e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
COMMISSION FILE NUMBER 001-14793
FIRST BANCORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
     
Puerto Rico   66-0561882
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. employer
identification number)
     
1519 Ponce de León Avenue, Stop 23   00908
Santurce, Puerto Rico   (Zip Code)
(Address of principal executive offices)    
(787) 729-8200
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock: 319,557,932 outstanding as of October 31, 2010.
 
 

 


 

FIRST BANCORP.
INDEX PAGE
         
    PAGE
PART I. FINANCIAL INFORMATION
       
Item 1. Financial Statements:
       
    5  
    6  
    7  
    8  
    9  
    10  
    51  
    99  
    99  
 
       
       
    100  
    100  
    115  
    115  
    115  
    115  
    115  
 
       
       
 EX-12.1
 EX-12.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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Forward Looking Statements
     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q or future filings by First BanCorp (the “Corporation”) with the Securities and Exchange Commission (“SEC”), in the Corporation’s press releases, in other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the word or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “should,” “anticipate” and similar expressions are meant to identify “forward-looking statements.”
     First BanCorp wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and represent First BanCorp’s expectations of future conditions or results and are not guarantees of future performance. First BanCorp advises readers that various factors could cause actual results to differ materially from those contained in any “forward-looking statement.” Such factors include, but are not limited to, the following:
    uncertainty about whether the Corporation will be able to fully comply with the written agreement dated June 3, 2010 (the “Agreement”) that the Corporation entered into with the Federal Reserve Bank of New York (the “FED” or “Federal Reserve”) and the order dated June 2, 2010 (the “Order” and collectively with the Agreement, the “Agreements”) that the Corporation’s banking subsidiary, FirstBank Puerto Rico (“FirstBank” or “the Bank”) entered into with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) that, among other things, require the Bank to attain certain capital levels and reduce its special mention, classified, delinquent and non-accrual assets;
 
    uncertainty as to whether the Corporation will be able to issue $500 million of equity so as to meet the remaining substantive condition necessary to compel the United States Department of the Treasury (the “U.S. Treasury”) to convert into common stock the shares of the Corporation’s Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series G (the “Series G Preferred Stock”), that the Corporation issued to the U.S. Treasury;
 
    uncertainty as to whether the Corporation will be able to complete future capital-raising efforts;
 
    uncertainty as to the availability of certain funding sources, such as retail brokered certificates of deposit (“CDs”);
 
    the risk of not being able to fulfill the Corporation’s cash obligations or pay dividends in the future to the Corporation’s stockholders due to the Corporation’s inability to receive approval from the FED to receive dividends from the Corporation’s main banking subsidiary;
 
    the risk of being subject to possible additional regulatory action;
 
    the strength or weakness of the real estate market and of the consumer and commercial credit sector and their impact on the credit quality of the Corporation’s loans and other assets, including the construction and commercial real estate loan portfolios, which have contributed and may continue to contribute to, among other things, the increase in the levels of non-performing assets, charge-offs and the provision expense and may subject the Corporation to further rise from loan defaults and foreclosures;
 
    adverse changes in general economic conditions in the United States and in Puerto Rico, including the interest rate scenario, market liquidity, housing absorption rates, real estate prices and disruptions in the U.S. capital markets, which may reduce interest margins, impact funding sources and affect demand for all of the Corporation’s products and services and the value of the Corporation’s assets, including the value of derivative instruments used for protection from interest rate fluctuations;
 
    the Corporation’s reliance on brokered CDs and its ability to obtain, on a periodic basis, approval to issue brokered CDs to fund operations and provide liquidity in accordance with the terms of the Order;
 
    an adverse change in the Corporation’s ability to attract new clients and retain existing ones;
 
    a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued recession in Puerto Rico and the current fiscal problems and budget deficit of the Puerto Rico government;
 
    a need to recognize additional impairments of financial instruments or goodwill relating to acquisitions;
 
    uncertainty about regulatory and legislative changes for financial services companies in Puerto Rico, the United States and the U.S. and British Virgin Islands, which could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from prior results and anticipated or projected results;

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    uncertainty about the effectiveness of the various actions undertaken to stimulate the U.S. economy and stabilize the U.S. financial markets, and the impact such actions may have on the Corporation’s business, financial condition and results of operations;
 
    changes in the fiscal and monetary policies and regulations of the federal government, including those determined by the FED, the FDIC, government-sponsored housing agencies and local regulators in Puerto Rico and the U.S. and British Virgin Islands;
 
    the risk of possible failure or circumvention of controls and procedures and the risk that the Corporation’s risk management policies may not be adequate;
 
    the risk that the FDIC may further increase the deposit insurance premium and/or require special assessments to replenish its insurance fund, causing an additional increase in the Corporation’s non-interest expense;
 
    risks of not being able to generate sufficient income to realize the benefit of the deferred tax asset;
 
    risks of not being able to recover the assets pledged to Lehman Brothers Special Financing, Inc.;
 
    risks relating to the impact on the price of the Corporation’s common stock of the reverse stock split that the Corporation will effect, prior to requesting effectiveness of the registration statement for the offering of shares of common stock;
 
    changes in the Corporation’s expenses associated with acquisitions and dispositions;
 
    the adverse effect of litigation;
 
    developments in technology;
 
    risks associated with further downgrades in the credit ratings of the Corporation’s long-term senior debt;
 
    general competitive factors and industry consolidation;
 
    risks associated with the depression of the price of the Corporation’s common stock, including the possibility of the Corporation’s common stock being delisted from the New York Stock Exchange (“NYSE”); and
 
    the possible future dilution to holders of the Corporation’s common stock resulting from additional issuances of common stock or securities convertible into common stock.
     The Corporation does not undertake, and specifically disclaims any obligation, to update any of the “forward- looking statements” to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal securities laws.
     Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009 as well as “Part II, Item 1A, Risk Factors,” in this Quarterly Report on Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
                 
    September 30, 2010     December 31, 2009  
ASSETS
               
 
               
Cash and due from banks
  $ 689,132     $ 679,798  
 
           
 
               
Money market investments:
               
Federal funds sold and securities purchased under agreements to resell
    5,769       1,140  
Time deposits with other financial institutions
    1,746       600  
Other short-term investments
    207,979       22,546  
 
           
Total money market investments
    215,494       24,286  
 
           
Investment securities available for sale, at fair value:
               
Securities pledged that can be repledged
    1,370,457       3,021,028  
Other investment securities
    1,605,723       1,149,754  
 
           
Total investment securities available for sale
    2,976,180       4,170,782  
 
           
Investment securities held to maturity, at amortized cost:
               
Securities pledged that can be repledged
    227,757       400,925  
Other investment securities
    262,210       200,694  
 
           
Total investment securities held to maturity, fair value of $513,569 (December 31, 2009 - $621,584)
    489,967       601,619  
 
           
 
               
Other equity securities
    64,310       69,930  
 
           
 
               
Loans, net of allowance for loan and lease losses of $608,526 (December 31, 2009 - $528,120)
    11,571,500       13,400,331  
Loans held for sale, at lower of cost or market
    9,196       20,775  
 
           
Total loans, net
    11,580,696       13,421,106  
 
           
 
               
Premises and equipment, net
    205,782       197,965  
Other real estate owned
    82,706       69,304  
Accrued interest receivable on loans and investments
    61,977       79,867  
Due from customers on acceptances
    754       954  
Other assets
    311,881       312,837  
 
           
Total assets
  $ 16,678,879     $ 19,628,448  
 
           
 
               
LIABILITIES
               
 
               
Deposits:
               
Non-interest-bearing deposits
  $ 703,836     $ 697,022  
Interest-bearing deposits
    11,839,731       11,972,025  
 
           
Total deposits
    12,543,567       12,669,047  
 
               
Loans payable
          900,000  
Securities sold under agreements to repurchase
    1,400,000       3,076,631  
Advances from the Federal Home Loan Bank (FHLB)
    835,440       978,440  
Notes payable (including $11,053 and $13,361 measured at fair value as of September 30, 2010 and December 31, 2009, respectively)
    25,057       27,117  
Other borrowings
    231,959       231,959  
Bank acceptances outstanding
    754       954  
Accounts payable from investment purchases
    159,390        
Accounts payable and other liabilities
    160,733       145,237  
 
           
Total liabilities
    15,356,900       18,029,385  
 
           
 
               
STOCKHOLDERS’ EQUITY
               
 
               
Preferred stock, authorized 50,000,000 shares: issued and outstanding 2,946,046 shares (December 31, 2009 - 22,404,000 shares issued and outstanding) aggregate liquidation value of $487,221 (December 31, 2009 - $950,100)
    411,876       928,508  
 
           
Common stock, $0.10 par value (December 31, 2009 - $1 par value), authorized 2,000,000,000 shares (December 31, 2009 - 250,000,000 shares authorized); issued 329,455,732 shares (December 31, 2009 - 102,440,522 shares issued)
    32,946       102,440  
Less: Treasury stock (at par value)
    (990 )     (9,898 )
 
           
Common stock outstanding, 319,557,932 shares outstanding (December 31, 2009 - 92,542,722 shares outstanding)
    31,956       92,542  
 
           
Additional paid-in capital
    289,640       134,223  
Legal surplus
    299,006       299,006  
Retained earnings
    259,206       118,291  
Accumulated other comprehensive income, net of tax expense of $6,517 (December 31, 2009 - $4,628)
    30,295       26,493  
 
           
Total stockholders’equity
    1,321,979       1,599,063  
 
           
Total liabilities and stockholders’equity
  $ 16,678,879     $ 19,628,448  
 
           
The accompanying notes are an integral part of these statements.

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
                                 
    Quarter Ended     Nine-Month Period Ended  
    September 30,     September 30,     September 30,     September 30,  
(In thousands, except per share information)   2010     2009     2010     2009  
Interest income:
                               
Loans
  $ 171,204     $ 179,956     $ 523,707     $ 553,219  
Investment securities
    32,313       61,881       114,602       199,513  
Money market investments
    511       185       1,571       393  
 
                       
Total interest income
    204,028       242,022       639,880       753,125  
 
                       
 
                               
Interest expense:
                               
Deposits
    61,004       72,163       190,736       246,931  
Loans payable
          463       3,442       1,423  
Federal funds purchased and securities sold under agreements to repurchase
    19,422       28,327       69,739       87,487  
Advances from FHLB
    7,179       8,127       22,460       24,736  
Notes payable and other borrowings
    2,721       3,809       3,876       10,803  
 
                       
Total interest expense
    90,326       112,889       290,253       371,380  
 
                       
Net interest income
    113,702       129,133       349,627       381,745  
 
                       
 
                               
Provision for loan and lease losses
    120,482       148,090       438,240       442,671  
 
                               
Net interest loss after provision for loan and lease losses
    (6,780 )     (18,957 )     (88,613 )     (60,926 )
 
                               
Non-interest income:
                               
Other service charges on loans
    1,963       1,796       5,205       4,848  
Service charges on deposit accounts
    3,325       3,458       10,294       9,950  
Mortgage banking activities
    6,474       3,000       11,114       6,179  
Net gain (loss) on sale of investments
    48,281       34,274       103,885       62,417  
Other-than-temporary impairment losses on investment securities:
                               
Total other-than-temporary impairment losses
                (603 )     (32,929 )
Noncredit-related impairment portion on debt securities not expected to be sold (recognized in other comprehensive income)
          (209 )           31,271  
 
                       
Net impairment losses on investment securities
          (209 )     (603 )     (1,658 )
Rental income
          390             1,246  
Loss on early extinguishment of repurchase agreements
    (47,405 )           (47,405 )      
Other non-interest income
    6,628       7,280       21,627       20,475  
 
                       
Total non-interest income
    19,266       49,989       104,117       103,457  
 
                       
Non-interest expenses:
                               
Employees’ compensation and benefits
    29,849       34,403       92,535       103,117  
Occupancy and equipment
    14,655       15,291       43,957       47,513  
Business promotion
    3,226       2,879       8,771       9,831  
Professional fees
    4,533       3,806       15,424       10,334  
Taxes, other than income taxes
    3,316       3,893       10,954       11,911  
Insurance and supervisory fees
    16,787       7,197       51,911       30,491  
Net loss on real estate owned (REO) operations
    8,193       5,015       22,702       17,016  
Other non-interest expenses
    8,123       10,293       32,401       33,080  
 
                       
Total non-interest expenses
    88,682       82,777       278,655       263,293  
 
                       
 
                               
Loss before income taxes
    (76,196 )     (51,745 )     (263,151 )     (220,762 )
 
                               
Income tax benefit (expense)
    963       (113,473 )     (9,721 )     (1,223 )
 
                       
 
                               
Net loss
  $ (75,233 )   $ (165,218 )   $ (272,872 )   $ (221,985 )
 
                       
 
                               
Net income (loss) available to common stockholders — basic
  $ 357,787     $ (174,689 )   $ 147,826     $ (262,741 )
 
                       
 
                               
Net income (loss) available to common stockholders — diluted
  $ 363,413     $ (174,689 )   $ 153,452     $ (262,741 )
 
                       
 
                               
Net income (loss) per common share:
                               
 
                               
Basic
  $ 2.09     $ (1.89 )   $ 1.24     $ (2.84 )
 
                       
Diluted
  $ 0.28     $ (1.89 )   $ 0.31     $ (2.84 )
 
                       
 
                               
Dividends declared per common share
  $     $     $     $ 0.14  
 
                       
The accompanying notes are an integral part of these statements.

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Nine-Month Period Ended  
    September 30,     September 30,  
(In thousands)   2010     2009  
Cash flows from operating activities:
               
Net loss
  $ (272,872 )   $ (221,985 )
 
           
 
               
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation
    14,879       15,722  
Amortization and impairment of core deposit intangible
    1,927       6,689  
Provision for loan and lease losses
    438,240       442,671  
Deferred income tax expense
    4,584       19,202  
Stock-based compensation recognized
    70       70  
Gain on sale of investments, net
    (103,885 )     (62,417 )
Loss on early extiguishment of repurchase agreements
    47,405        
Other-than-temporary impairments on investment securities
    603       1,658  
Derivatives instruments and hedging activities gain
    (212 )     (13,228 )
Net gain on sale of loans and impairments
    (4,969 )     (5,919 )
Net amortization of premiums and discounts on deferred loan fees and costs
    1,643       724  
Net increase in mortgage loans held for sale
    (2,240 )     (21,145 )
Amortization of broker placement fees
    15,948       17,434  
Net amortization of premium and discounts on investment securities
    4,423       5,706  
Increase (decrease) in accrued income tax payable
    224       (21,919 )
Decrease in accrued interest receivable
    17,890       19,010  
Decrease in accrued interest payable
    (8,881 )     (24,472 )
Decrease in other assets
    8,342       41,716  
Increase (decrease) in other liabilities
    12,572       (4,521 )
 
           
Total adjustments
    448,563       416,981  
 
           
 
               
Net cash provided by operating activities
    175,691       194,996  
 
           
 
               
Cash flows from investing activities:
               
Principal collected on loans
    3,047,448       2,267,772  
Loans originated
    (1,986,355 )     (3,362,850 )
Purchases of loans
    (114,089 )     (142,446 )
Proceeds from sale of loans
    204,369       9,510  
Proceeds from sale of repossessed assets
    72,043       50,035  
Proceeds from sale of available-for-sale securities
    2,353,364       1,038,814  
Purchases of securities held to maturity
    (8,475 )     (8,460 )
Purchases of securities available for sale
    (2,350,520 )     (2,781,394 )
Proceeds from principal repayments and maturities of securities held to maturity
    118,032       1,066,778  
Proceeds from principal repayments of securities available for sale
    1,613,491       721,056  
Additions to premises and equipment
    (22,696 )     (32,625 )
Proceeds from sale of other investment securities
    10,668       4,032  
Decrease (increase) in other equity securities
    5,370       (14,785 )
 
           
Net cash provided by (used in) investing activities
    2,942,650       (1,184,563 )
 
           
 
               
Cash flows from financing activities:
               
Net decrease in deposits
    (142,678 )     (758,078 )
Net (decrease) increase in loans payable
    (900,000 )     700,000  
Net (repayments) proceeds and cancellation costs of securities sold under agreements to repurchase
    (1,724,036 )     361,092  
Net FHLB advances (paid) taken
    (143,000 )     140,000  
Dividends paid
          (43,066 )
Issuance of preferred stock and associated warrant
          400,000  
Issuance costs of common stock issued in exchange for preferred stock Series A through E
    (8,085 )      
Other financing activities
          8  
 
           
Net cash (used in) provided by financing activities
    (2,917,799 )     799,956  
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    200,542       (189,611 )
 
               
Cash and cash equivalents at beginning of period
    704,084       405,733  
 
           
Cash and cash equivalents at end of period
  $ 904,626     $ 216,122  
 
           
 
               
Cash and cash equivalents include:
               
Cash and due from banks
  $ 689,132     $ 124,131  
Money market instruments
    215,494       91,991  
 
           
 
  $ 904,626     $ 216,122  
 
           
The accompanying notes are an integral part of these statements.

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
                 
    Nine-Month Period Ended  
    September 30,     September 30,  
    2010     2009  
Preferred Stock:
               
Balance at beginning of period
  $ 928,508     $ 550,100  
Issuance of preferred stock — Series F
          400,000  
Preferred stock discount — Series F
          (25,820 )
Accretion of preferred stock discount — Series F
    2,567       3,094  
Exchange of preferred stock — Series A through E
    (487,053 )      
Exchange of preferred stock — Series F
    (400,000 )      
Reversal of unaccreted preferred stock discount — Series F
    19,025        
Issuance of preferred stock — Series G
    424,174        
Preferred stock discount — Series G
    (76,788 )      
Accretion of preferred stock discount — Series G
    1,443        
 
           
Balance at end of period
    411,876       927,374  
 
           
 
               
Common Stock outstanding:
               
Balance at the beginning of the period
    92,542       92,546  
Restricted stock forfeited
          (4 )
Change in par value (from $1.00 to $0.10)
    (83,287 )      
Common stock issued in exchange of Series A through E preferred stock
    22,701        
 
           
Balance at end of period
    31,956       92,542  
 
           
 
               
Additional Paid-In-Capital:
               
Balance at beginning of period
    134,223       108,299  
Issuance of common stock warrants
          25,820  
Restricted stock forfeited
          4  
Stock-based compensation recognized
    70       70  
Fair value adjustment on amended common stock warrant
    1,179        
Common stock issued in exchange of Series A through E preferred stock
    68,105        
Issuance costs of common stock issued in exchange of Series A through E preferred stock
    (8,085 )      
Reversal of issuance costs of Series A through E preferred stock exchanged
    10,861        
Change in par value (from $1.00 to$0.10)
    83,287        
Other
          8  
 
           
Balance at end of period
    289,640       134,201  
 
           
 
               
Legal Surplus
    299,006       299,006  
 
           
 
               
Retained Earnings:
               
Balance at beginning of period
    118,291       440,777  
Net loss
    (272,872 )     (221,985 )
Cash dividends declared on common stock
          (12,966 )
Cash dividends declared on preferred stock
          (30,106 )
Accretion of preferred stock discount — Series F
    (2,567 )     (3,095 )
Stock dividend granted of Series F preferred stock
    (24,174 )      
Excess of carrying amount of Series A though E preferred stock exchanged over fair value of new shares of common stock
    385,387        
Preferred stock discount — Series G
    76,788        
Reversal of unaccreted discount — Series F
    (19,025 )      
Fair value adjustment on amended common stock warrant
    (1,179 )      
Accretion of preferred stock discount — Series G
    (1,443 )      
 
           
Balance at end of period
    259,206       172,625  
 
           
 
               
Accumulated Other Comprehensive Income, net of tax:
               
Balance at beginning of period
    26,493       57,389  
Other comprehensive income, net of tax
    3,802       15,706  
 
           
Balance at end of period
    30,295       73,095  
 
           
 
               
Total stockholders’equity
  $ 1,321,979     $ 1,698,843  
 
           
The accompanying notes are an integral part of these statements.

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
                                 
    Quarter Ended     Nine-Month Period Ended  
    September 30,     September 30,     September 30,     September 30,  
(In thousands)   2010     2009     2010     2009  
Net loss
  $ (75,233 )   $ (165,218 )   $ (272,872 )   $ (221,985 )
 
                       
 
                               
Unrealized losses on available-for-sale debt securities on which an other-than-temporary impairment has been recognized:
                               
 
                               
Noncredit-related impairment losses on debt securities not expected to be sold
          209             (31,271 )
Reclassification adjustment for other-than-temporary impairment on debt securities included in net income
          209             1,270  
 
                               
All other unrealized gains and losses on available-for-sale securities:
                               
All other unrealized holding gain arising during the period
    10,529       59,708       99,057       109,577  
Reclassification adjustments for net gain included in net income
    (48,783 )     (30,242 )     (93,719 )     (58,385 )
Reclassification adjustments for other-than-temporary impairment on equity securities
                353       388  
 
                               
Income tax benefit (expense) related to items of other comprehensive income
    5,238       (3,171 )     (1,889 )     (5,873 )
 
                       
 
                               
Other comprehensive (loss) income for the period, net of tax
    (33,016 )     26,713       3,802       15,706  
 
                       
 
                               
Total comprehensive loss
  $ (108,249 )   $ (138,505 )   $ (269,070 )   $ (206,279 )
 
                       
The accompanying notes are an integral part of these statements.

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FIRST BANCORP
PART I — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
     The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Corporation’s Audited Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, accordingly, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2009, included in the Corporation’s 2009 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.
     The results of operations for the quarter and nine-month period ended September 30, 2010 are not necessarily indicative of the results to be expected for the entire year.
Capital and Liquidity
     The Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. Sustained weak economic conditions that have severely affected Puerto Rico and the United States over the last several years have adversely impacted First BanCorp’s results of operations and capital levels. The net loss in 2009, primarily related to credit losses, the valuation allowance on deferred tax assets and an increase in the deposit insurance premium, reduced the Corporation’s capital levels during 2009. The net loss for the nine-month period ended September 30, 2010 was primarily driven by credit losses. The decrease in regulatory capital ratios during the first nine-months of 2010 was not significant since the net loss reported for the period was almost entirely offset by a decrease in risk-weighted assets, consistent with the Corporation’s decision to deleverage its balance sheet to preserve its capital position. As of September 30, 2010, the Corporation’s Total, Tier 1 capital and Leverage ratios were 13.26%, 11.96% and 8.34%, respectively, compared to 13.44%, 12.16% and 8.91%, respectively, as of December 31, 2009.
     As described in Note 18, Regulatory Matters, FirstBank is currently operating under a Consent Order ( the “Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and First BanCorp has entered into a Written Agreement (the “Written Agreement” and collectively with the Order the “Agreements”) with the Board of Governors of the Federal Reserve System (the “FED” or “Federal Reserve”).
     As previously reported, the Corporation submitted a Capital Plan to the FED and the FDIC in July 2010. The primary objective of this Capital Plan is to improve the Corporation’s capital structure in order to 1) enhance its ability to operate in the current economic environment, 2) be in a position to continue executing business strategies to return to profitability and 3) achieve certain minimum capital ratios set forth in the FDIC Order over time. The minimum capital ratios are 8% for Leverage (Tier 1 Capital to Average Total Assets), 10% for Tier 1 Capital to Risk-Weighted Assets and 12% for Total Capital to Risk-Weighted Assets. The Capital Plan sets forth the following capital restructuring initiatives as well as various deleveraging strategies:
  1.   The exchange of shares of the Corporation’s preferred stock held by the U.S. Treasury for common stock;
 
  2.   The exchange of shares of the Corporation’s common stock for any and all of the Corporation’s outstanding Series A through E Preferred Stock; and
 
  3.   A $500 million capital raise through the issuance of new common shares for cash.
     During the third quarter of 2010, the Corporation completed transactions designed to accomplish the first two initiatives. On July 20, 2010, the Corporation closed a transaction with the U.S. Treasury for the exchange of the $400 million of Fixed Rate Cumulative Perpetual Preferred Stock, Series F (the “Series F Preferred Stock”) that the U.S. Treasury acquired pursuant to the TARP Capital Purchase Program, and dividends accrued on such stock, for new shares of Series G Preferred Stock. A key benefit of this transaction was obtaining the right, under the terms of the new Series G Preferred Stock, to compel the conversion of this stock into shares of the Corporation’s common stock, provided that the Corporation meets a number of conditions. On August 30, 2010, the Corporation completed its offer to issue shares of its common stock in exchange for its outstanding Series A through E Preferred Stock (the “Exchange Offer”), which resulted in the issuance of 227,015,210 new shares of common stock in exchange for 19,482,128 shares of preferred stock with an aggregate liquidation amount of $487 million, or 89% of the outstanding Series A through E preferred stock.

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     In addition, on August 24, 2010, the Corporation obtained its stockholders’ approval to increase the number of authorized shares of common stock from 750 million to 2 billion and decrease the par value of its common stock from $1.00 to $0.10 per share. These approvals and the issuance of common stock in exchange for Series A through E Preferred Stock satisfy all but one of the substantive conditions to the Corporation’s ability to compel the conversion of the 424,174 shares of the new Series G Preferred Stock, issued to the U.S. Treasury. The other substantive condition to the Corporation’s ability to compel the conversion of the Series G Preferred Stock is the issuance of a minimum aggregate amount 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.
     These first two initiatives were designed to improve the Corporation’s ability to successfully raise additional capital through a sale of its common stock, which is the last component of the Capital Plan. On September 16, 2010, the Corporation filed a registration statement for a proposed underwritten public offering of $500 million ($575 million including an over allotment option) of its common stock with the SEC. The completion of the Exchange Offer and the issuance of the Series G Preferred Stock to the U.S. Treasury resulted in significant improvements in the Corporation’s Tangible and Tier 1 common equity ratios which improved to 5.21% and 6.62%, respectively, as of September 30, 2010 from 3.20% and 4.10%, respectively, as of December 31, 2009. (For information about and a reconciliation of these non-GAAP measures, see Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD &A”) — Risk Management — Capital — Capital Restructuring Initiatives.”) These capital transactions completed during the third quarter of 2010 are further discussed in Note 17.
     The Corporation has deleveraged its balance sheet in order to preserve capital, principally by selling investments and reducing the size of the loan portfolio. The decrease in securities and loans resulting from deleveraging and balance sheet repositioning strategies allowed a reduction of $3.6 billion in wholesale funding during 2010, including repurchase agreements, advances and traditional brokered CDs (“brokered CDs”). Such reductions were partially offset by increases in retail deposits. Significant decreases in risk-weighted assets have been achieved mainly through the non-renewal of commercial loans with 100% risk weightings, such as temporary loan facilities to the Puerto Rico and Virgin Islands governments, through the charge-offs of portions of loans deemed uncollectible and, to a lesser extent, the sale of non-performing loans. In addition, a reduced volume of loan originations contributed to this deleveraging strategy and partially offset the effect of net losses on capital ratios.
     Both the Corporation and the Bank actively manage liquidity and cash flow needs. The Corporation does not have any unsecured debt, other than brokered CDs, maturing during the remaining of 2010; additionally, it suspended common and preferred dividends to stockholders effective August 2009. As of September 30, 2010, the holding company had $43.2 million of cash and cash equivalents. Cash and cash equivalents at the Bank as of September 30, 2010 were approximately $904.3 million. The Bank has $100 million and $426 million in repurchase agreements and FHLB advances, respectively, maturing over the next year and $7.4 million in notes that mature prior to September 30, 2011. In addition, it had $6.7 billion in brokered deposits as of September 30, 2010 of which $3.2 billion mature over the next year. Liquidity at the bank level is highly dependent on bank deposits, which fund 75.56% of the Bank’s assets (or 35.43% excluding brokered CDs). At September 30, 2010, the Bank held approximately $843 million of readily pledgeable or saleable investment securities.
     The Corporation’s credit as a long-term issuer is currently rated CCC+ by Standard & Poor’s (“S&P”) and B- by Fitch Ratings Limited (“Fitch”); both with negative outlook. At the FirstBank subsidiary level, long-term issuer rating is currently B3 by Moody’s Investor Service (“Moody’s”), six notches below their definition of investment grade; CCC+ by S&P seven notches below their definition of investment grade, and B- by Fitch, six notches below their definition of investment grade. The outlook on the Bank’s credit ratings from the three rating agencies is negative. During the second quarter of 2010, the Corporation and its subsidiary bank suffered credit rating downgrades from Moody’s (B1 to B3), S&P (B to CCC+), and Fitch (B to B-) rating services. Furthermore, on June 2010, Moody’s and Fitch placed the Corporation on “Credit Watch Negative” and S&P placed a “Negative Outlook”. The Corporation does not have any outstanding debt or derivative agreements that would be affected by the recent credit downgrades. Furthermore, given our non-reliance on corporate debt or other instruments directly linked in terms of pricing or volume to credit ratings, the liquidity of the Corporation so far has also not been affected in any material way by the downgrades. The Corporation’s ability to access new non-deposit funding, however, could be adversely affected by these credit ratings and any additional downgrades.
     Based on current and expected liquidity needs and sources, management expects First BanCorp to be able to meet its obligations for a reasonable period of time. The Corporation has $3.2 billion of brokered CDs maturing within twelve months from September 30, 2010. While the Corporation has increased its liquidity levels due to the current economic environment, it has continued to issue brokered CDs pursuant to temporary approvals received from the FDIC to renew or roll over certain amounts of brokered CDs through December 31, 2010. Management anticipates it will continue to obtain waivers from the restrictions to issue brokered CDs under the Order to meet its obligations and execute its business plans. If unanticipated market factors emerge, or if the Corporation is unable to raise additional capital or complete identified capital preservation initiatives, successfully execute its strategic operating plans, issue a sufficient amount of brokered deposits or comply with the Order, its banking regulators could take further action, which could include actions that may have a material adverse effect on the Corporation’s business, results of operations and financial position.

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Adoption of new accounting requirements and recently issued but not yet effective accounting requirements
     The Financial Accounting Standards Board (“FASB”) has issued the following accounting pronouncements and guidance relevant to the Corporation’s operations:
     In June 2009, the FASB amended the existing guidance on the accounting for transfers of financial assets, to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets, the effects of a transfer on its financial position, financial performance, and cash flows, and a transferor’s continuing involvement, if any, in transferred financial assets. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Subsequently in December 2009, the FASB amended the existing guidance issued in June 2009. Among the most significant changes and additions to this guidance are changes to the conditions for sales of a financial asset based on whether a transferor and its consolidated affiliates included in the financial statements have surrendered control over the transferred financial asset or third party beneficial interest; and the addition of the term participating interest, which represents a proportionate (pro rata) ownership interest in an entire financial asset. The Corporation adopted the guidance with no material impact on its financial statements.
     In June 2009, the FASB amended the existing guidance on the consolidation of variable interests to improve financial reporting by enterprises involved with variable interest entities and address (i) the effects of the elimination of the qualifying special-purpose entity concept in the accounting for transfer of financial assets guidance, and (ii) constituent concerns about the application of certain key provisions of the guidance, including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Subsequently in December 2009, the FASB amended the existing guidance issued in June 2009. Among the most significant changes and additions to the guidance is the replacement of the quantitative based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. The Corporation adopted the guidance with no material impact on its financial statements.
     In January 2010, the FASB updated the Accounting Standards Codification (“Codification”) to provide guidance to improve disclosure requirements related to fair value measurements and require reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. Currently, entities are only required to disclose activity in Level 3 measurements in the fair-value hierarchy on a net basis. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. Entities are required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair-value hierarchy and the reasons for the transfers. Significance will be determined based on earnings and total assets or total liabilities or, when changes in fair value are recognized in other comprehensive income, based on total equity. A reporting entity must disclose and consistently follow its policy for determining when transfers between levels are recognized. Acceptable methods for determining when to recognize transfers include: (i) actual date of the event or change in circumstances causing the transfer; (ii) beginning of the reporting period; and (iii) end of the reporting period. The guidance requires disclosure of fair-value measurements by “class” instead of “major category.” A class is generally a subset of assets and liabilities within a financial statement line item and is based on the specific nature and risks of the assets and liabilities and their classification in the fair-value hierarchy. When determining classes, reporting entities must also consider the level of disaggregated information required by other applicable GAAP. For fair-value measurements using significant observable inputs (Level 2) or significant unobservable inputs (Level 3), this guidance requires reporting entities to disclose the valuation technique and the inputs used in determining fair value for each class of assets and liabilities. If the valuation technique has changed in the reporting period (e.g., from a market approach to an income approach) or if an additional valuation technique is used, entities are required to disclose the change and the reason for making the change. Except for the detailed Level 3 roll forward disclosures, the guidance is effective for annual and interim reporting periods beginning after December 15, 2009 (first quarter of 2010 for public companies with calendar year-ends). The new disclosures about purchases, sales, issuances, and settlements in the roll forward activity for Level 3 fair value measurements are effective for interim and annual reporting periods beginning after December 15, 2010 (first quarter of 2011 for public companies with calendar year-ends). Early adoption is permitted. In the initial adoption period, entities are not required to include disclosures for previous comparative periods; however, they are required for periods ending after initial adoption. The Corporation adopted the guidance in the first quarter of 2010 and the required disclosures are presented in Note 20 — Fair Value.
     In February 2010, the FASB updated the Codification to provide guidance to improve disclosure requirements related to the recognition and disclosure of subsequent events. The amendment establishes that an entity that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) is required to evaluate subsequent events through the date that the financial

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statements are issued. If an entity meets neither of those criteria, then it should evaluate subsequent events through the date the financial statements are available to be issued. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. Also, the scope of the reissuance disclosure requirements has been refined to include revised financial statements only. Revised financial statements include financial statements revised either as a result of the correction of an error or retrospective application of GAAP. The guidance in this update was effective on the date of issuance in February. The Corporation has adopted this guidance; refer to Note 25 — Subsequent events.
     In February 2010, the FASB updated the Codification to provide guidance on the deferral of consolidation requirements for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered qualifying special purpose entities. In addition, the deferral applies to a reporting entity’s interest in an entity that is required to comply or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities. The guidance also clarifies that for entities that do not qualify for the deferral, related parties should be considered for determining whether a decision maker or service provider fee represents a variable interest. In addition, the requirements for evaluating whether a decision maker’s or service provider’s fee is a variable interest are modified to clarify the FASB’s intention that a quantitative calculation should not be the sole basis for this evaluation. The guidance was effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of this guidance did not have an impact in the Corporation’s consolidated financial statements.
     In March 2010, the FASB updated the Codification to provide clarification on the scope exception related to embedded credit derivatives related to the transfer of credit risk in the form of subordination of one financial instrument to another. The transfer of credit risk that is only in the form of subordination of one financial instrument to another (thereby redistributing credit risk) is an embedded derivative feature that should not be subject to potential bifurcation and separate accounting. The amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed under this guidance. The Corporation may elect the fair value option for any investment in a beneficial interest in a securitized financial asset. The guidance is effective for the first fiscal quarter beginning after June 15, 2010. The adoption of this guidance did not have an impact in the Corporation’s consolidated financial statements.
     In April 2010, the FASB updated the codification to provide guidance on the effects of a loan modification when a loan is part of a pool that is accounted for as a single asset. Modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this Update are effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively and early application is permitted. The adoption of this guidance did not have an impact in the Corporation’s consolidated financial statements.
     In July 2010, the FASB updated the codification to expand the disclosure requirements regarding credit quality of financing receivables and the allowance for credit losses. The objectives of the enhanced disclosures are to provide information that will enable readers of financial statements to understand the nature of credit risk in a company’s financing receivables, how that risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period. An entity should provide disclosures on a disaggregated basis for portfolio segments and classes of financing receivable. The amendments in this Update are effective for both interim and annual reporting period ending after December 15, 2010. The Corporation is currently evaluating the impact of the adoption of this guidance on its financial statements.

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2 — EARNINGS PER COMMON SHARE
     The calculations of earnings per common share for the quarters and nine-month periods ended on September 30, 2010 and 2009 are as follows:
                                 
    Quarter Ended     Nine-Month Period Ended  
    September 30,     September 30,     September 30,     September 30,  
(In thousands, except per share information)   2010     2009     2010     2009  
Net loss
  $ (75,233 )   $ (165,218 )   $ (272,872 )   $ (221,985 )
Non-cumulative preferred stock dividends (Series A through E)
          (3,356 )           (23,494 )
Cumulative non-convertible preferred stock dividends (Series F)
    (1,618 )     (5,000 )     (11,618 )     (14,167 )
Cumulative convertible preferred stock dividend (Series G)
    (4,183 )           (4,183 )      
Preferred stock discount accretion (Series F and G)
    (1,688 )     (1,115 )     (4,010 )     (3,095 )
Favorable impact from issuing common stock in exchange for Series A through E preferred stock, net of issuance costs (1) (Refer to Note 17)
    385,387             385,387        
Favorable impact from issuing Series G mandatorily convertible preferred stock in exchange for Series F preferred stock (2) (Refer to Note 17)
    55,122             55,122        
 
                       
Net income (loss) available to common stockholders — basic
  $ 357,787     $ (174,689 )   $ 147,826     $ (262,741 )
Convertible preferred stock dividends and accretion
    5,626             5,626        
 
                       
Net income (loss) available to common stockholders — diluted
  $ 363,413     $ (174,689 )   $ 153,452     $ (262,741 )
 
                       
 
                               
Average common shares outstanding
    171,483       92,511       119,131       92,511  
Average potential common shares (3)
    1,126,792             379,725        
 
                       
Average common shares outstanding — assuming dilution
    1,298,275       92,511       498,856       92,511  
 
                       
 
                               
Basic earnings (loss) per common share
  $ 2.09     $ (1.89 )   $ 1.24     $ (2.84 )
 
                       
Diluted earnings (loss) per common share
  $ 0.28     $ (1.89 )   $ 0.31     $ (2.84 )
 
                       
 
(1)   Excess of carrying amount of Series A through E preferred stock exchanged over the fair value of new common shares issued.
 
(2)   Excess of carrying amount of Series F preferred stock exchanged and original warrant over the fair value of new Series G preferred stock issued and amended warrant.
 
(3)   Assumes conversion of the Series G convertible preferred stock at the time of issuance based on the most advantageous conversion rate from the standpoint of the security holder
     Earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average common shares issued and outstanding. Net income (loss) available to common stockholders represents net income (loss) adjusted for preferred stock dividends including dividends declared, and cumulative dividends related to the current dividend period that have not been declared as of the end of the period, and the accretion of discount on preferred stock issuances. For 2010 the net income available to common stockholders also includes the one-time effect of the issuance of common stock in exchange for shares of the Series A through E Preferred Stock and the issuance of a new Series G Preferred Stock in exchange for the Series F Preferred Stock. The Exchange Offer and the issuance of the Series G Preferred Stock to the U.S. Treasury are discussed in Note 17 to the consolidated financial statements. Basic weighted average common shares outstanding exclude unvested shares of restricted stock.
     Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested shares of restricted stock, and outstanding warrants using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options, unvested shares of restricted stock, and outstanding warrants that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. For the quarter and nine-month periods ended September 30, 2010 and 2009, there were 2,072,200 and 2,546,310, respectively, outstanding stock options, as well as warrants outstanding to purchase 5,842,259 shares of common stock that were excluded from the computation of diluted earnings per common share because their inclusion would have an antidilutive effect. Approximately 21,477 and 32,216 unvested shares of restricted stock outstanding as of September 30, 2010 and 2009 were excluded from the computation of earnings per share.
     The Series G Preferred Stock is included in the calculation of earnings per share in 2010 as all shares are assumed converted at the time of issuance of the Series G Preferred Stock, under the if converted method. The amount of potential common shares was obtained based on the most advantageous conversion rate from the standpoint of the security holder and assuming the Corporation will not be able to compel conversion until the seven-year anniversary, at which date the conversion price would be based on the

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Corporation’s stock price in the open market and conversion would be based on the full liquidation value of $1,000 per share, or a conversion rate of 3,347.84 shares of common stock for each share of Series G convertible preferred stock.
3 — STOCK OPTION PLAN
     Between 1997 and January 2007, the Corporation had a stock option plan (the “1997 stock option plan”) that authorized the granting of up to 8,696,112 options on shares of the Corporation’s common stock to eligible employees. The options granted under the plan could not exceed 20% of the number of common shares outstanding. Each option provides for the purchase of one share of common stock at a price not less than the fair market value of the stock on the date the option was granted. Stock options were fully vested upon grant. The maximum term to exercise the options is ten years. The stock option plan provides for a proportionate adjustment in the exercise price and the number of shares that can be purchased in the event of a stock dividend, stock split, reclassification of stock, merger or reorganization and certain other issuances and distributions such as stock appreciation rights.
     Under the 1997 stock option plan, the Compensation and Benefits Committee (the “Compensation Committee”) had the authority to grant stock appreciation rights at any time subsequent to the grant of an option. Pursuant to stock appreciation rights, the optionee surrenders the right to exercise an option granted under the plan in consideration for payment by the Corporation of an amount equal to the excess of the fair market value of the shares of common stock subject to such option surrendered over the total option price of such shares. Any option surrendered is cancelled by the Corporation and the shares subject to the option are not eligible for further grants under the option plan. On January 21, 2007, the 1997 stock option plan expired; all outstanding awards granted under this plan continue in full force and effect, subject to their original terms. No awards for shares could be granted under the 1997 stock option plan as of its expiration.
     On April 29, 2008, the Corporation’s stockholders approved the First BanCorp 2008 Omnibus Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. This plan allows the issuance of up to 3,800,000 shares of common stock, subject to adjustments for stock splits, reorganization and other similar events. The Corporation’s Board of Directors, upon receiving the relevant recommendation of the Compensation Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards subject to various limits and vesting restrictions that apply to individual and aggregate awards. Shares delivered pursuant to an award may consist, in whole or in part, of authorized and unissued shares of Common Stock or shares of Common Stock acquired by the Corporation. During the fourth quarter of 2008, the Corporation granted 36,243 shares of restricted stock with a fair value of $8.69 under the Omnibus Plan to the Corporation’s independent directors, of which 4,027 were forfeited in the second half of 2009 and 10,739 have vested.
     For the quarter and nine-month period ended September 30, 2010, the Corporation recognized $23,333 and $69,999, respectively, of stock-based compensation expense related to the aforementioned restricted stock awards. The total unrecognized compensation cost related to the non-vested restricted shares was $143,890 as of September 30, 2010 and is expected to be recognized over the next 1.2 years.
     There were no stock options granted during 2010 and 2009, therefore, no compensation associated with stock options was recorded in those years.
     Stock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based awards which will be forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a significant effect on share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period in which the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. When unvested options or shares of restricted stock are forfeited, any compensation expense previously recognized on the forfeited awards is reversed in the period of the forfeiture.

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The activity of stock options for the nine-month period ended September 30, 2010 is set forth below:
                                 
    Nine-month period ended  
    September 30, 2010  
                    Weighted-Average        
                    Remaining     Aggregate  
    Number of     Weighted-Average     Contractual Term     Intrinsic Value  
    Options     Exercise Price     (Years)     (In thousands)  
Beginning of period
    2,481,310     $ 13.46                  
Options cancelled
    (409,110 )     14.60                  
 
                           
End of period outstanding and exercisable
    2,072,200     $ 13.24       4.6     $  
 
                       
No stock options were exercised during the first nine months of 2010 or 2009.
4 — INVESTMENT SECURITIES
Investment Securities Available for Sale
     The amortized cost, non-credit loss component of other-than-temporary impairment (“OTTI”) on securities recorded in other comprehensive income (“OCI”), gross unrealized gains and losses recorded in OCI, approximate fair value, weighted-average yield and contractual maturities of investment securities available for sale as of September 30, 2010 and December 31, 2009 were as follows:
                                                                                                 
    September 30, 2010     December 31, 2009  
            Non-Credit                                             Non-Credit                      
            Loss Component     Gross             Weighted             Loss Component     Gross             Weighted  
    Amortized     of OTTI     Unrealized     Fair     average     Amortized     of OTTI     Unrealized     Fair     average  
    cost     Recorded in OCI     gains     losses     value     yield%     cost     Recorded in OCI     gains     losses     value     yield%  
    (Dollars in thousands)  
U.S. Treasury securities:
                                                                                               
After 1 to 5 years
  $ 599,959     $     $ 11,981     $     $ 611,940       1.34     $     $     $     $     $        
Obligations of U.S. Government sponsored agencies:
                                                                                               
After 1 to 5 years
    707,333             4,383             711,716       1.40       1,139,577             5,562             1,145,139       2.12  
Puerto Rico Government obligations:
                                                                                               
Due within one year
                                        12,016             1       28       11,989       1.82  
After 1 to 5 years
    126,682             588       14       127,256       5.33       113,232             302       47       113,487       5.40  
After 5 to 10 years
    104,331             187             104,518       5.18       6,992             328       90       7,230       5.88  
After 10 years
    4,719                   13       4,706       6.21       3,529             91             3,620       5.42  
 
                                                                       
United States and Puerto Rico Government obligations
    1,543,024             17,139       27       1,560,136       1.97       1,275,346             6,284       165       1,281,465       2.44  
 
                                                                       
Mortgage-backed securities:
                                                                                               
FHLMC certificates:
                                                                                               
After 1 to 5 years
                                        30                         30       5.54  
After 10 years
    1,934             118             2,052       5.00       705,818             18,388       1,987       722,219       4.66  
 
                                                                       
 
    1,934             118             2,052       5.00       705,848             18,388       1,987       722,249       4.66  
 
                                                                       
GNMA certificates:
                                                                                               
After 1 to 5 years
    38             3             41       6.49       69             3             72       6.56  
After 5 to 10 years
    1,398             79             1,477       4.76       808             39             847       5.47  
After 10 years
    948,009             33,902       824       981,087       4.27       407,565             10,808       980       417,393       5.12  
 
                                                                       
 
    949,445             33,984       824       982,605       4.27       408,442             10,850       980       418,312       5.12  
 
                                                                       
FNMA certificates:
                                                                                               
After 5 to 10 years
    82,373             4,697             87,070       4.48       101,781             3,716       91       105,406       4.55  
After 10 years
    137,957             8,408             146,365       5.51       1,374,533             30,629       2,776       1,402,386       4.51  
 
                                                                       
 
    220,330             13,105             233,435       5.12       1,476,314             34,345       2,867       1,507,792       4.51  
 
                                                                       
Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA:
                                                                                               
After 10 years
    118,771             1,710             120,481       0.99       156,086             633       412       156,307       0.99  
 
                                                                       
Other mortgage pass-through trust certificates:
                                                                                               
After 10 years
    105,184       27,785       1             77,400       2.26       117,198       32,846       2             84,354       2.30  
 
                                                                       
Total mortgage-backed securities
    1,395,664       27,785       48,918       824       1,415,973       3.97       2,863,888       32,846       64,218       6,246       2,889,014       4.35  
 
                                                                       
Equity securities (without contractual maturity) (1)
    77                   6       71             427             81       205       303        
 
                                                                       
 
                                                                                               
Total investment securities available for sale
  $ 2,938,765     $ 27,785     $ 66,057     $ 857     $ 2,976,180       2.92     $ 4,139,661     $ 32,846     $ 70,583     $ 6,616     $ 4,170,782       3.76  
 
                                                                       
 
(1)   Represents common shares of other financial institutions in Puerto Rico.
     Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options as was the case with approximately $1.2 billion of investment securities (mainly U.S. agency debt securities) called during 2010. The weighted-average yield on investment securities available for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on securities available for sale and the non-credit loss component of OTTI are presented as part of OCI.
     The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as

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of September 30, 2010 and December 31, 2009. It also includes debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings:
                                                 
    As of September 30, 2010  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Debt securities
                                               
 
                                               
Puerto Rico Government obligations
  $ 14,692     $ 27     $     $     $ 14,692     $ 27  
Mortgage-backed securities
                                               
GNMA
    171,468       824                   171,468       824  
Other mortgage pass-through trust certificates
                77,177       27,785       77,177       27,785  
Equity securities
    71       6                   71       6  
 
                                   
 
  $ 186,231     $ 857     $ 77,177     $ 27,785     $ 263,408     $ 28,642  
 
                                   
                                                 
    As of December 31, 2009  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Debt securities
                                               
 
                                               
Puerto Rico Government obligations
  $ 14,760     $ 118     $ 9,113     $ 47     $ 23,873     $ 165  
Mortgage-backed securities
                                               
FHLMC
    236,925       1,987                   236,925       1,987  
GNMA
    72,178       980                   72,178       980  
FNMA
    415,601       2,867                   415,601       2,867  
Collateralized mortgage obligations issued or guaranteed by FHLMC, FNMA and GNMA
    105,075       412                   105,075       412  
Other mortgage pass-through trust certificates
                84,105       32,846       84,105       32,846  
Equity securities
    90       205                   90       205  
 
                                   
 
  $ 844,629     $ 6,569     $ 93,218     $ 32,893     $ 937,847     $ 39,462  
 
                                   

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Investments Held to Maturity
     The amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of investment securities held to maturity as of September 30, 2010 and December 31, 2009 were as follows:
                                                                                 
    September 30, 2010     December 31, 2009  
            Gross             Weighted             Gross             Weighted  
    Amortized     Unrealized     Fair     average     Amortized     Unrealized     Fair     average  
    cost     gains     losses     value     yield%     cost     gains     losses     value     yield%  
                                    (Dollars in thousands)                                  
U.S. Treasury securities:
                                                                               
Due within 1 year
  $ 8,480     $ 5     $     $ 8,485       0.30     $ 8,480     $ 12     $     $ 8,492       0.47  
Puerto Rico Government obligations:
                                                                               
After 5 to 10 years
    19,106       975             20,081       5.86       18,584       564       93       19,055       5.86  
After 10 years
    4,731       112             4,843       5.50       4,995       77             5,072       5.50  
 
                                                           
United States and Puerto Rico Government obligations
    32,317       1,092             33,409       4.35       32,059       653       93       32,619       4.38  
 
                                                           
 
                                                                               
Mortgage-backed securities:
                                                                               
FHLMC certificates:
                                                                               
After 1 to 5 years
    3,100       52             3,152       3.80       5,015       78             5,093       3.79  
FNMA certificates:
                                                                               
After 1 to 5 years
    3,011       65             3,076       3.87       4,771       100             4,871       3.87  
After 5 to 10 years
    426,506       22,146             448,652       4.47       533,593       19,548             553,141       4.47  
After 10 years
    23,033       895             23,928       5.33       24,181       479             24,660       5.30  
 
                                                           
Mortgage-backed securities
    455,650       23,158             478,808       4.50       567,560       20,205             587,765       4.49  
 
                                                           
 
                                                                               
Corporate bonds:
                                                                               
After 10 years
    2,000             648       1,352       5.80       2,000             800       1,200       5.80  
 
                                                           
 
                                                                               
Total investment securities held-to-maturity
  $ 489,967     $ 24,250     $ 648     $ 513,569       4.50     $ 601,619     $ 20,858     $ 893     $ 621,584       4.49  
 
                                                           
     Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options.
     The following tables show the Corporation’s held-to-maturity investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2010 and December 31, 2009:
                                                 
    As of September 30, 2010  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Corporate bonds
  $     $     $ 1,352     $ 648     $ 1,352     $ 648  
 
                                   
 
  $     $     $ 1,352     $ 648     $ 1,352     $ 648  
 
                                   
                                                 
    As of December 31, 2009  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
Debt securities
                                               
Puerto Rico Government obligations
  $     $     $ 4,678     $ 93     $ 4,678     $ 93  
Corporate bonds
                1,200       800       1,200       800  
 
                                   
 
  $     $     $ 5,878     $ 893     $ 5,878     $ 893  
 
                                   

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Assessment for OTTI
     On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered OTTI. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Corporation to assess whether the unrealized loss is other-than-temporary.
     Prior to April 1, 2009, unrealized losses that were determined to be temporary were recorded, net of tax, in other comprehensive income for available-for-sale securities, whereas unrealized losses related to held-to-maturity securities determined to be temporary were not recognized. Regardless of whether the security was classified as available for sale or held to maturity, unrealized losses that were determined to be other-than-temporary were recorded through earnings. An unrealized loss was considered other-than-temporary if (i) it was probable that the holder would not collect all amounts due according to the contractual terms of the debt security, or (ii) the fair value was below the amortized cost of the debt security for a prolonged period of time and the Corporation did not have the positive intent and ability to hold the security until recovery or maturity.
     In April 2009, the FASB amended the OTTI model for debt securities. Under the amended guidance, OTTI losses must be recognized in earnings if an investor has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.
     Under the amended guidance, an unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result of the Corporation’s adoption of this new guidance, the credit loss component of an OTTI, if any, would be recorded as a separate line item in the accompanying consolidated statements of (loss) income, while the remaining portion of the impairment loss would be recognized in OCI, provided the Corporation does not intend to sell the underlying debt security and it is “more likely than not” that the Corporation will not have to sell the debt security prior to recovery. For the quarter and nine-month period ended September 30, 2010, there were no credit loss impairment charges in earnings.
     Debt securities issued by U.S. government agencies, government-sponsored entities and the U.S. Treasury accounted for more than 90% of the total available-for-sale and held-to-maturity portfolio as of September 30, 2010 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s assessment was concentrated mainly on private label MBS of approximately $105 million for which the Corporation evaluates credit losses on a quarterly basis. The Corporation considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:
The length of time and the extent to which the fair value has been less than the amortized cost basis.
Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;
The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and
Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.
     No OTTI losses on available-for-sale debt securities were recorded in the first nine months of 2010. Cumulative unrealized other-than-temporary impairment losses recognized in OCI as of September 30, 2010 amounted to $31.7 million.

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     For the third quarter and first nine months of 2009, the Corporation recorded OTTI losses on available-for-sale debt securities as follows:
                 
    Private label MBS  
    Quarter ended     Nine-month period ended  
(In thousands)   September 30, 2009     September 30, 2009  
Total other-than-temporary impairment losses
  $     $ (32,541 )
Unrealized other-than-temporary impairment losses recognized in OCI (1)
    (209 )     31,271  
 
           
Net impairment losses recognized in earnings (2)
  $ (209 )   $ (1,270 )
 
           
 
(1)   Represents the noncredit component impact of the OTTI on available-for-sale debt securities
 
(2)   Represents the credit component of the OTTI on available-for-sale debt securities
     The following table summarizes the rollforward of credit losses on debt securities held by the Corporation for which a portion of OTTI is recognized in OCI:
                 
    Private label MBS  
    Quarter ended     Nine-month period ended  
(In thousands)   September 30, 2009     September 30, 2009  
Credit losses at the beginning of the period
  $ 1,061     $  
Additions:
               
Credit losses related to securities for which an OTTI was not previously recognized
    209       1,270  
 
           
Ending balance of credit losses on debt securities held for which a portion of an OTTI was recognized in OCI
  $ 1,270     $ 1,270  
 
           
     Private label mortgage-backed securities (“MBS”) are collateralized by fixed-rate mortgages on single family residential properties in the United States. The interest rate on these private label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The underlying mortgages are fixed-rate single family loans with original high FICO scores (over 700) and moderate original loan-to-value ratios (under 80%), as well as moderate delinquency levels.
     Based on the expected cash flows derived from the model, and since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, no credit losses were reflected in earnings for the period ended September 30, 2010. As a result of the valuation performed as of September 30, 2010, no additional other-than-temporary impairment was recorded for the period. Significant assumptions in the valuation of the private label MBS as of September 30, 2010 were as follow:
                 
    Weighted    
    Average   Range
Discount rate
    14.5 %     14.5 %
Prepayment rate
    26 %     21.62% – 44.79 %
Projected Cumulative Loss Rate
    4 %     1.05% – 16.80 %
     For the nine-month period ended on September 30, 2010, the Corporation recorded OTTI of approximately $0.4 million on certain equity securities held in its available-for-sale investment portfolio related to financial institutions in Puerto Rico. Management concluded that the declines in value of the securities were other-than-temporary; as such, the cost basis of these securities was written down to the market value as of the date of the analysis and is reflected in earnings as a realized loss.
     Total proceeds from the sale of securities available for sale during the first nine months of 2010 amounted to approximately $2.4 billion (2009 —$1.0 billion). Given the Corporation’s balance sheet structure and the shape and level of the yield curve, which in turn is reflected in the valuation of the securities and the repurchase agreements, the Corporation took advantage of market conditions during the quarter and completed the sale of approximately $1.2 billion of U.S. agency MBS that was matched with the early termination of approximately $1.0 billion of repurchase agreements. The cost of the unwinding of the repurchase agreements of $47.4 million offset the gain of $47.1 million realized on the sale of investment securities.

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5 — OTHER EQUITY SECURITIES
     Institutions that are members of the FHLB system are required to maintain a minimum investment in FHLB stock. Such minimum is calculated as a percentage of aggregate outstanding mortgages, and an additional investment is required that is calculated as a percentage of total FHLB advances, letters of credit, and the collateralized portion of interest-rate swaps outstanding. The stock is capital stock issued at $100 par value. Both stock and cash dividends may be received on FHLB stock.
     As of September 30, 2010 and December 31, 2009, the Corporation had investments in FHLB stock with a book value of $63.0 million and $68.4 million, respectively. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from FHLB stock for the second quarter and nine-month period ended September 30, 2010 amounted to $0.6 million and $2.1 million, respectively, compared to $1.0 million and $2.2 million, respectively, for the same periods in 2009.
     The FHLB stocks owned by the Corporation are issued by the FHLB of New York and by the FHLB of Atlanta. Both Banks are part of the Federal Home Loan Bank System, a national wholesale banking network of 12 regional, stockholder-owned congressionally chartered banks. The Federal Home Loan Banks are all privately capitalized and operated by their member stockholders. The system is supervised by the Federal Housing Finance Agency, which ensures that the Home Loan Banks operate in a financially safe and sound manner, remain adequately capitalized and able to raise funds in the capital markets, and carry out their housing finance mission.
     The Corporation has other equity securities that do not have a readily available fair value. The carrying value of such securities as of September 30, 2010 and December 31, 2009 was $1.3 million and $1.6 million, respectively. An impairment charge of $0.25 million was recorded in the first quarter of 2010 related to an investment in a failed financial institution in the United States.
     During the first quarter of 2010, the Corporation recognized a $10.7 million gain on the sale of the remaining VISA Class C shares. As of September 30, 2010, the Corporation no longer held any VISA shares.
6 — LOAN PORTFOLIO
The following is a detail of the loan portfolio:
                 
    As of     As of  
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Residential mortgage loans, mainly secured by first mortgages
  $ 3,448,335     $ 3,595,508  
 
           
 
               
Commercial loans:
               
Construction loans
    1,114,647       1,492,589  
Commercial mortgage loans
    1,742,462       1,693,424  
Commercial and Industrial loans (1)
    3,824,916       4,927,304  
Loans to a local financial institution secured by real estate mortgages
    295,855       321,522  
 
           
Commercial loans
    6,977,880       8,434,839  
 
           
 
               
Finance leases
    289,573       318,504  
 
           
 
               
Consumer loans
    1,464,238       1,579,600  
 
           
 
               
Loans receivable
    12,180,026       13,928,451  
 
               
Allowance for loan and lease losses
    (608,526 )     (528,120 )
 
           
 
               
Loans receivable, net
    11,571,500       13,400,331  
 
               
Loans held for sale
    9,196       20,775  
 
           
Total loans
  $ 11,580,696     $ 13,421,106  
 
           
 
1 - As of September 30, 2010, includes $1.8 billion of commercial loans that are secured by real estate but are not dependent upon the real estate for repayment.
     The Corporation’s primary lending area is Puerto Rico. The Corporation’s Puerto Rico banking subsidiary, FirstBank, also lends in the U.S. and British Virgin Islands markets and in the United States (principally in the state of Florida). Of the total gross loan

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portfolio of $12.2 billion as of September 30, 2010, approximately 84% has credit risk concentration in Puerto Rico, 8% in the United States and 8% in the Virgin Islands.
     As of September 30, 2010, the Corporation had $273.1 million outstanding of credit facilities granted to the Puerto Rico Government and/or its political subdivisions, down from $1.2 billion as of December 31, 2009, and $57.2 million granted to the Virgin Islands government, down from $134.7 million as of December 31, 2009. A substantial portion of these credit facilities are obligations that have a specific source of income or revenues identified for their repayment, such as property taxes collected by the central Government and/or municipalities. Another portion of these obligations consists of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power and water utilities. Public corporations have varying degrees of independence from the central Government of Puerto Rico and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment.
     The largest loan to one borrower as of September 30, 2010 in the amount of $295.9 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. This commercial loan is secured by individual real estate loans, mostly 1-4 residential mortgage loans.
7 — ALLOWANCE FOR LOAN AND LEASE LOSSES
The changes in the allowance for loan and lease losses were as follows:
                                 
    Quarter Ended     Nine-Month Period Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
Balance at beginning of period
  $ 604,304     $ 407,746     $ 528,120     $ 281,526  
Provision for loan and lease losses
    120,482       148,090       438,240       442,671  
Charge-offs
    (120,487 )     (87,001 )     (367,309 )     (260,836 )
Recoveries
    4,227       2,649       9,475       8,123  
 
                       
Balance at end of period
  $ 608,526     $ 471,484     $ 608,526     $ 471,484  
 
                       
     The allowance for impaired loans is part of the allowance for loan and lease losses. The allowance for impaired loans covers those loans for which management has determined that it is probable that the debtor will be unable to pay all the amounts due in accordance with the contractual terms of the loan agreement, and does not necessarily represent loans for which the Corporation will incur a loss. As of September 30, 2010 and December 31, 2009, impaired loans and their related allowance were as follows:
                 
    As of     As of  
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Impaired loans with valuation allowance, net of charge-offs
  $ 1,394,335     $ 1,060,088  
Impaired loans without valuation allowance, net of charge-offs
    486,735       596,176  
 
           
Total impaired loans
  $ 1,881,070     $ 1,656,264  
 
           
 
               
Allowance for impaired loans
  $ 271,425     $ 182,145  
     Interest income of approximately $13.5 million and $25.9 million was recognized on impaired loans for the third quarter and first nine months of 2010, respectively, compared to $5.8 million and $20.0 million, respectively, for the same periods in 2009. The average recorded investment in impaired loans for the first nine-months of 2010 and 2009 was $1.8 billion and $839.7 million, respectively.

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The following tables show the activity for impaired loans and the related specific reserve during the first nine months of 2010:
         
    (In thousands)  
Impaired Loans:
       
Balance at beginning of year
  $ 1,656,264  
Loans determined impaired during the period
    802,957  
Net charge-offs (1)
    (299,871 )
Loans sold, net of charge-offs of $42.6 million (2)
    (120,556 )
Loans foreclosed, paid in full and partial payments, net of additional disbursements
    (157,724 )
 
     
Balance at end of period
  $ 1,881,070  
 
     
 
(1)   Approximately $151.5 million, or 51%, is related to construction loans.
 
(2)   Loans sold in Florida.
         
    (In thousands)  
Specific Reserve:
       
Balance at beginning of year
  $ 182,145  
Provision for loan losses
    389,151  
Net charge-offs
    (299,871 )
 
     
Balance at end of period
  $ 271,425  
 
     
     The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico and through programs sponsored by the Federal Government. Due to the nature of the borrower’s financial condition, restructurings or loan modifications through these program as well as other restructurings of individual commercial loans, commercial mortgage loans, construction loans and residential mortgages in the U.S. mainland fit the definition of Troubled Debt Restructuring (“TDR”). A restructuring of a debt constitutes a TDR if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include the refinancing of any past-due amounts, including interest and escrow, the extension of the maturity of the loan and modifications of the loan rate. As of September 30, 2010, the Corporation’s TDR loans amounted to $372.6 million consisting of: $185.6 million of residential mortgage loans, $41.7 million commercial and industrial loans, $90.3 million commercial mortgage loans and $55.0 million of construction loans. Outstanding unfunded loan commitments on TDR loans amounted to $2.3 million as of September 30, 2010.
     Included in the $372.6 million of TDR loans are certain impaired condo-conversion loans restructured into two separate agreements (loan splitting) in the fourth quarter of 2009. At that time, each of these loans was restructured into two notes: one that represents the portion of the loan that is expected to be fully collected along with contractual interest and the second note that represents the portion of the original loan that was charged-off. The restructuring of these loans was made after analyzing the borrowers’ and guarantors’ capacities to service the debt and ability to perform under the modified terms. As part of the restructuring of the loans, the first note of each loan has been placed on a monthly payment of principal and interest that amortizes the debt over 25 years at a market rate of interest. An interest rate reduction was granted for the second note. The carrying value of the notes deemed collectible amounted to $22.0 million as of September 30, 2010 and the charge-offs recorded prior to 2010 associated with these loans were $29.7 million. The loans that have been deemed collectible and returned to accrual status after a performance period, continue to be individually evaluated for impairment purposes and a specific reserve of $0.5 million was allocated to these loans as of September 30, 2010.
     As of September 30, 2010, the Corporation maintains a $8.5 million reserve for unfunded loan commitments mainly related to outstanding construction loans commitments in Puerto Rico. The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheet loan commitments at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included as part of accounts payable and other liabilities in the consolidated statement of financial condition.
8 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
     One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation’s assets or liabilities and the risk that net interest income from its loan and investment portfolios will be adversely affected by changes in interest rates. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.
     The Corporation uses various financial instruments, including derivatives, to manage the interest rate risk primarily for protection from rising interest rates in connection with private label MBS.
     The Corporation designates a derivative as a fair value hedge, cash flow hedge or an economic undesignated hedge when it enters into the derivative contract. As of September 30, 2010 and December 31, 2009, all derivatives held by the Corporation were

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considered economic undesignated hedges. These undesignated hedges are recorded at fair value with the resulting gain or loss recognized in current earnings.
     The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk:
     Interest rate cap agreements — Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates. Specifically, the interest rate on certain of the Corporation’s commercial loans to other financial institutions is generally a variable rate limited to the weighted-average coupon of the pass-through certificate or referenced residential mortgage collateral, less a contractual servicing fee. During the second quarter of 2010, the counterparty for interest rate caps for certain private label mortgage pass-through securities was taken over by the FDIC, immediately canceling all outstanding commitments, and as a result, interest rate caps with notional amount of $113 million are no longer considered to be derivative financial instruments. The total exposure to fair value of $3.0 million related to such contracts was reclassified to an account receivable.
     Interest rate swaps — Interest rate swap agreements generally involve the exchange of fixed-and floating-rate interest payment obligations without the exchange of the underlying notional principal amount. As of September 30, 2010, most of the interest rate swaps outstanding are used for protection against rising interest rates. In the past, interest rate swaps volume was much higher since they were used to convert fixed-rate brokered CDs (liabilities), mainly those with long-term maturities, to a variable rate to mitigate the interest rate risk inherent in variable rate loans. All interest rate swaps related to brokered CDs were called during 2009, in the face of lower interest rate levels, and, as a consequence, the Corporation exercised its call option on the swapped-to-floating brokered CDs. Similar to unrealized gains and losses arising from changes in fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being economically hedged.
     Indexed options — Indexed options are generally over-the-counter (OTC) contracts that the Corporation enters into in order to receive the appreciation of a specified Stock Index (e.g., Dow Jones Industrial Composite Stock Index) over a specified period in exchange for a premium paid at the contract’s inception. The option period is determined by the contractual maturity of the notes payable tied to the performance of the Stock Index. The credit risk inherent in these options is the risk that the exchange party may not fulfill its obligation. To satisfy the needs of its customers, the Corporation may enter into non-hedging transactions. On these transactions, generally, the Corporation participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and conditions.
     In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.
The following table summarizes the notional amounts of all derivative instruments as of September 30, 2010 and December 31, 2009:
                 
    Notional Amounts  
    As of     As of  
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Economic undesignated hedges:
               
 
               
Interest rate contracts:
               
Interest rate swap agreements used to hedge loans
  $ 41,635     $ 79,567  
Written interest rate cap agreements
    71,841       102,521  
Purchased interest rate cap agreements
    71,841       228,384  
 
               
Equity contracts:
               
Embedded written options on stock index deposits and notes payable
    53,515       53,515  
Purchased options used to manage exposure to the stock market on embedded stock index options
    53,515       53,515  
 
           
 
  $ 292,347     $ 517,502  
 
           

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     The following table summarizes the fair value of derivative instruments and identifies the location of such derivative instruments in the Statement of Financial Condition as of September 30, 2010 and December 31, 2009:
                                         
    Asset Derivatives     Liability Derivatives  
        September 30,     December 31,         September 30,     December 31,  
    Statement of   2010     2009     Statement of   2010     2009  
    Financial Condition   Fair     Fair     Financial Condition   Fair     Fair  
    Location   Value     Value     Location   Value     Value  
    (In thousands)  
Economic undesignated hedges:
                                       
 
                                       
Interest rate contracts:
                                       
Interest rate swap agreements used to hedge loans
  Other assets   $ 427     $ 319     Accounts payable and other liabilities   $ 6,171     $ 5,068  
Written interest rate cap agreements
  Other assets               Accounts payable and other liabilities     1       201  
Purchased interest rate cap agreements
  Other assets     1       4,423     Accounts payable and other liabilities            
 
                                       
Equity contracts:
                                       
Embedded written options on stock index deposits
  Other assets               Interest-bearing deposits           14  
Embedded written options on stock index notes payable
  Other assets               Notes payable     1,039       1,184  
Purchased options used to manage exposure to the stock market on embedded stock index options
  Other assets     1,109       1,194     Accounts payable and other liabilities            
 
                               
 
      $ 1,537     $ 5,936         $ 7,211     $ 6,467  
 
                               
     The following table summarizes the effect of derivative instruments on the Statement of Loss for the quarter and nine-month period ended September 30, 2010 and 2009:
                                     
        Unrealized Gain or (Loss)     Unrealized Gain or (Loss)  
    Location of Unrealized Gain or (loss)   Quarter Ended     Nine-Month Period Ended  
    Recognized in Income on   September 30,     September 30,  
    Derivatives   2010     2009     2010     2009  
        (In thousands)     (In thousands)  
Interest rate contracts:
                                   
Interest rate swap agreements used to hedge:
                                   
Brokered certificates of deposit
  Interest expense on deposits   $     $     $     $ (5,236 )
Notes payable
  Interest expense on notes payable and other borrowings                       3  
Loans
  Interest income on loans     (935 )     (406 )     (995 )     984  
Written and purchased interest rate cap agreements — mortgage-backed securities
  Interest income on investment securities           (1,028 )     (1,137 )     1,678  
Written and purchased interest rate cap agreements — loans
  Interest income on loans     (3 )     (51 )     (37 )     93  
Equity contracts:
                                   
Embedded written options on stock index deposits
  Interest expense on deposits     (1 )     1       (2 )     (81 )
Embedded written options on stock index notes payable
  Interest expense on notes payable and other borrowings     25       (14 )     76       (180 )
 
                           
Total loss on derivatives
      $ (914 )   $ (1,498 )   $ (2,095 )   $ (2,739 )
 
                           
Derivative instruments, such as interest rate swaps, are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The unrealized gains and losses in the fair value of derivatives that have economically hedged certain callable brokered CDs and medium-term notes are partially offset by unrealized gains and losses on the valuation of such economically hedged liabilities measured at fair value. The Corporation includes the gain or loss on those economically hedged liabilities (brokered CDs and medium-term notes) in the same line item as the offsetting loss or gain on the related derivatives as set forth below:
                                                 
    Quarter ended September 30,
    2010   2009
            Loss                   Loss    
    (Loss) / Gain   on liabilities measured at fair   Net Unrealized   Gain / (Loss)   on liabilities measured at fair   Net Unrealized
(In thousands)   on Derivatives   value   Loss   on Derivatives   value   Gain / (Loss)
Interest expense on deposits
  $ (1 )   $     $ (1 )   $ 1     $     $ 1  
 
                                               
Interest expense on notes payable and other borrowings
    25       (550 )     (525 )     (14 )     (1,576 )     (1,590 )
                                                 
    Nine-Month Period ended September 30,
    2010   2009
            Gain                   Gain / (Loss)    
    (Loss) / Gain   on liabilities measured at fair   Net Unrealized   Loss   on liabilities measured at fair   Net Unrealized
(In thousands)   on Derivatives   value   (Loss) / Gain   on Derivatives   value   Gain / (Loss)
Interest expense on deposits
  $ (2 )   $     $ (2 )   $ (5,317 )   $ 8,696     $ 3,379  
 
                                               
Interest expense on notes payable and other borrowings
    76       2,307       2,383       (177 )     (3,000 )     (3,177 )

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A summary of interest rate swaps as of September 30, 2010 and December 31, 2009 follows:
                 
    As of   As of
    September 30,   December 31,
    2010   2009
    (Dollars in thousands)
Pay fixed/receive floating (generally used to economically hedge loans):
               
Notional amount
  $ 41,635     $ 79,567  
Weighted-average receive rate at period end
    2.14 %     2.15 %
Weighted-average pay rate at period end
    6.83 %     6.52 %
Floating rates range from 167 to 252 basis points over 3-month LIBOR
               
     As of September 30, 2010, the Corporation has not entered into any derivative instrument containing credit-risk-related contingent features.
9 — GOODWILL AND OTHER INTANGIBLES
     Goodwill as of September 30, 2010 and December 31, 2009 amounted to $28.1 million, recognized as part of “Other assets”. The Corporation conducted its annual evaluation of goodwill during the fourth quarter of 2009. This evaluation is a two-step process. The Step 1 evaluation of goodwill allocated to the Florida reporting unit, which is one level below the United States business segment, indicated potential impairment of goodwill. The Step 1 fair value for the unit was below the carrying amount of its equity book value as of the December 31, 2009 valuation date, requiring the completion of Step 2. The Step 2 required a valuation of all assets and liabilities of the Florida unit, including any recognized and unrecognized intangible assets, to determine the fair value of net assets. To complete Step 2, the Corporation subtracted from the unit’s Step 1 fair value the determined fair value of the net assets to arrive at the implied fair value of goodwill. The results of the Step 2 analysis indicated that the implied fair value of goodwill exceeded the goodwill carrying value by $107.4 million, resulting in no goodwill impairment. There have been no events related to the Florida reporting unit that could indicate potential goodwill impairment since the date of the last evaluation; therefore, no goodwill impairment evaluation was performed during the first nine months of 2010. Goodwill and other indefinite life intangibles are reviewed at least annually for impairment. The Corporation understands that it is in its best interest to move the annual evaluation date to an earlier date within the fourth quarter, therefore, the Corporation will evaluate for goodwill impairment as of October 1, 2010. The change in date will provide room for improvement to the testing structure and coordination and will enable the evaluation to be performed in conjunction with the Corporation’s annual budgeting process.
     As of September 30, 2010, the gross carrying amount and accumulated amortization of core deposit intangibles was $41.8 million and $27.1 million, respectively, recognized as part of “Other assets” in the Consolidated Statements of Financial Condition (December 31, 2009 — $41.8 million and $25.2 million, respectively). During the quarter and nine-month period ended September 30, 2010, the amortization expense of core deposit intangibles amounted to $0.6 million and $1.9 million, respectively, compared to $0.8 million and $2.7 million, respectively, for the comparable periods in 2009. As a result of an impairment evaluation of core deposit intangibles, there was an impairment charge of $4.0 million recognized during the first half of 2009 related to core deposits in Florida attributable to decreases in the base of core deposits acquired and recorded as part of other non-interest expenses in the Statement of Income (Loss).
10 — NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS
     The Corporation transfers residential mortgage loans in sale or securitization transactions in which it has continuing involvement, which includes servicing responsibilities and guarantee arrangements. All such transfers have been accounted for as sales as required by applicable accounting guidance.
     When evaluating transfers and other transactions with Variable Interest Entities (“VIEs”) for consolidation under the recently adopted guidance, the Corporation first determines if the counterparty is an entity for which a variable interest exists. If no scope exception is applicable and a variable interest exists, the Corporation then evaluates if it is the primary beneficiary of the VIE and whether the entity should be consolidated or not.
     Below is a summary of transfers of financial assets to VIEs for which the Company has retained some level of continuing involvement:
Ginnie Mae
     The Corporation typically transfers first lien residential mortgage loans in conjunction with Ginnie Mae securitization transactions whereby the loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights.

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The securities issued through these transactions are guaranteed by the issuer and, as such, under seller/servicer agreements the Corporation is required to service the loans in accordance with the issuers’ servicing guidelines and standards. As of September 30, 2010, the Corporation serviced loans securitized through GNMA with principal balance of $432.2 million.
Trust Preferred Securities
     In 2004, FBP Statutory Trust I, a financing subsidiary of the Corporation, sold to institutional investors $100 million of its variable rate trust preferred securities. The proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.1 million of FBP Statutory Trust I variable rate common securities, were used by FBP Statutory Trust I to purchase $103.1 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. Also in 2004, FBP Statutory Trust II, a statutory trust that is wholly-owned by the Corporation, sold to institutional investors $125 million of its variable rate trust preferred securities. The proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.9 million of FBP Statutory Trust II variable rate common securities, were used by FBP Statutory Trust II to purchase $128.9 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. The trust preferred debentures are presented in the Corporation’s Consolidated Statement of Financial Condition as Other Borrowings, net of related issuance costs. The variable rate trust preferred securities are fully and unconditionally guaranteed by the Corporation. The $100 million Junior Subordinated Deferrable Debentures issued by the Corporation in April 2004 and the $125 million issued in September 2004 mature on September 17, 2034 and September 20, 2034, respectively; however, under certain circumstances, the maturity of Junior Subordinated Debentures may be shortened (such shortening would result in a mandatory redemption of the variable rate trust preferred securities). The trust preferred securities, subject to certain limitations, qualify as Tier I regulatory capital under current Federal Reserve rules and regulations. The Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act eliminates certain trust preferred securities from Tier 1 Capital, but TARP preferred securities are exempted from this treatment. These “regulatory capital deductions” for trust preferred securities are to be phased in incrementally over a period of 3 years beginning on January 1, 2013.
Grantor Trusts
     During 2004 and 2005, a third party to the Corporation, from now on identified as the seller, established a series of statutory trusts to effect the securitization of mortgage loans and the sale of trust certificates. The seller initially provided the servicing for a fee, which is senior to the obligations to pay trust certificate holders. The seller then entered into a sales agreement through which it sold and issued the trust certificates in favor of the Corporation’s banking subsidiary. Currently the Bank is the 100% owner of the trust certificates; the servicing of the underlying residential mortgages that generate the principal and interest cash flows, is performed by the seller, which receives a fee compensation for services provided, the servicing fee. The securities are variable rate securities tied to LIBOR index plus a spread. The principal payments from the underlying loans are remitted to a paying agent (the seller) who then remits interest to the Bank; interest income is shared to a certain extent with a third party financial institution that has an interest only strip (“IO”) tied to the cash flows of the underlying loans, whereas it is entitled to received the excess of the interest income less a servicing fee over the variable rate income that the Bank earns on the securities. This IO is limited to the weighted average coupon of the securities. No recourse agreement exists and the risk from losses on non accruing loans and repossessed collateral is absorbed by the Bank as the 100% holder of the certificates. As of September 30, 2010, the outstanding balance of Grantor Trusts amounted to $105.2 million with a weighted average yield of 2.26%.
Servicing Assets
     The Corporation is actively involved in the securitization of pools of FHA-insured and VA-guaranteed mortgages for issuance of GNMA mortgage-backed securities. Also, certain conventional conforming-loans are sold to FNMA or FHLMC with servicing retained. The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased.

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The changes in servicing assets are shown below:
                                 
    Quarter ended     Nine-month period ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
Balance at beginning of period
  $ 13,335     $ 10,148     $ 11,902     $ 8,151  
Capitalization of servicing assets
    2,181       1,748       5,244       4,929  
Amortization
    (572 )     (592 )     (1,504 )     (1,776 )
Adjustment to servicing assets for loans repurchased (1)
    (38 )           (736 )      
 
                       
Balance before valuation allowance at end of period
    14,906       11,304       14,906       11,304  
Valuation allowance for temporary impairment
    (1,018 )     (1,252 )     (1,018 )     (1,252 )
 
                       
Balance at end of period
  $ 13,888     $ 10,052     $ 13,888     $ 10,052  
 
                       
 
(1)   Amount represents the adjustment to fair value related to the repurchase of $3.8 million and $71.2 million for the quarter and nine-month period ended September 30, 2010, respectively, in principal balance of loans serviced for others.
     Impairment charges are recognized through a valuation allowance for each individual stratum of servicing assets. The valuation allowance is adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized. Other-than-temporary impairments, if any, are recognized as a direct write-down of the servicing assets.
Changes in the impairment allowance were as follows:
                                 
    Quarter ended     Nine-month period ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
Balance at beginning of period
  $ 282     $ 1,796     $ 745     $ 751  
Temporary impairment charges
    737       119       1,089       2,264  
Recoveries
    (1 )     (663 )     (816 )     (1,763 )
 
                       
Balance at end of period
  $ 1,018     $ 1,252     $ 1,018     $ 1,252  
 
                       
The components of net servicing income are shown below:
                                 
    Quarter ended     Nine-month period ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
Servicing fees
  $ 1,059     $ 828     $ 2,960     $ 2,132  
Late charges and prepayment penalties
    138       (42 )     459       439  
Adjustment for loans repurchased
    (38 )           (736 )      
 
                       
Servicing income, gross
    1,159       786       2,683       2,571  
Amortization and impairment of servicing assets
    (1,308 )     (48 )     (1,777 )     (2,277 )
 
                       
Servicing (loss) income, net
  $ (149 )   $ 738     $ 906     $ 294  
 
                       

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     The Corporation’s servicing assets are subject to prepayment and interest rate risks. Key economic assumptions used in determining the fair value at the time of sale ranged as follows:
                 
    Maximum   Minimum
Nine-month period ended September 30, 2010:
               
Constant prepayment rate:
               
Government guaranteed mortgage loans
    12.7 %     11.3 %
Conventional conforming mortgage loans
    18.0 %     14.8 %
Conventional non-conforming mortgage loans
    14.8 %     11.5 %
Discount rate:
               
Government guaranteed mortgage loans
    11.7 %     10.3 %
Conventional conforming mortgage loans
    9.3 %     9.2 %
Conventional non-conforming mortgage loans
    13.1 %     13.1 %
 
               
Nine-month period ended September 30, 2009:
               
Constant prepayment rate:
               
Government guaranteed mortgage loans
    24.8 %     20.2 %
Conventional conforming mortgage loans
    21.9 %     19.0 %
Conventional non-conforming mortgage loans
    20.1 %     17.1 %
Discount rate:
               
Government guaranteed mortgage loans
    13.4 %     11.8 %
Conventional conforming mortgage loans
    9.3 %     9.2 %
Conventional non-conforming mortgage loans
    13.2 %     13.1 %
     At September 30, 2010, fair values of the Corporation’s servicing assets were based on a valuation model that incorporates market driven assumptions, adjusted by the particular characteristics of the Corporation’s servicing portfolio, regarding discount rates and mortgage prepayment rates. The weighted-averages of the key economic assumptions used by the Corporation in its valuation model and the sensitivity of the current fair value to immediate 10 percent and 20 percent adverse changes in those assumptions for mortgage loans at September 30, 2010, were as follows:
         
    (Dollars in thousands)
Carrying amount of servicing assets
  $ 13,888  
Fair value
  $ 14,751  
Weighted-average expected life (in years)
    6.59  
 
       
Constant prepayment rate (weighted-average annual rate)
    15.61 %
Decrease in fair value due to 10% adverse change
  $ 791  
Decrease in fair value due to 20% adverse change
  $ 1,532  
 
       
Discount rate (weighted-average annual rate)
    10.43 %
Decrease in fair value due to 10% adverse change
  $ 525  
Decrease in fair value due to 20% adverse change
  $ 1,014  
     These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the servicing asset is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities.

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11 — DEPOSITS
The following table summarizes deposit balances:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Type of account and interest rate:
               
Non-interest bearing checking accounts
  $ 703,836     $ 697,022  
Savings accounts
    2,029,369       1,761,646  
Interest-bearing checking accounts
    1,063,193       998,097  
Certificates of deposit
    2,058,678       1,650,866  
Brokered certificates of deposit
    6,688,491       7,561,416  
 
           
 
  $ 12,543,567     $ 12,669,047  
 
           
     Brokered CDs mature as follows:
         
    September 30, 2010  
    (In thousands)  
One to ninety days
  $ 1,129,639  
Over ninety days to one year
    2,083,672  
One to three years
    3,289,085  
Three to five years
    174,898  
Over five years
    11,197  
 
     
Total
  $ 6,688,491  
 
     
     The following are the components of interest expense on deposits:
                                 
    Quarter Ended     Nine-Month Period Ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)     (In thousands)  
Interest expense on deposits
  $ 55,842     $ 66,876     $ 174,786     $ 232,876  
Amortization of broker placement fees
    5,161       5,288       15,948       17,434  
 
                       
Interest expense on deposits excluding net unrealized loss (gain) on derivatives and brokered CDs measured at fair value
    61,003       72,164       190,734       250,310  
 
                               
Net unrealized loss (gain) on derivatives and brokered CDs measured at fair value
    1       (1 )     2       (3,379 )
 
                       
Total interest expense on deposits
  $ 61,004     $ 72,163     $ 190,736     $ 246,931  
 
                       
     The interest expense on deposits includes the valuation to market of interest rate swaps that economically hedged brokered CDs, the related interest exchanged, the amortization of broker placement fees related to brokered CDs not measured at fair value and changes in fair value of callable brokered CDs measured at fair value.
     Total interest expense on deposits includes net cash settlements on interest rate swaps that economically hedged brokered CDs and that, for the nine-month period ended September 30, 2009, amounted to net interest realized of $5.5 million. No amount was recognized for the first nine months of 2010 since all interest rate swaps related to brokered CDs were called in the first half of 2009.
12 — LOANS PAYABLE
     Loans payable consisted of short-term borrowings under the FED Discount Window Program. During the second quarter of 2010, the Corporation repaid the remaining balance under the Discount Window. As the capital markets recovered from the crisis witnessed in 2009, the FED gradually reversed its stance back to lender of last resort. Advances from the Discount Window are once again discouraged, and as such, the Corporation no longer uses FED Advances for regular funding needs.

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13 — SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
     Securities sold under agreements to repurchase (repurchase agreements) consist of the following:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Repurchase agreements, interest ranging from 1.23% to 4.51%
               
(2009 – 0.23% to 5.39%)
  $ 1,400,000     $ 3,076,631  
 
           
Repurchase agreements mature as follows:
         
    September 30,  
    2010  
    (In thousands)  
Over ninety days to one year
  $ 100,000  
One to three years
    500,000  
Three to five years
    800,000  
 
     
Total
  $ 1,400,000  
 
     
As of September 30, 2010 and December 31, 2009, the securities underlying such agreements were delivered to the dealers with whom the repurchase agreements were transacted.
Repurchase agreements as of September 30, 2010, grouped by counterparty, were as follows:
                 
            Weighted-Average  
Counterparty   Amount     Maturity (In Months)  
Credit Suisse First Boston
  $ 400,000       33  
Citigroup Global Markets
    300,000       43  
Barclays Capital
    200,000       23  
Dean Witter / Morgan Stanley
    200,000       34  
JP Morgan Chase
    200,000       42  
UBS Financial Services, Inc.
    100,000       22  
 
             
 
  $ 1,400,000          
 
             
     As part of the Corporation’s balance sheet repositioning strategies, approximately $1.0 billion of repurchase agreements were early terminated during the third quarter of 2010. The cost of the unwinding of the repurchase agreements of $47.4 million was offset by a gain of $47.1 million on the sale of approximately $1.2 billion of U.S. agency MBS. The repaid repurchase agreements were scheduled to mature at various dates between January 2011 and October 2012 and had a weighted-average cost of 4.30%.
14 — ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)
Following is a summary of the advances from the FHLB:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Fixed-rate advances from FHLB, with a weighted-average interest rate of 3.38% (2009 – 3.21%)
  $ 835,440     $ 978,440  
 
           

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Advances from FHLB mature as follows:
         
    September 30,  
    2010  
    (In thousands)  
Over thirty days to ninety days
  $ 182,000  
Over ninety days to one year
    244,000  
One to three years
    356,000  
Three to five years
    53,440  
 
     
Total
  $ 835,440  
 
     
     As of September 30, 2010, the Corporation had additional capacity of approximately $185.9 million on this credit facility based on collateral pledged at the FHLB, including haircuts reflecting the perceived risk associated with holding the collateral.
15 — NOTES PAYABLE
Notes payable consist of:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Callable step-rate notes, bearing step increasing interest from 5.00% to 7.00% (5.50% as of September 30, 2010 and December 31, 2009) maturing on October 18, 2019, measured at fair value
  $ 11,053     $ 13,361  
 
               
Dow Jones Industrial Average (DJIA) linked principal protected notes:
               
 
               
Series A maturing on February 28, 2012
    6,600       6,542  
 
               
Series B maturing on May 27, 2011
    7,404       7,214  
 
           
Total
  $ 25,057     $ 27,117  
 
           
16 — OTHER BORROWINGS
Other borrowings consist of:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.75% over 3-month LIBOR (3.04% as of September 30, 2010 and 3.00% as of December 31, 2009)
  $ 103,093     $ 103,093  
 
               
Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.50% over 3-month LIBOR (2.79% as of September 30, 2010 and 2.75% as of December 31, 2009)
    128,866       128,866  
 
           
Total
  $ 231,959     $ 231,959  
 
           

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17 — STOCKHOLDERS’ EQUITY
     As of September 30, 2010, the Corporation had 2,000,000,000 authorized shares of common stock with a par value of $0.10 per share. As of September 30, 2010 there were 329,455,732 shares issued and 319,557,932 shares outstanding compared to 102,440,522 shares issued and 92,542,722 shares outstanding as of December 31, 2009. The increase in common shares is the result of the completion of the Exchange Offer discussed below. In February 2009, the Corporation’s Board of Directors declared a first quarter cash dividend of $0.07 per common share which was paid on March 31, 2009 to common stockholders of record on March 15, 2009 and in May 2009 declared a second quarter dividend of $0.07 per common share which was paid on June 30, 2009 to common stockholders of record on June 15, 2009. On July 30, 2009, the Corporation announced the suspension of common and preferred dividends effective with the preferred dividend for the month of August 2009.
     On August 24, 2010, the Corporation’s stockholder’s approved an additional increase in the Corporation’s common stock to 2 billion, up from 750 million. During the prior quarter, the Corporation’s stockholders had already increased the authorized shares of common stock from 250 million to 750 million. The Corporation’s stockholders also approved on August 24, 2010 a decrease in the par value of the common stock from $1 per share to $0.10 per share. The decrease in the par value of the Corporation’s common stock had no effect on the total dollar value of the Corporation’s stockholders’ equity. For the quarter ended September 30, 2010, the Corporation transferred $83.3 million from common stock to additional paid-in capital, which is the product of the number of shares issued and outstanding and the difference between the old par value of $1 and new par value of $0.10, of $0.90.
Exchange Offer
     On August 30, 2010, the Corporation completed its offer to issue shares of its common stock in exchange for its outstanding Series A through E Preferred Stock, which resulted in the issuance of 227,015,210 new shares of common stock in exchange for 19,482,128 shares of Preferred Stock with an aggregate liquidation amount of $487 million or 89% of the outstanding Series A through E Preferred Stock. In accordance with the terms of the Exchange Offer, the Corporation used a relevant price of $1.18 per share of its common stock and an exchange ratio of 55% of the preferred stock liquidation value to determine the number of shares of its common stock issued in exchange for the tendered shares of Series A through E Preferred Stock. The fair value of the common stock was $0.40 per share, which was the price as of the expiration date of the exchange offer. The carrying (liquidation) value of the Series A through E Preferred Stock exchanged, or $487.1 million, was reduced and common stock and additional paid-in capital increased in the amount of the fair value of the common stock issued. The Corporation recorded the par amount of the shares issued as common stock ($0.10 per common share) or $22.7 million. The excess of the common stock fair value over the par amount, or $68.1 million, was recorded in additional paid-in capital. The excess of the carrying amount of the shares of preferred stock over the fair value of the shares of common stock, or $385.4 million, was recorded as a reduction to accumulated deficit and an increase in earnings per common share computation.
     The results of the exchange offer with respect to Series A through E Preferred Stock were as follows:
                                                 
    Liquidation     Shares of preferred stock             Shares of preferred     Aggregate liquidation        
    preference per     outstanding prior to     Shares of preferred     stock outstanding     preference amount after     Shares of common stock  
Title of Securities   share     exchange     stock exchanged     after exchange     exchange (In thousands)     issued  
7.125% Noncumulative Perpetual Monthly
                                               
Income Preferred Stock, Series A
    $25       3,600,000       3,149,805       450,195     $ 11,255       36,703,077  
8.35% Noncumulative Perpetual Monthly
                                               
Income Preferred Stock, Series B
    $25       3,000,000       2,524,013       475,987       11,900       29,411,043  
7.40% Noncumulative Perpetual Monthly
                                               
Income Preferred Stock, Series C
    $25       4,140,000       3,679,389       460,611       11,515       42,873,983  
7.25% Noncumulative Perpetual Monthly
                                               
Income Preferred Stock, Series D
    $25       3,680,000       3,169,408       510,592       12,765       36,931,467  
7.00% Noncumulative Perpetual Monthly
                                               
Income Preferred Stock, Series E
    $25       7,584,000       6,959,513       624,487       15,612       81,095,640  
 
                                     
 
            22,004,000       19,482,128       2,521,872     $ 63,047       227,015,210  
 
                                     
     Dividends declared on the non-convertible non-cumulative preferred stock for the first nine months of 2009 amounted to $20.1 million; consistent with the Corporation’s announcement in July 2009, no dividends have been declared for the nine-month period ended September 30, 2010. The Corporation is currently in the process of voluntarily delisting the remaining Series A through E preferred Stock from the New York Stock Exchange.
Exchange Agreement with the U.S. Treasury
     On July 20, 2010, the Corporation closed a transaction with the U.S. Treasury for the exchange of all 400,000 shares of the Corporation’s Series F Preferred Stock, beneficially owned and held by the U.S. Treasury, for 424,174 shares of a new series of preferred stock, Series G Preferred Stock, with a liquidation preference of $1,000 per share. The Series G Preferred Stock is mandatorily convertible into approximately 380.2 million shares of the Corporation’s common stock, based upon the initial conversion price, by the Corporation upon the satisfaction of certain conditions and by the U.S. Treasury and any subsequent holder at any time and,

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unless earlier converted, is automatically convertible into common stock on the seventh anniversary of issuance. As mentioned above, on August, 24, 2010, the Corporation obtained its stockholders’ approval to increase the number of authorized shares of common stock from 750 million to 2 billion and decrease the par value of its common stock from $1.00 to $0.10 per share. These approvals and the issuance of common stock in exchange for Series A through E Preferred Stock satisfy all but one of the substantive conditions to the Corporation’s ability to compel the conversion of the 424,174 shares of the new series of Series G Preferred Stock, issued to the U.S. Treasury. The other substantive condition to the Corporation’s ability to compel the conversion of the Series G Preferred Stock is the issuance of a minimum aggregate amount 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. On September 16, 2010, the Corporation filed a registration statement for a proposed underwritten public offering of $500 million ($575 million including an over allotment option) of its common stock with the SEC. The Corporation will effect a reverse stock split, if necessary, in the range of between one new share of common stock for 10 old shares of common stock and one new share of common stock for 20 old shares of common stock, which is the range that stockholders approved at the Special Meeting of Stockholders on August 24, 2010.
     The Corporation accounted for this transaction as an extinguishment of the previously issued Series F Preferred Stock. As a result, the Corporation recorded $424.2 million of the new Series G Preferred Stock, net of a $76.8 million discount and derecognized the carrying value of the Series F Preferred Stock. The excess of the carrying amount of the Series F Preferred Stock over the fair value of the Series G Preferred Stock, or $33.6 million was recorded as a reduction to accumulated deficit.
     The valuation of the Series G Preferred Stock considered the following characteristics of the security, the base preferred stock component, which consists of quarterly dividends plus the principal repayment, a long call option which gives the U.S. Treasury the ability to convert the preferred stock to common stock at any time through July 20, 2017, and a short put option that provides the Corporation the ability to compel conversion, provided certain conditions described above are met, at any time within the nine month period from issue date through April 20, 2011.
     The value of the base preferred stock component was determined using a discounted cash flow method. The cash flows, which consist of the sum of the discounted quarterly dividends plus the principal repayment, were discounted considering the Corporation’s credit rating. The short and long call options were valued using a Cox-Rubinstein binomial option pricing model-based methodology. The valuation methodology considered the likelihood of option conversions under different scenarios, and the valuation interactions of the various components under each scenario.
     Like the Series F Preferred Stock, the Series G Preferred Stock, qualifies as Tier 1 regulatory capital. Cumulative dividends on the Series G Preferred Stock accrue on the liquidation preference amount on a quarterly basis at a rate of 5% per annum for the first five years, and thereafter at a rate of 9% per annum, but will only be paid when, as and if declared by the Corporation’s Board of Directors out of assets legally available therefore. The Series G Preferred Stock ranks pari passu with the Corporation’s existing Series A through E, in terms of dividend payments and distributions upon liquidation, dissolution and winding up of the Corporation. The Exchange Agreement relating to this issuance contains limitations on the payment of dividends on common stock, including limiting regular quarterly cash dividends to an amount not exceeding the last quarterly cash dividend paid per share, or the amount publicly announced (if lower), of common stock prior to October 14, 2008, which is $0.07 per share.
     Additionally, the Corporation issued an amended 10-year warrant (the “Warrant”) to the U.S. Treasury to purchase 5,842,259 shares of the Corporation’s common stock at an initial exercise price of $0.7252 per share instead of the exercise price on the original warrant of $10.27 per share. The Warrant has a 10-year term and is exercisable at any time. The exercise price and the number of shares issuable upon exercise of the Warrant are subject to certain anti-dilution adjustments. The Corporation evaluated the fair market value of the new warrant and recognized a $1.2 million increase in value due to the difference between the fair market value of the new and the old warrant as an increase to additional paid-in capital and an increase to the accumulated deficit. The warrant value was calculated using the Cox-Rubinstein binomial option pricing model-based methodology.
     The possible future issuance of equity securities through the exercise of the Warrant could affect the Corporation’s current stockholders in a number of ways, including by:
    diluting the voting power of the current holders of common stock (the shares underlying the warrant represent approximately 2% of the Corporation’s shares of common stock as of September 30, 2010);
 
    diluting the earnings per share and book value per share of the outstanding shares of common stock; and
 
    making the payment of dividends on common stock more expensive.
     As mentioned above, on July 30, 2009, the Corporation announced the suspension of dividends for common and all its outstanding series of preferred stock. This suspension was effective with the dividends for the month of August 2009, on the Corporation’s five outstanding series of non-cumulative preferred stock and dividends for the Corporation’s then outstanding Series F Preferred Stock and the Corporation’s common stock. Prior to any resumption of the payment of dividends on or repurchases of any of the remaining outstanding noncumulative preferred stock or common stock, the Corporation must comply with the terms of the Series G Preferred Stock. In addition, prior to the repurchase of any stock for cash, the Corporation must obtain the consent of the U.S. Treasury under certain circumstances.
Stock repurchase plan and treasury stock
     The Corporation has a stock repurchase program under which from time to time it repurchases shares of common stock in the open market and holds them as treasury stock. No shares of common stock were repurchased during 2010 and 2009 by the Corporation. As of September 30, 2010 and December 31, 2009, of the total amount of common stock repurchased in prior years, 9,897,800 shares were held as treasury stock and were available for general corporate purposes.

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18 — REGULATORY MATTERS
     Effective June 2, 2010, FirstBank, by and through its Board of Directors, entered into the Order with the FDIC and the Office of the Commissioner of Financial Institutions of Puerto Rico, a copy of which is attached as Exhibit 10.1 of the Form 8-K filed by the Corporation on June 4, 2010. This Order provides for various things, including (among other things) the following: (1) within 30 days of entering into the Order, the development by FirstBank of a capital plan to achieve over time a leverage ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 10% and a total risk-based capital ratio of at least 12%, (2) the preparation by FirstBank of strategic, liquidity and earnings plans and related projections within certain timetables set forth in the Order and on an ongoing basis, (3) the preparation by FirstBank of plans for reducing criticized assets and delinquent loans within timeframes set forth in the Order, (4) the requirement for First Bank board approval prior to the extension of credit to classified borrowers, (5) certain limitations with respect to brokered deposits, including the need for pre-approval by the FDIC of the issuance of brokered deposits (6) the establishment by FirstBank of a comprehensive policy and methodology for determining the allowance for loan and lease losses and the review and revision of loan policies, including the non-accrual policy, and (7) the operation by FirstBank under adequate and effective programs of independent loan review and appraisal compliance and under an effective policy for managing sensitivity to interest rate risk. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Order. Although all the regulatory capital ratios exceeded the established “well capitalized” levels at September 30, 2010, because of the Order with the FDIC, FirstBank cannot be treated as “well capitalized” institution under regulatory guidance.
     Effective June 3, 2010, First BanCorp entered into the Written Agreement with the FED, a copy of which is attached as Exhibit 10.2 of the Form 8-K filed by the Corporation on June 4, 2010. The Agreement provides, among other things, that the holding company must serve as a source of strength to FirstBank, and that, except upon consent of the FED, (1) the holding company may not pay dividends to stockholders or receive dividends from FirstBank, (2) the holding company and its nonbank subsidiaries may not make payments on trust preferred securities or subordinated debt, and (3) the holding company cannot incur, increase or guarantee debt or repurchase any capital securities. The Agreement also requires that the holding company submit a capital plan which reflects sufficient capital at First BanCorp on a consolidated basis, which must be acceptable to the FED, and follow certain guidelines with respect to the appointment or change in responsibilities of senior officers. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Written Agreement.
     The Corporation submitted its capital plan setting forth how it plans to improve capital positions to comply with the above mentioned Agreements over time. The primary objective of this Capital Plan is to improve the Corporation’s capital structure in order to (1) enhance its ability to operate in the current economic environment, (2) be in a position to continue executing business strategies to return to profitability and (3) achieve certain minimum capital ratios over time. Specifically, the capital plan details how the Bank will attempt to achieve a total capital to risk-weighted assets ratio of at least 12%, a Tier 1 capital to risk-weighted assets ratio of at least 10% and a leverage ratio of at least 8%. The Capital Plan sets forth the following capital restructuring initiatives as well as various deleveraging strategies: (1) the exchange of shares of the Corporation’s preferred stock held by the U.S. Treasury for common stock; (2) the exchange of shares of the Corporation’s common stock for any and all of the Corporation’s outstanding Series A through E Preferred Stock; and (3) a $500 million capital raise through the issuance of new common shares for cash. As discussed in Note 1, the Corporation has completed the transactions designed to accomplish the first two initiatives, including the exchange of 89% of the outstanding Series A through E Preferred Stock and the conversion of the preferred stock held by the U.S. Treasury into a new series of preferred stock that are mandatorily convertible into shares of common stock.
     In addition to the capital plan, the Corporation has submitted to its regulators a liquidity and brokered deposit plan, including a contingency funding plan, a non-performing asset reduction plan, a budget and profit plan, a strategic plan and a plan for the reduction of classified and special mention assets. Further, the Corporation have reviewed and enhanced the Corporation’s loan review program, various credit policies, the Corporation’s treasury and investments policy, the Corporation’s asset classification and allowance for loan and lease losses and non-accrual policies, the Corporation’s charge-off policy and the Corporation’s appraisal program. The Agreements also require the submission to the regulators of quarterly progress reports.
     The Order imposes no other restrictions on the FirstBank’s products or services offered to customers, nor do they impose any type of penalties or fines upon FirstBank or the Corporation. Concurrent with the Order, the FDIC has granted FirstBank temporary waivers to enable it to continue accessing the brokered deposit market through December 31, 2010. FirstBank will request approvals for future periods.

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19 — INCOME TAXES
     Income tax expense includes Puerto Rico and Virgin Islands income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation for U.S. income tax purposes and is generally subject to United States income tax only on its income from sources within the United States or income effectively connected with the conduct of a trade or business within the United States. Any such tax paid is creditable, within certain conditions and limitations, against the Corporation’s Puerto Rico tax liability. The Corporation is also subject to U.S.Virgin Islands taxes on its income from sources within that jurisdiction. Any such tax paid is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions and limitations.
     Under the Puerto Rico Internal Revenue Code of 1994, as amended (the “PR Code”), the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is not able to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss, a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable carry forward period (7 years under the PR Code). The PR Code provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations. Dividend payments from a U.S. subsidiary to the Corporation are subject to a 10% withholding tax based on the provisions of the U.S. Internal Revenue Code. Under the PR Code, First BanCorp is subject to a maximum statutory tax rate of 39%. In 2009, the Puerto Rico Government approved Act No. 7 (the “Act”), to stimulate Puerto Rico’s economy and to reduce the Puerto Rico Government’s fiscal deficit. The Act imposes a series of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax determined, which is applicable to corporations, among others, whose combined income exceeds $100,000, effectively resulting in an increase in the maximum statutory tax rate from 39% to 40.95% and an increase in the capital gain statutory tax rate from 15% to 15.75%. This temporary measure is effective for tax years that commenced after December 31, 2008 and before January 1, 2012. The PR Code also includes an alternative minimum tax of 22% that applies if the Corporation’s regular income tax liability is less than the alternative minimum tax requirements.
     The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through an International Banking Entities (“IBE”) of the Bank and through the Bank’s subsidiary, FirstBank Overseas Corporation, in which the interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation. Under the Act, all IBEs are subject to the special 5% tax on their net income not otherwise subject to tax pursuant to the PR Code. This temporary measure is also effective for tax years that commenced after December 31, 2008 and before January 1, 2012. The IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico. IBEs that operate as a unit of a bank pay income taxes at normal rates to the extent that the IBEs’ net income exceeds 20% of the bank’s total net taxable income.
     For the quarter and nine-month period ended September 30, 2010, the Corporation recognized an income tax benefit of $1.0 million and an income tax expense of $9.7 million, respectively, compared to income tax expense of $113.5 million and $1.2 million recorded for the same periods in 2009. The variance in income tax expense mainly resulted from the impact in the third quarter of 2009 of a non-cash charge of approximately $152.2 million to increase the valuation allowance for the Corporation’s deferred tax asset. The income tax benefit recorded for the third quarter of 2010 was mainly related to the operations of FirstBank Overseas, which had a pre-tax loss of $30.5 million during the third quarter, driven by its share of the loss on the early extinguishment of repurchase agreements. This entity was profitable for the nine-month period ended September 30, 2010. Meanwhile, the income tax expense for the first nine months of 2010 is related to the operations of profitable subsidiaries.
     As of September 30, 2010, the deferred tax asset, net of a valuation allowance of $290.5 million, amounted to $101.2 million compared to $109.2 million as of December 31, 2009. The decrease was associated with a $3.5 million increase in the valuation allowance related to deferred tax assets created prior to 2010 and the creation of deferred tax liabilities in connection with unrealized gains on available for sale securities; the unrealized gains on available-for-sale securities were recorded as part of other comprehensive income.
     Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax assets based on the consideration of all available evidence, using a “more likely than not” realization standard. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. In making such assessment, significant weight is to be given to evidence that can be objectively verified, including both positive and negative evidence. The accounting for income taxes guidance requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance, and recognizes tax benefits only when deemed probable.

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     In assessing the weight of positive and negative evidence, a significant negative factor that resulted in increases of the valuation allowance was that the Corporation’s banking subsidiary FirstBank Puerto Rico continues in a three-year historical cumulative loss position as of the end of the third quarter of 2010, mainly as a result of charges to the provision for loan and lease losses, especially in the construction loan portfolio in both, Puerto Rico and Florida markets, as a result of the economic downturn. As of September 30, 2010, management concluded that $101.2 million of the deferred tax assets will be realized. In assessing the likelihood of realizing the deferred tax assets, management has considered all four sources of taxable income mentioned above and, even though the Corporation expects to be profitable in the near future and be able to realize the deferred tax asset, given current uncertain economic conditions, the Corporation has only relied on tax-planning strategies as the main source of taxable income to realize the deferred tax asset amount. Among the most significant tax-planning strategies identified are: (i) sale of appreciated assets, (ii) consolidation of profitable and unprofitable companies (in Puerto Rico each company files a separate tax return; no consolidated tax returns are permitted), and (iii) deferral of deductions without affecting their utilization. In line with these strategies, effective July 1, 2010 the operations conducted by First Leasing and Grupo Empresas de Servicios Financieros (PR Finance) as separate subsidiaries were merged with and into FirstBank. Management will continue monitoring the likelihood of realizing the deferred tax assets in future periods. If future events differ from management’s September 30, 2010 assessment, an additional valuation allowance may need to be established, which may have a material adverse effect on the Corporation’s results of operations. Similarly, to the extent the realization of a portion, or all, of the tax asset becomes “more likely than not” based on changes in circumstances (such as, improved earnings, changes in tax laws or other relevant changes), a reversal of that portion of the deferred tax asset valuation allowance will then be recorded.
     The increase in the valuation allowance does not have any impact on the Corporation’s liquidity, nor does such an allowance preclude the Corporation from using tax losses, tax credits or other deferred tax assets in the future.
     FASB guidance prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken on income tax returns. Under the authoritative accounting guidance, income tax benefits are recognized and measured based upon a two-step model: 1) a tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit recognized in accordance with this model and the tax benefit claimed on a tax return is referred to as unrecognized tax benefits (“UTB”).
     During the second quarter of 2009, the Corporation reversed UTBs of $10.8 million and related accrued interest of $3.5 million due to the lapse of the statute of limitations for the 2004 taxable year. Also, in July 2009, the Corporation entered into an agreement with the Puerto Rico Department of the Treasury to conclude an income tax audit and to eliminate all possible income and withholding tax deficiencies related to taxable years 2005, 2006, 2007 and 2008. As a result of such agreement, the Corporation reversed during the third quarter of 2009 the remaining UTBs and related interest by approximately $2.9 million, net of the payment made to the Puerto Rico Department of the Treasury in connection with the conclusion of the tax audit. There were no UTBs outstanding as of September 30, 2010 and December 31, 2009.
     The Corporation classified all interest and penalties, if any, related to tax uncertainties as income tax expense. For the first nine months of 2009, the total amount of accrued interest reversed by the Corporation through income tax expense was $6.8 million. The amount of UTBs may increase or decrease for various reasons, including changes in the amounts for current tax year positions, the expiration of open income tax returns due to the expiration of statutes of limitations, changes in management’s judgment about the level of uncertainty, the status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.
20 — FAIR VALUE
Fair Value Option
Medium-Term Notes
     The Corporation elected the fair value option for certain medium term notes that were hedged with interest rate swaps that were previously designated for fair value hedge accounting. As of September 30, 2010 and December 31, 2009, these medium-term notes had a fair value of $11.1 million and $13.4 million, respectively, and principal balance of $15.4 million recorded in notes payable. Interest paid/accrued on these instruments is recorded as part of interest expense and the accrued interest is part of the fair value of the notes. Electing the fair value option allows the Corporation to eliminate the burden of complying with the requirements for hedge accounting (e.g., documentation and effectiveness assessment) without introducing earnings volatility.
     Medium-term notes for which the Corporation elected the fair value option were priced using observable market data in the institutional markets.

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Callable brokered CDs
     In the past, the Corporation also measured at fair value callable brokered CDs. All of the brokered CDs measured at fair value were called during 2009.
Fair Value Measurement
     The FASB authoritative guidance for fair value measurement defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value:
Level 1- Valuations of Level 1 assets and liabilities are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 1 assets and liabilities include equity securities that are traded in an active exchange market, as well as certain U.S. Treasury and other U.S. government and agency securities and corporate debt securities that are traded by dealers or brokers in active markets.
Level 2- Valuations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on the value of identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities (e.g., medium-term notes elected to be measured at fair value) whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3- Valuations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models for which the determination of fair value requires significant management judgment or estimation.
     For the quarter and nine-month period ended September 30, 2010, there have been no transfers into or out of Level 1 and Level 2 measurements of the fair value hierarchy.
Estimated Fair Value of Financial Instruments
     The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.
     The estimated fair value is subjective in nature and involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. In addition, the fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business.

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     The following table presents the estimated fair value and carrying value of financial instruments as of September 30, 2010 and December 31, 2009.
                                 
    Total Carrying             Total Carrying        
    Amount in             Amount in        
    Statement of             Statement of        
    Financial     Fair Value     Financial     Fair Value  
    Condition     Estimated     Condition     Estimated  
    9/30/2010     9/30/2010     12/31/2009     12/31/2009  
    (In thousands)  
Assets:
                               
Cash and due from banks and money market investments
  $ 904,626     $ 904,626     $ 704,084     $ 704,084  
Investment securities available for sale
    2,976,180       2,976,180       4,170,782       4,170,782  
Investment securities held to maturity
    489,967       513,569       601,619       621,584  
Other equity securities
    64,310       64,310       69,930       69,930  
Loans receivable, including loans held for sale
    12,189,222               13,949,226          
Less: allowance for loan and lease losses
    (608,526 )             (528,120 )        
 
                           
Loans, net of allowance
    11,580,696       11,104,113       13,421,106       12,811,010  
 
                           
Derivatives, included in assets
    1,537       1,537       5,936       5,936  
 
                               
Liabilities:
                               
Deposits
    12,543,567       12,720,872       12,669,047       12,801,811  
Loans payable
                900,000       900,000  
Securities sold under agreements to repurchase
    1,400,000       1,537,030       3,076,631       3,242,110  
Advances from FHLB
    835,440       872,852       978,440       1,025,605  
Notes Payable
    25,057       23,567       27,117       25,716  
Other borrowings
    231,959       63,587       231,959       80,267  
Derivatives, included in liabilities
    7,211       7,211       6,467       6,467  
Assets and liabilities measured at fair value on a recurring basis, including financial liabilities for which the Corporation has elected the fair value option, are summarized below:
                                                                 
    As of September 30, 2010   As of December 31, 2009
    Fair Value Measurements Using   Fair Value Measurements Using
                            Assets / Liabilities                           Assets / Liabilities
(In thousands)   Level 1   Level 2   Level 3   at Fair Value   Level 1   Level 2   Level 3   at Fair Value
Assets:
                                                               
Securities available for sale :
                                                               
Equity securities
  $ 71     $     $     $ 71     $ 303     $     $     $ 303  
U.S. Treasury Securities
    611,940                   611,940                          
Non-callable U.S. agency debt
    305,204                   305,204                          
Callable U.S. agency debt and MBS
          1,745,085             1,745,085             3,949,799             3,949,799  
Puerto Rico Government Obligations
          233,850       2,630       236,480             136,326             136,326  
Private label MBS
                77,400       77,400                   84,354       84,354  
Derivatives, included in assets:
                                                               
Interest rate swap agreements
          427             427             319             319  
Purchased interest rate cap agreements
          1             1             224       4,199       4,423  
Purchased options used to manage exposure to the stock market on embeded stock indexed options
          1,109             1,109             1,194             1,194  
Liabilities:
                                                             
Medium-term notes
          11,053             11,053             13,361             13,361  
Derivatives, included in liabilities:
                                                               
Interest rate swap agreements
            6,171             6,171             5,068             5,068  
Written interest rate cap agreements
          1             1             201             201  
Embedded written options on stock index deposits and notes payable
          1,039             1,039             1,198             1,198  

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    Changes in Fair Value for the Quarter Ended September 30, 2010, for     Changes in Fair Value for the Nine-Month Period Ended  
    items Measured at Fair Value Pursuant to Election of the Fair Value     September 30, 2010, for items Measured at Fair Value Pursuant  
    Option     to Election of the Fair Value Option  
    Unrealized Losses and Interest Expense     Unrealized Gains and Interest Expense  
(In thousands)   included in Current-Period Earnings (1)     included in Current-Period Earnings (1)  
Medium-term notes
  $ (762 )   $ 1,670  
 
           
 
  $ (762 )   $ 1,670  
 
           
 
(1)   Changes in fair value for the quarter and nine-month period ended September 30, 2010 include interest expense on medium-term notes of $0.2 million and $0.6 million, respectively. Interest expense on medium-term notes that have been elected to be carried at fair value are recorded in interest expense in the Consolidated Statement of (Loss) Income based on their contractual coupons.
                                                 
    Changes in Fair Value for the Quarter Ended     Changes in Fair Value for the Nine-Month Period Ended  
    September 30, 2009, for items Measured at Fair Value Pursuant     September 30, 2009, for items Measured at Fair Value Pursuant  
    to Election of the Fair Value Option     to Election of the Fair Value Option  
                    Total                     Total  
                    Changes in Fair Value                     Changes in Fair Value  
    Unrealized Losses and     Unrealized Losses and     Unrealized Losses     Unrealized Gains and     Unrealized Losses and     Unrealized Losses  
    Interest Expense included     Interest Expense included     and Interest Expense     Interest Expense included     Interest Expense included     and Interest Expense  
    in Interest Expense     in Interest Expense     included in     in Interest Expense     in Interest Expense     included in  
(In thousands)   on Deposits (1)     on Notes Payable (1)     Current-Period Earnings (1)     on Deposits (1)     on Notes Payable (1)     Current-Period Earnings (1)  
Callable brokered CDs
  $     $     $     $ (2,068 )   $     $ (2,068 )
Medium-term notes
          (1,788 )     (1,788 )           (3,637 )     (3,637 )
 
                                   
 
  $     $ (1,788 )   $ (1,788 )   $ (2,068 )   $ (3,637 )   $ (5,705 )
 
                                   
 
(1)   Changes in fair value for the nine-month period ended September 30, 2009 include interest expense on callable brokered CDs of $10.8 million and interest expense on medium-term notes of $0.2 million and $0.6 million for the quarter and first nine months of 2009, respectively. Interest expense on callable brokered CDs and medium term notes that have been elected to be carried at fair value are recorded in interest expense in the Consolidated Statement of Income based on their contractual coupons.
     The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter and nine-month period ended September 30, 2010 and 2009.
                                 
    Total Fair Value Measurements     Total Fair Value Measurements  
    (Quarter Ended September 30, 2010)     (Nine-Month Period Ended September 30, 2010)  
            Securities Available For              
Level 3 Instruments Only   Derivatives (1)     Sale (2)     Derivatives (1)     Securities Available For Sale (2)  
(In thousands)                                
Beginning balance
  $     $ 83,442     $ 4,199     $ 84,354  
 
Total gains or (losses) (realized / unrealized):
                               
Included in earnings
                (1,152 )      
Included in other comprehensive income
          1,090             5,060  
Purchases
                      2,584  
Principal repayments and amortization
          (4,502 )           (11,968 )
Other (1)
                (3,047 )      
 
                       
 
Ending balance
  $     $ 80,030     $     $ 80,030  
 
                       
 
(1)   Amounts related to the valuation of interest rate cap agreements. The counterparty to these interest rate cap agreements failed on April 30, 2010 and was acquired by another financial institution through an FDIC assisted transaction. The Corporation currently has a claim with the FDIC.
 
(2)   Amounts mostly related to certain private label mortgage-backed securities.
                                 
    Total Fair Value Measurements     Total Fair Value Measurements  
    (Quarter Ended September 30, 2009)     (Nine-Month Period Ended September 30, 2009)  
            Securities Available For              
Level 3 Instruments Only   Derivatives (1)     Sale (2)     Derivatives (1)     Securities Available For Sale (2)  
(In thousands)                                
Beginning balance
  $ 3,514     $ 96,568     $ 760     $ 113,983  
 
Total gains or (losses) (realized / unrealized):
                               
Included in earnings
    (1,047 )     (209 )     1,707       (1,270 )
Included in other comprehensive income
          1,580             336  
Principal repayments and amortization
          (5,853 )           (20,963 )
 
                       
 
Ending balance
  $ 2,467     $ 92,086     $ 2,467     $ 92,086  
 
                       
 
(1)   Amounts related to the valuation of interest rate cap agreements.
 
(2)   Amounts mostly related to certain private label mortgage-backed securities.

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          The table below summarizes changes in unrealized gains and losses recorded in earnings for the quarter and nine-month period ended September 30, 2009 for Level 3 assets and liabilities that are still held at the end of such periods.
                                 
    Changes in Unrealized     Changes in Unrealized  
    Losses     Gains (Losses)  
    Quarter Ended     Nine-Month Period Ended  
    September 30, 2009     September 30, 2009  
Level 3 Instruments Only           Securities Available For             Securities Available For  
(In thousands)   Derivatives     Sale     Derivatives     Sale  
Changes in unrealized gains (losses) relating to assets still held at reporting date (1)
                               
 
Interest income on loans
  $ (19 )   $     $ 29     $  
Interest income on investment securities
    (1,028 )           1,678        
Net impairment losses on investment securities
          (209 )           (1,270 )
 
                       
 
  $ (1,047 )   $ (209 )   $ 1,707     $ (1,270 )
 
                       
 
(1)   Unrealized gains of $1.6 million and $0.3 million on Level 3 available-for-sale securities was recognized as part of comprehensive income for the quarter and nine-month period ended September 30, 2009.
          Additionally, fair value is used on a non-recurring basis to evaluate certain assets in accordance with GAAP. Adjustments to fair value usually result from the application of lower-of-cost-or-market accounting (e.g., loans held for sale carried at the lower of cost or fair value and repossessed assets) or write-downs of individual assets (e.g., goodwill, loans).
          As of September 30, 2010, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table:
                                         
                            Losses recorded for   Losses recorded for
    Carrying value as of September 30, 2010   the Quarter Ended   the Nine-month period
(In thousands)   Level 1   Level 2   Level 3   September 30, 2010   ended September 30, 2010
Loans receivable (1)
  $     $     $ 1,512,091     $ 87,092     $ 387,536  
Other Real Estate Owned (2)
                82,706       5,880       13,144  
 
(1)   Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral. The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. absorption rates), which are not market observable.
 
(2)   The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Losses are related to market valuation adjustments after the transfer of the loans to the Other Real Estate Owned (“OREO”) portfolio.
          As of September 30, 2009, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table:
                                         
                            Losses recorded for   Losses recorded for
    Carrying value as of September 30, 2009   the Quarter Ended   the Nine-month period
(In thousands)   Level 1   Level 2   Level 3   September 30, 2009   ended September 30, 2009
Loans receivable (1)
  $     $     $ 994,441     $ 72,077     $ 202,645  
Other Real Estate Owned (2)
                67,493       3,099       8,260  
Core deposit intangible (3)
                7,016             3,988  
 
(1)   Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral. The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. absorption rates), which are not market observable.
 
(2)   The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Losses are related to market valuation adjustments after the transfer of the loans to the OREO portfolio.
 
(3)   Amount represents core deposit intangible of FirstBank Florida. The impairment was generally measured based on internal information about decreases in the base of core deposits acquired upon the acquisition of FirstBank Florida.
          The following is a description of the valuation methodologies used for instruments for which an estimated fair value is presented as well as for instruments for which the Corporation has elected the fair value option. The estimated fair value was calculated using certain facts and assumptions, which vary depending on the specific financial instrument.

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Cash and due from banks and money market investments
          The carrying amounts of cash and due from banks and money market investments are reasonable estimates of their fair value. Money market investments include held-to-maturity U.S. Government obligations, which have a contractual maturity of three months or less. The fair value of these securities is based on quoted market prices in active markets that incorporate the risk of nonperformance.
Investment securities available for sale and held to maturity
          The fair value of investment securities is the market value based on quoted market prices (as is the case with equity securities, U.S. Treasury notes and non-callable U.S. Agency debt securities), when available, or market prices for identical or comparable assets (as is the case with MBS and callable U.S. agency debt) that are based on observable market parameters including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers and reference data including market research operations. Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon models that use unobservable inputs due to the limited market activity of the instrument, as is the case with certain private label mortgage-backed securities held by the Corporation.
          Private label MBS are collateralized by fixed-rate mortgages on single-family residential properties in the United States; the interest rate on the securities is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The market valuation represents the estimated net cash flows over the projected life of the pool of underlying assets applying a discount rate that reflects market observed floating spreads over LIBOR, with a widening spread bias on a nonrated security. The market valuation is derived from a model that utilizes relevant assumptions such as prepayment rate, default rate, and loss severity on a loan level basis. The Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow analysis according to collateral attributes of the underlying mortgage pool (i.e. loan term, current balance, note rate, rate adjustment type, rate adjustment frequency, rate caps, others) in combination with prepayment forecasts obtained from a commercially available prepayment model (ADCO). The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. Loss assumptions were driven by the combination of default and loss severity estimates, taking into account loan credit characteristics (loan-to-value, state, origination date, property type, occupancy loan purpose, documentation type, debt-to-income ratio, other) to provide an estimate of default and loss severity. Refer to Note 4 — Investment securities for additional information about assumptions used in the valuation of private label MBS.
Other equity securities
          Equity or other securities that do not have a readily available fair value are stated at the net realizable value, which management believes is a reasonable proxy for their fair value. This category is principally composed of FHLB stock that is owned by the Corporation to comply with FHLB regulatory requirements. Their realizable value equals their cost as these shares can be freely redeemed at par.
Loans receivable, including loans held for sale
          The fair value of all loans was estimated using discounted cash flow analyses, based on interest rates currently being offered for loans with similar terms and credit quality and with adjustments that the Corporation’s management believes a market participant would consider in determining fair value. Loans were classified by type such as commercial, residential mortgage, credit cards and automobile. These asset categories were further segmented into fixed- and adjustable-rate categories. The fair values of performing fixed-rate and adjustable-rate loans were calculated by discounting expected cash flows through the estimated maturity date. Loans with no stated maturity, like credit lines, were valued at book value. Prepayment assumptions were considered for non-residential loans. For residential mortgage loans, prepayment estimates were based on prepayment experiences of generic U.S. mortgage-backed securities pools with similar characteristics (e.g. coupon and original term) and adjusted based on the Corporation’s historical data. Discount rates were based on the Treasury and LIBOR/Swap Yield Curves at the date of the analysis, and included appropriate adjustments for expected credit losses and liquidity. For impaired collateral dependent loans, the impairment was primarily measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observable transactions involving similar assets in similar locations.
Deposits
          The estimated fair value of demand deposits and savings accounts, which are deposits with no defined maturities, equals the amount payable on demand at the reporting date. For deposits with stated maturities, but that reprice at least quarterly, the fair value is also estimated to be the recorded amounts at the reporting date. The fair values of retail fixed-rate time deposits, with stated maturities, are based on the present value of the future cash flows expected to be paid on the deposits. The cash flows were based on contractual maturities; no early repayments are assumed. Discount rates were based on the LIBOR yield curve.

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          The estimated fair value of total deposits excludes the fair value of core deposit intangibles, which represent the value of the customer relationship measured by the value of demand deposits and savings deposits that bear a low or zero rate of interest and do not fluctuate in response to changes in interest rates.
          The fair value of brokered CDs, which are included within deposits, is determined using discounted cash flow analyses over the full term of the CDs. The valuation uses a “Hull-White Interest Rate Tree” approach, an industry-standard approach for valuing instruments with interest rate call options. The fair value of the CDs is computed using the outstanding principal amount. The discount rates used are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices. The fair value does not incorporate the risk of nonperformance, since brokered CDs are generally participated out by brokers in shares of less than $100,000 and insured by the FDIC.
Loans payable
          Loans payable consisted of short-term borrowings under the FED Discount Window Program. Due to the short-term nature of these borrowings, their outstanding balances are estimated to be the fair value.
Securities sold under agreements to repurchase
          Some repurchase agreements reprice at least quarterly, and their outstanding balances are estimated to be their fair value. Where longer commitments are involved, fair value is estimated using exit price indications of the cost of unwinding the transactions as of the end of the reporting period. Securities sold under agreements to repurchase are fully collateralized by investment securities.
Advances from FHLB
          The fair value of advances from FHLB with fixed maturities is determined using discounted cash flow analyses over the full term of the borrowings, using indications of the fair value of similar transactions. The cash flows assume no early repayment of the borrowings. Discount rates are based on the LIBOR yield curve. For advances from FHLB that reprice quarterly, their outstanding balances are estimated to be their fair value. Advances from FHLB are fully collateralized by mortgage loans and, to a lesser extent, investment securities.
Derivative instruments
          The fair value of most of the derivative instruments is based on observable market parameters and takes into consideration the credit risk component of paying counterparties when appropriate, except when collateral is pledged. That is, on interest rate swaps, the credit risk of both counterparties is included in the valuation; and on options and caps, only the seller’s credit risk is considered. The “Hull-White Interest Rate Tree” approach is used to value the option components of derivative instruments, and discounting of the cash flows is performed using US dollar LIBOR-based discount rates or yield curves that account for the industry sector and the credit rating of the counterparty and/or the Corporation. Derivatives include interest rate swaps used for protection against rising interest rates and, prior to June 30, 2009, included interest rate swaps to economically hedge brokered CDs and medium-term notes. For these interest rate swaps, a credit component was not considered in the valuation since the Corporation has fully collateralized with investment securities any mark to market loss with the counterparty and, if there were market gains, the counterparty had to deliver collateral to the Corporation.
          Certain derivatives with limited market activity, as is the case with derivative instruments named as “reference caps,” were valued using models that consider unobservable market parameters (Level 3). Reference caps were used mainly to hedge interest rate risk inherent in private label mortgage-backed securities, thus were tied to the notional amount of the underlying fixed-rate mortgage loans originated in the United States. The counterparty to these derivative instruments failed on April 30, 2010. The Corporation currently has a claim with the FDIC and the exposure to fair value of $3.0 million was recorded as an account receivable. In the past, significant inputs used for the fair value determination consisted of specific characteristics such as information used in the prepayment model which follow the amortizing schedule of the underlying loans, which was an unobservable input. The valuation model used the Black formula, which is a benchmark standard in the financial industry. The Black formula is similar to the Black-Scholes formula for valuing stock options except that the spot price of the underlying is replaced by the forward price. The Black formula uses as inputs the strike price of the cap, forward LIBOR rates, volatility estimates and discount rates to estimate the option value. LIBOR rates and swap rates are obtained from Bloomberg L.P. (“Bloomberg”) every day and are used to build a zero coupon curve based on the Bloomberg LIBOR/Swap curve. The discount factor is then calculated from the zero coupon curve. The cap is the sum of all caplets. For each caplet, the rate is reset at the beginning of each reporting period and payments are made at the end of each period. The cash flow of each caplet is then discounted from each payment date.
          Although most of the derivative instruments are fully collateralized, a credit spread is considered for those that are not secured in full. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments resulted in an unrealized gain of approximately $1.3 million as of September 30, 2010, which includes an unrealized gain of $0.8 million for the first nine months of 2010.

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Term notes payable
          The fair value of term notes is determined using a discounted cash flow analysis over the full term of the borrowings. This valuation also uses the “Hull-White Interest Rate Tree” approach to value the option components of the term notes. The model assumes that the embedded options are exercised economically. The fair value of medium-term notes is computed using the notional amount outstanding. The discount rates used in the valuations are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices and value the cancellation option in the term notes. For the medium-term notes, the credit risk is measured using the difference in yield curves between swap rates and a yield curve that considers the industry and credit rating of the Corporation as issuer of the note at a tenor comparable to the time to maturity of the note and option. The net gain from fair value changes attributable to the Corporation’s own credit to the medium-term notes for which the Corporation has elected the fair value option recorded for the first nine months of 2010 amounted to $1.9 million, compared to an unrealized loss of $2.9 million for the first nine months of 2009. The cumulative mark-to-market unrealized gain on the medium-term notes since measured at fair value attributable to credit risk amounted to $4.5 million as of September 30, 2010.
Other borrowings
          Other borrowings consist of junior subordinated debentures. Projected cash flows from the debentures were discounted using the LIBOR yield curve plus a credit spread. This credit spread was estimated using the difference in yield curves between Swap rates and a yield curve that considers the industry and credit rating of the Corporation as issuer of the note at a tenor comparable to the time to maturity of the debentures.
21 — SUPPLEMENTAL CASH FLOW INFORMATION
          Supplemental cash flow information follows:
                 
    Nine-Month Period Ended September 30,
    2010   2009
    (In thousands)
Cash paid for:
               
 
               
Interest on borrowings
  $ 285,567     $ 393,463  
Income tax
    435       503  
 
               
Non-cash investing and financing activities:
               
 
               
Additions to other real estate owned
    77,712       76,677  
Additions to auto repossesion
    55,826       61,107  
Capitalization of servicing assets
    5,244       4,929  
Loan securitizations
    164,904       262,129  
Non-cash acquisition of mortgage loans that previously served as collateral of a commercial loan to a local financial institution
          205,395  
Change in par value of common stock
    83,287        
Preferred Stock exchanged for new common stock issued:
               
Preferred stock exchanged (Series A through E)
    476,193        
New common stock issued
    90,806        
Series F Preferred Stock exchanged for Series G Preferred Stock:
               
Preferred stock exchanged (Series F)
    378,408        
New Series G Preferred Stock issued
    347,386        
Fair value adjustment on amended common stock warrant
    1,179        
22 — SEGMENT INFORMATION
          Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer of the Corporation and, to a lesser extent, the Board of Directors, the operating segments are driven primarily by the Corporation’s lines of business for its operations in Puerto Rico, the Corporation’s principal market, and by geographic areas for its operations outside of Puerto Rico. As of September 30, 2010, the Corporation had six reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments; United States operations and Virgin Islands operations. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Corporation’s organizational chart, nature of the products, distribution channels and the economic characteristics of the products were also considered in the determination of the reportable segments.

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          Starting in the fourth quarter of 2009, the Corporation realigned its reporting segments to better reflect how it views and manages its business. Two additional operating segments were created to evaluate the operations conducted by the Corporation, outside of Puerto Rico. Operations conducted in the United States and in the Virgin Islands are now individually evaluated as separate operating segments. This realignment in the segment reporting essentially reflects the effect of restructuring initiatives, including the merger of FirstBank Florida operations with and into FirstBank, and allows the Corporation to better present the results from its growth focus.
          Prior to the third quarter of 2009, the operating segments were driven primarily by the Corporation’s legal entities. FirstBank operations conducted in the Virgin Islands and through its loan production office in Miami, Florida were reflected in the Corporation’s then four reportable segments (Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments) while the operations conducted by FirstBank Florida were reported as part of a category named “Other”. In the third quarter of 2009, as a result of the aforementioned merger, the operations of FirstBank Florida were reported as part of the four reportable segments. Starting in the first quarter of 2010, activities related to auto floor plan financings previously included as part of Consumer (Retail) Banking are now included as part of the Commercial and Corporate Banking segment. The changes in the fourth quarter of 2009 and first quarter of 2010 reflected a further realignment of the organizational structure as a result of management changes. Prior period amounts have been reclassified to conform to current period presentation. These changes did not have an impact on the previously reported consolidated results of the Corporation.
          The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers represented by specialized and middle-market clients and the public sector. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, and floor plan financings as well as other products such as cash management and business management services. The Mortgage Banking segment’s operations consist of the origination, sale and servicing of a variety of residential mortgage loans. The Mortgage Banking segment also acquires and sells mortgages in the secondary markets. In addition, the Mortgage Banking segment includes mortgage loans purchased from other local banks and mortgage bankers. The Consumer (Retail) Banking segment consists of the Corporation’s consumer lending and deposit taking activities conducted mainly through its branch network and loan centers. The Treasury and Investments segment is responsible for the Corporation’s investment portfolio and treasury functions executed to manage and enhance liquidity. This segment lends funds to the Commercial and Corporate Banking, Mortgage Banking and Consumer (Retail) Banking segments to finance their lending activities and borrows from those segments. The Consumer (Retail) Banking segment also lends funds to other segments. The interest rates charged or credited by Treasury and Investments and the Consumer (Retail) Banking segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The United States operations segment consists of all banking activities conducted by FirstBank in the United States mainland, including commercial and retail banking services. The Virgin Islands operations segment consists of all banking activities conducted by the Corporation in the U.S. and British Virgin Islands, including commercial and retail banking services and insurance activities.
          The accounting policies of the segments are the same as those referred to in Note 1 to the Corporation’s financial statements for the year ended December 31, 2009 contained in the Corporation’s Annual Report or Form 10-K.
          The Corporation evaluates the performance of the segments based on net interest income, the estimated provision for loan and lease losses, non-interest income and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-earning assets less the allowance for loan and lease losses.

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The following table presents information about the reportable segments (in thousands):
                                                         
    Mortgage     Consumer     Commercial and     Treasury and     United States     Virgin Islands        
(In thousands)   Banking     (Retail) Banking     Corporate     Investments     Operations     Operations     Total  
For the quarter ended September 30, 2010:
                                                       
Interest income
  $ 38,653     $ 46,131     $ 58,034     $ 32,419     $ 12,416       16,375     $ 204,028  
Net (charge) credit for transfer of funds
    (21,677 )     1,161       (6,126 )     26,642                    
Interest expense
          (12,552 )           (64,769 )     (11,348 )     (1,657 )     (90,326 )
 
                                         
Net interest income (loss)
    16,976       34,740       51,908       (5,708 )     1,068       14,718       113,702  
 
                                         
 
                                                       
Provision for loan and lease losses
    (15,067 )     (13,632 )     (83,851 )           (4,137 )     (3,795 )     (120,482 )
Non-interest income
    6,348       6,902       2,579       932       235       2,270       19,266  
Direct non-interest expenses
    (11,532 )     (22,395 )     (12,860 )     (1,403 )     (10,401 )     (10,233 )     (68,824 )
 
                                         
Segment (loss) income
  $ (3,275 )   $ 5,615     $ (42,224 )   $ (6,179 )   $ (13,235 )   $ 2,960     $ (56,338 )
 
                                         
 
                                                       
Average earnings assets
  $ 2,601,342     $ 1,573,994     $ 5,775,249     $ 4,654,372     $ 986,730     $ 930,474     $ 16,522,161  
                                                         
    Mortgage     Consumer     Commercial and     Treasury and     United States     Virgin Islands        
    Banking     (Retail) Banking     Corporate     Investments     Operations     Operations     Total  
For the quarter ended September 30, 2009:
                                                       
Interest income
  $ 39,798     $ 49,304     $ 58,859     $ 61,313     $ 15,663       17,085     $ 242,022  
Net (charge) credit for transfer of funds
    (26,425 )     (1,765 )     (9,336 )     37,526                    
Interest expense
          (14,714 )           (73,836 )     (22,463 )     (1,876 )     (112,889 )
 
                                         
Net interest income (loss)
    13,373       32,825       49,523       25,003       (6,800 )     15,209       129,133  
 
                                         
 
                                                       
Provision for loan and lease losses
    (3,354 )     (18,138 )     (85,863 )           (32,346 )     (8,389 )     (148,090 )
Non-interest income
    3,212       8,383       1,483       34,042       112       2,757       49,989  
Direct non-interest expenses
    (8,105 )     (23,717 )     (9,882 )     (1,654 )     (7,077 )     (11,190 )     (61,625 )
 
                                         
Segment income (loss)
  $ 5,126     $ (647 )   $ (44,739 )   $ 57,391     $ (46,111 )   $ (1,613 )   $ (30,593 )
 
                                         
 
                                                       
Average earnings assets
  $ 2,726,367     $ 1,757,626     $ 6,115,810     $ 6,177,819     $ 1,430,889     $ 977,723     $ 19,186,234  
                                                         
    Mortgage     Consumer     Commercial and     Treasury and     United States     Virgin Islands        
    Banking     (Retail) Banking     Corporate     Investments     Operations     Operations     Total  
For the nine-month period ended September 30, 2010:
                                                       
Interest income
  $ 118,313     $ 140,820     $ 174,567     $ 114,401     $ 39,654     $ 52,125     $ 639,880  
Net (charge) credit for transfer of funds
    (71,189 )     5,982       (19,436 )     84,643                    
Interest expense
          (39,669 )           (211,632 )     (34,176 )     (4,776 )     (290,253 )
 
                                         
Net interest income (loss)
    47,124       107,133       155,131       (12,588 )     5,478       47,349       349,627  
 
                                         
 
                                                       
Provision for loan and lease losses
    (60,505 )     (37,048 )     (214,950 )           (108,950 )     (16,787 )     (438,240 )
Non-interest income
    10,765       21,670       7,184       55,805       550       8,143       104,117  
Direct non-interest expenses
    (29,820 )     (71,546 )     (50,022 )     (4,428 )     (32,410 )     (31,742 )     (219,968 )
 
                                         
Segment (loss) income
  $ (32,436 )   $ 20,209     $ (102,657 )   $ 38,789     $ (135,332 )   $ 6,963     $ (204,464 )
 
                                         
 
                                                       
Average earnings assets
  $ 2,674,753     $ 1,621,958     $ 6,073,657     $ 5,180,125     $ 1,131,391     $ 1,000,797     $ 17,682,681  
                                                         
    Mortgage     Consumer     Commercial and     Treasury and     United States     Virgin Islands        
    Banking     (Retail) Banking     Corporate     Investments     Operations     Operations     Total  
For the nine-month period ended September 30, 2009:
                                                       
Interest income
  $ 116,566     $ 150,786     $ 183,930     $ 197,561     $ 51,912       52,370     $ 753,125  
Net (charge) credit for transfer of funds
    (82,420 )     (3,648 )     (53,774 )     139,842                    
Interest expense
          (46,432 )           (262,224 )     (55,136 )     (7,588 )     (371,380 )
 
                                         
Net interest income
    34,146       100,706       130,156       75,179       (3,224 )     44,782       381,745  
 
                                         
 
                                                       
Provision for loan and lease losses
    (24,283 )     (32,782 )     (229,794 )           (133,126 )     (22,686 )     (442,671 )
Non-interest income
    6,369       24,162       3,975       59,929       1,330       7,692       103,457  
Direct non-interest expenses
    (23,835 )     (71,490 )     (31,779 )     (5,366 )     (29,092 )     (34,821 )     (196,383 )
 
                                         
Segment (loss) income
  $ (7,603 )   $ 20,596     $ (127,442 )   $ 129,742     $ (164,112 )   $ (5,033 )   $ (153,852 )
 
                                         
 
                                                       
Average earnings assets
  $ 2,635,929     $ 1,793,601     $ 6,220,832     $ 5,919,854     $ 1,475,681     $ 985,711       19,031,608  

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          The following table presents a reconciliation of the reportable segment financial information to the consolidated totals:
                                 
    Quarter Ended     Nine-month Period Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Net loss:
                               
 
                               
Total loss for segments and other
  $ (56,338 )   $ (30,593 )   $ (204,464 )   $ (153,852 )
Other operating expenses
    (19,858 )     (21,152 )     (58,687 )     (66,910 )
 
                       
Loss before income taxes
    (76,196 )     (51,745 )     (263,151 )     (220,762 )
Income tax benefit (expense)
    963       (113,473 )     (9,721 )     (1,223 )
 
                       
Total consolidated net loss
  $ (75,233 )   $ (165,218 )   $ (272,872 )   $ (221,985 )
 
                       
 
                               
Average assets:
                               
 
                               
Total average earning assets for segments
  $ 16,522,161     $ 19,186,234     $ 17,682,681     $ 19,031,608  
Average non-earning assets
    728,079       1,016,657       746,064       826,410  
 
                       
Total consolidated average assets
  $ 17,250,240     $ 20,202,891     $ 18,428,745     $ 19,858,018  
 
                       

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23 — COMMITMENTS AND CONTINGENCIES
          The Corporation enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and commitments to sell mortgage loans at fair value. As of September 30, 2010, commitments to extend credit amounted to approximately $841.0 million and standby letters of credit amounted to approximately $81.1 million. Included in commitments to extend credit is a $50.0 million participation in a loan extended for the construction of a resort facility in Puerto Rico. The Corporation does not expect to disburse this commitment until 2012. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause. Generally, the Corporation’s mortgage banking activities do not enter into interest rate lock agreements with prospective borrowers.
          Lehman Brothers Special Financing, Inc. (“Lehman”) was the counterparty to the Corporation on certain interest rate swap agreements. During the third quarter of 2008, Lehman failed to pay the scheduled net cash settlement due to the Corporation, which constituted an event of default under those interest rate swap agreements. The Corporation terminated all interest rate swaps with Lehman and replaced them with other counterparties under similar terms and conditions. In connection with the unpaid net cash settlement due as of September 30, 2010 under the swap agreements, the Corporation has an unsecured counterparty exposure with Lehman, which filed for bankruptcy on October 3, 2008, of approximately $1.4 million. This exposure was reserved in the third quarter of 2008. The Corporation had pledged collateral of $63.6 million with Lehman to guarantee its performance under the swap agreements in the event payment thereunder was required. The book value of pledged securities with Lehman as of September 30, 2010 amounted to approximately $64.5 million.
          The Corporation believes that the securities pledged as collateral should not be part of the Lehman bankruptcy estate given the fact that the posted collateral constituted a performance guarantee under the swap agreements and was not part of a financing agreement, and that ownership of the securities was never transferred to Lehman. Upon termination of the interest rate swap agreements, Lehman’s obligation was to return the collateral to the Corporation. During the fourth quarter of 2009, the Corporation discovered that Lehman Brothers, Inc., acting as agent of Lehman, had deposited the securities in a custodial account at JP Morgan Chase, and that, shortly before the filing of the Lehman bankruptcy proceedings, it had provided instructions to have most of the securities transferred to Barclay’s Capital (“Barclays”) in New York. After Barclay’s refusal to turn over the securities, during December 2009, the Corporation filed a lawsuit against Barclays in federal court in New York demanding the return of the securities.
          During February 2010, Barclays filed a motion with the court requesting that the Corporation’s claim be dismissed on the grounds that the allegations of the complaint are not sufficient to justify the granting of the remedies therein sought. Shortly thereafter, the Corporation filed its opposition motion. A hearing on the motions was held in court on April 28, 2010. The court, on that date, after hearing the arguments by both sides, concluded that the Corporation’s equitable-based causes of action, upon which the return of the investment securities is being demanded, contain allegations that sufficiently plead facts warranting the denial of Barclays’ motion to dismiss the Corporation’s claim. Accordingly, the judge ordered the case to proceed to trial. Subsequent to the decision handed down by the court, the district court judge transferred the case to the Lehman bankruptcy court for trial. While the Corporation believes it has valid reasons to support its claim for the return of the securities, the Corporation may not succeed in its litigation against Barclays to recover all or a substantial portion of the securities.
          Additionally, the Corporation continues to pursue its claim filed in January 2009 in the proceedings under the Securities Protection Act with regard to Lehman Brothers Incorporated in Bankruptcy Court, Southern District of New York. An estimated loss was not accrued as the Corporation is unable to determine the timing of the claim resolution or whether it will succeed in recovering all or a substantial portion of the collateral or its equivalent value. If additional relevant negative facts become available in future periods, a need to recognize a partial or full reserve of this claim may arise. Considering that the investment securities have not yet been recovered by the Corporation, despite its efforts in this regard, the Corporation decided to classify such investments as non-performing during the second quarter of 2009.
          As of September 30, 2010, First BanCorp and its subsidiaries were defendants in various legal proceedings arising in the ordinary course of business. Management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.

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24 — FIRST BANCORP (Holding Company Only) Financial Information
          The following condensed financial information presents the financial position of the Holding Company only as of September 30, 2010 and December 31, 2009 and the results of its operations for the quarter and nine-month period ended September 30, 2010 and 2009.
                 
    As of     As of  
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Assets
               
 
               
Cash and due from banks
  $ 43,216     $ 55,423  
Money market investments
    300       300  
Investment securities available for sale, at market:
               
Equity investments
    71       303  
Other investment securities
    1,300       1,550  
Investment in FirstBank Puerto Rico, at equity
    1,493,513       1,754,217  
Investment in FirstBank Insurance Agency, at equity
    6,402       6,709  
Investment in PR Finance, at equity
          3,036  
Investment in FBP Statutory Trust I
    3,093       3,093  
Investment in FBP Statutory Trust II
    3,866       3,866  
Other assets
    5,076       3,194  
 
           
Total assets
  $ 1,556,837     $ 1,831,691  
 
           
 
               
Liabilities & Stockholders’ Equity
               
 
               
Liabilities:
               
Other borrowings
  $ 231,959     $ 231,959  
Accounts payable and other liabilities
    2,899       669  
 
           
Total liabilities
    234,858       232,628  
 
           
Stockholders’ equity
    1,321,979       1,599,063  
 
           
Total Liabilities & Stockholders’ Equity
  $ 1,556,837     $ 1,831,691  
 
           
                                 
    Quarter Ended     Nine-Month Period Ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
Income:
                               
 
                               
Interest income on other investments
  $ 1     $     $ 1     $ 1  
Dividends from FirstBank Puerto Rico
          847       1,522       45,786  
Dividends from other subsidiaries
                1,400        
Other income
    56       56       157       197  
 
                       
 
    57       903       3,080       45,984  
 
                       
 
                               
Expense:
                               
 
                               
Notes payable and other borrowings
    1,850       1,870       5,219       6,599  
Other operating expenses
    862       516       2,372       1,678  
 
                       
 
    2,712       2,386       7,591       8,277  
 
                       
 
                               
Net gain (loss) on investments and impairments
          248       (603 )     (140 )
 
                       
 
                               
(Loss) income before income taxes and equity in undistributed losses of subsidiaries
    (2,655 )     (1,235 )     (5,114 )     37,567  
 
                               
Income tax provision
    (8 )           (8 )     (3 )
 
                               
Equity in undistributed losses of subsidiaries
    (72,570 )     (163,983 )     (267,750 )     (259,549 )
 
                       
 
                               
Net loss
  $ (75,233 )   $ (165,218 )   $ (272,872 )   $ (221,985 )
 
                       

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25 — SUBSEQUENT EVENTS
          The Company has performed an evaluation of all other events occurring subsequent to September 30, 2010, management has determined that there are no additional events occurring in this period that required disclosure in or adjustment to the accompanying financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
SELECTED FINANCIAL DATA
(In thousands, except for per share and financial ratios)
                                 
    Quarter ended   Nine-month period ended
    September 30,   September 30,   September 30,
    2010   2009   2010   2009
Condensed Income Statements:
                               
Total interest income
  $ 204,028     $ 242,022     $ 639,880     $ 753,125  
Total interest expense
    90,326       112,889       290,253       371,380  
Net interest income
    113,702       129,133       349,627       381,745  
Provision for loan and lease losses
    120,482       148,090       438,240       442,671  
Non-interest income
    19,266       49,989       104,117       103,457  
Non-interest expenses
    88,682       82,777       278,655       263,293  
Loss before income taxes
    (76,196 )     (51,745 )     (263,151 )     (220,762 )
Income tax benefit (expense)
    963       (113,473 )     (9,721 )     (1,223 )
Net loss
    (75,233 )     (165,218 )     (272,872 )     (221,985 )
Net income (loss) available to common stockholders, basic
    357,787       (174,689 )     147,826       (262,741 )
Net income (loss) available to common stockholders, diluted
    363,413       (174,689 )     153,452       (262,741 )
Per Common Share Results:
                               
Net income (loss) per share basic
  $ 2.09     $ (1.89 )   $ 1.24     $ (2.84 )
Net income (loss) per share diluted
  $ 0.28     $ (1.89 )   $ 0.31     $ (2.84 )
Cash dividends declared
  $     $     $     $ 0.14  
Average shares outstanding
    171,483       92,511       119,131       92,511  
Average shares outstanding diluted
    1,298,275       92,511       498,856       92,511  
Book value per common share
  $ 2.85     $ 8.34     $ 2.85     $ 8.34  
Tangible book value per common share (1)
  $ 2.71     $ 7.85     $ 2.71     $ 7.85  
Selected Financial Ratios (In Percent):
                               
Profitability:
                               
Return on Average Assets
    (1.73 )     (3.27 )     (1.98 )     (1.49 )
Interest Rate Spread (2)
    2.55       2.66       2.46       2.57  
Net Interest Margin (2)
    2.83       2.95       2.74       2.91  
Return on Average Total Equity
    (21.28 )     (35.47 )     (24.40 )     (15.53 )
Return on Average Common Equity
    (50.80 )     (74.62 )     (62.75 )     (34.94 )
Average Total Equity to Average Total Assets
    8.13       9.22       8.11       9.60  
Tangible common equity ratio (1)
    5.21       3.62       5.21       3.62  
Dividend payout ratio
                      (4.93 )
Efficiency ratio (3)
    66.69       46.21       61.41       54.26  
Asset Quality:
                               
Allowance for loan and lease losses to loans receivable
    5.00       3.43       5.00       3.43  
Net charge-offs (annualized) to average loans
    3.74       2.53       3.67       2.52  
Provision for loan and lease losses to net charge-offs
    103.63       175.56       122.47       175.17  
Non-performing assets to total assets
    10.01       8.39       10.01       8.39  
Non-performing loans to total loans receivable
    12.36       11.21       12.36       11.21  
Allowance to total non-performing loans
    40.41       30.64       40.41       30.64  
Allowance to total non-performing loans excluding residential real estate loans
    56.43       42.90       56.43       42.90  
Other Information:
                               
Common Stock Price: End of period
  $ 0.28     $ 3.05     $ 0.28     $ 3.05  
                 
    As of   As of
    September 30,   December 31,
    2010   2009
Balance Sheet Data:
               
Loans and loans held for sale
  $ 12,189,222     $ 13,949,226  
Allowance for loan and lease losses
    608,526       528,120  
Money market and investment securities
    3,745,951       4,866,617  
Intangible assets
    42,771       44,698  
Deferred tax asset, net
    101,248       109,197  
Total assets
    16,678,879       19,628,448  
Deposits
    12,543,567       12,669,047  
Borrowings
    2,492,456       5,214,147  
Total preferred equity
    411,876       928,508  
Total common equity
    879,808       644,062  
Accumulated other comprehensive income, net of tax
    30,295       26,493  
Total equity
    1,321,979       1,599,063  
 
(1)   Non-GAAP measure. Refer to “Capital” discussion below for additional information about the components and reconciliation of these measures.
 
(2)   On a tax-equivalent basis and excluding the changes in fair value of derivative and financial instruments and financial liabilities measured at fair value (see “Net Interest Income” discussion below for a reconciliation of this non-gaap measure).
 
(3)   Non-interest expenses to the sum of net interest income and non-interest income. The denominator includes non recurring income and changes in the fair value of derivative instruments and financial liabilities measured at fair value.

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     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the accompanying consolidated unaudited financial statements of First BanCorp and should be read in conjunction with the interim unaudited financial statements and the notes thereto. First BanCorp, incorporated under the laws of the Commonwealth of Puerto Rico, is sometimes referred in this Quarterly Report on Form 10-Q as “the Corporation”, “we”, “our.”
DESCRIPTION OF BUSINESS
     First BanCorp is a diversified financial holding company headquartered in San Juan, Puerto Rico offering a full range of financial products to consumers and commercial customers through various subsidiaries. First BanCorp is the holding company of FirstBank Puerto Rico (“FirstBank” or the “Bank”) and FirstBank Insurance Agency. Through its wholly-owned subsidiaries, the Corporation operates offices in Puerto Rico, the United States and British Virgin Islands and the State of Florida (USA) specializing in commercial banking, residential mortgage loan originations, finance leases, personal loans, small loans, auto loans, insurance agency and broker-dealer activities.
     As described in Item 1, Note 18, Regulatory Matters, FirstBank is currently operating under a Consent Order ( the “Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and First BanCorp has entered into a Written Agreement (the “Written Agreement” and collectively with the Order the “Agreements”) with the Board of Governors of the Federal Reserve System (the “FED” or “Federal Reserve”).
     As discussed in Item 1, Note 1 to the Consolidated Financial Statements, the Corporation has assessed its ability to continue as a going concern and has concluded that, based on current and expected liquidity needs and sources, management expects the Corporation to be able to meet its obligations for a reasonable period of time. The Corporation has $3.2 billion of traditional brokered certificates of deposit (“brokered CDs”) maturing within twelve months from September 30, 2010. The Corporation has continued to issue brokered CDs pursuant to temporary approvals received from the FDIC to renew or roll over certain amounts of brokered CDs through December 31, 2010. Management anticipates it will continue to obtain waivers from the restrictions to issue brokered CDs under the Order to meet its obligations and execute its business plans. If unanticipated market factors emerge, or if the Corporation is unable to raise additional capital or complete the identified alternative capital preservation initiatives, successfully execute its plans, or comply with the Order, its banking regulators could take further action, which could include actions that may have a material adverse effect on the Corporation’s business, results of operations and financial position. Also see “Liquidity and Capital Adequacy.”
OVERVIEW OF RESULTS OF OPERATIONS
     First BanCorp’s results of operations generally depend primarily upon its net interest income, which is the difference between the interest income earned on its interest-earning assets, including investment securities and loans, and the interest expense incurred on its interest-bearing liabilities, including deposits and borrowings. Net interest income is affected by various factors, including: the interest rate scenario; the volumes, mix and composition of interest-earning assets and interest-bearing liabilities; and the re-pricing characteristics of these assets and liabilities. The Corporation’s results of operations also depend on the provision for loan and lease losses, which significantly affected the results for the quarter ended September 30, 2010, non-interest expenses (such as personnel, occupancy, insurance premiums and other costs), non-interest income (mainly service charges and fees on loans and deposits and insurance income), gains (losses) on sales of investments, gains (losses) on mortgage banking activities, and income taxes.
     Net loss for the quarter ended September 30, 2010 amounted to $75.2 million, compared to a net loss of $165.2 million for the quarter ended September 30, 2009. The Corporation’s financial results for the third quarter of 2010, as compared to the third quarter of 2009, were principally impacted by (i) the impact in 2009 of a non-cash charge of $152.2 million to increase the deferred tax asset valuation allowance, and (ii) a reduction of $27.6 million in the provision for loan and lease losses related to lower charges to specific reserves, a slower migration of loans to non-performing status and the overall decline in the size of the loan portfolio. These factors were partially offset by (i) a decrease of $30.7 million in non-interest income driven by a reduction of $33.7 million in gains on sale of investments due to a lower volume of sales, aside from a nominal loss of $0.3 million resulting from a transaction on which the Corporation sold mortgage-backed securities realizing a gain of $47.1 million that was offset by the cost of $47.4 million for the early extinguishment of a matching set of repurchase agreements, (ii) a decrease of $15.4 million in net interest income mainly resulting from the Corporation’s deleveraging strategies to preserve its capital position and from higher than historical levels of liquidity maintained in the balance sheet due to the current economic environment, and (iii) an increase of $5.9 million in non-interest expenses driven by increases in the FDIC deposit insurance premium and higher losses on real estate owned (REO) operations due to write-downs to the value of repossessed properties and higher costs associated with a larger inventory.
     The key drivers of the Corporation’s financial results for the quarter ended September 30, 2010 include the following:
    Net interest income for the quarter ended September 30, 2010 was $113.7 million, compared to $129.1 million for the same period in 2009. The decrease is mainly associated with the deleveraging of the Corporation’s balance sheet to preserve its capital position, including sales of approximately $2.2 billion of investment securities over the last 12 months, mainly U.S. agency mortgage-backed securities (“MBS”), and loan repayments. Net interest income was also affected by compressions in net interest

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      margin, which on an adjusted tax-equivalent basis decreased to 2.83% for the third quarter of 2010 from 2.95% for the same period in 2009, mainly due to lower yields on investments and the adverse impact of maintaining higher than historical liquidity levels. Approximately $1.2 billion in investment securities were called over the last twelve months and were replaced with lower yielding U.S. agency investment securities. These factors were partially offset by the favorable impact of lower deposit pricing and the roll-off and repayments of higher cost funds, such as maturing brokered CDs and repurchase agreements, and improved spreads in commercial loans. Refer to the “Net Interest Income” discussion below for additional information.
 
    For the third quarter of 2010, the Corporation’s provision for loan and lease losses amounted to $120.5 million, compared to $148.1 million for the same period in 2009. Refer to the discussion under “Risk Management” below for an analysis of the allowance for loan and lease losses and non-performing assets and related ratios. The decrease in the provision for 2010 was primarily due to lower charges to specific reserves, a slower migration of loans to non-performing status and the overall reduction of the loan portfolio. Much of the decrease in the provision is related to the construction loan portfolio in Florida and the commercial and industrial (C&I) portfolio in Puerto Rico.
 
    The Corporation’s net charge-offs for the third quarter of 2010 were $116.3 million or 3.74% of average loans on an annualized basis, compared to $84.4 million or 2.53% of average loans on an annualized basis for the same period in 2009, an increase mainly related to impaired loans for which the Corporation had previously established adequate specific reserves, including charge-offs of $27.1 million for non-performing construction and commercial mortgage loans sold during the third quarter in Florida. Refer to the “Provision for Loan and Lease Losses” and “Risk Management – Non-performing assets and Allowance for Loan and Lease Losses” sections below for additional information.
 
    For the quarter ended September 30, 2010, the Corporation’s non-interest income amounted to $19.3 million, compared to $50.0 million for the quarter ended September 30, 2009. The decrease was mainly due to lower gains on sale of investments securities, as the Corporation realized gains of approximately $1.7 million on the sale of approximately $61.9 million of MBS, versus the $34.0 million aggregate gain recorded on the sale of approximately $613 million of U.S. agency MBS, $98 million of U.S Treasury Notes and VISA Class A shares in the third quarter of 2009. Also, a nominal loss of approximately $0.3 million was recorded in the third quarter, resulting from a transaction in which the Corporation sold approximately $1.2 billion in MBS, combined with the unwinding of a matching set of repurchase agreements as part of a balance sheet repositioning strategy. Partially offsetting these factors were increased gains from mortgage banking activities resulting from a higher volume of loans sold in the secondary market. Refer to the “Non Interest Income” discussion below for additional information.
 
    Non-interest expenses for the third quarter of 2010 amounted to $88.7 million, compared to $82.8 million for the same period in 2009. The increase is mainly related to a $7.8 million increase in the FDIC insurance premium expense, as premium rates increased and the level of deposits grew compared to 2009, and an increase of $3.2 million in losses on REO operations, driven by write-downs and costs associated with a larger inventory. This was partially offset by a decrease of $4.6 million in employees’ compensation reflecting further reductions in bonuses and other employee benefits and the headcount reduction. Refer to the “Non Interest Expenses” discussion below for additional information.
 
    For the third quarter of 2010, the Corporation recorded an income tax benefit of $1.0 million, compared to an income tax expense of $113.5 million for the same period in 2009. The 2009 results included a non-cash charge of approximately $152.2 million to increase the valuation allowance for the Corporation’s deferred tax asset. The income tax benefit for the third quarter of 2010 was mainly related to the operations of FirstBank Overseas, a profitable subsidiary for the first nine months of 2010, due to its share in the loss on the early extinguishment of repurchase agreements. Refer to the “Income Taxes” discussion below for additional information.
 
    Total assets as of September 30, 2010 amounted to $16.7 billion, a decrease of $2.9 billion compared to total assets as of December 31, 2009. The decrease in total assets was primarily a result of a net decrease of $1.8 billion in the loan portfolio largely attributable to repayments of credit facilities extended to the Puerto Rico government and/or political subdivisions coupled with charge-offs, the sale of non-performing loans and a higher allowance for loan and lease losses. Also, there was a decrease of $1.3 billion in investment securities driven by sales of MBS. The decrease in assets is consistent with the Corporation’s deleveraging and balance sheet repositioning strategies to, among other things, preserve its capital position and enhance net interest margins in the future. Refer to the “Financial Condition and Operating Data” discussion below for additional information.
 
    As of September 30, 2010, total liabilities amounted to $15.4 billion, a decrease of approximately $2.7 billion, as compared to $18.0 billion as of December 31, 2009. The decrease in total liabilities is mainly attributable to a $1.7 billion decrease in repurchase agreements driven by the early extinguishment of approximately $1 billion of long-term repurchase agreements as part of the Corporation’s balance sheet repositioning strategies and the nonrenewal of maturing repurchase agreements. Also, there was a decrease of $900 million and $143 million in advances from the FED and the Federal Home Loan Bank (“FHLB”), respectively, and a decrease of $872.9 million in brokered CDs. Partially offsetting the aforementioned decreases

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      was an increase of $747.4 million in total non-brokered deposits. Refer to the “Risk Management – Liquidity and Capital Adequacy” discussion below for additional information about the Corporation’s funding sources.
 
    The Corporation’s stockholders’ equity amounted to $1.3 billion as of September 30, 2010, a decrease of $277.1 million compared to the balance as of December 31, 2009, driven by the net loss of $272.9 million for the first nine months of 2010 and $8 million of issue costs related to the issuance of new common stock in exchange for $487 million of Series A through E preferred stock (the “Exchange Offer”), partially offset by an increase of $3.8 million in accumulated other comprehensive income. Although all the regulatory capital ratios exceeded the established “well capitalized” levels at September 30, 2010, due to the Order, FirstBank cannot be treated as a “well capitalized” institution under regulatory guidance.
 
      During the third quarter of 2010, the Corporation increased its common equity by issuing common stock in exchange for $487 million, or 89%, of the outstanding Series A through E preferred stock at conversion date and issued a new Series G mandatorily convertible preferred stock (the “Series G Preferred Stock”) in exchange for the $400 million Series F preferred stock held by the United States Department of Treasury (“U.S. Treasury”). As a result of these initiatives the Corporation’s tangible common equity and Tier 1 common equity ratios as of September 30, 2010 increased to 5.21% and 6.62%, respectively, from 3.20% and 4.10%, respectively, at December 31, 2009. Refer to the “Risk Management – Capital” section below for additional information, including further information about these non-GAAP financial measures and the Corporation’s capital plan execution.
 
    Total loan production, including purchases, refinancings and draws from existing commitments, for the quarter ended September 30, 2010 was $896 million, compared to $1.4 billion for the comparable period in 2009. The decrease in loan production during 2010, as compared to the third quarter of 2009, was reflected in all major loan categories but in particular in credit facilities extended to the Puerto Rico and Virgin Islands government. The Corporation continues with its targeted lending activities and, excluding credit facilities extended to the Puerto Rico and Virgin Islands governments, loan originations for the third quarter of 2010 were $481 million compared to $695 million for the third quarter of 2009, a reduction mainly related to the C&I, the residential mortgage and the construction loan portfolio.
 
    Total non-performing loans as of September 30, 2010 were $1.51 billion, compared to $1.56 billion as of December 31, 2009. The decrease of $57.9 million, or 4%, in non-performing loans from December 31, 2009 mainly in connection with charge-offs and sales of approximately $163 million of impaired loans in Florida. Non-performing construction loans decreased by $76.2 million mainly due to charge-offs and sales of $115.7 million of non-performing construction loans during 2010. Non-performing commercial mortgage loans decreased by $23.2 million, or 12%, since December 2009 mainly due to charge-offs and two relationships amounting to $12.5 million in the aggregate that became current and for which the Corporation expects to collect principal and interest in full pursuant to the terms of the loans. Non-performing residential mortgage loans decreased by $14.1 million mainly due to loans restored to accrual status based on compliance with modified terms as part of the Corporation’s loss mitigation and loans modifications transactions. Non-performing C&I loans increased by $52.0 million, or 22%, from the end of 2009 driven by the inflow of three relationships in Puerto Rico in individual amounts exceeding $10 million with an aggregate carrying value of $62 million, of which $38.9 million (net of a charge-off of $7.7 million) is related to the Corporation’s participation in a syndicated loan downgraded by the lead bank regulator in its latest annual review. The levels of non-accrual consumer loans, including finance leases, remained stable showing a $3.6 million increase during the first nine months of 2010. Refer to the “Risk Management — Non-performing loans and Non-performing Assets” section below for additional information.
CRITICAL ACCOUNTING POLICIES AND PRACTICES
     The accounting principles of the Corporation and the methods of applying these principles conform with generally accepted accounting principles in the United States (“GAAP”). The Corporation’s critical accounting policies relate to the 1) allowance for loan and lease losses; 2) other-than-temporary impairments; 3) income taxes; 4) classification and related values of investment securities; 5) valuation of financial instruments; and 6) income recognition on loans. These critical accounting policies involve judgments, estimates and assumptions made by management that affect the amounts recorded for assets and liabilities and for contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from estimates, if different assumptions or conditions prevail. Certain determinations inherently require greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than those originally reported.
     The Corporation’s critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in First BanCorp’s 2009 Annual Report on Form 10-K. There have not been any material changes in the Corporation’s critical accounting policies since December 31, 2009.

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RESULTS OF OPERATIONS
Net Interest Income
     Net interest income is the excess of interest earned by First BanCorp on its interest-earning assets over the interest incurred on its interest-bearing liabilities. First BanCorp’s net interest income is subject to interest rate risk due to the re-pricing and maturity mismatch of the Corporation’s assets and liabilities. Net interest income for the quarter and nine-month period ended September 30, 2010 was $113.7 million and $349.6 million, respectively, compared to $129.1 million and $381.7 million for the comparable periods in 2009. On a tax-equivalent basis and excluding the changes in the fair value of derivative instruments and unrealized gains and losses on liabilities measured at fair value, net interest income for the quarter and nine-month period ended September 30, 2010 was $121.9 million and $373.3 million, respectively, compared to $145.1 million and $420.1 million for the comparable periods of 2009.
     The following tables include a detailed analysis of net interest income. Part I presents average volumes and rates on an adjusted tax-equivalent basis and Part II presents, also on an adjusted tax-equivalent basis, the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Corporation’s net interest income. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by prior period rates), and (ii) changes in rate (changes in rate multiplied by prior period volumes). Rate-volume variances (changes in rate multiplied by changes in volume) have been allocated to the changes in volume and rate based upon their respective percentage of the combined totals.
     The net interest income is computed on a tax-equivalent basis and excluding: (1) the change in the fair value of derivative instruments and (2) unrealized gains or losses on liabilities measured at fair value (for definition and reconciliation of this non-GAAP measure, refer to discussions below).

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Part I
                                                 
    Average Volume     Interest income (1) / expense     Average Rate (1)  
    2010     2009     2010     2009     2010     2009  
Quarter ended September 30,   (Dollars in thousands)  
Interest-earning assets:
                                               
 
                                               
Money market & other short-term investments
  $ 794,318     $ 161,491     $ 511     $ 185       0.26 %     0.45 %
Government obligations (2)
    1,361,925       1,382,167       8,023       9,709       2.34 %     2.79 %
Mortgage-backed securities
    2,416,485       4,595,678       27,491       63,588       4.51 %     5.49 %
Corporate bonds
    2,000       2,000       29       29       5.75 %     5.75 %
FHLB stock
    63,950       76,843       640       1,038       3.97 %     5.36 %
Equity securities
    1,377       1,977             18       0.00 %     3.61 %
 
                                       
Total investments (3)
    4,640,055       6,220,156       36,694       74,567       3.14 %     4.76 %
 
                                       
 
                                               
Residential mortgage loans
    3,454,820       3,602,562       51,839       53,617       5.95 %     5.90 %
Construction loans
    1,240,522       1,604,565       8,096       12,402       2.59 %     3.07 %
C&I and commercial mortgage loans
    5,968,781       6,137,781       65,852       62,379       4.38 %     4.03 %
Finance leases
    293,956       335,636       5,937       6,775       8.01 %     8.01 %
Consumer loans
    1,484,976       1,640,556       43,326       46,692       11.58 %     11.29 %
 
                                       
Total loans (4) (5)
    12,443,055       13,321,100       175,050       181,865       5.58 %     5.42 %
 
                                       
Total interest-earning assets
  $ 17,083,110     $ 19,541,256     $ 211,744     $ 256,432       4.92 %     5.21 %
 
                                       
 
                                               
Interest-bearing liabilities:
                                               
 
                                               
Brokered CDs
  $ 6,929,356     $ 7,292,913     $ 39,086     $ 51,305       2.24 %     2.79 %
Other interest-bearing deposits
    5,008,676       3,995,123       21,917       20,860       1.74 %     2.07 %
Loans payable
          652,391             463       0.00 %     0.28 %
Other borrowed funds
    2,214,076       4,171,348       21,618       30,545       3.87 %     2.91 %
FHLB advances
    850,060       1,196,657       7,179       8,127       3.35 %     2.69 %
 
                                       
Total interest-bearing liabilities (6)
  $ 15,002,168     $ 17,308,432     $ 89,800     $ 111,300       2.37 %     2.55 %
 
                                       
 
                                               
Net interest income
                  $ 121,944     $ 145,132                  
 
                                           
 
                                               
Interest rate spread
                                    2.55 %     2.66 %
 
                                               
Net interest margin
                                    2.83 %     2.95 %
                                                 
    Average Volume     Interest income (1) / expense     Average Rate (1)  
    2010     2009     2010     2009     2010     2009  
Nine-Month Period Ended September 30,   (Dollars in thousands)  
Interest-earning assets:
                                               
 
                                               
Money market & other short-term investments
  $ 849,183     $ 126,234     $ 1,571     $ 393       0.25 %     0.42 %
Government obligations (2)
    1,356,257       1,355,492       25,000       45,214       2.46 %     4.46 %
Mortgage-backed securities
    2,938,302       4,392,359       103,491       187,021       4.71 %     5.69 %
Corporate bonds
    2,000       5,703       87       264       5.82 %     6.19 %
FHLB stock
    67,046       78,178       2,058       2,186       4.10 %     3.74 %
Equity securities
    1,516       2,103       15       54       1.32 %     3.43 %
 
                                       
Total investments (3)
    5,214,304       5,960,069       132,222       235,132       3.39 %     5.27 %
 
                                       
 
                                               
Residential mortgage loans
    3,518,566       3,508,471       158,244       159,383       6.01 %     6.07 %
Construction loans
    1,388,771       1,592,372       25,981       39,646       2.50 %     3.33 %
C&I and commercial mortgage loans
    6,270,952       6,223,979       198,642       193,325       4.24 %     4.15 %
Finance leases
    304,350       347,791       18,503       21,468       8.13 %     8.25 %
Consumer loans
    1,525,920       1,681,015       132,369       142,722       11.60 %     11.35 %
 
                                       
Total loans (4) (5)
    13,008,559       13,353,628       533,739       556,544       5.49 %     5.57 %
 
                                       
Total interest-earning assets
  $ 18,222,863     $ 19,313,697     $ 665,961     $ 791,676       4.89 %     5.48 %
 
                                       
 
                                               
Interest-bearing liabilities:
                                               
 
                                               
Brokered CDs
  $ 7,195,479     $ 7,267,812     $ 124,967     $ 180,815       2.32 %     3.33 %
Other interest-bearing deposits
    4,854,273       4,056,396       65,767       69,495       1.81 %     2.29 %
Loans payable
    400,549       574,117       3,442       1,423       1.15 %     0.33 %
Other borrowed funds
    2,697,408       3,799,118       75,998       95,113       3.77 %     3.35 %
FHLB advances
    926,444       1,395,752       22,460       24,736       3.24 %     2.37 %
 
                                       
Total interest-bearing liabilities (6)
  $ 16,074,153     $ 17,093,195     $ 292,634     $ 371,582       2.43 %     2.91 %
 
                                       
 
                                               
Net interest income
                  $ 373,327     $ 420,094                  
 
                                           
 
                                               
Interest rate spread
                                    2.46 %     2.57 %
 
                                               
Net interest margin
                                    2.74 %     2.91 %

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(1)   On an adjusted tax-equivalent basis. The adjusted tax-equivalent yield was estimated by dividing the interest rate spread on exempt assets by 1 less Puerto Rico statutory tax rate as adjusted for changes to enacted tax rates (40.95% for the Corporation’s subsidiaries other than IBEs and 35.95% for the Corporation’s IBEs) and adding to it the cost of interest-bearing liabilities. The tax-equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax-equivalent basis. Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. Changes in the fair value of derivatives and unrealized gains or losses on liabilities measured at fair value are excluded from interest income and interest expense because the changes in valuation do not affect interest paid or received.
 
(2)   Government obligations include debt issued by government sponsored agencies.
 
(3)   Unrealized gains and losses in available-for-sale securities are excluded from the average volumes.
 
(4)   Average loan balances include the average of non-performing loans.
 
(5)   Interest income on loans includes $2.5 million and $2.8 million for the third quarter of 2010 and 2009, respectively, and $8.1 million and $8.3 million for the nine-month period ended September 30, 2010 and 2009, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio.
 
(6)   Unrealized gains and losses on liabilities measured at fair value are excluded from the average volumes.
Part II
                                                 
    Quarter ended September 30,     Nine-month period ended September 30,  
    2010 compared to 2009     2010 compared to 2009  
    Increase (decrease)     Increase (decrease)  
    Due to:     Due to:  
    Volume     Rate     Total     Volume     Rate     Total  
            (In thousands)                     (In thousands)          
Interest income on interest-earning assets:
                                               
 
                                               
Money market & other short-term investments
  $ 558     $ (232 )   $ 326     $ 1,809     $ (631 )   $ 1,178  
Government obligations
    (140 )     (1,546 )     (1,686 )     49       (20,263 )     (20,214 )
Mortgage-backed securities
    (26,250 )     (9,847 )     (36,097 )     (54,927 )     (28,603 )     (83,530 )
Corporate bonds
                      (162 )     (15 )     (177 )
FHLB stock
    (156 )     (242 )     (398 )     (239 )     111       (128 )
Equity securities
    (4 )     (14 )     (18 )     (12 )     (27 )     (39 )
 
                                   
Total investments
    (25,992 )     (11,881 )     (37,873 )     (53,482 )     (49,428 )     (102,910 )
 
                                   
 
                                               
Residential mortgage loans
    (2,217 )     439       (1,778 )     410       (1,549 )     (1,139 )
Construction loans
    (2,548 )     (1,758 )     (4,306 )     (4,638 )     (9,027 )     (13,665 )
C&I and commercial mortgage loans
    (1,778 )     5,251       3,473       1,430       3,887       5,317  
Finance leases
    (838 )           (838 )     (2,652 )     (313 )     (2,965 )
Consumer loans
    (4,464 )     1,098       (3,366 )     (13,341 )     2,988       (10,353 )
 
                                   
Total loans
    (11,845 )     5,030       (6,815 )     (18,791 )     (4,014 )     (22,805 )
 
                                   
Total interest income
    (37,837 )     (6,851 )     (44,688 )     (72,273 )     (53,442 )     (125,715 )
 
                                   
 
                                               
Interest expense on interest-bearing liabilities:
                                               
 
                                               
Brokered CDs
    (2,459 )     (9,760 )     (12,219 )     (1,778 )     (54,070 )     (55,848 )
Other interest-bearing deposits
    4,819       (3,762 )     1,057       12,268       (15,996 )     (3,728 )
Loan payable
    (463 )