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.

Puerto Rico		66-0561882
(State or other jurisdiction of incorporation or organization)		(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):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

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: 21,303,669 outstanding as of July 31, 2011.

 

 

FIRST BANCORP.
INDEX PAGE

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2011 and December 31, 2010			5
Consolidated Statements of Loss (Unaudited) — Quarters ended June 30, 2011 and June 30, 2010 and a six-month periods ended June 30, 2011 and June 30, 2010			6
Consolidated Statements of Comprehensive Loss (Unaudited) — Quarters ended June 30, 2011 and June 30, 2010 and six-month periods ended June 30, 2011 and June 30, 2010			7
Consolidated Statements of Cash Flows (Unaudited) — Six-month periods ended June 30, 2011 and June 30, 2010			8
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) — Six-month periods ended June 30, 2011 and June 30, 2010			9
Notes to Consolidated Financial Statements (Unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			53
Item 3. Quantitative and Qualitative Disclosures About Market Risk			101
Item 4. Controls and Procedures			101
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			102
Item 1A. Risk Factors			102
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			104
Item 3. Defaults Upon Senior Securities			104
Item 4. Reserved			104
Item 5. Other Information			104
Item 6. Exhibits			104
SIGNATURES
EX-12.1
EX-12.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Forward Looking Statements

     This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q or future filings by First BanCorp (the “Corporation”) with the Securities and Exchange Commission (“SEC”), in the Corporation’s press releases or in other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the word or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “should,” “anticipate” and similar expressions are meant to identify “forward-looking statements.”

     First BanCorp wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which 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. First BanCorp advises readers that various factors could cause actual results to differ materially from those contained in any “forward-looking statement.” Such factors include, but are not limited to, the following:

	•		uncertainty about whether the Corporation will be able to fully comply with the written agreement dated June 3, 2010 (the “Written Agreement”) that the Corporation entered into with the Federal Reserve Bank of New York (the “FED” or “Federal Reserve”) and the order dated June 2, 2010 (the “FDIC Order”) and collectively with the Written Agreement, (the “Agreements”) that the Corporation’s banking subsidiary, FirstBank Puerto Rico (“FirstBank” or “the Bank”) entered into with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) that, among other things, require the Bank to attain certain capital levels and reduce its special mention, classified, delinquent and non-performing assets;
	•		uncertainty as to whether the Corporation’s stockholders will approve the proposal being presented at the Special Meeting of Stockholders to be held on August 23, 2011 to issue shares of common stock to institutional investors (the “capital raise”), which will enable the Corporation to compel the United States Department of the Treasury (the “U.S. Treasury”) to convert into common stock the shares of the Corporation’s Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series G (the “Series G Preferred Stock”), that the Corporation issued to the U.S. Treasury;
	•		uncertainty as to whether the Corporation will be able to complete any other future capital-raising efforts;
	•		uncertainty as to the availability of certain funding sources, such as retail brokered certificates of deposit (“CDs”);
	•		the Corporation’s reliance on brokered CDs and its ability to obtain, on a periodic basis, approval from the FDIC to issue brokered CDs to fund operations and provide liquidity in accordance with the terms of the Order;
	•		the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s stockholders due to the Corporation’s inability to receive approval from the FED to receive dividends from FirstBank;
	•		the risk of being subject to possible additional regulatory actions;
	•		the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and their impact on the credit quality of the Corporation’s loans and other assets, including the construction and commercial real estate loan portfolios, which have contributed and may continue to contribute to, among other things, the high levels of non-performing assets, charge-offs and the provision expense and may subject the Corporation to further risk from loan defaults and foreclosures;
	•		adverse changes in general economic conditions in the United States and in Puerto Rico, including the interest rate scenario, market liquidity, housing absorption rates, 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;
	•		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 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 prior results and anticipated or projected results;
	•		uncertainty about the effectiveness of the various actions undertaken to stimulate the U.S. economy and stabilize the U.S. 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, the FDIC, government-sponsored housing agencies and local 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 further 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 expense;
	•		the risk of not being able to recover the assets pledged to Lehman Brothers Special Financing, Inc.;
	•		the impact on the Corporation’s results of operations and financial condition associated with acquisitions and dispositions;
	•		a need to recognize additional impairments of financial instruments or goodwill relating to acquisitions;
	•		risks that further downgrades in the credit ratings of the Corporation’s long-term senior debt will adversely affect the Corporation’s ability to make future borrowings;
	•		the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on our businesses, business practices and cost of operations;
	•		general competitive factors and industry consolidation; and
	•		the possible future dilution to holders of the Corporation’s common stock resulting from additional issuances of common stock or securities convertible into common stock.

     The Corporation does not undertake, and specifically disclaims any obligation, to update any of the “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.

     Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010, 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

(In thousands, except for share information)		June 30, 2011				December 31, 2010
ASSETS
Cash and due from banks		$	239,488			$	254,723
Money market investments:
Federal funds sold			5,369				6,236
Time deposits with other financial institutions			855				1,346
Other short-term investments			107,985				107,978
Total money market investments			114,209				115,560
Investment securities available for sale, at fair value:
Securities pledged that can be repledged			1,371,887				1,344,873
Other investment securities			1,462,199				1,399,580
Total investment securities available for sale			2,834,086				2,744,453
Investment securities held to maturity, at amortized cost:
Securities pledged that can be repledged			—				239,553
Other investment securities			—				213,834
Total investment securities held to maturity (2010-fair value of $476,516)			—				453,387
Other equity securities			42,252				55,932
Investment in unconsolidated entities			46,092				—
Loans, net of allowance for loan and lease losses of $540,878 (2010 — $553,025)			10,224,647				11,102,411
Loans held for sale, at lower of cost or market			20,781				300,766
Total loans, net			10,245,428				11,403,177
Premises and equipment, net			203,140				209,014
Other real estate owned			96,618				84,897
Accrued interest receivable on loans and investments			51,719				59,061
Due from customers on acceptances			696				1,439
Other assets			240,245				211,434
Total assets		$	14,113,973			$	15,593,077
LIABILITIES
Deposits:
Non-interest-bearing deposits		$	720,573			$	668,052
Interest-bearing deposits			10,352,155				11,391,058
Total deposits			11,072,728				12,059,110
Securities sold under agreements to repurchase			1,200,000				1,400,000
Advances from the Federal Home Loan Bank (FHLB)			420,440				653,440
Notes payable (including $12,374 and $11,842 measured at fair value as of June 30, 2011 and December 31, 2010, respectively)			19,715				26,449
Other borrowings			231,959				231,959
Bank acceptances outstanding			696				1,439
Accounts payable and other liabilities			158,857				162,721
Total liabilities			13,104,395				14,535,118
Commitments and Contingencies (Note 22)
STOCKHOLDERS’ EQUITY
Preferred stock, authorized 50,000,000 shares: issued 22,828,174; outstanding 2,946,046; aggregate liquidation value of $487,221:
Fixed Rate Cumulative Mandatorily Convertible Preferred Stock: issued and outstanding 424,174 shares			365,656				361,962
Non-cumulative Perpetual Monthly Income Preferred Stock: issued 22,004,000 shares and outstanding 2,521,872 shares			63,047				63,047
Common stock, $0.10 par value, authorized 2,000,000,000 shares; issued 21,963,522 shares			2,196				2,196
Less: Treasury stock (at par value)			(66	)			(66	)
Common stock outstanding, 21,303,669 shares outstanding			2,130				2,130
Additional paid-in capital			319,505				319,459
Retained earnings			246,605				293,643
Accumulated other comprehensive income, net of tax expense of $4,618 (December 31, 2010 — $5,351)			12,635				17,718
Total stockholders’equity			1,009,578				1,057,959
Total liabilities and stockholders’ equity		$	14,113,973			$	15,593,077

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Quarter Ended								Six-Month Period Ended
		June 30,				June 30,				June 30,				June 30,
(In thousands, except per share information)		2011				2010				2011				2010
Interest income:
Loans		$	146,314			$	175,070			$	304,285			$	352,503
Investment securities			16,687				39,170				39,310				82,289
Money market investments			417				624				726				1,060
Total interest income			163,418				214,864				344,321				435,852
Interest expense:
Deposits			49,525				63,766				103,584				129,732
Loans payable			—				1,265				—				3,442
Securities sold under agreements to repurchase			13,022				25,035				26,158				50,317
Advances from FHLB			4,219				7,587				8,964				15,281
Notes payable and other borrowings			2,217				(1,851	)			4,901				1,155
Total interest expense			68,983				95,802				143,607				199,927
Net interest income			94,435				119,062				200,714				235,925
Provision for loan and lease losses			59,184				146,793				147,916				317,758
Net interest income (loss) after provision for loan and lease losses			35,251				(27,731	)			52,798				(81,833	)
Non-interest income:
Other service charges on loans			1,456				1,486				3,174				3,242
Service charges on deposit accounts			3,054				3,501				6,386				6,969
Mortgage banking activities			9,336				2,140				15,927				4,640
Net gain on sale of investments			21,949				24,240				41,290				55,604
Other-than-temporary impairment losses on investment securities:
Total other-than-temporary impairment losses			—				(3	)			—				(603	)
Noncredit-related impairment portion on debt securities not expected to be sold (recognized in other comprehensive income)			(607	)			—				(607	)			—
Net impairment losses on investment securities			(607	)			(3	)			(607	)			(603	)
Loss on early extinguishment of borrowings			(1,823	)			—				(1,823	)			—
Equity in losses of unconsolidated entities			(1,536	)			—				(1,536	)			—
Other non-interest income			7,033				8,161				16,536				14,999
Total non-interest income			38,862				39,525				79,347				84,851
Non-interest expenses:
Employees’ compensation and benefits			29,407				30,958				59,846				62,686
Occupancy and equipment			15,603				14,451				30,853				29,302
Business promotion			3,628				3,340				6,292				5,545
Professional fees			6,072				5,604				11,209				10,891
Taxes, other than income taxes			3,278				3,817				6,533				7,638
Insurance and supervisory fees			14,404				16,606				29,581				35,124
Net loss on real estate owned (REO) operations			5,971				10,816				11,471				14,509
Other non-interest expenses			8,068				13,019				13,512				24,278
Total non-interest expenses			86,431				98,611				169,297				189,973
Loss before income taxes			(12,318	)			(86,817	)			(37,152	)			(186,955	)
Income tax expense			(2,606	)			(3,823	)			(6,192	)			(10,684	)
Net loss		$	(14,924	)		$	(90,640	)		$	(43,344	)		$	(197,639	)
Net loss attributable to common stockholders		$	(22,205	)		$	(96,810	)		$	(57,642	)		$	(209,961	)
Net loss per common share:
Basic		$	(1.04	)		$	(15.70	)		$	(2.71	)		$	(34.04	)
Diluted		$	(1.04	)		$	(15.70	)		$	(2.71	)		$	(34.04	)
Dividends declared per common share		$	—			$	—			$	—			$	—

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Quarter Ended								Six-Month Period Ended
		June 30,				June 30,				June 30,				June 30,
(In thousands)		2011				2010				2011				2010
Net loss		$	(14,924	)		$	(90,640	)		$	(43,344	)		$	(197,639	)
Unrealized losses on available-for-sale debt securities on which an other-than-temporary impairment has been recognized:
Noncredit-related impairment losses on debt securities not expected to be sold			(607	)			—				(607	)			—
Reclassification adjustment for other-than-temporary impairment on debt securities included in net income			607				—				607				—
All other unrealized gains and losses on available-for-sale securities:
All other unrealized holding gains arising during the period			18,573				70,999				13,344				88,528
Reclassification adjustments for net gain included in net income			(21,949	)			(24,240	)			(21,949	)			(44,936	)
Reclassification adjustments for other-than-temporary impairment on equity securities			—				3				—				353
Net unrealized gains on securities reclassified from held to maturity to available for sale			—				—				2,789				—
Income tax benefit (expense) related to items of other comprehensive income			587				(6,399	)			733				(7,127	)
Other comprehensive (loss) income for the period, net of tax			(2,789	)			40,363				(5,083	)			36,818
Total comprehensive loss		$	(17,713	)		$	(50,277	)		$	(48,427	)		$	(160,821	)

FIRST BANCORP

		Six-Month Period Ended
		June 30,				June 30,
(In thousands)		2011				2010
Cash flows from operating activities:
Net loss		$	(43,344	)		$	(197,639	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation			12,082				9,863
Amortization of core deposit intangible			1,177				1,297
Provision for loan and lease losses			147,916				317,758
Deferred income tax expense			3,565				5,047
Stock-based compensation recognized			46				47
Gain on sale of investments, net			(40,611	)			(55,604	)
Loss on early extinguishment of borrowings			1,823				—
Other-than-temporary impairments on investment securities			607				603
Equity in losses of unconsolidated entities			1,536				—
Derivatives instruments and hedging activities loss (gain)			1,448				(1,676	)
Gain on sale of assets FB Insurance VI			(2,845	)			—
Net gain on sale of loans and impairments			(12,955	)			(526	)
Net amortization of premiums and discounts on deferred loan fees and costs			(873	)			802
Net decrease (increase) in mortgage loans held for sale			2,381				(8,845	)
Amortization of broker placement fees			9,542				10,787
Net amortization of premium and discounts on investment securities			2,038				3,293
Increase in accrued income tax payable			1,816				909
Decrease in accrued interest receivable			7,342				12,132
Increase (decrease) in accrued interest payable			1,948				(276	)
Increase in other assets			(14,503	)			(298	)
(Decrease) increase in other liabilities			(5,382	)			13,727
Total adjustments			118,098				309,040
Net cash provided by operating activities			74,754				111,401
Cash flows from investing activities:
Principal collected on loans			1,186,329				2,118,978
Loans originated			(985,980	)			(1,141,868	)
Purchases of loans			(70,459	)			(87,436	)
Proceeds from sale of loans			670,230				19,187
Proceeds from sale of repossessed assets			49,363				47,440
Proceeds from sale of available-for-sale securities			487,054				733,887
Proceeds from sale of held-to-maturity securities			348,750				—
Purchases of securities available for sale			(532,727	)			(1,921,842	)
Proceeds from principal repayments and maturities of securities held to maturity			33,726				75,054
Proceeds from principal repayments of securities available for sale			150,049				1,278,313
Additions to premises and equipment			(6,359	)			(19,338	)
Proceeds from sale of other investment securities			—				10,668
Proceeds from sale of assets FB Insurance VI			2,940				—
Proceeds from securities litigations settlement			679				—
Decrease (increase) in other equity securities			13,680				(163	)
Net cash provided by investing activities			1,347,275				1,112,880
Cash flows from financing activities:
Net (decrease) increase in deposits			(996,792	)			46,919
Net decrease in loans payable			—				(900,000	)
Net repayments and cancellation costs of securities sold under agreements to repurchase			(201,575	)			(492,193	)
Net FHLB advances paid and cancellation costs			(233,248	)			(38,000	)
Repayment of medium-term notes			(7,000	)			—
Net cash used in financing activities			(1,438,615	)			(1,383,274	)
Net decrease in cash and cash equivalents			(16,586	)			(158,993	)
Cash and cash equivalents at beginning of period			370,283				704,084
Cash and cash equivalents at end of period		$	353,697			$	545,091
Cash and cash equivalents include:
Cash and due from banks		$	239,488			$	523,047
Money market instruments			114,209				22,044
		$	353,697			$	545,091

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Six-Month Period Ended
		June 30,				June 30,
(In thousands)		2011				2010
Preferred Stock:
Balance at beginning of period		$	425,009			$	928,508
Accretion of preferred stock discount			3,694				2,322
Balance at end of period			428,703				930,830
Common Stock outstanding			2,130				6,169
Additional Paid-In-Capital:
Balance at beginning of period			319,459				220,596
Stock-based compensation recognized			46				47
Balance at end of period			319,505				220,643
Retained Earnings:
Balance at beginning of period			293,643				417,297
Net loss			(43,344	)			(197,639	)
Accretion of preferred stock discount			(3,694	)			(2,322	)
Balance at end of period			246,605				217,336
Accumulated Other Comprehensive Income (Loss), net of tax:
Balance at beginning of period			17,718				26,493
Other comprehensive (loss) income, net of tax			(5,083	)			36,818
Balance at end of period			12,635				63,311
Total stockholders’equity		$	1,009,578			$	1,438,289

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, 2010. 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, 2010, included in the Corporation’s 2010 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 six-month period ended June 30, 2011 are not necessarily indicative of the results to be expected for the entire year.

     All share and per share amounts of common shares included in the consolidated financial statements have been adjusted to retroactively reflect the 1-for-15 reverse stock split effected January 7, 2011.

     Capital and Liquidity

     The Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. Sustained weak economic conditions that have severely affected Puerto Rico and the United States over the last several years have adversely impacted First BanCorp’s and FirstBank’s results of operations and capital levels. The significant loss in 2010, primarily related to credit losses (including losses associated with adversely classified and non-performing loans transferred to held for sale), the increase in the deposit insurance premium expense and increases to the deferred tax asset valuation allowance, reduced the Corporation’s and the Bank’s capital levels during 2010. The net loss for the first half of 2011 was primarily related to credit losses.

     As described in Note 18, Regulatory Matters, FirstBank is currently operating under a Consent Order ( the “FDIC Order”) with the FDIC and the OCIF and First BanCorp has entered into a Written Agreement with the Federal Reserve. The minimum capital ratios established by the FDIC Order are 8% for Leverage (Tier 1 Capital to Average Total Assets), 10% for Tier 1 Capital to Risk-Weighted Assets and 12% for Total Capital to Risk-Weighted Assets. The FDIC Order does not contain a specific date for achieving the minimum capital ratios.

     In March 2011, the Corporation submitted an updated Capital Plan (the “Capital Plan”) to the regulators. The Capital Plan contemplates a $350 million capital raise through the issuance of new common shares for cash, and other actions to further reduce the Corporation’s and the Bank’s risk-weighted assets, strengthen their capital positions and meet the minimum capital ratios required under the FDIC Order. Among the strategies contemplated in the Capital Plan are further reductions of the Corporation’s loan portfolio and investment portfolio. The Capital Plan identified specific targeted Leverage, Tier 1 Capital to Risk-Weighted Assets and Total Capital to Risk-Weighted Assets ratios to be achieved by the Bank each calendar quarter until the capital levels required under the FDIC Order are achieved.

     Among the deleveraging strategies incorporated into the Capital Plan and completed during the first half of 2011 are the following:

	•		Sales of performing first lien residential mortgage loans — The Bank completed sales of approximately $518 million of residential mortgage loans to another financial institution.
	•		Sales of investment securities — The Bank completed sales of approximately $632 million of U.S. Agency MBS.
	•		Sale of commercial loan participations — The Bank sold approximately $45 million in loan participations.
	•		Sale of adversely classified and non-performing loans — The Bank sold loans with a book value of $269.3 million to CPG/GS PR NPL, LLC (“CPG/GS”) a new joint venture created by Goldman, Sachs & Co. and Caribbean Property Group in exchange for $88.5 million of cash, an acquisition loan of $136.1 million and a 35% interest in CPG/GS. Approximately 93% of the loans were adversely classified loans and 55% were in non-performing status.

     As of June 30, 2011, the Corporation’s Total Capital, Tier 1 Capital and Leverage ratios were 12.40%, 11.08% and 8.04%, respectively, compared to 12.02%, 10.73% and 7.57%, respectively, as of December 31, 2010. Meanwhile, FirstBank’s Total Capital, Tier 1 Capital and Leverage ratios as of June 30, 2011 were 12.15%, 10.83% and 7.87%, respectively, up from 11.57%, 10.28% and 7.25%, respectively, as of December 31, 2010. The improvement in the capital ratios was primarily related to the aforementioned

deleveraging strategies completed during the first half of 2011 and, in the case of FirstBank, also due to a $22 million capital contribution from the holding company. Proceeds from the sales of assets were used, in part, to pay down maturing liabilities. Although the Bank expected to meet the minimum capital ratios by June 30, 2011, given the time lag between the sales of the assets and the maturity of liabilities, the average assets for the quarter remained at higher levels, thus affecting temporarily the leverage ratio for the quarter. However, when computed using the ending balance of assets as of June 30, 2011, which already reflects the full effect of the deleverage activities, the leverage ratio would have been 8.38% and 8.20% for First BanCorp and FirstBank, respectively. Since the Bank’s leverage ratio exceeded 8% as of June 30, 2011, based on the ending balance of assets, the Bank is technically in compliance with the minimum required capital ratios.

     With respect to capital raise efforts, during the second quarter of 2011, the Corporation entered into separate agreements with Thomas H. Lee Partners, L.P. (“THL”) and with two funds managed by Oaktree Capital Management, L.P. (“Oaktree”) under which THL and Oaktree would purchase an aggregate of approximately $348.2 million ($174.1 million each investor) of common stock of the Corporation at a per share price of $3.50 provided the Corporation sells an aggregate of $500 million of shares of common stock. Each of these two investors’ investments will represent approximately 24.36% of the outstanding shares of the Corporation’s common stock upon completion of the capital raise and the conversion into common stock of the $424.2 million of the Series G Preferred Stock held by the U.S. Treasury. The Corporation has also entered into investment agreements with institutional investors and other private equity firms for the issuance of an aggregate of approximately $176.8 million of the Corporation’s common stock, which, together with the THL and Oaktree investments, result in $525 million in commitments. The completion of this transaction is subject to the approval of the Corporation’s stockholders at a Special Meeting of Stockholders on August 23, 2011 and regulators. If approved, the transaction is expected to close during the third quarter of 2011.

     If the stockholders and regulators approve the $525 million capital raise, the Corporation will issue 150 million shares of common stock at $3.50 per share and will immediately exercise its right to compel the conversion of all of the outstanding Series G Preferred Stock, which is held by the U.S. Treasury, into approximately 32.9 million shares of common stock. Also, the Corporation plans to conduct a rights offering that will enable current stockholders to purchase up to 10.7 million shares of common stock at the same $3.50 price per share for an aggregate of $37.3 million. The Corporation is expected to have nearly 229.98 million outstanding following the issuance of common stock to institutional investors and private equity firms, the conversion of the Series G Preferred Stock into common stock, the successful completion of the rights offering and the issuance of shares upon the exercise of anti-dilution rights held by certain of the institutional investors in the capital raise.

     Both the Corporation and the Bank actively manage liquidity and cash flow needs. The Corporation has suspended common and preferred dividends to stockholders since August 2009. As of June 30, 2011, the holding company had $21.2 million of cash and cash equivalents. Cash and cash equivalents at the Bank as of June 30, 2011 were approximately $353.7 million. The Bank has $100 million, $87 million and $7.3 million in repurchase agreements, FHLB advances and notes payable, respectively, maturing over the next twelve months. In addition, it had $5.2 billion in brokered CDs as of June 30, 2011, of which $3.0 billion mature over the next twelve months. Liquidity at the Bank level is highly dependent on bank deposits, which fund 78.7% of the Bank’s assets (or 41.8% excluding brokered CDs). The Corporation has continued to issue brokered CDs pursuant to approvals received from the FDIC to renew or roll over brokered CDs up to certain amounts through September 30, 2011. Management cannot be certain it will continue to obtain waivers from the restrictions to issue brokered CDs under the FDIC Order to meet its obligations and execute its business plans. As of June 30, 2011, the Bank held approximately $862.3 million of readily pledgeable or sellable investment securities, including $665 million in U.S. Treasury securities. Based on current and expected liquidity needs and sources, management expects First BanCorp to be able to meet its obligations for a reasonable period of time. During 2010, the Corporation and the Bank suffered credit downgrades. The Bank suffered a further downgrade in April 2011. The Corporation does not have any outstanding debt or derivative agreements that would be affected by the credit downgrades. Furthermore, given our non-reliance on corporate debt or other instruments directly linked in terms of pricing or volume to credit ratings, the liquidity of the Corporation so far has not been affected in any material way by the downgrades. The Corporation’s ability to access new non-deposit funding, however, could be adversely affected by these downgrades and any additional downgrades.

     If unanticipated market factors emerge, such as a significant increase in the provision for loan and lease losses, or if the Corporation is unable to complete the aforementioned capital raise or complete identified capital preservation initiatives, successfully execute its strategic operating plans, issue a sufficient amount of brokered CDs or comply with the FDIC Order, its banking regulators could take further action, which could include actions that may have a material adverse effect on the Bank’s business, results of operations and financial position, including the appointment of a conservator or receiver.

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

     The Financial Accounting Standards Board (“FASB”) has issued the following accounting pronouncements and guidance relevant to the Corporation’s operations:

     In December 2010, the FASB updated the Accounting Standards Codification (“Codification”) to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. As a result, current GAAP will be improved by eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairments may be reported sooner than under current practice. The objective of this Update is to address questions about entities with reporting units with zero or negative carrying amounts because some entities concluded that Step 1 of the test is passed in those circumstances because the fair value of their reporting unit will generally be greater than zero. As a result of that conclusion, some constituents raised concerns that Step 2 of the test is not performed despite factors indicating that goodwill may be impaired. The amendments in this Update do not provide guidance on how to determine the carrying amount or measure the fair value of the reporting unit. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance did not have an impact on the Corporation’s financial statements.

     In December 2010, the FASB updated the Codification to clarify required disclosures of supplementary pro forma information for business combinations. The amendments specify that, if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the year had occurred as of the beginning of the comparable prior annual period only. Additionally, the Update expands disclosures to include a description of the nature and amount of material nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. This guidance is effective for reporting periods beginning after December 15, 2010; early adoption is permitted. The Corporation adopted this guidance with no impact on the financial statements.

     In April 2011, the FASB updated the Codification to clarify the guidance on a creditor’s evaluation of whether a restructuring constitutes a troubled debt restructuring (“TDR”). Under the amendments, a creditor must separately conclude that a loan modification constitutes a “concession” and that the debtor is experiencing “financial difficulties” when evaluating whether a loan modification constitutes a TDR. If a creditor determines that it has granted a concession to a debtor, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a TDR. The amendments clarify the guidance on a creditor’s evaluation of whether it has granted a concession and what constitutes financial difficulty. In addition, the amendments clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a TDR. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Corporation is currently evaluating the impact of the adoption of this guidance on the financial statements.

     In April 2011, the FASB updated the Codification to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The Board concluded that this criterion is not a determining factor of effective control. Consequently, the amendments in this Update also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. Eliminating the transferor’s ability criterion and related implementation guidance from an entity’s assessment of effective control should improve the accounting for repurchase agreements and other similar transactions. The amendments in this Update are effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Corporation is currently evaluating the impact of the adoption of this guidance on the financial statements.

     In May 2011, the FASB updated the Codification to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (IFRSs). The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements and result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The amendments in this Update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Corporation is currently evaluating the impact of the adoption of this guidance on the financial statements.

     In June 2011, the FASB updated the Codification to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Under the amendments, an entity has the option to present the total comprehensive income either in a single continuous statement or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Additionally, this update requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present

reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this update should be applied retrospectively and are effective for fiscal years beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. Beginning with the financial statements for the quarter and six-month period ended June 30, 2011, the Corporation is following the guidance of consecutive presentation of the statement of net income and other comprehensive income.

2 — EARNINGS PER COMMON SHARE

     The calculations of earnings per common share for the quarters and six-month periods ended on June 30, 2011 and 2010 are as follows:

		Quarter Ended								Six-Month Period Ended
		June 30,				June 30,				June 30,				June 30,
		2011				2010				2011				2010
		(In thousands, except per share information)
Net Loss:
Net loss		$	(14,924	)		$	(90,640	)		$	(43,344	)		$	(197,639	)
Cumulative non-convertible preferred stock dividends (Series F)			—				(5,000	)			—				(10,000	)
Cumulative convertible preferred stock dividends (Series G)			(5,302	)			—				(10,604	)			—
Preferred stock discount accretion (Series G and F) (1)			(1,979	)			(1,170	)			(3,694	)			(2,322	)
Net loss attributable to common stockholders		$	(22,205	)		$	(96,810	)		$	(57,642	)		$	(209,961	)
Weighted-Average Shares:
Basic weighted-average common shares outstanding (2)			21,303				6,168				21,303				6,168
Average potential common shares (2)			—				—				—				—
Diluted weighted-average number of common shares outstanding (2)			21,303				6,168				21,303				6,168
Loss per common share:
Basic (2)		$	(1.04	)		$	(15.70	)		$	(2.71	)		$	(34.04	)
Diluted (2)		$	(1.04	)		$	(15.70	)		$	(2.71	)		$	(34.04	)

     Loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average common shares issued and outstanding. Net loss attributable to common stockholders represents net loss adjusted for preferred stock dividends including dividends declared, and cumulative dividends related to the current dividend period that have not been declared as of the end of the period, and the accretion of discount on preferred stock issuances. 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. As of June 30, 2011 and 2010, there were 129,934 and 138,165 outstanding stock options, respectively; warrants outstanding to purchase 389,483 shares of common stock and 716 and 1,432 unvested shares of restricted stock, respectively, that were excluded from the computation of diluted earnings per common share because their inclusion would have an antidilutive effect.

3 — STOCK OPTION 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 579,740 options on 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.

     Under the 1997 stock option plan, the Compensation and Benefits Committee (the “Compensation Committee”) had the authority to grant stock appreciation rights at any time subsequent to the grant of an option. Pursuant to stock appreciation rights, the optionee surrenders the right to exercise an option granted under the plan in consideration for payment by the Corporation of an amount equal to the excess of the fair market value of the shares of common stock subject to such option surrendered over the total option price of such shares. Any option surrendered is cancelled by the Corporation and the shares subject to the option are not eligible for further grants under the option plan. On January 21, 2007, the 1997 stock option plan expired; all outstanding awards granted under this plan continue in full force and effect, subject to their original terms. No awards for shares could be granted under the 1997 stock option plan as of its expiration.

     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 253,333 shares of common stock, subject to adjustments for stock splits, reorganizations 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, the Corporation granted 2,412 shares of restricted stock with a fair value of $130.35 under the Omnibus Plan to the Corporation’s independent directors. Of the original 2,412 shares of restricted stock, 268 were forfeited in the second half of 2009, 1,424 vested and, as of June 30, 2011, 720 remain restricted.

     For the quarter and six-month period ended June 30, 2011, the Corporation recognized $23,333 and $46,666 of stock-based compensation expense related to the aforementioned restricted stock awards. The total unrecognized compensation cost related to the non-vested restricted shares was $38,890 as of June 30, 2011 which expected to be recognized over the next five months.

     There were no stock options granted during 2011 and 2010, therefore no compensation associated with stock options was recorded in those years. No stock options were exercised during the first half of 2011 or in 2010.

     Stock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based awards that will be forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a significant effect on share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period in which the forfeiture estimate 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.

The activity of stock options for the six-month period ended June 30, 2011 is set forth below:

						Six-month Period Ended
		June 30, 2011
										Weighted-Average
										Remaining				Aggregate
		Number of				Weighted-Average				Contractual Term				Intrinsic Value
		Options				Exercise Price				(Years)				(In thousands)
Beginning of period			131,532			$	202.91
Options cancelled			(1,598	)			196.51
End of period outstanding and exercisable			129,934			$	202.99				4.02			$	—

4 — INVESTMENT SECURITIES

Investment Securities Available for Sale

     The amortized cost, non-credit loss component of other-than-temporary impairment (“OTTI”) on securities recorded in other comprehensive income (“OCI”), gross unrealized gains and losses recorded in OCI, approximate fair value, weighted-average yield and contractual maturities of investment securities available for sale as of June 30, 2011 and December 31, 2010 were as follows:

		June 30, 2011																								December 31, 2010
						Non-Credit																								Non-Credit
						Loss Component				Gross												Weighted								Loss Component				Gross												Weighted
		Amortized				of OTTI				Unrealized								Fair				average				Amortized				of OTTI				Unrealized								Fair				average
		cost				Recorded in OCI				gains				losses				value				yield%				cost				Recorded in OCI				gains				losses				value				yield%
																						(Dollars in thousands)
U.S. Treasury securities:
Due within one year		$	932,474			$	—			$	2,607			$	—			$	935,081				0.50			$	—			$	—			$	—			$	—			$	—				—
After 1 to 5 years			200,200				—				6,394				—				206,594				1.95				599,987				—				8,727				—				608,714				1.34
Obligations of U.S. Government sponsored agencies:
Due within one year			300,999				—				2,231				—				303,230				1.15				—				—				—				—				—				—
After 1 to 5 years			253,014				—				—				701				252,313				1.02				604,630				—				2,714				3,991				603,353				1.17
Puerto Rico Government obligations:
Due within one year			721				—				11				—				732				6.68				—				—				—				—				—				—
After 1 to 5 years			38,875				—				1,456				87				40,244				5.08				26,768				—				522				—				27,290				4.70
After 5 to 10 years			111,397				—				284				232				111,449				5.21				104,352				—				432				—				104,784				5.18
After 10 years			9,395				—				495				—				9,890				5.88				4,746				—				21				—				4,767				6.22
United States and Puerto Rico Government obligations			1,847,075				—				13,478				1,020				1,859,533				1.24				1,340,483				—				12,416				3,991				1,348,908				1.65
Mortgage-backed securities:
FHLMC certificates:
After 1 to 5 years			1,606				—				21				—				1,627				3.70				—				—				—				—				—				—
After 10 years			1,447				—				110				—				1,557				5.00				1,716				—				101				—				1,817				5.00
			3,053				—				131				—				3,184				4.32				1,716				—				101				—				1,817				5.00
GNMA certificates:
Due within one year			10				—				—				—				10				6.05				30				—				—				—				30				6.49
After 1 to 5 years			269				—				12				—				281				3.89				—				—				—				—				—				—
After 5 to 10 years			636				—				46				—				682				4.30				1,319				—				74				—				1,393				4.80
After 10 years			766,183				—				26,048				225				792,006				3.97				962,246				—				31,105				3,396				989,955				4.25
			767,098				—				26,106				225				792,979				3.97				963,595				—				31,179				3,396				991,378				4.25
FNMA certificates:
After 1 to 5 years			1,671				—				80				—				1,751				3.85				—				—				—				—				—				—
After 5 to 10 years			49,030				—				2,215				—				51,245				3.79				75,547				—				3,987				—				79,534				4.50
After 10 years			54,245				—				2,865				—				57,110				5.62				126,847				—				8,678				—				135,525				5.51
			104,946				—				5,160				—				110,106				4.74				202,394				—				12,665				—				215,059				5.13
Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA:
After 10 years			—				—				—				—				—				—				112,989				—				1,926				—				114,915				0.99
Other mortgage pass-through trust certificates:
After 10 years			92,584				25,763				1				—				66,822				2.28				100,130				27,814				1				—				72,317				2.31
Total mortgage-backed securities			967,681				25,763				31,398				225				973,091				3.89				1,380,824				27,814				45,872				3,396				1,395,486				3.97
Corporate bonds:
After 10 years			2,000				—				—				621				1,379				5.80				—				—				—				—				—				—
Equity securities (without contractual maturity) (1)			77				—				6				—				83				—				77				—				—				18				59				—
Total investment securities available for sale		$	2,816,833			$	25,763			$	44,882			$	1,866			$	2,834,086				2.15			$	2,721,384			$	27,814			$	58,288			$	7,405			$	2,744,453				2.83