Nonaccrual (1) Total TDRs $ $ 237,627 1,845 52,873 59,792 4,208 975 973 2,583 2,518 363,394 $ $ 20,946 458 15,960 10,628 3,076 - 1 - 275 51,344 $ $ 258,573 2,303 68,833 70,420 7,284 975 974 2,583 2,793 414,738 (1)Included in nonaccrual loans are $13.5 million in loans that are performing under the terms of the restructuring agreement but are reported in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and are deemed fully collectible. Under the provisions of the CARES Act of 2020, as amended by the Consolidated Appropriations Act, 2021 enacted on December 27, 2020, financial institutions may permit loan modifications for borrowers affected by the COVID-19 pandemic through January 1, 2022 without categorizing the modifications as TDRs, as long as the loans meet certain conditions, including the requirement that the loan was not more than 30 days past due as of December 31, 2019. As of December 31, 2021, commercial loans totaling $342.4 million, or 3.10% of the balance of the total loan portfolio held for investment, were permanently modified under the provisions of Section 4013 of the CARES Act of 2020, as amended by Division N, Title V, Section 541 of the Consolidated Appropriations Act. These permanent modifications primarily relate to commercial borrowers in industries with longer expected recovery times, mostly hospitality, retail and entertainment industries. With respect to temporary deferred repayment arrangements established in 2020 to assist borrowers affected by the COVID-19 pandemic, as of December 31, 2021, all loans previously modified under such programs have completed their deferral period. 119 The OREO portfolio, which is part of non-performing assets, decreased by $42.2 million to $40.8 million as of December 31, 2021, compared to $83.0 million as of December 31, 2020. The following tables show the composition of the OREO portfolio as of December 31, 2021 and 2020, as well as the activity of the OREO portfolio by geographic area during the year ended December 31, 2021: OREO Composition by Region (In thousands) Residential Commercial Construction (In thousands) Residential Commercial Construction OREO Activity by Region (In thousands) Beginning Balance Additions Sales Write-down adjustments Ending Balance Puerto Rico Virgin Islands Florida Consolidated As of December 31, 2021 28,396 4,521 3,833 36,750 Puerto Rico 31,517 41,176 5,925 78,618 $ $ $ $ 489 $ 2,810 151 3,450 $ 648 $ - - 648 $ 29,533 7,331 3,984 40,848 As of December 31, 2020 Virgin Islands Florida Consolidated 870 $ 3,180 361 4,411 $ 31 $ - - 31 $ 32,418 44,356 6,286 83,060 For the year ended December 31, 2021 Puerto Rico Virgin Islands Florida Consolidated 78,618 17,798 (52,649) (7,017) 36,750 $ $ 4,411 $ 669 (1,540) (90) 3,450 $ 31 $ 882 (265) - 648 $ 83,060 19,349 (54,454) (7,107) 40,848 $ $ $ $ $ $ 120 Net Charge-offs and Total Credit Losses Net charge-offs totaled $55.1 million, or 0.48% of average loans, for the year ended December 31, 2021, compared to $47.9 million, or 0.48% of average loans, for the year ended December 31, 2020. The bulk sale of nonaccrual residential mortgage loans added $23.1 million in net charge-off for the year ended December 31, 2021. Excluding the effect of net charge -offs related to the bulk sale, total net charge-offs in 2021 were $32.0 million, or 0.28% of average loans. Residential mortgage loans net charge-offs for the year ended December 31, 2021 were $28.5 million, or 0.87% of average residential mortgage loans, compared to $9.5 million, or 0.30% of average residential mortgage loans, for the year ended December 31, 2020. Excluding the effect of net charge-offs related to the bulk sale, residential mortgage loans net charge -offs for the year ended December 31, 2021 were $5.4 million, or 0.17% of average residential mortgage loans. Approximately $5.7 million in charge-offs during 2021 resulted from valuations of collateral dependent residential mortgage loans given high delinquency levels, compared to $7.9 million in 2020. Also, the overall level of charge-offs for the portfolio decreased during 2021 as compared to 2020, as a result of improvements in the credit quality indicators for the residential mortgage loan portfolio. In addition, the residential mortgage net charge-offs related to foreclosures amounted to $2.8 million during the year ended December 31, 2021, compared to $1.6 million for the same period of 2020, partially offsetting the aforementioned decreases. Commercial mortgage loan net charge -offs were $1.2 million, or 0.06% of average commercial mortgage loans, for the year ended December 31, 2021 compared to $1.4 million, or 0.08% of average commercial mortgage loans, for the year ended December 31, 2020. Commercial and industrial loans net recoveries for the year ended December 31, 2021 were $4.9 million, or 0.16% of average commercial and industrial loans, compared to net charge-offs of $0.4 million, or 0.02% of average commercial and industrial loans, for 2020. Commercial and industrial loan loss net recoveries for 2021 included a $5.2 million recovery in connection with the paydown of a nonaccrual commercial and industrial loan participation in the Puerto Rico region. Construction loans net recoveries for the year ended December 31, 2021 were $0.1 million, or 0.04% of average construction loans, compared to net recoveries of $0.1 million, or 0.06% of average construction loans, for 2020. Net charge-offs of consumer loans and finance leases for the year ended December 31, 2021 were $30.4 million, or 1.11% of average consumer loans and finance leases, compared to $36.7 million, or 1.53% of average consumer loans and finance leases, for 2020. The decrease in 2021 was primarily reflected in the auto loans, finance leases and small personal loans portfolios. The following table shows the ratios of net charge-offs (or recoveries) to average loans by loan category for the last five years: Residential mortgage (1) Commercial mortgage Commercial and Industrial Construction Consumer loans and finance leases Total loans (1) 2021 For the year ended December 31, 2018 2019 2020 2017 0.87 % 0.06 % (0.16)% (0.04)% 1.11 % 0.48 % 0.30% 0.08% 0.02% 0.66% 0.97% 0.16% (0.06)% (0.28)% 1.53% 0.48% 2.05% 0.91% 0.67% 1.03% 0.38% 6.75% 2.31% 1.09% 0.79% 2.42% 0.66% 2.05% 2.12% 1.33% (1) For the year ended December 31, 2021, includes net charge-offs totaling $23.1 million associated with the bulk sale of residential nonaccrual loans and related servicing advance receivables. Excluding net charge-offs associated with the bulk sale, residential mortgage and total net charge offs to related average loans for the year ended 2021 was 0.17% and 0.28%, respectively. 121 The following table presents net charge-offs (or recoveries) to average loans held in various portfolios by geographic segment for the last five years: PUERTO RICO: Residential mortgage(1) Commercial mortgage Commercial and Industrial Construction Consumer and finance leases Total loans (1) VIRGIN ISLANDS: Residential mortgage Commercial mortgage Commercial and Industrial Construction Consumer and finance leases Total loans FLORIDA: Residential mortgage Commercial mortgage Commercial and Industrial Construction Consumer and finance leases Total loans December 31, December 31, December 31, December 31, December 31, 2021 2020 2019 2018 2017 1.09 % 0.08 % (0.30)% (0.05)% 1.10 % 0.59 % 0.06 % (0.23)% - % - % 1.16 % 0.13 % (0.01)% (0.01)% 0.10 % (0.04)% 2.15 % 0.07 % 0.39 % 0.26 % - % (0.11)% 1.51 % 0.62 % 0.17 % (0.18)% - % (0.04)% 0.65 % 0.13 % - % (0.48)% 0.04 % (0.05)% 4.35 % - % 0.89 % 0.36 % 0.39 % 0.54 % 2.05 % 1.05 % 0.30 % (0.25)% (1.60)% (0.13)% 1.35 % (0.11)% (0.03)% 2.67 % - % (0.79)% 2.98 % 0.65 % 0.86 % 1.23 % 0.56 % 6.18 % 2.31 % 1.28 % 0.48 % (0.14)% 0.16 % 14.00 % 2.70 % 1.49 % 0.02 % 0.72 % 0.01 % (0.84)% 1.75 % 0.22 % 1.05 % 3.36 % 0.96 % 6.38 % 2.14 % 1.74 % 0.11 % (0.13)% (0.01)% (0.99)% 1.77 % 0.10 % 0.04 % (0.01)% - % (0.74)% 1.69 % 0.06 % (1) For the year ended December 31, 2021, includes net charge-offs totaling $23.1 million associated with the bulk sale of residential nonaccrual loans and related servicing advance receivables. Excluding net charge-offs associated with the bulk sale, residential mortgage and total net charge offs to related average loans for the year ended 2021 was 0.21% and 0.34%, respectively. 122 The above ratios are not necessarily indicative of the results expected in subsequent periods. Total net charge -offs plus losses on OREO operations for the year ended December 31, 2021 amounted to $53.0 million, or 0.46% of average loans and repossessed assets, compared to losses of $51.5 million, or a loss rate of 0.51%, for the year ended December 31, 2020. The following table presents information about the OREO inventory and credit losses for the periods indicated: (Dollars in thousands) OREO OREO balances, carrying value: Residential Commercial Construction Total OREO activity (number of properties): Beginning property inventory Properties acquired Properties disposed Ending property inventory Average holding period (in days) Residential Commercial Construction Total average holding period (in days) OREO operations gain (loss): Market adjustments and gains (losses) on sale: Residential Commercial Construction Total gains (losses) on sales Other OREO operations expenses Net Gain (Loss) on OREO operations (CHARGE-OFFS) RECOVERIES Residential charge-offs, net Commercial recoveries (charge-offs), net Construction recoveries, net Consumer and finance leases charge-offs, net Total charge-offs, net TOTAL CREDIT LOSSES(1) LOSS RATIO PER CATEGORY(2): Residential Commercial Construction Consumer Year Ended December 31, 2021 2020 $ $ $ $ $ $ 29,533 7,331 3,984 40,848 $ $ 513 167 (262) 418 700 2,018 2,115 1,075 4,166 (1,182) 820 3,804 (1,644) 2,160 (28,517) 3,676 76 (30,372) (55,137) (52,977) $ $ $ $ 32,418 44,356 6,286 83,060 697 120 (304) 513 626 2,170 2,151 1,566 (29) (886) (484) (1,399) (2,199) (3,598) (9,498) (1,836) 108 (36,652) (47,878) (51,476) 0.74% -0.05% -0.48% 1.11% 0.46% 0.30% 0.06% 0.21% 1.53% 0.51% TOTAL CREDIT LOSS RATIO(3) (1) Equal to net loss on OREO operations plus charge-offs, net. (2) Calculated as net charge-offs plus market adjustments, impairments (net of insurance recoveries), and gains (losses) on sale of OREO divided by average loans and repossessed assets. (3) Calculated as net charge-offs plus net loss on OREO operations divided by average loans and repossessed assets. 123 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 $11.1 billion as of December 31, 2021, the Corporation had credit risk of approximately 79% in the Puerto Rico region, 18% in the United States region, and 3% in the Virgin Islands region. Update on the Puerto Rico Fiscal Situation A significant portion of the Corporation’s business activities and credit exposure is concentrated in the Commonwealth of Puerto Rico, which has experienced an economic and fiscal crisis for more than a decade. Economic Indicators According to the latest revised estimates published by the Puerto Rico Planning Board (“PRPB”) in July 2021, Puerto Rico’s real gross national product (“GNP”) grew by 1.8% during fiscal year 2019 (previously at 1.5%). Also, the PRPB published its preliminary real GNP estimate for fiscal year 2020, suggesting that the Puerto Rico economy contracted by 3.2%. According to the PRPB, the economic growth seen during fiscal year 2019 primarily reflects the economic stimulus generated by the influx of federal recovery funds in response to the natural disasters that affected Puerto Rico in September 2017, while the contraction experienced in fiscal year 2020 was primarily driven by the adverse impact of the COVID-19 pandemic and the related mandatory restrictions. Fiscal Plan On January 27, 2022, the PROMESA oversight board certified the 2022 Fiscal Plan for Puerto Rico. Similar to previous fiscal plans, the 2022 Fiscal Plan incorporates updated information related to the macroeconomic environment, as well as government revenues, expenditures, structural reform efforts, and recent increases in federal funding. More importantly, the 2022 Fiscal Plan reflects the Commonwealth Plan of Adjustment recently confirmed by the U.S. District Court for the District of Puerto Rico. Relative to the previous fiscal plan, the 2022 Fiscal Plan incorporates a new set of expenditure projections that factor in the now-established debt service requirements pursuant to the Plan of Adjustment, as well as additional investments enabled by the increased resources available to the government. The 2022 Fiscal Plan prioritizes resource allocations across three major themes: (i) investing in the operational capacity of the government to deliver services with Civil Service Reform, (ii) prioritizing obligations to current and future retirees, and (iii) creating a fiscally responsible post-bankruptcy government. The 2022 Fiscal Plan contains an updated macroeconomic forecast that reflects the adverse impact of the pandemic-induced recession at the end of fiscal year 2020, followed by a forecasted rebound and recovery in fiscal years 2021 through 2023. Similar to 124 the previous fiscal plan, the 2022 Fiscal Plan incorporates a real growth series that was adjusted for the short-term income effects resulting from the extraordinary unemployment insurance and other pandemic-related direct transfer programs. Specifically, the revised fiscal plan estimates that Puerto Rico’s GNP will grow by 5.2% in the current fiscal year 2022, followed by a 0.6% growth in fiscal year 2023. Excluding the effect on household income from the unprecedented pandemic-related federal government stimulus, the 2022 Fiscal Plan estimates that real GNP growth would be 2.6% and 0.9% in fiscal years 2022 and 2023, respectively. Over the past few years, Puerto Rico has received an infusion of historical levels of federal support, creating new opportunities to address high priority needs. The 2022 Fiscal Plan projects that approximately $84 billion of disaster relief funding in total, from federal and private sources, will be disbursed in the reconstruction process over a period of 18 years (2018 to 2035). Moreover, since the previous fiscal plan was certified in 2021, the Commonwealth’s available resources have significantly increased principally as a result of two major developments: (i) incremental federal funding for health care as a result of the recent guidance issued by the Centers for Medicare and Medicaid Services (“CMS”), which increases the federal funding cap by over $2 billion per year, and (ii) improved local revenue collections as a result of a better-than-expected recovery, increased local consumption and economic activity enabled by enhanced income support programs (e.g. incremental funding of approximately $460 million for the Nutrition Assistance Program). The 2022 Fiscal Plan provides a roadmap to take maximum advantage of this unique opportunity, create an environment of fiscal stability, and develop the conditions for long-term growth and economic development. Nonetheless, the fiscal plan continues to underline the need to implement structural reforms to maximize the positive impact of federal recovery funds. Debt Restructuring After more than four years since the Commonwealth entered Title III, on January 18, 2022, the U.S. District Court for the District of Puerto Rico (the “Court”) issued an order to confirm the PoA to restructure approximately $35 billion of debt and other claims against the Commonwealth of Puerto Rico, the PBA, and the ERS; and more than $50 billion of pension liabilities. According to the PROMESA oversight board, the Plan of Adjustment provides a one-time cash payment to creditors, as well as the issuance of approximately $7.4 billion in new debt and contingent value instruments (“CVIs”), among other items. In addition, the PoA provides certain Commonwealth employees with various benefits. Confirmation of the PoA marks a major milestone in the overall debt restructuring process and creates a foundation for Puerto Rico’s recovery and economic growth. Key pending debt restructurings include the PREPA, for which the PROMESA oversight board said in a status report filed with the Court on January 19, 2021, that it intends to move forward with the settlement set forth in the Restructuring Support Agreement (“RSA”) and will continue efforts to propose a plan of adjustment for PREPA by the end of March 2022; however, such date is dependent on certain factors outside the government parties’ control that might push the filing of a plan into the second quarter of 2022. Exposure to the Puerto Rico Government As of December 31, 2021, the Corporation had $360.1 million of direct exposure to the Puerto Rico government, its municipalities, and public corporations, compared to $394.8 million as of December 31, 2020. As of December 31, 2021, approximately $187.8 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 $122.8 million consisted of municipal revenue and special obligation bonds. Approximately 61% of the Corporation’s exposure to Puerto Rico’s government consisted primarily of senior priority 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 the COVID-19 pandemic, as well as expense, revenue, or cash management measures taken to address the Puerto Rico government’s fiscal problems and measures included in fiscal plans of other government entities. In addition to municipalities, the total direct exposure also included $12.5 million in loans to an affiliate of PREPA, $33.4 million in loans to an agency of the Puerto Rico central government, and obligations of the Puerto Rico government, specifically a residential pass-through MBS issued by the PRHFA, at an amortized cost of $3.6 million as part of its available-for -sale investment securities portfolio (fair value of $2.9 million as of December 31, 2021). 125 The following table details the Corporation’s total direct exposure to Puerto Rico government obligations according to their maturities: As of December 31, 2021 Investment Portfolio (Amortized cost) Loans Total Exposure (In thousands) Puerto Rico Housing Finance Authority: After 10 years Total Puerto Rico Housing Finance Authority Puerto Rico public corporation: After 5 to 10 years After 10 years Total Puerto Rico public corporation Affiliate of the Puerto Rico Electric Power Authority: After 1 to 5 years Total Puerto Rico government affiliate Total Puerto Rico public corporation and government affiliate Municipalities: Due within one year After 1 to 5 years After 5 to 10 years After 10 years Total Municipalities $ 3,574 $ 3,574 - $ - - - - - - - 2,995 14,785 90,584 69,769 178,133 3,454 29,988 33,442 12,511 12,511 45,953 8,052 76,336 48,075 - 132,463 Total Direct Government Exposure $ 181,707 $ 178,416 $ 3,574 3,574 3,454 29,988 33,442 12,511 12,511 45,953 11,047 91,121 138,659 69,769 310,596 360,123 In addition, as of December 31, 2021, the Corporation had $92.8 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, 2020 - $106.5 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, 2019, the PRHFA’s mortgage loans insurance program covered loans in an aggregate amount of approximately $557 million. The regulations adopted by the PRHFA require the establishment of adequate reserves to guarantee the solvency of the mortgage loan insurance fund. As of June 30, 2019, the most recent date as to which information is available, the PRHFA was not in compliance with the regulations and had an unrestricted deficit of approximately $5.2 million in the mortgage loans insurance program. As of December 31, 2021, the Corporation had $2.7 billion of public sector deposits in Puerto Rico, compared to $1.8 billion as of December 31, 2020. Approximately 19% of the public sector deposits as of December 31, 2021 was from municipalities and municipal agencies in Puerto Rico and 81% was from public corporations, the central government and agencies, and U.S. federal government agencies in Puerto Rico. 126 Exposure to USVI government The Corporation has operations in the USVI and has credit exposure to USVI government entities. For many years, the USVI has been experiencing a number of fiscal and economic challenges that have deteriorated the overall financial and economic conditions in the area. Between 2008 and 2017, the USVI real GDP contracted at a compound annual growth rate of -4.2%. On May 26, 2021, the United States Bureau of Economic Analysis (the “BEA”) released estimates of GDP estimates for the USVI for 2019. According to the BEA, the USVI’s real GDP increased 2.2% in 2019. Also, the BEA revised the previously published real GDP growth estimate for 2018 from 1.5% to 1.6%. Growth in 2019 was primarily driven by increases in private fixed investment, exports and consumer spending. These increases were partially offset by decreases in inventory investment and government spending. Private fixed investment doubled from the previous year, reflecting growth in business purchases of equipment and in construction, including homes. In addition, disaster-related insurance payouts and federal assistance supported the reconstruction and major repairs of businesses and homes that were destroyed or heavily damaged by the two major hurricanes in September 2017. Although economic activity in the USVI showed signs of improvements during 2018 and 2019, the economic threat resulting from the COVID-19 pandemic is anticipated to diminish growth throughout 2020 and 2021. Notwithstanding, similar to Puerto Rico, the USVI has benefited from the various rounds of economic stimulus programs deployed by the Federal Government. Overall total pandemic-related relief funding allocated to the USVI exceeds $1.5 billion. On October 28, 2021, the U.S. Census Bureau released the 2020 Census population and housing unit count for the USVI. As of April 1, 2020, the USVI’s population was 87,146, representing a 18.1% decline from the 2010 Census population of 106,405. The housing unit count was 57,257 in 2020, representing an increase of 2.4% from the 2010 Census housing unit count of 55,901. PROMESA does not apply to the USVI and, as such, there is currently no federal legislation permitting the restructuring of the debts of the USVI and its public corporations and instrumentalities. To the extent that the fiscal condition of the USVI government continues to deteriorate, the U.S. Congress or the government of the USVI may enact legislation allowing for the restructuring of the financial obligations of the USVI government entities or imposing a stay on creditor remedies, including by making PROMESA applicable to the USVI. On February 8, 2022, the Virgin Islands Public Finance Authority (“VIPFA”) issued a voluntary notice to inform that the Government of the Virgin Islands (the “GVI”) is evaluating a refinancing of all the outstanding matching revenue fund revenue bonds issued by the VIPFA as part of a broader plan to increase liquidity to the GVI in order to provide additional dedicated funding to the Employees’ Retirement System of the Virgin Islands. According to the VIPFA, the proposed refinancing would be accomplished through a securitization of the matching fund revenues, with the proceeds of one or more new series of bonds (the “Securitization Bonds”) expected to be issued by the Matching Fund Special Purpose Securitization Corporation (the “Issuer”), a special purpose vehicle created pursuant to recently enacted legislation. Such securitization, if pursued, is expected to include the repayment, refunding or defeasance of all of the outstanding matching fund revenue bonds through the issuance of such Securitization Bonds and possibly a cash tender for the outstanding matching fund revenue bonds and/or an exchange of such outstanding matching fund revenue bonds for Securitization Bonds. As of December 31, 2021, the Corporation had $39.2 million in loans to USVI government instrumentalities and public corporations, compared to $61.8 million as of December 31, 2020. All the amount outstanding as of December 31, 2021, is owed by the public corporations of the USVI. As of December 31, 2021, all loans were currently performing and up to date on principal and interest payments. 127 BASIS OF PRESENTATION The Corporation has included in this Form 10-K the following financial measures that are not recognized under GAAP, which are referred to as non-GAAP financial measures: 1. 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 notab ly tax-exempt securities and tax-exempt loans, on a common basis that facilitates comparison of results to the results of peers. See “Results of Operations - Net Interest Income” above for the table that reconciles the net interest income calculated and presented in accordance with GAAP with the non-GAAP financial measure “net interest income excluding fair value changes and on a tax-equivalent basis.” The table also reconciles net interest spread and margin calculated and presented in accordance with GAAP with the non-GAAP financial measures “net interest spread and margin excluding fair value changes and on a tax-equivalent basis.” 2. 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 equity less preferred equity, goodwill, core deposit intangibles, and other intangibles, such as the purchased credit card relationship intangible and the insurance customer relationship intangible. Tangible assets are total assets less goodwill, core deposit intangibles, and other intangibles, such as the purchased credit card relationship intangible and the insurance customer relationship intangible. 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” above for a reconciliation of the Corporation’s tangible common equity and tangible assets. 3. ACL for loans and finance leases to adjusted total loans held for investment ratio is a non-GAAP financial measure that excludes SBA PPP loans amounting to $145.0 million and $406.0 million as of December 31, 2021 and December 31, 2020, respectively. The SBA PPP loans are fully-guaranteed by the SBA, and the principal amount of the loans may be forgiven in full or in part, thus presenting less credit risk than a non-SBA PPP loan. Management believes the use of this non -GAAP measure provides additional understanding when assessing the Corporation’s reserve coverage and facilitates comparison with other periods. See below for the reconciliation of the GAAP ratio of ACL for loans and finance leases to total loans held for investment to the Non-GAAP ratio of the ACL for loans and finance leases to adjusted total loans held for investment. 4. Adjusted provision for credit losses for loans and finance leases to net charge-offs ratio is a non-GAAP financial measure that excludes the effect related to the net loan loss reserve release of $6.4 million and $16.9 million recorded in the years ended December 31, 2019 and 2018, respectively, and the $71.3 million charge to the provision for the year ended December 31, 2017, resulting from revised estimates of the qualitative reserve associated with the effects of Hurricanes Irma and Maria. Management believes that this information helps investors understand the adjusted measure without regard to items that are not expected to reoccur with any regularity or may reoccur at uncertain times and in uncertain amounts on reported results and facilitates comparisons with other periods. See below for the reconciliation of the GAAP ratio of the provision for credit losses for loans and finance leases to net charge-offs to the Non-GAAP ratio of the adjusted provision for credit losses for loans and finance leases to net charge-offs. 5. To supplement the Corporation’s financial statements presented in accordance with GAAP, the Corporation uses, and believes that investors would benefit from disclosure of, non-GAAP financial measures that reflect adjustments to net income and non -interest expenses to exclude items that management identifies as Special Items because management believes they are not reflective of core operating performance, are not expected to reoccur with any regularity or may reoccur at uncertain times and in uncertain amounts. This Form 10-K includes the following non-GAAP financial measures for the year ended December 31, 2021 and 2020 that reflect the described items that were excluded for one of those reasons. 128 Adjusted net income reflects the effect of the following exclusions: ● Merger and restructuring costs of $26.4 million and $26.5 million recorded in 2021 and 2020, respectively, related to transaction costs and restructuring initiatives in connection with the acquisition of BSPR. ● COVID-19 pandemic-related expenses of $3.0 million and $5.4 million in 2021 and 2020, respectively. ● Gains of $13.2 million on the sales of U.S. agencies MBS and U.S. Treasury notes recorded in 2020. ● The $8.0 million benefit related to the partial reversal of the deferred tax asset valuation allowance recorded during 2020. ● Total benefit of $6.2 million recorded in 2020 resulting from hurricane-related insurance recoveries. ● Gain of $0.1 million on the repurchase of $0.4 million in TRuPs in 2020 reflected in the statement of income as Gain on early extinguishment of debt. ● The tax-related effects of all the pre-tax items mentioned in the above bullets as follows: − − Tax benefit of $9.9 million for both years 2021 and 2020, related to merge and restructuring costs in connection with the acquisition of BSPR (calculated based on the statutory tax rate of 37.5%). Tax benefit of $1.1 million and $2.0 million in 2021 and 2020, respectively, in connection with the COVID-19 pandemic-related expenses (calculated based on the statutory tax rate of 37.5%) − No tax expense was recorded for the gain on sales of U.S. agencies MBS and U.S. Treasury Notes in 2020. − − Tax expense of $2.3 million in 2020 related to the benefit of hurricane-related insurance recoveries (calculated based on the statutory tax rate of 37.5%). The gains realized on the repurchase of TRuPs in 2020 recorded at the holding company level, had no effect on the income tax expense in 2020. See “Overview of Results of Operations” above for the reconciliation of the non-GAAP financial measure “adjusted net income” to the GAAP financial measure. 129 Adjusted non-interest expenses - The following tables reconcile for the years ended December 31, 2021 and 2020 the GAAP non- interest expenses to adjusted non-interest expenses, which is a non-GAAP financial measure that excludes the relevant Special Items discussed above: $ $ 2021 (In thousands) Non-interest expenses Employees' compensation and benefits Occupancy and equipment Business promotion Professional service fees Taxes, other than income taxes FDIC deposit insurance Net gain on OREO and OREO expenses Credit and debit card processing expenses Communications Merger and restructuring costs Other non-interest expenses 2020 (In thousands) Non-interest expenses Employees' compensation and benefits Occupancy and equipment Business promotion Professional service fees Taxes, other than income taxes FDIC deposit insurance Net loss on OREO and OREO expenses Credit and debit card processing expenses Communications Merger and restructuring costs Other non-interest expenses Non-Interest Expenses (GAAP) Merger and Restructuring Costs COVID 19 Pandemic-Related Expenses Adjusted (Non- GAAP) 488,974 $ 200,457 93,253 15,359 59,956 22,151 6,544 (2,160) 22,169 9,387 26,435 35,423 26,435 $ - - - - - - - - - 26,435 - 2,958 $ 67 2,601 22 - 261 - - - - - 7 459,581 200,390 90,652 15,337 59,956 21,890 6,544 (2,160) 22,169 9,387 - 35,416 Non-Interest Expenses (GAAP) Merger and Restructuring Costs COVID 19 Pandemic-Related Expenses Hurricane- Related Insurance Recoveries Adjusted (Non-GAAP) 424,240 $ 177,073 74,633 12,145 52,633 17,762 6,488 3,598 19,144 8,437 26,509 25,818 26,509 $ - - - - - - - - - 26,509 - 5,411 $ 1,772 2,713 581 8 274 - - - 16 - 47 (1,153) $ - (789) (184) (180) - - - - - - - 393,473 175,301 72,709 11,748 52,805 17,488 6,488 3,598 19,144 8,421 - 25,771 130 Allowance for credit losses on loans and finance leases to adjusted total loans held for investment ratio – The following tables reconcile the “ACL for loans and finance leases to total loans held for investment ratio,” the GAAP financial measure, to the non-GAAP financial measure “ACL for loans and finance leases to adjusted total loans held for investment ratio,” as of December 31, 2021 and 2020, and the “provision for credit losses for loans and finance leases to net charge-offs ratio,” the GAAP financial measure, to the non-GAAP financial measure “adjusted provision for credit losses for loans and finance leases to net charge-offs ratio,” for the years ended December 31, 2021, 2020 and 2019: Allowance for Credit Losses for Loans and Finance Leases to Loans Held for Investment (GAAP to Non-GAAP reconciliation) As of December 31, 2021 Allowance for Credit Losses for Loans and Finance Leases Loans Held for Investment (In thousands) Allowance for credit losses for loans and finance leases and loans held for investment (GAAP) $ Less: SBA PPP loans Allowance for credit losses for loans and finance leases and adjusted loans held for investment, $ excluding SBA PPP loans (Non-GAAP) Allowance for credit losses for loans and finance leases to loans held for investment (GAAP) Allowance for credit losses for loans and finance leases to adjusted loans held for investment, excluding SBA PPP loans (Non-GAAP) 11,060,658 145,019 10,915,639 269,030 - 269,030 $ $ 2.43% 2.46% Allowance for Credit Losses for Loans and Finance Leases to Loans Held for Investment (GAAP to Non-GAAP reconciliation) As of December 31, 2020 Allowance for Credit Losses for Loans and Finance Leases Loans Held for Investment (In thousands) Allowance for credit losses for loans and finance leases and loans held for investment (GAAP) $ Less: SBA PPP loans Allowance for credit losses for loans and finance leases and adjusted loans held for investment, $ excluding SBA PPP loans (Non-GAAP) Allowance for credit losses for loans and finance leases to loans held for investment (GAAP) Allowance for credit losses for loans and finance leases to adjusted loans held for investment, excluding SBA PPP loans (Non-GAAP) 11,777,289 405,953 11,371,336 385,887 - 385,887 $ $ 3.28% 3.39% 131 Provision for credit losses - (benefit) expense Finance Leases to Net Charge-Offs (GAAP to Non GAAP reconciliation) Year Ended December 31, 2021 December 31, 2020 December 31, 2019 Provision for Credit Losses - (benefit) expense Net Charge- Offs Provision for Credit Losses - (benefit) expense Net Charge-Offs Provision for Credit Losses - (benefit) expense Net Charge-Offs (In thousands) Provision for credit losses - (benefit) expense and net charge-offs (GAAP) $ (61,720) $ 55,137 $ 40,225 $ 81,448 $ 59,253 $ 94,734 Less Special Item: Hurricane-related qualitative reserve release (provision) - - 6,425 - 16,943 - Provision for credit losses - (benefit) expense and net charge-offs, excluding special item (Non-GAAP) $ (61,720) $ 55,137 $ 46,650 $ 81,448 $ 76,196 $ 94,734 Provision for credit losses - (benefit) expense to net charge-offs (GAAP) -111.94% Provision for credit losses - (benefit) expense to net charge-offs, excluding special items (Non-GAAP) -111.94% 49.39% 57.28% 62.55% 80.43% Management believes that the presentation of adjusted net income, adjusted non-interest expenses and adjustments to the various components of non-interest expenses, the ratio of allowance for credit losses to adjusted total loans held for investment, and the ratio of adjusted provision for credit losses for loans and finance leases to net charge -offs enhance the ability of analysts and investors to analyze trends in the Corporation’s business and understand the performance of the Corporation. In addition, the Corporation may utilize these non-GAAP financial measures as a guide in its budgeting and long-term planning process. Any analysis of these non- GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP. CEO and CFO Certifications First BanCorp.’s Chief Executive Officer and Chief Financial Officer have filed with the SEC certifications required by Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Annual Report on Form 10-K. In addition, in 2021, First BanCorp’s Chief Executive Officer provided to the NYSE his annual certification, as required for all NYSE listed companies, that he was not aware of any violation by the Corporation of the NYSE corporate governance listing standards. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The information required herein is incorporated by reference to the information included under the sub-caption “Interest Rate Risk Management” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10- K. 132 Item 8. Financial Statements and Supplementary Data FIRST BANCORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 134 Report of Independent Registered Public Accounting Firm (PCAOB No. 173) …………………………….. Management’s Report on Internal Control over Financial Reporting ………………………………………… 137 138 Consolidated Statements of Financial Condition ……………………………………………………………... 139 Consolidated Statements of Income ……...…………………………………………………………………... 140 Consolidated Statements of Comprehensive Income ……...…………………………………………………. Consolidated Statements of Cash Flows ……………………………………………………………………… 141 142 Consolidated Statements of Changes in Stockholders’ Equity ……………………………………………….. 143 Notes to Consolidated Financial Statements ………………………………………………………………….. 133 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and the Board of Directors of First BanCorp. Santurce, Puerto Rico Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statement of financial condition of First BanCorp. (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Change in Accounting Principle As discussed in Notes 1 and 9 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codifications No. 326, Financial Instruments – Credit Losses (Topic 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. 134 Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses – Model and Forecast of Macroeconomic Variables As described in Notes 1 and 9 to the financial statements, the allowance for credit losses (“ACL”) for loans and finance leases is an accounting estimate of expected credit losses over the contractual life of financial assets carried at amortized cost and off-balance- sheet credit exposures. The calculation of the ACL for loans and finance leases, is primarily measured based on a probability of default / loss given default modeled approach. A significant amount of judgment was required when assessing the reasonableness and quality of the model design and construction, including whether the models were relevant to the Company’s loan portfolio and were suitable for use. Additionally, the estimate of the probability of default and loss given default assumptions uses relevant current and forward-looking macroeconomic variables, such as: unemployment rate; housing and real estate price indices; interest rates; market risk factors; and gross domestic product, and considers conditions throughout Puerto Rico, the Virgin Islands, and the State of Florida. A significant amount of judgment is required to assess the reasonableness of the macroeconomic variables. Changes in the model design as well as changes to these assumptions could have a material effect on the Company’s financial results. 135 The model and the current and forward-looking macroeconomic variables used contribute significantly to the determination of the ACL for loans and finance leases. We identified the assessment of the model design and construction and the assessment of relevant macroeconomic variables as a critical audit matter as the impact of these judgments represents a significant portion of the ACL for loans and finance leases and because management’s estimate required especially subjective auditor judgment and significant audit effort, including the need for specialized skill. The primary procedures we performed to address these critical audit matters included: ● Testing the effectiveness of controls over the evaluation of the conceptual design and construction of the models and the evaluation of the current and forward-looking macroeconomic variables, including controls addressing: o Management’s review and approval of the models and methodologies used to establish the ACL. o Management’s review and approval of the macroeconomic variables. o Management’s review of the reasonableness of the results of the macroeconomic variables used in the calculation. o Management’s review of the results of the third-party model validations. ● Substantively testing management’s process, including evaluating their judgments and assumptions, for assessing the conceptual design and construction of the models and for developing the macroeconomic variables, which included: o o o Evaluation, with the assistance of professionals with specialized skill and knowledge, of the reasonableness of management’s judgments related to the conceptual design and construction of the models. Evaluation of the completeness and accuracy of data inputs used as a basis for the adjustments relating to macroeconomic variables. Evaluation, with the assistance of professionals with specialized skill and knowledge, of the reasonableness of management’s judgments related to the macroeconomic variables used in the determination of the ACL for loans. Among other procedures, our evaluation considered, evidence from internal and external sources, loan portfolio performance trends and whether such assumptions were applied consistently period to period. o Analytical evaluation of the variables period to period for directional consistency and testing for reasonableness. /s/ Crowe LLP We have served as the Company’s auditor since 2018. Fort Lauderdale, Florida March 1, 2022 Stamp No. E413192 of the Puerto Rico Society of Certified Public Accountants was affixed to the record copy of this report. 136 Management’s Report on Internal Control over Financial Reporting To the Stockholders and Board of Directors of First BanCorp.: First BanCorp.’s (the “Corporation”) internal control over financial reporting is a process designed and effected by those charged with governance, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Corporation’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Management is responsible for establishing and maintaining effective internal control over financial reporting. Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2021, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control- Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2021, the Corporation’s internal control over financial reporting is effective based on the criteria established in Internal Control-Integrated Framework (2013). Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2021, has been audited by CROWE LLP, an independent public accounting firm, as stated in their accompanying report dated March 1, 2022. First BanCorp. /s/ Aurelio Alemán Aurelio Alemán President and Chief Executive Officer Date: March 1, 2022 /s/ Orlando Berges Orlando Berges Executive Vice President and Chief Financial Officer Date: March 1, 2022 137 FIRST BANCORP. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except for share information) ASSETS Cash and due from banks Money market investments: Time deposits with other financial institutions Other short-term investments Total money market investments Investment securities available for sale, at fair value: Securities pledged with creditors’ rights to repledge Other investment securities available for sale Total investment securities available for sale, at fair value (amortized cost 2021 - $6,534,503; 2020 - $4,584,851; allowance for credit losses of $1,105 as of December 31, 2021 and $1,310 as of December 31, 2020) Investment securities held to maturity, at amortized cost, net of allowance for credit losses of $8,571 as of December 31, 2021 and $8,845 as of December 31, 2020 (fair value 2021 - $167,147; 2020 - $173,806) Equity securities Loans, net of allowance for credit losses of $269,030 (2020 - $385,887) Loans held for sale, at lower of cost or market Total loans, net Premises and equipment, net Other real estate owned (“OREO”) Accrued interest receivable on loans and investments Deferred tax asset, net Goodwill Intangible assets Other assets Total assets LIABILITIES Non-interest-bearing deposits Interest-bearing deposits Total deposits Securities sold under agreements to repurchase Federal Home Loan Bank advances Other borrowings Accounts payable and other liabilities Total liabilities STOCKHOLDERS’ EQUITY Preferred stock, authorized, 50,000,000 shares: Non-cumulative Perpetual Monthly Income Preferred Stock: 22,004,000; 1,444,146 shares outstanding as of December 31, 2020, aggregate liquidation value of $36,104 as of December 31, 2020 (See Note 23) Common stock, $0.10 par value, authorized, 2,000,000,000 shares; 223,663,116 shares issued (2020 - 223,034,348 shares issued) Less: Treasury stock (at par value) Common stock outstanding, 201,826,505 shares outstanding (2020 - 218,235,064 shares outstanding) Additional paid-in capital Retained earnings, includes legal surplus reserve of $137,591 (2020 - $109,338) Accumulated other comprehensive (loss) income, net of tax of $9,786 as of December 31, 2021 (2020 - $7,590) December 31, 2021 December 31, 2020 $ 2,540,376 $ 1,433,261 300 2,382 2,682 321,180 6,132,581 300 60,272 60,572 341,789 4,305,230 6,453,761 4,647,019 $ $ $ $ 169,562 32,169 10,791,628 35,155 10,826,783 146,417 40,848 61,507 208,482 38,611 29,934 234,143 20,785,275 7,027,513 10,757,381 17,784,894 300,000 200,000 183,762 214,852 18,683,508 - 22,366 (2,183) 20,183 738,288 1,427,295 (83,999) 180,643 37,588 11,391,402 50,289 11,441,691 158,209 83,060 69,505 329,261 38,632 40,893 272,737 18,793,071 4,546,123 10,771,260 15,317,383 300,000 440,000 183,762 276,747 16,517,892 36,104 22,303 (480) 21,823 946,476 1,215,321 55,455 2,275,179 18,793,071 Total stockholders’ equity Total liabilities and stockholders’ equity 2,101,767 20,785,275 $ $ The accompanying notes are an integral part of these statements. 138 FIRST BANCORP. CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2020 2019 2021 $ $ 719,153 72,893 2,662 794,708 $ 631,047 58,547 3,388 692,982 (In thousands, except per share information) Interest and dividend income: Loans Investment securities Money market investments and interest-bearing cash accounts Total interest and dividend income Interest expense: Deposits Loans payable Securities sold under agreements to repurchase Advances from FHLB Other borrowings Total interest expense Net interest income Provision for credit losses - (benefit) expense: Loans and finance leases Unfunded loan commitments Debt securities Provision for credit losses - (benefit) expense Net interest income after provision for credit losses Non-interest income: Service charges and fees on deposit accounts Mortgage banking activities Net gain (loss) on investment securities Gain on early extinguishment of debt Insurance commission income Other non-interest income Total non-interest income Non-interest expenses: Employees' compensation and benefits Occupancy and equipment Business promotion Professional fees Taxes, other than income taxes Federal Deposit Insurance Corporation ("FDIC") deposit insurance Net (gain) loss on OREO and OREO expenses Credit and debit card processing expenses Communications Merger and restructuring costs Other non-interest expenses Total non-interest expenses Income before income taxes Income tax expense Net income Net income attributable to common stockholders Net income per common share: Basic Diluted 602,998 59,546 13,353 675,897 77,782 - 6,647 14,963 9,424 108,816 567,081 40,225 (412) - 39,813 527,268 23,916 17,058 (497) - 10,186 39,909 90,572 162,374 63,169 15,710 45,889 15,325 6,319 14,644 16,472 6,891 11,442 20,233 378,468 239,372 71,995 68,388 21 6,645 11,251 6,355 92,660 600,322 168,717 1,183 1,085 170,985 429,337 24,612 22,124 13,198 94 9,364 41,834 111,226 177,073 74,633 12,145 52,633 17,762 6,488 3,598 19,144 8,437 26,509 25,818 424,240 116,323 14,050 41,482 - 9,963 8,199 5,135 64,779 729,929 (61,720) (3,568) (410) (65,698) 795,627 35,284 24,998 - - 11,945 48,937 121,164 200,457 93,253 15,359 59,956 22,151 6,544 (2,160) 22,169 9,387 26,435 35,423 488,974 427,817 146,792 281,025 277,338 $ $ $ $ $ $ 102,273 $ 167,377 99,597 $ 164,701 1.32 $ 1.31 $ 0.46 $ 0.46 $ 0.76 0.76 The accompanying notes are an integral part of these statements. 139 FIRST BANCORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Net income Other comprehensive (loss) income, net of tax: Debt securities: Year Ended December 31, 2021 2020 2019 $ 281,025 $ 102,273 $ 167,377 Unrealized gain on debt securities for which credit losses have been recognized Reclassification adjustment for credit losses - (benefit) expense on debt securities included in net income 1,417 (136) 772 1,641 Reclassification adjustment for net gains included in net income on sales of available-for-sale debt securities with no credit losses previously recognized All other unrealized holding (losses) gains on available-for-sale debt securities Defined benefit plans adjustments: Net actuarial gain (loss) Other comprehensive (loss) income for the year, net of tax Total comprehensive income (In thousands) Income tax effect of items included in other comprehensive (loss) income: Debt securities: Unrealized gain on debt securities for which credit losses have been recognized Reclassification adjustment for credit losses - (benefit) expense on debt securities included in net Reclassification adjustments for net gain included in net income on sales of available-for-sale debt securities with no credit losses previously recognized All other unrealized holding (losses) gains on available-for-sale debt securities Defined benefit plans adjustments: Net actuarial gain (loss) Total income tax effect of items included in other comprehensive (loss) income $ $ $ 48 497 - 46,634 - 47,179 214,556 - (144,396) (13,198) 59,746 3,661 (139,454) 141,571 $ (270) 48,691 150,964 $ Year Ended December 31, 2021 2020 2019 - $ - - - - $ - - - 2,199 2,199 $ (162) (162) $ - - - - - - The accompanying notes are an integral part of these statements. 140 FIRST BANCORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of intangible assets Provision for credit losses - (benefit) expense Deferred income tax expense (benefit) Stock-based compensation Gain on early extinguishment of debt (Gain) loss on sales of investment securities Unrealized gain on derivative instruments Net (gain) loss on disposals or sales of premises and equipment and other assets Net gain on sales of loans Net amortization/accretion of discounts, premiums, and deferred loan fees and costs Originations and purchases of loans held for sale Sales and repayments of loans held for sale Amortization of broker placement fees Net amortization/accretion of premiums and discounts on investment securities Decrease (increase) in accrued interest receivable (Decrease) increase in accrued interest payable Decrease (increase) in other assets (Decrease) increase in other liabilities Net cash provided by operating activities Cash flows from investing activities: Net repayments (disbursements) on loans held for investment Proceeds from sales of loans held for investment Proceeds from sales of repossessed assets Proceeds from sales of available-for-sale securities Purchases of available-for-sale securities Proceeds from principal repayments and maturities of available-for-sale securities Proceeds from principal repayments and maturities of held-to-maturity securities Additions to premises and equipment Proceeds from sales of premises and equipment and other assets Net redemptions of other investments securities Proceeds from the settlement of insurance claims - investing activities Net (payments) cash acquired in acquisition Net cash used in investing activities Cash flows from financing activities: Net increase in deposits Net decrease in short-term borrowings Repayments of long-term borrowings Proceeds from long-term reverse repurchase agreements Repurchase of outstanding common stock Dividends paid on common stock Dividends paid on preferred stock Redemption of preferred stock- Series A through E Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash and cash equivalents include: Cash and due from banks Money market instruments Year Ended December 31, 2020 2021 2019 $ 281,025 $ 102,273 $ 167,377 24,965 11,407 (65,698) 118,323 5,460 - - (4,227) (32) (14,791) (25,294) (503,200) 528,253 218 26,549 7,701 (2,776) 24,344 (12,506) 399,721 599,097 81,458 55,867 - (3,447,921) 1,445,873 12,677 (13,349) 832 5,322 550 (3,381) (1,262,975) 2,472,579 - (240,000) - (216,522) (65,021) (2,453) (36,104) 1,912,479 1,049,225 1,493,833 2,543,058 2,540,376 2,682 2,543,058 $ $ $ 20,068 5,912 170,985 (4,371) 5,117 (94) (13,198) (5,635) (215) (13,273) (8,602) (648,052) 659,349 537 19,410 6,419 (2,990) (5,018) 9,116 297,738 (335,152) 6,788 35,270 1,195,250 (3,820,148) 1,277,762 6,431 (16,070) 497 3,881 - 406,626 (1,238,865) 1,767,441 (35,000) (95,282) 200,000 (206) (43,416) (2,676) - 1,790,861 849,734 644,099 1,493,833 1,433,261 60,572 1,493,833 $ $ $ $ $ $ 17,592 3,086 39,813 55,009 3,949 - 497 (2,934) 242 (10,446) (8,117) (362,612) 360,572 732 2,483 (1,971) 1,081 32,521 (4,590) 294,284 (341,870) 83,428 60,124 - (765,432) 628,675 6,138 (22,478) 1,568 6,292 587 - (342,968) 361,657 (15,086) (205,000) - (1,959) (30,356) (2,676) - 106,580 57,896 586,203 644,099 546,391 97,708 644,099 The accompanying notes are an integral part of these statements. 141 FIRST BANCORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except per share information) Preferred Stock: Balance at beginning of year Redemption of Series A through E Preferred Stock Balance at end of year Common stock outstanding: Balance at beginning of year Common stock repurchases (See Note 23) Restricted stock grants Unrestricted stock grants Vesting of performance shares unit Restricted stock forfeited Balance at end of year Additional paid-in capital: Balance at beginning of year Common stock repurchases (See Note 23) Stock-based compensation expense Restricted stock grants Unrestricted stock grants Vesting of performance shares unit Restricted stock forfeited Issuance costs of Series A through E Preferred Stock redeemed Balance at end of year Year Ended December 31, 2021 2020 2019 $ $ 36,104 (36,104) - $ 36,104 - 36,104 21,823 (1,695) 33 - 30 (8) 20,183 946,476 (214,827) 5,460 (33) - (30) 8 1,234 738,288 21,736 (5) 90 2 - - 21,823 941,652 (201) 5,117 (90) (2) - - - 946,476 36,104 - 36,104 21,724 (18) 31 - - (1) 21,736 939,674 (1,941) 3,949 (31) - - 1 - 941,652 Retained earnings: Balance at beginning of year Impact of adoption of Accounting Standards Codification ("ASC" or "Codification") Topic 326, "Financial Instruments - Credit Losses" ("ASC 326" or "CECL") Balance at beginning of period (as adjusted for impact of adoption of ASC 326) Net income Dividends on common stock (2021 - $0.31 per share; 2020 - $0.20 per share; 2019 - $0.14 per share) Dividends on preferred stock Excess of redemption value over carrying value of Series A through E Preferred Stock redeemed Balance at end of year Accumulated other comprehensive (loss) income, net of tax: Balance at beginning of year Other comprehensive (loss) income, net of tax Balance at end of year 1,215,321 1,221,817 1,087,617 281,025 (65,364) (2,453) (1,234) 1,427,295 55,455 (139,454) (83,999) (62,322) 1,159,495 102,273 (43,771) (2,676) - 1,215,321 6,764 48,691 55,455 167,377 (30,501) (2,676) - 1,221,817 (40,415) 47,179 6,764 Total stockholders’ equity $ 2,101,767 $ 2,275,179 $ 2,228,073 The accompanying notes are an integral part of these statements. 142 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of business First BanCorp. (the “Corporation”) is a publicly owned, Puerto Rico-chartered financial holding company that is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Corporation is a full service provider of financial services and products with operations in Puerto Rico, the United States, the U.S. Virgin Islands (the “USVI”), and the British Virgin Islands (the “BVI”). The Corporation provides a wide range of financial services for retail, commercial, and institutional clients. The Corporation has two wholly-owned subsidiaries: FirstBank Puerto Rico (“FirstBank” or the “Bank”), and FirstBank Insurance Agency, Inc. (“FirstBank Insurance Agency”). FirstBank is a Puerto Rico-chartered commercial bank, and FirstBank Insurance Agency is a Puerto Rico-chartered insurance agency. FirstBank is subject to the supervision, examination, and regulation of both the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (the “OCIF”) and the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured through the FDIC Deposit Insurance Fund. FirstBank also operates in the State of Florida, subject to regulation and examination by the Florida Office of Financial Regulation and the FDIC, in the USVI, subject to regulation and examination by the United States Virgin Islands Banking Board, and in the BVI, subject to regulation by the British Virgin Islands Financial Services Commission. The Consumer Financial Protection Bureau (the “CFPB”) regulates FirstBank’s consumer financial products and services. FirstBank Insurance Agency is subject to the supervision, examination, and regulation of the Office of the Insurance Commissioner of the Commonwealth of Puerto Rico and the Division of Banking and Insurance Financial Regulation in the USVI. Effective September 1, 2020, FirstBank completed the acquisition of Santander Bancorp, a wholly-owned subsidiary of Santander Holdings USA, Inc. and the holding company of Banco Santander Puerto Rico (“BSPR”), pursuant to a Stock Purchase Agreement dated as of October 21, 2019, by and among FirstBank and Santander Holdings, USA, Inc. (the “Stock Purchase Agreement”). Immediately following the closing of the transaction, Santander Bancorp was merged with and into FirstBank (the “HoldCo Merger”), with FirstBank surviving the HoldCo Merger. Immediately following the effectiveness of the HoldCo Merger, BSPR was merged with and into FirstBank, with FirstBank as the surviving entity in the merger. Refer to Note 2 – Business Combination, to the consolidated financial statements for more information about this acquisition. FirstBank conducts its business through its main office located in San Juan, Puerto Rico, 64 banking branches in Puerto Rico, eight seven wholly- banking branches in the USVI and the BVI, and 11 banking branches in the state of Florida (USA). FirstBank has owned subsidiaries with operations in Puerto Rico: First Federal Finance Corp. (d/b/a Money Express La Financiera), a finance company specializing in the origination of small loans with 28 offices in Puerto Rico; First Management of Puerto Rico, a Puerto Rico corporation, which holds tax-exempt assets; FirstBank Overseas Corporation, an international banking entity (an “IBE”) organized under the International Banking Entity Act of Puerto Rico; and one dormant company formerly engaged in the operation of certain OREO property. General The accompanying consolidated audited financial statements have been prepared in conformity with GAAP. The following is a description of the Corporation’s most significant accounting policies. Principles of consolidation The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The results of operations of companies or assets acquired are included from the date of acquisition. Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust- preferred securities (“TRuPs”) and entities in which the Corporation has a non-controlling interest, are not consolidated in the Corporation’s consolidated financial statements in accordance with authoritative guidance issued by the FASB for consolidation of variable interest entities (“VIE”). See “Variable Interest Entities” below for further details regarding the Corporation’s accounting policy for these entities . 143 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and contingent liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash items in transit, and amounts due from the Federal Reserve Bank of New York (the “Federal Reserve” or the “FED”) and other depository institutions. The term also includes money market funds and short-term investments with original maturities of three months or less. Investment securities The Corporation classifies its investments in debt and equity securities into one of four categories: Held-to-maturity — Debt securities that the entity has the intent and ability to hold to maturity. These securities are carried at amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred. Trading — Securities that are bought and held principally for the purpose of selling them in the near term. These securities are carried at fair value, with unrealized gains and losses reported in earnings. As of December 31, 2021, and 2020, the Corporation did not hold investment securities for trading purposes. Available-for-sale — Securities not classified as held-to-maturity or trading. These securities are carried at fair value, with unrealized holding gains and losses, net of deferred taxes, reported in other comprehensive income (“OCI”) as a separate component of stockholders’ equity. The unrealized holding gains and losses do not affect earnings until they are realized, or an allowance for credit losses (“ACL”) is recorded. Equity securities — Equity securities that do not have readily available fair values are classified as equity securities in the consolidated statements of financial condition. These securities are stated at the lower of cost or realizable value. This category is principally composed of FHLB stock that the Corporation owns to comply with FHLB regulatory requirements. The realizable value of the stock equals its cost. Also included in this category are marketable equity securities held at fair value with changes in unrealized gains or losses recorded through earnings. Premiums and discounts on debt securities are amortized as an adjustment to interest income on investments over the life of the related securities under the interest method without anticipating prepayments, except for mortgage-backed securities (“MBS”) where prepayments are anticipated. Premiums on callable debt securities, if any, are amortized to the earliest call date. Purchases and sales of securities are recognized on a trade-date basis. Gains and losses on sales are determined using the specific identification method. A debt security is placed on nonaccrual status at the time any principal or interest payment becomes 90 days delinquent. Interest accrued but not received for a security placed on non-accrual is reversed against interest income. As of December 31, 2021, a $ 2.9 million residential pass-through MBS issued by the Puerto Rico Housing Finance Authority (“PRHFA”) that is collateralized by certain second mortgages origination under a program launched by the Puerto Rico government in 2010, is in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral. No debt security was in a nonaccrual status as of December 31, 2020. Allowance for Credit Losses – Held-to-Maturity Debt Securities: The Corporation measures expected credit losses on held-to- maturity securities by major security type. As of December 31, 2021, the held-to-maturity securities portfolio consisted of Puerto Rico municipal bonds totaling $ 178.1 million. Approximately 73% of the held-to-maturity municipal bonds were issued by four of the largest municipalities in Puerto Rico. The vast majority of revenue for these four municipalities is independent of the Puerto Rico central government. These obligations typically are not issued in bearer form, nor are they registered with the Securities and Exchange Commission (“SEC”), and are not rated by external credit agencies. In most cases, these bonds have priority over the payment of operating costs and expenses of the municipality, which 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. 144 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The ACL for the held-to-maturity Puerto Rico municipal bonds of $ 8.6 million as of December 31, 2021 (2020 - $ 8.8 million) i.e., considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. These financing arrangements with Puerto Rico municipalities were issued in bond form and accounted for as securities but underwritten as loans with features that are typically found in commercial loans. Accordingly, similar to commercial loans, an internal risk rating ( pass, special mention, substandard, doubtful, or loss) is assigned to each bond at the time of issuance or acquisition, and monitored on a continuous basis with a formal assessment completed, at a minimum, on a quarterly basis. The Corporation determines the ACL for held-to-maturity Puerto Rico municipal bonds based on the product of a cumulative probability of default (“PD”) and loss given default (“LGD”), and the amortized cost basis of each bond over its remaining expected life. PD estimates represent the point -in-time as of which the PD is developed, and are updated quarterly based on, among other things, the payment performance experience, financial performance and market value indicators, and current and forecasted relevant forward-looking macroeconomic variables over the expected life of the bonds, to determine a lifetime term structure PD curve. LGD estimates are determined based on, among other things, historical charge-off events and recovery payments (if any), government sector historical loss experience, as well as relevant current and forecasted macroeconomic expectations of variables, such as unemployment rates, interest rates, and market risk factors based on industry performance, to determine a lifetime term structure LGD curve. Under this approach, all future period losses for each instrument are calculated using the PD and LGD loss rates derived from the term structure curves applied to the amortized cost basis of each bond. For the relevant macroeconomic expectations of variables, the methodology considers an initial forecast period (a “reasonable and supportable period”) of approach and reverting back to the historical macroeconomic mean. After the reversion period, the Corporation uses a historical loss forecast period covering the remaining contractual life based on the changes in key historical economic variables during representative historical expansionary and recessionary periods. Furthermore, the Corporation periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (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. two years and a reversion period of up to three years, utilizing a straight-line Prior to the implementation of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASC 326” or “CECL”) on January 1, 2020, the Corporation evaluated its held-to-maturity investment securities portfolio on a quarterly basis for indicators of other-than-temporary impairment (“OTTI”). The Corporation assessed whether OTTI had occurred, the credit portion of the OTTI was recognized in noninterest income while the noncredit portion was recognized in OCI. In determining the credit portion, the Corporation used a discounted cash flow analysis which included evaluating the timing and amount of the expected cash flow. The Corporation has elected not to measure an allowance for credit losses on accrued interest related to held-to-maturity debt securities, as uncollectible accrued interest receivables are written off on a timely manner. Refer to Note 5 - Investment Securities to the consolidated financial statements for additional information about reserve balances for held-to-maturity debt securities, activity during the period, and information about changes in circumstances that caused changes in the ACL for held-to-maturity debt securities during the years ended December 31, 2021 and 2020. Allowance for Credit Losses – Available -for-Sale Debt Securities: For available-for-sale debt securities in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written off to fair value through earnings. For available-for-sale debt securities that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the cash position of the issuer and its cash and capital generation capacity, which could increase or diminish the issuer’s ability to repay its bond obligations, the extent to which the fair value is less than the amortized cost basis, any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the financial condition of the issuer, credit ratings, the failure of the issuer to make scheduled principal or interest payments, recent legislation and government actions affecting the issuer’s industry, and actions taken by the issuer to deal with the economic climate. The Corporation also takes into consideration changes in the near-term prospects of the underlying collateral of a security, if any, such as changes in default rates, loss severity given default, and significant changes in prepayment assumptions and the level of cash flows generated from the underlying collateral, if any, supporting the principal and interest payments on the debt securities. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and the Corporation records an ACL for the credit loss, limited to the amount by which the fair value is less than the amortized cost basis. The Corporation recognizes in OCI any impairment that has not been recorded through an ACL. 145 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Corporation records changes in the ACL as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. The Corporation has elected not to measure an allowance for credit losses on accrued interest related to available-for-sale securities, as uncollectible accrued interest receivables are written off on a timely manner. Approximately 99% of the Corporation’s available-for-sale investment securities are issued by U.S. government-sponsored entities (“GSEs”). These securities are either explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses. For further information, including the methodology and assumptions used for the discounted cash flow analyses performed on other available-for-sale investment securities such as private label MBS and bonds issued by the PRHFA, refer to Note 5 – Investment Securities, and Note 30 – Fair Value, to the consolidated financial statements Prior to the implementation of CECL on January 1, 2020, the Corporation evaluated its available-for-sale investment securities portfolio in accordance with the methodology specified above paragraph except that the credit portion of the OTTI was recognized in noninterest income and reduced the amortized cost basis of the security. Any subsequent increase in the expected cash flows would be recognized as an adjustment to interest income. Loans held for investment Loans that the Corporation has the ability and intent to hold for the foreseeable future are classified as held for investment and are reported at amortized cost, net of its ACL. The substantial majority of the Corporation’s loans are classified as held for investment. Amortized cost is the principal outstanding balance, net of unearned interest, cumulative charge -offs, unamortized deferred origination fees and costs, and unamortized premiums and discounts. The Corporation reports credit card loans at their outstanding unpaid principal balance plus uncollected billed interest and fees net of such amounts deemed uncollectible. Interest income is accrued on the unpaid principal balance. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method or a method that approximates the interest method over the term of the loan as an adjustment to interest yield. Unearned interest on certain personal loans, auto loans, and finance leases and discounts and premiums are recognized as income under a method that approximates the interest method. When a loan is paid-off or sold, any remaining unamortized net deferred fees, or costs, discounts and premiums are included in loan interest income in the period of payoff. Nonaccrual and Past-Due Loans - Loans on which the recognition of interest income has been discontinued are designated as nonaccrual. Loans are classified as nonaccrual when they are 90 days past due for interest and principal, except for residential mortgage loans insured or guaranteed by the Federal Housing Administration (the “FHA”), the Veterans Administration (the “VA”) or the PRHFA, and credit card loans. It is the Corporation’s policy to report delinquent mortgage loans insured by the FHA, or guaranteed by the VA or the PRHFA, as loans past due 90 days and still accruing as opposed to nonaccrual loans since the principal repayment is insured or guaranteed. However, the Corporation discontinues the recognition of income relating to FHA/VA loans when such loans are over 15 months delinquent, taking into consideration the FHA interest curtailment process, and relating to PRHFA loans when such loans are over 90 days delinquent. Credit card loans continue to accrue finance charges and fees until charged off at 180 days. Loans generally may be placed on nonaccrual status prior to when required by the policies described above when the full and timely collection of interest or principal becomes uncertain (generally based on an assessment of the borrower’s financial condition and the adequacy of collateral, if any). When a loan is placed on nonaccrual status, any accrued but uncollected interest income is reversed and charged against interest income and amortization of any net deferred fees is suspended. The amount of accrued interest reversed against interest income totaled $ 2.0 million for the year ended December 31, 2021(2020 - $ 1.9 million). Interest income on nonaccrual loans is recognized only to the extent it is received in cash. However, when there is doubt regarding the ultimate collectability of loan principal, all cash thereafter received is applied to reduce the carrying value of such loans ( method). Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Generally, the Corporation returns a loan to accrual status when all delinquent interest and principal becomes current under the terms of the loan agreement, or after a sustained period of repayment performance ( six months ) and the loan is well secured and in the process of collection, and full repayment of the remaining contractual principal and interest is expected. Loans that are past due 30 days or more as to principal or interest are considered delinquent, with the exception of residential mortgage, commercial mortgage, and construction loans, which are considered past due when the borrower is in arrears on two or more monthly payments. The Corporation has elected not to measure an allowance for credit losses on accrued interest related to loans held for investment, as uncollectible accrued interest receivables are written off on a timely manner. i.e., the cost recovery Loans Acquired – Loans acquired through a purchase or a business combination are recorded at their fair value as of the acquisition date. The Corporation performs an assessment of acquired loans to first determine if such loans have experienced more than insignificant deterioration in credit quality since their origination and thus should be classified and accounted for as purchased credit deteriorated (“PCD”) loans. For loans that have not experienced more than insignificant deterioration in credit quality since origination, referred to as non-PCD loans, the Corporation records such loans at fair value, with any resulting discount or premium accreted or amortized into interest income over the remaining life of the loan using the interest method. Additionally, upon the 146 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) purchase or acquisition of non-PCD loans, the Corporation measures and records an ACL based on the Corporation’s methodology for determining the ACL. The ACL for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans are purchased or acquired. Acquired loans that are classified as PCD are recognized at fair value, which includes any resulting premiums or discounts. Premiums and non-credit loss related discounts are amortized or accreted into interest income over the remaining life of the loan using the interest method. Unlike non-PCD loans, the initial ACL for PCD loans is established through an adjustment to the acquired loan balance and not through a charge to the provision for credit losses in the period in which the loans were acquired. At acquisition, the ACL for PCD loans, which represents the fair value credit discount, is determined using a discounted cash flow method that considers the PDs and LGDs used in the Corporation’s ACL methodology. Characteristics of PCD loans include: delinquency, payment history since origination, credit scores migration and/or other factors the Corporation may become aware of through its initial analysis of acquired loans that may indicate there has been more than insignificant deterioration in credit quality since a loan’s origination. In connection with the BSPR acquisition on September 1, 2020, the Corporation acquired PCD loans with an aggregate fair value at acquisition of approximately $ 752.8 million, and recorded an initial ACL of approximately $ 28.7 million, which was added to the amortized cost of the loans. Subsequent to acquisition, the ACL for both non-PCD and PCD loans is determined pursuant to the Corporation’s ACL methodology in the same manner as all other loans. For PCD loans that prior to the adoption of ASC 326 were classified as purchased credit impaired (“PCI”) loans and accounted for under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) Subtopic 310-30, “Accounting for Purchased Loans Acquired with Deteriorated Credit Quality” (ASC Subtopic 310-30), the Corporation adopted ASC 326 using the prospective transition approach. As allowed by ASC 326, 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. As of December 31, 2021, such PCD loans consisted of $ 115.1 million of residential mortgage loans and $ 2.4 million of commercial mortgage loans acquired by the Corporation as part of previously completed asset acquisitions. These previous transactions include a transaction completed on February 27, 2015, in which FirstBank acquired ten Puerto Rico branches of Doral Bank, acquired certain assets, including PCD loans, and assumed deposits, through an alliance with Banco Popular of Puerto Rico, which was the successful lead bidder with the FDIC on the failed Doral Bank, as well as other co-bidders, and the acquisition from Doral Financial in the first quarter of 2014 of all of its rights, title and interest in first and second residential mortgage loans in full satisfaction of secured borrowings owed by such entity to FirstBank. As the Corporation elected to maintain pools of units of account for loans previously accounted for under ASC Subtopic 310-30, the Corporation is not able to remove loans from the pools until they are paid off, written off or sold (consistent with the Corporation’s practice prior to adoption of ASC 326), but is required to follow ASC 326 for purposes of the ACL. Regarding interest income recognition for PCD loans that existed at the time of adoption of ASC 326, the prospective transition approach for PCD loans required by ASC 326 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 that the Corporation has elected to maintain in previously existing pools pursuant to the policy election right upon adoption of ASC 326 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 use of the collateral in operations or improving the collateral for resale. Thus, the Corporation continues to exclude these pools of PCD loans from nonaccrual loan statistics. In accordance with ASC 326, the Corporation did not reassess whether modifications to individual acquired loans accounted for within pools were TDR as of the date of adoption. Charge-off of Uncollectible Loans - Net charge -offs consist of the unpaid principal balances of loans held for investment that the Corporation determines are uncollectible, net of recovered amounts. The Corporation records charge -offs as a reduction to the ACL and subsequent recoveries of previously charged-off amounts are credited to the ACL. Effective April 1, 2021, the Corporation updated its policies regarding the timing of recognition of auto loans and small personal loans charge -offs. The update requires the Corporation to charge-off auto loans, finance leases, and small personal loans, or portions of such loans, classified as “loss” when the loan becomes 120 days or more past due. Under the previous policy, the Corporation reserved the portion of auto loans and finance leases deemed “loss” once they were 120 days delinquent and charged-off an auto loan to their net realizable value when the collateral deficiency was deemed uncollectible (i.e., when foreclosure/repossession is probable) or when the loan was 365 days past due. For small personal loans, the Corporation previously reserved loans that were classified as “loss” when they were 120 days delinquent and charged-off a loan when the loan became 180 days past due. The policy update is supported by the fact that the majority of consumer loans that become 120 days or more delinquent will ultimately go to foreclosure or the borrower has demonstrated an inability or lack of willingness to meet their obligation of making timely payments to cure the delinquency. At the time the Corporation implemented the update to the charge-off policy in the second quarter of 2021, the amount of 147 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) loans determined to be classified as “loss” amounted to $ 4.1 million, which was charged-off during the quarter. Approximately $ 1.1 million of such charge -off exceeded existing reserves at the time the Corporation implemented the policy update. This update to the policy did not have an impact on the approach the Corporation uses to estimate the ACL for auto loans, finance leases, or small personal loans. Collateral dependent loans in the construction, commercial mortgage, and commercial and industrial loan portfolios are charged off to their net realizable value (fair value of collateral, less estimated costs to sell) when loans are considered to be uncollectible. Within the consumer loan portfolio, closed-end consumer loans are charged off when payments are 120 days in arrears, except for auto, finance lease and small personal loans as discussed above. Open-end (revolving credit) consumer loans, including credit card loans, are charged off when payments are 180 days in arrears. Residential mortgage loans that are 180 days delinquent are reviewed and charged-off, as needed, to the fair value of the underlying collateral less cost to sell. Generally, all loans may be charged off or written down to the fair value of the collateral prior to the application of the policies described above if a loss-confirming event has occurred. Loss-confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, or receipt of an asset valuation indicating a collateral deficiency when the asset is the sole source of repayment. Troubled Debt Restructurings - A restructuring of a loan constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. TDR loans are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, loans on nonaccrual status and restructured as TDRs will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of months, and there is evidence that such payments can, and are likely to, continue as agreed. six The Corporation removes loans from TDR classification, consistent with applicable authoritative accounting guidance, only when the following two circumstances are met: ● ● The loan is in compliance with the terms of the restructuring agreement; and The loan yields a market interest rate at the time of the restructuring. In other words, the loan was restructured with an interest rate equal to or greater than what the Corporation would have been willing to accept at the time of the restructuring for a new loan with comparable risk. If both conditions are met, the loan can be removed from the TDR classification in calendar years after the year in which the restructuring took place. A loan that had previously been modified in a TDR and is subsequently refinanced under then-current underwriting standards at a market rate with no concessionary terms is accounted for as a new loan and is no longer reported as a TDR. The ACL on a TDR loan is generally measured using a discounted cash flow method, as further explained below, where the expected future cash flows are discounted at the rate of the loan prior to the restructuring. For credit cards, personal loans, and nonaccrual auto loans and finance leases modified in a TDR, the ACL is measured using the same methodologies as those used for all other loans in those portfolios. Loans individually evaluated for credit loss determination – The Corporation may evaluate loans individually for purposes of the ACL determination when, based upon current information and events, including consideration of internal credit risk ratings, the Corporation assesses that it is probable that it will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the loan agreement, primarily collateral dependent commercial and construction loans, or loans that have been modified or are reasonably expected to be modified in a TDR (except for credit cards, personal loans and nonaccrual auto loans). The Corporation individually evaluates loans having balances of $ 0.5 million or more and with the aforementioned conditions in the construction, commercial mortgage, and commercial and industrial loan portfolios. The Corporation also evaluates individually for ACL purposes certain residential mortgage loans and home equity lines of credit with high delinquency levels. Interest income on loans individually evaluated for ACL determination is recognized based on the Corporation’s policy for recognizing interest on accrual and nonaccrual loans. Collateral dependent loans - The Corporation elected the practical expedient allowed by ASC 326 for loans for which it expects repayment to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulties based on the Corporation’s assessment as of the reporting date. Accordingly, when the Corporation determines that foreclosure is probable, expected credit losses on collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for undiscounted selling costs as appropriate. 148 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Allowance for credit losses for loans and finance leases The ACL for loans and finance leases held for investment is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans. Loans are charged-off against the allowance when management confirms the uncollectibility of a loan balance. The Corporation estimates the allowance 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 any difference 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. Expected credit losses are estimated over the contractual term of the loans, adjusted by prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: the Corporation has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Corporation. The Corporation estimates the ACL primarily based on a PD/LGD modeled approach, or individually for collateral dependent loans and certain TDR loans. The Corporation evaluates the need for changes to the ACL by portfolio segments and classes of loans within certain of those portfolio segments. Factors such as the credit risk inherent in a portfolio and how the Corporation monitors the related quality, as well as the estimation approach to estimate credit losses, are considered in the determination of such portfolio segments and classes. The Corporation has identified the following portfolio segments and measures the ACL using the following methods: Residential mortgage – Residential mortgage loans are loans secured by residential real property together with the right to receive the payment of principal and interest on the loan. The majority of the Corporation’s residential loans are first lien closed-end loans secured by 1-4 single-family residential properties. As of December 31, 2021, the Corporation’s outstanding balance of residential mortgages in the Puerto Rico and Virgin Islands regions were mainly fixed-rate loans, while in the Florida region approximately 55% of the residential mortgage loan portfolio consisted of hybrid adjustable rate mortgages. For purposes of the ACL determination, the Corporation stratifies the portfolio by two main regions ( i.e., the Puerto Rico/Virgin Islands region and the Florida region) and by the following two classes: (i) government-guaranteed residential mortgage loans, and (ii) conventional mortgage loans. Government- guaranteed loans are those originated to qualified borrowers under the FHA and the VA standards. Originated loans that meet the FHA’s standards qualify for the FHA’s insurance program whereas loans that meet the standards of the VA are guaranteed by such entity. No credit losses are determined for loans insured or guaranteed by the FHA or the VA due to the explicit guarantee of the U.S. federal government. Residential mortgage loans that do not qualify under the FHA or VA programs are referred to as conventional residential mortgage loans. For conventional residential mortgage loans, the Corporation calculates the ACL using a PD/LGD modeled approach, or individually for collateral dependent loans with high delinquency levels or loans that have been modified or are reasonably expected to be modified in a TDR. The ACL for residential mortgage loans measured using a PD/LGD model is calculated based on the product of PD, LGD, and the amortized cost basis determined for each loan over the remaining expected life of the loan, considering prepayments. PD estimates represent the point-in-time as of which the PD is developed for each residential mortgage loan, updated quarterly based on, among other things, historical payment performance and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates, over the expected life of the loans to determine a lifetime term structure PD curve. The Corporation determines LGD estimates based on, among other things, historical charge-off events and recovery payments, loan-to-value attributes, and relevant current and forecasted macroeconomic variables, such as the regional housing price index, to determine a lifetime term structure LGD curve. Under this approach, the Corporation calculates losses for each loan for all future periods using the PD and LGD loss rates derived from the term structure curves applied to the amortized cost basis of the loans, considering prepayments. For loans that have been modified or are reasonably expected to be modified in a TDR and loans previously written-down to their respective realizable values, the Corporation determines the ACL based on a risk-adjusted discounted cash flow methodology using PDs and LGDs developed as explained above. Under this approach, all future cash flows (interest and principal) for each loan are adjusted by the PDs and LGDs derived from the term structure curves and prepayments and then discounted at the effective interest rate as of the reporting date (or original rate for TDRs) to arrive at the net present value of future cash flows. For these loans, the estimated credit loss amount recorded in a period represents the excess of the carrying amount of the loan, net of any charge-off, over the net present value of cash flows resulting from the model. Residential mortgage loans that are 180 days or more past due are considered collateral dependent loans and are individually reviewed and charged-off, as needed, to the fair value of the collateral less cost to sell. 149 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Commercial mortgage – Commercial mortgage loans are loans secured primarily by commercial real estate properties for which the primary source of repayment comes from rent and lease payments that are generated by an income-producing property. For purposes of the ACL determination, the Corporation stratifies the portfolio by two main regions (i.e., the Puerto Rico/Virgin Islands region and the Florida region). An internal risk rating (i.e., pass, special mention, substandard, doubtful, or loss) is assigned to each loan at the time of origination and monitored on a continuous basis with a formal assessment completed quarterly, at a minimum. For commercial mortgage loans, the Corporation calculates the ACL using a PD/LGD modeled approach, or individually for those loans that meet the definition of collateral dependent loans or loans that have been modified or are reasonably expected to be modified in a TDR. The ACL for commercial mortgage loans measured using a PD/LGD model is calculated based on the product of a cumulative PD and LGD, and the amortized cost basis determined for each loan over the remaining expected life of the loan, considering prepayments. PD estimates represent the point-in-time as of which the PD is developed for each commercial mortgage loan, updated quarterly based on, among other things, the payment performance experience, industry historical loss experience, property type, occupancy, and relevant current and forward-looking macroeconomic variables over the expected life of the loans to determine a lifetime term structure PD curve. The Corporation determines LGD estimates based on historical charge-off events and recovery payments, industry historical loss experience, specific attributes of the loans, such as loan-to-value, debt service coverage ratios, and net operating income, as well as relevant current and forecasted macroeconomic variables expectations, such as commercial real estate price indexes, the gross domestic product (“GDP”), interest rates, and unemployment rates, among others, to determine a lifetime term structure LGD curve. Under this approach, the Corporation calculates losses for each loan for all future periods using the PD and LGD loss rates derived from the term structure curves applied to the amortized cost basis of the loans, considering prepayments. The ACL for collateral dependent loans, including loans modified or reasonably expected to be modified in a TDR, is determined based on the fair value of the collateral at the reporting date, adjusted for undiscounted selling costs as appropriate. Commercial and Industrial – Commercial and Industrial (“C&I”) loans include both unsecured and secured loans for which the primary source of repayment comes from the ongoing operations and activities conducted by the borrower and not from rental income or the sale or refinancing of any underlying real estate collateral; thus, credit risk is largely dependent on the commercial borrower’s current and expected financial condition. As of December 31, 2021, the C&I loan portfolio consisted of loans granted to large corporate customers as well as middle-market customers across several industries, and the government sector. For purposes of the ACL determination, the Corporation stratifies the C&I loan portfolio by two main regions ( i.e., the Puerto Rico/Virgin Islands region and the Florida region). An internal risk rating ( i.e., pass, special mention, substandard, doubtful, or loss) is assigned to each loan at the time of origination and monitored on a continuous basis with a formal assessment completed quarterly, at a minimum. For C&I loans, the Corporation calculates the ACL using a PD/LGD modeled approach, or, in some cases, based on a risk-adjusted discounted cash flow method or the fair value of the collateral. The ACL for C&I loans measured using a PD/LGD model is calculated based on the product of a cumulative PD and LGD, and the amortized cost basis determined for each loan over the remaining expected life of the loan, considering prepayments. PD estimates represent the point-in-time as of which the PD is developed for each C&I loan, updated quarterly based on industry historical loss experience, financial performance and market value indicators, and current and forecasted relevant forward-looking macroeconomic variables over the expected life of the loans to determine a lifetime term structure PD curve. The Corporation determines LGD estimates based on historical charge-off events and recovery payments, industry historical loss experience, specific attributes of the loans, such as loan to value, as well as relevant current and forecasted expectations for macroeconomic variables, such as, unemployment rates, interest rates, and market risk factors based on industry performance and the equity market, to determine a lifetime term structure LGD curve. Under this approach, the Corporation calculates losses for each loan for all future periods using the PD and LGD loss rates derived from the term structure curves applied to the amortized cost basis of the loans, considering prepayments. The Corporation determines the ACL for those C&I loans that it has determined, based upon current information and events, that it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms, and for any non-collateral dependent C&I loans that have been modified or are reasonably expected to be modified in a TDR, based on a risk-adjusted discounted cash flow methodology using PDs and LGDs developed as explained above. Under this approach, the Corporation adjusts all future cash flows (interest and principal) for each loan by the PDs and LGDs derived from the term structure curves and prepayments and then discount the adjusted cash flows at the effective interest rate as of the reporting date (original rate for TDRs) to arrive at the net present value of future cash flows and the ACL is calculated as the excess of the amortized cost basis over the net present value of future cash flows. The ACL for collateral dependent C&I loans is determined based on the fair value of the collateral at the reporting date, adjusted for undiscounted selling costs as appropriate. Construction – As of December 31, 2021, construction loans consisted generally of loans secured by real estate made to finance the construction of industrial, commercial, or residential buildings and included loans to finance land development in preparation for erecting new structures. These loans involve an inherently higher level of risk and sensitivity to market conditions. Demand from prospective tenants or purchasers may erode after construction begins because of a general economic slowdown or otherwise. For purposes of the ACL determination, the Corporation stratifies the construction loan portfolio by two main regions ( i.e., the Puerto Rico/Virgin Island region and the Florida region). An internal risk rating ( i.e., pass, special mention, substandard, doubtful, or loss) is assigned to each loan at the time of origination and monitored on a continuous basis with a formal assessment completed, at a minimum, on a quarterly basis. For construction loans, the Corporation calculates the ACL using a PD/LGD modeled approach, or individually for 150 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) those loans that meet the definition of collateral dependent loans or loans that have been modified or are reasonably expected to be modified in a TDR. The ACL for construction loans measured using a PD/LGD model is calculated based on the product of a cumulative PD and LGD, and the amortized cost basis determined for each loan over the remaining expected life of the loan, considering prepayments. PD estimates represent the point-in-time as of which the PD is developed for each construction loan, updated quarterly based on, among other things, historical payment performance experience, industry historical loss experience, underlying type of collateral, and relevant current and forward-looking macroeconomic variables over the remaining expected life of the loans to determine a lifetime term structure PD curve. The Corporation determines LGD estimates based on historical charge-off events and recovery payments, industry historical loss experience, specific attributes of the loans, such as loan-to-value, debt service coverage ratios, and relevant current and forecasted macroeconomic variables, such as unemployment rates, GDP, interest rates, and real estate price indexes, to determine a lifetime term structure LGD curve. Under this approach, the Corporation calculates losses for each loan for all future periods using the PD and LGD loss rates derived from the term structure curves applied to the amortized cost basis of the loans, considering prepayments. The ACL for collateral dependent loans, including loans modified or reasonably expected to be modified in a TDR, is determined based on the fair value of the collateral at the reporting date, adjusted for undiscounted selling costs as appropriate. Consumer – As of December 31, 2021, consumer loans generally consisted of unsecured and secured loans extended to individuals for household, family, and other personal expenditures, including several classes of products. For purposes of the ACL determination, the Corporation stratifies the portfolio by two main regions ( i.e., the Puerto Rico/Virgin Islands region and the Florida region) and by the following five classes: (i) auto loans; (ii) finance leases; (iii) credit cards; (iv) personal loans; and (v) other consumer loans, such as open-end home equity revolving lines of credit and other types of consumer credit lines, among others. In determining the ACL, management considers consumer loans risk characteristics including but not limited to credit quality indicators such as payment performance period, delinquency and original FICO scores. For auto loans and finance leases, the Corporation calculates the ACL using a PD/LGD modeled approach, or individually for loans modified or reasonably expected to be modified in a TDR and performing in accordance with restructured terms. The ACL for auto loans and finance leases measured using a PD/LGD model is calculated based on the product of a PD, LGD, and the amortized cost basis determined for each loan over the remaining expected life of the loan, considering prepayments. PD estimates represent the point-in-time as of which the PD is developed for each loan, updated quarterly based on, among other things, the historical payment performance and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates, over the expected life of the loans to determine a lifetime term structure PD curve. The Corporation determines LGD estimates primarily based on historical charge-off events and recovery payments to determine a lifetime term structure LGD curve. Under this approach, the Corporation calculates losses for each loan for all future periods using the PD and LGD loss rates derived from the term structure curves applied to the amortized cost basis of the loans, considering prepayments. For loans modified or reasonably expected to be modified in a TDR and performing in accordance with restructured terms, the Corporation determines the ACL based on a risk-adjusted discounted cash flow methodology using PDs and LGDs developed as explained above. Under this approach, all future cash flows (interest and principal) for each loan are adjusted by the PDs and LGDs derived from the term structure curves and prepayments and then discounted at the effective interest rate of the loan prior to the restructuring to arrive at the net present value of future cash flows and the ACL is calculated as the excess of the amortized cost basis over the net present value of future cash flows for each loan. For the credit card and personal loan portfolios, the Corporation determines the ACL on a pool basis, based on products PDs and LGDs developed considering historical losses for each origination vintage by length of loan terms, by geography, payment performance and by credit score. The PD and LGD for each cohort consider key macroeconomic variables, such as regional GDP, unemployment rates, and retail sales, among others. Under this approach, all future period losses for each instrument are calculated using the PDs and LGDs applied to the amortized cost basis of the loans, considering prepayments. In addition, home equity lines of credit that are 180 days or more past due are considered collateral dependent and are individually reviewed and charged-off, as needed, to the fair value of the collateral. For the ACL determination of all portfolios, the expectations for relevant macroeconomic variables related to the Puerto Rico/Virgin Islands region consider an initial reasonable and supportable period of to three years, utilizing a straight-line approach and reverting back to the historical macroeconomic mean. For the Florida region, the methodology considers a reasonable and supportable forecast period and an implicit reversion towards the historical trend that varies for each macroeconomic variable, achieving the steady state by year 5. After the reversion period, a historical loss forecast period covering the remaining contractual life, adjusted for prepayments, is used based on the changes in key historical economic variables during representative historical expansionary and recessionary periods. two years and a reversion period of up Furthermore, the Corporation periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to factors such as: (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 151 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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. Prior to the implementation of CECL on January 1, 2020, the ACL for loans and finance lease was subject to the guidance included in ASC 310 and ASC 450. Under the guidance, the Corporation was required to use an incurred loss methodology to estimate credit losses that were estimated to be incurred in the loan portfolio and that could ultimately materialize into confirmed losses in the form of charge-offs. The incurred loss methodology was a backward-looking approach to loss recognition and based on the concept of a triggering event having taken place, causing a loss to be inherent within the portfolio. This methodology under ASC 450 was predicated on a loss emergence period that was applied at a portfolio level. Consideration of forward looking macro-economic expectations was not permitted under this allowance methodology. Additionally, loans that were identified as impaired under the definition of ASC 310, were required to be assessed on an individual basis. The ACL and resulting provision expense levels for comparative periods prior to 2020 presented in this document were estimated in accordance with these requirements. Refer to Note 9 – Allowance for Credit Losses for Loans and Finance Leases, to the consolidated financial statements for additional information about reserve balances for each portfolio, activity during the period, and information about changes in circumstances that caused changes in the ACL for loans and finance leases during the year ended December 31, 2021 and 2020. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures and Other Assets 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 unless the obligation is unconditionally cancellable by the Corporation. The ACL on off- balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. As of December 31, 2021, the off-balance sheet credit exposures primarily consisted of unfunded loan commitments and standby letters of credit for commercial and construction loans. The Corporation utilized the PDs and LGDs derived from the above-explained methodologies for the commercial and construction loan portfolios. Under this approach, all future period losses for each loan are calculated using the PD and LGD loss rates derived from the term structure curves applied to the usage given default exposure. The ACL on off-balance sheet credit exposures is included as part of accounts payable and other liabilities in the consolidated statement of financial condition with adjustments included as part of the provision for credit loss expense in the consolidated statements of income. Refer to Note 9 – Allowance for Credit Losses for Loans and Finance Leases, to the consolidated financial statements for additional information about reserve balances for unfunded loan commitments, activity during the period, and information about changes in circumstances that caused changes in the ACL for off-balance sheet credit exposures during the years ended December 31, 2021 and 2020. The Corporation also estimates expected credit losses for certain accounts receivable, primarily claims from government- guaranteed loans, loan servicing-related receivables, and other receivables. The ACL on other assets measured at amortized cost is included as part of other assets in the consolidated statement of financial condition with adjustments included as part of other non- interest expenses in the consolidated statements of income. Loans held for sale Loans that the Corporation intends to sell or that the Corporation does not have the ability and intent to hold for the foreseeable future are classified as held-for-sale loans. Loans held for sale are recorded at the lower of aggregate cost or fair value. Generally, the loans held-for-sale portfolio consists of conforming residential mortgage loans that the Corporation intends to sell to the Government National Mortgage Association (“GNMA”) and GSEs, such as the Federal National Mortgage Association (“FNMA”) and the U.S. Federal Home Loan Mortgage Corporation (“FHLMC”). Generally, residential mortgage loans held for sale are valued on an aggregate portfolio basis and the value is primarily derived from quotations based on the MBS market. The amount by which cost exceeds market value in the aggregate portfolio of loans held for sale, if any, is accounted for as a valuation allowance with changes therein included in the determination of net income and reported as part of mortgage banking activities in the consolidated statements of income. Loan costs and fees are deferred at origination and are recognized in income at the time of sale. The fair value of commercial and construction loans held for sale, if any, is primarily derived from external appraisals, or broker price opinions that the Corporation considers, with changes in the valuation allowance reported as part of other non-interest income in the consolidated statements of income. In certain circumstances, the Corporation transfers loans from/to held for sale or held for investment based on a change in strategy. If such a change in holding strategy is made, significant adjustments to the loans’ carrying values may be necessary. Reclassifications of loans held for investment to held for sale are made at the amortized cost on the date of transfer and establish a new cost basis upon transfer. Write-downs of loans transferred from held for investment to held for sale are recorded as charge-offs at the time of transfer. 152 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Subsequent changes in value below amortized cost are reflected in non-interest income in the consolidated statements of income. Reclassifications of loans held for sale to held for investment are made at the amortized cost on the transfer date. Transfers and servicing of financial assets and extinguishment of liabilities After a transfer of financial assets in a transaction that qualifies for accounting as a sale, the Corporation derecognizes the financial assets when it has surrendered control and derecognizes liabilities when they are extinguished. A transfer of financial assets in which the Corporation surrenders control over the assets is accounted for as a sale to the extent that consideration other than beneficial interests is received in exchange. The criteria that must be met to determine that the control over transferred assets has been surrendered include: (i) the assets must be isolated from creditors of the transferor; (ii) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (iii) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Corporation transfers financial assets and the transfer fails any one of the above criteria, the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. Servicing assets The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased. In the ordinary course of business, the Corporation sells residential mortgage loans (originated or purchased) to GNMA, which generally securitizes the transferred loans into MBS for sale into the secondary market. Also, certain conventional conforming loans are sold to FNMA or FHLMC, with servicing retained. When the Corporation sells mortgage loans, it recognizes any retained servicing right, based on its fair value. Mortgage servicing rights (“servicing assets” or “MSRs”) retained in a sale or securitization arise from contractual agreements between the Corporation and investors in mortgage securities and mortgage loans. The value of MSRs is derived from the net positive cash flows associated with the servicing contracts. Under these contracts, the Corporation performs loan-servicing functions in exchange for fees and other remuneration. The servicing functions typically include: collecting and remitting loan payments, responding to borrower inquiries, accounting for principal and interest, holding custodial funds for payment of property taxes and insurance premiums, supervising foreclosures and property dispositions, and generally administering the loans. The MSRs, included as part of other assets in the statements of financial condition, entitle the Corporation to servicing fees based on the outstanding principal balance of the mortgage loans and the contractual servicing rate. The servicing fees are credited to income on a monthly basis when collected and recorded as part of mortgage banking activities in the consolidated statements of income. In addition, the Corporation generally receives other remuneration consisting of mortgagor-contracted fees such as late charges and prepayment penalties, which are credited to income when collected. Considerable judgment is required to determine the fair value of the Corporation’s MSRs. Unlike highly liquid investments, the market value of MSRs cannot be readily determined because these assets are not actively traded in securities markets. The initial carrying value of an MSR is generally determined based on its fair value. The Corporation determines the fair value of the MSRs based on a combination of market information on trading activity (MSR trades and broker valuations), benchmarking of servicing assets (valuation surveys), and cash flow modeling. The valuation of the Corporation’s MSRs incorporates two sets of assumptions: (i) market-derived assumptions for discount rates, servicing costs, escrow earnings rates, floating earnings rates, and the cost of funds; and (ii) market assumptions calibrated to the Corporation’s loan characteristics and portfolio behavior for escrow balances, delinquencies and foreclosures, late fees, prepayments, and prepayment penalties. Once recorded, the Corporation periodically evaluates MSRs for impairment. Impairment occurs when the current fair value of the MSR is less than its carrying value. If an MSR is impaired, the impairment is recognized in current-period earnings and the carrying value of the MSR is adjusted through a valuation allowance. If the value of the MSR subsequently increases, the recovery in value is recognized in current period earnings and the carrying value of the MSR is adjusted through a reduction in the valuation allowance. For purposes of performing the MSR impairment evaluation, the servicing portfolio is stratified on the basis of certain risk characteristics, such as region, terms, and coupons. The Corporation conducts an OTTI analysis to evaluate whether a loss in the value of the MSR in a particular stratum, if any, is other than temporary or not. When the recovery of the value is unlikely in the foreseeable future, a write-down of the MSR in the stratum to its estimated recoverable value is charged to the valuation allowance. As of December 31, 2021, the aggregate carrying value of the MSRs amounted to $ 31.0 million (2020 - $ 33.1 million). The MSRs are amortized over the estimated life of the underlying loans based on an income forecast method as a reduction of servicing income. The income forecast method of amortization is based on projected cash flows. A particular periodic amortization is 153 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) calculated by applying to the carrying amount of the MSRs the ratio of the cash flows projected for the current period to total remaining net MSR forecasted cash flow. Premises and equipment Premises and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation is provided on the straight-line method over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the leases ( i.e., the contractual term plus lease renewals that are reasonably assured) or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When the Corporation sells or disposes of assets, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings as part of other non-interest income in the consolidated statements of income. When the asset is no longer used in operations, and the Corporation intends to sell it, the asset is reclassified to other assets held for sale and is reported at the lower of the carrying amount or fair value less cost to sell. Leases The Corporation determines if an arrangement is a lease or contains a lease at inception. Operating and finance lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date, or at acquisition date in case of a business combination. As the rates implicit in the Corporation’s operating leases are not readily determinable, the Corporation generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating right-of-use (“ROU”) assets and finance lease assets are generally recognized based on the amount of the initial measurement of the lease liability. The Corporation’s leases are primarily related to operating leases for the Bank’s branches and automated teller machines (“ATMs”). Most of the Corporation’s leases with operating ROU assets have terms of two years to 30 years , some of which include options to extend the leases for up to seven years . The Corporation does not recognize ROU assets and lease liabilities that arise from short-term leases, primarily related to certain month-to-month ATM operating leases. As of December 31, 2021, the Corporation did not have a lease that qualifies as a finance lease. Lease expense is recognized on a straight-line basis over the lease term. The Corporation includes the lease ROU asset and lease liability as part of other assets and accounts payable and other liabilities, respectively, in the consolidated statements of financial condition. Other real estate owned OREO, which consists of real estate acquired in settlement of loans, is recorded at fair value minus estimated costs to sell the real estate acquired. Generally, loans have been written down to their net realizable value prior to foreclosure. Any further reduction to their net realizable value is recorded with a charge to the ACL at the time of foreclosure or shortly thereafter. Thereafter, gains or losses resulting from the sale of these properties and losses recognized on the periodic reevaluations of these properties are credited or charged to earnings and are included as part of net loss on OREO and OREO expenses in the consolidated statements of income. The cost of maintaining and operating these properties is expensed as incurred. The Corporation estimates fair values primarily based on appraisals, when available, and periodically reviews and updates the net realizable value. Business Combinations The Corporation accounts for acquisitions in accordance with the ASC Topic No. 805, “Business Combination” (“ASC 805”). Under ASC 805, a business combination is defined as a transaction or other event in which an acquirer obtains control of one or more businesses. In addition, under ASC 805, a business is considered to be an integrated set of activities and assets capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. If the net assets acquired meet the definition of a business and the transaction meets the definition of a business combination in ASC 805, the transaction is accounted for using the acquisition method pursuant to ASC 805. Under the acquisition method, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree are recorded at their estimated fair values as of the date of acquisition. The acquisition date is the date the acquirer obtains control. Goodwill is recognized as the excess of the sum of the consideration transferred, plus the fair value of any non -controlling interest in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. The Corporation has a measurement period, in which it may retrospectively adjust the initially recorded fair values to reflect new information obtained during the measurement period that, if known, would have affected the acquisition date fair value measurements. This measurement period cannot be more than one year after the acquisition date and ends as soon as the acquirer (i) receives the information it had been 154 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) seeking about facts and circumstances that existed as of the acquisition date or (ii) learns that it cannot obtain further information. The Corporation determined that the aforementioned acquisition of BSPR, completed on September 1, 2020, constituted a business combination as defined by ASC 805. Refer to Note 2 - Business Combination, to the consolidated financial statements for further discussion of the BSPR acquisition and its impact on the Corporation’s financial statements. Goodwill and other intangible assets Goodwill - Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as business combinations. The Corporation allocates goodwill to the reporting unit(s) that are expected to benefit from the synergies of the business combination. Once goodwill has been assigned to a reporting unit, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. The Corporation tests goodwill for impairment at least annually as of October 1st of each year and more frequently if circumstances exist that indicate a possible reduction in the fair value of a reporting unit below its carrying value. If, after assessing all relevant events or circumstances, the Corporation concludes that it is more-likely-than-not that the fair value of a reporting unit is below its carrying value, then an impairment test is required. Every other year or when deemed necessary by any particular economic or Corporation specific circumstances, the Corporation bypasses the qualitative assessment and proceeds directly to a quantitative analysis. In addition to the goodwill recorded at the Commercial and Corporate, Consumer Retail, and Mortgage Banking reporting units in connection with the acquisition of BSPR in 2020, the Corporation’s goodwill is mostly related to the United States (Florida) reporting unit. Management performed a qualitative analysis over the carrying amount of each relevant reporting units’ goodwill as of December 31, 2021 and concluded that it is more-likely-than-not that the fair value of the reporting units exceeded its carrying value. With respect to the goodwill of the Florida reporting unit , this assessment involved identifying the inputs and assumptions that most affects fair value, evaluating the significance of all identified relevant events and circumstances that affect fair value of the reporting entity and weighing such factors to determine if it is more likely than not that the fair value of the reporting unit was greater than it’s carrying amount. In the qualitative assessment of the Florida reporting unit, the Corporation evaluated events and circumstances that could impact the fair value including the following: ● ● ● ● ● ● Macroeconomic conditions, such as improvement or deterioration in general economic conditions; Industry and market considerations; Interest rate fluctuations; Overall financial performance of the entity; Performance of industry peers over the last year; and Recent market transactions. Similarly, evaluation for goodwill associated with the acquisition of BSPR focused on a qualitative assessment of the overall performance of the banking reporting unit and outlook of the macroeconomic conditions for the reporting unit. Management considered positive and negative evidence obtained during the evaluation of significant events and circumstances and evaluated such information to conclude that it is more likely than not that the reporting unit’s fair value is greater than it’s carrying amount; thus, quantitative tests were not required. Ultimately, the Corporation determined that goodwill was not impaired as of December 31, 2021 or 2020. The Corporation’s other intangible assets primarily relate to core deposits. The Corporation amortizes core deposit intangibles based on the projected useful lives of the related deposits, generally on a straight-line basis, and reviews these assets periodically for impairment when event or changes in circumstances indicate that the carrying amount may not exceed their fair value. The carrying value of core deposit intangible assets amounted to $ 28.6 million as of December 31, 2021 ($ 35.8 million as of December 31, 2020). Securities purchased and sold under agreements to repurchase The Corporation accounts for securities purchased under resale agreements and securities sold under repurchase agreements as collateralized financing transactions. Generally, the Corporation records these agreements at the amount at which the securities were purchased or sold. The Corporation monitors the fair value of securities purchased and sold, and obtains collateral from, or returns it to, the counterparties when appropriate. These financing transactions do not create material credit risk given the collateral involved and the related monitoring process. The Corporation sells and acquires securities under agreements to repurchase or resell the same or similar securities. Generally, similar securities are securities from the same issuer, with identical form and type, similar maturity, 155 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) identical contractual interest rates, similar assets as collateral, and the same aggregate unpaid principal amount. The counterparty to certain agreements may have the right to repledge the collateral by contract or custom. The Corporation presents such assets separately in the consolidated statements of financial condition as securities pledged with creditors’ rights to repledge. Repurchase and resale activities may be transacted under legally enforceable master repurchase agreements that give the Corporation, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Corporation offsets repurchase and resale transactions with the same counterparty in the consolidated statements of financial condition where it has such a legally enforceable right under a master netting agreement and the transactions have the same maturity date. From time to time, the Corporation modifies repurchase agreements to take advantage of prevailing interest rates. Following applicable GAAP guidance, if the Corporation determines that the debt under the modified terms is substantially different from the original terms, the modification must be accounted for as an extinguishment of debt. The Corporation considers modified terms to be substantially different if the present value of the cash flows under the terms of the new debt instrument is at least the present value of the remaining cash flows under the terms of the original instrument. The new debt instrument will be initially recorded at fair value, and that amount will be used to determine the debt extinguishment gain or loss to be recognized through the consolidated statements of income and the effective rate of the new instrument. If the Corporation determines that the debt under the modified terms is not substantially different, then the new effective interest rate is determined based on the carrying amount of the original debt instrument. The Corporation has determined that none of the repurchase agreements modified in the past were substantially different from the original terms, and, therefore, these modifications were not accounted for as extinguishments of debt. 10% different from Rewards liability The Corporation offers products, primarily credit cards, that offer various rewards to reward program members, such as airline tickets, cash, or merchandise, based on account activity. The Corporation generally recognizes the cost of rewards as part of business promotion expenses when the rewards are earned by the customer and, at that time, records the corresponding reward liability. The Corporation determines the reward liability based on points earned to date that the Corporation expects to be redeemed and the average cost per point redemption. The reward liability is reduced as points are redeemed. In estimating the reward liability, the Corporation considers historical reward redemption behavior, the terms of the current reward program, and the card purchase activity. The reward liability is sensitive to changes in the reward redemption type and redemption rate, which is based on the expectation that the vast majority of all points earned will eventually be redeemed. The reward liability, which is included in other liabilities in the consolidated statements of financial condition, totaled $ 8.8 million and $ 7.5 million as of December 31, 2021 and 2020, respectively. Income taxes The Corporation uses the asset and liability method for the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. In making such assessment, significant weight is given to evidence that can be objectively verified, including both positive and negative evidence. The authoritative guidance for accounting for income taxes requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, tax planning strategies and future taxable income, exclusive of the impact of the reversal of temporary differences and carryforwards. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions considering statutory, judicial, and regulatory guidance. Refer to Note 28 – Income Taxes, to the consolidated financial statements, for additional information. Under the authoritative accounting guidance, income tax benefits are recognized and measured based on a two-step analysis: i) a tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized; and ii) the benefit is measured at the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between a benefit not recognized in accordance with this analysis and the tax benefit claimed on a tax return is referred to as an Unrecognized Tax Benefit (“UTB”). The Corporation classifies interest and penalties, if any, related to UTBs as components of income tax expense. As of December 31, 2021, the Corporation had UTBs in an aggregate amount of $ 1.3 million that it acquired from BSPR, which, if recognized, would decrease the effective income tax rate in future periods. The Corporation release income tax effects from OCI as investments securities available for sale are sold or mature and as pension and post-retirement liabilities are extinguished. 156 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Treasury stock The Corporation accounts for treasury stock at par value. Under this method, the treasury stock account is increased by the par value of each share of common stock reacquired. Any excess amount paid per share over the par value is debited to additional paid-in capital. Any remaining excess is charged to retained earnings. Stock-based compensation Compensation cost is recognized in the financial statements for all share-based payment grants. On May 24, 2016, the Corporation’s stockholders approved the amendment and restatement of the First BanCorp. Omnibus Incentive Plan, as amended (the “Omnibus Plan”), to, among other things, increase the number of shares of common stock reserved for issuance under the Omnibus Plan, extend the term of the Omnibus Plan to May 24, 2026 and re-approve the material terms of the performance goals under the Omnibus Plan for purposes of the then-effective Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended. The Omnibus Plan provides for equity-based and non-equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, other stock-based awards and cash-based awards. The compensation cost for an award, determined based on the estimate of the fair value at the grant date (considering forfeitures and any post-vesting restrictions), is recognized over the period during which an employee or director is required to provide services in exchange for an award, which is the vesting period. Stock-based compensation accounting guidance requires the Corporation to reverse compensation expense for any awards that are forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a significant effect on share- based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period in which the forfeiture estimate changes. If the actual forfeiture rate is higher than the estimated forfeiture rate, an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease in the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase in the expense recognized in the financial statements. For additional information regarding the Corporation’s equity-based compensation and awards granted, refer to Note 22 – Stock-Based Compensation, to the consolidated financial statements. Comprehensive income Comprehensive income for First BanCorp. includes net income, as well as change in unrealized gain (loss) on available-for-sale securities and change in unrecognized pension and post retirement costs, net of estimated tax effects. Pension and Postretirement Benefit Obligations The Corporation maintains two frozen qualified noncontributory defined benefit pension plans (the “Pension Plans”) (including a complementary post-retirements benefits plan covering medical benefits and life insurance after retirement) that it assumed in the BSPR acquisition. Pension costs are computed on the basis of accepted actuarial methods and are charged to current operations. Net pension costs are based on various actuarial assumptions regarding future experience under the plan, which include costs for services rendered during the period, interest costs and return on plan assets, as well as deferral and amortization of certain items such as actuarial gains or losses. The funding policy is to contribute to the plan, as necessary, to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year. The cost of postretirement benefits, which is determined based on actuarial assumptions and estimates of the costs of providing these benefits in the future, is accrued during the years that the employee renders the required service. The guidance for compensation retirement benefits of ASC Topic 715, “Retirement Benefits,” requires the recognition of the funded status of each defined pension benefit plan, retiree health care plan and other postretirement benefit plans on the statement of financial condition . Segment information The Corporation reports financial and descriptive information about its reportable segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to 157 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) allocate resources and in assessing performance. The Corporation’s management determined that the segregation that best fulfills the segment definition described above is by 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 December 31, 2021, the Corporation had the following segments that are all reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments; United States Operations; and Virgin Islands Operations. Refer to Note 36 – Segment Information, to the consolidated financial statements, for additional information. six operating Valuation of financial instruments The measurement of fair value is fundamental to the Corporation’s presentation of its financial condition and results of operations. The Corporation holds debt and equity securities, derivatives, and other financial instruments at fair value. The Corporation holds its investments and liabilities mainly to manage liquidity needs and interest rate risks. A meaningful part of the Corporation’s total assets is reflected at fair value on the Corporation’s financial statements. The FASB’s authoritative guidance for 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 financial instruments. The hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Three levels of inputs may be used to measure fair value: Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; 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 Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Under the fair value accounting guidance, an entity has the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at the inception of the contract and, thereafter, to reflect any changes in fair value in current earnings. The Corporation did not make any fair value option election as of December 31, 2021 or 2020. See Note 30 – Fair Value, to the consolidated financial statements, for additional information. Revenue from contract with customers Refer to Note 31 – Revenue from contracts with customers, for a detailed description of the Corporation’s policies on the recognition and presentation of revenues from contracts with customers, including the income recognition for the insurance agency commissions’ revenue. Earnings per common share Earnings per share-basic is calculated 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 preferred stock dividends declared but not yet paid, and any cumulative preferred stock 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 excludes unvested shares of restricted stock that do not contain non-forfeitable dividend rights. The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the number of weighted- average common shares is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued, referred to as potential common shares. Potential dilutive common shares consist of unvested shares of restricted stock that do not contain non-forfeitable dividend rights, warrants outstanding during the period, and common stock issued under the assumed exercise of stock options, if any, using the treasury stock method. This method assumes that the potential dilutive common shares are issued and outstanding and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at 158 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) the exercise date. 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, stock options, and warrants outstanding during the period that result in lower potential 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. Potential dilutive common shares also include performance units that do not contain non-forfeitable dividend rights if the performance condition is met as of the end of the reporting period. Accounting Standards Adopted in 2021 Income Tax Simplification In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and the accounting related to areas such as franchise taxes, step-up in tax basis, goodwill, separate entity financial statements, and interim recognition of enactment of tax laws or rate changes. For public business entities, the standard took effect for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those fiscal years. The adoption of this guidance during the first quarter of 2021 did not have an effect on the Corporation’s consolidated financial statements. Accounting for Equity Securities and Certain Derivatives In January 2020, the FASB issued new guidance to clarify the accounting for equity securities under ASC Topic 321, “Investments – Equity Securities” (“ASC 321”); investments accounted for under the equity method of accounting in ASC Topic 323, “Investments – Equity Method and Joint Ventures”; and the accounting for certain forward contracts and purchased options accounted for under ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The guidance clarifies that an entity should consider observable transactions that result in either applying or discontinuing the equity method of accounting for the purpose of applying the measurement alternative provided by ASC 321, which allows certain equity securities without a readily determinable fair value to be measured at cost, less any impairment. When an entity accounts for an investment in equity securities under the measurement alternative and is required to transition to the equity method of accounting because of an observable transaction, it should remeasure the investment at fair value immediately before applying the equity method of accounting. Likewise, when an entity accounts for an investment in equity securities under the equity method of accounting and is required to transition to ASC 321 because of an observable transaction, it should remeasure the investment at fair value immediately after discontinuing the equity method of accounting. These amendments align the accounting for equity securities under the measurement alternative with that of other equity securities accounted for under ASC 321, reducing diversity in accounting outcomes. The guidance also clarifies that, when determining the accounting for nonderivative forward contracts and purchased options, an entity should not consider whether the underlying securities would be accounted for under the equity method or fair value option upon settlement or exercise. These instruments will not fail to meet the scope of ASC 815-10 solely because the securities would be accounted for under the equity method upon settlement of the contract or exercise of the option. For public business entities, the standard took effect for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those fiscal years. The adoption of this guidance during the first quarter of 2021 did not have an effect on the Corporation’s consolidated financial statements. Reference Rate Reform In March 2020, the FASB issued new accounting guidance related to the effects of the reference rate reform on financial reporting (“ASC Topic 848”). The guidance provides optional expedients and exceptions to applying GAAP to contract modifications that replace an interest rate impacted by reference rate reform (e.g., LIBOR) with a new alternative reference rate. The guidance is applicable to investment securities, receivables, loans, debt, leases, derivatives and hedge accounting elections and other contractual arrangements. In January 2021, the FASB issued an update which refines the scope of ASC Topic 848 and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate reform activities. The update permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. The guidance, may be adopted on any date on or after March 12, 2020. However, the relief is temporary and generally cannot be applied to contract modifications that occur after December 31, 2022 or hedging relationships entered into or evaluated after that date. As of the date hereof, the Corporation has made limited contract modification in connection with the reference rate reform. Other Accounting Standard Codification Improvements On October 15, 2020, ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs,” to clarify that for each reporting period an entity should reevaluate whether a callable debt security’s amortized cost basis exceeds the amount repayable by the issuer at the next call date. For public business entities, the guidance took effect for fiscal years, and interim 159 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) periods within those fiscal years, beginning after December 15, 2020. The adoption of this guidance did not have an effect on the Corporation’s consolidated financial statements. On October 29, 2020, the FASB issued ASU 2020-10, “Codification Improvements.” The amendments in this ASU affect a wide range of codification topics and are separated into two sections: B and C. The Section B amendments improve codification consistency by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements or on the face of the financial statements appears in the applicable disclosure section as well as the other presentation matters sections, reducing the chance that the requirement would be missed. These amendments are not expected to change current practice. The amendments in Section C clarify guidance for more consistent application. Section C addresses retirement benefits (Topic 715), interim reporting (Topic 270), receivables (Topic 310), guarantees (Topic 460), income taxes (Topic 470), and imputation of interest (Topic 835), among other topics. For public business entities the amendments are effective for annual periods beginning after December 15, 2020. The adoption of this guidance during the fourth quarter of 2021 did not have an effect on the Corporation’s consolidated financial statements. Recently Issued Accounting Standards Not Yet Effective or Not Yet Adopted On May 3, 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a Consensus of the Emerging Issues Task Force).” The ASU was issued to clarify and reduce diversity in practices for modification and exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after the exchange. The amendments do not apply to modifications or exchanges of financial instruments within another topic (for example, Topic 718). The ASU provides guidance on how to measure the effect of the modification or exchange and how that effect should be recognized. The ASU is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date. The Corporation does not expect that the amendments of this update will have a material effect on its consolidated financial statements. In July 2021, the FASB updated the Codification and amended ASC Topic 842, “Leases,” to require lessors to classify leases as operating leases if they have variable lease payments that do not depend on an index or rate and would have selling losses if they were classified as sales-type or direct financing leases. When a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset, and, therefore, does not recognize a selling profit or loss. The leased asset continues to be subject to the measurement and impairment requirements under other applicable GAAP before and after the lease transaction. For public business entities, the amendment will be effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Corporation does not expect that the amendments of this update will have a material effect on its consolidated financial statements. On October 28, 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers,” to address diversity in practice and inconsistency related to how revenue contracts with customers acquired in a business combination are accounted for. The amendments require that the acquirer recognizes and measures contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination and applies to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation does not expect that the amendments of this update will have a material effect on its consolidated financial statements. 160 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 2 – BUSINESS COMBINATION Effective as of September 1, 2020 , the Corporation completed the acquisition of BSPR. The acquisition of BSPR expands the Corporation’s presence in Puerto Rico, increases its operational scale and strengthens its competitiveness in consumer, commercial, business banking, and residential lending. The acquisition also allowed the Corporation to increase its deposit base at a lower cost, which enhances FirstBank’s funding and risk profile. The Corporation accounted for the acquisition as a business combination in accordance with ASC 805. Accordingly, the Corporation recorded the assets and liabilities assumed, as of the date of the acquisition, at their respective fair values and allocated to goodwill the excess of the purchase price consideration over the fair value of the net assets acquired. The determination of fair value required management to make estimates about discount rates, future expected cash flows, market conditions at the time of the acquisition, and other future events that are highly subjective in nature and subject to change. Fair value estimates related to the acquired assets and liabilities were subject to adjustment for up to one year after the closing date of the acquisition as additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. Since the acquisition, the Corporation adjusted the original fair value estimates and goodwill by approximately $ 4.2 million. Substantially all of the $ 4.2 million were recorded in the fourth quarter of 2020. The adjustments were primarily related to post- closing purchase price adjustments to account for differences between BSPR’s actual excess capital at closing date compared to the BSPR’s excess capital amount used for the preliminary closing statement at the acquisition date. During August 2021, the Corporation finalized its fair value analysis of the acquired assets and assumed liabilities associated with this acquisition. The following table summarizes the purchase price consideration and estimated fair values of assets acquired and liabilities assumed from BSPR as of September 1, 2020 under the acquisition method of accounting: (In thousands) Total purchase price consideration Fair value of assets acquired: Cash and cash equivalents Investment securities Residential mortgage loans Commercial mortgage loans Commercial and Industrial ("C&I") loans Consumer loans Loans, net Premises and equipment, net Intangible assets Other assets Total assets and identifiable intangible assets acquired Fair value of liabilities assumed: Deposits Other liabilities Total liabilities assumed Fair value of net assets and identifiable intangible assets acquired Goodwill Fair Value as Originally Measurement Period Fair Value as Recorded Adjustments Remeasured $ $ 3,382 - - 540 122 (390) (488) (216) - 448 (195) 37 - $ 865 865 (828) 4,210 $ 1,281,008 1,684,252 1,167,225 808,177 741,041 751,764 213,718 2,514,700 12,499 39,680 143,813 5,562,169 4,194,940 96,734 4,291,674 1,270,495 10,513 $ $ $ $ $ $ 1,277,626 1,684,252 1,167,225 807,637 740,919 752,154 214,206 2,514,916 12,499 39,232 144,008 5,562,132 4,194,940 $ 95,869 4,290,809 1,271,323 6,303 $ 161 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The application of the acquisition method of accounting resulted in goodwill of $ 10.5 million, a core deposit intangible of $35.9. million, and purchased credit card relationships of $ 3.8 million, which are included in the Corporation’s consolidated statement of financial condition. Goodwill recognized in this transaction is not deductible for income tax purposes. Refer to Note 14 – Goodwill, to the consolidated financial statements , for additional information about goodwill and other intangibles recognized as part of the transaction. Fair Value of Identifiable Assets Acquired and Liabilities Assumed The methods used to determine the fair values of the significant identifiable assets and liabilities assumed are described below: Cash and cash equivalents - Cash and cash equivalents include cash and due from banks, and interest-earning deposits with banks and the Federal Reserve System. The Corporation determined that the fair values of financial instruments that are short-term or re- price frequently and that have little, or no risk approximate the carrying values. Investment securities available for sale and held to maturity - The fair values of securities available for sale were based on observable inputs obtained from market transactions in similar securities. The fair value of held to maturity securities acquired in the BSPR acquisition, consisting of Puerto Rico municipal bonds, was determined based on the discounted cash flow method used for the valuation of loans described below. These held to maturity securities were identified as PCD debt securities at acquisition and had a fair value of $55.5 million and a contractual balance of $67.1 million as of the acquisition date. The Corporation established an initial ACL for PCD debt securities of $ 1.3 million, which represents the discount embedded in the purchase price that is attributable to credit losses, through an adjustment to the acquired debt securities amortized cost and the ACL. Loans – The Corporation calculated the fair value of loans acquired in the BSPR acquisition using an income approach. Under this approach, fair value is measured by the present value of the net economic benefits to be received over the life of the loan. The fair value was estimated based on a discounted cash flow method under which the present value of the contractual cash flows was calculated based on certain valuation assumptions such as default rates, loss severity, and prepayment rates, consistent with the Corporation’s CECL methodology, and discounted using a market rate of return that accounts for both the time value of money and investment risk factors. The discount rate utilized to analyze fair value considered the cost of funds rate, capital charge, servicing costs, and liquidity premium, mostly based on industry standards. The Corporation segmented the loan portfolio into two groups: non-PCD loans and PCD loans. Then loans within each group were pooled based on similar characteristics, such as loan type (i.e., residential mortgage, commercial and industrial, and consumer loans), credit scores, loan-to-value, fixed or adjustable interest rates, and credit risk ratings. The Corporation valued commercial mortgage loans at the loan level. Non-PCD loans and PCD loans had a fair value of $ 1.8 billion and $ 752.8 million, respectively, as of the acquisition date and a contractual balance of $ 1.8 billion and $786.0 million, respectively, as of the same date. In accordance with U.S. GAAP, there was no carryover of the ACL that had been previously recorded by BSPR. The Corporation recorded an initial ACL of $ 38.9 million for non-PCD loans (including unfunded commitments) through an increase to the provision for credit losses. The Corporation established an initial ACL for PCD loans of $ 28.7 million through an adjustment to the acquired loan balance and the ACL. Core deposit intangible (“CDI”) - The Corporation determined the CDI on non-maturing deposits by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates and maintenance costs, and costs of alternative funding using the discounted cash flow approach. Under this method, the value of the core deposit intangible was measured by the present value of the difference, or spread, between the ongoing cost of the acquired deposit base and the cost of the next best alternative source of funding, to be amortized using a straight-line method over a weighted average useful life of years. 5.7 Purchased credit card receivable intangible (“PCCR”) – PCCR is the value of credit card client relationships that were acquired in the business combination. The Corporation computed the fair value using a multi-period cash flow model, which it discounted using an appropriate risk-adjusted discount rate. This measure of fair value requires considerable judgments about future events, including customer retention and attrition estimates. The fair value is amortized using an accelerated method over a useful life of years. Deposits - The fair values used for non-maturity deposits such as demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. In determining the fair value of certificates of deposit, the cash flows of the contractual interest payments during the specific period of the certificates of deposit and scheduled principal payout were discounted to present value at market-based interest rates. The fair value is amortized over a weighted average useful life of years based on the maturity buckets for the time deposits established in the valuation determination. 1.2 3 162 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Merger and Restructuring Costs Upon completion of the acquisition, the Corporation began to integrate BSPR’s operations into FirstBank’s operations. As of December 31, 2021, the Corporation has completed all systems integration efforts and finalized personnel and functions integrations. Acquisition and restructuring costs are expensed as incurred. To the extent there are additional costs associated with the integration, the costs will be recognized based on the nature and timing of these integration actions. The Corporation recognized cumulative acquisition expenses of $ 64.3 million through December 31, 2021, of which $ 26.4 million, $ 26.5 million, and $ 11.4 million were incurred during the years ended December 31, 2021, 2020 and 2019, respectively. Acquisition, integration, and restructuring expenses were included in merger and restructuring costs in the consolidated statements of income, and consisted primarily of legal fees, severance and personnel-related costs, service contracts cancellation penalties, valuation services, systems conversion, and other integration efforts, as well as accelerated depreciation charges related to planned closures and consolidation of branches in accordance with the Corporation’s integration and restructuring plan. NOTE 3 – RESTRICTIONS ON CASH AND DUE FROM BANKS The Corporation’s bank subsidiary, FirstBank, is required by law to maintain minimum average weekly reserve balances to cover demand deposits. The amount of those minimum average weekly reserve balances for the period that ended December 31, 2021 was $1.2 billion (2020 - $ 883.8 million). As of December 31, 2021 and 2020, the Bank complied with the requirement. Cash and due from banks as well as other highly liquid securities are used to cover the required average reserve balances. As of December 31, 2021, and as required by the Puerto Rico International Banking Law, the Corporation maintained $ 300,000 in time deposits, which were considered restricted assets related to FirstBank Overseas Corporation, an international banking entity that is a subsidiary of FirstBank. NOTE 4 – MONEY MARKET INVESTMENTS Money market investments are composed of time deposits, overnight deposits with other financial institutions, and other short-term investments with original maturities of three months or less. Money market investments as of December 31, 2021 and 2020 were as follows: (Dollars in thousands) Time deposits with other financial institutions (1) (2) Overnight deposits with other financial institutions (3) Other short-term investments (4) (1) Consists of restricted time deposits required by the Puerto Rico International Banking Law. (2) Weighted-average interest rate of 0.05 % and 0.45% as of December 31, 2021 and 2020, respectively. (3) Weighted-average interest rate of 0.07 % and 0.15% as of December 31, 2021 and 2020, respectively. (4) Weighted-average interest rate of 0.15 % and 0.11% as of December 31, 2021 and 2020, respectively. 2021 2020 $ $ 300 1,200 1,182 2,682 $ $ 300 59,091 1,181 60,572 As of December 31, 2021 and 2020, the Corporation had no money market investments pledged as collateral. 163 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 5 – INVESTMENT SECURITIES Investment Securities Available for Sale The amortized cost, gross unrealized gains and losses recorded in OCI, ACL, estimated fair value, and weighted-average yield of investment securities available for sale by contractual maturities as of December 31, 2021 were as follows: December 31, 2021 Gross Unrealized Amortized cost Gains Losses ACL Fair value Weighted- average yield% (Dollars in thousands) U.S. Treasury securities: After 1 to 5 years U.S. government-sponsored agencies' obligations: After 1 to 5 years After 5 to 10 years After 10 years Puerto Rico government obligations: After 10 years(1) United States and Puerto Rico government obligations MBS: FHLMC certificates: After 1 to 5 years After 5 to 10 years After 10 years GNMA certificates: Due within one year After 1 to 5 years After 5 to 10 years After 10 years FNMA certificates: Due within one year After 1 to 5 years After 5 to 10 years After 10 years Collateralized mortgage obligations issued or guaranteed by the FHLMC FNMA and GNMA: After 1 to 5 years After 5 to 10 years After 10 years Private label: After 10 years Total MBS Other Due within one year After 1 to 5 years Total investment securities available for sale $ 149,660 $ 59 $ 1,233 $ 1,877,181 403,785 15,788 3,574 2,449,988 2,811 193,234 1,240,964 1,437,009 2 16,714 27,271 338,927 382,914 4,975 21,337 298,771 1,389,381 1,714,464 24,007 14,316 500,811 539,134 9,994 4,083,515 500 500 1,000 240 175 224 - 698 119 2,419 3,748 6,286 - 572 80 7,091 7,743 21 424 4,387 8,953 13,785 1 97 290 388 - 28,202 - - - 29,555 10,856 - 416 42,060 - 1,122 23,503 24,625 - - 139 2,174 2,313 - - 1,917 21,747 23,664 778 - 13,134 13,912 1,963 66,477 - - - - - - - 308 308 - - - - - - - - - - - - - - - - - - 797 797 - - - $ 148,486 1,847,866 393,104 16,012 2,850 2,408,318 2,930 194,531 1,221,209 1,418,670 2 17,286 27,212 343,844 388,344 4,996 21,761 301,241 1,376,587 1,704,585 23,230 14,413 487,967 525,610 7,234 4,044,443 500 500 1,000 $ 6,534,503 $ 28,900 $ 108,537 $ 1,105 $ 6,453,761 0.68 0.60 0.90 0.63 - 0.67 2.65 1.29 1.18 1.20 1.32 2.90 0.51 1.45 1.45 2.03 2.87 1.41 1.21 1.27 1.31 0.76 1.23 1.22 2.21 1.26 0.72 0.84 0.78 1.03 (1) 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. During the second quarter of 2021, the Corporation placed this instrument in nonaccrual status based on this delinquency status of the underlying second mortgage loans collateral. 164 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The amortized cost, gross unrealized gains and losses recorded in OCI, ACL, estimated fair value, and weighted-average yield of investment securities available for sale by contractual maturities as of December 31, 2020 were as follows: December 31, 2020 Gross Unrealized Amortized cost Gains Losses ACL Fair value Weighted- average yield% $ 7,498 $ 9 $ - $ 24,413 691,668 441,454 21,413 3,987 273 911 821 - - - 290 347 149 780 1,190,433 2,014 1,566 75 60,773 1,070,984 1,131,832 1 26,918 40,727 614,584 682,230 24,812 110,832 1,154,707 1,290,351 538 18,438 258,069 277,045 12,310 3,393,768 650 8 2,850 15,340 18,198 - 1,080 128 16,271 17,479 891 5,783 23,459 30,133 - 152 1,019 1,171 - 66,981 - - - 159 159 - - 69 148 217 - - 203 203 1 - 491 492 2,880 3,951 - - - - - - 308 308 - - - - - - - - - - - - - - - - - 1,002 1,002 - $ 7,507 24,686 692,289 441,928 21,264 2,899 1,190,573 83 63,623 1,086,165 1,149,871 1 27,998 40,786 630,707 699,492 25,703 116,615 1,177,963 1,320,281 537 18,590 258,597 277,724 8,428 3,455,796 650 $ 4,584,851 $ 68,995 $ 5,517 1,310 $ 4,647,019 1.65 1.95 0.57 0.83 0.65 6.97 0.72 4.86 2.15 1.38 1.42 1.93 2.91 0.42 1.27 1.29 2.81 2.13 1.53 1.61 0.81 0.80 1.56 1.51 2.25 1.47 2.94 1.28 (Dollars in thousands) U.S. Treasury securities: Due within one year U.S. government-sponsored agencies' obligations: Due within one year After 1 to 5 years After 5 to 10 years After 10 years Puerto Rico government obligations: After 10 years(1) United States and Puerto Rico government obligations MBS: FHLMC certificates: After 1 to 5 years After 5 to 10 years After 10 years GNMA certificates: Due within one year After 1 to 5 years After 5 to 10 years After 10 years FNMA certificates: After 1 to 5 years After 5 to 10 years After 10 years Collateralized mortgage obligations issued or guaranteed by the FHLMC, FNMA and GNMA: After 1 to 5 years After 5 to 10 years After 10 years Private label: After 10 years Total MBS Other After 1 to 5 years Total investment securities available for sale (1) 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. 165 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Maturities of MBS are based on the period of final contractual maturity. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted-average yield on investment securities available for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on securities available for sale is presented as part of OCI. The aggregate amortized cost and approximate market value of investment securities available for sale as of December 31, 2021 by contractual maturity are shown below: Amortized Cost Fair Value (Dollars in thousands) United States and Puerto Rico government obligations, and other debt securities: Within 1 year After 1 to 5 years After 5 to 10 years After 10 years MBS and collateralized mortgage obligations(1) Total investment securities available for sale $ $ 500 2,027,341 403,785 19,362 2,450,988 4,083,515 6,534,503 $ $ 500 1,996,852 393,104 18,862 2,409,318 4,044,443 6,453,761 (1) The expected maturities of MBS and collateralized mortgage obligations may differ from their contractual maturities because they may be subject to prepayments. 166 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables show the fair value and gross unrealized losses of the Corporation’s available-for-sale investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2021 and December 31, 2020. The tables also include debt securities for which an ACL was recorded. (In thousands) Debt securities: Puerto Rico-government obligations U.S. Treasury and U.S. government agencies’ obligations MBS: FNMA FHLMC GNMA Collateralized mortgage obligations issued or guaranteed by the FHLMC, FNMA and GNMA Private label MBS (In thousands) Debt securities: Puerto Rico-government obligations U.S. Treasury and U.S. government agencies’ obligations MBS: FNMA FHLMC GNMA Collateralized mortgage obligations issued or guaranteed by the FHLMC, FNMA and GNMA Private label MBS Less than 12 months As of December 31, 2021 12 months or more Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ - $ - $ 2,850 $ 416 $ 2,850 $ 416 1,717,340 25,401 606,179 16,243 2,323,519 41,644 1,237,701 986,345 194,271 19,843 16,144 1,329 112,559 221,896 41,233 3,821 8,481 984 1,350,260 1,208,241 235,504 23,664 24,625 2,313 466,004 - $ 4,601,661 $ 13,552 - 76,269 16,656 7,234 $ 1,008,607 $ 360 1,963 32,268 482,660 7,234 $ 5,610,268 $ 13,912 1,963 108,537 Less than 12 months Fair Value Unrealized Losses As of December 31, 2020 12 months or more Fair Value Unrealized Losses Total Fair Value Unrealized Losses $ - $ - $ 2,899 $ 780 $ 2,899 $ 425,155 93,509 89,292 70,504 621 203 159 217 23,377 165 448,532 - - - - - - 93,509 89,292 70,504 780 786 203 159 217 104,500 - 782,960 $ $ 410 - 1,610 $ 9,761 8,428 44,465 $ 82 2,880 3,907 $ 114,261 8,428 827,425 $ 492 2,880 5,517 167 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) There were no sales of securities available for sale during the year ended December 31, 2021. During the year ended December 31, 2020, proceeds from sales of available-for-sale investment securities amounted to $ 1.2 billion, including gross realized gains of $ 13.3 million and gross realized losses of $ 0.1 million. The $ 13.2 million net gain was realized on tax-exempt securities or was realized at the tax-exempt international banking entity subsidiary, which had no effect in the income tax expense recorded during the year ended December 31, 2020. 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 approximately 99% of the total available-for-sale portfolio as of December 31, 2021 and 2020, 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 the Corporation does not have the intent to sell these U.S. government and agencies debt securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Corporation does not consider impairments on these securities to be credit related as of December 31, 2021 and 2020. 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. The Corporation’s available-for-sale MBS portfolio included private label MBS with a fair value of $ 7.2 million, which had unrealized losses of approximately $ 2.8 million as of December 31, 2021 of which $ 0.8 million is due to credit deterioration and is part of the ACL. The interest rate on these private-label MBS is variable, tied to 3-month LIBOR, and limited to the weighted-average coupon on the underlying collateral. The underlying collateral are fixed-rate, single-family residential mortgage loans in the United States with original FICO scores over 700 and moderate loan-to-value ratios (under 80%), as well as moderate delinquency levels. of December 31, 2021, the Corporation did not have the intent to sell these securities and determined that it was likely that it will not be required to sell the securities before anticipated recovery. 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 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 and the housing price index. Under this approach, all future cash flows (interest and principal) from the underlying collateral loans, adjusted by prepayments and the PDs and LGDs, were discounted at the effective interest rate as of the reporting date. Significant assumptions in the valuation of the private label MBS were as follows: As As of December 31, 2021 Range Minimum Maximum Weighted Average As of December 31, 2020 Range Minimum Maximum Weighted Average Discount rate Prepayment rate Projected Cumulative Loss Rate 12.9% 15.2% 7.6% 12.9% 12.9% 7.6% 24.9% 0.2% 15.7% 12.2% 12.1% 10.2% 12.2% 12.2% 1.2% 18.8% 2.6% 22.3% 168 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Corporation evaluates if a credit loss exists, primarily by monitoring adverse variances in the present value of expected cash flows. As of December 31, 2021, the ACL for these private label MBS was $ 0.8 million, relatively flat compared to $ 1.0 million as of December 31, 2020. As of December 31, 2021, the Corporation’s available-for-sale investment securities portfolio also included a residential pass- through MBS issued by the PRHFA, collateralized by certain second mortgages, with a fair value of $ 2.9 million, which had an unrealized loss of approximately $ 0.7 million. Approximately $ 0.3 million of the unrealized losses was due to credit deterioration and is part of the ACL. The underlying second mortgage loans were originated under a program launched by the Puerto Rico government in 2010. This residential pass-through MBS was structured as a zero-coupon bond for the first ten years (up to July 2019). The underlying source of repayment on this residential pass-through MBS is second mortgage loans in Puerto Rico. 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. During the second quarter of 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral. The Corporation determined the ACL on this instrument based on a risk-adjusted discounted cash flow methodology that considered the structure and terms of the underlying collateral. 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. Under this approach, all future cash flows (interest and principal) from the underlying collateral loans, adjusted by prepayments and the PDs and LGDs, were discounted at the internal rate of return as of the reporting date and compared to the amortized cost. In the event that the second mortgage loans default and the collateral is insufficient to satisfy the outstanding balance of this residential pass-through MBS, PRHFA’ s ability to honor its insurance will depend on, among other factors, the financial condition of PRHFA at the time such obligation becomes due and payable. Further deterioration of the Puerto Rico economy or fiscal health of the PRHFA could impact the value of these securities, resulting in additional losses to the Corporation. As of December 31, 2021, the Corporation did not have the intent to sell this security and determined that it was likely that it will not be required to sell the security before its anticipated recovery . Accrued interest receivable on available-for-sale debt securities totaled $ 10.1 million as of December 31, 2021 ($ 8.5 million as of December 31, 2020) and is excluded from the estimate of credit losses. The following table presents a rollforward by major security type for the years ended December 31, 2021 and 2020 of the ACL on debt securities available-for-sale: (In thousands) Beginning balance Provision for credit losses - (benefit) Net charge-offs ACL on debt securities available-for-sale (In thousands) Beginning balance Provision for credit losses Net charge-offs ACL on debt securities available-for-sale Year Ended December 31, 2021 Puerto Rico Government Obligations Private label MBS Total 1,002 (136) (69) 797 $ $ 308 - - 308 $ $ Year Ended December 31, 2020 Puerto Rico Government Obligations Private label MBS Total $ - 1,333 (331) 1,002 $ - 308 - 308 $ $ $ $ $ $ 1,310 (136) (69) 1,105 - 1,641 (331) 1,310 169 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) During the year ended December 31, 2019, the Corporation recorded OTTI losses on available-for-sale debt securities as follows: 2019 (In thousands) (557) Total OTTI losses 60 Portion of OTTI recognized in OCI (497) Net impairment losses recognized in earnings (1) (1) Prior to the adoption of CECL on January 1, 2020, credit-related impairment recognized in earnings was reported $ $ aspart of net gain (loss) on investment securities in the consolidated statements of income rather than as a provision for credit losses. Investments Held to Maturity The amortized cost, gross unrecognized gains and losses, estimated fair value, ACL, weighted-average yield and contractual maturities of investment securities held to maturity as of December 31, 2021 and December 31, 2020 were as follows : December 31, 2021 (Dollars in thousands) Amortized cost Gross Unrecognized Gains Losses Fair value ACL Weighted- average yield% Puerto Rico municipal bonds: Due within one year After 1 to 5 years After 5 to 10 years After 10 years Total investment securities held to maturity $ $ 2,995 14,785 90,584 69,769 $ 5 $ - $ 526 1,555 - 156 3,139 9,777 $ 3,000 15,155 89,000 59,992 178,133 $ 2,086 $ 13,072 $ 167,147 $ 70 347 3,258 4,896 8,571 5.39 2.35 4.25 4.06 4.04 December 31, 2020 (Dollars in thousands) Amortized cost Gross Unrecognized Losses Gains Fair value ACL Weighted- average yield% Puerto Rico municipal bonds: Due within one year After 1 to 5 years After 5 to 10 years After 10 years Total investment securities held to maturity $ $ 556 $ 7 $ - $ 17,297 88,394 83,241 561 1,388 - 305 3,146 14,187 $ 563 17,553 86,636 69,054 189,488 $ 1,956 $ 17,638 $ 173,806 $ - 576 4,401 3,868 8,845 5.41 3.00 4.66 3.57 4.03 170 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables show the Corporation’s held-to-maturity investments’ fair value and gross unrecognized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrecognized loss position, as of December 31, 2021 and December 31, 2020, including debt securities for which an ACL was recorded: (In thousands) Debt securities: Puerto Rico municipal bonds (In thousands) Debt securities: Puerto Rico municipal bonds Less than 12 months As of December 31, 2021 12 months or more Total Fair Value Unrecognized Losses Fair Value Unrecognized Losses Fair Value Unrecognized Losses $ - $ - $ 140,732 $ 13,072 $ 140,732 $ 13,072 Less than 12 months As of December 31, 2020 12 months or more Total Fair Value Unrecognized Losses Fair Value Unrecognized Losses Fair Value Unrecognized Losses $ 28,252 $ 1,611 $ 116,216 $ 16,027 $ 144,468 $ 17,638 The Corporation determines the ACL of Puerto Rico municipal bonds 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, above. 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 December 31, 2021. The Puerto Rico municipal bonds had an ACL of $ 8.6 million as of December 31, 2021, down $ 0.2 million from $8.8 million as of December 31, 2020. The decrease was mainly related to improvements in forecasted macroeconomic variables and the repayment of certain bonds during the year ended December 31, 2021, partially offset by changes in some issuers’ financial metrics based on their most recent financial statements. The ACL recorded as of December 31, 2020 included the initial ACL for held-to-maturity securities of $ 8.1 million upon adoption of CECL on January 1, 2020, a $ 1.3 million initial ACL established for PCD debt securities with a fair value of $ 55.5 million acquired in the BSPR acquisition, and a $ 0.6 million net release of the initial reserves recorded during 2020. In accordance with the Corporation’s policy, accrued interest receivable on held-to-maturity debt securities that totaled $ 3.4 million as of December 31, 2021 ($ 3.6 million as of December 31, 2020) and was excluded from the estimate of credit losses. The following table presents the activity in the ACL for debt securities held to maturity by major security type for the years ended December 31, 2021 and 2020: Puerto Rico Municipal Bonds Year Ended December 31, 2021 December 31, 2020 (In thousands) Beginning Balance Impact of adopting ASC 326 Initial allowance on PCD debt securities Provision for credit losses - (benefit) $ $ 8,845 - - (274) 8,571 $ $ - 8,134 1,269 (558) 8,845 171 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 fiscal plans of other government entities, and, more recently, by the effect of the COVID-19 pandemic on the Puerto Rico and global economy. Given the inherent uncertainties about the fiscal situation of the Puerto Rico central government, the COVID-19 pandemic, and the measures taken, or to be taken, by other government entities in response to the COVID-19 pandemic on municipalities, the Corporation cannot be certain whether future charges to the ACL on these securities will be required.   From time to time, the Corporation has securities held to maturity 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 December 31, 2021, and 2020, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents. Credit Quality Indicators: The held-to-maturity investment securities portfolio consisted of financing arrangements with Puerto Rico municipalities issued in bond form, which 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 Puerto Rico municipal bonds held-to-maturity through the use of internal credit-risk ratings, which are generally updated on a quarterly basis. The Corporation considers a debt security held-to- maturity 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. The asset categories are defined below: Pass – Assets classified as pass have a well-defined primary source of repayment, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and strong capitalization and include assets categorized as watch. Assets classified as watch have acceptable business credit, but borrowers operations, cash flow or financial condition evidence more than average risk and requires additional level of supervision and attention from Loan Officers. Special Mention – Special Mention assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification. Substandard – Substandard assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Doubtful classifications have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently known facts, conditions and values. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived, but loss cannot be determined because of specific reasonable pending factors, which may strengthen the credit in the near term. Loss – Assets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may occur in the future. There is little or no prospect for near term improvement and no realistic strengthening action of significance pending. The Corporation periodically reviews its assets to evaluate if they are properly classified, and to determine impairment, if any. 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 securities. The objective of these loan reviews is 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 172 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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. The following table summarizes the amortized cost of the Puerto Rico Municipal Bonds, which are the Corporation’s only debt securities held-to-maturity, as of December 31, 2021 and 2020, aggregated by credit quality indicator: (In thousands) Risk Ratings: Pass Criticized: Special Mention Substandard Doubtful Loss Total Held to Maturity Puerto Rico Municipal Bonds December 31, 2021 December 31 2020 $ $ 178,133 $ - - - - 178,133 $ 189,488 - - - - 189,488 No held-to-maturity debt securities were on nonaccrual status, 90 days past due and still accruing, or past due as of December 31, 2021 and 2020. A security is considered to be past due once it is 30 days contractually past due under the terms of the agreement. 173 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 6 – EQUITY SECURITIES Institutions that are members of the FHLB system are required to maintain a minimum investment in FHLB stock. Such minimum investment is calculated as a percentage of aggregate outstanding mortgage related assets, and the FHLB requires an additional investment that is calculated as a percentage of total FHLB advances and letters of credit, if any. The FHLB stock represents capital stock issued at $ 100 par value, and both stock and cash dividends may be received. As of December 31, 2021 and 2020, the Corporation had investments in FHLB stock carried at a cost of $ million, respectively. Dividend income from FHLB stock for the years ended December 31, 2021, 2020, and 2019 amounted to $ million, $ 2.0 million, and $ 2.7 million, respectively. 21.5 million and $ 31.2 1.4 The FHLB of New York issued the shares of FHLB stock owned by the Corporation. The FHLB of New York is part of the Federal Home Loan Bank System, a national wholesale banking network of eleven regional, stockholder-owned congressionally chartered banks. The FHLBs are all privately capitalized and operated by their member stockholders. The system is supervised by the Federal Housing Finance Agency, which requires that the FHLBs operate in a financially safe and sound manner, remain adequately capitalized and able to raise funds in the capital markets, and carry out their housing finance mission. As of December 31, 2021 and 2020, the Corporation owned other equity securities with a readily determinable fair value of approximately $ 5.4 million and $ 1.5 million, respectively. During the year ended December 31, 2021, the Corporation recognized a marked-to-market loss of $ 0.1 million associated with these securities, which was recorded as part of other non-interest income in the consolidated statements of income, compared to a $ 38 thousand marked-to-market gain for the year ended December 2020, and a $ 0.4 thousand marked-to-market gain for the year ended December 2019. In addition, the Corporation has other equity securities that do not have a readily-determinable fair value. The carrying value of such securities as of December 31, 2021 and 2020 was $ 5.3 million and $ 4.9 million, respectively. 174 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 7 – INTEREST AND DIVIDEND INCOME ON INVESTMENT SECURITIES, MONEY MARKET INVESTMENTS AND INTEREST-BEARING CASH ACCOUNTS The following provides information about interest on investments, interest-bearing cash accounts, and FHLB dividend income: Year Ended December 31, 2020 2019 2021 (In thousands) MBS: Taxable Exempt (1) Puerto Rico government obligations, U.S. Treasury securities, and U.S. government agencies: Taxable Exempt (1) Other investment securities (including FHLB dividends) Taxable Total interest income on investment securities Interest on money market investments and interest-bearing cash accounts: Taxable Exempt Total interest income on money market investments and interest-bearing cash accounts Total interest and dividend income on investment securities, money market $ $ 31,398 18,667 50,065 9,404 30,877 40,281 $ 7,812 29,232 37,044 5,513 15,859 21,372 1,456 72,893 2,661 1 2,662 1,032 15,235 16,267 1,999 58,547 3,386 2 3,388 165 19,623 19,788 2,714 59,546 13,205 148 13,353 investments, and interest-bearing cash accounts $ 75,555 $ 61,935 $ 72,899 (1) Primarily MBS and government obligations held by International Banking Entities (as defined in the International Baking Entity Act of Puerto Rico), whose interest income and sales are exempt from Puerto Rico income taxation under that act, as well as tax-exempt Puerto Rico municipal bonds held as part of the held-to-maturity investment securities portfolio. The following table summarizes the components of interest and dividend income on investments: Year Ended December 31, 2020 2019 2021 (In thousands) Interest income on investment securities, money market investments, and interest-bearing cash accounts Dividends on FHLB stock Dividends on other equity securities Total interest income and dividends on investments $ $ 74,114 1,394 47 75,555 $ $ 59,952 1,959 24 61,935 $ $ 70,201 2,682 16 72,899 175 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 8 – LOANS HELD FOR INVESTMENT The following provides information about the loan portfolio held for investment as of the indicated dates: (In thousands) Residential mortgage loans, mainly secured by first mortgages Construction loans Commercial mortgage loans C&I loans (1) (2) Consumer loans Loans held for investment (3) ACL on loans and finance leases Loans held for investment, net $ $ As of December 31, 2021 As of December 31, 2020 2,978,895 138,999 2,167,469 2,887,251 2,888,044 11,060,658 (269,030) 10,791,628 $ $ 3,521,954 212,500 2,230,602 3,202,590 2,609,643 11,777,289 (385,887) 11,391,402 (1) As of December 31, 2021 and 2020, includes $145.0 million and $406.0 million, respectively, of SBA PPP loans. (2) As of each December 31, 2021 and 2020, includes $1.0 billion of commercial loans that were secured by real estate but were not dependent upon the real estate for repayment. (3) Includes accretable fair value net purchase discounts of $35.3 million and $48.0 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, and 2020, the Corporation had net deferred origination costs on its loan portfolio amounting to $ 4.3 million and $ 4.6 million, respectively. The total loan portfolio is net of unearned income of $ 79.0 million and $65.8 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, the Corporation was servicing residential mortgage loans owned by others in an aggregate amount of $4.0 billion (2020 — $ 4.2 billion), and commercial loan participations owned by others in an aggregate amount of $ 383.5 million as of December 31, 2021 (2020 — $ 422.0 million). Various loans, mainly secured by first mortgages, were assigned as collateral for CDs, individual retirement accounts, and advances from the FHLB. Total loans pledged as collateral amounted to $ 2.1 billion and $ 2.5 billion as of December 31, 2021 and 2020, respectively. 176 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables present by portfolio classes the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing as of December 31, 2021 and the interest income recognized on nonaccrual loans for the years ended December 31, 2021 and 2020: Puerto Rico and Virgin Islands region (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government -guaranteed Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer Loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total loans held for investment (1) $ As of December 31, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 Nonaccrual Loans with No ACL Nonaccrual Loans with ACL Total Nonaccrual Loans (2) Loans Past Due 90 days or more and Still Accruing (2)(3) Interest Income Recognized on Nonaccrual Loans Interest Income Recognized on Nonaccrual Loans $ - $ - $ - $ 3,689 1,000 8,289 10,925 3,146 196 - - 44,286 1,664 17,048 5,259 3,538 670 1,208 - 47,975 2,664 25,337 16,184 6,684 866 1,208 - 20 27,265 $ 1,543 75,216 $ 1,563 102,481 $ 65,394 $ 28,433 - 9,919 7,766 - - - 2,985 - 114,497 $ - 1,406 61 201 113 99 2 92 - 5 1,979 $ - 1,050 80 194 86 164 25 49 - 5 1,653 (1) (2) (3) Nonaccrual loans exclude $ 357.7 million of TDR loans that were in compliance with modified terms and in accrual status as of December 31, 2021. Nonaccrual loans exclude PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans accounted for under ASC Subtopic 310-30 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 accrete interest income based on the effective interest rate of the loan pools determined at the time of adoption of CECL and 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 amortized cost of such loans as of December 31, 2021 was $ 117.5 million. The portion of such loans contractually past due 90 days or more, amounting to $ 20.6 million as of December 31, 2021 ($ 19.1 million conventional residential mortgage loans and $ 1.5million commercial mortgage loans), is presented in the loans past due 90 days or more and still accruing category in the table above. These include rebooked loans, which were previously pooled into GNMA securities amounting to $ 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. During the year ended December 31, 2021, the Corporation repurchased, pursuant to the aforementioned repurchase option, $ 7.2 million as of December 31, 2021. Under the GNMA 1.1 million of loans previously sold to GNMA. 177 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Florida region (In thousands) As of December 31, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 Nonaccrual Loans with No ACL Nonaccrual Loans with ACL Total Nonaccrual Loans Loans Past Due 90 days or more and Still Accruing Interest Income Recognized on Nonaccrual Loans Interest Income Recognized on Nonaccrual Loans Residential mortgage loans, mainly secured by first mortgages: FHA/VA government -guaranteed Conventional residential mortgage loans $ Construction loans Commercial mortgage loans C&I loans Consumer Loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total loans held for investment (1) $ - $ - - - 468 - - - - - $ - $ 7,152 - - 483 - - - - 7,152 - - 951 - - - - 121 $ - - - 61 - - - - - $ 211 - - 70 - - - - - 468 $ 133 7,768 $ 133 8,236 $ - 182 $ 10 291 $ - 285 - - 71 12 - - - 8 376 (1) Nonaccrual loans exclude $ 5.7 million of TDR loans that were in compliance with modified terms and in accrual status as of December 31, 2021. Total (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government -guaranteed Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer Loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans As of December 31, 2021 Year Ended December 31, 2021 Year Ended December 31, 2020 Nonaccrual Loans with No ACL Nonaccrual Loans with ACL Total Nonaccrual Loans (2) Loans Past Due 90 days or more and Still Accruing (2)(3) Interest Income Recognized on Nonaccrual Loans Interest Income Recognized on Nonaccrual Loans $ - $ - $ - $ 3,689 1,000 8,289 11,393 3,146 196 - - 20 27,733 $ 51,438 1,664 17,048 5,742 3,538 670 1,208 - 1,676 82,984 $ 55,127 2,664 25,337 17,135 6,684 866 1,208 - 1,696 110,717 $ 65,515 28,433 - 9,919 7,827 - - - 2,985 - 114,679 $ - $ 1,617 61 201 183 99 2 92 - 15 2,270 $ $ - 1,335 80 194 157 176 25 49 - 13 2,029 Total loans held for investment (1) $ (1) (2) (3) Nonaccrual loans exclude $ 363.4 million of TDR loans that were in compliance with modified terms and in accrual status as of December 31, 2021. Nonaccrual loans excludes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans accounted for under ASC Subtopic 310-30 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 accrete interest income based on the effective interest rate of the loan pools determined at the time of adoption of CECL and 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 amortized cost of such loans as of December 31, 2021 was $ 117.5 million. The portion of such loans contractually past due 90 days or more, amounting to $" 20.6million as of December 31, 2021 ($ 19.1" million conventional residential mortgage loans and $ 1.5 million commercial mortgage loans), is presented in the loans past due 90 days or more and still accruing category in the table above. These include rebooked loans, which were previously pooled into GNMA securities, amounting to $ 7.2 million as of December 31, 2021. 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. During the year ended December 31, 2021, the Corporation repurchased, pursuant to the aforementioned repurchase option, $ GNMA. 1.1 million of loans previously sold to 178 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables present by portfolio classes the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing as of December 31, 2020: Puerto Rico and Virgin Islands region (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government -guaranteed Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer Loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans As of December 31, 2020 Nonaccrual Loans with No ACL Nonaccrual Loans with ACL Total Nonaccrual Loans (2) Loans Past Due 90 days or more and Still Accruing (2)(3) $ - $ - $ - $ 12,418 4,546 11,777 14,824 26 - - - - 43,591 $ 98,527 8,425 17,834 5,496 8,638 1,466 1,623 - 3,682 145,691 $ 110,945 12,971 29,611 20,320 8,664 1,466 1,623 - 3,682 189,282 $ 98,993 38,834 - 3,252 2,246 - - - 1,520 - 144,845 Total loans held for investment (1) $ (1) (2) (3) Nonaccrual loans exclude $ 386.7 million of TDR loans that were in compliance with modified terms and in accrual status as of December 31, 2020. Excludes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans accounted for under ASC Subtopic 310-30 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 accrete interest income based on the effective interest rate of the loan pools determined at the time of adoption of CECL and 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 amortized cost of such loans as of December 31, 2020 was $ 130.9 million. The portion of such loans contractually past due 90 days or more, amounting to $ conventional residential mortgage loans and $ 1.6 million commercial mortgage loans), is presented in the loans past due 90 days or more and still accruing category in the table above. These include loans rebooked, which were previously pooled into GNMA securities amounting to $ 10.7 million as of December 31, 2020. 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. During the year ended December 31, 2020, the Corporation repurchased, pursuant to the aforementioned repurchase option, $ 55.0 million of loans previously sold to GNMA. 26.3 million as of December 31, 2020 ($ 24.7 million 179 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2020 Nonaccrual Loans with No ACL Nonaccrual Loans with ACL Total Nonaccrual Loans Loans Past Due 90 days or more and Still Accruing Florida region (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government -guaranteed Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer Loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government -guaranteed Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer Loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans $ - $ - $ - $ 2,584 - - 561 - - - - - 3,145 $ 11,838 - - - 223 - - - 601 12,662 $ 14,422 - - 561 223 - - - 601 15,807 $ Total loans held for investment (1) $ (1) Nonaccrual loans exclude $ 6.6 million of TDR loans that were in compliance with modified terms and in accrual status as of December 31, 2020. As of December 31, 2020 Nonaccrual Loans with No ACL Nonaccrual Loans with ACL Total Nonaccrual Loans (2) Loans Past Due 90 days or more and Still Accruing (2)(3) $ - $ - $ - $ 15,002 4,546 11,777 15,385 26 - - - - 46,736 $ 110,365 8,425 17,834 5,496 8,861 1,466 1,623 - 4,283 158,353 $ 125,367 12,971 29,611 20,881 8,887 1,466 1,623 - 4,283 205,089 $ Total loans held for investment (1) $ (1) (2) (3) Nonaccrual loans exclude $ 393.3 million of TDR loans that were in compliance with modified terms and in accrual status as of December 31, 2020. Excludes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans accounted for under ASC Subtopic 310-30 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 accrete interest income based on the effective interest rate of the loan pools determined at the time of adoption of CECL and 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 amortized cost of such loans as of December 31, 2020 was $ 130.9 million. The portion of such loans contractually past due 90 days or more, amounting to $ conventional residential mortgage loans and $ 1.6 million commercial mortgage loans), is presented in the loans past due 90 days or more and still accruing category in the table above. These include rebooked loans , which were previously pooled into GNMA securities amounting to $ 10.7 million as of December 31, 2020. 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. During the year ended December 31, 2020, the Corporation repurchased, pursuant to the aforementioned repurchase option, $ 55.0 million of loans previously sold to GNMA. 26.3 million as of December 31, 2020 ($ 24.7 million 180 250 - - - - - - - - - 250 99,243 38,834 - 3,252 2,246 - - - 1,520 - 145,095 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) When a loan is placed on 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 $ 2.0 million and $ 1.9 million for the year ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the recorded investment on residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure amounted to $ 85.4 million, including $ 43.4 million of loans insured by the FHA or guaranteed by the VA, and $13.9 million of PCD loans acquired prior to the adoption, on January 1, 2020, of CECL and for which the Corporation made the accounting policy election of maintaining pools of loans previously accounted for under ASC 310 -30 as “units of account.” The Corporation commences the foreclosure process on residential real estate loans when a borrower becomes delinquent, in accordance with the requirements of the CFPB. Foreclosure procedures and timelines vary depending on whether the property is located in a judicial or non-judicial state. Judicial states (i.e., Puerto Rico, Florida, and the USVI) require the foreclosure to be processed through the state’s court while foreclosure in non-judicial states ( i.e., the BVI) is processed without court intervention. Foreclosure timelines vary according to local jurisdiction law and investor guidelines. Occasionally, foreclosures may be delayed due to, among other reasons, mandatory mediations, bankruptcy, court delays, and title issues. 120 days The Corporation’s aging of the loan portfolio held for investment by portfolio classes as of December 31, 2021 is as follows: As of December 31, 2021 Puerto Rico and Virgin Islands region (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government-guaranteed loans(2) (3) (4) Conventional residential mortgage loans(4) Commercial loans: Construction loans Commercial mortgage loans(4) C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total loans held for investment 30-59 Days Past Due 60-89 Days Past Due 90 days or more Past Due (1)(2)(3) Total Past Due Current Total loans held for investment $ $ - $ - 2,355 $ 29,724 65,394 $ 76,408 67,749 $ 106,132 56,903 $ 2,318,789 124,652 2,424,921 18 2,402 2,007 - 436 1,782 2,664 35,256 23,950 2,682 38,094 27,739 40,451 1,664,137 1,918,858 26,020 4,820 3,299 3,158 1,985 43,709 $ 4,828 713 1,285 1,904 811 43,838 $ 6,684 866 1,208 2,985 1,563 216,978 $ 37,532 6,399 5,792 8,047 4,359 304,525 $ 1,525,249 568,606 310,283 282,179 123,938 8,809,393 $ 43,133 1,702,231 1,946,597 1,562,781 575,005 316,075 290,226 128,297 9,113,918 (1) (2) Includes nonaccrual loans and accruing loans that were contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged-off at 180 days. It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA, guaranteed by the VA, and other government-insured loans as past-due loans 90 days and still accruing as opposed to nonaccrual loans since the principal repayment is insured. 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 $ FHA that were over 15 months delinquent. 46.6 million of residential mortgage loans insured by the (3) As of December 31, 2021, includes $ 7.2 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans. (4) 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, 2021 amounted to $ 6.1 million, $ 63.1 million, and $ 0.7 million, respectively. 181 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2021 Florida region (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government-guaranteed loans(2) Conventional residential mortgage loans(3) Commercial loans: Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans 30-59 Days Past Due 60-89 Days Past Due 90 days or more Past Due (1) (2) Total Past Due Current Total loans held for investment $ - $ - - $ 121 $ 121 $ 619 $ 2,108 7,152 9,260 419,322 - - 40 442 - - - 11 - - 63 121 - - - - - - 1,012 - - - - 133 - - 1,115 563 - - - 144 95,866 465,238 939,539 8,196 - 107 - 6,650 740 428,582 95,866 465,238 940,654 8,759 - 107 - 6,794 Total loans held for investment $ 493 $ 2,292 $ 8,418 $ 11,203 $ 1,935,537 $ 1,946,740 (1) Includes nonaccrual loans and accruing loans that were contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans). (2) It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA, guaranteed by the VA, and other government-insured loans as past-due loans 90 days and still accruing as opposed to nonaccrual loans since the principal repayment is insured. 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. Florida region were over 15 months delinquent as of December 31, 2021. No residential mortgage loans insured by the FHA in the (3) 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. Conventional residential mortgage loans past due 30-59 days, but less than two payments in arrears, as of December 31, 2021 amounted to $ 2.9 million. 182 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2021 Total (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government-guaranteed loans(2) (3) (4) Conventional residential mortgage loans(4) Commercial loans: Construction loans Commercial mortgage loans(4) C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans 30-59 Days Past Due 60-89 Days Past Due 90 days or more Past Due (1)(2)(3) Total Past Due Current Total loans held for investment $ - $ - 2,355 $ 31,832 65,515 $ 83,560 67,870 $ 115,392 57,522 $ 2,738,111 125,392 2,853,503 18 2,402 2,047 26,462 4,820 3,299 3,158 1,996 - 436 1,845 4,949 713 1,285 1,904 811 2,664 35,256 24,962 6,684 866 1,208 2,985 1,696 2,682 38,094 28,854 38,095 6,399 5,792 8,047 4,503 136,317 2,129,375 2,858,397 1,533,445 568,606 310,390 282,179 130,588 138,999 2,167,469 2,887,251 1,571,540 575,005 316,182 290,226 135,091 Total loans held for investment $ 44,202 $ 46,130 $ 225,396 $ 315,728 $ 10,744,930 $ 11,060,658 (1) (2) Includes nonaccrual loans and accruing loans that were contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged-off at 180 days. It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA, guaranteed by the VA, and other government-insured loans as past-due loans 90 days and still accruing as opposed to nonaccrual loans since the principal repayment is insured. 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 $ FHA that were over 15 months delinquent. 46.6 million of residential mortgage loans insured by the (3) As of December 31, 2021, includes $ 7.2 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans. (4) 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, 2021 amounted to $ 6.1 million, $ 66.0 million, and $ 0.7 million, respectively. 183 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Corporation’s aging of the loan portfolio held for investment by portfolio classes as of December 31, 2020 is as follows: As of December 31, 2020 Puerto Rico and Virgin Islands region (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government-guaranteed loans(2) (3) (4) Conventional residential mortgage loans (4) Commercial loans: Construction loans(4) Commercial mortgage loans(4) C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total loans held for investment 30-59 Days Past Due 60-89 Days Past Due 90 days or more Past Due (1)(2)(3) Total Past Due Current Total loans held for investment $ $ - $ - 2,223 $ 61,040 98,993 $ 101,216 $ 149,779 210,819 48,348 $ 2,641,820 149,564 2,852,639 - 5,071 3,283 19 6,588 10,692 12,971 32,863 22,566 12,990 44,522 36,541 72,026 1,808,702 2,228,190 85,016 1,853,224 2,264,731 24,025 5,059 4,034 3,528 2,143 47,143 $ 5,992 1,086 1,981 5,842 993 1,278,126 38,681 472,989 7,611 372,011 7,638 319,824 10,888 139,982 6,820 96,456 $ 334,127 $ 477,726 $ 9,310,380 $ 9,788,106 1,239,445 465,378 364,373 308,936 133,162 8,664 1,466 1,623 1,518 3,684 (1) (2) Includes nonaccrual loans and accruing loans that were contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged -off at 180 days. It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA, guaranteed by the VA, and other government-insured loans as past-due loans 90 days and still accruing as opposed to nonaccrual loans since the principal repayment is insured. 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 $ mortgage loans insured by the FHA that were over 15 months delinquent. 57.9 million of residential (3) As of December 31, 2020, includes $ 10.7 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans. (4) 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 December 31, 2020 amounted to $ million, respectively. 5.9 million, $ 105.2 million, $ 5.0 million, and $ 0.1 184 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2020 Florida region (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government-guaranteed loans(2) (3) Conventional residential mortgage loans(3) Commercial loans: Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans 30-59 Days Past Due 60-89 Days Past Due 90 days or more Past Due (1) (2) Total Past Due Current Total loans held for investment $ - $ - - $ 250 $ 250 $ 920 $ 3,237 14,422 17,659 500,922 - - 218 710 - - - 58 - - - 297 - - - - - - 561 223 - - - 601 - - 779 1,230 - - - 659 127,484 377,378 937,080 17,068 - 157 - 7,597 1,170 518,581 127,484 377,378 937,859 18,298 - 157 - 8,256 Total loans held for investment $ 986 $ 3,534 $ 16,057 $ 20,577 $ 1,968,606 $ 1,989,183 (1) Includes nonaccrual loans and accruing loans that were contractually delinquent 90 days or more ( i.e., FHA/VA guaranteed loans). (2) It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA, guaranteed by the VA, and other government-insured loans as past-due loans 90 days and still accruing as opposed to nonaccrual loans since the principal repayment is insured. 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. No residential mortgage loans insured by the FHA in the Florida region were over 15 months delinquent as of December 31, 2020. (3) 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 and conventional residential mortgage loans past due 30-59 days, but less than two payments in arrears, as of December 31, 2020 amounted to $ 0.2 million and $ 6.6 million, respectively. 185 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2020 Total (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government-guaranteed loans (2) (3) (4) Conventional residential mortgage loans (4) Commercial loans: Construction loans(4) Commercial mortgage loans(4) C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total loans held for investment 30-59 Days Past Due 60-89 Days Past Due 90 days or more Past Due (1)(2)(3) Total Past Due Current Total loans held for investment $ $ - $ - 2,223 $ 64,277 99,243 $ 101,466 $ 164,201 228,478 49,268 $ 3,142,742 150,734 3,371,220 - 5,071 3,501 24,735 5,059 4,034 3,528 2,201 48,129 $ 19 6,588 10,692 6,289 1,086 1,981 5,842 993 12,971 32,863 23,127 8,887 1,466 1,623 1,518 4,285 12,990 44,522 37,320 39,911 7,611 7,638 10,888 7,479 199,510 2,186,080 3,165,270 1,256,513 465,378 364,530 308,936 140,759 99,990 $ 350,184 $ 498,303 $ 11,278,986 $ 212,500 2,230,602 3,202,590 1,296,424 472,989 372,168 319,824 148,238 11,777,289 (1) (2) Includes nonaccrual loans and accruing loans that were contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged -off at 180 days. It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA, guaranteed by the VA, and other government-insured loans as past-due loans 90 days and still accruing as opposed to nonaccrual loans since the principal repayment is insured. 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 $ insured by the FHA that were over 15 months delinquent. 57.9 million of residential mortgage loans (3) As of December 31, 2020, includes $ 10.7 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans. (4) 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 December 31, 2020 amounted to $ respectively. 6.1 million, $ 111.8 million, $ 5.0 million, and $ 0.1 million, 186 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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, commercial and industrial, and construction loans individually to classify the loans’ credit risk. As mentioned above, the Corporation periodically reviews its commercial and construction loan classifications 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 securities, as discussed in Note 5 – Investment Securities, above. For residential mortgage and consumer loans, the Corporation also evaluates credit quality based on its interest accrual status. 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 December 31, 2021 and the amortized cost of commercial and construction loans by portfolio classes based on the internal credit-risk category as of December 31, 2020 was as follows: Puerto Rico and Virgin Islands region As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year(1) (In thousands) 2021 2020 2019 2018 2017 Prior CONSTRUCTION Risk Ratings: Pass Criticized: Special Mention Substandard Doubtful Loss $ 1,401 $ 12,596 $ 19,001 $ - - - - - - - - 765 - - - - - 841 - - $ 193 $ 4,875 $ - - - - - 3,461 - - Total construction loans $ 1,401 $ 12,596 $ 19,766 $ 841 $ 193 $ 8,336 $ As of December 31, 2020 Revolving Loans Amortized Cost Basis Total Total - - - - - - $ 38,066 $ 68,836 765 4,302 - - 776 15,404 - - $ 43,133 $ 85,016 COMMERCIAL MORTGAGE Risk Ratings: Pass Criticized: Special Mention Substandard Doubtful Loss $ 159,093 $ 364,911 $ 216,942 $ 223,817 $ 73,668 $ 356,908 $ 230 $ 1,395,569 $ 1,511,827 - 2,224 - - 10,621 89,409 - - - - - - 19,167 782 - - 118,122 2,227 - - 21,944 42,166 - - - - - - 259,263 47,399 - - 292,736 48,661 - - Total commercial mortgage loans $ 161,317 $ 375,532 $ 306,351 $ 243,766 $ 194,017 $ 421,018 $ 230 $ 1,702,231 $ 1,853,224 COMMERCIAL AND INDUSTRIAL Risk Ratings: Pass Criticized: Special Mention Substandard Doubtful Loss $ 307,431 $ 206,560 $ 346,746 $ 180,601 $ 160,389 $ 201,785 $ 449,040 $ 1,852,552 $ 2,155,226 9,549 633 - - 1,372 1,470 - - 836 14,534 - - - 2,109 - - - 17,170 - - 11,641 20,010 - - 9,252 5,469 - - 32,650 61,395 - - 59,421 50,084 - - Total commercial and industrial loans $ 317,613 $ 209,402 $ 362,116 $ 182,710 $ 177,559 $ 233,436 $ 463,761 $ 1,946,597 $ 2,264,731 (1) Excludes accrued interest receivable. 187 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2021 Term Loans Florida region Amortized Cost Basis by Origination Year (1) As of December 31, 2020 (In thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total Total CONSTRUCTION Risk Ratings: Pass Criticized: Special Mention Substandard Doubtful Loss $ 31,802 $ 26,209 $ 83 $ 37,772 $ - - - - - - - - - - - - - - - - Total construction loans $ 31,802 $ 26,209 $ 83 $ 37,772 $ - - - - - - $ $ - - - - - - $ $ - - - - - - $ 95,866 $ 127,484 - - - - - - - - $ 95,866 $ 127,484 COMMERCIAL MORTGAGE Risk Ratings: Pass Criticized: Special Mention Substandard Doubtful Loss $ 97,215 $ 77,086 $ 87,332 $ 61,379 $ 30,054 $ 33,078 $ 18,160 $ 404,304 $ 291,627 - - - - 7,126 13,601 6,782 5,353 - - - - - - - - - - - - 27,756 316 - - - - - - 60,618 316 - - 85,427 324 - - Total commercial mortgage loans $ 97,215 $ 84,212 $ 100,933 $ 68,161 $ 35,407 $ 61,150 $ 18,160 $ 465,238 $ 377,378 COMMERCIAL AND INDUSTRIAL Risk Ratings: Pass Criticized: Special Mention Substandard Doubtful Loss $ 239,017 $ 121,815 $ 207,483 $ 74,440 $ 59,182 $ 21,138 $ 103,748 $ 826,823 $ 823,124 - - - - - 24,444 - - 27,207 34,476 - - - - - - - - - - 4,770 4,630 - - 17,969 335 - - 49,946 63,885 - - 73,974 40,761 - - Total commercial and industrial loans $ 239,017 $ 146,259 $ 269,166 $ 74,440 $ 59,182 $ 30,538 $ 122,052 $ 940,654 $ 937,859 (1) Excludes accrued interest receivable. 188 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Total As of December 31, 2021 Term Loans (In thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total Total Amortized Cost Basis by Origination Year (1) As of December 31, 2020 CONSTRUCTION Risk Ratings: Pass Criticized: Special Mention Substandard Doubtful Loss $ 33,203 $ 38,805 $ 19,084 $ 37,772 $ 193 $ 4,875 $ - - - - - - - - 765 - - - - 841 - - - - - - - 3,461 - - Total construction loans $ 33,203 $ 38,805 $ 19,849 $ 38,613 $ 193 $ 8,336 $ - - - - - - $ 133,932 $ 196,320 765 4,302 - - 776 15,404 - - $ 138,999 $ 212,500 COMMERCIAL MORTGAGE Risk Ratings: Pass Criticized: Special Mention Substandard Doubtful Loss $ 256,308 $ 441,997 $ 304,274 $ 285,196 $ 103,722 $ 389,986 $ 18,390 $ 1,799,873 $ 1,803,454 - 2,224 - - 17,747 103,010 - - - - - - 25,949 782 - - 123,475 2,227 - - 49,700 42,482 - - - - - - 319,881 47,715 - - 378,163 48,985 - - Total commercial mortgage loans $ 258,532 $ 459,744 $ 407,284 $ 311,927 $ 229,424 $ 482,168 $ 18,390 $ 2,167,469 $ 2,230,602 COMMERCIAL AND INDUSTRIAL Risk Ratings: Pass Criticized: Special Mention Substandard Doubtful Loss $ 546,448 $ 328,375 $ 554,229 $ 255,041 $ 219,571 $ 222,923 $ 552,788 $ 2,679,375 $ 2,978,350 9,549 633 - - 1,372 25,914 - - 28,043 49,010 - - - 2,109 - - - 17,170 - - 16,411 24,640 - - 27,221 5,804 - - 82,596 125,280 - - 133,395 90,845 - - Total commercial and industrial loans $ 556,630 $ 355,661 $ 631,282 $ 257,150 $ 236,741 $ 263,974 $ 585,813 $ 2,887,251 $ 3,202,590 (1) Excludes accrued interest receivable. 189 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table presents the amortized cost of residential mortgage loans by origination year based on accrual status as of December 31, 2021, and the amortized cost of residential mortgage loans by accrual status of December 31, 2020: As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) (In thousands) 2021 2020 2019 2018 2017 Prior As of December 31, 2020 Revolving Loans Amortized Cost Basis Total Total Puerto Rico and Virgin Islands Region: FHA/VA government-guaranteed loans Accrual Status: Performing Non-Performing Total FHA/VA government-guaranteed loans Conventional residential mortgage loans: Accrual Status: Performing Non-Performing Total conventional residential mortgage loans Total: Accrual Status: Performing Non-Performing Total residential mortgage loans in Puerto Rico and Virgin Islands Region (1) Excludes accrued interest receivable. $ $ $ $ $ $ - - - 79,765 - 79,765 79,765 - 79,765 $ $ $ $ $ $ 362 - 362 34,742 - 34,742 35,104 - 35,104 $ $ $ $ $ $ 914 - 914 58,650 114 58,764 59,564 114 59,678 $ $ $ $ $ $ 2,051 - 2,051 85,739 279 86,018 87,790 279 88,069 $ $ $ $ $ $ 3,769 - 3,769 61,393 142 61,535 65,162 142 65,304 $ $ $ $ $ $ 117,556 - 117,556 2,056,657 47,440 2,104,097 2,174,213 47,440 2,221,653 $ $ $ $ $ $ - - - - - - - - - $ $ $ $ $ $ 124,652 - 124,652 2,376,946 47,975 2,424,921 2,501,598 47,975 2,549,573 $ $ $ $ $ $ 149,564 - 149,564 2,741,694 110,945 2,852,639 2,891,258 110,945 3,002,203 190 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) 2021 2020 2019 2018 2017 Prior As of December 31, 2020 Revolving Loans Amortized Cost Basis Total Total $ $ $ $ $ $ - - - 53,394 - 53,394 53,394 - 53,394 $ $ $ $ $ $ - - - 37,600 - 37,600 37,600 - 37,600 $ $ $ $ $ $ - - - 40,557 293 40,850 40,557 293 40,850 $ $ $ $ $ $ - - - 51,870 - 51,870 51,870 - 51,870 $ $ $ $ $ $ - - - 58,066 214 58,280 58,066 214 58,280 $ $ $ $ $ $ 740 - 740 179,943 6,645 186,588 180,683 6,645 187,328 $ $ $ $ $ $ - - - - - - - - - $ $ $ $ $ $ 740 - 740 421,430 7,152 428,582 422,170 7,152 429,322 $ $ $ $ $ $ 1,170 - 1,170 504,159 14,422 518,581 505,329 14,422 519,751 (In thousands) Florida Region: FHA/VA government-guaranteed loans Accrual Status: Performing Non-Performing Total FHA/VA government-guaranteed loans Conventional residential mortgage loans: Accrual Status: Performing Non-Performing Total conventional residential mortgage loans Total: Accrual Status: Performing Non-Performing Total residential mortgage loans in Florida region (1) Excludes accrued interest receivable. 191 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) 2021 2020 2019 2018 2017 Prior As of December 31, 2020 Revolving Loans Amortized Cost Basis Total Total $ $ $ $ $ $ - - - 133,159 - 133,159 133,159 - 133,159 $ $ $ $ $ $ 362 - 362 72,342 - 72,342 72,704 - 72,704 $ $ $ $ $ $ 914 - 914 99,207 407 99,614 100,121 407 100,528 $ $ $ $ $ $ 2,051 - 2,051 137,609 279 137,888 139,660 279 139,939 $ $ $ $ $ $ 3,769 - 3,769 119,459 356 119,815 123,228 356 123,584 $ $ $ $ $ $ 118,296 - 118,296 2,236,600 54,085 2,290,685 2,354,896 54,085 2,408,981 $ $ $ $ $ $ - - - - - - - - - $ $ $ $ $ $ 125,392 - 125,392 2,798,376 55,127 2,853,503 2,923,768 55,127 2,978,895 $ $ $ $ $ $ 150,734 - 150,734 3,245,853 125,367 3,371,220 3,396,587 125,367 3,521,954 (In thousands) Total: FHA/VA government-guaranteed loans Accrual Status: Performing Non-Performing Total FHA/VA government-guaranteed loans Conventional residential mortgage loans: Accrual Status: Performing Non-Performing Total conventional residential mortgage loans Total: Accrual Status: Performing Non-Performing Total residential mortgage loans (1) Excludes accrued interest receivable. 192 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table presents the amortized cost of consumer loans by origination year based on accrual status as of December 31, 2021, and the amortized cost of consumer loans by accrual status of December 31, 2020: As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) (In thousands) 2021 2020 2019 2018 2017 Prior Puerto Rico and Virgin Islands Regions: As of December 31, 2020 Revolving Loans Amortized Cost Basis Total Total Auto loans: Accrual Status: Performing Non-Performing Total auto loans Finance leases: Accrual Status: Performing Non-Performing Total finance leases Personal loans: Accrual Status: Performing Non-Performing Total personal loans Credit cards: Accrual Status: Performing Non-Performing Total credit cards Other consumer loans: Accrual Status: Performing Non-Performing Total other consumer loans Total: Performing Non-Performing Total consumer loans in Puerto Rico and Virgin Islands region (1) Excludes accrued interest receivable. $ $ $ $ $ $ $ $ $ $ 648,111 873 648,984 229,456 - 229,456 85,614 31 85,645 - - - 56,338 192 56,530 $ $ $ $ $ $ $ $ $ $ 350,581 830 351,411 114,945 84 115,029 53,074 153 53,227 - - - 18,128 111 18,239 $ $ $ $ $ $ $ $ $ $ 302,460 1,663 304,123 116,089 243 116,332 96,890 483 97,373 - - - 25,602 220 25,822 $ $ $ $ $ $ $ $ $ $ 159,021 1,175 160,196 76,144 269 76,413 44,969 226 45,195 - - - 8,594 49 8,643 $ $ $ $ $ $ $ $ $ $ 65,836 851 66,687 25,516 63 25,579 20,767 128 20,895 - - - 3,325 29 3,354 $ $ $ $ $ $ $ $ $ $ 30,088 1,292 31,380 11,989 207 12,196 13,553 187 13,740 - - - 6,066 761 6,827 $ $ $ $ $ $ $ $ $ $ - - - - - - - - - 290,226 - 290,226 8,681 201 8,882 $ $ $ $ $ $ $ $ $ $ 1,556,097 6,684 1,562,781 574,139 866 575,005 314,867 1,208 316,075 290,226 - 290,226 126,734 1,563 128,297 $ $ $ $ $ $ $ $ $ $ 1,269,462 8,664 1,278,126 471,523 1,466 472,989 370,388 1,623 372,011 319,824 - 319,824 136,300 3,682 139,982 1,019,519 1,096 536,728 1,178 541,041 2,609 288,728 1,719 115,444 1,071 61,696 2,447 298,907 2,862,063 2,567,497 201 10,321 15,435 $ 1,020,615 $ 537,906 $ 543,650 $ 290,447 $ 116,515 $ 64,143 $ 299,108 $ 2,872,384 $ 2,582,932 193 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) 2021 2020 2019 2018 2017 Prior As of December 31, 2020 Revolving Loans Amortized Cost Basis Total Total $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ - - - - - - 70 - 70 - - - 239 - 239 309 - $ $ $ $ $ $ $ $ $ $ - - - - - - 24 - 24 - - - 482 - 482 506 - 642 - 642 - - - 13 - 13 - - - - - - $ $ $ $ $ $ $ $ $ $ 4,748 - 4,748 - - - - - - - - - 40 - 40 $ $ $ $ $ $ $ $ $ $ 2,455 - 2,455 - - - - - - - - - 71 - 71 $ $ $ $ $ $ $ $ $ $ 655 - 4,788 - 2,526 - $ $ $ $ $ $ $ $ $ $ 914 - 914 - - - - - - - - - 3,096 23 3,119 4,010 23 $ $ $ $ $ $ $ $ $ $ - - - - - - - - - - - - 2,733 110 2,843 2,733 110 $ $ $ $ $ $ $ $ $ $ 8,759 - 8,759 - - - 107 - 107 - - - 6,661 133 6,794 15,527 133 18,075 223 18,298 - - - 157 - 157 - - - 7,655 601 8,256 25,887 824 (In thousands) Florida Region: Auto loans: Accrual Status: Performing Non-Performing Total auto loans Finance leases: Accrual Status: Performing Non-Performing Total finance leases Personal loans: Accrual Status: Performing Non-Performing Total personal loans Credit cards: Accrual Status: Performing Non-Performing Total credit cards Other consumer loans: Accrual Status: Performing Non-Performing Total other consumer loans Total: Performing Non-Performing Total consumer loans in Florida region $ 309 $ 506 $ 655 $ 4,788 $ 2,526 $ 4,033 $ 2,843 $ 15,660 $ 26,711 (1) Excludes accrued interest receivable. 194 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) 2021 2020 2019 2018 2017 Prior As of December 31, 2020 Revolving Loans Amortized Cost Basis Total Total $ $ $ $ $ $ $ $ $ $ 648,111 873 648,984 229,456 - 229,456 85,684 31 85,715 - - - 56,577 192 56,769 $ $ $ $ $ $ $ $ $ $ 350,581 830 351,411 114,945 84 115,029 53,098 153 53,251 - - - 18,610 111 18,721 $ $ $ $ $ $ $ $ $ $ 303,102 1,663 304,765 116,089 243 116,332 96,903 483 97,386 - - - 25,602 220 25,822 $ $ $ $ $ $ $ $ $ $ 163,769 1,175 164,944 76,144 269 76,413 44,969 226 45,195 - - - 8,634 49 8,683 $ $ $ $ $ $ $ $ $ $ 68,291 851 69,142 25,516 63 25,579 20,767 128 20,895 - - - 3,396 29 3,425 $ $ $ $ $ $ $ $ $ $ 1,019,828 537,234 541,696 293,516 117,970 1,096 1,178 2,609 1,719 1,071 31,002 1,292 32,294 11,989 207 12,196 13,553 187 13,740 - - - 9,162 784 9,946 65,706 2,470 $ $ $ $ $ $ $ $ $ $ - - - - - - - - - 290,226 - 290,226 11,414 311 11,725 $ $ $ $ $ $ $ $ $ $ 1,564,856 6,684 1,571,540 574,139 866 575,005 314,974 1,208 316,182 290,226 - 290,226 133,395 1,696 135,091 $ $ $ $ $ $ $ $ $ $ 1,287,537 8,887 1,296,424 471,523 1,466 472,989 370,545 1,623 372,168 319,824 - 319,824 143,955 4,283 148,238 301,640 2,877,590 2,593,384 311 10,454 16,259 (In thousands) Total: Auto loans: Accrual Status: Performing Non-Performing Total auto loans Finance leases: Accrual Status: Performing Non-Performing Total finance leases Personal loans: Accrual Status: Performing Non-Performing Total personal loans Credit cards: Accrual Status: Performing Non-Performing Total credit cards Other consumer loans: Accrual Status: Performing Non-Performing Total other consumer loans Total: Performing Non-Performing Total consumer loans $ 1,020,924 $ 538,412 $ 544,305 $ 295,235 $ 119,041 $ 68,176 $ 301,951 $ 2,888,044 $ 2,609,643 (1) Excludes accrued interest receivable. Accrued interest receivable on loans totaled $ 48.1 million as of December 31, 2021 ($ 57.2 million as of December 31, 2020), and is 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. 195 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables present information about collateral dependent loans that were individually evaluated for purposes of determining the ACL as of QtrEndCYYear and 2020: As of December 31, 2021 Collateral Dependent Loans - With Allowance Collateral Dependent Loans - With No Related Allowance Collateral Dependent Loans - Total Puerto Rico and Virgin Islands region Amortized Cost Related Allowance Amortized Cost Amortized Cost Related Allowance (In thousands) Residential mortgage loans: FHA/VA government -guaranteed loans Conventional residential mortgage loans Commercial loans: Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans As of December 31, 2021 Florida region (In thousands) Residential mortgage loans: FHA/VA government -guaranteed loans Conventional residential mortgage loans Commercial loans: Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans As of December 31, 2021 Total (In thousands) Residential mortgage loans: FHA/VA government -guaranteed loans Conventional residential mortgage loans Commercial loans: Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans $ $ $ $ $ $ $ - 48,398 $ - 3,731 $ - 781 - 49,179 $ - 9,908 5,781 - - 78 - 782 64,947 $ - 1,152 670 - - 1 - 98 5,652 $ 1,797 54,096 33,575 - - - - - 90,249 $ 1,797 64,004 39,356 - - 78 - 782 155,196 $ - 3,731 - 1,152 670 - - 1 - 98 5,652 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 $ - 3,373 $ - 235 $ - - - - - - - - - - 3,373 $ - - - - - - - - 235 $ - 2,265 468 - - - - - 2,733 $ - 3,373 - 2,265 468 - - - - - 6,106 $ $ - 235 - - - - - - - - 235 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 $ - 51,771 - 9,908 5,781 - - 78 - 782 68,320 $ - 3,966 - 1,152 670 - - 1 - 98 5,887 $ $ $ - 781 - 52,552 $ 1,797 56,361 34,043 - - - - - 92,982 $ 1,797 66,269 39,824 - - 78 - 782 161,302 $ - 3,966 - 1,152 670 - - 1 - 98 5,887 196 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2020 Collateral Dependent Loans - With Allowance Collateral Dependent Loans - With No Related Allowance Collateral Dependent Loans - Total Puerto Rico and Virgin Islands region Amortized Cost Related Allowance Amortized Cost Amortized Cost Related Allowance (In thousands) Residential mortgage loans: FHA/VA government -guaranteed loans Conventional residential mortgage loans Commercial loans: Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans As of December 31, 2020 Florida region (In thousands) Residential mortgage loans: FHA/VA government -guaranteed loans Conventional residential mortgage loans Commercial loans: Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans As of December 31, 2020 Total (In thousands) Residential mortgage loans: FHA/VA government -guaranteed loans Conventional residential mortgage loans Commercial loans: Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans $ $ $ $ $ $ - 100,950 $ $ - 9,582 $ - 7,145 - 108,095 $ 6,036 17,882 21,933 - - 146 - 857 147,804 $ 500 1,923 880 - - 2 - 113 13,000 $ 6,125 49,241 24,728 - - - - - 87,239 $ 12,161 67,123 46,661 - - 146 - 857 235,043 $ - 9,582 500 1,923 880 - - 2 - 113 13,000 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 $ - 6,224 $ - 988 - - - - - - - 248 6,472 $ - - - - - - - 83 1,071 $ - 2,400 - 2,327 561 - - - - - 5,288 $ $ - 8,624 - 2,327 561 - - - - 248 11,760 $ $ - 988 - - - - - - - 83 1,071 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 - 107,174 $ - 10,570 $ $ - 9,545 - 116,719 $ 6,036 17,882 21,933 - - 146 - 1,105 154,276 $ 500 1,923 880 - - 2 - 196 14,071 $ 6,125 51,568 25,289 - - - - - 92,527 $ 12,161 69,450 47,222 - - 146 - 1,105 246,803 $ - 10,570 500 1,923 880 - - 2 - 196 14,071 197 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 December 31, 2021 was 78% compared to 80% as of December 31, 2020. There were no significant changes in the extent to which collateral secures the Corporation’s collateral dependent financial assets during the year ended December 31, 2021. PCD and PCI Loans Prior to the adoption of ASC 326, the Corporation accounted for PCI loans and income recognition thereunder in accordance with ASC Subtopic 310-30. PCI loans are loans that as of the date of their acquisition have experienced deterioration in credit quality between origination and acquisition and for which it was probable at acquisition that not all contractually required payments would be collected. Following the adoption of ASC 326 on January 1, 2020, the Corporation analyzes acquired loans for more-than-insignificant deterioration in credit quality since their origination in accordance with ASC 326. Such loans are classified as PCD loans. Please also see Note 1 – Nature of Business and Summary of Significant Accounting Policies, above, for more information concerning the Corporation’s accounting for PCD loans. Prior to the adoption of ASC 326, the Corporation identified the amount by which the undiscounted expected future cash flows on PCI loans exceeded the estimated fair value of the loan on the date of acquisition as the “accretable yield,” representing the amount of estimated future interest income on the loan. The amount of accretable yield was re-measured at each financial reporting date, representing the difference between the remaining undiscounted expected cash flows and the then-current carrying value of the PCI loan. Following the adoption of ASC 326, the Corporation accounts for interest income on PCD loans using the interest method, whereby any purchase non-credit discounts or premiums are accreted or amortized into interest income as an adjustment of the loan’s yield. Upon the adoption of ASC 326, acquired loans classified as PCD are recorded at an initial amortized cost, which is comprised of the purchase price of the loans (or initial fair value) and the initial ACL determined for the loans, which represents the fair value credit discount, and any resulting premium or discount related to factors other than credit. Purchases and Sales of Loans During the years ended December 31, 2021, 2020, and 2019, the Corporation purchased C&I loan participations of $ 174.7 million, $40.0 million, and $20.0 million, respectively. In addition, during the year ended December 31, 2020, the Corporation purchased $0.8 million of residential mortgage loans as part of a internal program to purchase residential mortgage loans from mortgage bankers in Puerto Rico, compared to purchases of $ 18.8 million in 2019. In general, the loans purchased from mortgage bankers were conforming residential mortgage loans. Purchases of conforming residential mortgage loans provide the Corporation the flexibility to retain or sell the loans, including through securitization transactions, depending upon the Corporation’s interest rate risk management strategies. When the Corporation sells such loans, it generally keeps the right to service the loans. In the ordinary course of business, the Corporation sells residential mortgage loans (originated or purchased) to GNMA and GSEs, such as FNMA and FHLMC, which generally securitize the transferred loans into MBS for sale into the secondary market. During 2021, the Corporation sold $ 191.4 million of FHA/VA mortgage loans to GNMA, which packaged them into MBS, compared to sales of $ 221.5 million and $ 235.3 million in 2020 and 2019, respectively. Also, during 2021, the Corporation sold approximately $ 328.2 million of performing residential mortgage loans to FNMA and FHLMC, compared to sales of $ 254.7 million and $ 138.7 million in the years ended December 31, 2020 and 2019, 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 sold to GNMA, the Corporation holds an option to repurchase individual delinquent loans issued on or after January 1, 2003 when the borrower fails to make any payment for three consecutive months. This option gives the Corporation the ability, but not the obligation, to repurchase the delinquent loans at par without prior authorization from GNMA. Under ASC Topic 860, “Transfer and Servicing,” once the Corporation has the unilateral ability to repurchase the delinquent loan, it is considered to have regained effective control over the loan and is required to recognize the loan and a corresponding repurchase liability on the balance sheet regardless of the Corporation’s intent to repurchase the loan. As of December 31, 2021 and 2020, rebooked GNMA delinquent loans that were included in the residential mortgage loan portfolio amounted to $ 7.2 million and $10.7 million, respectively. 198 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) During the years ended December 31, 2021, 2020, and 2019, the Corporation repurchased, pursuant to the aforementioned repurchase option, $ 1.1 million, $ 55.0 million, and $ 33.5 million, respectively, of loans previously sold to GNMA. 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. On May 14, 2020, in response to the national emergency declared by the U.S. President related to the COVID- 19 pandemic, GNMA announced a temporary relief that excludes any new borrower delinquencies, occurring on or after April 2020, from the calculation of delinquency and default ratios established in the GNMA MBS guide. This exclusion was extended automatically to issuers that were compliant with GNMA delinquency rate thresholds as reflected by their April 2020 investor accounting report, reflecting March 2020 servicing data. The exemptions and delinquent loan exclusions will automatically expire on July 31, 2022, unless earlier rescinded or extended by GNMA, or the end of the national emergency, whichever comes earlier. Historically, losses for violations of representations and warranties, and on optional 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 repurchased at par loans previously sold to FNMA and FHLMC in the amount of $ 0.3 million, $ 42 thousand, and $ 0.3 million during the years ended December 31, 2021, 2020, and 2019, respectively. 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. The Corporation participates in the Main Street Lending program established by the FED under the CARES Act of 2020, as amended, to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Under this program, the Corporation originates loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sells a 95% participation interest in these loans to a special purpose vehicle (the “Main Street SPV”) organized by the FED to purchase the participation interests from eligible lenders, including the Corporation. During the fourth quarter of 2020, the Corporation originated million in principal amount and sold participation interests totaling $ 175.1 million to the Main Street SPV. 23 loans under this program totaling $ 184.4 During the year ended December 31, 2021, four criticized commercial loan participations in the Florida region totaling $ 43.1 million were sold. In addition, the Corporation sold a $ 3.1 million construction loan in the Puerto Rico region. In addition, during the third quarter of 2021, the Corporation sold $ 52.5 million of non-performing residential mortgage loans and related servicing advances of $ 2.0 million. The Corporation received $ 31.5 million, or 58% of book value before reserves, for the $54.5 million of non-performing loans and related servicing advances. Approximately $ 20.9 million of reserves had been allocated to the loans sold. The transaction resulted in total net charge-offs of $ 23.1 million and an additional loss of approximately $ 2.1 million recorded as charge to the provision for credit losses in the third quarter of 2021. 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 $11.1 billion as of December 31, 2021, credit risk concentration was approximately 79% in Puerto Rico, 18% in the U.S., and 3% in the USVI and BVI. As of December 31, 2021, the Corporation had $ 178.4 million outstanding in loans extended to the Puerto Rico government, its municipalities and public corporations, compared to $ 201.3 million as of December 31, 2020. As of December 31, 2021, approximately $ 100.3 million consisted of loans extended to municipalities in Puerto Rico that are general obligations supported by assigned property tax revenues, and $ 32.2 million of municipal special obligation bonds. 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. Late in 2015, the Government Development Bank for Puerto Rico (“GDB”) and the Municipal Revenue Collection Center (“CRIM”) signed and perfected a deed of trust. Through this deed, the Puerto Rico Fiscal Agency and Financial Advisory Authority, as fiduciary, is bound to keep the CRIM funds separate from any other deposits and must distribute the funds pursuant to applicable law. The CRIM funds are deposited at another commercial depository financial institution in Puerto Rico. In addition to loans extended to municipalities, the Corporation’s exposure to the Puerto Rico government as of December 31, 2021 included $ 12.5 million in loans granted to an affiliate of PREPA and $ 33.4 million in loans to an agency of the Puerto Rico central government. 199 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) In addition, as of December 31, 2021, the Corporation had $ 92.8 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 (December 31, 2020 - $106.5 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, 2019, the PRHFA’s mortgage loans insurance program covered loans in an aggregate amount of approximately $557 million. The regulations adopted by the PRHFA, requires the establishment of adequate reserves to guarantee the solvency of the mortgage loans insurance program . As of June 30, 2019, the most recent date as of which information is available, the PRHFA had an unrestricted deficit of approximately $5.2 million with respect to required reserves for the mortgage loan insurance program. The Corporation cannot predict at this time the ultimate effect on the Puerto Rico economy, the Corporation’s clients, and the Corporation’s financial condition and results of operations of the financial situation of the Commonwealth of Puerto Rico, the uncertainty about the ultimate effect of the Puerto Rico’s government debt adjustment plan recently approved by the U.S. District Court for the District of Puerto Rico, and the various legislative and other measures adopted and to be adopted by the Puerto Rico government and the PROMESA oversight board in response to such fiscal situation. The Corporation also has credit exposure to USVI government entities. As of December 31, 2021, the Corporation had $39.2 million in loans to USVI government public corporations, compared to $ 61.8 million as of December 31, 2020. As of December 31, 2021, all loans were currently performing and up to date on principal and interest payments. The USVI has been experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations to service their outstanding debt obligations. Troubled Debt Restructurings The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico. Depending upon the nature of a borrower’s financial condition, restructurings or loan modifications through this program, as well as other restructurings of individual C&I, commercial mortgage, construction, and residential mortgage loans, fit the definition of a TDR. A restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include, among others, the extension of the maturity of the loan and modifications of the loan rate. As of December 31, 2021, the Corporation’s total TDR loans held for investment of $ 414.7 million consisted of $ 258.6 million of residential mortgage loans, $ 70.4 million of C&I loans, $ 68.8 million of commercial mortgage loans, $ 2.3 million of construction loans, and $ 14.6 million of consumer loans. As of December 31, 2021 and 2020, the Corporation has committed to lend up to an additional $ 21 thousand and $ 5.0 million, respectively, on these loans. The Corporation’s loss mitigation programs for residential mortgage and consumer loans can provide for one or a combination of the following: movement of interest past due to the end of the loan; extension of the loan term; deferral of principal payments; and reduction of interest rates either permanently or for a period of up to six years (increasing back in step-up rates). Additionally, in certain cases, the restructuring may provide for the forgiveness of contractually -due principal or interest. Uncollected interest is added to the principal at the end of the loan term at the time of the restructuring and not recognized as income until collected or when the loan is paid off. These programs are available only to those borrowers who have defaulted, or are likely to default, permanently on their loans and would lose their homes in a foreclosure action absent some lender concession. Nevertheless, if the Corporation is not reasonably assured that the borrower will comply with its contractual commitment, the property is foreclosed. Prior to permanently modifying a loan, the Corporation may enter into trial modifications with certain borrowers. Trial modifications generally represent a six-month period during which the borrower makes monthly payments under the anticipated modified payment terms prior to a formal modification. Upon successful completion of a trial modification, the Corporation and the borrower enter into a permanent modification. TDR loans that are participating in or that have been offered a binding trial modification are classified as TDRs when the trial offer is made and continue to be classified as TDRs regardless of whether the borrower enters into a permanent modification. As of December 31, 2021, the Corporation included as TDRs $ 0.7 million of residential mortgage loans that were participating in or had been offered a trial modification. For the commercial real estate, commercial and industrial, and construction loan portfolios, at the time of a restructuring, the Corporation determines, on a loan-by-loan basis, whether a concession was granted for economic or legal reasons related to the borrower’s financial difficulty. Concessions granted for loans in these portfolios could include: reductions in interest rates to rates that are considered below market; extension of repayment schedules and maturity dates beyond the original contractual terms; waivers of borrower covenants; forgiveness of principal or interest; or other contractual changes that are considered to be concessions. The 200 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Corporation mitigates loan defaults for these loan portfolios through its collection function. The function’s objective is to minimize both early stage delinquencies and losses upon default of loans in these portfolios. In the case of the commercial and industrial, commercial mortgage, and construction loan portfolios, the Corporation’s 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, the Corporation extends, renews, and restructures loans with satisfactory credit profiles. Many commercial loan facilities are structured as lines of credit, which generally have one-year terms and, therefore, require annual renewals. Other facilities may be restructured or extended from time to time based upon changes in the borrower’s business needs, use of funds, and timing of completion of projects, and other factors. If the borrower is not deemed to have financial difficulties, extensions, renewals, and restructurings are done in the normal course of business and not considered to be concessions, and the loans continue to be recorded as performing. Under the provisions of the CARES Act of 2020, as amended by the Consolidated Appropriations Act, 2021 enacted on December 27, 2020, financial institutions may permit loan modifications for borrowers affected by the COVID-19 pandemic through January 1, 2022 without categorizing the modifications as TDRs, as long as the loan meets certain conditions, including the requirement that the loan was not more than 30 days past due as of December 31, 2019. As of December 31, 2021, commercial loans totaling $ million, or 3.10% of the balance of the total loan portfolio held for investment, were modified under the aforementioned provisions. These modifications on commercial loans were primarily related to borrowers in industries with longer expected recovery times, mostly hospitality, retail and entertainment industries, and consisted of providing deferrals of principal payments and interest rate adjustments for an extended period of time, typically 12 months. With respect to temporary deferred repayment arrangements established in 2020 to assist borrowers affected by the COVID-19 pandemic, as of December 31, 2021, all loans previously modified under such programs have completed their deferral period. 342.4 Selected information on the Corporation’s TDR loans held for investment based on the amortized cost by loan class and modification type is summarized in the following tables as of the indicated dates: Puerto Rico and Virgin Islands region (In thousands) TDRs: Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans As of December 31, 2021 Interest rate below market Maturity or term extension Combination of reduction in interest rate and extension of maturity Forgiveness of principal and/or interest Forbearance Agreement Other (1) Total $ 15,800 $ 16 1,421 218 - - 43 - 892 18,390 $ 10,265 $ 869 718 2,401 186 2 6 - 816 15,263 $ 176,615 $ 1,374 41,480 17,319 2,561 258 329 2,574 282 242,792 $ - $ - - - - - - 9 122 131 $ 220 - 16,041 16,765 - - - - - 33,026 $ $ 51,616 $ 44 6,908 33,302 4,503 715 596 - 274 97,958 $ 254,516 2,303 66,568 70,005 7,250 975 974 2,583 2,386 407,560 Total TDRs in Puerto Rico and Virgin Islands region $ (1) Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of two or more of the concessions listed in the table. Amounts included in Other that represent a combination of concessions are excluded from the amounts reported in the column for such individual concessions. 201 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Florida region (In thousands) TDRs: Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total TDRs in Florida region As of December 31, 2021 Interest rate below market Maturity or term extension Combination of reduction in interest rate and extension of maturity Forgiveness of principal and/or interest Forbearance Agreement Other (1) Total $ $ 603 $ - - - - - - - - 603 $ 897 $ - 812 282 31 - - - - 2,022 $ 2,557 $ - 1,453 - 3 - - - 75 4,088 $ - $ - - - - - - - - - $ - - - - - - - - - - $ $ - $ - - 133 - - - - 332 465 $ 4,057 - 2,265 415 34 - - - 407 7,178 (1) Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of two or more of the concessions listed in the table. Amounts included in Other that represent a combination of concessions are excluded from the amounts reported in the column for such individual concessions. Total (In thousands) TDRs: Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total TDRs As of December 31, 2021 Interest rate below market Maturity or term extension Combination of reduction in interest rate and extension of maturity Forgiveness of principal and/or interest Forbearance Agreement Other (1) Total $ $ 16,403 $ 16 1,421 218 - - 43 - 892 18,993 $ 11,162 $ 869 1,530 2,683 217 2 6 - 816 17,285 $ 179,172 $ 1,374 42,933 17,319 2,564 258 329 2,574 357 246,880 $ - $ - - - - - - 9 122 131 $ 220 - 16,041 16,765 - - - - - 33,026 $ $ 51,616 $ 44 6,908 33,435 4,503 715 596 - 606 98,423 $ 258,573 2,303 68,833 70,420 7,284 975 974 2,583 2,793 414,738 (1) Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of two or more of the concessions listed in the table. Amounts included in Other that represent a combination of concessions are excluded from the amounts reported in the column for such individual concessions. 202 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Puerto Rico and Virgin Islands region (In thousands) TDRs: Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans As of December 31, 2020 Interest rate below market Maturity or term extension Combination of reduction in interest rate and extension of maturity Forgiveness of principal and/or interest Forbearance Agreement Other (1) Total $ 17,740 $ 21 1,491 238 - - 58 - 1,602 21,150 $ 11,125 $ 1,700 1,380 12,267 474 15 9 - 991 27,961 $ 211,155 $ 1,516 35,714 14,119 4,863 588 571 2,342 572 271,440 $ - $ - - - - - - 16 193 209 $ 223 - 16,473 17,890 - - - - - 34,586 $ $ 66,694 $ 186 6,765 35,744 6,112 541 286 - 343 116,671 $ 306,937 3,423 61,823 80,258 11,449 1,144 924 2,358 3,701 472,017 Total TDRs in Puerto Rico and Virgin Islands region $ (1) Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of two or more of the concessions listed in the table. Amounts included in Other that represent a combination of concessions are excluded from the amounts reported in the column for such individual concessions. Florida region (In thousands) TDRs: Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total TDRs in Florida region As of December 31, 2020 Interest rate below market Maturity or term extension Combination of reduction in interest rate and extension of maturity Forgiveness of principal and/or interest Forbearance Agreement Other (1) Total $ $ 989 $ - - - - - - - 37 1,026 $ 401 $ - 834 - 55 - - - - 1,290 $ 2,257 $ - 1,781 - 15 - - - 172 4,225 $ - $ - - - - - - - - - $ - - - - - - - - - - $ $ 22 $ - - 224 - - - - 392 638 $ 3,669 - 2,615 224 70 - - - 601 7,179 (1) Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of two or more of the concessions listed in the table. Amounts included in Other that represent a combination of concessions are excluded from the amounts reported in the column for such individual concessions. 203 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Total (In thousands) TDRs: Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total TDRs As of December 31, 2020 Interest rate below market Maturity or term extension Combination of reduction in interest rate and extension of maturity Forgiveness of principal and/or interest Forbearance Agreement Other (1) Total $ $ 18,729 $ 21 1,491 238 - - 58 - 1,639 22,176 $ 11,526 $ 1,700 2,214 12,267 529 15 9 - 991 29,251 $ 213,412 $ 1,516 37,495 14,119 4,878 588 571 2,342 744 275,665 $ - $ - - - - - - 16 193 209 $ 223 - 16,473 17,890 - - - - - 34,586 $ $ 66,716 $ 186 6,765 35,968 6,112 541 286 - 735 117,309 $ 310,606 3,423 64,438 80,482 11,519 1,144 924 2,358 4,302 479,196 (1) Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of two or more of the concessions listed in the table. Amounts included in Other that represent a combination of concessions are excluded from the amounts reported in the column for such individual concessions. The following table presents the Corporation’s TDR loans held for investment activity for the indicated periods: (In thousands) Beginning balance of TDRs New TDRs Increases to existing TDRs Charge-offs post-modification (1) Sales, net of charge-offs Foreclosures Removed from the TDR classification Paid-off, partial payments and other (2) Ending balance of TDRs Year Ended December 31, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 $ $ 479,196 34,216 94 (17,434) (17,492) (3,117) (8,001) (52,724) 414,738 $ $ 487,997 36,319 6,009 (11,122) - (2,015) - (37,992) 479,196 $ $ 582,647 63,433 1,840 (10,342) - (12,872) - (136,709) 487,997 (1) For the year ended December 31, 2021, includes charge-offs totaling $ 12.5 million related to $ 29.9 million of residential mortgage TDR loans that were part of the $ 52.5 million bulk sale of nonaccrual residential mortgage loans. (2) For the year ended December 31, 2019, includes the payoff of a $ 92.4 million commercial mortgage loan. TDR loans are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, a loan on nonaccrual status and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of months , and there is evidence that such payments can, and are likely to, continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Loan modifications increase the Corporation’s interest income by returning a nonaccrual loan to performing status, if applicable, increase cash flows by providing for payments to be made by the borrower, and limit increases in foreclosure and OREO costs. A TDR loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the Corporation is willing to accept for a new loan with comparable risk may not be reported as a TDR loan in the calendar years subsequent to the restructuring, if it is in compliance with its modified terms. During the year ended December 31, 2021, the Corporation removed $ the TDR classification as the borrower was no longer experiencing financial difficulties, the outstanding loans are at market terms, and did not contain any concession to the borrowers. The Corporation did not remove any loans from the TDR classification during 2020 and 2019. 8.0 million in loans from six 204 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables provide a breakdown of the TDR loans held for investment portfolio by those in accrual and nonaccrual status as of the indicated dates: December 31, 2021 (In thousands) Puerto Rico and Virgin Islands region Florida region Total Accrual Nonaccrual Total TDRs Accrual Nonaccrual Total TDRs Accrual Nonaccrual (1) Total TDRs Conventional residential mortgage loans $ 234,597 $ 19,919 $ 254,516 $ 3,030 $ 1,027 $ 4,057 $ 237,627 $ 20,946 $ 258,573 Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit Cards Other consumer loans 1,845 50,608 59,792 4,174 975 973 2,583 2,111 458 15,960 10,213 3,076 - 1 - 275 2,303 66,568 70,005 7,250 975 974 2,583 2,386 - 2,265 - 34 - - - 407 - - 415 - - - - - - 2,265 415 34 - - - 407 1,845 52,873 59,792 4,208 975 973 2,583 2,518 458 15,960 10,628 3,076 - 1 - 275 2,303 68,833 70,420 7,284 975 974 2,583 2,793 Total TDRs $ 357,658 $ 49,902 $ 407,560 $ 5,736 $ 1,442 $ 7,178 $ 363,394 $ 51,344 $ 414,738 (1) Included in nonaccrual loans are $ 13.5 million in loans that are performing under the terms of the restructuring agreement but are reported in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and are deemed fully collectible. December 31, 2020 (In thousands) Puerto Rico and Virgin Islands region Florida region Total Accrual Nonaccrual Total TDRs Accrual Nonaccrual Total TDRs Accrual Nonaccrual (1) Total TDRs Conventional residential mortgage loans $ 253,421 $ 53,516 $ 306,937 $ 3,358 $ 311 $ 3,669 $ 256,779 $ 53,827 $ 310,606 Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit Cards Other consumer loans 2,480 43,012 73,649 6,481 1,125 920 2,358 3,274 943 18,811 6,609 3,423 61,823 80,258 4,968 11,449 19 4 - 427 1,144 924 2,358 3,701 - 2,615 - 70 - - - - - 224 - - - - - 2,615 224 70 - - - 564 37 601 2,480 45,627 73,649 6,551 1,125 920 2,358 3,838 943 18,811 6,833 3,423 64,438 80,482 4,968 11,519 19 4 - 464 1,144 924 2,358 4,302 Total TDRs $ 386,720 $ 85,297 $ 472,017 $ 6,607 $ 572 $ 7,179 $ 393,327 $ 85,869 $ 479,196 (1) Included in nonaccrual loans are $ 5.9 million in loans that are performing under the terms of the restructuring agreement but are reported in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and are deemed fully collectible. 205 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) TDR loans exclude restructured residential mortgage loans that are government-guaranteed ( e.g., FHA/VA loans) totaling $ 57.6 million as of December 31, 2021 (compared with $ 58.7 million as of December 31, 2020). The Corporation excludes FHA/VA guaranteed loans from TDR loan statistics given that, in the event that the borrower defaults on the loan, the principal and interest (at the specified debenture rate) are guaranteed by the U.S. government. Therefore, the risk of loss on these types of loans is very low. Loan modifications that are considered TDR loans completed during 2021, 2020 and 2019 were as follows: Year Ended December 31, 2021 (Dollars in thousands) TDRs: Puerto Rico and Virgin Islands region Post- Pre- modification modification Amortized Amortized Cost Cost Number of contracts Florida region Pre- modification Amortized Cost Post- modification Amortized Cost Number of contracts Total Pre- modification Amortized Cost Post- modification Amortized Cost Number of contracts Conventional residential mortgage loans 61 $ 6,221 $ 6,128 5 $ 1,466 $ 1,466 66 $ 7,687 $ 7,594 Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit Cards Other consumer loans Total TDRs Year Ended December 31, 2020 - 7 5 134 42 46 246 65 - 11,285 9,732 2,601 692 497 1,426 266 - 11,223 9,609 2,598 697 504 1,426 266 - - 1 - - - - - - - 299 - - - - - - - 299 - - - - - - 7 6 134 42 46 246 65 - 11,285 10,031 2,601 692 497 1,426 266 - 11,223 9,908 2,598 697 504 1,426 266 606 $ 32,720 $ 32,451 6 $ 1,765 $ 1,765 612 $ 34,485 $ 34,216 Puerto Rico and Virgin Islands region Post- Pre- modification modification Amortized Amortized Cost Cost Number of contracts Florida region Pre- modification Amortized Cost Post- modification Amortized Cost Number of contracts Number of contracts Total Pre- modification Amortized Cost Post- modification Amortized Cost (Dollars in thousands) TDRs: Conventional residential mortgage loans 103 $ 9,027 $ 8,307 - $ - $ Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit Cards Other consumer loans Total TDRs - 5 14 163 29 30 159 144 - 824 - 824 22,544 22,524 2,635 2,623 408 306 783 590 408 305 783 522 647 $ 37,117 $ 36,296 - - - - - - - - - - - - - - - - - - - - - - 103 $ 9,027 $ 8,307 - 5 14 163 29 30 159 145 - 824 - 824 22,544 22,524 2,635 2,623 408 306 783 613 408 305 783 545 648 $ 37,140 $ 36,319 1 1 $ 23 23 $ 23 23 206 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Year Ended December 31, 2019 Puerto Rico and Virgin Islands region Post- Pre- modification modification Amortized Amortized Cost Cost Number of contracts Florida region Pre- modification Amortized Cost Post- modification Amortized Cost Number of contracts Number of contracts Total Pre- modification Amortized Cost Post- modification Amortized Cost (Dollars in thousands) TDRs: Conventional residential mortgage loans 118 $ 14,606 $ 14,084 - $ - $ Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit Cards Other consumer loans Total TDRs 4 13 14 253 42 53 153 656 118 40,988 1,754 117 38,750 1,750 4,168 4,121 804 502 800 2,411 801 499 800 2,478 63,400 - - - 3 - - - - - - - 33 - - - - - - - - 33 - - - - 118 $ 14,606 $ 14,084 4 13 14 256 42 53 153 656 118 40,988 1,754 117 38,750 1,750 4,201 4,154 804 502 800 2,411 801 499 800 2,478 63,433 1,306 $ 66,151 $ 3 $ 33 $ 33 1,309 $ 66,184 $ Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a nonaccrual loan. Recidivism on a modified loan occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The Corporation considers a loan to have defaulted if the borrower has failed to make payments of either principal, interest, or both for a period of 90 days or more. 207 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Loan modifications considered TDR loans that defaulted during the years ended December 31, 2021, 2020, and 2019, and had become TDR loans during the 12-months preceding the default date, were as follows: Puerto Rico and Virgin Islands region (Dollars in thousands) Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total Puerto Rico and Virgin Islands region Florida region (Dollars in thousands) Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total in Florida region Total (Dollars in thousands) Conventional residential mortgage loans Construction loans Commercial mortgage loans C&I loans Consumer loans: Auto loans Finance leases Personal loans Credit cards Other consumer loans Total Year Ended December 31, 2021 2020 2019 Number of contracts Amortized Cost Number of contracts Amortized Cost Number of contracts Amortized Cost $ 7 - - - 92 - 1 42 11 153 $ 475 - - - 1,625 - 1 260 45 2,406 10 $ - - 3 55 1 1 47 58 175 $ 2,380 - - 124 947 5 7 228 209 3,900 11 $ - - - 130 1 1 - 77 220 $ 2,019 - - - 2,221 14 9 - 238 4,501 Year Ended December 31, 2021 2020 2019 Number of contracts Amortized Cost Number of contracts Amortized Cost Number of contracts Amortized Cost - - - - - - - - - - $ $ - - - - - - - - - - - - - - - - - - - - $ $ - - - - - - - - - - - - - - - - - - - - $ $ - - - - - - - - - - Year Ended December 31, 2021 2020 2019 Number of contracts Amortized Cost Number of contracts Amortized Cost Number of contracts Amortized Cost 10 $ - - 3 55 1 1 47 58 175 $ 2,380 - - 124 947 5 7 228 209 3,900 11 $ - - - 130 1 1 - 77 220 $ 2,019 - - - 2,221 14 9 - 238 4,501 $ 7 - - - 92 - 1 42 11 153 $ 475 - - - 1,625 - 1 260 45 2,406 208 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 9 – ALLOWANCE FOR CREDIT LOSSES FOR LOANS AND FINANCE LEASES The following table presents 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 Year Ended December 31, 2021 (In thousands) ACL: Beginning balance Provision for credit losses - (benefit) expense Charge-offs Recoveries Ending balance Year Ended December 31, 2020 (In thousands) ACL: $ 120,311 $ 5,380 $ 109,342 $ 37,944 $ 112,910 $ 385,887 (16,957) (33,294) 4,777 (1,408) (87) 163 (55,358) (1,494) 281 (8,549) (1,887) 6,776 20,552 (43,948) 13,576 (61,720) (80,710) 25,573 $ 74,837 $ 4,048 $ 52,771 $ 34,284 $ 103,090 $ 269,030 Residential Mortgage Loans Construction Loans Commercial Mortgage Commercial & Industrial Loans Consumer Loans Total Beginning balance, prior to adoption of CECL $ 44,806 $ 2,370 $ 39,194 $ 15,198 $ 53,571 $ 155,139 Impact of adopting CECL Allowance established for acquired PCD loans Provision for credit losses (1) Charge-offs Recoveries Ending balance 49,837 12,739 22,427 (11,017) 1,519 797 - 2,105 (76) 184 (19,306) 9,723 81,125 (3,330) 1,936 14,731 1,830 6,627 (3,634) 3,192 35,106 4,452 56,433 (46,483) 9,831 81,165 28,744 168,717 (64,540) 16,662 $ 120,311 $ 5,380 $ 109,342 $ 37,944 $ 112,910 $ 385,887 Residential Mortgage Loans Construction Loans Commercial Mortgage Commercial & Industrial Loans Consumer Loans Total Year Ended December 31, 2019 (In thousands) ACL: Beginning balance Provision for credit losses - expense (benefit) Charge-offs Recoveries Ending balance $ $ 50,794 $ 3,592 $ 55,581 $ 32,546 $ 53,849 $ 196,362 14,091 (22,742) 2,663 (1,496) (391) 665 (1,697) (15,088) 398 (13,696) (7,206) 3,554 43,023 (52,160) 8,859 40,225 (97,587) 16,139 44,806 $ 2,370 $ 39,194 $ 15,198 $ 53,571 $ 155,139 (1) Includes a $37.5 million charge related to the establishment of the initial reserves for non-PCD loans acquired in conjunction with the BSPR acquisition consisting of: (i) a $ 13.6 million charge related to non-PCD residential mortgage loans; (ii) a $9.2 million charge related to non-PCD commercial mortgage loans, (iii) a $4.6 million charge related to non-PCD commercial and industrial loans, and (iv) a $10.2 million charge related to non-PCD consumer loans. 209 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Corporation estimates the ACL following the methodologies described in Note 1, – Basis of Presentation and Significant Accounting Policies, above for each portfolio segment. As of each of the years ended December 31, 2021, and 2020, the Corporation used the base-case economic scenario from Moody’s Analytics to estimate the ACL. As of December 31, 2021, the baseline scenario continues to show a more favorable economic scenario and modest improvements in projected unemployment rates, and commercial real estate price index when compared to forecast of December 31, 2020. The U.S. mainland average forecasted commercial price index included in the 2021 forecast is an appreciation of 5.68% for the next two years, compared to an average contraction of 11.36% in the forecast of December 31, 2020, for the years 2021 and 2022. The current average forecasted Puerto Rico, Florida and U.S. mainland unemployment rate for the year 2022 is now 7.38%, 3.15% and 3.71%, respectively, compared to 8.12%, 6.14%, and 6.20%, respectively, in the forecast of December 31, 2020, showing an improvement in all three regions. Expectations for 2023, for these macroeconomic variables also present a favorable outlook over the forecasted period. As of December 31, 2021, the ACL for loans and finance leases was $ 269.0 million, down $ 116.9 million from December 31, 2020, driven by positive changes in the outlook of macroeconomic assumptions to which the reserve is correlated. The ACL for commercial and construction loans decreased by $ 61.6 million during the year ended December 31, 2021, primarily reflecting continued improvements in the outlook of macroeconomic variables, including improvements in the commercial real estate price index and unemployment rate forecasts, the overall decline in the size of these portfolios, and the effect of a $ 5.2 million loan loss recovery recorded in 2021 in connection with a paydown of a nonaccrual commercial and industrial loan. In addition, there was a $45.5 million decrease in the ACL for residential mortgage loans and a $ 9.8 million decrease in the ACL for consumer loans. The decrease in the ACL for consumer loans consisted of net charge-offs of $ 30.4 million, primarily taken on personal loans and credit card loans, partially offset by charges to the provision of $ 20.6 million that, among other things, account for the increase in the size of the portfolio of auto loans and finance leases and increases in cumulative historical charge-off levels for personal loans and credit card loans. The decrease in the ACL for residential mortgage loans consisted of net charge-offs of $ 28.5 million, of which $ 23.1 million are related to charge-offs recognized as part of the bulk sale of nonaccrual residential mortgage loans and related servicing advances during the third quarter of 2021, and a benefit, or provision recapture, of $ 17.0 million that was primarily related to improvements in the outlook of macroeconomic variables, such as regional unemployment rate and Home Price Index, and the overall portfolio decrease. For those loans where the ACL was determined based on a discounted cash flow model, the change in the ACL due to the passage of time is recorded as part of the provision for credit losses. Total net charge-offs increased $ 7.3 million, or 15%, in 2021. The variance consisted of a $ 19.0 million increase in residential mortgage net charge-offs, driven by the $ 23.1 million net charge-offs recorded in connection with the bulk sale of nonaccrual residential mortgage loans, partially offset by a $ 6.3 million decrease in consumer loans net charge-offs and the aforementioned $ 5.2 million loan loss recovery recorded in connection with the paydown of a nonaccrual commercial and industrial loans. As of December 31, 2020, the ACL for loans and finance leases was $ 385.9 million, up $ 230.8 million from December 31, 2019, driven by the $ 81.2 million increase as a result of adopting CECL, a $ 168.7 million provision for credit losses on loans, and the establishment of a $ 28.7 million ACL for PCD loans acquired in conjunction with the BSPR acquisition. The Corporation recorded net charge-offs of $ 47.9 million for the year ended December 31, 2020, compared to $ 81.4 million for the year ended December 31, 2019. 210 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The tables below present the ACL related to loans and finance leases and the carrying values of loans by portfolio segment as of December 31, 2021 and December 31, 2020: As of December 31, 2021 (Dollars in thousands) Total loans held for investment: Amortized cost of loans Allowance for credit losses Allowance for credit losses to amortized cost As of December 31, 2020 (Dollars in thousands) Total loans held for investment: Amortized cost of loans Allowance for credit losses Allowance for credit losses to amortized cost ____________ Residential Mortgage Loans Construction Loans Commercial Mortgage Commercial and Industrial Loans (1) Consumer Loans Total $ 2,978,895 74,837 $ 138,999 4,048 $ 2,167,469 52,771 $ 2,887,251 34,284 $ 2,888,044 103,090 $ 11,060,658 269,030 2.51 % 2.91 % 2.43 % 1.19 % 3.57 % 2.43 % Residential Mortgage Loans Construction Loans Commercial Mortgage Loans Commercial and Industrial Loans (1) Consumer Loans Total $ 3,521,954 120,311 $ 212,500 5,380 $ 2,230,602 109,342 $ 3,202,590 37,944 $ 2,609,643 112,910 $ 11,777,289 385,887 3.42 % 2.53 % 4.90 % 1.18 % 4.33 % 3.28 % (1) As of December 31, 2021 and December 31, 2020, includes $145.0 million and $406.0 million of SBA PPP loans, respectively, which require no ACL as these loans are 100% guaranteed by the SBA. 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. The Corporation estimates the ACL for these off-balance sheet exposures following the methodology described in Note 1 - Basis of Presentation and Significant Accounting Policies, above. As of December 31, 2021, the ACL for off-balance sheet credit exposures was $ 1.5 million, down $ 3.6 million from $ 5.1 million as of December 31, 2020. The decrease was mainly in connection with improvements in the outlook of macroeconomic variables. The following table presents the activity in the ACL for unfunded loan commitments and standby letters of credit for the years ended December 31, 2021, 2020 and 2019: (In thousands) Beginning Balance Impact of adopting CECL Provision for credit losses - (benefit) Ending balance $ $ 2021 Year Ended December 31, 2020 2019 5,105 $ - (3,568) 1,537 $ - $ 3,922 1,183 5,105 $ 412 - (412) - 211 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 10 – LOANS HELD FOR SALE The Corporation’s loans held-for-sale portfolio as of the dates indicated was composed of: (In thousands) Residential mortgage loans December 31, 2021 2020 $ 35,155 $ 50,289 NOTE 11 – OTHER REAL ESTATE OWNED The following table presents the OREO inventory as of the dates indicated: (In thousands) OREO OREO balances, carrying value: Residential (1) Commercial Construction Total December 31, 2021 2020 $ $ 29,533 7,331 3,984 40,848 $ $ 32,418 44,356 6,286 83,060 (1) Excludes $ 22.2 million and $ 18.6 million as of December 31, 2021 and 2020, respectively, of foreclosures that meet 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. 212 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 12 – RELATED -PARTY TRANSACTIONS The Corporation granted loans to its directors, executive officers, and certain related individuals or entities in the ordinary course of business. The movement and balance of these loans were as follows: (In thousands) Balance at December 31, 2019 New loans Payments Other changes Balance at December 31, 2020 New loans Payments Other changes Balance at December 31, 2021 Amount 1,032 425 (953) - 504 286 (108) 261 943 $ $ These loans were made subject to the provisions of the Federal Reserve’s Regulation O - “Loans to Executive Officers, Directors and Principal Shareholders of Member Banks,” which governs the permissible lending relationships between a financial institution and its executive officers, directors, principal shareholders, their families, and related parties. Amounts related to changes in the status of those who are considered related parties are reported as other changes in the table above, which, for 2021, was mainly related to the addition of three new executive officers and the departure of one executive officer. From time to time, the Corporation, in the ordinary course of its business, obtains services from related parties or makes contributions to non-profit organizations that have some association with the Corporation. 213 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 13 – PREMISES AND EQUIPMENT Premises and equipment comprise: (Dollars in thousands) Buildings and improvements Leasehold improvements Furniture and equipment Accumulated depreciation and amortization Land Projects in progress Total premises and equipment, net Useful Life Range In Years As of December 31, Minimum Maximum 2021 2020 10 1 2 35 10 10 $ $ $ 138,524 79,419 148,171 366,114 138,686 82,034 224,623 445,343 (251,659) (318,659) 114,455 23,873 8,089 146,417 $ 126,684 23,873 7,652 158,209 Depreciation and amortization expense amounted to $ 25.0 million, $20.1 million, and $17.6 million for the years ended December 31, 2021, 2020, and 2019, respectively. During the year ended December 31, 2021 the Corporation received insurance proceeds of $ 0.6 million related to the settlement and collection of an insurance claim associated with a damage property. This amount is included as part of other non-interest income in the consolidated statements of income. During 2020, the Corporation received insurance proceeds of $ 5.0 million resulting from the final settlement of the business interruption insurance claim related to lost profits caused by Hurricanes Irma and Maria. This amount is included as part of other non- interest income in the consolidated statements of income. In addition, during 2020, the Corporation received insurance proceeds of $1.2 million related to hurricane-related expenses claims recorded as a contra-account of non-interest expenses, primarily consisting of occupancy and equipment costs. During 2019, the Corporation received insurance proceeds of $ 0.6 million related to casualty losses incurred at some facilities. The 0.1 million for 2019 insurance proceeds were recorded against impairment losses. Insurance recoveries in excess of losses amounted $ and were recorded as a gain from insurance proceeds and reported as part of other non-interest income in the consolidated statements of income. 214 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 14 – GOODWILL AND OTHER INTANGIBLES Goodwill as of each December 31, 2021 and December 31, 2020 amounted to $ 38.6 million. As of December 31, 2021, the Corporation’s goodwill includes $ 26.7 million related to the United States (Florida) reporting unit and $ 11.9 million recorded mainly in connection with the acquisition of BSPR on September 1, 2020. 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 2021, as part of its annual evaluation, the Corporation performed a qualitative assessment to determine if a goodwill impairment test was necessary. This assessment involved identifying the inputs and assumptions that most affects fair value, evaluating the significance of all identified relevant events and circumstances that affect fair value of the 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 unit is greater than its carrying amount. As of December 31, 2021, the Corporation concluded that it is more -likely-than-not that the fair value of the reporting units exceeded its carrying value. As a result, no impairment charges for goodwill were recorded during the year ended December 31, 2021. The changes in the carrying amount of goodwill attributable to operating segments are reflected in the following table. The adjustments for the years ended December 31, 2020 and 2021 are measurement period adjustments, primarily related to post closing purchase price adjustments to account for differences between BSPR’s actual excess capital at closing date compared to the BSPR’s excess capital amount used for the preliminary closing statement at acquisition date. During the third quarter of 2021, the Corporation finalized its fair values analysis of the acquired assets and assumed liabilities associated with the BSPR acquisition. (In thousands) Goodwill, January 1, 2020 Merger and acquisitions Adjustments Goodwill, December 31, 2020 Adjustments Goodwill, December 31, 2021 Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Banking United States Operations Total $ $ $ - $ 574 385 959 $ 53 1,012 $ 1,406 $ 794 533 2,733 $ 74 2,807 $ - $ 4,935 3,313 8,248 $ (148) 8,100 $ 26,692 $ - - 26,692 $ - 26,692 $ 28,098 6,303 4,231 38,632 (21) 38,611 The Corporation had other intangible assets of $ 29.9 million as of December 31, 2021, consisting of $ 28.6 million in core deposit intangibles, $ 1.2 million in purchased credit card relationship intangibles, and $ 0.2 million in insurance customer relationship intangibles. 215 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table shows the gross amount and accumulated amortization of the Corporation’s other intangible assets as of the indicated dates: Year Ended December 31, 2021 Core deposit intangible Purchased credit card relationship intangible Insurance customer relationship intangible Total (In thousands) Gross amount of intangible assets: Beginning balance Measurement period adjustment(1) Ending balance Accumulated amortization: Beginning balance Amortization Ending balance Net intangible assets Remaining amortization period (in years) $ $ $ $ 87,096 448 87,544 (51,254) (7,719) (58,973) 28,571 8.0 $ $ 28,265 - 28,265 (23,532) (3,535) (27,067) 1,198 1.7 $ $ 1,067 - 1,067 (749) (153) (902) 165 1.1 (1) Measurement adjustment relates to fair value estimate update performed within 1 year of the closing date of the BSPR acquisition, in accordance with ASC 805. Year Ended December 31, 2020 Core deposit intangible Purchased credit card relationship intangible Insurance customer relationship intangible Total (In thousands) Gross amount of intangible assets: Beginning balance Additions due to acquisitions Ending balance Accumulated amortization: Beginning balance Amortization Ending balance Net intangible assets $ $ 51,664 $ 35,432 87,096 (48,176) (3,078) (51,254) 24,465 $ 3,800 28,265 (20,850) (2,682) (23,532) 35,842 $ 4,733 $ Remaining amortization period (in years) 9.0 2.7 1,067 $ - 1,067 (597) (152) (749) 318 $ 2.1 Year Ended December 31, 2019 Core deposit intangible Purchased credit card relationship intangible Insurance customer relationship intangible Total (In thousands) Gross amount of intangible assets: Beginning balance Accumulated amortization: Beginning balance Amortization Ending balance Net intangible assets Remaining amortization period (in years) $ $ 51,664 $ 24,465 $ 1,067 $ (47,329) (847) (48,176) 3,488 $ 5.1 (18,763) (2,087) (20,850) 3,615 $ 1.9 (445) (152) (597) 470 3.0 $ 116,428 448 116,876 (75,535) (11,407) (86,942) 29,934 77,196 39,232 116,428 (69,623) (5,912) (75,535) 40,893 77,196 (66,537) (3,086) (69,623) 7,573 216 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Corporation amortizes core deposit intangibles and customer relationship intangibles 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 customer relationship intangibles. As mentioned above, the Corporation analyzes core deposit intangibles and customer relationship intangibles 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 customer relationship intangibles as of December 31, 2021. The estimated aggregate annual amortization expense related to the intangible assets for future periods was as follows as of December 31, 2021: (In thousands) 2022 2023 2024 2025 2026 2027 and after $ Amount 8,816 7,736 6,416 3,509 872 2,585 217 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 15 – NON-CONSOLIDATED VARIABLE INTEREST ENTITIES (“VIE”) 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 In 2004, FBP Statutory Trust I, a financing trust that is wholly owned by the Corporation, sold to institutional investors $ million of its variable-rate trust-preferred securities (“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. Also in 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 borrowings. The variable-rate TRuPs are fully and unconditionally guaranteed by the Corporation. The Junior Subordinated Deferrable Debentures issued by the Corporation in April 2004 and September 2004 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). 100 During the third quarter of 2020, the Corporation completed the repurchase of $ 0.4 million of TRuPs of the FBP Statutory Trust I, which resulted in a commensurate reduction in the related Floating Rate Junior Subordinated Debentures. The Corporation’s purchase price equated to 75% of the $ 0.4 million par value. The 25% discount resulted in a gain of approximately $ 0.1 million. This gain is reflected in the consolidated statements of income as gain on early extinguishment of debt. As of each December 31, 2021 and 2020, the Corporation had subordinated debentures outstanding in the aggregate amount of $ 183.8 million. The Collins Amendment to the Dodd-Frank Act eliminated certain TRuPs from Tier 1 Capital; however, these instruments may remain in Tier 2 capital until the instruments are redeemed or mature. 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 December 31, 2021, the Corporation was current on all interest payments due on its subordinated debt. 218 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 these 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. These private label MBS are variable -rate securities indexed to 90-day LIBOR plus a spread. 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. This IO is limited to the weighted-average coupon of the underlying mortgage loans. 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 December 31, 2021, the amortized cost and fair value of these private label MBS amounted to $ 10.0 million and $ 7.2 million, respectively, with a weighted average yield of 2.21%, which is included as part of the Corporation’s available-for-sale investment securities portfolio. As described in Note 5 – Investment Securities, above, the ACL on these private label MBS amounted to $ 0.8 million as of December 31, 2021. Investment in unconsolidated entity On February 16, 2011, FirstBank sold an asset portfolio consisting of performing and nonaccrual construction, commercial mortgage, and commercial and industrial loans with an aggregate book value of $ 269.3 million to CPG/GS, an entity organized under the laws of the Commonwealth of Puerto Rico and majority owned by PRLP Ventures LLC (“PRLP”), a company created by Goldman, Sachs & Co. and Caribbean Property Group. In connection with the sale, the Corporation received $ 88.5 million in cash and a 35% interest in CPG/GS and made a loan in the amount of $ 136.1 million representing seller financing provided by FirstBank. The loan was refinanced and consolidated with other outstanding loans of CPG/GS in the second quarter of 2018 and was paid in full in October 2019. FirstBank’s equity interest in CPG/GS is accounted for under the equity method. FirstBank recorded a loss on its interest in CPG/GS in 2014 that reduced to zero the carrying amount of the Bank’s investment in CPG/GS. No negative investment needs to be reported as the Bank has no legal obligation or commitment to provide further financial support to this entity; thus, no further losses have been or will be recorded on this investment. CPG/GS used cash proceeds of the aforementioned seller-financed loan to cover operating expenses and debt service payments, including those related to the loan that was paid off in October 2019. FirstBank will not receive any return on its equity interest until PRLP receives an aggregate amount equivalent to its initial investment and a priority return of at least resulting in FirstBank’s interest in CPG/GS being subordinate to PRLP’s interest. CPG/GS will then begin to make payments pro rata to PRLP and FirstBank, 35% and 65%, respectively, until FirstBank has achieved a 12% return on its invested capital and the aggregate amount of distributions is equal to FirstBank’s capital contributions to CPG/GS. 12%, which has not occurred, The Bank has determined that CPG/GS is a VIE in which the Bank is not the primary beneficiary. In determining the primary beneficiary of CPG/GS, the Bank considered applicable guidance that requires the Bank to qualitatively assess the determination of whether it is the primary beneficiary (or consolidator) of CPG/GS based on whether it has both the power to direct the activities of CPG/GS that most significantly affect the entity’s economic performance and the obligation to absorb losses of, or the right to receive benefits from, CPG/GS that could potentially be significant to the VIE. The Bank determined that it does not have the power to direct the activities that most significantly impact the economic performance of CPG/GS as it does not have the right to manage or influence the loan portfolio, foreclosure proceedings, or the construction and sale of the property; therefore, the Bank concluded that it is not the primary beneficiary of CPG/GS. 219 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 December 31, 2021, 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: (In thousands) Balance at beginning of year Purchases of servicing assets (1) Capitalization of servicing assets Amortization Temporary impairment recoveries (charges), net Other (2) Balance at end of year (1) Represents MSRs acquired in the BSPR acquisition. Year Ended December 31, 2020 2019 2021 $ $ 33,071 - 5,194 (7,215) 124 (188) 30,986 $ $ 26,762 7,781 4,864 (5,777) (206) (353) 33,071 $ $ 27,428 - 4,039 (4,592) (43) (70) 26,762 (2) Amount represents adjustments related to the repurchase of loans serviced for others, including MSRs related to loans previously serviced for and eliminated as part of the acquisition in the third quarter of 2020. BSPR 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. Changes in the impairment allowance were as follows for the indicated periods: (In thousands) Balance at beginning of year Temporary impairment charges OTTI of servicing assets Recoveries Balance at end of year Year Ended December 31, 2020 2021 2019 $ $ 202 - - (124) 78 $ $ 73 301 (77) (95) 202 $ $ 30 78 - (35) 73 220 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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: (In thousands) Servicing fees Late charges and prepayment penalties Adjustment for loans repurchased Other Servicing income, gross Amortization and impairment of servicing assets Servicing income, net Year Ended December 31, 2020 2019 2021 $ $ 12,176 697 (188) (1) 12,684 (7,091) 5,593 $ $ 9,268 570 (353) - 9,485 (5,983) 3,502 $ $ 8,522 610 (70) (15) 9,047 (4,635) 4,412 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: Maximum Minimum Year Ended December 31, 2021 Constant prepayment rate: Government-guaranteed mortgage loans Conventional conforming mortgage loans Conventional non-conforming mortgage loans Discount rate: Government-guaranteed mortgage loans Conventional conforming mortgage loans Conventional non-conforming mortgage loans Year Ended December 31, 2020 Constant prepayment rate: Government-guaranteed mortgage loans Conventional conforming mortgage loans Conventional non-conforming mortgage loans Discount rate: Government-guaranteed mortgage loans Conventional conforming mortgage loans Conventional non-conforming mortgage loans Year Ended December 31, 2019 Constant prepayment rate: Government-guaranteed mortgage loans Conventional conforming mortgage loans Conventional non-conforming mortgage loans Discount rate: Government-guaranteed mortgage loans Conventional conforming mortgage loans Conventional non-conforming mortgage loans 6.4 % 6.8 % 8.6 % 12.0 % 10.0 % 13.7 % 6.5 % 7.2 % 9.2 % 12.0 % 10.0 % 14.3 % 6.4 % 6.9 % 9.3 % 12.0 % 10.0 % 14.3 % 6.3 % 6.6 % 8.2 % 12.0 % 10.0 % 13.5 % 6.2 % 6.9 % 8.6 % 12.0 % 10.0 % 13.7 % 6.2 % 6.7 % 8.9 % 12.0 % 10.0 % 14.3 % 221 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 December 31, 2021 and 2020 were as follows: (In thousands) Carrying amount of servicing assets Fair value Weighted-average expected life (in years) Constant prepayment rate (weighted-average annual rate) Decrease in fair value due to 10% adverse change Decrease in fair value due to 20% adverse change Discount rate (weighted-average annual rate) Decrease in fair value due to 10% adverse change Decrease in fair value due to 20% adverse change December 31, 2021 December 31, 2020 $ $ $ $ $ $ 30,986 42,132 7.96 6.55 % 1,027 2,011 11.17 % 1,852 3,561 $ $ $ $ $ $ 33,071 40,294 7.86 6.73 % 1,006 1,970 11.20 % 1,772 3,409 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 . 222 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 16 – DEPOSITS AND RELATED INTEREST The following table summarizes deposit balances as of the indicated dates: (In thousands) Type of account and interest rate: Non-interest-bearing deposit accounts Interest-bearing savings accounts Interest-bearing checking accounts Certificates of deposit Brokered CDs December 31, 2021 2020 $ $ 7,027,513 4,729,387 3,492,645 2,434,932 100,417 17,784,894 $ $ 4,546,123 4,088,969 3,651,806 2,814,313 216,172 15,317,383 The weighted-average interest rate on total interest-bearing deposits as of December 31, 2021 and 2020 was 0.31% and 0.55%, respectively. As of December 31, 2021, the aggregate amount of unplanned overdrafts of demand deposits that were reclassified as loans amounted to $ 1.6 million (2020 - $ 0.8 million). Pre-arranged overdrafts lines of credit amounted to $ 24.2 million as of December 31, 2021 (2020 - $ 26.0 million). The following table presents the contractual maturities of CDs, including brokered CDs, as of December 31, 2021: (In thousands) Three months or less Over three months to six months Over six months to one year Over one year to two years Over two years to three years Over three years to four years Over four years to five years Over five years Total Total 635,461 444,276 669,486 427,993 201,934 63,193 78,653 14,353 2,535,349 $ $ Time deposits with balances of more than $250,000 amounted to $ 1.0 billion for each of the years ended December 31, 2021 and 2020. This amount does not include CDs issued to deposit brokers in the form of large certificates of deposits that are generally participated out by brokers in shares of less than the FDIC insurance limit. As of December 31, 2021, unamortized broker placement fees amounted to $ 0.2 million (2020 - $ 0.4 million), which are amortized over the contractual maturity of the brokered CDs under the interest method. 223 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Brokered CDs mature as follows: (In thousands) Three months or less Over three months to six months Over six months to one year Over one year to three years Over three years to five years Total December 31, 2021 $ $ 14,668 11,687 37,228 30,137 6,697 100,417 As of December 31, 2021, deposit accounts issued to government agencies amounted to $ 3.3 billion (2020 - $ 2.1 billion). These deposits are generally insured by the FDIC up to the applicable limits. The uninsured portions were collateralized by securities and loans with an amortized cost of $ 3.4 billion (2020 - $ 2.0 billion) and an estimated market value of $ 3.3 billion (2020 - $ 2.1 billion). As of December 31, 2021, the Corporation had $ 2.7 billion of government deposits in Puerto Rico (2020 - $ 1.8 billion), $568.4 million in the Virgin Islands (2020 - $ 280.2 million) and $ 9.6 million in Florida (2020 - $ 9.7 million). A table showing interest expense on deposits for the indicated periods follows: (In thousands) Interest-bearing checking accounts Savings CDs Brokered CDs Total 2021 Year Ended December 31, 2020 2019 $ $ $ 5,776 6,586 26,138 2,982 $ 5,933 11,116 43,350 7,989 41,482 $ 68,388 $ 6,071 16,017 44,658 11,036 77,782 The total interest expense on deposits included the amortization of broker placement fees related to brokered CDs amounting to $0.2 million, $ 0.5 million, and $ 0.7 million for 2021, 2020 and 2019, respectively. Total interest expense also included $ 1.3 million and $1.0 million for 2021 and 2020, respectively, for the accretion of premiums related to time deposits assumed in the BSPR acquisition. Refer to Note 2 – Business Combination, for additional information. NOTE 17 – LOANS PAYABLE The Corporation participates in the Borrower-in-Custody Program (the “BIC Program ”) of the FED. Through the BIC Program, a broad range of loans (including commercial, consumer, and residential mortgages) may be pledged as collateral for borrowings through the FED Discount Window. As of December 31, 2021, pledged collateral that is related to this credit facility amounted to $ billion, mainly commercial, consumer, and residential mortgage loans, which after a margin “haircut” to discount the value of collateral pledged, represents approximately $ 1.2 billion of credit availability under this program. With the impacts of COVID-19 on individuals, communities, and organizations continuing to evolve, the Federal Reserve has taken several actions to support the economy and financial stability of market participants including, among other things, lowering the target range for the federal funds rate and relaunching large scale asset purchases. The FED Discount Window program provided the opportunity to access a low-rate short-term source of funding in a high volatility market environment. There were no outstanding borrowings under the Primary Credit FED Discount Window Program as of December 31, 2021. 2.0 224 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 18 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase (repurchase agreements) as of the dates indicated consisted of the following: (In thousands) Long-term repurchase agreement (1) December 31, 2021 2020 $ 300,000 $ 300,000 (1) Weighted-average interest rate of 3.35% and 1.77 % as of December 31, 2021 and 2020, respectively. During the first quarter of 2021, the interest rate related to securities sold under agreement to repurchase totaling $ 200 million changed from a variable rate (3-month LIBOR plus 130 to 132 basis points) to a fixed rate of 3.90% after the end of a prespecified lockout period. As of December 31, 2021, all of the outstanding securities sold under agreements to repurchase are tied to fixed interest rates. Accrued interest payable on repurchase agreements amounted to $ 1.9 million and $ 1.0 million as of December 31, 2021 and 2020, respectively. Repurchase agreements mature as follows as of the indicated date: (In thousands) One month to three months Three to five years Total December 31, 2021 $ $ 100,000 200,000 300,000 225 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following securities were sold under agreements to repurchase: Underlying Securities (Dollars in thousands) U.S. government-sponsored agencies MBS Total Accrued interest receivable Underlying Securities (Dollars in thousands) U.S. government-sponsored agencies MBS Total Accrued interest receivable $ $ $ $ $ $ As of December 31, 2021 Amortized Cost of Underlying Securities Approximate Fair Value of Underlying Securities Weighted Average Interest Rate of Security Balance of Borrowing - 319,225 $ - 300,000 $ 319,225 $ 300,000 $ - 321,180 321,180 - % 1.33 % 599 As of December 31, 2020 Amortized Cost of Underlying Securities Approximate Fair Value of Underlying Securities Weighted Average Interest Rate of Security Balance of Borrowing 12,219 320,640 $ 11,013 288,987 $ 332,859 $ 300,000 $ 12,351 329,438 341,789 1.94 % 1.65 % 753 226 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The maximum aggregate balance of repurchase agreements outstanding at any month-end during 2021 was $ 300.0 million (2020 - $475.8 million). The average balance during 2021 was $ 300.5 million (2020 - $291.5 million). The weighted-average interest rate during 2021 and 2020 was 3.32% and 2.28%, respectively, considering negative market rates on reverse repurchase agreements in 2020. As of December 31, 2021 and 2020, the securities underlying such agreements were delivered to the dealers with which the repurchase agreements were transacted. Repurchase agreements as of December 31, 2021, grouped by counterparty, were as follows: Counterparty (Dollars in thousands) JP Morgan Chase Credit Suisse First Boston Total Amount Weighted-Average Maturity (In Months) $ $ 100,000 200,000 300,000 1 37 NOTE 19 – ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB) The following is a summary of the advances from the FHLB as of the indicated dates: December 31, 2021 December 31, 2020 (In thousands) Long-term Fixed-rate advances from FHLB (1) $ 200,000 $ 440,000 (1) Weighted-average interest rate of 2.16 % and 2.26% as of December 31, 2021 and 2020, respectively. Advances from FHLB mature as follows as of the indicated date: December 31, 2021 (In thousands) Over six months to one year $ 200,000 227 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Corporation receives advances from the FHLB under an Advances, Collateral Pledge, and Security Agreement (the “Collateral Agreement”). The Collateral Agreement requires the Corporation to maintain a minimum amount of qualifying mortgage collateral with a market value of generally 120% or higher than the outstanding advances. As of December 31, 2021 and 2020, the estimated value of specific mortgage loans pledged as collateral amounted to $ 1.4 billion and $1.6 billion, respectively, as computed by the FHLB for collateral purposes. The carrying value of such loans as of December 31, 2021 amounted to $ 1.8 billion (2020 - $ 2.2 billion). As of December 31, 2021, the Corporation had additional capacity of approximately $ 1.2 billion on this credit facility based on collateral pledged at the FHLB, including a haircut reflecting the perceived risk associated with the collateral. Haircut refers to the percentage by which an asset’s market value is reduced for the purpose of collateral levels. Advances may be repaid prior to maturity, in whole or in part, at the option of the borrower upon payment of any applicable fee specified in the contract governing such advance. In calculating the fee, due consideration is given to (i) all relevant factors, including, but not limited to, any and all applicable costs of repurchasing and/or prepaying any associated liabilities and/or hedges entered into with respect to the applicable advance; (ii) the financial characteristics, in their entirety, of the advance being prepaid; and (iii), in the case of adjustable-rate advances, the expected future earnings of the replacement borrowing as long as the replacement borrowing is at least equal to the original advance’s par value and the replacement borrowing’s tenor is at least equal to the remaining maturity of the prepaid advance. NOTE 20 – OTHER BORROWINGS Other borrowings, as of the indicated dates, consisted of: (In thousands) Floating rate junior subordinated debentures (FBP Statutory Trust I) (1) Floating rate junior subordinated debentures (FBP Statutory Trust II) (2) December 31, 2021 December 31, 2020 $ $ 65,205 118,557 183,762 $ $ 65,205 118,557 183,762 (1) Amount represents junior subordinated interest-bearing debentures due in 2034 with a floating interest rate of 2.75 % over 3-month LIBOR ( 2.97 % as of December 31, 2021 and 2.98 % as of December 31, 2020). (2) Amount represents junior subordinated interest-bearing debentures due in 2034 with a floating interest rate of 2.50 % over 3-month LIBOR ( 2.71 % as of December 31, 2021 and 2.74 % as of December 31, 2020). 228 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 21 – EARNINGS PER COMMON SHARE The calculations of earnings per common share for the years ended December 31, 2021, 2020, and 2019 are as follows: (In thousands, except per share information) Net income Less: Preferred stock dividends Less: Excess of redemption value over carrying value of Series A through E Preferred Stock redeemed Net income attributable to common stockholders Weighted-Average Shares: Average common shares outstanding Average potential dilutive common shares Average common shares outstanding - assuming dilution Earnings per common share: Basic Diluted Year Ended December 31, 2021 2020 2019 281,025 $ (2,453) 102,273 $ (2,676) 167,377 (2,676) (1,234) 277,338 $ - 99,597 $ - 164,701 210,122 1,178 211,300 216,904 764 217,668 216,614 520 217,134 1.32 $ 1.31 $ 0.46 $ 0.46 $ 0.76 0.76 $ $ $ $ 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. For 2021, net income attributable to common stockholders was also adjusted due to the one -time effect to retained earnings of the excess of the redemption value paid over the carrying value of the Series A through E Preferred Stock redeemed as discussed in Note 23 – Stockholders’ Equity below. 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 that do not contain non-forfeitable dividend 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. Potential dilutive common shares also include performance units that do not contain non-forfeitable dividend rights if the performance condition is met as of the end of the reporting period. 229 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 22 – STOCK-BASED COMPENSATION On May 24, 2016, the Corporation’s stockholders approved the amendment and restatement of the First BanCorp. Omnibus Incentive Plan, as amended (the “Omnibus Plan”), to, among other things, increase the number of shares of common stock reserved for issuance under the Omnibus Plan, extend the term of the Omnibus Plan to May 24, 2026, and re-approve the material terms of the performance goals under the Omnibus Plan for purposes of the then-effective Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended. The Omnibus Plan provides for equity-based and non equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, other stock- based awards, and cash-based 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 December 31, 2021, there were 4,308,921 authorized shares of common stock available for issuance under the Omnibus Plan. The Corporation’s Board of Directors, based on the recommendation of the Corporation’s Compensation and Benefits Committee, 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 restricted stock granted under the Omnibus Plan is typically subject to a vesting period. During the year ended December 31, 2021, the Corporation awarded to its independent directors 29,291 shares of restricted stock that are subject to one-year vesting from the dates of grant. In addition, during the year ended December 31, 2021, the Corporation awarded 295,069 shares of restricted stock to employees; fifty percent ( 50%) of those shares vest on the two-year anniversary of the grant date and the remaining 50% vest on three-year anniversary of the grant date. Included in those 295,069 shares of restricted stock were 19,804 shares granted to retirement-eligible employees. The total expense determined for the restricted stock awarded to retirement-eligible employees was charged against earnings as of the grant date. During the year ended December 31, 2020, the Corporation awarded to its independent directors restricted stock that are subject to one-year vesting from the dates of grant. In addition, during 2020, the Corporation awarded shares of restricted stock to employees; fifty percent ( 50%) of those shares vest on the two-year anniversary of the grant date and the remaining 50% vest on three-year anniversary of the grant date. Included in those 851,673 shares of restricted stock were 47,194 shares granted to retirement-eligible employees. The fair value of the shares of restricted stock granted in 2021 and 2020 was based on the market price of the Corporation’s outstanding common stock on the date of the respective grant. 59,797 shares of 851,673 The following table summarizes the restricted stock activity in the year ended December 31, 2021 under the Omnibus Plan: Unvested shares outstanding at beginning of year Granted Forfeited Vested Unvested shares outstanding at end of year 2021 Number of shares of restricted stock Weighted- Average Grant Date Fair Value 1,320,723 324,360 (82,486) (413,822) 1,148,775 $ $ 5.74 11.47 6.42 7.69 6.61 230 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) For the years ended December 31, 2021, 2020 and 2019, the Corporation recognized $ 3.5 million, $ 3.2 million, and $ 2.8 million, respectively, of stock-based compensation expense related to restricted stock awards. As of December 31, 2021, there was $ 3.3 million of total unrecognized compensation cost related to unvested shares of restricted stock. The weighted average period over which the Corporation expects to recognize such cost was 1.4 years as of December 31, 2021. Stock-based compensation accounting guidance requires the Corporation to reverse compensation expense for any awards that are forfeited due to employee or director turnover. Changes in the estimated forfeiture rate may have a significant effect on stock-based compensation, as the Corporation recognizes the effect of adjusting the rate for all expense amortization in the period in which the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, an adjustment is made to increase the estimated forfeiture rate, which will decrease the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, an adjustment is made to decrease the estimated forfeiture rate, which will increase the expense recognized in the financial statements. Performance Units Under the Omnibus Plan, the Corporation may award performance units to Omnibus Plan participants. During the year ended December 31, 2021, the Corporation granted 160,485 units to executives, with each unit representing the value of one share of the Corporation’s common stock. The performance units granted in the year ended December 31, 2021 are for the performance period beginning January 1, 2021 and ending on December 31, 2023. These awards do not contain non-forfeitable rights to dividend equivalent amounts and can only be settled in shares of the Corporation’s common stock. The performance units will vest on the third anniversary of the effective date of the awards, subject to the achievement of a pre-established tangible book value per share target as of December 31, 2023. All the performance units will vest if performance is at the pre-established performance target level or above. However, the participants may vest with respect to 50% of the awards to the extent that performance is below the target but not less than 80% of the pre-established performance target (the “80% minimum threshold”), which is measured based upon the growth in the tangible book value during the performance cycle. If level performance is between the 80% minimum threshold and the pre-established performance target level, the participants will vest on a proportional amount. No performance units will vest if performance is below the 80% minimum threshold. During the years ended December 31, 2020 and 2019, the Corporation awarded 502,307 and 200,053 performance units to executives, respectively. The performance units will vest on the third anniversary of the effective date of the awards and are subject to a pre-established performance target level as described above. The following table summarizes the performance units activity during 2021 under the Omnibus Plan: (Number of units) Performance units at beginning of year Additions Vested Forfeited Performance units as of December 31, 2021 Year Ended December 31, 2021 1,006,768 160,485 (304,408) (47,946) 814,899 231 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The fair values of the performance units awarded were based on the market price of the Corporation’s outstanding common stock on the respective date of the grant. For the years ended December 31, 2021, 2020, and 2019, the Corporation recognized $ million, and $ 1.1 million, respectively, of stock-based compensation expense related to performance units. As of December 31, 2021, there was $2.2 million of total unrecognized compensation cost related to unvested performance units that the Corporation expects to recognize over the next three years. The total amount of compensation expense recognized reflects management’s assessment of the probability that the pre-established performance goal will be achieved. The Corporation will recognize a cumulative adjustment to compensation expense in the then-current period to reflect any changes in the probability of achievement of the performance goals. 2.0 million, $ 1.8 Other awards Under the Omnibus Plan, the Corporation may grant shares of unrestricted stock to plan participants. During the third quarter of 2020, the Corporation granted to its independent directors 19,157 shares of unrestricted stock that were fully vested at the time of the grant date. For the year ended December 31, 2020, the Corporation recognized $ 0.1 million of stock-based compensation expense related to unrestricted stock awards. There were no grants of unrestricted stock in 2021 and 2019. Shares withheld During the year ended December 31, 2021, the Corporation withheld 214,374 shares (2020 – 51,814 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. 232 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 23 – STOCKHOLDERS’ EQUITY Stock Repurchase Program On April 26, 2021, the Corporation announced that its Board of Directors approved a stock repurchase program, under which the Corporation may repurchase up to $ 300 million of its outstanding stock, including common and preferred stock, commencing in the second quarter of 2021 through June 30, 2022. During the year ended December 31, 2021, the Corporation repurchased shares of its common stock for $ 213.9 million and redeemed all of its outstanding shares of non-convertible, non-cumulative perpetual monthly income Series A through E Preferred Stock for its liquidation value of $ 36.1 million. The program does not obligate the Corporation to acquire any specific number of shares. Repurchases under the program may be executed through open market purchases, accelerated share repurchases and/or privately negotiated transactions or plans, including plans complying with Rule 10b5- 1 under the Exchange Act. The Corporation’s stock repurchase program is 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 repurchase program may be modified, extended, suspended, or terminated at any time at the Corporation’s discretion. 16,740,467 The shares of common stock repurchased are held as treasury stock. As of December 31, 2021, the Corporation has remaining authorization to repurchase approximately $ 50 million of common stock under the stock repurchase program which were repurchased during the first quarter of 2022. Common Stock The following table shows the changes in shares of common stock outstanding for 2021, 2020 and 2019: Common stock outstanding, beginning balances Common stock repurchased (1) Common stock issued, net of shares withheld for employee taxes Restricted stock forfeited Common stock outstanding, ending balances 218,235,064 (16,740,467) 414,394 (82,486) 201,826,505 217,359,337 - 878,813 (3,086) 218,235,064 217,235,140 - 138,197 (14,000) 217,359,337 2021 2020 2019 (1) Includes 11,490,467 shares of common stock repurchased in the open market at an average price of $ 5,250,000 shares of common stock repurchased through privately negotiated transactions at an average price of $ 12.82 for a total purchase price of approximately $ 147.3 million, and 12.68 for a total purchase price of approximately $ 66.6 million. For the years ended December 31, 2021, 2020 and 2019, total cash dividends declared on shares of common stock amounted to $65.4 million, $43.8 million, and $30.5 million, respectively. On October 22, 2021 the Corporation announced that its Board of Directors had declared a quarterly cash dividend of $ 0.10 per common share, which represented an increase of 43% or $0.03 per common share compared to the dividend paid in September 2021. The dividend was paid on December 10, 2021 to shareholders of record at the close business on November 26, 2021. 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, redeemable at the Corporation’s option, 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 of Directors when authorizing the issuance of that particular series. On November 30, 2021 the Corporation redeemed all of its 1,444,146 outstanding shares of Series A through E Preferred Stock for its liquidation value of $ 25 per share or $ 36.1 million. The difference between the liquidation value and net carrying value was $ 1.2 million, which was recorded as a reduction to retained earnings in 2021. For the years ended December 31, 2021, 2020 and 2019 total cash dividends paid on shares of preferred stock amounted to $ 2.5 million, $ 2.7 million, and $ 2.7 million, respectively. The redeemed preferred stock shares were not listed on any securities exchange or automated quotation system. No shares of preferred stock were outstanding as of December 31, 2021. 233 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Treasury stock During the years ended December 31, 2021, 2020 and 2019, the Corporation withheld an aggregate of 214,374 shares, 51,814 shares and 176,015 shares, respectively, of the restricted stock and performance units that vested during those periods, to cover the officers’ payroll and income tax withholding liabilities; these shares are held as treasury stock. Also held as treasury stock are the 16,740,467 shares of common stock repurchased in 2021 as part of the $ 300 million stock repurchase program. As of December 31, 2021 and 2020, the Corporation had 21,836,611 and 4,799,284 shares held as treasury stock, respectively. FirstBank Statutory Reserve (Legal Surplus) The Banking Law of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be transferred to a legal surplus reserve until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts transferred to the legal surplus reserve from retained earnings are not available for distribution to the Corporation, including for payment as dividends to the stockholders, 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 During years ended December 31, replenish the legal surplus reserve to an amount of at least 20% of the original capital contributed. 2021 and 2020, the Corporation transferred $ 28.3 million and $11.7 million, respectively, to the legal surplus reserve. FirstBank’s legal surplus reserve, included as part of retained earnings in the Corporation’s consolidated statements of financial condition, amounted to $ 137.6 million and $ 109.3 million as of December 31, 2021 and 2020, respectively. 234 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 24 – OTHER COMPREHENSIVE (LOSS) INCOME The following table presents changes in accumulated other comprehensive (loss) income for the years ended December 31, 2021, 2020 and 2019: (In thousands) Unrealized net holding gains (losses) on debt securities: Beginning balance Other comprehensive (loss) income Ending balance Adjustment of pension and postretirement benefit plans: Beginning balance Other comprehensive gain (loss) Ending balance ______________________ (1) All amounts presented are net of tax. Changes in Accumulated Other Comprehensive (Loss) Income by Component (1) 2021 Year ended December 31, 2020 2019 $ $ $ $ 55,725 (143,115) (87,390) (270) 3,661 3,391 $ $ $ $ 6,764 48,961 55,725 - (270) (270) $ $ $ $ (40,415) 47,179 6,764 - - - The following table presents the amounts reclassified out of each component of accumulated other comprehensive (loss) income for the years ended December 31, 2021, 2020 and 2019: Reclassifications Out of Accumulated Other Comprehensive (Loss) Income Affected Line Item in the Consolidated Statements of Income 2021 Year ended December 31, 2020 2019 (In thousands) Unrealized net holding gains (losses) on debt securities: Realized gain on sales of debt securities Provision for credit losses - (benefit) expense OTTI on debt securities (1) Net gain (loss) on investments securities Provision for credit losses (benefit) expense Net gain (loss) on investment securities Total before tax Income tax expense Total, net of tax $ $ $ - $ (13,198) $ (136) - (136) - (136) $ $ 1,641 - (11,557) - (11,557) $ $ - - 497 497 - 497 (1) ASC 326, which became effective on January 1, 2020, requires credit losses on available-for-sale debt securities to be presented as an allowance rather than as a write- down. Thus, credit losses on debt securities recorded prior to January 1, 2020 are presented as OTTI on debt securities while credit losses on debt securities after January 1, 2020 are presented as part of provision for credit losses. recorded 235 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 25 – EMPLOYEE BENEFIT PLANS Defined Benefit Retirement Plans The Corporation maintains two frozen qualified noncontributory defined benefit pension plans (the “Pension Plans”), and a related complementary post-retirement benefit plan covering medical benefits and life insurance after retirement, that it obtained in the BSPR acquisition on September 1, 2020. One plan covers substantially all of BSPR’s former employees who were active before January 1, 2007, while the other 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) income pursuant to the ASC Topic 715, Compensation-Retirement Benefits. Actuarial gains or losses, prior-service costs, and transition assets or obligations are recognized as components of net periodic benefit costs. December 31, 2021 December 31, 2020 (In thousands) Changes in projected benefit obligation: Projected benefit obligation at the beginning of period, defined benefit pension (September 1 for the 2020 period) Interest cost Actuarial (gain) loss (1) Benefits paid Projected benefit obligation at the end of period, pension plans Projected benefit obligation, other postretirement benefit plan Projected benefit obligation at the end of period Changes in plan assets: Fair value of plan assets at the beginning of period (September 1 for the 2020 period) Actual return on plan assets Benefits paid Fair value of pension plan assets at the end of period (2) Net asset (benefit obligation), pension plans Net benefit obligation, other-postretirement benefit plan Net asset (benefit obligation) $ $ $ $ $ $ 108,253 $ 2,473 (6,699) (6,160) 97,867 195 98,062 $ $ 105,963 $ 3,684 (6,160) 103,487 5,620 (195) 5,425 $ $ 107,571 900 1,321 (1,539) 108,253 245 108,498 104,522 2,980 (1,539) 105,963 (2,290) (245) (2,535) (1) Significant components of the Pension Plans’ actuarial gain (loss) that changed the benefit obligation were mainly related to updates in discount and mortality rates. (2) Other post-retirement plan did not contain any assets as of December 31, 2021 and 2020. The following are the pre-tax amounts recognized in accumulated other comprehensive (loss) income: (In thousands) Net actuarial (gain) loss Amortization of net loss Net amount recognized December 31, 2021 December 31, 2020 (5,862) 2 (5,860) $ $ 432 - 432 $ $ 236 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The weighted -average assumed discount rate to determine the projected benefit obligations for the pension plans as of December 31, 2021 was 2.77% compared to 2.36% as of December 31, 2020. Financial data relative to the Pension Plans and the Post Retirement Benefit Plan is summarized in the following tables: Affected Line Item in the Consolidated Statements of Income December 31, 2021 Period from September 1, 2020 to December 31, 2020 (In thousands) Net periodic benefit, pension plans: Interest cost Expected return on plan assets Net periodic benefit, pension plans Net periodic cost, other-post retirement plan Net Periodic benefit Other expenses Other expenses Other expenses Pre-tax amounts record in accumulated OCI, pension plans: Net actuarial (gain) loss Accumulated other comprehensive income/(loss), end of year, pension plans Accumulated other comprehensive income/(loss), end of year, other-postretirement benefit plan Accumulated other comprehensive income/(loss), end of year Total net periodic pension (income) loss recognized in total comprehensive income, pre-tax Weighted average assumptions used to determine net periodic pension cost, pension plans: Discount rate Expected return on plan assets (1) $ $ $ $ $ 2,473 (4,523) (2,050) 5 (2,045) $ $ (5,861) (5,861) $ 1 (5,860) $ 900 (2,062) (1,162) 2 (1,160) 404 404 28 432 (7,905) $ (728) 2.77% 4.43% 2.36% 5.99% (1) Other post-retirement plan did not contain any assets as of December 31, 2021 and 2020 and discount rate as of December 31, 2021 and 2020, was2.82% and 2.44%, respectively. The discount rate is estimated as the single equivalent rate such that the present value of the plan’s projected benefit obligation cash flows using the single rate equals the present value of those cash flows using the above mean actuarial yield curve. In developing the expected long-term rate of return assumption, the Corporation evaluated input from a consultant and the Corporation’s long-term inflation assumptions and interest rate scenarios. Projected returns are based on the same asset categories as the plan using well-known broad indexes. Expected returns are based by historical returns with adjustments to reflect a more realistic future return. Adjustments are done by categories, taking into consideration current and future market conditions. The Corporation also considered historical returns on its plan assets to review the expected rate of return. The Corporation anticipated that the Plan’s portfolio would generate a long term rate of return of 4.43% as of December 31, 2021. The investment policy statement for the Pension Plans includes: (i) liability hedging assets to reduce funded status risk, (ii) diversified return seeking assets to reduce equity risk, and (iii) establishes different glidepaths specific for each plan to systematically reduce risk as the funded status improves. 237 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table presents the changes in accumulated other comprehensive (loss) income of the Pension Plans and Postretirement Benefit Plan as of December 31, 2021 and 2020: (In thousands) Accumulated other comprehensive (income)/loss at beginning of period, pension plans Net (gain) loss Accumulated other comprehensive (income)/loss end of year pension plans Accumulated other comprehensive (income)/loss, other-post retirement plan Accumulated other comprehensive (gain) loss at end of period $ $ December 31, 2021 Period from September 1, 2020 to December 31, 2020 404 (5,861) (5,457) 29 (5,428) $ $ - 404 404 28 432 The following table presents information for the plans with a projected benefit obligation and accumulated benefit obligation in excess of plan assets for the year ended December 31, 2021 and 2020: (In thousands) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets December 31, 2021 December 31, 2020 $ $ 195 195 - $ $ 70,424 70,424 64,200 The Pension Plans asset allocations as of December 31, 2021 and 2020 by asset category are as follows: December 31, 2021 December 31, 2020 Asset category Equity securities Debt securities Investment in funds Other 0% 0% 98% 2% 100% 0% 0% 98% 2% 100% 238 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Corporation does not expect to contribute to the Pension Plans during 2022. The Corporation’s investment policy with respect to the Corporation’s Pension Plans is to optimize, without undue risk, the total return on investment of the Plan assets after inflation, within a framework of prudent and reasonable portfolio risk. The investment portfolio is diversified in multiple asset classes to reduce portfolio risk, and assets may be shifted between asset classes to reduce volatility when warranted by projections of the economic and/or financial market environment, consistent with Employee Retirement Income Security Act of 1974, as amended (ERISA). As circumstances and market conditions change, the Corporation’s target asset allocations may be amended to reflect the most appropriate distribution given the new environment, consistent with the investment objectives. Expected future benefit payments for the plans are as follows: (Dollars in thousands) Amount 2022 $ 2023 2024 2025 2026 2027 through 2031 $ 6,659 6,652 6,608 6,179 6,122 28,056 60,276 As of December 31, 2021 and 2020, substantially all of the plan assets of $ 103.5 million and $106.0 million, respectively, were invested in common collective trusts, which primarily consist of equity securities, mortgage-backed securities, corporate bonds and U. S. Treasuries. The portfolios in both plans have been measured at fair value using the net asset value per unit as a practical expedient as permitted by ASC Topic 820, and accordingly, have not been classified in the fair value hierarchy as of December 31, 2021. Determination of Fair Value The valuation process begins with market quotations for the individual security. Since many fixed maturities do not trade on a daily basis, each asset class is evaluated on its own based on relevant market information. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Additional inputs may be necessary for some securities. Some fair value estimates are determined from quotes provided by market makers or broker-dealers that are considered to be market participants and are considered to be an estimate of fair value that is indicative of market transactions. The following is a description of the valuation inputs and techniques used to measure the fair value of pension plan assets: Investment in Funds - Investment in collectible funds have been measured at fair value using the net assets value per unit practical expedient and, accordingly, have not been classified in the fair value hierarchy. Interest-Bearing Deposits - Interest-bearing deposits consist of money market accounts with short-term maturities and, therefore, the carrying value approximates fair value. 239 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Defined Contribution Plan In addition, FirstBank provides contributory retirement plans pursuant to Section 1081.01 of the Puerto Rico Internal Revenue Code of 2011 for Puerto Rico employees and Section 401(k) of the U.S. Internal Revenue Code for USVI and U.S. employees (the “Plans”). All employees are eligible to participate in the Plans after three months of service for purposes of making elective deferral contributions and one year of service for purposes of sharing in the Bank’s matching, qualified matching, and qualified non-elective contributions. Under the provisions of the Plans, the Bank contributes 50% of the first 6% of the participant’s compensation contributed to the Plans on a pretax basis, up to an annual limit. The matching contribution of fifty cents for every dollar of the employee’s contribution is comprised of: (i) twenty-five cents for every dollar of the employee’s contribution up to 6% of the employee’s eligible compensation to be paid to the Plan as of each bi-weekly payroll; and (ii) an additional twenty-five cents for every dollar of the employee’s contribution up to 6% of the employee’s eligible compensation to be deposited as a lump sum subsequent to the Plan Year. Puerto Rico employees were permitted to contribute up to $ 15,000 for each of the years ended December 31, 2021, 2020 and 2019 (USVI and U.S. employees - $ 19,500 for 2021, $19,500 for 2020 and $ 19,000 for 2019). Additional contributions to the Plans may be voluntarily made by the Bank as determined by its Board of Directors. No additional discretionary contributions were made for the years ended December 31, 2021, and 2020. On September 1, 2020, the Bank completed the acquisition of Santander Bancorp, a wholly-owned subsidiary of Santander Holdings USA, Inc. and the holding company of BSPR. Prior to the acquisition date, BSPR was the sponsor of the Banco Santander de Puerto Rico Employees’ Savings Plan (“the Santander Plan”). Effective on September 1, 2020, the Bank became the sponsor of the Santander Plan. Overall responsibility for administrating the Santander Plan rests with the Plan’s Administration Committee. Effective December 31, 2020, the Santander Plan was merged with the Plan (“the Plan Merger”). The contributory savings plan assumed in the BSPR acquisition also provided for matching contribution up to expenses of $ 3.5 million, $ 3.0 million and $ 2.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. 6% of the employee’s compensation. The Bank had total plan 240 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 26 – OTHER NON-INTEREST EXPENSES A detail of other non-interest expenses is as follows for the indicated periods: Year Ended December 31, 2020 2021 2019 (In thousands) Supplies and printing Amortization of intangible assets Servicing and processing fees Insurance and supervisory fees Provision for operational losses Other Total $ $ 1,830 11,407 5,121 9,098 5,069 2,898 35,423 $ $ 2,391 5,912 4,696 6,324 3,390 3,105 25,818 $ $ 1,966 3,086 4,781 3,596 2,164 4,640 20,233 NOTE 27 – OTHER NON-INTEREST INCOME A detail of other non-interest income is as follows for the indicated periods: Year Ended December 31, 2020 2021 2019 (In thousands) Non-deferrable loan fees Merchant-related income ATM and Point-of-Sale fees ("POS") Credit and debit card interchange and other fees Mail and cable transmission commissions Gain on sales of commercial and construction loans held for sale Gain from insurance proceeds Other Total $ $ 2,990 8,464 10,985 17,079 3,116 7 550 5,746 48,937 $ $ 3,750 5,844 7,723 12,042 2,540 - 5,000 4,935 41,834 $ $ 2,789 5,635 9,147 11,759 2,207 2,316 660 5,396 39,909 241 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 28 – 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, First BanCorp. 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, as amended (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 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 (“IBE”) unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest income and gains on sales is 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. The CARES Act of 2020 includes several provisions to stimulate the U.S. economy in the midst of the COVID-19 pandemic. The CARES Act of 2020 includes tax provisions that temporarily modified the taxable income limitations for NOL usage to offset future taxable income, NOL carryback provisions and other related income, and non-income based tax laws. Due to the fact that the COVID- 19 pandemic is still ongoing, the Federal Government extended some of the benefits and continued the economic stimulus from the CARES Act of 2020. The Corporation has evaluated such provisions and determined that the impact of the CARES Act of 2020 on the income tax provision and deferred tax assets as of December 31, 2021 was not significant. The components of income tax expense are summarized below for the indicated periods: (In thousands) Current income tax expense Deferred income tax expense (benefit): Reversal of deferred tax asset valuation allowance Other deferred income tax expense Total income tax expense 2021 Year Ended December 31, 2020 2019 $ $ 28,469 $ 18,421 $ - 118,323 (8,000) 3,629 146,792 $ 14,050 $ 16,986 - 55,009 71,995 242 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The differences between the income tax expense applicable to income before the provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico were as follows for the indicated periods: (Dollars in thousands) Computed income tax at statutory rate Federal and state taxes Benefit of net exempt income Disallowed NOL carryforward resulting from net exempt income Deferred tax valuation allowance Share-based compensation windfall Other permanent differences Tax return to provision adjustments Other-net Total income tax expense 2021 Year Ended December 31, 2020 2019 Amount % of Pretax Income Amount % of Pretax Income Amount % of Pretax Income $ $ 160,431 7,014 (20,717) 8,791 (13,572) (1,044) (1,185) (406) 7,480 146,792 37.5 % $ 1.6 % (4.8) % 43,621 4,944 (26,780) 37.5 % $ 4.2 % (23.0)% 89,764 4,467 (24,811) 2.0 % (3.2) % (0.2) % (0.3) % (0.1) % 1.7 % 34.2 % $ 9,054 (12,095) 157 (387) 597 (5,061) 14,050 7.8 % (10.4)% 0.1 % (0.3) % 0.5 % (4.3) % 12.1 % $ 15,887 (14,108) (1,165) (1,712) 1,846 1,827 71,995 37.5 % 1.6 % (10.4)% 6.6 % (5.9) % (0.5) % (0.7) % 0.8 % 1.1 % 30.1 % Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Significant components of the Corporation's deferred tax assets and liabilities as of December 31, 2021 and 2020 were as follows: December 31, 2021 2020 (In thousands) Deferred tax asset: NOL and capital losses carryforward Allowance for credit losses Alternative Minimum Tax credits available for carryforward Unrealized loss on OREO valuation Settlement payment-closing agreement Legal and other reserves Reserve for insurance premium cancellations Differences between the assigned values and tax bases of assets and liabilities recognized in purchase business combinations Unrealized loss on available-for-sale securities, net Other Total gross deferred tax assets $ $ Deferred tax liabilities: Servicing assets Pension Plan assets Unrealized gain on available-for-sale securities, net Other Total gross deferred tax liabilities Valuation allowance Net deferred tax asset 137,860 $ 105,917 37,361 7,703 7,031 4,576 881 8,926 14,181 4,420 328,856 $ 10,510 2,035 - 506 13,051 (107,323) 220,496 151,586 27,396 13,426 7,031 4,120 941 11,956 - 8,647 445,599 9,571 - 4,730 53 14,354 (101,984) 329,261 $ 208,482 $ 243 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized. Valua tion allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. Management assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determina tion of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, and tax planni ng strategies. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions considering statutory, judicial, and regulatory guidance. Total deferred tax assets of FirstBank, the banking subsidiary, amounted to $ 208.4 million as of December 31, 2021, net of a valuation allowance of $ 69.7 million, compared to total deferred tax asset of $ 329.1 million, net of a valuation allowance of $59.9 million, as of December 31, 2020. The decrease in deferred tax assets was mainly driven by the aforementioned credit losses reserve releases and the usage of NOLs. The increase in the valuation allowance was primarily related to the change in the market value of available-for-sale securities. The Corporation maintains a full valuation allowance for its deferred tax assets associated with capital losses carry forward. Therefore, changes in the unrealized losses of available -for-sale securities result in a change in the deferred tax asset and an equal change in the valuation allowance without having an effect on earnings. After completion of the deferred tax asset valuation allowance analysis for the fourth quarter of 2021 management concluded that, as of December 31, 2021, it is more likely than not that FirstBank will generate sufficient taxable income to realize $ 66.3 million of its deferred tax assets related to NOLs within the applicable carry-forward periods. The positive evidence considered by management in arriving at its conclusion includes factors such as: FirstBank’s three-year cumulative income position; sustained periods of profitability; management’s proven ability to forecast future income accurately and execute tax strategies; forecasts of future profitability, under several potential scenarios that support the partial utilization of NOLs prior to their expiration from 2022 through 2024; and the utilization of NOLs over the past three-years. The negative evidence considered by management includes: uncertainties around the state of the Puerto Rico economy, including considerations on the impact of the pandemic recovery funds together with the ultimate sustainability of the latest fiscal plan certified by the PROMESA oversight board. Management’s estimate of future taxable income is based on internal projections that consider historical performance, multiple internal scenarios and assumptions, as well as external data that management believes is reasonable. If events are identified that affect the Corporation’s ability to utilize its deferred tax assets, the analysis will be updated to determine if any adjustments to the valuation allowance are required. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the remaining valuation allowance may need to be increased. Such an increase could have a material adverse effect on the Corporation’s financial condition and results of operations. Conversely, a higher than projected proportion of taxable income to exempt income could lead to a higher usage of available NOLs and a lower amount of disallowed NOLs from projected levels of tax-exempt income, per the 2011 PR code, which in turn could result in further releases to the deferred tax valuation allowance; any such decreases could have a material positive effect on the Corporation’s financial condition and results of operations. As of December 31, 2021, approximately $ 177.9 million of the deferred tax assets of the Corporation are attributable to temporary differences or tax credit carryforwards that have no expiration date, compared to $ 210.7 million in 2020. The valuation allowance attributable to FirstBank’s deferred tax assets of $ 69.7 million as of December 31, 2021 is related to the estimated NOL disallowance attributable to projected levels of tax-exempt income, NOLs attributable to the Virgin Islands jurisdiction, and capital losses. The remaining balance of $ 37.6 million of the Corporation’s deferred tax asset valuation allowance non-attributable to FirstBank is mainly related to NOLs and capital losses at the holding company level. The Corporation will continue to provide a valuation allowance against its deferred tax assets in each applicable tax jurisdiction until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Corporation determines that it is more likely than not the deferred tax assets will be realized. The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance will be evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize these deferred tax assets. The Corporation has U.S. and USVI sourced NOL carryforwards. Section 382 of the U.S. Internal Revenue Code (“Section 382”) limits the ability to utilize U.S. and USVI NOLs for income tax purposes in such jurisdictions following an event that is considered to be an “ownership change”. Generally, an “ownership change” occurs when certain shareholders increase their aggregate ownership by 244 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) more than 50 percentage points over their lowest ownership percentage over a three-year testing period. Upon the occurrence of a Section 382 ownership change, the use of NOLs attributable to the period prior to the ownership change is subject to limitations and only a portion of the U.S. and USVI NOLs may be used by the Corporation to offset its annual U.S. and USVI taxable income, if any. In 2017, the Corporation completed a formal ownership change analysis within the meaning of 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 than the Corporation 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 is creditable against Puerto Rico tax liabilities or taken as a deduction against taxable income. However, the Corporation’s ability to reduce its 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 2021, 2020 and 2019, the Corporation incurred an income tax expense of approximately $ 6.8 million, $ 4.9 million and $ 4.5 million, respectively, related to its U.S. operations. The limitation did not impact the USVI operations in 2021, 2020 and 2019. 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 benefits in income tax expense. As of December 31, 2021, the Corporation had $ 0.2 million of accrued interest and penalties related to uncertain tax positions in the amount of $ 1.1 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; 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 2017 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2016 remain open to examination. 245 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 29 – LEASES The Corporation accounts for its leases in accordance with ASC 842 “Leases” (“ASC Topic 842”), which it adopted on January 1, 2019. ASC Topic 842 requires the Corporation to record liabilities for future lease obligations as well as assets representing the right to use the underlying lease asset. The Corporation’s operating leases are primarily related to the Corporation’s branches and leased commercial space for ATMs. Our leases mainly have terms ranging from two years to 30 years , some of which include options to extend the leases for up to seven years . Liabilities to make future lease payments are recorded in accounts payable and other liabilities, while right-of-use (“ROU”) assets are recorded in other assets in the Corporation’s consolidated statements of financial condition. As of December 31, 2021 and 2020, the Corporation did not have a lease that qualifies as a finance lease. Operating lease cost for the year ended December 31, 2021 amounted to $ 18.2 million (2020 - $ 13.8 million; 2019 - $ 10.7 million), recorded in occupancy and equipment in the consolidated statement of income. Supplemental balance sheet information related to leases as of the indicated dates was as follows: (Dollars in thousands) ROU asset Operating lease liability Operating lease weighted-average remaining lease term (in years) Operating lease weighted-average discount rate As of December 31, 2021 As of December 31, 2020 $ $ 90,319 93,772 $ $ 8.0 2.24% 103,186 106,502 8.5 2.25% Generally, the Corporation cannot practically determine the interest rate implicit in the lease. Therefore, the Corporation uses its incremental borrowing rate as the discount rate for the lease. Supplemental cash flow information related to leases was as follows: Year Ended December 31, 2021 Year Ended December 31, 2020 (In thousands) Operating cash flow from operating leases (1) ROU assets obtained in exchange for operating lease liabilities (2) $ $ 19,328 4,553 $ $ 13,464 1,328 (1) Represents cash paid for amounts included in the measurement of operating lease liabilities. (2) Represents non-cash activity and, accordingly, is not reflected in the consolidated statements of cash flows. For the year ended December 31, 2020 excludes $ 52.1 million ROU assets and related liabilities assumed 246 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Maturities under lease liabilities as of December 31, 2021, were as follows: Amount (Dollars in thousands) 2022 2023 2024 2025 2026 2027 and after Total lease payments Less: imputed interest Total present value of lease liability NOTE 30 – FAIR VALUE Fair Value Measurement $ $ 18,159 16,369 15,299 14,296 13,064 26,971 104,158 (10,386) 93,772 The FASB authoritative guidance for 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 financial instruments. The hierarchy 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 Level 2 Valuations of Level 1 assets and liabilities are obtained from readily-available pricing sources for market transactions involving identical assets or liabilities. Level 1 assets and liabilities include equity securities that trade in an active exchange market, as well as certain U.S. Treasury and other U.S. government and agency securities and corporate debt securities that are traded by dealers or brokers in active markets. Valuations 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 2 assets and liabilities include (i) MBS for which the fair value is estimated based on the value of identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments, and (iii) derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Level 3 Valuations 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. 247 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Financial Instruments Recorded at Fair Value on a Recurring Basis Investment securities available for sale and marketable equity securities held at fair value The fair value of investment securities was the market value based on quoted market prices (as is the case with U.S. Treasury notes, non-callable U.S. agencies debt securities, and equity securities with readily determinable fair values), when available (Level 1), or, market prices for identical or comparable assets (as is the case with MBS and callable U.S. agency debt securities) that are based on observable market parameters, including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers and reference data, including market research operations, when available (Level 2). Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon discounted cash flow models that use unobservable inputs due to the limited market activity of the instrument, as is the case with certain private label MBS held by the Corporation (Level 3). Derivative instruments The fair value of most of the Corporation’s derivative instruments is based on observable market parameters and takes into consideration the credit risk component of paying counterparties, when appropriate. On interest caps, only the seller's credit risk is considered. The Corporation valued the caps using a discounted cash flow approach based on the related LIBOR and swap rate for each cash flow The Corporation valued the interest rate swaps using a discounted cash flow approach based on the related LIBOR and swap forward rate for each cash flow. The Corporation considers a credit spread for those derivative instruments that are not secured. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments in 2021, 2020 and 2019 was immaterial. Assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2021 and 2020: (In thousands) Level 1 Level 2 Level 3 Assets/Liabilities at Fair Value Level 1 Level 2 Level 3 Assets/Liabilities at Fair Value As of December 31, 2021 Fair Value Measurements Using As of December 31, 2020 Fair Value Measurements Using Assets: Securities available for sale: U.S. Treasury securities Noncallable U.S. agencies debt securities Callable U.S. agencies debt securities and MBS Puerto Rico government obligations Private label MBS Other investments Equity securities Derivatives, included in assets: Interest rate swap agreements Purchased interest rate cap agreements Forward contracts Interest rate lock commitments Forward loan sales commitments Liabilities: Derivatives, included in liabilities: Interest rate swap agreements Written interest rate cap agreements Forward contracts $ 148,486 - - - - - 5,378 - - - - - - - - $ - $ 285,028 6,009,163 - - - - 1,098 8 - 379 20 1,092 8 78 - $ - - 2,850 7,234 1,000 - 148,486 $ 285,028 6,009,163 2,850 7,234 1,000 5,378 7,507 $ - - - - - 1,474 - $ 173,371 4,454,164 - - - - - $ - - 2,899 8,428 650 - 7,507 173,371 4,454,164 2,899 8,428 650 1,474 - - - - - - - - 1,098 8 - 379 20 1,092 8 78 - - - - - - - - 1,622 1 102 737 20 1,639 1 280 - - - - - - - - 1,622 1 102 737 20 1,639 1 280 248 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The table below presents a reconciliation of the beginning and ending balances of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2021, 2020, and 2019: Level 3 Instruments Only (In thousands) Beginning balance Total gain (losses) (realized/unrealized): Included in other comprehensive income Included in earnings BSPR securities acquired Purchases Principal repayments and amortization Ending balance ___________________ (1)Amounts mostly related to private label MBS. 2021 Securities Available for Sale (1) 2020 Securities Available for Sale (1) 2019 Securities Available for Sale (1) $ $ 11,977 $ 14,590 $ 1,281 136 - 1,000 (3,310) 11,084 $ 2,403 (1,641) 150 - (3,525) 11,977 $ 17,238 714 (497) - - (2,865) 14,590 The tables below present qualitative information for significant assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2021 and 2020: (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range Minimum Maximum Weighted Average December 31, 2021 Investment securities available-for-sale: Private label MBS Puerto Rico government obligations $ $ 7,234 Discounted cash flows 2,850 Discounted cash flows Discount rate Prepayment rate Projected Cumulative Loss Rate Discount rate Projected Cumulative Loss Rate 12.9% 7.6% 0.2% 7.9% 8.6% 12.9% 24.9% 15.7% 7.9% 8.6% 12.9% 15.2% 7.6% 7.9% 8.6% (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range Minimum Maximum Weighted Average December 31, 2020 Investment securities available-for-sale: Private label MBS $ 8,428 Discounted cash flows Puerto Rico government obligations $ 2,899 Discounted cash flows Discount rate Prepayment rate Projected Cumulative Loss Rate Discount rate Projected Cumulative Loss Rate 12.2% 1.2% 2.6% 7.9% 12.4% 12.2% 18.8% 22.3% 7.9% 12.4% 12.2% 12.1% 10.2% 7.9% 12.4% 249 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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. The fair value of these bonds was based on a discounted cash flow methodology that considers the structure and terms of the underlying collateral. The Corporation utilizes PDs and LGDs that consider, 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 of the PRHFA guarantee. Under this approach, all future cash flows (interest and principal) from the underlying collateral loans, adjusted by prepayments and the PDs and LGDs derived from the above-described methodology, are discounted at the internal rate of return as of the reporting date and compared to the amortized cost. The table below summarizes changes in unrealized gains and losses recorded in earnings for the years ended December 31, 2021, 2020 and 2019 for Level 3 assets and liabilities that were still held at the end of each year: Level 3 Instruments Only (In thousands) Changes in unrealized losses relating to assets still held at reporting date: OTTI on available-for-sale investment securities (credit component) (1) Provision for credit losses - benefit (expense) (2) Total Changes in Unrealized Losses Year Ended December 31, 2020 Securities Available for Sale 2019 Securities Available for Sale 2021 Securities Available for Sale $ $ - 136 136 $ $ $ - (1,641) (1,641) $ (497) - (497) (1) For years 2021 and 2020, credit-related impairment recognized in earnings is classified as provision for credit losses due to the Corporation’s adoption of CECL on January 1, 2020. For more information, see Note 1 – “Nature of Business and Summary Significant of Accounting Policies,” above. (2) Prior to the Corporation’s adoption of CECL on January 1, 2020, the provision for credit losses from debt securities was not applicable and therefore no amount is presented for the prior period. For more information, see Note 1 – “Nature of Business and Summary of Significant Accounting Policies,” above. 250 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Additionally, fair value is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP. Adjustments to fair value usually result from the application of lower-of-cost or market accounting ( e.g., loans held for sale carried at the lower-of-cost or fair value and repossessed assets) or write-downs of individual assets ( e.g., goodwill and loans). As of December 31, 2021, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non- recurring basis as shown in the following table: (In thousands) Loans receivable (1) OREO (2) Carrying value as of December 31, 2021 Level 3 Level 2 Level 1 Losses recorded for the Year Ended December 31, 2021 $ - $ - - $ - 161,302 $ 40,848 (2,959) (403) (1) Consists mainly of collateral dependent commercial and construction loans. The Corporation generally measured losses 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. As of December 31, 2020, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non- recurring basis as shown in the following table: (In thousands) Loans receivable (1) OREO (2) Carrying value as of December 31, 2020 Level 3 Level 2 Level 1 Losses recorded for the Year Ended December 31, 2020 $ - $ - - $ - 246,803 $ 83,060 (5,675) (1,970) (1) Consists mainly of collateral dependent commercial and construction loans. The Corporation generally measured losses 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. 251 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As of December 31, 2019, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a nonrecurring basis as shown in the following table: (In thousands) Loans receivable (1) OREO (2) Carrying value as of December 31, 2019 Level 3 Level 2 Level 1 Losses recorded for the Year Ended December 31, 2019 $ - $ - - $ - 217,252 $ 101,626 (18,013) (6,572) (1) Consists mainly of collateral dependent commercial and construction loans. The Corporation generally measured losses 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. Qualitative information regarding the fair value measurements for Level 3 financial instruments as of December 31, 2021 are as follows: Loans OREO Method Income, Market, Comparable Sales, Discounted Cash Flows December 31, 2021 Inputs External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors Income, Market, Comparable Sales, Discounted Cash Flows External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial instruments as of December 31, 2021 and 2020: (In thousands) Assets: Cash and due from banks and money market investments (amortized cost) Investment securities available for sale (fair value) Investment securities held to maturity (amortized cost) Less: allowance for credit losses on held to maturity securities Investment securities held to maturity, net of allowance Equity securities (fair value) Loans held for sale (lower of cost or market) Loans, held for investment (amortized cost) Less: allowance for credit losses for loans and finance leases Loans held for investment, net of allowance Derivatives, included in assets (fair value) Liabilities: Deposits (amortized cost) Securities sold under agreements to repurchase (amortized cost) Advances from FHLB (amortized cost) Other borrowings (amortized cost) Derivatives, included in liabilities (fair value) Total Carrying Amount in Statement of Financial Condition as of December 31, 2021 Fair Value Estimate as of December 31, 2021 Level 1 Level 2 Level 3 $ $ $ $ 2,543,058 $ 2,543,058 $ 2,543,058 $ - $ - 6,453,761 178,133 (8,571) 169,562 32,169 35,155 11,060,658 (269,030) 10,791,628 1,505 6,453,761 - 148,486 - 6,294,191 - 11,084 - 167,147 32,169 36,147 - 5,378 - - 167,147 26,791 36,147 - - 10,900,400 1,505 - - - 1,505 10,900,400 - 17,784,894 $ 17,800,706 $ - $ 17,800,706 $ - 322,105 202,044 177,689 1,178 - - - - 322,105 202,044 - 1,178 - - 177,689 - 300,000 200,000 183,762 1,178 252 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (In thousands) Assets: Cash and due from banks and money market investments (amortized cost) Investment securities available for sale (fair value) Investment securities held to maturity (amortized cost) Less: allowance for credit losses on held to maturity securities Investment securities held to maturity, net of allowance Equity securities (fair value) Loans held for sale (lower of cost or market) Loans, held for investment (amortized cost) Less: allowance for credit losses for loans and finance leases Loans held for investment, net of allowance Derivatives, included in assets (fair value) Liabilities: Deposits (amortized cost) Securities sold under agreements to repurchase (amortized cost) Advances from FHLB (amortized cost) Other borrowings (amortized cost) Derivatives, included in liabilities (fair value) Total Carrying Amount in Statement of Financial Condition as of December 31, 2020 Fair Value Estimate as of December 31, 2020 Level 1 Level 2 Level 3 $ $ $ $ 1,493,833 $ 1,493,833 $ 1,493,833 $ - $ - 4,647,019 189,488 (8,845) 180,643 37,588 50,289 11,777,289 (385,887) 11,391,402 2,842 4,647,019 - 173,806 37,588 52,322 11,564,635 2,842 15,317,383 $ 15,363,236 $ 300,000 440,000 183,762 1,920 329,493 446,703 151,645 1,920 7,507 - - 1,474 - - - - - - - - 4,627,535 - - 36,114 52,322 - 2,482 11,977 - 173,806 - - 11,564,635 - $ 15,363,236 $ - 329,493 446,703 - 1,920 - - 151,645 - 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, mortgage servicing rights, core deposit, and other customer relationship intangibles, 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 futures cash flows, and appropriate discount rates. 253 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 31 – 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. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC Topic 606, the Corporation performs the following five steps: (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the Corporation satisfies a performance obligation. The Corporation only applies the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. 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 those that contain 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 summarizes 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 years ended December 31, 2021, 2020 and 2019: Year ended December 31, 2021: (In thousands) Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Treasury and Investments United States Operations Virgin Islands Operations Total Net interest income (1) $ 104,638 $ 281,703 $ 191,917 $ 59,331 $ 65,967 $ 26,373 $ 729,929 Service charges and fees on deposit accounts Insurance commissions Merchant-related income Credit and debit card fees Other service charges and fees Not in scope of ASC Topic 606 (1) Total non-interest income - - - - 771 23,507 24,278 20,083 11,166 6,279 26,360 4,185 1,701 69,774 11,807 - 1,079 83 2,640 423 16,032 - - - - - 227 227 555 114 51 19 1,825 1,399 3,963 2,839 665 1,055 1,602 556 173 35,284 11,945 8,464 28,064 9,977 27,430 6,890 121,164 Total Revenue $ 128,916 $ 351,477 $ 207,949 $ 59,558 $ 69,930 $ 33,263 $ 851,093 254 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Year ended December 31, 2020: (In thousands) Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Treasury and Investments United States Operations Virgin Islands Operations Total Net interest income (1) $ 76,025 $ 220,678 $ 135,591 $ 87,879 $ 54,025 $ 26,124 $ 600,322 Service charges and fees on deposit accounts Insurance commissions Merchant-related income Credit and debit card fees Other service charges and fees Not in scope of Topic 606 (1)(2) Total non-interest income - - - - 342 21,727 22,069 13,286 8,754 4,516 18,218 2,900 3,288 50,962 8,026 - 478 62 2,260 1,780 12,606 - - - - 184 13,524 13,708 553 52 41 16 1,800 2,168 4,630 2,747 558 809 1,469 1,508 160 7,251 24,612 9,364 5,844 19,765 8,994 42,647 111,226 Total Revenue $ 98,094 $ 271,640 $ 148,197 $ 101,587 $ 58,655 $ 33,375 $ 711,548 Year ended December 31, 2019: (In thousands) Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Treasury and Investments United States Operations Virgin Islands Operations Total Net interest income (1) $ 68,803 $ 244,535 $ 91,266 $ 73,626 $ 62,539 $ 26,312 $ 567,081 Service charges and fees on deposit accounts Insurance commissions Merchant-related income Credit and debit card fees Other service charges and fees Not in scope of Topic 606 (1) Total non-interest income - - - - 216 16,609 16,825 14,534 9,621 4,120 19,014 3,012 1,428 51,729 5,811 - 466 104 2,690 2,643 11,714 - - - - - (225) (225) 631 67 - 43 1,558 508 2,807 2,940 498 1,049 1,744 1,313 178 7,722 23,916 10,186 5,635 20,905 8,789 21,141 90,572 Total Revenue $ 85,628 $ 296,264 $ 102,980 $ 73,401 $ 65,346 $ 34,034 $ 657,653 (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 andliabilities, as well as other non-interest income from loans, leases, investment securities and derivative financial instruments. (2) For the year ended December 31, 2020, includes a $5.0 million benefit resulting from the final settlement of the Corporation’s business interruption claim related to lost profits caused by Hurricanes Irma and Maria in 2017. This insurance recovery is presented as part of other non-interest income in theconsolidated statements of income. insurance 255 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) For 2021, 2020, and 2019, substantially all of the Corporation’s revenue within the scope of ASC Topic 606 was related to performance obligations satisfied at a point in time. The following is a discussion of the revenues under the scope of ASC Topic 606. Service Charges and Fees on Deposit Accounts Service charges and fees on deposit accounts relate to fees generated from a variety of deposit products and services rendered to customers. Charges include, but are not limited to, overdraft fees, insufficient fund fees, dormant fees, and monthly service charges. Such fees are recognized concurrently with the event on a daily basis or on a monthly basis depending upon the customer’s cycle date. These depository arrangements are considered day-to-day contracts that do not extend beyond the services performed, as customers have the right to terminate these contracts with no penalty or, if any, nonsubstantive penalties. Insurance Commissions For insurance commissions, which include regular and contingent commissions paid to the Corporation’s insurance agency, the agreements contain a performance obligation related to the sale/issuance of the policy and ancillary administrative post-issuance support. The performance obligations are satisfied when the policies are issued, and revenue is recognized at that point in time. In addition, contingent commission income may be considered to be constrained, as defined under ASC Topic 606. Contingent commission income is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or payments are received . For the years ended December 31, 2021, 2020 and 2019, the Corporation recognized revenue at the time that payments were confirmed and constraints were released of $ 3.3 million, $ 3.3 million, and $ 3.0 million, respectively. Merchant-related Income For merchant-related income, the determination of which included the consideration of a 2015 sale of merchant contracts that involved sales of point of sale (“POS”) terminals and entry into a marketing alliance under a revenue-sharing agreement, the Corporation concluded that control of the POS terminals and merchant contracts was transferred to the customer at the contract’s inception. With respect to the related revenue-sharing agreement, the Corporation satisfies the marketing alliance performance obligation over the life of the contract, and recognizes the associated transaction price as the entity performs and any constraints over the variable consideration are resolved. Credit and Debit Card Fees Credit and debit card fees primarily represent revenues earned from interchange fees and ATM fees. Interchange and network revenues are earned on credit and debit card transactions conducted with payment networks. ATM fees are primarily earned as a result of surcharges assessed to non-FirstBank customers who use a FirstBank ATM. Such fees are generally recognized concurrently with the delivery of services on a daily basis. Other Fees Other fees primarily include revenues generated from wire transfers, lockboxes, bank issuances of checks and trust fees recognized from transfer paying agent, retirement plan, and other trustee activities. Revenues are recognized on a recurring basis when the services are rendered. 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. During the year ended December 31, 2019, the Bank entered into a growth agreement with an international card service association to expand the customer base and enhance product offerings. The primary performance obligation of this contract required the Bank to either launch a new debit card product by 2021, or maintain a ratio of over 50% of the portfolio with the related card service association by the year ended December 31, 2021. In connection with this agreement, the Corporation recognized a contract liability as the revenue is constrained until the fulfillment of either of the above conditions. During the year ended December 31, 2021, the Bank successfully launched the new debit card product required and recognized revenues of $ 0.4 million from this contract. In addition, as discussed above, during 2015, the Bank entered into a long-term strategic marketing alliance under a revenue-sharing agreement with another entity to which the Bank sold its merchant contracts portfolio and related POS terminals. Merchant services are marketed through the Bank’s branches and offices in Puerto Rico and the Virgin Islands. Under the revenue-sharing agreement, 256 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) FirstBank shares with this entity revenues generated by the merchant contracts over the term of the 10-year agreement. As of December 31, 2021 and 2020, the contract liability amounted to approximately $ 1.1 million and $ 1.4 million, respectively, which will be recognized over the remaining term of the contract. For the years ended December 31, 2021, 2020, and 2019, the Corporation recognized revenue and its contract liabilities decreased by approximately $ 0.7 million, $ 0.3 million, and $ 0.3 million, respectively, due to the completion of performance over time. There were no changes in contract liabilities due to changes in transaction price estimates. The following table shows the activity of contract liabilities for the years ended December 31, 2021, 2020 and 2019: (In thousands) Beginning Balance Plus: Additions Less: Revenue recognized Ending balance $ $ 2021 2020 2019 2,151 $ 2,476 $ - - (708) 1,443 $ (325) 2,151 $ 2,071 730 (325) 2,476 A contract asset is the right to consideration for transferred goods or services when the amount is conditioned on something other than the passage of time. As of December 31, 2021 and 2020, there were no receivables from contracts with customers or contract assets recorded on the Corporation’s consolidated financial statements. Other Except for the contract liabilities noted above, the Corporation did not have any significant performance obligations as of December 31, 2021. 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. 257 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 32 – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION Supplemental statement of cash flows information is as follows for the indicated periods: (In thousands) Cash paid for: Interest on borrowings Income tax Operating cash flow from operating leases Non-cash investing and financing activities: Additions to OREO Additions to auto and other repossessed assets Capitalization of servicing assets Loan securitizations Loans held for investment transferred to held for sale Payable related to unsettled purchases of available-for-sale investment ROU asset obtained in exchange for operating lease liabilities Adoption of lease accounting standard: ROU asset operating leases Operating lease liabilities Acquisition (see Note 2): Consideration Fair value of assets acquired Liabilities assumed Year Ended December 31, 2020 2019 2021 $ $ $ 68,668 15,477 19,328 $ 94,872 16,713 13,464 19,348 33,408 5,194 191,434 33,010 - 4,553 - - 584 605 - 7,249 36,203 4,864 221,491 10,817 24,033 1,328 - - 1,280,424 5,561,564 4,291,674 $ $ 107,010 13,495 10,219 40,398 47,643 4,039 235,258 24,470 - 10,762 57,178 59,818 - - - 258 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 33 – REGULATORY MATTERS, COMMITMENTS, AND CONTINGENCIES 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 December 31, 2021, and 2020, 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 December 31, 2021, 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% 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. Under the Basel III rules, in order to be considered adequately capitalized and not subject to the above noted limitations, the Corporation is required to maintain: (i) a minimum Common Equity Tier 1 (“CET1”) capital to risk-weighted assets ratio of at least 7%; (ii) a minimum 4.5%, plus the 2.5% “capital conservation buffer,” resulting in a required minimum CET1 capital ratio of at least ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5%; (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum total capital ratio of 10.5%; and (iv) a required minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets. 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 1 impact to retained earnings plus 25% of the change in the ACL (excluding PCD loans) 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 December 31, 2021, the capital measures of the Corporation and the Bank excluded $ 64.8 million (to be phased-in during the next three years) that represents the CECL day 1 impact to retained earnings plus 25% of the increase in the allowance for credit losses (as defined in the interim final rule) from January 1, 2020 to December 31, 2021. The federal financial regulatory agencies may take other measures affecting regulatory capital to address the COVID-19 pandemic, although the nature and impact of such measures cannot be predicted at this time. 259 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The regulatory capital position of the Corporation and the Bank as of December 31, 2021 and 2020, which reflects the delay in the effect of CECL on regulatory capital, were as follows: Regulatory Requirements Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount To be Well -Capitalized Thresholds Amount Ratio (Dollars in thousands) As of December 31, 2021 Total Capital (to risk-weighted assets) First BanCorp. FirstBank CET1 Capital (to risk-weighted assets) First BanCorp. FirstBank Tier I Capital (to risk-weighted assets) First BanCorp. FirstBank Leverage ratio First BanCorp. FirstBank As of December 31, 2020 Total Capital (to risk-weighted assets) First BanCorp. FirstBank CET1 Capital (to risk-weighted assets) First BanCorp. FirstBank Tier I Capital (to risk-weighted assets) First BanCorp. FirstBank Leverage ratio First BanCorp. FirstBank $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2,433,953 2,401,390 20.50% $ 20.23% $ 2,112,630 2,150,317 17.80% $ 18.12% $ 2,112,630 2,258,317 2,112,630 2,258,317 17.80% $ 19.03% $ 10.14% $ 10.85% $ 2,416,682 2,360,493 20.37% $ 19.91% $ 2,053,045 1,903,251 17.31% $ 16.05% $ 2,089,149 2,211,251 2,089,149 2,211,251 17.61% $ 18.65% $ 11.26% $ 11.92% $ 949,637 949,556 534,171 534,125 712,228 712,167 833,091 832,773 948,890 948,624 533,751 533,601 711,667 711,468 742,352 741,841 8.0% 8.0% $ 4.5% 4.5% $ 6.0% 6.0% $ 4.0% 4.0% $ 8.0% 8.0% $ 4.5% 4.5% $ 6.0% 6.0% $ 4.0% 4.0% $ N/A 1,186,944 N/A 10.0% N/A 771,514 N/A 949,556 N/A 1,040,967 N/A 6.5% N/A 8.0% N/A 5.0% N/A 1,185,780 N/A 10.0% N/A 770,757 N/A 948,624 N/A 927,301 N/A 6.5% N/A 8.0% N/A 5.0% The following table summarizes commitments to extend credit and standby letters of credit as of the indicated dates: (In thousands) Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Construction undisbursed funds Unused personal lines of credit Commercial lines of credit Commercial letters of credit Standby letters of credit 260 December 31, 2021 2020 $ $ 197,917 1,180,824 725,259 151,140 4,342 119,900 1,180,860 759,947 135,987 4,964 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Management uses the same credit policies and approval process in entering into commitments and conditional obligations as it does for on-balance sheet instruments. 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. In general, commercial and standby letters of credit are issued to facilitate foreign and domestic trade transactions. Normally, commercial and standby letters of credit are short-term commitments used to finance commercial contracts for the shipment of goods. The collateral for these letters of credit includes cash or available commercial lines of credit. The fair value of commercial and standby letters of credit is based on the fees currently charged for such agreements, which, as of December 31, 2021 and 2020, were not significant. The Corporation obtained from GNMA commitment authority to issue GNMA MBS. Under this program, for 2021, the Corporation sold approximately $ 191.4 million (2020 - $ 221.5 million) of FHA/VA mortgage loan production into GNMA MBS. As of December 31, 2021, 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 December 31, 2021, no such disclosures were necessary. 261 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 34 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation’s assets or liabilities and will adversely affect the Corporation’s net interest income from its loan and investment portfolios. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates. The Corporation designates a derivative as a fair value hedge, cash flow hedge or economic undesignated hedge when it enters into the derivative contract. As of December 31, 2021 and 2020, all derivatives held by the Corporation were considered economic undesignated hedges. The Corporation records these undesignated hedges at fair value with the resulting gain or loss recognized in current earnings. The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk: Interest rate cap agreements – Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value of the interest rate cap increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates. Forward Contracts – Forward contracts are primarily sales of to-be-announced (“TBA”) MBS that will settle over the standard delivery date and do not qualify as “regular way” security trades. Regular-way security trades are contracts that have no net settlement provision and no market mechanism to facilitate net settlement and that provide for delivery of a security within the time frame generally established by regulations or conventions in the marketplace or exchange in which the transaction is being executed. The forward sales are considered derivative instruments that need to be marked to market. The Corporation uses these securities to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage -banking operations. The Corporation also reports as forward contracts the mandatory mortgage loan sales commitments that it enters into with GSEs that require or permit net settlement via a pair-off transaction or the payment of a pair-off fee. Unrealized gains (losses) are recogni zed as part of mortgage banking activities in the consolidated statements of income. Interest Rate Lock Commitments – Interest rate lock commitments are agreements under which the Corporation agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maxim um amount of the loan are set prior to funding. Under the agreement, the Corporation commits to lend funds to a potential borrower, generally on a fixed rate basis, regardless of whether interest rates change in the market. Interest rate swaps – The Corporation acquired interest rate swaps as a result of the acquisition of BSPR. An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreements acquired from BSPR consist of the Corporation offering borrower-facing derivative products using a “back-to-back” structure in which the borrower-facing derivative transaction is paired with an identical, offsetting transaction with an approved dealer-counterparty. By using a back-to-back trading structure, both the commercial borrower and the Corporation are largely insulated from market risk and volatility. The agreements set the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. The fair values of these swaps are recorded as components of other assets or accounts payable and other liabilities in the Corporation’s consolidated statements of financial condition. Changes in the fair values of interest rate swaps, which occur due to changes in interest rates, are recorded in the consolidated statements of income as a component of interest income on loans. To satisfy the needs of its customers, the Corporation may enter into non-hedging transactions. In these transactions, the Corporation generally participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and conditions. In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument. 262 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table summarizes the notional amounts of all derivative instruments as of the indicated dates: (In thousands) Undesignated economic hedges: Interest rate contracts: Interest rate swap agreements Written interest rate cap agreements Purchased interest rate cap agreements Interest rate lock commitments Forward Contracts: Sale of TBA GNMA MBS pools Forward loan sales commitments Notional Amounts (1) As of December 31, 2021 2020 $ $ 12,588 14,500 14,500 12,097 27,000 12,668 93,353 $ $ 15,864 14,500 14,500 19,931 42,000 19,998 126,793 (1) Notional amounts are presented on a gross basis with no netting of offsetting exposure positions. The following table summarizes for derivative instruments their fair values and location in the consolidated statements of financial condition as of the indicated dates: Asset Derivatives Liability Derivatives Statements of Financial Condition Location December 31, December 31, 2021 Fair Value 2020 Fair Value Statements of Financial Condition Location December 31, December 31, 2021 Fair Value 2020 Fair Value (In thousands) Undesignated economic hedges: Interest rate contracts: Interest rate swap agreements Written interest rate cap agreements Purchased interest rate cap agreements Interest rate lock commitments Forward Contracts: Sales of TBA GNMA MBS pools Forward loan sales commitments Other assets Other assets Other assets Other assets Other assets Other assets $ $ 1,098 $ - 8 379 - 20 1,505 $ 1,622 - 1 737 102 20 2,482 Accounts payable and other liabilities Accounts payable and other liabilities Accounts payable and other liabilities Accounts payable and other liabilities Accounts payable and other liabilities Accounts payable and other liabilities $ $ 1,092 $ 8 - - 78 - 1,178 $ 1,639 1 - - 280 - 1,920 The following table summarizes the effect of derivative instruments on the consolidated statements of income for the indicated periods: Undesignated economic hedges: Interest rate contracts: Interest rate swap agreements Written and purchased interest rate cap agreements Interest rate lock commitments Forward contracts: Sales of TBA GNMA MBS pools Forward loan sales commitments Total (loss) gain on derivatives Gain (or Loss) Year ended December 31, 2020 (In thousands) 2019 2021 $ $ $ 23 - (687) 114 - (550) $ 27 - 576 (54) (37) 512 $ $ - (6) 224 245 8 471 Location of Unrealized Gain (Loss) on Derivative Recognized in Statements of Income Interest income - Loans Interest income - Loans Mortgage Banking Activities Mortgage Banking Activities Mortgage Banking Activities 263 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Derivative instruments are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, and the level of interest rates, as well as the expectations for rates in the future. As of December 31, 2021, the Corporation had not entered into any derivative instrument containing credit-risk-related contingent features. Credit and Market Risk of Derivatives The Corporation uses derivative instruments to manage interest rate risk. By using derivative instruments, the Corporation is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the Corporation’s fair value gain on the derivative. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty owes the Corporation which, therefore, creates a credit risk for the Corporation. When the fair value of a derivative instrument contract is negative, the Corporation owes the counterparty and, therefore, it has no credit risk. The Corporation minimizes its credit risk in derivative instruments by entering into transactions with reputable broker dealers ( periodically by the Management Investment and Asset Liability Committee of the Corporation (the “MIALCO”) and by the Board of Directors. The Corporation also has a policy of requiring that all derivative instrument contracts be governed by an International Swaps and Derivatives Association Master Agreement, which includes a provision for netting. The Corporation has a policy of diversifying derivatives counterparties to reduce the consequences of counterparty default. i.e., financial institutions) that are reviewed The Corporation had credit risk of $ 1.5 million as of December 31, 2021 (2020 - $ 2.5 million) related to derivative instruments with positive fair values. The credit risk does not consider the value of any collateral and the effects of legally enforceable master netting agreements. There were no credit losses associated with derivative instruments recognized in 2021, 2020, or 2019. Market risk is the adverse effect that a change in interest rates or implied volatility rates has on the value of a financial instrument. The Corporation manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The MIALCO monitors the Corporation’s derivative activities as part of its risk-management oversight of the Corporation’s treasury functions. 264 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 35 – OFFSETTING OF ASSETS AND LIABILITIES The Corporation enters into master agreements with counterparties, primarily related to derivatives and repurchase agreements, that may allow for netting of exposures in the event of default. In an event of default, each party has 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. The following tables present information about contracts subject to offsetting provisions related to financial assets and liabilities as well as derivative assets and liabilities, as of the indicated dates: Offsetting of Financial Assets and Derivative Assets As of December 31, 2021 Gross Amounts Not Offset in the Statement of Financial Condition Gross Amounts of Recognized Assets Gross Amounts Offset in the Statement of Financial Condition Net Amounts of Assets Presented in the Statement of Financial Condition Financial Instruments Cash Collateral Net Amount $ 8 $ - $ 8 $ - $ (8) $ - Gross Amounts Not Offset in the Statement of Financial Condition Gross Amounts of Recognized Assets Gross Amounts Offset in the Statement of Financial Condition Net Amounts of Assets Presented in the Statement of Financial Condition Financial Instruments Cash Collateral Net Amount $ 89 $ - $ 89 $ - $ (89) $ - (In thousands) Description Derivatives As of December 31, 2020 (In thousands) Description Derivatives 265 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Offsetting of Financial Liabilities and Derivative Liabilities As of December 31, 2021 Gross Amounts Not Offset in the Statement of Financial Condition Gross Amounts Offset in the Statement of Financial Condition Net Amounts of Liabilities Presented in the Statement of Financial Condition Gross Amounts of Recognized Liabilities Financial Instruments Cash Collateral Net Amount $ $ 1,170 300,000 301,170 $ $ - - - $ $ 1,170 300,000 301,170 $ $ (1,170) $ (300,000) (301,170) $ - $ - - $ - - - Gross Amounts Not Offset in the Statement of Financial Condition Gross Amounts Offset in the Statement of Financial Condition Net Amounts of Liabilities Presented in the Statement of Financial Condition Gross Amounts of Recognized Liabilities Financial Instruments Cash Collateral Net Amount $ $ 1,919 300,000 301,919 $ $ - - - $ $ 1,919 300,000 301,919 $ $ (1,919) $ (300,000) (301,919) $ - $ - - $ - - - (In thousands) Description Derivatives Securities sold under agreements to repurchase Total As of December 31, 2020 (In thousands) Description Derivatives Securities sold under agreements to repurchase Total 266 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 36 – 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 December 31, 2021, the Corporation had reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) 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. six 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 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 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, Mortgage Banking, Consumer (Retail) Banking, and 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,” above. 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. The following tables present information about the reportable segments for the indicated periods: (In thousands) For the year ended December 31, 2021: Interest income Net (charge) credit for transfer of funds Interest expense Net interest income Provision for credit losses - (benefit) expense Non-interest income Direct non-interest expenses Segment income Average earnings assets Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Banking Treasury and Investments United States Operations Virgin Islands Operations Total $ $ $ $ 144,203 (39,565) - 104,638 (16,030) 24,278 29,125 115,821 $ $ 271,127 38,859 (28,283) 281,703 20,322 69,774 165,357 165,798 $ $ 201,684 (9,767) - 191,917 (67,544) 16,032 36,219 239,274 $ 67,841 14,687 (23,197) 59,331 (136) 227 4,093 55,601 $ $ 82,194 (4,214) (12,013) 65,967 (975) 3,963 33,902 37,003 $ $ 27,659 - (1,286) 26,373 (1,335) 6,890 28,084 $ 6,514 $ 794,708 - (64,779) 729,929 (65,698) 121,164 296,780 620,011 2,506,365 $ 2,551,278 $ 3,793,945 $ 7,827,326 $ 2,126,528 $ 430,499 $ 19,235,941 267 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (In thousands) For the year ended December 31, 2020: Interest income Net (charge) credit for transfer of funds Interest expense Net interest income Provision for credit losses - expense Non-interest income Direct non-interest expenses Segment income Average earnings assets (In thousands) For the year ended December 31, 2019: Interest income Net (charge) credit for transfer of funds Interest expense Net interest income Provision for credit losses - expense (benefit) Non-interest income (loss) Direct non-interest expenses Segment income Average earnings assets Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Banking Treasury and Investments United States Operations Virgin Islands Operations Total $ 128,043 (52,018) - 76,025 22,518 22,069 33,054 42,522 $ $ 240,725 18,771 (38,818) 220,678 54,094 50,962 131,133 86,413 $ $ 155,254 (19,663) - 135,591 74,607 12,606 28,631 44,959 $ $ 55,003 59,074 (26,198) 87,879 2,774 13,708 3,449 95,364 $ $ 84,169 (6,164) (23,980) 54,025 12,592 4,630 33,782 12,281 $ $ 29,788 - (3,664) 26,124 4,400 7,251 28,815 160 $ 692,982 - (92,660) 600,322 170,985 111,226 258,864 281,699 2,241,753 $ 2,202,595 $ 3,039,786 $ 4,232,144 $ 2,026,619 $ 458,608 $ 14,201,505 Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Banking Treasury and Investments United States Operations Virgin Islands Operations Total $ 120,981 (52,178) - 68,803 13,499 16,825 34,825 37,304 $ $ 216,066 66,675 (38,206) 244,535 41,043 51,729 116,854 138,367 $ $ 148,224 (56,958) - 91,266 (17,977) 11,714 35,130 85,827 $ $ 63,175 47,477 (37,026) 73,626 - (225) 2,729 70,672 $ $ 97,406 (5,016) (29,851) 62,539 7,296 2,807 34,070 23,980 $ $ 30,045 - (3,733) 26,312 (4,048) 7,722 28,995 9,087 $ 675,897 - (108,816) 567,081 39,813 90,572 252,603 365,237 2,161,772 $ 1,960,352 $ 2,489,933 $ 2,487,084 $ 1,931,015 $ 467,252 $ 11,497,408 $ $ $ $ $ $ The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods: (In thousands) Net income: Total income for segments Other operating expenses (1) Income before income taxes Income tax expense Total consolidated net income Average assets: Total average earning assets for segments Average non-earning assets Total consolidated average assets 2021 Year Ended December 31, 2020 2019 $ $ $ $ 620,011 192,194 427,817 146,792 281,025 19,235,941 1,067,092 20,303,033 $ $ $ $ 281,699 165,376 116,323 14,050 102,273 14,201,505 1,031,141 15,232,646 $ $ $ $ 365,237 125,865 239,372 71,995 167,377 11,497,408 954,726 12,452,134 (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. 268 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table presents revenues (interest income plus non-interest income) and selected balance sheet data by geography based on the location in which the transaction was originated as of indicated dates: (In thousands) Revenues: Puerto Rico United States Virgin Islands Total consolidated revenues Selected Balance Sheet Information: Total assets: Puerto Rico United States Virgin Islands Loans: Puerto Rico United States Virgin Islands Deposits: Puerto Rico (1) United States (2) Virgin Islands 2021 2020 2019 $ $ $ $ $ $ $ $ $ $ 795,166 86,157 34,549 915,872 18,175,910 2,189,440 419,925 8,755,434 1,948,716 391,663 14,113,874 1,928,749 1,742,271 $ $ $ $ $ 678,370 88,799 37,039 804,208 16,091,112 2,117,966 583,993 9,367,032 1,993,797 466,749 12,338,934 1,622,481 1,355,968 628,489 100,213 37,767 766,469 10,059,890 2,048,260 503,116 6,695,953 1,879,346 466,383 6,422,864 1,661,657 1,263,908 (1)For 2021, 2020, and 2019, includes $ 34.2 million, $ 109.0 million, and $ 243.4 million, respectively, of brokered CDs allocated to Puerto Rico operations. (2)For 2021, 2020, and 2019 includes $ 66.2 million, $ 107.1 million, and $ 191.7 million, respectively, of brokered CDs allocated to the United States operations. 269 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 37- 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 December 31, 2021 and 2020, and the results of its operations and cash flows for the years ended December 31, 2021, 2020, and 2019: Statements of Financial Condition (In thousands) Assets Cash and due from banks Money market investments Other investment securities Investment in First Bank Puerto Rico, at equity Investment in First Bank Insurance Agency, at equity Investment in FBP Statutory Trust I Investment in FBP Statutory Trust II Other assets Total assets Liabilities and Stockholders' Equity Liabilities: Other borrowings Accounts payable and other liabilities Total liabilities Stockholders' equity Total liabilities and stockholders' equity As of December 31, 2021 2020 20,751 - 285 2,247,289 19,521 1,951 3,561 366 2,293,724 183,762 8,195 191,957 2,101,767 2,293,724 $ $ $ $ 10,909 6,211 285 2,396,963 41,313 1,951 3,561 2,023 2,463,216 183,762 4,275 188,037 2,275,179 2,463,216 $ $ $ $ 270 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Statements of Income (In thousands) Income Interest income on money market investments Dividend income from banking subsidiaries Dividend income from non-banking subsidiaries Other income Expense Other borrowings Other operating expenses Gain on early extinguishment of debt Income before income taxes and equity in undistributed earnings of subsidiaries Income tax expense Equity in undistributed earnings of subsidiaries Net income Other comprehensive (loss) income, net of tax Comprehensive income Year Ended December 31, 2020 2021 2019 $ $ $ $ $ 51 98,060 30,000 154 128,265 5,135 1,929 7,064 - 121,201 2,854 162,678 281,025 (139,454) $ $ 71 52,707 - 439 53,217 6,355 2,097 8,452 94 44,859 2,429 59,843 102,273 48,691 233 42,243 - 283 42,759 9,424 2,131 11,555 - 31,204 2,752 138,925 167,377 47,179 141,571 $ 150,964 $ 214,556 271 FIRST BANCORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Statements of Cash Flows (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation Equity in undistributed earnings of subsidiaries Gain on early extinguishment of debt Net decrease (increase) in other assets Net increase (decrease) in other liabilities Net cash provided by operating activities Cash flows from investing activities: Return of capital from wholly-owned subsidiaries Net cash provided by investing activities (1) Cash flows from financing activities: Repurchase of common stock Repayment of junior subordinated debentures Dividends paid on common stock Dividends paid on preferred stock Redemption of preferred stock - Series A through E Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of year Cash and cash equivalents include: Cash and due from banks Money market instruments Year Ended December 31, 2020 2021 2019 $ 281,025 $ 102,273 $ 167,377 149 (162,678) - 1,657 3,578 123,731 200,000 200,000 (216,522) - (65,021) (2,453) (36,104) (320,100) 3,631 17,120 20,751 20,751 - 20,751 $ $ $ $ $ $ 231 (59,843) (94) (1,514) (459) 40,594 - - (206) (282) (43,416) (2,676) - (46,580) (5,986) 23,106 17,120 10,909 6,211 17,120 $ $ $ 314 (138,925) - 11,710 526 41,002 - - (1,959) - (30,356) (2,676) - (34,991) 6,011 17,095 23,106 16,895 6,211 23,106 (1) During 2021 First Bank of Puerto Rico, a wholly-owned subsidiary of First BanCorp., redeemed $ 200 million or 8 million shares of its preferred stock. NOTE 38 – SUBSEQUENT EVENTS The Corporation has performed an evaluation of all events occurring subsequent to December 31, 2021; management has determined that there were no events occurring in this period that require disclosure in or adjustment to the accompanying financial statements. 272 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures Nothing to report. Item 9A. 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 Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation as of the period covered by this Form 10-K, our CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective and provide reasonable assurance that the information required to be disclosed by the Corporation in reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and reported to the Corporation’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Our management’s report on Internal Control over Financial Reporting is included in Item 8 and incorporated herein by reference. Management has conducted an assessment of the Corporation’s internal control over financial reporting as of December 31, 2021 based on the criteria established in Internal Control – Integrated Framework (2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon that assessment, management concluded that the Corporation’s internal control over financial reporting was effective as of December 31, 2021. The effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2021 has been audited by Crowe LLP, an independent registered public accounting firm, as stated in their report included in Item 8 of this Annual Report Form 10-K. Changes in Internal Control over Financial Reporting There have been no changes to the Corporation’s internal control over financial reporting during our most recent quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 273 Item 10. Directors, Executive Officers and Corporate Governance PART III Information in response to this item is incorporated herein by reference from the sections entitled “Information with Respect to Nominees Standing for Election as Directors and with respect to Executive Officers of the Corporation,” “Corporate Governance and Related Matters,” “Delinquent Section 16(A) Reports” and “Audit Committee Report” contained in First BanCorp.’s definitive Proxy Statement for use in connection with its 2022 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed with the SEC within 120 days of the close of First BanCorp.’s 2021 fiscal year. Item 11. Executive Compensation. Information in response to this item is incorporated herein by reference from the sections entitled “Compensation Committee Interlocks and Insider Participation,” “Compensation of Directors,” “Compensation Discussion and Analysis,” “Executive Compensation Disclosure” and “Compensation Committee Report” in First BanCorp.’s Proxy Statement to be filed with the SEC within 120 days of the close of First BanCorp.’s 2021 fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Securities authorized for issuance under equity compensation plans The following table sets forth information about First BanCorp. common stock authorized for issuance under First BanCorp.’s existing equity compensation plans as of December 31, 2021: (a) (b) Number of Securities to be Issued Upon Exercise of Outstanding Options, warrants and rights Weighted Average Exercise Price of Outstanding Options, warrants and rights (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) Plan category Equity compensation plans, approved by stockholders Equity compensation plans not approved by stockholders Total 814,899 (1) N/A 814,899 $ $ - N/A - 4,308,921 (2) N/A 4,308,921 (1) Amount represents unvested performance-based units granted to executives, with each unit representing one share of the Corporation's common stock. Performance shares will vest on the achievement of a pre-established performance target goal at the end of a three-year performance period. Refer to Note 22 - "Stock-Based Compensation" of the Notes to Consolidated Financial Statements for more information on performance units. (2) Securities available for future issuance under the First BanCorp. 2008 Omnibus Incentive Plan (the "Omnibus Plan"), which was initially approved by stockholders on April 29, 2008. Most recently, on May 24, 2016, the Omnibus Plan was amended to, among other things, increase the number of shares of common stock reserved for issuance under the Omnibus Plan and extend the term of the Omnibus Plan to May 24, 2026. The Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. As amended, this plan provides for the issuance of up to 14,169,807 shares of common stock, subject to adjustments for stock splits, reorganization and other similar events. As of December 31, 2021, 4,308,921 shares of Common Stock were available for future issuance under the Omnibus Plan. Additional information in response to this item is incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” in First BanCorp.’s Proxy Statement to be filed with the SEC within 120 days of the close of First BanCorp.’s 2021 fiscal year. Item 13. Certain Relationships and Related Transactions, and Director Independence Information in response to this item is incorporated herein by reference from the sections entitled “Certain Relationships and Related Person Transactions” and “Corporate Governance and Related Matters” in First BanCorp.’s Proxy Statement to be filed with the SEC within 120 days of the close of First BanCorp.’s 2021 fiscal year. 274 Item 14. Principal Accountant Fees and Services. Audit Fees Information in response to this item is incorporated herein by reference from the section entitled “Audit Fees” and “Audit Committee Report” in First BanCorp.’s Proxy Statement to be filed with the SEC within 120 days of the close of First BanCorp.’s 2021 fiscal year. PART IV Item 15. Exhibits and Financial Statement Schedules (a) List of documents filed as part of this report. (1) Financial Statements. The following consolidated financial statements of First BanCorp., together with the reports thereon of First BanCorp.’s independent registered public accounting firm, Crowe LLP (PCAOB ID No. 173), dated March 1, 202 2, are included in Item 8 of this Annual Report on Form 10-K: – Report of Crowe LLP, Independent Registered Public Accounting Firm. – Attestation Report of Crowe LLP, Independent Registered Public Accounting Firm on Internal Control over Financial Reporting. –Consolidated Statements of Financial Condition as of December 31, 2021 and 2020. –Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 2021. – Consolidated Statements of Comprehensive Income for Each of the Three Years in the Period Ended December 31, 2021. – Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2021. – Consolidated Statements of Changes in Stockholders’ Equity for Each of the Three Years in the Period Ended December 31, 2021. – Notes to the Consolidated Financial Statements. (2) Financial statement schedules. All financial schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (b) Exhibits listed in the Exhibit Index below are filed herewith as part of this Annual Report on Form 10-K and are incorporated herein by reference. Item 16. Form 10-K Summary Not applicable. 275  EXHIBIT INDEX Exhibit No. Description 2.1 2.2 3.1 3.2 4.1 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* 10.12* 10.13* 10.14* 10.15* 10.16* 10.17* 10.18* 14.1 21.1 23.1 31.1 31.2 32.1 32.2 101.INS 101.SCH Stock Purchase Agreement, dated October 21, 2019, among Santander Holdings USA, Inc., FirstBank Puerto Rico, and, solely for the purpose set forth therein, First BanCorp, incorporated by reference from Exhibit 2.1 of the Form 8-K filed on October 22, 2019.(1) Amendment No. 1 to the Stock Purchase Agreement, dated September 1, 2020, by and among Santander Holdings USA, Inc., FirstBank Puerto Rico, and, solely for the purpose set forth therein, First BanCorp, incorporated by reference from Exhibit 2.1 of the Form 10-Q for the quarter ended September 30, 2020 filed on November 9, 2020. Restated Articles of Incorporation, incorporated by reference from Exhibit 3.1 of the Registration Statement on Form S-1/A filed by First BanCorp on October 20, 2011. Amended and Restated By-Laws, incorporated by reference from Exhibit 3.2 of the Form 8-K filed by First BanCorp on March 31, 2020. Description of First BanCorp. capital stock, incorporated by reference from Exhibit 4.1 of the Form 10-K filed on March 2, 2020. First BanCorp Omnibus Incentive Plan, as amended, incorporated by reference from Exhibit 99.1 to the Form S-8 filed by First BanCorp on June 21,2016. Employment Agreement—Aurelio Alemán, incorporated by reference from the Form 10-K for the year ended December 31, 1998 filed by First BanCorp on March 26, 1999. Amendment No. 1 to Employment Agreement—Aurelio Alemán, incorporated by reference from Exhibit 10.2 of the Form 10-Q for the quarter ended March 31, 2009 filed by First BanCorp on May 11, 2009. Amendment No. 2 to Employment Agreement—Aurelio Alemán, incorporated by reference from Exhibit 10.6 of the Form 10-K for the year ended December 31, 2009 filed by First BanCorp on March 2, 2010. Employment Agreement—Orlando Berges, incorporated by reference from Exhibit 10.1 of the Form 10-Q for the quarter ended June 30, 2009 filed by First BanCorp on August 11, 2009. Form of Restricted Stock Award Agreement incorporated by reference from Exhibit 10.23 to the Form S-1/A filed by First BanCorp on July 16, 2010. Letter Agreement between First BanCorp. and Roberto R. Herencia, incorporated by reference from Exhibit 10.1 of the Form 8-K/A filed by First BanCorp on November 2, 2011. Revised Non-management Chairman of the Board Compensation Structure, incorporated by reference from Exhibit 10.1 of the Form 10-Q for the quarter ended September 30, 2017 filed by First BanCorp. on November 9, 2017. Stock Purchase Agreement between First BanCorp and Roberto Herencia dated February 17, 2012, incorporated by reference from Exhibit 10.36 of the Form 10-K for the fiscal year ended December 31, 2011 filed by First BanCorp. on March 13, 2012. Non – Employee Director Compensation Structure, incorporated by reference from Exhibit 10.1 of the Form 10-Q for the quarter ended September 30, 2017 filed by First BanCorp on November 9, 2017. Offer Letter between First BanCorp and Juan Acosta Reboyras incorporated by reference from Exhibit 10.1 of the Form 8- K filed on September 3, 2014. Offer Letter between First BanCorp and Luz A. Crespo incorporated by reference from Exhibit 10.1 of the Form 8-K filed on February 9, 2015. Offer Letter between First BanCorp and John A. Heffern incorporated by reference from Exhibit 10.1 of the Form 8-K filed on November 1, 2017. Form of First BanCorp Long-Term Incentive Award Agreement incorporated by reference from Exhibit 10.1 of the Form 10-Q for the quarter ended March 31, 2018. Form of Executive Employment Agreement executed by each executive officer incorporated by reference from Exhibit 10.1 of the Form 10-Q for the quarter ended June 30, 2018. Offer Letter between First BanCorp and Daniel E. Frye incorporated by reference from Exhibit 10.1 of the Form 8-K filed on August 31, 2018. Offer Letter between First BanCorp and Félix M. Villamil incorporated by reference from Exhibit 10.1 of the Form 8-K filed on November 5, 2020. Offer Letter between First BanCorp and Patricia M. Eaves incorporated by reference from Exhibit 10.1 of the Form 8-K filed on April 1, 2021. Code of Ethics for CEO and Senior Financial Officers, incorporated by reference from Exhibit 14.1 of the Form 10-K for the fiscal year ended December 31, 2008 filed by First BanCorp on March 2, 2009. List of First BanCorp’s subsidiaries Consent of Crowe LLP Section 302 Certification of the CEO Section 302 Certification of the CFO Section 906 Certification of the CEO Section 906 Certification of the CFO 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. Inline XBRL Taxonomy Extension Schema Document, filed herewith 276 101.CAL 101.LAB 101.PRE 101.DEF 104 Inline XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith Inline XBRL Taxonomy Extension Label Linkbase Document, filed herewith Inline XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith Inline XBRL Taxonomy Extension Definitions Linkbase Document, filed herewith The cover page of First BanCorp. Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL (included within the Exhibit 101 attachments) _____________________________ (1) Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a copy of any omitted schedule as a supplement to the SEC or its staff upon request. *Management contract or compensatory plan or agreement. 277 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. By: /s/ Aurelio Alemán Aurelio Alemán President, Chief Executive Officer and Director Date: 3/1/2022 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Aurelio Alemán Aurelio Alemán President, Chief Executive Officer and Director /s/ Orlando Berges Orlando Berges, CPA Executive Vice President and Chief Financial Officer /s/ Roberto R. Herencia Roberto R. Herencia, Director and Chairman of the Board /s/ Patricia M. Eaves Patricia M. Eaves, Director /s/ Luz A. Crespo Luz A. Crespo, Director /s/ Juan Acosta-Reboyras Juan Acosta-Reboyras, Director /s/ John A. Heffern John A. Heffern, Director /s/ Daniel E. Frye Daniel E. Frye, Director /s/ Tracey Dedrick Tracey Dedrick, Director /s/ Felix Villamil Felix Villamil, Director /s/ Said Ortiz Said Ortiz, CPA Senior Vice President and Chief Accounting Officer 278 Date: 3/1/2022 Date: 3/1/2022 Date: 3/1/2022 Date: 3/1/2022 Date: 3/1/2022 Date: 3/1/2022 Date: 3/1/2022 Date: 3/1/2022 Date: 3/1/2022 Date: 3/1/2022 Date: 3/1/2022 FIRST BANCORP. AS OF DECEMBER 31, 2021 EXHIBIT 21.1 Subsidiaries of the Registrant Name Jurisdiction of Incorporation FirstBank Puerto Rico First Federal Finance Limited Liability Company (D/B/A Money Express) FirstBank Overseas Corp. First Management of Puerto Rico, LLC FirstBank Insurance Agency, LLC Puerto Rico Puerto Rico Puerto Rico Puerto Rico Puerto Rico CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23.1 The Board of Directors First BanCorp.: We consent to the incorporation by reference in Registration Statements on Form S-3 (No. 333-209516) and on Form S-8 (Nos. 333- 212157, 333-181178, 333-155764, 333-106661, and 333-106656) of First BanCorp. of our report dated March 1, 2022, relating to the financial statements and effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K. /s/ Crowe, LLP New York, New York March 1, 2022 EXHIBIT 31.1 I, Aurelio Alemán, certify that: 1. I have reviewed this Form 10-K 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: March 1, 2022 By: /s/ Aurelio Alemán Aurelio Alemán President and Chief Executive Officer I, Orlando Berges, certify that: 1. I have reviewed this Form 10-K of First BanCorp.; EXHIBIT 31.2 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: March 1, 2022 By: /s/ Orlando Berges Orlando Berges Executive Vice President and Chief Financial Officer EXHIBIT 32.1 CERTIFICATION 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 Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form l0-K”) 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-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2022 /s/ Aurelio Alemán Name: Aurelio Alemán Title: President and Chief Executive Officer EXHIBIT 32.2 CERTIFICATION 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 Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form l0-K”) 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-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2022 /s/ Orlando Berges Name: Orlando Berges Title: Executive Vice President and Chief Financial Officer Investor Information Independent Registered Public Accounting Firm for the Fiscal Year Ended Investor Relations Ramón Rodríguez December 31, 2021 Crowe LLP 488 Madison Avenue, Floor 3 New York, NY 10022-5722 Corporate Strategy and Investor Relations First BanCorp 787-729-2989 ramon.rodriguez@firstbankpr.com Additional Information and Form 10-K General Counsel Additional financial information about First Sara Álvarez, Esq. BanCorp may be requested by contacting Executive Vice President and General Counsel Ramón Rodríguez, Corporate Strategy and First BanCorp Investor Relations, 1519 Ponce de Leon Ave., Stop 23, PO Box 9146, San Juan, PR 00908-0146. First BanCorp’s filings with the Securities and Exchange Commission (SEC) may be accessed on the website maintained by the SEC at http://www.sec.gov and on our website at www.1firstbank.com, Investor Relations section, SEC Filings link. Transfer Agent and Registrar Computershare P.O. Box 505000 Louisville, KY 40233-5000 or Overnight Computershare 462 South 4th Street, Suite 1600 Louisville, KY 40202 Toll free: 866-230-0168 Toll: 201-680-6578 Website: www.computershare.com/investor Common Stock The Company’s common stock trades on the New York Stock Exchange under the symbol FBP. NYSE and SEC Certifications The Corporation filed on May 24, 2021, the certification of the Chief Executive Officer required under section 303A.12(a) of the New York Stock Exchange’s listed Company Manual. The Corporation has also filed, as exhibits to its 2021 Annual Report on Form 10-K, the CEO and the CFO certifications as required by Sections 302 and Section 906 of the Sarbanes-Oxley Act. 1519 Ponce de Leon Ave., Stop 23 PO Box 9146 San Juan, PR 00908-0146 

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