UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-14793

FIRST BANCORP.

Puerto Rico		66-0561882
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)
1519 Ponce de León Avenue, Stop 23		00908
Santurce, Puerto Rico		(Zip Code)
(Address of principal executive offices)

(787) 729-8200

(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock: 319,557,932 outstanding as of October 31, 2010.

 

 

FIRST BANCORP.
INDEX PAGE

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2010 and December 31, 2009			5
Consolidated Statements of Loss (Unaudited) — Quarters ended September 30, 2010 and September 30, 2009 and nine-month periods ended September 30, 2010 and September 30, 2009			6
Consolidated Statements of Cash Flows (Unaudited) — Nine-month periods ended September 30, 2010 and September 30, 2009			7
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) — Nine-month periods ended September 30, 2010 and September 30, 2009			8
Consolidated Statements of Comprehensive Loss (Unaudited) — Quarters ended September 30, 2010 and September 30, 2009 and nine-month periods ended September 30, 2010 and September 30, 2009			9
Notes to Consolidated Financial Statements (Unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			51
Item 3. Quantitative and Qualitative Disclosures About Market Risk			99
Item 4. Controls and Procedures			99
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			100
Item 1A. Risk Factors			100
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			115
Item 3. Defaults Upon Senior Securities			115
Item 4. Reserved			115
Item 5. Other Information			115
Item 6. Exhibits			115
SIGNATURES
EX-12.1
EX-12.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Forward Looking Statements

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

     First BanCorp wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and represent First BanCorp’s expectations of future conditions or results and are not guarantees of future performance. First BanCorp advises readers that various factors could cause actual results to differ materially from those contained in any “forward-looking statement.” Such factors include, but are not limited to, the following:

	•		uncertainty about whether the Corporation will be able to fully comply with the written agreement dated June 3, 2010 (the “Agreement”) that the Corporation entered into with the Federal Reserve Bank of New York (the “FED” or “Federal Reserve”) and the order dated June 2, 2010 (the “Order” and collectively with the Agreement, the “Agreements”) that the Corporation’s banking subsidiary, FirstBank Puerto Rico (“FirstBank” or “the Bank”) entered into with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) that, among other things, require the Bank to attain certain capital levels and reduce its special mention, classified, delinquent and non-accrual assets;
	•		uncertainty as to whether the Corporation will be able to issue $500 million of equity so as to meet the remaining substantive condition necessary to compel the United States Department of the Treasury (the “U.S. Treasury”) to convert into common stock the shares of the Corporation’s Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series G (the “Series G Preferred Stock”), that the Corporation issued to the U.S. Treasury;
	•		uncertainty as to whether the Corporation will be able to complete future capital-raising efforts;
	•		uncertainty as to the availability of certain funding sources, such as retail brokered certificates of deposit (“CDs”);
	•		the risk of not being able to fulfill the Corporation’s cash obligations or pay dividends in the future to the Corporation’s stockholders due to the Corporation’s inability to receive approval from the FED to receive dividends from the Corporation’s main banking subsidiary;
	•		the risk of being subject to possible additional regulatory action;
	•		the strength or weakness of the real estate market and of the consumer and commercial credit sector and their impact on the credit quality of the Corporation’s loans and other assets, including the construction and commercial real estate loan portfolios, which have contributed and may continue to contribute to, among other things, the increase in the levels of non-performing assets, charge-offs and the provision expense and may subject the Corporation to further rise from loan defaults and foreclosures;
	•		adverse changes in general economic conditions in the United States and in Puerto Rico, including the interest rate scenario, market liquidity, housing absorption rates, real estate prices and disruptions in the U.S. capital markets, which may reduce interest margins, impact funding sources and affect demand for all of the Corporation’s products and services and the value of the Corporation’s assets, including the value of derivative instruments used for protection from interest rate fluctuations;
	•		the Corporation’s reliance on brokered CDs and its ability to obtain, on a periodic basis, approval to issue brokered CDs to fund operations and provide liquidity in accordance with the terms of the Order;
	•		an adverse change in the Corporation’s ability to attract new clients and retain existing ones;
	•		a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued recession in Puerto Rico and the current fiscal problems and budget deficit of the Puerto Rico government;
	•		a need to recognize additional impairments of financial instruments or goodwill relating to acquisitions;
	•		uncertainty about regulatory and legislative changes for financial services companies in Puerto Rico, the United States and the U.S. and British Virgin Islands, which could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from prior results and anticipated or projected results;

	•		uncertainty about the effectiveness of the various actions undertaken to stimulate the U.S. economy and stabilize the U.S. financial markets, and the impact such actions may have on the Corporation’s business, financial condition and results of operations;
	•		changes in the fiscal and monetary policies and regulations of the federal government, including those determined by the FED, the FDIC, government-sponsored housing agencies and local regulators in Puerto Rico and the U.S. and British Virgin Islands;
	•		the risk of possible failure or circumvention of controls and procedures and the risk that the Corporation’s risk management policies may not be adequate;
	•		the risk that the FDIC may further increase the deposit insurance premium and/or require special assessments to replenish its insurance fund, causing an additional increase in the Corporation’s non-interest expense;
	•		risks of not being able to generate sufficient income to realize the benefit of the deferred tax asset;
	•		risks of not being able to recover the assets pledged to Lehman Brothers Special Financing, Inc.;
	•		risks relating to the impact on the price of the Corporation’s common stock of the reverse stock split that the Corporation will effect, prior to requesting effectiveness of the registration statement for the offering of shares of common stock;
	•		changes in the Corporation’s expenses associated with acquisitions and dispositions;
	•		the adverse effect of litigation;
	•		developments in technology;
	•		risks associated with further downgrades in the credit ratings of the Corporation’s long-term senior debt;
	•		general competitive factors and industry consolidation;
	•		risks associated with the depression of the price of the Corporation’s common stock, including the possibility of the Corporation’s common stock being delisted from the New York Stock Exchange (“NYSE”); and
	•		the possible future dilution to holders of the Corporation’s common stock resulting from additional issuances of common stock or securities convertible into common stock.

     The Corporation does not undertake, and specifically disclaims any obligation, to update any of the “forward- looking statements” to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal securities laws.

     Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009 as well as “Part II, Item 1A, Risk Factors,” in this Quarterly Report on Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

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

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)

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

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

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

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

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

The accompanying notes are an integral part of these statements.

PART I — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

     The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Corporation’s Audited Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, accordingly, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2009, included in the Corporation’s 2009 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.

     The results of operations for the quarter and nine-month period ended September 30, 2010 are not necessarily indicative of the results to be expected for the entire year.

Capital and Liquidity

     The Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. Sustained weak economic conditions that have severely affected Puerto Rico and the United States over the last several years have adversely impacted First BanCorp’s results of operations and capital levels. The net loss in 2009, primarily related to credit losses, the valuation allowance on deferred tax assets and an increase in the deposit insurance premium, reduced the Corporation’s capital levels during 2009. The net loss for the nine-month period ended September 30, 2010 was primarily driven by credit losses. The decrease in regulatory capital ratios during the first nine-months of 2010 was not significant since the net loss reported for the period was almost entirely offset by a decrease in risk-weighted assets, consistent with the Corporation’s decision to deleverage its balance sheet to preserve its capital position. As of September 30, 2010, the Corporation’s Total, Tier 1 capital and Leverage ratios were 13.26%, 11.96% and 8.34%, respectively, compared to 13.44%, 12.16% and 8.91%, respectively, as of December 31, 2009.

     As described in Note 18, Regulatory Matters, FirstBank is currently operating under a Consent Order ( the “Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and First BanCorp has entered into a Written Agreement (the “Written Agreement” and collectively with the Order the “Agreements”) with the Board of Governors of the Federal Reserve System (the “FED” or “Federal Reserve”).

     As previously reported, the Corporation submitted a Capital Plan to the FED and the FDIC in July 2010. The primary objective of this Capital Plan is to improve the Corporation’s capital structure in order to 1) enhance its ability to operate in the current economic environment, 2) be in a position to continue executing business strategies to return to profitability and 3) achieve certain minimum capital ratios set forth in the FDIC Order over time. The minimum capital ratios are 8% for Leverage (Tier 1 Capital to Average Total Assets), 10% for Tier 1 Capital to Risk-Weighted Assets and 12% for Total Capital to Risk-Weighted Assets. The Capital Plan sets forth the following capital restructuring initiatives as well as various deleveraging strategies:

	1.		The exchange of shares of the Corporation’s preferred stock held by the U.S. Treasury for common stock;
	2.		The exchange of shares of the Corporation’s common stock for any and all of the Corporation’s outstanding Series A through E Preferred Stock; and
	3.		A $500 million capital raise through the issuance of new common shares for cash.

     During the third quarter of 2010, the Corporation completed transactions designed to accomplish the first two initiatives. On July 20, 2010, the Corporation closed a transaction with the U.S. Treasury for the exchange of the $400 million of Fixed Rate Cumulative Perpetual Preferred Stock, Series F (the “Series F Preferred Stock”) that the U.S. Treasury acquired pursuant to the TARP Capital Purchase Program, and dividends accrued on such stock, for new shares of Series G Preferred Stock. A key benefit of this transaction was obtaining the right, under the terms of the new Series G Preferred Stock, to compel the conversion of this stock into shares of the Corporation’s common stock, provided that the Corporation meets a number of conditions. On August 30, 2010, the Corporation completed its offer to issue shares of its common stock in exchange for its outstanding Series A through E Preferred Stock (the “Exchange Offer”), which resulted in the issuance of 227,015,210 new shares of common stock in exchange for 19,482,128 shares of preferred stock with an aggregate liquidation amount of $487 million, or 89% of the outstanding Series A through E preferred stock.

     In addition, on August 24, 2010, the Corporation obtained its stockholders’ approval to increase the number of authorized shares of common stock from 750 million to 2 billion and decrease the par value of its common stock from $1.00 to $0.10 per share. These approvals and the issuance of common stock in exchange for Series A through E Preferred Stock satisfy all but one of the substantive conditions to the Corporation’s ability to compel the conversion of the 424,174 shares of the new Series G Preferred Stock, issued to the U.S. Treasury. The other substantive condition to the Corporation’s ability to compel the conversion of the Series G Preferred Stock is the issuance of a minimum aggregate amount of $500 million of additional capital, subject to terms, other than the price per share, reasonably acceptable to the U.S. Treasury in its sole discretion.

     These first two initiatives were designed to improve the Corporation’s ability to successfully raise additional capital through a sale of its common stock, which is the last component of the Capital Plan. On September 16, 2010, the Corporation filed a registration statement for a proposed underwritten public offering of $500 million ($575 million including an over allotment option) of its common stock with the SEC. The completion of the Exchange Offer and the issuance of the Series G Preferred Stock to the U.S. Treasury resulted in significant improvements in the Corporation’s Tangible and Tier 1 common equity ratios which improved to 5.21% and 6.62%, respectively, as of September 30, 2010 from 3.20% and 4.10%, respectively, as of December 31, 2009. (For information about and a reconciliation of these non-GAAP measures, see Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD &A”) — Risk Management — Capital — Capital Restructuring Initiatives.”) These capital transactions completed during the third quarter of 2010 are further discussed in Note 17.

     The Corporation has deleveraged its balance sheet in order to preserve capital, principally by selling investments and reducing the size of the loan portfolio. The decrease in securities and loans resulting from deleveraging and balance sheet repositioning strategies allowed a reduction of $3.6 billion in wholesale funding during 2010, including repurchase agreements, advances and traditional brokered CDs (“brokered CDs”). Such reductions were partially offset by increases in retail deposits. Significant decreases in risk-weighted assets have been achieved mainly through the non-renewal of commercial loans with 100% risk weightings, such as temporary loan facilities to the Puerto Rico and Virgin Islands governments, through the charge-offs of portions of loans deemed uncollectible and, to a lesser extent, the sale of non-performing loans. In addition, a reduced volume of loan originations contributed to this deleveraging strategy and partially offset the effect of net losses on capital ratios.

     Both the Corporation and the Bank actively manage liquidity and cash flow needs. The Corporation does not have any unsecured debt, other than brokered CDs, maturing during the remaining of 2010; additionally, it suspended common and preferred dividends to stockholders effective August 2009. As of September 30, 2010, the holding company had $43.2 million of cash and cash equivalents. Cash and cash equivalents at the Bank as of September 30, 2010 were approximately $904.3 million. The Bank has $100 million and $426 million in repurchase agreements and FHLB advances, respectively, maturing over the next year and $7.4 million in notes that mature prior to September 30, 2011. In addition, it had $6.7 billion in brokered deposits as of September 30, 2010 of which $3.2 billion mature over the next year. Liquidity at the bank level is highly dependent on bank deposits, which fund 75.56% of the Bank’s assets (or 35.43% excluding brokered CDs). At September 30, 2010, the Bank held approximately $843 million of readily pledgeable or saleable investment securities.

     The Corporation’s credit as a long-term issuer is currently rated CCC+ by Standard & Poor’s (“S&P”) and B- by Fitch Ratings Limited (“Fitch”); both with negative outlook. At the FirstBank subsidiary level, long-term issuer rating is currently B3 by Moody’s Investor Service (“Moody’s”), six notches below their definition of investment grade; CCC+ by S&P seven notches below their definition of investment grade, and B- by Fitch, six notches below their definition of investment grade. The outlook on the Bank’s credit ratings from the three rating agencies is negative. During the second quarter of 2010, the Corporation and its subsidiary bank suffered credit rating downgrades from Moody’s (B1 to B3), S&P (B to CCC+), and Fitch (B to B-) rating services. Furthermore, on June 2010, Moody’s and Fitch placed the Corporation on “Credit Watch Negative” and S&P placed a “Negative Outlook”. The Corporation does not have any outstanding debt or derivative agreements that would be affected by the recent credit downgrades. Furthermore, given our non-reliance on corporate debt or other instruments directly linked in terms of pricing or volume to credit ratings, the liquidity of the Corporation so far has also not been affected in any material way by the downgrades. The Corporation’s ability to access new non-deposit funding, however, could be adversely affected by these credit ratings and any additional downgrades.

     Based on current and expected liquidity needs and sources, management expects First BanCorp to be able to meet its obligations for a reasonable period of time. The Corporation has $3.2 billion of brokered CDs maturing within twelve months from September 30, 2010. While the Corporation has increased its liquidity levels due to the current economic environment, it has continued to issue brokered CDs pursuant to temporary approvals received from the FDIC to renew or roll over certain amounts of brokered CDs through December 31, 2010. Management anticipates it will continue to obtain waivers from the restrictions to issue brokered CDs under the Order to meet its obligations and execute its business plans. If unanticipated market factors emerge, or if the Corporation is unable to raise additional capital or complete identified capital preservation initiatives, successfully execute its strategic operating plans, issue a sufficient amount of brokered deposits or comply with the Order, its banking regulators could take further action, which could include actions that may have a material adverse effect on the Corporation’s business, results of operations and financial position.

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

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

     In June 2009, the FASB amended the existing guidance on the accounting for transfers of financial assets, to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets, the effects of a transfer on its financial position, financial performance, and cash flows, and a transferor’s continuing involvement, if any, in transferred financial assets. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Subsequently in December 2009, the FASB amended the existing guidance issued in June 2009. Among the most significant changes and additions to this guidance are changes to the conditions for sales of a financial asset based on whether a transferor and its consolidated affiliates included in the financial statements have surrendered control over the transferred financial asset or third party beneficial interest; and the addition of the term participating interest, which represents a proportionate (pro rata) ownership interest in an entire financial asset. The Corporation adopted the guidance with no material impact on its financial statements.

     In June 2009, the FASB amended the existing guidance on the consolidation of variable interests to improve financial reporting by enterprises involved with variable interest entities and address (i) the effects of the elimination of the qualifying special-purpose entity concept in the accounting for transfer of financial assets guidance, and (ii) constituent concerns about the application of certain key provisions of the guidance, including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Subsequently in December 2009, the FASB amended the existing guidance issued in June 2009. Among the most significant changes and additions to the guidance is the replacement of the quantitative based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. The Corporation adopted the guidance with no material impact on its financial statements.

     In January 2010, the FASB updated the Accounting Standards Codification (“Codification”) to provide guidance to improve disclosure requirements related to fair value measurements and require reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. Currently, entities are only required to disclose activity in Level 3 measurements in the fair-value hierarchy on a net basis. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. Entities are required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair-value hierarchy and the reasons for the transfers. Significance will be determined based on earnings and total assets or total liabilities or, when changes in fair value are recognized in other comprehensive income, based on total equity. A reporting entity must disclose and consistently follow its policy for determining when transfers between levels are recognized. Acceptable methods for determining when to recognize transfers include: (i) actual date of the event or change in circumstances causing the transfer; (ii) beginning of the reporting period; and (iii) end of the reporting period. The guidance requires disclosure of fair-value measurements by “class” instead of “major category.” A class is generally a subset of assets and liabilities within a financial statement line item and is based on the specific nature and risks of the assets and liabilities and their classification in the fair-value hierarchy. When determining classes, reporting entities must also consider the level of disaggregated information required by other applicable GAAP. For fair-value measurements using significant observable inputs (Level 2) or significant unobservable inputs (Level 3), this guidance requires reporting entities to disclose the valuation technique and the inputs used in determining fair value for each class of assets and liabilities. If the valuation technique has changed in the reporting period (e.g., from a market approach to an income approach) or if an additional valuation technique is used, entities are required to disclose the change and the reason for making the change. Except for the detailed Level 3 roll forward disclosures, the guidance is effective for annual and interim reporting periods beginning after December 15, 2009 (first quarter of 2010 for public companies with calendar year-ends). The new disclosures about purchases, sales, issuances, and settlements in the roll forward activity for Level 3 fair value measurements are effective for interim and annual reporting periods beginning after December 15, 2010 (first quarter of 2011 for public companies with calendar year-ends). Early adoption is permitted. In the initial adoption period, entities are not required to include disclosures for previous comparative periods; however, they are required for periods ending after initial adoption. The Corporation adopted the guidance in the first quarter of 2010 and the required disclosures are presented in Note 20 — Fair Value.

     In February 2010, the FASB updated the Codification to provide guidance to improve disclosure requirements related to the recognition and disclosure of subsequent events. The amendment establishes that an entity that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) is required to evaluate subsequent events through the date that the financial

statements are issued. If an entity meets neither of those criteria, then it should evaluate subsequent events through the date the financial statements are available to be issued. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. Also, the scope of the reissuance disclosure requirements has been refined to include revised financial statements only. Revised financial statements include financial statements revised either as a result of the correction of an error or retrospective application of GAAP. The guidance in this update was effective on the date of issuance in February. The Corporation has adopted this guidance; refer to Note 25 — Subsequent events.

     In February 2010, the FASB updated the Codification to provide guidance on the deferral of consolidation requirements for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered qualifying special purpose entities. In addition, the deferral applies to a reporting entity’s interest in an entity that is required to comply or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities. The guidance also clarifies that for entities that do not qualify for the deferral, related parties should be considered for determining whether a decision maker or service provider fee represents a variable interest. In addition, the requirements for evaluating whether a decision maker’s or service provider’s fee is a variable interest are modified to clarify the FASB’s intention that a quantitative calculation should not be the sole basis for this evaluation. The guidance was effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of this guidance did not have an impact in the Corporation’s consolidated financial statements.

     In March 2010, the FASB updated the Codification to provide clarification on the scope exception related to embedded credit derivatives related to the transfer of credit risk in the form of subordination of one financial instrument to another. The transfer of credit risk that is only in the form of subordination of one financial instrument to another (thereby redistributing credit risk) is an embedded derivative feature that should not be subject to potential bifurcation and separate accounting. The amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed under this guidance. The Corporation may elect the fair value option for any investment in a beneficial interest in a securitized financial asset. The guidance is effective for the first fiscal quarter beginning after June 15, 2010. The adoption of this guidance did not have an impact in the Corporation’s consolidated financial statements.

     In April 2010, the FASB updated the codification to provide guidance on the effects of a loan modification when a loan is part of a pool that is accounted for as a single asset. Modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this Update are effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively and early application is permitted. The adoption of this guidance did not have an impact in the Corporation’s consolidated financial statements.

     In July 2010, the FASB updated the codification to expand the disclosure requirements regarding credit quality of financing receivables and the allowance for credit losses. The objectives of the enhanced disclosures are to provide information that will enable readers of financial statements to understand the nature of credit risk in a company’s financing receivables, how that risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period. An entity should provide disclosures on a disaggregated basis for portfolio segments and classes of financing receivable. The amendments in this Update are effective for both interim and annual reporting period ending after December 15, 2010. The Corporation is currently evaluating the impact of the adoption of this guidance on its financial statements.

2 — EARNINGS PER COMMON SHARE

     The calculations of earnings per common share for the quarters and nine-month periods ended on September 30, 2010 and 2009 are as follows:

		Quarter Ended								Nine-Month Period Ended
		September 30,				September 30,				September 30,				September 30,
(In thousands, except per share information)		2010				2009				2010				2009
Net loss		$	(75,233	)		$	(165,218	)		$	(272,872	)		$	(221,985	)
Non-cumulative preferred stock dividends (Series A through E)			—				(3,356	)			—				(23,494	)
Cumulative non-convertible preferred stock dividends (Series F)			(1,618	)			(5,000	)			(11,618	)			(14,167	)
Cumulative convertible preferred stock dividend (Series G)			(4,183	)			—				(4,183	)			—
Preferred stock discount accretion (Series F and G)			(1,688	)			(1,115	)			(4,010	)			(3,095	)
Favorable impact from issuing common stock in exchange for Series A through E preferred stock, net of issuance costs (1) (Refer to Note 17)			385,387				—				385,387				—
Favorable impact from issuing Series G mandatorily convertible preferred stock in exchange for Series F preferred stock (2) (Refer to Note 17)			55,122				—				55,122				—
Net income (loss) available to common stockholders — basic		$	357,787			$	(174,689	)		$	147,826			$	(262,741	)
Convertible preferred stock dividends and accretion			5,626				—				5,626				—
Net income (loss) available to common stockholders — diluted		$	363,413			$	(174,689	)		$	153,452			$	(262,741	)
Average common shares outstanding			171,483				92,511				119,131				92,511
Average potential common shares (3)			1,126,792				—				379,725				—
Average common shares outstanding — assuming dilution			1,298,275				92,511				498,856				92,511
Basic earnings (loss) per common share		$	2.09			$	(1.89	)		$	1.24			$	(2.84	)
Diluted earnings (loss) per common share		$	0.28			$	(1.89	)		$	0.31			$	(2.84	)

     Earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average common shares issued and outstanding. Net income (loss) available to common stockholders represents net income (loss) adjusted for preferred stock dividends including dividends declared, and cumulative dividends related to the current dividend period that have not been declared as of the end of the period, and the accretion of discount on preferred stock issuances. For 2010 the net income available to common stockholders also includes the one-time effect of the issuance of common stock in exchange for shares of the Series A through E Preferred Stock and the issuance of a new Series G Preferred Stock in exchange for the Series F Preferred Stock. The Exchange Offer and the issuance of the Series G Preferred Stock to the U.S. Treasury are discussed in Note 17 to the consolidated financial statements. Basic weighted average common shares outstanding exclude unvested shares of restricted stock.

     Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested shares of restricted stock, and outstanding warrants using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options, unvested shares of restricted stock, and outstanding warrants that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. For the quarter and nine-month periods ended September 30, 2010 and 2009, there were 2,072,200 and 2,546,310, respectively, outstanding stock options, as well as warrants outstanding to purchase 5,842,259 shares of common stock that were excluded from the computation of diluted earnings per common share because their inclusion would have an antidilutive effect. Approximately 21,477 and 32,216 unvested shares of restricted stock outstanding as of September 30, 2010 and 2009 were excluded from the computation of earnings per share.

     The Series G Preferred Stock is included in the calculation of earnings per share in 2010 as all shares are assumed converted at the time of issuance of the Series G Preferred Stock, under the if converted method. The amount of potential common shares was obtained based on the most advantageous conversion rate from the standpoint of the security holder and assuming the Corporation will not be able to compel conversion until the seven-year anniversary, at which date the conversion price would be based on the

Corporation’s stock price in the open market and conversion would be based on the full liquidation value of $1,000 per share, or a conversion rate of 3,347.84 shares of common stock for each share of Series G convertible preferred stock.

3 — STOCK OPTION PLAN

     Between 1997 and January 2007, the Corporation had a stock option plan (the “1997 stock option plan”) that authorized the granting of up to 8,696,112 options on shares of the Corporation’s common stock to eligible employees. The options granted under the plan could not exceed 20% of the number of common shares outstanding. Each option provides for the purchase of one share of common stock at a price not less than the fair market value of the stock on the date the option was granted. Stock options were fully vested upon grant. The maximum term to exercise the options is ten years. The stock option plan provides for a proportionate adjustment in the exercise price and the number of shares that can be purchased in the event of a stock dividend, stock split, reclassification of stock, merger or reorganization and certain other issuances and distributions such as stock appreciation rights.

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

     On April 29, 2008, the Corporation’s stockholders approved the First BanCorp 2008 Omnibus Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. This plan allows the issuance of up to 3,800,000 shares of common stock, subject to adjustments for stock splits, reorganization and other similar events. The Corporation’s Board of Directors, upon receiving the relevant recommendation of the Compensation Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards subject to various limits and vesting restrictions that apply to individual and aggregate awards. Shares delivered pursuant to an award may consist, in whole or in part, of authorized and unissued shares of Common Stock or shares of Common Stock acquired by the Corporation. During the fourth quarter of 2008, the Corporation granted 36,243 shares of restricted stock with a fair value of $8.69 under the Omnibus Plan to the Corporation’s independent directors, of which 4,027 were forfeited in the second half of 2009 and 10,739 have vested.

     For the quarter and nine-month period ended September 30, 2010, the Corporation recognized $23,333 and $69,999, respectively, of stock-based compensation expense related to the aforementioned restricted stock awards. The total unrecognized compensation cost related to the non-vested restricted shares was $143,890 as of September 30, 2010 and is expected to be recognized over the next 1.2 years.

     There were no stock options granted during 2010 and 2009, therefore, no compensation associated with stock options was recorded in those years.

     Stock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based awards which will be forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a significant effect on share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period in which the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. When unvested options or shares of restricted stock are forfeited, any compensation expense previously recognized on the forfeited awards is reversed in the period of the forfeiture.

The activity of stock options for the nine-month period ended September 30, 2010 is set forth below:

		Nine-month period ended
		September 30, 2010
										Weighted-Average
										Remaining				Aggregate
		Number of				Weighted-Average				Contractual Term				Intrinsic Value
		Options				Exercise Price				(Years)				(In thousands)
Beginning of period			2,481,310			$	13.46
Options cancelled			(409,110	)			14.60
End of period outstanding and exercisable			2,072,200			$	13.24				4.6			$	—

No stock options were exercised during the first nine months of 2010 or 2009.

4 — INVESTMENT SECURITIES

Investment Securities Available for Sale

     The amortized cost, non-credit loss component of other-than-temporary impairment (“OTTI”) on securities recorded in other comprehensive income (“OCI”), gross unrealized gains and losses recorded in OCI, approximate fair value, weighted-average yield and contractual maturities of investment securities available for sale as of September 30, 2010 and December 31, 2009 were as follows:

		September 30, 2010																								December 31, 2009
						Non-Credit																								Non-Credit
						Loss Component				Gross												Weighted								Loss Component				Gross												Weighted
		Amortized				of OTTI				Unrealized								Fair				average				Amortized				of OTTI				Unrealized								Fair				average
		cost				Recorded in OCI				gains				losses				value				yield%				cost				Recorded in OCI				gains				losses				value				yield%
		(Dollars in thousands)
U.S. Treasury securities:
After 1 to 5 years		$	599,959			$	—			$	11,981			$	—			$	611,940				1.34			$	—			$	—			$	—			$	—			$	—				—
Obligations of U.S. Government sponsored agencies:
After 1 to 5 years			707,333				—				4,383				—				711,716				1.40				1,139,577				—				5,562				—				1,145,139				2.12
Puerto Rico Government obligations:
Due within one year			—				—				—				—				—				—				12,016				—				1				28				11,989				1.82
After 1 to 5 years			126,682				—				588				14				127,256				5.33				113,232				—				302				47				113,487				5.40
After 5 to 10 years			104,331				—				187				—				104,518				5.18				6,992				—				328				90				7,230				5.88
After 10 years			4,719				—				—				13				4,706				6.21				3,529				—				91				—				3,620				5.42
United States and Puerto Rico Government obligations			1,543,024				—				17,139				27				1,560,136				1.97				1,275,346				—				6,284				165				1,281,465				2.44
Mortgage-backed securities:
FHLMC certificates:
After 1 to 5 years			—				—				—				—				—				—				30				—				—				—				30				5.54
After 10 years			1,934				—				118				—				2,052				5.00				705,818				—				18,388				1,987				722,219				4.66
			1,934				—				118				—				2,052				5.00				705,848				—				18,388				1,987				722,249				4.66
GNMA certificates:
After 1 to 5 years			38				—				3				—				41				6.49				69				—				3				—				72				6.56
After 5 to 10 years			1,398				—				79				—				1,477				4.76				808				—				39				—				847				5.47
After 10 years			948,009				—				33,902				824				981,087				4.27				407,565				—				10,808				980				417,393				5.12
			949,445				—				33,984				824				982,605				4.27				408,442				—				10,850				980				418,312				5.12
FNMA certificates:
After 5 to 10 years			82,373				—				4,697				—				87,070				4.48				101,781				—				3,716				91				105,406				4.55
After 10 years			137,957				—				8,408				—				146,365				5.51				1,374,533				—				30,629				2,776				1,402,386				4.51
			220,330				—				13,105				—				233,435				5.12				1,476,314				—				34,345				2,867				1,507,792				4.51
Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA:
After 10 years			118,771				—				1,710				—				120,481				0.99				156,086				—				633				412				156,307				0.99
Other mortgage pass-through trust certificates:
After 10 years			105,184				27,785				1				—				77,400				2.26				117,198				32,846				2				—				84,354				2.30
Total mortgage-backed securities			1,395,664				27,785				48,918				824				1,415,973				3.97				2,863,888				32,846				64,218				6,246				2,889,014				4.35
Equity securities (without contractual maturity) (1)			77				—				—				6				71				—				427				—				81				205				303				—
Total investment securities available for sale		$	2,938,765			$	27,785			$	66,057			$	857			$	2,976,180				2.92			$	4,139,661			$	32,846			$	70,583			$	6,616			$	4,170,782				3.76