# FIRST BANCORP /PR/ (FBP) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FIRST BANCORP /PR/'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1057706/000105770623000002/fbp1231202210k.htm
Accession: 0001057706-23-000002
Filing date: 2023-02-28
Report date: 2022-12-31
Extracted from Item 7 to the first post-MD&A boundary after HTML sanitization.
Confidence: high

Company profile: /company/FBP/
All MD&A years: /company/FBP/mda/
Previous year: /company/FBP/mda/fy2021/ (FY 2021)
Next year: /company/FBP/mda/fy2023/ (FY 2023)

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
 
of

America
 
(“GAAP”).
 
See
 
“Special
 
Items”
 
and
 
“Basis
 
of
 
Presentation”
 
below
 
for
 
information
 
about
 
why
 
non-GAAP
 
financial

measures are presented
 
and the reconciliation
 
of 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
 
2022 results compared to 2021.
 
For a discussion of 2021 results compared

to
 
2020,
 
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,
 
2021,
 
filed
 
with
 
the
 
Securities
 
and
 
Exchange

Commission (“SEC”) on March 1, 2022.

In
 
this
 
discussion
 
and
 
analysis
 
of
 
our
 
financial
 
condition
 
and
 
results
 
of
 
operations,
 
we
 
have
 
included
 
information
 
that
 
may

constitute
 
“forward-looking
 
statements”
 
within
 
the
 
meaning
 
of
 
the
 
safe
 
harbor
 
provisions
 
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”).

Forward-looking statements are not historical
 
facts or statements of current conditions,
 
but instead represent only our beliefs regar
 
ding

future events, many of
 
which, by their nature, are inherently
 
uncertain and outside our control.
 
By identifying these statements
 
for you

in this manner,
 
we are alerting you to
 
the possibility that our actual
 
results, financial condition, liquidity
 
and capital actions may
 
differ

materially from the anticipated results,
 
financial condition, liquidity and capital
 
actions in these forward-looking statements.
 
Important

factors that
 
could cause
 
our results,
 
financial condition,
 
liquidity and
 
capital actions
 
to differ
 
from those
 
in these
 
statements include,

among others, those described in “Risk Factors” in Part I, Item 1A of this Form 10-K.

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
 
(“FirstBank”
 
or the
 
“Bank”)
 
and
 
FirstBank
 
Insurance
 
Agency.
 
Through
 
its wholly
 
-owned
 
subsidiaries,
 
the Corporation

operates
 
in
 
Puerto
 
Rico,
 
the
 
United
 
States
 
Virgin
 
Islands
 
(“USVI”),
 
the
 
British
 
Virgin
 
Islands
 
(“BVI”),
 
and
 
the
 
state
 
of
 
Florida,

concentrating on
 
commercial banking,
 
residential mortgage loans,
 
credit cards, personal
 
loans, small loans,
 
auto loans and
 
leases, and

insurance agency activities.

SIGNIFICANT EVENTS

Economy

The Corporation
 
remains cautiously optimistic
 
on economic conditions
 
in Puerto Rico,
 
its principal market.
 
Total
 
non-farm payroll

employment
 
rose
 
to
 
a
 
decade
 
high
 
of
 
927,100
 
in
 
December
 
2022,
 
or
 
a
 
4%
 
year-over-year
 
increase.
 
Moreover,
 
the
 
most
 
recent

Economic Development
 
Bank for
 
Puerto Rico’s
 
Economic Activity
 
Index (“EDB-EAI”),
 
which is
 
highly correlated
 
to Puerto
 
Rico’s

real gross
 
national product
 
(“GNP”) in
 
both level
 
and annual
 
growth rates,
 
showed a
 
2.6% growth
 
for the
 
first nine
 
months of
 
2022.

Although
 
global
 
expectations
 
point
 
to
 
an
 
economic
 
slowdown
 
in
 
the
 
United
 
States,
 
the
 
Corporation
 
expects
 
growth
 
in
 
the
 
local

economy
 
to
 
be
 
sustained
 
by
 
the
 
large
 
amount
 
of
 
federal
 
disaster
 
relief
 
funds
 
that
 
are
 
pending
 
to
 
be
 
disbursed.
 
Over
 
$45
 
billion

remaining
 
obligated
 
disaster
 
recovery
 
funding
 
has
 
been
 
earmarked
 
to
 
support
 
broad
 
based
 
economic
 
development
 
and
 
rebuilding

initiatives.

Growth
 
in
 
economic
 
activity,
 
the
 
robustness
 
of
 
the
 
labor
 
market,
 
supply
 
chain
 
complications
 
and
 
geopolitical
 
matters,
 
have

contributed to rising
 
inflation. In response,
 
the Federal Reserve (the
 
“FED”) has raised interest
 
rates and has
 
been reducing the
 
size of

its balance
 
sheet. Furthermore,
 
the FED
 
signaled that
 
it would
 
continue to
 
implement these
 
policy actions
 
in order
 
to bring
 
inflation

down. The
 
timing and
 
impact of
 
inflation and
 
rising interest
 
rates on
 
our business
 
and related
 
financial results
 
will depend
 
on future

developments, which are highly uncertain and difficult
 
to predict.

We
 
delivered positive
 
results in
 
2022, driven
 
by continued
 
execution of
 
strategic initiatives
 
including loan
 
and lease
 
growth,
 
and

expanded
 
fee
 
income
 
while
 
maintaining
 
disciplined
 
expense
 
management.
 
Credit
 
continues
 
to
 
perform
 
well,
 
reflecting
 
lower

nonaccrual and adversely
 
classified loan balances,
 
as well as charge
 
-off rates that
 
are still lower
 
than pre-pandemic
 
levels. We
 
remain

vigilant to
 
changing global
 
economic conditions
 
and the
 
effect that
 
restrictive monetary
 
policies may
 
continue to
 
have on
 
the overall

inflationary
 
environment.
 
We
 
believe
 
that
 
the Corporation
 
is well
 
equipped
 
to manage
 
rising market
 
challenges
 
going into
 
the
 
next

cycle.
 
We
 
are
 
highly
 
encouraged
 
by
 
the
 
growth
 
prospects
 
in
 
our
 
main
 
market,
 
which
 
should
 
continue
 
to
 
benefit
 
from
 
rebuilding

activity over the next few years.

42

See
 
“Update
 
on
 
the
 
Puerto
 
Rico
 
Fiscal
 
Situation”
 
below
 
for
 
additional
 
information
 
on
 
the
 
economic
 
and
 
fiscal
 
crisis
 
that
 
Puerto

Rico has experienced for more than a decade.

Return of Capital to Shareholders

In 2022, the
 
Corporation returned
 
approximately $363
 
million, or 119%
 
of 2022 earnings,
 
to its shareholders
 
through $275
 
million

in repurchases of common stock and the payment of $88 million in common
 
stock dividends.

For the year ended December
 
31, 2022, the Corporation repurchased
 
approximately 19.4 million shares of
 
common stock for a total

purchase
 
price
 
of
 
$275.0
 
million
 
under
 
previously
 
publicly-announced
 
stock
 
repurchase
 
programs.
 
Of
 
this
 
total,
 
$225.0
 
million
 
of

common
 
stock,
 
representing
 
16.0
 
million
 
common
 
shares
 
at
 
a
 
weighted-average
 
price
 
of
 
$14.06,
 
were
 
repurchased
 
under
 
the
 
$350

million
 
stock
 
repurchase
 
program
 
announced
 
on
 
April
 
27,
 
2022
 
(the
 
“2022
 
Repurchase
 
Plan”).
 
As
 
of
 
February
 
21,
 
2023,
 
the

Corporation
 
has
 
repurchased
 
approximately
 
18.1
 
million
 
shares
 
of
 
common
 
stock
 
totaling
 
$254.9
 
million
 
through
 
open
 
market

purchases
 
under
 
the
 
2022
 
Repurchase
 
Plan.
 
With
 
the
 
additional
 
purchases,
 
the
 
Corporation
 
has
 
$95.1
 
million
 
remaining
 
for
 
share

repurchases under the 2022 Repurchase Plan.

On February
 
9, 2023,
 
the Corporation’s
 
Board of
 
Directors declared
 
a quarterly
 
cash dividend
 
of $0.14
 
per common
 
share, which

represents an
 
increase of
 
$0.02 per
 
common share,
 
or a
 
17% increase,
 
compared to
 
its most
 
recent dividend
 
paid in
 
December 2022.

The dividend
 
is payable
 
on March
 
10,
 
2023 to
 
shareholders of
 
record
 
at the
 
close of
 
business on
 
February
 
24, 2023.
 
The increased

quarterly dividend level equates to an annualized dividend of $0.56 per common
 
share.

LIBOR Transition

On January 1, 2022,
 
the publication of certain
 
U.S. Dollar (“USD”) LIBOR
 
settings ceased. The
 
publication of the most
 
commonly

used
 
overnight,
 
one-month,
 
three-month,
 
six-month
 
and
 
twelve-month
 
USD
 
LIBOR
 
will
 
cease
 
immediately
 
after
 
June
 
30,
 
2023,

except that
 
per the
 
UK Financial
 
Conduct Authority
 
(the “FCA”)
 
proposal, the
 
one-, three-,
 
and six-month
 
tenors will
 
continue to
 
be

published on a “non-representative,” synthetic basis until September
 
30, 2024.

The Adjustable
 
Interest Rate
 
Act (the
 
“LIBOR Act”),
 
that was
 
enacted in
 
March 2022,
 
provides
 
a statutory
 
framework to
 
replace

USD LIBOR
 
for
 
contracts
 
governed
 
by
 
U.S.
 
law
 
that
 
do
 
not have
 
clear
 
and
 
practicable
 
provisions
 
for
 
replacing
 
USD LIBOR
 
after

June
 
30,
 
2023
 
(“tough
 
legacy
 
contracts”).
 
On
 
December
 
16,
 
2022,
 
the
 
FED
 
adopted
 
final
 
rule
 
12
 
C.F.R.
 
Part
 
253,
 
“Regulation

Implementing
 
the LIBOR
 
Act (Regulation
 
ZZ)” (the
 
“Final Rule”).
 
The Final
 
Rule identifies
 
replacement benchmark
 
rates based
 
on

the
 
Secured
 
Overnight
 
Financing
 
Rate (“SOFR”)
 
to
 
replace
 
the
 
aforementioned
 
USD LIBOR
 
settings
 
that
 
will
 
cease
 
after
 
June
 
30,

2023
 
in
 
contracts
 
subject
 
to
 
the
 
LIBOR
 
Act.
 
Under
 
the
 
final
 
rule,
 
tough
 
legacy
 
contracts
 
will
 
be
 
converted
 
by
 
operation
 
of
 
law
 
to

various forms of SOFR, along with a spread
 
adjustment, upon a LIBOR replacement date (i.e.,
 
the first London banking day after June

30, 2023).
 
The spread
 
adjustment was
 
designed to
 
compensate for
 
USD LIBOR
 
being higher
 
than SOFR in
 
two regards.
 
First, USD

LIBOR
 
is
 
an
 
unsecured
 
rate
 
while
 
SOFR
 
is
 
a
 
secured
 
rate.
 
Second,
 
USD
 
LIBOR
 
includes
 
term
 
premia.
 
In
 
addition,
 
the
 
final
 
rule

codifies
 
safe harbor
 
protections
 
for
 
selection or
 
use of
 
SOFR as
 
a replacement
 
benchmark
 
and
 
clarifies who
 
would be
 
considered
 
a

“determining person”
 
able to
 
elect a
 
replacement benchmark
 
when USD
 
LIBOR ceases
 
to be
 
published as
 
representative on
 
June 30,

2023.

As of
 
December 31,
 
2022, the
 
Corporation’s
 
risk exposure
 
to USD
 
LIBOR consisted
 
of the
 
following: (i)
 
$1.4 billion
 
of variable-

rate
 
commercial
 
and
 
construction
 
loans
 
(including
 
unused
 
commitments),
 
(ii)
 
$44.6
 
million
 
of
 
U.S.
 
agencies
 
debt
 
securities
 
and

private label mortgage-backed securities
 
(“MBS”) held as part
 
of the available-for-sale
 
debt securities portfolio, (iii)
 
$124.4 million of

Puerto
 
Rico
 
municipalities
 
bonds
 
held
 
as
 
part
 
of
 
the
 
held-to-maturity
 
debt
 
securities
 
portfolio,
 
and
 
(iv)
 
$183.8
 
million
 
of
 
junior

subordinated
 
debentures
 
reported
 
as
 
other
 
borrowings
 
in
 
the
 
accompanying
 
audited
 
consolidated
 
statements
 
of
 
financial
 
condition

included
 
in