FIRST BANCORP /PR/ - FORM 10-Q

Attached files

file	filename
EX-12.1 - EX-12.1 - FIRST BANCORP /PR/	g27245exv12w1.htm
EX-12.2 - EX-12.2 - FIRST BANCORP /PR/	g27245exv12w2.htm
EX-31.2 - EX-31.2 - FIRST BANCORP /PR/	g27245exv31w2.htm
EX-32.1 - EX-32.1 - FIRST BANCORP /PR/	g27245exv32w1.htm
EX-32.2 - EX-32.2 - FIRST BANCORP /PR/	g27245exv32w2.htm
EX-31.1 - EX-31.1 - FIRST BANCORP /PR/	g27245exv31w1.htm

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 March 31, 2011


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

For the transition period from to

COMMISSION FILE NUMBER 001-14793

FIRST BANCORP.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


Puerto Rico		66-0561882
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification number)

1519 Ponce de León Avenue, Stop 23		00908
Santurce, Puerto Rico		(Zip Code)
(Address of principal executive offices)

(787) 729-8200

(Registrant’s telephone number, including area code)

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

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

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

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: 21,303,669 outstanding as of April 30, 2011.

FIRST BANCORP.
INDEX PAGE


	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of March 31, 2011 and December 31, 2010		5
Consolidated Statements of Loss (Unaudited) — Quarters ended March 31, 2011 and March 31, 2010		6
Consolidated Statements of Cash Flows (Unaudited) — Quarters ended March 31, 2011 and March 31, 2010		7
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) — Quarters ended March 31, 2011 and March 31, 2010		8
Consolidated Statements of Comprehensive Loss (Unaudited) — Quarters ended March 31, 2011 and March 31, 2010		9
Notes to Consolidated Financial Statements (Unaudited)		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		50
Item 3. Quantitative and Qualitative Disclosures About Market Risk		95
Item 4. Controls and Procedures		95

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		96
Item 1A. Risk Factors		96
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		96
Item 3. Defaults Upon Senior Securities		96
Item 4. Reserved		96
Item 5. Other Information		96
Item 6. Exhibits		96

SIGNATURES
EX-12.1
EX-12.2
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 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 “Written 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 “FDIC Order” and collectively with the Written 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 $350 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 any other future capital-raising efforts;

	•		uncertainty as to the availability of certain funding sources, such as retail brokered certificates of deposit (“CDs”);

	•		the Corporation’s reliance on brokered CDs and its ability to obtain, on a periodic basis, approval from the FDIC to issue brokered CDs to fund operations and provide liquidity in accordance with the terms of the Order;

	•		the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s stockholders due to the Corporation’s inability to receive approval from the FED to receive dividends from the Corporation’s banking subsidiary, FirstBank;

	•		the risk of being subject to possible additional regulatory actions;

	•		the strength or weakness of the real estate market and of the consumer and commercial credit sectors 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 high levels of non-performing assets, charge-offs and the provision expense and may subject the Corporation to further risk 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;

	•		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;

	•		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 Federal Reserve, 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 our non-interest expense;

	•		the risk of not being able to recover the assets pledged to Lehman Brothers Special Financing, Inc.;

	•		the impact on the Corporation’s results of operations and financial condition associated with acquisitions and dispositions;

	•		a need to recognize additional impairments of financial instruments or goodwill relating to acquisitions;

	•		the adverse effect of litigation;

	•		risks that further downgrades in the credit ratings of the Corporation’s long-term senior debt will adversely affect the Corporation’s ability to make future borrowings;

	•		the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on our businesses, business practices and cost of operations;

	•		general competitive factors and industry consolidation; and

	•		the 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, 2010 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)


(In thousands, except for share information)	March 31, 2011			December 31, 2010
ASSETS

Cash and due from banks	$	663,581		$	254,723


Money market investments:
Federal funds sold		5,382			6,236
Time deposits with other financial institutions		1,355			1,346
Other short-term investments		202,976			107,978

Total money market investments		209,713			115,560


Investment securities available for sale, at fair value:
Securities pledged that can be repledged		1,667,261			1,344,873
Other investment securities		1,056,906			1,399,580

Total investment securities available for sale		2,724,167			2,744,453


Investment securities held to maturity, at amortized cost:
Securities pledged that can be repledged		—			239,553
Other investment securities		—			213,834

Total investment securities held to maturity (2010-fair value of $476,516)		—			453,387


Other equity securities		99,060			55,932


Loans, net of allowance for loan and lease losses of $561,695 (2010 - $553,025)		10,528,080			11,102,411
Loans held for sale, at lower of cost or market		305,494			300,766

Total loans, net		10,833,574			11,403,177


Premises and equipment, net		206,863			209,014
Other real estate owned		91,948			84,897
Accrued interest receivable on loans and investments		55,580			59,061
Due from customers on acceptances		598			1,439
Other assets		219,006			211,434

Total assets	$	15,104,090		$	15,593,077


LIABILITIES

Deposits:
Non-interest-bearing deposits	$	707,938		$	668,052
Interest-bearing deposits		11,008,498			11,391,058

Total deposits		11,716,436			12,059,110

Securities sold under agreements to repurchase		1,400,000			1,400,000
Advances from the Federal Home Loan Bank (FHLB)		540,440			653,440
Notes payable (including $12,437 and $11,842 measured at fair value as of March 31, 2011 and December 31, 2010, respectively)		27,837			26,449
Other borrowings		231,959			231,959
Bank acceptances outstanding		598			1,439
Accounts payable and other liabilities		159,551			162,721

Total liabilities		14,076,821			14,535,118


Commitments and Contingencies (Note 22)

STOCKHOLDERS’ EQUITY

Preferred stock, authorized 50,000,000 shares: issued 22,828,174; outstanding 2,946,046; aggregate liquidation value of $487,221:
Fixed Rate Cumulative Mandatorily Convertible Preferred Stock: issued and outstanding 424,174 shares		363,677			361,962
Non-cumulative Perpetual Monthly Income Preferred Stock: issued 22,004,000 shares and outstanding 2,521,872 shares		63,047			63,047
Common stock, $0.10 par value, authorized 2,000,000,000 shares; issued 21,963,522 shares		2,196			2,196
Less: Treasury stock (at par value)		(66	)		(66	)

Common stock outstanding, 21,303,669 shares outstanding		2,130			2,130

Additional paid-in capital		319,483			319,459
Legal surplus		299,006			299,006
Accumulated deficit		(35,498	)		(5,363	)
Accumulated other comprehensive income, net of tax expense of $5,205 (December 31, 2010 - $5,351)		15,424			17,718

Total stockholders’equity		1,027,269			1,057,959

Total liabilities and stockholders’ equity	$	15,104,090		$	15,593,077

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF LOSS

(Unaudited)


	Quarter Ended
	March 31,			March 31,
(In thousands, except per share data)	2011			2010
Interest income:
Loans	$	157,971		$	177,433
Investment securities		22,623			43,119
Money market investments		309			436

Total interest income		180,903			220,988


Interest expense:
Deposits		54,059			65,966
Loans payable		—			2,177
Federal funds purchased and securities sold under agreements to repurchase		13,136			25,282
Advances from FHLB		4,745			7,694
Notes payable and other borrowings		2,684			3,006

Total interest expense		74,624			104,125

Net interest income		106,279			116,863


Provision for loan and lease losses		88,732			170,965


Net interest income (loss) after provision for loan and lease losses		17,547			(54,102	)

Non-interest income:
Other service charges on loans		1,718			1,756
Service charges on deposit accounts		3,332			3,468
Mortgage banking activities		6,591			2,500
Net gain on sale of investments, net of impairments on equity securities		19,341			30,764
Other non-interest income		9,503			6,838

Total non-interest income		40,485			45,326


Non-interest expenses:
Employees’ compensation and benefits		30,439			31,728
Occupancy and equipment		15,250			14,851
Business promotion		2,664			2,205
Professional fees		5,137			5,287
Taxes, other than income taxes		3,255			3,821
Insurance and supervisory fees		15,177			18,518
Net loss on real estate owned (REO) operations		5,500			3,693
Other non-interest expenses		5,444			11,259

Total non-interest expenses		82,866			91,362


Loss before income taxes		(24,834	)		(100,138	)

Income tax expense		(3,586	)		(6,861	)


Net loss	$	(28,420	)	$	(106,999	)


Net loss attributable to common stockholders	$	(35,437	)	$	(113,151	)


Net loss per common share:

Basic	$	(1.66	)	$	(18.34	)

Diluted	$	(1.66	)	$	(18.34	)


Dividends declared per common share	$	—		$	—

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Quarter Ended
	March 31,			March 31,
(In thousands)	2011			2010
Cash flows from operating activities:
Net Loss	$	(28,420	)	$	(106,999	)


Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		5,810			5,171
Amortization and impairment of core deposit intangible		589			666
Provision for loan and lease losses		88,732			170,965
Deferred income tax expense		1,746			4,076
Stock-based compensation recognized		24			24
Gain on sale of investments, net		(18,710	)		(31,364	)
Other-than-temporary impairments on investment securities		—			600
Derivatives instruments and hedging activities loss		518			1,733
Gain on sale of assets FB Insurance VI		(2,845	)		—
Net gain on sale of loans and impairments		(5,505	)		(220	)
Net amortization of premiums and discounts on deferred loan fees and costs		395			246
Net increase in mortgage loans held for sale		(1,382	)		(4,385	)
Amortization of broker placement fees		5,359			5,465
Net amortization of premium and discounts on investment securities		1,736			968
Increase in accrued income tax payable		1,642			2,384
Decrease in accrued interest receivable		3,481			8,517
Decrease in accrued interest payable		(22	)		(417	)
(Increase) decrease in other assets		(2,355	)		13,208
(Decrease) increase in other liabilities		(7,145	)		12,659

Total adjustments		72,068			190,296


Net cash provided by operating activities		43,648			83,297


Cash flows from investing activities:
Principal collected on loans		569,498			1,050,262
Loans originated		(503,164	)		(565,515	)
Purchases of loans		(32,728	)		(41,893	)
Proceeds from sale of loans		330,978			19,064
Proceeds from sale of repossessed assets		21,920			19,575
Proceeds from sale of available-for-sale securities		41,422			393,433
Proceeds from sale of held-to-maturity securities		348,798			—
Purchases of securities available for sale		—			(99,867	)
Proceeds from principal repayments and maturities of securities held to maturity		33,726			35,998
Proceeds from principal repayments and maturities of securities available for sale		106,117			423,747
Additions to premises and equipment		(3,810	)		(6,278	)
Proceeds from sale of other investment securities		—			5,602
Proceeds from sale of assets FB Insurance VI		2,940			—
Proceeds from securities litigations settlement		631			—
Decrease in other equity securities		4,500			—

Net cash provided by investing activities		920,828			1,234,128


Cash flows from financing activities:
Net (decrease) increase in deposits		(348,465	)		203,321
Net decrease in loans payable		—			(300,000	)
Net decrease in securities sold under agreements to repurchase		—			(576,631	)
Net FHLB advances paid		(113,000	)		(18,000	)

Net cash used in financing activities		(461,465	)		(691,310	)


Net increase in cash and cash equivalents		503,011			626,115
Cash and cash equivalents at beginning of period		370,283			704,084

Cash and cash equivalents at end of period	$	873,294		$	1,330,199


Cash and cash equivalents include:
Cash and due from banks	$	663,581		$	675,551
Money market instruments		209,713			654,648

	$	873,294		$	1,330,199

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


	Quarter Ended
	March 31,			March 31,
(In thousands)	2011			2010
Preferred Stock:
Balance at beginning of period	$	425,009		$	928,508
Accretion of preferred stock discount		1,715			1,152

Balance at end of period		426,724			929,660


Common Stock outstanding		2,130			6,169


Additional Paid-In-Capital:
Balance at beginning of period		319,459			220,596
Stock-based compensation recognized		24			24

Balance at end of period		319,483			220,620


Legal Surplus		299,006			299,006


(Accumulated deficit) Retained Earnings :
Balance at beginning of period		(5,363	)		118,291
Net loss		(28,420	)		(106,999	)
Cash dividends declared on common stock		—			—
Cash dividends declared on preferred stock		—			—
Accretion of preferred stock discount		(1,715	)		(1,152	)

Balance at end of period		(35,498	)		10,140


Accumulated Other Comprehensive Income (Loss), net of tax:
Balance at beginning of period		17,718			26,493
Other comprehensive loss, net of tax		(2,294	)		(3,545	)

Balance at end of period		15,424			22,948


Total stockholders’equity	$	1,027,269		$	1,488,543

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)


	Quarter Ended
	March 31,			March 31,
	2011			2010
Net loss	$	(28,420	)	$	(106,999	)


Other comprehensive loss:
Unrealized gains and losses on available-for-sale securities:
Unrealized holding (losses) gains arising during the period		(5,181	)		17,529
Reclassification adjustments for net gain included in net income		(48	)		(20,696	)
Reclassification adjustments for other-than-temporary impairment on equity securities		—			350
Net unrealized gains on securities reclassified from held to maturity to available for sale		2,789			—
Income tax benefit (expense) related to items of other comprehensive income		146			(728	)


Other comprehensive loss for the period, net of tax		(2,294	)		(3,545	)


Total comprehensive loss	$	(30,714	)	$	(110,544	)

The accompanying notes are an integral part of these statements.

FIRST BANCORP

PART I — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Corporation’s Audited Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010. 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, 2010, included in the Corporation’s 2010 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 ended March 31, 2011 are not necessarily indicative of the results to be expected for the entire year.

All share and per share amounts of common shares included in the consolidated financial statements have been adjusted to retroactively reflect the 1-for-15 reverse stock split effected January 7, 2011.

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 and FirstBank’s results of operations and capital levels. The significant loss in 2010, primarily related to credit losses (including losses associated with adversely classified loans and non-performing loans transferred to held for sale), the increase in the deposit insurance premium expense and increases to the deferred tax asset valuation allowance reduced the Corporation’s and the Bank’s capital levels during 2010. The net loss for the first quarter of 2011 was primarily related to credit losses. As of March 31, 2011, the Corporation’s Total Capital, Tier 1 Capital and Leverage ratios were 11.97%, 10.65% and 7.78%, respectively, compared to 12.02%, 10.73% and 7.57%, respectively, as of December 31, 2010. Meanwhile, FirstBank’s Total Capital, Tier 1 Capital and Leverage ratios as of March 31, 2011 were 11.71%, 10.40% and 7.60%, respectively, up from 11.57%, 10.28% and 7.25%, respectively, as of December 31, 2010. The improvement in the capital ratios for FirstBank was primarily related to a $22 million capital contribution from the holding company.

As described in Note 17, Regulatory Matters, FirstBank is currently operating under a Consent Order ( the “FDIC Order”) with the FDIC and the OCIF and First BanCorp has entered into a Written Agreement (the “Written Agreement” and collectively with the Order the “Agreements”) with the Federal Reserve. The minimum capital ratios established by the FDIC Order 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 FDIC Order does not contain a specific date for achieving the minimum capital ratios.

The Corporation is working to complete a capital raise to ensure that the projected level of regulatory capital can support its balance sheet over the long-term. As part of the Corporation’s capital raising efforts, the Corporation has been engaged in conversations with a number of entities, including private equity firms. The issuance of additional equity securities and other capital management or business strategies could depress the market price of our common stock and result in the dilution of our common stockholders.

In March 2011, the Corporation submitted an updated Capital Plan (the “Capital Plan”) to the regulators. The Capital Plan contemplates a $350 million capital raise through the issuance of new common shares for cash, and other actions to further reduce the Corporation’s and the Bank’s risk-weighted assets, strengthen their capital positions and meet the minimum capital ratios required under the FDIC Order. Among the strategies contemplated in the Capital Plan are further reduction of the Corporation’s loan portfolio and investment portfolio. The Capital Plan identified specific targeted Leverage, Tier 1 Capital to Risk-Weighted Assets and Total Capital to Risk-Weighted Assets ratios to be achieved by the Bank each calendar quarter until the capital levels required under the FDIC Order are achieved. As of March 31, 2011, all capital ratios for FirstBank are above the targeted capital levels and the Corporation expects to be in compliance with the minimum capital ratios under the FDIC Order by June 30, 2011.

the regulators a contingency plan for the sale, merger, or liquidation of the institution in the event the primary sources of capital are not available. Thereafter the FDIC would determine whether and when to initiate an acceptable contingency plan.

Should the Corporation’s efforts to raise capital not be completed, the Corporation’s Capital Plan includes other actions which could allow the Bank to attain the minimum capital ratios under the FDIC Order. The strategies incorporated into the Capital Plan to meet the minimum capital ratios include the following:

Strategies completed during the first quarter of 2011:

	•		Sale of performing first lien residential mortgage loans — The Bank sold approximately $236 million in mortgage loans to another financial institution during February 2011. Proceeds were used, in part, to reduce funding sources and to support liquidity reserves.

	•		Sale of Investment securities — The Bank sold approximately $330 million in investment securities during March 2011. Proceeds were used, in part, to reduce funding sources and to support liquidity reserves.

	•		The Corporation contributed $22 million of capital to the Bank during March 2011.

Strategies completed or expected to be completed by June 30, 2011:

	•		Sale of performing first lien residential mortgage loans- The Bank entered into a letter of intent to sell mortgage loans before June 30, 2011. During the first quarter of 2011, the Corporation reclassified from held for investment to held for sale approximately $282 million related to this transaction. The loans were sold in April 2011.

	•		Sale of investment securities — The Bank sold approximately $268 million in investment securities on April 6, 2011.

	•		Sale of commercial loan participations — The Bank has commenced negotiations to sell approximately $150 million in loan participations to other financial institutions by June 30, 2011.

	•		The proceeds received from the above three transactions will be used to reduce funding sources.

Upon the successful completion of these actions, when combined with the achievement of operating results in line with management’s current expectations, management expects that the Corporation and the Bank will attain the minimum capital ratios set forth in the Capital Plan. However, no assurance can be given that the Corporation and the Bank will be able to achieve such ratios.

Both the Corporation and the Bank actively manage liquidity and cash flow needs. The Corporation suspended common and preferred dividends to stockholders since August 2009. As of March 31, 2011, the holding company had $19.8 million of cash and cash equivalents. Cash and cash equivalents at the Bank as of March 31, 2011 were approximately $873.3 million. The Bank has $100 million, $187 million and $15.4 million, in repurchase agreements, FHLB advances and notes payable, respectively, maturing over the next twelve months. In addition, it had $5.7 billion in brokered CDs as of March 31, 2011, of which $3.0 billion mature over the next twelve months. Liquidity at the Bank level is highly dependent on bank deposits, which fund 77.82% of the Bank’s assets (or 39.91% excluding brokered CDs). The Corporation has continued to issue brokered CDs pursuant to approvals received from the FDIC to renew or roll over certain amounts of brokered CDs through June 30, 2011. Management cannot be certain it will continue to obtain waivers from the restrictions to issue brokered CDs under the FDIC Order to meet its obligations and execute its business plans. As of March 31, 2011, the Bank held approximately $332 million of readily pledgeable or sellable investment securities. As previously noted above, the Corporation plans to sell certain loans and investments in 2011 to that would allow it to meet and maintain minimum capital ratios required by the FDIC Order. 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. During 2010, the Corporation and the Bank suffered credit downgrades. The Bank suffered a further downgrade in April 2011. The Corporation does not have any outstanding debt or derivative agreements that would be affected by the 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 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 downgrades and any additional downgrades.

If unanticipated market factors emerge, such as a significant increase in the provision for loan and lease losses, 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 CDs or comply with the FDIC Order, its banking regulators could take further action, which could include actions that may have a material adverse effect on the Bank’s business, results of operations and financial position, including the appointment of a conservator or receiver.

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 December 2010, the FASB updated the Accounting Standards Codification (“Codification”) to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. As a result, current GAAP will be improved by eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairments may be reported sooner than under current practice. The objective of this Update is to address questions about entities with reporting units with zero or negative carrying amounts because some entities concluded that Step 1 of the test is passed in those circumstances because the fair value of their reporting unit will generally be greater than zero. As a result of that conclusion, some constituents raised concerns that Step 2 of the test is not performed despite factors indicating that goodwill may be impaired. The amendments in this Update do not provide guidance on how to determine the carrying amount or measure the fair value of the reporting unit. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance did not have an impact on the Corporation’s financial statements.

In December 2010, the FASB updated the Codification to clarify required disclosures of supplementary pro forma information for business combinations. The amendments specify that, if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the year had occurred as of the beginning of the comparable prior annual period only. Additionally, the Update expands disclosures to include a description of the nature and amount of material nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. This guidance is effective for reporting periods beginning after December 15, 2010; early adoption is permitted. The Corporation adopted this guidance with no impact on the financial statements.

In April 2011, the FASB updated the Codification to clarify the guidance on a creditor’s evaluation of whether a restructuring constitutes a troubled debt restructuring (“TDR”). Under the amendments, a creditor must separately conclude that a loan modification constitutes a “concession” and that the debtor is experiencing “financial difficulties” when evaluating whether a loan modification constitutes a TDR. If a creditor determines that it has granted a concession to a debtor, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a TDR. The amendments clarify the guidance on a creditor’s evaluation of whether it has granted a concession and what constitutes financial difficulty. In addition, the amendments clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a TDR. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Corporation is currently evaluating the impact of the adoption of this guidance on the financial statements.

In April 2011, the FASB updated the Codification to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The Board concluded that this criterion is not a determining factor of effective control. Consequently, the amendments in this Update also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. Eliminating the transferor’s ability criterion and related implementation guidance from an entity’s assessment of effective control should improve the accounting for repurchase agreements and other similar transactions. The amendments in this Update are effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Corporation is currently evaluating the impact of the adoption of this guidance on the financial statements.

2 — EARNINGS PER COMMON SHARE

The calculations of earnings per common share for the quarters ended on March 31, 2011 and 2010 are as follows:


	Quarter Ended
	March 31,			March 31,
	2011			2010
	(In thousands, except per share data)
Net loss:
Net loss	$	(28,420	)	$	(106,999	)
Cumulative non-convertible preferred stock dividends (Series F)		—			(5,000	)
Cumulative convertible preferred stock dividend (Series G)		(5,302	)		—
Preferred stock discount accretion (Series G and F)		(1,715	)		(1,152	)

Net loss attributable to common stockholders	$	(35,437	)	$	(113,151	)

Average common shares outstanding ⁽¹⁾		21,303			6,168
Average potential common shares ⁽¹⁾		—			—

Average common shares outstanding- assuming dilution ⁽¹⁾		21,303			6,168


Basic loss per common share ⁽¹⁾	$	(1.66	)	$	(18.34	)

Diluted loss per common share ⁽¹⁾	$	(1.66	)	$	(18.34	)


(1)		All share and per share data has been adjusted to retroactively reflect the 1-for-15 reverse stock split effected January 7, 2011.

Loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average common shares issued and outstanding. Net loss attributable to common stockholders represents net 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. 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 quarters ended March 31, 2011 and 2010, there were 131,532 and 163,687 outstanding stock options, respectively; warrants outstanding to purchase 389,483 shares of common stock and 716 and 1,432 unvested shares of restricted stock, respectively, that were excluded from the computation of diluted earnings per common share because their inclusion would have an antidilutive effect.

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 579,740 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 253,333 shares of common stock, subject to adjustments for stock splits, reorganizations 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. During the fourth quarter of 2008, the Corporation granted 2,412 shares of restricted stock with a fair value of $130.35 under the Omnibus Plan to the Corporation’s independent directors. Of the original 2,412 shares of restricted stock, 268 were forfeited in the second half of 2009, 1,424 vested and, as of March 31, 2011, 720 remain restricted.

For the quarters ended March 31, 2011 and 2010, the Corporation recognized $23,333 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 $62,223 as of March 31, 2011 which expected to be recognized over the next eight months.

The Corporation accounts for stock options using the “modified prospective” method. There were no stock options granted during 2011 and 2010, therefore no compensation associated with stock options was recorded in those years. No stock options were exercised during the first quarter of 2011 or in 2010.

Stock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based awards that 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.

Stock options outstanding as of March 31, 2011 follows:

Quarter Ended

March 31, 2011

Weighted-Average

Remaining

Aggregate

Number of

Weighted-Average

Contractual Term

Intrinsic Value

Options

Exercise Price

(Years)

(In thousands)

End of period outstanding and exercisable

131,532

202.91

4.28

—

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 March 31, 2011 and December 31, 2010 were as follows:


	March 31, 2011												December 31, 2010
			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:
Due within one year	$	58,430	$	—	$	329	$	—	$	58,759		0.91	$	—	$	—	$	—	$	—	$	—		—
After 1 to 5 years		550,081		—		6,953		—		557,034		1.37		599,987		—		8,727		—		608,714		1.34

Obligations of U.S. Government sponsored agencies:
After 1 to 5 years		554,322		—		2,398		5,027		551,693		1.09		604,630		—		2,714		3,991		603,353		1.17

Puerto Rico Government obligations:
Due within one year		709		—		16		—		725		6.68		—		—		—		—		—		—
After 1 to 5 years		38,613		—		1,350		—		39,963		5.08		26,768		—		522		—		27,290		4.70
After 5 to 10 years		111,374		—		276		2		111,648		5.21		104,352		—		432		—		104,784		5.18
After 10 years		9,458		—		60		—		9,518		5.87		4,746		—		21		—		4,767		6.22

United States and Puerto Rico Government obligations		1,322,987		—		11,382		5,029		1,329,340		1.70		1,340,483		—		12,416		3,991		1,348,908		1.65

Mortgage-backed securities:
FHLMC certificates:
After 1 to 5 years		2,043		—		32		—		2,075		3.79		—		—		—		—		—		—
After 10 years		1,533		—		101		—		1,634		5.00		1,716		—		101		—		1,817		5.00

		3,576		—		133		—		3,709		4.31		1,716		—		101		—		1,817		5.00

GNMA certificates:
Due within one year		15		—		—		—		15		6.18		30		—		—		—		30		6.49
After 1 to 5 years		243		—		11		—		254		3.90		—		—		—		—		—		—
After 5 to 10 years		1,015		—		61		—		1,076		5.06		1,319		—		74		—		1,393		4.80
After 10 years		933,292		—		29,245		2,545		959,992		4.24		962,246		—		31,105		3,396		989,955		4.25

		934,565		—		29,317		2,545		961,337		4.24		963,595		—		31,179		3,396		991,378		4.25

FNMA certificates:
After 1 to 5 years		2,062		—		101		—		2,163		3.86		—		—		—		—		—		—
After 5 to 10 years		96,630		—		5,117		—		101,747		4.36		75,547		—		3,987		—		79,534		4.50
After 10 years		139,002		—		8,682		—		147,684		5.48		126,847		—		8,678		—		135,525		5.51

		237,694		—		13,900		—		251,594		5.01		202,394		—		12,665		—		215,059		5.13


Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA:
After 10 years		107,222		—		1,268		—		108,490		0.99		112,989		—		1,926		—		114,915		0.99


Other mortgage pass-through trust certificates:
After 10 years		95,417		27,063		1		—		68,355		2.04		100,130		27,814		1		—		72,317		2.31


Total mortgage-backed securities		1,378,474		27,063		44,619		2,545		1,393,485		3.97		1,380,824		27,814		45,872		3,396		1,395,486		3.97


Corporate bonds:
After 10 years		2,000		—		—		705		1,295		5.80		—		—		—		—		—		—

Equity securities (without contractual maturity) (1)		77		—		—		30		47		—		77		—		—		18		59		—


Total investment securities available for sale	$	2,703,538	$	27,063	$	56,001	$	8,309	$	2,724,167		2.86	$	2,721,384	$	27,814	$	58,288	$	7,405	$	2,744,453		2.83


(1)		Represents common shares of other financial institutions in Puerto Rico.

Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options as was the case with $50 million of U.S. agency debt securities called during 2011. The weighted-average yield on investment securities available for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on securities available for sale and the non-credit loss component of OTTI are presented as part of OCI.

The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2011 and December 31, 2010. It also includes debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings:


	As of March 31, 2011
	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:

U.S. Government agencies obligations	$	247,990	$	5,027	$	—	$	—	$	247,990	$	5,027
Puerto Rico Government obligations		99,998		2		—		—		99,998		2
Mortgage-backed securities:
GNMA		196,374		2,545		—		—		196,374		2,545
Other mortgage pass-through trust certificates		—		—		68,145		27,063		68,145		27,063
Corporate bonds		—		—		1,295		705		1,295		705
Equity securities		47		30		—		—		47		30

	$	544,409	$	7,604	$	69,440	$	27,768	$	613,849	$	35,372


	As of December 31, 2010
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
Debt securities:

U.S. Government agencies obligations	$	249,026	$	3,991	$	—	$	—	$	249,026	$	3,991
Mortgage-backed securities:
GNMA		192,799		3,396		—		—		192,799		3,396
Other mortgage pass-through trust certificates		—		—		72,101		27,814		72,101		27,814
Equity securities		59		18		—		—		59		18

	$	441,884	$	7,405	$	72,101	$	27,814	$	513,985	$	35,219

Investments Held to Maturity

On March 7, 2011, the Corporation sold $330 million of mortgage-backed securities that were originally intended to be held to maturity, consistent with deleveraging initiatives included in the Corporation’s Capital Plan. The Corporation realized a gain of $18.7 million associated with this transaction. After the sale, in line with the Corporation’s ongoing capital management strategy, the remaining $89 million of investment securities held in the held-to-maturity portfolio was reclassified to the available-for-sale portfolio.

The amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of investment securities held to maturity as of December 31, 2010 were as follows:


	December 31, 2010
			Gross						Weighted
	Amortized		Unrealized				Fair		average
	cost		gains		losses		value		yield%
	(Dollars in thousands)
U.S. Treasury securities:
Due within 1 year	$	8,487	$	5	$	—	$	8,492		0.30
Puerto Rico Government obligations:
After 5 to 10 years		19,284		795		—		20,079		5.87
After 10 years		4,665		49		—		4,714		5.50

United States and Puerto Rico Government obligations		32,436		849		—		33,285		4.36


Mortgage-backed securities:
FHLMC certificates:
After 1 to 5 years		2,569		42		—		2,611		3.71
FNMA certificates:
After 1 to 5 years		2,525		130		—		2,655		3.86
After 5 to 10 years		391,328		21,946		—		413,274		4.48
After 10 years		22,529		885		—		23,414		5.33

Mortgage-backed securities		418,951		23,003		—		441,954		4.52


Corporate bonds:
After 10 years		2,000		—		723		1,277		5.80


Total investment securities held-to-maturity	$	453,387	$	23,852	$	723	$	476,516		4.51

From time to time the Corporation has securities held to maturity with an original maturity of three months or less that are considered cash and cash equivalents and classified as money market investments in the Consolidated Statement of Financial Condition. As of March 31, 2011, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents.

The following tables show the Corporation’s held-to-maturity investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2010:


	As of December 31, 2010
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
Corporate bonds	$	—	$	—	$	1,277	$	723	$	1,277	$	723

Assessment for OTTI

On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered OTTI. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Corporation to assess whether the unrealized loss is other-than-temporary.

Prior to April 1, 2009, unrealized losses that were determined to be temporary were recorded, net of tax, in other comprehensive income for available-for-sale securities, whereas unrealized losses related to held-to-maturity securities determined to be temporary were not recognized. Regardless of whether the security was classified as available-for-sale or held to maturity, unrealized losses that were determined to be other-than-temporary were recorded through earnings. An unrealized loss was considered other-than-temporary if (i) it was probable that the holder would not collect all amounts due according to the contractual terms of the debt security, or (ii) the fair value was below the amortized cost of the debt security for a prolonged period of time and the Corporation did not have the positive intent and ability to hold the security until recovery or maturity.

OTTI losses for debt securities must be recognized in earnings if an investor has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.

An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an OTTI, if any, is recorded as a component of Net impairment losses on investment securities in the accompanying consolidated statements of (loss) income, while the remaining portion of the impairment loss is recognized in OCI, provided the Corporation does not intend to sell the underlying debt security and it is “more likely than not” that the Corporation will not have to sell the debt security prior to recovery.

Debt securities issued by U.S. government agencies, government-sponsored entities and the U.S. Treasury accounted for more than 91% of the total available-for-sale portfolio as of March 31, 2011 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s assessment was concentrated mainly on private label mortgage-backed securities (“MBS”) of approximately $95 million for which the Corporation evaluates credit losses on a quarterly basis. The Corporation considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

	•		The length of time and the extent to which the fair value has been less than the amortized cost basis.

	•		Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;

	•		The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

	•		Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

No OTTI losses on available-for-sale debt securities were recorded during the quarters ended March 31, 2011 and 2010. Cumulative unrealized OTTI losses recognized in OCI as of March 31, 2011 amounted to $27.1 million.

Private label MBS are collateralized by fixed-rate mortgages on single family residential properties in the United States. The interest rate on these private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The underlying mortgages are fixed-rate single family loans with original high FICO scores (over 700) and moderate original loan-to-value ratios (under 80%), as well as moderate delinquency levels.

Based on the expected cash flows derived from the model, and since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, no credit losses were reflected in earnings for the quarters ended March 31, 2011 and 2010. Significant assumptions in the valuation of the private label MBS as of March 31, 2011 and December 31, 2010 were as follow:


	March 31, 2011						December 31, 2010
	Weighted						Weighted
	Average			Range			Average			Range
Discount rate		14.5	%		14.5	%		14.5	%		14.5	%
Prepayment rate		18	%		13.56% - 26.82	%		24	%		18.2% - 43.73	%
Projected Cumulative Loss Rate		5	%		1.53% - 10.77	%		6	%		1.49% - 16.25	%

For of the quarter ended on March 31, 2010, the Corporation recorded OTTI of approximately $0.4 million on certain equity securities held in its available-for-sale investment portfolio related to financial institutions in Puerto Rico. No OTTI losses were recognized for the first quarter of 2011. Management concluded that the declines in value of the securities were other-than-temporary; as such, the cost basis of these securities was written down to the market value as of the date of the analysis and is reflected in earnings as a realized loss.

Total proceeds from the sale of securities available for sale during the quarter ended March 31, 2011 amounted to approximately $41.4 million (2010 —$393.4 million excluding unsettled proceeds of $57.1 million of securities sold).

5 — OTHER EQUITY SECURITIES

Institutions that are members of the FHLB system are required to maintain a minimum investment in FHLB stock. Such minimum is calculated as a percentage of aggregate outstanding mortgages, and an additional investment is required that is calculated as a percentage of total FHLB advances, letters of credit, and the collateralized portion of interest-rate swaps outstanding. The stock is capital stock issued at $100 par value. Both stock and cash dividends may be received on FHLB stock.

As of March 31, 2011 and December 31, 2010, the Corporation had investments in FHLB stock with a book value of $50.1 million and $54.6 million, respectively. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from FHLB stock for the quarters ended March 31, 2011 and 2010 amounted to $0.7 million and $0.8 million, respectively.

The FHLB stocks owned by the Corporation are issued by the FHLB of New York and by the FHLB of Atlanta. Both Banks are part of the Federal Home Loan Bank System, a national wholesale banking network of 12 regional, stockholder-owned congressionally chartered banks. The Federal Home Loan Banks are all privately capitalized and operated by their member stockholders. The system is supervised by the Federal Housing Finance Agency, which ensures that the Home Loan Banks operate in a financially safe and sound manner, remain adequately capitalized and able to raise funds in the capital markets, and carry out their housing finance mission.

The Corporation has other equity securities that do not have a readily available fair value. The carrying value of such securities as of March 31, 2011 and December 31, 2010 was $1.3 million. An impairment charge of $0.25 million was recorded in the first quarter of 2010 related to an investment in a failed financial institution in the United States. During the first quarter of 2010, the Corporation recognized a $10.7 million gain on the sale of VISA Class C shares. The Corporation no longer holds any VISA shares.

During the first quarter of 2011, the Corporation completed the sale of loans with a book value of $269.3 million to a new joint venture in exchange for $88.5 million of cash, a $136.1 million acquisition loan and a $47.6 million, or 35%, equity interest in the new joint venture. The Corporation recorded the investment in the new joint venture using the equity method of accounting. Accordingly, the Corporation recorded the investment in the new joint venture at its transaction date fair value of $47.6 million and included the investment as part of Other Equity Securities in the Statement of Financial Condition. Subsequently, the Corporation will recognize its share of earnings and losses of the new joint venture in the period in which the earnings or losses are recorded.

6 — LOANS RECEIVABLE

The following is a detail of the loan portfolio held for investment:


	March 31,			December 31,
	2011			2010
	(In thousands)
Residential mortgage loans, mainly secured by first mortgages	$	2,896,692		$	3,417,417


Commercial loans:
Construction loans		682,245			700,579
Commercial mortgage loans		1,588,768			1,670,161
Commercial and Industrial loans ⁽¹⁾		3,977,301			3,861,545
Loans to local financial institutions collateralized by real estate mortgages		285,359			290,219

Commercial loans		6,533,673			6,522,504


Finance leases		272,392			282,904


Consumer loans		1,387,018			1,432,611


Loans receivable		11,089,775			11,655,436

Allowance for loan and lease losses		(561,695	)		(553,025	)


Loans receivable, net	$	10,528,080		$	11,102,411


1 -		As of March 31, 2011, includes $1.7 billion of commercial loans that are secured by real estate but are not dependent upon the real estate for repayment.

Loans held for investment on which accrual of interest income had been discontinued as of March 31, 2011 and December 31, 2010 were as follows:


	March 31,		December 31,
(Dollars in thousands)	2011		2010
Non-performing loans:
Residential mortgage	$	391,962	$	392,134
Commercial mortgage		129,828		217,165
Commercial and Industrial		327,477		317,243
Construction		341,179		263,056
Consumer:
Auto loans		19,987		25,350
Finance leases		3,632		3,935
Other consumer loans		18,986		20,106

Total non-performing loans held for investment ⁽¹⁾	$	1,233,051	$	1,238,989


1 -		As of March 31, 2011 and December 31, 2010, excludes $5.5 million and $159.3 million, respectively, in non-performing loans held for sale.

The Corporation’s aging of the loans held for investment portfolio as of March 31, 2011, follows:


			30-89 days		90 days or more		Total		90 days and
As of March 31, 2011	Current		Past Due		Past Due ⁽¹⁾		Portfolio		still accruing
	(in thousands)
Residential Mortgage:
FHA/VA and other government guaranteed loans ⁽²⁾	$	142,570	$	16,582	$	84,425	$	243,577	$	84,425
Other residential mortage loans		2,144,706		104,008		404,401		2,653,115		12,439
Commercial:
Commercial & Industrial Loans		3,811,285		81,032		370,343		4,262,660		42,866
Commercial Mortgage Loans		1,360,791		93,459		134,518		1,588,768		4,690
Construction Loans		315,823		15,364		351,058		682,245		9,879
Consumer:
Auto		869,931		93,250		19,987		983,168		—
Finance Leases		250,171		18,589		3,632		272,392		—
Other Consumer Loans		364,426		20,438		18,986		403,850		—

Total Loans Receivable	$	9,259,703	$	442,722	$	1,387,350	$	11,089,775	$	154,299


(1)		Includes non-performing loans and accruing loans which are contractually delinquent 90 days or more (i.e. FHA/VA and other guaranteed loans).

(2)		As of March 31, 2011, includes $58.1 million of defaulted loans collateralizing Ginnie Mae (“GNMA”) securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.

The Corporation’s primary lending area is Puerto Rico. The Corporation’s Puerto Rico banking subsidiary, FirstBank, also lends in the U.S. and British Virgin Islands markets and in the United States (principally in the state of Florida). Of the total gross loans held for investment portfolio of $11.1 billion as of March 31, 2011, approximately 83% have credit risk concentration in Puerto Rico, 8% in the United States and 9% in the Virgin Islands.

As of March 31, 2011, the Corporation had $325.9 million outstanding of credit facilities granted to the Puerto Rico Government and/or its political subdivisions, up from $325.1 million as of December 31, 2010, and $98.8 million granted to the Virgin Islands government, up from $84.3 million as of December 31, 2010. A substantial portion of these credit facilities are obligations that have a specific source of income or revenues identified for their repayment, such as property taxes collected by the central Government and/or municipalities. Another portion of these obligations consists of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power and water utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment.

Aside from loans extended to the Puerto Rico Government and its political subdivision, the largest loan to one borrower as of March 31, 2011 in the amount of $285.4 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. This commercial loan is secured by individual real-estate loans, mostly 1-4 residential mortgage loans.

7 — ALLOWANCE FOR LOAN AND LEASE LOSSES AND IMPAIRED LOANS

The changes in the allowance for loan and lease losses for the period ended March 31, 2011 were as follows:


	Residential			Commercial			Commercial &			Construction			Consumer
(Dollars in thousands)	Mortgage Loans			Mortgage Loans			Industrial Loans			Loans			Loans			Total
March 31, 2011
Allowance for loan and lease losses:
Beginning balance	$	62,330		$	105,596		$	152,641		$	151,972		$	80,486		$	553,025
Charge-offs		(5,404	)		(31,171	)		(16,344	)		(19,165	)		(11,969	)		(84,053	)
Recoveries		243			67			56			1,927			1,698			3,991
Provision		6,327			13,381			41,486			22,463			5,075			88,732

Ending balance	$	63,496		$	87,873		$	177,839		$	157,197		$	75,290		$	561,695

Ending balance: specific reserve for impaired loans	$	43,295		$	29,610		$	81,989		$	98,167		$	415		$	253,476

Ending balance: general allowance	$	20,201		$	58,263		$	95,850		$	59,030		$	74,875		$	308,219

Loans receivables:
Ending balance	$	2,896,692		$	1,588,768		$	4,262,660		$	682,245		$	1,659,410		$	11,089,775

Ending balance: impaired loans	$	566,270		$	232,054		$	395,979		$	365,412		$	2,407		$	1,562,122

Ending balance: loans with general allowance	$	2,330,422		$	1,356,714		$	3,866,681		$	316,833		$	1,657,003		$	9,527,653

There were no significant purchases of loans during 2011. The Corporation did sell approximately $236 million of performing residential mortgage loans to another financial institution and $20.7 million of performing residential mortgage loans in the secondary market to FNMA and FHLMC during the first quarter of 2011. Also, the Corporation securitized approximately $41.5 million of

FHA/VA mortgage loan production to GNMA mortgage-backed securities during 2011. Refer to Note 8 — Loans held for sale for additional information about loans sold and loans reclassified from held for investment to held for sale during the first quarter of 2011.

Changes in the allowance for the quarter ended March 31, 2010 were as follows:


	March 31,
	2010
	(In thousands)
Balance at beginning of the period	$	528,120
Provision for loan and lease losses		170,965
Losses charged against the allowance		(126,306	)
Recoveries credited to the allowance		2,524

Balance at end of period	$	575,303

The allowance for impaired loans is part of the allowance for loan and lease losses. The allowance for impaired loans covers those loans for which management has determined that it is probable that the debtor will be unable to pay all the amounts due in accordance with the contractual terms of the loan agreement, and does not necessarily represent loans for which the Corporation will incur a loss.

Information regarding impaired loans for the periods ended March 31, 2011 and December 31, 2010 was as follows:



			Unpaid				Average		Interest
Impaired Loans	Recorded		Principal		Related		Recorded		Income
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Recognized
As of March 31, 2011
With no related allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—	$	—	$	—
Other residential mortage loans		293,488		301,581		—		269,068		3,463
Commercial:
Commercial mortgage loans		18,628		19,824		—		25,478		543
Commercial & Industrial Loans		63,328		73,342		—		58,980		225
Construction Loans		37,910		40,220		—		31,492		127
Consumer:
Auto loans		—		—		—		—		—
Finance leases		—		—		—		—		—
Other consumer loans		1,141		1,496		—		901		6

	$	414,495	$	436,463	$	—	$	385,919	$	4,364

With an allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—	$	—	$	—
Other residential mortage loans		272,782		309,570		43,295		291,984		1,307
Commercial:
Commercial mortgage loans		213,426		268,508		29,610		181,934		2,051
Commercial & Industrial Loans		332,651		430,517		81,989		328,929		2,154
Construction Loans		327,502		433,556		98,167		282,737		1,478
Consumer:
Auto loans		—		—		—		—		—
Finance leases		—		—		—		—		—
Other consumer loans		1,266		1,266		415		1,381		6

	$	1,147,627	$	1,443,417	$	253,476	$	1,086,965	$	6,996

Total:
FHA/VA Guaranteed loans	$	—	$	—	$	—	$	—	$	—
Other residential mortage loans		566,270		611,151		43,295		561,052		4,770
Commercial:
Commercial mortgage loans		232,054		288,332		29,610		207,412		2,594
Commercial & Industrial Loans		395,979		503,859		81,989		387,909		2,379
Construction Loans		365,412		473,776		98,167		314,229		1,605
Consumer:
Auto loans		—		—		—		—		—
Finance leases		—		—		—		—		—
Other consumer loans		2,407		2,762		415		2,282		12

	$	1,562,122	$	1,879,880	$	253,476	$	1,472,884	$	11,360


			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
As of December 31, 2010
With no related allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—
Other residential mortage loans		244,648		253,636		—
Commercial:
Commercial mortgage loans		32,328		32,868		—
Commercial & Industrial Loans		54,631		58,927		—
Construction Loans		25,074		26,557		—
Consumer:
Auto loans		—		—		—
Finance leases		—		—		—
Other consumer loans		659		1,015		—

	$	357,340	$	373,003	$	—

With an allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—
Other residential mortage loans		311,187		350,576		42,666
Commercial:
Commercial mortgage loans		150,442		186,404		26,869
Commercial & Industrial Loans		325,206		416,919		65,030
Construction Loans		237,970		323,127		57,833
Consumer:
Auto loans		—		—		—
Finance leases		—		—		—
Other consumer loans		1,496		1,496		264

	$	1,026,301	$	1,278,522	$	192,662

Total:
FHA/VA Guaranteed loans	$	—	$	—	$	—
Other residential mortage loans		555,835		604,212		42,666
Commercial:
Commercial mortgage loans		182,770		219,272		26,869
Commercial & Industrial Loans		379,837		475,846		65,030
Construction Loans		263,044		349,684		57,833
Consumer:
Auto loans		—		—		—
Finance leases		—		—		—
Other consumer loans		2,155		2,511		264

	$	1,383,641	$	1,651,525	$	192,662

Interest income of approximately $6.9 million was recognized on impaired loans for the quarter ended March 31, 2010. The average recorded investment in impaired loans for the first quarter of 2010 was $1.7 billion.

The following tables show the activity for impaired loans and the related specific reserve during the first quarter of 2011 and 2010:


	Quarter Ended
	March 31,			March 31,
	2011			2010
	(In thousands)
Impaired Loans:
Balance at beginning of period	$	1,383,641		$	1,656,264
Loans determined impaired during the period		277,548			317,333
Net charge-offs		(60,620	)		(101,259	)
Loans sold, net of charge-offs		(850	)		(18,749	)
Loans foreclosed, paid in full and partial payments or no longer considered impaired		(37,597	)		(7,503	)

Balance at end of period	$	1,562,122		$	1,846,086


	Quarter Ended
	March 31,			March 31,
	2011			2010
	(In thousands)
Specific Reserve:
Balance at beginning of period	$	192,662		$	182,145
Provision for loan losses		121,434			164,414
Net charge-offs		(60,620	)		(101,259	)

Balance at end of period	$	253,476		$	245,300

The Corporation’s credit quality indicators by loan type as of March 31, 2011 and December 31, 2010 are summarized below:


	Commercial Credit Exposure-Credit risk Profile based on
	Creditworthiness category:
March 31, 2011	Adversely Classified⁽¹⁾		Total Portfolio
	(In thousands)
Commercial Mortgage	$	245,008	$	1,588,768
Construction		404,301		682,245
Commercial and Industrial		596,596		4,262,660


	Commercial Credit Exposure-Credit risk Profile based on
	Creditworthiness category:
December 31, 2010	Adversely Classified⁽¹⁾		Total Portfolio
	(In thousands)
Commercial Mortgage	$	353,860	$	1,670,161
Construction		323,880		700,579
Commercial and Industrial		558,937		4,151,764


⁽¹⁾		Excludes $5.5 million (construction) as of March 31, 2011 and $261.8 million as of December 31, 2010 ($205.7 million construction; $35.4 million commercial mortgage; $20.7 million commercial and industrial) of adversely classified loans held for sale.

The Corporation considered a loan as adversely classified if its risk rating is Substandard, Doubtful or Loss. These categories are defined as follows:

Substandard- A Substandard Asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful- Doubtful classifications have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived, but Loss cannot be determined because of specific reasonable pending factors which may strengthen the credit in the near term.

Loss- Assets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. There is little or no prospect for near term improvement and no realistic strengthening action of significance pending.


March 31, 2011	Consumer Credit Exposure-Credit risk Profile based on payment activity
	Residential Real-Estate				Consumer
	FHA/VA/Guaranteed		Other residential loans		Auto		Finance Leases		Other Consumer
	(In thousands)
Performing	$	243,577	$	2,261,153	$	963,181	$	268,760	$	384,864
Non-performing		—		391,962		19,987		3,632		18,986

Total	$	243,577	$	2,653,115	$	983,168	$	272,392	$	403,850


December 31, 2010	Consumer Credit Exposure-Credit risk Profile based on payment activity
	Residential Real-Estate				Consumer
	FHA/VA/Guaranteed		Other residential loans		Auto		Finance Leases		Other Consumer
	(In thousands)
Performing	$	232,522	$	2,792,761	$	983,626	$	278,969	$	403,529
Non-performing		—		392,134		25,350		3,935		20,106

Total	$	232,522	$	3,184,895	$	1,008,976	$	282,904	$	423,635

The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico and through programs sponsored by the Federal Government. Depending upon the nature of borrowers’ financial condition, restructurings or loan modifications through this program as well as other restructurings of individual commercial, commercial mortgage, construction and residential mortgage loans in the U.S. mainland fit the definition of TDR. A restructuring of a debt constitutes a TDR if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include the refinancing of any past-due amounts, including interest and escrow, the extension of the maturity of the loan and modifications of the loan rate. As of March 31, 2011, the Corporation’s TDR loans consisted of $291.2 million of residential mortgage loans, $40.7 million commercial and industrial loans, $139.9 million commercial mortgage loans and $15.4 million of construction loans. Outstanding unfunded loan commitments on TDR loans amounted to $1.2 million as of March 31, 2011.

Included in the $139.9 million of commercial mortgage TDR loans are certain loan relationships restructured through loan splitting, one in the first quarter of 2011 and one in the fourth quarter of 2010. Each of these loan relationships were restructured into two notes; one that represents the portion of the loan that is expected to be fully collected along with contractual interest and the second note that represents the portion of the original loan that was charged-off. The renegotiations of these loans have been made after analyzing the borrowers’ and guarantors capacity to repay the debt and ability to perform under the modified terms. For the relationship restructured in the first quarter of 2011, the first note of $57.5 million was placed on a monthly payment that amortize the debt over 30 years at a market rate of interest. The second note, amounting to $28.3 million was fully charged-off. For the relationship restructured in the fourth quarter of 2010, as part of the renegotiation of the loans, the first note of $17 million was placed on a monthly payment schedule that amortizes the debt over 30 years at a market rate of interest. The second note for $2.7 million was fully charged-off. The following tables provide additional information about the volume of this type of loan restructurings and the effect on the allowance for loan and lease losses in 2011.


Principal balance deemed collectible at end of period	$	74,442

Amount charged-off during the first quarter of 2011	$	28,340


Allowance for loan losses:
Balance at beginning of period	$	23,108
Provision for loan losses		7,205
Charge-offs		(28,340	)

Balance at end of period	$	1,973

The loans comprising the $74.4 million that have been deemed collectible were placed in accruing status as the borrowers have exhibited a period of sustained performance but continue to be individually evaluated for impairment purposes. These transactions contributed to a $105.3 million decrease in non-performing loans over the last two quarters.

As of March 31, 2011, the Corporation maintains a $5.5 million reserve for unfunded loan commitments mainly related to outstanding construction loans commitments. The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheet loan commitments at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included as part of accounts payable and other liabilities in the consolidated statement of financial condition.

8 — LOANS HELD FOR SALE

As of March 31, 2011 and December 31, 2010, the Corporation’s loans held for sale portfolio was composed of:


	March 31,		December 31,
	2011		2010
	(In thousands)
Residential mortgage loans	$	299,441	$	19,148
Construction loans		6,053		207,270
Commercial and Industrial loans		—		20,643
Commercial mortgage loans		—		53,705

Total	$	305,494	$	300,766

During the first quarter of 2011, the Corporation reclassified approximately $282 million of loans, mainly residential mortgage loans, from held for investment to held for sale pursuant to a letter of intent to sell loans entered into by FirstBank with another financial institution. The loans were subsequently sold in April 2011.

Non-performing loans held for sale totaled $5.5 million (construction) and $159.3 million ($140.1 million construction loans and $19.2 million commercial mortgage loans) as of March 31, 2011 and December 31, 2010, respectively.

At the end of the fourth quarter of 2010, the Corporation transferred $447 million of loans to held for sale at a value of $281.6 million. This resulted in charge-offs at the time of transfer of $165.1 million. During the first quarter of 2011, these loans with a book value of $269.3 million were sold to a new joint venture created by Goldman, Sachs & Co. and Caribbean Property Group in exchange for $88.5 million of cash, an acquisition loan of $136.1 million and a $47.6 million, or 35%, interest in the joint venture. At March 31, 2011, the only related balance remaining from loans transferred in the fourth quarter of 2010 amounted to $5.5 million. Further details of this transaction are discussed in Note 11.

9 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation’s assets or liabilities and the risk that net interest income from its loan and investment portfolios will be adversely affected by changes in interest rates. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

The Corporation designates a derivative as a fair value hedge, cash flow hedge or as an economic undesignated hedge when it enters into the derivative contract. As of March 31, 2011 and December 31, 2010, all derivatives held by the Corporation were considered economic undesignated hedges. These undesignated hedges are recorded at fair value with the resulting gain or loss recognized in current earnings.

The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk:

Interest rate cap agreements — Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates. Specifically, the interest rate on certain of the Corporation’s commercial loans to other financial institutions is generally a variable rate limited to the weighted-average coupon of the referenced residential mortgage collateral, less a contractual servicing fee. During the second quarter of 2010, the counterparty for interest rate caps for certain private label MBS was taken over by the FDIC, which resulted in the immediate cancelation of all outstanding commitments, and

as a result, interest rate caps with a notional amount of $103 million are no longer considered to be derivative financial instruments. The total exposure to fair value of $3.0 million related to such contracts was reclassified to an account receivable.

Interest rate swaps — Interest rate swap agreements generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying notional principal amount. As of March 31, 2011, most of the interest rate swaps outstanding are used for protection against rising interest rates. Similar to unrealized gains and losses arising from changes in fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being economically hedged.

Indexed options — Indexed options are generally over-the-counter (OTC) contracts that the Corporation enters into in order to receive the appreciation of a specified Stock Index (e.g., Dow Jones Industrial Composite Stock Index) over a specified period in exchange for a premium paid at the contract’s inception. The option period is determined by the contractual maturity of the notes payable tied to the performance of the Stock Index. The credit risk inherent in these options is the risk that the exchange party may not fulfill its obligation.

Forward Contracts — Forward contracts are sales of to-be-announced (“TBA”) mortgage-backed securities that will settle over the standard delivery date and do not qualify as “regular way” security trades. Regular-way security trades are contracts with no net settlement provision and no market mechanism to facilitate net settlement and they provide for delivery of a security within the time generally established by regulations or conventions in the market-place or exchange in which the transaction is being executed. The forward sales are considered derivative instruments that need to be marked-to-market. These securities are used to hedge the loan production of GNMA securities of the mortgage-banking operations. Unrealized gains (losses) are recognized as part of mortgage banking activities in the Consolidated Statement of (Loss) Income.

To satisfy the needs of its customers, the Corporation may enter into non-hedging transactions. On these transactions, generally, the Corporation participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and conditions.

In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.

The following table summarizes the notional amounts of all derivative instruments as of March 31, 2011 and December 31, 2010:


	Notional Amounts
	As of		As of
	March 31,		December 31,
	2011		2010
	(In thousands)
Economic undesignated hedges:

Interest rate contracts:
Interest rate swap agreements used to hedge loans	$	40,860	$	41,248
Written interest rate cap agreements		71,364		71,602
Purchased interest rate cap agreements		71,364		71,602

Equity contracts:
Embedded written options on stock index deposits and notes payable		53,515		53,515
Purchased options used to manage exposure to the stock market on embedded stock index options		53,515		53,515
Forward contracts:
Sales of TBA GNMA MBS pools		27,000		—

	$	317,618	$	291,482

The following table summarizes the fair value of derivative instruments and the location in the Statement of Financial Condition as of March 31, 2011 and December 31, 2010:


	Asset Derivatives					Liability Derivatives
		March 31,		December 31,			March 31,		December 31,
	Statement of	2011		2010		Statement of	2011		2010
	Financial Condition	Fair		Fair		Financial Condition	Fair		Fair
	Location	Value		Value		Location	Value		Value
	(In thousands)
Economic undesignated hedges:

Interest rate contracts:
Interest rate swap agreements used to hedge loans	Other assets	$	316	$	351	Accounts payable and other liabilities	$	4,813	$	5,192
Written interest rate cap agreements	Other assets		—		—	Accounts payable and other liabilities		1		1
Purchased interest rate cap agreements	Other assets		1		1	Accounts payable and other liabilities		—		—
Equity contracts:
Embedded written options on stock index deposits	Other assets		—		—	Interest-bearing deposits		—		—
Embedded written options on stock index notes payable	Other assets		—		—	Notes payable		2,167		1,508
Purchased options used to manage exposure to the stock market on embedded stock index options	Other assets		2,207		1,553	Accounts payable and other liabilities		—		—
Forward Contracts:
Sales of TBA GNMA MBS pools	Other assets		32		—	Accounts payable and other liabilities		296		—

		$	2,556	$	1,905		$	7,276	$	6,701

The following table summarizes the effect of derivative instruments on the Statement of Loss for the quarters ended March 31, 2011 and March 31, 2010:


		Unrealized Gain (Loss)
	Location of Gain or (Loss)	Quarter Ended
	Recognized in Income on Derivatives	March 31,
		2011			2010
		(In thosands)
ECONOMIC UNDESIGNATED HEDGES:
Interest rate contracts:
Interest rate swap agreements used to hedge fixed-rate:
Loans	Interest income - Loans	$	345		$	(13	)
Written and purchased interest rate cap agreements
- mortgage-backed securities	Interest income - Investment securities		—			(697	)
Written and purchased interest rate cap agreements
- loans	Interest income - loans		—			(34	)
Equity contracts:
Embedded written and purchased options on stock index deposits	Interest expense - Deposits		—			(1	)
Embedded written and purchased options on stock index notes payable	Interest expense - Notes payable and other borrowings		(5	)		(30	)
Forward contracts:
Sales of TBA GNMA MBS pools	Mortgage Banking Activities		(264	)		—

Total gain (loss) on derivatives		$	76		$	(775	)

Derivative instruments, such as interest rate swaps, are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future.

A summary of interest rate swaps as of March 31, 2011 and December 31, 2010 follows:


	As of			As of
	March 31,			December 31,
	2011			2010
	(Dollars in thousands)
Pay fixed/receive floating :
Notional amount	$	40,860		$	41,248
Weighted-average receive rate at period end		2.13	%		2.14	%
Weighted-average pay rate at period end		6.83	%		6.83	%
Floating rates range from 167 to 252 basis points over 3-month LIBOR

As of March 31, 2011, the Corporation has not entered into any derivative instrument containing credit-risk-related contingent features.

10 — GOODWILL AND OTHER INTANGIBLES

Goodwill as of March 31, 2011 and December 31, 2010 amounted to $28.1 million, recognized as part of “Other Assets”. The Corporation conducted its annual evaluation of goodwill and intangibles during the fourth quarter of 2010. The evaluation was a two step process. The Step 1 evaluation of goodwill allocated to the Florida reporting unit indicated potential impairment of goodwill. The Step 1 fair value for the unit was below the carrying amount of its equity book value as of the October 1, 2010 valuation date, requiring the completion of Step 2. The Step 2 required a valuation of all assets and liabilities of the Florida unit, including any recognized and unrecognized intangible assets, to determine the fair value of net assets. To complete Step 2, the Corporation subtracted from the unit’s Step 1 fair value the determined fair value of the net assets to arrive at the implied fair value of goodwill. The results of the Step 2 analysis indicated that the implied fair value of goodwill exceeded the goodwill carrying value by $12.3 million, resulting in no goodwill impairment. Goodwill was not impaired as of December 31, 2010, nor was any goodwill written-off due to impairment during 2010. There have been no events related to the Florida reporting unit that could indicate potential goodwill impairment since the date of the last evaluation; therefore, no goodwill impairment evaluation was performed during the first quarter of 2011. Goodwill and other indefinite life intangibles are reviewed at least annually for impairment.

As of March 31, 2011, the gross carrying amount and accumulated amortization of core deposit intangibles was $41.8 million and $28.4 million, respectively, recognized as part of “Other Assets” in the consolidated statements of financial condition (December 31, 2010 — $41.8 million and $27.8 million, respectively). For the quarter ended March 31, 2011, the amortization expense of core deposit intangibles amounted to $0.6 million (2010 — $0.7 million).

11 — VARIABLE INTEREST ENTITIES AND SERVICING ASSETS

The Corporation transfers residential mortgage loans in sale or securitization transactions in which it has continuing involvement, including servicing responsibilities and guarantee arrangements. All such transfers have been accounted for as sales as required by applicable accounting guidance.

When evaluating transfers and other transactions with Variable Interest Entities (“VIEs”) for consolidation under the recently adopted guidance, the Corporation first determines if the counterparty is an entity for which a variable interest exists. If no scope exception is applicable and a variable interest exists, the Corporation then evaluates if it is the primary beneficiary of the VIE and whether the entity should be consolidated or not.

Below is a summary of transfers of financial assets to VIEs for which the Corporation has retained some level of continuing involvement:

Ginnie Mae

The Corporation typically transfers first lien residential mortgage loans in conjunction with Ginnie Mae securitization transactions whereby the loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights. The securities issued through these transactions are guaranteed by the issuer and, as such, under seller/servicer agreements the Corporation is required to service the loans in accordance with the issuers’ servicing guidelines and standards. As of March 31, 2011, the Corporation serviced loans securitized through GNMA with principal balance of $502.6 million.

Trust Preferred Securities

In 2004, FBP Statutory Trust I, a financing subsidiary of the Corporation, sold to institutional investors $100 million of its variable rate trust preferred securities. The proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.1 million of FBP Statutory Trust I variable rate common securities, were used by FBP Statutory Trust I to purchase $103.1 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. Also in 2004, FBP Statutory Trust II, a statutory trust that is wholly-owned by the Corporation, sold to institutional investors $125 million of its variable rate trust preferred securities. The proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.9 million of FBP Statutory Trust II variable rate common securities, were used by FBP Statutory Trust II to purchase $128.9 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. The trust preferred debentures are presented in the Corporation’s Consolidated Statement of Financial Condition as Other Borrowings, net of related issuance costs. The variable rate trust preferred securities are fully and unconditionally guaranteed by the Corporation. The $100 million Junior Subordinated Deferrable Debentures issued by the Corporation in April 2004 and the $125 million issued in September 2004 mature on September 17, 2034 and September 20, 2034, respectively; however, under certain circumstances, the maturity of Junior Subordinated Debentures may be shortened (such shortening would result in a mandatory redemption of the variable rate trust preferred securities). The trust preferred securities, subject to certain limitations, qualify as Tier I regulatory capital under current Federal Reserve rules and regulations. The Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act eliminates certain trust preferred securities from Tier 1 Capital, but TARP preferred securities are exempted from this treatment. These “regulatory capital deductions” for trust preferred securities are to be phased in incrementally over a period of 3 years beginning on January 1, 2013.

Grantor Trusts

During 2004 and 2005, a third party to the Corporation, from now on identified as the seller, established a series of statutory trusts to effect the securitization of mortgage loans and the sale of trust certificates. The seller initially provided the servicing for a fee, which is senior to the obligations to pay trust certificate holders. The seller then entered into a sales agreement through which it sold and issued the trust certificates in favor of the Corporation’s banking subsidiary. Currently, the Bank is the sole owner of the trust certificates; the servicing of the underlying residential mortgages that generate the principal and interest cash flows, is performed by another third party, which receives a fee compensation for services provided, the servicing fee. The securities are variable rate securities indexed to 90 day LIBOR plus a spread. The principal payments from the underlying loans are remitted to a paying agent (servicer) who then remits interest to the Bank; interest income is shared to a certain extent with the FDIC, that has an interest only strip (“IO”) tied to the cash flows of the underlying loans, whereas it is entitled to received the excess of the interest income less a servicing fee over the variable rate income that the Bank earns on the securities. This IO is limited to the weighted average coupon of the securities. The FDIC became the owner of the IO upon the intervention of the seller, a failed financial institution. No recourse agreement exists and the risk from losses on non accruing loans and repossessed collateral are absorbed by the Bank as the sole holder of the certificates. As of March 31, 2011, the outstanding balance of Grantor Trusts amounted to $95 million with a weighted average yield of 2.04%.

Joint Venture

On February 16, 2011, the Corporation sold an asset portfolio consisting of performing and non-performing construction, commercial mortgage and C&I loans with an aggregate book value of $269.3 million to a new joint venture (the “Joint Venture”) organized under the Laws of the Commonwealth of Puerto Rico and majority owned by PRLP Ventures LLC (“PRLP”), a company created by Goldman, Sachs & Co. and Caribbean Property Group (“CPG”). In exchange for the sale, the Corporation received $88.5 million in cash; a 35% interest in the Joint Venture, valued at $47.6 million; and $136.1 million representing seller financing provided by FirstBank, which has a 7-year maturity and bears variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entity’s assets as well as the PRLP’s 65% ownership interest in the Joint Venture. As of March 31, 2011, the carrying amount of the loan is $136.1 million and is included in the Corporation’s C&I loan receivable portfolio; while the carrying value of FirstBank’s equity interest is $47.6 million as of March 31, 2011 and is included as part of Other Equity Securities in the Statement of Financial Condition.

FirstBank will additionally provide an $80 million advance facility to the Joint Venture to fund unfunded commitments and costs to complete projects under construction, of which $45.7 million were disbursed in the first quarter of 2011, and a $20 million working capital line of credit to fund certain expenses of the Joint Venture. These loans will bear variable interest at 30-day LIBOR plus 300 basis points. As of March 31, 2011, the carrying value of the advance facility and working capital line were $45.7 million and $0, respectively, and are included in the Corporation’s C&I loan receivable portfolio.

The Corporation has determined that the Joint Venture is a VIE in which the Corporation is not the primary beneficiary. In determining the primary beneficiary of the Joint Venture, the Corporation considered applicable guidance which requires the Corporation to qualitatively assess the determination of the primary beneficiary (or consolidator) of the Joint Venture on whether it has both the power to direct the activities of the Joint Venture that most significantly impact the entity’s economic performance; and the obligation to absorb losses of the Joint Venture that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The Corporation determined that it does not have the power to direct the activities that most significantly impact the economic performance of the Joint Venture as it does not have the right to manage the loan portfolio, impact foreclosure proceedings, or manage the construction and sale of the property; therefore, the Corporation concluded that it is not the primary beneficiary of the Joint Venture. As a creditor to the Joint Venture, the Corporation has certain rights related to the Joint Venture, however, these are intended to be protective in nature and do not provide the Corporation with the ability to manage the operations of the Joint Venture. Because the Joint Venture is not a consolidated subsidiary of the Corporation, the Corporation accounted for this transaction as a true sale, recognizing in books the cash received, the notes receivable and the interest in the joint venture and derecognizing the loan portfolio sold.

Servicing Assets

The Corporation is actively involved in the securitization of pools of FHA-insured and VA-guaranteed mortgages for issuance of GNMA mortgage-backed securities. Also, certain conventional conforming-loans are sold to FNMA or FHLMC with servicing retained. The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased.

The changes in servicing assets are shown below:


	March 31,			March 31,
	2011			2010
	(In thousands)
Balance at beginning of period	$	15,597		$	11,902
Capitalization of servicing assets		1,231			1,686
Amortization		(524	)		(435	)
Adjustment to servicing assets for loans repurchased (1)		(61	)		(559	)

Balance before valuation allowance at end of period		16,243			12,594
Valuation allowance for temporary impairment		(1,237	)		(180	)

Balance at end of period	$	15,006		$	12,414


(1)		Amount represents the adjustment to fair value related to the repurchase in the quarters ended March 31, 2011 and 2010 of $12.0 million and $53.5 million, respectively, in principal balance of loans serviced for others.

Impairment charges are recognized through a valuation allowance for each individual stratum of servicing assets. The valuation allowance is adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized. Other-than-temporary impairments, if any, are recognized as a direct write-down of the servicing assets.

Changes in the impairment allowance were as follows:


	March 31,			March 31,
	2011			2010
	(In thousands)
Balance at beginning of period	$	434		$	745
Temporary impairment charges		974			136
Recoveries		(171	)		(701	)

Balance at end of period	$	1,237		$	180

The components of net servicing income are shown below:


	March 31,			March 31,
	2011			2010
	(In thousands)
Servicing fees	$	1,251		$	928
Late charges and prepayment penalties		244			114
Other (1)		(61	)		(559	)

Servicing income, gross		1,434			483
(Amortization and impairment) recovery of servicing assets		(1,327	)		130

Servicing income, net	$	107		$	613


(1)		Amount represents the adjustment to fair value related to the repurchase in the quarters ended March 31, 2011 and 2010 of $12.0 million and $53.5 million, respectively, in principal balance of loans serviced for others.

The Corporation’s servicing assets are subject to prepayment and interest rate risks. Constant prepayment rate assumptions for the Corporation’s servicing assets for the quarter ended March 31, 2011 and the quarter ended March 31, 2010 were 10.6% and 12.7% for government guaranteed mortgage loans, respectively. For conventional conforming mortgage loans, the Corporation used 12.7% and 14.8% and for conventional non-conforming mortgage loans 11.7% and 11.5% for the periods ended March 31, 2011 and March 31, 2010, respectively. Discount rate assumptions used were 11.3% and 10.3% for government guaranteed mortgage loans; 9.3% for conventional conforming mortgage loans; and 15.0% and 13.1% for conventional non-conforming mortgage loans for the periods ended March 31, 2011 and March 31, 2010, respectively.

At March 31, 2011, fair values of the Corporation’s servicing assets were based on a valuation model that incorporates market driven assumptions, adjusted by the particular characteristics of the Corporation’s servicing portfolio, regarding discount rates and mortgage prepayment rates. The weighted-averages of the key economic assumptions used by the Corporation in its valuation model and the sensitivity of the current fair value to immediate 10 percent and 20 percent adverse changes in those assumptions for mortgage loans at March 31, 2011, were as follows:


	(Dollars in thousands)
Carrying amount of servicing assets	$	15,006
Fair value	$	15,719
Weighted-average expected life (in years)		8.5

Constant prepayment rate (weighted-average annual rate)		11.74	%
Decrease in fair value due to 10% adverse change	$	707
Decrease in fair value due to 20% adverse change	$	1,368

Discount rate (weighted-average annual rate)		10.42	%
Decrease in fair value due to 10% adverse change	$	614
Decrease in fair value due to 20% adverse change	$	1,186

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the servicing asset is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities.

12 — DEPOSITS

The following table summarizes deposit balances:


	March 31,		December 31,
	2011		2010
	(In thousands)
Type of account:
Non-interest bearing checking accounts	$	707,938	$	668,052
Savings accounts		1,968,350		1,938,475
Interest-bearing checking accounts		1,055,648		1,012,009
Certificates of deposit		2,263,273		2,181,205
Brokered certificates of deposit		5,721,227		6,259,369

	$	11,716,436	$	12,059,110

The following are the components of interest expense on deposits:


	Quarter Ended
	March 31,		March 31,
	2011		2010
	(In thousands)
Interest expense on deposits	$	48,700	$	60,500
Amortization of broker placement fees		5,359		5,465

Interest expense on deposits excluding net unrealized loss (gain) on derivatives and brokered CDs measured at fair value		54,059		65,965
Net unrealized loss on derivatives		—		1

Total interest expense on deposits	$	54,059	$	65,966

13 — SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase (repurchase agreements) consist of the following:


	March 31,		December 31,
	2011		2010
	(In thousands)
Repurchase agreements, interest ranging from 0.99% to 4.51%	$	1,400,000	$	1,400,000

Repurchase agreements mature as follows:


	March 31,
	2011
	(In thousands)
Over ninety days to one year	$	100,000
One to three years		700,000
Three to five years		600,000

Total	$	1,400,000

As of March 31, 2011 and December 31, 2010, the securities underlying such agreements were delivered to the dealers with whom the repurchase agreements were transacted.

Repurchase agreements as of March 31, 2011, grouped by counterparty, were as follows:


			Weighted-Average
Counterparty	Amount		Maturity
			(In Months)
UBS Financial Services, Inc.	$	100,000		16
Barclays Capital		200,000		17
Credit Suisse First Boston		400,000		27
Dean Witter / Morgan Stanley		200,000		28
JP Morgan Chase		200,000		36
Citigroup Global Markets		300,000		37

	$	1,400,000

14 — ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)

Following is a summary of the advances from the FHLB:


	March 31,		December 31,
	2011		2010
	(In thousands)
Fixed-rate advances from FHLB, with a weighted-average interest rate of 3.32% (2010 - 3.33%)	$	540,440	$	653,440

Advances from FHLB mature as follows:


	March 31,
	2011
	(In thousands)
One to thirty days	$	5,000
Over thirty to ninety days		15,000
Over ninety days to one year		167,000
One to three years		353,440

Total	$	540,440

As of March 31, 2011, the Corporation had additional capacity of approximately $486.4 million on this credit facility based on collateral pledged at the FHLB, including haircuts reflecting the perceived risk associated with holding the collateral.

15 — NOTES PAYABLE

Notes payable consist of:


	March 31,		December 31,
	2011		2010
	(Dollars in thousands)
Callable step-rate notes, bearing step increasing interest from 5.00% to 7.00% (6.00% as of March 31, 2011 and December 31, 2010) maturing on October 18, 2019, measured at fair value	$	12,437	$	11,842
Dow Jones Industrial Average (DJIA) linked principal protected notes:
Series A maturing on February 28, 2012		7,175		6,865
Series B maturing on May 27, 2011		8,225		7,742

	$	27,837	$	26,449

16 — OTHER BORROWINGS

Other borrowings consist of:


	March 31,		December 31,
	2011		2010
	(Dollars in thousands)
Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.75% over 3-month LIBOR (3.06% as of March 31, 2011 and 3.05% as of December 31, 2010)	$	103,093	$	103,093

Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.50% over 3-month LIBOR (2.81% as of March 31, 2011 and 2.80% as of December 31, 2010)		128,866		128,866

	$	231,959	$	231,959

17 — STOCKHOLDERS’ EQUITY

Common Stock

As of March 31, 2011, the Corporation had 2,000,000,000 authorized shares of common stock with a par value of $0.10 per share. As of both March 31, 2011 and December 31, 2010, there were 21,963,522 shares issued and 21,303,669 shares outstanding. The Corporation stopped paying common and preferred stock dividends since August 2009.

As of March 31, 2011, there were 716 shares of restricted stock outstanding that are expected to vest in the fourth quarter of 2011. The shares of restricted stock may vest more quickly in the event of death, disability, retirement, or a change in control. Based on particular circumstances evaluated by the Compensation Committee as they may relate to the termination of a restricted stock holder, the Corporation’s Board of Directors may, with the recommendation of the Compensation Committee, grant the full vesting of the restricted stock held upon termination of employment. Holders of restricted stock have the right to dividends or dividend equivalents, as applicable, during the restriction period. Such dividends or dividend equivalents will accrue during the restriction period, but will not be paid until restrictions lapse. The holder of restricted stock has the right to vote the shares.

Effective January 7, 2011, the Corporation implemented a one-for-fifteen reverse stock split of all outstanding shares of its common stock. At the Corporation’s Special Meeting of Stockholders held on August 24, 2010, stockholders approved an amendment to the Corporation’s Restated Articles of Incorporation to implement a reverse stock split at a ratio, to be determined by the board in its sole discretion, within the range of one new share of common stock for 10 old shares and one new share for 20 old shares. As authorized, the board elected to effect a reverse stock split at a ratio of one-for-fifteen. The reverse stock split allowed the Corporation to regain compliance with listing standards of the New York Stock Exchange. The one-for-fifteen reverse stock split reduced the number of outstanding shares of common stock from 319,557,932 shares to 21,303,669 shares of common stock. All share and per share amounts included in these financial statements have been adjusted to retroactively reflect the 1-for-15 reverse stock split.

Preferred Stock

The Corporation has 50,000,000 authorized shares of preferred stock with a par value of $1, redeemable at the Corporation’s option subject to certain terms. This stock may be issued in series and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. As of March 31, 2011, the Corporation has five outstanding series of non-convertible non-cumulative preferred stock: 7.125% non-cumulative perpetual monthly income preferred stock, Series A; 8.35% non-cumulative perpetual monthly income preferred stock, Series B; 7.40% non-cumulative perpetual monthly income preferred stock, Series C; 7.25% non-cumulative perpetual monthly income preferred stock, Series D; and 7.00% non-cumulative perpetual monthly income preferred stock, Series E. The liquidation value per share is $25. The Corporation is currently in the process of voluntarily delisting the Series A through E preferred stock from the New York Stock Exchange.

On July 20, 2010, the Corporation issued $424.2 million Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series G (the “Series G Preferred Stock”), in exchange of the $400 million of Fixed Rate Cumulative Perpetual Preferred Stock, Series F (the “Series F Preferred Stock”), that the U.S. Treasury had acquired pursuant to the TARP Capital Purchase Program, and dividends accrued on such 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, and by the Treasury and any subsequent holder at any time and, unless earlier converted, is automatically convertible into common stock on the seventh anniversary of issuance. On the seventh anniversary of issuance, each share of the Series G Preferred Stock will mandatorily convert into a number of shares of the Corporation’s common stock equal to a fraction, the numerator of which is $1,000 and the denominator of which is the market price of the Corporation’s common stock on the second trading day preceding the mandatory conversion date, provided, however, holders of the Series G Preferred Stock shall not be entitled to convert shares until the converting holder has first received any applicable regulatory approvals. 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 in 2010 of common stock in exchange for Series A through E preferred stock satisfy all but one of the substantive conditions to the Corporation’s ability to compel the conversion of the 424,174 shares of the new series of Series G Preferred Stock, issued to the U.S. Treasury. The other substantive condition to the Corporation’s ability to compel the conversion of the Series G Preferred Stock is the issuance of a minimum amount of additional capital, subject to terms, other than the price per share, reasonably acceptable to the U.S. Treasury in its sole discretion. On September 16, 2010, the Corporation filed a registration statement for a proposed underwritten offering of $500 million of its common stock with the SEC. Thereafter, it amended the registration statement to lower the size of the offering to $350 million as a result of the negotiation of an amendment to the exchange agreement with the U.S Treasury.

During the fourth quarter of 2010, the U.S. Treasury agreed to a reduction from $500 million to $350 million in the size of the capital raise required to satisfy the remaining substantive condition to compel the conversion of the Series G Preferred Stock owned by the U.S. Treasury into shares of common stock. Additionally, the U.S. Treasury agreed to extend to October 7, 2011, the date by when the Corporation is required to complete an equity raise in order to compel conversion of the Series G Preferred Stock into shares of common stock. In connection with the negotiation of this reduction, the Corporation agreed to a reduction in the previously agreed upon discount of the liquidation preference of the Series G Preferred Stock from 35% to 25%, thus, increasing the number of shares of common stock into which the Series G Preferred Stock. Based on an initial conversion rate of 68.9465 shares of common stock for each share of Series G Preferred Stock(calculated by dividing $750, or a discount of 25% from the $1,000 liquidation preference per share of Series G Preferred Stock, by the initial conversion price of $10.878 per share, which is subject to adjustment), the number of shares into which the Series G Preferred Stock would be convertible would increase from 25.3 million to 29.2 million shares of common stock. As a result of the change in the discount, a non-cash adjustment of $11.3 million was recorded in the fourth quarter of 2010 as an acceleration of the Series G Preferred Stock discount accretion.

The value of the base preferred stock component of the Series G Preferred Stock was determined using a discounted cash flow method and applying a discount rate. The cash flows, which consist of the sum of the discounted quarterly dividends plus the principal repayment, were discounted considering the Corporation’s credit rating. The short and long call options were valued using a Cox-Rubinstein binomial option pricing model-based methodology. The valuation methodology considered the likelihood of option conversions under different scenarios, and the valuation interactions of the various components under each scenario. The difference from the par amount of the Series G Preferred Stock is accreted to preferred stock over 7 years using the interest method with a corresponding adjustment to preferred dividends.

The Series G Preferred Stock qualifies as Tier 1 regulatory capital. Cumulative dividends on the Series G Preferred Stock accrue on the liquidation preference on a quarterly basis at a rate of 5% per annum for the first five years, and thereafter at a rate of 9% per annum, but will only be paid when, as and if declared by the Corporation’s Board of Directors out of assets legally available therefore. The Series G Preferred Stock ranks pari passu with the Corporation’s existing Series A through E preferred stock in terms of dividend payments and distributions upon liquidation, dissolution and winding up of the Corporation. The exchange agreement relating to the issuance of the Series G Preferred Stock limits the payment of dividends on common stock, including limiting regular quarterly cash dividends to an amount not exceeding the last quarterly cash dividend paid per share, or the amount publicly announced (if lower), on common stock prior to October 14, 2008, which is $1.05 per share.

Additionally, the Corporation issued an amended 10-year warrant (the “Warrant”) to the U.S. Treasury to purchase 389,483 shares of the Corporation’s common stock at an initial exercise price of $10.878 per share instead of the exercise price on the original warrant of $154.05 per share. The Warrant has a 10-year term and is exercisable at any time. The exercise price and the number of shares issuable upon exercise of the Warrant are subject to certain anti-dilution adjustments.

The possible future issuance of equity securities through the exercise of the Warrant could affect the Corporation’s current stockholders in a number of ways, including by:

	•		diluting the voting power of the current holders of common stock (the shares underlying the warrant represent approximately 2% of the Corporation’s shares of common stock as of March 31, 2011);

	•		diluting the earnings per share and book value per share of the outstanding shares of common stock; and

	•		making the payment of dividends on common stock more expensive.

As mentioned above the Corporation stopped paying dividends for common and all its outstanding series of preferred stock. This suspension was effective with the dividends for the month of August 2009 on the Corporation’s five outstanding series of non-cumulative preferred stock and dividends or the Corporation’s then outstanding Series F Preferred Stock and the Corporation’s common stock. Prior to any resumption of the payment of dividends on or repurchases of any of the remaining outstanding noncumulative preferred stock or common stock, the Corporation must comply with the terms of the Series G Preferred Stock. In addition, prior to the repurchase of any stock for cash, the Corporation must obtain the consent of the U.S. Treasury under certain circumstances.

Stock repurchase plan and treasury stock

The Corporation has a stock repurchase program under which, from time to time, it repurchases shares of common stock in the open market and holds them as treasury stock. No shares of common stock were repurchased during the first quarter of 2011 and 2010 by the Corporation. As of March 31, 2011 and December 31, 2010, of the total amount of common stock repurchased in prior years, 659,853 shares were held as treasury stock and were available for general corporate purposes.

Legal surplus

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be transferred to legal surplus until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts transferred to the legal surplus account from the retained earnings account are not available for distribution to the stockholders.

18 — REGULATORY MATTERS

The Corporation is subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting

practices. The Corporation’s capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings and other factors.

Capital standards established by regulations require the Corporation to maintain minimum amounts and ratios for Leverage (Tier 1 capital to average total assets) and ratios of Tier 1 Capital to Risk-Weighted Assets and Total Capital to Risk-Weighted Assets as defined in the regulations. The total amount of risk-weighted assets is computed by applying risk-weighting factors to the Corporation’s assets and certain off-balance sheet items, which generally vary from 0% to 100% depending on the nature of the asset.

Effective June 2, 2010, FirstBank, by and through its Board of Directors, entered into the FDIC Order with the FDIC and the Office of the Commissioner of Financial Institutions of Puerto Rico. This Order provides for various things, including (among other things) the following: (1) having and retaining qualified management; (2) increased participation in the affairs of FirstBank by its board of directors; (3) development and implementation by FirstBank of a capital plan to attain a leverage ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 10% and a total risk-based capital ratio of at least 12%; (4) adoption and implementation of strategic, liquidity and fund management and profit and budget plans and related projects within certain timetables set forth in the Order and on an ongoing basis; (5) adoption and implementation of plans for reducing FirstBank’s positions in certain classified assets and delinquent and non-accrual loans within timeframes set forth in the Order; (6) refraining from lending to delinquent or classified borrowers already obligated to FirstBank on any extensions of credit so long as such credit remains uncollected, except where FirstBank’s failure to extend further credit to a particular borrower would be detrimental to the best interests of FirstBank, and any such additional credit is approved by the FirstBank’s board of directors; (7) refraining from accepting, increasing, renewing or rolling over brokered deposits without the prior written approval of the FDIC; (8) establishment of a comprehensive policy and methodology for determining the allowance for loan and lease losses and the review and revision of FirstBank’s loan policies, including the non-accrual policy; and (9) adoption and implementation of adequate and effective programs of independent loan review, appraisal compliance and an effective policy for managing FirstBank’s sensitivity to interest rate risk. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the FDIC Order. Although all the regulatory capital ratios exceeded the established “well capitalized” levels at March 31, 2011, because of the FDIC Order with the FDIC, FirstBank cannot be treated as “well capitalized” institution under regulatory guidance.

Effective June 3, 2010, First BanCorp entered into the Written Agreement with the FED. The Agreement provides, among other things, that the holding company must serve as a source of strength to FirstBank, and that, except upon consent of the FED, (1) the holding company may not pay dividends to stockholders or receive dividends from FirstBank, (2) the holding company and its nonbank subsidiaries may not make payments on trust preferred securities or subordinated debt, and (3) the holding company cannot incur, increase or guarantee debt or repurchase any capital securities. The Written Agreement also requires that the holding company submit a capital plan which reflects sufficient capital at First BanCorp on a consolidated basis, which must be acceptable to the FED, and follow certain guidelines with respect to the appointment or change in responsibilities of senior officers. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Written Agreement.

The Corporation submitted its capital plan setting forth how it plans to improve capital positions to comply with the FDIC Order and the Written Agreement over time. Additional information about, the Corporation’s achievement of various aspects of the Capital Plan and the terms of the Capital Plan are described above in Note 1.

In addition to the Capital Plan, the Corporation has submitted to its regulators a liquidity and brokered deposit plan, including a contingency funding plan, a non-performing asset reduction plan, a budget and profit plan, a strategic plan and a plan for the reduction of classified and special mention assets. Further, the Corporation has reviewed and enhanced the Corporation’s loan review program, various credit policies, the Corporation’s treasury and investments policy, the Corporation’s asset classification and allowance for loan and lease losses and non-accrual policies, the Corporation’s charge-off policy and the Corporation’s appraisal program. The Agreements also require the submission to the regulators of quarterly progress reports.

The FDIC Order imposes no other restrictions on the FirstBank’s products or services offered to customers, nor does it or the Written Agreement impose any type of penalties or fines upon FirstBank or the Corporation. Concurrent with the FDIC Order, the FDIC has granted FirstBank temporary waivers to enable it to continue accessing the brokered deposit market through June 30, 2011. FirstBank will request approvals for future periods.

19 — INCOME TAXES

Income tax expense includes Puerto Rico and Virgin Islands income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation for U.S. income tax purposes and is generally subject to United States income tax only on its income from sources within the United States or income effectively connected with the conduct of a trade or business within the United States. Any such tax paid is creditable, within certain conditions and limitations, against the Corporation’s Puerto Rico tax liability. The Corporation is also subject to U.S.Virgin Islands taxes on its income from sources within that jurisdiction. Any such tax paid is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions and limitations.

Under the Puerto Rico Internal Revenue Code of 1994, as amended (the “PR Code”), the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is not able to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss, a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable carry forward period (7 years under the PR Code). The PR Code provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations. Dividend payments from a U.S. subsidiary to the Corporation are subject to a 10% withholding tax based on the provisions of the U.S. Internal Revenue Code.

Under the PR Code, First BanCorp is subject to a maximum statutory tax rate of 39%. In 2009 the Puerto Rico Government approved Act No. 7 (the “Act”), to stimulate Puerto Rico’s economy and to reduce the Puerto Rico Government’s fiscal deficit. The Act imposes a series of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax determined, which is applicable to corporations, among others, whose combined income exceeds $100,000, effectively resulting in an increase in the maximum statutory tax rate from 39% to 40.95% and an increase in the capital gain statutory tax rate from 15% to 15.75%. These temporary measures are effective for tax years that commenced after December 31, 2008 and before January 1, 2012. The PR Code also includes an alternative minimum tax of 22% that applies if the Corporation’s regular income tax liability is less than the alternative minimum tax requirements.

The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through International Banking Entity (“IBE”) of the Bank (“FirstBank IBE”) and through the Bank’s subsidiary, FirstBank Overseas Corporation, in which the interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation. Under the Act, all IBE are subject to the special 5% tax on their net income not otherwise subject to tax pursuant to the PR Code. This temporary measure is also effective for tax years that commenced after December 31, 2008 and before January 1, 2012. FirstBank IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico. IBEs that operate as a unit of a bank pay income taxes at normal rates to the extent that the IBEs’ net income exceeds 20% of the bank’s total net taxable income.

On January 31, 2011, the Puerto Rico Government approved Act No. 1, which repealed the 1994 PR Code and replaces it with the Puerto Rico Internal Revenue Code of 2010 (the “2010 PR Code”). The provisions of the 2010 Code are generally applicable to taxable years commencing after December 31, 2010. The matters discussed above are equally applicable under the 2010 Code except that the maximum corporate tax rate has been reduced from 39% (40.95% for calendar years 2009 and 2010) to 30% (25% for taxable years commencing after December 31, 2013 if certain economic conditions are met by the Puerto Rico economy). Corporations are entitled to elect continue to determine its Puerto Rico income tax responsibility for such 5 year period under the provisions of the 1994 Code.

For the quarter ended March 31, 2011, the Corporation recorded an income tax expense of $3.6 million compared to an income tax expense of $6.9 million for the same period in 2010. As a result of the reduction in the statutory income tax rates from 39% to 30% under the new 2010 Code, the Corporation recorded a $102.0 million reduction in its deferred tax assets and a $100.0 million reduction in the valuation allowance. Since the majority of the deferred tax assets were reserved prior to 2011, the net charge to the income statement during the first quarter of 2011 attributed to changes in tax rates was approximately $2.0 million in connection with profitable subsidiaries. As of March 31, 2011, the deferred tax asset, net of a valuation allowance of $355.4 million, amounted to $7.7 million compared to $9.3 million as of December 31, 2010. The Corporation continued to reserve deferred tax assets created in connection with the operations of its banking subsidiary, FirstBank.

Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on the consideration of all available evidence, using a “more likely than not” realization standard. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. In making such assessment, significant weight is to be given to evidence that can be objectively verified, including both positive and negative evidence. The accounting for income taxes guidance requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance, and recognizes tax benefits only when deemed probable of realization.

In assessing the weight of positive and negative evidence, a significant negative factor that resulted in increases of the valuation allowance was that the Corporation’s banking subsidiary, FirstBank Puerto Rico, continues in a three-year historical cumulative loss position as of the end of the first quarter of 2011, and has projected to be in a loss position for the remaining of 2011. As of March 31, 2011, management concluded that $7.7 million of the deferred tax asset will be realized. The Corporation’s deferred tax assets for which it has not established a valuation allowance relate to profitable subsidiaries and to amounts that can be realized through future reversals of existing taxable temporary differences. To the extent the realization of a portion, or all, of the tax asset becomes “more

likely than not” based on changes in circumstances (such as, improved earnings, changes in tax laws or other relevant changes), a reversal of that portion of the deferred tax asset valuation allowance will then be recorded.

The tax effect of the unrealized holding gain or loss on securities available-for-sale, excluding that on securities held by the Corporation’s international banking entities which is exempt, was computed based on a 15% capital gain tax rate, and is included in accumulated other comprehensive income as part of stockholders’ equity.

The FASB guidance prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken on income tax returns. Under the authoritative accounting guidance, income tax benefits are recognized and measured based upon a two-step model: 1) a tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit recognized in accordance with this model and the tax benefit claimed on a tax return is referred to as an UTB.

The Corporation classified all interest and penalties, if any, related to tax uncertainties as income tax expense. The amount of UTBs may increase or decrease for various reasons, including changes in the amounts for current tax year positions, the expiration of open income tax returns due to the expiration of statutes of limitations, changes in management’s judgment about the level of uncertainty, the status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. There were no UTBs outstanding as of March 31, 2011 and December 31, 2010.

20 — FAIR VALUE

Fair Value Option

FASB authoritative guidance permits the measurement of selected eligible financial instruments at fair value.

Medium-Term Notes

The Corporation elected the fair value option for certain medium term notes that were hedged with interest rate swaps that were previously designated for fair value hedge accounting. As of March 31, 2011 and December 31, 2010, these medium-term notes with a principal balance of $15.4 million, had a fair value of $12.4 million and $11.8 million, respectively, recorded in notes payable. Interest paid/accrued on these instruments is recorded as part of interest expense and the accrued interest is part of the fair value of the notes. Electing the fair value option allows the Corporation to eliminate the burden of complying with the requirements for hedge accounting (e.g., documentation and effectiveness assessment) without introducing earnings volatility.

Medium-term notes for which the Corporation elected the fair value option were priced using observable market data in the institutional markets.

Fair Value Measurement

The FASB authoritative guidance for fair value measurement defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value:


Level 1		Valuations of Level 1 assets and liabilities are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 1 assets and liabilities include equity securities that are traded in an active exchange market, as well as certain U.S. Treasury and other U.S. government and agency securities and corporate debt securities that are traded by dealers or brokers in active markets.

Level 2		Valuations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on the value of identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities (e.g., medium-term notes elected to be measured at fair value) whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.


Level 3		Valuations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models for which the determination of fair value requires significant management judgment or estimation.

For 2011, there have been no transfers into or out of Level 1 and Level 2 measurement of the fair value hierarchy.

Estimated Fair Value of Financial Instruments

The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.

The estimated fair value is subjective in nature and involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. In addition, the fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business.

The following table presents the estimated fair value and carrying value of financial instruments as of March 31, 2011 and December 31, 2010.


	Financial			Fair Value		Financial			Fair Value
	Condition			Estimated		Condition			Estimated
	3/31/2011			3/31/2011		12/31/2010			12/31/2010
				(In thousands)
Assets:
Cash and due from banks and money market investments	$	873,294		$	873,294	$	370,283		$	370,283
Investment securities available for sale		2,724,167			2,724,167		2,744,453			2,744,453
Investment securities held to maturity		—			—		453,387			476,516
Other equity securities		99,060			99,060		55,932			55,932
Loans held for sale		305,494			312,253		300,766			300,766
Loans, held for investment		11,089,775					11,655,436
Less: allowance for loan and lease losses		(561,695	)				(553,025	)

Loans held for investment, net of allowance		10,528,080			10,019,395		11,102,411			10,581,221

Derivatives, included in assets		2,556			2,556		1,905			1,905

Liabilities:
Deposits		11,716,436			11,837,155		12,059,110			12,207,613
Securities sold under agreements to repurchase		1,400,000			1,507,010		1,400,000			1,513,338
Advances from FHLB		540,440			560,436		653,440			677,866
Notes Payable		27,837			25,702		26,449			24,909
Other borrowings		231,959			122,722		231,959			71,488
Derivatives, included in liabilities		7,276			7,276		6,701			6,701

Assets and liabilities measured at fair value on a recurring basis, including financial liabilities for which the Corporation has elected the fair value option, are summarized below:


	As of March 31, 2011								As of December 31, 2010
	Fair Value Measurements Using								Fair Value Measurements Using
							Assets / Liabilities								Assets / Liabilities
(In thousands)	Level 1		Level 2		Level 3		at Fair Value		Level 1		Level 2		Level 3		at Fair Value
Assets:
Securities available for sale :
Equity securities	$	47	$	—	$	—	$	47	$	59	$	—	$	—	$	59
U.S. Treasury Securities		615,793		—		—		615,793		608,714		—		—		608,714
Non-callable U.S. agency debt		303,704		—		—		303,704		304,257		—		—		304,257
Callable U.S. agency debt and MBS		—		1,573,119		—		1,573,119		—		1,622,265		—		1,622,265
Puerto Rico Government Obligations		—		158,771		3,083		161,854		—		134,165		2,676		136,841
Private label MBS		—		—		68,355		68,355		—		—		72,317		72,317
Corporate bonds		—		—		1,295		1,295		—		—		—		—
Derivatives, included in assets:
Interest rate swap agreements		—		316		—		316		—		351		—		351
Purchased interest rate cap agreements		—		1		—		1		—		1		—		1
Purchased options used to manage exposure to the stock market on embeded stock indexed options		—		2,207		—		2,207		—		1,553		—		1,553
Forward Contracts		—		32		—		32		—		—		—		—
Liabilities:
Medium-term notes		—		12,437		—		12,437		—		11,842		—		11,842
Derivatives, included in liabilities:
Interest rate swap agreements				4,813		—		4,813		—		5,192		—		5,192
Written interest rate cap agreements		—		1		—		1		—		1		—		1
Embedded written options on stock index deposits and notes payable		—		2,167		—		2,167		—		1,508		—		1,508
Forward Contracts		—		296		—		296		—		—		—		—


	Changes in Fair Value for items Measured at Fair Value
	Pursuant to Election of the Fair Value Option For the
	Quarter ended March 31,
	2011			2010
	Unrealized Gains and Interest Expense
(In thousands)	included in Current-Period Earnings (1)
Medium-term notes	$	(824	)	$	(1,029	)


(1)		Changes in fair value for the quarter ended March 31, 2011 and 2010 include interest expense on medium-term notes of $0.2 million and $0.1 million, respectively. Interest expense on medium-term notes that have been elected to be carried at fair value are recorded in interest expense in the Consolidated Statement of Loss based on their contractual coupons.

The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2011 and 2010.


	Total Fair Value Measurements			Total Fair Value Measurements
	(Quarter Ended March 31, 2011)			(Quarter Ended March 31, 2010)
Level 3 Instruments Only	Securities						Securities
(In thousands)	Available For Sale⁽¹⁾			Derivatives⁽²⁾			Available For Sale⁽¹⁾
Beginning balance	$	74,993		$	4,199		$	84,354
Total gains or (losses) (realized/unrealized):
Included in earnings		—			(712	)		—
Included in other comprehensive income		46			—			323
Held-to-Maturity investment securities reclassified to Available-for-Sale		2,000			—			—
Principal repayments and amortization		(4,306	)		—			(3,794	)

Ending balance	$	72,733		$	3,487		$	80,883


(1)		Amounts mostly related to private label mortgage-backed securities.

(2)		Amounts related to the valuation of interest rate cap agreements. The counterparty to these interest rate cap agreements failed on April 30, 2010 and was acquired by another financial institution in an FDIC assisted transaction. The Corporation currently has a claim with the FDIC.

The table below summarizes changes in unrealized gains and losses recorded in earnings for the quarter ended March 31, 2010 for Level 3 assets and liabilities that are still held at the end of the period.


	Changes in
	Unrealized Losses
Level 3 Instruments Only	(Quarter Ended March 31, 2010)
(In thousands)	Derivatives
Changes in unrealized losses relating to assets still held at reporting date^{(1) (2)}:

Interest income on loans	$	(15	)
Interest income on investment securities		(697	)

	$	(712	)


(1)		Amounts represent valuation of interest rate cap agreements

(2)		Unrealized losses of $0.3 million on Level 3 available-for-sale securities was recognized as part of other comprehensive income for the quarter ended March 31, 2010.

Additionally, fair value is used on a non-recurring basis to evaluate certain assets in accordance with GAAP. Adjustments to fair value usually result from the application of lower-of-cost-or-market accounting (e.g., loans held for sale carried at the lower of cost or fair value and repossessed assets) or write-downs of individual assets (e.g., goodwill, loans).

As of March 31, 2011, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table:


							Losses recorded for
	Carrying value as of March 31, 2011						the Quarter Ended
	Level 1		Level 2		Level 3		March 31, 2011
			(In thousands)
Loans receivable (1)	$	—	$	—	$	1,331,634	$	95,786
Other Real Estate Owned (2)		—		—		91,948		2,975


(1)		Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral. The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. absorption rates), which are not market observable.

(2)		The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Losses are related to market valuation adjustments after the transfer from the loan to the OREO portfolio.

As of March 31, 2010, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table:


							Losses recorded for
	Carrying value as of March 31, 2010						the Quarter Ended
	Level 1		Level 2		Level 3		March 31, 2010
			(In thousands)
Loans receivable (1)	$	—	$	—	$	1,390,467	$	137,767
Other Real Estate Owned (2)		—		—		73,444		1,195
Loans held for sale (3)		—		19,927		—		140


(1)		Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral.

		The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. absorption rates), which are not market observable.

(2)		The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Losses are related to market valuation adjustments after the transfer from the loan to the Other Real Estate Owned (“OREO”) portfolio.

(3)		Fair value is primarily derived from quotations based on the mortgage-backed securities market.

The following is a description of the valuation methodologies used for instruments for which an estimated fair value is presented as well as for instruments for which the Corporation has elected the fair value option. The estimated fair value was calculated using certain facts and assumptions, which vary depending on the specific financial instrument.

Cash and due from banks and money market investments

The carrying amounts of cash and due from banks and money market investments are reasonable estimates of their fair value. Money market investments might include held-to-maturity U.S. Government obligations, which have a contractual maturity of three months or less. The fair value of these securities is based on quoted market prices in active markets that incorporate the risk of nonperformance.

Investment securities available for sale and held to maturity

The fair value of investment securities is the market value based on quoted market prices (as is the case with equity securities, U.S. Treasury notes and non-callable U.S. Agency debt securities), when available, or market prices for identical or comparable assets (as is the case with MBS and callable U.S. agency debt) that are based on observable market parameters including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers and reference data including market research operations. Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon models that use unobservable inputs due to the limited market activity of the instrument, as is the case with certain private label mortgage-backed securities held by the Corporation.

Private label MBS are collateralized by fixed-rate mortgages on single-family residential properties in the United States; the interest rate on the securities is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The market valuation represents the estimated net cash flows over the projected life of the pool of underlying assets applying a discount rate that reflects market observed floating spreads over LIBOR, with a widening spread bias on a nonrated security. The market valuation is derived from a model that utilizes relevant assumptions such as prepayment rate, default rate, and loss severity on a loan level basis. The Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow analysis according to collateral attributes of the underlying mortgage pool (i.e. loan term, current balance, note rate, rate adjustment type, rate adjustment frequency, rate caps, others) in combination with prepayment forecasts obtained from a commercially available prepayment model (ADCO). The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. Loss assumptions were driven by the combination of default and loss severity estimates, taking into account loan credit characteristics (loan-to-value, state, origination date, property type, occupancy loan purpose, documentation type, debt-to-income ratio, other) to provide an estimate of default and loss severity. Refer to Note 4 for additional information about assumptions used in the valuation of private label MBS.

Other equity securities

Equity or other securities that do not have a readily available fair value are stated at the net realizable value, which management believes is a reasonable proxy for their fair value. This category is principally composed of stock that is owned by the Corporation to comply with FHLB regulatory requirements. Their realizable value equals their cost as these shares can be freely redeemed at par. Also includes, the Corporation’s 35% interest in a joint venture. The initial value of $47.6 million represents 35% of all the assets of the joint venture. Please refer to Note 11 for additional information.

Loans receivable, including loans held for sale

The fair value of loans held for investment and for mortgage loans held for sale was estimated using discounted cash flow analyses, based on interest rates currently being offered for loans with similar terms and credit quality and with adjustments that the Corporation’s management believes a market participant would consider in determining fair value. Loans were classified by type such as commercial, residential mortgage, and automobile. These asset categories were further segmented into fixed- and adjustable-rate categories. The fair values of performing fixed-rate and adjustable-rate loans were calculated by discounting expected cash flows through the estimated maturity date. Loans with no stated maturity, like credit lines, were valued at book value. Prepayment assumptions were considered for non-residential loans. For residential mortgage loans, prepayment estimates were based on recent historical prepayment experience of the Corporation’s residential mortgage portfolio. Discount rates were based on the Treasury and LIBOR/Swap Yield Curves at the date of the analysis, and included appropriate adjustments for expected credit losses and liquidity. For impaired collateral dependent loans, the impairment was primarily measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observable transactions involving similar assets in similar locations. For construction, commercial mortgage and commercial loans transferred to held for sale during the fourth quarter of 2010, the fair value equals the established sales price of these loans. The Corporation completed the sale of substantially all of these loans on February 16, 2011.

Deposits

The estimated fair value of demand deposits and savings accounts, which are deposits with no defined maturities, equals the amount payable on demand at the reporting date. The fair values of retail fixed-rate time deposits, with stated maturities, are based on the present value of the future cash flows expected to be paid on the deposits. The cash flows were based on contractual maturities; no early repayments are assumed. Discount rates were based on the LIBOR yield curve.

The estimated fair value of total deposits excludes the fair value of core deposit intangibles, which represent the value of the customer relationship measured by the value of demand deposits and savings deposits that bear a low or zero rate of interest and do not fluctuate in response to changes in interest rates.

The fair value of brokered CDs, which are included within deposits, is determined using discounted cash flow analyses over the full term of the CDs. The valuation uses a “Hull-White Interest Rate Tree” approach, an industry-standard approach for valuing instruments with interest rate call options. The fair value of the CDs is computed using the outstanding principal amount. The discount rates used are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices. The fair value does not incorporate the risk of nonperformance, since interests in brokered CDs are generally sold by brokers in amounts of less than $100,000 and, therefore, insured by the FDIC.

Securities sold under agreements to repurchase

Some repurchase agreements reprice at least quarterly, and their outstanding balances are estimated to be their fair value. Where longer commitments are involved, fair value is estimated using exit price indications of the cost of unwinding the transactions as of the end of the reporting period. Securities sold under agreements to repurchase are fully collateralized by investment securities.

Advances from FHLB

The fair value of advances from FHLB with fixed maturities is determined using discounted cash flow analyses over the full term of the borrowings, using indications of the fair value of similar transactions. The cash flows assume no early repayment of the borrowings. Discount rates are based on the LIBOR yield curve. For advances from FHLB that reprice quarterly, their outstanding balances are estimated to be their fair value. Advances from FHLB are fully collateralized by mortgage loans and, to a lesser extent, investment securities.

Derivative instruments

The fair value of most of the derivative instruments is based on observable market parameters and takes into consideration the credit risk component of paying counterparties when appropriate, except when collateral is pledged. That is, on interest rate swaps, the credit risk of both counterparties is included in the valuation; and, on options and caps, only the seller’s credit risk is considered. The “Hull-White Interest Rate Tree” approach is used to value the option components of derivative instruments, and discounting of the cash flows is performed using US dollar LIBOR-based discount rates or yield curves that account for the industry sector and the credit rating of the counterparty and/or the Corporation. Derivatives include interest rate swaps used for protection against rising interest rates. For these interest rate swaps, a credit component was not considered in the valuation since the Corporation has fully collateralized with investment securities any mark to market loss with the counterparty and, if there were market gains, the counterparty had to deliver collateral to the Corporation.

Although most of the derivative instruments are fully collateralized, a credit spread is considered for those that are not secured in full. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments resulted in an unrealized gain of approximately $0.6 million as of March 31, 2011, which includes an unrealized loss of $0.2 million recorded in the first quarter of 2011 and an unrealized loss of $0.1 million for the first quarter of 2010.

Term notes payable

The fair value of term notes is determined using a discounted cash flow analysis over the full term of the borrowings. This valuation also uses the “Hull-White Interest Rate Tree” approach to value the option components of the term notes. The model assumes that the embedded options are exercised economically. The fair value of medium-term notes is computed using the notional amount outstanding. The discount rates used in the valuations are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices and value the cancellation option in the term notes. For the medium-term notes, the credit risk is measured using the difference in yield curves between swap rates and a yield curve that considers the industry and credit rating of the Corporation as issuer of the note at a tenor comparable to the time to maturity of the note and option. The net loss from fair value changes attributable to the Corporation’s own credit to the medium-term notes for which the Corporation has elected the fair value option recorded for the first quarter of 2011 amounted to $0.6 million, compared to an unrealized loss of $1.0 million for the first quarter of 2010. The cumulative mark-to-market unrealized gain on the medium-term notes since measured at fair value attributable to credit risk amounted to $3.1 million as of March 31, 2011.

Other borrowings

Other borrowings consist of junior subordinated debentures. Projected cash flows from the debentures were discounted using the LIBOR yield curve plus a credit spread. This credit spread was estimated using the difference in yield curves between Swap rates and a yield curve that considers the industry and credit rating of the Corporation as issuer of the note at a tenor comparable to the time to maturity of the debentures.

21 — SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information follows:


	Quarter Ended March 31,
	2011		2010
	(In thousands)
Cash paid for:

Interest on borrowings	$	68,257	$	98,088
Income tax		242		—

Non-cash investing and financing activities:

Additions to other real estate owned		28,483		18,930
Additions to auto repossesions		16,691		18,909
Capitalization of servicing assets		1,231		1,686
Loan securitizations		41,474		57,204
Loans sold to a joint venture in exchange for an acquisition loan and an equity interest in the joint venture		183,709		—
Reclassification of Held-to-Maturity investment securities to Available-for-Sale		88,751		—

22 — SEGMENT INFORMATION

Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer of the Corporation and, to a lesser extent, the Board of Directors, the operating segments are driven primarily by the Corporation’s lines of business for its operations in Puerto Rico, the Corporation’s principal market, and by geographic areas for its operations outside of Puerto Rico. As of March 31, 2011, the Corporation had six reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments; United States operations and Virgin Islands operations. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Corporation’s organizational chart, nature of the products, distribution channels and the economic characteristics of the products were also considered in the determination of the reportable segments.

The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers represented by specialized and middle-market clients and the public sector. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, and floor plan financings as well as other products such as cash management and business management services. The Mortgage Banking segment’s operations consist of the origination, sale and servicing of a variety of residential mortgage loans. The Mortgage Banking segment also acquires and sells mortgages in the secondary markets. In addition, the Mortgage Banking segment includes mortgage loans purchased from other local banks and mortgage bankers. The Consumer (Retail) Banking segment consists of the Corporation’s consumer lending and deposit-taking activities conducted mainly through its branch network and loan centers. The Treasury and Investments segment is responsible for the Corporation’s investment portfolio and treasury functions executed to manage and enhance liquidity. This segment lends funds to the Commercial and Corporate Banking, Mortgage Banking and Consumer (Retail) Banking segments to finance their lending activities and borrows from those segments and from the United States Operations segment. The Consumer (Retail) Banking and the United States Operations segments also lend funds to other segments. The interest rates charged or credited by Treasury and Investments, the Consumer (Retail) Banking and the United States Operations segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The United States operations segment consists of all banking activities conducted by FirstBank in the United States mainland, including commercial and retail banking services. The Virgin Islands

operations segment consists of all banking activities conducted by the Corporation in the U.S. and British Virgin Islands, including commercial and retail banking services and insurance activities.

The accounting policies of the segments are the same as those referred to in Note 1 to the Corporation’s financial statements for the year ended December 31, 2010 contained in the Corporation’s Annual Report or Form 10-K.

The Corporation evaluates the performance of the segments based on net interest income, the estimated provision for loan and lease losses, non-interest income and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-earning assets less the allowance for loan and lease losses.

The following table presents information about the reportable segments (in thousands):


	Mortgage			Consumer			Commercial and			Treasury and			United States			Virgin Islands
(In thousands)	Banking			(Retail) Banking			Corporate			Investments			Operations			Operations			Total
For the quarter ended March 31, 2011:
Interest income	$	34,880		$	43,413		$	52,390		$	22,630		$	12,342		$	15,248		$	180,903
Net (charge) credit for transfer of funds		(18,692	)		1,838			(3,230	)		15,505			4,579			—			—
Interest expense		—			(11,505	)		—			(50,691	)		(10,797	)		(1,631	)		(74,624	)

Net interest income		16,188			33,746			49,160			(12,556	)		6,124			13,617			106,279
Provision for loan and lease losses		(675	)		(5,192	)		(51,124	)		—			(7,900	)		(23,841	)		(88,732	)
Non-interest income		6,787			6,929			2,220			19,143			143			5,263			40,485
Direct non-interest expenses		(7,815	)		(22,355	)		(9,153	)		(1,476	)		(8,602	)		(10,069	)		(59,470	)

Segment income (loss)	$	14,485		$	13,128		$	(8,897	)	$	5,111		$	(10,235	)	$	(15,030	)	$	(1,438	)


Average earnings assets	$	2,438,536		$	1,492,909		$	5,387,552		$	3,584,468		$	904,348		$	910,154		$	14,717,967

For the quarter ended March 31, 2010:
Interest income	$	40,026		$	47,562		$	58,842		$	42,774		$	13,930		$	17,854		$	220,988
Net (charge) credit for transfer of funds		(25,327	)		2,140			(6,826	)		30,013			—			—			—
Interest expense		—			(13,568	)					(77,740	)		(11,267	)		(1,550	)		(104,125	)

Net interest income		14,699			36,134			52,016			(4,953	)		2,663			16,304			116,863

Provision for loan and lease losses		(16,014	)		(12,493	)		(59,448	)		—			(71,202	)		(11,808	)		(170,965	)
Non-interest income		2,251			7,307			1,602			30,585			154			3,427			45,326
Direct non-interest expenses		(8,095	)		(24,000	)		(17,586	)		(1,612	)		(9,317	)		(11,009	)		(71,619	)

Segment (loss) income	$	(7,159	)	$	6,948		$	(23,416	)	$	24,020		$	(77,702	)	$	(3,086	)	$	(80,395	)


Average earnings assets	$	2,708,763		$	1,667,043		$	6,452,243		$	5,466,721		$	1,261,836		$	1,041,767		$	18,598,373

The following table presents a reconciliation of the reportable segment financial information to the consolidated totals:


	Quarter ended March 31,
	2011			2010
	(In thousands)
Net loss:
Total loss for segments and other	$	(1,438	)	$	(80,395	)
Other operating expenses		(23,396	)		(19,743	)

Loss before income taxes		(24,834	)		(100,138	)
Income tax expense		(3,586	)		(6,861	)

Total consolidated net loss	$	(28,420	)	$	(106,999	)


Average assets:
Total average earning assets for segments	$	14,717,967		$	18,598,373
Average non-earning assets		661,017			716,679

Total consolidated average assets	$	15,378,984		$	19,315,052

23 — COMMITMENTS AND CONTINGENCIES

The Corporation enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and commitments to sell mortgage loans at fair value. As of March 31, 2011, commitments to extend credit amounted to approximately $667.9 million and commercial and financial standby letters of credit amounted to approximately $80.5 million. Commitments to extend credit are agreements to lend to a

customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. In the case of credit cards and personal lines of credit, the Corporation can at any time and without cause, cancel the unused credit facility. Generally, the Corporation’s mortgage banking activities do not enter into interest rate lock agreements with prospective borrowers.

Lehman Brothers Special Financing, Inc. (“Lehman”) was the counterparty to the Corporation on certain interest rate swap agreements. During the third quarter of 2008, Lehman failed to pay the scheduled net cash settlement due to the Corporation, which constituted an event of default under those interest rate swap agreements. The Corporation terminated all interest rate swaps with Lehman and replaced them with other counterparties under similar terms and conditions. In connection with the unpaid net cash settlement due as of March 31, 2011 under the swap agreements, the Corporation has an unsecured counterparty exposure with Lehman, which filed for bankruptcy on October 3, 2008, of approximately $1.4 million. This exposure was reserved in the third quarter of 2008. The Corporation had pledged collateral of $63.6 million with Lehman to guarantee its performance under the swap agreements in the event payment there under was required. The book value of pledged securities with Lehman as of December 31, 2010 amounted to approximately $64.5 million.

The Corporation believes that the securities pledged as collateral should not be part of the Lehman bankruptcy estate given the fact that the posted collateral constituted a performance guarantee under the swap agreements and was not part of a financing agreement, and that ownership of the securities was never transferred to Lehman. Upon termination of the interest rate swap agreements, Lehman’s obligation was to return the collateral to the Corporation. During the fourth quarter of 2009, the Corporation discovered that Lehman Brothers, Inc., acting as agent of Lehman, had deposited the securities in a custodial account at JP Morgan Chase, and that, shortly before the filing of the Lehman bankruptcy proceedings, it had provided instructions to have most of the securities transferred to Barclays Capital (“Barclays”) in New York. After Barclays’s refusal to turn over the securities, during December 2009, the Corporation filed a lawsuit against Barclays in federal court in New York demanding the return of the securities.

During February 2010, Barclays filed a motion with the court requesting that the Corporation’s claim be dismissed on the grounds that the allegations of the complaint are not sufficient to justify the granting of the remedies therein sought. Shortly thereafter, the Corporation filed its opposition motion. A hearing on the motions was held in court on April 28, 2010. The court, on that date, after hearing the arguments by both sides, concluded that the Corporation’s equitable-based causes of action, upon which the return of the investment securities is being demanded, contain allegations that sufficiently plead facts warranting the denial of Barclays’ motion to dismiss the Corporation’s claim. Accordingly, the judge ordered the case to proceed to trial. Subsequent to the court decision, the district court judge transferred the case to the Lehman bankruptcy court for trial. While the Corporation believes it has valid reasons to support its claim for the return of the securities, the Corporation may not succeed in its litigation against Barclays to recover all or a substantial portion of the securities. Upon such transfer, the Bankruptcy court began to entertain the pre-trial procedures including discovery of evidence. In this regard, an initial scheduling conference was held before the United States Bankruptcy Court for the Southern District of New York on November 17, 2010, at which time a proposed case management plan was approved. Discovery has commenced pursuant to that case management plan and is currently scheduled for completion by September 15, 2011, but this timing is subject to adjustment.

Additionally, the Corporation continues to pursue its claim filed in January 2009 in the proceedings under the Securities Protection Act with regard to Lehman Brothers Incorporated in Bankruptcy Court, Southern District of New York. An estimated loss was not accrued as the Corporation is unable to determine the timing of the claim resolution or whether it will succeed in recovering all or a substantial portion of the collateral or its equivalent value. If additional relevant negative facts become available in future periods, a need to recognize a partial or full reserve of this claim may arise. Considering that the investment securities have not yet been recovered by the Corporation, despite its efforts in this regard, the Corporation has maintained such investments classified as non-performing since the second quarter of 2009.

As of March 31, 2011, First BanCorp and its subsidiaries were defendants in various legal proceedings arising in the ordinary course of business. Management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position, results of operations or cash flows.

24 — FIRST BANCORP (Holding Company Only) Financial Information

The following condensed financial information presents the financial position of the Holding Company only as of March 31, 2011 and December 31, 2010 and the results of its operations for the quarters ended March 31, 2011 and 2010.


	As of March 31,		As of December 31,
	2011		2010
	(In thousands)
Assets
Cash and due from banks	$	19,760	$	42,430
Money market investments		—		—
Investment securities available for sale, at market:
Equity investments		47		59
Other investment securities		1,300		1,300
Investment in First Bank Puerto Rico, at equity		1,224,020		1,231,603
Investment in First Bank Insurance Agency, at equity		6,659		6,275
Investment in FBP Statutory Trust I		3,093		3,093
Investment in FBP Statutory Trust II		3,866		3,866
Other assets		6,660		5,395

Total assets	$	1,265,405	$	1,294,021


Liabilities & Stockholders’ Equity
Liabilities:
Other borrowings	$	231,959	$	231,959
Accounts payable and other liabilities		6,177		4,103

Total liabilities		238,136		236,062


Stockholders’ equity		1,027,269		1,057,959

Total liabilities and stockholders’ equity	$	1,265,405	$	1,294,021


	Quarter Ended
	March 31,			March 31,
	2011			2010
	(In thousands)
Income:

Dividends from FirstBank Puerto Rico	$	—		$	751
Other income		52			50

		52			801


Expense:

Notes payable and other borrowings		1,718			1,672
Other operating expenses		510			689

		2,228			2,361


Investment-related proceeds and impairments on equity securities		679			(600	)


Loss before income taxes and equity in undistributed losses of subsidiaries		(1,497	)		(2,160	)

Income tax benefit		—			—

Equity in undistributed losses of subsidiaries		(26,923	)		(104,839	)


Net loss	$	(28,420	)	$	(106,999	)

25 — SUBSEQUENT EVENTS

On April 6, 2011, consistent with the Corporation’s deleverage strategy included in the Capital Plan submitted to regulators in the first quarter of 2011, the Corporation sold approximately $268 million in U.S. Agency MBS for which an approximate $20 million gain was recognized.

On April 15, 2011, the Corporation sold mortgage loans with an unpaid principal balance of $282 million to another financial institution. The Corporation recognized a gain of approximately $6.8 million associated with this transaction in the second quarter of 2011. These loans were reclassified to held for sale in the first quarter of 2011.

The Corporation has performed an evaluation of all other events occurring subsequent to March 31, 2011; management has determined that there are no additional events occurring in this period that required disclosure in or adjustment to the accompanying financial statements.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

SELECTED FINANCIAL DATA
(In thousands, except for per share and financial ratios)


	Quarter Ended
	March 31,
	2011			2010
Condensed Income Statement:

Total interest income	$	180,903		$	220,988
Total interest expense		74,624			104,125
Net interest income		106,279			116,863
Provision for loan and lease losses		88,732			170,965
Non-interest income		40,485			45,326
Non-interest expenses		82,866			91,362
Loss before income taxes		(24,834	)		(100,138	)
Income tax expense		(3,586	)		(6,861	)
Net loss		(28,420	)		(106,999	)
Net loss attributable to common stockholders		(35,437	)		(113,151	)

Per Common Share Results (1):

Net loss per share basic	$	(1.66	)	$	(18.34	)
Net loss per share diluted	$	(1.66	)	$	(18.34	)
Cash dividends declared	$	—		$	—
Average shares outstanding		21,303			6,168
Book value per common share	$	28.19		$	90.59
Tangible book value per common share (2)	$	26.24		$	83.45

Selected Financial Ratios (In Percent):
Profitability:

Return on average assets		(0.75	)		(2.25	)
Interest rate spread ⁽³⁾		2.63			2.45
Net interest margin ⁽³⁾		2.89			2.73
Return on average total equity		(11.09	)		(27.07	)
Return on average common equity		(23.42	)		(68.06	)
Average total equity to average total assets		6.76			8.30
Tangible common equity ratio ⁽²⁾		3.71			2.74
Dividend payout ratio		—			—
Efficiency ratio ⁽⁴⁾		56.46			56.33

Asset Quality:

Allowance for loan and lease losses to period end loans held for investment		5.06			4.33
Net charge-offs (annualized) to average loans		2.74			3.65
Provision for loan and lease losses to net charge-offs		110.83			138.12
Non-performing assets to total assets		9.34	⁽⁵⁾		9.49
Non-performing loans held for investment to total loans held for investment		11.12			12.35
Allowance to total non-performing loans held for investment		45.55			35.09
Allowance to total non-performing loans held for investment, excluding residential real estate loans		66.78			48.24

Other Information:
Common Stock Price: End of period	$	5.00		$	36.15


	As of		As of
	March 31,		December 31,
	2011		2010
Balance Sheet Data:

Total loans	$	11,395,269	$	11,956,202
Allowance for loan and lease losses		561,695		553,025
Money market and investment securities		2,933,880		3,369,332
Intangible assets		41,552		42,141
Deferred tax asset, net		7,669		9,269
Total assets		15,104,090		15,593,077
Deposits		11,716,436		12,059,110
Borrowings		2,200,236		2,311,848
Total preferred equity		426,724		425,009
Total common equity		585,121		615,232
Accumulated other comprehensive loss, net of tax		15,424		17,718
Total equity		1,027,269		1,057,959


(1)		All share and per share data has been adjusted to retroactively reflect the 1-for-15 reverse stock split effected January 7, 2011.

(2)		Non-GAAP measure. Refer to “Capital” discussion below for additional information of the components and reconciliation of these measures.

(3)		On a tax-equivalent basis and excluding the changes in fair value of derivative instruments and financial liabilities measured at fair value (see “Net Interest Income” discussion below for a reconciliation of this non-GAAP measure).

(4)		Non-interest expense to the sum of net interest income and non-interest income. The denominator includes non-recurring income and changes in the fair value of derivative instruments and financial instruments measured at fair value.

(5)		Non-performing assets, excluding non-performing loans held for sale, to total assets, excluding non-performing loans transferred to held for sale was 9.30% as of March 31, 2011.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the accompanying consolidated unaudited financial statements of First BanCorp (the “Corporation” or “First BanCorp”) and should be read in conjunction with such financial statements and the notes thereto.

DESCRIPTION OF BUSINESS

Description of Business

First BanCorp is a diversified financial holding company headquartered in San Juan, Puerto Rico offering a full range of financial products to consumers and commercial customers through various subsidiaries. First BanCorp is the holding company of FirstBank Puerto Rico (“FirstBank” or the “Bank”) and FirstBank Insurance Agency. Through its wholly-owned subsidiaries, the Corporation operates offices in Puerto Rico, the United States and British Virgin Islands and the State of Florida (USA) specializing in commercial banking, residential mortgage loan originations, finance leases, personal loans, small loans, auto loans, insurance agency and broker-dealer activities.

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

As discussed in Note 1 to the Consolidated Financial Statements, the Corporation has assessed its ability to continue as a going concern and has concluded that, based on current and expected liquidity needs and sources, management expects the Corporation to be able to meet its obligations for a reasonable period of time. 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, including, the appointment of a conservator or receiver. Also see “Liquidity Risk and Capital Adequacy.”

OVERVIEW OF RESULTS OF OPERATIONS

First BanCorp’s results of operations generally depend primarily upon its net interest income, which is the difference between the interest income earned on its interest-earning assets, including investment securities and loans, and the interest expense incurred on its interest-bearing liabilities, including deposits and borrowings. Net interest income is affected by various factors, including: the interest rate scenario; the volumes, mix and composition of interest-earning assets and interest-bearing liabilities; and the re-pricing characteristics of these assets and liabilities. The Corporation’s results of operations also depend on the provision for loan and lease losses, which significantly affected the results for the past two years, non-interest expenses (such as personnel, occupancy, deposit insurance premiums and other costs), non-interest income (mainly service charges and fees on loans and deposits and insurance income), gains (losses) on sales of investments, gains (losses) on mortgage banking activities, and income taxes.

Net loss for the quarter ended March 31, 2011 amounted to $28.4 million, or $1.66 loss per diluted common share, compared to a net loss of $107.0 million, or $18.34 loss per diluted common share for the quarter ended March 31, 2010. The Corporation’s financial results for the first quarter of 2011, as compared to the first quarter of 2010, were principally impacted by (i) a decrease in the provision for loan and lease losses of $82.2 million primarily related to lower charges to specific reserves, a decrease in the volume non-performing loans as well as reductions in charge-offs and the overall reduction of the loan portfolio, and (ii) a decrease of $8.5 million in non-interest expenses mainly related to a decrease in the reserve for off-balance sheet exposures such as letters of credit and unfunded commitments as well as a decrease in the FDIC deposit insurance premium. These factors were partially offset by a decrease of $10.6 million in net interest income primarily related to a decrease in average interest earning assets and a decrease of $4.8 million in non-interest income mainly related to lower gains on sales of investment securities.

The key drivers of the Corporation’s financial results for the quarter ended March 31, 2011 include the following:

	•		Net interest income for the quarter ended March 31, 2011 was $106.3 million, compared to $116.9 million for the same period in 2010. The decrease largely due to a decrease in the volume of interest earning assets, consistent with the Corporation’s deleveraging initiatives to preserve and improve the Corporation’s capital position. Average interest-earning assets decreased by $3.8 billion when compared to the first quarter of 2010, reflecting a $1.9 billion reduction in average total loans and leases mainly due to loan sales combined with non-renewal of maturing government credit facilities and pay-downs; average investment securities and other short-term investments decreased by $1.9 billion primarily related to sales and prepayments of U.S. agency MBS. Refer to the “Net Interest Income” discussion below for additional information.

	•		For the first quarter of 2011, the Corporation’s provision for loan and lease losses amounted to $88.7 million, compared to $171.0 million for the same period in 2010. The decrease in the provision for 2011 was primarily due to lower charges to specific reserves, a decrease in non-performing

			loans, charge-offs and the overall reduction of the loan portfolio. Much of the decrease in the provision is related to the construction and residential mortgage loan portfolios. Refer to the discussions under “Provision for loan and lease losses” and “Risk Management” below for an analysis of the allowance for loan and lease losses and non-performing assets and related ratios.

	•		As previously reported, at the end of the 2010 fourth quarter, the Corporation transferred $447 million of loans ($335 million of construction loans, $83 million of commercial mortgage loans and $29 million of commercial and industrial loans) to held for sale at a value of $281.6 million. This resulted in charge-offs at the time of transfer of $165.1 million ($127.0 million related to construction loans, $29.5 million related to commercial mortgage loans and $8.6 million related to commercial and industrial (“C&I”) loans). The 2010 fourth quarter provision for loan losses included $102.9 million related to this transfer of loans to loans held for sale. During the first quarter of 2011, these loans with a book value of $269.3 million were sold at essentially book value. The completion of the loan sale was the main driver of the reduction of $159.8 million in total non-performing loans during the first quarter of 2011.

	•		For the quarter ended March 31, 2011, the Corporation’s non-interest income amounted to $40.5 million, compared to $45.3 million for the quarter ended March 31, 2010. The decrease mainly reflects the impact of a $10.7 million gain on the sale of VISA Class C shares recognized in the first quarter of 2010, partially offset by a $4.3 million increase in income from mortgage banking activities. The increase in mortgage banking activities is mainly related to a $5.3 million gain recognized on the bulk sale of $236 million of performing residential mortgage loans to another financial. Refer to the “Non Interest Income” discussion below for additional information.

	•		Non-interest expenses for the first quarter of 2011 amounted to $82.9 million, compared to $91.4 million for the same period in 2010. The decrease is mainly related to a decrease of $6.6 million in charges to the reserve for off-balance sheet exposures due to reductions in letters of credit and unfunded loan commitment balances, a decrease of $3.2 million in the FDIC deposit insurance premium and a $1.3 million decrease in employee compensation and benefits. Refer to the “Non Interest Expenses” discussion below for additional information.

	•		For the first quarter of 2011, the Corporation recorded an income tax expense of $3.6 million, compared to an income tax expense of $6.9 million for the same period in 2010. The income tax expense for 2011 is mainly related to a net reduction of $2.0 million of the Corporation’s deferred tax assets associated with a reduction in statutory tax rates. Refer to the “Income Taxes” discussion below for additional information.

	•		Total assets as of March 31, 2011 amounted to $15.1 billion, down $489.0 million from $15.6 billion as of December 31, 2010. The Corporation continued to execute deleveraging initiatives and total loans decreased by $560.9 million due to loan sales completed in the first quarter of 2011. Total investment securities decreased by $430.5 million mainly due to sale and prepayments of U.S. agency MBS. Partially off- setting these decreases was an increase of $503.0 million in cash and cash equivalent related to proceeds received from sales of loans and investments. Refer to the “Financial Condition and Operating Data” discussion below for additional information.

	•		As of March 31, 2011, total liabilities amounted to $14.1 billion, a decrease of $458.3 million when compared to the balance as of December 31, 2010. The decrease is mainly attributable to a decrease of $538.1 million in brokered deposits, and a $113.0 million decrease in advances from FHLB, partially offset by an increase in core deposits of $177.2 million and an increase of $18.2 million in public funds. Refer to the “Risk Management — Liquidity and Capital Adequacy” discussion below for additional information about the Corporation’s funding sources.

	•		The Corporation’s stockholders’ equity amounted to $1.0 billion as of March 31, 2011, a decrease of $30.7 million compared to the balance as of December 31, 2010, driven by the net loss of $28.4 million for the first quarter, as well as a decrease of $2.3 million in accumulated other comprehensive income. Refer to the “Risk Management — Capital” section below for additional information, including information about the Corporation’s Capital Plan execution.

	•		Total loan production, including purchases, for the quarter ended March 31, 2011 was $696.0 million, compared to $637.0 million for the comparable period in 2010. The increase in loan production during 2011, as compared to the first quarter of 2010, was mainly related to the acquisition loan of $136 million provided by the Corporation to a new joint venture for the financing of loans sold to this entity and additional disbursements of approximately $45.7 million to the joint venture as part of a credit facility used to finance completion costs of the underlying projects under construction.

	•		Total non-performing loans as of March 31, 2011 amounted to $1.24 billion, a decrease of $159.8 million when compared to the balance as of December 31, 2010. The completion of the previously reported loan sale transaction with a joint venture removed approximately $153.6 million of non-performing loans from the balance sheet. Excluding the impact of the loan sale transaction, non-performing loans decreased by $5.9 million, reflecting declines in commercial mortgage and consumer non-performing loans

partially offset by increases in construction and C&I non-performing loans. Refer to the “Risk Management — Non-accruing and Non-performing Assets” section below for additional information.

CRITICAL ACCOUNTING POLICIES AND PRACTICES

The accounting principles of the Corporation and the methods of applying these principles conform with generally accepted accounting principles in the United States (“GAAP”). The Corporation’s critical accounting policies relate to the 1) allowance for loan and lease losses; 2) other-than-temporary impairments; 3) income taxes; 4) classification and related values of investment securities; 5) valuation of financial instruments; and 6) income recognition on loans. These critical accounting policies involve judgments, estimates and assumptions made by management that affect the amounts recorded for assets and liabilities and for contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from estimates, if different assumptions or conditions prevail. Certain determinations inherently require greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than those originally reported.

The Corporation’s critical accounting policies are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in First BanCorp’s 2010 Annual Report on Form 10-K. There have not been any material changes in the Corporation’s critical accounting policies since December 31, 2010.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the excess of interest earned by First BanCorp on its interest-earning assets over the interest incurred on its interest-bearing liabilities. First BanCorp’s net interest income is subject to interest rate risk due to the re-pricing and maturity mismatch of the Corporation’s assets and liabilities. Net interest income for the quarter ended March 31, 2011 was $106.3 million compared to $116.9 million for the comparable period in 2010. On a tax-equivalent basis and excluding the changes in the fair value of derivative instruments and unrealized gains and losses on liabilities measured at fair value, net interest income for the quarter ended March 31, 2011 was $108.8 million compared to $128.5 million for the comparable period of 2010.

The following tables include a detailed analysis of net interest income. Part I presents average volumes and rates on an adjusted tax-equivalent basis and Part II presents, also on an adjusted tax-equivalent basis, the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Corporation’s net interest income. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by prior period rates), and (ii) changes in rate (changes in rate multiplied by prior period volumes). Rate-volume variances (changes in rate multiplied by changes in volume) have been allocated to the changes in volume and rate based upon their respective percentage of the combined totals.

The net interest income is computed on an adjusted tax-equivalent basis and excluding: (1) the change in the fair value of derivative instruments, and (2) unrealized gains or losses on liabilities measured at fair value. For definition and reconciliation of this non-GAAP measure, refer to discussions below.

Part I


	Average Volume				Interest income ⁽¹⁾ / expense				Average Rate ⁽¹⁾
Quarter ended March 31,	2011		2010		2011		2010		2011			2010
	Dollars in thousands)
Interest-earning assets:

Money market and other short-term investments	$	488,087	$	904,600	$	309	$	436		0.26	%		0.20	%
Government obligations ⁽²⁾		1,344,053		1,283,568		6,189		8,820		1.87	%		2.79	%
Mortgage-backed securities		1,701,179		3,266,239		17,005		40,582		4.05	%		5.04	%
Corporate bonds		2,000		2,000		29		29		5.88	%		5.88	%
FHLB stock		51,332		68,380		713		843		5.63	%		5.00	%
Equity securities		24,662		1,802		1		15		0.02	%		3.38	%

Total investments ⁽³⁾		3,611,313		5,526,589		24,246		50,725		2.72	%		3.72	%

Residential mortgage loans		3,262,780		3,554,096		47,844		53,599		5.95	%		6.12	%
Construction loans		811,530		1,483,314		6,377		8,753		3.19	%		2.39	%
C&I and commercial mortgage loans		5,907,727		6,652,754		58,191		67,404		3.99	%		4.11	%
Finance leases		278,642		313,899		5,694		6,343		8.29	%		8.20	%
Consumer loans		1,411,940		1,565,404		40,520		44,820		11.64	%		11.61	%

Total loans ^{(4) (5)}		11,672,619		13,569,467		158,626		180,919		5.51	%		5.41	%

Total interest-earning assets	$	15,283,932	$	19,096,056	$	182,872	$	231,644		4.85	%		4.92	%


Interest-bearing liabilities:
Brokered CDs	$	6,019,057	$	7,452,195	$	32,769	$	44,382		2.21	%		2.42	%
Other interest-bearing deposits		5,238,157		4,678,391		21,290		21,583		1.65	%		1.87	%
Loans payable		—		804,444		—		2,177		—			1.10	%
Other borrowed funds		1,660,759		3,004,155		15,222		27,300		3.72	%		3.69	%
FHLB advances		576,729		971,596		4,745		7,694		3.34	%		3.21	%

Total interest-bearing liabilities ⁽⁶⁾	$	13,494,702	$	16,910,781	$	74,026	$	103,136		2.22	%		2.47	%

Net interest income					$	108,846	$	128,508


Interest rate spread										2.63	%		2.45	%

Net interest margin										2.89	%		2.73	%


(1)		On an adjusted tax-equivalent basis. The adjusted tax-equivalent yield was estimated by dividing the interest rate spread on exempt assets by 1 less Puerto Rico statutory tax rate as adjusted for changes to enacted tax rates (30.0% for the Corporation’s subsidiaries other than IBEs and 25.0% for the Corporation’s IBEs in 2011; 40.95% for the Corporation’s subsidiaries other than IBEs and 35.95% for the Corporation’s IBEs in 2010) and adding to it the cost of interest-bearing liabilities. The tax-equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax-equivalent basis. Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. Changes in the fair value of derivative and unrealized gains or losses on liabilities measured at fair value are excluded from interest income and interest expense because the changes in valuation do not affect interest paid or received.

(2)		Government obligations include debt issued by government sponsored agencies.

(3)		Unrealized gains and losses in available-for-sale securities are excluded from the average volumes.

(4)		Average loan balances include the average of non-performing loans.

(5)		Interest income on loans includes $2.2 million and $3.1 million for the first quarter of 2011 and 2010, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio.

(6)		Unrealized gains and losses on liabilities measured at fair value are excluded from the average volumes.

Part II


				Quarter ended March 31,
				2011 compared to 2010
				Increase (decrease)
				Due to:
	Volume			Rate			Total
	(In thousands)
Interest income on interest-earning assets:

Money market and other short-term investments	$	(235	)	$	108		$	(127	)
Government obligations		370			(3,001	)		(2,631	)
Mortgage-backed securities		(16,746	)		(6,831	)		(23,577	)
Corporate bonds		—			—			—
FHLB stock		(226	)		96			(130	)
Equity securities		97			(111	)		(14	)

Total investments		(16,740	)		(9,739	)		(26,479	)


Residential mortgage loans		(4,302	)		(1,453	)		(5,755	)
Construction loans		(4,669	)		2,293			(2,376	)
C&I and commercial mortgage loans		(7,380	)		(1,833	)		(9,213	)
Finance leases		(722	)		73			(649	)
Consumer loans		(4,430	)		130			(4,300	)

Total loans		(21,503	)		(790	)		(22,293	)

Total interest income		(38,243	)		(10,529	)		(48,772	)


Interest expense on interest-bearing liabilities:

Brokered CDs		(8,029	)		(3,584	)		(11,613	)
Other interest-bearing deposits		2,465			(2,758	)		(293	)
Loan payable		(2,177	)		—			(2,177	)
Other borrowed funds		(12,347	)		269			(12,078	)
FHLB advances		(3,212	)		263			(2,949	)

Total interest expense		(23,300	)		(5,810	)		(29,110	)

Change in net interest income		(14,943	)		(4,719	)		(19,662	)

Portions of the Corporation’s interest-earning assets, mostly investments in obligations of some U.S. Government agencies and sponsored entities, generate interest which is exempt from income tax, principally in Puerto Rico. Also, interest and gains on sales of investments held by the Corporation’s international banking entities are tax-exempt under the Puerto Rico tax law, except for a temporary 5% tax rate imposed by the Puerto Rico Government on IBEs’ net income effective for years that commenced after December 31, 2008 and before January 1, 2012 (refer to the Income Taxes discussion below for additional information). To facilitate the comparison of all interest data related to these assets, the interest income has been converted to an adjusted taxable equivalent basis. The tax equivalent yield was estimated by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate as adjusted for changes to enacted tax rates (30.0% for the Corporation’s subsidiaries other than IBEs and 25.0% for the Corporation’s IBEs in 2011) and adding to it the average cost of interest-bearing liabilities. The computation considers the interest expense disallowance required by Puerto Rico tax law. Refer to the “Income Taxes” discussion below for additional information of the Puerto Rico tax law.

The presentation of net interest income excluding the effects of the changes in the fair value of the derivative instruments and unrealized gains or losses on liabilities measured at fair value (“valuations”) provides additional information about the Corporation’s net interest income and facilitates comparability and analysis. The changes in the fair value of the derivative instruments and unrealized gains or losses on liabilities measured at fair value have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively, or on interest payments exchanged with interest rate swap counterparties.

The following table reconciles net interest income in accordance with GAAP to net interest income excluding valuations, and net interest income on an adjusted tax-equivalent basis, net interest rate spread and net interest margin on a GAAP basis to these items excluding valuations and on an adjusted tax-equivalent basis:


	Quarter Ended March 31,
	2011			2010
Net Interest Income (in thousands)
Interest Income — GAAP	$	180,903		$	220,988
Unrealized (gain) loss on derivative instruments		(345	)		744

Interest income excluding valuations		180,558			221,732
Tax-equivalent adjustment		2,314			9,912

Interest income on a tax-equivalent basis excluding valuations		182,872			231,644

Interest Expense — GAAP		74,624			104,125
Unrealized (loss) gain on derivative instruments and liabilities measured at fair value		(598	)		(989	)

Interest expense excluding valuations		74,026			103,136


Net interest income — GAAP	$	106,279		$	116,863


Net interest income excluding valuations	$	106,532		$	118,596


Net interest income on a tax-equivalent basis excluding valuations	$	108,846		$	128,508


Average Balances (in thousands)
Loans and leases	$	11,672,619		$	13,569,467
Total securities and other short-term investments		3,611,313			5,526,589

Average Interest-Earning Assets	$	15,283,932		$	19,096,056


Average Interest-Bearing Liabilities	$	13,494,702		$	16,910,781


Average Yield/Rate
Average yield on interest-earning assets — GAAP		4.80	%		4.69	%
Average rate on interest-bearing liabilities — GAAP		2.24	%		2.50	%

Net interest spread — GAAP		2.56	%		2.19	%

Net interest margin — GAAP		2.82	%		2.48	%


Average yield on interest-earning assets excluding valuations		4.79	%		4.71	%
Average rate on interest-bearing liabilities excluding valuations		2.22	%		2.47	%

Net interest spread excluding valuations		2.57	%		2.24	%

Net interest margin excluding valuations		2.83	%		2.52	%


Average yield on interest-earning assets on a tax-equivalent basis and excluding valuations		4.85	%		4.92	%
Average rate on interest-bearing liabilities excluding valuations		2.22	%		2.47	%

Net interest spread on a tax-equivalent basis and excluding valuations		2.63	%		2.45	%

Net interest margin on a tax-equivalent basis and excluding valuations		2.89	%		2.73	%

The following table summarizes the components of the changes in fair values of interest rate swaps and interest rate caps, which are included in interest income:


	Quarter Ended March 31,
(In thousands)	2011		2010
Unrealized gain (loss) on derivatives (economic undesignated hedges):

Interest rate caps	$	—	$	(731	)
Interest rate swaps on loans		345		(13	)

Net unrealized gain (loss) on derivatives (economic undesignated hedges)	$	345	$	(744	)

The following table summarizes the components of the net unrealized gain and loss on derivatives (economic undesignated hedges) and net unrealized gain and loss on liabilities measured at fair value which are included in interest expense:


	Quarter ended March 31,
(In thousands)	2011		2010
Unrealized loss on derivatives (economic undesignated hedges):

Interest rate swaps and options on stock index deposits	$	—	$	1
Interest rate swaps and options on stock index notes		5		30

Net unrealized loss on derivatives (economic undesignated hedges)	$	5	$	31


Unrealized loss on liabilities measured at fair value:

Unrealized loss on medium-term notes		593		958

Net unrealized loss on liabilities measured at fair value	$	593	$	958


Net unrealized loss on derivatives (economic undesignated hedges) and liabilities measured at fair value	$	598	$	989

Interest income on interest-earning assets primarily represents interest earned on loans receivable and investment securities.

Interest expense on interest-bearing liabilities primarily represents interest paid on brokered CDs, branch-based deposits, repurchase agreements, advances from the FHLB and FED and notes payable.

Unrealized gains or losses on derivatives represent changes in the fair value of derivatives, primarily interest rate swaps used for protection against rising interest rates.

Unrealized gains or losses on liabilities measured at fair value represent the change in the fair value of such liabilities (medium-term notes), other than the accrual of interests.

Derivative instruments, such as interest rate swaps, are subject to market risk. While the Corporation does have certain trading derivatives to facilitate customer transactions, the Corporation does not utilize derivative instruments for speculative purposes. As of March 31, 2011, most of the interest rate swaps outstanding are used for protection against rising interest rates. Refer to Note 9 of the accompanying unaudited consolidated financial statements for further details concerning the notional amounts of derivative instruments and additional information. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on net interest income. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future.

Net interest income decreased 9% to $106.3 million for the first quarter of 2011 from $116.9 million in the first quarter of 2010. The decrease in net interest income is largely due to the decrease in volume of interest-earning assets, consistent with the Corporation’s capital plan that includes deleverage initiatives to preserve and improve the Corporation’s capital position. Average total loans and leases decreased 14% or $1.9 billion mainly due to loan sales completed throughout 2010 and in the first quarter of 2011. Average investment securities and other short-term investments decreased 35% or $1.9 billion mainly as a result of sales and prepayments of mortgage-backed securities of which proceeds have been used to pay-down high cost interest borrowings such as repurchase agreements and brokered CDs. The Corporation has sold approximately $2.3 billion of investment securities over the last 12 months, mainly U.S. agency MBS, including the sale during the first quarter of 2011 of approximately $330 million of U.S. agency MBS originally intended to be held to maturity.

The average volume of all major loan categories, in particular the average volume of construction and commercial loans, decreased when compared to the first quarter of 2010. The decrease of $671.8 million in the average volume of construction loans is primarily related to sales of performing and non-performing loans completed over the last 12 months, including construction loans with a book value of $201.5 million sold in the first quarter of 2011 as part of the aforementioned loan sale transaction with the joint venture. Before charge-offs recorded at the time of the transfer of loans to held for sale in the fourth quarter of 2010, the carrying value of such construction loans sold to the joint venture amounted to $325.4 million. Other reductions came from charge-off activity, repayments and sales of non-performing credits in Florida in 2010. Average C&I and commercial mortgage loans decreased by $745.0 million primarily related to both paydowns and charge-offs, including repayments of facilities granted to the Puerto Rico and Virgin Islands governments, and loans sold. The average volume of residential mortgage loans decreased by $291.3 million primarily related to sales of performing loans, including $236 million of performing residential mortgage loans sold to another financial institution in the first

quarter of 2011, pay-downs and charge-off activity. The average volume of consumer loans, including finance leases, decreased by $188.7 million, resulting from paydowns and charge-offs that exceeded new loan originations.

Partially offsetting the decline in the average volume of earning assets was an increase of 16 basis points in the net interest margin (on a tax equivalent basis), reflecting the positive impacts of an increase in core deposits at a lower cost coupled with benefits from the roll-off and repayments of higher cost funds, such as maturing brokered CDs, and the stabilization of non-performing loan levels. The overall average cost of funding decreased 25 basis points in the first quarter of 2011 when compared to the same period in 2010. These favorable factors were partially offset by lower yields on MBS. The average balance of interest bearing non-brokered deposits increased $559.8 million while the average balance of brokered CDs decreased by $1.4 billion.

On an adjusted tax-equivalent basis, net interest income decreased by $19.7 million, or 15%, for the first quarter of 2011 compared to the same period in 2010. The decrease for the first quarter of 2011, as compared to the corresponding period of 2010, was principally due to a decrease in average interest earning assets, as discussed above, while the tax-equivalent adjustment decreased by $7.6 million. The tax-equivalent adjustment increases interest income on tax-exempt securities and loans by an amount which makes tax-exempt income comparable, on a pre-tax basis, to the Corporation’s taxable income as previously stated. The decrease in the tax-equivalent adjustment was mainly related to decreases in tax-exempt assets, lower yields on U.S. agency and MBS held by the Bank’s IBE subsidiary, and due to the reduction in the statutory tax rates.

Provision and Allowance for Loan and Lease Losses

The provision for loan and lease losses is charged to earnings to maintain the allowance for loan and lease losses at a level that the Corporation considers adequate to absorb probable losses inherent in the portfolio. The adequacy of the allowance for loan and lease losses is also based upon a number of additional factors including trends in charge-offs and delinquencies, current economic conditions, the fair value of the underlying collateral and the financial condition of the borrowers, and, as such, includes amounts based on judgments and estimates made by the Corporation. Although the Corporation believes that the allowance for loan and lease losses is adequate, factors beyond the Corporation’s control, including factors affecting the economies of Puerto Rico, the United States, the U.S. Virgin Islands and the British Virgin Islands, may contribute to delinquencies and defaults, thus necessitating additional reserves.

For the quarter ended on March 31, 2011, the Corporation recorded a provision for loan and lease losses of $88.7 million compared to $171.0 million for the comparable period in 2010. The decrease was mainly related to a $76.8 million decrease in the provision for construction loans due to lower charge-offs driven by stabilization in property values and the reduction in the concentration of residential construction loans. Additionally, a decrease in inflows of construction loans to non-accrual status and a decrease in the level of adversely classified loans, which require higher reserves, contributed to a lower provision. Total adversely classified construction loans decreased $481.4 million, or 54%, over the last 12 months. The decrease in adversely classified loans is a result of the execution of several initiatives to accelerate the de-risking of the balance sheet, including the aforementioned loan portfolio sale to a joint venture.

The provision for commercial mortgage loans decreased by $24.2 million primarily driven by a decrease in non-performing loans. The provision for residential mortgage loans decreased by $22.4 million driven by improvements in delinquency and charge-off trends and the provision for consumer loans, including finance leases, decreased by $8.0 million primarily related to improvements in charge-off trends and economic factors. Partially offsetting the aforementioned decreases was a $49.2 million increase in the provision for C&I loans driven by an increase in non-performing loans.

In terms of geography, the Corporation recorded a provision of $57.0 million in the first quarter of 2011 for its loan portfolio in Puerto Rico compared to $88.0 million in the comparable 2010 quarter, a decrease of $31.0 million. The decrease is mainly related to the construction and residential mortgage loan portfolio. The provision for construction loans in Puerto Rico decreased by $54.2 million mainly due to reductions in charge-offs, non-performing and adversely classified loans as mentioned above. The provision for residential mortgage loans decreased by $15.3 million due to improvements in delinquency and charge-off trends, while the provision for consumer loans, including finance leases decreased by $7.3 million. The provision for commercial mortgage loans in Puerto Rico decreased by $1.0 million due to a reduction in non-performing and adversely classified loans. The aforementioned decreases in the provision were partially offset by an increase of $46.9 million in the provision for C&I loans mainly due to an increase in the migration of loans to non-accrual status.

With respect to the loan portfolio in the United States, the Corporation recorded a $7.9 million provision for the first quarter of 2011 compared to a $71.2 million provision for the first quarter of 2010. The decrease of $63.3 million is mainly related to the construction and commercial mortgage loan portfolios. The provision for construction loans in the United States decreased by $35.2 million compared to the first quarter of 2010, primarily due to decreases to specific reserves, as a result of sales of non-performing loans throughout 2010, the slower migration of loans to non-performing status and the overall reduction of the Corporation’s exposure to construction loans in Florida to $70.4 million, compared to an exposure of $277.6 million a year ago. The provision for commercial mortgage loans in the United States decreased by $23.2 million compared to the first quarter of 2010 also due to lower charges to specific reserves and a slower migration of

loans to non-accrual status. The provision for residential mortgage loans decreased by $6.0 million, while the provision for C&I loans in the United States portfolio increased slightly by $1.3 million.

The provision recorded for the loan portfolio in the Virgin Islands amounted to $23.8 million in the first quarter of 2011, an increase of $12.0 million compared to the same period a year ago mainly associated with the construction loan portfolio. The provision for construction loans increased by $12.5 million substantially related to one relationship amounting to $100 million which was placed in non-accrual status. Refer to the discussions under “Credit Risk Management” below for an analysis of the allowance for loan and lease losses, non-performing assets, impaired loans and related information and refer to the discussions under “Financial Condition and Operating Analysis — Loan Portfolio” and under “Risk Management — Credit Risk Management” below for additional information concerning the Corporation’s loan portfolio exposure in the geographic areas where the Corporation does business.

Non-Interest Income


	Quarter Ended March 31,
	2011		2010
	(In thousands)
Other service charges on loans	$	1,718	$	1,756
Service charges on deposit accounts		3,332		3,468
Mortgage banking activities		6,591		2,500
Insurance income		1,333		2,275
Broker-dealer income		48		207
Other operating income		8,122		4,356


Non-interest income before net gain on investments		21,144		14,562


Proceeds from securities litigation settlement		631		—
Gain on VISA shares and related proceeds		—		10,668
Net gain on sale of investments		18,710		20,696
OTTI on equity securities		—		(600	)

Net gain on investments		19,341		30,764


Total	$	40,485	$	45,326

Non-interest income primarily consists of other service charges on loans; service charges on deposit accounts; commissions derived from various banking, securities and insurance activities; gains and losses on mortgage banking activities; and net gains and losses on investments and impairments.

Other service charges on loans consist mainly of service charges on credit card-related activities and other non-deferrable fees (e.g. agent, commitment and drawing fees).

Service charges on deposit accounts include monthly fees and other fees on deposit accounts.

Income from mortgage banking activities includes gains on sales and securitization of loans and revenues earned for administering residential mortgage loans originated by the Corporation and subsequently sold with servicing retained. In addition, lower-of-cost-or-market valuation adjustments to the Corporation’s residential mortgage loans held for sale portfolio and servicing rights portfolio, if any, are recorded as part of mortgage banking activities.

Insurance income consists of insurance commissions earned by the Corporation’s subsidiary, FirstBank Insurance Agency, Inc., and the Bank’s subsidiary in the U.S. Virgin Islands, FirstBank Insurance V.I., Inc. These subsidiaries offer a wide variety of insurance business.

The other operating income category is composed of miscellaneous fees such as debit, credit card and point of sale (POS) interchange fees and check and cash management fees and includes commissions from the Corporation’s broker-dealer subsidiary, FirstBank Puerto Rico Securities.

The net gain (loss) on investment securities reflects gains or losses as a result of sales that are consistent with the Corporation’s investment policies as well as OTTI charges on the Corporation’s investment portfolio.

Non-interest income decreased $4.8 million to $40.5 million for the first quarter of 2011 from $45.3 million for the first quarter of 2010. The decrease in non-interest income was primarily a result of a decrease in gains from sales of investments primarily due to a $10.7 million gain on the sale of VISA Class C shares recognized in the first quarter of 2010 and a reduction of $2.0 million in gains on sale of MBS due to a lower volume of sales. Some of the most significant transactions that affected non-interest income during the first quarter of 2011 follow:

	•		An $18.7 million gain on the sale of approximately $330 million of FNMA MBS as part of the Corporation’s deleverage strategies. There were also proceeds of approximately $0.6 million in the first quarter of 2011 from a securities litigation settlement.

	•		A $5.3 million gain on the bulk sale of $236 million of performing residential mortgage loans to another financial institution.

	•		A $2.8 million gain on substantially all of the assets of FirstBank Insurance Agency VI. This transaction represents a repositioning of the Bank’s insurance business in the Virgin Islands to bring it more in line with its Puerto Rico insurance business model.

Non-Interest Expenses

The following table presents the detail of non-interest expenses for the periods indicated:


	Quarter Ended March 31,
	2011		2010
	(In thousands)
Employees’ compensation and benefits	$	30,439	$	31,728
Occupancy and equipment		15,250		14,851
Deposit insurance premium		13,465		16,653
Other taxes, insurance and supervisory fees		4,967		5,686
Professional fees — recurring		4,180		4,529
Professional fees — non-recurring		957		758
Servicing and processing fees		2,211		2,008
Business promotion		2,664		2,205
Communications		1,878		2,114
Net loss on REO operations		5,500		3,693
Other		1,355		7,137

	$	82,866	$	91,362

Non-interest expenses decreased $8.5 million to $82.9 million for the first quarter of 2011 from $91.4 million for the first quarter of 2010. The decrease reflected:

	•		A decrease of $3.2 million in the FDIC deposit insurance premium primarily related to a decrease in average deposits (mainly in brokered CDs).

	•		A $6.6 million decrease in the provision for off-balance sheet exposures due to reductions in letters of credit and unfunded loan commitment balances.

	•		A $1.3 million decrease in employee compensation and benefits as a result of cost reduction strategies implemented during 2010 and reductions in headcount. Over the last 12 months, the Corporation reduced its headcount by approximately 138 or 5%.

The aforementioned decreases were partially offset by a $1.8 million increase in foreclosure-related expenses mainly due to higher write-downs to the value of repossessed properties and costs associates with a higher inventory.

Income Taxes

FINANCIAL CONDITION AND OPERATING DATA ANALYSIS

Assets

Total assets were approximately $15.1 billion as of March 31, 2011, down $489.0 million from approximately $15.6 billion as of December 31, 2010. The Corporation continued with the execution of deleverage initiatives included in its Capital Plan. Total loans decreased by $560.9 million driven by the completion of the sale of loans with an approximate book value of $269.3 million to a joint venture and the bulk sale of approximately $236 million of residential mortgage loans to a another financial institution. Total investment securities decreased by $430.5 million mainly due to the sale and prepayments of U.S. agency MBS, including the sale of $330 million of MBS originally intended to be held to maturity, consistent with the deleveraging initiatives included in the Corporation’s Capital Plan. After the sale, in line with the Corporation’s ongoing capital management strategy, the remaining $89 million of investment securities held in the held-to-maturity portfolio were reclassified to the available-for-sale portfolio during the first quarter of 2011. Also, U.S. agency debt securities of approximately $50 million were called prior to their contractual maturities during the first quarter of 2011. Proceeds from sales of loans and investments, and the increase in core deposits, contributed to the increase of $503.0 million in cash and cash equivalents that strengthened the liquidity reserves. Such excess liquidity is expected to be used, in part, to pay down brokered CDs maturing during the second quarter of 2011. Refer to the “Loan portfolio” and “Investment Activities” discussion below for additional information.

Loan Portfolio

The following table presents the composition of the Corporation’s loan portfolio, including loans held for sale, as of the dates indicated:


	March 31,			December 31,
(In thousands)	2011			2010
Residential mortgage loans	$	2,896,692		$	3,417,417


Commercial loans:
Commercial mortgage loans		1,588,768			1,670,161
Construction loans		682,245			700,579
Commercial and Industrial loans		3,977,301			3,861,545
Loans to local financial institutions collateralized by real estate mortgages		285,359			290,219

Total commercial loans		6,533,673			6,522,504


Finance leases		272,392			282,904


Consumer loans and other loans		1,387,018			1,432,611


Total loans held for investment		11,089,775			11,655,436

Loans held for sale		305,494			300,766

		11,395,269			11,956,202

Less:
Allowance for loan and lease losses		(561,695	)		(553,025	)


Total loans, net	$	10,833,574		$	11,403,177

As of March 31, 2011, the Corporation’s total loans decreased by $569.6 million, when compared with the balance as of December 31, 2010. All major loan categories decreased from 2010 levels mainly as a result of loan sales coupled with pay-downs and charge-offs, with the exception of C&I loans which increased due to loans granted in relation to the loan sale transaction with the joint venture.

Of the total gross loan portfolio held for investment of $11.1 billion as of March 31, 2011, approximately 83% have credit risk concentration in Puerto Rico, 8% in the United States (mainly in the state of Florida) and 9% in the Virgin Islands, as shown in the following table:


	Puerto			Virgin			United
As of March 31, 2011	Rico			Islands			States			Total
	(In thousands)
Residential mortgage loans	$	2,147,770		$	426,530		$	322,392		$	2,896,692


Commercial loans:
Commercial mortgage loans		1,063,541			66,975			458,252			1,588,768
Construction loans		423,800			188,027			70,418			682,245
Commercial and Industrial loans		3,750,455			198,457			28,389			3,977,301
Loans to a local financial institution collateralized by real estate mortgages		285,359			—			—			285,359

Total commercial loans		5,523,155			453,459			557,059			6,533,673

Finance leases		272,392			—			—			272,392

Consumer loans		1,289,627			66,615			30,776			1,387,018

Total loans held for investment, gross		9,232,944			946,604			910,227			11,089,775
Allowance for loan and lease losses		(431,814	)		(69,797	)		(60,084	)		(561,695	)

Total loans held for investment, net		8,801,130			876,807			850,143			10,528,080
Loans held for sale		299,493			6,001			—			305,494

	$	9,100,623		$	882,808		$	850,143		$	10,833,574

Loan Production

First BanCorp relies primarily on its retail network of branches to originate residential and consumer loans. The Corporation supplements its residential mortgage originations with wholesale servicing released mortgage loan purchases from mortgage bankers. The Corporation manages its construction and commercial loan originations through centralized units and most of its originations come from existing customers as well as through referrals and direct solicitations.

The following table details First BanCorp’s loan production, including purchases and refinancing, for the periods indicated:


	Quarter Ended March 31,
	2011		2010
	(In thousands)
Residential real-estate	$	115,226	$	126,672
C&I and commercial mortgage		419,023		304,935
Construction		35,357		50,853
Finance leases		20,110		23,050
Consumer		106,290		131,483

Total loan production	$	696,006	$	636,993

The Corporation is experiencing continued loan demand and has continued with its targeted origination strategies. Total loan originations for the first quarter of 2011, including refinancing and draws from existing commitments, amounted to approximately $696.0 million, an increase of $59.0 million when compared to the same period in 2010. The increase is primarily related to a $114.1 million increase in commercial loan originations, which include the acquisition loan of $136 million provided by FirstBank to the joint venture for the financing of the loans sold and additional disbursements of approximately $45.7 million to the joint venture as part of a credit facility used to finance completion costs of the underlying projects under construction. The remaining portfolios reflected decreases in originations. Residential mortgage loan originations, including purchases of $35.6 million, amounted to $115.2 million, down from $126.7 million in the first quarter of 2010. Consumer loan originations amounted to $106.3 million, down from $131.5 million for the same quarter in 2010. Credit facilities granted to government were $21.6 million for the first quarter of 2011 compared to $76 million for the first quarter of 2010.

Residential Real Estate Loans

As of March 31, 2011, the Corporation’s residential real estate loan portfolio held for investment decreased by $520.7 million as compared to the balance as of December 31, 2010. The majority of the Corporation’s outstanding balance of residential mortgage loans consists of fixed-rate, fully amortizing, full documentation loans. In accordance with the Corporation’s underwriting guidelines, residential real estate loans are mostly fully documented loans, and the Corporation is not actively involved in the origination of negative amortization loans or adjustable-rate mortgage loans. The decrease was mainly attributed to a combination of sales of $236 million of loans to another financial institution, sales of $20.7 million to FNMA and FHLMC in the secondary market, and securitizations amounting to $41.5 million. Also, during the first quarter of 2011 the Corporation reclassified approximately $282 million of residential mortgage loans held for investment to held for sale, pursuant to a letter of intent to sell loans entered into by FirstBank with another financial institution. These loans were subsequently sold in April of 2011. Refer to the “Contractual Obligations and Commitments” discussion below for additional information about outstanding commitments to sell mortgage loans.

Commercial and Construction Loans

As of March 31, 2011, the Corporation’s commercial and construction loan portfolio held for investment increased by $11.2 million, as compared to the balance as of December 31, 2010, due mainly to $181.7 million in loans granted to the joint venture as part of the loan sale transaction, partially offset by $64.6 million in charge-offs, pay downs and loans foreclosed. The Corporation’s commercial loans are primarily variable- and adjustable-rate loans.

On February 16, 2011, the Corporation sold an asset portfolio consisting on performing and non-performing construction, commercial mortgage and C&I loans with an aggregate book value of $269.3 million to a new joint venture (the “Joint Venture”) organized under the Laws of the Commonwealth of Puerto Rico and majority owned by PRLP Ventures LLC (“PRLP”), a company created by Goldman, Sachs & Co. and Caribbean Property Group (“CPG”). In exchange for the sale, the Corporation received $88.5 million in cash; a 35% interest in the Joint Venture, valued at $47.6 million; and $136.1 million representing seller financing provided by FirstBank, which has a 7-year maturity and bears variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entity’s assets as well as the PRLP’s 65% ownership interest in the Joint Venture. As of March 31, 2011, the carrying amount of the loan is $136.1 million and is included in the Corporation’s C&I loan receivable portfolio; while the carrying value of FirstBank’s equity interest is $47.6 million as of March 31, 2011 and is included as part of Other Equity Securities in the Statement of Financial Condition.

Aside from loans extended to the Puerto Rico and its political subdivision, the largest loan to one borrower as of March 31, 2011 in the amount of $285.4 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. This commercial loan is secured by individual real-estate loans, mostly 1-4 residential mortgage loans.

Construction loans originations decreased by $15.5 million due to the strategic decision by the Corporation to reduce its exposure to construction projects in both Puerto Rico and the United States. The Corporation’s construction lending volume has been stagnant for the last two years due to the slowdown in the U.S. housing market and the current economic environment in Puerto Rico. The Corporation has reduced its exposure to condo-conversion loans in its Florida operations and construction loan originations in Puerto Rico are mainly draws from existing commitments. Approximately 875 residential housing units, or 4% of the total housing inventory available in the Puerto Rico market, are residential projects financed by the Corporation, of which approximately 687 are units with sales prices under $200,000. More than 95% of the construction loan originations in 2011 are related to disbursements from previous established commitments and new loans are mainly associated with construction loans to individuals. In Puerto Rico, absorption rates on low income residential projects financed by the Corporation showed signs of improvement during 2010 but the market is still under pressure because of an oversupply of housing units compounded by lower demand and diminished consumer purchasing power and confidence.

As a key initiative to increase the absorption rate in residential construction projects, the Corporation has engaged in discussions with developers to review sales strategies and provide additional incentives to supplement the Puerto Rico Government housing stimulus package enacted in September 2010. From September 1, 2010 to June 30, 2011, the Government of Puerto Rico is providing tax and transaction fees incentives to both purchasers and sellers (whether a Puerto Rico resident or not) of new and existing residential property, as well as commercial property with a sales price of no more than $3 million. Among its provisions, the housing stimulus package provides various types of income and property taxes exemptions as well as reduced closing costs, including:

Purchase/Sale of New Residential Property within the Period

- Any long term capital gain upon selling new residential property will be 100% exempt from the payment of income taxes. The purchaser will have an exemption for five years on the payment of property taxes. The cost of filing stamps and seals are waived during the period.

Purchase/Sale of Existing Residential Property, or Commercial Property with a Sales Price of No More than $3 Million, within the Period (“Qualified Property”)

- Any long term capital gain upon selling Qualified Property within the Period will be 100% exempt from the payment of income taxes. Fifty percent of the long term capital gain derived from the future sale of the foregoing property will be exempt from the payment of income taxes, including the basic alternative tax and the alternative minimum tax. Fifty percent of the cost of filing stamps and seals are waived during the period.

Rental Income from Residential Properties

- Income derived from the rental of new or existing residential property will be exempt from income taxes for a period of up to 10 calendar years, commencing on January 1, 2011.

This legislation is aimed to alleviate some of the stress in the construction industry.

The construction loan portfolio held for investment in Puerto Rico decreased by $13.5 million during the first quarter of 2011 driven mainly by charge-offs. In Florida the construction portfolio decreased by $8.1 million, also driven by charge-offs during the first quarter of 2011.

The composition of the Corporation’s construction loan portfolio held for investment as of March 31, 2011 by category and geographic location follows:


	Puerto			Virgin
As of March 31, 2011	Rico			Islands			Florida			Total
	(In thousands)
Loans for residential housing projects:
High-rise ⁽¹⁾	$	16,590		$	—		$	—		$	16,590
Mid-rise ⁽²⁾		34,021			4,939			15,159			54,119
Single-family detach		51,208			9,620			9,049			69,877

Total for residential housing projects		101,819			14,559			24,208			140,586


Construction loans to individuals secured by residential properties		12,182			10,076			—			22,258
Condo-conversion loans		7,619			—			—			7,619
Loans for commercial projects		140,392			120,078			—			260,470
Bridge loans — residential		57,133			—			—			57,133
Bridge loans — commercial		—			24,032			12,997			37,029
Land loans — residential		54,256			16,497			22,550			93,303
Land loans — commercial		48,380			2,126			10,679			61,185
Working capital		3,078			1,041			—			4,119

Total before net deferred fees and allowance for loan losses		424,859			188,409			70,434			683,702

Net deferred fees		(1,059	)		(382	)		(16	)		(1,457	)

Total construction loan portfolio, gross		423,800			188,027			70,418			682,245

Allowance for loan losses		(82,675	)		(57,624	)		(16,898	)		(157,197	)


Total construction loan portfolio, net	$	341,125		$	130,403		$	53,520		$	525,048


(1)		For purposes of the above table, high-rise portfolio is composed of buildings with more than 7 stories, composed of two projects in Puerto Rico.

(2)		Mid-rise relates to buildings of up to 7 stories.

The following table presents further information on the Corporation’s construction portfolio as of and for the quarter ended March 31, 2011:


	(Dollars in thousands)
Total undisbursed funds under existing commitments	$	155,783


Construction loans held for investment in non-accrual status ⁽¹⁾	$	341,179


Net charge offs — Construction loans ⁽²⁾	$	17,238


Allowance for loan losses — Construction loans	$	157,197


Non-performing construction loans to total construction loans		50.01	%


Allowance for loan losses — construction loans to total construction loans		23.04	%


Net charge-offs (annualized) to total average construction loans ⁽²⁾		8.50	%


(1)		Excludes $5.5 million of non-performing construction loans held for sale as of March 31, 2011.

(2)		Includes charge-offs of $5.2 million related to construction loans in Florida and $12.0 million related to construction loans in Puerto Rico.

The following summarizes the construction loans for residential housing projects in Puerto Rico segregated by the estimated selling price of the units:


(In thousands)
Under $300k	$	63,289
$300k - $600k		11,120
Over $600k (1)		27,410

	$	101,819


(1)		Mainly composed of one single-family detached projects that account for approximately 71% of the residential housing projects in Puerto Rico with selling prices over $600k.

Consumer Loans and Finance Leases

As of March 31, 2011, the Corporation’s consumer loan and finance leases portfolio decreased by $56.1 million, as compared to the portfolio balance as of December 31, 2010. This is mainly the result of repayments and charge-offs that on a combined basis more than offset the volume of loan originations during the first quarter of 2011. Nevertheless, the Corporation experienced a decrease in net charge-offs for consumer loans and finance leases that amounted to $10.3 million for the first quarter of 2011, as compared to $14.1 million for the same period a year ago.

Investment Activities

As part of its strategy to diversify its revenue sources and maximize its net interest income, First BanCorp maintains an investment portfolio that is classified as available-for-sale or held-to-maturity. The Corporation’s total investment securities portfolio as of March 31, 2011 aggregated $2.8 billion, a reduction of $430.5 million mainly due to the sale and prepayments of U.S. agency MBS, including the sale of $330 million of MBS originally intended to be held to maturity in line with the deleverage initiatives included in the Corporation’s Capital Plan. After the sale and consistent with the Corporation’s ongoing capital management strategy, the remaining $89 million of investment securities held in the held-to-maturity portfolio were reclassified to the available-for-sale portfolio during the first quarter of 2011. Also, U.S. agency debt securities of approximately $50 million were called prior to its contractual maturity during the first quarter of 2011.

Over 91% of the Corporation’s available-for-sale and held-to-maturity securities portfolio is invested in U.S. Government and Agency debentures and fixed-rate U.S. government sponsored-agency MBS (mainly GNMA, FNMA and FHLMC fixed-rate securities). The Corporation’s investment in equity securities classified as available for sale is minimal, approximately $0.1 million, which consists of common stock of another financial institution in Puerto Rico.

The following table presents the carrying value of investments at the indicated dates:


	As of		As of
	March 31,		December 31,
(In thousands)	2011		2010
	(In thousands)
Money market investments	$	209,713	$	115,560


Investment securities held-to-maturity, at amortized cost:
U.S. Government and agencies obligations		—		8,487
Puerto Rico Government obligations		—		23,949
Mortgage-backed securities		—		418,951
Corporate bonds		—		2,000

		—		453,387


Investment securities available-for-sale, at fair value:
U.S. Government and agencies obligations		1,167,486		1,212,067
Puerto Rico Government obligations		161,854		136,841
Mortgage-backed securities		1,393,485		1,395,486
Corporate bonds		1,295		—
Equity securities		47		59

		2,724,167		2,744,453


Other equity securities, including $50.1 million and $54.6 million of FHLB stock as of March 31, 2011 and December 31, 2010, respectively		99,060		55,932

Total investments	$	3,032,940	$	3,369,332

Mortgage-backed securities at the indicated dates consist of:


	As of		As of
	March 31,		December 31,
(In thousands)	2011		2010
Held-to-maturity
FHLMC certificates	$	—	$	2,569
FNMA certificates		—		416,382

		—		418,951

Available-for-sale
FHLMC certificates		3,709		1,817
GNMA certificates		961,337		991,378
FNMA certificates		251,594		215,059
Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA		108,490		114,915
Other mortgage pass-through certificates		68,355		72,317

		1,393,485		1,395,486

Total mortgage-backed securities	$	1,393,485	$	1,814,437

The carrying values of investment securities classified as available-for-sale as of March 31, 2011 by contractual maturity (excluding mortgage-backed securities and equity securities) are shown below:


	Carrying		Weighted
(Dollars in thousands)	Amount		Average Yield %
U.S. Government and agencies obligations
Due within one year	$	58,759		0.91
Due after one year through five years		1,108,727		1.23

		1,167,486		1.21


Puerto Rico Government obligations
Due within one year		725		6.68
Due after one year through five years		39,963		5.08
Due after five years through ten years		111,648		5.21
Due after ten years		9,518		5.87

		161,854		5.22


Corporate bonds
Due after ten years		1,295		5.80

		1,295		5.80


Total		1,330,635		1.71

Mortgage-backed securities		1,393,485		3.97

Equity securities		47		—


Total investment securities available for sale	$	2,724,167		2.86

Net interest income of future periods will be affected by the Corporation’s decision to deleverage its investment securities portfolio to preserve its capital position and from balance sheet repositioning strategies. Also, net interest income could be affected by prepayments of mortgage-backed securities. Acceleration in the prepayments of mortgage-backed securities would lower yields on these securities, as the amortization of premiums paid upon acquisition of these securities would accelerate. Conversely, acceleration in the prepayments of mortgage-backed securities would increase yields on securities purchased at a discount, as the amortization of the discount would accelerate. These risks are directly linked to future period market interest rate fluctuations. Also, net interest income in future periods might be affected by the Corporation’s investment in callable securities. Approximately $50 million of investment securities, U.S. Agency debentures, with an average yield of 2.00% were called during the first quarter of 2011. As of March 31, 2011, the Corporation has approximately $366.4 million in debt securities (U.S. agency and Puerto Rico government securities) with embedded calls and with an average yield of 2.34%. Refer to the “Risk Management” section below for further analysis of the effects of changing interest rates on the Corporation’s net interest income and of the interest rate risk management strategies followed by the Corporation. Also refer to Note 4 to the accompanying unaudited consolidated financial statements for additional information regarding the Corporation’s investment portfolio.

RISK MANAGEMENT

Risks are inherent in virtually all aspects of the Corporation’s business activities and operations. Consequently, effective risk management is fundamental to the success of the Corporation. The primary goals of risk management are to ensure that the Corporation’s risk taking activities are consistent with the Corporation’s objectives and risk tolerance and that there is an appropriate balance between risk and reward in order to maximize stockholder value.

The Corporation has in place a risk management framework to monitor, evaluate and manage the principal risks assumed in conducting its activities. First BanCorp’s business is subject to eight broad categories of risks: (1) liquidity risk, (2) interest rate risk, (3) market risk, (4) credit risk, (5) operational risk, (6) legal and compliance risk, (7) reputational risk, and (8) contingency risk. First BanCorp has adopted policies and procedures designed to identify and manage risks to which the Corporation is exposed, specifically those relating to liquidity risk, interest rate risk, credit risk, and operational risk.

The Corporation’s risk management policies are described below as well as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of First BanCorp’s 2010 Annual Report on Form 10-K.

Liquidity and Capital Adequacy

Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs for liquidity and accommodate fluctuations in asset and liability levels due to changes in the Corporation’s business operations or unanticipated events.

The Corporation manages liquidity at two levels. The first is the liquidity of the parent company, which is the holding company that owns the banking and non-banking subsidiaries. The second is the liquidity of the banking subsidiary. As of March 31, 2011, FirstBank could not pay any dividend to the parent company except upon receipt of prior approval by the FED.

The Asset and Liability Committee of the Board of Directors is responsible for establishing the Corporation’s liquidity policy as well as approving operating and contingency procedures, and monitoring liquidity on an ongoing basis. The MIALCO, using measures of liquidity developed by management, which involve the use of several assumptions, reviews the Corporation’s liquidity position on a monthly basis. The MIALCO oversees liquidity management, interest rate risk and other related matters. The MIALCO, which reports to the Board of Directors’ Asset and Liability Committee, is composed of senior management officers, including the Chief Executive Officer, the Chief Financial Officer, the Chief Risk Officer, the Retail Financial Services Director, the Risk Manager of the Treasury and Investments Division, the Asset/Liability Manager, and the Treasurer. The Treasury and Investments Division is responsible for planning and executing the Corporation’s funding activities and strategy; monitoring liquidity availability on a daily basis and reviewing liquidity measures on a weekly basis. The Treasury and Investments Accounting and Operations area of the Comptroller’s Department is responsible for calculating the liquidity measurements used by the Treasury and Investment Division to review the Corporation’s daily and weekly liquidity position and on a monthly basis, the Asset/Liability Manager estimates the liquidity gap for longer periods.

In order to ensure adequate liquidity through the full range of potential operating environments and market conditions, the Corporation conducts its liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility and diversity. Key components of this operating strategy include a strong focus on the continued development of customer-based funding, the maintenance of direct relationships with wholesale market funding providers, and the maintenance of the ability to liquidate certain assets when, and if, requirements warrant.

The Corporation develops and maintains contingency funding plans. These plans evaluate the Corporation’s liquidity position under various operating circumstances and allow the Corporation to ensure that it will be able to operate through periods of stress when access to normal sources of funds is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, outline actions and procedures for effectively managing through a difficult period, and define roles and responsibilities. In the Contingency Funding Plan, the Corporation stresses the balance sheet and the liquidity position to critical levels that imply difficulties in getting new funds or even maintaining its current funding position, thereby ensuring the ability to honor its commitments, and establishing liquidity triggers monitored by the MIALCO in order to maintain the ordinary funding of the banking business. Three different scenarios are defined in the Contingency Funding Plan: local market event, credit rating downgrade, and a concentration event. They are reviewed and approved annually by the Board of Directors’ Asset and Liability Committee.

The Corporation manages its liquidity in a proactive manner, and maintains a sound liquidity position. Multiple measures are utilized to monitor the Corporation’s liquidity position, including basic surplus and time-based reserve measures. The Corporation has maintained basic surplus (cash, short-term assets minus short-term liabilities, and secured lines of credit) well in excess of the self-imposed minimum limit of 5% of total assets. As of March 31, 2011, the estimated basic surplus ratio was approximately 11%, including un-pledged investment securities, FHLB lines of credit, and cash. At the end of the quarter, the Corporation had $486 million available for additional credit on FHLB lines of credit. Unpledged liquid securities as of March 31, 2011 mainly consisted of fixed-rate MBS and U.S. agency debentures totaling approximately $332 million. The Corporation does not rely on uncommitted inter-bank lines of credit (federal funds lines) to fund its operations and does not include them in the basic surplus computation. The Corporation has continued to issue brokered CDs pursuant to approvals received from the FDIC to renew or roll over certain amounts through June 30, 2011.

Sources of Funding

The Corporation utilizes different sources of funding to help ensure that adequate levels of liquidity are available when needed. Diversification of funding sources is of great importance to protect the Corporation’s liquidity from market disruptions. The principal sources of short-term funds are deposits, including brokered CDs, securities sold under agreements to repurchase, and lines of credit with the FHLB. The Asset Liability Committee of the Board of Directors reviews credit availability on a regular basis. The Corporation has also securitized and sold mortgage loans as a supplementary source of funding. Issuance of commercial paper have also in the past provided additional funding. Long-term funding has also been obtained through the issuance of notes and, to a lesser extent, long-term brokered CDs. The cost of these different alternatives, among other things, is taken into consideration.

The Corporation has deleveraged its balance sheet by reducing the amounts of brokered CDs. The reductions in brokered CDs are consistent with the requirements of the Order that preclude the issuance of brokered CDs without FDIC approval and require a plan to reduce the amount of brokered CDs. The reductions in brokered CDs are being partly offset by increases in core deposits. Brokered CDs decreased $538.1 million to $5.7 billion as of March 31, 2011 from $6.3 billion as of December 31, 2010. At the same time, as the Corporation focuses on reducing its reliance on brokered deposits, it is seeking to add core deposits.

The Corporation continues to have the support of creditors, including repurchase agreements counterparties, the FHLB, and other agents such as wholesale funding brokers. While liquidity is an ongoing challenge for all financial institutions, management believes that the Corporation’s available borrowing capacity and efforts to grow deposits will be adequate to provide the necessary funding for the 2011 business plans. Nevertheless, management’s alternative capital preservation strategies can be implemented should adverse liquidity conditions arise. Refer to “Capital” discussion below for additional information about capital raising efforts that would impact capital and liquidity levels.

The Corporation’s principal sources of funding are:

Brokered CDs — A large portion of the Corporation’s funding has been retail brokered CDs issued by the Bank subsidiary, FirstBank Puerto Rico. Total brokered CDs decreased from $6.3 billion at year-end 2010 to $5.7 billion as of March 31, 2011. Although all the regulatory capital ratios exceeded the established “well capitalized” levels at March 31, 2011, because of the Order with the FDIC, FirstBank cannot be treated as a “well capitalized” institution under regulatory guidance and cannot replace maturing brokered CDs without the prior approval of the FDIC. Since the issuance of the Order, the FDIC has granted the Bank temporary waivers to enable it to continue accesing the brokered deposit market through June 30, 2011. Also, the Corporation successfully implemented its core deposit growth strategy that has resulted in an increase of $177.3 million in core deposits during the first quarter of 2011.

The average remaining term to maturity of the retail brokered CDs outstanding as of March 31, 2011 is approximately 1.09 years. Approximately 0.5% of the principal value of these certificates are callable at the Corporation’s option.

The use of brokered CDs has been particularly important for the growth of the Corporation. The Corporation encounters intense competition in attracting and retaining regular retail deposits in Puerto Rico. The brokered CDs market is very competitive and liquid, and the Corporation has been able to obtain substantial amounts of funding in short periods of time. This strategy has enhanced the Corporation’s liquidity position, since the brokered CDs are insured by the FDIC up to regulatory limits, and can be obtained faster than regular retail deposits. Should the FDIC fail to approve waivers for the renewal of brokered CD’s, the Corporation would accelerate the deleveraging through a systematic disposition of assets to meet its liquidity needs. During 2011, the Corporation issued $313.4 million in brokered CDs to renew maturing brokered CDs having an average coupon of 0.89% (all-in cost of 1.16%). Management believes it will continue to obtain waivers from the restrictions in the issuance of brokered CDs under the Order to meet its obligations and execute its business plans.

The following table presents a maturity summary of brokered and retail CDs with denominations of $100,000 or higher as of March 31, 2011:


	Total
	(In thousands)
Three months or less	$	774,034
Over three months to six months		1,059,849
Over six months to one year		2,059,795
Over one year		3,140,880

Total	$	7,034,558

Certificates of deposit in denominations of $100,000 or higher include brokered CDs of $5.7 billion issued to deposit brokers in the form of large ($100,000 or more) certificates of deposit that are generally participated out by brokers in shares of less than $100,000 and are therefore insured by the FDIC. Certificates of deposit with denominations of $100,000 or higher also include $21.7 million of deposits through the Certificate of Deposit Account Registry Service (CDARS). In an effort to meet customer needs and provide its customers with the best products and services available, the Corporation’s bank subsidiary, FirstBank Puerto Rico, has joined a program that gives depositors the opportunity to insure their money beyond the standard FDIC coverage. CDARS can offer customers access to FDIC insurance coverage beyond the $250 thousand per account without limit, by placing deposit in multiple banks through a single bank gateway, when they enter into the CDARS Deposit Placement Agreement, while earning attractive returns on their deposits.

Retail deposits — The Corporation’s deposit products also include regular savings accounts, demand deposit accounts, money market accounts and retail CDs. Total deposits, excluding brokered CDs, increased by $195.5 million to $6.0 billion from the balance of $5.8 billion as of December 31, 2010, reflecting increases in core-deposit products such as money market, savings and interest-bearing checking accounts. A significant portion of the increase was related to increases in money market accounts and retail CDs in Florida. Successful marketing campaigns and attractive rates were the main reason for the increase in Florida. Increases were also reflected in Puerto Rico, the Corporation’s principal market, with an increase of $78.6 million (mainly retail deposits and public funds) and in the Virgin Islands with an increase of $18.7 million. Refer to Note 12 in the accompanying unaudited financial statements for further details.

Refer to the “Net Interest Income” discussion above for information about average balances of interest-bearing deposits, and the average interest rate paid on deposits for the quarters ended March 31, 2011 and 2010.

Securities sold under agreements to repurchase — The Corporation’s investment portfolio is substantially funded with repurchase agreements. Securities sold under repurchase agreements were $1.4 billion as of March 31, 2011 and December 31, 2010. One of the Corporation’s strategies has been the use of structured repurchase agreements and long-term repurchase agreements to reduce exposure to interest rate risk by lengthening the final maturities of its liabilities while keeping funding costs at reasonable levels. All of the $1.4 billion of repurchase agreements outstanding as of March 31, 2011 consist of structured repurchase agreements. The access to this type of funding was affected by the liquidity turmoil in the financial markets witnessed in the second half of 2008 and in 2009. Certain counterparties are still not willing to extend the term of maturing repurchase agreements. Nevertheless, in addition to short-term repos, the Corporation has been able to maintain access to credit by using cost-effective sources such as FHLB advances. Refer to Note 14 in the accompanying notes to the unaudited interim consolidated financial statements for further details about repurchase agreements outstanding by counterparty and maturities.

Under the Corporation’s repurchase agreements, as is the case with derivative contracts, the Corporation is required to pledge cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines due to changes in interest rates, a liquidity crisis or any other factor, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Given the quality of the collateral pledged, recently the Corporation has not experienced significant margin calls from counterparties arising from credit-quality-related write-downs in valuations and, as of March 31, 2011, it had only $0.45 million of cash equivalent instruments deposited in connection with collateralized interest rate swap agreements.

Advances from the FHLB — The Corporation’s Bank subsidiary is a member of the FHLB system and obtains advances to fund its operations under a collateral agreement with the FHLB that requires the Bank to maintain qualifying mortgages as collateral for advances taken. As of March 31, 2011 and December 31, 2010, the outstanding balance of FHLB advances was $540.4 million and $653.4 million, respectively. Approximately $353.4 million of outstanding advances from the FHLB have maturities of over one year. As part of its precautionary initiatives to safeguard access to credit and obtain low interest rates, the Corporation has been pledging assets with the FHLB while at the same time the FHLB has been revising its credit guidelines and “haircuts” in the computation of the availability of credit lines.

Though currently not in use, other sources of short-term funding for the Corporation include commercial paper and federal funds purchased. Furthermore, in previous years the Corporation entered into several financing transactions to diversify its funding sources, including the issuance of notes payable and Junior subordinated debentures as part of its longer-term liquidity and capital management activities. No assurance can be given that these sources of liquidity will be available and, if available, will be on comparable terms. The Corporation continues to evaluate its financing options, including available options resulting from federal government initiatives to deal with the crisis in the financial markets.

With respect to the Corporation’s $231.9 million of outstanding subordinated debentures, we have provided, within the time frame prescribed by the indentures governing the subordinated debentures, a notice to the trustees of the subordinated debentures of our election to extend the interest payments on the debentures. Under the indentures, we have the right, from time to time, and without causing an event of default, to defer payments of interest on the subordinated debentures by extending the interest payment period at any time and from time to time during the term of the subordinated debentures for up to twenty consecutive quarterly periods. We have elected to defer the interest payments that were due in September and December 2010 and in March 2011 because the Federal Reserve advised us that it would not provide its approval for the payment of interest on these subordinated debentures.

The Corporation’s principal uses of funds are the origination of loans and the repayment of maturing deposits and borrowings. The Corporation has committed substantial resources to its mortgage banking subsidiary, FirstMortgage Inc. As a result, the ratio of residential real estate loans as a percentage of total loans has increased over time from 14% at December 31, 2004 to 26% at March 31, 2011. Commensurate with the increase in its mortgage banking activities, the Corporation has also invested in technology and personnel to enhance the Corporation’s secondary mortgage market capabilities. The enhanced capabilities improve the Corporation’s liquidity profile as they allow the Corporation to derive liquidity, if needed, from the sale of mortgage loans in the secondary market. The U.S. (including Puerto Rico) secondary mortgage market is still highly liquid in large part because of the sale or guarantee

programs of the FHA, VA, HUD, FNMA and FHLMC. The Corporation obtained Commitment Authority to issue GNMA mortgage-backed securities from GNMA and, under this program, the Corporation completed the securitization of approximately $41.5 million of FHA/VA mortgage loans into GNMA MBS during the first quarter of 2011. Any regulatory actions affecting GNMA, FNMA or FHLMC could adversely affect the secondary mortgage market.

Impact of Credit Ratings on Access to Liquidity and Valuation of Liabilities

The Corporation’s credit as a long-term issuer is currently rated CCC+ with negative outlook by Standard & Poor’s (“S&P”) and CC by Fitch Ratings Limited (“Fitch”). At the FirstBank subsidiary level, long-term issuer ratings are currently Caa2 with negative outlook by Moody’s Investor Service (“Moody’s”), eight notches below their definition of investment grade; CCC+ with negative outlook by S&P seven notches below their definition of investment grade, and CC by Fitch, eight notches below their definition of investment grade.

During 2010, the Corporation suffered credit rating downgrades from S&P (from B to CCC+), and Fitch (from B- to CC) rating services. The FirstBank subsidiary also experienced credit rating downgrades in 2010: Moody’s from B1 to B3, S&P from B to CCC+, and Fitch from B to CC. Furthermore, in April 2011 Moody’s downgraded the Bank’s credit rating from B3 to Caa2 with 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 not been affected in any material way by the downgrades. The Corporation’s ability to access new non-deposit sources of funding, however, could be adversely affected by these credit ratings and any additional downgrades.

The Corporation’s liquidity is contingent upon its ability to obtain new external sources of funding to finance its operations. The Corporation’s current credit ratings and any further downgrades in credit ratings can hinder the Corporation’s access to external funding and/or cause external funding to be more expensive, which could in turn adversely affect results of operations. Also, changes in credit ratings may further affect the fair value of certain liabilities and unsecured derivatives that consider the Corporation’s own credit risk as part of the valuation.

Cash Flows

Cash and cash equivalents were $873.3 million and $1.3 billion at March 31, 2011 and 2010, respectively. These balances increased by $503.0 million and $626.1 million from December 31, 2010 and 2009, respectively. The following discussion highlights the major activities and transactions that affected the Corporation’s cash flows during the first quarter of 2011 and 2010.

Cash Flows from Operating Activities

First BanCorp’s operating assets and liabilities vary significantly in the normal course of business due to the amount and timing of cash flows. Management believes cash flows from operations, available cash balances and the Corporation’s ability to generate cash through short- and long-term borrowings will be sufficient to fund the Corporation’s operating liquidity needs.

For the first quarter of 2011, net cash provided by operating activities was $43.6 million. Net cash generated from operating activities was higher than net loss reported largely as a result of adjustments for operating items such as the provision for loan and lease losses, partially offset by adjustments to net income from gain on sale of investments.

For the first quarter of 2010, net cash provided by operating activities was $83.3 million, which was higher than net income, mainly also as a result of adjustments for operating items such as the provision for loan and lease losses.

Cash Flows from Investing Activities

The Corporation’s investing activities primarily include originating loans to be held to maturity and purchasing, selling and repayments of its available-for-sale and held-to-maturity investment securities. For the quarter ended March 31, 2011, net cash provided by investing activities was $920.8 million, primarily reflecting proceeds from loans, as well as proceeds from securities sold or called during the first quarter of 2011 and MBS prepayments. Proceeds from sales of securities during 2011 and from repayments of loans and MBS were used for loan origination disbursements and paydown of maturing brokered CDs and FHLB Advances.

For the first quarter of 2010, net cash provided by investing activities was $1.2 billion, primarily from loan repayments and proceeds from securities sold or called.

Cash Flows from Financing Activities

The Corporation’s financing activities primarily include the receipt of deposits and issuance of brokered CDs, the issuance and payments of long-term debt, the issuance of equity instruments and activities related to its short-term funding. In addition, the Corporation paid monthly dividends on its preferred stock and quarterly dividends on its common stock until it announced the suspension of dividends beginning in August 2009. In the first quarter of 2011, net cash used in financing activities was $461.5 million due to paydowns of maturing brokered CDs coupled with paydowns of FHLB Advances.

In the first quarter of 2010, net cash used in financing activities was $691.3 million due to paydowns of FHLB and FED advances and maturing repurchase agreements, partially offset by growth in the core deposit base.

Capital

The Corporation’s stockholders’ equity amounted to $1.0 billion as of March 31, 2011, a decrease of $30.7 million compared to the balance as of December 31, 2010, driven by the net loss of $28.4 million for the first quarter and a decrease of $2.3 million in other comprehensive income due to lower unrealized gains on available for sale securities. Based on the Agreement with the FED, currently neither First BanCorp, nor FirstBank, is permitted to pay dividends on capital securities without prior approval.

Effective June 2, 2010, FirstBank, by and through its Board of Directors, entered into the Order with the FDIC (see “Description of Business”). Although all the regulatory capital ratios exceeded the established “well capitalized” levels at March 31, 2011, because of the Order with the FDIC, FirstBank cannot be treated as a “well capitalized” institution under regulatory guidance. Set forth below are First BanCorp’s, and FirstBank Puerto Rico’s regulatory capital ratios as of March 31, 2011 and December 31, 2010, based on existing established FED and FDIC guidelines.


				Banking Subsidiary
	First						To be well			Consent Order
	BanCorp			FirstBank			capitalized			Requirements over time
As of March 31, 2011

Total capital (Total capital to risk-weighted assets)		11.97	%		11.71	%		10.00	%		12.00	%
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)		10.65	%		10.40	%		6.00	%		10.00	%
Leverage ratio		7.78	%		7.60	%		5.00	%		8.00	%

As of December 31, 2010

Total capital (Total capital to risk-weighted assets)		12.02	%		11.57	%		10.00	%		12.00	%
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)		10.73	%		10.28	%		6.00	%		10.00	%
Leverage ratio		7.57	%		7.25	%		5.00	%		8.00	%

The improvement in the capital ratios for FirstBank was primarily related to a $22 million capital contribution from the holding company and due to the significant decrease in risk-weight and total average assets consistent with the Corporation’s actions to deleverage and de-risk the balance sheet.

The Consent Order required that FirstBank submit a Capital Plan to the FDIC detailing the manner by which it would achieve a total capital to risk-weighted assets ratio of at least 12%, a Tier 1 capital to risk-weighted assets ratio of at least 10% and a leverage ratio of at least 8% over time. In this respect, FirstBank submitted in March 2011, an updated Capital Plan that contemplates a $350 million capital raise through the issuance of new common shares for cash, and other actions to further reduce the Corporation’s and FirstBank’s risk-weighted assets, strengthened their capital positions and meet the minimum capital ratios required for FirstBank under the Consent Order. The Capital Plan identifies specific targeted leverage, Tier 1 risk-based capital and total risk-based capital ratios to be achieved each calendar quarter until the capital levels required under the Order are achieved. As of March 31, 2011, all capital ratios for FirstBank are above the Capital Plan’s targeted levels and the Corporation expects to be in compliance with the minimum capital ratios under the FDIC Order by June 30, 2011.

If the Bank fails to achieve the capital ratios as provided in the FDIC Order, within 45 days of being out of compliance, the Bank would be required to increase capital in an amount sufficient to comply with the capital ratios set forth in the Capital Plan, or submit to the regulators a contingency plan for the sale, merger, or liquidation of the institution in the event the primary sources of capital are not available. Thereafter the FDIC would determine whether and when to initiate an acceptable contingency plan.

Strategies completed during the first quarter of 2011:

	•		Sale of performing first lien residential mortgage loans — The Bank sold approximately $236 million in mortgage loans to another financial institution during February 2011. Proceeds were used, in part, to reduce funding sources and to support liquidity reserves.

	•		Sale of Investment securities — The Bank sold approximately $330 million in investment securities during March 2011. Proceeds were used, in part, to reduce funding sources and to support liquidity reserves.

	•		The Corporation contributed $22 million of capital to the Bank during March 2011.

Strategies completed or expected to be completed by June 30, 2011:

	•		Sale of performing first lien residential mortgage loans- The Bank entered into a letter of intent to sell mortgage loans before June 30, 2011. During the first quarter of 2011, the Corporation reclassified from held to investment to held for sale approximately $282 million related to this transaction. The loans were sold in April 2011.

	•		Sale of investment securities — The Bank sold approximately $268 million in investment securities on April 6, 2011.

	•		Sale of commercial loan participations — The Bank has commenced negotiations to sell approximately $150 million in loan participations to other financial institutions by June 30, 2011.

	•		The proceeds received from the above three transactions will be used to reduce funding sources.

In the event the Corporation is unable to complete its capital raising efforts during 2011 and actual credit losses exceed amounts projected, the Capital Plan includes additional actions designed to allow the Bank to maintain the minimum capital ratios for the foreseeable future, including the sale of additional assets. The Corporation’s tangible common equity ratio decreased to 3.71% as of March 31, 2011, from 3.80% as of December 31, 2010, and the Tier 1 common equity to risk-weighted assets ratio as of March 31, 2011 decreased to 4.82% from 5.01% as of December 31, 2010.

The tangible common equity ratio and tangible book value per common share are non-GAAP measures generally used by the financial community to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill and core deposit intangibles. Tangible assets are total assets less goodwill and core deposit intangibles. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method of accounting for mergers and acquisitions. Neither tangible common equity, nor tangible assets, or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets for the periods ended March 31, 2011 and December 31, 2010, respectively:


	March 31,			December 31,
(In thousands)	2011			2010
Total equity — GAAP	$	1,027,269		$	1,057,959
Preferred equity		(426,724	)		(425,009	)
Goodwill		(28,098	)		(28,098	)
Core deposit intangible		(13,454	)		(14,043	)


Tangible common equity	$	558,993		$	590,809


Total assets — GAAP	$	15,104,090		$	15,593,077
Goodwill		(28,098	)		(28,098	)
Core deposit intangible		(13,454	)		(14,043	)


Tangible assets	$	15,062,538		$	15,550,936

Common shares outstanding		21,304			21,304


Tangible common equity ratio		3.71	%		3.80	%
Tangible book value per common share	$	26.24		$	27.73

The Tier 1 common equity to risk-weighted assets ratio is calculated by dividing (a) tier 1 capital less non-common elements including qualifying perpetual preferred stock and qualifying trust preferred securities by (b) risk-weighted assets, which assets are calculated in accordance with applicable bank regulatory requirements. The Tier 1 common equity ratio is not required by GAAP or on a recurring basis by applicable bank regulatory requirements. However, this ratio was used by the Federal Reserve in connection with its stress test administered to the 19 largest U.S. bank holding companies under the Supervisory Capital Assessment Program (SCAP), the results of which were announced on May 7, 2009. Management is currently monitoring this ratio, along with the other ratios discussed above, in evaluating the Corporation’s capital levels and believes that, at this time, the ratio may be of interest to investors.

The following table reconciles stockholders’ equity (GAAP) to Tier 1 common equity:


	March 31,			December 31,
(In thousands)	2011			2010
Total equity — GAAP	$	1,027,269		$	1,057,959
Qualifying preferred stock		(426,724	)		(425,009	)
Unrealized gain on available-for-sale securities (1)		(15,453	)		(17,736	)
Disallowed deferred tax asset (2)		(981	)		(815	)
Goodwill		(28,098	)		(28,098	)
Core deposit intangible		(13,454	)		(14,043	)
Cumulative change gain in fair value of liabilities acounted for under a fair value option		(2,156	)		(2,185	)
Other disallowed assets		(881	)		(226	)

Tier 1 common equity	$	539,522		$	569,847


Total risk-weighted assets	$	11,183,518		$	11,372,856


Tier 1 common equity to risk-weighted assets ratio		4.82	%		5.01	%


1-		Tier 1 capital excludes net unrealized gains (losses) on available-for-sale debt securities and net unrealized gains on available-for-sale equity securities with readily determinable fair values, in accordance with regulatory risk-based capital guidelines. In arriving at Tier 1 capital, institutions are required to deduct net unrealized losses on available-for-sale equity securities with readily determinable fair values, net of tax.

2-		Approximately $12 million and $13 million of the Corporation’s net deferred tax assets at March 31, 2011 and December 31, 2010, respectively were included without limitation in regulatory capital pursuant to the risk-based capital guidelines, while approximately $1.0 million of such assets at March 31, 2011 and $0.8 million at December 31, 2010 exceeded the limitation imposed by these guidelines and, as “disallowed deferred tax assets,” were deducted in arriving at Tier 1 capital. According to regulatory capital guidelines, the deferred tax assets that are dependent upon future taxable income are limited for inclusion in Tier 1 capital to the lesser of: (i) the amount of such deferred tax asset that the entity expects to realize within one year of the calendar quarter end-date, based on its projected future taxable income for that year or (ii) 10% of the amount of the entity’s Tier 1 capital. Approximately $5 million of the Corporation’s other net deferred tax liability at March 31, 2011 and December 31, 2010 represented primarily the deferred tax effects of unrealized gains and losses on available-for-sale debt securities, which are permitted to be excluded prior to deriving the amount of net deferred tax assets subject to limitation under the guidelines.

Off -Balance Sheet Arrangements

In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage the Corporation’s credit, market or liquidity risks, (3) diversify the Corporation’s funding sources and (4) optimize capital.

As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These financial instruments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. As of March 31, 2011, commitments to extend credit and commercial and financial standby letters of credit amounted to approximately $667.9 million and $80.5 million, respectively. Commitments to extend credit are agreements to lend to customers as long as the conditions established in the contract are met. Generally, the Corporation’s mortgage banking activities do not enter into interest rate lock agreements with its prospective borrowers.

Contractual Obligations and Commitments

The following table presents a detail of the maturities of the Corporation’s contractual obligations and commitments, which consist of CDs, long-term contractual debt obligations, commitments to sell mortgage loans and commitments to extend credit:


	Contractual Obligations and Commitments
	As of March 31, 2011
	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
	(In thousands)
Contractual obligations:
Certificates of deposit		7,984,500		4,538,028		3,360,144		72,249		14,079
Securities sold under agreements to repurchase		1,400,000		100,000		700,000		600,000		—
Advances from FHLB		540,440		187,000		353,440		—		—
Notes payable		27,837		15,400		—		—		12,437
Other borrowings		231,959		—		—		—		231,959

Total contractual obligations	$	10,184,736	$	4,840,428	$	4,413,584	$	672,249	$	258,475

Commitments to sell mortgage loans	$	27,571	$	27,571

Standby letters of credit	$	30,133	$	30,133

Commitments to extend credit:
Lines of credit	$	509,861	$	509,861
Letters of credit		50,389		50,389
Commitments to originate loans		158,008		108,008		50,000

Total commercial commitments	$	718,258	$	668,258	$	50,000

The Corporation has obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under other commitments to sell mortgage loans at fair value and to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Other contractual obligations result mainly from contracts for the rental and maintenance of equipment. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. There have been no significant or unexpected draws on existing commitments. In the case of credit cards and personal lines of credit, the Corporation can at any time and without cause cancel the unused credit facility. In the ordinary course of business, the Corporation enters into operating leases and other commercial commitments. There have been no significant changes in such contractual obligations since December 31, 2010.

return of the securities, the Corporation may not succeed in its litigation against Barclays to recover all or a substantial portion of the securities. Upon such transfer, the Bankruptcy court began to entertain the pre-trial procedures including discovery of evidence. In this regard, an initial scheduling conference was held before the United States Bankruptcy Court for the Southern District of New York on November 17, 2010, at which time a proposed case management plan was approved. Discovery has commenced pursuant to that case management plan and is currently scheduled for completion by September 15, 2011, but this timing is subject to adjustment.

Additionally, the Corporation continues to pursue its claim filed in January 2009 in the proceedings under the Securities Protection Act with regard to Lehman Brothers Incorporated in Bankruptcy Court, Southern District of New York. An estimated loss was not accrued as the Corporation is unable to determine the timing of the claim resolution or whether it will succeed in recovering all or a substantial portion of the collateral or its equivalent value. If additional relevant negative facts become available in future periods, a need to recognize a partial or full reserve of this claim may arise. Considering that the investment securities have not yet been recovered by the Corporation, despite its efforts in this regard, the Corporation decided to classify such investments as non-performing during the second quarter of 2009.

Interest Rate Risk Management

First BanCorp manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income and to maintain stability of profitability under varying interest rate scenarios. The MIALCO oversees interest rate risk and meetings focus on, among other things, current and expected conditions in world financial markets, competition and prevailing rates in the local deposit market, liquidity, securities market values, recent or proposed changes to the investment portfolio, alternative funding sources and related costs, hedging and the possible purchase of derivatives such as swaps and caps, and any tax or regulatory issues which may be pertinent to these areas. The MIALCO approves funding decisions in light of the Corporation’s overall strategies and objectives.

The Corporation performs on a quarterly basis a consolidated net interest income simulation analysis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a one-to-five-year time horizon, assuming upward and downward yield curve shifts. The rate scenarios considered in these disclosures reflect gradual upward and downward interest rate movements of 200 basis points, during a twelve-month period. Simulations are carried out in two ways:

(1) Using a static balance sheet, as the Corporation had it on the simulation date, and

(2) Using a dynamic balance sheet based on recent patterns and current strategies.

The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing structure and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may be important in projecting net interest income.

The Corporation uses a simulation model to project future movements in the Corporation’s balance sheet and income statement. The starting point of the projections generally corresponds to the actual values on the balance sheet on the date of the simulations.

These simulations are highly complex, and are based on many assumptions that are intended to reflect the general behavior of the balance sheet components over the period in question. It is unlikely that actual events will match these assumptions in all cases. For this reason, the results of these forward-looking computations are only approximations of the true sensitivity of net interest income to changes in market interest rates.

The following table presents the results of the simulations as of March 31, 2011 and December 31, 2010. Consistent with prior years, these exclude non-cash changes in the fair value of derivatives and liabilities elected to be measured at fair value:


	March 31, 2011												December 31, 2010
	Net Interest Income Risk (Projected for the next 12 months)												Net Interest Income Risk (Projected for the next 12 months)
	Static Simulation						Growing Balance Sheet						Static Simulation						Growing Balance Sheet
(Dollars in millions)	$ Change			% Change			$ Change			% Change			$ Change			% Change			$ Change			% Change
+ 200 bps ramp	$	20.7			4.96	%	$	19.6			4.85	%	$	24.8			5.37	%	$	24.8			5.60	%
- 200 bps ramp	$	(11.7	)		(2.81	)%	$	(15.4	)		(3.83	)%	$	(22.8	)		(4.94	)%	$	(24.2	)		(5.48	)%

The Corporation continues to manage its balance sheet structure to control the overall interest rate risk and preserve its capital position. The Corporation continued with a deleveraging and balance sheet repositioning strategy. During the first quarter of 2011, the investment portfolio decreased by approximately $430 million, while the loan portfolio decreased by $570 million. This decrease in assets resulting from the deleveraging strategy allowed a reduction of approximately $651 million in wholesale funding since the end of the fourth quarter of 2010, including FHLB Advances and Brokered CDs. In addition, the Corporation continues to grow its core deposit base while adjusting the mix of its funding sources to better match the expected average life of the assets.

Taking into consideration the above-mentioned facts for modeling purposes, the net interest income for the next twelve months under a non-static balance sheet scenario, is estimated to increase by $19.6 million in a gradual parallel upward move of 200 basis points.

Following the Corporation’s risk management policies, modeling of the downward “parallel” rates moves by anchoring the short end of the curve, (falling rates with a flattening curve) was performed, even though, given the current level of rates as of March 31, 2011, some market interest rate were projected to be zero. Under this scenario the net interest income for the next twelve months in a non-static balance sheet scenario is estimated to decrease by $15.4 million.

Derivatives

First BanCorp uses derivative instruments and other strategies to manage its exposure to interest rate risk caused by changes in interest rates beyond management’s control.

The following summarizes major strategies, including derivative activities, used by the Corporation in managing interest rate risk:

For detailed information regarding the volume of derivative activities (e.g. notional amounts), location and fair values of derivative instruments in the Statement of Financial Condition and the amount of gains and losses reported in the Statement of Loss, refer to Note 9 in the accompanying unaudited consolidated financial statements.

The following tables summarize the fair value changes in the Corporation’s derivatives as well as the sources of the fair values:


	Three-month period ended
(In thousands)	March 31, 2011
Fair value of contracts outstanding at the beginning of the period	$	(4,796	)
Changes in fair value during the period		76

Fair value of contracts outstanding as of March 31, 2010	$	(4,720	)

Source of Fair Value


	Payments Due by Period
	Maturity								Maturity
	Less Than			Maturity			Maturity		In Excess			Total
(In thousands)	One Year			1-3 Years			3-5 Years		of 5 Years			Fair Value
As of March 31, 2011
Pricing from observable market inputs	$	(224	)	$	(585	)	$	15	$	(3,926	)	$	(4,720	)

	$	(224	)	$	(585	)	$	15	$	(3,926	)	$	(4,720	)

As of March 31, 2011 and December 31, 2010, all of the derivative instruments held by the Corporation were considered economic undesignated hedges.

The use of derivatives involves market and credit risk. The market risk of derivatives stems principally from the potential for changes in the value of derivative contracts based on changes in interest rates. The credit risk of derivatives arises from the potential of default from the counterparty. To manage this credit risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Master netting agreements incorporate rights of set-off that provide for the net settlement of contracts with the same counterparty in the event of default. Currently the Corporation is mostly engaged in derivative instruments with counterparties with a credit rating of single A or better. All of the Corporation’s interest rate swaps are supported by securities collateral agreements, which allow the delivery of securities to and from the counterparties depending on the fair value of the instruments, to minimize credit risk.

Refer to Note20 of the accompanying unaudited consolidated financial statements for additional information regarding the fair value determination of derivative instruments.

Set forth below is a detailed analysis of the Corporation’s credit exposure by counterparty with respect to derivative instruments outstanding as of March 31, 2011 and December 31, 2010.


			As of March 31, 2011
(In thousands)					Total								Accrued
					Exposure at		Negative			Total			interest receivable
Counterparty	Rating⁽¹⁾		Notional		Fair Value⁽²⁾		Fair Values			Fair Value			(payable)
Interest rate swaps with rated counterparties:
JP Morgan		A+	$	42,420	$	1,291	$	(4,512	)	$	(3,221	)	$	—
Credit Suisse First Boston		A+		5,484		—		(301	)		(301	)		—
Goldman Sachs		A		6,515		916		—			916			—
Morgan Stanley		A		108,600		1		—			1			—

				163,019		2,208		(4,813	)		(2,605	)		—
Other derivatives:
Other derivatives (3)				154,599		348		(2,463	)		(2,115	)		(139	)

Total			$	317,618	$	2,556	$	(7,276	)	$	(4,720	)	$	(139	)


			As of December 31, 2010
(In thousands)					Total								Accrued
					Exposure at		Negative			Total			interest receivable
Counterparty	Rating⁽¹⁾		Notional		Fair Value⁽²⁾		Fair Values			Fair Value			(payable)
Interest rate swaps with rated counterparties:
JP Morgan		A+	$	42,808	$	889	$	(4,865	)	$	(3,976	)	$	—
Credit Suisse First Boston		A+		5,493		—		(327	)		(327	)		—
Goldman Sachs		A		6,515		664		—			664			—
Morgan Stanley		A		108,829		1		—			1			—

				163,645		1,554		(5,192	)		(3,638	)		—
Other derivatives:
Other derivatives (3)				127,837		351		(1,509	)		(1,158	)		(140	)

Total			$	291,482	$	1,905	$	(6,701	)	$	(4,796	)	$	(140	)


(1)		Based on the S&P and Fitch Long Term Issuer Credit Ratings.

(2)		For each counterparty, this amount includes derivatives with positive fair value excluding the related accrued interest receivable/payable.

(3)		Credit exposure with several Puerto Rico counterparties for which a credit rating is not readily available.

A “Hull-White Interest Rate Tree” approach is used to value the option components of derivative instruments. The discounting of the cash flows is performed using US dollar LIBOR-based discount rates or yield curves that account for the industry sector and the credit rating of the counterparty and/or the Corporation. Although most of the derivative instruments are fully collateralized, a credit spread is considered for those that are not secured in full. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments resulted in an unrealized gain of approximately $0.6 million as of March 31, 2011, which includes an unrealized loss of $0.2 million recorded in the first quarter of 2011 and an unrealized loss of $0.1 million for the first quarter of 2010. The Corporation compares the valuations obtained with valuations received from counterparties, as an internal control procedure.

Credit Risk Management

First BanCorp is subject to credit risk mainly with respect to its portfolio of loans receivable and off-balance sheet instruments, mainly derivatives and loan commitments. Loans receivable represents loans that First BanCorp holds for investment and, therefore, First BanCorp is at risk for the term of the loan. Loan commitments represent commitments to extend credit, subject to specific condition, for specific amounts and maturities. These commitments may expose the Corporation to credit risk and are subject to the same review and approval process as for loans. Refer to “Contractual Obligations and Commitments” above for further details. The credit risk of derivatives arises from the potential of the counterparty’s default on its contractual obligations. To manage this credit risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. For further details and information on the Corporation’s derivative credit risk exposure, refer to “—Interest Rate Risk Management” section above. The Corporation manages its credit risk through credit policy, underwriting, independent loan review and quality control procedures, statistical analysis, comprehensive financial analysis, and established management committees. The Corporation also employs proactive collection and loss mitigation efforts. Furthermore, personnel performing structured loan workout functions are responsible for avoiding defaults and minimizing losses upon default within each region and for each business segment. In the case of commercial and industrial, commercial mortgage and costruction loan portfolios, the Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, loss mitigation programs, and sales of REO. In addition to the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the non-performing and/or adversely classified status. The SAG utilizes relationship officers, collection specialists and attorneys. In the case of residential construction projects, the workout function monitors project specifics, such as project management and marketing, as deemed necessary.

The Corporation may also have risk of default in the securities portfolio. The securities held by the Corporation are principally fixed-rate mortgage-backed securities and U.S. Treasury and agency securities. Thus, a substantial portion of these instruments is backed by mortgages, a guarantee of a U.S. government-sponsored entity or backed by the full faith and credit of the U.S. government and is deemed to be of the highest credit quality.

Management, comprised of the Corporation’s Commercial Credit Risk Officer, Retail Credit Risk Officer, Chief Lending Officer and other senior executives, has the primary responsibility for setting strategies to achieve the Corporation’s credit risk goals and objectives. Those goals and objectives are documented in the Corporation’s Credit Policy.

Allowance for Loan and Lease Losses and Non-performing Assets

Allowance for Loan and Lease Losses

The allowance for loan and lease losses represents the estimate of the level of reserves appropriate to absorb inherent credit losses. The amount of the allowance was determined by empirical analysis and judgments regarding the quality of each individual loan portfolio. All known relevant internal and external factors that affected loan collectibility were considered, including analyses of

historical charge-off experience, migration patterns, changes in economic conditions, and changes in loan collateral values. For example, factors affecting the economies of Puerto Rico, Florida (USA), the US Virgin Islands and the British Virgin Islands may contribute to delinquencies and defaults above the Corporation’s historical loan and lease losses. Such factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress such as have been experienced since 2008. The process includes judgmental and quantitative elements that may be subject to significant change. There is no certainty that the allowance will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. To the extent actual outcomes differ from our estimates, the credit quality of our customer base materially decreases or the risk profile of a market, industry, or group of customers changes materially, or if the allowance is determined to not be adequate, additional provisions for credit losses could be required, which could adversely affect our business, financial condition, liquidity, capital, and results of operations in future periods.

The allowance for loan and lease losses provides for probable losses that have been identified with specific valuation allowances for individually evaluated impaired loans and for probable losses believed to be inherent in the loan portfolio that have not been specifically identified. Internal risk ratings are assigned to each business loan at the time of approval and are subject to subsequent periodic reviews by the Corporation’s senior management. The allowance for loan and lease losses is reviewed on a quarterly basis as part of the Corporation’s continued evaluation of its asset quality. Refer to “Critical Accounting Policies — Allowance for Loan and Lease Losses” section above for additional information about the methodology used by the Corporation to determine specific reserves and the general valuation allowance.

The Corporation continued to strengthen its reserve coverage for most portfolios. The allowance for loan losses to total loans for residential mortgage loans increased from 1.82% at December 31, 2010 to 2.19% as of March 31, 2011. The C&I loans reserve coverage ratio increased from 3.68% at December 31, 2010 to 4.17% at March 31, 2011. The construction loans reserve coverage ratio increased from 21.69% as of December 31, 2010 to 23.04% at March 31, 2011. In contrast, the commercial mortgage reserve coverage decreased from 6.32% at December 31, 2010 to 5.53% at March 31, 2011 due to decreases in non-performing loans, while the consumer and finance leases reserve coverage ratio decreased from 4.69% as of December 31, 2010 to 4.54% at March 31, 2011 due to decreases in non-performing loans.

Substantially all of the Corporation’s loan portfolio is located within the boundaries of the U.S. economy. Whether the collateral is located in Puerto Rico, the U.S. and British Virgin Islands or the U.S. mainland (mainly in the state of Florida), the performance of the Corporation’s loan portfolio and the value of the collateral supporting the transactions are dependent upon the performance of and conditions within each specific area real estate market. Economic reports related to the real estate market in Puerto Rico indicate that the real estate market experienced readjustments in value driven by the loss of income due to the unemployment of consumers, reduced demand and the general economic conditions. The Corporation sets adequate loan-to-value ratios upon original approval following its regulatory and credit policy standards. The real estate market for the U.S. Virgin Islands remains fairly stable. In the Florida market, residential real estate has experienced a very slow turnover, but the Corporation continues to reduce its credit exposure through disposition of assets and different loss mitigation initiatives.

As shown in the following table, the allowance for loan and lease losses increased to $561.7 million at March 31, 2011, compared with $553.0 million at December 31, 2010. The $8.7 million increase in the allowance primarily reflected increases in specific reserves associated with C&I impaired loans. Refer to the “Provision for Loan and Lease Losses” discussion above for additional information.

The following table sets forth an analysis of the activity in the allowance for loan and lease losses during the periods indicated:


	Quarter Ended
	March 31,
(Dollars in thousands)	2011			2010
Allowance for loan and lease losses, beginning of period	$	553,025		$	528,120


Provision (recovery) for loan and lease losses:
Residential mortgage		6,327			28,739
Commercial mortgage		13,381			37,560
Commercial and Industrial		41,486			(7,685	)
Construction		22,463			99,300
Consumer and finance leases		5,075			13,051


Total provision for loan and lease losses		88,732			170,965

Charge-offs:
Residential mortgage		(5,404	)		(13,346	)
Commercial mortgage		(31,171	)		(19,318	)
Commercial and Industrial		(16,344	)		(23,922	)
Construction		(19,165	)		(53,323	)
Consumer and finance leases		(11,969	)		(16,397	)

		(84,053	)		(126,306	)

Recoveries:
Residential mortgage		243			—
Commercial mortgage		67			21
Commercial and Industrial		56			146
Construction		1,927			108
Consumer and finance leases		1,698			2,249

		3,991			2,524

Net charge-offs		(80,062	)		(123,782	)


Allowance for loan and lease losses, end of period	$	561,695		$	575,303


Allowance for loan and lease losses to period end total loans receivable		5.06	%		4.33	%
Net charge-offs annualized to average loans outstanding during the period		2.74	%		3.65	%
Provision for loan and lease losses to net charge-offs during the period		1.11	x		1.38	x

The following table sets forth information concerning the allocation of the allowance for loan and lease losses by loan category and the percentage of loan balances in each category to the total of such loans as of the dates indicated:


	As of					As of
	March 31, 2011					December 31, 2010
(In thousands)	Amount		Percent			Amount		Percent
Residential mortgage	$	63,496		26	%	$	62,330		29	%
Commercial mortgage loans		87,873		14	%		105,596		14	%
Construction loans		157,197		6	%		151,972		6	%
Commercial and Industrial loans (including loans to local financial institutions)		177,839		39	%		152,641		36	%
Consumer loans and finance leases		75,290		15	%		80,486		15	%

	$	561,695		100	%	$	553,025		100	%

The following table sets forth information concerning the composition of the Corporation’s allowance for loan and lease losses as of March 31, 2011 and December 31, 2010 by loan category and by whether the allowance and related provisions were calculated individually or through a general valuation allowance:


	Residential			Commercial						Construction			Consumer and
(Dollars in thousands)	Mortgage Loans			Mortgage Loans			C&I Loans			Loans			Finance Leases			Total
As of March 31, 2011

Impaired loans without specific reserves:
Principal balance of loans, net of charge-offs	$	293,488		$	18,628		$	63,328		$	37,910		$	1,141		$	414,495

Impaired loans with specific reserves:
Principal balance of loans, net of charge-offs		272,782			213,426			332,651			327,502			1,266			1,147,627
Allowance for loan and lease losses		43,295			29,610			81,989			98,167			415			253,476
Allowance for loan and lease losses to principal balance		15.87	%		13.87	%		24.65	%		29.97	%		32.78	%		22.09	%

Loans with general allowance:
Principal balance of loans		2,330,422			1,356,714			3,866,681			316,833			1,657,003			9,527,653
Allowance for loan and lease losses		20,201			58,263			95,850			59,030			74,875			308,219
Allowance for loan and lease losses to principal balance		0.87	%		4.29	%		2.48	%		18.63	%		4.52	%		3.23	%

Total loans held for investment:
Principal balance of loans	$	2,896,692		$	1,588,768		$	4,262,660		$	682,245		$	1,659,410		$	11,089,775
Allowance for loan and lease losses		63,496			87,873			177,839			157,197			75,290			561,695
Allowance for loan and lease losses to principal balance		2.19	%		5.53	%		4.17	%		23.04	%		4.54	%		5.06	%

As of December 31, 2010

Impaired loans without specific reserves:
Principal balance of loans, net of charge-offs	$	244,648		$	32,328		$	54,631		$	25,074		$	659		$	357,340

Impaired loans with specific reserves:
Principal balance of loans, net of charge-offs		311,187			150,442			325,206			237,970			1,496			1,026,301
Allowance for loan and lease losses		42,666			26,869			65,030			57,833			264			192,662
Allowance for loan and lease losses to principal balance		13.71	%		17.86	%		20.00	%		24.30	%		17.65	%		18.77	%

Loans with general allowance:
Principal balance of loans		2,861,582			1,487,391			3,771,927			437,535			1,713,360			10,271,795
Allowance for loan and lease losses		19,664			78,727			87,611			94,139			80,222			360,363
Allowance for loan and lease losses to principal balance		0.69	%		5.29	%		2.32	%		21.52	%		4.68	%		3.51	%

Total loans held for investment:
Principal balance of loans	$	3,417,417		$	1,670,161		$	4,151,764		$	700,579		$	1,715,515		$	11,655,436
Allowance for loan and lease losses		62,330			105,596			152,641			151,972			80,486			553,025
Allowance for loan and lease losses to principal balance		1.82	%		6.32	%		3.68	%		21.69	%		4.69	%		4.74	%

The following tables show the activity for impaired loans and the related specific reserves during the first quarter of 2011 and 2010:


	Quarter Ended
	March 31,			March 31,
	2011			2010
	(In thousands)
Impaired Loans:
Balance at beginning of period	$	1,383,641		$	1,656,264
Loans determined impaired during the period		277,548			317,333
Net charge-offs		(60,620	)		(101,259	)
Loans sold, net of charge-offs		(850	)		(18,749	)
Loans foreclosed, paid in full and partial payments or no longer considered impaired		(37,597	)		(7,503	)

Balance at end of period	$	1,562,122		$	1,846,086


	For the Quarter Ended March 31, 2011
	Residential			Commercial						Construction			Consumer and Finance
	Mortgage Loans			Mortgage Loans			C&I Loans			Loans			Leases			Total
Allowance for impaired loans, beginning of period	$	42,666		$	26,869		$	65,030		$	57,833		$	264		$	192,662
Provision for impaired loans		5,791			27,841			28,205			59,091			506			121,434
Charge-offs		(5,162	)		(25,100	)		(11,246	)		(18,757	)		(355	)		(60,620	)

Allowance for impaired loans, end of period	$	43,295		$	29,610		$	81,989		$	98,167		$	415		$	253,476


	For the Quarter Ended March 31, 2010
	Residential			Commercial						Construction
	Mortgage Loans			Mortgage Loans			C&I Loans			Loans			Total
Allowance for impaired loans, beginning of period	$	2,616		$	30,945		$	62,491		$	86,093		$	182,145
Provision for impaired loans		9,137			31,362			33,655			90,260			164,414
Charge-offs		(9,778	)		(17,429	)		(21,738	)		(53,314	)		(102,259	)

Allowance for impaired loans, end of period	$	1,975		$	44,878		$	74,408		$	123,039		$	244,300

Credit Quality

Credit quality performance in the 2011 first quarter continued to show signs of stabilization, including a $5.9 million decrease in non-performing loans held for investment. Other key credit quality metrics showed improvements, including continued improvement in construction and residential net charge-offs, and some noticeable improvement in C&I and consumer charge-offs. The allowance for loan and lease losses was further strengthened and increased $8.7 million to $561.7 million, or 5.06% of period-end total loans, from $553.0 million, or 4.74% at December 31, 2010.

Non-performing Loans and Non-performing Assets

Total non-performing assets consist of non-performing loans, foreclosed real estate and other repossessed properties as well as non-performing investment securities. Non-performing loans are those loans on which the accrual of interest is discontinued. When a loan is placed in non-performing status, any interest previously recognized and not collected is reversed and charged against interest income.

Non-performing Loans Policy

Residential Real Estate Loans — The Corporation classifies real estate loans in non-performing status when interest and principal have not been received for a period of 90 days or more.

Commercial and Construction Loans — The Corporation places commercial loans (including commercial real estate and construction loans) in non-performing status when interest and principal have not been received for a period of 90 days or more or when collection of all of principal or interest is not expected due to deterioration in the financial condition of the borrower.

Finance Leases — Finance leases are classified in non-performing status when interest and principal have not been received for a period of 90 days or more.

Consumer Loans — Consumer loans are classified in non-performing status when interest and principal have not been received for a period of 90 days or more.

Cash payments received on certain loans that are impaired and collateral dependent are recognized when collected in accordance with the contractual terms of the loans. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized on a cash basis (when collected). However, when management believes that the ultimate collectability of principal is in doubt, the interest portion is applied to principal. The risk exposure of this portfolio is diversified as to individual borrowers and industries among other factors. In addition, a large portion is secured with real estate collateral.

Other Real Estate Owned (OREO)

OREO acquired in settlement of loans is carried at the lower of cost (carrying value of the loan) or fair value less estimated costs to sell off the real estate at the date of acquisition (estimated realizable value).

Other Repossessed Property

The other repossessed property category includes repossessed boats and autos acquired in settlement of loans. Repossessed boats and autos are recorded at the lower of cost or estimated fair value.

Investment Securities

This category presents investment securities reclassified to non-accrual status, at their book value.

Past Due Loans over 90 days and still accruing

These are accruing loans which are contractually delinquent 90 days or more. These past due loans are either current as to interest but delinquent in the payment of principal or are insured or guaranteed under applicable FHA and VA programs.

The Corporation has in place loan loss mitigation programs providing homeownership preservation assistance. Loans modified through this program are reported as non-performing loans and interest is recognized on a cash basis. When there is reasonable assurance of repayment and the borrower has made payments over a sustained period, the loan is returned to accrual status.

The following table presents non-performing assets as of the dates indicated:


	March 31,			December 31,
(Dollars in thousands)	2011			2010
Non-performing loans held for investment:
Residential mortgage	$	391,962		$	392,134
Commercial mortgage		129,828			217,165
Commercial and Industrial		327,477			317,243
Construction		341,179			263,056
Finance leases		3,632			3,935
Consumer		38,973			45,456

		1,233,051			1,238,989


Other real estate owned		91,948			84,897
Other repossessed property		15,125			14,023
Investment securities (1)		64,543			64,543

Total non-performing assets, excluding loans held for sale	$	1,404,667		$	1,402,452

Non-perfoming loans held for sale		5,454			159,321

Total non-performing assets, including loans held for sale	$	1,410,121		$	1,561,773


Past due loans 90 days and still accruing	$	154,299		$	144,114

Non-performing assets to total assets		9.34	%		9.96	%

Non-performing loans held for investment to total loans held for investment		11.12	%		10.63	%

Allowance for loan and lease losses		561,695			553,025

Allowance to total non-performing loans held for investment		45.55	%		44.64	%

Allowance to total non-performing loans held for investment, excluding residential real estate loans		66.78	%		65.30	%


(1)		Collateral pledged with Lehman Brothers Special Financing, Inc.

The following table shows non-performing assets by geographic segment:


	March 31,		December 31,
(Dollars in thousands)	2011		2010
Puerto Rico:
Non-performing loans held for investment:
Residential mortgage	$	335,919	$	330,737
Commercial mortgage		87,655		177,617
Commercial and Industrial		319,541		307,608
Construction		180,041		196,948
Finance leases		3,632		3,935
Consumer		36,648		43,241

Total non-performing loans held for investment		963,436		1,060,086


REO		70,416		67,488
Other repossessed property		14,949		13,839
Investment securities		64,543		64,543

Total non-performing assets, excluding loans held for sale	$	1,113,344	$	1,205,956
Non-performing loans held for sale		5,454		159,321

Total non-performing assets, including loans held for sale	$	1,118,798	$	1,365,277

Past due loans 90 days and still accruing	$	140,180	$	142,756

Virgin Islands:
Non-performing loans held for investment:
Residential mortgage	$	10,249	$	9,655
Commercial mortgage		8,233		7,868
Commercial and Industrial		5,572		6,078
Construction		117,153		16,473
Consumer		1,052		927

Total non-performing loans held for investment		142,259		41,001


REO		3,034		2,899
Other repossessed property		151		108

Total non-performing assets, excluding loans held for sale	$	145,444	$	44,008
Non-performing loans held for sale		—		—

Total non-performing assets, including loans held for sale	$	145,444	$	44,008

Past due loans 90 days and still accruing	$	10,734	$	1,358

Florida:
Non-performing loans held for investment:
Residential mortgage	$	45,794	$	51,742
Commercial mortgage		33,940		31,680
Commercial and Industrial		2,364		3,557
Construction		43,985		49,635
Consumer		1,273		1,288

Total non-performing loans held for investment		127,356		137,902


REO		18,498		14,510
Other repossessed property		25		76

Total non-performing assets, excluding loans held for sale	$	145,879	$	152,488
Non-performing loans held for sale		—		—

Total non-performing assets, including loans held for sale	$	145,879	$	152,488

Past due loans 90 days and still accruing	$	3,385	$	—

Total non-performing loans were $1.24 billion as of March 31, 2011, down from $1.40 billion at December 31, 2010. The completion of the loan sale transaction with a joint venture removed approximately $153.6 million of non-performing loans and $257 million of adversely classified assets from the balance sheet. Total non-performing loans held for investment, which exclude non-

performing loans held for sale, were $1.23 billion at March 31, 2011, which represented 11.12% of total loans held for investment. This was down $5.9 million from December 31, 2010. The decrease in non-performing loans held for investment from the fourth quarter of 2010 primarily reflected declines in commercial mortgage and consumer non-performing loans, partially offset by increases in construction and C&I non-performing loans.

Non-performing commercial mortgage loans held for investment decreased by $87.3 million, or 40%, from the end of the fourth quarter of 2010. This decline was substantially related to a $85.6 million loan relationship in Puerto Rico which was formally restructured so as to be reasonably assured of principal and interest repayment and of performance according to its modified terms. The Corporation restructured the balance due from this borrower by splitting it into two separate notes. Non-performing commercial mortgage loans increased $2.3 million and $0.4 million in the United States and Virgin Islands, respectively.

Non-performing construction loans held for investment increased by $78.1 million, or 30%, from the end of the fourth quarter of 2010. The increase mainly reflected the placement in non-performing status of a $100 million loan relationship related to a commercial project in the Virgin Islands region, which was the single largest construction relationship in performing status prior to this quarter. This was partially offset by charge-offs and paydowns. Non-performing construction loans held for investment in Puerto Rico decreased $16.9 million mainly due to charge-offs and paydowns while the non-performing construction loan portfolio in the United States decreased by $5.7 million. The decrease in non-performing construction loans in the United States portfolio was also mainly related to charge-offs, including $3.0 million associated with a residential development project. There were no inflows of construction projects into non-accrual status in Puerto Rico and the United States during the first quarter of 2011.

C&I non-performing loans held for investment increased by $10.2 million, or 3%, on a sequential quarter basis. The increase was related primarily to one relationship in Puerto Rico of approximately $7.9 million. This was partially offset by charge-offs, including a $5.0 million charge-off in one relationship in Puerto Rico. In the United States and the Virgin Islands, C&I non-performing loans decreased by $1.2 million and $0.5 million, respectively. The decrease in the United States was mainly related to the sale of a $0.9 million loan.

Non-performing residential mortgage loans remained relatively flat at $392 million. In Puerto Rico, non-performing residential mortgage loans increased by $5.2 million. Meanwhile, non-performing residential mortgage loans decreased by $5.9 million in the United States, including $4.1 million related to loans foreclosed. In the Virgin Islands, non-performing residential mortgage loans increased by $0.6 million. Approximately $231.0 million, or 59% of total non-performing residential mortgage loans, have been written down to their net realizable value.

The levels of non-performing consumer loans, including finance leases, showed a $6.8 million decrease during the first quarter, mainly related to auto financings in Puerto Rico.

At March 31, 2011, approximately $282.1 million of the loans placed in non-accrual status, mainly construction and commercial loans, were current, or had delinquencies of less than 90 days in their interest payments, including $68.9 million of restructured loans maintained in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status. Collections are being recorded on a cash basis through earnings, or on a cost-recovery basis, as conditions warrant.

During the quarter ended March 31, 2011, interest income of approximately $1.8 million related to non-performing loans with a carrying value of $661.8 million as of March 31, 2011, mainly non-performing construction and commercial loans, was applied against the related principal balances under the cost-recovery method.

As of March 31, 2011, approximately $369.7 million, or 30%, of total non-performing loans held for investment have been charged-off to their net realizable value.

The allowance to non-performing loans held for investment ratio as of March 31, 2011 was 45.55%, compared to 44.64% as of December 31, 2010. As of March 31, 2011, approximately $369.7 million, or 30%, of total non-performing loans have been charged-off to their net realizable value as shown in the following table.


	Residential			Commercial						Construction			Consumer and
(Dollars in thousands)	Mortgage Loans			Mortgage Loans			C&I Loans			Loans			Finance Leases			Total
As of March 31, 2011
Non-performing loans held for investment charged-off to realizable value	$	231,039		$	11,240		$	75,475		$	50,804		$	1,141		$	369,699
Other non-performing loans held for investment		160,923			118,588			252,002			290,375			41,464			863,352

Total non-performing loans held for investment	$	391,962		$	129,828		$	327,477		$	341,179		$	42,605		$	1,233,051


Allowance to non-performing loans held for investment		16.20	%		67.68	%		54.31	%		46.07	%		176.72	%		45.55	%
Allowance to non-performing loans held for investment, excluding non-performing loans charged-off to realizable value		39.46	%		74.10	%		70.57	%		54.14	%		181.58	%		65.06	%

As of December 31, 2010
Non-performing loans held for investment charged-off to realizable value	$	291,118		$	20,239		$	101,151		$	32,139		$	659		$	445,306
Other non-performing loans held for investment		101,016			196,926			216,092			230,917			48,732			793,683

Total non-performing loans held for investment	$	392,134		$	217,165		$	317,243		$	263,056		$	49,391		$	1,238,989


Allowance to non-performing loans held for investment		15.90	%		48.62	%		48.11	%		57.77	%		162.96	%		44.64	%
Allowance to non-performing loans held for investment, excluding non-performing loans charged-off to realizable value		61.70	%		53.62	%		70.64	%		65.81	%		165.16	%		69.68	%


Principal balance deemed collectible at end of period	$	74,442

Amount charged-off during the first quarter of 2011	$	28,340


Allowance for loan losses:
Balance at beginning of period	$	23,108
Provision for loan losses		7,205
Charge-offs		(28,340	)

Balance at end of period	$	1,973

The REO portfolio, which is part of non-performing assets, increased by $7.1 million, reflecting increases in residential properties in the United States, and increases in both commercial and residential properties in Puerto Rico, partially offset by sales of REO properties. Consistent with the Corporation’s assessment of the value of properties and current and future market conditions, management continues to execute strategies to dispose real estate acquired in satisfaction of debt. During the first quarter of 2011, the Corporation sold approximately $12.6 million of REO properties ($3.5 million in Florida, $8.8 million in Puerto Rico and $0.3 million in the Virgin Islands), compared to $6.0 million in the first quarter of 2010.

The over 90-day delinquent, but still accruing, loans held for investment, excluding loans guaranteed by the U.S. Government, increased during the first quarter of 2011 by $7.1 million to $69.9 million, or 0.63% of total loans held for investment, at March 31, 2011.

Net Charge-offs and Total Credit Losses

Total net charge-offs for the first quarter of 2011 were $80.1 million, or 2.74% of average loans on an annualized basis. This was down $43.7 million, or 35%, from $123.8 million, or an annualized 3.65%, in the first quarter of 2010. Lower net charge-offs were reflected primarily in the Puerto Rico and the United States portfolio with a $9.8 million and a $33.6 million decrease, respectively, mainly related to the construction and residential mortgage loan portfolio. Net charge-offs in Virgin Islands remained relatively flat reflecting a $0.4 million decrease.

Construction loans net charge-offs in the first quarter of 2011 were $17.2 million, or an annualized 8.50%, down from $53.2 million, or an annualized 14.35% of related loans, in the first quarter of 2010. Approximately 70%, or $12.0 million, of the construction loan net charge-offs in the first quarter of 2011 were related to the Puerto Rico portfolio, driven by three relationships with charge-offs totaling $10.9 million associated with commercial and residential projects. In Florida, construction loan net charge-offs were $5.2 million, a decrease of $14.3 million when compared to 2010 first quarter levels, of which approximately $4.7 million was related to two relationships. The construction portfolio in Florida has been reduced to $70.4 million, as of March 31, 2011, from $78.5 million, as of December 31, 2010. Construction loans net charge-offs in the Virgin Islands were $0.1 million for the first quarter of 2011, unchanged from the first quarter of 2010. Construction loans charge-offs in the Virgin Islands over the last two quarters are directly related to an adequately reserved residential project placed in non-accruing status in the fourth quarter of 2010.

C&I loan net charge-offs in the first quarter of 2011 were $16.3 million, or an annualized 1.54% of related average loans, down from $23.8 million, or an annualized 1.88% of related loans, in the first quarter of 2010. Approximately 95%, or $15.4 million, of net charge-offs in the first quarter of 2011, were in Puerto Rico, of which $10.1 million was related to four relationships. No significant C&I loans charge-offs were recorded in the United States or Virgin Islands portfolios.

Residential mortgage loan net charge-offs were $5.2 million, or an annualized 0.63% of related average loans. This represents a decrease of $8.1 million from $13.3 million, or an annualized 1.50% of related average balances in the first quarter of 2011. Although there continues to be valuation pressure, the Corporation experienced reductions in delinquent loans. Approximately $4.0 million in charge-offs for the first quarter of 2011 ($1.7 million in Puerto Rico and $2.3 million in Florida) resulted from valuations for impairment purposes of residential mortgage loan portfolios considered homogeneous given high delinquency and loan-to-value levels, compared to $9.8 million recorded in the first quarter of 2010. The total amount of the residential mortgage loan portfolio that has been charged-off to its net realizable value as of March 31, 2011 amounted to $231.0 million. This represents approximately 53% of the total non-performing residential mortgage loan portfolio outstanding as of March 31, 2011. Net charge-offs of residential mortgage loans also include $1.4 million related to loans foreclosed during the first quarter of 2011, down from $3.3 million recorded for loans foreclosed in the first quarter of 2010. Loss rates in the Corporation’s Puerto Rico operations continue to be lower than loss rates in the Florida market.

Net charge-offs on consumer loan and finance leases in the first quarter of 2011 were $10.3 million, or an annualized 2.43% of related average loans, compared to $14.1 million, or an annualized 3.01% of average loans for the first quarter of 2010.

Commercial mortgage loan net charge-offs in the first quarter of 2011 were $31.1 million, or an annualized 7.37% of related average loans, up from $19.3 million, or an annualized 4.85% of related loans, in the first quarter of 2010. The 2011 first quarter net charge-offs were mainly driven by the charge-off related to the aforementioned $85.6 million relationship in Puerto Rico restructured by the Corporation through a loan split. Commercial mortgage loan net charge-offs in Florida amounted to $1.9 million for the first quarter of 2011.

The following table presents annualized charge-offs to average loans held-in-portfolio:


	Quarter Ended
	March 31,			March 31,
	2011			2010
Residential mortgage		0.63	%		1.50	%
Commercial mortgage		7.37	%		4.85	%
Commercial and Industrial		1.54	%		1.88	%
Construction		8.50	%		14.35	%
Consumer and finance leases		2.43	%		3.01	%
Total loans		2.74	%		3.65	%

The above ratios are based on annualized charge-offs and are not necessarily indicative of the results expected for the entire year or in subsequent periods.

The following table presents annualized net charge-offs to average loans by geographic segment:


	Quarter Ended
	March 31,			March 31,
	2011			2010
PUERTO RICO:
Residential mortgage		0.39	%		1.11	%
Commercial mortgage		10.07	%		0.71	%
Commercial and Industrial		1.55	%		1.92	%
Construction		8.77	%		13.45	%
Consumer and finance leases		2.50	%		2.95	%
Total loans		2.82	%		2.80	%

VIRGIN ISLANDS:
Residential mortgage		0.05	%		0.47	%
Commercial mortgage		0.00	%		0.00	%
Commercial and Industrial		1.59	%		(0.02	)% (1)
Construction		0.16	%		0.15	%
Consumer and finance leases		1.05	%		3.82	%
Total loans		0.45	%		0.55	%

FLORIDA:
Residential mortgage		3.26	%		5.70	%
Commercial mortgage		1.65	%		13.23	%
Commercial and Industrial		0.92	%		10.78	%
Construction		26.29	%		27.23	%
Consumer and finance leases		1.59	%		3.96	%
Total loans		4.29	%		13.90	%


(1)		For the first quarter of 2010, recoveries in commercial and industrial loans in the Virgin Islands exceeded charge-offs.

Total credit losses (equal to net charge-offs plus losses on REO operations) for the first quarter ended March 31, 2011 amounted to $85.6 million, or 2.91% on an annualized basis to average loans and repossessed assets in contrast to credit losses of $127.5 million, or a loss rate of 3.84%, for the first quarter of 2010.

The following table presents a detail of the REO inventory and credit losses for the periods indicated:


	Quarter Ended
	March 31,

	2011			2010
	(In thousands)
REO
REO balances, carrying value:
Residential	$	58,426		$	38,851
Commercial		26,434			20,322
Condo-conversion projects		—			8,000
Construction		7,088			6,271

Total	$	91,948		$	73,444


REO activity (number of properties):
Beginning property inventory,		479			285
Properties acquired		91			98
Properties disposed		(80	)		(52	)

Ending property inventory		490			331


Average holding period (in days)
Residential		332			235
Commercial		418			204
Condo-conversion projects		—			733
Construction		480			417

		368			296

REO operations (loss) gain:
Market adjustments and (losses) gain on sale:
Residential		(2,633	)		(1,245	)
Commercial		(1,103	)		(676	)
Condo-conversion projects		—			—
Construction		135			49

		(3,601	)		(1,872	)

Other REO operations expenses		(1,899	)		(1,821	)

Net Loss on REO operations	$	(5,500	)	$	(3,693	)


CHARGE-OFFS
Residential charge-offs, net		(5,161	)		(13,346	)
Commercial charge-offs, net		(47,392	)		(43,073	)
Construction charge-offs, net		(17,238	)		(53,215	)
Consumer and finance leases charge-offs, net		(10,271	)		(14,148	)

Total charge-offs, net		(80,062	)		(123,782	)

TOTAL CREDIT LOSSES (1)	$	(85,562	)	$	(127,475	)

LOSS RATIO PER CATEGORY (2):
Residential		0.94	%		1.62	%
Commercial		3.27	%		2.63	%
Construction		8.36	%		14.21	%
Consumer		2.41	%		3.00	%
TOTAL CREDIT LOSS RATIO (3)		2.91	%		3.84	%


(1)		Equal to REO operations (losses) gains plus Charge-offs, net.

(2)		Calculated as net charge-offs plus market adjustments and gains (losses) on sale of REO divided by average loans and repossessed assets.

(3)		Calculated as net charge-offs plus net loss on REO operations divided by average loans and repossessed assets.

Operational Risk

The Corporation faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products. Coupled with external influences such as market conditions, security risks, and legal risk, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk, the Corporation has developed, and continues to enhance, specific internal controls, policies and procedures that are designated to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these mechanisms is to provide reasonable assurance that the Corporation’s business operations are functioning within the policies and limits established by management.

The Corporation classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, and legal and compliance, the Corporation has specialized groups, such as the Legal Department, Information Security, Corporate Compliance, Information Technology and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the business groups.

Legal and Compliance Risk

Legal and compliance risk includes the risk of non-compliance with applicable legal and regulatory requirements, the risk of adverse legal judgments against the Corporation, and the risk that a counterparty’s performance obligations will be unenforceable. The Corporation is subject to extensive regulation in the different jurisdictions in which it conducts its business, and this regulatory scrutiny has been significantly increasing over the last several years. The Corporation has established and continues to enhance procedures based on legal and regulatory requirements that are designed to ensure compliance with all applicable statutory and regulatory requirements. The Corporation has a Compliance Director who reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and implementation of an enterprise-wide compliance risk assessment process. The Compliance division has officer roles in each major business areas with direct reporting relationships to the Corporate Compliance Group.

Concentration Risk

The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. However, the Corporation has diversified its geographical risk as evidenced by its operations in the Virgin Islands and in Florida.

As of March 31, 2011, the Corporation had $325.9 million outstanding of credit facilities granted to the Puerto Rico Government and/or its political subdivisions compared to $325.1 million as of December 31, 2010, and $98.8 million granted to the Virgin Islands government, compared to $84.3 million as of December 31, 2010. A substantial portion of these credit facilities are obligations that have a specific source of income or revenues identified for their repayment, such as property taxes collected by the central Government and/or municipalities. Another portion of these obligations consists of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment.

Aside from loans extended to the Puerto Rico Government and its political subdivisions, the largest loan to one borrower as of March 31, 2011 in the amount of $285.4 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. This commercial loan is secured by individual real-estate loans, mostly 1-4 residential mortgage loans.

Of the total gross loan held for investment portfolio of $11.1 billion as of March 31, 2011, approximately 83% have credit risk concentration in Puerto Rico, 8% in the United States and 9% in the Virgin Islands.


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding market risk to which the Corporation is exposed, see the information contained in “Part I — Item 2 -“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.”


ITEM 4.		CONTROLS AND PROCEDURES

Disclosure Control and Procedures

First BanCorp’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of First BanCorp’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2011. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.

Internal Control over Financial Reporting

There have been no changes to the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II — OTHER INFORMATION


ITEM 1.		LEGAL PROCEEDINGS

In the opinion of the Company’s management, the pending and threatened legal proceedings of which management is aware will not have a material adverse effect on the financial condition, results of operations or cash flows of the Corporation.


ITEM 1A.		RISK FACTORS

Our business, operating results and/or the market price of our common and preferred stock may be significantly affected by a number of factors. For a detailed discussion of certain risk factors that could affect the Corporation’s operations, financial condition or results for future periods see Item 1A, Risk Factors, in the Corporation’s 2010 Annual Report on Form 10-K. These factors could also cause actual results to differ materially from historical results or the results contemplated by the forward-looking statements contained in this report. Also refer to the discussion in “Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report for additional information that may supplement or update the discussion of risk factors in the Corporation’s 2010 Form 10-K.

The risks described in the Corporation’s 2010 Form 10-K are not the only risks facing the Corporation. Additional risks and uncertainties not currently known to the Corporation or currently deemed by the Corporation to be immaterial also may materially adversely affect the Corporation’s business, financial condition or results of operations.


ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.


ITEM 3.		DEFAULTS UPON SENIOR SECURITIES

Not applicable.


ITEM 4.		RESERVED


ITEM 5.		OTHER INFORMATION

Not applicable.


ITEM 6.		EXHIBITS

12.1 — Ratio of Earnings to Fixed Charges.

12.2 — Ratio of Earnings to Fixed Charges and Preference Dividends.

31.1 — CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 — CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 — CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 — CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized:


	First BanCorp. Registrant
Date: May 16, 2011	By:	/s/ Aurelio Alemán
		Aurelio Alemán
		President and Chief Executive Officer


Date: May 16, 2011	By:	/s/ Orlando Berges
		Orlando Berges
		Executive Vice President and Chief Financial Officer

FIRST BANCORP /PR/ - FORM 10-Q - May 16, 2011

Attached files

FIRST BANCORP /PR/ Reports