First BanCorp. Announces Earnings for the Quarter and Year Ended December 31, 2016

First BanCorp. (the “Corporation”) (NYSE: FBP), the bank holding company for FirstBank Puerto Rico (“FirstBank” or “the Bank”), today reported net income of $23.9 million for the fourth quarter of 2016, or $0.11 per diluted share, compared to $24.1 million, or $0.11 per diluted share, for the third quarter of 2016 and $15.0 million, or $0.07 per diluted share, for the fourth quarter of 2015.

For the year ended December 31, 2016, the Corporation reported net income of $93.2 million, or $0.43 per diluted share, compared to $21.3 million, or $0.10 per diluted share, for the year ended December 31, 2015.

The financial results for 2016 and 2015 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:

Year ended December 31, 2016 and interim periods

• Charge to the provision for loan and lease losses of $1.8 million ($1.1 million after-tax) related to the sale of the $16.3 million pool of non-performing assets in the fourth quarter of 2016, mostly comprised of non-performing commercial loans.
• Gain of $1.5 million ($1.2 million after-tax) from recovery of a residual CMO previously written off once the trust was liquidated in the fourth quarter of 2016.
• Brokerage and insurance commissions of $1.7 million ($1.0 million after-tax) net of incentive costs, recorded in the fourth quarter of 2016, primarily from the sale of large fixed annuities contracts.
• Adjustment of $2.7 million ($1.7 million after-tax) recorded in the fourth quarter of 2016 to reduce the credit card rewards program liability due to the expiration of reward points earned by customers up to September 2013 (the conversion date of the credit card portfolio acquired from FIA in May 2012). Refer to the Non-Interest Expenses discussion below for additional information.
• Costs of $0.6 million associated with the secondary offering of the Corporation’s common stock by certain of the existing stockholders. The costs, incurred at the holding company level, had no effect on the income tax expense in 2016.
• Gain of $6.1 million ($5.9 million after-tax) on sales of $198.7 million of U.S. agency MBS that carried an average yield of 2.36% recorded in the third quarter of 2016.
• Severance payments of $0.3 million ($0.2 million after-tax) related to permanent job discontinuance recorded in the third quarter of 2016.
• Other-than-temporary impairment (“OTTI”) charges on debt securities, primarily on Puerto Rico Government debt securities, of $6.7 million recorded in the first quarter of 2016. No tax benefit was recognized for the OTTI charges.
• Gain of $4.2 million on the repurchase and cancellation of $10 million in trust preferred securities recorded in the first quarter of 2016, reflected in the statement of income set forth below as “Gain on early extinguishment of debt.” The gain, realized at the holding company level, had no effect on the income tax expense in 2016.

Year ended December 31, 2015 and interim periods

• Charges of $48.7 million ($29.7 million after-tax) related to a bulk sale of assets with a carrying value of $150.4 million (the “bulk sale of assets”) completed in the second quarter of 2015, mostly comprised of non-performing commercial loans.
• OTTI charges on debt securities, primarily on Puerto Rico Government debt securities, of $3.0 million and $16.5 million for the quarter and year ended December 31, 2015, respectively. No tax benefit was recognized for the OTTI charges.
• Gain of $7.0 million ($4.3 million after tax) associated with a long-term strategic marketing alliance entered into during the fourth quarter of 2015 as part of the sale of the FirstBank Puerto Rico merchant contracts portfolio.
• Costs of $2.2 million ($1.4 million after-tax) related to a voluntary early retirement program recorded in the fourth quarter of 2015.
• Bargain purchase gain of $13.4 million ($8.2 million after-tax) on assets acquired and liabilities assumed from Doral Bank recorded in the first quarter of 2015.
• Costs of $4.6 million ($2.8 million after-tax) for the year ended December 31, 2015 related to the conversion of loan and deposit accounts acquired from Doral Bank to the FirstBank systems.

The following table reconciles for the fourth and third quarters of 2016, the fourth quarter of 2015, and the years ended December 31, 2016 and 2015 the reported net income to adjusted net income, a non-GAAP financial measure that excludes 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:

Aurelio Alemán, President and Chief Executive Officer of First BanCorp., commented: “We are quite pleased with our results for the fourth quarter and fiscal year end 2016. Throughout the uncertain macroeconomic backdrop in Puerto Rico our institution continues to improve performance metrics and demonstrate improving earnings capabilities. We generated net income for the fourth quarter of $23.9 million, or $0.11 per diluted share, and $93.2 million, or $0.43 per diluted share for the year. Adjusted pre-tax pre-provision income reached $208 million for 2016 and efficiency ratio improved to 62% for the year.

During the fourth quarter, we saw improvement in all of our key franchise metrics: Our loan portfolio grew $16 million despite the sale of non-performing assets. Deposits net of government and brokered increased $29 million, while reducing reliance on brokered CDs by $119 million. We were able to expand our net interest margin to 4.30% and further reduce our expense base. Our nonperforming assets declined slightly by $9.5 million compared to the prior quarter. We continue to experience some migration into nonperforming assets but remain diligent in our efforts to reduce these.

The involvement of the US Congress, the recently approved PROMESA law and the change in administration in Puerto Rico are viewed as drivers for improved fiscal governance, debt balancing and economic stability. Our Puerto Rico government exposure declined slightly and we remain encouraged and focused on achieving the resolution to our nonperforming Puerto Rico government exposures.

On the capital front, during the course of 2016 we repurchased a small portion of our trust preferred securities; we brought current the accrued and unpaid interest on our trust preferred securities; we successfully completed a secondary offering; and we reinstated the dividends on our preferred stock. Our turnaround story is well underway and our leadership team is committed to continue enhancing shareholder value as we navigate through the Puerto Rico economic turnaround.”

This press release includes certain non-GAAP financial measures, including adjusted net income, adjusted provision for loan and lease losses, adjusted net charge-offs, adjusted non-interest income, adjusted non-interest expenses, adjusted pre-tax, pre-provision income, adjusted net interest income and margin, certain capital ratios, and certain other financial measures that exclude the effect of 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, and should be read in conjunction with the discussion below in “Basis of Presentation – Use of Non-GAAP Financial Measures” and the accompanying tables (Exhibit A), which are an integral part of this press release.

INCOME BEFORE INCOME TAXES AND RECONCILIATION TO ADJUSTED PRE-TAX, PRE-PROVISION INCOME

Income before income taxes for the fourth quarter of 2016 amounted to $37.2 million compared to $34.5 million for the third quarter of 2016. The following table reconciles income before income taxes to adjusted pre-tax, pre-provision income for the last five quarters. Adjusted pre-tax, pre-provision income for the fourth quarter of 2016 amounted to $55.0 million, up $4.8 million from the third quarter of 2016:

Adjusted pre-tax, pre-provision income is a non-GAAP financial measure that management believes is useful to investors in analyzing the Corporation’s performance and trends. This metric is income before income taxes adjusted to exclude the provision for loan and lease losses, gains or losses on sales of investment securities and impairments, and fair value adjustments on derivatives. In addition, from time to time, earnings are adjusted also for 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 (for additional information about this non-GAAP financial measure, see Basis of Presentation - Adjusted Pre-Tax, Pre-Provision Income).

NET INTEREST INCOME

Net interest income, excluding fair value adjustments on derivatives (“valuations”), and net interest income on a tax-equivalent basis are non-GAAP financial measures. See Basis of Presentation – Net Interest Income, Excluding Valuations, and on a Tax-Equivalent Basis below for additional information. The following table reconciles net interest income in accordance with GAAP to net interest income excluding valuations, and net interest income on a tax-equivalent basis for the last five quarters. The table also reconciles net interest spread and net interest margin on a GAAP basis to these items excluding valuations, and on a tax-equivalent basis.

Net interest income for the fourth quarter of 2016 amounted to $121.1 million, an increase of $2.9 million when compared to net interest income of $118.2 million for the third quarter of 2016. The increase in net interest income was mainly due to:

• A $1.7 million increase in interest income on loans mainly due to the recovery of interest income of approximately $1.6 million on certain commercial non-performing loans that were fully paid off in the fourth quarter.
• A $1.1 million increase in net interest income resulting from the use of proceeds from sales of U.S. agency MBS and cash balances deposited in the Federal Reserve Bank to repay maturing repurchase agreements and brokered CDs in the fourth quarter. The Corporation repaid in the fourth quarter $300 million of repurchase agreements that carried an average cost of 3.63%. In addition, the average balance of brokered CDs decreased by $167.9 million to $1.5 billion in the fourth quarter. The average all-in cost of the $349.8 million brokered CDs that matured in the fourth quarter was 0.99%.
• A $0.45 million increase in interest income associated with a lower U.S. agency MBS premium amortization expense. The fourth quarter U.S. agency MBS prepayments decreased to $61.5 million compared to $68.5 million in the third quarter.

Partially offset by:

• A $0.3 million decrease in interest income associated with the full quarter impact of the discontinuance of interest income recognition on bonds of the Government Development Bank for Puerto Rico (“GDB”) and the Puerto Rico Public Buildings Authority that were placed in non-performing status during the third quarter of 2016.

Net interest margin was 4.30%, up 24 basis points from the third quarter of 2016. The increase was primarily driven by the aforementioned use of cash balances and proceeds from sales of U.S. agency MBS to repay certain high-cost maturing repurchase agreements and brokered CDs, the recovery of interest income on certain non-performing commercial loans that were fully paid off in the fourth quarter, and the change in mix of earning assets. Loans increased as a percentage of interest-earning assets from 76.3% in the third quarter of 2016 to 79.1% in the fourth quarter of 2016.

PROVISION FOR LOAN AND LEASE LOSSES

The provision for loan and lease losses for the fourth quarter of 2016 was $23.2 million compared to $21.5 million for the third quarter of 2016, an increase driven by the $1.8 million charge to the provision related to the sale of the $16.3 million pool of non-performing assets in the fourth quarter of 2016.

During the fourth quarter of 2016 the Corporation completed the sale of a pool of non-performing assets, primarily comprised of non-performing commercial loans, with a book value of $16.3 million (principal balance of $19.5 million), in a cash transaction. The proceeds from this sale were $11.7 million. Approximately $2.8 million of reserves had been allocated to the loans. This transaction resulted in total net charge-offs of $4.6 million and an incremental pre-tax loss of $1.8 million recorded as a charge to the provision for loan and lease losses.

Excluding the $1.8 million charge related to the sale of the $16.3 million pool of non-performing assets, the adjusted provision of $21.4 million for the fourth quarter of 2016 decreased $0.1 million compared to the provision for loan and lease losses of $21.5 million for the third quarter of 2016. The $0.1 million decrease in the adjusted provision for loan and lease losses was driven by the following variances:

• A $1.1 million decrease in the provision for residential mortgage loans primarily reflecting a lower level of charge-offs and a decrease in the migration of loans to late stages of delinquency.
• A $0.3 million decrease in the adjusted provision for commercial and construction loans mainly due to a $3.6 million decrease in the provision for impaired construction loans in the Virgin Islands, partially offset by the impact in the previous quarter of reserve releases related to upgrades in the classification of certain commercial loans.

Partially offset by:

• A $1.3 million increase in the provision for consumer loans reflecting higher provisions for auto loans, credit cards and small loans.

See Credit Quality below for additional information regarding the allowance for loan and lease losses, including variances in net charge-offs.

NON-INTEREST INCOME

Non-interest income for the fourth quarter of 2016 amounted to $23.6 million, compared to $26.1 million for the third quarter of 2016. The $2.6 million decrease was primarily related to the effect in the third quarter of the $6.1 million gain on sales of U.S. agency MBS, partially offset by a $1.7 million increase in brokerage and insurance commissions, primarily related to the sale of large fixed annuities contracts, and a $1.5 million gain recorded in the fourth quarter from the recovery of a residual CMO previously written off.

On a non-GAAP basis, excluding the effect of the aforementioned items, the adjusted non-interest income of $20.2 million for the fourth quarter of 2016 increased $0.2 million compared to adjusted non-interest income of $20.0 million for the third quarter of 2016. The $0.2 million increase in adjusted non-interest income was primarily due to:

• A $0.4 million increase in income from debit card interchange fees and ATM fees. Higher interchange fees are closely related to seasonality, while the increase in ATM fees reflects both changes in the fee structure and the expansion of the Bank’s automatic teller network with a total of 80 new locations.

Partially offset by:

• A $0.2 million decrease in revenues from the mortgage banking business driven by a $0.4 million decrease in gains on sales of residential mortgage loans in the secondary market to Fannie Mae and Freddie Mac, partially offset by the impact in the previous quarter of a $0.3 million increase to the valuation allowance related to servicing assets. Also, gains on sales of residential mortgage loans to Ginnie Mae decreased by $2.3 million due to higher market interest rates, partially offset by a $2.2 million increase in realized and unrealized gains on TBAs MBS forward contracts. Total loans sold in the secondary market to U.S. government-sponsored entities amounted to $135.5 million with a related gain of $1.9 million in the fourth quarter of 2016, compared to $127.9 million with a related gain of $4.6 million in the third quarter of 2016.

NON-INTEREST EXPENSES

Non-interest expenses in the fourth quarter of 2016 amounted to $84.2 million, a decrease of $4.1 million from $88.3 million in the third quarter of 2016. The decrease includes the effect of a $2.7 million adjustment recorded in the fourth quarter to reduce the credit card rewards liability due to the expiration of reward points earned by customers up to September 2013 (the conversion date of the credit card portfolio acquired from FIA in May 2012). Most of these points had been accrued at acquisition date and ultimately experienced a redemption pattern materially different from those points accrued after conversion. The variance also includes the effect of costs of $0.6 million associated with the secondary offering of the Corporation’s common stock by certain of the existing stockholders, and the impact in the previous quarter of $0.3 million of severance payments related to permanent job discontinuance.

On a non-GAAP basis, excluding the effect of the aforementioned items, the adjusted non-interest expenses of $86.3 million for the fourth quarter of 2016 decreased $1.7 million compared to adjusted non-interest expenses of $88.0 million for the third quarter of 2016. The $1.7 million decrease in adjusted non-interest expenses was primarily due to:

• A $1.4 million decrease in the provision for unfunded loan commitments and letters of credit, included as part of “Other” in the table above, primarily related to a floor plan revolving credit facility.
• A $0.4 million decrease in the FDIC insurance premium expense reflecting, among other things, the effect of an improved earnings trend as well as the effect of reductions in brokered deposits and average assets.
• A $0.3 million decrease in local regulatory supervisory fees, included as part of “Other insurance and supervisory fees” in the table above, tied to the overall decrease in total assets.
• A $0.3 million decrease in adjusted business promotion expenses, driven by a $0.8 million adjustment associated with the reduction in value assigned to each point of a deposit account rewards program, partially offset by higher marketing expenses in the fourth quarter.
• A $0.2 million decrease in losses on OREO operations, primarily related to lower write-downs to the value of OREO properties.

Partially offset by:

• A $0.6 million increase in legal reserves, included as part of “Other” in the table above, mainly related to labor-related cases.
• A $0.2 million increase in adjusted total professional service fees, primarily associated with consulting services to assess several technology systems.

INCOME TAXES

The Corporation recorded an income tax expense for the fourth quarter of 2016 of $13.3 million compared to $10.4 million for the third quarter of 2016. The increase in the income tax expense for the fourth quarter was driven by a higher than expected proportion of income from taxable sources compared to income from exempt sources. As of December 31, 2016, the Corporation had a net deferred tax asset of $286.3 million (net of a valuation allowance of $207.2 million, including a valuation allowance of $171.0 million against the deferred tax assets of the Corporation’s banking subsidiary, FirstBank).

CREDIT QUALITY

Non-Performing Assets

Variances in credit quality metrics:

• Total non-performing assets decreased by $9.5 million to $734.5 million as of December 31, 2016, compared to $744.0 million as of September 30, 2016. Total non-performing loans, including non-performing loans held for sale, decreased by $6.6 million from $574.8 million as of the end of the third quarter of 2016 to $568.2 million as of December 31, 2016. The decrease in non-performing assets was primarily attributable to the aforementioned sale of the $16.3 million pool of non-performing assets, primarily non-performing commercial loans, as well as commercial loan charge-offs and collections, partially offset by non-performing loan inflows in the quarter.
• Inflows to non-performing loans held for investment were $67.9 million, an increase of $17.5 million, compared to inflows of $50.4 million in the third quarter of 2016. The increase was driven by the inflow of a $33.7 million commercial and industrial loan in the Puerto Rico region. Inflows to non-performing commercial and construction loans increased by $24.3 million to $37.3 million during the fourth quarter compared to $13.0 million in the third quarter of 2016. Higher inflows in the commercial and construction portfolios were partially offset by a $5.5 million decrease in inflows of non-performing residential mortgage loans and a $1.4 million decrease in inflows of non-performing consumer loans.
• Adversely classified commercial and construction loans held for investment decreased by $57.3 million to $489.4 million as of December 31, 2016.
• The OREO balance decreased by $1.8 million, driven by sales of $7.9 million and adjustments to the OREO value of $3.9 million, partially offset by additions of $10.0 million in the fourth quarter, primarily residential properties in Puerto Rico.
• Total troubled debt restructuring (“TDR”) loans held for investment were $647.0 million as of December 31, 2016, down $9.3 million from September 30, 2016. Approximately $384.9 million of total TDR loans held for investment were in accrual status as of December 31, 2016.

Allowance for Loan and Lease Losses

The following table sets forth information concerning the allowance for loan and lease losses during the periods indicated:

• The ratio of the allowance for loan and lease losses to total loans held for investment decreased to 2.31% as of December 31, 2016 compared to 2.42% as of September 30, 2016, primarily due to charge-offs on impaired commercial loans and loans included in the sale of non-performing assets recorded in the fourth quarter against previously-established specific reserves. The ratio of the total allowance to non-performing loans held for investment was 36.71% as of December 31, 2016 compared to 37.77% as of September 30, 2016.

The following table sets forth information concerning the composition of the Corporation’s allowance for loan and lease losses as of December 31, 2016 and September 30, 2016 by loan category and by whether the allowance and related provisions were calculated individually for impairment purposes or through a general valuation allowance:

Net Charge-Offs

The following table presents annualized net charge-offs to average loans held-in-portfolio:

The ratios above are based on annualized net charge-offs and are not necessarily indicative of the results expected in subsequent periods.

Net charge-offs for the fourth quarter of 2016 were $31.7 million, or an annualized 1.43% of average loans, compared to $41.9 million, or an annualized 1.90% of average loans, in the third quarter of 2016. Net charge-offs in the fourth quarter included $4.6 million associated with the sale of the $16.3 million pool of non-performing assets. Excluding the impact of net charge-offs related to the sale of the $16.3 million pool of non-performing assets, adjusted total net charge-offs in the fourth quarter of 2016 were $27.0 million, or an annualized 1.22% of average loans, a decrease of $14.9 million compared to the third quarter of 2016. The decrease of $14.9 million in adjusted net charge-offs was mainly related to:

• A $12.6 million decrease in commercial and construction loan adjusted net charge-offs, primarily related to the impact in the previous quarter of charge-offs of $13.7 million associated with two of the three facilities guaranteed by the Puerto Rico Tourism Development Fund (“TDF”).

• A $2.1 million decrease in residential mortgage loan net charge-offs, primarily related to loans evaluated for impairment based on delinquency and loan-to-value levels.
• A $0.2 million decrease in consumer loan net charge-offs, primarily related to boat loans.

STATEMENT OF FINANCIAL CONDITION

Total assets were approximately $11.9 billion as of December 31, 2016, down $152.8 million from September 30, 2016.

The decrease was mainly due to:

• A $229.3 million decrease in cash and cash equivalents primarily related to liquidity used to repay maturing brokered CDs and repurchase agreements, and the purchase of investments securities, as further explained below.

Partially offset by:

• A $52.3 million increase in investment securities driven by:
  • Purchases of approximately $199.1 million of securities issued by U.S. agencies with an aggregate average yield of 2.56%, including: (i) $193.5 million of U.S. agencies MBS and (ii) $5.6 million of U.S. agencies callable debentures.
  • A $14.2 million increase in FHLB stock.
    
    Partially offset by:
  • Prepayments of approximately $61.5 million of U.S. agencies MBS.
  • The maturity or call prior to the scheduled maturity of $54.6 million of U.S. agencies debt securities.
  • A $38.8 million decrease in the fair value of investment securities available for sale.
• A $16.4 million increase in total loans, primarily due to a growth of $75.4 million in the Florida region reflected in all major loan categories and a $16.4 million increase in the Virgin Islands region particularly related to loans granted to government entities. The aforementioned increases were partially offset by a $75.3 million decrease in the Puerto Rico region, reflecting a $30.4 million decrease in commercial and construction loans that was driven by the sale of non-performing loans and charge-offs, a $30.4 million decrease in residential mortgage loans, and a $14.5 million decrease in consumer loans. The allowance for loan and lease losses decreased $8.5 million to $205.6 million as of December 31, 2016 from $214.1 million as of the end of the third quarter of 2016.
  
  Total loan originations, including refinancings, renewals, and draws from existing revolving and non-revolving commitments, amounted to approximately $757.1 million, compared to $803.6 million in the third quarter of 2016. These figures exclude the credit card utilization activity. Commercial and construction loan originations decreased by $46.9 million to $418.7 million in the fourth quarter of 2016 from $465.6 million in the third quarter of 2016. Consumer loan originations increased by $6.0 million to $144.9 million in the fourth quarter of 2016 compared to $138.9 million in the third quarter of 2016. Residential mortgage loan originations and purchases decreased by $5.7 million to $193.5 million in the fourth quarter of 2016 compared to $199.1 million in the third quarter of 2016.

Total liabilities were approximately $10.1 billion as of December 31, 2016, down $139.2 million from September 30, 2016.

The decrease was mainly due to:

• The repayment at maturity of $300 million of repurchase agreements that carried an average cost of 3.63%.
• A $118.8 million decrease in brokered CDs. The Corporation redeemed in the fourth quarter approximately $349.8 million of maturing brokered CDs with an all-in cost of 0.99%, partially offset by issuances of brokered CDs of approximately $231.0 million with an all-in cost of 1.31%.
• A $60.8 million decrease in government deposits, including decreases of $54.6 million and $6.2 million in the Puerto Rico and the Virgin Islands regions, respectively.

Partially offset by:

• A $315.0 million increase in FHLB advances, including new 2-3 Year FHLB advances totaling $145.0 million with an average cost of 1.69% and short-term FHLB advances totaling $170.0 million maturing in January 2017.

• A $29.5 million increase in deposits, excluding government deposits and brokered CDs, reflecting increases of $30.3 million and $16.9 million in the Puerto Rico and the Virgin Islands regions, respectively, partially offset by a $17.7 million reduction in the Florida region.

Total stockholders’ equity amounted to $1.8 billion as of December 31, 2016, a decrease of $13.6 million from September 30, 2016, mainly driven by:

• A decrease of $38.8 million in other comprehensive income mainly related to the decrease in the fair value of U.S. agency MBS driven by higher market interest rates.

Partially offset by:

• The net income of $23.9 million reported in the fourth quarter.

The Corporation’s common equity tier 1 capital, tier 1 capital, total capital and leverage ratios under the Basel III rules as of December 31, 2016 were 17.77%, 17.77%, 21.37% and 13.70%, respectively, compared to common equity tier 1 capital, tier 1 capital, total capital and leverage ratios of 17.64%, 17.64%, 21.27%, and 13.04%, respectively, as of the end of the third quarter of 2016. The Corporation paid interest for the fourth quarter of 2016 on the subordinated debt associated with its trust preferred securities and paid dividends on its non-cumulative perpetual monthly income preferred stock in December 2016. As of December 31, 2016, the Corporation is current on all interest payments related to its subordinated debt.

Meanwhile, the common equity tier 1 capital, tier 1 capital, total capital and leverage ratios as of December 31, 2016 of our banking subsidiary, FirstBank Puerto Rico, were 16.95%, 19.56%, 20.83%, and 15.10%, respectively, compared to common equity tier 1 capital, tier 1 capital, total capital and leverage ratios of 16.83%, 19.46%, 20.73% and 14.40%, respectively, as of the end of the third quarter of 2016.

As previously announced, a secondary offering of the Corporation’s common stock by certain of the Corporation’s existing stockholders was completed on December 5, 2016. Funds affiliated with Thomas H. Lee Partners (“THL”) sold 9 million shares of common stock, and funds managed by Oaktree Capital Management, L.P. (“Oaktree”) sold 9 million shares of common stock. In addition, the underwriters exercised their option to purchase an additional 2.7 million shares of common stock from the selling stockholders. The Corporation did not receive any proceeds from the offering. As of December 31, 2016, each of THL and Oaktree owns 14.5% of the Corporation’s common stock.

Tangible Common Equity

The Corporation’s tangible common equity ratio increased to 14.34% as of December 31, 2016 from 14.27% as of September 30, 2016.

The following table presents a reconciliation of the Corporation’s tangible common equity and tangible assets over the last five quarters to the comparable GAAP items:

Exposure to Puerto Rico Government

As of December 31, 2016, the Corporation had $323.3 million of direct exposure to the Puerto Rico Government, its municipalities and public corporations, compared to $325.9 million as of September 30, 2016. Approximately $191.9 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. Approximately $6.9 million consisted of loans to units of the central government, and approximately $81.9 million consisted of loans to public corporations, including the direct exposure to the Puerto Rico Electric Power Authority (“PREPA”) with a book value of $65.5 million as of December 31, 2016. The Corporation’s total direct exposure also includes obligations of the Puerto Rico Government with an amortized cost of $42.7 million as part of its available-for-sale investment securities portfolio, net of $22.2 million in cumulative other-than-temporary credit impairment charges, and recorded on its books at a fair value of $26.8 million as of December 31, 2016.

In addition, the Corporation had financings to the hotel industry in Puerto Rico guaranteed by the TDF with a book value of $111.8 million as of December 31, 2016, down $1.0 million, compared to $112.8 million as of September 30, 2016. As previously reported, the Corporation’s exposure to commercial loans guaranteed by the TDF was placed in non-accrual status in the first quarter of 2016 and interest payments collected are now applied against principal. Approximately $2.0 million of interest payments received on loans guaranteed by the TDF since late March 2016 have been applied against principal. The largest of these three facilities is current on contractual payments. The Corporation has been receiving partial payments from the other two facilities since their operations are insufficient to cover the entire contractual payments and the Corporation is not receiving collections from the TDF guarantee. As of December 31, 2016, the total reserve coverage ratio related to commercial loans extended to or guaranteed by the Puerto Rico Government (excluding municipalities) was 17%.

The exposure to municipalities in Puerto Rico includes $156.2 million of financing arrangements with Puerto Rico municipalities that were issued in bond form, but underwritten as loans with features that are typically found in commercial loans. These bonds are accounted for as held-to-maturity investment securities.

As of December 31, 2016, the Corporation had $408.8 million of public sector deposits in Puerto Rico, compared to $463.5 million as of September 30, 2016. Approximately 28% is from municipalities and municipal agencies in Puerto Rico and 72% is from public corporations and the central government and agencies in Puerto Rico.

Conference Call / Webcast Information

First BanCorp’s senior management will host an earnings conference call and live webcast on Thursday, January 26, 2017, at 10:00 a.m. (Eastern Time). The call may be accessed via a live Internet webcast through the investor relations section of the Corporation’s web site: www.1firstbank.com or through a dial-in telephone number at (877) 506-6537 or (412) 380–2001 for international callers. The Corporation recommends that listeners go to the web site at least 15 minutes prior to the call to download and install any necessary software. Following the webcast presentation, a question and answer session will be made available to research analysts and institutional investors. A replay of the webcast will be archived in the investor relations section of First BanCorp’s web site, www.1firstbank.com, until January 26, 2018. A telephone replay will be available one hour after the end of the conference call through February 26, 2017 at (877) 344-7529 or (412) 317-0088 for international callers. The replay access code is 10099840.

Safe Harbor

This press release may contain “forward-looking statements” concerning the Corporation’s future economic, operational and financial performance. The words or phrases “expect,” “anticipate,” “intend,” “look forward,” “should,” “would,” “believes” and similar expressions are meant to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by such sections. 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 various factors, including, but not limited to, the following could cause actual results to differ materially from those expressed in, or implied by such forward-looking statements: the ability of the Puerto Rico government or any of its public corporations or other instrumentalities to repay its respective debt obligations, including as a result of payment defaults on the Puerto Rico government general obligations, bonds of the Government Development Bank for Puerto Rico and certain bonds of government public corporations, and recent and any future downgrades of the long-term and short-term debt ratings of the Puerto Rico government, which could exacerbate Puerto Rico’s adverse economic conditions and, in turn, further adversely impact the Corporation; uncertainty as to the ultimate outcomes of actions resulting from the enactment by the U.S. government of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to address Puerto Rico’s financial problems; uncertainty about whether the Corporation will be able to continue to fully comply with the written agreement dated June 3, 2010 that the Corporation entered into with the Federal Reserve Bank of New York (the “New York Fed”), that, among other things, requires the Corporation to serve as a source of strength to FirstBank and that, except with the consent generally of the New York Fed and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), prohibits the Corporation from paying dividends to stockholders or receiving dividends from FirstBank, making payments on trust preferred securities or subordinated debt and incurring, increasing or guaranteeing debt or repurchasing any capital securities and uncertainty whether such consent will be provided for future interest payments on the subordinated debt despite the consents that enabled the Corporation to pay all the accrued but deferred interest payments plus the interest for the second, third and fourth quarters of 2016 on the Corporation’s subordinated debentures associated with its trust preferred securities, and for future monthly dividend on its non-cumulative perpetual preferred stock, despite the consent that enabled the Corporation to pay monthly dividends on its non-cumulative perpetual preferred stock for December and January; a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued recession in Puerto Rico; uncertainty as to the availability of certain funding sources, such as brokered CDs; the Corporation’s reliance on brokered CDs to fund operations and provide liquidity; the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s common stockholders in the future due to the Corporation’s need to receive approval from the New York Fed, the Federal Reserve Board and the Office of the Commissioner of Financial Institutions of Puerto Rico to declare or pay any dividends and to take dividends or any other form of payment representing a reduction in capital from FirstBank or FirstBank’s failure to generate sufficient cash flow to make a dividend payment to the Corporation; the weakness of the real estate markets and of the consumer and commercial sectors and their impact on the credit quality of the Corporation’s loans and other assets, which have contributed and may continue to contribute to, among other things, high levels of non-performing assets, charge-offs and provisions for loan and lease losses and may subject the Corporation to further risk from loan defaults and foreclosures; the ability of FirstBank to realize the benefits of its deferred tax assets subject to the remaining valuation allowance; adverse changes in general economic conditions in Puerto Rico, the U.S., and the U.S. Virgin Islands and British Virgin Islands, including the interest rate environment, market liquidity, housing absorption rates, real estate prices, and disruptions in the U.S. capital markets, which reduced interest margins and affected funding sources, and has affected demand for all of the Corporation’s products and services and reduced the Corporation’s revenues and earnings, and the value of the Corporation’s assets, and may continue to have these effects; 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 other-than-temporary, including additional impairments on the Puerto Rico government’s obligations; uncertainty about regulatory and legislative changes for financial services companies in Puerto Rico, the U.S., and the U.S. and British Virgin Islands, 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 Federal Reserve Board, the New York Fed, the FDIC, government-sponsored housing agencies, and regulators in Puerto Rico and the U.S. and British Virgin Islands; the risk of possible failure or circumvention of controls and procedures and the risk that the Corporation’s risk management policies may not be adequate; 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; the impact on the Corporation’s results of operations and financial condition of acquisitions and dispositions; a need to recognize additional impairments on the Corporation’s financial instruments, goodwill or other intangible assets relating to acquisitions; the risk that downgrades in the credit ratings of the Corporation’s long-term senior debt will adversely affect the Corporation’s ability to access necessary external funds; the impact on the Corporation’s businesses, business practices and results of operations of a potential higher interest rate environment; 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.

Basis of Presentation

Use of Non-GAAP Financial Measures

This press release contains non-GAAP financial measures. Non-GAAP financial measures are used when management believes they will be helpful to an investor’s understanding of the Corporation’s results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation of the non-GAAP financial measure to the comparable GAAP financial measure, can be found in the text or in the attached tables to this earnings release. Any analysis of these non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP.

Tangible Common Equity Ratio and Tangible Book Value per Common Share

The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures 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 also 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.

Adjusted Pre-Tax, Pre-Provision Income

Adjusted pre-tax, pre-provision income is a non-GAAP performance metric that management uses and believes that investors may find useful in analyzing underlying performance trends, particularly in times of economic stress. Adjusted pre-tax, pre-provision income, as defined by management, represents net income (loss) excluding income tax expense (benefit), the provision for loan and lease losses, as well as certain 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.

Net Interest Income, Excluding Valuations, and on a Tax-Equivalent Basis

Net interest income, interest rate spread, and net interest margin are reported excluding the changes in the fair value of derivative instruments and on a tax-equivalent basis in order to provide to investors additional information about the Corporation’s net interest income that management uses and believes should facilitate comparability and analysis. The changes in the fair value of derivative instruments have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively. The tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a marginal income tax rate. Income from tax-exempt earning assets is increased by an amount equivalent to the taxes that would have been paid if this income had been taxable at statutory rates. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread, and net interest margin on a fully tax-equivalent basis. This adjustment puts all earning assets, most notably tax-exempt securities and certain loans, on a common basis that facilitates comparison of results to the results of peers.

Financial measures adjusted to exclude the effect of the sale of the $16.3 million pool of non-performing assets, the bulk sale of assets, the gain from recovery of investments previously written off, brokerage and insurance commissions from the sale of large fixed annuities contracts, adjustment to the credit card rewards liability due to unusually large customer forfeitures, costs associated with the secondary offering, gains on sales of investment securities, severance payments on job discontinuance and expenses related to the voluntary early retirement program above what the Corporation believes are the normal or recurring level of those expenses, OTTI charges on debt securities, the gain on the repurchase and cancellation of trust preferred securities, the gain on sale of merchant contracts, the bargain purchase gain on assets acquired and deposits assumed from Doral Bank and related acquisition and conversion costs.

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 the provision for loan and lease losses, net charge-offs, non-interest income, non-interest expenses and net income to exclude 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. During the fourth and third quarters of 2016, the fourth quarter of 2015 and the years ended December 31, 2016 and 2015, the following items were excluded for one of those reasons:

• Adjusted provision for loan and lease losses for the fourth quarter and year ended December 31, 2016 excludes the effect of the $1.8 million charge related to the sale of the $16.3 million pool of non-performing assets in the fourth quarter of 2016 and for the year ended December 31, 2015 excludes the $46.9 million charge to the provision on the bulk sale of assets executed in the second quarter of 2015.
• Adjusted net charge-offs for the fourth quarter and year ended December 31, 2016 excludes the effect of net charge-offs of $4.6 million related to the sale of the $16.3 million pool of non-performing assets in the fourth quarter of 2016 and for the year ended December 31, 2015 excludes net charge-offs of $61.4 million related to the bulk sale of assets executed in the second quarter of 2015.
• Adjusted non-interest income excludes for the fourth and third quarters of 2016, the fourth quarter of 2015 and the years ended December 31, 2016 and 2015 the following:
  • Gain of $1.5 million from the recovery of a residual CMO previously written off once the trust was liquidated in the fourth quarter of 2016.
  • Brokerage and insurance commissions of $1.8 million from the sale of large fixed annuities contracts recorded in the fourth quarter of 2016.
  • Gain of $6.1 million on sales of U.S. agency MBS recorded in the third quarter of 2016.
  • OTTI charges on debt securities of $3.0 million, $6.7 million, and $16.5 million for the fourth quarter of 2015, and years ended December 31, 2016 and 2015, respectively.
  • Gain of $4.2 million on the repurchase and cancellation of trust preferred securities recorded in the first quarter of 2016.
  • Gain of $7.0 million on the sale of merchant contracts recorded in the fourth quarter of 2015.
  • Loss of $0.6 million on loans held for sale included in the bulk sale of assets executed in the second quarter of 2015.
  • Bargain purchase gain of $13.4 million on assets acquired and liabilities assumed from Doral Bank in the first quarter of 2015.
• Adjusted non-interest expenses excludes for the fourth and third quarters of 2016, the fourth quarter of 2015 and the years ended December 31, 2016 and 2015 the following:
  • A $2.7 million adjustment recorded in the fourth quarter of 2016 to reduce the credit card rewards liability due to the expiration of reward points earned by customers up to September 2013 (the conversion date of the credit card portfolio acquired from FIA in May 2012). Most of these points had been accrued at acquisition date and ultimately experienced a redemption pattern materially different from those points accrued after conversion.
  • Incentive costs of $0.1 million related to the sale of large fixed annuities contracts recorded in the fourth quarter of 2016.
  • Costs of $0.6 million associated with the secondary offering of the Corporation’s common stock by certain of the existing stockholders recorded in the fourth quarter of 2016.
  • Severance payments of $0.3 million related to permanent job discontinuance recorded in the third quarter of 2016.
  • Costs of $2.2 million related to a voluntary early retirement program recorded in the fourth quarter of 2015.
  • Transaction expenses and certain losses totaling $1.2 million related to the bulk sale of assets executed in the second quarter of 2015.
  • Acquisition and conversion costs of $4.6 million related to assets acquired and liabilities assumed from Doral Bank recorded in the first half of 2015.
• Adjusted net income excludes the effect of all the items mentioned in the above bullets for the fourth and third quarters of 2016, the fourth quarter of 2015, and the years ended December 31, 2016 and 2015 and their related tax impacts as follows:
  • Tax benefit of $0.7 million related to the sale of the $16.3 million pool of non-performing assets in the fourth quarter of 2016 (calculated based on the statutory tax rate of 39%).
  • Tax expense of $0.3 million related to the gain from recovery of a residual CMO previously written off, which was recorded in the fourth quarter of 2016 (calculated based on the applicable capital gain tax rate of 20%).
  • Tax expense of $0.7 million related to brokerage and insurance commissions from the sale of large fixed annuities contracts, net of incentive costs, recorded in the fourth quarter of 2016 (calculated based on the statutory tax rate of 39%).
  • Tax expense of $1.1 million related to the adjustment to reduce the credit card rewards liability due to unusually large customer forfeitures, which was recorded in the fourth quarter of 2016 (calculated based on the statutory tax rate of 39%).
  • Tax expense of $0.2 million related to the taxable portion of the gain on sale of U.S. agency MBS, which was recorded in the third quarter of 2016 (calculated based on the applicable capital gain tax rate of 20%).
  • Tax benefit of $0.1 million related to the severance expense, which was recorded in the third quarter of 2016 (calculated based on the statutory tax rate of 39%).
  • Tax expense of $2.7 million related to the gain on sale of merchant contracts, which was recorded in the fourth quarter of 2015 (calculated based on the statutory tax rate of 39%).
  • Tax benefit of $0.9 million related to the voluntary early retirement program expenses, which was recorded in the fourth quarter of 2015 (calculated based on the statutory tax rate of 39%).
  • Tax benefit of $19.0 million related to charges on the bulk sale of assets, including transaction costs, executed in the second quarter of 2015 (calculated based on the statutory tax rate of 39%).
  • Tax expense of $5.2 million related to the bargain purchase gain on assets acquired and liabilities assumed from Doral Bank in the first quarter of 2015 (calculated based on the statutory tax rate of 39%).
  • Tax benefit of $1.8 million related to acquisition and conversion costs of assets acquired and liabilities assumed from Doral Bank in the first half of 2015 (calculated based on the statutory tax rate of 39%).
  • No tax benefit was recorded for the OTTI charges recorded in 2016 and 2015.
  • The gain realized on the repurchase and cancellation of trust preferred securities and costs incurred associated with the secondary offering, recorded at the holding company level, had no effect on the income tax expense in 2016.

Management believes that the adjusted provision for loan and lease losses, adjusted net charge-offs, adjusted non-interest income, adjusted non-interest expenses, and adjusted net income enhance the ability of analysts and investors to analyze trends in the Corporation’s business and better understand the performance of the Corporation. In addition, the Corporation may utilize these non-GAAP financial measures as guides in its budgeting and long-term planning process.

The following table reconciles these non-GAAP financial measures to the corresponding measures presented in accordance with GAAP.