FIRST BANCORP /PR/ (FBP) FY 2021 MD&A

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

47

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

48

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.

49

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