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, 2008

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

For the transition period from                                          to                                           

FIRST BANCORP.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Puerto Rico (State or other jurisdiction of incorporation or organization)		66-0561882 (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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

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

Common stock: 92,510,506 outstanding as of October 31, 2008.

 

 

FIRST BANCORP.
INDEX PAGE

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2008 and December 31, 2007			4
Consolidated Statements of Income (Unaudited) — Quarters ended September 30, 2008 and September 30, 2007 and Nine-months ended September 30, 2008 and September 30, 2007			5
Consolidated Statements of Cash Flows (Unaudited) — Nine-months ended September 30, 2008 and September 30, 2007			6
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) — Nine-months ended September 30, 2008 and September 30, 2007			7
Consolidated Statements of Comprehensive Income (Unaudited) — Quarters ended September 30, 2008 and September 30, 2007 and Nine-months ended September 30, 2008 and September 30, 2007			8
Notes to Consolidated Financial Statements (Unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			40
Item 3. Quantitative and Qualitative Disclosures About Market Risk			89
Item 4. Controls and Procedures			89
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			90
Item 1A. Risk Factors			90
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			91
Item 3. Defaults Upon Senior Securities			91
Item 4. Submission of Matters to a Vote of Security Holders			92
Item 5. Other Information			92
Item 6. Exhibits			92
SIGNATURES
EX-3.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Forward Looking Statements

     This Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q or future filings by First BanCorp (the “Corporation”) with the Securities and Exchange Commission (“SEC”), in the Corporation’s press releases or in other public or 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 arising from credit and other risks of the Corporation’s lending and investment activities, including the Corporation’s condo conversion loans from its Miami Corporate Banking operations and the construction loan portfolio in Puerto Rico, which may affect, among other things, the level of non-performing assets, charge-offs and loan loss provision;
	•		an adverse change in the Corporation’s ability to attract new clients and retain existing ones;
	•		changes in general economic conditions in the United States and Puerto Rico, including the interest rate environment, market liquidity, market rates and prices, and disruptions in the U.S. capital markets which may reduce interest margins, impact funding sources and affect demand for the Corporation’s products and services and the value of the Corporation’s assets, including the value of the interest rate swaps that economically hedge the interest rate risk mainly relating to brokered certificates of deposit and medium-term notes as well as other derivative instruments used for protection from interest rate fluctuations;
	•		uncertainty about the effectiveness and impact of the U.S. government’s rescue plan, including the bailout of U.S. government-sponsored housing agencies, on the financial markets in general and on the Corporation’s business, financial condition and results of operations;
	•		uncertainty about the Corporation’s participation in the Troubled Asset Relief Program, if it should decide to apply to issue preferred stock through this program;
	•		changes in the fiscal and monetary policies and regulations of the federal government and including those determined by the Federal Reserve System (FED), the Federal Deposit Insurance Corporation (FDIC), government-sponsored housing agencies and local regulators in Puerto Rico and the U.S. and British Virgin Islands;
	•		risks of not being able to recover all assets pledged to Lehman Brothers Special Financing, Inc.;
	•		changes in the Corporation’s expenses associated with acquisitions and dispositions;
	•		developments in technology;
	•		the impact of Doral Financial Corporation’s and R&G Financial Corporation’s financial condition on the repayment of their outstanding secured loans to the Corporation;
	•		the Corporation’s ability to issue brokered certificates of deposit and fund operations;
	•		risks associated with downgrades in the credit ratings of the Corporation’s securities; and
	•		general competitive factors and industry consolidation.

     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, of Part II of this Quarterly Report on Form 10-Q, and Item 1A, Risk Factors, in the Corporation’s Annual Report on Form 10-K.

FIRST BANCORP

(Unaudited)

(In thousands, except for share information)		September 30, 2008				December 31, 2007
ASSETS
Cash and due from banks		$	151,040			$	195,809
Money market instruments			34,998				148,579
Federal funds sold			142,436				7,957
Time deposits with other financial institutions			116,684				26,600
Total money market investments			294,118				183,136
Investment securities available for sale, at fair value:
Securities pledged that can be repledged			2,691,829				789,271
Other investment securities			1,325,120				497,015
Total investment securities available for sale			4,016,949				1,286,286
Investment securities held to maturity, at amortized cost:
Securities pledged that can be repledged			985,230				2,522,509
Other investment securities			748,826				754,574
Total investment securities held to maturity, fair value of $1,711,586 (2007 - $3,261,934)			1,734,056				3,277,083
Other equity securities			60,796				64,908
Loans, net of allowance for loan and lease losses of $261,170 (2007 - $190,168)			12,419,422				11,588,654
Loans held for sale, at lower of cost or market			32,510				20,924
Total loans, net			12,451,932				11,609,578
Premises and equipment, net			172,285				162,635
Other real estate owned			40,422				16,116
Accrued interest receivable on loans and investments			91,158				107,979
Due from customers on acceptances			961				747
Other assets			290,723				282,654
Total assets		$	19,304,440			$	17,186,931
LIABILITIES
Deposits:
Non-interest-bearing deposits		$	661,197			$	621,884
Interest-bearing deposits (including $1,515,525 and $4,186,563 measured at fair value as of September 30, 2008 and December 31, 2007, respectively)			12,158,635				10,412,637
Total deposits			12,819,832				11,034,521
Loans payable			300,000				—
Federal funds purchased and securities sold under agreements to repurchase			3,326,936				3,094,646
Advances from the Federal Home Loan Bank (FHLB)			986,000				1,103,000
Notes payable (including $12,445 and $14,306 measured at fair value as of September 30, 2008 and December 31, 2007, respectively)			26,725				30,543
Other borrowings			231,890				231,817
Bank acceptances outstanding			961				747
Accounts payable and other liabilities			170,824				270,011
Total liabilities			17,863,168				15,765,285
Commitments and contingencies (Note 20)
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 102,408,306 as of September 30, 2008 (2007 - 102,402,306)			102,408				102,402
Less: Treasury stock (at par value)			(9,898	)			(9,898	)
Common stock outstanding, 92,510,506 as of September 30, 2008 (2007 - 92,504,506)			92,510				92,504
Additional paid-in capital			108,326				108,279
Legal surplus			286,049				286,049
Retained earnings			451,474				409,978
Accumulated other comprehensive loss, net of tax benefit of $1,086 (2007 - $227)			(47,187	)			(25,264	)
Total stockholders’ equity			1,441,272				1,421,646
Total liabilities and stockholders’ equity		$	19,304,440			$	17,186,931

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Quarter Ended								Nine-Month Period Ended
		September 30,				September 30,				September 30,				September 30,
(In thousands, except per share data)		2008				2007				2008				2007
Interest income:
Loans		$	208,241			$	223,738			$	626,846			$	678,288
Investment securities			79,077				62,794				211,095				202,138
Money market investments			974				9,399				6,046				19,961
Total interest income			288,292				295,931				843,987				900,387
Interest expense:
Deposits			95,089				143,188				301,053				401,160
Loans payable			240				—				240				—
Federal funds purchased and repurchase agreements			35,790				34,300				98,698				115,460
Advances from FHLB			10,018				9,172				30,738				26,370
Notes payable and other borrowings			2,534				4,242				9,573				17,718
Total interest expense			143,671				190,902				440,302				560,708
Net interest income			144,621				105,029				403,685				339,679
Provision for loan and lease losses			55,319				34,260				142,435				83,802
Net interest income after provision for loan and lease losses			89,302				70,769				261,250				255,877
Non-interest income:
Other service charges on loans			1,612				1,290				4,343				5,499
Service charges on deposit accounts			3,170				3,160				9,725				9,536
Mortgage banking activities			1,231				1,125				2,354				2,238
Net (loss) gain on investments and impairments			(564	)			(3,119	)			14,950				(6,714	)
Net gain on partial extinguishment and recharacterization of a secured commercial loan to a local financial institution			—				—				—				2,497
Rental income			583				620				1,705				1,953
Gain on sale of credit card portfolio			—				—				—				2,819
Insurance reimbursements and other agreements related to a contingency settlement			—				15,075				—				15,075
Other non-interest income			7,839				5,769				22,176				17,742
Total non-interest income			13,871				23,920				55,253				50,645
Non-interest expenses:
Employees’ compensation and benefits			35,629				33,995				106,949				103,719
Occupancy and equipment			15,647				14,970				46,167				43,848
Business promotion			4,083				2,973				13,150				12,767
Professional fees			2,724				4,473				12,702				16,478
Taxes, other than income taxes			4,242				4,015				12,256				11,249
Insurance and supervisory fees			4,213				5,282				12,142				8,773
Foreclosure-related expenses			5,626				588				12,054				1,129
Other non-interest expenses			10,212				8,656				30,906				29,807
Total non-interest expenses			82,376				74,952				246,326				227,770
Income before income taxes			20,797				19,737				70,177				78,752
Income tax benefit (provision)			3,749				(5,595	)			20,952				(17,983	)
Net income		$	24,546			$	14,142			$	91,129			$	60,769
Net income attributable to common stockholders		$	14,477			$	4,073			$	60,922			$	30,562
Net income per common share:
Basic		$	0.16			$	0.05			$	0.66			$	0.36
Diluted		$	0.16			$	0.05			$	0.66			$	0.36
Dividends declared per common share		$	0.07			$	0.07			$	0.21			$	0.21

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Nine-Month Period Ended
		September 30,				September 30,
(In thousands)		2008				2007
Cash flows from operating activities:
Net income		$	91,129			$	60,769
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			14,188				13,239
Amortization of core deposit intangible			2,695				2,477
Provision for loan and lease losses			142,435				83,802
Deferred income tax (benefit) provision			(23,986	)			12,511
Stock-based compensation recognized			—				2,848
(Gain) loss on sale of investments, net			(16,135	)			1,482
Other-than-temporary impairments on available-for-sale securities			1,185				5,232
Derivative instruments and hedging activities (gain) loss			(31,889	)			6,481
Net gain on sale of loans and impairments			(1,635	)			(1,485	)
Net gain on partial extinguishment and recharacterization of a secured commercial loan to a local financial institution			—				(2,497	)
Net amortization of premiums and discounts and deferred loan fees and costs			(956	)			(936	)
Amortization of broker placement fees			10,935				7,426
Accretion of basis adjustments on fair value hedges			—				(2,061	)
Net accretion of premium and discounts on investment securities			(8,196	)			(29,550	)
Gain on sale of credit card portfolio			—				(2,819	)
Decrease in accrued income tax payable			(13,429	)			(4,791	)
Decrease in accrued interest receivable			17,018				6,088
Decrease in accrued interest payable			(37,906	)			(26,374	)
Decrease in other assets			12,716				2,279
Decrease in other liabilities			(15,378	)			(97,550	)
Total adjustments			51,662				(24,198	)
Net cash provided by operating activities			142,791				36,571
Cash flows from investing activities:
Principal collected on loans			2,081,236				2,330,949
Loans originated			(2,858,266	)			(2,619,987	)
Purchase of loans			(373,997	)			(147,848	)
Proceeds from sale of loans			106,583				97,500
Proceeds from sale of repossessed assets			54,127				43,756
Purchase of servicing assets			(621	)			(1,614	)
Proceeds from sale of available for sale securities			389,784				408,285
Purchase of securities held to maturity			(99	)			(417,450	)
Purchase of securities available for sale			(3,368,093	)			—
Principal repayments and maturities of securities held to maturity			1,551,272				392,480
Principal repayments of securities available for sale			255,425				163,959
Additions to premises and equipment			(21,663	)			(19,294	)
Proceeds from sale of other investment securities			9,474				—
Decrease (increase) in other equity securities			4,224				(20,520	)
Net cash inflow on acquisition of business			5,154				—
Net cash (used in) provided by investing activities			(2,165,460	)			210,216
Cash flows from financing activities:
Net increase in deposits			1,723,172				622,608
Net increase in loans payable			300,000				—
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements			232,290				(1,168,698	)
Net FHLB advances (paid) taken			(117,000	)			445,000
Repayments of notes payable and other borrowings			—				(150,000	)
Dividends paid			(49,633	)			(44,981	)
Issuance of common stock			—				91,967
Exercise of stock options			53				—
Net cash provided by (used in) financing activities			2,088,882				(204,104	)
Net increase in cash and cash equivalents			66,213				42,683
Cash and cash equivalents at beginning of period			378,945				568,811
Cash and cash equivalents at end of period		$	445,158			$	611,494
Cash and cash equivalents include:
Cash and due from banks		$	151,040			$	138,037
Money market instruments			294,118				473,457
		$	445,158			$	611,494

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Nine-Month Period Ended
(In thousands)		September 30, 2008				September 30, 2007
Preferred Stock		$	550,100			$	550,100
Common Stock outstanding:
Balance at beginning of period			92,504				83,254
Issuance of common stock			—				9,250
Common stock issued under stock option plan			6				—
Balance at end of period			92,510				92,504
Additional Paid-In-Capital:
Balance at beginning of period			108,279				22,757
Issuance of common stock			—				82,717
Shares issued under stock option plan			47				—
Stock-based compensation recognized			—				2,848
Balance at end of period			108,326				108,322
Legal Surplus			286,049				276,848
Retained Earnings:
Balance at beginning of period			409,978				326,761
Net income			91,129				60,769
Cash dividends declared on common stock			(19,426	)			(18,131	)
Cash dividends declared on preferred stock			(30,207	)			(30,207	)
Cumulative adjustment for accounting change (adoption of FIN 48)			—				(2,615	)
Cumulative adjustment for accounting change (adoption of SFAS No. 159)			—				91,778
Balance at end of period			451,474				428,355
Accumulated Other Comprehensive Loss, net of tax:
Balance at beginning of period			(25,264	)			(30,167	)
Other comprehensive loss, net of tax			(21,923	)			(11,776	)
Balance at end of period			(47,187	)			(41,943	)
Total stockholders’ equity		$	1,441,272			$	1,414,186

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Quarter Ended								Nine-Month Period Ended
		September 30,				September 30,				September 30,				September 30,
(In thousands)		2008				2007				2008				2007
Net income		$	24,546			$	14,142			$	91,129			$	60,769
Other comprehensive gain (loss):
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during the period			30,773				15,364				(17,306	)			(18,522	)
Less: Reclassification adjustments for net loss (gain) and other-than-temporary impairments included in net income			696				3,119				(5,476	)			6,714
Income tax benefit (expense) related to items of other comprehensive income			109				(173	)			859				32
Other comprehensive gain (loss) for the period, net of tax			31,578				18,310				(21,923	)			(11,776	)
Total comprehensive income		$	56,124			$	32,452			$	69,206			$	48,993

The accompanying notes are an integral part of these statements.

FIRST BANCORP

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, 2007. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the SEC and, accordingly, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2007, included in the Corporation’s 2007 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.

     The results of operations for the quarter and nine-month period ended September 30, 2008 are not necessarily indicative of the results to be expected for the entire year.

Recently issued accounting pronouncements

     On April 30, 2007, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. (“FSP”) FIN 39-1 (“FSP FIN 39-1”), which amends FIN 39, “Offsetting of Amounts Related to Certain Contracts.” FSP FIN 39-1 impacts entities that enter into master netting arrangements as part of their derivative transactions by allowing net derivative positions to be offset in the financial statements against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral or the obligation to return cash collateral under those arrangements. FSP FIN 39-1 became effective for fiscal years beginning after November 15, 2007. The Corporation analyzed the potential impact of FSP FIN 39-1 on its financial statements. As of September 30, 2008, the Corporation did not apply this pronouncement since FSP FIN 39-1 applies only to cash collateral and all of the collateral received or delivered to counterparties for derivative instruments are investment securities.

     In November 2007, the SEC issued Staff Accounting Bulletin No. (“SAB”) 109, “Written Loan Commitments That Are Accounted For At Fair Value Through Earnings Under Generally Accepted Accounting Principles.” This interpretation expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under GAAP. SAB 109 supersedes SAB 105, “Application of Accounting Principles to Loan Commitments,” which provided the prior views of the staff regarding derivative loan commitments that are accounted for at fair value through earnings pursuant to Statement of Financial Accounting Standards No. (“SFAS”) 133, “Accounting for Derivative Instruments and Hedging Activities.” SAB 109 expresses the current view of the staff that, consistent with the guidance in SFAS 156, “Accounting for Servicing of Financial Assets,” and SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 109 became effective for fiscal quarters beginning after December 15, 2007. The adoption of this statement in 2008 did not have an effect on the Corporation’s financial statements.

     In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The Corporation is currently evaluating the possible effect, if any, of the adoption of this statement on its financial statements, commencing on January 1, 2009.

     In December 2007, the FASB issued SFAS 141R, “Business Combinations.” This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, including contingent liabilities, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Corporation is currently evaluating the possible effect, if any, of the adoption of this statement on its financial statements.

     In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (b) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Although the Corporation continues to evaluate the disclosure framework dictated by this Statement, most of the required disclosures are included in Note 8 — “Derivative Instruments and Hedging Activities.”

     In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. (“SAS”) 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” SFAS 162 provides and direct the GAAP hierarchy to the entities instead of the auditor as provided by SAS 69 because the entities (not their auditors) are responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Any effect of applying the provisions of SFAS 162 should be reported as a change in accounting principle in accordance with SFAS 154, “Accounting Changes and Error Corrections.” SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The adoption of SFAS 162 did not impact the Corporation’s current accounting policies or the Corporation’s financial results.

     In May 2008, the FASB issued FSP APB 14-1 (“FSP—APB 14-1”). FSP-APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, FSP-APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP-APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. As of September 30, 2008, the Corporation does not have any convertible debt instrument.

     In May 2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee Insurance Contracts — an interpretation of FASB Statement No. 60.” This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how SFAS 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities. Except for those disclosures, earlier application of SFAS 163 is not permitted. The Corporation is currently evaluating the possible effect, if any, of the adoption of this statement on its financial statements, commencing on January 1, 2009.

     In June 2008, the FASB issued FSP EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 applies to entities with outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends. Furthermore, awards with dividends that do not need to be returned to the entity, if the employee forfeits, the award are considered participating securities. Accordingly, under FSP EITF 03-6-1 unvested share-based payment awards that are considered to be participating securities should be included in the computation of EPS pursuant to the two-class method under SFAS 128. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Early application is not permitted. The Corporation is currently evaluating this statement in light of the recently approved Omnibus Incentive Plan, however, as of September 30, 2008, there are no outstanding unvested share-based payment awards.

     In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4 (“FSP FAS 133-1 and FIN 45-4”), “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.” FSP FAS 133-1 and FIN 45-4 amends SFAS 133 to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. A seller of credit derivatives must disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable users of financial statements to assess their potential effect on its financial position, financial performance, and cash flows. As of September 30, 2008, the Corporation is not involved in the credit derivatives market. This FSP also amends FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to require an additional disclosure about the current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the FASB’s intent about the effective date of SFAS 161. This FSP clarifies the FASB’s intent that the disclosures required by SFAS 161 should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008. The provisions of this FSP that amend SFAS 133 and FIN 45 will be effective for reporting periods (annual or interim) ending after November 15, 2008. The adoption of this pronouncement will not have a significant impact on the Corporation’s financial statements.

     In October 2008, the FASB issued FSP No. FAS 157-3 (“FSP FAS 157-3”), “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” FSP FAS 157-3 clarifies the application of SFAS 157, “Fair Value Measurements,” in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP became effective on October 10, 2008 and also applies to prior periods for which financial statements have not been issued. The adoption of this pronouncement did not impact the Corporation’s fair value methodologies on its financial assets.

2 — EARNINGS PER COMMON SHARE

        The calculations of earnings per common share for the quarters and nine-month periods ended on September 30, 2008 and 2007 are as follows:

		Quarter Ended								Nine-Month Period Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(In thousands, except per share data)
Net Income:
Net income		$	24,546			$	14,142			$	91,129			$	60,769
Less: Preferred stock dividends			(10,069	)			(10,069	)			(30,207	)			(30,207	)
Net income available to common stockholders		$	14,477			$	4,073			$	60,922			$	30,562
Weighted-Average Shares:
Basic weighted-average common shares outstanding			92,511				87,075				92,507				84,542
Average potential common shares			58				242				116				416
Diluted weighted-average number of common shares outstanding			92,569				87,317				92,623				84,958
Earnings per common share:
Basic		$	0.16			$	0.05			$	0.66			$	0.36
Diluted		$	0.16			$	0.05			$	0.66			$	0.36

          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 the 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 on earnings per share. For the quarter and nine-month periods ended September 30, 2008, a total of 3,596,300 (2,054,600 for the third quarter of 2007) and 2,020,600 (2,054,600 for the nine month period ended on September 30, 2007) weighted-average outstanding stock options, respectively, were not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share.

3 — STOCK OPTION PLAN

          Between 1997 and January 2007, the Corporation had a stock option plan (“the 1997 stock option plan”) covering certain employees. This plan allowed for 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 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 1997 stock option plan, 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. During the second quarter of 2008, the Compensation Committee approved the grant of stock appreciation rights to one employee. The employee surrendered the right to exercise 120,000 stock options in the form of stock appreciation rights for a payment of $0.2 million. On January 21, 2007, the 1997 stock option plan expired; all outstanding awards grants under this plan continue in full force and effect, subject to their original terms.

          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. As of the date of the filing of this Quarterly Report on Form 10-Q, no awards have been granted under the Omnibus Plan.

          The Corporation accounted for stock options using the “modified prospective” method under SFAS 123R, “Share-Based Payment.” There were no stock options granted during the first nine months of 2008. The compensation expense associated with stock options for the nine-month period ended September 30, 2007 was approximately $2.8 million. All employee stock options granted during 2007 were fully vested at the time of grant.

          The activity of stock options during the first nine months of 2008 is set forth below:

		Nine Month Period Ended
		September 30, 2008
										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
		Number of				Exercise				Contractual				Value (In
		Options				Price				Term (Years)				thousands)
Beginning of period			4,136,910			$	12.60
Options exercised			(6,000	)			8.85
Options cancelled			(121,000	)			9.03
End of period outstanding and exercisable			4,009,910			$	12.71				6.3			$	4,231

          The fair value of options granted in 2007, which was estimated using the Black-Scholes option pricing method, and the assumptions used are as follows:

		2007
Weighted-average stock price at grant date and exercise price		$	9.20
Stock option estimated fair value		$	2.40 - $2.45
Weighted-average estimated fair value		$	2.43
Expected stock option term (years)			4.31-4.59
Expected volatility			32	%
Expected dividend yield			3.0	%
Risk-free interest rate			5.1	%

          The Corporation uses empirical research data to estimate option exercises and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected volatility is based on the historical implied volatility of the Corporation’s common stock at each grant date; otherwise, historical volatilities based upon 260 observations (working days) were obtained from Bloomberg L.P. (“Bloomberg”) and used as inputs in the model. The dividend yield is based on the historical 12-month dividend yield observable at each grant date. The risk-free rate for the period is based on historical zero coupon curves obtained from Bloomberg at the time of grant based on the option’s expected term.

          The options exercised during the first nine months of 2008 did not have any intrinsic value and the cash proceeds from these options were approximately $53,000. No stock options were exercised during 2007.

4 — 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 as of September 30, 2008 and December 31, 2007 were as follows:

		September 30, 2008																				December 31, 2007
						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 and Obligations of U.S. Government sponsored agencies:
After 5 to 10 years		$	—			$	—			$	—			$	—				—			$	6,975			$	26			$	—			$	7,001				6.05
After 10 years			—				—				—				—				—				8,984				47				—				9,031				6.21
Puerto Rico Government obligations:
Due within one year			4,584				51				—				4,635				6.17				—				—				—				—				—
After 1 to 5 years			10,606				60				337				10,329				4.51				13,947				141				347				13,741				4.99
After 5 to 10 years			6,292				192				73				6,411				5.80				7,245				247				99				7,393				5.67
After 10 years			15,782				24				544				15,262				5.30				3,416				37				66				3,387				5.64
United States and Puerto Rico Government obligations			37,264				327				954				36,637				5.27				40,567				498				512				40,553				5.62
Mortgage-backed securities:
FHLMC certificates:
Due within one year			47				—				—				47				4.99				98				1				—				99				5.50
After 1 to 5 years			234				4				—				238				7.03				640				20				—				660				7.01
After 5 to 10 years			31				3				—				34				8.41				—				—				—				—				—
After 10 years			1,957,623				2,001				10,826				1,948,798				5.45				158,070				235				111				158,194				5.60
			1,957,935				2,008				10,826				1,949,117				5.45				158,808				256				111				158,953				5.61
GNMA certificates:
Due within one year			99				1				—				100				5.88				—				—				—				—				—
After 1 to 5 years			216				7				—				223				6.74				496				8				—				504				6.48
After 5 to 10 years			602				13				—				615				5.34				708				6				5				709				6.01
After 10 years			338,674				692				1,707				337,659				5.38				42,665				582				120				43,127				5.93
			339,591				713				1,707				338,597				5.38				43,869				596				125				44,340				5.94
FNMA certificates:
After 1 to 5 years			59				5				—				64				10.01				34				1				—				35				7.08
After 5 to 10 years			260,550				588				272				260,866				4.98				289,125				138				750				288,513				4.93
After 10 years			1,315,718				5,547				2,915				1,318,350				5.58				608,942				5,290				582				613,650				5.65
			1,576,327				6,140				3,187				1,579,280				5.48				898,101				5,429				1,332				902,198				5.42
Mortgage pass-through certificates:
After 10 years			146,941				2				37,217				109,726				5.64				162,082				3				28,407				133,678				6.14
Mortgage-backed securities			4,020,794				8,863				52,937				3,976,720				5.46				1,262,860				6,284				29,975				1,239,169				5.55
Corporate bonds:
After 5 to 10 years			1,300				—				780				520				7.70				1,300				—				198				1,102				7.70
After 10 years			4,411				—				2,534				1,877				7.97				4,412				—				1,066				3,346				7.97
Corporate bonds			5,711				—				3,314				2,397				7.91				5,712				—				1,264				4,448				7.91
Equity securities (without contractual maturity)			1,453				—				258				1,195				1.94				2,638				—				522				2,116				—
Total investment securities available for sale		$	4,065,222			$	9,190			$	57,463			$	4,016,949				5.46			$	1,311,777			$	6,782			$	32,273			$	1,286,286				5.55

          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 gain or loss on securities available for sale is 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, as of September 30, 2008 and December 31, 2007:

		As of September 30, 2008
		Less than 12 months								12 months or more								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(In thousands)
Debt securities
Puerto Rico Government obligations		$	11,928			$	418			$	13,624			$	536			$	25,552			$	954
Mortgage-backed securities
FHLMC			1,766,133				10,785				3,115				41				1,769,248				10,826
GNMA			297,689				1,707				—				—				297,689				1,707
FNMA			880,477				3,186				21				1				880,498				3,187
Mortgage pass-through trust certificates			—				—				109,421				37,217				109,421				37,217
Corporate bonds			—				—				2,397				3,314				2,397				3,314
Equity securities			474				258				—				—				474				258
		$	2,956,701			$	16,354			$	128,578			$	41,109			$	3,085,279			$	57,463

		As of December 31, 2007
		Less than 12 months								12 months or more								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(In thousands)
Debt securities
Puerto Rico Government obligations		$	—			$	—			$	13,648			$	512			$	13,648			$	512
Mortgage-backed securities
FHLMC			48,202				40				3,436				71				51,638				111
GNMA			625				11				26,887				114				27,512				125
FNMA			285,973				274				221,902				1,058				507,875				1,332
Mortgage pass-through certificates			133,337				28,407				—				—				133,337				28,407
Corporate bonds			—				—				4,448				1,264				4,448				1,264
Equity securities			1,384				522				—				—				1,384				522
		$	469,521			$	29,254			$	270,321			$	3,019			$	739,842			$	32,273