FIRST BANCORP.
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
     
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 0-17224
FIRST BANCORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
     
Puerto Rico   66-0561882
(State or other jurisdiction of   (I.R.S. employer
incorporation or organization)   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 o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in rule 12b-2 of the Exchange Act).
Large accelerated filer þ       Accelerated filer o       Non-accelerated filer 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: 83,254,056 outstanding as of June 30, 2007.
 
 

 


 

FIRST BANCORP.
INDEX PAGE
         
    PAGE
PART I. FINANCIAL INFORMATION
       
Item 1. Financial Statements:
       
    5  
    6  
    7  
    8  
    9  
    10  
    11  
    12  
    56  
    99  
    99  
 
       
       
    103  
    103  
    103  
    103  
    103  
    103  
    103  
 
       
 EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906, CERTIFICATION OF THE CEO
 EX-32.2 SECTION 906, CERTIFICATION OF THE CFO

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EXPLANATORY NOTE
     First BanCorp ( the “Corporation” or “First BanCorp”) was unable to timely file with the Securities and Exchange Commission (“SEC”) this Quarterly Report on Form 10-Q for the interim period ended September 30, 2006 and the Quarterly Reports on Form 10-Q for the interim periods ended June 30, 2006, March 31, 2006, September 30, 2005 and June 30, 2005 as a result of the delay in completing the restatement of the Corporation’s audited financial statements for the years ended December 31, 2004, 2003 and 2002, and the unaudited selected quarterly financial information for each of the four quarters of 2004, 2003 and 2002, which resulted in delays in the filing of an amendment of First BanCorp’s Annual Report on Form 10-K for the year ended December 31, 2004 and consequent delays in the filing of the Corporation’s subsequent reports. For information regarding the restatement of First BanCorp’s previously issued financial statements, see the Corporation’s Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2004, which was filed with the SEC on September 26, 2006, and Note 1 – “Restatement of Previously Issued Financial Statements” — to the accompanying unaudited Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2006.
FORWARD LOOKING STATEMENTS
     This Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q or future filings by First BanCorp with the SEC, in the Corporation’s press releases or in other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the word or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “should,” “anticipate” and similar expressions are meant to identify “forward-looking statements.”
     First BanCorp wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and represent First BanCorp’s expectations of future conditions or results and are not guarantees of future performance. First BanCorp advises readers that various factors could cause actual results to differ materially from those contained in any “forward-looking statement.” Such factors include, but are not limited to, the following:
    risks associated with the Corporation’s inability to prepare and timely submit SEC and other regulatory filings;
 
    a reduction in the Corporation’s ability to attract new clients and retain existing ones;
 
    general economic conditions, including prevailing interest rates and the performance of the financial markets, which may affect demand for the Corporation’s products and services and the value of the Corporation’s assets, including the value of the interest rate swaps that hedge the interest rate risk mainly relating to brokered certificates of deposit and medium-term notes;
 
    risks arising from worsening economic conditions in Puerto Rico;
 
    risks arising from credit and other risks of the Corporation’s lending and investment activities, including the condo conversion loans in its Miami Agency;
 
    increases in the Corporation’s expenses associated with acquisitions and dispositions;
 
    developments in technology;
 
    risks associated with changes to the Corporation’s business strategy to no longer acquire mortgage loans in bulk;
 
    risks associated with the failure to obtain a final order from the District Court of Puerto Rico approving the settlement of the class-action lawsuit brought against the Corporation;

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    the impact of Doral Financial Corporation financial condition on its repayment of its outstanding secured loan to the Corporation;
 
    risks associated with being subject to the cease and desist order;
 
    potential further downgrades in the credit ratings of the Corporation’s securities;
 
    general competitive factors and industry consolidation; and
 
    risks associated with regulatory and legislative changes for financial services companies in Puerto Rico, the United States, and the U.S. and British Virgin Islands.
     The Corporation does not undertake, and specifically disclaims any obligation, to update any of the “forward-looking statements” to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal securities laws.
     Investors should carefully consider these factors and the risk factors outlined under Item 1A, Risk Factors, in First BanCorp’s 2005 Annual Report on Form 10-K and under Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q.

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
                                 
                            September 30, 2004  
    September 30, 2006     December 31, 2005     September 30, 2005     (As Restated)  
Assets
                               
Cash and due from banks
  $ 81,983,261     $ 155,848,810     $ 137,248,464     $ 91,317,992  
 
                       
Money market instruments, including $381,848,364 pledged that can be repledged as of December 31, 2005 (September 30, 2005 - $267,777,336; September 30, 2004 - $300,000,000)
    748,784,722       666,856,432       1,073,114,286       732,600,317  
Federal funds sold and securities purchased under agreements to resell
    41,336,579       508,967,369       160,783,017       302,000,000  
Time deposits with other financial institutions
    9,100,000       48,967,475       48,600,000       600,000  
 
                       
Total money market investments
    799,221,301       1,224,791,276       1,282,497,303       1,035,200,317  
 
                       
Investment securities available for sale, at fair value:
                               
Securities pledged that can be repledged
    1,272,618,338       1,744,846,054       1,806,959,109       1,225,842,399  
Other investment securities
    483,936,067       203,331,449       280,255,292       251,671,039  
 
                       
Total investment securities available for sale
    1,756,554,405       1,948,177,503       2,087,214,401       1,477,513,438  
 
                       
Investment securities held to maturity, at amortized cost:
                               
Securities pledged that can be repledged
    2,335,051,406       3,115,260,660       2,727,562,713       3,290,537,802  
Other investment securities
    1,022,978,696       323,327,297       239,186,736       360,132,648  
 
                       
Total investment securities held to maturity
    3,358,030,102       3,438,587,957       2,966,749,449       3,650,670,450  
 
                       
Other equity securities
    20,989,185       42,367,500       77,230,500       69,025,000  
 
                       
 
                               
Loans, net of allowance for loan and lease losses of $150,924,964 (December 31, 2005 - $147,998,733; September 30, 2005 - $147,267,275; September 30, 2004 - $137,253,064)
    10,710,424,305       12,436,257,993       12,150,959,315       8,496,426,264  
Loans held for sale, at lower of cost or market
    30,603,213       101,672,531       74,198,668       7,419,060  
 
                       
Total loans, net
    10,741,027,518       12,537,930,524       12,225,157,983       8,503,845,324  
 
                       
Premises and equipment, net
    152,079,987       116,947,772       111,862,913       88,865,587  
Other real estate owned
    3,712,895       5,019,106       6,032,210       6,938,890  
Accrued interest receivable on loans and investments
    101,149,237       103,692,478       82,754,088       60,944,997  
Due from customers on acceptances
    531,416       353,864       397,538       717,930  
Other assets
    372,662,226       343,933,937       294,848,038       196,904,455  
 
                       
Total assets
  $ 17,387,941,533     $ 19,917,650,727     $ 19,271,992,887     $ 15,181,944,380  
 
                       
Liabilities & Stockholders’ Equity
                               
 
                               
Liabilities:
                               
Non-interest-bearing deposits
  $ 676,027,822     $ 811,006,126     $ 751,689,852     $ 603,713,284  
Interest-bearing deposits
    11,205,497,022       11,652,746,080       11,501,114,323       6,753,832,707  
Federal funds purchased and securities sold under agreements to repurchase
    3,228,435,000       4,833,882,000       4,470,696,000       4,558,915,656  
Advances from the Federal Home Loan Bank (FHLB)
    134,000,000       506,000,000       448,000,000       1,373,000,000  
Notes payable
    181,575,237       178,693,249       178,419,384       152,901,700  
Other borrowings
    231,694,859       231,622,020       231,597,474       276,667,705  
Subordinated notes
                82,684,827       82,137,249  
Bank acceptance outstanding
    531,416       353,864       397,538       717,930  
Payable for unsettled investment trade
                      10,285,040  
Accounts payable and other liabilities
    505,665,617       505,506,453       352,634,036       197,125,840  
 
                       
Total liabilities
    16,163,426,973       18,719,809,792       18,017,233,434       14,009,297,111  
 
                       
 
                               
Commitments and contingencies (Note 17)
                               
 
                               
Stockholders’ equity:
                               
Preferred stock, authorized 50,000,000 shares: issued and outstanding 22,004,000 shares at $25 liquidation value per share
    550,100,000       550,100,000       550,100,000       550,100,000  
 
                       
Common stock, $1 par value, authorized 250,000,000 shares; issued 93,151,856 shares (December 31, 2005- 90,772,856 shares ; September 30, 2005 - 90,772,856 shares; September 30, 2004 - 45,206,555 shares)
    93,151,856       90,772,856       90,772,856       45,206,555  
Less: Treasury Stock (at par value)
    (9,897,800 )     (9,897,800 )     (9,897,800 )     (4,920,900 )
 
                       
Common stock outstanding
    83,254,056       80,875,056       80,875,056       40,285,655  
 
                       
Additional paid-in capital
    22,756,994                   3,209,915  
Capital reserve
                82,825,000       80,000,000  
Legal surplus
    265,844,192       265,844,192       183,019,192       165,709,122  
Retained earnings
    331,375,119       316,696,971       357,748,736       292,850,947  
Accumulated other comprehensive (loss) income, net of tax benefit (expense) of $234,362 (December 31, 2005 - $16,259 ; September 30, 2005 - ($369,061) ; September 30, 2004 ($1,131,416))
    (28,815,801 )     (15,675,284 )     191,469       40,491,630  
 
                       
Total stockholders’ equity
    1,224,514,560       1,197,840,935       1,254,759,453       1,172,647,269  
 
                       
Total liabilities and stockholders’ equity
  $ 17,387,941,533     $ 19,917,650,727     $ 19,271,992,887     $ 15,181,944,380  
 
                       
The accompanying notes are an integral part of these statements.

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                         
    Quarter Ended  
                    September 30,  
    September 30,     September 30,     2004  
    2006     2005     (As Restated)  
Interest income:
                       
Loans
  $ 216,953,076     $ 214,006,807     $ 115,148,412  
Investment securities
    70,490,419       71,660,199       70,363,002  
Money market investments
    30,267,972       6,596,601       1,152,460  
 
                 
Total interest income
    317,711,467       292,263,607       186,663,874  
 
                 
 
                       
Interest expense:
                       
Deposits (Note 11)
    135,647,412       161,152,342       (30,653,464 )
Federal funds purchased and repurchase agreements
    49,412,806       48,838,569       34,625,138  
Advances from FHLB
    2,876,488       5,207,707       7,573,861  
Notes payable and other borrowings
    7,072,733       10,321,624       4,512,647  
 
                 
Total interest expense
    195,009,439       225,520,242       16,058,182  
 
                 
Net interest income
    122,702,028       66,743,365       170,605,692  
 
                 
 
                       
Provision for loan and lease losses
    20,559,123       12,861,207       13,199,850  
 
                 
 
                       
Net interest income after provision for loan and lease losses
    102,142,905       53,882,158       157,405,842  
 
                 
 
                       
Non-interest income:
                       
Other service charges on loans
    1,227,894       1,529,430       851,848  
Service charges on deposit accounts
    3,025,188       3,025,013       2,705,111  
Mortgage banking activities
    1,595,068       318,125       1,328,492  
Gain on partial extinguishment of a secured commercial loan to a local financial institution
    1,000,000              
Net (loss) gain on investments and impairments
    (6,083,674 )     4,517,344       360,031  
Rental income
    847,343       875,408       814,398  
Other operating income
    6,432,570       7,427,195       5,631,393  
 
                 
Total non-interest income
    8,044,389       17,692,515       11,691,273  
 
                 
 
                       
Non-interest expenses:
                       
Employees’ compensation and benefits
    32,881,298       26,838,736       21,153,090  
Occupancy and equipment
    13,730,875       12,842,629       10,260,593  
Business promotion
    4,512,400       4,876,566       4,354,617  
Professional fees
    7,407,582       3,553,065       1,023,091  
Taxes, other than income taxes
    3,577,530       2,577,072       2,283,388  
Insurance and supervisory fees
    1,862,433       1,171,779       994,620  
Other operating expenses
    8,967,989       8,695,503       5,807,371  
 
                 
Total non-interest expenses
    72,940,107       60,555,350       45,876,770  
 
                 
 
                       
Income before income taxes
    37,247,187       11,019,323       123,220,345  
Income tax (provision) benefit
    (10,565,431 )     6,285,264       (34,826,984 )
 
                 
 
Net income
  $ 26,681,756     $ 17,304,587     $ 88,393,361  
 
                 
Net income attributable to common stockholders
  $ 16,612,757     $ 7,235,588     $ 78,324,362  
 
                 
Net income per common share:
                       
Basic
  $ 0.20     $ 0.09     $ 0.97  
 
                 
Diluted
  $ 0.20     $ 0.09     $ 0.94  
 
                 
Dividends declared per common share
  $ 0.07     $ 0.07     $ 0.06  
 
                 
The accompanying notes are an integral part of these statements.

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                         
    Nine Month Period Ended  
                    September 30,  
    September 30,     September 30,     2004  
    2006     2005     (As Restated)  
Interest income:
                       
Loans
  $ 710,646,312     $ 541,459,045     $ 325,791,945  
Investment securities
    214,171,649       201,724,546       169,875,169  
Money market investments
    65,041,845       10,613,567       2,415,876  
 
                 
Total interest income
    989,859,806       753,797,158       498,082,990  
 
                 
 
                       
Interest expense:
                       
Deposits (Note 11)
    479,639,216       252,840,683       71,913,056  
Federal funds purchased and repurchase agreements
    154,111,848       126,896,352       94,816,509  
Advances from FHLB
    9,921,291       27,497,510       18,690,602  
Notes payable and other borrowings
    24,428,872       21,472,722       8,287,120  
 
                 
Total interest expense
    668,101,227       428,707,267       193,707,287  
 
                 
Net interest income
    321,758,579       325,089,891       304,375,703  
 
                 
 
                       
Provision for loan and lease losses
    49,289,600       34,889,980       39,600,000  
 
                 
 
                       
Net interest income after provision for loan and lease losses
    272,468,979       290,199,911       264,775,703  
 
                 
 
                       
Non-interest income:
                       
Other service charges on loans
    4,181,291       4,187,995       2,957,425  
Service charges on deposit accounts
    9,580,326       8,736,728       8,230,790  
Mortgage banking activities
    1,447,392       3,888,206       3,090,458  
Loss on partial extinguishment of a secured commercial loan to a local financial institution
    (10,640,344 )            
Net (loss) gain on investments and impairments
    (6,658,218 )     12,849,663       4,875,926  
Rental income
    2,458,013       2,584,232       2,133,341  
Gain on sale of credit card portfolio
                5,532,684  
Other operating income
    20,047,067       19,116,254       17,981,078  
 
                 
Total non-interest income
    20,415,527       51,363,078       44,801,702  
 
                 
 
                       
Non-interest expenses:
                       
Employees’ compensation and benefits
    96,875,998       76,427,208       62,126,994  
Occupancy and equipment
    40,060,463       35,247,619       29,080,304  
Business promotion
    12,610,641       14,509,582       12,411,300  
Professional fees
    24,943,755       6,960,961       2,963,785  
Taxes, other than income taxes
    8,690,870       7,131,394       6,182,051  
Insurance and supervisory fees
    5,472,995       3,362,138       3,080,826  
Other operating expenses
    27,063,159       25,996,404       18,346,305  
 
                 
Total non-interest expenses
    215,717,881       169,635,306       134,191,565  
 
                 
 
                       
Income before income taxes
    77,166,625       171,927,683       175,385,840  
Income tax provision
    (14,819,125 )     (32,002,088 )     (39,754,445 )
 
                 
 
                       
Net income
  $ 62,347,500     $ 139,925,595     $ 135,631,395  
 
                 
Net income attributable to common stockholders
  $ 32,140,503     $ 109,718,598     $ 105,424,398  
 
                 
Net income per common share:
                       
Basic
  $ 0.39     $ 1.36     $ 1.31  
 
                 
Diluted
  $ 0.39     $ 1.32     $ 1.27  
 
                 
Dividends declared per common share
  $ 0.21     $ 0.21     $ 0.18  
 
                 
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,     September 30,     2004  
    2006     2005     (As Restated)  
Cash flows from operating activities:
                       
Net income
  $ 62,347,500     $ 139,925,595     $ 135,631,395  
 
                 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    12,566,395       11,179,619       10,474,400  
Amortization of core deposit intangible
    2,581,437       2,463,235       1,797,465  
Provision for loan and lease losses
    49,289,600       34,889,980       39,600,000  
Deferred income tax (benefit) provision
    (35,605,857 )     (17,898,389 )     237,561  
Stock-based compensation recognized
    5,379,511              
Gain on sale of investments, net
    (5,431,170 )     (14,348,729 )     (7,574,918 )
Other-than-temporary impairments on available-for-sale securities
    12,089,388       1,499,066       2,698,992  
Unrealized loss (gain) on derivative instruments
    64,025,985       39,977,961       (23,644,682 )
Net gain on sale of loans and impairments
    (1,063,882 )     (3,635,744 )     (2,873,893 )
Net loss on partial extinguishment of a secured commercial loan to a local financial institution
    10,640,344              
Net amortization of premiums and discounts and deferred loan fees and costs
    (2,045,780 )     (45,794 )     1,736,639  
Amortization of broker placement fees
    15,228,471       11,384,353       10,228,646  
Amortization of basis adjustments on fair value hedges
    458,374              
Net (accretion) of discounts and premiums on investment securities
    (26,242,786 )     (19,494,586 )     (20,521,612 )
Amortization of discount on subordinated notes
          404,409       371,861  
Gain on sale of credit card portfolio
                (5,532,684 )
(Decrease) increase in accrued income tax payable
    (42,621,586 )     16,444,977       (6,013,033 )
Decrease (increase) in accrued interest receivable
    2,543,241       (23,057,636 )     (19,408,552 )
Increase in accrued interest payable
    26,564,232       39,556,298       6,294,948  
Decrease (increase) in other assets
    4,922,947       (19,422,780 )     (20,475,269 )
Increase in other liabilities
    17,353,014       30,974,572       23,331,745  
 
                 
Total adjustments
    110,631,878       90,870,812       (9,272,386 )
 
                 
Net cash provided by operating activities
    172,979,378       230,796,407       126,359,009  
 
                 
 
                       
Cash flows from investing activities:
                       
Principal collected on loans
    5,209,573,268       2,522,641,911       1,664,761,267  
Loans originated
    (3,491,295,450 )     (4,580,927,938 )     (3,327,844,911 )
Purchase of loans
    (134,310,032 )     (317,031,608 )     (147,976,311 )
Proceeds from sale of loans
    116,214,827       120,682,234       109,704,058  
Proceeds from sale of repossessed assets
    32,988,920       24,737,292       23,556,754  
Purchase of servicing assets
    (723,779 )            
Proceeds from sale of available for sale securities
    228,122,652       223,329,617       32,845,372  
Purchase of securities held to maturity
    (402,607,038 )     (1,410,859,719 )     (1,547,072,399 )
Purchase of securities available for sale
    (225,372,830 )     (1,220,389,587 )     (495,451,907 )
Principal repayments and maturities of securities held to maturity
    509,566,831       1,842,826,825       1,056,932,801  
Principal repayments of securities available for sale
    168,697,285       232,016,437       270,854,574  
Additions to premises and equipment
    (47,698,610 )     (19,603,460 )     (14,070,585 )
Decrease (increase) in other equity securities
    21,378,315       6,827,600       (23,000,000 )
Cash paid for net assets acquired in acquisition of business
          (78,404,804 )      
 
                 
Net cash provided by (used in) investing activities
    1,984,534,359       (2,654,155,200 )     (2,396,761,287 )
 
                 
 
                       
Cash flows from financing activities:
                       
Net (decrease) increase in deposits
    (651,589,392 )     3,892,017,199       577,444,682  
Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements
    (1,605,447,000 )     303,335,087       919,443,313  
Net FHLB advances (paid) taken
    (372,000,000 )     (1,190,000,000 )     460,000,000  
Net proceeds from issuance of notes payable and other borrowings
                429,409,766  
Repayments of notes payable and other borrowings
          (45,167,616 )      
Dividends paid
    (47,669,352 )     (47,184,548 )     (44,684,441 )
Exercise of stock options
    19,756,483       2,094,354       3,199,430  
Treasury stock acquired
          (965,079 )      
 
                 
Net cash (used in) provided by financing activities
    (2,656,949,261 )     2,914,129,397       2,344,812,750  
 
                 
Net (decrease) increase in cash and cash equivalents
    (499,435,524 )     490,770,604       74,410,472  
Cash and cash equivalents at beginning of period
    1,380,640,086       926,975,163       1,052,107,837  
 
                 
Cash and cash equivalents at end of period
  $ 881,204,562     $ 1,417,745,767     $ 1,126,518,309  
 
                 
Cash and cash equivalents include:
                       
Cash and due from banks
  $ 81,983,261     $ 137,248,464     $ 91,317,992  
Money market instruments
    799,221,301       1,282,497,303       1,035,200,317  
 
                 
 
  $ 881,204,562     $ 1,419,745,767     $ 1,126,518,309  
 
                 
 
                       
Supplemental disclosures of cash flow information:
                       
Cash paid during the period for:
                       
Interest on borrowings
  $ 559,113,647     $ 400,248,577     $ 293,543,996  
Income Taxes
    91,125,590       32,823,146       41,131,288  
 
                       
Non-cash investing and financing activities:
                       
Additions to other real estate owned
  $ 2,466,033     $ 2,973,012     $ 4,682,526  
Additions to auto repossessions
    86,020,776       45,952,789       31,032,738  
Capitalization of servicing assets
    851,591       1,480,900       1,459,800  
Mortgage loans securitized and transferred to securities available-for-sale
                51,107,154  
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, 2004  
    September 30, 2006     September 30, 2005     (As Restated)  
Preferred Stock
  $ 550,100,000     $ 550,100,000     $ 550,100,000  
 
                 
 
                       
Common Stock outstanding:
                       
Balance at beginning of period
    80,875,056       40,389,155       40,027,285  
Common stock issued under stock option plan
    2,379,000       76,373       258,370  
Treasury stock acquired before stock split
          (28,000 )      
Shares issued as a result of stock split
          40,437,528        
 
                 
Balance at end of period
    83,254,056       80,875,056       40,285,655  
 
                 
 
                       
Additional Paid-In-Capital:
                       
Balance at beginning of period
          4,863,299       268,855  
Shares issued under stock option plan
    17,377,483       2,017,981       2,941,060  
Stock-based compensation recognized
    5,379,511              
Treasury stock acquired
          (937,079 )      
Adjustment for stock split
          (5,944,201 )      
 
                 
Balance at end of period
    22,756,994             3,209,915  
 
                 
 
                       
Capital Reserve
          82,825,000       80,000,000  
 
                 
 
                       
Legal Surplus
    265,844,192       183,019,192       165,709,122  
 
                 
 
                       
Retained Earnings:
                       
Balance at beginning of period
    316,696,971       299,501,016       201,903,993  
Net income
    62,347,500       139,925,595       135,631,395  
Cash dividends declared on common stock
    (17,462,355 )     (16,977,551 )     (14,477,444 )
Cash dividends declared on preferred stock
    (30,206,997 )     (30,206,997 )     (30,206,997 )
Adjustment for stock split
          (34,493,327 )      
 
                 
Balance at end of period
    331,375,119       357,748,736       292,850,947  
 
                 
 
                       
Accumulated Other Comprehensive (Loss) Income, net of tax:
                       
Balance at beginning of period
    (15,675,284 )     43,635,624       35,812,500  
Other comprehensive (loss) income, net of tax
    (13,140,517 )     (43,444,155 )     4,679,130  
 
                 
Balance at end of period
    (28,815,801 )     191,469       40,491,630  
 
                 
 
                       
Total stockholders’ equity
  $ 1,224,514,560     $ 1,254,759,453     $ 1,172,647,269  
 
                 
The accompanying notes are an integral part of these statements.

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
                         
    Quarter Ended  
                    September 30,  
    September 30,     September 30,     2004  
    2006     2005     (As Restated)  
Net income
  $ 26,681,756     $ 17,304,587     $ 88,393,361  
 
                 
 
                       
Other comprehensive income (loss):
                       
Unrealized gain (loss) on securities:
                       
Unrealized holding gain (loss) arising during the period
    48,411,623       (32,042,194 )     18,839,245  
Less: Reclassification adjustments for net loss (gain) and other than temporary impairments included in net income
    6,083,674       (4,517,344 )     (360,031 )
Income tax (expense) benefit related to items of other comprehensive income
    (675,834 )     762,753       (48,139 )
 
                 
 
                       
Other comprehensive income (loss) for the period, net of tax
    53,819,463       (35,796,785 )     18,431,075  
 
                 
 
                       
Total comprehensive income (loss)
  $ 80,501,219     $ (18,492,198 )   $ 106,824,436  
 
                 
The accompanying notes are an integral part of these statements.

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
                         
    Nine Month Period Ended  
                    September 30,  
    September 30,     September 30,     2004  
    2006     2005     (As Restated)  
Net income
  $ 62,347,500     $ 139,925,595     $ 135,631,395  
 
                 
 
                       
Other comprehensive (loss) income:
                       
Unrealized (loss) gain on securities:
                       
Unrealized holding (loss) gain arising during the period
    (20,016,838 )     (31,119,827 )     10,073,391  
Less: Reclassification adjustments for net loss (gain) and other than temporary impairments included in net income
    6,658,218       (12,849,663 )     (4,875,926 )
Income tax benefit (expense) related to items of other comprehensive income
    218,103       525,335       (518,335 )
 
                 
 
                       
Other comprehensive (loss) income for the period, net of tax
    (13,140,517 )     (43,444,155 )     4,679,130  
 
                 
 
                       
Total comprehensive income
  $ 49,206,983     $ 96,481,440     $ 140,310,525  
 
                 

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FIRST BANCORP
PART I — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
     As previously reported, on December 13, 2005 the Corporation concluded that its financial statements for the interim and annual periods from January 1, 2000 through March 31, 2005 should no longer be relied upon and that its consolidated financial statements for some or all of the periods included therein should be restated (the “2004 restatement”). On September 26, 2006, the Corporation filed with the SEC an Amended Annual Report on Form 10-K/A restating its audited financial statements for the years ended December 31, 2004, 2003 and 2002. The following provides a brief description of the principal accounting adjustments included in the 2004 restatement of the Corporation’s consolidated financial statements and the effect of the adjustments on the Corporation’s Consolidated Statement of Financial Condition as of September 30, 2004, its Consolidated Statements of Income for the quarter and nine month period ended September 30, 2004 and its Consolidated Statement of Cash Flows for the nine month period ended September 30, 2004. In addition, with the filing of its 2006 Annual Report on Form 10-K, First BanCorp restated its 2005 and 2004 Statements of Cash Flows due to some incorrect classifications. The classification errors related to three main items: 1) the treatment of discounts and the related accretion activity on certain investment securities (mostly “zero coupon securities”), 2) the classification of cash flows from the disposition of repossessed assets, and 3) purchases of zero coupon bonds and agency discount notes amounts presented as part of investing activities (the “2006 restatement”). All financial information for the quarter and nine month period ended September 30, 2004 included in any subsequent notes is presented on a restated basis. A more detailed description of the accounting adjustments made in connection with the 2004 restatement, as well as a background discussion of the 2004 restatement, is included in Note 1 “—Restatement of Previously Issued Financial Statements —” to First Bancorp audited Consolidated Financial Statements, included in the Corporation’s amended 2004 Annual Report on Form 10-K. A more detailed description of the accounting adjustments made in connection with the 2006 restatement, is included in Note 1 “— Restatement of 2005 and 2004 Consolidated Statements of Cash Flows—” to First BanCorp audited Consolidated Financial Statements, included in the Corporation’s 2006 Annual Report on Form 10-K.
     As discussed in more detail below, First BanCorp has separately quantified the impact of various accounting adjustments on its interim unaudited Consolidated Financial Statements.

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RECONCILIATION OF PREVIOUSLY REPORTED TO RESTATED FIGURES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
         
    As of  
    September 30,  
(In thousands)   2004  
Cash and due from banks, (no adjustment required)
  $ 91,318  
 
     
 
       
Money market investments, as previously reported
  $ 1,023,910  
Impact of accounting errors and corrections:
       
Reclassifications
    11,290  
 
     
 
       
Money market investments, as restated
  $ 1,035,200  
 
     
 
       
Investment securities including FHLB Stock, as previously reported
  $ 5,350,974  
Impact of accounting errors and corrections:
       
Accounting for investment securities
    771  
Recharacterization of pass-through certificates as secured loans
    (143,246 )
Reclassifications
    (11,290 )
 
     
 
       
Investment securities including FHLB stock, as restated
  $ 5,197,209  
 
     
 
       
Total loans, net of allowance for loan and lease losses, as previously reported
  $ 8,365,028  
Impact of accounting errors and corrections:
       
Accounting for derivative instruments and broker placement fees
    (210 )
Accounting for origination fees and costs and premiums and discounts on loans
    (2,267 )
Recharacterization of pass-through certificates as secured loans
    143,246  
Reclassifications
    492  
Other accounting adjustments
    (2,444 )
 
     
 
       
Total loans, net of allowance for loan and lease losses, as restated
  $ 8,503,845  
 
     
 
       
Total other assets, as previously reported
  $ 346,430  
Impact of accounting errors and corrections:
       
Accounting for derivative instruments and broker placement fees
    (475 )
Tax impact of accounting adjustments
    7,259  
Reclassifications
    (488 )
Valuation of financial instruments
    1,200  
Other accounting adjustments
    446  
 
     
 
       
Total other assets, as restated
  $ 354,372  
 
     
 
       
Total assets, as restated
  $ 15,181,944  
 
     
 
       
Total liabilities, as previously reported
  $ 13,994,207  
Impact of accounting errors and corrections:
       
Accounting for derivative instruments and broker placement fees
    13,863  
Tax impact of accounting adjustments
    2,392  
Reclassifications
    4  
Other accounting adjustments
    (1,169 )
 
     
 
       
Total liabilities, as restated
  $ 14,009,297  
 
     
 
       
Stockholders’ equity, as previously reported
  $ 1,183,453  
Impact of accounting errors and corrections:
       
Accounting for derivative instruments and broker placement fees
    (15,211 )
Accounting for investment securities
    3,121  
Accounting for origination fees and costs and premiums and discounts on loans
    (2,267 )
Valuation of financial instruments
    1,200  
Tax impact of accounting adjustments
    4,866  
Impact of accounting adjustments in other comprehensive income
    (1,686 )
Other accounting adjustments
    (829 )
 
     
 
       
Stockholders’ equity, as restated
  $ 1,172,647  
 
     

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RECONCILIATION OF PREVIOUSLY REPORTED TO RESTATED FIGURES
CONSOLIDATED STATEMENT OF INCOME
                 
    Quarter Ended     Nine Month Period Ended  
    September 30, 2004     September 30, 2004  
(In thousands, except per share amounts)                
Net interest income, as previously reported
  $ 103,272     $ 281,753  
Impact of accounting errors and corrections:
               
Accounting for derivative instruments and broker placement fees
    58,924       11,761  
Accounting for investment securities
    6,043       1,731  
Accounting for origination fees and costs and premiums and discounts on loans
    241       535  
Reclassification of late charges, penalty fees on loans and other
    2,561       8,803  
Other accounting adjustments
    (435 )     (207 )
 
           
 
               
Net interest income, as restated
  $ 170,606     $ 304,376  
 
           
 
               
Provision for loan and lease losses (no adjustment required)
  $ 13,200     $ 39,600  
 
           
 
               
Non-interest income, as previously reported
  $ 15,722     $ 53,370  
Impact of accounting errors and corrections:
               
Accounting for derivative instruments and broker placement fees
    (763 )     623  
Accounting for origination fees and costs and premiums and discounts on loans
    (721 )     (2,020 )
Reclassification of late charges, penalty fees on loans and other
    (2,561 )     (8,803 )
Valuation of financial instruments
          1,200  
Other accounting adjustments
    15       432  
 
           
 
               
Non-interest income, as restated
  $ 11,692     $ 44,802  
 
           
 
               
Non-interest expenses, as previously reported
  $ 45,976     $ 134,644  
Impact of accounting errors and corrections:
               
Accounting for origination fees and costs and premiums and discounts on loans
    (280 )     (805 )
Other accounting adjustments
    181       353  
 
           
 
               
Non-interest expenses, as restated
  $ 45,877     $ 134,192  
 
           
 
               
Income tax expense, as previously reported
  $ (10,737 )   $ (31,659 )
Impact of accounting errors and corrections
    (24,091 )     (8,096 )
 
           
 
               
Income tax expense, as restated
  $ (34,828 )   $ (39,755 )
 
           
 
               
Net income, as restated
  $ 88,393     $ 135,631  
 
           
 
               
Basic earnings per common share, as previously reported
  $ 0.48     $ 1.23  
Effect of adjustments
    0.49       0.08  
 
           
Basic earnings per common share, as restated
  $ 0.97     $ 1.31  
 
           
 
               
Diluted earnings per common share, as previously reported
  $ 0.47     $ 1.20  
Effect of adjustments
    0.47       0.07  
 
           
Diluted earnings per common share, as restated
  $ 0.94     $ 1.27  
 
           
     The Corporation classified the accounting practices and related adjustments that were affected by the restatement into the categories described below.
Accounting for Derivative Instruments and Broker Placement Fees. As part of the restatement, the Corporation reviewed its accounting for derivative instruments and concluded that its use of the “short-cut” method of hedge accounting under Statement of Financial Accounting Standard No. (“SFAS”) 133, “Accounting for Derivative Instruments and Hedging Activities,” for interest rate swaps that economically hedge mainly brokered certificates of deposit (“CDs”) was not consistent with generally accepted accounting principles in the United States of America (“GAAP”) because the fee received from the swap counterparty at the inception of the relationship caused the swap not to have a fair value of zero at inception (which is required under SFAS 133 to qualify for the short-cut

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method). In connection with the evaluation of hedge accounting transactions, the Corporation concluded that the short-cut method was also incorrectly used for certain interest rate swaps hedging medium-term notes, certain corporate bonds and certain commercial loan receivables.
     Prior to the restatement, the Corporation recorded, under the short-cut method, the effective portion of the change in fair value of the hedged item as an adjustment to income that offsets the fair value adjustment on the related interest rate swap. Furthermore, prior to the restatement, the broker placement fees were offset with the upfront fees received from the swap counterparties at inception with no separate accounting recognition.
     The adjustments related to the correction of the accounting for derivative instruments and broker placement fees primarily consisted of: (1) eliminating the fair value adjustments previously made to the brokered CDs, medium-term notes and other hedged items; (2) recognizing the fair value of the interest rate swaps at inception, which is the equivalent of the upfront fees received from swap counterparties; (3) recognizing the placement fees paid to the brokers that placed the brokered CDs and medium-term notes as deferred costs required to be amortized over the expected maturities of the related economically hedged items; and (4) correcting the fair value of the interest rate swaps as of the end of each reporting period.
     The net cumulative pre-tax effect through September 30, 2004 related to the correction of the accounting for derivative instruments and broker placement fees was a decrease of $15.2 million. The following table details the components of the pre-tax income effect from the correction in the accounting for interest rate swaps and broker placement fees for the quarter and nine month period ended September 30, 2004:
                 
    Quarter Ended     Nine Month Period Ended  
    September 30, 2004     September 30, 2004  
Elimination of fair value adjustments previously made to hedged items
  $ 61,661     $ 12,507  
Recognition of interest rate swap up-front fees
    3,727       16,468  
Broker placement fees amortization
    (3,351 )     (8,886 )
Corrections to interest rate swap valuations
    (3,876 )     (7,705 )
 
           
Total
  $ 58,161     $ 12,384  
 
           
Recharacterization of purchases of mortgage loans and pass-through trust certificates as commercial loans secured by mortgage loans. Prior to the restatement, the Corporation had inaccurately recorded as purchases of residential mortgages, commercial mortgage loans and pass-through trust certificates certain mortgage-related transactions with local financial institutions. Certain of these transactions included or likely included recourse provisions, which had not been analyzed as part of the Corporation’s financial reporting process. The Corporation determined that such transactions did not satisfy the “reasonable assurance” standard of SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, regarding the isolation of assets in bankruptcy, with the result that they did not qualify as a “true sale” for accounting purposes. The restatement reflects these mortgage-related transactions as commercial loans secured by mortgage loans and pass-through trust certificates. This conclusion resulted in the revised classification of approximately $3.1 billion in mortgage-related loans to secured loans to local financial institutions as of September 30, 2004 and $143.2 million pass-through trust certificates to secured loans to local financial institutions as of September 30, 2004. The recharacterization of the mortgage-related transactions did not impact the Corporation’s retained earnings as of September 30, 2004.
Accounting for Investment Securities. The Corporation historically amortized premiums and discounts related to most of its investment securities into interest income over the life of the related securities using a straight-line method adjusted for prepayment of securities. As part of the restatement, the Corporation concluded that it needed to correct its methodology and adjust its financial statements to reflect the amortization of premiums and discounts into interest income over the terms of the securities using the effective interest method instead of the straight-line method. The cumulative effect of this correction on the Corporation’s pre-tax income through September 30, 2004

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was an increase of $3.1 million. For the quarter and nine month period ended September 30, 2004, the effect for the correction of the accounting for investment securities was an increase on the Corporation’s pre-tax income of $6.0 million and $1.7 million, respectively.
     In addition, the Corporation identified other types of investment instruments that had not been recognized in the Consolidated Statement of Financial Condition in accordance with the provisions of SFAS 115 “Accounting for Certain Investments in Debt and Equity Securities.”
Accounting for deferral and recognition of origination fees and costs on loans. As part of the restatement process, the Corporation reviewed the methodology used to measure origination fees and costs associated with its loans origination, in accordance with SFAS 91, “Accounting for Nonrefundable Fees and Costs Associated with Origination or Acquiring Loans and Initial Direct Costs of Leases”, which establishes the accounting treatment for nonrefundable fees and costs associated with lending, committing to lend or purchasing loans. The Corporation concluded that throughout the restatement period, it did not apply SFAS 91 requirements to one of its consumer loans portfolios. Accordingly, the Corporation concluded that, in order to comply with SFAS 91, it needed to defer and amortize loan origination fees and costs on this portfolio using the interest method. The cumulative effect of this correction on the Corporation’s pre-tax income through September 30, 2004 was a decrease of approximately $2.3 million, of which $0.2 million and $0.7 million was recorded as a reduction in pre-tax income for the quarter and nine month period ended September 30, 2004, respectively.
Valuation of financial instruments. In connection with a loan restructuring, First BanCorp became the holder of warrants. The warrant certificate gives the Corporation the right to purchase common stock from a privately held company at a fixed price. This transaction was not formally evaluated or documented as part of the Corporation’s financial reporting process. As part of the restatement process, the Corporation concluded that this transaction meets the definition of a derivative instrument as stated in SFAS 133. Accordingly, the warrant was marked to market and the valuation recognized in earnings as part of “Other operating income.” The cumulative effect of this correction on the Corporation’s pre-tax income through September 30, 2004 was an increase of $1.2 million, all of which related to the quarter ended March 31, 2004.
Other Accounting Adjustments and Reclassifications. As part of the restatement, the Corporation also made corrections to various other aspects of its Consolidated Financial Statements, including adjustments to the gain on sale of credit card portfolios, accrual of rental expense on lease contracts and income from a loan origination subsidiary. The cumulative effect of all these other adjustments on the Corporation’s pre-tax income through September 30, 2004 was a decrease of $0.8 million, of which approximately $0.6 million was recorded as a decrease to pre-tax income for the quarter ended September 30, 2004 and $0.1 million was recorded as a decrease to pre-tax income for the nine month period ended September 30, 2004.
     The reclassifications made to conform to GAAP included, among other things, reclassifying late charges and prepayment fees on loans from non-interest income to interest income on loans, and reclassifying dividends on equity securities from non-interest income to interest income on investments. Other reclassifications included reclassifying loans receivable balances within loan categories, reclassifying certain amounts previously reported as repurchase agreements to other borrowings, and reclassifying certain short-term investments previously reported as part of the available for sale and held to maturity investment portfolio to money market investments.
Income Taxes. As a result of the corrections reflected in the restatement, the Corporation’s cumulative income tax expense through September 30, 2004 was reduced by approximately $4.9 million, of which $24.1 million was recorded as an increase to income tax expense for the quarter ended September 30, 2004 and $8.1 million was recorded as an increase to income tax expense for the nine month period ended September 30, 2004. The cumulative reduction through September 30, 2004 resulted principally from changes in deferred taxes. See Note 15 for additional details regarding the Corporation’s income taxes.

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     The following table shows the impact of all restatement adjustments on the previously reported unaudited Consolidated Statement of Financial Condition as of September 30, 2004.
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)
                         
    September 30, 2004             September 30, 2004  
(Dollars in thousands)   (As Previously Reported)     Adjustments     (As Restated)  
Assets
                       
Cash and due from banks
  $ 91,318     $     $ 91,318  
 
                 
 
                       
Money market instruments
    721,310       11,290       732,600  
Federal funds sold and securities purchased under agreements to resell
    302,000             302,000  
Time deposits with other financial institutions
    600             600  
 
                 
Total money market investments
    1,023,910       11,290       1,035,200  
 
                 
Investment securities available for sale, at fair value:
                       
Securities pledged that can be repledged
    1,270,255       (44,413 )     1,225,842  
Other investment securities
    350,923       (99,252 )     251,671  
 
                 
Total investment securities available for sale
    1,621,178       (143,665 )     1,477,513  
 
                 
Investment securities held to maturity, at amortized cost:
                       
Securities pledged that can be repledged
    3,289,813       725       3,290,538  
Other investment securities
    371,333       (11,200 )     360,133  
 
                 
Total investment securities held to maturity
    3,661,146       (10,475 )     3,650,671  
 
                 
Other equity securities
    68,650       375       69,025  
 
                 
Loans, net of allowance for loan and lease losses
    8,357,609       138,817       8,496,426  
Loans held for sale, at lower of cost or market
    7,419             7,419  
 
                 
Total loans, net
    8,365,028       138,817       8,503,845  
 
                 
Premises and equipment, net
    88,866             88,866  
Other real estate owned
    6,939             6,939  
Accrued interest receivable
    61,181       (236 )     60,945  
Due from customers on acceptances
    718             718  
Other assets
    188,726       8,178       196,904  
 
                 
Total assets
  $ 15,177,660     $ 4,284     $ 15,181,944  
 
                 
Liabilities & Stockholders’ Equity
                       
Liabilities:
                       
Non-interest-bearing deposits
  $ 603,713     $     $ 603,713  
Interest-bearing deposits
    6,764,318       (10,485 )     6,753,833  
Federal funds purchased and securities sold under agreements to repurchase
    4,614,109       (55,194 )     4,558,915  
Advances from the Federal Home Loan Bank (FHLB)
    1,373,000             1,373,000  
Notes payable
    153,551       (649 )     152,902  
Other borrowings
    231,500       45,168       276,668  
Subordinated notes
    82,821       (684 )     82,137  
Bank acceptance outstanding
    718             718  
Payable for unsettled investment trade
    10,285             10,285  
Accounts payable and other liabilities
    160,192       36,934       197,126  
 
                 
Total liabilities
    13,994,207       15,090       14,009,297  
 
                 
 
                       
Stockholders’ equity:
                       
Preferred stock, authorized 50,000,000 shares: issued and outstanding 22,004,000 shares at $25 liquidation value per share
    550,100             550,100  
Common stock, $1 par value, authorized 250,000,000 shares; issued 45,206,555 shares
    45,207             45,207  
Less: Treasury Stock (at par value)
    (4,921 )           (4,921 )
 
                 
Common stock outstanding
    40,286             40,286  
 
                 
Additional paid-in capital
    3,210             3,210  
Capital reserve
    80,000             80,000  
Legal surplus
    163,107       2,602       165,709  
Retained earnings
    304,573       (11,722 )     292,851  
Accumulated other comprehensive income, net of tax
    42,177       (1,686 )     40,491  
 
                 
Total stockholders’ equity
    1,183,453       (10,806 )     1,172,647  
 
                 
Total liabilities and stockholders’ equity
  $ 15,177,660     $ 4,284     $ 15,181,944  
 
                 

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     The following tables show the impact of all restatement adjustments on the previously reported unaudited Consolidated Statements of Income and basic and diluted earnings per share for the quarter and nine month period ended September 30, 2004.
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                         
    Quarter Ended  
    September 30,             September 30,  
    2004             2004  
(In thousands, except per share data)   (As Previously Reported)     Adjustments     (As Restated)  
Interest income:
                       
Loans
  $ 113,832     $ 1,316     $ 115,148  
Investment securities
    65,095       5,268       70,363  
Money market investments
    1,153             1,153  
 
                 
Total interest income
    180,080       6,584       186,664  
 
                 
 
                       
Interest expense:
                       
Deposits
    30,730       (61,384 )     (30,654 )
Federal funds purchased and repurchase agreements
    34,829       (204 )     34,625  
Advances from FHLB
    7,574             7,574  
Notes payable and other borrowings
    3,675       838       4,513  
 
                 
Total interest expense
    76,808       (60,750 )     16,058  
 
                 
Net interest income
    103,272       67,334       170,606  
 
                 
 
                       
Provision for loan and lease losses
    13,200             13,200  
 
                 
 
                       
Net interest income after provision for loan and lease losses
    90,072       67,334       157,406  
 
                 
 
                       
Non-interest income:
                       
Other service charges on loans
    4,384       (3,532 )     852  
Service charges on deposit accounts
    2,705             2,705  
Mortgage banking activities
    1,329             1,329  
Net gain on investments and impairments
    360             360  
Rental income
    814             814  
Other operating income
    6,130       (498 )     5,632  
 
                 
Total non-interest income
    15,722       (4,030 )     11,692  
 
                 
 
                       
Non-interest expenses:
                       
Employees’ compensation and benefits
    21,433       (280 )     21,153  
Occupancy and equipment
    10,223       37       10,260  
Business promotion
    4,354             4,354  
Professional fees
    1,024             1,024  
Taxes, other than income taxes
    2,283             2,283  
Insurance and supervisory fees
    995             995  
Other operating expenses
    5,664       144       5,808  
 
                 
Total non-interest expenses
    45,976       (99 )     45,877  
 
                 
 
                       
Income before income tax
    59,818       63,403       123,221  
Income tax provision
    (10,737 )     (24,091 )     (34,828 )
 
                 
 
                       
Net income
  $ 49,081     $ 39,312     $ 88,393  
 
                 
Net income attributable to common stockholders
  $ 39,012     $ 39,312     $ 78,324  
 
                 
Net income per common share:
                       
Basic
  $ 0.48     $ 0.49     $ 0.97  
 
                 
Diluted
  $ 0.47     $ 0.47     $ 0.94  
 
                 

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                         
    Nine Months Ended  
    September 30,             September 30,  
    2004             2004  
(In thousands, except per share data)   (As Previously Reported)     Adjustments     (As Restated)  
Interest income:
                       
Loans
  $ 316,954     $ 8,838     $ 325,792  
Investment securities
    168,465       1,410       169,875  
Money market investments
    2,416             2,416  
 
                 
Total interest income
    487,835       10,248       498,083  
 
                 
 
                       
Interest expense:
                       
Deposits
    84,387       (12,474 )     71,913  
Federal funds purchased and repurchase agreements
    95,175       (359 )     94,816  
Advances from FHLB
    18,691             18,691  
Notes payable and other borrowings
    7,829       458       8,287  
 
                 
Total interest expense
    206,082       (12,375 )     193,707  
 
                 
Net interest income
    281,753       22,623       304,376  
 
                 
 
                       
Provision for loan and lease losses
    39,600             39,600  
 
                 
 
                       
Net interest income after provision for loan and lease losses
    242,153       22,623       264,776  
 
                 
 
                       
Non-interest income:
                       
Other service charges on loans
    14,547       (11,590 )     2,957  
Service charges on deposit accounts
    8,231             8,231  
Mortgage banking activities
    3,091             3,091  
Net gain on investments and impairments
    4,876             4,876  
Rental income
    2,133             2,133  
Gain on sale of credit card portfolio
    5,533             5,533  
Other operating income
    14,959       3,022       17,981  
 
                 
Total non-interest income
    53,370       (8,568 )     44,802  
 
                 
 
                       
Non-interest expenses:
                       
Employees’ compensation and benefits
    62,932       (805 )     62,127  
Occupancy and equipment
    29,054       26       29,080  
Business promotion
    12,411             12,411  
Professional fees
    2,964             2,964  
Taxes, other than income taxes
    6,182             6,182  
Insurance and supervisory fees
    3,081             3,081  
Other operating expenses
    18,020       327       18,347  
 
                 
Total non-interest expenses
    134,644       (452 )     134,192  
 
                 
 
                       
Income before income tax
    160,879       14,507       175,386  
Income tax provision
    (31,659 )     (8,096 )     (39,755 )
 
                 
 
                       
Net income
  $ 129,220     $ 6,411     $ 135,631  
 
                 
Net income attributable to common stockholders
  $ 99,013     $ 6,411     $ 105,424  
 
                 
Net income per common share:
                       
Basic
  $ 1.23     $ 0.08     $ 1.31  
 
                 
Diluted
  $ 1.20     $ 0.07     $ 1.27  
 
                 

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Restatement of 2004 Consolidated Statement of Cash Flows
     During the preparation of the 2006 consolidated financial statements, management became aware of some incorrect classifications in the Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004. The classification errors related to three main items: 1) the treatment of discounts and the related accretion activity on certain investment securities (mostly “zero coupon securities”) purchased by the Corporation which were incorrectly presented as cash flows related to investing activities (“principal repayments and maturities of securities held-to-maturity”), instead of operating activities (“net amortization or accretion of discounts and premiums on investment securities”), 2) the classification of cash flows from the disposition of repossessed assets which was included as part of operating activities (“decrease or increase in other assets”), instead of investing activities (“proceeds from sale of repossessed assets”), and 3) purchases of zero coupon bonds and agency discount notes amounts presented as part of investing activities (“purchases of securities held-to-maturity”) were reported at par amount rather than the actual cash paid for the securities and the discounts on such securities were being presented as investing activities (“principal repayments and maturities of securities held-to-maturity”) rather than being excluded from the Cash Flow Statements.
     The cash flows related to the accretion of discount on certain investment securities have been properly classified as “cash flows from operating activities” and the cash flows from the disposition of repossessed assets have been properly classified as “cash flows from investing activities” in the restated Consolidated Statement of Cash Flows for the nine month period ended September 30, 2004. The amounts presented as purchases, principal repayments and maturities of securities under “cash flows from investing activities” have also been corrected to reflect actual cash outflows and inflows related to zero coupon bonds and discounts notes. In addition, the Corporation has corrected the classification of other items, including items related to the 2004 restatement (see footnotes in table below), and the classification of short-term held-to-maturity investments (less than 90 days) from investments to cash and cash equivalents.
     Also, the Corporation has corrected the classification of cash receipts from sales and repayments as well as cash disbursements in originations of loans classified as held-for-sale on the consolidated statements of cash flows. The Corporation previously reported the cash receipts from sales and repayments as well as cash disbursements in originations of loans classified as held-for-sale that were originally acquired for investment as cash flows of operating activities in the consolidated statements of cash flows. Since these loans were originally acquired by the Corporation for investment purposes, cash receipts from sales and repayments as well as cash disbursements in originations of these loans should be classified as cash flows of investing activities in the consolidated statements of cash flows.

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     The following comparative table presents the effects of the aforementioned classification corrections as well as the impact of all restatement adjustments related with the 2004 restatement on the Consolidated Statement of Cash Flows for the nine month period ended September 30, 2004:
                         
    2004  
    As Previously              
Nine Month Period Ended September 30, (in thousands)   Reported     Adjustments     (As Restated)  
Cash flows from operating activities:
                       
Net income
  $ 129,220     $ 6,411     $ 135,631  
 
                 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Deferred income tax (benefit) provision (1)
    (5,047 )     5,285       238  
Unrealized derivatives (gain) (2)
    (1,174 )     (22,471 )     (23,645 )
Amortization of brokers’ placement fees (2)
          10,229       10,229  
(Accretion) amortization of premiums and discounts on investment securities (3)
          (20,522 )     (20,522 )
Decrease (increase) in other assets (3)
    6,011       (26,486 )     (20,475 )
Other adjustments to cash flows from operating activities (4) (5)
    (7,526 )     52,428       44,902  
 
                 
Total adjustments to reconcile net income to net cash provided by operating activities
    (7,736 )     (1,537 )     (9,273 )
 
                 
Net cash provided by operating activities
    121,484       4,874       126,358  
 
                 
 
                       
Cash flows from investing activities:
                       
Proceeds from sale of repossessed assets (3)
          23,557       23,557  
Purchase of securities held to maturity (3)
    (5,182,605 )     3,635,533       (1,547,072 )
Principal repayments and maturities of securities held to maturity (3)
    4,651,937       (3,595,004 )     1,056,933  
Other adjustments to cash flows from investing activities (4) (5)
    (1,894,906 )     (35,273 )     (1,930,179 )
 
                 
Net cash used in investing activities
    (2,425,574 )     28,813       (2,396,761 )
 
                 
 
                       
Cash flows from financing activities:
                       
Net increase in deposits (2)
    590,289       (12,844 )     577,445  
Other adjustments to cash flows from financing activities (5)
    1,768,785       (1,417 )     1,767,368  
 
                 
Net cash provided by financing activities
    2,359,074       (14,261 )     2,344,813  
 
                 
Net increase in cash and cash equivalents
    54,984       19,426       74,410  
Cash and cash equivalents at beginning of period
    1,060,244       (8,136 )     1,052,108  
 
                 
Cash and cash equivalents at end of period (6)
  $ 1,115,228     $ 11,290     $ 1,126,518  
 
                 
 
(1)   Deferred tax effect of items related to the 2004 restatement; refer to explanation of change in Note 1 – Restatement of previously issued financial statements – Income Taxes above.
 
(2)   Refer to explanation of change in Note 1 – Restatement of previously issued financial statements — Accounting for Derivative Instruments and Broker Placement Fees above.
 
(3)   Refer to explanation of change in the first paragraph of Restatement of 2004 Consolidated Statements of Cash Flows above.
 
(4)   Refer to explanation of change in the third paragraph of Restatement of 2004 Consolidated Statements of Cash Flows above.
 
(5)   Change resulting from certain not significant 2004 restatement adjustments (refer to Note 1 – Restatement of previously issued financial statements) and the correction of immaterial classification errors.
 
(6)   Correction of classification of short-term held-to-maturity investments (less than 90 days) from investments to cash and cash equivalents.

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2 – 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 Annual Audited Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005. Certain information and note disclosure normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted from these statements pursuant to the rules and regulations of the SEC and, accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2005, included in the Corporation’s 2005 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.
     The results of operations for the quarter and nine month period ended on September 30, 2006, are not necessarily indicative of the results to be expected for the entire year.
     On May 24, 2005, the Corporation’s Board of Directors declared a two-for-one split in the Corporation’s common stock. The record date of the stock split was June 15, 2005, and the distribution date was June 30, 2005. The per share data contained in the Consolidated Financial Statements prior to the quarter ended June 30, 2005 has been adjusted to reflect the two-for-one stock split.
Recently issued accounting pronouncements
     The Financial Accounting Standards Board (“FASB”), its Emerging Issues Task Force (“EITF”) and the SEC have issued the following accounting pronouncements and Issue discussions relevant to the Corporation’s operations:
     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115”. This Statement allows entities to choose to measure certain financial assets and liabilities at fair value with changes in fair value reflected in earnings. The fair value option may be applied on an instrument-by-instrument basis. This Statement is effective for periods after November 15, 2007, however, early adoption is permitted provided that the entity also elects to apply the provisions of SFAS 157, “Fair Value Measurements”. The Corporation adopted SFAS 159 effective January 1, 2007. The Corporation decided to early adopt SFAS 159 for the callable brokered CDs and a portion of the callable fixed medium-term notes that were economically hedged with interest rate swaps. First BanCorp had been following the long-haul method of accounting, which was adopted on April 3, 2006, under SFAS 133 for the portfolio of callable interest rate swaps, callable brokered CDs and callable notes. One of the main considerations in determining to early adopt SFAS 159 for these instruments was to eliminate the operational procedures required by the long-haul method of accounting in terms of documentation, effectiveness assessment, and manual procedures followed by the Corporation to fulfill the requirements specified by SFAS 133.
     Upon adoption of SFAS 159, the Corporation selected the fair value measurement for approximately 63%, of the brokered CDs portfolio and certain of the medium-term notes portfolio (“designated liabilities”). Interest rate risk on the brokered CDs and medium term notes chosen for the fair value measurement option will continue to be economically hedged through callable interest rate swaps with the same terms and conditions. The cumulative after-tax effect on the opening balance of retained earnings from adopting these standards is an approximate increase of $92.2 million. Under SFAS 159, this one-time credit was not recognized in current earnings. Regulatory capital increased by the positive adjustment to retained earnings, exceeding by higher margins the capital levels required to be classified as well-capitalized and strengthened the Corporation’s regulatory capital ratios.

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     With the Corporation’s elimination of the use of the long-haul method in connection with the adoption of SFAS 159 as of January 1, 2007, the Corporation will no longer amortize the basis adjustment. The basis adjustment amortization is the reversal of the change in value of the brokered CDs and medium term notes recognized since the implementation of the long-haul method. Since the time the Corporation implemented the long-haul method, it has recognized the basis adjustment and the changes in the value of the brokered CDs and medium term notes based on the expected call date of the instruments. The adoption of SFAS 159 also requires the recognition, as part of the adoption adjustment to retained earnings, of all of the unamortized placement fees that were paid to broker counterparties upon the issuance of the brokered CDs and medium term notes. The Corporation previously amortized those fees through earnings based on the expected call date of the instruments. The impact of the de-recognition of the basis adjustment and the unamortized placement fees as of January 1, 2007 results in a cumulative after-tax reduction to retained earnings of approximately $23.8 million. This negative charge is included in the total cumulative after-tax increase to retained earnings of $92.2 million that results with the adoption of SFAS 157 and SFAS 159.
     In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). This interpretation expresses the SEC staff’s views regarding the process of quantifying financial statement misstatements that could result in improper amounts of assets or liabilities. While a misstatement may not be considered material for the period in which it occurred, it may be considered material in a subsequent year if the corporation were to correct the misstatement through current period earnings. SAB 108 requires a materiality evaluation based on all relevant quantitative and qualitative factors and the quantification of the misstatement using both a balance sheet and income statement approach to determine materiality. SAB 108 is effective for periods ending after November 15, 2006. The adoption of this Statement did not have a material effect on the Corporation’s financial condition and results of operations.
     In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)”. This Statement requires corporations to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement is effective for periods ending after December 15, 2006. This Statement is not applicable to the Corporation and therefore has no impact to the Corporation’s financial condition or results of operations.
     In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement is effective for periods beginning after November 15, 2007. Effective January 1, 2007, the Corporation elected to early adopt this Statement. For further details and for the effect on the Corporation’s financial condition and results of operations upon adoption of SFAS 157 and SFAS 159, refer to the discussion on SFAS 159 above.
     In June 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”. This interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109. This interpretation provides a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for periods beginning after December 15, 2006. The Corporation adopted FIN 48 effective January 1, 2007. The cumulative effect of adoption of FIN 48 resulted in an increase of $2.6 million to tax reserves with offsetting adjustments to retained earnings. Additionally, in connection with the adoption of

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FIN 48, the Corporation elected to classify interest and penalties related to unrecognized tax portions as components of income tax expense.
     In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” an amendment of SFAS No. 140. This Statement requires that servicing assets and servicing liabilities be initially measured at fair value along with any derivative instruments used to mitigate inherent risks. This Statement is effective for periods beginning after September 15, 2006. The adoption of this Statement in 2007 did not have a material effect on the Corporation’s financial condition and results of operations.
     In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140”. This Statement allows fair value measurement for any hybrid financial instrument that contains an embedded derivative requiring bifurcation. It also establishes a requirement to evaluate interests in securitized financial assets to establish whether the interests are freestanding derivatives or hybrid financial instruments that contain an embedded derivative requiring bifurcation. This Statement is effective for all financial instruments acquired or issued after September 15, 2006. The adoption of this Statement did not have a material effect on the Corporation’s financial condition and results of operations.
     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3”. This Statement changes the requirements for the accounting for and reporting of a voluntary change in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of a change in accounting principle unless it is impracticable to do so; in which case the earliest period for which retrospective application is practicable should be applied. If it is impracticable to calculate the cumulative effect of a change in accounting principle, the Statement requires prospective application as of the earliest date practicable. This Statement does not change the guidance in APB Opinion No. 20 with regard to the reporting of the correction of an error, or a change in accounting estimate. The Statement’s purpose is to improve the comparability of financial information among periods. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005. The adoption of this statement did not have a material effect on the Corporation’s financial condition and results of operations.
     In December 2004, the Financial Accounting Standard Board (“FASB”) issued SFAS 123R, “Share-Based Payment”. This statement is a revision of SFAS 123, “Accounting for Stock- Based Compensation” and it also supersedes APB No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”), and its related implementation guidance.
     This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). The cost will be recognized over the period during which an employee is required to provide service in exchange for the award — the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.
     SFAS 123R eliminates the alternative to use APB 25’s intrinsic value method of accounting that was provided in SFAS 123 as originally issued. Under APB 25, issuing stock options to employees generally resulted in recognition of no compensation cost.
     The Corporation prospectively applied SFAS123R to its financial statements as of January 1, 2006. Refer to Note 4 to these consolidated financial statements for required disclosures and further information on the impact of the adoption of this accounting pronouncement.

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3 – EARNINGS PER COMMON SHARE
     The calculations of earnings per common share for the quarters and nine month periods ended on September 30, 2006, 2005 and 2004 are as follows:
                         
    Quarter Ended  
    September 30,  
                    2004  
    2006     2005     (As Restated)  
    (In thousands, except per share data)  
Net Income:
                       
Net Income
  $ 26,682     $ 17,305     $ 88,393  
Less: Preferred stock dividend
    (10,069 )     (10,069 )     (10,069 )
 
                 
Net income available to common stockholders
  $ 16,613     $ 7,236     $ 78,324  
 
                 
 
                       
Weighted-Average Shares:
                       
Basic weighted average common shares outstanding
    83,254       80,875       80,484  
Average potential common shares
    83       2,051       2,524  
 
                 
Diluted weighted-average number of common shares outstanding
    83,337       82,926       83,008  
 
                 
 
                       
Earnings per common share:
                       
Basic
  $ 0.20     $ 0.09     $ 0.97  
 
                 
Diluted
  $ 0.20     $ 0.09     $ 0.94  
 
                 
                         
    Nine Month Period Ended  
    September 30,  
                    2004  
    2006     2005     (As Restated)  
    (In thousands, except per share data)  
Net Income:
                       
Net Income
  $ 62,348     $ 139,926     $ 135,631  
Less: Preferred stock dividend
    (30,207 )     (30,207 )     (30,207 )
 
                 
Net income available to common stockholders
  $ 32,141     $ 109,719     $ 105,424  
 
                 
 
                       
Weighted-Average Shares:
                       
Basic weighted average common shares outstanding
    82,694       80,837       80,348  
Average potential common shares
    360       2,218       2,480  
 
                 
Diluted weighted-average number of common shares outstanding
    83,054       83,055       82,828  
 
                 
 
                       
Earnings per common share:
                       
Basic
  $ 0.39     $ 1.36     $ 1.31  
 
                 
Diluted
  $ 0.39     $ 1.32     $ 1.27  
 
                 
     Potential common shares consist of common stock issuable under the assumed exercise of stock options using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise 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 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 in earnings per share. For the quarter and nine month period ended September 30, 2006, there were 2,179,796 and 2,438,791 weighted-average outstanding stock options, respectively, that were excluded from the computation of outstanding shares because they were antidilutive. For

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the quarter and nine month period ended September 30, 2005, there were 1,719,600 and 725,228 weighted-average outstanding stock options, respectively, that were excluded from the computation of outstanding shares because they were antidilutive. All options outstanding were included in the computation of outstanding shares for the quarter ended September 30, 2004. For the nine month period ended on September 30, 2004, a total of 928,800 stock options, were not included in the computation of outstanding shares because they were antidilutive.
4 – STOCK OPTION PLAN
     Since 1997 the Corporation has had a stock option plan covering certain employees. This plan allowed for the granting of up to 8,696,112 purchase options on shares of the Corporation’s common stock to officers and other employees. According to the plan, the options granted cannot 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 is granted. Stock options are fully vested upon issuance. 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 Corporation’s stock option plan, the Compensation Committee may grant stock appreciation rights at any time subsequent to the grant of an option. Pursuant to the 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 shall be cancelled by the Corporation and the shares subject to the option shall not be eligible for further grants under the option plan.
     During the second quarter of 2005, the Corporation issued 76,373 (152,746 as adjusted for the June 2005 stock split) shares of common stock as a result of the exercise of 36,479 stock options and 39,894 shares granted pursuant to stock appreciation rights before the June 2005 stock split, both under the Corporation’s stock-based compensation plan.
     Prior to the adoption of SFAS 123R on January 1, 2006, the Corporation accounted for stock options under the recognition and measurement principles of APB 25 and related Interpretations. No stock-based employee compensation cost was reflected in net income for the quarters and nine month periods ended September 30, 2005 and 2004, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. The table below illustrates the effect on net income and earnings per common share if the Corporation had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation granted during the third quarter and first nine months of 2005 and 2004.

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Pro-forma information:
                                 
    Quarter ended     Nine month period ended  
    September 30,     September 30,  
            2004             2004  
    2005     (As Restated)     2005     (As Restated)  
    (In thousands, except per share data)  
Net income
                               
As reported
  $ 17,305     $ 88,393     $ 139,926     $ 135,631  
Deduct: Stock-based employee compensation expense determined under fair value method
                6,118       4,963  
 
                       
Pro forma
  $ 17,305     $ 88,393     $ 133,808     $ 130,668  
 
                       
 
                               
Earnings per common share-basic:
                               
As reported
  $ 0.09     $ 0.97     $ 1.36     $ 1.31  
Pro forma
  $ 0.09     $ 0.97     $ 1.28     $ 1.25  
 
                               
Earnings per common share-diluted:
                               
As reported
  $ 0.09     $ 0.94     $ 1.32     $ 1.27  
Pro forma
  $ 0.09     $ 0.94     $ 1.25     $ 1.21  
     On January 1, 2006, the Corporation adopted SFAS 123R using the “modified prospective” method. Under this method, and since all previously issued stock options were fully vested at the time of the adoption, the Corporation expenses the fair value of all employee stock options granted after January 1, 2006 (same as the prospective method). The compensation expense associated with expensing stock options for the quarter and nine month period ended September 30, 2006 was approximately $0.5 million and $5.4 million, respectively. All employee stock options granted during 2006 were fully vested at the time of grant.
     The activity of stock options during the first nine months of 2006 is set forth below:
                                 
    Nine Month Period Ended  
    September 30, 2006  
                    Weighted-Average        
                    Remaining     Aggregate  
    Number of     Weighted-Average     Contractual Term     Intrinsic Value  
    Options     Exercise Price     (Years)     (In thousands)  
Beginning of period
    5,316,410     $ 13.28                  
Options granted
    1,235,000       12.21                  
Options exercised
    (2,379,000 )     8.30                  
Options expired unexercised
    (1,148,000 )     20.68                  
 
                           
End of period outstanding and exercisable
    3,024,410     $ 13.95       7.23     $ 2,065  
 
                       

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     The fair value of options granted in 2006, 2005 and 2004 that was estimated using the Black-Scholes option pricing, and the assumptions used follow:
                         
    2006   2005   2004
Weighted Average Stock Price at grant date and exercise price
  $ 12.21     $ 23.92     $ 21.45  
Stock option estimated fair value
  $ 2.89-$4.60     $ 6.40-$6.41     $ 5.30-$5.45  
Weighted-average estimated fair value
  $ 4.36     $ 6.40     $ 5.33  
Expected stock option term (years)
    4.22-4.31       4.25 - 4.27       4.08-4.33  
Expected volatility
    39% -46 %     28 %     28 %
Weighted-average expected volatility
    45 %     28 %     28 %
Expected dividend yield
    2.2% - 3.2 %     1.0 %     1.0 %
Weighted-average expected dividend yield
    2.3 %     1.0 %     1.0 %
Risk-free interest rate
    4.7% - 5.6 %     4.2 %     3.1 %
     The Corporation uses empirical research data to estimate options exercises and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. For 2006, the expected volatility is based on the historical implied volatility of the Corporation’s common stock at each grant date. For periods prior to 2006, the expected volatility is based on the historical volatility of the Corporation’s common stock over a 260-working days period. The dividend yield is based on the historical 12-month dividend yield observable at each grant date. The risk-free rate for periods is based on historical zero coupon curves obtained from Bloomberg at the time of grant based on the option expected term.
     No options were exercised during the third quarter of 2006 and 2005. The total intrinsic value of options exercised during the third quarter of 2004 was $1.1 million. The total intrinsic value of options exercised during the first nine months of 2006, 2005 and 2004 was approximately $10.0 million, $0.8 million and $7.6 million, respectively. Cash proceeds from options exercised during the third quarter of 2004 amounted to approximately $0.5 million. Cash proceeds from options exercised during the first nine months of 2006, 2005 and 2004 amounted to approximately $19.8 million, $0.6 million and $3.2 million, respectively.

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5 – INVESTMENT SECURITIES
     Investment Securities Available for Sale
          The amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of investment securities available for sale at September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004 were as follows:
                                                                                 
    September 30, 2006     December 31, 2005  
            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)  
Obligations of U.S. Government Sponsored Agencies:
                                                                               
Within 1 year
  $     $     $     $           $ 1,000     $     $     $ 1,000       6.00  
After 5 to 10 years
    402,378       21       9,778       392,621       4.31       392,939             4,289       388,650       4.27  
After 10 years
    12,984       8       47       12,945       6.16                                
Puerto Rico Government Obligations:
                                                                               
After 1 to 5 years
    4,624       149             4,773       6.17       4,594       223             4,817       6.17  
After 5 to 10 years
    15,467       303       507       15,263       4.86       15,271       196       678       14,789       4.84  
After 10 years
    5,360       101       172       5,289       5.88       5,311       131       42       5,400       5.88  
 
                                                               
United States and Puerto Rico Government Obligations
    440,813       582       10,504       430,891       4.42       419,115       550       5,009       414,656       4.34  
 
                                                               
Mortgage-backed Securities:
                                                                               
FHLMC certificates:
                                                                               
Within 1 year
    10                   10       6.06       2                   2       4.26  
After 1 to 5 years
    2,016       40             2,056       7.03       1,762       30             1,792       6.43  
After 5 to 10 years
                                  1,336       82             1,418       7.98  
After 10 years
    6,021       55       156       5,920       5.60       6,839       77       166       6,750       5.55  
 
                                                               
 
    8,047       95       156       7,986       5.96       9,939       189       166       9,962       6.03  
 
                                                               
 
                                                                               
GNMA certificates:
                                                                               
After 1 to 5 years
    692       5             697       6.37       939       14             953       6.39  
After 5 to 10 years
    1,068       6       3       1,071       5.78       291       10             301       6.64  
After 10 years
    393,906       482       7,663       386,725       5.23       438,565       1,021       1,959       437,627       5.19  
 
                                                               
 
    395,666       493       7,666       388,493       5.24       439,795       1,045       1,959       438,881       5.20  
 
                                                               
 
                                                                               
FNMA certificates:
                                                                               
After 1 to 5 years
    105                   105       7.33       187       3             190       7.55  
After 5 to 10 years
    9,026       11       150       8,887       4.76       124       11             135       11.40  
After 10 years
    907,500       670       13,376       894,794       5.17       1,038,126       1,054       10,031       1,029,149       5.14  
 
                                                               
 
    916,631       681       13,526       903,786       5.16       1,038,437       1,068       10,031       1,029,474       5.14  
 
                                                               
 
                                                                               
Mortgage pass-through certificates:
                                                                               
After 10 years
    375       3             378       7.28       400       3             403       7.29  
 
                                                               
Mortgage-backed Securities
    1,320,719       1,272       21,348       1,300,643       5.19       1,488,571       2,305       12,156       1,478,720       5.16  
 
                                                               
Corporate Bonds:
                                                                               
After 1 to 5 years
                                  2,483       84       1       2,566       7.75  
After 5 to 10 years
    1,302             178       1,124       7.46       1,912       12       42       1,882       8.09  
After 10 years
    4,468             792       3,676       7.72       21,857       909       1,833       20,933       7.44  
 
                                                               
Corporate bonds
    5,770             970       4,800       7.66       26,252       1,005       1,876       25,381       7.52  
 
                                                               
 
                                                                               
Equity securities (without contractual maturity)
    18,302       1,955       37       20,220       0.80       29,931       1,131       1,641       29,421       3.70  
 
                                                               
 
                                                                               
Total Investment Securities Available for Sale
  $ 1,785,604     $ 3,809     $ 32,859     $ 1,756,554       4.96     $ 1,963,869     $ 4,991     $ 20,682     $ 1,948,178       5.00  
 
                                                               

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                                            September 30, 2004  
    September 30, 2005     (As Restated)  
            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)  
Obligations of U.S. Government Sponsored Agencies:
                                                                               
After 5 to 10 years
  $ 392,782     $ 394     $ 2,886     $ 390,290       4.27     $ 284,743     $ 11,742     $     $ 296,485       4.68  
Puerto Rico Government Obligations:
                                                                               
After 1 to 5 years
    4,585       261             4,846       6.17       4,449       255             4,704       6.16  
After 5 to 10 years
    15,207       223       172       15,258       4.83       12,730       251       66       12,915       4.58  
After 10 years
    5,295       135       46       5,384       5.87       7,567       437       83       7,921       5.94  
 
                                                               
United States and Puerto Rico Government Obligations
    417,869       1,013       3,104       415,778       4.33       309,489       12,685       149       322,025       4.73  
 
                                                               
Mortgage-backed Securities:
                                                                               
FHLMC certificates:
                                                                               
Within 1 year
                                  1                   1       4.26  
After 1 to 5 years
    1,964       45             2,009       6.41       2,634       135             2,769       6.35  
After 5 to 10 years
    1,535       99             1,634       8.04       2,568       167             2,735       8.12  
After 10 years
    7,191       98       101       7,188       5.58       3,069       176             3,245       6.85  
 
                                                               
 
    10,690       242       101       10,831       6.08       8,272       478             8,750       7.08  
 
                                                               
 
                                                                               
GNMA certificates:
                                                                               
After 1 to 5 years
    996       17             1,013       6.40       965       44             1,009       5.90  
After 5 to 10 years
    321       11             332       6.65       996       61             1,057       6.90  
After 10 years
    456,524       969       1,007       456,486       5.21       110,105       2,428             112,533       4.75  
 
                                                               
 
    457,841       997       1,007       457,831       5.21       112,066       2,533             114,599       4.78  
 
                                                               
 
                                                                               
FNMA certificates:
                                                                               
After 1 to 5 years
    113       2             115       7.53       48       3             51       8.29  
After 5 to 10 years
    164       8             172       9.10       362       34             396       8.37  
After 10 years
    1,093,553       2,453       2,457       1,093,549       5.11       922,291       16,546       3       938,834       4.97  
 
                                                               
 
    1,093,830       2,463       2,457       1,093,836       5.11       922,701       16,583       3       939,281       4.98  
 
                                                               
Mortgage pass-through certificates:
                                                                               
After 10 years
    408       4             412       7.29       554       5             559       7.28  
 
                                                               
Mortgage-backed Securities
    1,562,769       3,706       3,565       1,562,910       5.15       1,043,593       19,599       3       1,063,189       4.97  
 
                                                               
Corporate Bonds:
                                                                               
Within 1 year
    20,000                   20,000       4.68       20,000       450             20,450       6.36  
After 1 to 5 years
    3,361       2,080             5,441       7.63       20,875       1,835             22,710       3.13  
After 5 to 10 years
    3,399       1,022       87       4,334       7.81       375       751             1,126       7.73  
After 10 years
    22,682       914       1,490       22,106       7.44                                
 
                                                               
Corporate bonds
    49,442       4,016       1,577       51,881       6.36       41,250       3,036             44,286       4.74  
 
                                                               
 
                                                                               
Equity securities (without contractual maturity)
    56,572       6,506       6,433       56,645       3.51       41,557       8,818       2,362       48,013       0.35  
 
                                                               
 
                                                                               
Total Investment Securities Available for Sale
  $ 2,086,652     $ 15,241     $ 14,679     $ 2,087,214       4.97     $ 1,435,889     $ 44,138     $ 2,514     $ 1,477,513       4.78  
     Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted average yield on investment securities held for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gains or losses on available for sale securities are presented as part of accumulated other comprehensive income.
     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, at September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004:

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    As of September 30, 2006  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (Dollars in thousands)  
Debt Securities
                                               
Obligations of U.S. Government Sponsored Agencies
  $ 12,911     $ 65     $ 383,660     $ 9,760     $ 396,571     $ 9,825  
Puerto Rico Government Obligations
                13,482       679       13,482       679  
Mortgage-Backed Securities
                                               
FHLMC
    591             4,008       156       4,599       156  
GNMA
    367,308       7,666                   367,308       7,666  
FNMA
    368,958       5,900       506,296       7,626       875,254       13,526  
Corporate Bonds
                4,800       970       4,800       970  
Equity Securities
    1,735       37                   1,735       37  
 
                                   
 
  $ 751,503     $ 13,668     $ 912,246     $ 19,191     $ 1,663,749     $ 32,859  
 
                                   
                                                 
    As of December 31, 2005  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (Dollars in thousands)  
Debt Securities
                                               
Obligations of U.S. Government Sponsored Agencies
  $ 388,650     $ 4,289     $     $     $ 388,650     $ 4,289  
Puerto Rico Government Obligations
                13,440       720       13,440       720  
Mortgage-Backed Securities
                                               
FHLMC
    4,440       166                   4,440       166  
GNMA
    369,231       1,959                   369,231       1,959  
FNMA
    939,197       10,031                   939,197       10,031  
Corporate Bonds
    8,711       1,876                   8,711       1,876  
Equity Securities
    16,229       1,641                   16,229       1,641  
 
                                   
 
  $ 1,726,458     $ 19,962     $ 13,440     $ 720     $ 1,739,898     $ 20,682  
 
                                   

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    As of September 30, 2005  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (Dollars in thousands)  
Debt Securities
                                               
Obligations of U.S. Government Sponsored Agencies
  $ 292,950     $ 2,886     $     $     $ 292,950     $ 2,886  
Puerto Rico Government Obligations
                13,943       218       13,943       218  
Mortgage-Backed Securities
                                               
FHLMC
    4,660       101                   4,660       101  
GNMA
    426,362       1,007                   426,362       1,007  
FNMA
    823,027       2,457                   823,027       2,457  
Corporate Bonds
    10,828       1,577                   10,828       1,577  
Equity Securities
    29,036       6,433                   29,036       6,433  
 
                                   
 
  $ 1,586,863     $ 14,461     $ 13,943     $ 218     $ 1,600,806     $ 14,679  
 
                                   
                                                 
    As of September 30, 2004  
    (As Restated)  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (Dollars in thousands)  
Debt Securities
                                               
Puerto Rico Government Obligations
  $ 4,852     $ 149     $     $     $ 4,852     $ 149  
Mortgage-Backed Securities
                                               
FNMA
    1,001       3                   1,001       3  
Equity Securities
    22,600       2,362                       22,600       2,362  
 
                                   
 
  $ 28,453     $ 2,514     $     $     $ 28,453     $ 2,514  
 
                                   
     The Corporation’s investment securities portfolio is comprised principally of (i) mortgage-backed securities issued or guaranteed by FNMA, GNMA or FHLMC and (ii) U.S. Treasury and agencies securities. Thus, payment of a substantial portion of these instruments is either guaranteed or secured by mortgages together with a U.S. government sponsored entity or is backed by the full faith and credit of the U.S. government. Principal and interest on these securities are therefore deemed recoverable. The Corporation’s policy is to review its investment portfolio for possible other-than temporary impairment, at least quarterly. At September 30, 2006, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments; as a result, the impairments are considered temporary. The increase in the net unrealized loss position during 2006 was principally due to increases in interest rates and the corresponding decrease in prices.
     During the first nine months of 2006, 2005, and 2004, the Corporation recorded other-than-temporary impairments of $12.1 million, $1.5 million, and $2.7 million, respectively, on certain equity securities held in its investment portfolio. 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 at the date of the analyses.
     Total proceeds from the sale of securities available for sale during the nine-month period ended September 30, 2006 amounted to approximately $228.1 million ( 2005 — $223.3 million ; 2004-$32.8 million). The Corporation realized gross gains of approximately $5.6 million and approximately $0.2 million in gross realized losses for the first nine months of 2006 (2005 — $14.3 million in gross realized gains ; 2004-$7.6 million in gross realized gains and approximately $15,000 in gross realized losses).

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Investment Securities Held to Maturity
     The amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of investment securities held-to-maturity at September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004 were as follows:
                                                                                 
    September 30, 2006     December 31, 2005  
            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
  $ 156,913     $ 23     $     $ 156,936       4.96     $ 149,156     $ 48     $     $ 149,204       3.97  
 
                                                                               
Obligations of other U.S. Government Sponsored Agencies:
                                                                               
After 10 years
    2,066,418             63,531       2,002,887       5.83       2,041,558             65,799       1,975,759       5.83  
Puerto Rico Government Obligations:
                                                                               
After 1 to 5 years
                                  5,000       20             5,020       5.00  
After 5 to 10 years
    16,575       535       141       16,969       5.84                                
After 10 years
    15,000       309             15,309       5.50       9,163       502       143       9,522       5.94  
 
                                                           
United States and Puerto Rico Government obligations
    2,254,906       867       63,672       2,192,101       5.77       2,204,877       570       65,942       2,139,505       5.70  
 
                                                           
 
                                                                               
Mortgage-backed securities:
                                                                               
FHLMC certificates:
                                                                               
After 5 to 10 years
    16,511             574       15,937       3.57       20,211             778       19,433       3.63  
 
                                                                               
FNMA certificates:
                                                                               
After 5 to 10 years
    15,196             542       14,654       3.80       18,418             602       17,816       3.79  
After 10 years
    1,069,417       57       37,369       1,032,105       4.38       1,195,082             35,277       1,159,805       4.32  
 
                                                           
Mortgage-backed securities
    1,101,124       57       38,485       1,062,696       4.36       1,233,711             36,657       1,197,054       4.30  
 
                                                           
 
                                                                               
Corporate Bonds:
                                                                               
After 10 years
    2,000                   2,000       5.80                                
 
                                                           
 
                                                                               
Total Investment Securities Held to Maturity
  $ 3,358,030     $ 924     $ 102,157     $ 3,256,797       5.31     $ 3,438,588     $ 570     $ 102,599     $ 3,336,559       5.20  
 
                                                           

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                                            September 30, 2004  
    September 30, 2005     (As Restated)  
            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)  
Obligations of other U.S. Government Sponsored Agencies:
                                                                               
Due within 1 year
  $ 64,838     $     $     $ 64,838       3.85     $     $     $     $        
After 10 years
    1,583,502             44,707       1,538,795       5.76       2,011,140       359       39,122       1,972,377       5.39  
Puerto Rico Government Obligations:
                                                                               
After 1 to 5 years
    5,000       43             5,043       5.00       5,000       135             5,135       5.00  
After 10 years
    9,030       507       144       9,393       5.94       8,517       797             9,314       5.93  
 
                                                           
United States and Puerto Rico Government obligations
    1,662,370       550       44,851       1,618,069       5.68       2,024,657       1,291       39,122       1,986,826       5.39  
 
                                                           
 
                                                                               
Mortgage-backed securities:
                                                                               
FHLMC certificates:
                                                                               
After 5 to 10 years
    21,736             743       20,993       3.69       28,508       5       624       27,889       3.59  
 
FNMA certificates:
                                                                               
After 5 to 10 years
    19,611             539       19,072       3.78       24,905             46       24,859       3.80  
After 10 years
    1,263,032             27,895       1,235,137       4.29       1,572,601       32       10,154       1,562,479       4.27  
 
                                                           
Mortgage-backed securities
    1,304,379             29,177       1,275,202       4.27       1,626,014       37       10,824       1,615,227       4.25  
 
                                                           
 
                                                                               
Total Investment Securities Held to Maturity
  $ 2,966,749     $ 550     $ 74,028     $ 2,893,271       5.06     $ 3,650,671     $ 1,328     $ 49,946     $ 3,602,053       4.89  
 
                                                           
     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’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004.
                                                 
    As of September 30, 2006  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (Dollars in thousands)  
Debt Securities
                                               
Other U.S. Government Sponsored Agencies
  $ 139,960     $ 9,723     $ 1,862,927     $ 53,808     $ 2,002,887     $ 63,531  
Puerto Rico Government Obligations
                3,900       141       3,900       141  
Mortgage Backed Securities
                                               
FHLMC
                15,937       574       15,937       574  
FNMA
    24,817       1,092       1,018,585       36,819       1,043,402       37,911  
 
                                   
 
  $ 164,777     $ 10,815     $ 2,901,349     $ 91,342     $ 3,066,126     $ 102,157  
 
                                   
                                                 
    As of December 31, 2005  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (Dollars in thousands)  
Debt Securities
                                               
Other U.S. Government Sponsored Agencies
  $ 1,585,810     $ 40,379     $ 389,949     $ 25,420     $ 1,975,759     $ 65,799  
Puerto Rico Government Obligations
    3,746       143                   3,746       143  
Mortgage-Backed Securities
                                               
FHLMC
                19,433       778       19,433       778  
FNMA
    11,771       339       1,165,849       35,540       1,177,620       35,879  
 
                                   
 
  $ 1,601,327     $ 40,861     $ 1,575,231     $ 61,738     $ 3,176,558     $ 102,599  
 
                                   

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    As of September 30, 2005  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (Dollars in thousands)  
Debt Securities
                                               
US Treasury Securities
                                               
Other U.S. Government Sponsored Agencies
  $ 1,219,932     $ 18,884     $ 383,701     $ 25,823     $ 1,603,633     $ 44,707  
Puerto Rico Government Obligations
    3,695       144                   3,695       144  
Mortgage- Backed Securities
                                               
FHLMC
    513       21       20,480       722       20,993       743  
FNMA
    374,127       7,891       880,082       20,543       1,254,209       28,434  
 
                                   
 
  $ 1,598,267     $ 26,940     $ 1,284,263     $ 47,088     $ 2,882,530     $ 74,028  
 
                                   
                                                 
    As of September 30, 2004  
    (As restated)  
    Less than 12 months     12 months or more     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (Dollars in thousands)  
Debt Securities
                                               
Other U.S. Government Sponsored Agencies
  $ 1,378,472     $ 30,840     $ 457,154     $ 8,282     $ 1,835,626     $ 39,122  
Mortgage-Backed Securities
                                               
FHLMC
                27,028       624       27,028       624  
FNMA
    1,556,661       10,200                   1,556,661       10,200  
 
                                   
 
  $ 2,935,133     $ 41,040     $ 484,182     $ 8,906     $ 3,419,315     $ 49,946  
 
                                   
     Held-to-maturity securities in an unrealized loss position at September 30, 2006 are primarily mortgage-backed securities and U.S. agency securities. The vast majority of them are rated the equivalent of AAA by the major rating agencies. Management believes that the unrealized losses in the held-to-maturity portfolio at September 30, 2006 are substantially related to market interest rate fluctuations and not deterioration in the creditworthiness of the issuers; as a result, the impairment is considered temporary.

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6 – 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.
     At September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004, there were investments in FHLB stock with book value of $19.3 million, $40.9 million, $75.8 million and $68.6 million respectively. The estimated market value of such investments is its redemption value determined by the ultimate recoverability of its par value.
     The Corporation has other equity securities that do not have a readily available fair value. The carrying value of such securities at September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004 was $1.7 million, $1.4 million, $1.4 million and $0.4 million, respectively.
7 – LOAN PORTFOLIO
     The following is a detail of the loan portfolio:
                                 
                            September 30,  
    September 30,     December 31,     September 30,     2004  
    2006     2005     2005     (As Restated)  
    (Dollars in thousands)  
Residential real estate loans, mainly secured by first mortgages
  $ 2,663,587     $ 2,245,272     $ 2,025,749     $ 1,211,980  
 
Commercial loans:
                               
Construction loans
    1,533,409       1,137,118       969,540       398,570  
Commercial mortgage loans
    1,180,631       1,090,193       1,037,658       632,330  
Commercial loans
    2,388,014       2,421,219       2,311,053       1,765,082  
Loans to local financial institutions collateralized by real estate mortgages and pass-through trust certificates
    960,970       3,676,314       4,011,063       3,135,491  
 
                       
Commercial loans
    6,063,024       8,324,844       8,329,314       5,931,473  
 
                       
 
Finance leases
    344,416       280,571       258,705       198,322  
 
                       
 
                               
Consumer loans
    1,790,323       1,733,569       1,684,458       1,291,904  
 
                       
 
                               
Loans receivable
    10,861,350       12,584,256       12,298,226       8,633,679  
Allowance for loan and lease losses
    (150,925 )     (147,999 )     (147,267 )     (137,253 )
 
                       
Loans receivable, net
    10,710,425       12,436,257       12,150,959       8,496,426  
Loans held for sale
    30,603       101,673       74,199       7,419  
 
                       
Total loans
  $ 10,741,028     $ 12,537,930     $ 12,225,158     $ 8,503,845  
 
                       
     The Corporation’s primary lending area is Puerto Rico. The Corporation’s Bank subsidiary also lends in the U.S. and British Virgin Islands markets and in the state of Florida (USA). The Corporation has a significant lending concentration of $527.8 million in one mortgage originator in Puerto Rico at September 30, 2006. The Corporation has outstanding $433.2 million with another mortgage originator in Puerto Rico for total loans granted to mortgage originators amounting to $961.0 million at September 30, 2006. These commercial loans were secured by individual residential and commercial mortgage loans. The mortgage originators have always paid the loans in accordance with their terms and conditions of the loan agreements.
     Of the total net loans portfolio of $10.7 billion as of September 30, 2006, approximately 77% have credit risk concentration in Puerto Rico, 15% in the state of Florida and 8% in the Virgin Islands.

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     On May 25, 2006, the Corporation entered into a series of credit agreements with Doral Financial Corporation (“Doral”) to formally document as secured borrowings the loan transfers between the parties that previously had been accounted for as sales. The terms of the credit agreements specified: (1) a floating interest payment based on a spread over 90-day LIBOR subject to a cap; (2) an amortization schedule tied to the scheduled amortization of the underlying mortgage loans subject to a maximum maturity of 10 years; (3) mandatory prepayments as a result of actual prepayments from the underlying mortgages; and (4) an option to Doral to prepay the loan without penalty at any time.
     On May 31, 2006, First BanCorp received a cash payment from Doral, substantially reducing the balance of approximately $2.9 billion in secured commercial loans to approximately $450 million as of that date. In connection with the repayment, the Corporation and Doral entered into a sharing agreement on May 25, 2006 with respect to certain profits or losses that Doral incurs as part of the sales of the mortgages that collateralized the commercial loans. First BanCorp agreed to reimburse Doral for 40% of the net losses incurred by Doral as a result of sales or securitization of the mortgages, subject to certain conditions and subject to a maximum reimbursement of $9.5 million, which will be reduced proportionately to the extent that Doral does not sell the mortgages. As a result of the sharing agreement and the partial extinguishment of the commercial loans by Doral, the Corporation recorded a net loss of $10.6 million during the first nine months of 2006 composed of gains and losses as part of the sharing agreement and the difference between the carrying value of the loans and the net payment received from Doral.
8 – ALLOWANCE FOR LOAN AND LEASE LOSSES
     The changes in the allowance for loan and lease losses were as follows:
                         
    Quarter Ended  
    September 30,  
    2006     2005     2004  
    (Dollars in thousands)  
Balance at beginning of period
  $ 146,527     $ 146,154     $ 133,678  
Provision for loan and lease losses
    20,560       12,861       13,200  
Charge-offs
    (21,233 )     (13,197 )     (11,104 )
Recoveries
    5,071       1,449       1,479  
 
                 
Balance at end of year
  $ 150,925     $ 147,267     $ 137,253  
 
                 
                         
    Nine Month Period Ended  
    September 30,  
    2006     2005     2004  
    (Dollars in thousands)  
Balance at beginning of period
  $ 147,999     $ 141,036     $ 126,378  
Provision for loan and lease losses
    49,290       34,890       39,600  
Charge-offs
    (54,494 )     (34,794 )     (33,081 )
Recoveries
    8,130       4,772       4,356  
Other adjustments (1)
          1,363        
 
                 
Balance at end of year
  $ 150,925     $ 147,267     $ 137,253  
 
                 
 
(1)   Represents allowance for loan losses from the acquisition of Ponce General Corporation.

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     The allowance for impaired loans is part of the allowance for loan and lease losses. These loans represent loans for which management has determined that it is probable that the debtor will be unable to pay all the amounts due, according to the contractual terms of the loan agreement, and do not necessarily represent loans for which the Corporation will incur a substantial loss. At September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004, impaired loans had a related allowance as follows:
                                 
                            As of
    As of   As of   As of   September 30,
    September 30,   December 31,   September 30,   2004
    2006   2005   2005   (As Restated)
    (Dollars in thousands)
Impaired loans
  $ 60,159     $ 59,801     $ 58,369     $ 62,589  
 
Allowance for impaired loans
  $ 8,762     $ 9,219     $ 17,193     $ 14,729  
     Interest income in the amount of approximately $0.6 million, $1.1 million and $0.4 million was recognized on impaired loans for the quarters ended September 30, 2006, 2005 and 2004, respectively. Interest income in the amount of approximately $2.6 million, $3.8 million and $1.6 million was recognized on impaired loans for the nine month period ended September 30, 2006, 2005 and 2004, respectively.

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9 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
     The primary market risk facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of its assets or liabilities and the risk that net interest income from its loan and investment portfolios will change in response to changes in interest rates. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.
     The Corporation uses various financial instruments, including derivatives, to manage the interest rate risk related primarily to the values of its brokered CDs and medium-term notes.
Interest rate swap contracts that qualify for hedge accounting
     As part of the interest rate risk management, the Corporation has entered into a series of interest rate swap agreements. Under the interest rate swaps, the Corporation agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. Net interest settlements on interest rate swaps that qualify for hedge accounting and unrealized gains and losses arising from changes in fair value of derivative instruments and hedged items are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being hedged.
     Effective April 3, 2006, the Corporation adopted the long- haul method of effectiveness testing under SFAS 133, for substantially all of the interest rate swaps that hedge its brokered CDs and medium-term notes. The long haul method requires periodic assessment of hedge effectiveness and measurement of ineffectiveness. The ineffectiveness results to the extent that changes in the fair values of a derivative do not offset changes in the fair values of the hedged item due to changes in the hedged risk in the Consolidated Statement of Income.
     First BanCorp’s implementation of the long-haul method resulted from its previously reported determination that it should not have used the short-cut method to account for interest rate swaps related to brokered CDs and medium- term notes because of technical issues involving the interpretation of the use of the method (refer to First BanCorp audited Consolidated Financial Statements, included in the Corporation’s amended 2004 Annual Report on Form 10-K for additional information). Accordingly, prior to the implementation of the long-haul method, First BanCorp had reflected changes in the fair value of those swaps as well as swaps related to certain loans as non-hedging instruments through operations. Prior to the implementation of fair value hedge, the Corporation recorded unrealized losses in the valuation of derivative instruments of approximately $68.0 million for 2006. With respect to the brokered CDs and medium term notes (“hedged liabilities”) the basis differential between the market value and the book value of the hedged liabilities at the inception of fair value hedge accounting in the amount of approximately $200.0 million amortizes or accretes as a yield adjustment over the expected remaining term of the hedged liabilities as the changes in value since the inception of the long haul method are recorded to the hedged liabilities. For the third quarter and first nine months of 2006, the Corporation recorded an accretion of $0.8 million and an amortization of $0.5 million, respectively, as a basis adjustment on the hedged liabilities.
     The Corporation recognized, as a reduction to interest expense, approximately $1.4 million and $3.4 million for the quarter and nine-months ended September 30, 2006, respectively, representing ineffectiveness on the hedges of its brokered CDs and medium-term notes that qualified as fair value hedges under SFAS 133.

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Interest rate swap contracts not qualifying for hedge accounting
     Prior to April 3, 2006, the Corporation used interest rate swaps as economic hedges. These swaps either did not qualify for hedge accounting treatment or were not qualified by the Corporation for hedge accounting treatment. Changes in the fair value of these derivatives and the interest exchanged were recognized in earnings in the interest income or interest expense caption of the Consolidated Statements of Income depending upon whether an asset or liability was being economically hedged. At December 31, 2005, September 30, 2005 and September 30, 2004, all derivative instruments held by the Corporation were considered economic hedges as these did not qualify for hedge accounting under SFAS 133.
     The following table summarizes the notional amounts of all derivative instruments as of September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004:
                                 
    Notional amounts  
                            As of  
    As of     As of     As of     September 30,  
    September 30,     December 31,     September 30,     2004  
    2006     2005     2005     (As Restated)  
    (Dollars in thousands)  
Interest rate swap agreements:
                               
Pay fixed versus receive floating
  $ 80,720     $ 109,320     $ 109,320     $ 113,165  
Received fixed versus pay floating
    4,858,490       5,751,128       5,748,120       3,867,766  
Embedded written options
    13,515       13,515       13,515       13,515  
Purchased options
    13,515       13,515       13,515       13,515  
Written interest rate cap agreements
    125,200       150,200       150,200       25,000  
Purchased interest rate caps
    338,617       386,750       556,052       25,000  
 
                       
 
  $ 5,430,057     $ 6,424,428     $ 6,590,722     $ 4,057,961  
 
                       

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     The following table summarizes the notional amounts of all derivatives by the Corporation’s designation as of September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004:
                                 
    Notional amounts  
                            As of  
    As of     As of     As of     September 30,  
    September 30,     December 31,     September 30,     2004  
    2006     2005     2005     (As Restated)  
    (Dollars in thousands)  
Designated hedges:
                               
Fair value hedge:
                               
Interest rate swaps used to hedge fixed rate certificates of deposit
  $ 4,321,746     $     $     $  
Interest rate swaps used to hedge fixed and step rate notes payable
    165,442                    
 
                       
Total fair value hedges
  $ 4,487,188     $     $     $  
 
                       
 
                               
Economic undesignated hedges:
                               
Interest rate swaps used to hedge fixed rate certificates of deposit and loans
  $ 452,022     $ 5,860,448     $ 5,857,440     $ 3,980,931  
Embedded options on stock index deposits
    13,515       13,515       13,515       13,515  
Purchased options used to manage exposure to the stock market on embedded stock index options
    13,515       13,515       13,515       13,515  
Written interest rate cap agreements
    125,200       150,200       150,200       25,000  
Purchased interest rate cap agreements
    338,617       386,750       556,052       25,000  
 
                       
Total derivatives not designated as hedge
  $ 942,869     $ 6,424,428     $ 6,590,722     $ 4,057,961  
 
                       
 
                               
Total
  $ 5,430,057     $ 6,424,428     $ 6,590,722     $ 4,057,961  
 
                       
     As of September 30, 2006, derivatives qualifying for fair value hedge accounting with a negative fair value of $143.8 million were recorded as part of “Accounts payable and other liabilities” in the Consolidated Statements of Financial Condition. Changes in the fair value of hedged liabilities since the inception of hedge accounting were recorded to the hedged liabilities.
     As of September 30, 2006, derivatives not designated or not qualifying as a hedge with a positive fair value of $16.5 million (December 31, 2005 — $15.8 million; September 30, 2005 — $17.6 million; September 30, 2004 — $5.8 million) and with a negative fair value of $19.6 million (December 31, 2005 — $158.1 million; September 30, 2005 — $126.2 million; September 30, 2004 - $58.8 million) were recorded as part of “Other Assets” and “Accounts payable and other liabilities”, respectively, in the Consolidated Statements of Financial Condition.

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     The majority of the Corporation’s derivative instruments represent interest rate swaps and mainly convert long-term fixed-rate brokered CDs to a floating rate. A summary of the types of swaps used at September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004 follows:
                                 
                            As of
    As of   As of   As of   September 30,
    September 30,   December 31,   September 30,   2004
    2006   2005   2005   (As Restated)
    (Dollars in thousands)
Pay fixed/receive floating:
                               
Notional amount
  $ 80,720     $ 109,320     $ 109,320     $ 113,165  
Weighted average receive rate at period end
    7.39 %     6.41 %     5.86 %     3.46 %
Weighted average pay rate at period end
    6.37 %     6.60 %     6.60 %     6.97 %
Floating rates range from 187 to 251.5 basis points over 3-month LIBOR
                               
 
                               
Receive fixed/pay floating:
                               
Notional amount
  $ 4,858,490     $ 5,751,128     $ 5,748,120     $ 3,867,766  
Weighted average receive rate at period end
    5.13 %     4.90 %     4.88 %     5.23 %
Weighted average pay rate at period end
    5.49 %     4.37 %     3.82 %     1.79 %
Floating rates range from 5 basis points under to 19.5 basis points over 3-month LIBOR
                               
     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 (i.e., 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.
     Interest rate caps are option-like contracts that require the writer, i.e. the seller, to pay the purchaser at specified future dates the amount, if any, by which a specified market interest rate exceeds the fixed cap rate, applied to a notional principal amount.
     To satisfy the needs of its customers, the Corporation may enter into non-hedging transactions. These transactions are structured with the same terms and conditions and the Corporation participates as a buyer in one of the agreements and as the seller in the other agreements.
     In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related. 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.

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10 – GOODWILL AND OTHER INTANGIBLES
     Goodwill at September 30, 2006 amounted to $28.7 million (December 31, 2005 — $28.7 million, September 30, 2005 — $28.7 million and September 30, 2004 — $0) and resulted primarily from the acquisition of Ponce General Corporation in 2005. No goodwill was written down during 2006, 2005 and 2004.
     At September 30, 2006, the gross carrying amount and accumulated amortization of core deposit intangibles was $41.2 million and $14.1 million, respectively, recognized as part of Other Assets in the Consolidated Statements of Financial Condition (December 31, 2005 — $41.2 million and $11.6 million, respectively ; September 30, 2005 — $41.2 million and $10.3 million, respectively ; September 30, 2004 — $23.9 million and $7.3 million, respectively). During the quarters ended September 30, 2006, 2005 and 2004, the amortization expense of core deposits amounted to $0.8 million, $0.9 million, and $0.6 million, respectively. For the nine month periods ended September 30, 2006, 2005 and 2004, the amortization expense of core deposits amounted to $2.6 million, $2.5 million, and $1.8 million, respectively.
11 – DEPOSITS
     The following table summarizes deposit balances:
                                 
                            As of  
    As of     As of     As of     September 30,  
    September 30,     December 31,     September 30,     2004  
    2006     2005     2005     (As Restated)  
    (Dollars in thousands)  
Non-interest-bearing checking account deposits
  $ 676,028     $ 811,006     $ 751,690     $ 603,713  
Saving accounts
    998,844       1,034,047       1,084,843       893,080  
Interest-bearing checking accounts
    354,604       375,305       376,915       331,117  
Certificates of deposit
    1,703,483       1,664,379       1,667,130       1,336,161  
Brokered certificates of deposit
    8,148,566       8,579,015       8,372,226       4,193,475  
 
                       
 
  $ 11,881,525     $ 12,463,752     $ 12,252,804     $ 7,357,546  
 
                       
     The interest expense on deposits includes the valuation to market of interest rate swaps that hedge brokered certificates of deposit, the related interest exchanged, the amortization of broker placement fees and the basis adjustment amortization on the brokered CDs designated under fair value hedges.
     The following are the components of interest expense on deposits:
                                                 
    Quarter ended     Nine month period ended  
                    September 30,                     September 30,  
    September 30,     September 30,     2004     September 30,     September 30,     2004  
    2006     2005     (As Restated)     2006     2005     (As Restated)  
    (Dollars in thousands)  
Interest expense on deposits
  $ 141,903     $ 88,568     $ 30,342     $ 402,956     $ 202,905     $ 83,045  
Amortization of broker placement fees
    6,491       4,917       3,084       15,196       11,364       9,574  
 
                                   
Interest expense on deposits excluding unrealized (gain) loss on derivatives (designated and undesignated hedges) and (accretion) amortization of basis adjustment on fair value hedges
    148,394       93,485       33,426       418,152       214,269       92,619  
Unrealized (gain) loss on derivatives (designated and undesignated hedges)
    (11,886 )     67,668       (64,080 )     61,069       38,572       (20,706 )
(Accretion) amortization of basis adjustment on fair value hedges
    (861 )                 418              
 
                                   
Total interest expense on deposits
  $ 135,647     $ 161,153     $ (30,654 )   $ 479,639     $ 252,841     $ 71,913  
 
                                   
     Total interest expense on deposits includes interest exchanged on interest rate swaps that hedge designated and undesignated brokered certificates of deposit that for the quarter and nine month period ended September 30, 2006 amounted to net interest incurred of $6.0 million and $4.3 million, respectively (2005 – net interest realized for the quarter and nine month period of $16.4 million and $61.5 million, respectively ; 2004 – net interest realized for the quarter and nine month period of $32.7 million and $94.7 million, respectively).

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12 – NOTES PAYABLE
     Notes payable consist of:
                                 
                            September 30,  
    September 30,     December 31,     September 30,     2004  
    2006     2005     2005     (As Restated)  
    (Dollars in Thousands)  
Callable fixed rate notes, bearing interest at 6.00%, maturing on October 1, 2024
  $ 151,246     $ 149,456     $ 149,452     $  
 
                               
Callable step-rate notes, bearing step increasing interest from 5.00% to 7.00% maturing on October 18, 2019
    15,547       15,245       15,241        
 
                               
Dow Jones Industrial Average (DJIA) linked principal protected notes:
                               
 
                               
Series A maturing on February 28, 2012
    7,107       6,752       6,631       6,328  
 
                               
Series B maturing on May 27, 2011
    7,675       7,240       7,095       6,661  
 
Callable fixed rate notes, bearing interest at 6.40%, maturing on June 1, 2019
                      30,112  
 
                               
Callable fixed rate notes, bearing interest at 6.40%, maturing on July 1, 2019
                      99,841  
 
                               
Callable step-up fixed rate notes, bearing interest at 4.90%, maturing on July 1, 2014
                      9,960  
 
                       
 
 
  $ 181,575     $ 178,693     $ 178,419     $ 152,902  
 
                       

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13 – OTHER BORROWINGS
     Other borrowings consist of:
                                 
                            September 30,  
    September 30,     December 31,     September 30,     2004  
    2006     2005     2005     (As Restated)  
    (Dollars in Thousands)  
Junior subordinated debentures due in 2034, interest bearing at a floating rate of 2.75% over 3-month LIBOR (8.14% at September 30, 2006, 7.25% at December 31, 2005, 6.64% at September 30, 2005 and 4.64% at September 30, 2004)
  $ 102,829     $ 102,756     $ 102,731     $ 102,634  
 
                               
Junior subordinated debentures due in 2034, interest bearing at a floating rate of 2.50% over 3-month LIBOR (7.89% at September 30, 2006, 7.00% at December 31, 2005, 6.39% at September 30, 2005 and 4.37% at September 30, 2004)
    128,866       128,866       128,866       128,866  
 
                               
Loan payable to a local financial institution due in October 2004, interest bearing at 2.09%
                      45,168  
 
                       
 
  $ 231,695     $ 231,622     $ 231,597     $ 276,668  
 
                       
14 – SUBORDINATED NOTES
     On December 20, 1995, the Corporation issued 7.63% subordinated capital notes in the amount of $100 million maturing on December 20, 2005. The notes were issued at a discount. At September 30, 2006, there was no outstanding balance as the notes payable were paid at their maturity date of December 20, 2005 (carrying value of $82.7 million as of September 30, 2005 and $82.1 million as of September 30, 2004). Interest on the notes was paid semiannually and at maturity. The notes represented unsecured obligations of the Corporation ranking subordinate in right of payment to all existing and future senior debt including the claims of depositors and other general creditors. The notes could not be redeemed prior to their maturity.
15 – INCOME TAXES
     Income tax expense include Puerto Rico and Virgin Islands income taxes as well as applicable 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 this jurisdiction. However, any tax paid, subject to certain conditions and limitations, is creditable against the Corporation’s Puerto Rico tax liability.
     Under the Puerto Rico Internal Revenue Code of 1994, as amended (“PR Code”), First BanCorp is subject to a maximum statutory tax rate of 39%, except that in years 2005 and 2006, an additional transitory tax rate of 2.5% was signed into law by the Governor of Puerto Rico. In August 2005, the Government of Puerto Rico approved a transitory tax rate of 2.5% that increased the maximum statutory tax rate from 39.0% to 41.5% for a two-year period. The additional tax related to the income earned from January 1 to the date of enactment of the law was

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fully recorded in the third quarter of 2005. On May 13, 2006, with an effective date of January 1, 2006, the Governor of Puerto Rico approved an additional transitory tax rate of 2.0% applicable only to companies covered by the Puerto Rico Banking Act as amended, such as First Bank Puerto Rico (“First Bank” or the “Bank”), which raised the maximum statutory tax rate to 43.5% for taxable years that commenced during calendar year 2006. For taxable years beginning after December 31, 2006, the maximum statutory tax rate will be 39%. 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 doing business through international banking units (IBEs) of the Corporation and the Bank and by the Bank’s subsidiary, FirstBank Overseas Corporation. The IBEs and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico. Since 2004, IBEs that operate as a unit of a bank pay income taxes at normal rates to the extent that the IBEs’ net income exceeds predetermined percentages of the bank’s total net taxable income; such limitations were 30% of total net taxable income for a taxable year commencing between July 1, 2004 and July 1, 2005, and 20% of total net taxable income for taxable years commencing thereafter.
     For the nine month period ended September 30, 2006, the Corporation’s provision for income tax was $14.8 million compared to $32.0 million and $39.8 million for the same period in 2005 and 2004, respectively. The decrease in income tax expense for the first nine months of 2006 as compared to the first nine months of 2005 and 2004 was mainly due to an increase in deferred tax benefits resulting principally from higher unrealized losses on derivative instruments. For the first nine months of 2006, the Corporation recognized a deferred tax benefit of $35.6 million compared to a deferred tax benefit of $17.9 million for the same period in 2005 and a deferred tax provision of $0.2 million for the first nine months of 2004.
     The Corporation evaluated its ability to realize its deferred tax assets and concluded, based on the evidence available, that it is more likely than not that some of the deferred tax assets will not be realized and, thus, established a valuation allowance of $4.9 million as of September 30, 2006. At September 30, 2006, the deferred tax asset, net of the valuation allowance, amounted to approximately $170.9 million compared to $93.3 million at September 30, 2005 and $55.6 million at September 30, 2004. At September 30, 2005 and 2004, based on the Corporation’s analysis and available evidence, the Corporation did not establish a valuation allowance.
16 – SEGMENT INFORMATION
     Based upon the Corporation’s organizational structure and the information provided to the Chief Operating Decision Maker and to a lesser extent to the Board of Directors, the operating segments are driven primarily by the Corporation’s legal entities. At September 30, 2006, the Corporation had four reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; and Treasury and Investments, as well as an Other category reflecting other legal entities reported separately on an aggregate basis. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Corporation’s organizational chart, nature of the products, distribution channels and the economic characteristics of the products were also considered in the determination of the reportable segments.
     The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers represented by the public sector and specialized and middle-market clients. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, and other products such as cash management and business management services. The Mortgage Banking segment’s

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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. Certain mortgage loans are purchased from other local banks or mortgage brokers. The Consumer (Retail) segment consists of the Corporation’s consumer lending and deposit-taking activities conducted mainly through its branch network and loan centers. The Treasury and Investment segment is responsible for the Corporation’s investment portfolio and treasury functions executed to manage and enhance liquidity. This segment loans funds to the Commercial and Corporate Banking; Mortgage Banking; and Consumer segments to finance their lending activities and borrows from those segments. The Consumer segment also loans funds to other segments. The interest rates charged or credited by Treasury and Investments and the Consumer segment are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The Other category is mainly composed of insurance, finance leases and other products.
     The accounting policies of the business segments are the same as those described in Note 1 of the Corporation’s financial statements for the year ended December 31, 2005 contained in the annual report of the Corporation on Form 10-K.
     The Corporation evaluates the performance of the segments based on net interest income after the estimated provision for loan and lease losses, non-interest income and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-earning assets less the allowance for loan and lease losses.
     The following table presents information about the reportable segments (in thousands):
                                                 
    Mortgage           Commercial and   Treasury and        
    Banking   Consumer   Corporate   Investments   Other   Total
For the quarter ended September 30, 2006:
                                               
Interest income
  $ 38,256     $ 51,095     $ 98,146     $ 100,078     $ 30,136     $ 317,711  
Net (charge) credit for transfer of funds
    (27,473 )     27,754       (69,499 )     74,735       (5,517 )      
Interest expense
          (18,302 )           (169,804 )     (6,903 )     (195,009 )
                                     
Net interest income
    10,783       60,547       28,647       5,009       17,716       122,702  
                                     
Provision for loan and lease losses
    (209 )     (11,488 )     (4,589 )           (4,274 )     (20,560 )
Other income (loss)
    1,617       5,695       1,835       (5,942 )     4,840       8,045  
Direct operating expenses
    (4,759 )     (20,807 )     (3,987 )     (2,398 )     (11,570 )     (43,521 )
                                     
Segment income (loss)
  $ 7,432     $ 33,947     $ 21,906     $ (3,331 )   $ 6,712     $ 66,666  
                                     
 
                                               
Average earnings assets
  $ 2,346,487     $ 1,921,140     $ 5,297,964     $ 7,674,849     $ 1,189,667     $ 18,430,107  
 
                                               
For the quarter ended September 30, 2005:
                                               
Interest income
  $ 27,821     $ 45,326     $ 117,823     $ 77,586     $ 23,707     $ 292,263  
Net (charge) credit for transfer of funds
    (17,677 )     20,522       (69,692 )     70,260       (3,413 )      
Interest expense
          (14,317 )           (207,383 )     (3,820 )     (225,520 )
                                     
Net interest income (loss)
    10,144       51,531       48,131       (59,537 )     16,474       66,743  
                                     
Provision for loan and lease losses
    (470 )     (7,295 )     (1,859 )           (3,237 )     (12,861 )
Other income
    16       7,098       1,202       4,727       4,650       17,693  
Direct operating expenses
    (4,023 )     (20,003 )     (2,651 )     (1,432 )     (9,242 )     (37,351 )
                                     
Segment income
  $ 5,667     $ 31,331     $ 44,823     $ (56,242 )   $ 8,645     $ 34,224  
                                     
 
                                               
Average earnings assets
  $ 1,702,626     $ 1,769,130     $ 7,561,035     $ 6,471,610     $ 917,143     $ 18,421,544  
 
                                               
For the quarter ended September 30, 2004 (As Restated):
                                               
Interest income
  $ 19,539     $ 34,492     $ 49,082     $ 71,516     $ 12,035     $ 186,664  
Net (charge) credit for transfer of funds
    (12,636 )     13,983       (25,144 )     25,791       (1,994 )      
Interest expense
          (9,933 )           (6,125 )           (16,058 )
                                     
Net interest income
    6,903       38,542       23,938       91,182       10,041       170,606  
                                     
(Provision) recovery for loan and lease losses
    (221 )     (4,614 )     (4,737 )           (3,628 )     (13,200 )
Other income
    1,339       4,579       1,946       572       3,256       11,692  
Direct operating expenses
    (2,985 )     (16,947 )     (1,935 )     (852 )     (4,785 )     (27,504 )
                                     
Segment income
  $ 5,036     $ 21,560     $ 19,212     $ 90,902     $ 4,884     $ 141,594  
                                     
 
                                               
Average earnings assets
  $ 1,152,374     $ 1,352,992     $ 5,258,914     $ 5,808,739     $ 296,362     $ 13,869,381  

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    Mortgage           Commercial and   Treasury and        
    Banking   Consumer   Corporate   Investments   Other   Total
For the nine-month period ended September 30, 2006:
                                               
Interest income
  $ 110,108     $ 151,607     $ 365,568     $ 277,252     $ 85,324     $ 989,859  
Net (charge) credit for transfer of funds
    (77,279 )     80,959       (245,668 )     256,875       (14,887 )      
Interest expense
          (52,235 )           (597,709 )     (18,156 )     (668,100 )
 
                                   
Net interest income (loss)
    32,829       180,331       119,900       (63,582 )     52,281       321,759  
 
                                   
Provision for loan and lease losses
    (3,796 )     (24,405 )     (4,556 )           (16,533 )     (49,290 )
Other income (loss)
    1,513       17,440       (6,760 )     (6,788 )     15,011       20,416  
Direct operating expenses
    (12,134 )     (63,479 )     (12,549 )     (5,679 )     (33,221 )     (127,062 )
 
                                   
Segment income (loss)
  $ 18,412     $ 109,887     $ 96,035     $ (76,049 )   $ 17,538     $ 165,823  
 
                                   
 
                                               
Average earnings assets
  $ 2,256,743     $ 1,930,513     $ 6,613,801     $ 7,214,537     $ 1,131,857     $ 19,147,451  
 
                                               
For the nine-month period ended September 30, 2005:
                                               
Interest income
  $ 76,481     $ 127,029     $ 280,467     $ 210,982     $ 58,838     $ 753,797  
Net (charge) credit for transfer of funds
    (47,747 )     55,879       (173,560 )     175,280       (9,852 )      
Interest expense
          (37,935 )           (383,472 )     (7,300 )     (428,707 )
 
                                   
Net interest income
    28,734       144,973       106,907       2,790       41,686       325,090  
 
                                   
Provision for loan and lease losses
    (1,964 )     (19,814 )     (5,666 )           (7,446 )     (34,890 )
Other income
    3,604       17,360       3,915       13,317       13,167       51,363  
Direct operating expenses
    (11,363 )     (56,206 )     (7,687 )     (3,807 )     (23,124 )     (102,187 )
 
                                   
Segment income
  $ 19,011     $ 86,313     $ 97,469     $ 12,300     $ 24,283     $ 239,376  
 
                                   
 
                                               
Average earnings assets
  $ 1,530,763     $ 1,657,212     $ 7,172,343     $ 5,823,033     $ 710,506     $ 16,893,857  
 
                                               
For the nine-month period ended September 30, 2004 (As Restated):
                                               
Interest income
  $ 56,217     $ 101,011     $ 134,058     $ 172,292     $ 34,505     $ 498,083  
Net (charge) credit for transfer of funds
    (36,004 )     39,295       (57,501 )     59,965       (5,755 )      
Interest expense
          (29,826 )           (163,881 )           (193,707 )
 
                                   
Net interest income
    20,213       110,480       76,557       68,376       28,750       304,376  
 
                                   
Provision for loan and lease losses
    (661 )     (19,843 )     (10,896 )           (8,200 )     (39,600 )
Other income
    3,138       19,940       5,875       6,517       9,332       44,802  
Direct operating expenses
    (7,792 )     (48,114 )     (5,745 )     (2,302 )     (13,443 )     (77,396 )
 
                                   
Segment income
  $ 14,898     $ 62,463     $ 65,791     $ 72,591     $ 16,439     $ 232,182  
 
                                   
 
                                               
Average earnings assets
  $ 1,073,365     $ 1,296,098     $ 4,887,378     $ 5,228,527     $ 279,752     $ 12,825,120  

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     The following table presents a reconciliation of the reportable segment financial information to the consolidated totals (in thousands):
                         
    Quarter Ended  
    September 30,  
                    2004  
    2006     2005     (As Restated)  
Net income:
                       
Total income for segments and other
  $ 66,666     $ 34,224     $ 141,594  
Other operating expenses
    (29,419 )     (23,204 )     (18,373 )
 
                 
Income before income tax (expense) benefit
    37,247       11,020       123,221  
Income taxes
    (10,565)       6,285       (34,828 )
 
                 
Total consolidated net income
  $ 26,682     $ 17,305     $ 88,393  
 
                 
 
                       
Average assets:
                       
Total average earning assets for segments
  $ 18,430,107     $ 18,421,544     $ 13,869,381  
Average non- earning assets
    736,097       588,549       409,889  
 
                 
Total consolidated average assets
  $ 19,166,204     $ 19,010,093     $ 14,279,270  
 
                 
                         
    Nine-month Period Ended  
    September 30,  
                    2004  
    2006     2005     (As Restated)  
Net income:
                       
Total income for segments and other
  $ 165,823     $ 239,376     $ 232,182  
Other operating expenses
    (88,656 )     (67,448 )     (56,796 )
 
                 
Income before income taxes
    77,167       171,928       175,386  
Income taxes
    (14,819 )     (32,002 )     (39,755 )
 
                 
Total consolidated net income
  $ 62,348     $ 139,926     $ 135,631  
 
                 
 
                       
Average assets:
                       
Total average earning assets for segments
  $ 19,147,451     $ 16,893,857     $ 12,825,120  
Average non-earning assets
    721,444       537,922       446,754  
 
                 
Total consolidated average assets
  $ 19,868,895     $ 17,431,779     $ 13,271,874  
 
                 
17. 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 and purchase mortgage loans at fair value. As of September 30, 2006, commitments to extend credit amounted to approximately $1.9 billion and stand by letters of credit amounted to approximately $100.8 million. Commitments to extend credit are agreements to lend to a customer as long as the conditions established in the contract are met. Commitments generally have fixed expiration dates or other termination clauses. Generally, the Corporation’s mortgage banking activities do not enter into interest rate lock agreements with its prospective borrowers.
     As of September 30, 2006, First BanCorp and its subsidiaries were defendants in various legal proceedings arising in the ordinary course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations, except as described below.

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     On August 1, 2005, the Audit Committee of the Corporation determined that it should review the background and accounting for certain mortgage-related transactions that the Corporation had entered into with Doral Financial Corporation (“Doral”) and R&G Financial Corporation (“R&G”) between 1999 and 2005 that did not qualify as “true sales” for accounting purposes. The Committee retained the law firms of Clifford Chance U.S. LLP and Martínez Odell & Calabria and forensic accountants FTI Consulting Inc. to assist the Audit Committee in its review. On August 25, 2005, the Corporation announced the receipt of a letter from the SEC in which the SEC indicated that it was conducting an informal inquiry into the Corporation. On October 21, 2005, the Corporation announced that the SEC had issued a formal order of investigation into the accounting for the mortgage–related transactions with Doral and R&G. The Corporation announced on December 13, 2005 that management, with the concurrence of the Board of Directors, determined to restate its previously reported financial statements to correct its accounting for the mortgage-related transactions. The Corporation has fully cooperated with the SEC’s investigation. In August 2006, the Audit Committee completed its review and the Corporation filed the Amended 2004 Form 10-K with the SEC on September 26, 2006, the 2005 Form 10-K on February 9, 2007 and the 2006 Form 10-K on July 9, 2007.
     On August 7, 2007, First BanCorp announced that the SEC approved a final settlement with the Corporation, which resolves the previously disclosed SEC investigation of the Corporation. Under the settlement, the Corporation agreed, without admitting or denying any wrongdoing, to be enjoined from future violations of certain provisions of the securities laws. The Corporation also agreed to pay an $8.5 million civil penalty and the disgorgement of $1 to the SEC. The SEC may request that the civil penalty be subject to distribution pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. The monetary payment will have no impact on the Corporation’s earnings or capital in 2007. As reflected in First BanCorp’s previously filed audited Consolidated Financial Statements for 2005, the Corporation accrued $8.5 million in 2005 for the potential settlement with the SEC. In connection with the settlement, the Corporation consented to the entry of a final judgment to implement the terms of the agreement. The United States District Court for the Southern District of New York must consent to the entry of the final judgment in order to consummate the settlement.
     Following the announcement of the Audit Committee’s review, the Corporation and certain of its current and former officers and directors were named as defendants in five separate securities class actions filed between October 31, 2005 and December 5, 2005, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. At present, all securities class actions have been consolidated into one case named “In Re: First BanCorp Securities Litigations”. Subsequently, in 2007, the Corporation reached an agreement in principle and signed a memorandum of understanding with the lead plaintiff. The agreement specified a payment of $74.25 million by the Corporation subject to the approval by the United States District Court for the District of Puerto Rico.
     On August 1, 2007, the United States District Court for the District of Puerto Rico issued a “Preliminary Order” approving the stipulation of settlement filed in connection with the proposed settlement of the class action lawsuit brought on behalf of First BanCorp’s shareholders against the Corporation in the amount of $74.25 million.
     The effectiveness of a final order to be issued by the Court is subject to:
      The payment of $61 million to be deposited by First BanCorp in a settlement fund within fifteen calendar days of the date of issuance of the “Preliminary Order;” and
      The mailing of a notice to shareholders that describes the general terms of the settlement.

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     The court hearing for the final order of approval of the settlement has been set for October 15, 2007. First BanCorp intends to comply with the $61 million payment requirement within the timeframe set forth in the terms of the settlement. The remaining amount of $13,250,000 will be paid before December 31, 2007. The monetary payment will have no impact on the Corporation’s earnings or capital in 2007. As reflected in First BanCorp’s audited Consolidated Financial Statements, included in the Corporation’s 2005 Annual Report on Form 10-K, the Corporation accrued $74.25 million in 2005 for a possible settlement of the class action.
     The Corporation expects to seek recovery of a total of approximately $14.75 million from its insurance companies and from former executives of the Corporation. Since agreements with the insurance carriers have not been executed, the Corporation cannot provide assurances that the monies from the insurance carriers will be received and consequently, the Corporation has not made accruals for any potential payment from its insurance carriers.
     Between November 8, 2005 and March 7, 2006, several shareholders of the Corporation commenced five separate derivative actions against certain current and former executive officers and directors of the Corporation. In these actions, the Corporation was included as a nominal defendant. These actions were filed pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and alleged, among other things, a breach of fiduciary duty on behalf of the defendants. All shareholder derivative actions were consolidated into one case named “In Re: First BanCorp Derivative Litigation” which was dismissed on November 30, 2006 before the U.S. District Court for the District of Puerto Rico.

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18 – FIRST BANCORP (Holding Company Only) Financial Information
     The following condensed financial information presents the financial position of the Holding Company only at September 30, 2006, December 31, 2005, September 30, 2005 and September 30, 2004 and the results of its operations for the quarter and nine-month period ended on September 30, 2006, 2005 and 2004.
                                 
                            As of  
    As of     As of     As of     September 30,  
    September 30,     December 31,     September 30,     2004  
    2006     2005     2005     (As Restated)  
    (Dollars in thousands)  
Assets
                               
 
Cash and due from banks
  $ 20,682     $ 2,772     $ 18,007     $ 17,604  
Money market instruments
    300       300       75,300       194,200  
Investment securities available for sale, at market:
                               
Equity investments
    20,220       29,421       52,962       45,556  
Other equity securities
    1,425       1,425       1,425       375  
Loans receivable, net
    67,173       74,914       78,852       97,823  
Investment in FirstBank Puerto Rico, at equity
    1,348,269       1,316,380       1,207,411       1,129,363  
Investment in FirstBank Insurance Agency, at equity
    3,177       5,953       4,833       2,413  
Investment in Ponce General Corporation, at equity
    102,087       105,907       104,991        
Investment in PR Finance, at equity
    2,579       3,005       2,545        
Accrued interest receivable
    376       363       354       281  
Investment in FBP Statutory Trust I
    3,093       3,093       3,093        
Investment in FBP Statutory Trust II
    3,866       3,866       3,866        
Other assets
    35,522       29,758       740       8,389  
 
                       
Total assets
  $ 1,608,769     $ 1,577,157     $ 1,554,379     $ 1,496,004  
 
                       
 
                               
Liabilities & Stockholders’ Equity
                               
 
                               
Liabilities:
                               
Other borrowings
  $ 231,695     $ 295,446     $ 298,660     $ 321,668  
Accounts payable and other liabilities
    152,559       83,870       960       1,689  
 
                       
Total liabilities
    384,254       379,316       299,620       323,357  
 
                       
Stockholders’ equity
    1,224,515       1,197,841       1,254,759       1,172,647  
 
                       
Total liabilities and stockholders’ equity
  $ 1,608,769     $ 1,577,157     $ 1,554,379     $ 1,496,004  
 
                       

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                    Quarter Ended  
    Quarter Ended     Quarter Ended     September 30,  
    September 30,     September 30,     2004  
    2006     2005     (As Restated)  
    (Dollars in thousands)  
Income:
                       
Interest income on investment securities
  $     $ 321     $ 82  
Interest income on other investments
    4       587       241  
Interest income on loans
    983       1,053       821  
Dividend from FirstBank Puerto Rico
    22,209       17,013       15,957  
Other income
    142       109       212  
 
                 
 
    23,338       19,083       17,313  
 
                 
 
                       
Expense:
                       
Notes payable and other borrowings
    4,755       4,345       1,677  
Interest on funding to subsidiaries
    1,296              
Other operating expenses
    1,492       244       201  
 
                 
 
    7,543       4,589       1,878  
 
                 
 
                       
(Loss) gain on sale of investments, net
    (9,139 )     4,517       360  
 
                 
 
                       
Income before income tax provision and equity in undistributed earnings of subsidiaries
    6,656       19,011       15,795  
 
                       
Income tax benefit (provision)
    1,157       (32 )     (24 )
 
                       
Equity in undistributed earnings (loss) of subsidiaries
    18,869       (1,674 )     72,622  
 
                 
 
                       
Net income
  $ 26,682     $ 17,305     $ 88,393  
 
                 
                         
                    Nine-month Period Ended  
    Nine-month Period Ended     Nine-month Period Ended     September 30,  
    September 30,     September 30,     2004  
    2006     2005     (As Restated)  
    (Dollars in thousands)  
Income:
                       
Interest income on investment securities
  $ 178     $ 663     $ 323  
Interest income on other investments
    171       2,309       532  
Interest income on loans
    3,068       3,085       1,267  
Dividend from FirstBank Puerto Rico
    41,297       50,644       46,277  
Dividend from other subsidiaries
    13,500       240       2,770  
Other income
    400       583       441  
 
                 
 
    58,614       57,524       51,610  
 
                 
 
                       
Expense:
                       
Federal funds purchased and repurchase agreements
                2  
Notes payable and other borrowings
    13,423       11,861       2,548  
Interest on funding to subsidiaries
    3,265              
(Recovery) provision for loan losses
    (71 )            
Other operating expenses
    4,036       892       592  
 
                 
 
    20,653       12,753       3,142  
 
                 
 
                       
(Loss) gain on sale of investments, net
    (10,989 )     6,297       4,275  
 
                 
 
                       
Income before income tax provision and equity in undistributed earnings of subsidiaries
    26,972       51,068       52,743  
 
                       
Income tax benefit (provision)
    320       (66 )     (98 )
 
                       
Equity in undistributed earnings of subsidiaries
    35,056       88,924       82,986  
 
                 
 
                       
Net income
  $ 62,348     $ 139,926     $ 135,631  
 
                 

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19. SUBSEQUENT EVENTS
Following the close of the third quarter of 2006, a number of events have occurred including:
    Effective January 1, 2007, the Corporation elected to early adopt SFAS 159 for the callable brokered CDs and a portion of the callable medium-term notes that were previously recognized under the long-haul method as hedged against certain interest rate swaps under SFAS 133. Refer to Note 2 for additional information on the adoption of SFAS 159.
 
    In February 2007, the Corporation entered into various agreements with R&G relating to prior transactions originally treated as purchases of mortgages and pass-through trust certificates from R&G subsidiaries. First, through a mortgage payment agreement, R&G paid the Corporation approximately $50 million to reduce the commercial loan that R&G Premier has outstanding with the Corporation. In addition, the remaining balance of approximately $271 million was re-documented as a secured loan from the Corporation to R&G. Second, R&G and the Corporation amended various agreements involving approximately $218 million of securities collateralized by loans that were originally sold through five grantor trusts. The modifications to the original agreements allow the Corporation to treat these transactions as “true sales” for accounting and legal purposes. The agreements enable First BanCorp to fulfill the remaining requirement of the Consent Order signed with banking regulators relating to the mortgage-related transactions with R&G that First BanCorp recharacterized for accounting and legal purposes as commercial loans secured by the mortgage loans and pass-through trust certificates.