10-Q
Table of Contents

 
 
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
For the quarterly period ended June 30, 2009
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
COMMISSION FILE NUMBER 001-14793
FIRST BANCORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
     
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 þ   Accelerated filer o   Non-accelerated filer o
(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: 92,542,722 outstanding as of July 31, 2009.
 
 

 


 

FIRST BANCORP.
INDEX PAGE
         
    PAGE
PART I. FINANCIAL INFORMATION
       
Item 1. Financial Statements:
       
    4  
    5  
    6  
    7  
    8  
    9  
    55  
    120  
    120  
 
       
       
    121  
    121  
    124  
    124  
    125  
    125  
    125  
 
       
    126  
 EX-10.1
 EX-12.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

2


Table of Contents

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:
    risks arising from credit and other risks of the Corporation’s lending and investment activities, including the Corporation’s condo-conversion loans from its Florida operations and the construction and commercial loan portfolios in Puerto Rico, which have affected and may continue to affect, among other things, the level of non-performing assets, charge-offs and the provision expense;
 
    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 recession in the United States, the continued recession in Puerto Rico and the current fiscal problems and budget deficit of the Puerto Rico government;
 
    adverse changes in general economic conditions in the state of Florida and Puerto Rico, including the interest rate scenario, market liquidity, rates and prices, and disruptions in the U.S. capital markets, which may reduce interest margins, impact funding sources and affect demand for 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;
 
    uncertainty about the impact of measures adopted by the Puerto Rico government in response to its fiscal situation on the different sectors of the economy;
 
    uncertainty about the effectiveness and impact of the U.S. government’s rescue plan, including the bailout of U.S. government-sponsored housing agencies, on the financial markets in general and 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 recover all 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 the 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; and
 
    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.
     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 carefully consider these factors and the risk factors referenced under Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q.

3


Table of Contents

FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
                 
(In thousands, except for share information)   June 30, 2009     December 31, 2008  
ASSETS
               
 
               
Cash and due from banks
  $ 177,963     $ 329,730  
 
           
 
               
Money market investments:
               
Federal funds sold
    50,773       54,469  
Time deposits with other financial institutions
    1,540       600  
Other short-term investments
    17,512       20,934  
 
           
Total money market investments
    69,825       76,003  
 
           
 
               
Investment securities available for sale, at fair value:
               
Securities pledge that can be repledged
    4,188,442       2,913,721  
Other investment securities
    1,339,539       948,621  
 
           
Total investment securities available for sale
    5,527,981       3,862,342  
 
           
 
               
Investment securities held to maturity, at amortized cost:
               
Securities pledge that can be repledged
    452,690       968,389  
Other investment securities
    234,241       738,275  
 
           
Total investment securities held to maturity, fair value of $703,430 (2008 - $1,720,412)
    686,931       1,706,664  
 
           
 
               
Other equity securities
    83,430       64,145  
 
               
Loans, net of allowance for loan and lease losses of $407,746 (2008 - $281,526)
    12,695,025       12,796,363  
Loans held for sale, at lower of cost or market
    32,939       10,403  
 
           
Total loans, net
    12,727,964       12,806,766  
 
           
 
               
Premises and equipment, net
    192,817       178,468  
Other real estate owned
    58,064       37,246  
Accrued interest receivable on loans and investments
    79,415       98,565  
Due from customers on acceptances
    789       504  
Other assets
    407,708       330,835  
 
           
Total assets
  $ 20,012,887     $ 19,491,268  
 
           
 
               
 
               
LIABILITIES
               
 
               
Deposits:
               
Non-interest-bearing deposits
  $ 718,370     $ 625,928  
Interest — bearing deposits (including $0 and $1,150,959 measured at fair value as of June 30, 2009 and December 31, 2008, respectively)
    11,317,057       12,431,502  
 
           
Total deposits
    12,035,427       13,057,430  
 
               
Loans payable
    135,000        
Securities sold under agreements to repurchase
    4,130,092       3,421,042  
Advances from the Federal Home Loan Bank (FHLB)
    1,325,440       1,060,440  
Notes payable (including $11,565 and $10,141 measured at fair value as of June 30, 2009 and December 31, 2008, respectively)
    24,388       23,274  
Other borrowings
    231,959       231,914  
Bank acceptances outstanding
    789       504  
Accounts payable from investment purchases
    142,859        
Accounts payable and other liabilities
    146,247       148,547  
 
           
Total liabilities
    18,172,201       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 (2008 - $550,100)
    926,259       550,100  
 
           
Common stock, $1 par value, authorized 250,000,000 shares; issued 102,444,549
    102,444       102,444  
Less: Treasury stock (at cost)
    (9,898 )     (9,898 )
 
           
Common stock outstanding, 92,546,749 shares outstanding
    92,546       92,546  
 
           
Additional paid-in capital
    134,179       108,299  
Legal surplus
    299,006       299,006  
Retained earnings
    342,314       440,777  
Accumulated other comprehensive income, net of deferred tax expense of $3,419 (2008 - $717)
    46,382       57,389  
 
           
Total stockholders’equity
    1,840,686       1,548,117  
 
           
Total liabilities and stockholders’equity
  $ 20,012,887     $ 19,491,268  
 
           
The accompanying notes are an integral part of these statements.

4


Table of Contents

FIRST BANCORP
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(Unaudited)
                                 
    Quarter Ended     Six-Month Period Ended  
    June 30,     June 30,     June 30,     June 30,  
(In thousands, except per share information)   2009     2008     2009     2008  
Interest income:
                               
Loans
  $ 185,318     $ 204,794     $ 373,263     $ 418,605  
Investment securities
    67,345       70,001       137,632       132,018  
Money market investments
    117       1,813       208       5,072  
 
                       
Total interest income
    252,780       276,608       511,103       555,695  
 
                       
 
                               
Interest expense:
                               
Deposits
    79,458       99,767       174,768       205,964  
Loans payable
    614             960        
Federal funds purchased and securities sold under agreements to repurchase
    29,015       28,969       59,160       62,908  
Advances from FHLB
    8,317       9,572       16,609       20,720  
Notes payable and other borrowings
    4,362       3,694       6,994       7,039  
 
                       
Total interest expense
    121,766       142,002       258,491       296,631  
 
                       
Net interest income
    131,014       134,606       252,612       259,064  
 
                       
 
                               
Provision for loan and lease losses
    235,152       41,323       294,581       87,116  
 
                               
Net interest (loss) income after provision for loan and lease losses
    (104,138 )     93,283       (41,969 )     171,948  
 
                               
Non-interest income:
                               
Other service charges on loans
    1,523       1,418       3,052       2,731  
Service charges on deposit accounts
    3,327       3,191       6,492       6,555  
Mortgage banking activities
    2,373       804       3,179       1,123  
Net gain (loss) on sale of investments
    10,305       (190 )     28,143       16,003  
Other-than-temporary impairment losses on investment securities:
                               
Total other-than-temporary impairment losses
    (32,541 )     (489 )     (32,929 )     (489 )
Noncredit-related impairment losses on debt securities not expected to be sold (recognized in other comprehensive income)
    31,480             31,480        
 
                       
Net impairment losses on investment securities
    (1,061 )     (489 )     (1,449 )     (489 )
Rental income
    407       579       856       1,122  
Other non-interest income
    6,541       6,689       13,195       14,337  
 
                       
Total non-interest income
    23,415       12,002       53,468       41,382  
 
                       
 
                               
Non-interest expeses:
                               
Employees’ compensation and benefits
    34,472       34,994       68,714       71,320  
Occupancy and equipment
    14,824       15,541       29,598       30,520  
Business promotion
    3,836       4,802       6,952       9,067  
Professional fees
    3,342       4,919       6,528       9,978  
Taxes, other than income taxes
    6,641       3,988       10,642       8,014  
Insurance and supervisory fees
    16,622       3,945       23,294       7,929  
Net loss on real estate owned (REO) operations
    6,626       3,172       12,001       6,428  
Other non-interest expenses
    9,625       10,402       22,787       20,694  
 
                       
Total non-interest expenses
    95,988       81,763       180,516       163,950  
 
                       
 
                               
(Loss) income before income taxes
    (176,711 )     23,522       (169,017 )     49,380  
 
                               
Income tax benefit
    98,053       9,472       112,250       17,203  
 
                       
 
                               
Net (loss) income
  $ (78,658 )   $ 32,994     $ (56,767 )   $ 66,583  
 
                       
 
                               
Net (loss) income attributable to common stockholders
  $ (94,825 )   $ 22,925     $ (88,052 )   $ 46,445  
 
                       
 
                               
Net (loss) income per common share:
                               
 
                               
Basic
  $ (1.03 )   $ 0.25     $ (0.95 )   $ 0.50  
 
                       
Diluted
  $ (1.03 )   $ 0.25     $ (0.95 )   $ 0.50  
 
                       
 
                               
Dividends declared per common share
  $ 0.07     $ 0.07     $ 0.14     $ 0.14  
 
                       
 
                               
The accompanying notes are an integral part of these statements.

5


Table of Contents

FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Six-Month Period Ended  
    June 30,     June 30,  
(In thousands)   2009     2008  
Cash flows from operating activities:
               
Net (loss) income
  $ (56,767 )   $ 66,583  
 
           
 
               
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
               
Depreciation
    10,460       9,165  
Amortization and impairment of core deposit intangible
    5,856       1,695  
Provision for loan and lease losses
    294,581       87,116  
Deferred income tax benefit
    (94,057 )     (15,068 )
Stock-based compensation recognized
    52        
Gain on sale of investments, net
    (28,143 )     (16,003 )
Other-than-temporary impairments on available-for-sale securities
    1,449       489  
Derivatives instruments and hedging activities gain
    (16,302 )     (27,599 )
Net gain on sale of loans and impairments
    (3,807 )     (617 )
Net amortization of premiums and discounts an deferred loan fees and costs
    549       (539 )
Net increase in mortgage loans held for sale
    (27,691 )      
Amortization of broker placement fees
    12,146       7,079  
Net amortization (accretion) of premium and discounts on investment securities
    5,341       (7,900 )
Decrease in accrued income tax payable
    (16,509 )     (4,715 )
Decrease in accrued interest receivable
    19,390       10,205  
Decrease in accrued interet payable
    (19,193 )     (31,588 )
Decrease in other assets
    17,283       12,365  
Increase (decrease) in other liabilities
    22,521       (23,244 )
 
           
Total adjustments
    183,925       841  
 
           
 
               
Net cash provided by operating activities
    127,158       67,424  
 
           
 
               
Cash flows from investing activities:
               
Principal collected on loans
    1,661,329       1,446,537  
Loans originated
    (1,984,001 )     (1,948,093 )
Purchases of loans
    (100,697 )     (116,864 )
Proceeds from sale of loans
    4,866       70,601  
Proceeds form sale of repossessed assets
    31,510       37,190  
Purchase of servicing assets
          (621 )
Proceeds from sale of available-for-sale securities
    791,313       389,784  
Purchases of securities held to maturity
          (99 )
Purchases of securities available for sale
    (2,627,666 )     (3,351,675 )
Principal repayments and maturities of securities held to maturity
    1,017,001       1,489,215  
Principal repayments of securities available for sale
    511,713       165,658  
Additions to premises and equipment
    (24,809 )     (15,088 )
Proceeds from redemption of other investment securities
          9,342  
Increase in other equity securities
    (19,285 )     (17,106 )
Net cash inflow on acquisition of business
          5,154  
 
           
Net cash used in investing activities
    (738,726 )     (1,836,065 )
 
           
 
               
Cash flows from financing activities
               
Net (decrease) increase in deposits
    (1,015,725 )     432,637  
Net increase in loans payable
    135,000        
Net increase in federal funds purchased and securities sold under agreements to repurchase
    709,050       904,944  
Net FHLB advances taken
    265,000       357,000  
Dividends paid
    (39,710 )     (33,088 )
Issuance of preferred stock and associated warrant
    400,000        
Exercise of stock options
          53  
Other financing activities
    8        
 
           
Net cash provided by financing activities
    453,623       1,661,546  
 
           
 
               
Net decrease in cash and cash equivalents
    (157,945 )     (107,095 )
 
               
Cash and cash equivalents at beginning of period
    405,733       378,945  
 
           
Cash and cash equivalents at end of period
  $ 247,788     $ 271,850  
 
           
 
               
Cash and cash equivalents include:
               
Cash and due from banks
  $ 177,963     $ 122,979  
Money market instruments
    69,825       148,871  
 
           
 
  $ 247,788     $ 271,850  
 
           
The accompanying notes are an integral part of these statements.

6


Table of Contents

FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
                 
    Six-Month Period Ended  
    June 30,     June 30,  
    2009     2008  
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
    (23,841 )      
 
           
Balance at end of period
    926,259       550,100  
 
           
 
               
Common Stock outstanding:
               
Balance at beginning of period
    92,546       92,504  
Common stock issued under stock option plan
          6  
 
           
Balance at end of period
    92,546       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  
Stock-based compensation recognized
    52        
Other
    8        
 
           
Balance at end of period
    134,179       108,326  
 
           
 
               
Legal Surplus
    299,006       286,049  
 
           
 
               
Retained Earnings:
               
Balance at beginning of period
    440,777       409,978  
Net (loss) income
    (56,767 )     66,583  
Cash dividends declared on common stock
    (12,966 )     (12,950 )
Cash dividends declared on preferred stock
    (26,750 )     (20,138 )
Accretion of preferred stock discount — Series F
    (1,980 )      
 
           
Balance at end of period
    342,314       443,473  
 
           
 
               
Accumulated Other Comprehensive Income (Loss), net of tax:
               
Balance at beginning of period
    57,389       (25,264 )
Other comprehensive loss, net of tax
    (11,007 )     (53,501 )
 
           
Balance at end of period
    46,382       (78,765 )
 
           
 
               
Total stockholders’equity
  $ 1,840,686     $ 1,401,693  
 
           
The accompanying notes are an integral part of these statements.

7


Table of Contents

FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
                                 
    Quarter Ended     Six-Month Period Ended  
    June 30,     June 30,     June 30,     June 30,  
(In thousands)   2009     2008     2009     2008  
Net (loss) income
  $ (78,658 )   $ 32,994     $ (56,767 )   $ 66,583  
 
                       
 
                               
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
    (31,480 )           (31,480 )      
Reclassification adjustment for other-than-temporary impairment on debt securities included in net income
    1,061             1,061        
 
                               
All other unrealized gains and losses on available-for-sale securities:
                               
All other unrealized holding gain (loss) arising during the period
    6,565       (66,258 )     49,869       (48,079 )
Reclassification adjustments for net (gain) loss included in net income
    (10,305 )     190       (28,143 )     (6,661 )
Reclassification adjustments for other-than-temporary impairment on equity securities
          489       388       489  
 
                               
Income tax (expense) benefit related to items of other comprehensive income
    (2,210 )     511       (2,702 )     750  
 
                       
 
                               
Other comprehensive loss for the period, net of tax
    (36,369 )     (65,068 )     (11,007 )     (53,501 )
 
                       
 
                               
Total comprehensive (loss) income
  $ (115,027 )   $ (32,074 )   $ (67,774 )   $ 13,082  
 
                       
The accompanying notes are an integral part of these statements.

8


Table of Contents

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 six-month period ended June 30, 2009 are not necessarily indicative of the results to be expected for the entire year.
Adoption of new accounting standards and recently issued but not yet effective accounting pronouncements
     In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. (“SFAS”) 163, “Accounting for Financial Guarantee Insurance Contracts — an interpretation of FASB Statement No. 60.” This Statement requires 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 Statement also clarifies how SFAS 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. SFAS 163 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 statement. The adoption of this Statement did not have a significant impact on the Corporation’s financial statements.
     In June 2008, the FASB issued Staff Position No. (“FSP”) EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 applies to entities with

9


Table of Contents

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 FSP EITF 03-6-1 unvested share-based payment awards that are considered to be participating securities should be included in the computation of EPS pursuant to the two-class method under SFAS 128. FSP EITF 03-6-1 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 June 30, 2009, the outstanding unvested shares of restricted stock do not contain rights to nonforfeitable dividends.
     In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP No. FAS 141(R)-1 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 under SFAS 141(R), “Business Combinations.” The FSP will carry forward the requirements in SFAS 141 for acquired contingencies, thereby requiring that such contingencies 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 in accordance with SFAS 5, “Accounting for Contingencies.” This FSP 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 FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP No. FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157, “Fair Value Measurements.” The FSP relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS 157 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 FSP 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.

10


Table of Contents

     In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”). FSP FAS 115-2 requires an entity to recognize the credit component of an other-than-temporary impairment (“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 FSP also requires expanded disclosures and became effective for interim and annual reporting periods ending after June 15, 2009. As a result of the adoption of this FSP, the Corporation recorded a $1.1 million OTTI through earnings in the second quarter of 2009 that represents the credit loss of available-for-sale private label mortgage-backed securities (“MBS”). This FSP does not amend existing recognition and measurement guidance related to an OTTI of equity securities. The expanded disclosures related to FSP FAS 115-2 are included in Note 4 — Investment Securities.
     In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1 amends SFAS 107, “Disclosures about Fair Value of Financial Instruments,” applies to all financial instruments within the scope of SFAS 107 and 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 FSP became effective for interim reporting periods ending after June 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1 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 SFAS 165, “Subsequent Events” (“SFAS 165”). SFAS 165 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. SFAS 165 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. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. Refer to Note 23 for subsequent events evaluated by the Corporation.
     In June 2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 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. SFAS 166 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

11


Table of Contents

period and for interim and annual reporting periods thereafter. The Corporation is evaluating the impact the adoption of SFAS 166 will have on its financial statements.
     In June 2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 improves financial reporting by enterprises involved with variable interest entities and addresses (i) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166 and (ii) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 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 SFAS 167 will have on its financial statements.
     In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162”. The FASB Accounting Standards Codification (“Codification”) will be 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. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in SFAS 168. All other accounting literature not included in the Codification is nonauthoritative. Following this Statement, the FASB will not issue new standards 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.

12


Table of Contents

2 — EARNINGS PER COMMON SHARE
     The calculations of earnings per common share for the quarters and six-month periods ended on June 30, 2009 and 2008 are as follows:
                                 
    Quarter Ended     Six-Month Period Ended  
    June 30,     June 30,     June 30,     June 30,  
    2009     2008     2009     2008  
    (In thousands, except per share information)  
Net (Loss) Income:
                               
Net (loss) income
  $ (78,658 )   $ 32,994     $ (56,767 )   $ 66,583  
Less: Preferred stock dividends (1)
    (15,069 )     (10,069 )     (29,305 )     (20,138 )
Less: Preferred stock discount accretion
    (1,098 )           (1,980 )      
 
                       
Net (loss) income attributable to common stockholders
  $ (94,825 )   $ 22,925     $ (88,052 )   $ 46,445  
 
                       
 
                               
Weighted-Average Shares:
                               
Basic weighted-average common shares outstanding
    92,511       92,505       92,511       92,505  
Average potential common shares
          203             145  
 
                       
Diluted weighted-average number of common shares outstanding
    92,511       92,708       92,511       92,650  
 
                       
 
                               
(Loss) earning per common share:
                               
Basic
  $ (1.03 )   $ 0.25     $ (0.95 )   $ 0.50  
Diluted
  $ (1.03 )   $ 0.25     $ (0.95 )   $ 0.50  
 
(1)   For the quarter and six-month period ended June 30, 2009, preferred stock dividends include $2.6 million of Series F Preferred Stock cumulative preferred dividends not declared as of the end of the period. Refer to Note 16 for additional information related to the Series F Preferred Stock issued to the U.S. Treasury in connection with the Troubled Asset Relief Program (TARP) Capital Purchase Program.
     (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 six-month period ended June 30, 2009, there were 3,910,910 outstanding stock options, warrants outstanding to purchase 5,842,259 shares of common stock related to the TARP Capital Purchase Program and 36,243 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 Warrant (as hereinafter defined) under the TARP Capital Purchase Program. For the quarter and six-month period ended June 30,

13


Table of Contents

2008, a total of 2,020,600 weighted-average outstanding stock options 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 grants 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. For the quarter and six-month period ended June 30, 2009, the Corporation recognized $26,250 and $52,500, respectively, of stock-based compensation expense related to the aforementioned restricted stock awards. The total unrecognized compensation cost related to these non-vested restricted stocks was $253,750 as of June 30, 2009 and is expected to be recognized over the next 2.4 years.
     The Corporation accounted for stock options using the “modified prospective” method upon adoption of SFAS 123R, “Share-Based Payment.” There were no stock options granted during 2009 and 2008 and therefore no compensation expense associated with stock options for the first half of 2009 and 2008.

14


Table of Contents

     SFAS 123R requires the Corporation to develop an estimate of the number of share-based awards which 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.
     Stock options outstanding as of June 30, 2009 are set forth below:
                                 
    Six-Month Period Ended  
    June 30, 2009  
                    Weighted-Average        
                    Remaining     Aggregate  
    Number of     Weighted-Average     Contractual Term     Intrinsic Value  
    Options     Exercise Price     (Years)     (In thousands)  
Stock options outstanding and exercisable at the beginning and end of period
    3,910,910     $ 12.82       5.7     $  
 
                       
     There were no stock options granted or exercised during the first half of 2009. No options were granted during the first half of 2008. Cash proceeds from 6,000 options exercised during the first half of 2008 amounted to approximately $53,000 and did not have any intrinsic value.

15


Table of Contents

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 accumulated other comprehensive income, approximate fair value, weighted-average yield and contractual maturities of investment securities available for sale as of June 30, 2009 and December 31, 2008 were as follows:
                                                                                         
    June 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)  
U.S. Treasury securities:
                                                                                       
After 5 to 10 years
  $ 95,694     $     $ 1,016     $     $ 96,710       3.54     $     $     $     $        
 
                                                                                       
Obligations of U.S. Government sponsored agencies:
                                                                                       
After 1 to 5 years
    1,139,521             4,321       157       1,143,685       2.12                                
 
                                                                                       
Puerto Rico Government obligations:
                                                                                       
Due within one year
    4,287             6             4,293       6.14       4,593       46             4,639       6.18  
After 1 to 5 years
    110,692             77       238       110,531       5.41       110,624       259       479       110,404       5.41  
After 5 to 10 years
    6,394             291       82       6,603       5.80       6,365       283       128       6,520       5.80  
After 10 years
    15,784             20       196       15,608       5.31       15,789       45       264       15,570       5.30  
 
                                                                 
United States and Puerto Rico Government obligations
    1,372,372             5,731       673       1,377,430       2.55       137,371       633       871       137,133       5.44  
 
                                                                 
Mortgage-backed securities:
                                                                                       
FHLMC certificates:
                                                                                       
Due within one year
    9                         9       6.49       37                   37       5.94  
After 1 to 5 years
    87             2             89       6.74       157       2             159       7.07  
After 5 to 10 years
    30             3             33       8.41       31       3             34       8.40  
After 10 years
    1,718,250             46,145       3,813       1,760,582       5.12       1,846,386       45,743       1       1,892,128       5.46  
 
                                                                 
 
    1,718,376             46,150       3,813       1,760,713       5.12       1,846,611       45,748       1       1,892,358       5.46  
 
                                                                 
GNMA certificates:
                                                                                       
Due within one year
    28                         28       7.08       45       1             46       5.72  
After 1 to 5 years
    91             4             95       6.56       180       6             186       6.71  
After 5 to 10 years
    509             11             520       4.59       566       9             575       5.33  
After 10 years
    328,235             7,956       588       335,603       5.37       331,594       10,283       10       341,867       5.38  
 
                                                                 
 
    328,863             7,971       588       336,246       5.37       332,385       10,299       10       342,674       5.38  
 
                                                                 
FNMA certificates:
                                                                                       
After 1 to 5 years
    41             4             45       10.87       53       5             58       10.20  
After 5 to 10 years
    263,233             9,521       535       272,219       4.81       269,716       4,678             274,394       4.96  
After 10 years
    1,492,364             25,128       5,267       1,512,225       4.59       1,071,521       28,005       1       1,099,525       5.60  
 
                                                                 
 
    1,755,638             34,653       5,802       1,784,489       4.62       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
    174,459                   2,452       172,007       1.07                                
 
                                                                 
 
                                                                                       
Other mortgage pass-through trust certificates:
                                                                                       
After 10 years
    128,046       31,480       2             96,568       3.18       144,217       2       30,236       113,983       5.43  
 
                                                                 
 
                                                                                       
Total mortgage-backed securities
    4,105,382       31,480       88,776       12,655       4,150,023       4.70       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             110       9       528       3.65       814             145       669       2.38  
 
                                                                 
 
                                                                                       
Total investment securities available for sale
  $ 5,478,181     $ 31,480     $ 94,617     $ 13,337     $ 5,527,981       4.16     $ 3,804,236     $ 89,370     $ 31,264     $ 3,862,342       5.46  
 
                                                                 
 
(1)   Represents common shares of other financial institutions in Puerto Rico.
     Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted-average yield on investment securities available for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on securities

16


Table of Contents

available for sale and the non-credit loss component of OTTI are presented as part of AOCI ..
The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2009 and December 31, 2008. It also includes debt securities for which an other-than-temporary impairment was recognized and only the amount related to a credit loss was recognized in earnings :
                                                 
    As of June 30, 2009  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Debt securities
                                               
U.S Government sponsored agencies
  $ 149,843     $ 157     $     $     $ 149,843     $ 157  
 
Puerto Rico Government obligations
    11,189       11       13,655       505       24,844       516  
 
                                               
Mortgage-backed securities
                                               
FHLMC
    247,171       3,813                   247,171       3,813  
GNMA
    39,876       588                   39,876       588  
FNMA
    603,947       5,802       14             603,961       5,802  
Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA
    172,007       2,452                   172,007       2,452  
Other mortgage pass-through trust certificates
                96,303       31,480       96,303       31,480  
Equity securities
    46       9                   46       9  
 
                                   
 
                                               
 
  $ 1,224,079     $ 12,832     $ 109,972     $ 31,985     $ 1,334,051     $ 44,817  
 
                                   
                                                 
    As of December 31, 2008  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Debt securities
                                               
Puerto Rico Government obligations
  $     $     $ 13,288     $ 871     $ 13,288     $ 871  
 
                                               
Mortgage-backed securities
                                               
FHLMC
    68       1                   68       1  
GNMA
    903       10                   903       10  
FNMA
    361       1       21             382       1  
Other mortgage pass-through trust certificates
                113,685       30,236       113,685       30,236  
 
                                               
Equity securities
    318       145                   318       145  
 
                                   
 
                                               
 
  $ 1,650     $ 157     $ 126,994     $ 31,107     $ 128,644     $ 31,264  
 
                                   

17


Table of Contents

Investment Securities Held to Maturity
     The amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of investment securities held-to-maturity as of June 30, 2009 and December 31, 2008 were as follows:
                                                                                 
    June 30, 2009     December 31, 2008  
            Gross             Weighted             Gross             Weighted  
    Amortized     Unrealized     Fair     average     Amortized     Unrealized     Fair     average  
    cost     gains     losses     value     yield%     cost     gains     losses     value     yield%  
    (Dollars in thousands)  
U.S. Treasury securities:
                                                                               
Due within 1 year
  $ 8,500     $ 85     $     $ 8,585       1.07     $ 8,455     $ 34     $     $ 8,489       1.07  
 
                                                                               
Obligations of other U.S. Government sponsored agencies:
                                                                               
After 10 years
    8,235             1,902       6,333       6.13       945,061       5,281       728       949,614       5.77  
Puerto Rico Government obligations:
                                                                               
After 5 to 10 years
    18,249       422       170       18,501       5.86       17,924       480       97       18,307       5.85  
After 10 years
    5,060       9             5,069       5.50       5,145       35             5,180       5.50  
 
                                                           
United States and Puerto Rico Government obligations
    40,044       516       2,072       38,488       4.85       976,585       5,830       825       981,590       5.73  
 
                                                           
 
                                                                               
Mortgage-backed securities:
                                                                               
FHLMC certificates:
                                                                               
After 1 to 5 years
    6,713       84       1       6,796       3.80       8,338       71       5       8,404       3.83  
FNMA certificates:
                                                                               
After 1 to 5 years
    6,054       104             6,158       3.91       7,567       88             7,655       3.85  
After 5 to 10 years
    607,531       18,512             626,043       4.50       686,948       9,227             696,175       4.46  
After 10 years
    24,589       202       6       24,785       5.31       25,226       247       25       25,448       5.31  
 
                                                           
Mortgage-backed securities
    644,887       18,902       7       663,782       4.52       728,079       9,633       30       737,682       4.48  
 
                                                           
 
                                                                               
Corporate bonds:
                                                                               
After 10 years
    2,000             840       1,160       5.80       2,000             860       1,140       5.80  
 
                                                           
 
                                                                               
Total investment securities held-to-maturity
  $ 686,931     $ 19,418     $ 2,919     $ 703,430       4.54     $ 1,706,664     $ 15,463     $ 1,715     $ 1,720,412       5.19  
 
                                                           
     Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options.

18


Table of Contents

     The following tables show the Corporation’s held-to-maturity investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2009 and December 31, 2008:
                                                 
    As of June 30, 2009  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Debt securities
                                               
U.S Government sponsored agencies
  $     $     $ 6,333     $ 1,902     $ 6,333     $ 1,902  
 
                                               
Puerto Rico Government obligations
    6,928       72       4,552       98       11,480       170  
 
                                               
Mortgage-backed securities
                                               
FNMA
    6,593       6                   6,593       6  
FHLMC
                506       1       506       1  
Corporate bonds
                1,160       840       1,160       840  
 
                                   
 
  $ 13,521     $ 78     $ 12,551     $ 2,841     $ 26,072     $ 2,919  
 
                                   
                                                 
    As of December 31, 2008  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Debt securities
                                               
U.S. Government sponsored agencies
  $     $     $ 7,262     $ 728     $ 7,262     $ 728  
Puerto Rico Government obligations
                4,436       97       4,436       97  
 
                                               
Mortgage-backed securities
                                               
FNMA
                6,825       25       6,825       25  
FHLMC
                600       5       600       5  
 
                                               
Corporate bonds
                1,140       860       1,140       860  
 
                                   
 
  $     $     $ 20,263     $ 1,715     $ 20,263     $ 1,715  
 
                                   
Assessment for OTTI
On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered OTTI pursuant to FSP SFAS 115-1 and SFAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP SFAS 115-1 and 124-1”). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Corporation to assess whether the unrealized loss is other-than-temporary. Prior to the adoption of FSP FAS 115-2, unrealized losses that were determined to be temporary were recorded, net of tax, in other comprehensive income for available for sale securities, whereas

19


Table of Contents

unrealized losses related to held-to-maturity securities determined to be temporary were not recognized. Regardless of whether the security was classified as available for sale or held to maturity, unrealized losses that were determined to be other-than-temporary were recorded to earnings. An unrealized loss was considered other-than-temporary if (i) it was probable that the holder would not collect all amounts due according to the contractual terms of the debt security, or (ii) the fair value was below the amortized cost of the debt security for a prolonged period of time and the Corporation did not have the positive intent and ability to hold the security until recovery or maturity.
The Corporation adopted FSP FAS 115-2 during the second quarter of 2009. FSP FAS 115-2 amended the OTTI model for debt securities. Under the new guidance, OTTI losses must be recognized in earnings if an investor has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.
Under FSP FAS 115-2, an unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result of the Corporation’s adoption of FSP FAS 115-2, the credit loss component of an OTTI is recorded as a component of Net impairment losses on investment securities in the accompanying consolidated statement of (loss) income, while the remaining portion of the impairment loss is recognized in OCI, provided the Corporation does not intend to sell the underlying debt security and it is “more likely than not” that the Corporation will not have to sell the debt security prior to recovery.
Debt securities issued by U.S. government agencies, government-sponsored entities and the U.S. Treasury accounted for more than 95% of the total available-for-sale and held-to-maturity portfolio as of June 30, 2009 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s assessment was concentrated mainly on private label MBS of approximately $128 million for which the Corporation evaluates credit losses on a quarterly basis. The Corporation considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:
    The length of time and the extent to which the fair value has been less than the amortized cost basis.
 
    Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;
 
    The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

20


Table of Contents

    Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.
     During the second quarter of 2009, the Corporation recorded OTTI losses on available-for-sale debt securities as follows:
         
(In thousands)   Private label MBS  
Total other-than-temporary impairment losses
  $ (32,541 )
Unrealized other-than-temporary impairment losses recognized in OCI (1)
    31,480  
 
     
Net impairment losses recognized in earnings (2)
  $ (1,061 )
 
     
 
(1)   Represents the noncredit component impact of the OTTI on available-for-sale debt securities
 
(2)   Represents the credit component of the OTTI on available-for-sale debt securities
     The following table summarizes the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI is recognized in OCI:
         
    Quarter Ended  
(In thousands)   June 30, 2009  
Credit losses at the beginning of the period
  $  
Additions:
       
Credit losses related to securities for which an OTTI was not previously recognized
    1,061  
 
     
Ending balance of credit losses on debt securities held for which a portion of an OTTI was recognized in OCI
  $ 1,061  
 
     
     As of June 30, 2009, debt securities with OTTI, for which a loss related to credit was recognized in earnings, consisted entirely of private label MBS. Private label MBS are mortgage pass-through certificates bought from R&G Financial Corporation (“R&G Financial”), a Puerto Rican financial institution. During the second quarter of 2009, the Corporation received from R&G Financial a payment of $4.2 million to eliminate the 10% recourse provision contained in the private label MBS. The elimination of the recourse provision was the reason for which the present value of the expected future cash flows in these private label MBS is less than the amortized cost of the security.
     Private label MBS are collateralized by fixed-rate mortgages on single-family residential properties in the United States and the interest rate is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The underlying mortgages are fixed-rate single family loans with original high FICO scores (over 700) and moderate original loan-to-value ratios (under 80%), as well as moderate delinquency levels. The Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow analysis according to collateral attributes of the underlying mortgage pool (i.e.

21


Table of Contents

loan term, current balance, note rate, rate adjustment type, rate adjustment frequency, rate caps, others) in combination with prepayment forecasts obtained from a commercially available prepayment model (ADCO). The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. Loss assumptions were driven by the combination of default and loss severity estimates, taking into account loan credit characteristics (loan-to-value, state, origination date, property type, occupancy, loan purpose, documentation type, debt-to-income ratio, others) to provide an estimate of default and loss severity.
     For valuation purposes, the Corporation used a discounted cash flow model applying a discount rate that reflects market observed floating spreads over LIBOR, with a widening spread bias on a non-rated security and utilizes relevant assumptions such as prepayment rate, default rate, and loss severity on a loan level basis. Based on the expected cash flows derived from the model, and since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss component was reflected in earnings. Significant assumptions in the valuation of the private label MBS were as follows as of June 30, 2009.
                 
    Weighted    
    Average   Range
Discount rate
    15 %   15%
Prepayment rate
    23 %   15.90% – 39.40%
Projected Cumulative Loss Rate
    4 %   0.39% – 8.90%
     For the six-month periods ended on June 30, 2009 and 2008, the Corporation recorded OTTI of approximately $0.4 million and $0.5 million, respectively, on certain equity securities held in its available-for-sale investment portfolio related to financial institutions in Puerto Rico. Management concluded that the declines in value of the securities were other-than-temporary; as such, the cost basis of these securities was written down to the market value as of the date of the analysis and is reflected in earnings as a realized loss.
     Total proceeds from the sale of securities available for sale during the first half of 2009 amounted to approximately $791.3 million (2008 — $389.8 million). The following table summarizes the realized gains and losses on sales of securities available for sale for the periods indicated:
                                 
    Quarter Ended June 30,     Six-Month Period Ended June 30,  
(In thousands)   2009     2008     2009     2008  
Realized gains
  $ 10,305     $     $ 28,143     $ 6,851  
Realized losses
          (190 )           (190 )
 
                       
Net realized security gains (losses)
  $ 10,305     $ (190 )   $ 28,143     $ 6,661  
 
                       

22


Table of Contents

5 — OTHER EQUITY SECURITIES
     Institutions that are members of the FHLB system are required to maintain a minimum investment in FHLB stock. Such minimum is calculated as a percentage of aggregate outstanding mortgages, and an additional investment is required that is calculated as a percentage of total FHLB advances, letters of credit, and the collateralized portion of interest-rate swaps outstanding. The stock is capital stock issued at $100 par value. Both stock and cash dividends may be received on FHLB stock.
     As of June 30, 2009 and December 31, 2008, the Corporation had investments in FHLB stock with a book value of $81.9 million and $62.6 million, respectively. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from FHLB stock for the second quarter and six-month period ended June 30, 2009 amounted to $0.8 million and $1.1 million, respectively, compared to $1.1 million and $2.3 million, respectively, for the same periods in 2008.
     The Corporation has other equity securities that do not have a readily available fair value. The carrying value of such securities as of June 30, 2009 and December 31, 2008 was $1.6 million. During the first quarter of 2008, the Corporation realized a one-time gain of $9.3 million on the mandatory redemption of part of its investment in VISA, Inc., which completed its initial public offering (IPO) in March 2008.
6 — LOAN PORTFOLIO
     The following is a detail of the loan portfolio:
                 
    As of     As of  
    June 30,     December 31,  
    2009     2008  
    (In thousands)  
Residential real estate loans, mainly secured by first mortgages
  $ 3,621,496     $ 3,481,325  
 
           
 
               
Commercial loans:
               
Construction loans
    1,580,207       1,526,995  
Commercial mortgage loans
    1,564,933       1,535,758  
Commercial loans
    4,002,306       3,857,728  
Loans to local financial institutions collaterilized by real estate mortgages
    336,300       567,720  
 
           
Commercial loans
    7,483,746       7,488,201  
 
           
 
               
Finance leases
    341,119       363,883  
 
Consumer loans
    1,656,410       1,744,480  
 
           
 
               
Loans receivable
    13,102,771       13,077,889  
 
               
Allowance for loan and lease losses
    (407,746 )     (281,526 )
 
           
 
               
Loans receivable, net
    12,695,025       12,796,363  
 
               
Loans held for sale
    32,939       10,403  
 
           
 
               
Total loans
  $ 12,727,964     $ 12,806,766  
 
           

23


Table of Contents

     The Corporation’s primary lending area is Puerto Rico. The Corporation’s Puerto Rico banking subsidiary (“FirstBank” or “the Bank”) also lends in the U.S. and British Virgin Islands markets and in the United States (principally in the state of Florida). Of the total gross loan portfolio, including loans held for sale, of $13.1 billion as of June 30, 2009, approximately 81% has regional credit risk concentration in Puerto Rico, 11% in the United States (mainly in the state of Florida) and 8% in the Virgin Islands.
The Corporation’s largest loan concentration to one borrower of $336.3 million as of June 30, 2009 is with one mortgage originator in Puerto Rico, Doral Financial Corporation. This commercial loan is secured by individual mortgage loans on residential and commercial real estate. During the second quarter of 2009, the Corporation completed a transaction with R&G Financial that involved the purchase of approximately $205 million of residential mortgage loans that previously served as collateral for a commercial loan extended to R&G Financial. The purchase price of the transaction was retained by the Corporation to fully pay off the loan, thereby significantly reducing the Corporation’s exposure to a single borrower. Also, a $500 million facility extended in the first quarter of 2009 to the Puerto Rico Sales Tax Financing Corp. (COFINA under its Spanish acronym), an instrumentality of the Government of Puerto Rico, was paid off on June 18, 2009.
7 — ALLOWANCE FOR LOAN AND LEASE LOSSES
     The changes in the allowance for loan and lease losses were as follows:
                                 
    Quarter Ended     Six-Month Period Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
    (In thousands)  
Balance at beginning of period
  $ 302,531     $ 210,495     $ 281,526     $ 190,168  
Provision for loan and lease losses
    235,152       41,323       294,581       87,116  
Charge-offs
    (131,375 )     (31,602 )     (173,835 )     (58,988 )
Recoveries
    1,438       2,056       5,474       3,976  
 
                       
Balance at end of period
  $ 407,746     $ 222,272     $ 407,746     $ 222,272  
 
                       
     The allowance for impaired loans is part of the allowance for loan and lease losses. The allowance for impaired loans covers those loans for which management has determined that it is probable that the debtor will be unable to pay all the amounts due in accordance with the contractual terms of the loan agreement, and does not necessarily represent loans for which the Corporation will incur a loss. As of June 30, 2009 and December 31, 2008, impaired loans and their related allowance were as follows:
                 
    As of     As of  
    June 30,     December 31,  
    2009     2008  
    (In thousands)  
Impaired loans with valuation allowance, net of charge-offs
  $ 647,390     $ 384,914  
Impaired loans without valuation allowance, net of charge-offs
    288,199       116,315  
 
           
Total impaired loans
  $ 935,589     $ 501,229  
 
           
 
               
Allowance for impaired loans
  $ 117,526     $ 83,353  

24


Table of Contents

     The loans that were classified as impaired during the first half of 2009, totaled approximately $614.0 million ($368.3 million pertained to Florida operations). These loans required a specific reserve of $83.9 million. Partially offsetting the increase in impaired loans were charge-offs of approximately $26.5 million related to the $614 million of loans classified as impaired during 2009 and approximately $93.3 million associated with impaired loans identified prior to 2009 and other decreases, including loans paid in full, partial payments and collateral repossessions, mainly in Florida. During the first half of 2009, the Corporation repossessed approximately $9.2 million of commercial real estate properties in Florida, net of charge-offs of approximately $8.2 million.
     Approximately $64.7 million, or 54%, of the charge-offs recorded during 2009 are related to the construction loan portfolio in Florida and $26.3 million, or 22%, are related to the construction loan portfolio in Puerto Rico.
     The following table sets forth an analysis of the activity in the allowance for impaired loans for the six-month period ended June 30, 2009:
                                         
    For the Six-Month Period Ended June 30, 2009  
    Construction     Commercial     Commercial Mortgage              
    Loans     Loans     Loans     Other Loans (1)     Total  
Allowance for impaired loans, beginning of period
  $ 56,330     $ 18,343     $ 8,680     $     $ 83,353  
Provision for impaired loans
    113,185       19,463       17,796       3,571       154,015  
Charge-offs
    (91,060 )     (14,946 )     (13,836 )           (119,842 )
 
                             
Allowance for impaired loans, end of period
  $ 78,455     $ 22,860     $ 12,640     $ 3,571     $ 117,526  
 
                             
 
(1)   Mainly related to restructured residential mortgage loans.
     Interest income in the amount of approximately $5.4 million and $9.8 million was recognized on impaired loans for the second quarter and first half of 2009, respectively, compared to $2.2 million and $7.9 million, respectively, for the same periods in 2008. The average recorded investment in impaired loans for the first six-months of 2009 and 2008 was $693.4 million and $205.8 million, respectively.
     The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico. Due to the nature of the borrower’s financial condition, the restructure or loan modification through this program as well as other individual commercial, commercial mortgage loans, construction loans and residential mortgages in the U.S. mainland fits the definition of Troubled Debt Restructuring (“TDR”) as defined by SFAS 15, “Accounting by Debtors and Creditors of Troubled Debt Restructurings.” Such restructures are identified as TDRs and accounted for based on the provisions SFAS 114, “Accounting by Creditors for Impairment of a Loan.” As of June 30, 2009, the Corporation’s TDR loans consisted of $56.9 million of residential mortgage loans, $25.1 million commercial loans, $44.5 million commercial mortgage loans and $104.0 million of construction loans.

25


Table of Contents

8 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
     One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation’s assets or liabilities and the risk that net interest income from its loan and investment portfolios will change in response to changes in interest rates. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.
     The Corporation uses various financial instruments, including derivatives, to manage the interest rate risk primarily to the value of its medium-term notes and for protection of rising interest rates in connection with private label MBS.
     The Corporation designates a derivative as a fair value hedge, a cash flow hedge or an economic undesignated hedge when it enters into the derivative contract. As of June 30, 2009 and December 31, 2008, all derivatives held by the Corporation were considered economic undesignated hedges. These undesignated hedges are recorded at fair value with the resulting gain or loss recognized in current earnings.
     The following summarizes most of the derivative activities used by the Corporation in managing interest rate risk:
Interest rate cap agreements — Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection against rising interest rates. Specifically, the interest rate on certain private label mortgage pass-through securities and certain of the Corporation’s commercial loans to other financial institutions is generally a variable rate limited to the weighted-average coupon of the pass-through certificate or referenced residential mortgage collateral, less a contractual servicing fee.
Interest rate swaps — Interest rate swap agreements generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying notional principal amount. As of June 30, 2009, most of the interest rate swaps outstanding are used for protection against rising interest rates. In the past, interest rate swaps volume was much higher since they were used to convert fixed-rate brokered CDs (liabilities), mainly those with long-term maturities, to a variable rate and mitigate the interest rate risk inherent in variable rate loans. However, most of these interest rate swaps were called during 2009, in the face of lower interest rate levels, and as a consequence the Corporation exercised its call option on the swapped-to-floating brokered CDs. Similar to unrealized gains and losses arising from changes in fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being economically hedged.

26


Table of Contents

Indexed options — Indexed options are generally over-the-counter (OTC) contracts that the Corporation enters into in order to receive the appreciation of a specified Stock Index (e.g., Dow Jones Industrial Composite Stock Index) over a specified period in exchange for a premium paid at the contract’s inception. The option period is determined by the contractual maturity of the notes payable tied to the performance of the Stock Index. The credit risk inherent in these options is the risk that the exchange party may not fulfill its obligation.
     To satisfy the needs of its customers, the Corporation may enter into non-hedging transactions. On these transactions, generally, the Corporation participates as a buyer in one of the agreements and as the seller in the other agreement under the same terms and conditions.
     In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.
     The following table summarizes the notional amounts of all derivative instruments as of June 30, 2009 and December 31, 2008:
                 
    Notional Amounts  
    As of     As of  
    June 30,     December 31,  
    2009     2008  
    (In thousands)  
Economic undesignated hedges:
               
 
               
Interest rate contracts:
               
Interest rate swap agreements used to hedge fixed-rate brokered certificates of deposits, notes payable and loans
  $ 80,577     $ 1,184,820  
Written interest rate cap agreements
    197,955       128,043  
Purchase interest rate cap agreements
    335,114       276,400  
Equity contracts:
               
Embedded written options on stock index deposits and notes payable
    53,515       53,515  
Purchased options used to manage exposure to the stock
market on embedded stock index options
    53,515       53,515  
 
           
 
  $ 720,676     $ 1,696,293  
 
           

27


Table of Contents

     The following table summarizes the fair values of derivative instruments and the location in the Statement of Financial Condition as of June 30, 2009 and December 31, 2008:
                                                 
    Asset Derivatives     Liability Derivatives  
            As of     As of             As of     As of  
            June 30,     December 31,             June 30,     December 31,  
          2009     2008           2009     2008  
    Statement of                     Statement of              
    Financial Condition     Fair     Fair     Financial Condition     Fair     Fair  
    Location     Value     Value     Location     Value     Value  
    (Dollars in thousands)  
Economic undesignated hedges:
                                               
 
                                               
Interest rate contracts:
                                               
Interest rate swap agreements used to hedge fixed-rate brokered CDs, notes payable and loans
  Other Assets   $ 326     $ 5,649     Accounts payable and other liabilities   $ 5,708     $ 7,188  
Written interest rate cap agreements
  Other Assets               Accounts payable and other liabilities     428       3  
Purchase interest rate cap agreements
  Other Assets     4,004       764     Accounts payable and other liabilities            
 
                                               
Equity contracts:
                                               
Embedded written options on stock index deposits
  Other Assets               Interest bearing deposits     23       241  
Embedded written options on stock index notes payable
  Other Assets               Notes payable     510       1,073  
Purchased options used to manage exposure to the stock market on embedded stock index options
  Other Assets     568       1,597     Accounts payable and other liabilities            
 
                                       
 
          $ 4,898     $ 8,010             $ 6,669     $ 8,505  
 
                                       
     The following table summarizes the effect of derivative instruments on the Statement of Income for the quarters and six-month periods ended on June 30, 2009 and 2008:
                                            
          Unrealized Gain or (Loss)     Unrealized Gain or (Loss)  
    Location of Unrealized Gain or (loss)     Quarter Ended     Six-Month Period Ended  
    Recognized in Income on     June 30,     June 30,  
    Derivatives     2009     2008     2009     2008  
            (In thousands)     (In thousands)  
Interest rate contracts:
                                       
Interest rate swap agreements used to hedge:
                                       
Brokered CDs
  Interest Expense on Deposit   $ (877 )   $ (29,805 )   $ (5,236 )   $ 25,552  
Notes payable
  Interest Expense on Notes Payable and Other Borrowings           (247 )     3       (114 )
Loans
  Interest Income on Loans     837       2,548       1,390       40  
 
                                       
Written and purchased interest rate cap agreements - mortgage-backed securities
  Interest Income on Investment Securities     2,489       3,041       2,706       857  
Written and purchased interest rate cap agreements — loans
  Interest Income on Loans     139       54       144       23  
 
                                       
Equity contracts:
                                       
Embedded written and purchased options on stock index deposits
  Interest Expense on Deposits     (15 )     (129 )     (82 )     (150 )
Embedded written and purchased options on stock index notes payable
  Interest Expense on Notes Payable and Other Borrowings     (53 )     (67 )     (166 )     113  
 
                             
Total Unrealized Gain (Loss) on derivatives
          $ 2,520     $ (24,605 )   $ (1,241 )   $ 26,321  
 
                             
     Derivative instruments, such as interest rate swaps, are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The unrealized gains and losses in the fair value of derivatives that economically hedge certain callable brokered CDs and medium-term notes are partially offset by unrealized gains and losses on the valuation of such economically hedged liabilities that were elected to be measured at fair value under the provisions of SFAS 159. The Corporation includes the gain or loss on those economically hedged liabilities (brokered CDs and medium-term notes) in the same line item as the offsetting loss or gain on the related derivatives as set forth below:

28


Table of Contents

                                                 
    Quarter ended June 30,
    2009   2008
    Loss   Gain / (Loss)   Net Unrealized   Loss   Gain   Net Unrealized
(In thousands)   on Derivatives   on SFAS 159 liabilities   Gain / (Loss)   on Derivatives   on SFAS 159 liabilities   Loss
Interest expense on Deposits
  $ (892 )   $ 1,555     $ 663     $ (29,934 )   $ 28,462     $ (1,472 )
Interest expense on Notes Payable and Other Borrowings
    (53 )     (1,679 )     (1,732 )     (314 )     2       (312 )
                                                 
    Six-Month Period ended June 30,
    2009   2008
    Loss   Gain / (Loss)   Net Unrealized   Gain / (Loss)   (Loss) / Gain   Net Unrealized
(In thousands)   on Derivatives   on SFAS 159 liabilities   Gain / (Loss)   on Derivatives   on SFAS 159 liabilities   Gain
Interest expense on Deposits
  $ (5,318 )   $ 8,696     $ 3,378       25,402       (21,095 )   $ 4,307  
Interest expense on Notes Payable and Other Borrowings
    (163 )     (1,424 )     (1,587 )     (1 )     899       898  
     A summary of interest rate swaps as of June 30, 2009 and December 31, 2008 follows:
                 
    As of   As of
    June 30,   December 31,
    2009   2008
    (Dollars in thousands)
Pay fixed/receive floating:
               
Notional amount
  $ 80,577     $ 78,855  
Weighted-average receive rate at period end
    2.24 %     3.21 %
Weighted-average pay rate at period end
    6.52 %     6.75 %
Floating rates range from 167 to 252 basis points over 3-month LIBOR
               
 
               
Receive fixed/pay floating (generally used to economically hedge fixed-rate brokered CDs and notes payable):
               
Notional amount
  $     $ 1,105,965  
Weighted-average receive rate at period end
    0.00 %     5.30 %
Weighted-average pay rate at period end
    0.00 %     3.09 %
     During the first half of 2009, all of the $1.1 billion of interest rate swaps that economically hedge brokered CDs were called by the counterparties, mainly due to lower levels of 3-month LIBOR. Following the cancellation of the interest rate swaps, the Corporation exercised its call option on the approximately $1.1 billion swapped-to- floating brokered CDs. The Corporation recorded a net loss of $3.5 million as a result of these transactions resulting from the reversal of the cumulative mark-to-market valuation of the swaps and the brokered CDs called.
     As of June 30, 2009, the Corporation has not entered into any derivative instrument containing credit-risk-related contingent features.

29


Table of Contents

9 — GOODWILL AND OTHER INTANGIBLES
     Goodwill as of June 30, 2009 and December 31, 2008 amounted to $28.1 million recognized as part of “Other Assets.” The goodwill resulted primarily from the acquisition of Ponce General Corporation in 2005. No goodwill impairment was recognized during 2009 and 2008. Goodwill is reviewed for impairment at least annually. Goodwill impairment analysis will be conducted during the second half of 2009.
     As of June 30, 2009, the gross carrying amount and accumulated amortization of core deposit intangibles was $41.8 million and $23.7 million, respectively, recognized as part of “Other Assets” in the Consolidated Statements of Financial Condition (December 31, 2008 — $45.8 million and $21.8 million, respectively). During the quarter and six-month period ended June 30, 2009, the amortization expense of core deposits amounted to $0.9 million and $1.9 million, respectively, compared to $0.9 million and $1.7 million, respectively, for the comparable periods in 2008. As a result of an impairment evaluation on core deposit intangibles, in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” there was an impairment charge of $4.0 million recognized during the first half of 2009 related to core deposits in FirstBank Florida attributable to decreases in the base of core deposits acquired.
10 — DEPOSITS
     The following table summarizes deposit balances:
                 
    As of     As of  
    June 30,     December 31,  
    2009     2008  
    (In thosands)  
Non-interest bearing checking account deposits
  $ 718,370     $ 625,928  
Savings accounts
    1,479,795       1,288,179  
Interest-bearing checking accounts
    881,868       726,731  
Certificates of deposits
    1,719,229       1,986,770  
Brokered certificates of deposits (includes $0 and $1,150,959 measured at fair value as of June 30, 2009 and December 31, 2008, respectively)
    7,236,165       8,429,822  
 
           
 
  $ 12,035,427     $ 13,057,430  
 
           
     The interest expense on deposits includes the market valuation of interest rate swaps that economically hedge brokered CDs, the related interest exchanged, the amortization of broker placement fees related to brokered CDs not elected for the fair value option and changes in fair value of callable brokered CDs elected for the fair value option under SFAS 159 (“SFAS 159 brokered CDs”).

30


Table of Contents

     The following are the components of interest expense on deposits:
                                 
    Quarter Ended     Six-Month Period Ended  
    June 30,     June 30,     June 30,     June 30,  
    2009     2008     2009     2008  
    (In thousands)     (In thousands)  
Interest expense on deposits
  $ 75,058     $ 94,039     $ 166,000     $ 203,192  
Amortization of broker placement fees (1)
    5,063       4,256       12,146       7,079  
 
                       
Interest expense on deposits excluding net unrealized (gain) loss on derivatives and SFAS 159 brokered CDs
    80,121       98,295       178,146       210,271  
 
                               
Net unrealized (gain) loss on derivatives and SFAS 159 brokered CDs
    (663 )     1,472       (3,378 )     (4,307 )
 
                       
Total interest expense on deposits
  $ 79,458     $ 99,767     $ 174,768     $ 205,964  
 
                       
 
(1)   Related to brokered CDs not elected for the fair value option under SFAS 159.
     Total interest expense on deposits includes net cash settlements on interest rate swaps that economically hedge brokered CDs that for the quarter and six-month period ended June 30, 2009 amounted to net interest realized of $0.8 million and $5.5 million, respectively, compared to $12.9 million and $19.9 million, respectively, for the comparable periods in 2008. As of June 30, 2009, there were no interest rate swap agreements outstanding that hedge brokered CDs since all of them were called by the counterparties during 2009. Refer to Note 8 for additional information.
11 — LOANS PAYABLE
     As of June 30, 2009, loans payable consisted of $135 million in short-term borrowings under the FED Discount Window Program bearing interest at 0.50%. In the first quarter of 2009, the Corporation received approval to participate in the Borrower-in-Custody (“BIC”) Program of the FED. Through the BIC Program, a broad range of loans (including commercial, consumer and mortgages) may be pledged as collateral for borrowings through the FED Discount Window. As of June 30, 2009, the Corporation had an unused capacity of approximately $514 million on this credit facility based on collateral pledged at the FED, including the haircut reflecting the perceived risk associated with holding the collateral.
12 — SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
     Securities sold under agreements to repurchase (repurchase agreements) consist of the following:
                 
    June 30,     December 31,  
    2009     2008  
    (In thousands)  
Repurchase agreements, interest ranging from -1.75% to 5.39% (2008 - 2.29% to 5.39%) (1)
  $ 4,130,092     $ 3,421,042  
 
           
 
(1)   As of June 30, 2009, certain U.S. Treasury securities repurchase agreements amounting to $66.4 million were arranged at negative rates.

31


Table of Contents

          Repurchase agreements mature as follows:
         
    June 30,  
    2009  
    (In thousands)  
One to thirty days
  $ 1,142,592  
Over thirty to ninety days
     
Over ninety days to one year
    587,500  
One to three years
    1,000,000  
Three to five years
    900,000  
Over five years
    500,000  
 
     
Total
  $ 4,130,092  
 
     
     As of June 30, 2009 and December 31, 2008, the securities underlying such agreements were delivered to the dealers with whom the repurchase agreements were transacted.
     Repurchase agreements as of June 30, 2009, grouped by counterparty, were as follows:
                 
(Dollars in thousands)           Weighted-Average  
            Maturity  
Counterparty   Amount     (In Months)  
Credit Suisse First Boston
  $ 1,383,031       22  
Dean Witter / Morgan Stanley
    796,500       14  
Citigroup Global Markets
    694,830       38  
JP Morgan
    585,151       27  
Barclays Capital
    570,580       26  
UBS Financial Services, Inc.
    100,000       37  
 
             
 
  $ 4,130,092          
 
             
13 — ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)
     Following is a summary of the advances from the FHLB:
                 
    June 30,     December 31,  
    2009     2008  
    (In thousands)  
Fixed-rate advances from FHLB, with a weighted-average interest rate of 2.41% (2008 - 3.09%)
  $ 1,325,440     $ 1,060,440  
 
           

32


Table of Contents

     Advances from FHLB mature as follows:
         
    (In thousands)  
One to thirty days
  $ 525,000  
Over thirty to ninety days
     
Over ninety days to one year
    60,000  
One to three years
    507,000  
Three to five years
    233,440  
 
     
Total
  $ 1,325,440  
 
     
     As of June 30, 2009, the Corporation had additional capacity of approximately $402 million on this credit facility based on collateral pledged at the FHLB, including the haircut reflecting the perceived risk associated with holding the collateral.
14 — NOTES PAYABLE
          Notes payable consist of:
                 
    June 30,     December 31,  
    2009     2008  
    (In thousands)  
Callable step-rate notes, bearing step increasing interest from 5% to 7% (5.50% as of June 30, 2009 and December 31, 2008) maturing on October 18, 2019, measured at fair value under SFAS 159
  $ 11,565     $ 10,141  
 
               
Dow Jones Industrial Average (DJIA) linked principal protected notes:
               
 
               
Series A maturing on February 28, 2012
    6,095       6,245  
 
               
Series B maturing on May 27, 2011
    6,728       6,888  
 
           
Total
  $ 24,388     $ 23,274  
 
           
15 — OTHER BORROWINGS
          Other borrowings consist of:
                 
    June 30,     December 31,  
    2009     2008  
    (In thousands)  
Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.75% over 3-month LIBOR (3.36% as of June 30, 2009 and 4.62% as of December 31, 2008)
  $ 103,093     $ 103,048  
 
               
Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.50% over 3-month LIBOR (3.11% as of June 30, 2009 and 4.00% as of December 31, 2008)
    128,866       128,866  
 
           
Total
  $ 231,959     $ 231,914  
 
           

33


Table of Contents

16 — STOCKHOLDERS’ EQUITY
Common stock
     The Corporation has 250,000,000 authorized shares of common stock with a par value of $1 per share. As of June 30, 2009 and December 31, 2008, there were 102,444,549 shares issued and 92,546,749 shares outstanding. In February 2009, the Corporation’s Board of Directors declared a first quarter cash dividend of $0.07 per common share which was paid on March 31, 2009 to common stockholders of record on March 15, 2009 and in May 2009 declared a second quarter dividend of $0.07 per common share which was paid on June 30, 2009 to common stockholders of record on June 15, 2009. On July 30, 2009, the Corporation announced the suspension of common and preferred dividends effective with the preferred dividend for the month of August 2009.
Stock repurchase plan and treasury stock
     The Corporation has a stock repurchase program under which from time to time it repurchases shares of common stock in the open market and holds them as treasury stock. No shares of common stock were repurchased during 2009 and 2008 by the Corporation. As of June 30, 2009 and December 31, 2008, of the total amount of common stock repurchased, 9,897,800 shares were held as treasury stock and were available for general corporate purposes.
Preferred stock
     The Corporation has 50,000,000 authorized shares of preferred stock with a par value of $1, redeemable at the Corporation’s option subject to certain terms. This stock may be issued in series and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. As of June 30, 2009, the Corporation has five outstanding series of non- convertible non-cumulative preferred stock: 7.125% non-cumulative perpetual monthly income preferred stock, Series A; 8.35% non-cumulative perpetual monthly income preferred stock, Series B; 7.40% non-cumulative perpetual monthly income preferred stock, Series C; 7.25% non-cumulative perpetual monthly income preferred stock, Series D; and 7.00% non-cumulative perpetual monthly income preferred stock, Series E, which trade on the NYSE. The liquidation value per share is $25. Annual dividends of $1.75 per share (Series E), $1.8125 per share (Series D), $1.85 per share (Series C), $2.0875 per share (Series B) and $1.78125 per share (Series A) are payable monthly, if declared by the Board of Directors. Dividends declared on the non-convertible non-cumulative preferred stock for the first half of 2009 and 2008 amounted to $20.1 million.
     In January 2009, in connection with the TARP Capital Purchase Program, established as part of the Emergency Economic Stabilization Act of 2008, the Corporation issued to the U.S. Treasury 400,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series F, $1,000 liquidation preference value per share. The Series F Preferred Stock has a call feature after three years. In connection with this investment, the Corporation also

34


Table of Contents

issued to the U.S. Treasury a 10-year warrant (the “Warrant”) to purchase 5,842,259 shares of the Corporation’s common stock at an exercise price of $10.27 per share. The Corporation registered the Series F Preferred Stock, the Warrant and the shares of common stock underlying the Warrant for sale under the Securities Act of 1933. The allocated carrying values of the Series F Preferred Stock and the Warrant on the date of issuance (based on the relative fair values) were $374.2 million and $25.8 million, respectively. The Series F Preferred Stock will accrete to the redemption price of $400 million over five years.
     The Series F Preferred Stock qualifies as Tier 1 regulatory capital. Cumulative dividends on the Series F Preferred Stock accrue on the liquidation preference amount on a quarterly basis at a rate of 5% per annum for the first five years, and thereafter at a rate of 9% per annum, but will only be paid when, as and if declared by the Corporation’s Board of Directors out of assets legally available therefore. The Series F Preferred Stock ranks pari passu with the Corporation’s existing Series A through E, in terms of dividend payments and distributions upon liquidation, dissolution and winding up of the Corporation. The Purchase Agreement of this issuance contains limitations on the payment of dividends on common stock, including limiting regular quarterly cash dividends to an amount not exceeding the last quarterly cash dividend paid per share, or the amount publicly announced (if lower), of common stock prior to October 14, 2008, which is $0.07 per share. For the six-month period ended June 30, 2009, preferred stock dividends of Series F Preferred Stock amounted to $9.2 million, including $2.6 million of cumulative preferred dividends not declared as of the end of the period.
     The Warrant has a 10-year term and is exercisable at any time. The exercise price and the number of shares issuable upon exercise of the Warrant are subject to certain anti-dilution adjustments.
     The possible future issuance of equity securities through the exercise of the warrant could affect the Corporation’s current stockholders in a number of ways, including by:
    diluting the voting power of the current holders of common stock (the shares underlying the Warrant represent approximately 6% of the Corporation’s shares of common stock as of June 30, 2009);
 
    diluting the earnings per share and book value per share of the outstanding shares of common stock; and
 
    making the payment of dividends on common stock more expensive.
As mentioned above, on July 30, 2009, the Corporation announced the suspension of dividends for common and all its outstanding series of preferred stock. This suspension is effective with the dividends for the month of August 2009, on the Corporation’s five outstanding series of non-cumulative preferred stock and dividends for the Corporation’s outstanding Series F Cumulative Preferred Stock and the Corporation’s common stock.

35


Table of Contents

17 — INCOME TAXES
     Income tax expense includes Puerto Rico and Virgin Islands income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation for U.S. income tax purposes and is generally subject to United States income tax only on its income from sources within the United States or income effectively connected with the conduct of a trade or business within the United States. Any such tax paid is creditable, within certain conditions and limitations, against the Corporation’s Puerto Rico tax liability. The Corporation is also subject to U.S. Virgin Islands taxes on its income from sources within that jurisdiction. Any such tax paid is creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions and limitations.
     Under the Puerto Rico Internal Revenue Code of 1994, as amended (“PR Code”), First BanCorp is subject to a maximum statutory tax rate of 39%. In 2009 the Puerto Rico Government approved Act No. 7 (the “Act”), to stimulate Puerto Rico’s economy and to reduce the Puerto Rico Government’s fiscal deficit. The Act imposes a series of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax determined, which is applicable to corporations, among others, whose combined income exceeds $100,000, effectively resulting in an increase in the maximum statutory tax rate from 39% to 40.95%. This temporary measure is effective for tax years that commenced after December 31, 2008 and before January 1, 2012. The PR Code also includes an alternative minimum tax of 22% that applies if the Corporation’s regular income tax liability is less than the alternative minimum tax requirements.
     The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through International Banking Entities (“IBEs”) of the Corporation and the Bank and through the Bank’s subsidiary FirstBank Overseas Corporation, in which the interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation. Under the Act, all IBEs are subject to a special 5% tax on their net income not otherwise subject to tax pursuant to the PR Code. This temporary measure is also effective for tax years that commence after December 31, 2008 and before January 1, 2012. The IBEs and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico. IBEs that operate as a unit of a bank pay income taxes at normal rates to the extent that the IBEs’ net income exceeds 20% of the bank’s total net taxable income.
     For the six-month period ended June 30, 2009, the Corporation recognized an income tax benefit of $112.3 million, compared to an income tax benefit of $17.2 million recorded for the same period in 2008. The positive fluctuation in the financial results was mainly related to increased deferred tax benefits due to net operating losses carryforward recorded as a result of current taxable losses and due to lower taxable income and adjustments to the deferred tax asset, as a result of the aforementioned changes to the PR Code enacted tax rates. The Corporation recorded an additional income tax benefit of $6.0 million for the six-month period ended

36


Table of Contents

June 30, 2009 in connection with changes to enacted tax rates, net of a $3.6 million provision recorded for the operations of FirstBank Overseas Corporation. Deferred tax amounts have been adjusted for the effect of the change in the income tax rate considering the enacted tax rate expected to apply to taxable income in the period in which the deferred tax asset or liability is expected to be settled or realized.
     As of June 30, 2009, the Corporation evaluated its ability to realize the deferred tax asset and concluded, based on the evidence available, that it is more likely than not that some of the deferred tax asset will not be realized and, thus, established a valuation allowance of $5.5 million, compared to a valuation allowance of $7.3 million as of December 31, 2008. As of June 30, 2009, the deferred tax asset, net of the valuation allowance of $5.5 million, amounted to approximately $217.8 million compared to $128.0 million, net of the valuation allowance of $7.3 million as of December 31, 2008.
     FASB Interpretation No. 48 (“FIN 48”) prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken on income tax returns. Under FIN 48, income tax benefits are recognized and measured based upon a two-step model: 1) a tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit recognized in accordance with FIN 48 and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit (“UTB”).
     As of June 30, 2009, the balance of the Corporation’s UTBs amounted to $4.7 million (excluding accrued interest), all of which, if recognized, would affect the Corporation’s effective tax rate. The Corporation classifies all interest and penalties, if any, related to tax uncertainties as income tax expense. As of June 30, 2009 and December 31, 2008, the Corporation’s accrual for interest that relates to tax uncertainties amounted to $2.1 million and $6.8 million, respectively. As of June 30, 2009, there is no need to accrue for the payment of penalties. For the six-month period ended on June 30, 2009 and 2008, the total amount of interest recognized by the Corporation as part of income tax expense related to tax uncertainties was $0.5 million and $0.8 million, respectively. The amount of UTBs may increase or decrease in the future for various reasons, including changes in the amounts for current tax year positions, the expiration of open income tax returns due to the expiration of statutes of limitations, changes in management’s judgment about the level of uncertainty, the status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. During the second quarter of 2009, the Corporation reversed UTBs by $10.8 million and related accrued interest of $3.5 million due to the lapse of the statute of limitations for the 2004 taxable year.
     The Corporation’s UTBs and interest relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has expired. The statute of limitations under the PR Code is 4 years, and for Virgin Islands and U.S. income tax purposes is 3 years after a tax return is due or filed, whichever is later. The completion of an audit by the taxing authorities or the expiration

37


Table of Contents

of the statute of limitations for a given audit period could result in an adjustment to the Corporation’s liability for income taxes. Any such adjustment could be material to results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period.
     In July 2009, the Corporation entered into an agreement with the Puerto Rico Department of the Treasury to conclude an income tax investigation and to eliminate all possible income and withholding tax deficiencies related to taxable years 2005, 2006, 2007 and 2008. As a result of such agreement, the Corporation will reverse during the third quarter of 2009 the remaining UTBs and related interest by approximately $2.9 million, net of the payment made to the Puerto Rico Department of the Treasury in connection with the conclusion of the tax investigation.
18 — FAIR VALUE
     SFAS 159 generally permits the measurement of selected eligible financial instruments at fair value at specified election dates. The Corporation elected to adopt the fair value option for certain of its brokered CDs and medium-term notes (“SFAS 159 liabilities”) on the adoption date.
Fair Value Option
Callable Brokered CDs and Certain Medium-Term Notes
     The Corporation elected the fair value option for certain financial liabilities that were hedged with interest rate swaps that were previously designated for fair value hedge accounting in accordance with SFAS 133. As of June 30, 2009 and December 31, 2008, these liabilities included certain medium-term notes with a fair value of $11.6 million and $10.1 million, respectively, and principal balance of $15.4 million recorded in notes payable. As of December 31, 2008, liabilities recognized at fair value also included callable brokered CDs with an aggregate fair value of $1.15 billion and principal balance of $1.13 billion, recorded in interest-bearing deposits. Interest paid/accrued on these instruments is recorded as part of interest expense and the accrued interest is part of the fair value of the SFAS 159 liabilities. Electing the fair value option allows the Corporation to eliminate the burden of complying with the requirements for hedge accounting under SFAS 133 (e.g., documentation and effectiveness assessment) without introducing earnings volatility. Interest rate risk on the callable brokered CDs measured at fair value under SFAS 159 was economically hedged with callable interest rate swaps, with the same terms and conditions, until they were all called during 2009. The Corporation did not elect the fair value option for the vast majority of other brokered CDs because these are not hedged by derivatives.
     Medium-term notes and callable brokered CDs for which the Corporation elected the fair value option were priced using observable market data in the institutional markets.
Fair Value Measurement

38


Table of Contents

     SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
     
Level 1
  Valuations of Level 1 assets and liabilities are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 1 assets and liabilities include equity securities that are traded in an active exchange market, as well as certain U.S. Treasury and other U.S. government and agency securities and corporate debt securities that are traded by dealers or brokers in active markets.
 
   
Level 2
  Valuations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on the value of identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities (e.g., callable brokered CDs and medium-term notes elected for the fair value option under SFAS 159) whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
 
   
Level 3
  Valuations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models for which the determination of fair value requires significant management judgment or estimation.
Estimated Fair Value of Financial Instruments
     The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.
     The estimated fair value is subjective in nature and involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the underlying assumptions used in calculating fair value could significantly affect the

39


Table of Contents

results. In addition, the fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business.
     The following table presents the estimated fair value and carrying value of financial instruments as of June 30, 2009 and December 31, 2008.
                                 
    Total Carrying             Total Carrying        
    Amount in             Amount in        
    Statement of             Statement of        
    Financial     Fair Value     Financial     Fair Value  
    Condition     Estimated     Condition     Estimated  
    6/30/2009(1)     6/30/2009(2)     12/31/2008(1)     12/31/2008(2)  
            (In thousands)          
Assets:
                               
Cash and due from banks and money market investments
  $ 247,788     $ 247,788     $ 405,733     $ 405,733  
Investment securities available for sale
    5,527,981       5,527,981       3,862,342       3,862,342  
Investment securities held to maturity
    686,931       703,430       1,706,664       1,720,412  
Other equity securities
    83,430       83,430       64,145       64,145  
Loans receivable, including loans held for sale
    13,135,710               13,088,292          
Less: allowance for loan and lease losses
    (407,746 )             (281,526 )        
 
                           
Loans, net of allowance
    12,727,964       12,769,659       12,806,766       12,416,603  
Derivatives, included in assets
    4,898       4,898       8,010       8,010  
 
                               
Liabilities:
                               
Deposits
    12,035,427       12,175,191       13,057,430       13,221,026  
Loans payable
    135,000       135,000              
Federal funds purchased and securities sold under agreements to repurchase
    4,130,092       4,308,099       3,421,042       3,655,652  
Advances from FHLB
    1,325,440       1,367,332       1,060,440       1,079,298  
Notes payable
    24,388       22,940       23,274       18,755  
Other borrowings
    231,959       76,727       231,914       81,170  
Derivatives, included in liabilities
    6,669       6,669       8,505       8,505  
 
(1)   This column discloses carrying amount, required by FSP FAS 107-1 and APB 28-1.
 
(2)   This column discloses fair value estimates, required by FSP FAS 107-1 and APB 28-1.
     Assets and liabilities measured at fair value on a recurring basis, including financial liabilities for which the Corporation has elected the fair value option, are summarized below:
                                                                 
    As of June 30, 2009   As of December 31, 2008
    Fair Value Measurements Using   Fair Value Measurements Using
                            Assets / Liabilities                           Assets / Liabilities
(In thousands)   Level 1   Level 2   Level 3   at Fair Value   Level 1   Level 2   Level 3   at Fair Value
Assets:
                                                               
Securities available for sale (1)
  $ 97,238     $ 5,334,175     $ 96,568     $ 5,527,981     $ 2,217     $ 3,746,142     $ 113,983     $ 3,862,342  
Derivatives, included in assets (1)
          1,384       3,514       4,898             7,250       760       8,010  
 
Liabilities:
                                                               
Callable brokered CDs (2)
                                  1,150,959             1,150,959  
Medium-term notes (2)
          11,565             11,565             10,141             10,141  
Derivatives, included in liabilities (1)
          6,669             6,669             8,505             8,505  
 
(1)   Carried at fair value prior to the adoption of SFAS 159.
 
(2)   Items for which the Corporation has elected the fair value option under SFAS 159.

40


Table of Contents

                                                 
    Changes in Fair Value for the Quarter Ended     Changes in Fair Value for the Six-Month Period Ended  
    June 30, 2009, for items Measured at Fair Value Pursuant     June 30, 2009, for items Measured at Fair Value Pursuant  
    to Election of the Fair Value Option     to Election of the Fair Value Option  
                    Total                     Total  
                    Changes in Fair Value                     Changes in Fair Value  
    Unrealized Losses and     Unrealized Gains and     Unrealized (Losses) Gains     Unrealized Gains and     Unrealized Losses and     Unrealized Gains (Losses)  
    Interest Expense included     Interest Expense included     and Interest Expense     Interest Expense included     Interest Expense included     and Interest Expense  
    in Interest Expense     in Interest Expense     included in     in Interest Expense     in Interest Expense     included in  
(In thousands)   on Deposits (1)     on Notes Payable (1)     Current-Period Earnings (1)     on Deposits (1)     on Notes Payable (1)     Current-Period Earnings (1)  
Callable brokered CDs
  $ (287 )   $     $ (287 )   $ (2,068 )   $     $ (2,068 )
Medium-term notes
          (1,892 )     (1,892 )           (1,849 )     (1,849 )
 
                                   
 
  $ (287 )   $ (1,892 )   $ (2,179 )   $ (2,068 )   $ (1,849 )   $ (3,917 )
 
                                   
 
(1)   Changes in fair value for the quarter and six-month period ended June 30, 2009 include interest expense on callable brokered CDs of $1.8 million, and $10.8 million, respectively, and interest expense on medium-term notes of $0.2 million and $0.4 million, respectively. Interest expense on callable brokered CDs and medium-term notes that have been elected to be carried at fair value under the provisions of SFAS 159 are recorded in interest expense in the Consolidated Statement of Income based on their contractual coupons.
                                                 
    Changes in Fair Value for the Quarter Ended     Changes in Fair Value for the Six-Month Period Ended  
    June 30, 2008, for items Measured at Fair Value Pursuant     June 30, 2008, for items Measured at Fair Value Pursuant  
    to Election of the Fair Value Option     to Election of the Fair Value Option  
                    Total                     Total  
                    Changes in Fair Value                     Changes in Fair Value  
    Unrealized Gains and     Unrealized Gains and     Unrealized Gains     Unrealized Losses and     Unrealized Gains and     Unrealized (Losses) Gains  
    Interest Expense included     Interest Expense included     and Interest Expense     Interest Expense included     Interest Expense included     and Interest Expense  
    in Interest Expense     in Interest Expense     included in     in Interest Expense     in Interest Expense     included in  
(In thousands)   on Deposits (1)     on Notes Payable (1)     Current-Period Earnings (1)     on Deposits (1)     on Notes Payable (1)     Current-Period Earnings (1)  
Callable brokered CDs
  $ (1,320 )   $     $ (1,320 )   $ (99,992 )   $     $ (99,992 )
Medium-term notes
          (211 )     (211 )           474       474  
 
                                   
 
  $ (1,320 )   $ (211 )   $ (1,531 )   $ (99,992 )   $ 474     $ (99,518 )
 
                                   
 
(1)   Changes in fair value for the quarter and six-month period ended June 30, 2008 include interest expense on callable brokered CDs of $29.8 million, and $78.9 million, respectively, and interest expense on medium-term notes of $0.2 million and $0.4 million, respectively. Interest expense on callable brokered CDs and medium-term notes that have been elected to be carried at fair value under the provisions of SFAS 159 are recorded in interest expense in the Consolidated Statement of Income based on their contractual coupons.
     The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters and six-month periods ended June 30, 2009 and 2008.
                                 
    Total Fair Value Measurements     Total Fair Value Measurements  
    (Quarter Ended June 30, 2009)     (Six-Month Period Ended June 30, 2009)  
(In thousands)   Derivatives (1)     Securities Available For Sale (2)     Derivatives (1)     Securities Available For Sale (2)  
Beginning balance
  $ 982     $ 110,982     $ 760     $ 113,983  
 
                               
Total gains or (losses) (realized / unrealized):
                               
Included in earnings
    2,532       (1,061 )     2,754       (1,061 )
Included in other comprehensive income
          (2,372 )           (1,244 )
 
                               
Principal repayments and amortization
          (10,981 )           (15,110 )
 
                       
 
                               
Ending balance
  $ 3,514     $ 96,568     $ 3,514     $ 96,568  
 
                       
 
(1)   Amounts related to the valuation of interest rate cap agreements which were carried at fair value prior to the adoption of SFAS 159.
 
(2)   Amounts mostly related to certain private label mortgage-backed securities which were carried at fair value prior to the adoption of SFAS 159.
                                 
    Total Fair Value Measurements     Total Fair Value Measurements  
    (Quarter Ended June 30, 2008)     (Six-Month Period Ended June 30, 2008)  
(In thousands)   Derivatives (1)     Securities Available For Sale (2)     Derivatives (1)     Securities Available For Sale (2)  
Beginning balance
  $ 2,888     $ 119,051     $ 5,103     $ 133,678  
 
                               
Total gains or (losses) (realized / unrealized):
                               
Included in earnings
    3,095             880        
Included in other comprehensive income
          3,025             (7,607 )
 
                               
Principal repayments and amortization
          (6,886 )           (10,881 )
 
                       
 
                               
Ending balance
  $ 5,983     $ 115,190     $ 5,983     $ 115,190  
 
                       
 
(1)   Amounts related to the valuation of interest rate cap agreements which were carried at fair value prior to the adoption of SFAS 159.
 
(2)   Amounts mostly related to certain private label mortgage-backed securities which were carried at fair value prior to the adoption of SFAS 159.

41


Table of Contents

     The table below summarizes changes in unrealized gains and losses recorded in earnings for the quarters and six-month periods ended June 30, 2009 and 2008 for Level 3 assets and liabilities that are still held as of the end of each period.
                                 
    Changes in Unrealized     Changes in Unrealized  
    Gains (Losses)     Gains (Losses)  
    Quarter Ended     Six-Month Period Ended  
    June 30, 2009     June 30, 2009  
(In thousands)   Derivatives     Securities Available For Sale     Derivatives     Securities Available For Sale  
Changes in unrealized gains (losses) relating to assets still held at reporting date (1)
                               
 
                               
Interest income on loans
  $ 43     $     $ 48     $  
Interest income on investment securities
    2,489             2,706        
Net impairment losses on investment securities
          (1,061 )           (1,061 )
 
                       
 
  $ 2,532     $ (1,061 )   $ 2,754     $ (1,061 )
 
                       
 
(1)   Unrealized losses of $2.4 million and $1.2 million on Level 3 available-for-sale securities was recognized as part of comprehensive income for the quarter and six-month period ended June 30, 2009.
                                 
    Changes in Unrealized     Changes in Unrealized  
    Gains (Losses)     Gains (Losses)  
    Quarter Ended     Six-Month Period Ended  
    June 30, 2008     June 30, 2008  
(In thousands)   Derivatives     Securities Available For Sale     Derivatives     Securities Available For Sale  
Changes in unrealized gains (losses) relating to assets still held at reporting date (1)
                               
 
                               
Interest income on loans
  $ 54     $     $ 23     $  
Interest income on investment securities
    3,041             857        
Net impairment losses on investment securities
                       
 
                       
 
  $ 3,095     $     $ 880     $  
 
                       
 
(1)   Unrealized gain of $3.0 million and unrealized loss of $7.6 million on Level 3 available-for-sale securities was recognized as part of comprehensive income for the quarter and six-month period ended June 30, 2008.
     Additionally, fair value is used on a non-recurring basis to evaluate certain assets in accordance with GAAP. Adjustments to fair value usually result from the application of lower-of-cost-or-market accounting (e.g., loans held for sale carried at the lower of cost or fair value and repossessed assets) or write-downs of individual assets (e.g., goodwill, loans).
     As of June 30, 2009, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table:
                                         
                            Losses recorded for   Losses recorded for
                            the Quarter Ended   the Six-month period
    Carrying value as of June 30, 2009   June 30, 2009   ended June 30, 2009
(In thousands)   Level 1   Level 2   Level 3                
Loans receivable (1)
  $     $     $ 759,241     $ 80,146     $ 117,880  
Other Real Estate Owned (2)
                58,064       3,677       5,695  
Core deposit intangible (3)
                7,348       270       3,988  
 
(1)   Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral in accordance with the provisions of SFAS 114. The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. absorption rates), which are not market observable.
 
(2)   The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Losses are related to market valuation adjustments after the transfer from the loan to the Other Real Estate Owned (“OREO”) portfolio.
 
(3)   Amount represents core deposit intangible of FirstBank Florida. The impairment was generally measured based on internal information about decreases in the base of core deposits acquired upon the acquisition of FirstBank Florida.

42


Table of Contents

     As of June 30, 2008, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table:
                                         
                            Losses recorded for   Losses recorded for
                            the Quarter Ended   the Six-month period
    Carrying value as of June 30, 2008   June 30, 2008   ended June 30, 2008
    Level 1   Level 2   Level 3                
(In thousands)                                        
Loans receivable (1)
  $     $     $ 175,341     $ 21,896     $ 40,685  
Other Real Estate Owned (2)
                38,620       522       843  
Loans held for sale (3)
          29,194             457       457  
 
(1)   Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral in accordance with the provisions of SFAS 114. The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. absorption rates), which are not market observable.
 
(2)   The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Losses are related to market valaution adjustments after the transfer from the loan to the OREO portfolio.
 
(3)   Fair value is primarily derived from quotations based on the mortgage-backed securities market.
     The following is a description of the valuation methodologies used for instruments for which an estimated fair value is presented as well as for instruments for which the Corporation has elected the fair value option. The estimated fair value was calculated using certain facts and assumptions, which vary depending on the specific financial instrument.
Cash and due from banks and money market investments
     The carrying amount of cash and due from banks and money market investments are reasonable estimates of their fair value. Money market investments include held-to-maturity U.S. Government obligations, which have a contractual maturity of three months or less. The fair value of these securities is based on quoted market prices in active markets that incorporate the risk of nonperformance.
Investment securities available for sale and held to maturity
     The fair value of investment securities is the market value based on quoted market prices, when available, or market prices for identical or comparable assets that are based on observable market parameters including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids offers and reference data including market research operations. Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon models that use unobservable inputs due to the limited market activity of the instrument, as is the case with certain private label mortgage-backed securities held by the Corporation. Refer to Note 4 for additional information about the fair value of private label mortgage-backed securities.
Other equity securities
     Equity or other securities that do not have a readily available fair value are stated at the net realizable value which management believes is a reasonable proxy for their fair value.

43


Table of Contents

This category is principally composed of stock that is owned by the Corporation to comply with Federal Home Loan Bank (FHLB) regulatory requirements. Their realizable value equals their cost as these shares can be freely redeemed at par.
Loans receivable, including loans held for sale
     The fair value of all loans was estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality and with adjustments that the Corporation’s nanagement believes a market participant would consider in determining fair value. Loans were classified by type such as commercial, residential mortgage, credit cards and automobile. These asset categories were further segmented into fixed- and adjustable-rate categories. The fair values of performing fixed-rate and adjustable-rate loans were calculated by discounting expected cash flows through the estimated maturity date. Loans with no stated maturity, like credit lines, were valued at book value. Prepayment assumptions were considered for non-residential loans. For residential mortgage loans, prepayment estimates were based on prepayment experiences of generic U.S. mortgage-backed securities pools with similar characteristics (e.g. coupon and original term) and adjusted based on the Corporation’s historical data. Discount rates were based on the Treasury and LIBOR/Swap Yield Curves at the date of the analysis, and included appropriate adjustments for expected credit losses and liquidity.
     For impaired collateral dependent loans, the impairment was primarily measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observable transactions involving similar assets in similar locations, in accordance with the provisions of SFAS 114.
Deposits
     The estimated fair value of demand deposits and savings accounts, which are deposits with no defined maturities, equals the amount payable on demand at the reporting date. For deposits with stated maturities, but that reprice at least quarterly, the fair value is also estimated to be the recorded amounts at the reporting date.
     The fair values of retail fixed-rate time deposits, with stated maturities, are based on the present value of the future cash flows expected to be paid on the deposits. The cash flows were based on contractual maturities; no early repayments are assumed. Discount rates were based on the LIBOR yield curve.
     The estimated fair value of total deposits excludes the fair value of core deposit intangibles, which represent the value of the customer relationship measured by the value of demand deposits and savings deposits that bear a low or zero rate of interest and do not fluctuate in response to changes in interest rates.
     The fair value of brokered CDs, which are included within deposits, is determined using discounted cash flow analyses over the full term of the CDs. The valuation uses a

44


Table of Contents

“Hull-White Interest Rate Tree” approach, an industry-standard approach for valuing instruments with interest rate call options. The fair value of the CDs is computed using the outstanding principal amount. The discount rates used are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices. The fair value does not incorporate the risk of nonperformance, since brokered CDs are generally participated out by brokers in shares of less than $100,000 and insured by the FDIC.
Loans payable
Loans payable consisted of short-term borrowings under the FED Discount Window Program. Due to the short-term nature of these borrowings, their outstanding balances are estimated to be the fair value.
Securities sold under agreements to repurchase
     Some repurchase agreements reprice at least quarterly, and their outstanding balances are estimated to be their fair value. Where longer commitments are involved, fair value is estimated using exit price indications of the cost of unwinding the transactions as of the end of the reporting period. Securities sold under agreements to repurchase are fully collateralized by investment securities.
Advances from FHLB
     The fair value of advances from FHLB with fixed maturities is determined using discounted cash flow analyses over the full term of the borrowings, using indications of the fair value of similar transactions. The cash flows assume no early repayment of the borrowings. Discount rates are based on the LIBOR yield curve. For advances from FHLB that reprice quarterly, their outstanding balances are estimated to be their fair value. Advances from FHLB are fully collateralized by mortgage loans and, to a lesser extent, investment securities.
Derivative instruments
The fair value of most of the derivative instruments is based on observable market parameters and takes into consideration the credit risk component, when appropriate. The “Hull-White Interest Rate Tree” approach is used to value the option components of derivative instruments, and discounting of the cash flows is performed using USD dollar LIBOR-based discount rates or yield curves that account for the industry sector and the credit rating of the counterparty and/or the Corporation. Derivatives include interest rate swaps used for protection against rising interest rates and prior to June 30, 2009 included interest rate swaps to economically hedge brokered CDs and medium-term notes. For these interest rate swaps, a credit component was not considered in the valuation since the Corporation has fully collateralized with investment securities any mark to market loss with the counterparty and if there were market gains the counterparty had to deliver collateral to the Corporation.

45


Table of Contents

     Certain derivatives with limited market activity, as is the case with derivative instruments named as “reference caps,” are valued using models that consider unobservable market parameters (Level 3). Reference caps are used mainly to hedge interest rate risk inherent in private label mortgage-backed securities, thus are tied to the notional amount of the underlying fixed-rate mortgage loans originated in the United States. Significant inputs used for fair value determination consist of specific characteristics such as information used in the prepayment model which follows the amortizing schedule of the underlying loans, which is an unobservable input. The valuation model uses the Black formula, which is a benchmark standard in the financial industry. The Black formula is similar to the Black-Scholes formula for valuing stock options except that the spot price of the underlying is replaced by the forward price. The Black formula uses as inputs the strike price of the cap, forward LIBOR rates, volatility estimates and discount rates to estimate the option value. LIBOR rates and swap rates are obtained from Bloomberg L.P. (“Bloomberg”) every day and build zero coupon curve based on the Bloomberg LIBOR/Swap curve. The discount factor is then calculated from the zero coupon curve. The cap is the sum of all caplets. For each caplet, the rate is reset at the beginning of each reporting period and payments are made at the end of each period. The cash flow of each caplet is then discounted from each payment date.
     Although most of the derivative instruments are fully collateralized, a credit spread is considered for those that are not secured in full. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments resulted in an unrealized loss of approximately $0.8 million as of June 30, 2009, of which an unrealized loss of $2.7 million was recorded in the first half of 2009 and an unrealized gain of $0.1 million in the first half of 2008.
Term notes payable
     The fair value of term notes is determined using a discounted cash flow analysis over the full term of the borrowings. This valuation also uses the “Hull-White Interest Rate Tree” approach to value the option components of the term notes. The model assumes that the embedded options are exercised economically. The fair value of medium-term notes is computed using the notional amount outstanding. The discount rates used in the valuations are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices and value the cancellation option in the term notes. For the medium-term notes, the credit risk is measured using the difference in yield curves between swap rates and a yield curve that considers the industry and credit rating of the Corporation as issuer of the note at a tenor comparable to the time to maturity of the note and option. The net loss from fair value changes attributable to the Corporation’s own credit to the medium-term notes for which the Corporation has elected the fair value option amounted to $10.1 million for the first half of 2009 and an unrealized gain of $0.9 million for the first half of 2008. The cumulative mark-to-market unrealized loss on the medium-term notes since the adoption of SFAS 159 attributable to credit risk amounted to $4.4 million as of June 30, 2009.

46


Table of Contents

Other borrowings
     Other borrowings consist of junior subordinated debentures. Projected cash flows from the debentures were discounted using the LIBOR yield curve plus a credit spread. This credit spread was estimated using the difference in yield curves between Swap rates and a yield curve that considers the industry and credit rating of the Corporation (US Finance BB) as issuer of the note at a tenor comparable to the time to maturity of the debentures.
19 — SUPPLEMENTAL CASH FLOW INFORMATION
          Supplemental cash flow information follows:
                 
    Six-Month Period Ended June 30,
    2009   2008
    (In thousands)
Cash paid for:
               
 
               
Interest on borrowings
  $ 283,134     $ 367,767  
Income tax
    319       2,082  
 
               
Non-cash investing and financing activities:
               
 
               
Additions to other real estate owned
    52,862       36,171  
Additions to auto repossesion
    40,048       44,497  
Capitalization of servicing assets
    3,181       515  
Loan securitizations
    187,815        
Non-cash acquisition of mortgage loans that previously served as collateral of a commercial loan to a local financial institution
  205,395      
     On January 28, 2008, the Corporation completed the acquisition of Virgin Islands Community Bank (“VICB”), with operations in St. Croix, U.S. Virgin Islands, at a purchase price of $2.5 million. The Corporation acquired cash of approximately $7.7 million from VICB.
20 — SEGMENT INFORMATION
     Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer of the Corporation and, to a lesser extent, the Board of Directors, the operating segments are driven primarily by the Corporation’s legal entities. As of June 30, 2009, the Corporation had four reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; and Treasury and Investments. There is also an Other category reflecting other legal entities reported separately on an aggregate basis. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Corporation’s organizational chart, nature of the products, distribution channels and the economic characteristics of the products were also considered in the determination of the reportable segments.
     The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers represented by specialized and middle-market clients and the public sector. The Commercial and Corporate Banking segment offers commercial

47


Table of Contents

loans, including commercial real estate and construction loans, and other products such as cash management and business management services. The Mortgage Banking segment’s operations consist of the origination, sale and servicing of a variety of residential mortgage loans. The Mortgage Banking segment also acquires and sells mortgages in the secondary markets. In addition, the Mortgage Banking segment includes mortgage loans purchased from other local banks and mortgage bankers. The Consumer (Retail) Banking segment consists of the Corporation’s consumer lending and deposit-taking activities conducted mainly through its branch network and loan centers. The Treasury and Investments segment is responsible for the Corporation’s investment portfolio and treasury functions executed to manage and enhance liquidity. This segment loans funds to the Commercial and Corporate Banking, Mortgage Banking and Consumer (Retail) Banking segments to finance their lending activities and borrows from those segments. The Consumer (Retail) Banking segment also loans funds to other segments. The interest rates charged or credited by Treasury and Investments and the Consumer (Retail) Banking segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The Other category is mainly composed of insurance, finance leases and other products.
     The accounting policies of the business segments are the same as those described in Note 1 to the Corporation’s financial statements for the year ended December 31, 2008 contained in the Corporation’s Annual Report on Form 10-K.
     The Corporation evaluates the performance of the segments based on net interest income after the estimated provision for loan and lease losses, non-interest income and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-earning assets less the allowance for loan and lease losses.

48


Table of Contents

The following table presents information about the reportable segments (in thousands):
                                                 
    Mortgage     Consumer     Commercial and     Treasury and              
    Banking     (Retail) Banking     Corporate     Investments     Other     Total  
For the quarter ended June 30, 2009:
                                           
Interest income
  $ 45,212     $ 39,925     $ 72,065     $ 66,499     $ 29,079     $ 252,780  
Net (charge) credit for transfer of funds
    (31,837 )     17,248       (20,431 )     34,877       143        
Interest expense
          (18,353 )           (96,456 )     (6,957 )     (121,766 )
 
                                   
Net interest (loss) income
    13,375       38,820       51,634       4,920       22,265       131,014  
 
                                   
 
                                               
Provision for loan and lease losses
    (14,683 )     (15,000 )     (194,162 )           (11,307 )     (235,152 )
Non-interest income
    2,402       7,004       1,280       8,365       4,364       23,415  
Direct non-interest expenses
    (9,539 )     (27,006 )     (17,487 )     (1,990 )     (12,974 )     (68,996 )
 
                                   
Segment (loss) income
  $ (8,445 )   $ 3,818     $ (158,735 )   $ 11,295     $ 2,348     $ (149,719 )
 
                                   
 
                                               
Average earnings assets
  $ 3,009,312     $ 1,783,988     $ 7,158,541     $ 6,015,921     $ 1,351,426     $ 19,319,188  
 
                                               
For the quarter ended June 30, 2008:
                                               
Interest income
  $ 47,455     $ 40,022     $ 85,666     $ 71,254     $ 32,211     $ 276,608  
Net (charge) credit for transfer of funds
    (35,066 )     23,808       (49,502 )     64,451       (3,691 )      
Interest expense
          (19,563 )           (114,004 )     (8,435 )     (142,002 )
 
                                   
Net interest income
    12,389       44,267       36,164       21,701       20,085       134,606  
 
                                   
 
                                               
Provision for loan and lease losses
    (1,259 )     (14,414 )     (20,037 )           (5,613 )     (41,323 )
Non-interest income (loss)
    853       6,674       1,137       (587 )     3,925       12,002  
Direct non-interest expenses
    (6,125 )     (25,546 )     (8,099 )     (1,586 )     (11,400 )     (52,756 )
 
                                   
Segment income
  $ 5,858     $ 10,981     $ 9,165     $ 19,528     $ 6,997     $ 52,529  
 
                                   
 
                                               
Average earnings assets
  $ 2,909,308     $ 1,720,661     $ 5,992,390     $ 5,487,619     $ 1,357,393     $ 17,467,371  
 
                                               
For the six-month period ended June 30, 2009:
                                               
Interest income
  $ 92,627     $ 80,727     $ 142,362     $ 136,255     $ 59,132     $ 511,103  
Net (charge) credit for transfer of funds
    (66,141 )     37,048       (49,900 )     79,029       (36 )      
Interest expense
          (37,442 )           (206,365 )     (14,684 )     (258,491 )
 
                                   
Net interest income
    26,486       80,333       92,462       8,919       44,412       252,612  
 
                                   
 
                                               
Provision for loan and lease losses
    (23,125 )     (19,242 )     (230,447 )           (21,767 )     (294,581 )
Non-interest income
    3,239       13,877       2,546       25,887       7,919       53,468  
Direct non-interest expenses
    (17,023 )     (52,233 )     (27,464 )     (3,712 )     (29,250 )     (129,682 )
 
                                   
Segment (loss) income
  $ (10,423 )   $ 22,735     $ (162,903 )   $ 31,094     $ 1,314     $ (118,183 )
 
                                   
 
                                               
Average earnings assets
  $ 3,043,468     $ 1,807,617     $ 6,960,139     $ 5,788,847     $ 1,354,233     $ 18,954,304  
 
                                               
For the six-month period ended June 30, 2008:
                                               
Interest income
  $ 92,560     $ 82,412     $ 179,746     $ 135,872     $ 65,105     $ 555,695  
Net (charge) credit for transfer of funds
    (69,146 )     45,999       (107,276 )     135,109       (4,686 )      
Interest expense
          (38,725 )           (240,675 )     (17,231 )     (296,631 )
 
                                   
Net interest income
    23,414       89,686       72,470       30,306       43,188       259,064  
 
                                   
 
                                               
Provision for loan and lease losses
    (6,968 )     (28,989 )     (33,081 )           (18,078 )     (87,116 )
Non-interest income
    1,229       13,968       2,148       15,734       8,303       41,382  
Direct non-interest expenses
    (12,505 )     (53,115 )     (17,596 )     (3,436 )     (22,839 )     (109,491 )
 
                                   
Segment income
  $ 5,170     $ 21,550     $ 23,941     $ 42,604     $ 10,574     $ 103,839  
 
                                   
 
                                               
Average earnings assets
  $ 2,861,979     $ 1,732,717     $ 5,923,744     $ 5,297,547     $ 1,353,989     $ 17,169,976  

49


Table of Contents

The following table presents a reconciliation of the reportable segment financial information to the consolidated totals (in thousands):
                                 
    Quarter Ended     Six-month Period Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Net (loss) income:
                               
 
                               
Total (loss) income for segments and other
  $ (149,719 )   $ 52,529     $ (118,183 )   $ 103,839  
Other operating expenses
    (26,992 )     (29,007 )     (50,834 )     (54,459 )
 
                       
(Loss) income before income taxes
    (176,711 )     23,522       (169,017 )     49,380  
Income tax benefit
    98,053       9,472       112,250       17,203  
 
                       
Total consolidated net (loss) income
  $ (78,658 )   $ 32,994     $ (56,767 )   $ 66,583  
 
                       
 
                               
Average assets:
                               
 
                               
Total average earning assets for segments
  $ 19,319,188     $ 17,467,371     $ 18,954,304     $ 17,169,976  
Average non-earning assets
    741,908       759,060       731,277       712,651  
 
                       
Total consolidated average assets
  $ 20,061,096     $ 18,226,431     $ 19,685,581     $ 17,882,627  
 
                       
21 — COMMITMENTS AND CONTINGENCIES
     The Corporation enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and commitments to sell mortgage loans at fair value. As of June 30, 2009, commitments to extend credit amounted to approximately $1.4 billion and standby letters of credit amounted to approximately $101.6 million. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. In the case of credit cards and personal lines of credit, the Corporation can, at any time and without cause, cancel the unused credit facility. Generally, the Corporation’s mortgage banking activities do not enter into interest rate lock agreements with its prospective borrowers.
     The Corporation obtained from GNMA a Commitment Authority to issue GNMA mortgage-backed securities for approximately $301.5 million. Under this program, as of June 30, 2009, the Corporation had securitized approximately $188 million of FHA/VA mortgage loan production into GNMA mortgage-backed securities.
     Lehman Brothers Special Financing, Inc. (“Lehman”) was the counterparty to the Corporation on certain interest rate swap agreements. During the third quarter of 2008, Lehman failed to pay the scheduled net cash settlement due to the Corporation, which constitutes an event of default under those interest rate swap agreements. The Corporation terminated all interest rate swaps with Lehman and replaced them with other counterparties under similar terms and conditions. In connection with the unpaid net cash settlement due as of June 30, 2009, under the swap agreements, the Corporation has an

50


Table of Contents

unsecured counterparty exposure with Lehman, which filed for bankruptcy on October 3, 2008, of approximately $1.4 million. This exposure was reserved in the third quarter of 2008. The Corporation had pledged collateral of $63.6 million with Lehman to guarantee its performance under the swap agreements in the event payment thereunder was required. The book value of pledged securities with Lehman as of June 30, 2009 amounted to approximately $64.5 million. The position of the Corporation with respect to the recovery of the collateral, after discussion with its outside legal counsel, is that at all times title to the collateral has been vested in the Corporation and that, therefore, this collateral should not, for any purpose, be considered property of the bankruptcy estate available for distribution among Lehman’s creditors. On January 30, 2009, the Corporation filed a customer claim with the trustee and at this time the Corporation is unable to determine the timing of the claim resolution or whether it will succeed in recovering all or a substantial portion of the collateral or its equivalent value. As additional relevant facts become available in future periods, a need to recognize a partial or full reserve of this claim may arise. Considering that the investment securities have not yet been recovered by the Corporation, despite its efforts in this regard, the Corporation decided to classify such investments as non-performing during the second quarter of 2009.
     As of June 30, 2009, First BanCorp and its subsidiaries were defendants in various legal proceedings arising in the ordinary course of business. Management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.

51


Table of Contents

22 — FIRST BANCORP (Holding Company Only) Financial Information
     The following condensed financial information presents the financial position of the Holding Company only as of June 30, 2009 and December 31, 2008 and the results of its operations for the quarters and six-month periods ended June 30, 2009 and 2008.
                 
    As of     As of  
    June 30,     December 31,  
    2009     2008  
    (In thousands)  
Assets
               
 
               
Cash and due from banks
  $ 83,394     $ 58,075  
Money market investments
    300       300  
 
               
Investment securities available for sale, at market:
               
Equity investments
    528       669  
 
               
Other investment securities
    1,550       1,550  
Investment in FirstBank Puerto Rico, at equity
    1,805,023       1,574,940  
Investment in FirstBank Insurance Agency, at equity
    6,552       5,640  
Investment in Ponce General Corporation, at equity
    160,438       123,367  
Investment in PR Finance, at equity
    2,924       2,789  
Investment in FBP Statutory Trust I
    3,093       3,093  
Investment in FBP Statutory Trust II
    3,866       3,866  
Other assets
    5,753       6,596  
 
           
Total assets
  $ 2,073,421     $ 1,780,885  
 
           
 
               
Liabilities & Stockholders’ Equity
               
 
               
Liabilities:
               
Other borrowings
  $ 231,959     $ 231,914  
Accounts payable and other liabilities
    776       854  
 
           
Total liabilities
    232,735       232,768  
Stockholders’ equity
    1,840,686       1,548,117  
 
           
Total Liabilities & Stockholders’ Equity
  $ 2,073,421     $ 1,780,885  
 
           

52


Table of Contents

                                 
    Quarter Ended     Six-Month Period Ended  
    June 30,     June 30,     June 30,     June 30,  
    2009     2008     2009     2008  
    (In thousands)                  
Income:
                               
 
                               
Interest income on investment securities
  $     $ 57     $     $ 790  
Interest income on other investments
          204       1       733  
Dividends from FirstBank Puerto Rico
    24,962       30,001       44,939       41,872  
Dividends from other subsidiaries
                      2,500  
Other income
    69       93       141       213  
 
                       
 
    25,031       30,355       45,081       46,108  
 
                       
 
                               
Expense:
                               
 
                               
Notes payable and other borrowings
    2,291       3,126       4,729       7,389  
Interest on funding to subsidiaries
                      550  
Recovery for loan losses
                      (1,398 )
Other operating expenses
    751       563       1,162       1,034  
 
                       
 
    3,042       3,689       5,891       7,575  
 
                       
 
                               
Net loss on investments and impairments
          (489 )     (388 )     (489 )
 
                       
 
                               
Income before income taxes and equity in undistributed earnings of subsidiaries
    21,989       26,177       38,802       38,044  
 
                               
Income tax provision
    (11 )     (1 )     (3 )     (546 )
 
                               
Equity in undistributed (losses) earnings of subsidiaries
    (100,636 )     6,818       (95,566 )     29,085  
 
                       
 
                               
Net (loss) income
  $ (78,658 )   $ 32,994     $ (56,767 )   $ 66,583  
 
                       
23 — SUBSEQUENT EVENTS
     In July 2009, the Corporation entered into an agreement with the Puerto Rico Department of the Treasury to conclude an income tax investigation and to eliminate all possible income and withholding tax deficiencies related to taxable years 2005, 2006, 2007 and 2008. As a result of such agreement, the Corporation will reverse during the third quarter of 2009 the remaining UTBs and related interest by approximately $2.9 million, net of the payment made to the Puerto Rico Department of the Treasury in connection with the conclusion of the tax investigation. Also, the agreement provides a three-year moratorium on the deduction of the last installment of the Class Action payment made by the Corporation in 2007, according to a previous agreement entered with the Puerto Rico Department of the Treasury in February 2008. This moratorium started on January 1, 2009 and will end on December 31, 2011. During this period, the Corporation will not be allowed to deduct any part of the last installment of $18.75 million for income tax purposes.
Effective July 1, 2009, the operations conducted by FirstBank Florida as a separate subsidiary were merged with and into FirstBank Puerto Rico, the Corporation’s main banking subsidiary. As part of the Corporation’s strategic planning it has been determined that business synergies can be achieved by merging FirstBank Florida with and into FirstBank Puerto Rico, which reorganization included the consolidation of FirstBank Puerto Rico’s loan production office with the former thrift banking operations of FirstBank Florida. For the last three years the Corporation has been conducting dual banking operations in the Florida market, upon consummation of the merger, the consolidation of the former thrift banking operations with the loan production office

53


Table of Contents

resulted in FirstBank Puerto Rico having a more diversified and efficient banking operation in the form of a branch network in the Florida market. The merger allows the Florida operations to benefit by leveraging the capital position of FirstBank Puerto Rico and thereby provide it with the support necessary to grow in the Florida market.
     The Corporation adopted SFAS 165 during the second quarter of 2009 and has evaluated subsequent events through August 10, 2009, which is the date the financial statements were issued. There are not any material subsequent events, other than those described above, which would require further disclosure.

54


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
SELECTED FINANCIAL DATA
(In thousands, except for per share and financial ratios)
                                 
    Quarter ended   Six-month period ended
    June 30,   June 30,   June 30,
    2009   2008   2009   2008
Condensed Income Statements:
                               
Total interest income
  $ 252,780     $ 276,608     $ 511,103     $ 555,695  
Total interest expense
    121,766       142,002       258,491       296,631  
Net interest income
    131,014       134,606       252,612       259,064  
Provision for loan and lease losses
    235,152       41,323       294,581       87,116  
Non-interest income
    23,415       12,002       53,468       41,382  
Non-interest expenses
    95,988       81,763       180,516       163,950  
(Loss) Income before income taxes
    (176,711 )     23,522       (169,017 )     49,380  
Income tax benefit
    98,053       9,472       112,250       17,203  
Net (loss) income
    (78,658 )     32,994       (56,767 )     66,583  
Net (loss) income attributable to common stockholders
    (94,825 )     22,925       (88,052 )     46,445  
Per Common Share Results:
                               
Net (loss) income per share basic
  $ (1.03 )   $ 0.25     $ (0.95 )   $ 0.50  
Net (loss) income per share diluted
  $ (1.03 )   $ 0.25     $ (0.95 )   $ 0.50  
Cash dividends declared
  $ 0.07     $ 0.07     $ 0.14     $ 0.14  
Average shares outstanding
    92,511       92,505       92,511       92,505  
Average shares outstanding diluted
    92,511       92,708       92,511       92,650  
Book value per common share
  $ 9.88     $ 9.21     $ 9.88     $ 9.21  
Tangible book value per common share (1)
  $ 9.38     $ 8.62     $ 9.38     $ 8.62  
Selected Financial Ratios (In Percent):
                               
Profitability:
                               
Return on Average Assets
    (1.57 )     0.72       (0.58 )     0.74  
Interest Rate Spread (2)
    2.60       2.92       2.53       2.78  
Net Interest Margin (2)
    2.92       3.28       2.89       3.19  
Return on Average Total Equity
    (15.93 )     9.16       (5.89 )     9.26  
Return on Average Common Equity
    (36.14 )     10.29       (16.99 )     10.46  
Average Total Equity to Average Total Assets
    9.85       7.91       9.79       8.04  
Tangible common equity ratio (1)
    4.35       4.25       4.35       4.25  
Dividend payout ratio
    (6.84 )     28.25       (14.73 )     27.88  
Efficiency ratio (3)
    62.16       55.77       58.98       54.57  
Asset Quality:
                               
Allowance for loan and lease losses to loans receivable
    3.11       1.82       3.11       1.82  
Net charge-offs (annualized) to average loans
    3.85       0.97       2.52       0.91  
Provision for loan and lease losses to net charge-offs
    180.97       139.86       174.97       158.36  
Non-performing assets to total assets
    6.53       2.65       6.53       2.65  
Non-accruing loans to total loans receivable
    8.94       3.67       8.94       3.67  
Allowance to total non-accruing loans
    34.81       49.56       34.81       49.56  
Allowance to total non-accruing loans excluding residential real estate loans
    52.85       101.85       52.85       101.85  
Other Information:
                               
Common Stock Price: End of period
  $ 3.95     $ 6.34     $ 3.95     $ 6.34  
                 
    As of   As of
    June 30,   December 31,
    2009   2008
Balance Sheet Data:
               
Loans and loans held for sale
  $ 13,135,710     $ 13,088,292  
Allowance for loan and lease losses
    407,746       281,526  
Money market and investment securities
    6,368,167       5,709,154  
Intangible assets
    46,228       52,083  
Deferred tax asset, net
    217,843       128,039  
Total assets
    20,012,887       19,491,268  
Deposits
    12,035,427       13,057,430  
Borrowings
    5,846,879       4,736,670  
Total preferred equity
    926,259       550,100  
Total common equity
    868,045       940,628  
Accumulated other comprehensive income, net of tax
    46,382       57,389  
Total equity
    1,840,686       1,548,117  
 
1-   Non-gaap measures. Refer to “Capital” discussion below for additional information of the components and reconciliation of these measures.
 
2-   On a tax equivalent basis and excluding the changes in fair value of derivative instruments and financial instruments measured at fair value under SFAS 159 (see “Net Interest Income” discussion below for a reconciliation of this non-gaap measure).
 
3-   Non-interest expenses to the sum of net interest income and non-interest income. The denominator includes non-recurring income and changes in the fair value of derivative instruments and financial instruments measured at fair value under SFAS 159.

55


Table of Contents

     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the accompanying consolidated audited financial statements of First BanCorp (the “Corporation” or “First BanCorp”) and should be read in conjunction with the interim unaudited financial statements and the notes thereto.
DESCRIPTION OF BUSINESS
     First BanCorp is a diversified financial holding company headquartered in San Juan, Puerto Rico offering a full range of financial products to consumers and commercial customers through various subsidiaries. First BanCorp is the holding company of FirstBank Puerto Rico (“FirstBank” or the “Bank”), Grupo Empresas de Servicios Financieros (d/b/a “PR Finance Group”) and FirstBank Insurance Agency. Through its wholly-owned subsidiaries, the Corporation operates offices in Puerto Rico, the United States and British Virgin Islands and the State of Florida (USA) specializing in commercial banking, residential mortgage loan originations, finance leases, personal loans, small loans, auto loans, vehicle rental and insurance agency services. Refer to Note 23 of the accompanying unaudited consolidated financial statements for information about operations conducted in Florida.
OVERVIEW OF RESULTS OF OPERATIONS
     First BanCorp’s results of operations generally depend primarily upon its net interest income, which is the difference between the interest income earned on its interest-earning assets, including investment securities and loans, and the interest expense incurred on its interest-bearing liabilities, including deposits and borrowings. Net interest income is affected by various factors, including: the interest rate scenario; the volumes, mix and composition of interest-earning assets and interest-bearing liabilities; and the re-pricing characteristics of these assets and liabilities. The Corporation’s results of operations also depend on the provision for loan and lease losses, which significantly affected the results for the second quarter and six-month period ended June 30, 2009, non-interest expenses (such as personnel, occupancy and other costs), non-interest income (mainly service charges and fees on loans and deposits and insurance income), the results of its hedging activities, gains (losses) on investments, gains (losses) on sale of loans, and income taxes.
     Net loss for the quarter ended June 30, 2009 amounted to $78.7 million or $1.03 per diluted common share, compared to net income of $33.0 million or $0.25 per diluted common share for the quarter ended June 30, 2008. The Corporation’s financial performance for the second quarter of 2009, as compared to the second quarter of 2008, was principally impacted by an increase of $193.8 million in the provision for loan and lease losses attributable to the migration of a substantial portion of loans to the substandard or doubtful category (including some considered as impaired), higher general reserves to account for increases in charge-offs and delinquency levels, specific reserves for additional loans classified as impaired during the second quarter of 2009 and the overall growth of the Corporation’s loan portfolio and, to a lesser extent, by (i) an increase of $14.2 million in non-interest expenses driven primarily by non-controllable

56


Table of Contents

expenses, such as a charge of $8.9 million for the special assessment levied by the Federal Deposit Insurance Corporation (“FDIC”) and a $3.6 million increase in the regular deposit insurance premium, and (ii) a decrease of $3.6 million in net interest income adversely impacted by lower loan yields, resulting from a significant increase in non-accrual loans and the repricing of variable-rate construction and commercial loans tied to short-term indexes. These factors were partially offset by: (i) a net income tax benefit increase of $88.6 million resulting from lower taxable income and changes in enacted tax rates in Puerto Rico, and (ii) an increase of $11.4 million in non-interest income mainly related to a realized gain of $10.3 million on the sale of investment securities (mainly U.S. sponsored agency fixed-rate MBS) and an increase in gains from mortgage banking activities driven by a higher volume of loans sales and securitizations.
          The highlights and key drivers of the Corporation’s financial results for the quarter ended June 30, 2009 include the following:
    Net interest income for the quarter ended June 30, 2009 was $131.0 million, compared to $134.6 million for the same period in 2008. The net interest spread and margin, on an adjusted tax equivalent basis, for the quarter ended June 30, 2009 were 2.60% and 2.92%, respectively, compared to 2.92% and 3.28%, respectively, for the same period in 2008. Net interest income was adversely impacted primarily by a significant increase in non-accrual loans and, to a lesser extent, the repricing of floating-rate commercial and construction loans at lower rates. Lower loan yields more than offset the benefit of lower short-term rates in the average cost of funding and the increase in average interest-earning assets. Refer to the “Net Interest Income” discussion below for additional information about, among other things, recent actions taken by the Corporation to restructure its investment portfolio.
 
    For the second quarter of 2009, the Corporation’s provision for loan and lease losses amounted to $235.2 million, compared to $41.3 million for the same period in 2008. Refer to the discussion under the “Risk Management” section below for an analysis of the allowance for loan and lease losses and non-performing assets and related ratios. The increase in the provision for 2009 was primarily due to: the migration of a substantial portion of loans to the substandard and doubtful categories (including some considered as impaired), thus requiring a higher reserve; changes in reserve factors used to determine the general reserve for the Corporation’s construction, commercial and residential mortgage loan portfolios, in both the Puerto Rico and Florida portfolios, to account for higher charge-offs and delinquency levels; specific reserves necessary for additional loans classified as impaired during the second quarter of 2009; and the overall growth of the Corporation’s loan portfolio.
 
      The Corporation’s net charge-offs for the second quarter of 2009 were $129.9 million or 3.85% of average loans on an annualized basis, compared to $29.5 million or 0.97% of average loans on an annualized basis for the same period in 2008. The increase in net charge-offs was primarily related to construction and commercial loans, in the Florida region. Refer to the “Provision for Loan and Lease Losses” and

57


Table of Contents

      “Risk Management — Non-performing assets and Allowance for Loan and Lease Losses” sections below for additional information.
    For the quarter ended June 30, 2009, the Corporation’s non-interest income amounted to $23.4 million, compared to $12.0 million for the quarter ended June 30, 2008. The increase was mainly due to a realized gain of $10.3 million on the sale of certain investments and a $1.6 million increase in gains from mortgage banking activities. During the second quarter of 2009, the Corporation completed the sale of approximately $242 million of U.S. agency MBS, realizing a gain of $9.4 million, and also sold its remaining exposure to auto industry corporate bonds of $1.5 million realizing a gain of $0.9 million in the process. Refer to the “Non Interest Income” discussion below for additional information.
 
    Non-interest expenses for the second quarter of 2009 amounted to $96.0 million, compared to $81.8 million for the same period in 2008. The Corporation recorded $8.9 million in the second quarter of 2009 for the accrual of the special assessment levied by the FDIC. The FDIC special assessment, together with an increase of $3.6 million in the regular deposit insurance premium, resulted in an increase of over $12 million in FDIC assessments as compared to the second quarter of 2008. Other increases in non-interest expenses are mainly related to higher losses on real estate owned (“REO”) operations and an increase in property tax expense. Refer to the “Non Interest Expenses” discussion below for additional information.
 
    For the second quarter of 2009, the Corporation recorded an income tax benefit of $98.1 million, compared to an income tax benefit of $9.5 million for the same period in 2008. The fluctuation is mainly related to increased deferred tax benefits due to net operating losses carryforward recorded as a result of current taxable losses and due to a lower current income tax provision resulting from lower taxable-income and adjustments to deferred tax asset, as a result of changes to the enacted rates in the Puerto Rico Internal Revenue Code of 1994, as amended (the “PR Code”). Refer to the “Income Taxes” discussion below for additional information.
 
    Total assets as of June 30, 2009 amounted to $20.0 billion, an increase of $521.6 million compared to total assets as of December 31, 2008. The increase in total assets was primarily a result of an increase of $665.2 million in investment securities, partially offset by a decrease of $157.9 million in cash and cash equivalent funds used to pay down maturing borrowings. The Corporation increased its investment securities portfolio with the purchase of highly liquid securities, such as U.S. agency MBS and debt securities as well as U.S. Treasury investments. Refer to the “Financial Condition and Operating Data” discussion below for additional information.
 
    As of June 30, 2009, total liabilities amounted to $18.2 billion, an increase of approximately $229.0 million, as compared to $17.9 billion as of December 31, 2008. The increase in total liabilities was mainly attributable to an increase of

58


Table of Contents

      $709.1 million in repurchase agreements, mainly new short-term repurchase agreements entered into to fund the growth of the investment portfolio, an increase of $400 million in advances from the Federal Home Loan Bank (“FHLB”) and the Federal Reserve (“FED”) and an increase of $171.7 million in core deposits, mainly in Puerto Rico. The aforementioned increases were partially offset by a decrease of approximately $1.2 billion in brokered CDs. Brokered certificates of deposit (“CDs”) with original maturities over 6 months and issued when interest rates were higher matured or were called during 2009 and current short-term rates on repurchase agreements and FHLB and FED advances provided a cost effective funding alternative. Refer to the “Risk management — Liquidity and Capital Adequacy” discussion below for additional information about the Corporation’s funding sources.
    The Corporation’s stockholders’ equity amounted to $1.8 billion as of June 30, 2009, an increase of $292.6 million compared to the balance as of December 31, 2008, driven by the $400 million investment by the United States Department of the Treasury (the “U.S. Treasury”) in preferred stock of the Corporation through the U.S. Treasury Troubled Asset Relief Program (TARP) Capital Purchase Program. Partially offsetting this increase was the net loss of $56.8 million incurred in the first half of 2009, dividends amounting to $39.7 million for the first half of 2009 ($13.0 million in common stock, or $0.14 per share, and $26.7 million in preferred stock), and a decrease of $11.0 million in accumulated other comprehensive income. Refer to the “Risk Management — Capital” section below for additional information.
 
    Total loan production, including purchases, for the quarter ended June 30, 2009 was $900.4 million, compared to $1.0 billion for the comparable period in 2008. The decrease in loan production during 2009, as compared to the second quarter of 2008, was mainly associated with a reduced volume of commercial loan originations in Puerto Rico, adversely impacted by deteriorated economic conditions and a lower overall demand for all types of loans.
 
    Total non-performing assets as of June 30, 2009 were $1.3 billion, compared to $637.2 million as of December 31, 2008. The increase in non-performing assets since December 31, 2008 was led by an increase of $367.8 million in loans classified as non-performing in the state of Florida, mainly construction loans, an increase of $97.7 million in non-performing residential mortgage loans in Puerto Rico, an increase of $85.0 million in non-performing construction loans in Puerto Rico and an increase of $41.3 million in non-performing commercial loans in Puerto Rico. Also, during the second quarter of 2009, the Corporation classified as non-performing investment securities with a book value of $64.5 million that were pledged to Lehman Brothers Special Financing, Inc., in connection with several interest rate swap agreements entered into with that institution. Considering that the investment securities have not yet been recovered by the Corporation, despite its efforts in this regard, the Corporation decided to classify such investments as non-performing. Other increases in non-performing assets mainly consist of additions to

59


Table of Contents

      repossessed properties, mainly additions to the real estate owned portfolio, which increased by $20.8 million. Partially offsetting the aforementioned increases was a decrease of $5.2 million in non-performing consumer loans (including finance leases) in Puerto Rico. Refer to the “Risk Management — Non-accruing and Non-performing Assets” section below for additional information.
CRITICAL ACCOUNTING POLICIES AND PRACTICES
     The accounting principles of the Corporation and the methods of applying these principles conform with generally accepted accounting principles in the United States (“GAAP”) and to general practices within the banking industry. The Corporation’s critical accounting policies relate to the 1) allowance for loan and lease losses; 2) other-than-temporary impairments; 3) income taxes; 4) classification and related values of investment securities; 5) valuation of financial instruments; 6) derivative financial instruments; and 7) income recognition on loans. These critical accounting policies involve judgments, estimates and assumptions made by management that affect the recorded assets and liabilities and contingent assets and liabilities disclosed as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from estimates, if different assumptions or conditions prevail. Certain determinations inherently have greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than those originally reported.
     The Corporation’s critical accounting policies are described in the Management Discussion and Analysis of Financial Condition and Results of Operations section of First BanCorp’s 2008 Annual Report on Form 10-K. There have not been any material changes in the Corporation’s critical accounting policies since December 31, 2008, except for changes in the Other-than-Temporary Impairment (“OTTI”) model for debt securities as required by the Financial Accounting Standards Board Staff Position No. (“FSP”) FAS 115-2 and FAS 124-2 which the Corporation adopted during the second quarter of 2009. Refer to Note 4 of the accompanying unaudited consolidated financial statements for additional information about the adoption of FSP FAS 115-2 and FAS 124-2.
RESULTS OF OPERATIONS
Net Interest Income
     Net interest income is the excess of interest earned by First BanCorp on its interest-earning assets over the interest incurred on its interest-bearing liabilities. First BanCorp’s net interest income is subject to interest rate risk due to the re-pricing and maturity mismatch of the Corporation’s assets and liabilities. Net interest income for the quarter and six-month period ended June 30, 2009 was $131.0 million and $252.6 million, respectively, compared to $134.6 million and $259.1 million, respectively, for the comparable periods in 2008. On a tax equivalent basis and excluding the changes in the fair value of derivative instruments and unrealized gains and losses on liabilities elected

60


Table of Contents

to be measured at fair value under SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” net interest income for the quarter and six-month period ended June 30, 2009 was $142.6 million and $275.0 million, respectively, compared to $144.5 million and $275.8 million, respectively, for the comparable periods of 2008.
     The following tables include a detailed analysis of net interest income. Part I presents average volumes and rates on an adjusted tax equivalent basis and Part II presents, also on an adjusted tax equivalent basis, the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Corporation’s net interest income. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by prior period rates), and (ii) changes in rate (changes in rate multiplied by prior period volumes). Rate-volume variances (changes in rate multiplied by changes in volume) have been allocated to the changes in volume and rate based upon their respective percentage of the combined totals.
     The net interest income is computed on a tax equivalent basis (for definition and reconciliation of this non-GAAP measure, refer to discussions below) and excluding: (1) the change in the fair value of derivative instruments and (2) unrealized gains or losses on SFAS 159 liabilities.

61


Table of Contents

Part I
                                                 
    Average Volume     Interest income (1) / expense     Average Rate (1)  
Quarter ended June 30,   2009     2008     2009     2008     2009     2008  
    (Dollars in thousands)  
Interest-earning assets:
                                               
 
Money market & other short-term investments
  $ 101,819     $ 374,559     $ 117     $ 1,813       0.46 %     1.95 %
 
Government obligations (2)
    1,540,821       1,303,468       15,904       20,566       4.14 %     6.35 %
Mortgage-backed securities
    4,322,708       3,806,115       60,012       58,034       5.57 %     6.13 %
Corporate bonds
    7,458       6,103       202       141       10.86 %     9.29 %
FHLB stock
    86,509       66,703       788       1,140       3.65 %     6.87 %
Equity securities
    1,977       4,183       18             3.65 %     0.00 %
 
                                       
Total investments (3)
    6,061,292       5,561,131       77,041       81,694       5.10 %     5.91 %
 
                                       
 
Residential real estate loans
    3,425,235       3,308,950       51,717       54,239       6.06 %     6.59 %
Construction loans
    1,626,141       1,475,995       13,142       20,745       3.24 %     5.65 %
Commercial loans
    6,423,055       5,379,906       66,801       73,461       4.17 %     5.49 %
Finance leases
    347,732       376,007       7,111       8,108       8.20 %     8.67 %
Consumer loans
    1,678,057       1,613,563       47,436       46,479       11.34 %     11.59 %
 
                                       
Total loans (4) (5)
    13,500,220       12,154,421       186,207       203,032       5.53 %     6.72 %
 
                                       
Total interest-earning assets
  $ 19,561,512     $ 17,715,552     $ 263,248     $ 284,726       5.40 %     6.46 %
 
                                       
 
                                               
Interest-bearing liabilities:
                                               
 
                                               
Brokered CDs
  $ 7,051,179     $ 7,373,267     $ 56,677     $ 72,218       3.22 %     3.94 %
Other interest-bearing deposits
    4,146,552       3,671,865       23,443       26,077       2.27 %     2.86 %
Loans payable
    768,505             614             0.32 %     0.00 %
Other borrowed funds
    3,862,885       3,724,955       31,646       32,351       3.29 %     3.49 %
FHLB advances
    1,450,478       1,151,861       8,317       9,572       2.30 %     3.34 %
 
                                       
Total interest-bearing liabilities (6)
  $ 17,279,599     $ 15,921,948     $ 120,697     $ 140,218       2.80 %     3.54 %
 
                                       
Net interest income
                  $ 142,551     $ 144,508                  
 
                                           
 
                                               
Interest rate spread
                                    2.60 %     2.92 %
 
                                               
Net interest margin
                                    2.92 %     3.28 %
                                                 
    Average Volume     Interest income (1) / expense     Average Rate (1)  
Six-Month Period Ended June 30,   2009     2008     2009     2008     2009     2008  
    (Dollars in thousands)  
Interest-earning assets:
                                               
 
Money market & other short-term investments
  $ 108,314     $ 402,774     $ 208     $ 5,072       0.39 %     2.53 %
 
Government obligations (2)
    1,341,934       1,786,011       35,505       57,711       5.34 %     6.50 %
Mortgage-backed securities
    4,288,731       3,102,385       123,433       92,025       5.80 %     5.97 %
Corporate bonds
    7,584       6,185       235       282       6.25 %     9.17 %
FHLB stock
    78,856       64,274       1,148       2,261       2.94 %     7.07 %
Equity securities
    2,167       4,186       36       11       3.35 %     0.53 %
 
                                       
Total investments (3)
    5,827,586       5,365,815       160,565       157,362       5.56 %     5.90 %
 
                                       
 
Residential real estate loans
    3,460,647       3,249,913       105,766       105,959       6.16 %     6.56 %
Construction loans
    1,586,125       1,474,252       27,244       44,465       3.46 %     6.07 %
Commercial loans
    6,267,792       5,301,551       130,946       158,901       4.21 %     6.03 %
Finance leases
    353,969       377,004       14,693       16,396       8.37 %     8.75 %
Consumer loans
    1,701,580       1,633,598       96,030       94,535       11.38 %     11.64 %
 
                                       
Total loans (4) (5)
    13,370,113       12,036,318       374,679       420,256       5.65 %     7.02 %
 
                                       
Total interest-earning assets
  $ 19,197,699     $ 17,402,133     $ 535,244     $ 577,618       5.62 %     6.67 %
 
                                       
 
                                               
Interest-bearing liabilities:
                                               
 
                                               
Brokered CDs
  $ 7,255,053     $ 7,286,442     $ 129,510     $ 157,921       3.60 %     4.38 %
Other interest-bearing deposits
    4,087,541       3,492,825       48,635       52,350       2.40 %     3.03 %
Loans payable
    534,331             960             0.36 %     0.00 %
Other borrowed funds
    3,609,918       3,697,892       64,568       70,845       3.61 %     3.85 %
FHLB advances
    1,496,949       1,109,465       16,609       20,720       2.24 %     3.76 %
 
                                       
Total interest-bearing liabilities (6)
  $ 16,983,792     $ 15,586,624     $ 260,282     $ 301,836       3.09 %     3.89 %
 
                                       
 
                                               
Net interest income
                  $ 274,962     $ 275,782                  
 
                                           
 
                                               
Interest rate spread
                                    2.53 %     2.78 %
 
                                               
Net interest margin
                                    2.89 %     3.19 %
 
(1)   On an adjusted tax equivalent basis. The adjusted tax equivalent yield was estimated by dividing the interest rate spread on exempt assets by (1 less Puerto Rico statutory tax rate as adjusted for recent changes to enacted tax rates

62


Table of Contents

    (40.95% for the Corporation’s subsidiaries other than IBEs in 2009, 35.95% for the Corporation’s IBEs in 2009 and 39% for all subsidiaries in 2008)) and adding to it the cost of interest-bearing liabilities. The tax equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax equivalent basis. Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. Changes in the fair value of derivative and unrealized gains or losses on SFAS 159 liabilities are excluded from interest income and interest expense because the changes in valuation do not affect interest paid or received.
 
(2)   Government obligations include debt issued by government sponsored agencies.
 
(3)   Unrealized gains and losses in available-for-sale securities are excluded from the average volumes.
 
(4)   Average loan balances include the average of non-accruing loans.
 
(5)   Interest income on loans includes $2.7 million and $2.9 million for the second quarter of 2009 and 2008, respectively, and $5.5 million and $5.4 million for the six-month period ended June 30, 2009 and 2008, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio.
 
(6)   Unrealized gains and losses on SFAS 159 liabilities are excluded from the average volumes.
Part II
                                                 
    Quarter ended June 30,     Six-month period ended June 30,  
    2009 compared to 2008     2009 compared to 2008  
    Increase (decrease)     Increase (decrease)  
            Due to:                     Due to:        
    Volume     Rate     Total     Volume     Rate     Total  
    (In thousands)     (In thousands)  
Interest income on interest-earning assets:
                                               
 
                                               
Money market & other short-term investments
  $ (828 )   $ (868 )   $ (1,696 )   $ (2,253 )   $ (2,611 )   $ (4,864 )
Government obligations
    3,146       (7,808 )     (4,662 )     (12,661 )     (9,545 )     (22,206 )
Mortgage-backed securities
    7,632       (5,654 )     1,978       34,647       (3,239 )     31,408  
Corporate bonds
    35       26       61       54       (101 )     (47 )
FHLB stock
    263       (615 )     (352 )     367       (1,480 )     (1,113 )
Equity securities
          18       18       (20 )     45       25  
 
                                   
Total investments
    10,248       (14,901 )     (4,653 )     20,134       (16,931 )     3,203  
 
                                   
 
Residential real estate loans
    1,917       (4,439 )     (2,522 )     6,554       (6,747 )     (193 )
Construction loans
    1,709       (9,312 )     (7,603 )     2,675       (19,896 )     (17,221 )
Commercial loans
    12,711       (19,371 )     (6,660 )     24,631       (52,586 )     (27,955 )
Finance leases
    (578 )     (419 )     (997 )     (1,000 )     (703 )     (1,703 )
Consumer loans
    1,910       (953 )     957       3,775       (2,280 )     1,495  
 
                                   
Total loans
    17,669       (34,494 )     (16,825 )     36,635       (82,212 )     (45,577 )
 
                                   
Total interest income
    27,917       (49,395 )     (21,478 )     56,769       (99,143 )     (42,374 )
 
                                   
 
                                               
Interest expense on interest-bearing liabilities:
                                               
 
                                               
Brokered CDs
    (3,012 )     (12,529 )     (15,541 )     (671 )     (27,740 )     (28,411 )
Other interest-bearing deposits
    3,099       (5,733 )     (2,634 )     8,154       (11,869 )     (3,715 )
Loan payable
    614             614       960             960  
Other borrowed funds
    1,199       (1,904 )     (705 )     (1,718 )     (4,559 )     (6,277 )
FHLB advances
    2,117       (3,372 )     (1,255 )     5,809       (9,920 )     (4,111 )
 
                                   
Total interest expense
    4,017       (23,538 )     (19,521 )     12,534       (54,088 )     (41,554 )
 
                                   
Change in net interest income
  $ 23,900     $ (25,857 )   $ (1,957 )   $ 44,235     $ (45,055 )   $ (820 )
 
                                   
     A portion of the Corporation’s interest-earning assets, mostly investments in obligations of some U.S. Government agencies and sponsored entities, generate interest which is exempt from income tax, principally in Puerto Rico. Also, interest and gains on sales of investments held by the Corporation’s international banking entities are tax-exempt under the Puerto Rico tax law (Refer to the Income Taxes discussion below for additional information regarding recent legislation that imposes a temporary 5% tax rate on IBEs’ net income). To facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis. The tax equivalent yield was estimated by dividing the interest rate spread on exempt assets by (1 less the Puerto Rico statutory tax rate as adjusted for recent changes to enacted tax

63


Table of Contents

rates (40.95% for the Corporation’s subsidiaries other than IBEs in 2009, 35.95% for the Corporation’s IBEs in 2009 and 39% for all subsidiaries in 2008)) and adding to it the cost of interest-bearing liabilities. The computation considers the interest expense disallowance required by Puerto Rico tax law. An increase in revenues was observed in connection with the increase in volume and interest rate spread in tax-exempt MBS held by the Corporation’s IBEs. Refer to the “Income Taxes” discussion below for additional information of the Puerto Rico tax law.
     The presentation of net interest income excluding the effects of the changes in the fair value of the derivative instruments and unrealized gains or losses on SFAS 159 liabilities provides additional information about the Corporation’s net interest income and facilitates comparability and analysis. The changes in the fair value of the derivative instruments and unrealized gains or losses on SFAS 159 liabilities have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively, or on interest payments exchanged with interest rate swap counterparties.
     The following table reconciles the interest income on an adjusted tax equivalent basis set forth in Part I above to interest income set forth in the Consolidated Statements of (Loss) Income:
                                 
    Quarter Ended June 30,     Six-month period ended June 30,  
(In thousands)   2009     2008     2009     2008  
Interest income on interest-earning assets on an adjusted tax equivalent basis
  $ 263,248     $ 284,726     $ 535,244     $ 577,618  
Less: tax equivalent adjustments
    (13,933 )     (13,761 )     (28,381 )     (22,843 )
Plus: net unrealized gain on derivatives
    3,465       5,643       4,240       920  
 
                       
Total interest income
  $ 252,780     $ 276,608     $ 511,103     $ 555,695  
 
                       
     The following table summarizes the components of the changes in fair values of interest rate swaps and interest rate caps, which are included in interest income.
                                 
    Quarter Ended June 30,     Six-month period ended June 30,  
(In thousands)   2009     2008     2009     2008  
Unrealized gain on derivatives (economic undesignated hedges):
                               
 
Interest rate caps
  $ 2,628     $ 3,095     $ 2,850     $ 880  
Interest rate swaps on loans
    837       2,548       1,390       40  
 
 
                       
Net unrealized gain on derivatives (economic undesignated hedges)
  $ 3,465     $ 5,643     $ 4,240     $ 920  
 
                       

64


Table of Contents

     The following table summarizes the components of interest expense for the quarters and six-month periods ended June 30, 2009 and 2008. As previously stated, the net interest margin analysis excludes the changes in the fair value of derivatives and unrealized gains or losses on SFAS 159 liabilities.
                                 
    Quarter ended June 30,     Six-month period ended June 30,  
(In thousands)   2009     2008     2009     2008  
Interest expense on interest-bearing liabilities
  $ 116,481     $ 148,867     $ 253,635     $ 314,704  
Net interest realized on interest rate swaps
    (847 )     (12,905 )     (5,499 )     (19,947 )
Amortization of placement fees on brokered CDs
    5,063       4,256       12,146       7,079  
 
                       
Interest expense excluding net unrealized loss (gain) on derivatives (economic undesignated hedges) and net unrealized (gain) loss on SFAS 159 liabilities
    120,697       140,218       260,282       301,836  
Net unrealized loss (gain) on derivatives (economic undesignated) and SFAS 159 liabilities
    1,069       1,784       (1,791 )     (5,205 )
 
                       
Total interest expense
  $ 121,766     $ 142,002     $ 258,491     $ 296,631  
 
                       
     The following table summarizes the components of the net unrealized gain and loss on derivatives (economic undesignated hedges) and net unrealized gain and loss on SFAS 159 liabilities which are included in interest expense.
                                 
    Quarter ended June 30,     Six-month period ended June 30,  
    2009     2008     2009     2008  
(In thousands)                                
Unrealized loss (gain) on derivatives (economic undesignated hedges):
                               
 
Interest rate swaps and other derivatives on brokered CDs
  $ 892     $ 29,934     $ 5,318     $ (25,402 )
Interest rate swaps and other derivatives on medium-term notes
    53       314       163       1  
 
 
                       
Net unrealized loss (gain) on derivatives (economic undesignated hedges)
  $ 945     $ 30,248     $ 5,481     $ (25,401 )
 
                       
 
                               
Unrealized (gain) loss on SFAS 159 liabilities:
                               
 
Unrealized (gain) loss on brokered CDs
    (1,555 )     (28,462 )     (8,696 )     21,095  
Unrealized loss (gain) on medium-term notes
    1,679       (2 )     1,424       (899 )
 
 
                       
Net unrealized loss (gain) on SFAS 159 liabilities
  $ 124     $ (28,464 )   $ (7,272 )   $ 20,196  
 
                       
 
                               
Net unrealized loss (gain) on derivatives (economic undesignated hedges) and SFAS 159 liabilities
  $ 1,069     $ 1,784     $ (1,791 )   $ (5,205 )
 
                       
     Interest income on interest-earning assets primarily represents interest earned on loans receivable and investment securities.
     Interest expense on interest-bearing liabilities primarily represents interest paid on brokered CDs, branch-based deposits, repurchase agreements, advances from the FHLB and FED and notes payable.
     Net interest incurred or realized on interest rate swaps primarily represents net interest exchanged on pay-float swaps that economically hedge brokered CDs and medium-term notes.
     The amortization of broker placement fees represents the amortization of fees paid to brokers upon issuance of related financial instruments (i.e., brokered CDs not elected for the fair value option under SFAS 159).

65


Table of Contents

     Unrealized gains or losses on derivatives represent changes in the fair value of derivatives, primarily interest rate swaps, that economically hedge liabilities (i.e., brokered CDs and medium-term notes) or assets (i.e., loans and investments).
     Unrealized gains or losses on SFAS 159 liabilities represent the change in the fair value of such liabilities (medium-term notes and brokered CDs), other than the accrual of interests, for which the Corporation elected the fair value option under SFAS 159.
     Derivative instruments, such as interest rate swaps, are subject to market risk. While the Corporation does have certain trading derivatives to facilitate customer transactions, the Corporation does not utilize derivative instruments for speculative purposes. As of June 30, 2009, most of the interest rate swaps outstanding are used for protection against rising interest rates. In the past, the volume of interest rate swaps was much higher, as they were used to convert the fixed-rate of a large portfolio of brokered CDs, mainly those with long-term maturities, to a variable rate and mitigate the interest rate risk related to variable rate loans. However, most of these interest rate swaps were called during 2009, in the face of lower interest rate levels. Refer to Note 8 of the accompanying unaudited consolidated financial statements for further details concerning the notional amounts of derivative instruments and additional information. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on net interest income. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future.
     Net interest income decreased 3% to $131.0 million for the second quarter of 2009 from $134.6 million in the second quarter of 2008 and by 2% to $252.6 million for the first six months of 2009 from $259.1 million in the first half of 2008. Net interest income was adversely impacted primarily by a significant increase in non-accrual loans and, to a lesser extent, the repricing of floating-rate commercial and construction loans at lower rates. Net interest margin on an adjusted tax-equivalent basis decreased from 3.28% for the second quarter of 2008 to 2.92% for the second quarter of 2009 and from 3.19% for the first half of 2008 to 2.89% for the first half of 2009. Lower loan yields more than offset the benefit of lower short-term rates in the average cost of funding and the increase in average interest-earning assets. The weighted-average yield on loans on a tax-equivalent basis decreased from 6.72% for the second quarter of 2008 to 5.53% for the second quarter of 2009 and from 7.02% for the first half of 2008 to 5.65% for the first half of 2009. The target for the Federal Funds rate was lowered between 200 and 225 basis points from March 31, 2008 to June 30, 2009, the Prime Rate dropped to 3.25% from 5.25% as of March 31, 2008, and the 3-month LIBOR decreased to 0.595% from 2.69% as of March 31, 2008 adversely affecting the interest income from the variable-rate construction and commercial loans tied to short-term indexes, which was exacerbated by the significant increase of over $700 million in non-performing loans since June 30, 2008 (refer to “Risk Management — Non-accruing and Non-performing Assets” section below for additional information about non-performing loans levels). The Corporation is

66


Table of Contents

currently originating loans and renegotiating existing ones at higher credit spreads to account for inherent risks in the current economy. Such actions are positively impacting net interest income. Lower yields were also observed in the investment securities portfolio, driven by the high level of MBS prepayments and the approximately $940 million U.S. agency debentures called since June 30, 2008. Partially offsetting the decline in earning assets yields were lower funding costs and an increase in average earning assets. The decrease in the Corporation’s average cost of funds is related to the current low level of short-term interest rates as well as the change in the mix of funding sources. Brokered certificates of deposit (“CDs”) with original maturities over 6 months and issued when interest rates were higher matured, or were called during 2009, and current short-term rates on repurchase agreements and FHLB and FED advances provided a cost effective funding alternative. Since being approved to participate during the first quarter of 2009 in the Borrower-in-Custody Program (“BIC”) of the FED, the Corporation has taken advantage of that alternative funding channel. Through the BIC program, a broad range of loans (including commercial, consumer and mortgages) are pledged as collateral for borrowings at the FED Discount Window. The Corporation has increased its use of this low-cost source of funding, and as of June 30, 2009, the Corporation had approximately $514 million of available credit through the BIC program. Also, the current low interest rate levels made available the issuance of new short-term brokered CDs at rates significantly lower than those that matured. For the six-month period ended June 30, 2009, the Corporation issued $3.3 billion in brokered CDs at an average rate of 1.01% (including the rollover of short-term brokered CDs and replacement of brokered CDs called) with a weighted-average maturity of 6 months. The Corporation increased its short-term borrowing as a measure of interest rate risk management to match the shortening in the average life of the investment portfolio, as discussed below, and has been reducing the pricing of its core deposits given current market rates.
     Average earning assets for the second quarter and first half of 2009 increased by $1.8 billion, as compared to comparable periods in 2008. The increase was driven by commercial and residential real estate loan originations, including the $500 million facility extended to the Puerto Rico Sales Tax Financing Corp. (COFINA under its Spanish acronym), an instrumentality of the Government of Puerto Rico, that was outstanding for almost the entire second quarter of 2009 until it was paid off on June 18, 2009. Also, funds obtained through short-term borrowings as well as proceeds from sales and prepayments of MBS were invested, in part, in the purchase of investment securities to offset declining securities yields due to the acceleration of MBS prepayments and calls of approximately $937 million of U.S. agency debentures in 2009. The average volume of investment securities increased by $500.2 million for the second quarter of 2009, as compared to the second quarter of 2008, and by $461.8 million for the first half of 2009 compared to the first half of 2008. Purchases of investment securities for the first half of 2009 (mainly U.S. agency callable securities with contractual maturities of 2-3 years and 15 year U.S. government sponsored agencies MBS) were financed with very low-cost of sources of funding, thus protecting interest margins.
     On an adjusted tax equivalent basis, net interest income decreased by $2.0 million, or 1%, for the second quarter of 2009 compared to the same period in 2008 and by $0.8 million for the first half of 2009 compared to the first half of 2008. The decrease was

67


Table of Contents

principally due to the lower yields on earning assets as described above, partially offset by a $0.2 million increase in the tax-equivalent adjustment as compared to the second quarter of 2008 and by a $5.5 million increase in the tax-equivalent adjustment for the first half of 2009 as compared to the same period in 2008. The tax-equivalent adjustment increases interest income on tax-exempt securities and loans by an amount which makes tax-exempt income comparable, on a pre-tax basis, to the Corporation’s taxable income as previously stated. The increase in the tax-equivalent adjustment was mainly related to increases in the interest rate spread on tax-exempt assets, mainly MBS held by the Corporation’s IBE subsidiary, FirstBank Overseas Corporation, resulting from the overall decrease in the cost of funding.
Provision and Allowance for Loan and Lease Losses
     The provision for loan and lease losses is charged to earnings to maintain the allowance for loan and lease losses at a level that the Corporation considers adequate to absorb probable losses inherent in the portfolio. The adequacy of the allowance for loan and lease losses is also based upon a number of additional factors including trends in charge-offs and delinquencies, current economic conditions, the fair value of the underlying collateral and the financial condition of the borrowers, and, as such, includes amounts based on judgments and estimates made by the Corporation. Although the Corporation believes that the allowance for loan and lease losses is adequate, factors beyond the Corporation’s control, including factors affecting the economies of Puerto Rico, the United States, the U.S. Virgin Islands and the British Virgin Islands, may contribute to delinquencies and defaults, thus necessitating additional reserves.
     For the quarter and six-month period ended on June 30, 2009, the Corporation provided $235.2 million and $294.6 million, respectively, for loan and lease losses as compared to $41.3 million and $87.1 million, respectively, for the comparable periods in 2008. Refer to the discussions under “Credit Risk Management” below for an analysis of the allowance for loan and lease losses, non-performing assets, impaired loans and related information and refer to the discussions under “Financial Condition and Operating Analysis — Loan Portfolio” and under “Risk Management — Credit Risk Management” below for additional information concerning the Corporation’s loan portfolio exposure in the geographic areas where the Corporation does business.

68


Table of Contents

Non-Interest Income
                                 
    Quarter Ended June 30,     Six-Month Period Ended June 30,  
    2009     2008     2009     2008  
    (In thousands)  
Other service charges on loans
  $ 1,523     $ 1,418     $ 3,052     $ 2,731  
Service charges on deposit accounts
    3,327       3,191       6,492       6,555  
Mortgage banking activities
    2,373       804       3,179       1,123  
Rental income
    407       579       856       1,122  
Insurance income
    2,229       2,551       4,599       5,279  
Other operating income
    4,312       4,138       8,596       9,058  
 
                       
 
                               
Non-interest income before net gain on investments
    14,171       12,681       26,774       25,868  
 
                       
 
Gain on VISA shares
                      9,342  
Net gain on sale of investments
    10,305       (190 )     28,143       6,661  
OTTI on equity securities
          (489 )     (388 )     (489 )
OTTI on debt securities
    (1,061 )           (1,061 )      
 
                       
Net gain on investments
    9,244       (679 )     26,694       15,514  
 
                       
 
                               
Total
  $ 23,415     $ 12,002     $ 53,468     $ 41,382  
 
                       
     Non-interest income primarily consists of other service charges on loans; service charges on deposit accounts; commissions derived from various banking, securities and insurance activities; gains and losses on mortgage banking activities; and net gains and losses on investments and impairments.
     Other service charges on loans consist mainly of service charges on credit card-related activities and other non-deferrable fees.
     Service charges on deposit accounts include monthly fees and other fees on deposit accounts.
     Income from mortgage banking activities includes gains on sales and securitization of loans and revenues earned administering residential mortgage loans originated by the Corporation and subsequently sold with servicing retained. In addition, lower-of-cost-or-market valuation adjustments to the Corporation’s residential mortgage loans held for sale and servicing rights, if any, are recorded as part of mortgage banking activities.
     Rental income represents income generated by the Corporation’s subsidiary, First Leasing and Rental Corporation, on the rental of various types of motor vehicles.
     Insurance income consists of insurance commissions earned by the Corporation’s subsidiary FirstBank Insurance Agency, Inc., and the Bank’s subsidiary in the U.S. Virgin Islands, FirstBank Insurance V.I., Inc. These subsidiaries offer a wide variety of insurance business.
     The other operating income category is composed of miscellaneous fees such as debit, credit card and point of sale (POS) interchange fees and check and cash management fees.

69


Table of Contents

     The net gain (loss) on investment securities reflects gains or losses as a result of sales that are consistent with the Corporation’s investment policies as well as other-than-temporary impairment charges on the Corporation’s investment portfolio.
Non-interest income increased to $23.4 million for the second quarter of 2009 from $12.0 million for the second quarter of 2008 and increased to $53.5 million for the first half of 2009 compared to $41.4 million for the first half of 2008. The increase was related to gains from a higher volume of sales of investment securities and higher gains from mortgage banking activities. A realized gain of $10.3 million and $28.1 million was recorded in the second quarter and first half of 2009, respectively, on the sale of investment securities (mainly U.S. agency MBS), compared to a realized loss of $0.2 million and a realized gain of $6.7 million, respectively, for the comparable periods in 2008. During the second quarter of 2009, the Corporation completed the sale of approximately $342 million ($763 million for the first half of 2009) of investment securities (mainly U.S agency MBS), realizing a gain of $9.4 million ($27.2 million for the first half of 2009), and also sold its remaining exposure to auto industry corporate bonds of $1.5 million realizing a gain of $0.9 million in the process. A high prepayment scenario for MBS is anticipated through the rest of the year. Given this outlook, and the fact that certain available-for-sale securities were trading at a substantial premium over par, the Corporation continued to re-structure its investment portfolio, rather than wait for the MBS to be pre-paid at par, which has resulted in the realization of gains on sales. The impact of realized gains on sale of MBS securities was partially offset, when compared to the first half of 2008, by the $9.3 million gain recorded in the first quarter of 2008 on the mandatory redemption of a portion of the Corporation’s investment in VISA as part of VISA’s Initial Public Offering.
A $1.6 million increase in gains from mortgage banking activities for the second quarter of 2009, as compared to the second quarter of 2008, and of $2.1 million for the first half of 2009 as compared to the first half of 2008 contributed to higher net interest income and was driven by a higher volume of loan sales and securitizations. Servicing rights recorded for loan sales and securitizations during the second quarter and first half of 2009 amounted to $2.0 million and $3.1 million, respectively, compared to $0.2 million and $0.5 million, respectively, for the comparable periods in 2008. During the second quarter and first half of 2009, and for the first time in many years, the Corporation completed the securitization of approximately $114 million and $188 million, respectively, of FHA/VA mortgage loans into GNMA MBS.
Partially offsetting the aforementioned increases in non-interest income were OTTI charges on debt securities of approximately $1.1 million recorded in the second quarter of 2009. The Corporation adopted FSP FAS 115-2 and FAS 124-2 in the second quarter of 2009. This FSP amended the OTTI model for debt securities. Under the new guidance, OTTI loss must be recognized in earnings if an investor has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell

70


Table of Contents

a debt security, it must evaluate expected cash flows to be received and record in earnings any credit loss that has occurred.
     Debt securities issued by U.S. Government agencies, government sponsored entities and the U.S. Treasury accounted for more than 95% of the total available-for-sale and held-to-maturity portfolio as of June 30, 2009 and do not have any credit losses, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s assessment was concentrated mainly on the approximately $130 million private label MBS which the Corporation evaluates for credit losses on a quarterly basis. The Corporation recorded a $1.1 million OTTI loss (net of a payment received of $4.2 million) through earnings in the second quarter of 2009 that represents the credit loss of available-for-sale private label MBS. During the second quarter of 2009, the Corporation received from R&G Financial Corporation (R&G), a Puerto Rican financial institution, a payment of $4.2 million to eliminate the 10% recourse provision contained in the private label MBS. The elimination of the recourse provision was the reason for which the present value of the expected future cash flows in these private label MBS is less than the amortized cost of the security. The non-credit component of the unrealized loss was $31.5 million as of June 30, 2009, which was recorded in comprehensive income. Since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss component was reflected in earnings, thus contributing to the decrease in non-interest income. Refer to Note 4 of the accompanying unaudited consolidated financial statements for additional information.
     With respect to equity securities, no OTTI loss was recorded during the second quarter of 2009, compared to a charge of $0.5 million for the second quarter of 2008. OTTI loss for equity securities of $0.4 million was recorded for the first half of 2009 compared to a charge of $0.5 million for the first half of 2008. The remaining carrying amount of available-for-sale equity securities as of June 30, 2009 amounted to $0.5 million.
     Fee income from deposit accounts and non-deferrable loan fees remained stable. Despite an increase in the deposit base, service charges on deposits remained stable as a result of the decrease in the volume of transactions that require service charges. Customers engaged in fewer transactions because of the current economic environment.
Non-Interest Expenses
     The following table presents the detail of non-interest expenses for the periods indicated:

71


Table of Contents

                                 
    Quarter Ended June 30,     Six-month Period Ended June 30,  
    2009     2008     2009     2008  
    (In thousands)  
Employees’ compensation and benefits
  $ 34,472     $ 34,994     $ 68,714     $ 71,320  
Occupancy and equipment
    14,824       15,541       29,598       30,520  
Deposit insurance premium
    14,895       2,345       19,775       4,691  
Other taxes, insurance and supervisory fees
    8,368       5,588       14,161       11,252  
Professional fees — recurring
    3,138       3,620       5,961       8,180  
Professional fees — non-recurring
    204       1,299       567       1,798  
Servicing and processing fees
    2,246       2,381       4,558       4,969  
Business promotion
    3,836       4,802       6,952       9,067  
Communications
    2,018       2,250       4,145       4,523  
Net loss on REO operations
    6,626       3,172       12,001       6,428  
Other
    5,361       5,771       14,084       11,202  
 
                       
 
  $ 95,988     $ 81,763     $ 180,516     $ 163,950  
 
                       
     Non-interest expenses increased to $96.0 million for the second quarter of 2009 from $81.8 million for the second quarter of 2008 and increased to $180.5 million for the first half of 2009 compared to $164.0 million for the first half of 2008. The Corporation recorded $8.9 million in the second quarter of 2009 for the accrual of the special assessment levied by the FDIC. The FDIC special assessment, together with an increase in the regular deposit insurance premium, resulted in an increase of over $12 million for the second quarter and over $15 million for the first half in FDIC assessments as compared to 2008. The final FDIC assessment rule establishes a special assessment of five basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009. The special assessment will be collected on September 30, 2009. The special assessment is assessed against assets minus Tier 1 capital rather than domestic deposits, but the assessment is capped at 10 basis points of an institution’s domestic deposits so that no institution will pay an amount higher than they would have paid under the interim rule.
     Property tax expenses were higher by approximately $2.6 million for the second quarter of 2009, compared to the second quarter of 2008 and for the first half of 2009 compared to the first half of 2008, mainly attributable to accruals for the reassessed value of certain properties.
     Losses on REO operations amounted to $6.6 million for the second quarter of 2009, compared to $3.2 million for the second quarter of 2008, and amounted to $12.0 million for the first half of 2009 compared to $6.4 million for the first half of 2008. Among the components of these increasing losses are expenses incurred in REO insurance, taxes and maintenance associated with a higher inventory and write-downs of the value of repossessed properties due to declining real estate prices, including a $1.5 million write-down during the second quarter of 2009 relating to a foreclosed condo-conversion project in the U.S. mainland.
     Also contributing to higher non-interest expenses for the first half of 2009 was a $4.0 million impairment of the core deposit intangible of FirstBank Florida. The core deposit intangible represents the value of the premium paid to acquire core deposits of an institution. Upon the acquisition of FirstBank Florida in 2005, the Corporation recorded a core deposit intangible of $17.3 million. The amortized book value of $11.7 million was evaluated and the evaluation calculated an estimated value of $7.3 million under SFAS 144, “Accounting

72


Table of Contents

for the Impairment or Disposal of Long-Lived Assets.” This non-cash impairment charge, attributable to decreases in the base of core deposits acquired, does not affect the Corporation’s cash balances, liquidity or operations. Moreover, the charge did not have a negative impact on the Corporation’s tangible capital and regulatory capital ratios.
     The Corporation had reductions in all other operating expenses, as compared to 2008, including a decrease of $1.6 million for the quarter and $3.5 million for the first half in professional service fees, a decrease of $1.0 million for the quarter and $2.1 million for the first half in business promotion expenses, a decrease of $0.7 million for the quarter and $0.9 for the first half in occupancy and equipment expenses and a decrease of $0.5 million for the quarter and $2.6 million for the first half in employees’ compensation and benefit expenses. The Corporation has been able to continue the growth of its operations without incurring substantial additional operating expenses and is committed to its Business Rationalization program, which includes revenue generating and cost-cutting initiatives.
Income Taxes
     Income tax expense includes Puerto Rico and Virgin Islands income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation for U.S. income tax purposes and is generally subject to United States income tax only on its income from sources within the United States or income effectively connected with the conduct of a trade or business within the United States. Any such tax paid is creditable, within certain conditions and limitations, against the Corporation’s Puerto Rico tax liability. The Corporation is also subject to U.S. Virgin Islands taxes on its income from sources within that jurisdiction. Any such tax paid is creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions and limitations.
     Under the Puerto Rico Internal Revenue Code of 1994, as amended (“PR Code”), First BanCorp is subject to a maximum statutory tax rate of 39%. In 2009 the Puerto Rico Government approved Act No. 7 (the “Act”), to stimulate Puerto Rico’s economy and to reduce the Puerto Rico Government’s fiscal deficit. The Act imposes a series of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax determined, which is applicable to corporations, among others, whose combined income exceeds $100,000, effectively resulting in an increase in the maximum statutory tax rate from 39% to 40.95%. This temporary measure is effective for tax years that commenced after December 31, 2008 and before January 1, 2012. The PR Code also includes an alternative minimum tax of 22% that applies if the Corporation’s regular income tax liability is less than the alternative minimum tax requirements.
     The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through International Banking Entities (“IBEs”) of the Corporation and the Bank and through the Bank’s subsidiary FirstBank Overseas Corporation, in which the interest income and gain

73


Table of Contents

on sales is exempt from Puerto Rico and U.S. income taxation. Under the Act, all IBEs are subject to a special 5% tax on their net income not otherwise subject to tax pursuant to the PR Code. This temporary measure is also effective for tax years that commence after December 31, 2008 and before January 1, 2012. The IBEs and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for a total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico. IBEs that operate as a unit of a bank pay income taxes at normal rates to the extent that the IBEs’ net income exceeds 20% of the bank’s total net taxable income.
     For the quarter and six-month period ended June 30, 2009, the Corporation recognized an income tax benefit of $98.1 million and $112.3 million, respectively, compared to an income tax benefit of $9.5 million and $17.2 million, respectively, recorded for the same periods in 2008. The positive fluctuation in the financial results was mainly related to increased deferred tax benefits due to net operating losses carryforward recorded as a result of current taxable losses and due to lower taxable income and adjustments to deferred tax asset, as a result of the aforementioned changes to the PR Code enacted tax rates. The Corporation recorded an additional income tax benefit of $1.6 million and $6.0 million for the quarter and six-month period ended June 30, 2009, respectively, in connection with changes to enacted tax rates, net of a $1.8 million and $3.6 million provision for the quarter and six-month period ended June 30, 2009, respectively, recorded for the operations of FirstBank Overseas Corporation. Deferred tax amounts have been adjusted for the effect of the tax rate expected to apply to taxa