SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

o		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to Section 240.14a-12

FIRST BANCORP.

(Name of Registrant as Specified In Its Charter)

Not Applicable
(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

þ		No fee required.
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	1)		Title of each class of securities to which transaction applies:
	2)		Aggregate number of securities to which transaction applies:
	3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):
	4)		Proposed maximum aggregate value of transaction:
	5)		Total fee paid:

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule, and the date of its filing.

	1)		Amount Previously Paid:
	2)		Form, Schedule or Registration Statement No.:
	3)		Filing Party:
	4)		Date Filed:

 

 

1519 PONCE DE LEON AVENUE

SANTURCE, PUERTO RICO 00908

(787) 729-8200

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

 

To the Stockholders of First BanCorp:

 

NOTICE IS HEREBY GIVEN, pursuant to a resolution of the Board of Directors and Section 3 of the Corporation’s By-laws, that a Special Meeting of Stockholders of First BanCorp will be held at our principal offices located at 1519 Ponce de Leon Avenue, Santurce, Puerto Rico, on August 24, 2010, at 10:00 a.m., for the purpose of considering and taking action on the following matters, all of which are described in the accompanying Proxy Statement:

 

(1) To approve the issuance of up to 256,401,610 shares of the Corporation’s Common Stock in exchange (the “Exchange Offer”) for shares of the Corporation’s Noncumulative Perpetual Monthly Income Preferred Stock, Series A, B, C, D and E (“Preferred Stock”), in accordance with applicable New York Stock Exchange rules;

 

(2) To approve the issuance of shares of the Corporation’s Common Stock in the Exchange Offer to Héctor M. Nevares-LaCosta, a member of the Board of Directors, in exchange for his shares of Preferred Stock in accordance with applicable New York Stock Exchange rules;

 

(3) To approve an amendment to Article Sixth of the Corporation’s Restated Articles of Incorporation to decrease the par value of the Corporation’s Common Stock from $1.00 to $0.10;

 

(4) To approve the issuance of up to 28,476,121 shares of the Corporation’s Common Stock to The Bank of Nova Scotia (“BNS”), in accordance with applicable New York Stock Exchange rules, if it exercises its anti-dilution right under the Stockholder Agreement, dated August 24, 2007 (the “Stockholder Agreement”), by and between us and BNS, in connection with the Exchange Offer;

 

(5) To approve the issuance of shares of the Corporation’s Common Stock to BNS, in accordance with applicable New York Stock Exchange rules, if it exercises its anti-dilution right under the Stockholder Agreement, in connection with the conversion into Common Stock of the Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series G;

 

(6) To approve an amendment to Article Sixth of the Corporation’s Restated Articles of Incorporation to increase the number of authorized shares of the Corporation’s Common Stock from 750,000,000 to 2,000,000,000; and

 

(7) To approve an amendment to Article Sixth of the Corporation’s Restated Articles of Incorporation to implement a reverse stock split.

 

Only stockholders of record as of the close of business on August 2, 2010 are entitled to receive notice of and to vote at the Special Meeting or any adjournment or adjournments thereof. A list of stockholders as of the Record Date will be open to the examination of any stockholder, for any purpose germane to the Special Meeting, during ordinary business hours, for a period of ten days prior to the Special Meeting, at our principal offices.

 

You are cordially invited to attend the Special Meeting. It is important that your shares be represented regardless of the number you own. Even if you plan to be present at the Special Meeting, you are urged to complete, sign, date and promptly return the enclosed proxy in the envelope provided. If you attend the Special Meeting, you may vote either in person or by proxy. You may revoke any proxy that you give at any time prior to its exercise.

 

By Order of the Board of Directors

 

Lawrence Odell

Secretary

 

Santurce, Puerto Rico

August 2, 2010

 

TABLE OF CONTENTS

 

1519 Ponce De Leon Avenue

Santurce, Puerto Rico 00908

 

SPECIAL MEETING OF STOCKHOLDERS

 

This proxy statement (the “Proxy Statement”) is furnished in connection with the solicitation of proxies on behalf of the Board of Directors of First BanCorp (the “Corporation”) for use at the Special Meeting of Stockholders to be held at our offices located at 1519 Ponce de Leon Avenue, Santurce, Puerto Rico, on August 24, 2010 at 10:00 a.m., and at any adjournment or adjournments thereof (the “Special Meeting”). This Proxy Statement is first being sent or given to holders of record of our common stock, par value $1.00 per share (the “Common Stock”), on or about August 2, 2010. The Board of Directors has designated two individuals to serve as proxies to vote the shares represented at the Special Meeting. Shares represented by properly executed proxies that are received will be voted at the Special Meeting in accordance with the instructions specified in the proxy. If you properly submit a proxy but do not give instructions on how you want your shares to be voted, your shares will be voted FOR each proposal by the designated proxies in accordance with the Board of Directors’ recommendations, which are described below.

 

What information is contained in this Proxy Statement?

 

The information in this Proxy Statement relates to the proposals to be voted on at the Special Meeting, the voting process, and other required information.

 

What is the purpose of the Special Meeting?

 

At the Special Meeting, stockholders will act upon the following matters:

 

(i) the issuance of up to 256,401,610 shares of Common Stock in exchange (the “Exchange Offer”) for shares of our Noncumulative Perpetual Monthly Income Preferred Stock, Series A, B, C, D, and E (“Preferred Stock”);

 

(ii) the issuance of shares of Common Stock in the Exchange Offer to Director Héctor M. Nevares-LaCosta, a member of our Board of Directors, upon his exchange of his shares of Preferred Stock for shares of Common Stock;

 

(iii) an amendment to Article Sixth of our Restated Articles of Incorporation (“Articles of Incorporation”) to decrease the par value of the Common Stock from $1.00 to $0.10 per share;

 

(iv) the issuance of up to 28,476,121 shares of Common Stock to The Bank of Nova Scotia (“BNS”) if it exercises its anti-dilution right under the Stockholder Agreement dated August 24, 2007 (the “Stockholder Agreement”) in connection with the Exchange Offer;

 

(v) the issuance of shares of Common Stock to BNS if it exercises its anti-dilution right under the Stockholder Agreement in connection with the conversion into Common Stock of the Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series G (“Series G Preferred Stock”), owned by the United States Department of the Treasury (the “U.S. Treasury”);

 

(vi) an amendment to Article Sixth of our Articles of Incorporation to increase the number of authorized shares of Common Stock from 750,000,000 to 2,000,000,000; and

 

(vii) an amendment to Article Sixth of our Articles of Incorporation to implement a reverse stock split.

What should I receive?

 

You should receive this Proxy Statement, including exhibits, the Notice of Special Meeting of Stockholders and the proxy card.

 

How many votes do I have?

 

You will have one vote for every share of Common Stock you owned as of the close of business on August 2, 2010, the Record Date for the Special Meeting.

 

If I am a holder of shares of Common Stock, but I did not hold my shares of Common Stock as of the Record Date, am I entitled to vote?

 

If you were not a record or beneficial holder of shares of Common Stock as of the Record Date, you will not be entitled to vote with respect to such shares.

 

How many votes can all stockholders cast?

 

Stockholders may cast one vote for each of the Corporation’s 92,542,722 shares of Common Stock that were outstanding on the Record Date.

 

How many votes must be present to hold the Special Meeting?

 

A majority of the votes that can be cast must be present either in person or by proxy to hold the Special Meeting. Proxies received but marked as abstentions or broker non-votes will be included in the calculation of the number of shares considered to be present at the Special Meeting for purposes of determining whether the majority of the votes that can be cast are present. A broker non-vote occurs when a broker or other nominee indicates on the proxy card that it does not have discretionary authority to vote on a particular matter. Votes cast by proxy or in person at the Special Meeting will be counted by The Bank of New York Mellon, an independent third party. We urge you to vote by proxy even if you plan to attend the Special Meeting so that we will know as soon as possible that enough votes will be present for us to hold the Special Meeting.

 

Why is my approval necessary for the issuances of shares of Common Stock?

 

Our Common Stock is listed on the NYSE under the symbol “FBP.” As further discussed below, NYSE Listed Company Manual Section 312.03 requires that we seek stockholder approval prior to the issuances of Common Stock contemplated by Proposal Nos. 1, 2, 4, and 5.

 

What vote is required and how are abstentions and broker non-votes treated?

 

Approval of each of Proposal Nos. 1, 2, 4, and 5, relating to the issuance of shares of Common Stock in accordance with applicable New York Stock Exchange rules, requires the affirmative vote of the holders of a majority of the votes cast on each such proposal, provided that the total votes cast on such proposal, whether for or against, represent over 50% of all of the shares of Common Stock outstanding. Abstentions and broker non-votes will not be counted in determining the number of votes cast.

 

Approval of Proposal Nos. 3, 6, and 7, relating to amendments to Article Sixth of the Articles of Incorporation, requires the affirmative vote of a majority of the shares of Common Stock outstanding. Broker non-votes and abstentions will have the same effect as votes cast against the proposed amendments.

 

How does the Board recommend that I vote?

 

The Board of Directors recommends that you vote:

 

 

 

How do I vote?

 

You can vote either in person at the Special Meeting or by proxy without attending the Special Meeting.

 

To vote by proxy, you must:

 

 

Please refer to the specific instructions set forth on the enclosed proxy card. For security reasons, our electronic voting system has been designed to authenticate your identity as a stockholder.

 

If you hold your shares in “street name,” your broker, bank, trustee or other nominee will provide you with materials and instructions for voting your shares.

 

Can I vote my shares in person at the Special Meeting?

 

If you are a “stockholder of record,” you may vote your shares in person at the Special Meeting. If you hold your shares in “street name,” you must obtain a valid, legal proxy from your broker, bank, trustee or other nominee, giving you the right to vote the shares at the Special Meeting.

 

What is the difference between holding shares as a stockholder of record and as a beneficial owner?

 

Most of our stockholders hold their shares through a broker, bank, trustee or other nominee rather than directly in their own name. As summarized below, there are some differences between shares held of record and those owned beneficially.

 

Stockholder of Record.  If your shares are registered directly in your name with our transfer agent, The Bank of New York Mellon Shareowner Services, LLC, you are considered the stockholder of record with respect to those shares, and these proxy materials are being sent directly to you. As a stockholder of record, you may vote in person at the Special Meeting or vote by proxy. Whether or not you plan to attend the Special Meeting, we urge you to vote via the Internet, by telephone, or by completing, signing, dating and returning the proxy card.

 

Beneficial Owner.  If your shares are held by a broker, bank, trustee or other nominee, you are considered the beneficial owner of shares held in “street name,” and these proxy materials are being forwarded to you by your broker, bank, trustee or other nominee who is considered the stockholder of record with respect to those shares. As a beneficial owner, you have the right to direct your broker, bank, trustee or other nominee on how to vote the shares held in your account, and it will enclose or provide voting instructions for you to use in directing it on how to vote your shares. The organization that holds your shares, however, is considered the stockholder of record for purposes of voting at the Special Meeting. Accordingly, because you are not the stockholder of record, you may not vote your shares in person at the Special Meeting unless you request and

obtain a valid, legal proxy from your broker, bank, trustee or other nominee giving you the right to vote the shares at the Special Meeting. The organization that holds your shares cannot vote your shares without your instructions, so it is important that you exercise your right to vote.

 

Who will bear the costs of soliciting proxies for the Special Meeting?

 

We will bear the cost of soliciting proxies for the Special Meeting. In addition to solicitation by mail, proxies may be solicited personally, by telephone or otherwise. The Board of Directors has engaged the firm of Morrow & Co., LLC to aid in the solicitation of proxies. The cost is estimated at $10,000, plus reimbursement of reasonable out-of-pocket expenses. Our directors, officers and employees may also solicit proxies but will not receive any additional compensation for their services. Proxies and proxy materials will also be distributed at our expense by brokers, nominees, custodians and other similar parties.

 

Can I change my vote?

 

Yes, you may change your vote. If you are a stockholder of record, you may revoke your proxy at any time before it is exercised by sending in a new proxy card with a later date, or casting a new vote by telephone or over the Internet, or sending a written notice of revocation to the President or Secretary of First BanCorp, at P.O. Box 9146, San Juan, Puerto Rico 00908-0146, delivered before the proxy is exercised. If you attend the Special Meeting and want to vote in person, you may request that your previously submitted proxy not be used. If your shares are held in the name of a broker, bank, trustee or other nominee, that institution will instruct you as to how your vote may be changed.

 

What should I do if I receive more than one set of proxy materials?

 

You may receive more than one set of voting materials, including multiple copies of this Proxy Statement and multiple proxy cards. For example, if you hold your shares in more than one brokerage account, you may receive a separate proxy card for each brokerage account in which you hold shares. Please complete, sign, date and return each proxy card that you receive.

 

Could other matters be presented at the Special Meeting?

 

The Board of Directors does not intend to present any business at the Special Meeting other than that described in the Notice of Special Meeting of Stockholders.

 

What happens if the Special Meeting is postponed or adjourned?

 

Your proxy will still be valid and may be voted at the postponed or adjourned Special Meeting. You will still be able to change or revoke your proxy until it is voted.

 

Who can help answer my questions?

 

If you have any questions about how to grant or revoke your vote or need copies of our filings, you should contact Lawrence Odell, Secretary of the Board of Directors, by e-mail at lawrence.odell@firstbankpr.com or by telephone at 787-729-8109.

 

This Proxy Statement, including exhibits, and the 2009 annual report to security holders are available at http://bnymellon.mobular.net/bnymellon/fbp. You may obtain directions to be able to attend the Special Meeting and vote in person by contacting Lawrence Odell, Secretary of the Board of Directors, by e-mail at lawrence.odell@firstbankpr.com or by telephone at 787-729-8109.

 

The following tables sets forth certain information as of June 30, 2010, unless otherwise described, with respect to shares of our Common Stock and Preferred Stock beneficially owned (unless otherwise indicated in the footnotes) by: (1) each person known to us to be the beneficial owner of more than 5% of our Common Stock; (2) each director; (3) each named executive officer (as defined in Item 402(a)(2) of Regulation S-K); and (4) all current directors and executive officers as a group. Any ownership of Preferred Stock by executives who are not named executive officers is also shown. This information has been provided by each of the directors and executive officers at our request or derived from statements filed with the SEC pursuant to Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Beneficial ownership of securities, as shown below, has been determined in accordance with applicable guidelines issued by the SEC. Beneficial ownership includes the possession, directly or indirectly, through any formal or informal arrangement, either individually or in a group, of voting power (which includes the power to vote, or to direct the voting of, such security) and/or investment power (which includes the power to dispose of, or to direct the disposition of, such security).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table sets forth information as of June 30, 2010 with respect to shares of our Preferred Stock beneficially owned by our directors and executive officers:

 

 

 

 

José Menéndez-Cortada, Jorge L. Díaz-Irizarry, Sharee Ann Umpierre-Catinchi, Héctor M. Nevares-LaCosta and Dacio Pasarell have advised us that they will tender all of their shares of Preferred Stock in the Exchange Offer.

 

Background

 

For the fiscal year ended 2009 and the first quarter of 2010, we reported losses of approximately $275 million and $107 million, respectively. These losses were primarily caused by specific reserves and provisions against our loan portfolios in Florida and Puerto Rico. The deterioration in the quality of these assets resulted from the economic recession being experienced in the United States and in Puerto Rico. Particularly hard hit by the recession were real estate values in the two principal markets in which we operate. This adverse financial downturn diminished the collateral values supporting many of the loans extended by us in those markets. In turn, this caused us to increase reserves and, in many cases, charge off substantial amounts. The downturn in the economy and the resulting deterioration of our credits increased our non-performing assets as of March 31, 2010 to approximately $1.8 billion. We announced in our earnings release issued on July 27, 2010 that our loss for the quarter ended June 30, 2010 was $90.6 million and our non-performing assets were $1.7 billion as of June 30, 2010.

 

As a result of the continuing difficult economic conditions, we are seeking to improve our capital structure. We have assured our regulators that we are committed to raising capital and we have submitted capital plans to our regulators regarding how we plan to raise capital. The capital plans were submitted in accordance with a Written Agreement dated June 3, 2010 (the “Agreement”) that we entered into with the Federal Reserve Bank of New York (the “Fed”) and a Consent Order dated June 2, 2010 (the “Order” and collectively with the Agreement, the “Agreements”) that our subsidiary, FirstBank Puerto Rico (“FirstBank), entered into with the Federal Deposit Insurance Corporation (the “FDIC”) and the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico. Pursuant to these Agreements, the Corporation and FirstBank agreed to take certain actions designed to improve our financial condition. These actions include the adoption and implementation of various plans, procedures and policies related to our capital, lending activities, liquidity and funds management and strategy. The Order requires FirstBank to develop and adopt a plan to attain a leverage ratio of at least 8%, a Tier 1 capital to risk-weighted assets ratio of at least 10% and a Total capital to risk-weighted assets ratio of at least 12%, and obtain approval prior to issuing, increasing, renewing or rolling over brokered deposits. The Agreement also requires the Corporation to obtain the approval of the Fed prior to paying dividends, receiving dividends from FirstBank, incurring, increasing or guaranteeing any debt, or purchasing or redeeming any stock, to comply with certain notice provisions prior to appointing any new directors or senior executive officers and to comply with certain restrictions on severance payments and indemnification. Concurrent with the issuance by the FDIC of its Order, the FDIC granted FirstBank a temporary waiver through June 30, 2010 to enable it to continue accessing the brokered deposit market. The FDIC has granted an additional waiver through September 30, 2010. FirstBank will request waivers for future periods. No assurance can be given that the FDIC will continue to issue waivers for amounts that will enable FirstBank to meet its funding needs. Any failure to obtain a waiver would have a significantly adverse effect on FirstBank, which has relied on brokered deposits to fund a major part of its operations and had, as of March 31, 2010, $7.4 billion in brokered deposits outstanding, representing approximately 57% of our total deposits. We announced in our earnings release issued on July 27, 2010 that our average balance of brokered CDs decreased to $7.21 billion for the second quarter of 2010.

 

We have been taking steps to implement strategies to increase tangible common equity and regulatory capital through (1) the Exchange Offer, which is being submitted for stockholder approval at the Special Meeting, (2) the issuance of approximately $500 million of equity in one or more public or private offerings (a “Capital Raise”), (3) the conversion into Common Stock of the shares of Series G Preferred Stock that we issued to the U.S. Treasury in exchange for the Series F Preferred Stock that we sold to the U.S. Treasury on January 16, 2009, and (4) a rights offering to common stockholders. With respect to a Capital Raise, we plan to seek to raise at least $500 million of equity because we believe that amount would enable us to absorb possible additional losses based on a worst case evaluation of possible losses over the next five years while

maintaining the capital ratios required for a well-capitalized financial institution as well as those required by the FDIC’s Order. With respect to the conversion, under the conditions described below, we can compel the conversion of the Series G Preferred Stock into shares of Common Stock. See “— Agreement with the U.S. Treasury.” If we complete a Capital Raise, we expect to issue rights to the holders of our currently outstanding 92,542,722 shares of Common Stock that entitle them to acquire one share of Common Stock for each share of Common Stock they own at a price equal to the purchase price in a Capital Raise. No assurance can be given that we will complete the Exchange Offer, a Capital Raise, the conversion of the Series G Preferred Stock into Common Stock or a rights offering.

 

We believe that the Exchange Offer and, to the extent completed, the conversion of the Series G Preferred Stock into Common Stock and a Capital Raise would enhance our long-term financial stability, improve our ability to operate in the current economic environment, and improve our ability to access the capital markets in order to fund strategic initiatives or other business needs and to absorb any future credit losses.

 

Our inability to complete the Exchange would hinder our efforts to sell Common Stock in a Capital Raise. If we need to continue to recognize significant reserves and we cannot complete a Capital Raise, the Corporation and FirstBank may not be able to comply with the minimum capital requirements included in the capital plans required by the Agreements. These capital plans, which are subject to the approval of our regulators, set forth our plan to attain the capital ratio requirements set forth in the Order over time. If, at the end of any quarter, we do not comply with any specified minimum capital ratios, we must notify our regulators. The Corporation must notify the Fed within 30 days of the end of any quarter of its inability to comply with a capital ratio requirement and submit an acceptable written plan that details the steps it will take to comply with the requirement. FirstBank must immediately notify the FDIC of its inability to comply with a capital ratio requirement and, within 45 days, it must either increase its capital to comply with the ratio requirements or submit a contingency plan to the FDIC for its sale, merger, or liquidation. In the event of a liquidation of FirstBank, the holders of any outstanding preferred stock would rank senior to the holders of our Common Stock with respect to rights upon any liquidation of the Corporation.

 

The Exchange Offer for Preferred Stock

 

On July 16, 2010, we commenced the Exchange Offer. For each share of Preferred Stock that we accept for exchange in accordance with the terms of the Exchange Offer, we will issue a number of shares of our Common Stock having the aggregate dollar value (based on a price per share determined as described below) equal to $13.75, which is equal to 55% of the $25 liquidation preference of a share of Preferred Stock. The price per share will be based on the greater of the average Volume Weighted Average Price (or “VWAP”) during the five trading-day period ending on the second business day immediately preceding the expiration date of the Exchange Offer and the minimum share price of $1.18. As of July 21, 2010, the market value of a share of Common Stock was $0.51 and the market prices of a share of each series of Preferred Stock were as follows: Series A Preferred Stock - $4.77; Series B Preferred Stock — $4.70; Series C Preferred Stock — $4.77; Series D Preferred Stock - $4.89; and Series E Preferred Stock — $4.65. If the minimum share price is used to determine the number of shares to be issued in the Exchange Offer, we will issue 11.6525 shares of Common Stock in exchange for each share of Preferred Stock. As discussed below under “— Required Stockholder Action,” completion of the Exchange Offer is subject to stockholder approval.

 

Agreement with the U.S. Treasury

 

On July 7, 2010, we entered into an agreement with the U.S. Treasury regarding the exchange of our shares of Series F Preferred Stock, which has a liquidation preference of $400 million, and accrued and unpaid dividends on the Series F Preferred Stock, for shares of a new series of Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series G. Based on accrued and unpaid dividends of $24.2 million as of July 20, 2010, we issued 424,174 shares of Series G Preferred Stock to the U.S. Treasury on July 20, 2010. Notice was mailed to our stockholders of record on July 9, 2010 that we obtained an exception from the shareholder approval policy set forth in Section 312.03 of the New York Stock Exchange Listed Company Manual to issue the securities to the U.S. Treasury.

The Series G Preferred Stock has terms similar to the Series F Preferred Stock (including the same $1,000 liquidation preference per share), but is convertible, under the conditions discussed below, into shares of Common Stock based on an initial conversion rate of 896.3045 shares of Common Stock for each share of Series G Preferred Stock, calculated by dividing $650, or a discount of 35% from the $1,000 liquidation preference per share of Series G Preferred Stock, by the initial conversion price of $0.7252 per share, which is subject to adjustment. Based on the initial conversion rate, the 424,174 shares of Series G Preferred Stock will be convertible into approximately 380.2 million shares of Common Stock. The conversion price of the Series G Preferred Stock is subject to adjustment, including if the shares of Common Stock issued in a Capital Raise are priced below 90% of the market price per share of Common Stock on the trading day immediately preceding the pricing date of such Capital Raise, or if shares of Common Stock are otherwise issued, except in certain circumstances, including the Exchange Offer, at a price below the then conversion price of the Series G Preferred Stock. We can compel conversion of the Series G Preferred Stock into Common Stock if, within nine months from the date of the agreement, (a) at least $385 million of the liquidation preference of our Series A through E Preferred Stock is tendered in the Exchange Offer, (b) we raise $500 million of additional capital, subject to terms, other than the price per share, reasonably acceptable to the U.S. Treasury in its sole discretion, (c) we obtain the approval of the holders of our Common Stock of an amendment to our Articles of Incorporation to increase the number of authorized shares of Common Stock from 750,000,000 to at least 1,200,000,000 and to reduce the par value of a share of Common Stock from $1.00 to $0.10, (d) we have received from the appropriate banking regulators all requisite approvals (which we expect to receive), (e) we have made any applicable anti-dilution adjustments and (f) none of the Corporation or any of its subsidiaries has dissolved or became subject to insolvency or similar proceedings, or has become subject to other materially adverse regulatory or other actions. The U.S. Treasury, and any subsequent holder of the Series G Preferred Stock, has the right to convert the Series G Preferred Stock at any time. Unless earlier converted by the holder or the Corporation, the Series G Preferred Stock will automatically convert into shares of Common Stock on the seventh anniversary of the issuance of the Series G Preferred Stock at the then current market price of our Common Stock.

 

At the time we exchanged the Series F Preferred Stock for Series G Preferred Stock, we issued to the U.S. Treasury an amended and restated warrant having a 10-year term and exercisable at an initial exercise price of $0.7252 per share to replace the original warrant we issued to the U.S. Treasury when it acquired the Series F Preferred Stock. Like the original warrant, the amended and restated warrant has an anti-dilution right that will require an adjustment to the exercise price of, and the number of shares underlying, the warrant. This adjustment will be necessary under various circumstances, including if we issue shares of Common Stock for consideration per share that is lower than the initial conversion price of the Series G Preferred Stock, or $0.7252. Depending upon the market price of shares of Preferred Stock at the time we issue shares of Common Stock in the Exchange Offer, the amended and restated warrant may require adjustment to the exercise price of the warrant to equal the consideration per share received by us in the Exchange Offer and the number of shares underlying the amended and restated warrant would be increased by the number obtained by multiplying the initial number by a fraction equal to the exercise price prior to the Exchange Offer over the consideration per share we receive in the Exchange Offer.

 

The agreement with the U.S. Treasury includes various other provisions. Included among these provisions are the U.S. Treasury’s agreement to vote, or cause to be voted, any shares of Common Stock that it acquires pursuant to the terms of the Series G Preferred Stock or the amended and restated warrant, except with respect to certain matters, in the same proportion as the votes of all other outstanding shares of Common Stock. The U.S. Treasury will retain discretionary authority to vote on the election and removal of directors, the approval of any business combination or sale of substantially all of the assets or property of the Corporation, the approval of any dissolution of the Corporation, the approval of any issuance of any securities of the Corporation on which holders of Common Stock are entitled to vote and on any other matters reasonably incidental to those matters, as determined by the U.S. Treasury.

Required Stockholder Action

 

We cannot complete the Exchange Offer unless our stockholders approve Proposal No. 1, which seeks approval of the issuance of up to 256,401,610 shares of Common Stock in the Exchange Offer. In addition, we may not be able to complete the Exchange Offer if our stockholders do not approve Proposal No. 3, which seeks stockholder approval of an amendment to Article Sixth of the Articles of Incorporation to decrease the par value of the Corporation’s Common Stock from $1.00 to $0.10 per share. The reduction in the par value of our Common Stock will be necessary to complete the Exchange Offer if, for example, the market value of a share of Preferred Stock tendered in the exchange is less than $10 at a time when the market value of the Common Stock would result in the issuance of more than 10 shares per tendered share of Preferred Stock.

 

We are also requesting stockholder approval of Proposal Nos. 2 and 4, which relate to the Exchange Offer. Adoption of these proposals is not a condition to the completion of the Exchange Offer. If stockholders do not approve Proposal No. 2, which seeks approval of the issuance of shares of Common Stock to Mr. Nevares-LaCosta upon his tender of shares of Preferred Stock in the Exchange Offer, or Proposal No. 4, which seeks stockholder approval of the issuance of shares of Common Stock to BNS upon its exercise of the anti-dilution right that it has under the Stockholder Agreement, we will be unable to issue shares to Mr. Nevares-LaCosta or BNS in an amount that exceeds 1% of the outstanding shares of Common Stock prior to such issuances.

 

We are also requesting stockholder approval of Proposal No. 5, which relates to the issuance of shares of Common Stock to BNS upon its exercise of the anti-dilution right that it has under the Stockholder Agreement in connection with the conversion into Common Stock of the Series G Preferred Stock that we issued to the U.S. Treasury. If stockholders do not approve Proposal No. 5, we will be unable to issue shares to BNS as a result of the conversion into Common Stock of the Series G Preferred Stock in an amount that exceeds 1% of the outstanding shares of Common Stock prior to such issuance.

 

Finally, we are requesting stockholder approval of Proposal Nos. 6 and 7, which seek stockholder approval of amendments to Article Sixth of the Articles of Incorporation to increase the number of authorized shares of Common Stock and to implement a reverse stock split. If stockholders do not approve Proposal No. 6, we will not have enough authorized shares of Common Stock to issue shares of Common Stock to investors in a Capital Raise for $500 million and to current stockholders in a rights offering. If stockholders do not approve Proposal No. 7, we may not be able to bring our Common Stock share price and average share price for 30 consecutive trading days above $1.00, which is a continued listing requirement of the NYSE. The NYSE will commence suspension and delisting procedures if we cannot regain compliance with this requirement by January 9, 2011.

 

Overview and Reason for the Proposal

 

The Board of Directors is seeking stockholder approval of the issuance of shares of Common Stock in exchange for shares of Preferred Stock. On July 16, 2010, we commenced an offer to issue 256,401,610 shares of Common Stock in the Exchange Offer. A special committee of the Board of Directors, comprised of Fernando Rodriguez-Amaro (Chairman), Aurelio Alemán-Bermúdez, José Rodriguez-Perello, Frank Kolodziej-Castro and José Ferrer-Canals recommended to the full Board the terms of the Exchange Offer and the Board determined to conduct the Exchange Offer. None of the members of the special committee own shares of Preferred Stock.

 

Our Common Stock is listed on the NYSE and, thus, we are subject to NYSE listing requirements. Under NYSE Listed Company Manual Section 312.03(c), stockholder approval is required prior to the issuance of Common Stock, or of securities convertible into or exercisable for Common Stock, in any transaction or series of related transactions, other than in certain circumstances that are inapplicable in this case, if (1) the Common Stock has, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for Common Stock or (2) the number of shares of Common Stock to be issued is, or will be upon issuance, equal to or in

excess of 20% of the number of shares of Common Stock outstanding before the issuance of the Common Stock or of securities convertible into or exercisable for Common Stock. Because 256,401,610 shares are being offered for issuance in the exchange, and that issuance would constitute over 20% of the outstanding shares of Common Stock prior to the completion of the Exchange Offer, we are required to seek stockholder approval prior to such issuance.

 

Purpose of the Exchange Offer

 

We decided to conduct the Exchange Offer to improve our capital structure given the continuing difficult economic conditions in the markets in which we operate and the evolving regulatory environment. We must increase our common equity to provide additional protection against future recognition of additional loan loss reserves against our loan portfolio and credit losses associated with the disposition of nonperforming assets due to the current economic situation in Puerto Rico and the United States that has impacted the Corporation’s asset quality and earnings performance. Total non-performing loans to total loans increased to 12.35% as of March 31, 2010 from 11.23% as of December 31, 2009 and from 5.27% as of March 31, 2009.

 

The restructuring of our equity components through the Exchange Offer will strengthen the quality of our regulatory capital position and enhance our ability to meet any new capital requirements. Furthermore, through the Exchange Offer, we are seeking to improve our common equity to risk weighted assets ratio. In the Supervisory Capital Assessment Program, the SCAP, applied to large money-center banks in the U.S., federal regulators established a 4% Tier 1 common equity to risk weighted assets ratio as the minimum threshold to determine the potential capital needs of such banks. While the SCAP is not applicable to us, we believe that the Tier 1 common equity ratio is being viewed by financial analysts and rating agencies as a guide for measuring the capital adequacy of banking institutions. The Exchange Offer will also improve our tangible common equity to tangible assets ratio, which is another metric used by financial analysts to determine a bank’s capital requirements. As of March 31, 2010, our Tier 1 common equity ratio was 3.36% and our tangible common equity ratio was 2.74%. If $385 million of the liquidation preference or approximately 70% of the outstanding shares of Preferred Stock are exchanged in the Exchange Offer, our Tier 1 common equity ratio and tangible common equity ratio as of March 31, 2010 on a pro forma basis after giving effect to the Exchange Offer would have been 6.23% and 4.79%, respectively. This success rate would meet one of the conditions necessary for us to compel the U.S. Treasury to convert into Common Stock the Series G Preferred Stock that we issued to the U.S. Treasury in exchange for the Series F Preferred Stock. The other substantive conditions necessary for us to compel the conversion are our issuance of $500 million of additional capital, subject to terms, other than the price per share, reasonably acceptable to the U.S. Treasury in its sole discretion, and receipt of the approval by the holders of our Common Stock of an amendment to our Restated Articles of Incorporation to increase the number of authorized shares of Common Stock from 750,000,000 to at least 1,200,000,000 and reduce the par value of our Common Stock from $1.00 to $0.10 per share.

 

Terms of the Exchange

 

We are offering to exchange up to 256,401,610 newly issued shares of Common Stock for any and all issued and outstanding shares of Preferred Stock. For each share of Preferred Stock that we accept for exchange in accordance with the terms of the exchange offer, we will issue a number of shares of Common Stock having the Exchange Value set forth in the table below unless the average VWAP of the Common Stock is $1.18 or less, in which case we will issue 11.6525 shares of Common Stock for each share of Preferred Stock.

 

 

Depending on the trading price of our Common Stock, the market value of the Common Stock we issue on the settlement date in exchange for each share of Preferred Stock we accept for exchange may be less than, equal to or greater than the applicable Exchange Value referred to above. If the trading price of our Common Stock is below $1.18 per share, the market value of our Common Stock to be received in the exchange offer will be less than the applicable Exchange Value.

 

Consequences If Stockholders Approve the Proposal

 

The issuance of our shares of Common Stock in connection with the Exchange Offer would increase the number of outstanding shares. As shown in the tables below, the increased number of shares would reduce the loss per share for the quarter ended March 31, 2010 and book value per share as of March 31, 2010 on a pro forma basis. In addition, the issuance of the additional shares would decrease any future earnings per share and would have a dilutive effect on each stockholder’s percentage voting power.

 

Unaudited Pro Forma Financial Information

 

The following selected unaudited pro forma financial information is presented to give effect to and show the pro forma impact of the Exchange Offer on First BanCorp’s balance sheet as of March 31, 2010 and First BanCorp’s results of operations for the fiscal year ended December 31, 2009 and the quarter ended March 31, 2010 assuming two different levels of participation in the Exchange Offer as discussed below. The unaudited pro forma financial information does not give effect to our issuance of Series G Preferred Stock to the U.S. Treasury in exchange for the Series F Preferred Stock or a Capital Raise.

 

The unaudited pro forma financial information is presented for illustrative purposes only and does not necessarily indicate the financial position or results that would have been realized had the Exchange Offer been completed as of the dates indicated or that will be realized in the future when and if the Exchange Offer is completed. The selected unaudited pro forma financial information has been derived from, and should be read in conjunction with First BanCorp’s historical consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with the SEC, which are included as Exhibits C and D, respectively, to this Proxy Statement.

 

Unaudited Pro Forma Balance Sheets

 

The unaudited pro forma consolidated balance sheet of First BanCorp as of March 31, 2010 is presented as if the Exchange Offer had been completed on March 31, 2010. We have shown the pro forma impact of a “High Participation Scenario” and a “Low Participation Scenario” prepared using the assumptions set forth below.

The “High Participation Scenario” assumes (i) the exchange of 90% of the outstanding shares of Preferred Stock ($495.09 million aggregate liquidation preference) for 230,761,449 shares of our Common Stock, and (ii) a Relevant Price of $1.18 per share.

 

The “Low Participation Scenario” assumes (i) the exchange of 50% of the outstanding shares of Preferred Stock ($275.05 million aggregate liquidation preference) for 128,200,805 shares of our Common Stock, and (ii) a Relevant Price of $1.18 per share.

 

If the Relevant Price is greater than the $1.18 per share amount assumed in the preceding paragraphs, there will be a decrease in the number of shares of Common Stock being issued and an increase in surplus, and increase in earnings per share relative to the pro forma financial statement information.

 

There can be no assurance that the foregoing assumptions will be realized in the future.

Unaudited Pro Forma Financial Information

 

High Participation Scenario

 

 

 

 

Unaudited Pro Forma Financial Information

 

Low Participation Scenario

 

 

 

 

 

 

 

Pro Forma Earnings Implications

 

The following presents the pro forma impact of the Exchange Offer on certain statement of operations items and losses per share of Common Stock for the quarter ended March 31, 2010 and the year ended December 31, 2009 as if the Exchange Offer had been completed on January 1, 2009. We have calculated the pro forma information below by (1) eliminating all the actual dividends in 2009 paid to holders of shares of Preferred Stock who participate at the levels assumed in each of the High Participation Scenario and the Low Participation Scenario, and (2) assuming that the new shares of our Common Stock issuable in the Exchange Offer were issued on January 1, 2009 and received dividends through August 2009. The retained earnings impact of the Exchange Offer has not been included in the analysis because it is not recurring.

 

 

 

 

Consequences If Stockholders Do Not Approve the Proposal

 

We will not be able to complete the Exchange Offer if our stockholders do not approve this Proposal No. 1. Further, we may not be able to complete the Exchange Offer if stockholders do not approve Proposal No. 3, relating to the amendment of our Articles of Incorporation to reduce the par value of a share of our Common Stock, if this is necessary so that we can issue shares of Common Stock in exchange for tendered Preferred Stock. Our inability to complete the Exchange Offer would hinder our efforts to sell Common Stock in a Capital Raise. If we need to continue to recognize significant reserves and we cannot complete a Capital Raise, the Corporation and FirstBank may not be able to comply with the minimum capital requirements included in the capital plans required by the Agreements. These capital plans, which are subject to the approval of our regulators, set forth our plan to attain the capital ratio requirements set forth in the Order over time. If, at the end of any quarter, we do not comply with any specified minimum capital ratios, we must notify our regulators. The Corporation must notify the Fed within 30 days of the end of any quarter of its inability to comply with a capital ratio requirement and submit an acceptable written plan that details the steps it will take to comply with the requirement. FirstBank must immediately notify the FDIC of its inability to comply with a capital ratio requirement and, within 45 days, it must either increase its capital to comply with the ratio requirements or submit a contingency plan to the FDIC for its sale, merger, or liquidation. In the event of a liquidation of FirstBank, the holders of any outstanding preferred stock would rank senior to the holders of our Common Stock with respect to rights upon any liquidation of the Corporation. Finally, if we cannot complete the Exchange Offer and issue Common Stock in exchange for $385 million of liquidation preference of Preferred Stock, we will not be able to compel the exchange into Common Stock of the Series G Preferred Stock we issued to the U.S. Treasury on July 20, 2010, even if we are able to complete a Capital Raise for $500 million, which is another condition to our ability to compel the conversion.

 

Description and Comparison of Preferred Stock, Series G Preferred Stock and Common Stock Rights

 

Our Articles of Incorporation authorize the issuance of 750,000,000 shares of Common Stock, par value $1.00 per share, and 50,000,000 shares of preferred stock, par value $1.00 per share. The following summary outlines the rights of holders of the shares of Preferred Stock, the holder of Series G Preferred Stock and the holders of the Common Stock to be issued in the exchange offer. This summary is qualified in its entirety by reference to our Articles of Incorporation, including the Certificates of Designation, and our by-laws (the “Bylaws”). We urge you to read these documents for a more complete understanding of the differences between the shares of Preferred Stock and the Common Stock. We issued shares of a new series of Series G Preferred Stock to the U.S. Treasury in exchange for Series F Preferred Stock and accrued and unpaid dividends on such stock. The Series G Preferred Stock has terms similar to the Series F Preferred Stock but is convertible as described below.

 

Governing Documents

 

Shares of Preferred Stock:  Holders of shares of Preferred Stock and Series G Preferred Stock have the rights set forth in our Articles of Incorporation, including the applicable Certificate of Designation, the Bylaws and Puerto Rico law.

 

Common Stock:  Holders of shares of our Common Stock have the rights set forth in our Articles of Incorporation, the Bylaws and Puerto Rico law.

Dividends and Distributions

 

On July 30, 2009, we announced the suspension of dividends on our Common Stock, Preferred Stock and Series F Preferred Stock (which has been exchanged for Series G Preferred Stock) effective with the preferred dividend for August 2009. We are generally not obligated or required to pay dividends on our Common Stock or preferred stock and no such dividends can be paid unless they are declared by our board of directors out of funds legally available for payment. Moreover, the Agreement we entered with the Fed requires us to obtain its approval before we pay any dividends.

 

Shares of Preferred Stock:  The shares of Preferred Stock, as well as Series G Preferred Stock, rank senior to the Common Stock and any other stock that is expressly junior to Preferred Stock and Series G Preferred Stock as to payment of dividends. Dividends on shares of Preferred Stock are payable monthly and are not mandatory or cumulative. Shares of Series G Preferred Stock pay cumulative compounding dividends quarterly in arrears of 5% per year until the fifth anniversary of the issuance of Series F Preferred Stock, and 9% thereafter. Holders of shares of Preferred Stock are entitled to receive dividends, when, as, and if declared by our Board of Directors, out of funds legally available for dividends.

 

Common Stock:  Subject to the preferential rights of any other class or series of capital stock, including Preferred Stock, holders of our Common Stock are entitled to receive, pro rata, dividends when and as declared by our Board of Directors out of funds legally available for the payment of dividends. In general, so long as any shares of Preferred Stock remain outstanding and until we meet various federal regulatory considerations, we cannot declare, set apart or pay any dividends on shares of our Common Stock unless all accrued and unpaid dividends on our Preferred Stock for the twelve monthly dividend periods ending on the immediately preceding dividend payment date have been paid or are paid contemporaneously and the full monthly dividend on our Preferred Stock for the then current month has been or is contemporaneously declared and paid or declared and set apart for payment. In addition, in general, and subject to certain limitations in the applicable certificate of designation, so long as any shares of Series G Preferred Stock remain outstanding, we cannot declare, set apart or pay any dividends on shares of our Common Stock unless all accrued and unpaid dividends for all past dividend periods, including the latest completed dividend period, on all outstanding shares of Series G Preferred Stock have been declared and paid in full.

 

Ranking

 

Shares of Preferred Stock:  Each series of Preferred Stock, as well as Series G Preferred Stock, currently ranks senior to the Common Stock with respect to dividend rights and rights upon liquidation, dissolution or winding-up of First BanCorp. Each series of Preferred Stock, as well as Series G Preferred Stock, is equal in right of payment with the other outstanding series of shares of preferred stock. The liquidation preference of the shares of Preferred Stock is $25 per share, plus accrued and unpaid dividends thereon for the current monthly dividend period to the date of distribution. The liquidation preference of shares of Series G Preferred Stock is $1,000 per share, plus the amount of any accrued and unpaid dividends, whether or not declared, to the date of payment.

 

Common Stock:  The Common Stock ranks junior with respect to dividend rights and rights upon liquidation, dissolution or winding-up of First BanCorp to all other securities and indebtedness of First BanCorp.

 

Conversion Rights

 

None of the shares of Preferred Stock, or Common Stock are convertible into other securities. The Series G Preferred Stock is convertible under the conditions described below, into shares of Common Stock based on an initial conversion rate of 896.3045 shares of Common Stock for each share of Series G Preferred Stock, calculated by dividing $650, or a discount of 35% from the $1,000 liquidation preference per share of Series G Preferred Stock, by the initial conversion price of $0.7252 per share, which is subject to adjustment. Based on the initial conversion rate, the 424,174 shares of Series G Preferred Stock issued to the U.S. Treasury will be convertible into approximately 380.2 million shares of Common Stock. The conversion price of the Series G Preferred Stock is subject to adjustment, including if the shares of Common Stock issued in a Capital

Raise are priced below 90% of the market price per share of Common Stock on the trading day immediately preceding the pricing date of such Capital Raise, or if shares of Common Stock are otherwise issued, except in certain circumstances, including the Exchange Offer, at a price below the then conversion price of the Series G Preferred Stock. We can compel conversion of the Series G Preferred Stock into Common Stock if, within nine months from the date of the agreement with the U.S. Treasury, (a) at least $385 million of the liquidation preference of our Series A through E Preferred Stock is tendered in the Exchange Offer, (b) we raise $500 million of additional capital, subject to terms, other than the price per share, reasonably acceptable to the U.S. Treasury in its sole discretion, (c) we obtain the approval of the holders of our Common Stock of an amendment to our Articles of Incorporation to increase the number of authorized shares of Common Stock from 750,000,000 to at least 1,200,000,000 and to reduce the par value of a share of Common Stock from $1.00 to $0.10, (d) we have received from the appropriate banking regulators all requisite approvals (which we expect to receive), (e) we have made any applicable anti-dilution adjustments, and (f) none of the Corporation or any of its subsidiaries has dissolved or became subject to insolvency or similar proceedings, or has become subject to other materially adverse regulatory or other actions. The U.S. Treasury, and any subsequent holder of the Series G Preferred Stock, has the right to convert the Series G Preferred Stock at any time. Unless earlier converted by the holder or the Corporation, the Series G Preferred Stock will automatically convert into shares of Common Stock on the seventh anniversary of the issuance of the Series G Preferred Stock at the then current market price of our Common Stock.

 

Voting Rights

 

Shares of Preferred Stock:  Whenever dividends remain unpaid on the shares of preferred stock or any other class or series of preferred stock that ranks on parity with shares of preferred stock as to payment of dividends and having equivalent voting rights, the Parity Stock, for at least 18 monthly dividend periods (whether or not consecutive), the number of directors constituting our Board of Directors will be increased by two members and the holders of the shares of preferred stock together with holders of Parity Stock, voting separately as a single class, will have the right to elect the two additional members of our board of directors. When First BanCorp has paid full dividends on any class or series of noncumulative Parity Stock for at least 12 consecutive monthly dividend periods following such nonpayment, and has paid cumulative dividends in full on any class or series of cumulative Parity Stock, the voting rights will cease and the authorized number of directors will be reduced by two. Holders of shares of Preferred Stock currently have the right to vote as a separate class with all other series of Parity Stock adversely affected by and entitled to vote thereon (except Series G Preferred Stock, which votes as a separate class), with respect to:

 

 

Approval of two-thirds of such shares is required.

 

So long as any shares of Series G Preferred Stock are outstanding, in addition to the voting rights set forth above, the vote or consent of the holders of at least of two-thirds of the shares of Series G Preferred Stock at the time outstanding, voting separately as a single class, shall be necessary for effecting or validating any consummation of a binding share exchange or reclassification involving Series G Preferred Stock or of a merger or consolidation of First BanCorp with another entity, unless the shares of Series G Preferred Stock remain outstanding following any such transaction or, if First BanCorp is not the surviving entity, are converted into or exchanged for preference securities and such remaining outstanding shares of Series G Preferred Stock or preference securities have rights, references, privileges and voting powers that are not materially less favorable than the rights, preferences, privileges or voting powers of Series G Preferred Stock, taken as a whole.

Common Stock:  Holders of shares of our Common Stock are entitled to one vote per share on all matters voted on by our stockholders. There are no cumulative voting rights for the election of directors.

 

Common Stock

 

We have no obligation or right to redeem our Common Stock.

 

Redemption

 

Preferred Stock: Optional Redemption by First BanCorp.  We may redeem all or a portion of each series of shares of Preferred Stock, at our option on or after the date set forth in the table below at the redemption prices set forth below, on any dividend payment date for which dividends have been declared in full.

 

 

Series G Preferred Stock may not be redeemed prior to January 16, 2012 unless we have received aggregate gross proceeds from one or more Qualified Equity Offerings (as defined below) of at least $100 million. In such a case, we may redeem Series G Preferred Stock, subject to the approval of the Board of Governors of the Federal Reserve System, in whole or in part, up to a maximum amount equal to the aggregate net cash proceeds received by us from such qualified equity offerings. A “Qualified Equity Offering” is a sale and issuance for cash by us, to persons other than the Corporation or its subsidiaries after January 16, 2009, of shares of perpetual Preferred Stock, Common Stock or a combination thereof, that in each case qualify as Tier 1 capital of the Corporation at the time of issuance under the applicable risk-based capital guidelines. Qualified Equity Offerings do not include issuances made in connection with agreements or arrangements entered into, or pursuant to financing plans that were publicly announced, on or prior to October 13, 2008. After January 16, 2012, Series G Preferred Stock may be redeemed, in whole or in part, at any time and from time to time, subject to the approval of the Board of Governors of the Federal Reserve System. In any redemption of Series G Preferred Stock, the redemption price is an amount equal to the per-share liquidation amount plus accrued and unpaid dividends to but excluding the date of redemption.

 

Redemption at Option of Holder.  The shares of Preferred Stock and Series G Preferred Stock are not redeemable at the option of the holders.

 

Common Stock:  We have no obligation or right to redeem our Common Stock.

 

Listing

 

Shares of Preferred Stock:  Each series of Preferred Stock is listed on the NYSE. However, we intend to delist each series of Preferred Stock from the NYSE after completion of the Exchange Offer and we do not intend to apply for listing of any series of shares of Preferred Stock on any other securities exchange. To the extent permitted by law, we intend to deregister each outstanding series of Preferred Stock under the Exchange

Act after delisting each such series from the NYSE. Series G Preferred Stock is not listed on a national securities exchange. If requested by the U.S. Treasury, we are required to list, and maintain such listing, of the Series G Preferred Stock and the amended warrant on the NYSE or a different national stock exchange, to the extent such securities comply with applicable listing requirements.

 

Common Stock:  The Common Stock is listed for trading on the NYSE.

 

No Appraisal Rights

 

Under Puerto Rico law, stockholders are not entitled to appraisal rights with respect to the actions contemplated by Proposal No. 1.

 

Required Vote

 

Approval of this Proposal No. 1 to issue 256,401,610 newly issued shares of Common Stock in exchange for shares of Preferred Stock requires the affirmative vote of holders of a majority of the votes cast on the proposal, provided that the total votes cast on the proposal, whether for or against, represent over 50% of all of the shares of Common Stock outstanding. Abstentions and broker non-votes will not be counted in determining the number of votes cast.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ISSUANCE OF SHARES OF COMMON STOCK IN THE EXCHANGE BECAUSE IT IS IN THE BEST INTEREST OF STOCKHOLDERS.

 

Overview and Reason for the Proposal

 

The Board of Directors seeks stockholder approval of the issuance of shares of Common Stock to Héctor M. Nevares-LaCosta in connection with his participation in the Exchange Offer. Mr. Nevares-LaCosta, a member of our Board of Directors, currently beneficially owns 196,100 shares of Preferred Stock. If stockholders approve Proposal No. 1 and this Proposal No. 2, we will issue shares of Common Stock to Mr. Nevares-LaCosta in the Exchange Offer based on the same terms as those offered to other holders of Preferred Stock in the Exchange Offer. Mr. Nevares-LaCosta has advised us that, if Proposal Nos. 1 and 2 are approved, he will tender all of his shares of Preferred Stock in the Exchange Offer.

 

Under NYSE Listed Company Manual Section 312.03(b), stockholder approval is required prior to the issuance of Common Stock, or securities convertible into or exercisable for Common Stock, in any transaction or series of related transactions with a director or officer if “the number of shares of Common Stock to be issued, or if the number of shares of Common Stock into which the securities may be convertible or exercisable, exceeds either one percent of the number of shares of Common Stock or one percent of the voting power outstanding before the issuance.” Subject to stockholder approval of this Proposal No. 2 and Proposal No. 1 relating to the Exchange Offer itself, upon Mr. Nevares-LaCosta’s tender of shares of Preferred Stock in the Exchange Offer, we will issue shares of Common Stock to him based on the same terms as those offered to other participants in the Exchange Offer, which amount may exceed 1% of shares of outstanding Common Stock prior to the Exchange Offer depending upon the number of shares of Preferred Stock he tenders and the number of shares tendered by other participants. Accordingly, we are seeking stockholder approval of the issuance of such shares of Common Stock to Mr. Nevares-LaCosta.

 

Consequences if Stockholders Approve this Proposal

 

Dilution.  The issuance of our shares of Common Stock in connection with the Exchange Offer to Mr. Nevares-LaCosta would increase the number of outstanding shares. An increased number of shares would

reduce the loss per share for the quarter ended March 31, 2010 on a pro forma basis, would decrease any future earnings per share and would have a dilutive effect on each stockholder’s percentage voting power.

 

The following table summarizes (1) the total number of shares that would be issued and outstanding assuming Proposal Nos. 1 and 2 are approved and all of the offered shares are issued in the Exchange Offer, (2) the total number of shares of Common Stock Mr. Nevares-LaCosta would beneficially own if he tenders all of his shares of Preferred Stock, and (3) the resulting percentage of outstanding shares that Mr. Nevares-LaCosta would beneficially own if we issue all of the shares offered in the Exchange Offer.

 

 

 

 

Consequences if Stockholders Do Not Approve this Proposal

 

If stockholders do not approve this Proposal, we will be unable to exchange Mr. Nevares-LaCosta’s tendered shares of Preferred Stock for Common Stock.

 

No Appraisal Rights

 

Under Puerto Rico law, stockholders are not entitled to appraisal rights with respect to the actions contemplated by Proposal No. 2.

 

Required Vote

 

Approval of this Proposal No. 2 to exchange Mr. Nevares-LaCosta’s shares of Preferred Stock for shares of Common Stock in the Exchange Offer requires the affirmative vote of the holders of a majority of the votes cast on such proposal, provided that the total votes cast on the proposal, whether for or against, represent over 50% of all of the shares of Common Stock outstanding. Abstentions and broker non-votes will not be counted in determining the number of votes cast.

 

Recommendation of the Board of Directors

 

THE BOARD RECOMMENDS THAT YOU VOTE FOR THE ISSUANCE OF SHARES OF COMMON STOCK IN THE EXCHANGE OFFER TO MR. NEVARES-LACOSTA.

 

Overview and Reason for the Amendment

 

On July 27, 2010, our Board of Directors adopted a resolution to amend our Articles of Incorporation to decrease the par value of our shares of Common Stock from $1.00 to $0.10 per share if necessary to complete the Exchange Offer. Adoption of this amendment will be necessary to complete the Exchange Offer if, for example, the market value of a share of Preferred Stock tendered in the exchange is less than $10 at a time when the market value of the Common Stock would result in the issuance of more than 10 shares of Common Stock per tendered share of Preferred Stock. Under Puerto Rico law, shares of Common Stock, other than Treasury shares, cannot be sold for a price equal to less than the par value of the stock. In addition, adoption of this amendment is one of the conditions that must be satisfied for us to compel the conversion of the Series G Preferred Stock into Common Stock.

In accordance with Puerto Rico law, approval and adoption of an amendment to our Articles of Incorporation to decrease the par value of our Common Stock requires stockholder approval.

 

Consequences if Stockholders Approve this Proposal

 

If stockholders approve this proposal, the Board of Directors currently intends to file, with the Secretary of Puerto Rico, the Articles of Incorporation reflecting such amendment as soon as practicable following stockholders approval. This amendment, if adopted, will not change or affect the number of shares of Common Stock held by any stockholder. The change in par value will cause technical changes on our balance sheet as to the amounts shown as “Common Stock” and “additional paid-in capital.”

 

If approved, the amendment would amend and restate Article Sixth of our Articles of Incorporation. The text of the proposed amendment to the Articles of Incorporation is attached to this Proxy Statement as Exhibit A. The proposed amendment also reflects an increase in the number of authorized shares of Common Stock from 750,000,000 shares to 2,000,000,000 shares, as discussed in Proposal No. 6 below.

 

Consequences if Stockholders Do Not Approve this Proposal

 

If stockholders do not approve the proposal to reduce the par value of the Common Stock from $1.00 to $0.10 per share and the decrease in the par value of the Common Stock is necessary to complete the Exchange Offer, such as, because the market value of a share of Preferred Stock tendered in the Exchange Offer is less than $10 at a time when the market value of the Common Stock would result in the issuance of more than 10 shares of Common Stock for a share of Preferred Stock, we will not be able to complete the Exchange Offer. In addition, if stockholders do not approve this proposal, we will not meet one of the conditions necessary for us to compel the conversion into Common Stock of the Series G Preferred Stock that we issued to the U.S. Treasury in exchange for the Series F Preferred Stock on July 20, 2010. Finally, our inability to complete the Exchange Offer would hinder our efforts to sell Common Stock in a Capital Raise. If we need to continue to recognize significant reserves and we cannot complete a Capital Raise, the Corporation and FirstBank may not be able to comply with the minimum capital requirements included in the capital plans required by the Agreements. These capital plans, which are subject to the approval of our regulators, set forth our plan to attain the capital ratio requirements set forth in the Order over time. See “Overview of the Proposals — Background” for further discussion of consequences if we are unable to complete the Exchange Offer.

 

No Appraisal Rights

 

Under Puerto Rico law, our stockholders are not entitled to appraisal rights with respect to this proposed amendment to our Articles of Incorporation to decrease the par value of our Common Stock.

 

Required Vote

 

Approval of Proposal No. 3 to amend our Articles of Incorporation to decrease the par value of our Common Stock from $1.00 to $0.10 requires the affirmative vote of holders of a majority of the shares of Common Stock outstanding. Abstentions and broker non-votes will have the same effect as votes against this proposal.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO ARTICLE SIXTH OF THE RESTATED ARTICLES OF INCORPORATION TO DECREASE THE PAR VALUE OF OUR COMMON STOCK FROM $1.00 TO $0.10 PER SHARE.

 

Overview and Reason for the Proposal

 

The Board of Directors seeks stockholder approval of the issuance of up to 28,476,121 shares of Common Stock to BNS if it exercises its anti-dilution right under the Stockholder Agreement in connection with the Exchange Offer.

 

In connection with our sale in 2007 of 9,250,450 shares of Common Stock, or approximately 10%, to BNS at a price of $10.25 per share, we and BNS entered into the Stockholder Agreement. Pursuant to the terms of the Stockholder Agreement, for as long as BNS beneficially owns at least 5% of our outstanding Common Stock, BNS has a right of first refusal, which does not apply to our issuance of shares of Common Stock in the Exchange Offer, and an anti-dilution right. If we complete the Exchange Offer, BNS would be entitled to acquire up to the number of shares of our Common Stock that would enable it to maintain its percentage interest in the Corporation after we consummate the transaction. BNS’s anti-dilution right entitles it to pay a price equal to the price per share at which the shares of our Common Stock were issued in the transaction. If BNS declines to exercise its anti-dilution right, BNS’s beneficial ownership would be reduced by the issuance of the additional shares.

 

Under NYSE Listed Company Manual Section 312.03(b), any sale of additional shares of Common Stock to BNS in an amount that exceeds 1% of the outstanding shares of Common Stock requires the prior approval of our stockholders under the listing requirements of the NYSE unless the sale is at a price in cash at least as great as the higher of the book or market value of Common Stock, provided that the number of shares to be issued does not exceed 5% of the number of shares of Common Stock outstanding before the issuance. Since BNS’s anti-dilution right permits it to acquire more than 5% of the number of shares of common Stock outstanding before the issuance to BNS, stockholder approval is required.

 

Pursuant to the Federal Reserve’s Order approving BNS’s acquisition of our Common Stock in 2007, BNS is required to file an application and receive the Federal Reserve’s approval before it may directly or indirectly acquire additional shares of our Common Stock or attempt to exercise a controlling influence over First BanCorp. As a result, if BNS desires to exercise its anti-dilution right in connection with the Exchange Offer, BNS will be required to obtain the consent of the Federal Reserve.

 

Consequences if Stockholders Approve this Proposal

 

Dilution.  The issuance of our shares of Common Stock to BNS would increase the number of outstanding shares. An increased number of shares would reduce the loss per share for the quarter ended March 31, 2010 on a pro forma basis, would decrease any future earnings per share and would have a dilutive effect on each stockholder’s percentage voting power. Thus, current stockholders’ interests in the Corporation would be diluted while BNS would be able to maintain its ownership percentage.

 

The following table summarizes (1) the maximum number of shares that will be outstanding if Proposal Nos. 1 and 4 are approved, we issue all of the offered shares in the Exchange Offer, and BNS exercises its anti-dilution right in full, (2) the total number of shares of Common Stock that BNS will own if it fully exercises its anti-dilution right, and (3) BNS’s percentage ownership assuming the maximum number of shares of Common Stock are issued in the Exchange Offer and to BNS. This table does not include the shares of Common Stock that are issuable upon conversion of the Series G Preferred Stock, that may be issued in a Capital Raise or that may be acquired by BNS pursuant to its anti-dilution right in connection with the conversion of the Series G Preferred Stock or a Capital Raise.

 

Consequences if Stockholders Do Not Approve this Proposal

 

If BNS exercises its anti-dilution right and stockholders do not approve the issuance of such shares, we will not issue shares to BNS in an amount that exceeds 1% of the shares of Common Stock outstanding prior to the issuance, notwithstanding the terms of the Stockholder Agreement. This may constitute a breach of the Stockholder Agreement and might entitle BNS to damages or other relief against us.

 

No Appraisal Rights

 

Under Puerto Rico law, stockholders are not entitled to appraisal rights with respect to the actions contemplated by Proposal No. 4.

 

Required Vote

 

Approval of this Proposal No. 4 to issue shares of Common Stock to BNS pursuant to its anti-dilution right in connection with the Exchange Offer requires the affirmative vote of holders of a majority of the votes cast on the proposal, provided that the total votes cast on the proposal, whether for or against, represent over 50% of all of the shares of Common Stock outstanding. Abstentions and broker non-votes will not be counted in determining the number of votes cast.

 

Recommendation of the Board of Directors

 

THE BOARD RECOMMENDS THAT YOU VOTE FOR THE ISSUANCE OF SHARES OF COMMON STOCK TO BNS PURSUANT TO BNS’S ANTI-DILUTION RIGHT UNDER THE STOCKHOLDER AGREEMENT IN CONNECTION WITH THE EXCHANGE OFFER.

 

Overview and Reason for the Proposal

 

The Board of Directors seeks stockholder approval of the issuance of up to 42,224,017 shares of Common Stock to BNS if it exercises its anti-dilution right under the Stockholder Agreement in connection with the conversion into Common Stock of the shares of Series G Preferred Stock that we issued to the U.S. Treasury in exchange for the Series F Preferred Stock or such higher number of shares of Common Stock determined as a result of the impact of any adjustment to the conversion price of the Series G Preferred Stock. The 42,224,017 shares is based on the current conversion price of the Series G.

 

As noted in Proposal No. 4, pursuant to the terms of the Stockholder Agreement, for as long as BNS beneficially owns at least 5% of our outstanding Common Stock, BNS has a right of first refusal, which does not apply to our issuance of the Series G Preferred Stock or the shares of Common Stock upon conversion of the Series G Preferred Stock, and an anti-dilution right. We have been discussing with BNS an amendment to the Stockholder Agreement pursuant to which BNS would have the ability to decide whether to exercise its anti-dilution right after we have issued shares of Common Stock in the Exchange Offer, any Capital Raise and the conversion of the Series G Preferred Stock rather than in connection with the issuance of shares of Common Stock in each of those transactions. If BNS agrees, its anti-dilution right will entitle it to acquire as a result of the conversion of the Series G Preferred Stock up to the number of shares of our Common Stock that would enable it to maintain its percentage interest in the Corporation after the conversion at a price equal to the price per share at which the Series G Preferred Stock is converted into Common Stock. If BNS declines to exercise its anti-dilution right, BNS’s beneficial ownership would be reduced by the issuance of the additional shares.

 

Under NYSE Listed Company Manual Section 312.03(b), any sale of additional shares of Common Stock or securities convertible into Common Stock to BNS in an amount that exceeds 1% of the outstanding shares of Common Stock requires the prior approval of our stockholders under the listing requirements of the NYSE unless the sale is at a price in cash at least as great as the higher of the book or market value of Common

Stock, provided that the number of shares to be issued does not exceed 5% of the number of shares of Common Stock outstanding before the issuance. Since BNS’s anti-dilution right permits it to acquire more than 5% of the number of shares of common Stock outstanding before the issuance of shares to BNS, stockholder approval is required.

 

Pursuant to the Federal Reserve’s Order approving BNS’s acquisition of our Common Stock in 2007, BNS is required to file an application and receive the Federal Reserve’s approval before it may directly or indirectly acquire additional shares of our Common Stock or attempt to exercise a controlling influence over First BanCorp. As a result, if BNS desires to exercise its anti-dilution right and purchase additional shares of our Common Stock, BNS will be required to obtain the consent of the Federal Reserve.

 

Consequences if Stockholders Approve this Proposal

 

Dilution.  The issuance of our shares of Common Stock upon conversion of Series G Preferred Stock issued to BNS would increase the number of outstanding shares. An increased number of shares would reduce the loss per share for the quarter ended March 31, 2010 on a pro forma basis, would decrease any future earnings per share and would have a dilutive effect on each stockholder’s percentage voting power. Thus, while BNS would be able to maintain its ownership percentage, other stockholders’ interests in the Corporation would be diluted.

 

The following table summarizes (1) the maximum number of shares that will be outstanding if Proposal Nos. 1, 4, and 5 are approved, we issue all of the offered shares of Common Stock in the Exchange Offer, we issue shares of Common Stock to the U.S. Treasury in the conversion, and BNS exercises its anti-dilution right in full, (2) the total number of shares of Common Stock that BNS will own if it fully exercises its anti-dilution right in connection with the Exchange Offer and the conversion of Series G Preferred Stock, and (3) BNS’s percentage ownership assuming 636,590,675 shares of Common Stock are issued in the Exchange Offer and the conversion of Series G Preferred Stock and BNS fully exercises its anti-dilution rights. This table does not reflect the issuance of shares in a Capital Raise even though the conversion of the Series G Preferred Stock by the Corporation requires the issuance of $500 million of equity in a Capital Raise. BNS has waived its right of first refusal in connection with a Capital Raise but will have an anti-dilution right in connection with a Capital Raise. This table also does not reflect the issuance of shares to BNS as a result of its exercise of its anti-dilution right in connection with a Capital Raise. Completion of such a Capital Raise may require stockholder approval.

 

 

Consequences if Stockholders Do Not Approve this Proposal

 

If BNS exercises its anti-dilution right and stockholders do not approve the issuance of such shares, we will not issue shares of Common Stock to BNS in an amount that exceeds 1% of the shares outstanding prior to the issuance, notwithstanding the terms of the Stockholder Agreement. This may constitute a breach of the Stockholder Agreement and might entitle BNS to damages or other relief against us.

 

No Appraisal Rights

 

Under Puerto Rico law, stockholders are not entitled to appraisal rights with respect to the actions contemplated by Proposal No. 5.

Required Vote

 

Approval of this Proposal No. 5 to issue shares of Series G Preferred Stock convertible into Common Stock to BNS pursuant to its anti-dilution right in connection with the conversion of Series G Preferred Stock into Common Stock requires the affirmative vote of holders of a majority of the votes cast on the proposal, provided that the total votes cast on the proposal, whether for or against, represent over 50% of all of the shares of Common Stock outstanding. Abstentions and broker non-votes will not be counted in determining the number of votes cast.

 

Recommendation of the Board of Directors

 

THE BOARD RECOMMENDS THAT YOU VOTE FOR THE ISSUANCE OF SHARES OF COMMON STOCK TO BNS PURSUANT TO BNS’S ANTI-DILUTION RIGHT UNDER THE STOCKHOLDER AGREEMENT IN CONNECTION WITH THE ISSUANCE OF SERIES G PREFERRED STOCK.

 

Overview and Reasons for the Amendment

 

On July 27, 2010, our Board of Directors adopted resolutions approving and authorizing an amendment to our Articles of Incorporation to increase the number of authorized shares of our Common Stock from 750,000,000 to 2,000,000,000 and directing that the amendment be submitted to a vote of the stockholders at the Special Meeting. In accordance with Puerto Rico law, approval and adoption of an amendment to our Articles of Incorporation to increase the authorized shares of our Common Stock or Preferred Stock requires stockholder approval.

 

The Board of Directors determined that the amendment is in the best interests of First BanCorp and its stockholders. If the proposed amendment is approved by stockholders, the Board of Directors currently intends to file, with the Puerto Rico Department of State, the Articles of Incorporation reflecting such amendment as soon as practicable following stockholder approval. Attached hereto as Exhibit A to this Proxy Statement is the proposed amendment to the Articles of Incorporation. (The amendment included as Exhibit A also reflects the proposed amendment to decrease the par value of a share of Common Stock from $1.00 to $0.10 per share.)

 

At the Annual Meeting of Stockholders on April 27, 2010, our stockholders approved the increase in our authorized shares of Common Stock from 250,000,000 to 750,000,000. Since then, we have commenced the Exchange Offer to issue 256,401,610 shares of Common Stock in exchange for our outstanding Preferred Stock and issued shares of Series G Preferred Stock in exchange for Series F Preferred Stock. In addition, we plan to seek to raise $500 million in a Capital Raise. Finally, we expect to offer to our current stockholders the opportunity to buy one share of Common Stock for each share of Common Stock they own at the purchase price set forth in a Capital Raise. In our prospectus for the Exchange Offer, we disclosed that we estimated that we would issue an additional 1.43 billion shares after the completion of the Exchange Offer as a result of conversion of the Series G Preferred Stock, the Capital Raise and the issuance of shares to BNS. This estimate was based on a sale in a Capital Raise of $500 million at an assumed per-share price of $0.57, the market price of our Common Stock on July 14, 2010, and a sale to BNS of the maximum number of shares it could buy upon exercise of its anti-dilution right. No assurance can be given as to the price at which shares would be sold in any Capital Raise or whether any such Capital Raise can be completed. Since we had 92,542,722 shares of Common Stock outstanding as of July 22, 2010, we do not have enough shares of Common Stock authorized for issuance to complete the above transactions. Accordingly, our Board of Directors has proposed this increase to enable us to complete the transactions described above.

Our Articles of Incorporation currently authorize the issuance of up to 750,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock. If adopted, the proposed amendment will not result in an increase in the number of authorized shares of Preferred Stock.

 

Of the 750,000,000 shares of Common Stock currently authorized, as of the close of business on the Record Date, there were 92,542,722 shares of Common Stock issued and outstanding. Furthermore, we have reserved for future issuance or are currently offering to issue:

 

a) 380,189,051 shares of Common Stock reserved for issuance upon conversion of the Series G Preferred Stock, based on the initial conversion price;

 

b) 5,842,259 shares of Common Stock upon the exercise of an outstanding warrant held by the U.S. Treasury;

 

c) 2,073,200 shares of Common Stock subject to outstanding options under the 1997 Stock Option Plan;

 

d) 3,767,784 shares of Common Stock for issuance under the First BanCorp 2008 Omnibus Incentive Plan; and

 

e) subject to the approval of our stockholders, (i) 256,401,610 shares of Common Stock in the Exchange Offer, (ii) assuming the issuance of all of the offered shares in the Exchange Offer and subject to the approval of our stockholders, 28,476,121 shares of Common Stock for issuance to BNS if it exercises its anti-dilution right, and (iii) assuming the issuance of 380,189,065 shares of Common Stock in exchange for Series G Preferred Stock that we issued to the U.S. Treasury, and subject to the approval of our stockholders, 42,224,017 shares of Common Stock for issuance to BNS if it exercises its anti-dilution right.

 

Consequences if Stockholders Approve this Proposal

 

Dilution.  As is the case with the current authorized but unissued shares of Common Stock, the additional shares of Common Stock authorized by this proposed amendment could be issued upon approval by our Board of Directors without further vote of our stockholders except as may be required in particular cases by our Articles of Incorporation, applicable law, regulatory agencies or the NYSE. Under our Articles of Incorporation, stockholders do not have preemptive rights to subscribe to additional securities that we issue, which means that current stockholders do not have a prior right to purchase any new issue of Common Stock in order to maintain their proportionate ownership interest in the Corporation. If we issue additional shares of Common Stock or securities convertible into or exercisable for Common Stock, such issuances would have a dilutive effect on the voting power and would reduce loss per share and any future earnings per share of our currently outstanding shares of Common Stock. We will not need stockholder approval of a Capital Raise in the form of a public offering.

 

The following table sets forth the total number of (1) authorized shares of our Common Stock as of July 22, 2010, (2) outstanding shares of our Common Stock as of July 22, 2010, (3) reserved shares of our Common Stock, including pursuant to the Exchange Offer and the conversion of Series G Preferred Stock but excluding shares issuable to BNS upon its exercise of its anti-dilution right, (4) shares of our Common Stock available for issuance, which excludes the reserved shares, (5) proposed authorized shares, subject to stockholder approval pursuant to this Proposal 6 and (6) Common Stock available for issuance if this Proposal 6 is approved by the stockholders.

 

 

The number of shares potentially available for issuance if stockholders approve this Proposal would enable us to issue shares in a Capital Raise, if we can complete such a Capital Raise and obtain any required stockholder approval. This would enable us to convert the Series G Preferred Stock as long as we satisfy the

other conditions to such conversion. In addition, we believe that we would have enough shares to conduct a rights offering.

 

Anti-takeover Effects.  Under certain circumstances, the proposed amendment to the Articles of Incorporation could have an anti-takeover effect. The proposed increase in the number of authorized shares of Common Stock may discourage or make more difficult a change in control of the Corporation. For example, we could issue additional shares to dilute the voting power of, create voting impediments for, or otherwise frustrate the efforts of persons seeking to take over or gain control of the Corporation, whether or not the change in control is favored by a majority of our unaffiliated stockholders. We could also privately place shares of Common Stock with purchasers who would side with our Board of Directors in opposing a hostile takeover bid, except that we would need stockholder approval of any such private sales that exceed 20% of the outstanding shares prior to the sale. Except for the possible acquisition of approximately 21% of Common Stock by the U.S. Treasury if we are able to compel the conversion of the Series G Preferred Stock into Common Stock, assuming we issue approximately 1.68 billion shares in the Exchange Offer, in a Capital Raise and to BNS at the market price of our Common Stock on July 14, 2010 of $0.57, the Board of Directors is not aware of any plans for or attempt to effect a change in control of the Corporation.

 

Consequences if Stockholders Do Not Approve this Proposal

 

If stockholders do not approve this proposal, we will not be able to issue shares of Common Stock to investors in a $500 million Capital Raise, which will preclude us from compelling the conversion of the Series G Preferred Stock into Common Stock. In addition, if stockholders do not approve this proposal, we will not be able to issue shares to BNS if it exercises its anti-dilution right or in a rights offering. If BNS exercises it anti-dilution right and we cannot issue shares to BNS, this may constitute a breach of the Stockholder Agreement and might entitle BNS to damages or other relief against us. If we need to continue to recognize significant reserves and we cannot complete a Capital Raise, the Corporation and FirstBank may not be able to comply with the minimum capital requirements included in the capital plans required by the Agreements. These capital plans, which are subject to the approval of our regulators, set forth our plan to attain the capital ratio requirements set forth in the Order over time. See “Overview of the Proposals — Background” for further discussion of consequences if we are unable to complete the Exchange Offer.

 

No Appraisal Rights

 

Under Puerto Rico law, our stockholders are not entitled to appraisal rights with respect to this proposed amendment to our Articles of Incorporation to increase the number of authorized shares of Common Stock.

 

Required Vote

 

Approval of Proposal No. 6 to amend our Articles of Incorporation to increase the authorized number of shares of Common Stock from 750,000,000 to 2,000,000,000 requires the affirmative vote of holders of a majority of the shares of Common Stock outstanding. Abstentions and broker non-votes will have the same effect as votes against this proposal.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO ARTICLE SIXTH OF THE ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 750,000,000 TO 2,000,000,000.

 

Overview and Reasons for the Amendment

 

On July 27, 2010, our Board of Directors adopted resolutions approving and authorizing an amendment to our Articles of Incorporation to implement a reverse stock split at a ratio of not less than one-for-ten and not more than one-for-twenty and directing that the amendment be submitted to a vote of the stockholders at the Special Meeting. In accordance with Puerto Rico law, approval and adoption of an amendment to our Articles of Incorporation to implement a reverse stock split requires stockholder approval.

 

On July 9, 2010, First BanCorp. received notice from the New York Stock Exchange that the Corporation was not in compliance with the minimum price per share continued listing requirement set forth in Section 802.01C of the NYSE Listed Company Manual (the “Notice”). The Notice indicated that the Corporation was not in compliance with such continued listing requirement because, as of July 6, 2010, the average closing price of the Common Stock was less than $1.00 over the consecutive 30 trading-day period immediately prior to the Notice.

 

On July 22, 2009, the Corporation informed the NYSE that it intended to cure this deficiency within six months following the date of the Notice by bringing the Common Stock share price and average share price for 30 consecutive trading days above $1.00. Specifically, the Corporation has informed the NYSE of its intent to cure the deficiency by implementing a reverse stock split, if necessary.

 

If the proposed amendment is approved by stockholders, the Board of Directors will determine, prior to the filing of the amendment with the Puerto Rico Department of State, whether a reverse stock split is in the best interest of stockholders, and if so, the ratio for such split. The Board of Directors will consider, among other things, the market price and liquidity of our Common Stock prior to implementing a reverse stock split. Attached hereto as Exhibit B to this Proxy Statement is the proposed amendment to the Articles of Incorporation.

 

If stockholders approve this Proposal at the Special Meeting but the Board does not implement a reverse stock split by the close of business on January 9, 2011, the Board will not have authority to implement a reverse stock split pursuant to such approval.

 

Consequences if Stockholders Approve this Proposal and the Board Implements a Reverse Stock Split

 

If stockholders approve this proposal and the Board determines that it is in the best interests of stockholders to implement the reverse stock split, a number of outstanding shares of Common Stock ranging from 10 to 20 shares, depending on the reverse stock split ratio determined by the Board, of outstanding Common Stock will be converted into one share of Common Stock.

 

Reduction of Shares Held by Individual Stockholders.  Each common stockholder will own fewer shares of Common Stock, but the proposed reverse stock split will affect all common stockholders proportionately and will not affect any stockholder’s percentage ownership interest or proportionate voting power, except for differences resulting from the treatment of fractional shares.

 

However, if the reverse stock split were implemented, it may increase the number of stockholders who own “odd lots,” or a number of shares that is less than 100 shares. Such stockholders may find it difficult to sell such shares and in connection with any sale may have to pay higher commissions and other transaction costs as compared to a sale involving a “round lot,” or a number that is in even multiples of 100.

 

Impact on Authorized and Outstanding Shares.  In connection with the reverse stock split, we will not reduce the total number of authorized shares of Common Stock. As previously disclosed, as a result of the continuing difficult economic conditions, we decided to seek to improve our capital structure. Thus, we have been taking steps to implement strategies to increase tangible common equity and regulatory capital through (1) the issuance of shares of Common Stock in the Exchange Offer, (2) the issuance of approximately $500 million of equity in a Capital Raise, (3) the conversion into Common Stock of the shares of Series G

Preferred Stock that we issued to the U.S. Treasury in exchange for Series F Preferred Stock, and (4) a rights offering to common stockholders. Since we have 92,542,722 shares of Common Stock outstanding as of July 22, 2010, we do not have enough shares of Common Stock authorized for issuance to complete the above transactions. As outlined in Proposal No. 6, the Board of Directors has proposed an increase in the number of authorized shares of Common Stock to enable us to complete the transactions described above.

 

If adopted and implemented by the Board of Directors, this amendment will become effective upon filing with the Puerto Rico Department of State. We expect that the Board will implement a reverse stock split only if necessary to comply with the NYSE continued listing requirement.

 

Anti-takeover Effects.  Similar to Proposal No. 6, under certain circumstances, the proposed amendment to the Articles of Incorporation could have an anti-takeover effect. The resulting increase in the number of authorized and unissued shares of Common Stock may discourage or make more difficult a change in control of the Corporation. For example, we could issue additional shares to dilute the voting power of, create voting impediments for, or otherwise frustrate the efforts of persons seeking to take over or gain control of the Corporation, whether or not the change in control is favored by a majority of our unaffiliated stockholders. We could also privately place shares of Common Stock with purchasers who would side with our Board of Directors in opposing a hostile takeover bid, except that we would need stockholder approval of any such private sales that exceed 20% of the outstanding shares prior to the sale. Except for the possible acquisition of approximately 21% of Common Stock by the U.S. Treasury if the Series G Preferred Stock is converted into Common Stock, assuming we issue approximately 1.68 billion shares in the Exchange Offer, in a Capital Raise and to BNS at the market price of our Common Stock on July 14, 2010 of $0.57, the Board of Directors is not aware of any plans for or attempt to effect a change in control of the Corporation.

 

Impact on Equity Compensation Plans and Outstanding Awards.  The reverse stock split will impact the number of shares of common stock available for issuance under the Corporation’s equity incentive plans in proportion to the reverse stock split ratio. Under the terms of the Corporation’s outstanding equity awards, the reverse stock split would cause a reduction in the number of shares of Common Stock issuable upon exercise, settlement or vesting of such awards in proportion to the exchange ratio of the reverse stock split and would cause a proportionate increase in the exercise price of such awards to the extent they are stock options or similar awards. The aggregate number of shares authorized for future issuance under the Corporation’s equity incentive plans will also be proportionately reduced, as will the maximum aggregate limit on the number of shares that may be granted to any one participant under the respective plans. In implementing the proportionate reduction, the number of shares issuable upon exercise, settlement or vesting of outstanding equity awards will be rounded up to the nearest whole share.

 

No Assurance Regarding Impact on the Corporation’s Stock Price.  If the Board implements a reverse stock split, the Board expects that the reverse stock split would increase the market price of our Common Stock so that the Corporation is able to bring the Common Stock share price and average share price for 30 consecutive trading days above $1.00 and, thereby, regain compliance with this NYSE continued listing requirement. No assurance can be provided, however, that the market price of the Corporation’s Common Stock will exceed or remain in excess of the $1.00 per share minimum price after a reverse stock split. It is possible that the per share price of common stock after the reverse stock split will not rise in proportion to the reduction in the number of shares of common stock outstanding resulting from the reverse stock split. Furthermore, the market price of the stock may be affected by other factors that may be unrelated to the number of shares outstanding, including the Corporation’s performance.

 

Consequences if Stockholders Do Not Approve this Proposal

 

If stockholders do not approve this proposal we will not be able to implement a reverse stock split. The inability to implement a reverse stock split may hinder our ability to bring our Common Stock share price and average share price for 30 consecutive trading days above $1.00, which is a listing requirement of the NYSE. The NYSE will commence suspension and delisting procedures if we cannot regain compliance with this requirement by January 9, 2011. If the NYSE delisted the Common Stock, the market liquidity of our Common Stock would be adversely affected.

Board Discretion to Implement the Reverse Stock Split

 

If the proposed amendment is approved by our stockholders, it will be implemented, if at all, only upon a determination by our Board of Directors that a reverse stock split, at a ratio determined by the Board of Directors within the range of one-for-ten and one-for-twenty, is in the best interests of stockholders. The Board of Directors’ determination as to whether such a split will be implemented and, if so, the ratio, will be based upon several factors, including existing and expected marketability and liquidity of our Common Stock, prevailing market conditions and the likely effect on the market price of our Common Stock. If our Board of Directors determines to implement a reverse stock split, the Board of Directors will consider various factors in selecting the ratio including the overall market conditions at the time and the recent trading history of our Common Stock.

 

Fractional Shares

 

Stockholders will not receive fractional shares in connection with a reverse stock split. Instead, our exchange agent, The Bank of New York Mellon Shareowner Services, LLC, will aggregate all fractional shares and arrange for them to be sold as soon as practicable after the split is implemented at the then prevailing prices on the open market on behalf of those stockholders who would otherwise be entitled to receive a fractional share. We expect that the exchange agent will cause the sale to be conducted in an orderly fashion at a reasonable pace and that it may take several days to sell all of the aggregated fractional shares of Common Stock. After completing the sale, stockholders will receive a cash payment from the exchange agent in an amount equal to the stockholder’s pro rata share of the total net proceeds of these sales. No transaction costs will be assessed on the sale; however, the proceeds will be subject to certain taxes as discussed below. In addition, stockholders will not be entitled to receive interest for the period of time between implementation of a reverse stock split and the date a stockholder receives payment for the cashed-out shares. The payment amount will be paid to the stockholder in the form of a check.

 

After a reverse stock split, stockholders will have no further interest in the Corporation with respect to their cashed-out fractional shares. A stockholder will not have any voting, dividend or other rights with respect to its fractional share except to receive payment as described above.

 

Stock Certificates

 

If stockholders approve the amendment to our Articles of Incorporation to implement a reverse stock split and the reverse stock split is implemented, as soon as practicable after the date the Board decides to implement the reverse stock split and the amendment implementing the reverse stock split becomes effective, the Corporation will send a letter of transmittal to each stockholder of record at the effective time for use in transmitting old stock certificates to our transfer agent, The Bank of New York Mellon Shareowner Services, LLC, who will serve as our exchange agent. The letter of transmittal will contain instructions for the surrender of old certificates to the exchange agent in exchange for new certificates representing the number of shares of Common Stock into which such holders’ shares represented by the old certificates have been converted as a result of the reverse stock split. Until so surrendered, each current certificate representing shares of our stock will be deemed for all corporate purposes after the effective time of the amendment implementing the reverse stock split to evidence ownership of shares in the appropriately reduced whole number of shares of Common Stock. Stockholders should not destroy any stock certificates and should not send in their old certificates to the exchange agent until they have received the letter of transmittal.

 

Persons holding their shares in “street name” through banks, brokers or other nominees will be contacted by such banks, brokers or nominees and will not receive a letter of transmittal from the Corporation. Banks, brokers, and other nominees holding shares of Common Stock for stockholders will be instructed to implement the reverse stock split for such beneficial holders, and these banks, brokers, and other nominees may apply their own specific procedures for processing the reverse stock split.

No Appraisal Rights

 

Under Puerto Rico law, our stockholders are not entitled to appraisal rights with respect to this proposed amendment to our Articles of Incorporation to implement a reverse stock split.

 

Certain Material U.S. Federal Income Tax Consequences

 

The following is a general summary of certain U.S. federal income tax consequences of the reverse stock split that may be relevant to stockholders. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, (the “Code”), Treasury regulations promulgated thereunder, published administrative rulings and judicial decisions as of the date hereof, all of which may change, possibly with retroactive effect, resulting in U.S. federal income tax consequences that may differ from those discussed below. This summary does not purport to be complete and does not address all aspects of federal income taxation that may be relevant to stockholders in light of their particular circumstances or to stockholders that may be subject to special tax rules, including, without limitation: (1) stockholders subject to the alternative minimum tax; (2) banks, insurance companies, or other financial institutions; (3) tax-exempt organizations; (4) dealers in securities or commodities; (5) regulated investment companies or real estate investment trusts; (6) traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; (7) foreign stockholders or U.S. stockholders whose “functional currency” is not the U.S. dollar; (8) persons holding the Common Stock as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction; (9) persons who acquire shares of the Common Stock in connection with employment or other performance of services; (10) dealers and other stockholders that do not own their shares of Common Stock as capital assets; (11) U.S. expatriates, (12) foreign entities; or (13) non-resident alien individuals. In addition, this summary does not address the tax consequences arising under the laws of any foreign, state or local jurisdiction and U.S. federal tax consequences other than federal income taxation. Furthermore, this summary also assumes that shares of Common Stock, both before and after the reverse stock split, are held as a “capital asset” as defined in the Code, which is generally property held for investment. If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of the Common Stock, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership.

 

We have not sought, and will not seek, an opinion of counsel or a ruling from the IRS regarding the U.S. federal income tax consequences of the reverse stock split and there can be no assurance the Internal Revenue Service (“IRS”) will not challenge the statements and conclusions set forth below or that a court would not sustain any such challenge. You should consult your tax advisor as to the application to your particular situation of the tax consequences discussed below, as well as the application of any state, local, foreign or other tax.

 

Tax Consequences Generally.  The reverse stock split should constitute a “recapitalization” for U.S. federal income tax purposes. As a result, a stockholder generally should not recognize gain or loss upon the reverse stock split, except with respect to cash received in lieu of a fractional share of the Common Stock, as discussed below. A stockholder’s aggregate tax basis in the shares of the Common Stock received pursuant to the reverse stock split should equal the aggregate tax basis of the shares of the Common Stock surrendered (excluding any portion of such basis that is allocated to any fractional share of the Common Stock), and such stockholder’s holding period (i.e., acquired date) in the shares of the Common Stock received should include the holding period in the shares of the Common Stock surrendered. Treasury regulations promulgated under the Code provide detailed rules for allocating the tax basis and holding period of the shares of the Common Stock surrendered to the shares of the Common Stock received pursuant to the reverse stock split. Stockholders who acquired their shares of Common Stock on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.

 

Cash in Lieu of Fractional Shares.  A stockholder who receives cash in lieu of a fractional share of the Common Stock pursuant to the reverse stock split generally should recognize capital gain or loss in an amount equal to the difference between the amount of cash received and the holder’s tax basis in the shares of the Common Stock surrendered that is allocated to such fractional share of the Common Stock. Such capital gain

or loss should be long term capital gain or loss if the holder’s holding period for the Common Stock surrendered exceeded one year at the effective time of the reverse stock split.

 

Information Reporting and Backup Withholding.  Information returns generally will be required to be filed with the IRS with respect to the receipt of cash in lieu of a fractional share of the Common Stock pursuant to the reverse stock split. In addition, stockholders may be subject to a backup withholding tax (currently at an applicable rate of 28%) on the payment of such cash if they do not provide their taxpayer identification numbers in the manner required or otherwise fail to comply with applicable backup withholding tax rules. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or allowed as a credit against the stockholder’s federal income tax liability, if any, provided the required information is timely furnished to the IRS.

 

Certain Puerto Rico Tax Consequences

 

The following discussion describes the material Puerto Rico tax consequences relating to the proposed stock split. It does not purport to be a comprehensive description of all of the tax considerations arising from or relating to the proposed reverse stock split and does not describe any tax consequences arising under the laws of any state, locality or taxing jurisdiction other than Puerto Rico. It does not address special classes of holders, such as life insurance companies, special partnerships, corporations of individuals, registered investment companies, estate and trusts and tax-exempt organizations.

 

This discussion is based on the tax laws of Puerto Rico as in effect on the date of this Proxy Statement, as well as regulations, administrative pronouncements and judicial decisions available on or before such date and now in effect. All of the foregoing are subject to change, which change could apply retroactively and could affect the continued validity of this summary.

 

You should consult your own tax advisor as to the application to your particular situation of the tax considerations discussed below, as well as the application of any state, local, foreign or other tax.

 

Subject to the above stated, Puerto Rico income tax consequences of the proposed reversed stock split described herein may be summarized as follows:

 

1. The reverse stock split will qualify as a tax-free recapitalization under the Puerto Rico Puerto Rico Internal Revenue Code of 1994, as amended. Accordingly, except for any cash received in lieu of fractional shares, a shareholder will not recognize any gain or loss for Puerto Rico income tax purposes as a result of the receipt of the post-reverse stock split common stock pursuant to the reverse stock split.

 

2. The shares of post-reverse stock split common stock in the hands of a shareholder will have an aggregate basis for computing gain or loss on a subsequent disposition equal to the aggregate basis of the shares of pre-reverse stock split common stock held by that shareholder immediately prior to the reversed stock split, reduced by the basis allocable to any fractional shares which the shareholder is treated as having sold for cash, as discussed in paragraph 4 below.

 

3. A shareholder’s holding period for the post-reverse stock split common stock will include the holding period of the pre-reverse stock split common stock exchanged.

 

4. Shareholders who receive cash for fractional shares will generally be treated for Puerto Rico income tax purposes as having sold their fractional shares and will recognize gain or loss in an amount equal to the difference between the cash received and the portion of the of their basis for the pre-reverse stock split common stock allocated to the fractional shares. Such gain or loss will generally be a capital gain or loss if the stock was held as a capital asset, and such gain or loss will be long-term gain or loss to the extent that the shareholder’s holding period exceeds 6 months for Puerto Rico income tax purposes.

 

5. Shareholders who do not hold fractional shares and only receive post-reverse stock split common stock for their pre-reverse stock split common stock pursuant to the reverse stock split should not recognize any gain or loss for Puerto Rico income tax purposes as a result of the reverse stock split.

6. Any gain or loss from the sale of fractional shares as discussed above realized by a shareholder that is not a resident of Puerto Rico will not be subject to income taxation in Puerto Rico.

 

7. Puerto Rico information reporting requirements will apply with respect to the cash proceeds to be received by the non-corporate shareholders in lieu of fractional shares.

 

Required Vote

 

Approval of Proposal No. 7 to amend our Articles of Incorporation to implement a reverse stock split requires the affirmative vote of holders of a majority of the shares of Common Stock outstanding. Abstentions and broker non-votes will have the same effect as votes against this proposal.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO ARTICLE SIXTH OF THE ARTICLES OF INCORPORATION TO IMPLEMENT A REVERSE STOCK SPLIT AT AN EXCHANGE RATIO THAT WILL BE WITHIN A RANGE OF ONE-FOR-TEN AND ONE-FOR-TWENTY, WHICH WILL BE DETERMINED BY THE CORPORATION’S BOARD OF DIRECTORS.

 

SEC rules provide that stockholders must submit to a company any proposals that they would like included in a company’s proxy statement no later than 120 days before the first anniversary of the date on which the previous year’s proxy statement was first mailed to stockholders unless the date of the annual meeting has been changed by more than 30 days from the date of the previous year’s meeting. When the date is changed by more than 30 days from the date of the previous year’s meeting, the deadline is a reasonable time before the company begins to print and send its proxy materials. In accordance with our By-laws, we expect to hold our 2011 Annual Meeting of Stockholders on or before April 26, 2011, subject to the right of the Board of Directors to change such date based on changed circumstances.

 

Any proposal that a stockholder wishes to have considered for presentation at the 2011 Annual Meeting and included in our proxy statement and form of proxy used in connection with such meeting must be forwarded to the Secretary of the Corporation at the principal executive offices of the Corporation no later than December 7, 2010. Any such proposal must comply with the requirements of Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended.

 

Under the Corporation’s By-laws, if a stockholder seeks to propose a nominee for director for consideration at the annual meeting of stockholders, notice must be received by the Secretary of the Corporation at least 30 days prior to the date of the annual meeting of stockholders. Accordingly, under the By-laws, any stockholders nominations for directors for consideration at the 2011 Annual Meeting must be received by the Secretary of the Corporation at the principal executive offices of the Corporation no later than March 25, 2011.

 

The financial statements for the fiscal years ended December 31, 2009, 2008 and 2007 and the related management’s discussion and analysis of financial condition and results of operations, including the selected quarterly financial data and quantitative and qualitative disclosures about market risk, set forth in our Annual Report on Form 10-K for the year ended December 31, 2009 and the financial statements for the interim period ended March 31, 2010 and the related management’s discussion and analysis of financial condition and results of operations, including quantitative and qualitative disclosures about market risk, set forth in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 attached as Exhibits C and D, respectively, to this Proxy Statement, are incorporated herein by reference. Our auditors, PricewaterhouseCoopers LLP, are not expected to be represented at the Special Meeting.

 

By Order of the Board of Directors,

 

Lawrence Odell

Secretary

 

Santurce, Puerto Rico

August 2, 2010

Exhibit A

 

Proposed Amendment to
Article SIXTH of the Restated Articles of Incorporation

 

(new language in bold and deleted language in brackets)

 

SIXTH

 

The authorized capital of the Corporation shall be [EIGHT HUNDRED MILLION DOLLARS ($800,000,000)] TWO HUNDRED FIFTY MILLION DOLLARS ($250,000,000) represented by [SEVEN HUNDRED FIFTY MILLION (750,000,000)] TWO BILLION (2,000,000,000) shares of common stock, [ONE DOLLAR ($1.00)] TEN CENTS ($0.10) par value per share, and FIFTY MILLION (50,000,000) shares of Preferred Stock, ONE DOLLAR ($1.00) par value per share.

 

The shares may be issued by the Corporation from time to time as authorized by the board of directors without the further approval of shareholders, except as otherwise provided in this Article Sixth or to the extent that such approval is required by governing law, rule or regulations. No shares of capital stock (including shares issuable upon conversion, exchange or exercise of other securities) shall be issued, directly or indirectly, to officers, directors or controlling persons of the Corporation other than as part of a general public offering, unless their issuance or the plan (including stock option plans) under which they would be issued has been approved by a majority of the total votes to be cast at a legal meeting of stockholders.

 

The board of directors is expressly authorized to provide, when it deems necessary, for the issuance of shares of preferred stock in one or more series, with such voting powers, and with such designations, preferences, rights, qualifications, limitations or restrictions thereof, as shall be expressed in resolution or resolutions of the board of directors, authorizing such issuance, including (but without limiting the generality of the foregoing) the following:

 

(a) the designation of such series;

 

(b) the dividend rate of such series, the conditions and dates upon which the dividends shall be payable, the preference or relation which such dividends shall bear to the dividends payable on any other class or classes of capital stock of the Corporation, and whether such dividends shall be cumulative or non-cumulative;

 

(c) whether the shares of such series shall be subject to redemption by the Corporation, and if made subject to such redemption, the terms and conditions of such redemption;

 

(d) the terms and amount of any sinking fund provided for the purchase or redemption of the shares of such series;

 

(e) whether the shares of such series shall be convertible and if provision be made for conversion, the terms of such conversion;

 

(f) the extent, if any, to which the holders of such shares shall be entitled to vote; provided however, that in no event, shall any holder of any series of preferred stock be entitled to more than vote for each such share;

 

(g) the restrictions and conditions, if any, upon the issue or re-issue of any additional preferred stock ranking on a parity with or prior to such shares as to dividends or upon dissolution; and

 

(h) the rights of the holders of such shares upon dissolution of, or upon distribution of assets of the Corporation, which rights may be different in the case of voluntary dissolution.

Exhibit B

 

Proposed Amendment to

Article SIXTH of the Restated Articles of Incorporation

(new language in bold)

 

The following is hereby added to the end of Article SIXTH:

 

Effective upon the filing of this Restated Articles of Incorporation with Puerto Rico Department of State (the “Effective Time”), every [number ranging from 10 to 20] shares of Common Stock, par value [$1.00 per share][or $0.10 per share if Proposal No. 3 is adopted], issued and outstanding immediately prior to the Effective Time shall, automatically and without any action on the part of the respective holders thereof, be combined, reclassified and changed into one fully paid and non-assessable share of Common Stock, par value [$1.00/$0.10] per share; provided, however, that no fractional shares shall be issued. Stockholders who would otherwise be entitled to a fractional share will receive a cash payment in lieu of such fractional share.

 

Any Stockholder who, immediately prior to the Effective Time, owns a number of shares of Old Common Stock which is not evenly divisible by [number ranging from 10 to 20] shall, with respect to such fractional interest, be entitled to receive cash in lieu of any fractional share of New Common Stock in an amount equal to the Stockholder’s pro rata share of net proceeds attributable to the sale of such fractional shares following the aggregation and sale by the Corporation’s exchange agent of all fractional shares of New Common Stock otherwise issuable. Each certificate that theretofore represented shares of Old Common Stock shall thereafter represent the number of shares of New Common Stock into which shares of Old Common Stock represented by such certificate shall have been reclassified and combined; provided, that each person holding of record a stock certificate or certificates that represented shares of Old Common Stock shall receive upon surrender of such certificate or certificates, a new certificate or certificates evidencing and representing the number of shares of New Common Stock to which such person is entitled under the foregoing reclassification and combination.

Exhibit C

 

Annual Report on Form 10-K for the Year Ended December 31, 2009

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

 

COMMISSION FILE NUMBER 001-14793

FIRST BANCORP.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Registrant’s telephone number, including area code:

 

(787) 729-8200

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

NONE

 

Indicate by check mark if the registrant is a well- known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act.  Yes o     No þ

 

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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

 

 

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

 

The aggregate market value of the voting common equity held by non affiliates of the registrant as of June 30, 2009 (the last day of the registrant’s most recently completed second quarter) was $328,696,232 based on the closing price of $3.95 per share of common stock on the New York Stock Exchange on June 30, 2009. The registrant had no nonvoting common equity outstanding as of June 30, 2009. For the purposes of the foregoing calculation only, registrant has treated as common stock held by affiliates only common stock of the registrant held by its directors and executive officers and voting stock held by the registrant’s employee benefit plans. The registrant’s response to this item is not intended to be an admission that any person is an affiliate of the registrant for any purposes other than this response.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 92,542,722 shares as of January 31, 2010.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in April 2010, which will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2009, are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14, of this Form-10-K.

 

 

FIRST BANCORP

 

2009 ANNUAL REPORT ON FORM 10-K

 

TABLE OF CONTENTS

 

Forward Looking Statements

 

This Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-K 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:

 

 

 

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 outlined under Item 1A, Risk Factors, in this Annual Report on Form 10-K.

 

FirstBanCorp, incorporated under the laws of the Commonwealth of Puerto Rico, is sometimes referred to in this Annual Report on Form 10-K as “the Corporation”, “we”, “our”, “the Registrant”.

 

 

GENERAL

 

First BanCorp is a publicly-owned financial holding company that is subject to regulation, supervision and examination by the Federal Reserve Board (the “FED”). The Corporation was incorporated under the laws of the Commonwealth of Puerto Rico to serve as the bank holding company for FirstBank Puerto Rico (“FirstBank” or the “Bank”). The Corporation is a full service provider of financial services and products with operations in Puerto Rico, the United States and the US and British Virgin Islands. As of December 31, 2009, the Corporation had total assets of $19.6 billion, total deposits of $12.7 billion and total stockholders’ equity of $1.6 billion.

 

The Corporation provides a wide range of financial services for retail, commercial and institutional clients. As of December 31, 2009, the Corporation controlled three wholly-owned subsidiaries: FirstBank, FirstBank Insurance Agency, Inc. (“FirstBank Insurance Agency”) and Grupo Empresas de Servicios Financieros (d/b/a “PR Finance Group”). FirstBank is a Puerto Rico-chartered commercial bank, FirstBank Insurance Agency is a Puerto Rico-chartered insurance agency and PR Finance Group is a domestic corporation.

 

FirstBank is subject to the supervision, examination and regulation of both the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) and the Federal Deposit Insurance Corporation (the “FDIC”). Deposits are insured through the FDIC Deposit Insurance Fund. In addition, within FirstBank, the Bank’s United States Virgin Islands operations are subject to regulation and examination by the United States Virgin Islands Banking Board, and the British Virgin Islands operations are subject to regulation by the British Virgin Islands Financial Services Commission. FirstBank Insurance Agency is subject to the supervision, examination and regulation of the Office of the Insurance Commissioner of the Commonwealth of Puerto Rico and operates nine offices in Puerto Rico. PR Finance Group is subject to the supervision, examination and regulation of the OCIF.

 

FirstBank conducted its business through its main office located in San Juan, Puerto Rico, forty-eight full service banking branches in Puerto Rico, sixteen branches in the United States Virgin Islands (USVI) and British Virgin Islands (BVI) and ten branches in the state of Florida (USA). FirstBank had six wholly-owned subsidiaries with operations in Puerto Rico: First Leasing and Rental Corporation, a vehicle leasing company with two offices in Puerto Rico; First Federal Finance Corp. (d/b/a Money Express La Financiera), a finance company specializing in the origination of small loans with twenty-seven offices in Puerto Rico; First Mortgage, Inc. (“First Mortgage”), a residential mortgage loan origination company with thirty-eight offices in FirstBank branches and at stand alone sites; First Management of Puerto Rico, a domestic corporation; FirstBank Puerto Rico Securities Corp, a broker-dealer subsidiary created in March 2009 and engaged in municipal bond underwriting and financial advisory services on structured financings principally provided to government entities in the Commonwealth of Puerto Rico; and FirstBank Overseas Corporation, an international banking entity organized under the International Banking Entity Act of Puerto Rico. FirstBank had three subsidiaries with operations outside of Puerto Rico: First Insurance Agency VI, Inc., an insurance agency with three offices that sells insurance products in the USVI; and First Express, a finance company specializing in the origination of small loans with three offices in the USVI.

 

Effective July 1, 2009, the Corporation consolidated the operations of FirstBank Florida, formerly a stock savings and loan association indirectly owned by the Corporation, with and into FirstBank Puerto Rico and dissolved Ponce General Corporation, former holding company of FirstBank Florida. On October 30, 2009, the Corporation divested its motor vehicle rental operations held through First Leasing and Rental Corporation through the sale of such business.

BUSINESS SEGMENTS

 

The Corporation has six reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments; United States Operations; and Virgin Islands Operations. These segments are described below:

 

Commercial and Corporate Banking

 

The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for the public sector and specialized industries such as healthcare, tourism, financial institutions, food and beverage, shopping centers and middle-market clients. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, and other products such as cash management and business management services. A substantial portion of this portfolio is secured by the underlying value of the real estate collateral, and collateral and the personal guarantees of the borrowers are taken in abundance of caution. Although commercial loans involve greater credit risk than a typical residential mortgage loan because they are larger in size and more risk is concentrated in a single borrower, the Corporation has and maintains a credit risk management infrastructure designed to mitigate potential losses associated with commercial lending, including strong underwriting and loan review functions, sales of loan participations and continuous monitoring of concentrations within portfolios.

 

Mortgage Banking

 

The Mortgage Banking segment conducts its operations mainly through FirstBank and its mortgage origination subsidiary, FirstMortgage. These operations consist of the origination, sale and servicing of a variety of residential mortgage loans products. Originations are sourced through different channels such as branches, mortgage bankers and real estate brokers, and in association with new project developers. FirstMortgage focuses on originating residential real estate loans, some of which conform to Federal Housing Administration (“FHA”), Veterans Administration (“VA”) and Rural Development (“RD”) standards. Loans originated that meet FHA standards qualify for the federal agency’s insurance program whereas loans that meet VA and RD standards are guaranteed by their respective federal agencies. In December 2008, the Corporation obtained from the Government National Mortgage Association (“GNMA”) the necessary Commitment Authority to issue GNMA mortgage-backed securities. Under this program, during 2009, the Corporation completed the securitization of approximately $305.4 million of FHA/VA mortgage loans into GNMA MBS.

 

Mortgage loans that do not qualify under these programs are commonly referred to as conventional loans. Conventional real estate loans could be conforming and non-conforming. Conforming loans are residential real estate loans that meet the standards for sale under the Fannie Mae (“FNMA”) and Freddie Mac (“FHLMC”) programs whereas loans that do not meet the standards are referred to as non-conforming residential real estate loans. The Corporation’s strategy is to penetrate markets by providing customers with a variety of high quality mortgage products to serve their financial needs faster and simpler and at competitive prices. The Mortgage Banking segment also acquires and sells mortgages in the secondary markets. Residential real estate conforming loans are sold to investors like FNMA and FHLMC. More than 90% of the Corporation’s residential mortgage loan portfolio consists of fixed-rate, fully amortizing, full documentation loans that have a lower risk than the typical sub-prime loans that have adversely affected the U.S. real estate market. The Corporation is not active in negative amortization loans or option adjustable rate mortgage loans (ARMs) including ARMs with teaser rates.

 

Consumer (Retail) Banking

 

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 in Puerto Rico. Loans to consumers include auto, boat, lines of credit, and personal loans. Deposit products include interest bearing and non-interest bearing checking and savings accounts, Individual Retirement Accounts (IRA) and retail certificates of deposit. Retail deposits gathered through each branch of FirstBank’s retail network serve as one of the funding sources for the lending and investment activities.

Consumer lending has been mainly driven by auto loan originations. The Corporation follows a strategy of seeking to provide outstanding service to selected auto dealers that provide the channel for the bulk of the Corporation’s auto loan originations. This strategy is directly linked to our commercial lending activities as the Corporation maintains strong and stable auto floor plan relationships, which are the foundation of a successful auto loan generation operation. The Corporation’s commercial relations with floor plan dealers are strong and directly benefit the Corporation’s consumer lending operation and are managed as part of the consumer banking activities.

 

Personal loans and, to a lesser extent, marine financing and a small revolving credit portfolio also contribute to interest income generated on consumer lending. Credit card accounts are issued under the Bank’s name through an alliance with FIA Card Services (Bank of America), which bears the credit risk. Management plans to continue to be active in the consumer loans market, applying the Corporation’s strict underwriting standards.

 

Treasury and Investments

 

The Treasury and Investments segment is responsible for the Corporation’s treasury and investment management functions. In the treasury function, which includes funding and liquidity management, this segment sells funds to the Commercial and Corporate Banking, Mortgage Banking, and Consumer (Retail) Banking segments to finance their lending activities and purchases funds gathered by those segments. Funds not gathered by the different business units are obtained by the Treasury Division through wholesale channels, such as brokered deposits, Advances from the FHLB and repurchase agreements with investment securities, among others.

 

Since the Corporation is a net borrower of funds, the securities portfolio does not result from the investment of excess funds. The securities portfolio is a leverage strategy for the purposes of liquidity management, interest rate management and earnings enhancement.

 

The interest rates charged or credited by Treasury and Investments are based on market rates.

 

United States Operations

 

The United States operations segment consists of all banking activities conducted by FirstBank in the United States mainland. The Corporation provides a wide range of banking services to individual and corporate customers in the state of Florida through its ten branches and two specialized lending centers. In the United States, the Corporation originally had an agency lending office in Miami, Florida. Then, it acquired Coral Gables-based Ponce General (the parent company of Unibank, a savings and loans bank in 2005) and changed the savings and loan’s name to FirstBank Florida. Those two entities were operated separately. In 2009, the Corporation filed an application with the Office of Thrift Supervision to surrender the Miami-based FirstBank Florida charter and merge its assets into FirstBank Puerto Rico, the main subsidiary of First BanCorp. The Corporation placed the entire Florida operation under the control of a new appointed Executive Vice President. The merger allows the Florida operations to benefit by leveraging the capital position of FirstBank Puerto Rico and thereby provide them with the support necessary to grow in the Florida market.

 

Virgin Islands Operations

 

The Virgin Islands operations segment consists of all banking activities conducted by FirstBank in the U.S. and British Virgin Islands, including retail and commercial banking services. In 2002, after acquiring Chase Manhattan Bank operations in the Virgin Islands, FirstBank became the largest bank in the Virgin Islands (USVI & BVI), serving St. Thomas, St. Croix, St. John, Tortola and Virgin Gorda, with 16 branches. In 2008, FirstBank acquired the Virgin Island Community Bank (“VICB”) in St. Croix, increasing its customer base and share in this market. The Virgin Islands operations segment is driven by its consumer and commercial lending and deposit-taking activities. Loans to consumers include auto, boat, lines of credit, personal loans and residential mortgage loans. Deposit products include interest bearing and non-interest bearing checking and savings accounts, Individual Retirement Accounts (IRA) and retail certificates of deposit. Retail deposits gathered through each branch serve as the funding sources for the lending activities.

For information regarding First BanCorp’s reportable segments, please refer to Note 33, “Segment Information,” to the Corporation’s financial statements for the year ended December 31, 2009 included in Item 8 of this Form 10-K.

 

Employees

 

As of December 31, 2009, the Corporation and its subsidiaries employed 2,713 persons. None of its employees are represented by a collective bargaining group. The Corporation considers its employee relations to be good.

 

SIGNIFICANT EVENTS DURING 2009

 

Participation in the U.S. Treasury Department’s Capital Purchase Program

 

On January 16, 2009, the Corporation entered into a Letter Agreement with the United States Department of the Treasury (“Treasury”) pursuant to which Treasury invested $400,000,000 in preferred stock of the Corporation under the Treasury’s Troubled Asset Relief Program Capital Purchase Program. Under the Letter Agreement, which incorporates the Securities Purchase Agreement — Standard Terms (the “Purchase Agreement”), the Corporation issued and sold to Treasury (1) 400,000 shares of the Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series F, $1,000 liquidation preference per share (the “Series F Preferred Stock”), and (2) a warrant dated January 16, 2009 (the “Warrant”) to purchase 5,842,259 shares of the Corporation’s common stock (the “Warrant shares”) at an exercise price of $10.27 per share. The exercise price of the Warrant was determined based upon the average of the closing prices of the Corporation’s common stock during the 20-trading day period ended December 19, 2008, the last trading day prior to the date the Corporation’s application to participate in the program was preliminarily approved. The Purchase Agreement is incorporated into Exhibit 10.4 hereto by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed with the SEC on January 20, 2009.

 

The Series F Preferred Stock qualifies as Tier 1 regulatory capital. Cumulative dividends on the Series F Preferred Stock will 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 will rank pari passu with the Corporation’s existing 7.125% Noncumulative Perpetual Monthly Income Preferred Stock, Series A, 8.35% Noncumulative Perpetual Monthly Income Preferred Stock, Series B, 7.40% Noncumulative Perpetual Monthly Income Preferred Stock, Series C, 7.25% Noncumulative Perpetual Monthly Income Preferred Stock, Series D, and 7.00% Noncumulative Perpetual Monthly Income Preferred Stock, Series E, in terms of dividend payments and distributions upon liquidation, dissolution and winding up of the Corporation. The Purchase Agreement 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. The ability of the Corporation to purchase, redeem or otherwise acquire for consideration, any shares of its common stock, preferred stock or trust preferred securities are subject to restrictions outlined in the Purchase Agreement, including upon a default in the payment of dividends. The Corporation suspended the payment of dividends effective in August 2009. These restrictions will terminate on the earlier of (a) January 16, 2012 and (b) the date on which the Series F Preferred Stock is redeemed in whole or Treasury transfers all of the Series F Preferred Stock to third parties that are not affiliates of Treasury.

 

The shares of Series F Preferred Stock are non-voting, other than having class voting rights on certain matters that could adversely affect the Series F Preferred Stock. If dividends on the Series F Preferred Stock have not been paid for an aggregate of six quarterly dividend periods or more, whether or not consecutive, the Corporation’s authorized number of directors will be increased automatically by two and the holders of the Series F Preferred Stock, voting together with holders of any then outstanding parity stock, will have the right to elect two directors to fill such newly created directorships at the Corporation’s next annual meeting of stockholders or at a special meeting of stockholders called for that purpose prior to such annual meeting.

These preferred share directors will be elected annually and will serve until all accrued and unpaid dividends on the Series F Preferred Stock have been declared and paid in full.

 

On January 13, 2009, the Corporation filed a Certificate of Designations (the “Certificate of Designations”) with the Puerto Rico Department of State for the purpose of amending its Certificate of Incorporation to fix the designations, preferences, limitations and relative rights of the Series F Preferred Stock.

 

As per the Purchase Agreement, prior to January 16, 2012, the Corporation may redeem, subject to the approval of the Board of Governors of the Federal Reserve System, the shares of Series F Preferred Stock only with proceeds from one or more “Qualified Equity Offerings,” as such term is defined in the Certificate of Designations. After January 16, 2012, the Corporation may redeem, subject to the approval of the Board of Governors of the Federal Reserve System, in whole or in part, out of funds legally available therefore, the shares of Series F Preferred Stock then outstanding. Pursuant to the American Recovery and Reinvestment Act of 2009, subject to consultation with the appropriate Federal banking agency, the Secretary of Treasury may permit a TARP recipient to repay any financial assistance previously provided under TARP without regard to whether the financial institution has replaced such funds from any other source.

 

The Warrant has a ten-year term and is exercisable at any time for 5,842,259 shares of First BanCorp common stock at an exercise price of $10.27. The exercise price and the number of shares of common stock issuable upon exercise of the Warrant are adjustable in a number of circumstances, as discussed below. The exercise price and the number of shares of common stock issuable upon exercise of the Warrant will be adjusted proportionately:

 

 

None of the shares of Series F Preferred Stock, the Warrant, or the Warrant shares are subject to any contractual restriction on transfer. The Series F Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Corporation registered for resale shares of Series F Preferred Stock, the Warrant and the Warrant shares, and the sale of the Warrant shares by the Corporation to any purchasers of the Warrant. In addition, under the shelf registration, the Corporation registered the resale of 9,250,450 shares of common stock by or on behalf of the Bank of Nova Scotia, its pledges, donees, transferees or other successors in interest.

 

Under the terms of the Purchase Agreement, (i) the Corporation amended its compensation, bonus, incentive and other benefit plans, arrangements and agreements (including severance and employment agreements), to the extent necessary to be in compliance with the executive compensation and corporate

governance requirements of Section 111(b) of the Emergency Economic Stability Act of 2008 and applicable guidance or regulations and (ii) each Senior Executive Officer, as defined in the Purchase Agreement, executed a written waiver releasing Treasury and the Corporation from any claims that such officers may otherwise have as a result of the Corporation’s amendment of such arrangements and agreements to be in compliance with Section 111(b). Until such time as Treasury ceases to own any debt or equity securities of the Corporation acquired pursuant to the Purchase Agreement, the Corporation must maintain compliance with these requirements.

 

Reduction of credit exposure with financial institutions

 

The Corporation has continued working on the reduction of its credit exposure with Doral and R&G Financial. During the second quarter of 2009, the Bank purchased from R&G Financial $205 million of residential mortgages that previously served as collateral for a commercial loan extended to R&G . The purchase price of the transaction was retained by the Corporation to fully pay off the commercial loan, thereby significantly reducing the Corporation’s exposure to a single borrower. As of December 31, 2009, there still an outstanding balance of $321.5 million due from Doral.

 

Surrender of the stock savings and loans association charter in Florida

 

Effective July 1, 2009 as part of the merger of FirstBank Florida with and into FirstBank Puerto Rico, FirstBank Florida surrendered its stock savings and loans association charter granted by the Office of Thrift Supervsion. Under the regulatory oversight of the Federal Deposit Insurance Corporation and under the FirstBank Florida trade name, FirstBank continues to offer the same services offered by the former stock savings and loans association through its branch network in Florida.

 

Dividend Suspension

 

On July 30, 2009, after reporting a net loss for the quarter ended June 30, 2009, the Corporation announced that the Board of Directors resolved to suspend the payment of the common and preferred dividends, including the Series F Preferred Stock, effective with the preferred dividend payments for the month of August 2009.

 

Business Developments

 

Effective July 1, 2009, the Corporation consolidated the operations of FirstBank Florida, formerly a stock savings and loan association indirectly owned by the Corporation, with and into FirstBank Puerto Rico and dissolved Ponce General Corporation, former holding company of FirstBank Florida.

 

On October 31, 2009, First Leasing and Rental Corporation sold its motor vehicle rental operations and realized a nominal gain of $0.2 million.

 

Credit Ratings

 

The Corporation’s credit as long-term issuer is currently rated B by Standard & Poor’s (“S&P”) and B- by Fitch Ratings Limited (“Fitch”); both with negative outlook.

 

FirstBank’s long-term senior debt rating is currently rated B1 by Moody’s Investor Service (“Moodys”), four notches below their definition of investment grade; B by S&P, and B by Fitch, both five notches under their definition of investment grade. The outlook on the Bank’s credit ratings from the three rating agencies is negative.

 

WEBSITE ACCESS TO REPORT

 

The Corporation makes available annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, free of charge on or through its internet website at www.firstbankpr.com,

(under the “Investor Relations” section), as soon as reasonably practicable after the Corporation electronically files such material with, or furnishes it to, the SEC.

 

The Corporation also makes available the Corporation’s corporate governance guidelines, the charters of the audit, asset/liability, compensation and benefits, credit, strategic planning, corporate governance and nominating committees and the codes and principles mentioned below, free of charge on or through its internet website at www.firstbankpr.com (under the “Investor Relations” section):

 

 

The corporate governance guidelines, and the aforementioned charters and codes may also be obtained free of charge by sending a written request to Mr. Lawrence Odell, Executive Vice President and General Counsel, PO Box 9146, San Juan, Puerto Rico 00908.

 

The public may read and copy any materials First BanCorp files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC at its website (www.sec.gov).

 

MARKET AREA AND COMPETITION

 

Puerto Rico, where the banking market is highly competitive, is the main geographic service area of the Corporation. As of December 31, 2009, the Corporation also had a presence in the state of Florida and in the United States and British Virgin Islands. Puerto Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions in the United States mainland.

 

Competitors include other banks, insurance companies, mortgage banking companies, small loan companies, automobile financing companies, leasing companies, brokerage firms with retail operations, and credit unions in Puerto Rico, the Virgin Islands and the state of Florida. The Corporation’s businesses compete with these other firms with respect to the range of products and services offered and the types of clients, customers, and industries served.

 

The Corporation’s ability to compete effectively depends on the relative performance of its products, the degree to which the features of its products appeal to customers, and the extent to which the Corporation meets clients’ needs and expectations. The Corporation’s ability to compete also depends on its ability to attract and retain professional and other personnel, and on its reputation.

 

The Corporation encounters intense competition in attracting and retaining deposits and its consumer and commercial lending activities. The Corporation competes for loans with other financial institutions, some of which are larger and have greater resources available than those of the Corporation. Management believes that the Corporation has been able to compete effectively for deposits and loans by offering a variety of transaction account products and loans with competitive features, by pricing its products at competitive interest rates, by offering convenient branch locations, and by emphasizing the quality of its service. The Corporation’s ability to originate loans depends primarily on the rates and fees charged and the service it provides to its borrowers in making prompt credit decisions. There can be no assurance that in the future the Corporation will be able to continue to increase its deposit base or originate loans in the manner or on the terms on which it has done so in the past.

 

SUPERVISION AND REGULATION

 

Recent Events affecting the Corporation

 

Events since early 2008 affecting the financial services industry and, more generally, the financial markets and the economy as a whole, have led to various proposals for changes in the regulation of the financial

services industry. In 2009, the House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009, which, among other things, calls for the establishment of a Consumer Financial Protection Agency having broad authority to regulate providers of credit, savings, payment and other consumer financial products and services; creates a new structure for resolving troubled or failed financial institutions; requires certain over-the-counter derivative transactions to be cleared in a central clearinghouse and/or effected on the exchange; revises the assessment base for the calculation of the Federal Deposit Insurance Corporation (“FDIC”) assessments; and creates a structure to regulate systemically important financial companies, including providing regulators with the power to require such companies to sell or transfer assets and terminate activities if they determine that the size or scope of activities of the company pose a threat to the safety and soundness of the company or the financial stability of the United States. Other proposals have been made, including additional capital and liquidity requirements and limitations on size or types of activity in which banks may engage. It is not clear at this time which of these proposals will be finally enacted into law, or what form they will take, or what new proposals may be made, as the debate over financial reform continues in 2010. The description below summarizes the current regulatory structure in which the Corporation operates. In the event the regulatory structure change significantly, the structure of the Corporation and the products and services it offers could also change significantly as a result.

 

Bank Holding Company Activities and Other Limitations

 

The Corporation is subject to ongoing regulation, supervision, and examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic and annual reports and other information concerning its own business operations and those of its subsidiaries. In addition, the Corporation is subject to regulation under the Bank Holding Company Act of 1956, as amended (“Bank Holding Company Act”). Under the provisions of the Bank Holding Company Act, a bank holding company must obtain Federal Reserve Board approval before it acquires direct or indirect ownership or control of more than 5% of the voting shares of another bank, or merges or consolidates with another bank holding company. The Federal Reserve Board also has authority under certain circumstances to issue cease and desist orders against bank holding companies and their non-bank subsidiaries.

 

A bank holding company is prohibited under the Bank Holding Company Act, with limited exceptions, from engaging, directly or indirectly, in any business unrelated to the businesses of banking or managing or controlling banks. One of the exceptions to these prohibitions permits ownership by a bank holding company of the shares of any corporation if the Federal Reserve Board, after due notice and opportunity for hearing, by regulation or order has determined that the activities of the corporation in question are so closely related to the businesses of banking or managing or controlling banks as to be a proper incident thereto.

 

Under the Federal Reserve Board policy, a bank holding company such as the Corporation is expected to act as a source of financial strength to its banking subsidiaries and to commit support to them. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks must be subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. As of December 31, 2009, FirstBank was the only depository institution subsidiary of the Corporation.

 

The Gramm-Leach-Bliley Act (the “GLB Act”) revised and expanded the provisions of the Bank Holding Company Act by including a section that permits a bank holding company to elect to become a financial holding company and engage in a full range of financial activities. In April 2000, the Corporation filed an election with the Federal Reserve Board and became a financial holding company under the GLB Act. The GLB Act requires a bank holding company that elects to become a financial holding company to file a written declaration with the appropriate Federal Reserve Bank and comply with the following (and such compliance must continue while the entity is treated as a financial holding company): (i) state that the bank holding company elects to become a financial holding company; (ii) provide the name and head office address of the bank holding company and each depository institution controlled by the bank holding company; (iii) certify

that all depository institutions controlled by the bank holding company are well-capitalized as of the date the bank holding company files for the election; (iv) provide the capital ratios for all relevant capital measures as of the close of the previous quarter for each depository institution controlled by the bank holding company; and (v) certify that all depository institutions controlled by the bank holding company are well-managed as of the date the bank holding company files the election. All insured depository institutions controlled by the bank holding company must have also achieved at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act during the depository institution’s most recent examination.

 

A financial holding company ceasing to meet these standards is subject to a variety of restrictions, depending on the circumstances. If the Federal Reserve Board determines that any of the financial holding company’s subsidiary depository institutions are either not well-capitalized or not well-managed, it must notify the financial holding company. Until compliance is restored, the Federal Reserve Board has broad discretion to impose appropriate limitations on the financial holding company’s activities. If compliance is not restored within 180 days, the Federal Reserve Board may ultimately require the financial holding company to divest its depository institutions or in the alternative, to discontinue or divest any activities that are permitted only to non-financial holding company bank holding companies.

 

The potential restrictions are different if the lapse pertains to the Community Reinvestment Act requirement. In that case, until all the subsidiary institutions are restored to at least “satisfactory” Community Reinvestment Act rating status, the financial holding company may not engage, directly or through a subsidiary, in any of the additional activities permissible under the GLB Act or make additional acquisitions of companies engaged in the additional activities. However, completed acquisitions and additional activities and affiliations previously begun are left undisturbed, as the GLB Act does not require divestiture for this type of situation.

 

Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The GLB Act specifically provides that the following activities have been determined to be “financial in nature”: (a) lending, trust and other banking activities; (b) insurance activities; (c) financial or economic advice or services; (d) pooled investments; (e) securities underwriting and dealing; (f) existing bank holding company domestic activities; (g) existing bank holding company foreign activities; and (h) merchant banking activities. The Corporation offers insurance agency services through its wholly-owned subsidiary, FirstBank Insurance Agency and through First Insurance Agency V. I., Inc., a subsidiary of FirstBank. In association with JP Morgan Chase, the Corporation, through FirstBank Puerto Rico Securities, Inc., a wholly owned subsidiary of FirstBank, also offers municipal bond underwriting services focused mainly on municipal and government bonds or obligations issued by the Puerto Rico government and its public corporations. Additionally, FirstBank Puerto Rico Securities, Inc. offers financial advisory services.

 

In addition, the GLB Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand the list of “financial” or “incidental” activities, but requires consultation with the Treasury, and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is “complementary” to a financial activity and does not “pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.”

 

Under the GLB Act, if the Corporation fails to meet any of the requirements for being a financial holding company and is unable to resolve such deficiencies within certain prescribed periods of time, the Federal Reserve Board could require the Corporation to divest control of one or more of its depository institution subsidiaries or alternatively cease conducting financial activities that are not permissible for bank holding companies that are not financial holding companies.

 

Sarbanes-Oxley Act

 

The Sarbanes-Oxley Act of 2002 (“SOA”) implemented a range of corporate governance and accounting measures to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability

of disclosures under federal securities laws. In addition, SOA has established membership requirements and responsibilities for the audit committee, imposed restrictions on the relationship between the Corporation and external auditors, imposed additional responsibilities for the external financial statements on our chief executive officer and chief financial officer, expanded the disclosure requirements for corporate insiders, required management to evaluate its disclosure controls and procedures and its internal control over financial reporting, and required the auditors to issue a report on the internal control over financial reporting.

 

Since the 2004 Annual Report on Form 10-K, the Corporation has included in its annual report on Form 10-K its management assessment regarding the effectiveness of the Corporation’s internal control over financial reporting. The internal control report includes a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the Corporation; management’s assessment as to the effectiveness of the Corporation’s internal control over financial reporting based on management’s evaluation, as of year-end; and the framework used by management as criteria for evaluating the effectiveness of the Corporation’s internal control over financial reporting. As of December 31, 2009, First BanCorp’s management concluded that its internal control over financial reporting was effective. The Corporation’s independent registered public accounting firm reached the same conclusion.

 

Emergency Economic Stabilization Act of 2008

 

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. The EESA authorized the Treasury to access up to $700 billion to protect the U.S. economy and restore confidence and stability to the financial markets. One such program under the Treasury Department’s Troubled Asset Relief Program (TARP) was action by Treasury to make significant investments in U.S. financial institutions through the Capital Purchase Program (CPP). The Treasury’s stated purpose in implementing the CPP was to improve the capitalization of healthy institutions, which would improve the flow of credit to businesses and consumers, and boost the confidence of depositors, investors, and counterparties alike. All federal banking and thrift regulatory agencies encouraged eligible institutions to participate in the CPP.

 

The Corporation applied for, and the Treasury approved, a capital purchase in the amount of $400,000,000. The Corporation entered into a Letter Agreement with the Treasury, pursuant to which the Corporation issued and sold to the Treasury for an aggregate purchase price of $400,000,000 in cash (i) 400,000 shares of the Series F Preferred Stock, and (2) the Warrant to purchase 5,842,259 shares of the Corporation’s common stock at an exercise price of $10.27 per share, subject to certain anti-dilution and other adjustments. The TARP transaction closed on January 16, 2009.

 

Under the terms of the Letter Agreement with the Treasury, (i) the Corporation amended its compensation, bonus, incentive and other benefit plans, arrangements and agreements (including severance and employment agreements) to the extent necessary to be in compliance with the executive compensation and corporate governance requirements of Section 111(b) of the Emergency Economic Stability Act of 2008 and applicable guidance or regulations issued by the Secretary of Treasury on or prior to January 16, 2009 and (ii) each Senior Executive Officer, as defined in the Purchase Agreement, executed a written waiver releasing Treasury and the Corporation from any claims that such officers may otherwise have as a result the Corporation’s amendment of such arrangements and agreements to be in compliance with Section 111(b). Until such time as Treasury ceases to own any debt or equity securities of the Corporation acquired pursuant to the Purchase Agreement, the Corporation must maintain compliance with these requirements.

 

American Recovery and Reinvestment Act of 2009

 

On February 17, 2009, the Congress enacted the American Recovery and Reinvestment Act of 2009 (“Stimulus Act”). The Stimulus Act includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, health care, and infrastructure, including energy sector. The Stimulus Act includes new provisions relating to compensation paid by institutions that receive government assistance under TARP, including institutions that have already received such assistance, effectively amending the existing compensation and corporate governance requirements of Section 111(b) of the EESA. The provisions include restrictions on the amounts and forms of compensation payable, provision

for possible reimbursement of previously paid compensation and a requirement that compensation be submitted to non-binding “say on pay” shareholders votes.

 

On June 10, 2009, the Treasury issued regulations implementing the compensation requirements under ARRA, which amended the requirements of EESA. The regulations became applicable to existing and new TARP recipients upon publication in the Federal Register on June 15, 2009. The regulations make effective the compensation provisions of ARRA and include rules requiring: (i) review of prior compensation by a Special Master; (ii) restrictions on paying or accruing bonuses, retention awards or incentive compensation for certain employees; (iii) regular review of all employee compensation arrangements by the company’s senior risk officer and compensation committee to ensure that the arrangements do not encourage unnecessary and excessive risk-taking or manipulation of reporting earnings; (iv) recoupment of bonus payments based on materially inaccurate information; (v) prohibition on severance or change in control payments for certain employees; (vi) adoption of policies and procedures to avoid excessive luxury expenses; and (vii) mandatory “say on pay” votes (which was effective beginning in February 2009). In addition, the regulations also introduce several additional requirements and restrictions, including: (i) Special Master review of ongoing compensation in certain situations; (ii) prohibition on tax gross-ups for certain employees; (iii) disclosure of perquisites; and (iv) disclosure regarding compensation consultants.

 

Homeowner Affordability and Stability Plan

 

On February 18, 2009, President Obama announced a comprehensive plan to help responsible homeowners avoid foreclosure by providing affordable and sustainable mortgage loans. The Homeowner Affordability and Stability Plan, a $75 billion federal program, provides for a sweeping loan modification program targeted at borrowers who are at risk of foreclosure because their incomes are not sufficient to make their mortgage payments. It also includes refinancing opportunities for borrowers who are current on their mortgage payments but have been unable to refinance because their homes have decreased in value. Under the Homeowner Stability Initiative, Treasury will spend up to $50 billion dollars to make mortgage payments affordable and sustainable for middle-income American families that are at risk of foreclosure. Borrowers who are delinquent on the mortgage for their primary residence and borrowers who, due to a loss of income or increase in expenses, are struggling to keep their payments current may be eligible for a loan modification. Under the Homeowner Affordability and Stability Plan, borrowers who are current on their mortgage but have been unable to refinance because their house has decreased in value may have the opportunity to refinance into a 30-year, fixed-rate loan. Through the program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they hold in their portfolios or that they guarantee in their own mortgage-backed securities. Lenders were able to begin accepting refinancing applications on March 4, 2009. The Obama Administration announced on March 4, 2009 the new U.S. Department of the Treasury guidelines to enable servicers to begin modifications of eligible mortgages under the Homeowner Affordability and Stability Plan. The guidelines implement financial incentives for mortgage lenders to modify existing first mortgages and sets standard industry practice for modifications.

 

Temporary Liquidity Guarantee Program

 

The FDIC adopted the Temporary Liquidity Guarantee Program (“TLGP”) in October 2008 following a determination of systemic risk by the Secretary of the Treasury (after consultation with the President) that was supported by recommendations from the FDIC and the Board of Governors of the Federal Reserve System. The TLGP is part of a coordinated effort by the FDIC, the Treasury, and the Federal Reserve System to address unprecedented disruptions in the credit markets and the resultant difficulty of many financial institutions to obtain funds and to make loans to creditworthy borrowers. On October 23, 2008, the FDIC’s Board of Directors (Board) authorized the publication in the Federal Register of an interim rule that outlined the structure of the TLGP. The interim rule was finalized and a final rule was published in the Federal Register on November 26, 2008. Designed to assist in the stabilization of the nation’s financial system, the FDIC’s TLGP is composed of two distinct components: the Debt Guarantee Program (“DGP”) and the Transaction Account Guarantee Program (“TAG program”). Under the DGP, the FDIC guarantees certain senior unsecured debt issued by participating entities. Under the TAG program, the FDIC guarantees all funds held in qualifying

noninterest-bearing transaction accounts at participating insured depository institutions (“IDIs”). The DGP initially permitted participating entities to issue FDIC-guaranteed senior unsecured debt until June 30, 2009, with the FDIC’s guarantee for such debt to expire on the earlier of the maturity of the debt (or the conversion date, for mandatory convertible debt) or June 30, 2012. To reduce the potential for market disruptions at the conclusion of the DGP and to begin the orderly phase-out of the program, on May 29, 2009 the Board issued a final rule that extended for four months the period during which certain participating entities could issue FDIC-guaranteed debt. All IDIs and those other participating entities that had issued FDIC-guaranteed debt on or before April 1, 2009 were permitted to participate in the extended DGP without application to the FDIC. Other participating entities that received approval from the FDIC also were permitted to participate in the extended DGP. The expiration of the guarantee period was also extended from June 30, 2012 to December 31, 2012. As a result, all such participating entities were permitted to issue FDIC-guaranteed debt through and including October 31, 2009, with the FDIC’s guarantee expiring on the earliest of the debt’s mandatory conversion date (for mandatory convertible debt), the stated maturity date, or December 31, 2012.

 

On October 20, 2009, the FDIC established a limited, six-month emergency guarantee facility upon expiration of the DGP. Under this emergency guarantee facility, certain participating entities can apply to the FDIC for permission to issue FDIC-guaranteed debt during the period starting October 31, 2009 through April 30, 2010. The fee for issuing debt under the emergency facility will be at least 300 basis points, which the FDIC reserves the right to increase on a case-by-case basis, depending upon the risks presented by the issuing entity. The TAG Program has been extended until June 30, 2010. The cost of participating in the program increased after December 31, 2009. Separately, Congress extended the temporary increase in the standard coverage limit to $250,000 until December 31, 2013. FirstBank currently participates in the TLGP solely through the TAG program.

 

USA Patriot Act

 

Under Title III of the USA Patriot Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions are required to, among other things, identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Presently, only certain types of financial institutions (including banks, savings associations and money services businesses) are subject to final rules implementing the anti-money laundering program requirements of the USA Patriot Act.

 

Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institutions. The Corporation has adopted appropriate policies, procedures and controls to address compliance with the USA Patriot Act and Treasury regulations.

 

Privacy Policies

 

Under Title V of the GLB Act, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic customer data with parties at the customer’s request and establish policies and procedures to protect customer data from unauthorized access. The Corporation and its subsidiaries have adopted policies and procedures in order to comply with the privacy provisions of the GLB Act and the Fair and Accurate Credit Transaction Act of 2003 and the regulations issued thereunder.

 

State Chartered Non-Member Bank and Banking Laws and Regulations in General

 

FirstBank is subject to regulation and examination by the OCIF and the FDIC, and is subject to certain requirements established by the Federal Reserve Board. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their businesses, their investments, their reserves against deposits, the timing and availability of deposited funds, and the nature and amount of and collateral for certain loans. In addition to the impact of regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. Among the instruments used by the Federal Reserve Board to implement these

objectives are open market operations in U.S. government securities, adjustments of the discount rate, and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our future business, earnings, and growth cannot be predicted.

 

References herein to applicable statutes or regulations are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference to those statutes and regulations. Any change in applicable laws or regulations may have a material adverse effect on the business of commercial banks, and bank holding companies, including FirstBank and the Corporation.

 

As a creditor and financial institution, FirstBank is subject to certain regulations promulgated by the Federal Reserve Board, including, without limitation, Regulation B (Equal Credit Opportunity Act), Regulation DD (Truth in Savings Act), Regulation E (Electronic Funds Transfer Act), Regulation F (Limits on Exposure to Other Banks), Regulation O (Loans to Executive Officers, Directors and Principal Shareholders), Regulation W (Transactions Between Member Banks and Their Affiliates), Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds Availability Act), Regulation X (Real Estate Settlement Procedures Act), Regulation BB (Community Reinvestment Act) and Regulation C (Home Mortgage Disclosure Act).

 

During 2008, federal agencies adopted revisions to several rules and regulations that will impact lenders and secondary market activities. In 2008, the Federal Reserve Bank revised Regulation Z, adopted under the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA), by adopting a final rule which prohibits unfair, abusive or deceptive home mortgage lending practices and restricts certain mortgage lending practices. The final rule also establishes advertisement standards and requires certain mortgage disclosures to be given to the consumers earlier in the transaction. The rule was effective in October 2009. The final rule regarding the TILA also includes amendments revising disclosures in connection with credit cards accounts and other revolving credit plans to ensure that information provided to customers is provided in a timely manner and in a form that is readily understandable.

 

There are periodic examinations by the OCIF and the FDIC of FirstBank to test the Bank’s compliance with various statutory and regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the FDIC’s insurance fund and depositors. The regulatory structure also gives the regulatory authorities discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and for engaging in unsafe or unsound practices. In addition, certain bank actions are required by statute and implementing regulations. Other actions or failure to act may provide the basis for enforcement action, including the filing of misleading or untimely reports with regulatory authorities.

 

Dividend Restrictions

 

The Corporation is subject to certain restrictions generally imposed on Puerto Rico corporations with respect to the declaration and payment of dividends (i.e., that dividends may be paid out only from the Corporation’s net assets in excess of capital or, in the absence of such excess, from the Corporation’s net earnings for such fiscal year and/or the preceding fiscal year). The Federal Reserve Board has also issued a policy statement that as a matter of prudent banking, a bank holding company should generally not maintain a given rate of cash dividends unless its net income available to common shareholders has been sufficient to fund fully the dividends and the prospective rate of earnings retention appears to be consistent with the organization’s capital needs, asset quality, and overall financial condition.

On February 24, 2009, the Federal Reserve published the “Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies” (the “Supervisory Letter”) which discusses the ability of bank holding companies to declare dividends and to redeem or repurchase equity securities. The Supervisory Letter is generally consistent with prior Federal Reserve supervisory policies and guidance, although places greater emphasis on discussions with the regulators prior to dividend declarations and redemption or repurchase decisions even when not explicitly required by the regulations. The Federal Reserve provides that the principles discussed in the letter are applicable to all bank holding companies, but are especially relevant for bank holding companies that are either experiencing financial difficulties and/or receiving public funds under the Treasury’s TARP Capital Purchase Program. To that end, the Supervisory Letter specifically addresses the Federal Reserve’s supervisory considerations for TARP participants.

 

The Supervisory Letter provides that a board of directors should “eliminate, defer, or severely limit” dividends if: (i) the bank holding company’s net income available to shareholders for the past four quarters, net of dividends paid during that period, is not sufficient to fully fund the dividends; (ii) the bank holding company’s rate of earnings retention is inconsistent with capital needs and overall macroeconomic outlook; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Supervisory Letter further suggests that bank holding companies should inform the Federal Reserve in advance of paying a dividend that: (i) exceeds the earnings for the quarter in which the dividend is being paid; or (ii) could result in a material adverse change to the organization’s capital structure.

 

As of December 31, 2009, the principal source of funds for the Corporation’s parent holding company is dividends declared and paid by its subsidiary, FirstBank. The ability of FirstBank to declare and pay dividends on its capital stock is regulated by the Puerto Rico Banking Law, the Federal Deposit Insurance Act (the “FDIA”), and FDIC regulations. In general terms, the Puerto Rico Banking Law provides that when the expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be charged against undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If the reserve fund is not sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the bank’s capital account. The Puerto Rico Banking Law provides that, until said capital has been restored to its original amount and the reserve fund to 20% of the original capital, the bank may not declare any dividends.

 

In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding such bank.

 

In addition, the Purchase Agreement entered into with the Treasury 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. Also, upon issuance of the Series F Preferred Stock, the ability of the Corporation to purchase, redeem or otherwise acquire for consideration, any shares of its common stock, preferred stock or trust preferred securities is subject to restrictions, including limitations when the Corporation has not paid dividends. These restrictions will terminate on the earlier of (a) the third anniversary of the closing date of the issuance of the Series F Preferred Stock and (b) the date on which the Series F Preferred Stock has been redeemed in whole or Treasury has transferred all of the Series F Preferred Stock to third parties that are not affiliates of Treasury. The restrictions described in this paragraph are set forth in the Purchase Agreement.

 

On July 30, 2009, after reporting a net loss for the quarter ended June 30, 2009, the Corporation announced that the Board of Directors resolved to suspend the payment of the common and preferred dividends, including the TARP preferred dividends, effective with the preferred dividend payments for the month of August 2009.

Limitations on Transactions with Affiliates and Insiders

 

Certain transactions between financial institutions such as FirstBank and its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and by Regulation W. An affiliate of a financial institution is any corporation or entity, that controls, is controlled by, or is under common control with the financial institution. In a holding company context, the parent bank holding company and any companies which are controlled by such parent bank holding company are affiliates of the financial institution. Generally, Sections 23A and 23B of the Federal Reserve Act (i) limit the extent to which the financial institution or its subsidiaries may engage in “covered transactions” (defined below) with any one affiliate to an amount equal to 10% of such financial institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such financial institution’s capital stock and surplus and (ii) require that all “covered transactions” be on terms substantially the same, or at least as favorable to the financial institution or affiliate, as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act.

 

The GLB Act requires that financial subsidiaries of banks be treated as affiliates for purposes of Sections 23A and 23B of the Federal Reserve Act, but (i) the 10% capital limitation on transactions between the bank and such financial subsidiary as an affiliate is not applicable, and (ii) notwithstanding other provisions in Sections 23A and 23B, the investment by the bank in the financial subsidiary does not include retained earnings of the financial subsidiary. The GLB Act provides that: (1) any purchase of, or investment in, the securities of a financial subsidiary by any affiliate of the parent bank is considered a purchase or investment by the bank; and (2) if the Federal Reserve Board determines that such treatment is necessary, any loan made by an affiliate of the parent bank to the financial subsidiary is to be considered a loan made by the parent bank.

 

The Federal Reserve Board has adopted Regulation W which interprets the provisions of Sections 23A and 23B. The regulation unifies and updates staff interpretations issued over the years, incorporates several new interpretations and provisions (such as to clarify when transactions with an unrelated third party will be attributable to an affiliate), and addresses new issues arising as a result of the expanded scope of nonbanking activities engaged in by banks and bank holding companies in recent years and authorized for financial holding companies under the GLB Act.

 

In addition, Sections 22(h) and (g) of the Federal Reserve Act, implemented through Regulation O, place restrictions on loans to executive officers, directors, and principal stockholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer, a greater than 10% stockholder of a financial institution, and certain related interests of these, may not exceed, together with all other outstanding loans to such persons and affiliated interests, the financial institution’s loans to one borrower limit, generally equal to 15% of the institution’s unimpaired capital and surplus. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers, and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers.

 

Federal Reserve Board Capital Requirements

 

The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve Board capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier I or core capital and up to one-half of that amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of

common stockholders’ equity and perpetual preferred stock, subject in the case of the latter to limitations on the kind and amount of such perpetual preferred stock that may be included as Tier I capital, less goodwill and, with certain exceptions, other intangibles. Tier II capital generally consists of hybrid capital instruments, perpetual preferred stock that is not eligible to be included as Tier I capital, term subordinated debt and intermediate-term preferred stock and, subject to limitations, allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of assets, which are typically held by a bank holding company, including multi-family residential and commercial real estate loans, commercial business loans and commercial loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics.

 

The federal bank regulatory agencies’ risk-based capital guidelines for years have been based upon the 1988 capital accord (“Basel I”) of the Basel Committee, a committee of central bankers and bank supervisors from the major industrialized countries. This body develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In 2004, it proposed a new capital adequacy framework (“Basel II”) for large, internationally active banking organizations to replace Basel I. Basel II was designed to produce a more risk-sensitive result than its predecessor. However, certain portions of Basel II entail complexities and costs that were expected to preclude their practical application to the majority of U.S. banking organizations that lack the economies of scale needed to absorb the associated expenses.

 

Effective April 1, 2008, the U.S. federal bank regulatory agencies adopted Basel II for application to certain banking organizations in the United States. The new capital adequacy framework applies to organizations that: (i) have consolidated assets of at least $250 billion; or (ii) have consolidated total on-balance sheet foreign exposures of at least $10 billion; or (iii) are eligible to, and elect to, opt-in to the new framework even though not required to do so under clause (i) or (ii) above; or (iv) as a general matter, are subsidiaries of a bank or bank holding company that uses the new rule. During a two-year phase in period, organizations required or electing to apply Basel II will report their capital adequacy calculations separately under both Basel I and Basel II on a “parallel run” basis. Given the high thresholds noted above, FirstBank is not required to apply Basel II and does not expect to apply it in the foreseeable future.

 

On January 21, 2010, the federal banking agencies, including the Federal Reserve Board, issued a final risk-based regulatory capital rule related to the Financial Accounting Standards Board’s adoption of amendments to the accounting requirements relating to transfers of financial assets and variable interests in variable interest entities. These accounting standards make substantive changes to how banks account for securitized assets that are currently excluded from their balance sheets as of the beginning of the Corporation’s 2010 fiscal year. The final regulatory capital rule seeks to better align regulatory capital requirements with actual risks. Under the final rule, banks affected by the new accounting requirements generally will be subject to higher minimum regulatory capital requirements.

 

The final rule permits banks to include without limit in tier 2 capital any increase in the allowance for lease and loan losses calculated as of the implementation date that is attributable to assets consolidated under the requirements of the variable interests accounting requirements. The rule provides an optional delay and phase-in for a maximum of one year for the effect on risk-based capital and the allowance for lease and loan losses related to the assets that must be consolidated as a result of the accounting change. The final rule also eliminates the risk-based capital exemption for asset-backed commercial paper assets. The transitional relief does not apply to the leverage ratio or to assets in conduits to which a bank provides implicit support. Banks will be required to rebuild capital and repair balance sheets to accommodate the new accounting standards by the middle of 2011.

 

Deposit Insurance

 

Under current FDIC regulations, each depository institution is assigned to a risk category based on capital and supervisory measures. In 2009, the FDIC revised the method for calculating the assessment rate for depository institutions by introducing several adjustments to an institution’s initial base assessment rate. A depository institution is assessed premiums by the FDIC based on its risk category as adjusted and the amount

of deposits held. Higher levels of banks failures over the past two years have dramatically increased resolution costs of the FDIC and depleted the deposit insurance fund. In addition, the amount of FDIC insurance coverage for insured deposits has been increased generally from $100,000 per depositor to $250,000 per depositor. In light of the increased stress on the deposit insurance fund caused by these developments, and in order to maintain a strong funding position and restore the reserve ratios of the deposit insurance fund, the FDIC: (i) imposed a special assessment in June, 2009, (ii) increased assessment rates of insured institutions generally, and (iii) required them to prepay on December 30, 2009 the premiums that are expected to become due over the next three years. FirstBank obtained a waiver from the FDIC to make such prepayment.

 

FDIC Capital Requirements

 

The FDIC has promulgated regulations and a statement of policy regarding the capital adequacy of state-chartered non-member banks like FirstBank. These requirements are substantially similar to those adopted by the Federal Reserve Board regarding bank holding companies, as described above.

 

The regulators require that banks meet a risk-based capital standard. The risk-based capital standard for banks requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk-weighted assets of 8%. In determining the amount of risk-weighted assets, weights used (ranging from 0% to 100%) are based on the risks inherent in the type of asset or item. The components of Tier I capital are equivalent to those discussed below under the 3.0% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, mandatorily convertible securities, subordinated debt and intermediate preferred stock and, generally, allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.

 

The capital regulations of the FDIC establish a minimum 3.0% Tier I capital to total assets requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks from 4.0% to 5.0% or more. Under these regulations, the highest-rated banks are those that are not anticipating or experiencing significant growth and have well-diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity and good earnings and, in general, are considered a strong banking organization and are rated composite I under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders’ equity including retained earnings, non-cumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights.

 

In August 1995, the FDIC published a final rule modifying its existing risk-based capital standards to provide for consideration of interest rate risk when assessing the capital adequacy of a bank. Under the final rule, the FDIC must explicitly include a bank’s exposure to declines in the economic value of its capital due to changes in interest rates as a factor in evaluating a bank’s capital adequacy. In June 1996, the FDIC adopted a joint policy statement on interest rate risk. Because market conditions, bank structure, and bank activities vary, the agency concluded that each bank needs to develop its own interest rate risk management program tailored to its needs and circumstances. The policy statement describes prudent principles and practices that are fundamental to sound interest rate risk management, including appropriate board and senior management oversight and a comprehensive risk management process that effectively identifies, measures, monitors and controls such interest rate risk.

 

Failure to meet capital guidelines could subject an insured bank to a variety of prompt corrective actions and enforcement remedies under the FDIA (as amended by Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), and the Riegle Community Development and Regulatory Improvement Act of 1994, including, with respect to an insured bank, the termination of deposit insurance by the FDIC, and certain restrictions on its business.

Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions (including paying dividends), or paying management fees to a holding company if the institution would thereafter be undercapitalized. Institutions that are adequately capitalized but not well-capitalized cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits.

 

The federal bank regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agency’s corrective powers include, among other things:

 

 

A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.

 

As of December 31, 2009, FirstBank was well-capitalized. A bank’s capital category, as determined by applying the prompt corrective action provisions of law, however, may not constitute an accurate representation of the overall financial condition or prospects of the Bank, and should be considered in conjunction with other available information regarding financial condition and results of operations.

 

Set forth below are the Corporation’s, FirstBank’s capital ratios as of December 31, 2009, based on Federal Reserve and FDIC guidelines, respectively.