UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-14793

FIRST BANCORP.

 

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Puerto Rico (State or other jurisdiction of incorporation or organization)		66-0561882 (I.R.S. employer identification number)

1519 Ponce de León Avenue, Stop 23 Santurce, Puerto Rico (Address of principal executive offices)		00908 (Zip Code)

(787) 729-8200
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock: 92,542,722 outstanding as of November 2, 2009.

 

 

FIRST BANCORP.
INDEX PAGE

				PAGE
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2009 and December 31, 2008		5
		Consolidated Statements of (Loss) Income (Unaudited) — Quarters ended September 30, 2009 and September 30, 2008 and Nine-months ended September 30, 2009 and September 30, 2008		6
		Consolidated Statements of Cash Flows (Unaudited) — Nine-months ended September 30, 2009 and September 30, 2008		7
		Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) — Nine-months ended September 30, 2009 and September 30, 2008		8
		Consolidated Statements of Comprehensive (Loss) Income (Unaudited) — Quarters ended September 30, 2009 and September 30, 2008 and Nine-months ended September 30, 2009 and September 30, 2008		9
		Notes to Consolidated Financial Statements (Unaudited)		10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		58
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		121
Item 4.		Controls and Procedures		121
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		122
Item 1A.		Risk Factors		122
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		127
Item 3.		Defaults Upon Senior Securities		127
Item 4.		Submission of Matters to a Vote of Security Holders		127
Item 5.		Other Information		127
Item 6.		Exhibits		127
SIGNATURES
EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Forward-Looking Statements

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, First BanCorp (the “Corporation”) may make forward-looking statements in its press releases, other filings with the Securities and Exchange Commission (“SEC”) or in other public or stockholder communications.

     These forward-looking statements may relate to the Corporation’s financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan and lease losses, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting guidance on the Corporation’s financial condition and results of operations. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and are generally identified by the use of words or phrases such as “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe,” “expect,” “may” or similar expressions.

     First BanCorp cautions readers not to place undue reliance on any of these forward-looking statements since they speak only as of the date made and represent First BanCorp’s expectations of future conditions or results and are not guarantees of future performance. The Corporation does not undertake and specifically disclaims any obligations to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of those statements.

     Forward-looking statements are, by their nature, subject to risks and uncertainties. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain important factors that could cause actual results to differ materially to those contained in any forward-looking statement:

	•		the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and its impact on the credit quality of the Corporation’s loans and other assets, including the Corporation’s construction and commercial real estate loan portfolios, which have contributed and may continue to contribute, among other things, to the increase in the levels of non-performing assets, charge-offs and the provision expense;
	•		adverse changes in general economic conditions in the United States and in Puerto Rico, including the interest rate scenario, market liquidity, housing absorption rates and real estate prices, and disruptions in the U.S. capital markets, which may reduce interest margins, impact funding sources and affect demand for all of the Corporation’s products and services and the value of the Corporation’s assets, including the value of derivative instruments used for protection from interest rate fluctuations;
	•		an adverse change in the Corporation’s ability to attract new clients and retain existing ones;
	•		a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued recession in Puerto Rico and the current fiscal problems and budget deficit of the Puerto Rico government;
	•		uncertainty about the legislative and other measures adopted by the Puerto Rico government in response to its fiscal deficit situation and the impact of such measures on several sectors of the Puerto Rico economy;
	•		uncertainty about the effectiveness of the various actions undertaken to stimulate the United States economy and stabilize the United States financial markets, and the impact such actions may have on the Corporation’s business, financial condition and results of operations;
	•		changes in the fiscal and monetary policies and regulations of the federal government, including those determined by the Federal Reserve System (FED), the Federal Deposit Insurance Corporation (FDIC), government-sponsored housing agencies and local regulators in Puerto Rico and the U.S. and British Virgin Islands;
	•		risks of not being able to generate sufficient income to realize the benefit of the deferred tax asset;
	•		risks of not being able to recover the assets pledged to Lehman Brothers Special Financing, Inc.;
	•		risks associated with the soundness of other financial institutions;
	•		changes in the Corporation’s expenses associated with acquisitions and dispositions;
	•		developments in technology;
	•		the impact of Doral Financial Corporation’s financial condition on the repayment of its outstanding secured loans to the Corporation;
	•		the Corporation’s ability to issue brokered certificates of deposit and fund operations;

	•		risks associated with downgrades in the credit ratings of the Corporation’s securities;
	•		general competitive factors and industry consolidation;
	•		risks associated with regulatory and legislative changes for financial services companies in Puerto Rico, the United States, and the U.S. and British Virgin Islands, which could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from those anticipated or projected; and
	•		the risk that the FDIC may further increase the deposit insurance premium and/or require special assessments to replenish its insurance fund, causing an increase in our non-interest expense.

     Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008 as well as “Part II, Item 1A, Risk Factors,” in this Quarterly Report on Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

(In thousands, except for share information)		September 30, 2009				December 31, 2008
ASSETS
Cash and due from banks		$	124,131			$	329,730
Money market investments:
Federal funds sold			71,264				54,469
Time deposits with other financial institutions			600				600
Other short-term investments			20,127				20,934
Total money market investments			91,991				76,003
Investment securities available for sale, at fair value:
Securities pledged that can be repledged			3,330,247				2,913,721
Other investment securities			1,424,742				948,621
Total investment securities available for sale			4,754,989				3,862,342
Investment securities held to maturity, at amortized cost:
Securities pledged that can be repledged			431,561				968,389
Other investment securities			213,539				738,275
Total investment securities held to maturity, fair value of $670,395 (2008 — $1,720,412)			645,100				1,706,664
Other equity securities			78,930				64,145
Loans, net of allowance for loan and lease losses of $471,484 (2008 — $281,526)			13,258,788				12,796,363
Loans held for sale, at lower of cost or market			25,896				10,403
Total loans, net			13,284,684				12,806,766
Premises and equipment, net			195,371				178,468
Other real estate owned			67,493				37,246
Accrued interest receivable on loans and investments			77,532				98,565
Due from customers on acceptances			622				504
Account receivable from investment sales			464,910				—
Other assets			295,432				330,835
Total assets		$	20,081,185			$	19,491,268
LIABILITIES
Deposits:
Non-interest-bearing deposits		$	695,928			$	625,928
Interest — bearing deposits (including $0 and $1,150,959 measured at fair value as of September 30, 2009 and December 31, 2008, respectively)			11,602,862				12,431,502
Total deposits			12,298,790				13,057,430
Loans payable			700,000				—
Securities sold under agreements to repurchase			3,782,134				3,421,042
Advances from the Federal Home Loan Bank (FHLB)			1,200,440				1,060,440
Notes payable (including $13,140 and $10,141 measured at fair value as of September 30, 2009 and December 31, 2008, respectively)			26,531				23,274
Other borrowings			231,959				231,914
Bank acceptances outstanding			622				504
Accounts payable and other liabilities			141,866				148,547
Total liabilities			18,382,342				17,943,151
Commitments and Contingencies (Note 21)
STOCKHOLDERS’ EQUITY
Preferred stock, authorized 50,000,000 shares: issued and outstanding 22,404,000 shares (2008 — 22,004,000) at an aggregate liquidation value of $950,100 (December 31, 2008 — $550,100)			927,374				550,100
Common stock, $1 par value, authorized 250,000,000 shares; issued 102,440,522 (2008 — 102,444,549)			102,440				102,444
Less: Treasury stock (at cost)			(9,898	)			(9,898	)
Common stock outstanding, 92,542,722 shares outstanding (2008 — 92,546,749)			92,542				92,546
Additional paid-in capital			134,201				108,299
Legal surplus			299,006				299,006
Retained earnings			172,625				440,777
Accumulated other comprehensive income, net of deferred tax expense of $6,590 (2008 — $717)			73,095				57,389
Total stockholders’ equity			1,698,843				1,548,117
Total liabilities and stockholders’ equity		$	20,081,185			$	19,491,268

The accompanying notes are an integral part of these statements.

FIRST BANCORP
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(Unaudited)

		Quarter Ended								Nine-Month Period Ended
		September 30,				September 30,				September 30,				September 30,
(In thousands, except per share information)		2009				2008				2009				2008
Interest income:
Loans		$	179,956			$	208,241			$	553,219			$	626,846
Investment securities			61,881				79,077				199,513				211,095
Money market investments			185				974				393				6,046
Total interest income			242,022				288,292				753,125				843,987
Interest expense:
Deposits			72,163				95,089				246,931				301,053
Loans payable			463				240				1,423				240
Federal funds purchased and securities sold under agreements to repurchase			28,327				35,790				87,487				98,698
Advances from FHLB			8,127				10,018				24,736				30,738
Notes payable and other borrowings			3,809				2,534				10,803				9,573
Total interest expense			112,889				143,671				371,380				440,302
Net interest income			129,133				144,621				381,745				403,685
Provision for loan and lease losses			148,090				55,319				442,671				142,435
Net interest (loss) income after provision for loan and lease losses			(18,957	)			89,302				(60,926	)			261,250
Non-interest income:
Other service charges on loans			1,796				1,612				4,848				4,343
Service charges on deposit accounts			3,458				3,170				9,950				9,725
Mortgage banking activities			3,000				1,231				6,179				2,354
Net gain on sale of investments			34,274				132				62,417				16,135
Other-than-temporary impairment losses on investment securities:
Total other-than-temporary impairment losses			—				(696	)			(32,929	)			(1,185	)
Noncredit-related impairment portion on debt securities not expected to be sold (recognized in other comprehensive income)			(209	)			—				31,271				—
Net impairment losses on investment securities			(209	)			(696	)			(1,658	)			(1,185	)
Rental income			390				583				1,246				1,705
Other non-interest income			7,280				7,839				20,475				22,176
Total non-interest income			49,989				13,871				103,457				55,253
Non-interest expenses:
Employees’ compensation and benefits			34,403				35,629				103,117				106,949
Occupancy and equipment			15,291				15,647				47,513				46,167
Business promotion			2,879				4,083				9,831				13,150
Professional fees			3,806				2,724				10,334				12,702
Taxes, other than income taxes			3,893				4,242				11,911				12,256
Insurance and supervisory fees			7,197				4,213				30,491				12,142
Net loss on real estate owned (REO) operations			5,015				5,626				17,016				12,054
Other non-interest expenses			10,293				10,212				33,080				30,906
Total non-interest expenses			82,777				82,376				263,293				246,326
(Loss) income before income taxes			(51,745	)			20,797				(220,762	)			70,177
Income tax (expense) benefit			(113,473	)			3,749				(1,223	)			20,952
Net (loss) income		$	(165,218	)		$	24,546			$	(221,985	)		$	91,129
Net (loss) income attributable to common stockholders		$	(174,689	)		$	14,477			$	(262,741	)		$	60,922
Net (loss) income per common share:
Basic		$	(1.89	)		$	0.16			$	(2.84	)		$	0.66
Diluted		$	(1.89	)		$	0.16			$	(2.84	)		$	0.66
Dividends declared per common share		$	—			$	0.07			$	0.14			$	0.21

The accompanying notes are an integral part of these statements.

FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine-Month Period Ended
		September 30,				September 30,
(In thousands)		2009				2008
Cash flows from operating activities:
Net (loss) income		$	(221,985	)		$	91,129
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation			15,722				14,188
Amortization and impairment of core deposit intangible			6,689				2,695
Provision for loan and lease losses			442,671				142,435
Deferred income tax expense (benefit)			19,202				(23,986	)
Stock-based compensation recognized			70				—
Gain on sale of investments, net			(62,417	)			(16,135	)
Other-than-temporary impairments on available-for-sale securities			1,658				1,185
Derivatives instruments and hedging activities gain			(13,228	)			(31,889	)
Net gain on sale of loans and impairments			(5,919	)			(1,635	)
Net amortization of premiums and discounts and deferred loan fees and costs			724				(956	)
Net increase in mortgage loans held for sale			(21,145	)			—
Amortization of broker placement fees			17,434				10,935
Net amortization (accretion) of premium and discounts on investment securities			5,706				(8,196	)
Decrease in accrued income tax payable			(21,919	)			(13,429	)
Decrease in accrued interest receivable			19,010				17,018
Decrease in accrued interest payable			(24,472	)			(37,906	)
Decrease in other assets			41,716				12,716
Decrease in other liabilities			(4,521	)			(15,378	)
Total adjustments			416,981				51,662
Net cash provided by operating activities			194,996				142,791
Cash flows from investing activities:
Principal collected on loans			2,267,772				2,081,236
Loans originated			(3,362,850	)			(2,858,266	)
Purchases of loans			(142,446	)			(373,997	)
Proceeds from sale of loans			9,510				106,583
Proceeds from sale of repossessed assets			50,035				54,127
Purchase of servicing assets			—				(621	)
Proceeds from sale of available-for-sale securities			1,038,814				389,784
Purchases of securities held to maturity			(8,460	)			(99	)
Purchases of securities available for sale			(2,781,394	)			(3,368,093	)
Principal repayments and maturities of securities held to maturity			1,066,778				1,551,272
Principal repayments of securities available for sale			721,056				255,425
Additions to premises and equipment			(32,625	)			(21,663	)
Proceeds from sale/redemption of other investment securities			4,032				9,474
(Increase) decrease in other equity securities			(14,785	)			4,224
Net cash inflow on acquisition of business			—				5,154
Net cash used in investing activities			(1,184,563	)			(2,165,460	)
Cash flows from financing activities:
Net (decrease) increase in deposits			(758,078	)			1,723,172
Net increase in loans payable			700,000				300,000
Net increase in federal funds purchased and securities sold under agreements to repurchase			361,092				232,290
Net FHLB advances taken (paid)			140,000				(117,000	)
Dividends paid			(43,066	)			(49,633	)
Issuance of preferred stock and associated warrant			400,000				—
Exercise of stock options			—				53
Other financing activities			8				—
Net cash provided by financing activities			799,956				2,088,882
Net (decrease) increase in cash and cash equivalents			(189,611	)			66,213
Cash and cash equivalents at beginning of period			405,733				378,945
Cash and cash equivalents at end of period		$	216,122			$	445,158
Cash and cash equivalents include:
Cash and due from banks		$	124,131			$	151,040
Money market instruments			91,991				294,118
		$	216,122			$	445,158

The accompanying notes are an integral part of these statements.

FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

		Nine-Month Period Ended
		September 30,				September 30,
		2009				2008
		(In thousands)
Preferred Stock:
Balance at beginning of period		$	550,100			$	550,100
Issuance of preferred stock — Series F			400,000				—
Preferred stock discount — Series F, net of accretion			(22,726	)			—
Balance at end of period			927,374				550,100
Common Stock outstanding:
Balance at beginning of period			92,546				92,504
Common stock issued under stock option plan			—				6
Restricted stock forfeited			(4	)			—
Balance at end of period			92,542				92,510
Additional Paid-In-Capital:
Balance at beginning of period			108,299				108,279
Issuance of common stock warrants			25,820				—
Shares issued under stock option plan			—				47
Restricted stock forfeited			4				—
Stock-based compensation recognized			70				—
Other			8				—
Balance at end of period			134,201				108,326
Legal Surplus			299,006				286,049
Retained Earnings:
Balance at beginning of period			440,777				409,978
Net (loss) income			(221,985	)			91,129
Cash dividends declared on common stock			(12,966	)			(19,426	)
Cash dividends declared on preferred stock			(30,106	)			(30,207	)
Accretion of preferred stock discount — Series F			(3,095	)			—
Balance at end of period			172,625				451,474
Accumulated Other Comprehensive Income (Loss), net of tax:
Balance at beginning of period			57,389				(25,264	)
Other comprehensive income (loss), net of tax			15,706				(21,923	)
Balance at end of period			73,095				(47,187	)
Total stockholders’ equity		$	1,698,843			$	1,441,272

The accompanying notes are an integral part of these statements.

FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)

		Quarter Ended								Nine-Month Period Ended
		September 30,				September 30,				September 30,				September 30,
(In thousands)		2009				2008				2009				2008
Net (loss) income		$	(165,218	)		$	24,546			$	(221,985	)		$	91,129
Unrealized losses on available-for-sale debt securities on which an other-than-temporary impairment has been recognized:
Noncredit-related impairment portion on debt securities not expected to be sold			209				—				(31,271	)			—
Reclassification adjustment for other-than-temporary impairment on debt securities included in net income			209				—				1,270				—
All other unrealized gains and losses on available-for-sale securities:
All other unrealized holding gain (loss) arising during the period			59,708				30,773				109,577				(17,306	)
Reclassification adjustments for net gain			—				—
included in net income			(30,242	)			—				(58,385	)			(6,661	)
Reclassification adjustments for other-than-temporary impairment on equity securities			—				696				388				1,185
Income tax (expense) benefit related to items of other comprehensive income			(3,171	)			109				(5,873	)			859
Other comprehensive income (loss) for the period, net of tax			26,713				31,578				15,706				(21,923	)
Total comprehensive (loss) income		$	(138,505	)		$	56,124			$	(206,279	)		$	69,206

The accompanying notes are an integral part of these statements.

FIRST BANCORP

PART I — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

     The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Corporation’s Audited Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the SEC and, accordingly, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2008, included in the Corporation’s 2008 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.

     The results of operations for the quarter and nine-month period ended September 30, 2009 are not necessarily indicative of the results to be expected for the entire year.

Adoption of new accounting requirements and recently issued but not yet effective accounting requirements

     In May 2008, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on financial guarantee insurance contracts requiring that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This guidance also clarifies how the accounting and reporting by insurance entities applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. FASB authoritative guidance on the accounting for financial guarantee insurance contracts is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities which are effective since the first interim period after the issuance of this guidance. The adoption of this guidance did not have a significant impact on the Corporation’s financial statements.

     In June 2008, the FASB issued authoritative guidance for determining whether instrument granted in shared-based payment transactions are participating securities. This guidance applies to entities with outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends. Furthermore, awards with dividends that do not need to be returned to the entity if the employee forfeits the award are considered participating securities. Accordingly, under this guidance unvested share-based payment

awards that are considered to be participating securities should be included in the computation of earnings per share (“EPS”) pursuant to the two-class method as required by FASB guidance on earnings per share. FASB guidance on determining whether instruments granted in share-based payment transactions are participating securities is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of this Statement did not have an impact on the Corporation’s financial statements since, as of September 30, 2009, the outstanding unvested shares of restricted stock do not contain rights to nonforfeitable dividends.

     In April 2009, the FASB issued authoritative guidance for the accounting of assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination. The guidance will carry forward the requirement that acquired contingencies in a business combination be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. Otherwise, entities would typically account for the acquired contingencies based on a reasonable estimate in accordance with FASB guidance on the accounting for contingencies. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this Statement did not have an impact on the Corporation’s financial statements.

     In April 2009, the FASB issued authoritative guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and for identifying transactions that are not orderly. This guidance relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what the guidance states is the objective of fair value measurement, that is, to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. This guidance is effective for interim and annual reporting periods ending after June 15, 2009 on a prospective basis. The adoption of this Statement did not impact the Corporation’s fair value methodologies on its financial assets.

     In April 2009, the FASB amended the existing guidance on determining whether an impairment for investments in debt securities is other-than-temporary (“OTTI”) and requires an entity to recognize the credit component of an OTTI of a debt security in earnings and the noncredit component in other comprehensive income (“OCI”) when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. This guidance also requires expanded disclosures and became effective for interim and annual reporting periods ending after June 15, 2009. In connection with this guidance, the Corporation recorded $0.2 million and $1.3 million for the quarter and nine-month periods ended September 30, 2009, respectively, of OTTI charges through earnings that represents the credit loss of available-for-sale private label mortgage-backed securities (“MBS”). This guidance does

not amend existing recognition and measurement guidance related to an OTTI of equity securities. The expanded disclosures related to this new guidance are included in Note 4 — Investment Securities.

     In April 2009, the FASB amended the existing guidance on the disclosure about fair values of financial instruments, which requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. This guidance became effective for interim reporting periods ended after June 15, 2009. The adoption of the amended guidance expanded the Corporation’s interim financial statement disclosures with regard to the fair value of financial instruments as presented in Note 18 — Fair Value.

     In May 2009, the FASB issued authoritative guidance on subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance sets forth (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for interim or annual financial periods ending after June 15, 2009. The Corporation evaluated subsequent events through November 9, 2009, the date on which this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission. There are not any material subsequent event that would require further disclosure.

     In June 2009, the FASB amended the existing guidance on the accounting for transfer of financial assets, which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Corporation is evaluating the impact the adoption of the guidance will have on its financial statements.

     In June 2009, the FASB amended the existing guidance on the consolidation of variable interest, which improves financial reporting by enterprises involved with variable interest entities and addresses (i) the effects on certain provisions of the amended guidance as a result of the elimination of the qualifying special-purpose entity concept in the accounting for transfer of financial assets guidance and (ii) constituent concerns about the application of certain key provisions of the guidance, including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for

interim and annual reporting periods thereafter. The Corporation is evaluating the impact, if any, the adoption of this guidance will have on its financial statements.

     In June 2009, the FASB issued authoritative guidance on the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification (“Codification”) is the single source of authoritative nongovernmental GAAP. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This guidance is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in this guidance. All other accounting literature not included in the Codification is nonauthoritative. Following this guidance, the FASB will not issue new guidance in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification.

     In August 2009, the FASB updated the Codification in connection with the fair value measurement of liabilities to clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:

1.

A valuation technique that uses:

	a.		The quoted price of the identical liability when traded as an asset
	b.		Quoted prices for similar liabilities or similar liabilities when traded as assets

2.

Another valuation technique that is consistent with the principles of fair value measurement. Two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability.

     The update also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The update also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustment to the quoted price of the asset are required are Level 1 fair value measurements. This update is effective for the first reporting period (including interim periods) beginning after issuance. The Corporation is evaluating the impact, if any, the adoption of this guidance will have on its financial statements.

     In September 2009, the FASB updated the Codification to reflect SEC staff pronouncements on earnings-per-share calculations. According to the update, the SEC staff believes that when a public company redeems preferred shares, the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount on the balance sheet after issuance costs of the preferred stock should be added to or subtracted from net income before doing an earnings-per-share calculation. The SEC’s staff also thinks it is not appropriate to aggregate preferred

shares with different dividend yields when trying to determine whether the “if-converted” method is dilutive to the earnings-per-share calculation. As of September 30, 2009, the Corporation has not been involved in a redemption or induced conversion of preferred stock.

     The guidance is effective for new share lending arrangements for interim and annual periods beginning on or after June 15, 2009. For existing arrangements, the guidance is effective for fiscal years beginning on or after December 15, 2009 and must be applied retrospectively for arrangements outstanding as of the effective date. This guidance did not have an impact on the Corporation’s financial statements.

2 — EARNINGS PER COMMON SHARE

     The calculations of earnings per common share for the quarters and nine-month periods ended on September 30, 2009 and 2008 are as follows:

		Quarter Ended								Nine-Month Period Ended
		September 30,				September 30,				September 30,				September 30,
		2009				2008				2009				2008
		(In thousands, except per share information)
Net (Loss) Income:
Net (loss) income		$	(165,218	)		$	24,546			$	(221,985	)		$	91,129
Less: Preferred stock dividends (1)			(8,356	)			(10,069	)			(37,661	)			(30,207	)
Less: Preferred stock discount accretion			(1,115	)			—				(3,095	)			—
Net (loss) income attributable to common stockholders		$	(174,689	)		$	14,477			$	(262,741	)		$	60,922
Weighted-Average Shares:
Basic weighted-average common shares outstanding			92,511				92,511				92,511				92,507
Average potential common shares			—				58				—				116
Diluted weighted-average number of common shares outstanding			92,511				92,569				92,511				92,623
(Loss) earning per common share:
Basic		$	(1.89	)		$	0.16			$	(2.84	)		$	0.66
Diluted		$	(1.89	)		$	0.16			$	(2.84	)		$	0.66

     (Loss) earnings per common share are computed by dividing net (loss) income attributable to common stockholders by the weighted average common shares issued and outstanding. Net (loss) income attributable to common stockholders represents net (loss) income adjusted for preferred stock dividends including dividends declared, accretion of discount on preferred stock issuances and cumulative dividends related to the current dividend period that have not been declared as of the end of the period. Basic weighted average common shares outstanding exclude unvested shares of restricted stock.

     Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested shares of restricted stock, and outstanding warrants using the treasury stock method. This method assumes that the potential common shares are issued 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 the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options, unvested shares of restricted stock, and outstanding warrants that result in lower potential 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. For the quarter and nine-month periods ended September 30, 2009, there were 2,546,310 outstanding stock options, warrants outstanding to purchase 5,842,259 shares of common stock related to the TARP Capital Purchase Program and 32,216 unvested shares of restricted stock that were excluded from the computation of diluted earnings per common share because the Corporation reported a net loss attributable to common stockholders for such periods. Refer to Note 16 for additional information related to the issuance of the Series F Preferred Stock and Warrants (as hereinafter defined) under the TARP Capital Purchase Program. For the quarter and nine-month periods ended September 30, 2008, a total of 3,596,300 and 2,020,600 weighted-average outstanding stock options, respectively, were not included in the computation of

dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share.

3 — STOCK-BASED COMPENSATION PLAN

     Between 1997 and January 2007, the Corporation had a stock option plan (“the 1997 stock option plan”) that authorized the granting of up to options for 8,696,112 shares of the Corporation’s common stock to eligible employees. The options granted under the plan could not exceed 20% of the number of common shares outstanding. Each option provides for the purchase of one share of common stock at a price not less than the fair market value of the stock on the date the option was granted. Stock options were fully vested upon grant. The maximum term to exercise the options is ten years. The stock option plan provides for a proportionate adjustment in the exercise price and the number of shares that can be purchased in the event of a stock dividend, stock split, reclassification of stock, merger or reorganization and certain other issuances and distributions such as stock appreciation rights. On January 21, 2007, the 1997 stock option plan expired; all outstanding awards granted under this plan continue to be in full force and effect, subject to their original terms. All shares that remained available for grants under the 1997 stock option plan were cancelled.

     On April 29, 2008, the Corporation’s stockholders approved the First BanCorp 2008 Omnibus Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. This plan allows the issuance of up to 3,800,000 shares of common stock, subject to adjustments for stock splits, reorganization and other similar events. The Corporation’s Board of Directors, upon receiving the relevant recommendation of the Compensation 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.

     During the fourth quarter of 2008, pursuant to its independent director compensation plan, the Corporation granted 36,243 shares of restricted stock with a fair value of $8.69 under the Omnibus Plan to the Corporation’s independent directors. The restrictions on such restricted stock awards will lapse ratably on an annual basis over a three-year period commencing on December 1, 2009. As of September 30, 2009, there were 32,216 unvested shares of restricted stock outstanding after the forfeiture in 2009 of 4,027 shares due to the resignation of an independent director. For the quarter and nine-month period ended September 30, 2009, the Corporation recognized $16,528 and $69,028, respectively, of stock-based compensation expense related to the aforementioned outstanding unvested restricted stock awards. The total unrecognized compensation cost related to these unvested restricted stocks was $237,222 as of September 30, 2009 and is expected to be recognized over the next 2.2 years.

     The Corporation accounted for stock options using the “modified prospective” method. Under the modified prospective method, compensation cost is recognized in the financial statements for all share-based payments granted after January 1, 2006. There were no stock options granted during 2009 and 2008 and therefore no compensation expense associated with stock options for the first nine months of 2009 and 2008.

     Stock-based compensation accounting guideline requires the Corporation to develop an estimate of the number of share-based awards that will be forfeited due to employee 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 is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. When unvested options or shares of restricted stock are forfeited, any compensation expense previously recognized on the forfeited awards is reversed in the period of the forfeiture. During 2009, as mentioned above, 4,027 unvested shares of restricted stock were forfeited resulting in the reversal of $9,722 of previously recorded stock-based compensation expense.

     Stock options outstanding as of September 30, 2009 are set forth below:

		Nine-Month Period Ended
		September 30, 2009
										Weighted-Average
										Remaining				Aggregate
		Number of				Weighted-Average				Contractual Term				Intrinsic Value
		Options				Exercise Price				(Years)				(In thousands)
Beginning of year outstanding and exercisable			3,910,910			$	12.82
Options cancelled			(1,364,600	)			11.87
End of period outstanding and exercisable			2,546,310			$	13.32				5.4			$	—

     There were no stock options granted or exercised during the first nine months of 2009. No options were granted during the first nine months of 2008. Cash proceeds from 6,000 options exercised during the first nine months of 2008 amounted to approximately $53,000 and did not have any intrinsic value.

4 — INVESTMENT SECURITIES

     Investment Securities Available for Sale

     The amortized cost, non-credit loss component of OTTI securities recorded in accumulated other comprehensive income (“AOCI”), gross unrealized gains and losses recorded in AOCI, approximate fair value, weighted-average yield and contractual maturities of investment securities available for sale as of September 30, 2009 and December 31, 2008 were as follows:

		September 30, 2009																								December 31, 2008
						Non-Credit
						Loss Component				Gross												Weighted								Gross												Weighted
		Amortized				of OTTI				Unrealized								Fair				average				Amortized				Unrealized								Fair				average
		cost				Recorded in AOCI				gains				losses				value				yield%				cost				gains				losses				value				yield%
		(Dollars in thousands)
Obligations of U.S. Government sponsored agencies:
After 1 to 5 years		$	1,139,554			$	—			$	9,108			$	—			$	1,148,662				2.12			$	—			$	—			$	—			$	—				—
Puerto Rico Government obligations:
Due within one year			11,962				—				2				84				11,880				1.81				4,593				46				—				4,639				6.18
After 1 to 5 years			113,198				—				717				164				113,751				5.40				110,624				259				479				110,404				5.41
After 5 to 10 years			6,932				—				192				142				6,982				5.88				6,365				283				128				6,520				5.80
After 10 years			12,792				—				408				—				13,200				5.26				15,789				45				264				15,570				5.30
United States and Puerto Rico Government obligations			1,284,438				—				10,427				390				1,294,475				2.46				137,371				633				871				137,133				5.44
Mortgage-backed securities:
FHLMC certificates:
Due within one year			4				—				—				—				4				7.18				37				—				—				37				5.94
After 1 to 5 years			61				—				1				—				62				6.39				157				2				—				159				7.07
After 5 to 10 years			29				—				3				—				32				8.37				31				3				—				34				8.40
After 10 years			1,037,930				—				35,217				—				1,073,147				4.89				1,846,386				45,743				1				1,892,128				5.46
			1,038,024				—				35,221				—				1,073,245				4.89				1,846,611				45,748				1				1,892,358				5.46
GNMA certificates:
Due within one year			—				—				—				—				—				—				45				1				—				46				5.72
After 1 to 5 years			77				—				3				—				80				6.56				180				6				—				186				6.71
After 5 to 10 years			842				—				36				—				878				5.43				566				9				—				575				5.33
After 10 years			383,738				—				12,529				92				396,175				5.20				331,594				10,283				10				341,867				5.38
			384,657				—				12,568				92				397,133				5.20				332,385				10,299				10				342,674				5.38
FNMA certificates:
After 1 to 5 years			39				—				3				—				42				10.84				53				5				—				58				10.20
After 5 to 10 years			245,841				—				12,425				—				258,266				4.80				269,716				4,678				—				274,394				4.96
After 10 years			1,435,476				—				40,868				—				1,476,344				4.55				1,071,521				28,005				1				1,099,525				5.60
			1,681,356				—				53,296				—				1,734,652				4.59				1,341,290				32,688				1				1,373,977				5.47
Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA:
After 10 years			164,418				—				—				1,591				162,827				1.00				—				—				—				—				—
Other mortgage pass-through trust certificates:
After 10 years			121,984				29,900				2				—				92,086				2.60				144,217				2				30,236				113,983				5.43
Total mortgage-backed securities			3,390,439				29,900				101,087				1,683				3,459,943				4.51				3,664,503				88,737				30,248				3,722,992				5.46
Corporate bonds:
After 5 to 10 years			—				—				—				—				—				—				241				—				—				241				7.70
After 10 years			—				—				—				—				—				—				1,307				—				—				1,307				7.97
Corporate bonds			—				—				—				—				—				—				1,548				—				—				1,548				7.93
Equity securities (without contractual maturity) (1)			427				—				144				—				571				3.61				814				—				145				669				2.38
Total investment securities available for sale		$	4,675,304			$	29,900			$	111,658			$	2,073			$	4,754,989				3.94			$	3,804,236			$	89,370			$	31,264			$	3,862,342				5.46