UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 20052007
Commission File No. 001-14793
First BanCorp.
(Exact name of registrant as specified in its charter)
   
Puerto Rico 66-0561882
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
   
1519 Ponce de León Avenue, Stop 23
Santurce, Puerto Rico 00908
   
(Address of principal executive office) (Zip Code)
Registrant’s telephone number, including area code:
(787) 729-8200
Securities registered under Section 12(b) of the Act:
Title of each className of each exchange on which registered
Common Stock ($1.00 par value)New York Stock Exchange
7.125% Noncumulative Perpetual Monthly Income
Preferred Stock, Series A (Liquidation Preference $25 per share)
New York Stock Exchange
8.35% Noncumulative Perpetual Monthly Income
Preferred Stock, Series B (Liquidation Preference $25 per share)
New York Stock Exchange
7.40% Noncumulative Perpetual Monthly Income
Preferred Stock, Series C (Liquidation Preference $25 per share)
New York Stock Exchange
7.25% Noncumulative Perpetual Monthly Income
Preferred Stock, Series D (Liquidation Preference $25 per share)
New York Stock Exchange
Common Stock ($1.00 par value)
7.125% Noncumulative Perpetual Monthly Income
Preferred Stock, Series A (Liquidation Preference $25 per share)
8.35% Noncumulative Perpetual Monthly Income
Preferred Stock, Series B (Liquidation Preference $25 per share)
7.40% Noncumulative Perpetual Monthly Income
Preferred Stock, Series C (Liquidation Preference $25 per share)
7.25% Noncumulative Perpetual Monthly Income
Preferred Stock, Series D (Liquidation Preference $25 per share)
7.00% Noncumulative Perpetual Monthly Income
Preferred Stock, Series E (Liquidation Preference $25 per share)
New York Stock Exchange
Securities registered under Section 12(g) of the Act:
NONE
     Indicate by check mark if the registrant is a wellwell- known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesþo Nooþ
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act. Yeso Noþ
     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. Yesoþ Noþo
     Indicate by check mark if disclosure of delinquent filerfilers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, (as definedor 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).Act. (Check one):
Large Accelerated FilerþAccelerated Filerþ      Accelerated Filero      Non-Accelerated Filero
Non-Accelerated Filer  o (Do not check if a smaller reporting company)Smaller reporting companyo
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
     The aggregate market value of the voting common stockequity held by nonaffiliatesnon affiliates of the registrant as of June 30, 20062007 (the last day of the registrant’s most recently completed second quarter) was $763,121,000$ 822,446,217 based on the closing price of $9.30$10.99 per share of common stock on the New York Stock Exchange on June 30, 2006 (see Note 1 below).
2007. The number of shares outstanding of the registrant’s common stock, as of December 31, 2006 was:
Common stock, par value $1.00 – 83,254,056
     Note 1-The registrant had no nonvoting common equity outstanding as of June 30, 2006. In calculating2007. For the aggregate market valuepurposes of the common stock held by non affiliates of the registrant,foregoing calculation only, registrant has treated as common stock held by affiliates only common stock of the registrant held by its principaldirectors and executive officerofficers and voting stock held by the registrant’s employee benefit plans. The registrant’s response to this item is not intended to be an admission that any person is an affiliate of the registrant for any purposes other than this response.
      Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 92,504,506 shares as of January 31, 2008.
 

 


DOCUMENTS INCORPORATED BY REFERENCE
PART III
Item 10Directors, Executive Officers and Corporate Governance.Information in response to this Item is incorporated into this Annual Report on Form 10-K by reference from the sections entitled “Information with Respect to Nominees for Director of First BanCorp, Directors whose Terms Continue and Executive Officers of the Corporation” and “Corporate Governance and Related Matters” in First BanCorp’s definitive Proxy Statement for use in connection with its 2008 Annual Meeting of stockholders (the “Proxy Statement”).
Item 11Executive Compensation.Information in response to this Item is incorporated into this Annual Report on Form 10-K by reference from the sections entitled “Compensation Discussion and Analysis,” “Tabular Executive Compensation Disclosure,” “Compensation of Directors,” and “Compensation Committee Report” in First BanCorp’s Proxy Statement.
Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Information in response to this Item is incorporated into this Annual Report on Form 10-K by reference from the section entitled “Beneficial Ownership of Securities” in First BanCorp’s Proxy Statement.
Item 13Certain Relationships and Related Transactions, and Director Independence.Information in response to this Item is incorporated into this Annual Report on Form 10-K by reference from the sections entitled “Certain Relationships and Related Person Transactions” and “Corporate Governance and Related Matters” in First BanCorp’s Proxy Statement.
Item 14Principal Accountant Fees and Services.Information in response to this Item is incorporated into this Annual Report on Form 10-K by reference from the section entitled “Audit Fees” in First BanCorp’s Proxy Statement.

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FIRST BANCORP
20052007 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
     
  
EXPLANATORY NOTE  
     
6
25
30
30
31
31
  
  
     
Business5
Risk Factors31
Unresolved Staff Comments37
Properties37
Legal Proceedings38
Submission of Matters to a Vote of Security Holders38
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities39
  32
 Selected Financial Data35 41
Management’s Discussion and Analysis of Financial Condition and Results of Operations43
  36
Quantitative and Qualitative Disclosures About Market Risk85
  107
Financial Statements and Supplementary Data85
  108
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure85
Controls and Procedures86
Other Information92
  108
  108 
  
     
  
  
 Directors and Executive Officers of the Registrant109 162
  109 Executive Compensation167
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters173
  109
Certain Relationships and Related Transactions, and Director Independence175
  109
Principal Accountant Fees and Services 175109
     
  
     
  109 Exhibits, Financial Statement Schedules177
     
  
SIGNATURES178
 EX-10.4 EMPLOYMENT AGREEMENT - LAWRENCE ODELLEX-3.2 BY-LAWS OF FIRST BANCORP
 EX-10.5 AMENDMENT TO EMPLOYMENT AGREEMENT - LAWRENCE ODELLEX-14.4 INDEPENDENCE PRINCIPLES FOR DIRECTORS
 EX-10.6 EMPLOYMENT AGREEMENT - FERNANDO SCHERRER
EX-10.7 SERVICES AGREEMENT- MARTINEZ ODELL & CALABRIA
EX-10.8 AMENDMENT TO SERVICES AGREEMENT-MARTINEZ ODELL & CALABRIA
EX-10.9 SEPARATION AGREEMENT - FERNANDO BATLLE
EX-10.10 CONSULTING SERVICES AGREEMENT FERNANDO BATTLE
EX-10.11 CONTRACT FOR PURCHASEEX-21.1 LIST OF BUILDING
EX-10.12 EMPLOYMENT AGREEMENT FORMFIRST BANCORP'S SUBSIDIARIES
 EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
 EX-32.2 SECTION 906 CERTIFICATION OF THE CFO
EX-99.1 AUDIT COMMITTEE CHARTER

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EXPLANATORY NOTE
          As a result of the delay in completing First Bancorp’s amended Annual Report on Form 10-K for the year ended December 31, 2004, which included the restatement of the Corporation’s audited financial statements for the years ended December 31, 2004, 2003 and 2002, and the unaudited selected quarterly financial data for each of the four quarters of 2004 and 2003, First Bancorp was unable to timely file with the Securities and Exchange Commission (“SEC”) this Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q for the fiscal quarters ended September 30, 2006, June 30, 2006, March 31, 2006, September 30, 2005 and June 30, 2005. For information regarding the restatement of First Bancorp’s previously issued financial statements, see the Corporation’s Amendment No. 1 to Annual Report on Form 10-K/A (“Amended 2004 Form 10-K”) for the year ended December 31, 2004, which was filed with the SEC on September 26, 2006.

34


Forward Looking Statements
     This Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-K or future filings by First BanCorp (the “Corporation”) with the Securities and Exchange Commission (“SEC”), in the Corporation’s press releases or in other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the word or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “should,” “anticipate” and similar expressions are meant to identify “forward-looking statements.”
     First BanCorp wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and represent First BanCorp’s expectations of future conditions or results and are not guarantees of future performance. First BanCorp advises readers that various factors could cause actual results to differ materially from those contained in any “forward-looking statement.” Such factors include, but are not limited to, the following:
  risks arising from material weaknessesan adverse change in the Corporation’s internal control over financial reporting;
risks associated with the Corporation’s inability to prepare and timely submit regulatory filings;
the Corporation’s ability to attract new clients and retain existing ones;
 
  general economic conditions, including prevailingthe interest ratesrate scenario and the performance of the financial markets, which may affect demand for the Corporation’s products and services and the value of the Corporation’s assets, including the value of all of the interest rate swaps that economically hedge the interest rate risk mainly relating to brokered certificates of deposit medium-term notes, and commercial loans and the ineffectiveness of such hedges or the undesignated portion of suchas well as other derivative instruments used for protection from interest rate swaps;fluctuations;
 
  risks arising from worsening economic conditions in Puerto Rico and in the United States market;
risks arising from credit and other risks of the Corporation’s lending and investment activities;activities, including the condo conversion loans in its Miami Agency;
 
  changes in the Corporation’s expenses associated with acquisitions and dispositions;
 
  developments in technology;
 
  risks associated with changing the impact of Doral Financial Corporation’s business strategyand R&G Financial Corporation’s financial condition on the repayment of their outstanding secured loans to no longer acquire mortgage loans in bulk;
risks associated with the ongoing shareholder litigation against the Corporation;
 
  risks associated withto the ongoing SEC investigation;
risksCorporation associated with being subject to the Federal Reserve Board of New York (FED) cease and desist order;
 
  potential furtherthe Corporation’s ability to issue brokered certificates of deposit and fund operations;
risks associated with downgrades in the credit ratings of the Corporation’s securities;
 
  general competitive factors and industry consolidation; and
 
  risks associated with regulatory and legislative changes for financial services companies in Puerto Rico, the United States, and the U.S. and British Virgin Islands.
     The Corporation does not undertake, and specifically disclaims any obligation, to update any “forward-lookingof the “forward- looking statements” to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal securities laws.
     Investors should carefully consider these factors and the risk factors outlined under Item 1A, Risk Factors, in this Annual Report on Form 10-K.

45


PART I
Item 1. Business
GENERAL
     First BanCorp (the “Corporation”) is a publicly-owned financial holding corporationcompany that is subject to regulation, supervision and examination by the Federal Reserve Board.Board (the “FED”). The Corporation was incorporated under the laws of the Commonwealth of Puerto Rico to serve as the bank holding company for FirstBank Puerto Rico (“FirstBank” or the “Bank”). The Corporation is a full service provider of Financialfinancial services and products with operations in Puerto Rico, the United States and the US and British Virgin Islands.
     The Corporation provides a wide range of financial services for retail, commercial and institutional clients. AtAs of December 31, 2005,2007, the Corporation controlled four wholly-owned subsidiaries: FirstBank, Puerto Rico (“FirstBank” or the “Bank”), FirstBank Insurance Agency, Inc. (“FirstBank Insurance Agency”), Grupo Empresas de Servicios Financieros (d/b/a “PR Finance Group”) and Ponce General Corporation, Inc. (“Ponce General”). FirstBank is a Puerto Rico-chartered commercial bank, FirstBank Insurance Agency is a Puerto Rico-chartered insurance agency, PR Finance Group is a domestic corporation and Ponce General is the holding company of a federally chartered stock savings association, FirstBank Florida. FirstBank is subject to the supervision, examination and regulation of both the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) and the Federal Deposit Insurance Corporation (the “FDIC”). Deposits are insured through the FDIC Deposit Insurance Fund. WithinIn addition, within FirstBank, there are two additional separately regulated businesses: (1) the Virgin Islands operations; and (2) the Miami loan agency. The U.S. Virgin Islands operations of FirstBank are subject to regulation and examination by the United States Virgin Islands Banking Board, and the British Virgin Islands operations are subject to regulation by the British Virgin Islands Financial Services Commission. FirstBank’s loan agency in the stateState of Florida is regulated by the Office of Financial Regulation of the State of Florida, the Federal Reserve Bank of Atlanta and the Federal Reserve Bank of New York. As of December 31, 2005,2007, the Corporation had total assets of $19.9$17.2 billion, total deposits of $12.4$11.0 billion and total stockholders’ equity of $1.2$1.4 billion.
     FirstBank Insurance Agency is subject to the supervision, examination and regulation of the Office of the Insurance Commissioner of the Commonwealth of Puerto Rico and operates fourteen offices in Puerto Rico. PR Finance Group is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico.OCIF. FirstBank Florida is subject to the supervision, examination and regulation of the Office of Thrift Supervision (the “OTS”).
     AtAs of December 31, 2005,2007, FirstBank conducted its business through its main officesoffice located in San Juan, Puerto Rico, forty-sixforty-eight full service banking branches in Puerto Rico, fourteentwenty-two branches in the United States Virgin Islands (USVI) and British Virgin Islands (BVI) and a loan agency in Coral Gables,Miami, Florida (USA). FirstBank had four wholly-owned subsidiaries with operations in Puerto Rico;Rico: First Leasing and Rental Corporation, a vehicle leasing and daily rental company with nineseven offices in Puerto Rico; First Federal Finance Corp. (d/b/a Money Express La Financiera), a finance company with thirty-seventhirty-nine offices in Puerto Rico; First Mortgage, Inc. (“First Mortgage”), a residential mortgage loan origination company with thirtytwenty-six offices in FirstBank branches and at stand alone sites; and FirstBank Overseas Corporation, an international banking entity organized under the International Banking Entity Act of Puerto Rico. FirstBank had three subsidiaries with operations outside of Puerto Rico;Rico: First Insurance Agency VI, Inc., an insurance agency with threetwo offices that sellsells insurance products in the USVI; First Express, a finance company specializing in the origination of small loans with three offices in the USVI; and First Trade, Inc., which provides foreign sales corporation management services with an officeservices.
     The Corporation operates in the USVI and an office in Barbados; and First Express, a small loans company with three offices in the USVI.

5


Business combinations
     On March 31, 2005, the Corporation completed the acquisition of 100% of the outstanding common shares of Ponce General Corporation, the holding company of Unibank and Ponce Realty. The purpose of the acquisition was to build a platform in Florida from which to initiate further expansion into the United States. As of the acquisition date, excluding the effect of purchase accounting entries, Ponce General had approximately $546.2 million in assets, $476.0 million in loans composed mainly of residential and commercial mortgage loans amounting to approximately $425.8 million, commercial and construction loans amounting to approximately $28.2 million and consumer loans amounting to approximately $22.1 million and $439.1 million in deposits. The consideration consisted mainly of payments made to principal and minority shareholders of Ponce General’s outstanding common stock at acquisition date. This consideration along with other direct acquisition costs and liabilities incurred led to a total acquisition cost of approximately $101.9 million. The purchase price resulted in a premium of approximately $36 million that was mainly allocated to core deposit intangibles and goodwill. The Corporation subsequently changed the name of Unibank to FirstBank Florida.
     FirstBank Florida is aStates mainland through its federally chartered stock savings association which is headquartered in Miami, Florida (USA) and currently is the only operating subsidiary of Ponce General.First Bank Florida. FirstBank Florida provides a wide range of banking services to individual and corporate customers through its eightnine branches in Florida (USA).the U.S. mainland.

6


BUSINESS SEGMENTS
     Based upon the Corporation’s organizational structure and the information provided to the Chief Operating Decision Maker and to a lesser extent the Board of Directors, the operating segments are driven primarily by the legal entities.
     The Corporation has four reportable segments: Consumer (Retail), Commercial and Corporate Banking,Banking; Mortgage BankingBanking; Consumer (Retail) Banking; and Treasury and Investments. These segments are described below:
Consumer
     The Consumer (Retail) segment consists of the Corporation’s consumer lending and deposit-taking activities conducted mainly through its branch network and loan centers. Loans to consumers include auto, credit card and personal loans. Deposit products include checking and savings accounts, Individual Retirement Accounts (IRA) and retail certificates of deposit. Retail deposits gathered through each branch of the FirstBank’s retail network serve as one of the funding sources for the lending and investment activities.
     Consumer lending growth has been mainly driven by auto loan originations. The growth of these portfolios has been achieved through a strategy of providing outstanding service to selected auto dealers who provide the channel for the bulk of the Corporation’s auto loan originations. This strategy is directly linked to our commercial lending activities as the Corporation maintains strong and stable auto floor plan relationships, which is the foundation of a successful auto loan generation operation. The Corporation continues to strengthen the commercial relations with floor plan dealers, which directly benefit the Corporation’s consumer lending operation and which are managed as part of the consumer banking activities.
     Personal loans, and to a lesser extent marine financing and a small credit card portfolio also contribute to interest income generated on consumer lending. Management plans to continue to be active in the consumer loans market, applying the Corporation’s strict underwriting standards.

6


Commercial and Corporate Banking
     The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers represented by the public sector and specialized industries such as healthcare, tourism, financial institutions, food and beverage, shopping centers and middle-market clients. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, and other products such as cash management and business management services. A substantial portion of thisthe commercial loan portfolio is secured by commercial real estate. Although commercial loans involve greater credit risk than a typical mortgage loan because they are larger in size and more risk is concentrated in a single borrower, the Corporation has and maintains an effective credit risk management infrastructure designed to mitigate potential losses associated with commercial lending, including strong underwriting and loan review functions, sales of loan participations and continuous monitoring of concentrations within portfolios.
Mortgage Banking
     The Mortgage Banking segment conducts its operations mainly through FirstBank and its mortgage origination subsidiary, FirstMortgage. These operations consist of the origination, sale and servicing of a variety of residential mortgage loans products. Originations are sourced through different channels, such as branches and mortgage brokers,and real estate brokers, and in association with new project developers. FirstMortgage focuses on originating residential real estate loans, some of which conform to Federal Housing Administration (“FHA”), Veterans Administration (“VA”) and Rural Development (“RD”) standards. Loans originated that meet FHA standards qualify for the federal agency’s insurance program whereas loans that meet VA and RD standards are guaranteed by their respective federal agencies. Mortgage loans that do not qualify under these programs are commonly referred to as conventional loans. Conventional real estate loans could be conforming and non-conforming. Conforming loans are residential real estate loans that meet the standards for sale under the Fannie Mae and Freddie Mac programs whereas loans that do not meet the standards are referred to as non-conforming residential real estate loans. The Corporation’s strategy is to penetrate markets by providingseeking to provide customers with a variety of high quality mortgage products to serve their financial needs faster simplerand more easily than the competition and at competitive prices.
The Mortgage Banking segment also acquires and sells mortgages in the secondary markets. From time to time, residential real estate conforming loans are typically sold to secondary buyers like Fannie Mae and Freddie Mac. More than 90% of the Corporation’s residential mortgage loan portfolio consists of fixed-rate, fully amortizing, full documentation loans that have a lower risk than the typical sub-prime loans that have already affected the U.S. real estate market. The Corporation is not active in negative amortization loans or option adjustable rate mortgage loans (ARMs) including ARMs with teaser rates.
Consumer (Retail) Banking
     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. Loans to consumers include auto, credit card and personal loans. Deposit products include checking and savings accounts, Individual Retirement Accounts (IRA) and retail certificates of deposit. Retail deposits gathered through each branch of FirstBank’s retail network serve as one of the funding sources for lending and investment activities.
     Consumer lending growth has been mainly driven by auto loan originations. The growth of this portfolio has been achieved through a strategy of providing outstanding service to selected auto dealers who provide the channel for the bulk of the Corporation’s auto loan originations. This strategy is directly linked to the Corporation’s commercial lending activities as the Corporation maintains strong and stable auto floor plan relationships, which are the foundation of a successful auto loan generation operation. The Corporation continues to strengthen commercial relations with floor plan dealers, which directly benefit the Corporation’s consumer lending operation and are managed as part of the consumer banking activities.

7


     Personal loans and, to a lesser extent, marine financing and a small credit card portfolio also contribute to interest income generated on consumer lending. Management plans to continue to be active in the consumer loans market, applying the Corporation’s strict underwriting standards.
Treasury and Investments
     The Treasury and Investments segment is responsible for the Corporation’s investment portfolio and treasury functions designed to manage and enhance liquidity. This segment sells funds to the Commercial and Corporate Banking, Mortgage Banking, and Consumer Lending(Retail) Banking segments to finance their lending activities and purchases funds gathered by those segments.
     The interest rates charged or credited by Treasury and Investments are based on market rates.
     For information regarding First BanCorp’s reportable segments, please refer to note 32Note 31, “Segment Information”Information,” to the Corporation’s financial statements for the year ended December 31, 20052007 included in Item 8 of this Form 10-K.
Employees
     AtAs of December 31, 2005,2007, the Corporation and its subsidiaries employed 2,725approximately 3,000 persons. None of its employees are represented by a collective bargaining group. The Corporation considers its employee relations to be good.

7


RECENT SIGNIFICANT EVENTS
Audit Committee ReviewSettlement of Class Action Lawsuit
     On November 28, 2007, the United States District Court for the District of Puerto Rico approved the settlement of all claims in the consolidated securities class action relating to the accounting for mortgage-related transactions named “In Re: First BanCorp Securities Litigations.”
     Under the terms of the settlement, the Corporation paid an aggregate of $74.25 million. The monetary payment had no impact on the Corporation’s earnings or capital in 2007. As previously announcedreflected in First BanCorp’s audited Consolidated Financial Statements for 2005, included in the Corporation’s 2005 Annual Report on August 1,Form 10-K, the Corporation accrued $74.25 million in 2005 for the Audit Committee (the “Committee”)potential settlement of the class action lawsuit. In 2007, the Corporation recognized income of approximately $15.1 million from an agreement reached with insurance companies and former executives of the Corporation determinedfor indemnity of expenses, which was accounted for as “Insurance Reimbursements and Other Agreements Related to a Contingency Settlement” on the Consolidated Statement of Income.
SEC Investigation
     On August 7, 2007, First BanCorp announced that the SEC had approved a final settlement with the Corporation, which resolved the previously disclosed SEC investigation of the Corporation’s accounting for the mortgage-related transactions with Doral Financial Corporation (“Doral”) and R&G Financial Corporation (“R&G Financial”).
     Under the settlement with the SEC, the Corporation agreed, without admitting or denying any wrongdoing, to the issuance of a Federal Court Order enjoining it from committing future violations of certain provisions of the federal securities laws. The Corporation also agreed to the payment of an $8.5 million civil penalty and the disgorgement of $1 to the SEC. The SEC may request that the civil penalty be subject to distribution pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. The monetary payment had no impact on the Corporation’s earnings or capital in 2007. As reflected in First BanCorp’s previously filed audited Consolidated Financial Statements for 2005, the Corporation accrued $8.5 million in 2005 for the potential settlement with the SEC. In connection with the settlement, the Corporation consented to the entry of a final judgment to implement

8


the terms of the agreement. The United States District Court for the Southern District of New York consented to the entry of the final judgment in order to consummate the settlement. The monetary payment was made on October 15, 2007.
Regulatory Actions
     On November 20, 2007, the Corporation announced that, following the most recent Safety and Soundness examination of FirstBank, the FDIC and the OCIF terminated the Order to Cease and Desist dated March 16, 2006 related to the mortgage-related transactions with other financial institutions and the Order to Cease and Desist dated August 24, 2006 related to the Bank’s compliance with the Bank Secrecy Act (“BSA”).
     In February 2006, the OTS imposed restrictions on FirstBank Florida as a result of safety and soundness concerns derived from the Company’s previous announcement that it would restate its financial statements. Under these restrictions, FirstBank Florida cannot make any payments to the Corporation or its affiliates pursuant to a tax-sharing agreement nor can FirstBank Florida employ or receive consultative services from an executive officer of the Corporation or its affiliates without the prior written approval of OTS’ Regional Director. Additionally, FirstBank Florida cannot enter into any agreement to sell loans or any portions of any loans to the Corporation or its affiliates nor can FirstBank Florida make any payment to the Corporation or its affiliates via an intercompany account or arrangement unless pursuant to a pre-existing contractual agreement for services rendered in the normal course of business. Also, FirstBank Florida cannot pay dividends to its parent, Ponce General, a wholly owned subsidiary of First BanCorp, without prior approval from the OTS.
     On March 17, 2006, the Corporation announced that it had agreed with the FED to a cease and desist order issued with the consent of the Corporation (the “Consent Order”). The Consent Order addresses certain concerns of banking regulators relating to the incorrect accounting for and documentation of mortgage-related transactions with Doral and R&G. The Corporation had initially reported those transactions as purchases of mortgage loans when they should have been accounted for as secured loans to the financial institutions because, as a legal and accounting matter, they did not constitute “true sales” but rather financing arrangements. The Consent Order requires the Corporation to take various affirmative actions, including engaging an independent consultant to review the backgroundmortgage portfolios and prepare a report including findings and recommendations, submitting capital and liquidity contingency plans, providing notice prior to the incurring of additional debt or the restructuring or repurchasing of debt, obtaining approval prior to purchasing or redeeming stock, filing amended regulatory reports upon completion of the restatement of financial statements, and obtaining regulatory approval prior to paying dividends after those payable in March 2006. The requirements of the Consent Order have been substantially completed and reported to the regulator as required by the Consent Order.
     The Corporation has continued working on the reduction of its exposure to Doral and R&G. The outstanding balance of loans to Doral and R&G amounted to $382.6 million and $242.0 million, respectively, as of December 31, 2007.
     During the first quarter of 2007, the Corporation entered into various agreements with R&G relating to prior transactions accounted for as commercial loans secured by mortgage loans and pass-through trust certificates from R&G subsidiaries. First, through a mortgage payment agreement, R&G paid the Corporation approximately $50 million to reduce the commercial loan that R&G Premier Bank, R&G’s banking subsidiary, had outstanding with the Corporation. In addition, the remaining balance of $271 million was re-documented as a secured loan from the Corporation to R&G. Second, R&G and the Corporation amended various agreements involving, as of the date of the transaction, approximately $183.8 million of securities collateralized by loans that were originally sold through five grantor trusts. The modifications to the original agreements allow the Corporation to treat these transactions as “true sales” for accounting and legal purposes, as such, these commercial loans secured by trust certificates were classified as available for certainsale securities. The execution of the agreements enabled the Corporation to fulfill the remaining requirements of the Consent Order with banking regulators relating to the mortgage-related transactions that FirstBank had entered into between 1999the Corporation recharacterized for accounting and 2005. The Committee retainedlegal purposes as commercial loans secured by the law firms of Clifford Chance U.S. LLPmortgage loans and Martínez Odell & Calabria and forensic accountants FTI Consulting Inc. to assistpass-through trust certificates.
Restatement
     With the Committee in its review. Subsequent to the announcementfiling during 2007 of the review, a number of significant events occurred, including the announcement of the restatement and other events described below. In August 2006 the Committee completed its review and the Amended 2004 Form 10-K for the fiscal year ended December 31, 2004 was filed with2006, the SECquarterly financial statements on September 26, 2006.
Governmental Action
SEC
On August 23, 2005, the Corporation received a letter from the SEC in which the SEC indicated that it was conducting an informal inquiry into the Corporation. The inquiry pertains to, among other things, the accountingForm 10-Q for 2007 quarters and the quarterly financial statements on Form 10-Q for mortgage-related transactions with Doral and R&G during the calendar years 1999 through 2005.
On October 21, 2005, the Corporation announced that the SEC issued a formal order of investigation in its ongoing inquiry of the Corporation. The Corporation has cooperated with the SEC in connection with this investigation.
On September 26, 2006 the Corporation filed with the SEC the Amended 2004 Form 10-K which included restated financial information for the fiscal years 2000 through 2004.
First BanCorp has been engaged in discussions with the staff of the SEC regarding a possible resolution to its investigation of the Corporation’s restatement, and has accrued $8.5 million in its consolidated financial statements for the year ended December 31, 2005 in connection with a potential settlement of the SEC’s investigation of the Corporation. Any settlement is subject to the approval of the Commissioners of the SEC. There can be no assurance that the Corporation’s efforts to resolve the SEC’s investigation with respect to the Corporation will be successful, or that the amount accrued will be sufficient, and the Corporation cannot predict at this time the timing or final terms of any settlement.
Banking Regulators
Beginning in the Fall of 2005, the Corporation received inquiries from federal banking regulators regarding the status and impact of the restatement and related safety and soundness concerns.

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On December 6, 2005, the Commonwealth of Puerto Rico Commissioner of Financial Institutions (“Commissioner”) determined that the Corporation had exceeded the lending limit requirements of Section 17(a) of the Puerto Rico Banking Law which governs the amount a bank may lend to a single person, group or related entity. The Puerto Rico Banking Law also authorizes OCIF to determine other components which may be considered as part of a bank’s capital for purposes of establishing its lending limit. After consideration of other components, OCIF authorized the Corporation to retain the secured loans of Doral and R&G as it believed that these loans are secured by sufficient collateral to diversify, disperse and significantly diffuse the risks connected to such loans thereby satisfying the safety and soundness considerations mandated by Section 28 of the Puerto Rico Banking Law.
On December 7, 2005, the Corporation was advised by the FDIC that the revised classification of the mortgage-related transactions for accounting purposes resulted in such transactions being viewed for regulatory capital purposes as commercial loans to mortgage companies rather than mortgage loans secured by one-to-four family residential properties. FirstBank then advised the FDIC that pursuant to regulatory requirements, the revised classification of the mortgage transactions and the correction of the accounting for the interest rate swaps would cause FirstBank to be slightly below the well-capitalized level, within the meaning established by the FDIC. On March 17, 2006, the Corporation announced that FirstBank had returned to the well-capitalized level. The partial payment made by R&G (described below under Business Developments) contributed to return to the well-capitalized level.
In reaction to these earlier events, in February 2006, the OTS imposed restrictions on FirstBank Florida. Under these restrictions, FirstBank Florida cannot make any payments to the Corporation or its affiliates pursuant to a tax-sharing agreement nor can FirstBank Florida employ or receive consultative services from an executive officer of the Corporation or its affiliates without the prior written approval of the OTS’ Regional Director. Additionally, FirstBank Florida cannot enter into any agreement to sell loans or any portions of any loans to the Corporation or its affiliates nor can FirstBank Florida make any payment to the Corporation or its affiliates via an intercompany account or arrangement unless pursuant to a pre-existing contractual agreement for services rendered in the normal course of business. Also, FirstBank Florida can not pay dividends to its parent, First BanCorp, without prior approval from the OTS.
On March 17, 2006, the Corporation announced that it had agreed with the Board of Governors of the Federal Reserve System to a cease and desist order issued with the consent of the Corporation (the “Consent Order”). The Consent Order addresses certain concerns of banking regulators relating to the incorrect accounting for and documentation of mortgage-related transactions with Doral and R&G. The Corporation had initially reported those transactions as purchases of mortgage loans when they should have been accounted for as secured loans to the financial institutions because as a legal matter, they did not constitute “true sales” but rather financing arrangements. The Corporation also announced that FirstBank had entered into a similar agreement with the FDIC and the Commissioner (referred to together with the Consent Orders as the “Consent Orders”). The agreements, signed by all parties involved, did not impose any restrictions on the Corporation’s or FirstBank’s day-to-day banking and lending activities.
The Consent Orders with banking regulators imposed certain restrictions and reporting requirements on the Corporation and FirstBank. Under the Consent Order, FirstBank may not directly or indirectly enter into, participate in, or in any other manner engage certain transactions with any affiliate without the prior written approval of the FDIC. The Consent Orders require the Corporation and FirstBank to take various affirmative actions, including engaging an independent

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consultant to review the mortgage portfolios and prepare a report including findings and recommendations, submitting capital and liquidity contingency plans, providing notice prior to the incurring of additional debt or the restructuring or repurchasing of debt, obtaining approval prior to purchasing or redeeming stock, filing amended regulatory reports upon completion of the restatement of financial statements, and obtaining regulatory approval prior to paying dividends after those payable in March 2006. The Cease and Desist Order requirements have been substantially completed and submitted to the Regulators as required by the Consent Orders.
FirstBank received a letter dated May 24, 2006 from the FDIC regarding FirstBank’s failure to file with the FDIC its Part 363 annual report for the fiscal year ended December 31, 2005. On June 12, 2006, FirstBank notified the FDIC that it intended to file an amended 2004 Part 363 annual report and its 2005 Part 363 annual report after the Corporation filed this 2005 Form 10-K with the SEC.
Subsequent to the effectiveness of the Consent Orders, the Corporation and FirstBank have requested and obtained written approval from the Federal Reserve Board and the FDIC for the payment of dividends by FirstBank to its holding company, and for the payment of dividends by the Corporation to the holders of its preferred stock, common stock and trust preferred stock. The written approvals have been obtained in accordance with the Consent Order requirements.
On August 29, 2006, the Corporation announced that its subsidiary, FirstBank, consented and agreed to the issuance of a Cease and Desist Order by the FDIC (the “Order”) relating to the Bank’s compliance with certain provisions of the Bank Secrecy Act (the “BSA Consent Order”). The BSA Consent Order requires FirstBank to take various affirmative actions, including that FirstBank operate with adequate management supervision and Board of Directors’ oversight to prevent any future unsafe or unsound banking practices or violations of law or regulation, on BSA related matters; implementing systems of internal controls, independent testing and training programs to ensure full compliance with BSA and laws and regulations enforced by the Office of Foreign Assets Control (“OFAC”); designating a BSA and OFAC Officer, and amending existing policies, procedures and processes relating to internal and external audits to review compliance with BSA and OFAC provisions as part of routine auditing; engaging independent consultants to review account and transaction activity from June 1, 2005 to the effective date of the Order and to conduct a comprehensive review of FirstBank’s actions to implement the consent Order in order to assess the effectiveness of the policies, procedures and processes adopted by FirstBank; and appointing a compliance committee of the Board of Directors.
Since the beginning of 2006, FirstBank has been refining core areas of its risk management and compliance systems, and prior to this BSA Order has instituted a significant number of measures required by the BSA consent Order. The BSA consent Order did not impose any civil or monetary penalties, and does not restrict FirstBank’s current day-to-day banking operations.
New York Stock Exchange Listing
On April 13, 2006, the Corporation notified the NYSE that, given the delay in the filing of the Corporation’s 2005 Form 10-K, which required the postponement of the 2006 Annual Meeting of Stockholders, the Corporation was not going to distribute its annual report to shareholders by April 30, 2006. As a result, the Corporation is not in compliance with Section Rule 203.01,Annual Report Requirement, of the NYSE Listed Company Manual, which requires a listed company to distribute its annual report within 120 days after its fiscal year end.
The NYSE’s Section 802.01E procedures apply to the Corporation given its failure to file the Form 10-K for the fiscal year ended December 31, 2005, which the NYSE explained in a letter dated April 3, 2006. These procedures contemplate that the NYSE will monitor a company that has not timely filed a Form 10-K. If the company does not file its annual report within six months
quarters (which includes restated financial information for March 31, 2005 and the 2004 quarters) the Corporation became current with its SEC periodic reporting obligations.
Issuance of common equity
     On August 24, 2007, First BanCorp entered into a Stockholder Agreement relating to its sale in a private placement of 9,250,450 shares or 10% of the Corporation’s common stock (“Common Stock”) to The Bank of Nova Scotia (“Scotiabank”), a large financial institution with operations around the world, at a price of $10.25 per share pursuant to the terms of an Investment Agreement, dated February 15, 2007 (the “Investment Agreement”). The net proceeds to First BanCorp after discounts and expenses were $91.9 million. The securities sold to Scotiabank were issued pursuant to the exemption from registration in Section 4(2) of the Securities Act of 1933, as amended. Pursuant to the Investment Agreement, Scotiabank has the right to require the Corporation to register the Common Stock for resale by Scotiabank, or successor owners of the Common Stock.
     First BanCorp has agreed to give Scotiabank notice if any decision to commence a process involving the sale of First BanCorp during the 18 months after Scotiabank’s investment is made, and to negotiate with Scotiabank exclusively for 30 days thereafter if Scotiabank so requests. In addition, during the 18-month period Scotiabank may give notice to First BanCorp providing its offer to acquire the Corporation. First BanCorp has agreed to negotiate the offer received on an exclusive basis for a period of 30 days. Also, First BanCorp has agreed to give Scotiabank notice of the terms of any proposed acquisition received from a third party during the 18-month period and to allow Scotiabank five business days to indicate whether it will present a counteroffer. Finally, ScotiaBank is entitled to an observer at meetings of the Board of Directors of First BanCorp, including any committee meetings of the Board of Directors of First BanCorp subject to certain limitations. The observer has no voting rights.
Business Developments
     On January 28, 2008, FirstBank acquired Virgin Islands Community Bank (VICB) in St. Croix, U.S. Virgin Islands. VICB has three branches on St. Croix and deposits of approximately $56 million.
Recent Puerto Rico Legislation
     On December 10, 2007, the Governor of Puerto Rico signed Act No. 181 (“Act 181”). Act 181 reduces the special tax rate on long term capital gains applicable to individuals, estates and trusts from 12.5% to 10%. In the case of the sale of real property or stock by nonresident individuals the applicable rate will be 25%, however, if the individual is a U.S. citizen, the rate will be 10%. The special tax rate on long term capital gains for corporations and partnerships was reduced from 20% to 15%. The special tax rates established by Act 181 will apply only to transactions that occurred on July 1, 2007 and after.
     On December 14, 2007, the Governor of Puerto Rico signed Act No. 197 (“Act 197”) which provides certain credits when individuals purchase certain new or existing homes. The incentives are as follows: (a) for a new constructed home that will constitute the individuals principal residence, a credit equal to 20% of the sales price or $25,000, whichever is lower; (b) for new constructed homes that will not constitute the individuals principal residence, a credit of 10% of the sales price or $15,000, whichever is lower; and (c) for existing homes a credit of 10% of the sales price or $10,000, whichever is lower.  Credits under Act 197 need to be certified by the Secretary of Treasury and the maximum amount of credits to be granted under Act 197 is $220,000,000.
     From the homebuyer’s perspective: (1) the individual may benefit from the credit no more than twice; (2) the amount of credit granted will be credited against the principal amount of the mortgage; (3) the individual must acquire the property before June 30, 2008; and (4) for new constructed homes constituting the principal residence and existing homes, the individual must live in it as his or her principal residence at least three consecutive years. Noncompliance with this requirement will affect only the homebuyer’s credit and not the tax credit granted to the financial institution. 
     From the financial institution’s perspective: (1) the credit may be used against income taxes, including estimated taxes, for years commencing after December 31, 2007 in three installments, subject to certain limitations, between January 1, 2008 and June 30, 2011; (2) the credit may be ceded, sold or otherwise transferred to any other

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of the filing due date, the NYSE may, in its sole discretion, allow the company’s securities to be traded for up to an additional six months depending on the company’s specific circumstances. If the NYSE determines that an additional trading period of up to six months is not appropriate, suspension and delisting procedures will be commenced. If the NYSE determines that an additional trading period of up to six months is appropriate and the company fails to file its annual report by the end of that additional period, suspension and delisting procedures will generally commence. The procedures provide that the NYSE may commence delisting proceedings at any time. On October 3, 2006, the Corporation announced that the New York Stock Exchange (NYSE) granted an extension for continued listing and trading on the NYSE through April 3, 2007, subject to the NYSE’s ongoing monitoring of the Corporation’s 2005 10-K filing efforts. With the filing of this 2005 Annual Report on Form 10-K on or prior to April 3, 2007, the Corporation will have complied with the extension granted by the NYSE.
person; and (3) any tax credit not used in a given tax year, as certified by the Secretary of Treasury, may be claimed as a refund.
Recent LegislationCredit Ratings
Act 41 of August 1, 2005 imposed a transitory additional tax of 2.5% on taxable income for all corporations. This transitory tax effectively increased the statutory tax rate from 39% to 41.5%. Act 41 is effective for taxable years commencing after December 31, 2004 and ending on or before December 31, 2006, and therefore is effective for the 2005 and 2006 taxable years with a retroactive effect to January 1, 2005.
Act 89 of May 13, 2006 imposed a 2% additional income tax on income subject to regular taxes of all corporations operating pursuant to Act 55 of 1933. Act 89 will be effective for the taxable year commencing after December 31, 2005 and on or before December 31, 2006 and therefore, increased the statutory tax for the 2006 taxable year to 43.5%. The statutory tax will revert to 39% for taxable years commencing after December 31, 2006.
Act 98 of May 16, 2006 imposed an extraordinary 5% tax on the taxable income reported in the corporate tax return of corporations whose gross income exceeded $10 million for the taxable year ended on or before December 31, 2005. Covered taxpayers were required to file a special return and pay the tax no later than July 31, 2006. The extraordinary tax paid will be taken as a credit against the income tax of the entity determined for taxable years commencing after July 31, 2006, subject to certain limitations. Any unused credit may be carried forward to subsequent taxable years, subject to certain limitations.
Private Litigation
Following the announcement of the Audit Committee’s review, the Corporation and certain of its officers and directors and former officers and directors were named as defendants in five (5) separate securities class actions filed between October 31, 2005 and December 5, 2005, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. At present, all securities class actions have been consolidated into one case named “In Re: First BanCorp Securities Litigations” currently pending before the U.S. District Court for the District of Puerto Rico. The Corporation has been engaged in discussions with lead plaintiffs through private mediation proceedings. In connection with a potential settlement, the Corporation accrued $74.2 million in its consolidated financial statements for the year ended December 31, 2005. There can be no assurance that the amount accrued will be sufficient and the Corporation cannot predict at this time the timing or final terms of any settlement.
Between November 8, 2005 and March 7, 2006 several shareholders of the Corporation

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commenced five separate derivative actions against certain current and former executive officers and directors of the Corporation. In these actions, the Corporation was included as a nominal defendant. These actions were filed pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and alleged, among other things, a breach of fiduciary duty on behalf of the defendants. All shareholder derivative actions were consolidated into one case named “In Re: First BanCorp Derivative Litigation” which was dismissed on November 30, 2006 before the U.S. District Court for the District of Puerto Rico.
Restatement
On October 21, 2005, December 13, 2005, and March 17, 2006, the Corporation announced that it had concluded that the mortgage-related transactions that FirstBank entered into with Doral and R&G since 1999 did not qualify as “true sales” for accounting purposes. As a consequence, the Corporation announced on December 13, 2005 that management, with the concurrence of the Board of Directors, determined to restate its previously reported financial statements to correct its accounting for the mortgage-related transactions. In addition, the Corporation announced that it would also restate its financial statements to correct the accounting treatment used for certain interest rate swaps it accounted for as hedges using the short-cut method.
On September 26, 2006, the Corporation filed with the SEC the Amended 2004 Form 10-K for the fiscal year ended December 31, 2004, which includes restated financial information for the fiscal years 2000 through 2004.
The Corporation has taken a number of significant actions to remedy the material weaknesses in its internal controls during 2005 and has remedied some of the most pervasive weaknesses existing as of December 31, 2004. These steps have primarily taken place since December 31, 2005. Accordingly, First BanCorp’s management concluded that its internal control over financial reporting remained ineffective as of December 31, 2005 based on the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). A description of the material weaknesses existing as of December 31, 2005 is included in Part II, Item 9A. Controls and Procedures of this Annual Report on Form 10-K.
The Corporation developed and is implementing a plan for remedying all of the identified material weaknesses, and the work continues in 2007. As part of this remediation program, the Corporation has added skilled resources to improve controls and increase the reliability of the financial closing process.
Corporate Governance Changes
     Changes in Senior Management
In September 2005, following the announcementOn December 6, 2007, Standard & Poors (“S&P”), a division of the Audit Committee’s review,McGraw Hill Companies, Inc., affirmed the BB+ long-term counterparty credit rating of First Bank. At the same time, S&P removed the rating from CreditWatch with negative implications where it was placed on October 3, 2005 to stable outlook. On February 21, 2007, Fitch Ratings, Ltd., a subsidiary of Fimalac, S.A., affirmed First BanCorp’s long-term issuer default rating of BB and removed the Corporation implemented changes to its senior management. Specifically, the Board of Directors asked that Angel Alvarez-Pérez, then President, Chief Executive Officer and Chairman of the Board (the “Former CEO”), Annie Astor-Carbonell, then Chief Financial Officer and Director of the Board (the “Former CFO”), and Carmen Szendrey-Ramos, then General Counsel and Secretary of the Board (the “Former GC”), resign. On September 30, 2005, the Corporation announced that the Former CEO had resigned from his management positions and that the Former CFO had resigned

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from her position as CFO. In October 2005, the Corporation terminated the Former GC.
On September 30, 2005, the Board of Directors made the following appointments: Luis M. Beauchamp to serve as President and CEO of the Corporation; Aurelio Alemán to serve as Chief Operating Officer (“COO”) and Senior Executive Vice President; and Luis Cabrera-Marín to serve, on an interim basis, as CFO of the Corporation.
On February 22, 2006, the Corporation announced the retention of Lawrence Odell as Executive Vice President and General Counsel of the Corporation and its subsidiary, FirstBank.
On July 18, 2006, the Company’s Board of Directors appointed Fernando Scherrer as Executive Vice President and Chief Financial Officer of the Company, effective July 24, 2006. Mr. Scherrer had been working with the Corporation since October 2005 as a consultant in its reassessment of accounting issues and preparation of restated financial statements and other consulting matters.
Rating Watch Negative. The rating outlook is negative.
Changes in Board Structure
On September 30, 2005, the Corporation announced that the Former CEO retired from his positions as Chairman of the Board of Directors and as Director of the Corporation, effective December 31, 2005. Additionally, effective September 30, 2005, the Former CFO resigned from her position as Director of the Corporation.
On September 30, 2005, the Board of Directors of the Corporation elected Luis Beauchamp and Aurelio Alemán as Directors.
On November 28, 2005, the Corporation announced that the Board of Directors elected Fernando Rodríguez-Amaro as a Director and as an additional financial expert to serve in the Audit Committee. Thereafter, he was appointed Chairman of the Audit Committee effective January 1, 2006. In addition, the Board of Directors appointed José Menéndez-Cortada as Independent Lead Director effective February 15, 2006.
On March 28, 2006, José Julián Alvarez, 72, informed the Corporation that he would resign from his position as director of the Corporation, effective March 31, 2006. Mr. Alvarez’s term as a director would have expired at the 2006 Annual Meeting of Stockholders and, given the Company’s retirement policy for the Board of Directors, Mr. Alvarez would not have been eligible for reelection.
Change in By-Laws
On March 14, 2006, the Board of Directors of the Corporation approved an amendment to the Corporation’s By-Laws. As amended, Section 2 of Article I of the By-Laws provides that the Board of Directors will set a date and time for the annual meeting of stockholders in circumstances that do not permit the meeting to occur within 120 days after the Corporation’s fiscal year end due to the Corporation’s inability to issue its annual report with audited financial statements. In such event, the Board will set such date and time within a reasonable period after the Corporation submits an annual report with audited financial statements to stockholders. Prior to adoption of this amendment, Section 2 of Article I did not provide that the Board of Directors could set the date and time of the annual meeting. The amendment was effective upon approval by the Board.

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Business Developments
On March 13, 2005, the Corporation announced the closing of its acquisition of Ponce General Corporation, a Delaware corporation, and its subsidiaries, Unibank, a federal savings and loan association, and Ponce Realty Corporation, a Delaware corporation with real estate holdings in Florida. Unibank, headquartered in Miami, Florida, had 11 financial service facilities located in the Miami/Dade, Broward, Orange and Osceola counties of Florida. The Corporation subsequently changed the name of Unibank to FirstBank Florida.
Following the Corporation’s October 21, 2005 announcement that the SEC had issued a formal order of investigation, the major rating agencies downgraded the Corporation’s and FirstBank’s ratings in a series of actions. Fitch Ratings, Ltd., a subsidiary of Fimalac, S.A. lowered the Corporation’s long-term senior debt rating from BBB- to BB and placed the rating on Rating Watch Negative. Standard & Poors, a division of the McGraw Hill Companies, Inc. lowered the long-term senior debt and counterparty rating of FirstBank, from BBB- to BB+ and placed the rating on Credit Watch Negative. Moody’s Investor Service lowered FirstBank’s long-term senior debt rating from Baa3 to Ba1 and placed the rating on negative outlook.
On March 17, 2006, the Corporation announced that in the fourth quarter of 2005, R&G made a partial payment of $137 million, which released capital allocated to the loans secured by the mortgage loans to R&G and that First BanCorp made a capital contribution to FirstBank of $110 million at the end of 2005.
On May 31, 2006, the Corporation announced that its subsidiary, FirstBank, received a cash payment from Doral of approximately $2.4 billion, substantially reducing the balance in secured commercial loans resulting from the Corporation’s previously-announced revised classification of several mortgage-related transactions with Doral. In addition, FirstBank and Doral entered into a sharing agreement with respect to certain profits or losses that Doral incurs as part of the sales of the mortgages that previously collateralized the commercial loans, subject to a maximum reimbursement of $9.5 million, which will be reduced proportionately to the extent that Doral does not sell the mortgages.
Disclosure Controls and Procedures and Internal Control over Financial Reporting
See Item 9A in this Form 10-K for information concerning management’s conclusion that, as of December 31, 2005, our disclosure controls and procedures were not effective as a result of the material weaknesses discussed in Management’s Report on Internal Control Over Financial Reporting, see also therein the Remediation Plan initiated to correct identified material weaknesses and to further enhance the Corporation’s overall governance standards.
     Certain of these and other subsequent events were addressed in the Corporation’s Current Reports on Form 8-K filed with the SEC on August 25, 2005; October 5, 2005; October 26, 2005; November 29, 2005; December 13, 2005; February 22, 2006; March 20, 2006; June 1, 2006; July 24, 2006; August 29, 2006; September 26, 2006; October 4, 2006; October 6, 2006; October 24, 2006; November 3, 2006; December 5, 2006; December 28, 2006 and December 29, 2006.
WEBSITE ACCESS TO REPORT
     We makeThe Corporation makes available our annual reportreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, available free of charge on or through our internet website atwww.firstbankpr.com, (“Sobre nosotros” section, SEC Filings link), as soon as reasonably practicable after wethe Corporation electronically filefiles such material with, or furnishfurnishes it to, the SEC.

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     WeThe Corporation also makemakes available the Corporation’s corporate governance standards, the charters of the audit, compensation and benefits, corporate governance and nominating committees;committees and the codes mentioned below, free of charge on or through our internet website atwww.firstbankpr.com (“Sobre nosotros,” Governance Documents link):
  Code of Ethics for Senior Financial Officers
 
  Code of Ethics applicable to all employees
 
  Independence Principles for Directors
     The corporate governance standards, and the aforementioned charters and codes may also be obtained free of charge by sending a written request to Mr. Lawrence Odell, Executive Vice President and General Counsel, PO Box 9146, San Juan, Puerto Rico 00908.
     As previously announced on December 13, 2005, First BanCorp determined that previously filed interim unaudited and annual audited financial statements should no longer be relied upon and that it needed to restate previously issued financial statements. The Corporation restated financial information for the periods from January 1, 2000 through December 31, 2004. Other than the Annual Report on Amended 2004 Form 10-K, the Corporation has not amended any of its previously filed reports. The consolidated financial statements and other financial information in First BanCorp’s previously filed reports for the dates and periods referred to above, other than the Amended 2004 Form 10-K should no longer be relied upon.
     The public may read and copy any materials First BanCorp files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC at its website (www.sec.gov). ).

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MARKET AREA AND COMPETITION
     Puerto Rico, where the banking market is highly competitive, is the main geographic service area of the Corporation. AtAs of December 31, 2005,2007, the Corporation also had a presence through its subsidiaries in the United States and British Virgin Islands and through its loan agency in Coral Gables, Florida. Through the acquisition of Ponce General Corporation, FirstBank has established a presenceand its federally chartered stock savings association in Florida with the plan of future expansion into the United States market.(USA). Puerto Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions in the United States mainland.
     Competitors include other banks, insurance companies, mortgage banking companies, small loan companies, automobile financing companies, leasing companies, vehicle rental companies, brokerage firms with retail operations, and credit unions in Puerto Rico, the Virgin Islands and in the state of Florida. The Corporation’s businesses compete with these other firms with respect to the range of products and services offered and the types of clients, customers, and industries served.
     The Corporation’s ability to compete effectively depends on the relative performance of its products, the degree to which the features of its products appeal to customers, and the extent to which the Corporation meets client’sclients’ needs and expectations. The Corporation’s ability to compete also depends on its ability to attract and retain professional and other personnel, and on its reputation.

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     The Corporation encounters intense competition in attracting and retaining deposits and in its consumer and commercial lending activities. The Corporation competes for loans with other financial institutions, some of which are larger and have greater resources available than those of the Corporation. Management believes that the Corporation has been able to compete effectively for deposits and loans by offering a variety of transaction account products and loans with competitive features, by pricing its products at competitive interest rates, by offering convenient branch locations, and by emphasizing the quality of its service. The Corporation’s ability to originate loans depends primarily on the rates and fees charged and the service it provides to its borrowers in making prompt credit decisions. There can be no assurance that in the future the Corporation will be able to continue to increase its deposit base or originate loans in the manner or on the terms on which it has done so in the past.
SUPERVISION AND REGULATION
     On March 17, 2006, the Corporation announced that the Corporation and FirstBank consented to cease and desist orders with the Federal Reserve Board and the FDIC. For more information regarding these orders, see “Recent Significant Events – Governmental Action, Banking Regulatory Matters.”
Bank Holding Company Activities and Other Limitations
     The Corporation is subject to ongoing regulation, supervision, and examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic and annual reports and other information concerning its own business operations and those of its subsidiaries. In addition, under the provisions of the Bank Holding Company Act, a bank holding company must obtain Federal Reserve Board approval before it acquires directly or indirectly ownership or control of more than 5% of the voting shares of another bank, or merges or consolidates with another bank holding company. The Federal Reserve Board also has authority under certain circumstances to issue cease and desist orders against bank holding companies and their non-bank subsidiaries.
     A bank holding company is prohibited under the Bank Holding Company Act, with limited exceptions, from engaging, directly or indirectly, in any business unrelated to the businessbusinesses of banking or of managing or controlling banks. One of the exceptions to these prohibitions permits ownership by a bank holding company of the shares of any corporation if the Federal Reserve Board, after due notice and opportunity for hearing, by regulation or order has determined that the activities of the corporation in question are so closely related to the businessbusinesses of banking or of managing or controlling banks as to be a proper incident thereto.
     Under the Federal Reserve Board policy, a bank holding company such as the Corporation is expected to act as a source of financial strength to its banking subsidiaries and to commit support to them. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks

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must be subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. AtAs of December 31, 2005,2007, FirstBank and FirstBank Florida were the only depository institution subsidiaries of the Corporation.On March 31, 2005, the Corporation announced the acquisition, in an all-cash consideration merger transaction, of Ponce General Corporation, a Delaware corporation, and its subsidiaries, Unibank, a federal savings and loan association, and Ponce Realty Corporation, a Delaware corporation with real estate holdings in Florida. The Corporation subsequently changed the name of the acquired bank to FirstBank Florida. For additional information, see “Recent Significant Events – Business Developments.”

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     The Gramm-Leach-Bliley Act revised and expanded the provisions of the Bank Holding Company Act by including a section that permits a bank holding company to elect to become a financial holding company to engage in a full range of financial activities. The Gramm-Leach-Bliley Act requires that in the event that thea bank holding company that elects to become a financial holding company the election must be made by filingto file a written declaration with the appropriate Federal Reserve Bank and complyingcomply with the following (and such compliance must continue while the entity is treated as a financial holding company): (i) state that the bank holding company elects to become a financial holding company; (ii) provide the name and head office address of the bank holding company and each depository institution controlled by the bank holding company; (iii) certify that all depository institutions controlled by the bank holding company are well capitalizedwell-capitalized as of the date the bank holding company files for the election; (iv) provide the capital ratios for all relevant capital measures as of the close of the previous quarter for each depository institution controlled by the bank holding company; and (v) certify that all depository institutions controlled by the bank holding company are well managedwell-managed as of the date the bank holding company files the election. All insured depository institutions controlled by the bank holding company must have also achieved at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act during the depository institution’s most recent examination. In April 2000, the Corporation filed an election with the Federal Reserve Board and became a financial holding company.
     Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act specifically provides that the following activities have been determined to be “financial in nature”: (a) Lending,lending, trust and other banking activities; (b) Insuranceinsurance activities; (c) Financialfinancial or economic advice or services; (d) Pooledpooled investments; (e) Securitiessecurities underwriting and dealing; (f) Existingexisting bank holding company domestic activities; (g) Existingexisting bank holding company foreign activities; and (h) Merchantmerchant banking activities. The Corporation offers insurance agency services through its wholly-owned subsidiary, FirstBank Insurance Agency Inc. and through First Insurance Agency V. I., Inc., a subsidiary of FirstBank.
     In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand the list of “financial” or “incidental” activities, but requires consultation with the U.S. Treasury, and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is “complementary” to a financial activity and does not “pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.”
     Under the Gramm-Leach-Bliley Act, if the Corporation fails to meet any of the requirements for being a financial holding company and is unable to resolve such deficiencies within certain prescribed periods of time, the Federal Reserve Board could require the Corporation to divest control of one or more of its depository institution subsidiaries or alternatively cease conducting financial activities that are not permissible for bank holding companies that are not financial holding companies.
Sarbanes-Oxley Act
     On July 20, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (“SOA”), which implemented legislative reforms intended to address corporate and accounting fraud. SOA contains reforms of various business practices and numerous aspects of corporate governance. Most of these requirements have been implemented by regulations issued by the SEC. The following is a summary of certain key provisions of SOA.

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     In addition to the establishment of an accounting oversight board that enforces auditing, quality control and independence standards and is funded by fees from all publicly traded companies, SOA places restrictions on the scope of services that may be provided by accounting firms to their public corporation audit clients. Any non-audit services being provided to a public corporation audit client requires pre-approval by the corporation’s audit committee. In addition, SOA makes certain changes to the requirements for rotation of certain persons involved in the audit after a period of time. SOA requires chief executive officers and chief financial officers, or their

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equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. In addition, counsel is required to report evidence of a material violation of the securities laws or a breach of fiduciary duties to the corporation’s chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.
     Under SOA, longer prison terms may apply to corporate executives who violate federal securities laws; the period during which certain types of suits can be brought against a corporation or its officers is extended; and bonuses issued to top executivesand other equity-based compensation received by the Chief Executive Officer and Chief Financial Officer prior to restatement of a corporation’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to corporations’ executives and directors (other than loans by financial institutions permitted by federal rules or regulations) are prohibited. In addition, as a result of the legislation, accelerates the time frame for disclosures by public companies as they must immediately disclose anymake certain material changes in their financial condition or operations. Directorsdisclosures on an accelerated basis and directors and executive officers required tomust report changes in ownership in a corporation’s securities must report within two business days of the change.
     SOA increases responsibilities and codifies certain requirements related to audit committees of public companies and how they interact with the corporation’s “registered public accounting firm.” Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies are required to disclose whether at least one member of the committee is a “financial expert” (as such term is defined by the SEC) and if not, the reasons why. A corporation’s registered public accounting firm is prohibited from performing statutorily mandated audit services for a corporation if the corporation’s chief executive officer, chief financial officer, controller, chief accounting officer or any person serving in equivalent positions had been employed by such firm and participated in the audit of such corporation during the one-year period preceding the audit initiation date. SOA also prohibits any officer or director of a corporation or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the audit of the corporation’s financial statements for the purpose of rendering the financial statements materially misleading.
     SOA also has provisions relating to inclusion of certainmanagement’s assessment of internal control reports and assessments by managementover financial reporting in the annual report on Form 10-K. The law also requires the corporation’s independent registered public accounting firm that issues the audit report to attest to and report on management’s assessment of the corporation’s internal controls and on the effectiveness of internal controlscontrol over financial reporting. Commencing withSince the 2004 Annual Report on Form 10-K, (the “Original Filing”), the Corporation has been required to include an internal control report containingincluded its management’s assessment regarding the effectiveness of the Corporation’s internal control structure and procedures over financial reporting. The internal controlscontrol report includes a statement of management’s responsibility for establishing and maintaining adequate internal controlscontrol over financial reporting for the Corporation; management’s assessment as to the effectiveness of the Corporation’s internals controlsinternal control over financial reporting based on management’s evaluation, of them, as of year-end; and the framework used by management as criteria for evaluating the effectiveness of the Corporation’s internal controlscontrol over financial reporting. Both reports,

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As of December 31, 2007, First BanCorp’s management concluded that its internal control over financial reporting was effective based on the criteria set forth in Internal Control — Integrated Framework issued by Management and the Independent Registered Public Accounting Firm, are being filed as partCommittee of Sponsoring Organizations of the Annual Report on this Form 10-K.Treadway Commission (“COSO”). The Corporation’s independent registered public accounting firm reached the same conclusion.
USA Patriot Act
     Under Title III of the USA Patriot Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions are required to, among other things, identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Presently, only certain types of financial institutions (including banks, savings associations and money services businesses) are subject to final rules implementing the anti-money laundering program requirements of the USA Patriot Act.
     Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institutions. The Corporation has adopted appropriate policies, procedures and controls to address compliance with the USA Patriot Act and U.S. Treasury Department regulations. See “Recent Significant Events – Governmental Action and Banking Regulators” for information regarding recent issues relating to compliance with the Bank Secrecy Act.

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Privacy Policies
     Under the Gramm-Leach-Bliley Act, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request and establish policies and procedures to protect customer data from unauthorized access. The Corporation and its subsidiaries have adopted policies and procedures in order to comply with the privacy provisions of the Gramm-Leach-Bliley Act and the Fair and accurate Credit Transaction Act of 2003 and the regulations issued there underthereunder.
State Chartered Non-Member Bank; Federal Savings Bank; Banking Laws and Regulations in General
     FirstBank is subject to extensive regulation and examination by the CommissionerOCIF and the FDIC, and is subject to certain requirements established by the Federal Reserve Board. FirstBank Florida is a federally regulated savings bank subject to extensive regulation and examination by the OTS, and FDIC, and subject to certain Federal Reserve regulations. The federal and state laws and regulations which are applicable to banks and savings banks regulate, among other things, the scope of their business,businesses, their investments, their reserves against deposits, the timing and availability of deposited funds, and the nature and amount of and collateral for certain loans. In addition to the impact of regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. References herein to applicable statutes or regulations are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference to those statutes and regulations. Any change in applicable laws or regulations may have a material adverse effect on the business of commercial banks, thrifts and bank holding companies, including FirstBank, FirstBank Florida and the Corporation. However, management is not aware of any current proposals by any federal or state regulatory authority that, if implemented, would have or would be reasonably likely to have a material effect on the liquidity, capital resources or operations of FirstBank, FirstBank Florida or the Corporation.
     As a creditor and financial institution, FirstBank is subject to certain regulations promulgated by the Federal Reserve Board, including, without limitation, Regulation B (Equal Credit Opportunity Act), Regulation DD (Truth in Savings Act), Regulation E (Electronic Funds Transfer Act), Regulation F

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(Limits (Limits on Exposure to Other Banks), Regulation O (Loans to Executive Officers, Directors and Principal Shareholders), Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds Availability Act), Regulation X (Real Estate Settlement Procedures Act), Regulation BB (Community Reinvestment Act) and Regulation C (Home Mortgage Disclosure Act). On December 18, 2007, the Federal Reserve Board proposed for public comment certain changes to Regulation Z (Truth in Lending) to protect consumers from unfair or deceptive home mortgage lending and advertising practices. The proposed regulation would prohibit a lender from engaging in a pattern or practice of lending without considering a borrower’s ability to repay the loans from sources other than the home’s value, and prohibit a lender from making a loan by relying on income or assets that it does not verify. Comments are due on this proposal in March 2008, and regulations could be issued later this year.
     There are periodic examinations by the CommissionerOCIF and the FDIC orof FirstBank and by the OTS and the FDICof FirstBank Florida to test each bank’s compliance with various statutory and regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the FDIC’s insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and for engaging in unsafe or unsound practices. In addition, certain bank actions are required by statute and implementing regulations. Other actions or failure to act may provide the basis for enforcement action, including the filing of misleading or untimely reports with regulatory authorities.

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     For a discussionOn August 3, 2007, the OTS issued an advance notice of proposed rulemaking under its authority contained in the Federal Trade Commission Act as to unfair or deceptive acts or practices. This new rule would apply only to savings associations, and would likely address the issues that arise in the context of mortgage lending or servicing. The OTS asks whether existing bank regulatory actions relatingguidance on unfairness or deception, such as the guidelines for residential mortgage lending practices adopted by the Office of the Comptroller of the Currency should be addressed in regulation form. This advance notice could result in additional regulation of credit practices to FirstBankaddress a variety of consumer protection issues.
     The U.S. Congress is also considering legislation which would affect mortgage lending in the United States by establishing a national standard as to abusive lending practices, including a minimum standard requiring that borrowers have a reasonable ability to repay the loan. The House of Representatives passed The Mortgage Reform and FirstBank Florida, see the discussion under “Recent Significant Events – Governmental Action-Banking Regulators.”Anti-Predatory Lending Act of 2007 on November 15, 2007. It is unclear whether legislation in this area will become law.
Dividend Restrictions
     The Corporation is subject to certain restrictions generally imposed on Puerto Rico corporations with respect to the declaration and payment of dividends (i.e., that dividends may be paid out only from the Corporation’s net assets in excess of capital or, in the absence of such excess, from the Corporation’s net earnings for such fiscal year and/or the preceding fiscal year). The Federal Reserve Board has also issued a policy statement that provides that bank holding companies should generally pay dividends only out of current operating earnings.
     AtAs of December 31, 2005,2007, the principal source of funds for the Corporation is dividends declared and paid by its subsidiary, FirstBank. The ability of FirstBank to declare and pay dividends on its capital stock is regulated by the Puerto Rico Banking Law, the Federal Deposit Insurance Act (the “FDIA”), and FDIC regulations. In general terms, the Puerto Rico Banking Law provides that when the expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be charged against undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If the reserve fund is not sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the bank’s capital account. The Puerto Rico Banking Law provides that, until said capital has been restored to its original amount and the reserve fund to 20% of the original capital, the bank may not declare any dividends.
     In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding such bank.
     In addition, the Consent Orders imposeOrder with the Federal Reserve imposes certain restrictions on dividend payments. FirstBank, the insured institution, may not declare or pay dividends or any other form of payment representing a reduction in capital without the prior written approval of the FDIC. The FDIC will approve a dividend or any other form of payment representing a reduction in capital provided that the FDIC determines that such dividend or payment will not have an unacceptable impact on FirstBank’s capital position, cash flow, concentrations of credit, asset quality and allowance for loan and lease loss needs. Also, the

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Corporation may not pay dividends or other payments without the permission of the Federal Reserve Bank. The Federal Reserve Bank has approved all requests for approval of dividend declarations since the Corporation agreed to the Consent Order.
Limitations on Transactions with Affiliates and Insiders
     Certain transactions between financial institutions such as FirstBank and FirstBank Florida and affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and by Regulation W. An affiliate of a financial institution is any corporation or entity, whichthat controls, is controlled by, or is under common control with the financial institution. In a holding company context, the parent bank holding company and any companies which are controlled by such parent bank holding company are affiliates of the financial institution. Generally, Sections 23A and 23B of the Federal Reserve Act (i) limit the extent to which the financial institution or its subsidiaries may engage in “covered transactions” (defined below) with any one affiliate to an amount equal to 10% of such financial institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such financial institution’s capital stock and surplus and (ii) require that all “covered transactions” be on terms substantially the same, or at least as favorable to the financial institution or affiliate, as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions. In addition, loans or other extensions of credit by the financial

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institution to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act.
     The Gramm-Leach-Bliley Act providesrequires that financial subsidiaries of banks be treated as affiliates for purposes of Sections 23A and 23B of the Federal Reserve Act, but provides that (i) the 10% capital limitation on transactions between the bank and such financial subsidiary as an affiliate is not be applicable, and (ii) notwithstanding other provisions in Sections 23A and 23B, the investment by the bank in the financial subsidiary does not include retained earnings of the financial subsidiary. The Gramm-Leach-Bliley Act provides that: (1) any purchase of, or investment in, the securities of a financial subsidiary by any affiliate of the parent bank is considered a purchase or investment by the bank; and (2) if the Federal Reserve Board determines that such treatment is necessary, any loan made by an affiliate of the parent bank to the financial subsidiary is to be considered a loan made by the parent bank.
     The Federal Reserve Board has adopted Regulation W which interprets the provisions of Sections 23A and 23B. The regulation unifies and updates staff interpretations issued over the years, incorporates several new interpretations and provisions (such as to clarify when transactions with an unrelated third party will be attributedattributable to an affiliate), and addresses new issues arising as a result of the expanded scope of nonbanking activities engaged in by banks and bank holding companies in recent years and authorized for financial holding companies under the Gramm-Leach-Bliley Act.
     In addition, Sections 22(h) and (g) of the Federal Reserve Act, implemented through Regulation O, place restrictions on loans to executive officers, directors, and principal stockholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer, a greater than 10% stockholder of a financial institution, and certain related interests of these, may not exceed, together with all other outstanding loans to such personpersons and affiliated interests, the financial institution’s loans to one borrower limit, generally equal to 15% of the institution’s unimpaired capital and surplus. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers, and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers. On December 6, 2006, the Federal Reserve Board announced the approval of, and invited public

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consent on, an interim rule amending Regulation O that will eliminate several statutory reporting and disclosure requirements relating to insider lending. The interim rule does not alter the substantial restrictions on loans by insured depository institutions to their insiders.
     The Consent OrdersOrder with banking regulatorsthe FED imposed some additional restrictions and reporting requirements on the Corporation. Under this Consent Order, the Corporation and FirstBank. Under its Consent Order with the FDIC, FirstBank mustNon-Bank affiliates shall not, directly or indirectly, enter into, participate, or in any other manner engage in any covered transaction with the Subsidiary Banks, except as permitted by section 23A of the following transactionsFederal Reserve Act; shall not directly or indirectly, enter into, participate, or in any other manner engage in any transaction with any affiliateInsider without the prior written approval of the FDIC: (i)approval; and must submit a loan or extension of credit to the affiliate; (ii) a purchase of or an investment in securities issued by the affiliate; (iii) a purchase of assets, including assets subject to an agreement to repurchase, from the affiliate; (iv) the acceptance of securities issued by the affiliate as collateral security for a loan or extension of credit to any person or company; (v) the issuance of a guarantee, acceptance, or letter of credit, including an endorsement or standby letter of credit, on behalf of an affiliate; (vi) the sale of securities or other assets to an affiliate, including assets subject to an agreement to repurchase; (vii) the payment of money or furnishing of services to an affiliate under contract, lease or otherwise; (viii) any transaction in which an affiliate acts as agent or broker or receives a fee for its services to FirstBank; and (ix) any transaction or series of transactions with a third party if an affiliate has a financial interest in the third party, or an affiliate is a participant in such transaction or series of transactions. Under its Consent Order with the Federal Reserve Bank, the Corporation mustmonthly report summarizing all covered transactions, and not engageas defined in insider transactions without the prior written approvalsection 23A of the Federal Reserve Bank.Act, between First BanCorp, the Non-Bank Affiliates, and the Subsidiary Banks.
     In February 2006, the Office of Thrift Supervision (“OTS”)OTS imposed restrictions on FirstBank Florida, formerly Unibank, a subsidiary acquired by First BanCorp in March 2005. Under these restrictions, FirstBank Florida cannot make any payments to the Corporation or its affiliates pursuant to a tax-sharing agreement nor can the bank employ or receive consultative services from an executive officer of the Corporation or its affiliates without the prior written approval of the OTS Regional Director. Additionally, FirstBank Florida cannot enter into any agreement to sell loans or any portions of any loans to the Corporation or its affiliates nor can the bank make any payment to the Corporation or its affiliates via an intercompany account or arrangement unless pursuant to a pre-existing contractual agreement for services rendered in the normal course of business.
Federal Reserve Board Capital Requirements
     The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve Board capital adequacy guidelines generally require bank holding

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companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier I or core capital and up to one-half of that amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common stockholders’ equity and perpetual preferred stock, subject in the case of the latter to limitations on the kind and amount of such perpetual preferred stock that may be included as Tier I capital, less goodwill and, with certain exceptions, other intangibles. Tier II capital generally consists of hybrid capital instruments, perpetual preferred stock that is not eligible to be included as Tier I capital;capital, term subordinated debt and intermediate-term preferred stock;stock and, subject to limitations, allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of assets,,which are typically held by a bank holding company, including multi-family residential and commercial real estate loans, commercial business loans and commercial loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics.

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     In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital to total assets of 3.0%. Total assets for purposes of this calculation do not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted. The Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio requirement is the minimum for the top-rated bank holding companies without supervisory, financial or operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth. Other bank holding companies will be expected to maintain Tier I leverage capital ratios of at least 4.0% or more, depending on their overall condition. As of December 31, 2005,2007, the Corporation exceeded each of its capital requirements and was a well-capitalized institution as defined in the Federal Reserve Board regulations.
     The federal banking agencies are currently analyzing regulatory capital requirements as part of an effort to implement the Basel Committee on Banking SupervisionSupervision’s new capital adequacy framework for large, internationally active banking organizations (Basel II), as well as to update their risk-based capital standards to enhance the risk-sensitivity of the capital charges, to reflect changes in accounting standards and financial markets, and to address competitive equity questions that may be raised by U.S. implementation of the Basel II framework. Accordingly, the federal agencies, including the Federal Reserve Board and the FDIC, are considering several revisions to regulations issued in response to an earlier set of standards published by the Basel Committee in 1988 (Basel I). On September 25, 2006, the banking agencies proposed in a notice of proposal a new risk-based capital adequacy framework under Basel II. The framework is intended to produce risk-based capital requirements that are more risk-sensitive than the existing risk-based capital rules. On February 15, 2007, U.S. banking agencies released proposed supervisory guidance to accompany the September Basel II notice of proposed rulemaking. The guidance includes standards to promote safety and soundness and to encourage the comparability of regulatory capital measures across banks.
     A final rule implementing advanced approaches of Basel II was published jointly by the U.S. banking agencies on December 7, 2007. This rule establishes regulatory capital requirements and supervisory expectations for credit and operational risks for banks that choose or are required to adopt the advanced approaches, and articulates enhanced standards for the supervisory review of capital adequacy for those banks. The final rule retains the three groups of banks identified in the proposed rule: (i) large or internationally active banks that are required to adopt advanced capital approaches under Basel II (core banks); (ii) banks that voluntarily decide to adopt the advance approaches (opt-in banks); and (iii) banks that do not adopt the advanced approaches (general banks), and for which the provisions of the final rule are inapplicable. The final rule also retains the proposed rule definition of a core bank as a bank that meets either of two criteria: (i) consolidated assets of $250 billion or more, or (ii) consolidated total on-balance-sheet foreign exposure of $10 billion or more. Also, a bank is a core bank if it is a subsidiary of a bank or bank holding company that uses advanced approaches. At this moment, the provisions of the final rule are not applicable to the Corporation.
     The agencies expect to publish in the near future a proposed rule that would provide all non-core banks with the option to adopt a standardized approach under Basel II.

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FDIC Risk-Based Assessment System
     Under a new rule adopted by the FDIC in November 2006, beginning in 2007, the FDIC will placeplaced each institution that it insures in one of four risk categories using a two-step process based first on capital ratios and then on other relevant information (the supervisory group assignment). Beginning in 2007, FDIC insurance premium rates will range between 5 and 43 cents per $100 in accessible deposits. The Corporation experienced significant increases in the insurance assessments as a result of this new assessment system. Future charges could increase or decrease depending on the volume of deposits, upward or downward changes in the regulatory ratings given to the institution upon examination results and or changes in the Corporation’s credit ratings.
FDIC Capital Requirements
     The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered non-member banks like FirstBank. These requirements are substantially similar to those adopted by the Federal Reserve Board regarding bank holding companies, as described above. In addition, FirstBank Florida must comply with similar capital requirements adopted by the OTS.
     The regulators require that banks meet a risk-based capital standard. The risk-based capital standard for banks requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weightedrisk-weighted assets of 8%. In determining the amount of risk-weighted assets, weights used (range(ranging from 0% to 100%) are based on the risks inherent in the type of asset or item. The components of Tier I capital are equivalent to those discussed below under the 3.0% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatorymandatorily convertible securities, certain subordinated debt and intermediate preferred stock and, generally, allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.
     The FDIC’scapital regulations of the FDIC and OTS’ capital regulationsthe OTS establish a minimum 3.0% Tier I capital to total assets requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will

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increase the minimum Tier I leverage ratio for such other banks from 4.0% to 5.0% or more. Under these regulations, the highest-rated banks are those that are not anticipating or experiencing significant growth and have well diversifiedwell-diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity and good earnings and, in general, are considered a strong banking organization and are rated composite I under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders’ equity including retained earnings, noncumulativenon-cumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights.
     In August 1995, the FDIC and OTS published a final rule modifying their existing risk-based capital standards to provide for consideration of interest rate risk when assessing the capital adequacy of a bank. Under the final rule, the FDIC must explicitly include a bank’s exposure to declines in the economic value of its capital due to changes in interest rates as a factor in evaluating a bank’s capital adequacy. In June 1996, the FDIC and OTS adopted a joint policy statement on interest rate risk. Because market conditions, bank structure, and bank activities vary, the agencies concluded that each bank needs to develop its own interest rate risk management program tailored to its needs and circumstances. The policy statement describes prudent principles and practices that are fundamental to sound interest rate risk management, including appropriate board and senior management oversight and a comprehensive risk management process that effectively identifies, measures, monitors and controls such interest rate risk.
     Failure to meet capital guidelines could subject an insured bank like to a variety of prompt corrective actions and enforcement remedies under the FDIA (as amended by FDICIA)Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), and the Riegle Community Development and Regulatory Improvement Act of 1994, including, with respect to an insured bank, the termination of deposit insurance by the FDIC, and certain restrictions on its business. In general terms, undercapitalized depository institutions are prohibited from making any capital

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distributions (including dividends), are subject to restrictions on borrowing from the Federal Reserve System, are subject to growth limitations and are required to submit capital restoration plans.
     AtAs of December 31, 2005,2007, FirstBank and FirstBank Florida were well capitalized.well-capitalized. A bank’s capital category, as determined by applying the prompt corrective action provisions of law, however, may not constitute an accurate representation of the overall financial condition or prospects of the Bank, and should be considered in conjunction with other available information regarding financial condition and results of operations.
     Set forth below are the Corporation’s, FirstBank’s and FirstBank Florida’s capital ratios atas of December 31, 2005,2007, based on then existing Federal Reserve, FDIC and FDIC guidelines.OTS guidelines, respectively.
                                
 First BanCorp Banking Subsidiary   Banking Subsidiaries
 Well- Well-
 FirstBank Capitalized FirstBank Capitalized
 First BanCorp FirstBank Florida Minimum First BanCorp FirstBank Florida Minimum
As of December 31, 2007
 
Total capital (Total capital to risk-weighted assets)  10.72%  10.89%  10.97%  10.00%  13.86%  13.23%  10.92%  10.00%
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)  9.71%  9.85%  10.65%  6.00%  12.61%  11.98%  10.42%  6.00%
Leverage ratio  6.72%  6.78%  7.99%  5.00%
Leverage ratio (1)  9.29%  8.85%  7.79%  5.00%
     The Consent Orders entered into with banking regulators require the Corporation and FirstBank Puerto Rico to submit a capital plan to ensure that an adequate capital position is maintained by both FirstBank and the Corporation in light of the reclassification of the mortgage-related transactions as secured loans. The capital plan was submitted to regulators and is being periodically reviewed against actual results.

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(1)Tier 1 capital to average assets in the case of First BanCorp and FirstBank and Tier 1 Capital to adjusted total assets in the case of FirstBank Florida.
Activities and Investments
     The activities as “principal” and equity investments of FDIC-insured, state-chartered banks such as FirstBank are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state-chartered bank generally may not directly or indirectly acquire or retain any equity investments of a type, or in an amount, that is not permissible for a national bank.
Federal Home Loan Bank System
     FirstBank is a member of the Federal Home Loan Bank (FHLB) system. The FHLB system consists of twelve regional Federal Home Loan Banks governed and regulated by the Federal Housing Finance Board (FHFB). The Federal Home Loan Banks serve as reserve or credit facilities for member institutions within their assigned regions. They are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system, and they make loans (advances) to members in accordance with policies and procedures established by the FHLB system and the Boardboard of directors of each regional FHLB.
     FirstBank is a member of the FHLB of New York (FHLB-NY) and as such is required to acquire and hold shares of capital stock in that FHLB for a certain amount, which is calculated in accordance with the requirements set forth in applicable laws and regulations. FirstBank is in compliance with the stock ownership requirements of the FHLB-NY. All loans, advances and other extensions of credit made by the FHLB-NY to FirstBank are secured by a portion of FirstBank’s mortgage loan portfolio, certain other investments and the capital stock of the FHLB-NY held by FirstBank.
     FirstBank Florida is a member of the FHLB of Atlanta and is subject to similar requirements as those of FirstBank.
Ownership and Control
     Because of FirstBank’s status as an FDIC-insured bank, as defined in the Bank Holding Company Act, First BancorpBanCorp, as the owner of FirstBank’s common stock, is subject to certain restrictions and disclosure obligations under various federal laws, including the Bank Holding Company Act and the Change in Bank Control Act (the “CBCA”). Regulations pursuant to the Bank Holding Company Act generally require prior Federal Reserve Board approval for an acquisition of control of an insured institution (as defined in the Act) or holding company thereof by

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any person (or persons acting in concert). Control is deemed to exist if, among other things, a person (or persons acting in concert) acquires more than 25% of any class of voting stock of an insured institution or holding company thereof. Under the CBCA, control is presumed to exist subject to rebuttal if a person (or persons acting in concert) acquires more than 10% of any class of voting stock and either (i) the corporation has registered securities under Section 12 of the Securities Exchange Act of 1934, or (ii) no person will own, control or hold the power to vote a greater percentage of that class of voting securities immediately after the transaction. The concept of acting in concert is very broad and also is subject to certain rebuttable presumptions, including among others, that relatives, business partners, management officials, affiliates and others are presumed to be acting in concert with each other and their businesses. The FDIC’sregulations of the FDIC and OTS’ regulationsthe OTS implementing the CBCA are generally similar to those described above.
     The Puerto Rico Banking Law requires the approval of the CommissionerOCIF for changes in control of a Puerto Rico bank. See “Puerto Rico Banking Law.”

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Cross-Guarantees
     Under the FDIA, a depository institution (which term includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined generally as the appointment of a conservator or a receiver and “in danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions liable to the FDIC, and any obligations of that bank to its parent corporation are subordinated to the subsidiary bank’s cross-guarantee liability with respect to commonly controlled insured depository institutions. FirstBank and FirstBank Florida are currently the only FDIC insuredFDIC-insured depository institutions controlled by the Corporation and therefore subject to this guaranty provision.
Standards for Safety and Soundness
     The FDIA, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the FDIC and the other federal bank regulatory agencies to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation, and compensation. The FDIC and the other federal bank regulatory agencies adopted, effective August 9, 1995, a set of guidelines prescribing safety and soundness standards pursuant to FDIA,,as amended. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. For additional information, see the discussion under “Recent Significant Events – Governmental Action, Banking Regulators.”
Brokered Deposits
     FDIC regulations adopted under the FDIA govern the receipt of brokered deposits by banks. Well capitalizedWell-capitalized institutions are not subject to limitations on brokered deposits, while adequately capitalizedadequately-capitalized institutions are able to accept, renew or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the interest paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. As of December 31, 2005,2007, FirstBank was a well-capitalized institution and was therefore not subject to anythese limitations on brokered deposits.

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Puerto Rico Banking Law
     As a commercial bank organized under the laws of the Commonwealth, FirstBank is subject to supervision, examination and regulation by the Commonwealth of Puerto Rico Commissioner of Financial Institutions (“Commissioner”) pursuant to the Puerto Rico Banking Law of 1933, as amended (the “Banking Law”). The Banking Law contains provisions governing the incorporation and organization, rights and responsibilities of directors, officers and stockholders as well as the corporate powers, lending limitations, capital requirements, investment requirements and other aspects of FirstBank and its affairs. In addition, the Commissioner is given extensive rule makingrule-making power and administrative discretion under the Banking Law.

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     The Banking Law authorizes Puerto Rico commercial banks to conduct certain financial and related activities directly or through subsidiaries, including the leasing of personal property and operatingthe operation of a small loan corporation.
     The Banking Law requires every bank to maintain a legal reserve which shall not be less than twenty percent (20%) of its demand liabilities, except government deposits (federal, state and municipal), whichthat are secured by actual collateral. The reserve is required to be composed of any of the following securities or combination thereof: (1) legal tender of the United States; (2) checks on banks or trust companies located in any part of Puerto Rico that are to be presented for collection during the day following thatthe day on which they are received, (3) money deposited in other banks provided said deposits are authorized by the Commissioner, subject to immediate collection; (4) federal funds sold to any Federal Reserve Bank and securities purchased under agreementagreements to resell executed by the bank with such funds that are subject to be repaid to the bank on or before the close of the next business day; and (5) any other asset that the Commissioner identifies from time to time.
     The Banking Law permits Puerto Rico commercial banks to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of fifteen percent (15%) of the sum of: (i) the bank’s paid-in capital; (ii) the bank’s reserve fund; (iii) 50% of the bank’s retained earnings; subject to certain limitations, and (iv) any other components that the Commissioner may determine from time to time. If such loans are secured by collateral worth at least twenty five percent (25%) more than the amount of the loan, the aggregate maximum amount may reach one third (33.33%) of the sum of the bank’s paid-in capital, reserve fund, 50% of retained earnings and such other components that the Commissioner may determine from time to time. There are no restrictions under the Banking Law on the amount of loans whichthat are wholly secured by bonds, securities and other evidence of indebtedness of the Government of the United States, or of the Commonwealth of Puerto Rico, or by bonds, not in default, of municipalities or instrumentalities of the Commonwealth of Puerto Rico. The revised classification of the mortgage-related transactions as secured commercial loans to local financial institutions included in the Corporation’s restatement of previously issued financial statements (Form 10-K/A 2004) due to, among other corrections,, caused the revised classification of mortgage-related transactions as secured commercial loans to Doral and R&G Financial, caused the transactions to be treated as two secured commercial loans which were in excess of the lending limitslimitations imposed by the Banking Law. In this regard, FirstBank received a ruling from the Commissioner that results in FirstBank being considered in continued compliance with the loanlending limitations. The Puerto Rico Banking Law authorizes the Commissioner to one borrower limitation.determine other components which may be considered for purposes of establishing its lending limit, which components may lay outside the traditional elements mentioned in Section 17. After consideration of other components, the Commissioner authorized the Corporation to retain the secured loans to Doral and R&G as it believed that these loans were secured by sufficient collateral to diversify, disperse and significantly diffuse the risks connected to such loans thereby satisfying the safety and soundness considerations mandated by Section 28 of the Puerto Rico Banking Law.
     The Banking Law prohibits Puerto Rico commercial banks from making loans secured by their own stock, and from purchasing their own stock, unless such purchase is made pursuant to a stock repurchase program approved by the Commissioner or is necessary to prevent losses because of a debt previously contracted in good faith. The stock purchased by the Puerto Rico commercial bank must be sold by the bank in a public or private sale within one year from the date of purchase.
     The Banking Law provides that no officers, directors, agents or employees of a Puerto Rico commercial bank may serve or discharge a position of officer, director, agent or employee of another Puerto Rico commercial bank, financial corporation,savings and loan association, trust corporation, corporation engaged in granting mortgage loans or any other institution engaged in the money lending business in Puerto Rico. This prohibition is not applicable to the affiliates of a Puerto Rico commercial bank.

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     The Banking Law requires that Puerto Rico commercial banks prepare each year a balance summary of their operations, and submit such balance summary balance for approval at a regular meeting of stockholders, together with an explanatory report thereon. The Banking Law also requires that at least ten percent (10%) of the yearly net income of a Puerto Rico commercial bank be credited annually to a reserve fund.

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This apportionmentcredit is required to be done every year until such reserve fund shall be equal to the total paid in capitalpaid-in-capital of the bank.
     The Banking Law also provides that when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall be declared until said capital has been restored to its original amount and the reserve fund to twenty percent (20%) of the original capital.
     The Banking Law requires the prior approval of the Commissioner with respect to a transfer of capital stock of a bank that results in a change of control of the bank. Under the Banking Law, a change of control is presumed to occur if a person or a group of persons acting in concert, directly or indirectly, acquire more than 5% of the outstanding voting capital stock of the bank. The Commissioner has interpreted the restrictions of the Banking Law as applying to acquisitions of voting securities of entities controlling a bank, such as a bank holding company. Under the Banking Law, the determination of the Commissioner whether to approve a change of control filing is final and non-appealable.
     The Finance Board, which is composed of the Commissioner, the Secretary of the Treasury, the Secretary of Commerce, the Secretary of Consumer Affairs, the President of the Economic Development Bank, the President of the Government Development Bank, and the President of the Planning Board, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in Puerto Rico. The current regulations of the Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses, including real estate development loans but excluding certain other personal and commercial loans secured by mortgages on real estate properties, is to be determined by free competition. Accordingly, the regulations do not set a maximum rate for charges on retail installment sales contracts and for credit card purchases and set aside previous regulations which regulated these maximum finance charges. Furthermore, there is no maximum rate set for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and insurance premiums.
International Banking Act of Puerto Rico (“IBE Act”)
     The business and operations of the First BanCorp IBE, FirstBank IBE and FirstBank Overseas Corporation are subject to supervision and regulation by the Commissioner. Under the IBE Act, certain sales, encumbrances, assignments, mergers, exchanges or transfers of shares, interests or participation(s) in the capital of an international banking entity (an “IBE”) may not be initiated without the prior approval of the Commissioner. The IBE Act and the regulations issued thereunder by the Commissioner (the “IBE Regulations”) limit the business activities that may be carried out by an IBE. Such activities are limited in part to persons and assets located outside of Puerto Rico.
     Pursuant to the IBE Act and the IBE Regulations, each of First BanCorp andIBE, FirstBank IBEsIBE and FirstBank Overseas Corporation must maintain books and records of all its transactions in the ordinary course of business. The First BanCorp andIBE, FirstBank IBEsIBE and FirstBank Overseas Corporation are also required thereunder to submit to the Commissioner quarterly and annual reports of their financial condition and results of operations, including annual audited financial statements.
     The IBE Act empowers the Commissioner to revoke or suspend, after notice and hearing, a license issued thereunder if, among other things, the IBE fails to comply with the IBE Act, the IBE Regulations

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or the terms of its license, or if the Commissioner finds that the business or affairs of the IBE are conducted in a manner that is not consistent with the public interest.
Puerto Rico Income Taxes
     Under the Puerto Rico Internal Revenue Code of 1994 (the “Code”), all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Corporation, and each of its subsidiaries are

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subject to a maximum statutory corporate income tax rate of 39% or an alternative minimum tax (“AMT”) on income earned from all sources, whichever is higher. The excess of AMT over regular income tax paid in any one year may be used to offset regular income tax in future years, subject to certain limitations. The Code provides for a dividend received deduction of 100% on dividends received from wholly owned subsidiaries subject to income taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.
     In computing the interest expense deduction, the Corporation’s interest deduction will be reduced in the same proportion that the average exempt assets bear to the average total assets. Therefore, to the extent that the Corporation holds certain investments and loans which are exempt from Puerto Rico income taxation, part of its interest expense will be disallowed for tax purposes.
     The Corporation has maintained an effective tax rate lower than the maximum statutory tax rate of 41.5% (39% plus a 2.5% transitory tax)39% as of December 31, 2005,2007, mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income tax combined with income from the international banking divisions (IBE)IBE units of the Corporation and the Bank and by the Bank’s subsidiary, FirstBank Overseas Corporation. The IBE, and FirstBank Overseas Corporation were created under the IBE Act, which provides for Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico. Pursuant to the provisions of Act No. 13 of January 8, 2004, the IBE Act was amended to impose income tax at regular rates on IBEs that operate as units of a bank, to the extent that the IBEs net income exceeds 40%25% of the bank’s total net taxable income (including net income generated by the IBE unit) for the taxable yearyears that commenced on July 1, 2003, 30% for the taxable year that commenced on July 1, 2004 and 20% for taxable years commencing in July 1, 2005, and thereafter. These amendments apply only to IBEs that operate as units of a bank; they do not impose income tax on an IBE that operates as a subsidiary of a bank.
     Puerto Rico Banking Law Act 41 of August 1, 2005 amended the Puerto Rico Internal Revenue Code by imposing a transitorytemporary additional tax of 2.5% on net taxable income for all corporations. This transitorytemporary tax effectively increased the statutory tax rate from 39% to 41.5%. The Act became effective for taxable years commencing after December 31, 2004 and ending on or before December 31, 2006 and therefore iswas effective for the 2005 and 2006 taxable years with a retroactive effect to January 1, 2005.
     Puerto Rico Internal Revenue Code Act 89 of May 13, 2006 imposedamended the Puerto Rico Internal Revenue Code by imposing a 2% additional income tax on income subject to regular taxes of all corporations operating pursuant to Act 55 of 1933 (The Puerto Rico Banking Act). Act 89 will bewas effective for the taxable year commencingthat commenced after December 31, 2005 and on or before December 31, 2006 and, therefore, increased the statutory tax for the 2006 taxable year to 43.5%. The statutory tax will revertreverted to 39% for taxable years commencing after December 31, 2006.
United States Income Taxes
     The Corporation is also subject to federal income tax on its income from sources within the United States and on any item of income that is, or is considered to be, effectively connected with the active conduct of a trade or business within the United States. The U.S. Internal Revenue codeCode provides for tax exemption of portfolio interest received by a foreign corporation from sources within the United States,

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States; therefore, the Corporation is not subject to federal income tax on certain U.S. investments which qualify under the term “portfolio interest”.
Insurance Operations Regulation
     FirstBank Insurance Agency Inc. is registered as an insurance agency with the Insurance Commissioner of Puerto Rico and is subject to regulations issued by the Insurance Commissioner relating to, among other things, licensing of employees, sales, solicitation and advertising practices, and to the FDICFED as to certain consumer protection provisions mandated by the Gramm-Leach-Bliley Act and its implementing regulations.
Community Reinvestment
     Under the Community Reinvestment Act (“CRA”), federally insured banks have a continuing and affirmative obligation to meet the credit needs of their entire community, including lowlow- and moderate-income residents, consistent with their safe and sound operation. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the type of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the federal supervisory agencies, as part of the general examination of supervised banks, to assess the bank’s record of

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meeting the credit needs of its community, assign a performance rating, and take such record and rating into account onin their evaluation of certain applications by such bank. The CRA also requires all institutions to make public disclosure of their CRA ratings. FirstBank and FirstBank Florida received a “satisfactory” CRA rating in itstheir most recent examinationexaminations by the FDIC.FDIC and the OTS, respectively.
Mortgage Banking Operations
     FirstBank is subject to the rules and regulations of the Federal Housing Administration (“FHA”), U.S. Department of Veteran Affairs (“VA”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), HousingFHA, VA, FNMA, FHLMC, HUD and Urban Development (“HUD”) and Government National Mortgage Association (“GNMA”)GNMA with respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines that include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and with respect to VA loans, fix maximum interest rates. Moreover, lenders such as FirstBank are required annually to submit to FHA, VA, FNMA, FHLMC, GNMA and HUD audited financial statements, and each regulatory entity has its own financial requirements. FirstBank’s affairs are also subject to supervision and examination by FHA, VA, FNMA, FHLMC, GNMA and HUD at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other things, prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. FirstBank is licensed by the Commissioner under the Puerto Rico Mortgage Banking Law, and as such is subject to regulation by the Commissioner, with respect to, among other things, licensing requirements and establishment of maximum origination fees on certain types of mortgage loan products.
     Section 5 of the Puerto Rico Mortgage Banking Law requires the prior approval of the Commissioner for the acquisition of control of any mortgage banking institution licensed under such law. For purposes of the Puerto Rico Mortgage Banking Law, the term “control” means the power to direct or influence decisively, directly or indirectly, the management or policies of a mortgage banking institution. The

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Puerto Rico Mortgage Banking Law provides that a transaction that results in the holding of less than 10% of the outstanding voting securities of a mortgage banking institution shall not be considered a change in control.
Recent Legislation
     Act 89 of May 13, 2006 imposed a 2% additional income tax on the net income subjectRefer to regular taxes of all corporations operating pursuant to Act 55 of 1933 (The“Recent Significant Events – Recent Puerto Rico Banking Act). The Act became effectiveLegislation” above for the taxable year commencing after December 31, 2005 and on or before December 31, 2006, and therefore, increased the statutory tax for the 2006 taxable year to 43.5%. The statutory tax will revert to 39% for taxable years commencing after December 31, 2006.
     Act 98 of May 16, 2006 imposedinformation regarding significant legislation approved during 2007 that may have an extraordinary 5% tax on the net taxable income reportedeffect in the corporate tax return of corporations whose gross income exceeded $10 million for the taxable year ended on or before December 31, 2005. Covered taxpayers were required to file a special returnCorporation’s operations and pay the tax no later than July 31, 2006. The extraordinary tax paid will be taken as a credit against the income tax of the entity determined for taxable years commencing after July 31, 2006, subject to certain limitations. Any unused credit may be carried forward to subsequent taxable years.
     On December 22, 2006, Law No. 283 was approved, amending the Section 27 of Law No. 55 of May 12, 1933, as amended. This law clarifies the process for the determination of loan losses by financial institutions in the Commonwealth of Puerto Rico, stipulating that accrued interest on loans past due 90 days or more should be excluded from income, except on loans collateralized by mortgages, where interest past due not exceeding one year, could be included as part of income given proper disclosure of the fact that they have not been collected. It also requires that loans past due 365 days for which no interest was collected during the periods be charged to losses, except on collateralized and under legal collection efforts, which will be charged to losses up to their net realizable value.results.
Item 1A. Risk Factors
     Certain risk factors that may affect the Corporation’s future results of operations are discussed below.
Risks Relating to the 2004 Restatement ProcessCorporation’s Business
First BanCorp is subject to the ongoing regulatory investigation by the SEC
     On August 25, 2005, the Corporation announced the receipt of a letter from the SEC in which the SEC indicated that it was conducting an informal inquiry into the Corporation. The inquiry relates to, among other things, the accounting for mortgage loans purchased by the Corporation from two other financial institutions during the calendar years 1999 through 2004. On October 21, 2005, the Corporation announced that the SEC had issued a formal order of investigation into the accounting for the mortgage–related transactions with Doral and R&G.
     First BanCorp has been engaged in discussions with the staff of the SEC regarding a possible resolution to its investigation of the Corporation’s restatement, and has accrued $8.5 million in its consolidated financial statements for the year ended December 31, 2005 in connection with a potential settlement of the SEC’s investigation of the Corporation. Any settlement is subject to the approval of the Commissioner of the SEC. There can be no assurance that the Corporation’s efforts to resolve the SEC’s investigation with respect to the Corporation will be successful, or that the amount accrued will be sufficient, and the Corporation cannot predict at this time the timing or final terms of any settlement.
Pending litigation could adversely affect First BanCorp’s results of operations
     As a consequence of the accounting review and restatement, the Corporation is subject to pending class-action proceedings (refer to “Recent Significant Events” above). Following the announcement of the Audit Committee’s review, the Corporation and certain of its officers and directors and former officers and directors were named as defendants in five separate securities class actions filed between October 31, 2005 and December 5, 2005, alleging violations of Sections 10(b) and 20(a) of the

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Securities Exchange Act of 1934. At present, all securities class actions have been consolidated into one case named “In Re: First BanCorp Securities Litigations” currently pending before the U.S. District Court for the District of Puerto Rico. The Corporation has been engaged in discussions with lead plaintiffs through private mediation proceedings. The Corporation has accrued $74.2 million in its consolidated financial statements for the year ended December 31, 2005 in connection with a potential settlement. There can be no assurance that the amount accrued will be sufficient and the Corporation cannot predict at this time the timing or final terms of any settlement.
     Between November 8, 2005 and March 7, 2006 several shareholders of the Corporation commenced five separate derivative actions against certain current and former executive officers and directors of the Corporation. In these actions, the Corporation was included as a nominal defendant. These actions were filed pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and alleged, among other things, a breach of fiduciary duty on behalf of the defendants. All shareholder derivative actions were consolidated into one case named “In Re: First BanCorp Derivative Litigation” which was dismissed on November 30, 2006 before the U.S. District Court for the District of Puerto Rico.
Banking regulators could take adverse action against the Corporation or its banking subsidiaries as a result of the Consent Orders
     The Corporation is subject to supervision and regulation by the Board of Governors of the Federal Reserve System.FED. The Corporation is a bank holding company that qualifies as a financial holding corporation. As such, the Corporation is permitted to engage in a broader spectrum of activities than those permitted to bank holding companies that are not financial holding companies. To continue to qualify as a financial holding corporation, each of the Corporation’s banking subsidiaries must continue to qualify as “well capitalized”“well-capitalized” and “well managed.“well-managed.” As of December 31, 2005,2007, the Corporation and its banking subsidiaries continue to satisfy all applicable capital guidelines. This, however, does not prevent banking regulators from taking adverse actions against the Corporation or its banking subsidiaries as a result of the Consent OrdersOrder or related internal control matters. If the Corporation were not to continue to qualify as a financial holding corporation, it might be

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required to discontinue certain activities and may be prohibited from engaging in new activities without prior regulatory approval.
     Federal banking regulators,The FED, in the performance of theirits supervisory and enforcement duties, havehas significant discretion and power to initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices.practices. Failure of the Corporation or FirstBank to remain in compliance with the terms of the Consent OrdersOrder could result in the imposition of additional cease and desist orders and/or in monetarymoney penalties.
Downgrades in the Corporation’s credit ratings could potentially increase the cost of borrowing funds
     FollowingThe credit ratings of the Corporation and First Bank and their outstanding securities are subject to downgrades as a result of, among other things, their results and operations. For example, following the Corporation’s announcement on October 21, 2005 that the SEC had issued a formal order of investigation, the major rating agencies downgraded the Corporation’s and FirstBank’s ratings in a series of actions. In response to this announcement, Fitch Ratings, Ltd. lowered the Corporation’s long-term senior debt rating from BBB- to BB and placed the rating on negative outlook after removing it from Rating Watch Negative. Standard & Poors lowered the long-term senior debt and counterparty rating of FirstBank from BBB- to BB+ and placed the rating on stable outlook after removing it from Credit Watch Negative.with negative implications and Moody’s Investor Service lowered FirstBank’s long-term senior debt rating from Baa3 to Ba1 and placed the rating on negative outlook. These or furtherAny future downgrades may adversely affect the Corporation’s and FirstBank’s ability to access capital and will likely result in more stringent covenants and higher interest rates under the terms of any future indebtedness.
     These debt and financial strength ratings are current opinions of the rating agencies. As such, they may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances.
     The Corporation’s liquidity is contingent upon its ability to obtain external sources of funding to finance its operations. 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 the results of operations.
     These debt and financial strength ratings are current opinions of the rating agencies. As such, they may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances.

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Management has identified several material weaknesses in the Corporation’s internal controls over financial reporting
     The Corporation’s management has concluded that the Corporation’s internal controls over financial reporting were not effective at December 31, 2005 as a result of several material weaknesses described in this Form 10-K. A discussion of the material weaknesses that have been identified by management can be found in Item 9A of Part II of this Form 10-K along with the Corporation’s remediaton plan.
There is a lack of public disclosure concerning the Corporation
     The Corporation has not yet filed with the SEC its quarterly reports on Form 10-Q for the fiscal quarters ended June 30, 2005, September 30, 2005, March 31, 2006, June 30, 2006 and September 30, 2006. In addition, it needs to file an Amended quarterly report in Form 10Q for fiscal quarter ended March 31, 2005. The Corporation expects to file these reports or the financial information required by these reports as soon as practicable after the filing of this Form 10-K. Until the Corporation files these quarterly reports, there will be limited public information available concerning the Corporation’s most recent results of operations and financial condition.
Failure to comply with reporting covenants under debt arrangements may result in the acceleration of payment obligations
     Under certain debt instruments and notes, the Corporation is required to timely file its periodic reports with the appropriate counterparty holders. The Corporation has not yet filed its quarterly reports on Form 10-Q for the fiscal quarters ended March 31, 2005 (Amended), June 30, 2005, September 30, 2005, March 31, 2006, June 30, 2006 and September 30, 2006 (the “Delayed Reports”).
     The Corporation is not currently in default as the counterparty holders have extended the timing required for the filing of the Delayed Reports until December 31, 2006 or later. However, if the Corporation were to default on the filing of the delayed reports, the counterparty holders will have the right to accelerate the maturity of the debt arrangements which amount to approximately $165 million.
The Corporation’s delay in filing all required reports may adversely affect its ability to attract customers, investors and employees
     The Corporation’s ability to attract customers and investors may be adversely affected by its delay in filing all the required reports and the risks and uncertainties that delay may suggest. This delay may also have an adverse effect on the Corporation’s ability to attract and retain key employees and management personnel.
Risks Relating to the Corporation’s Business
Fluctuations in interest rates may impact the Corporation’s results of operations
     Increases in interest rates are the primary market risk affecting the Corporation. Interest rates are highly sensitive to many factors, such as governmental monetary policies and domestic and international economic and political conditions that are beyond the control of the Corporation.
     Since the yearFrom 2004 to 2007, increases in interest rates have been increasing and this may negatively affectaffected the following areas of the Corporation’s business:

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 The net interest income;
 
 The value of owned securities, including interest rate swaps; and
 
 the volume of loans originated, particularly mortgage loans.
Increases in interest rates may reduce net interest income
     Increases in short-term interest rates may reduce net interest income, which is the principal component of the Corporation’s earnings. Net interest income is the difference between the amount received by the Corporation on its interest-earning assets and the interest paid by the Corporation on its interest-bearing liabilities. When interest rates rise, the Corporation must pay more in interest on its liabilities while the interest earned on its assets does not rise as quickly. This may cause the Corporation’s profits to decrease. This adverse impact on earnings is greater when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term rates.

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Increases in interest rates may reduce the value of holdings of securities including interest rate swaps
     Fixed-rate securities and the interest rate swaps entered into by the Corporation are generally subject to decreases in market value when interest rates rise, which wouldmay require recognition of a loss, (e.g., the identification of other-than-temporary impairment on its available for sale or held to maturity investments portfolio) thereby potentially affecting adversely the results of operations.
Increases in interest rates may reduce demand for mortgage and other loans
     Higher interest rates increase the cost of mortgage and other loans to consumers and businesses and may reduce demand for such loans, which may negatively impact the Corporation’s profits by reducing the amount of loan origination income.
     In addition,Decreases in interest rates may increase the exercise of embedded calls in the investment securities portfolio
     Future net interest income could be affected by the Corporation’s holding of callable securities. The recent drop in the long end of the yield curve has the effect of increasing the probability of the exercise of embedded calls in the approximately $2.1 billion U.S. Agency securities portfolio that if substituted with new lower-yield investments may negatively impact the Corporation’s interest income.
Decreases in interest rates may reduce net interest margin may be negatively impacted prospectivelyincome due to the current unprecedented re-pricing mismatch of assets and liabilities tied to short-term interest rates (Basis Risk)
     Basis risk occurs when market rates for different financial instruments, or the indices used to price assets and liabilities, change at different times or by different amounts. Recent liquidity pressures affecting the excess liquidityU.S. financial markets have caused a wider than historical spread between brokered CDs costs and LIBOR rates for similar terms. This in turn, is preventing the Corporation from cash receipts from Doral and R&G forcapturing the repaymentfull benefit of secured loans to these institutions. The negative impact could be the result of reinvestment of proceedsrecent drops in lower yielding assets until a planned deleverage ofinterest rates as the Corporation’s financial statement of condition is completed.loan portfolio funded by LIBOR-based brokered CDs continues to maintain the same historical spread to short-term LIBOR rates. To the extent that such pressures fail to subside in the near future, the margin between the Corporation’s LIBOR-based assets and LIBOR-based liabilities may compress and adversely affect net interest income.
The Corporation is subject to default risk on loans, which may adversely affect its results
     The Corporation is subject to the risk of loss from loan defaults and foreclosures with respect to the loans it originates. The Corporation establishes provisionsa provision for loan losses, which leadleads to reductions in its income from operations, in order to maintain its allowance for inherent loan losses at a level which its management deems to be appropriate based upon an assessment of the quality of its loan portfolio. Although the Corporation’s management utilizes its best judgment in providing for loan losses, there can be no assurance that management has accurately estimated the level of inherent loan losses or that the Corporation will not have to increase its provisionsprovision for loan losses in the future as a result of future increases in non performing loans or for other reasons beyond its control. Any such increases in the Corporation’s provisionsprovision for loan losses or any loan losses in excess of its provisionsprovision for loan losses would have an adverse effect on the Corporation’s future financial condition and results of operations. Given the difficulties of the Corporation’s largest borrowers, Doral and R&G Financial, the Corporation can give no assurance that these borrowers will continue to repay their secured loans on a timely basis or that the Corporation will continue to be able to accurately assess any risk of loss from the loans to these financial institutions.
The Corporation is subject to greater credit risk with respect to its portfolio of construction and commercial loans
      The Corporation invests in construction loans and mortgage loans secured by income-producing residential buildings and commercial properties through its banking subsidiaries. These loans are subject to greater credit risk than consumer and residential mortgage loans. These types of loans involve greater credit risk than residential mortgage loans because they are larger in size, concentrate more risk in a single borrower and are generally more sensitive to economic conditions. The properties securing these loans are also harder to dispose of in foreclosure.
Changes in collateral valuation for properties located in stagnant or distressed economies may require increased reserves
     Substantially all of the loan portfolio of the Corporation is located within the boundaries of the U.S. economy. Whether the collateral is located in Puerto Rico, the U.S. Virgin Islands or the U.S. mainland, the performance of the Corporation’s loan portfolio and the collateral value backing the transactions are dependent upon the performance of and conditions within each specific area real estate market. Recent economic reports related to the real estate market in Puerto Rico indicate that certain pockets of the real estate market are subject to readjustments in value driven not by demand but more by the purchasing power of the consumers and general economic conditions. In South Florida we are seeing the negative impact associated with low absorption rates and property value adjustments due to overbuilding. A significant decline in collateral valuations for collateral dependent loans may require increases in

27


the Corporation’s specific provision for loan losses and an increase in the general valuation allowance. Any such increase would have an adverse effect on the Corporation’s future financial condition and results of operations.
The Corporation’s business concentration in Puerto Rico imposes risks
     The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. This imposes risks from lack of diversification in the geographical portfolio. The Corporation’s financial condition and results of operations are highly dependent on the economic conditions of Puerto Rico, where adverse political or economic developments, natural disasters, etc., could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans, and reduce the value of the Corporation’s loans and loan servicing portfolio.

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These factors could materially and adversely affect the Corporation’s financial condition and results of operations. As a result of the reclassification of purchases of mortgage loans, theThe Corporation had substantial secured loans to two local financial institutions, Doral and R&G, in the aggregate amount of $3.7 billion$624.6 million and $3.8 billion$932.0 million as of December 31, 2007 and 2006, respectively.
First BanCorp’s credit quality may be adversely affected by Puerto Rico’s current economic condition
      Beginning in 2005 and 2004, respectively. On May 31, 2006,continuing through 2007, a number of key economic indicators suggested that the Corporation announced that its subsidiary, FirstBank, received a cash payment from Doral of approximately $2.4 billion, substantially reducing the balance in secured commercial loans resulting from the Corporation’s previously-announced revised classification of several mortgage-related transactions with Doral.
First BanCorp is subject to risks associated with the Commonwealth of Puerto Rico’s temporary budget crisis
     Due to a budget impasse, the Commonwealtheconomy of Puerto Rico (the “Commonwealth”) closed all public agencies on May 1, 2006, except those related to safety, health and other essential services. All agencies were subsequently opened two weeks later and a budget approval bywas slowing down.
     Construction remained weak during 2007, as the Legislature was signed into law by the Governor, Aníbal Acevedo Vilá. Subsequently, Moody’s Investors Service downgradedcombination of rising interest rates, the Commonwealth’s general obligation bond ratingfiscal situation and decreasing public investment in construction projects affected the sector. During the period from January to Baa3 from Baa2, and keptNovember of the rating on Watchlistcalendar year 2007, cement production, a real indicator of construction activity, declined by 11.7% as compared to the same period in 2006. As of September 2007, exports decreased by 11.7%, while imports decreased by 8.9 %, a negative trade, which continues since the first negative trade balance of the last decade was registered in November 2006. Tourism activity has also declined during fiscal year 2007. Total hotel registrations for possible further downgrade.the fiscal year 2007 declined 5.1 % as compared to the fiscal year 2006. During 2007 new vehicle sales decreased by 13%, the lowest since 1993. In 2007, average employment declined by 1.27% while the average number of unemployed increased by 3.30%; the unemployment rate increased to 11.2% when compared to the December 2006 unemployment rate of 10.2%.
     According to Moody’s, this action reflectsIn general, the Commonwealth’s strained financial condition, and ongoing political conflict and lack of agreement regarding the measures necessary to end the government’s multi-yearPuerto Rico economy continued its trend of financial deterioration. A fiscal reform has been recently approved, where the Housedecreasing growth, primarily due to weaker manufacturing, softer consumption and Senate approved a tax reform authorizing a 7% sales tax, with the option, if expected revenues do not materialize, to raise it to 8% after December 2006. Notwithstanding, significant budget deficitsdecreased government investment in construction.
     The above economic concerns and fiscal imbalance could continueuncertainty in the coming years. Any significantprivate and public sectors may also have an adverse political or economic developments in Puerto Rico resulting from the budget impasse could have a negative impacteffect on the credit quality of the Corporation’s future financial conditionloan portfolios, as delinquency rates are expected to increase in the short-term, until the economy stabilizes. Also, a potential reduction in consumer spending may also impact growth in other interest and resultsnon-interest revenue sources of operations.the Corporation.
Rating downgrades on the Government of Puerto Rico’s debt obligations may affect the Corporation’s credit exposure
     Even though Puerto Rico’s economy is closely integrated to that of the U.S. mainland and its government and many of its instrumentalities are investment-grade rated borrowers in the U.S. capital markets, the current fiscal situation of the Government of Puerto Rico has led nationally recognized rating agencies to downgrade its debt obligations.
     In May 2006, Moody’s Investors Service downgraded the Government’s general obligation bond rating to Baa3 from Baa2, and put the credit on “watchlist”“watch list” for possible further downgrades. The Commonwealth’s appropriation bonds and some of the subordinated revenue bonds were also downgraded by one notch and are now rated just below investment grade at Ba1. Moody’s commented that this action reflects the Government’s strained financial condition, the ongoing political conflict and lack of agreement regarding the measures necessary to end the

28


government’s multi-year trend of financial deterioration. Standard & Poor’s Rating Services (“S&P”) still rates the Government’s general obligations two notches above junk at BBB, and the Commonwealth’s appropriation bonds and some of the subordinated revenue bonds BBB-, a category that continues to bestill investment-grade rated.
     In July 2006, S&P and Moody’s affirmed their credit ratings on the Commonwealth debt, and removed the debt from their respective watch lists, thus reducing the possibilityprobability of an immediate additional downgrade.a downgrade in the near future. These actions resulted after the Government approved the budget for the 2007 fiscal year, which runs from July 2006 through June 2007 and included the adoptionestablishment of a new sales tax. Revenues from the sales tax are to be dedicated primarily to fund the government’s operating expenses, and, to a lesser extent, to repay government debt and fund local municipal governments.

35


     Both rating agencies maintained the negative outlook for the Puerto Rico general obligation bonds. Factors such as the government’s ability to implement meaningful steps to curb operating expenditures, improve managerial and budgetary controls, and eliminate the government’s reliance on operating budget loans from the Government Development Bank of Puerto Rico will be key determinants of future rating stabilityimprovement and restoration of a stable long-term outlook. Also, the inability to agreeA repeat of an impasse on future fiscal year Commonwealth budgetsbudget agreements could result in negative ratings pressureactions from the rating agencies.
     It is uncertain how the financial markets may react to any potential future ratings downgrade in Puerto Rico’s debt obligations. However, the fallout from the recent budgetary crisis and a possible ratings downgrade could adversely affect the value of Puerto Rico’s Government obligations.
First Bancorp’s credit quality may be adversely affected by Puerto Rico’s current economic condition
     The slowdown on the island’s growth rate, which appears to have started in 2005 according to the Puerto Rico Planning Board statistics, has continued in 2006. Manufacturing has declined in overall activity for 2006 as compared to the same period in 2005, for the first time since 2002.
     Construction remained relatively weak during 2006, as the combination of rising interest rates, the Commonwealth’s fiscal situation and decreasing public investment in construction projects affected the sector. However, it did manage to expand very modestly versus the prior-year period. The value of construction permits during the fiscal year ending June 2006 declined 4.3%, with most of the drop coming from the public sector. Retail sales during the six months ending June 2006 also reflected the uncertainty prevalent at the time related to the Commonwealth’s fiscal situation, as well as increased oil and utility prices. Sales registered a decline of 1.9% as compared to the same period in 2005, as the months surrounding the temporary government shutdown were particularly affected. The unemployment rate was 9.6% as of October 2006.
     Tourism is the one sector that has been resilient. Activity in the sector has expanded consistently since 2004, and in the 2006 fiscal year ending June 2006 it registered the strongest increase in four years. Factors that may be boosting the tourism sector are geo-political tensions throughout the world, a relative benign hurricane season for the past two years, and a relatively firm U.S. economy.
     In general, it is apparent that in 2006 the Puerto Rican economy continued its trend of decreasing growth and ended the first half of the year with minimal momentum, primarily due to weaker manufacturing, softer consumption and decreased government investment in construction.
     The above economic concerns and uncertainty in the private and public sectors may also have an adverse effect in the credit quality of the Corporation’s loan portfolios, as delinquency rates are expected to increase in the short-term, until the economy stabilizes. Also, a potential reduction in consumer spending may also impact growth in other interest and non-interest revenue sources of the Corporation.
A prolonged economic slowdown or athe decline in the real estate market in the U.SU.S. mainland could harm the results of operations of FirstMortgage
     The residential mortgage loan origination business has historically been cyclical, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. Any decline inThe market for residential mortgage loan originations is currently in the marketdecline and this trend could also reduce the level of mortgage loans the Corporation may produce in the future and adversely impact our business. During periods of rising interest rates, refinancing originations for many mortgage products tend to decrease as

36


the economic incentives for borrowers to refinance their existing mortgage loans are reduced. In addition, the residential mortgage loan origination business is impacted by home values. Over the past several years,eighteen months, residential real estate values in somemany areas of the U.S. mainland have increaseddecreased greatly, which has contributed to the recent rapid growth in the residential mortgage industry, particularly with respect to refinancings. If residential real estate values decline, this could leadled to lower volumes and higher losses across the industry, adversely impacting our mortgage business.
     The actual rates of delinquencies, foreclosures and losses on loans could be higher during economic slowdowns. Rising unemployment, higher interest rates or declines in housing prices tend to have a greater negative effect on the ability of borrowers to repay their mortgage loans. Any sustained period of increased delinquencies, foreclosures or losses could harm the Corporation’s ability to sell loans, the prices the Corporation’sCorporation receives for loans, the values of mortgage loans held-for-sale or residual interests in securitizations, which could harm the Corporation’s financial condition and results of operations. In addition, any material decline in real estate values would weaken the collateral loan-to-value ratios and increase the possibility of loss if a borrower defaults. In such event, the Corporation will be subject to the risk of loss on such mortgage asset arising from borrower defaults to the extent not covered by third-party credit enhancement.
Changes in regulations and legislation could have a financial impact on First BanCorp
     As a financial institution, the Corporation is subject to the scrutinylegislative and rulemaking authority of various regulatory and legislative bodies. Any change in regulations and/or legislation, whether in the United States or Puerto Rico, could have a financial impact on the results of operations of the Corporation.

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Controversy surrounding parcels of land underlying a significant construction loan of the Corporation, Paseo Caribe, could have a significant effect on the Corporation’s results of operations
-Litigation in connection with the Opinion of the Secretary of Justice of Puerto Rico
     The Corporation announced in a press release dated December 11, 2007, that the Secretary of Justice of Puerto Rico issued an opinion stating that various of the parcels of land upon which construction of the Paseo Caribe project is being conducted are of public domain and therefore not eligible for sale to private parties. The Corporation had further stated that, as a result of this opinion, First BanCorp (through its banking subsidiary FirstBank) had filed a declaratory judgment lawsuit in San Juan Superior Court requesting that the court declare that the tracts of land in question never constituted public domain property. After the filing of this action the Superior Court has held two hearings in which it has heard oral arguments and received briefs and evidence from all parties involved, including First BanCorp, the Department of Justice, the Paseo Caribe developer, the Hotel Development Corporation and Hilton Hotels. On February 8, 2008 the San Juan Superior Court issued its judgment ruling that the properties in question are not of public domain but legally belong to Paseo Caribe. This judgment will be followed by an appellate process until the Supreme Court of Puerto Rico, the court of last result in Puerto Rico, renders its final adjudications on this matter. The Corporation intends to pursue certain legal processes in order to expedite the final resolution of this matter by the Supreme Court of Puerto Rico.
     In terms of the construction, following the December 11, 2007 decision by the Secretary of Justice, the Regulations and Permits Board ("ARPE") issued a 60 days temporary suspension of the constuction permits. The temporary suspension of the construction permits expired on February 26, 2008, but upon such expiration ARPE followed with another order extending the suspension of the permits for an additional 60 days. On February 28, 2008, the Puerto Rico Supreme Court revoked ARPE's determination thus allowing the continuation of the construction of the Paseo Caribe project.
-Details on the Financing of the Project
     The Corporation has approximately $114 million of financing outstanding with Paseo Caribe allocated to the various construction and development phases within the overall project. As it relates to the parcels of land that the Secretary of Justice deems of public domain, the amount of loans outstanding is approximately $47 million. The loans are current as of the date of the filing of this Annual Report on Form 10-K. Additionally, the mortgage liens on the tracts of land securing the Corporation’s loans are insured with title insurance policies purchased at the time of the closing of the financing. The title insurance covers any defect in title that includes title to the property being vested differently than stated in the policy, the title becoming non-marketable, or the invalidity or enforceability of the mortgage lien.
Item��Item 1B. Unresolved Staff Comments
     None.
Item 2. Properties
     AtAs of December 31, 2005,2007, First BanCorp owned the following three main offices located in Puerto Rico:
     Main offices:
1.- Headquarter OfficesHeadquarters – Located at First Federal Building, 1519 Ponce de León Avenue, Santurce, Puerto Rico, a 16 story office building. Approximately 60% of the building, an underground three level parking lot and an adjacent parking lot are owned by the Corporation.
 
2.- EDP & Operations Center – A five storyfive-story structure located at 1506 Ponce de León Avenue, Santurce, Puerto Rico. These facilities are fully occupied by the Corporation.
 
3.- Consumer Lending Center – A three storythree-story building with a three-level parking lot located at 876 Muñoz Rivera Avenue, corner Jesús T. Piñero Avenue, Hato Rey, Puerto Rico. These facilities are fully occupied by the Corporation.
In addition, during 2006, First BanCorp purchased the following office located in Puerto Rico:
1130Muñoz Rivera – a building located on 1130 Muñoz Rivera Avenue, Hato Rey, Puerto Rico. These facilities will be remodeled and expanded to accommodate branch operations, data processing,
     In addition, during 2006, First BanCorp purchased a building located on 1130 Muñoz Rivera Avenue, Hato Rey, Puerto Rico. These facilities are being remodeled and expanded to accommodate branch operations, data processing,

3730


administrative and headquarter offices. FirstBank expects to commence occupancy in the fourth quarter of 2007.
administrative and certain headquarter offices. FirstBank expects to commence occupancy as soon as practicable but not earlier than 2009.
     In addition, the Corporation owned 2829 branch and office premises and an auto lotlots and leased 107172 branch premises, loan and office centers and other facilities. All of these premises are located in Puerto Rico, Florida and in the U.S. and British Virgin Islands and Florida.Islands. Management believes that the Corporation’s properties are well maintained and are suitable for the Corporation’s business as presently conducted.
Item 3. Legal Proceedings
     During 2005 and 2006,2007, the Corporation becamecontinued to be subject to various legal proceedings, including regulatory investigations and civil litigation, as a result of the restatement of the 2004 financial information. For information on these proceedings, seeplease refer to Note 32 to the audited financial statements included in Item 8, Financial Statements and Supplementary data, of this Annual Report on Form 10-K and to “Recent Significant Events, — Governmental Action” and “Recent Significant Events – Private Litigation”, above.
     Additionally, the Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. In the opinion of the Corporation’s management, except as described in Note 32 to the Recentaudited financial statements included in Item 8, Financial Statements and Supplementary data, of this Annual Report on Form 10-K and in “Recent Significant Events sectionEvents”, above, the pending and threatened legal proceedings forof which management is aware will not have a material adverse effect on the financial condition or results of operations of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
     On April 28, 2005 First BanCorp held its annual meeting of stockholders.stockholders on October 31, 2007. The number of shares present in person and/or by proxy at suchproposals submitted to the meeting was 37,644,661 representing 93%and the results of the 40,393,155 sharesvoting thereon were reported under Part II, Item 4 of common stock issued and outstandingthe Company’s Quarterly Report on March 14, 2005, which was the record dateForm 10-Q for the determination of the stockholders entitled to vote at the meeting.
     The following was voted upon at the Annual Meeting of Stockholders:
     (a) The election of the following directors:
         
  For Withheld
Annie Astor-Carbonell  37,005,125   639,536 
Jorge L. Díaz-Irizarry  36,129,639   1,515,022 
José Menéndez Cortada  36,129,539   1,515,122 
     The following were the directors whose terms of office continued:
Angel Alvarez-Pérez
José Julián Alvarez Bracero
José L. Ferrer-Canals
Richard Reiss Huyke
José Teixidor-Méndez
Sharee Ann Umpierre-Catinchi
(b)Ratification of the appointment of PricewaterhouseCoopers as the Corporation’s Independent Registered Public Accounting Firm for fiscal year 2005.
     The appointment of PricewaterhouseCoopers was ratified as follows:quarter ended September 30, 2007, and are incorporated herein by reference.

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For36,160,779
Against1,407,676
Abstain76,206
     In September 2005, following the announcement of the Audit Committee’s review, the Corporation implemented changes to its senior management. Specifically, the Board of Directors asked for the resignation of Angel Alvarez-Pérez, then President, Chief Executive Officer and Chairman of the Board and Annie Astor-Carbonell, then Chief Financial Officer and Director of the Board. On September 30, 2005, the Corporation announced that the Former CEO had resigned from his management positions effective September 30, 2005 and would retire as a director effective December 31, 2005 and that the Former CFO had resigned from her position as CFO and as a director effective September 30, 2005.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market and Holders Information
     The Corporation’s common stock is traded on the New York Stock Exchange (the “NYSE”(“NYSE”) under the symbol FBP. On December 31, 2006 and 2005,2007, there were 566 and 589, respectively,520 holders of record of the Corporation’s common stock.
     The following table sets forth, for the calendar quarters indicated, the high and low closing sales prices ofand the cash dividends declared on the Corporation’s common stock for the periods indicated as reported by the NYSE.during such periods. This table reflects the effect of the June 2005 two-for-one stock split.split on the Corporation’s outstanding shares of common stock as of June 15, 2005.
                
             Dividends
Quarter ended High Low Last High Low Last Per Share
2007:
 
December $10.16 $6.15 $7.29 $0.07 
September 11.06 8.62 9.50 0.07 
June 13.64 10.99 10.99 0.07 
March 13.52 9.08 13.26 0.07 
 
2006:
  
December $10.79 $9.39 $9.53  $10.79 $9.39 $9.53 $0.07 
September 11.15 8.66 11.06  11.15 8.66 11.06 0.07 
June 12.22 8.90 9.30  12.22 8.90 9.30 0.07 
March 13.15 12.20 12.36  13.15 12.20 12.36 0.07 
  
2005:
  
December $15.56 $10.61 $12.41  $15.56 $10.61 $12.41 $0.07 
September 26.07 16.50 16.92  26.07 16.50 16.92 0.07 
June 21.31 17.31 20.08  21.31 17.31 20.08 0.07 
March 32.26 20.78 21.13  32.26 20.78 21.13 0.07 
 
2004:
 
December $32.43 $23.65 $31.76 
September 24.93 19.81 24.15 
June 21.34 17.57 20.38 
March 21.66 19.50 20.80 
 
2003:
 
December $20.16 $15.62 $19.78 
September 15.99 14.18 15.38 
June 15.84 13.73 13.73 
March 14.00 11.36 13.49 
     First BanCorp has five outstanding series of non convertible preferred stock: 7.125% noncumulativenon-cumulative perpetual monthly income preferred stock, Series A (liquidation preference $25 per share),

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; 8.35% noncumulativenon-cumulative perpetual monthly income preferred stock, Series B (liquidation preference $25 per share),; 7.40% noncumulativenon-cumulative perpetual monthly income preferred stock, Series C (liquidation preference $25 per share), 7.25 % noncumulative; 7.25% non-cumulative perpetual monthly income preferred stock, Series D (liquidation preference $25 per share)share,); and 7.00% noncumulativenon-cumulative perpetual monthly income preferred stock, Series E (liquidation preference $25 per share) (collectively “Preferred Stock”), which trade on the NYSE.
     On April 13, 2006,The Series A, B, C, D, and E Preferred Stock rank on parity with respect to dividend rights and rights upon liquidation, winding up or dissolution. Holders of each series of preferred stock will be entitled to receive cash dividends, when, and if declared by the Corporation notified the NYSE that, given the delay in the filingboard of directors of First BanCorp out of funds legally available for dividends.
     The terms of the Corporation’s 2005 Form 10-K, which requiredpreferred stock do not permit the postponementCorporation to declare, set apart or pay any dividend or make any other distribution of assets on, or redeem, purchase, set apart or otherwise acquire shares of common stock or of any other class of stock of First BanCorp ranking junior to the preferred stock, unless all accrued and unpaid dividends on the preferred stock and any parity stock, for the twelve monthly dividend periods ending on the immediately preceding dividend payment date, shall have been paid or are paid contemporaneously; the full monthly dividend on the preferred stock and any parity stock for the then current month has been or is contemporaneously declared and paid or declared and set apart for payment; and the Corporation has not defaulted in the payment of the 2006 Annual Meetingredemption price of Stockholders,any shares of the Corporation was not going to distribute its annual report to shareholders by April 30, 2006. As a result,preferred stock and any parity stock called for redemption. If the Corporation is unable to pay in full the dividends on the preferred stock and on any other shares

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of stock of equal rank as to the payment of dividends, all dividends declared upon the preferred stock and any such other shares of stock will be declared pro rata.
     The Corporation may not in complianceissue shares ranking, as to dividend rights or rights on liquidation, winding up and dissolution, senior to the Series A, B, C, D, and E Preferred Stock, except with Section Rule 203.01,Annual Report Requirement,the consent of the NYSE Listed Company Manual, which requires a listed company to distribute its annual report within 120 days after its fiscal year end.
     The NYSE’s Section 802.01E procedures apply to the Corporation given its failure to file the Form 10-K for the fiscal year ended December 31, 2005, which the NYSE explained in a letter dated April 3, 2006. These procedures contemplate that the NYSE will monitor a company that has not timely filed a Form 10-K. If the company does not file its annual report within six monthsholders of at least two-thirds of the filing due date, the NYSE may, in its sole discretion, allow the company’s securities to be traded for up to an additional six months depending on the company’s specific circumstances. If the NYSE determines that an additional trading period of up to six months is not appropriate, suspension and delisting procedures will be commenced. If the NYSE determines that an additional trading period of up to six months is appropriate and the company fails to file its annual report by the end of that additional period, suspension and delisting procedures will generally commence. The procedures provide that the NYSE may commence delisting proceedings at any time. On October 3, 2006, the Corporation announced that the New York Stock Exchange (NYSE) granted an extension for continued listing and trading on the NYSE through April 3, 2007, subject to the NYSE’s ongoing monitoringoutstanding aggregate liquidation preference of the Corporation’s 2005 10-K filing efforts. With the filing of this 2005 Form 10-K on or prior to April 3, 2007, the Corporation will have complied with the extension granted.Series A, B, C, D, and E Preferred Stock.
     Dividends
     The Corporation has a policy of paying quarterly cash dividends on its outstanding shares of common stock. Accordingly, the Corporation declared a cash dividend of $0.07 per share for each quarter of 2005, $0.06 per share for each quarter2007, 2006 and 2005. In terms of 2004the dividend payment, the Corporation is confident, based on internal projections, that it will be able to continue paying the current dividend to the common and $0.06 per share for each quarter of 2003.preferred shareholders during 2008. See the discussion under “Dividend Restrictions” under Item 1 for additional information concerning restrictions on the payment of dividends that apply to the Corporation and FirstBank.
     First BanCorp did not purchase any of its equity securities during 2007 or 2006.
     The Puerto Rico Internal Revenue Code requires the withholding of income tax from dividend income derived by resident U.S. citizens, special partnerships, trusts and estates and non-resident U.S. citizens, custodians, partnerships, and corporations from sources within Puerto Rico.
     Resident U.S. Citizens
     A special tax of 10% is imposed on eligible dividends paid to individuals, special partnerships, trusts, and estates to be applied to all distributions unless the taxpayer specifically elects otherwise. Once this election is made it is irrevocable. However, the taxpayer can elect to include in gross income the eligible distributions received and take a credit for the amount of tax withheld. If the taxpayer does not make this election on the tax return, then he can exclude from gross income the distributions received and reported without claiming the credit for the tax withheld.

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     Nonresident U.S. Citizens
     Nonresident U.S. citizens have the right to certain exemptions when a Withholding Tax Exemption Certificate (Form 2732) is properly completed and filed with the Corporation. The Corporation, as withholding agent, is authorized to withhold a tax of 10% only from the excess of the income paid over the applicable tax-exempt amount.
     U.S. Corporations and Partnerships
     Corporations and partnerships not organized under Puerto Rico laws that have not engaged in trade or business in Puerto Rico during the taxable year in which the dividend is paid are subject to the 10% dividend tax withholding. Corporations or partnerships not organized under the laws of Puerto Rico that have engaged in trade or business in Puerto Rico are not subject to the 10% withholding, but they must declare the dividend as gross income on their Puerto Rico income tax return.
Equity     For information regarding securities authorized for issuance under First BanCorp’s stock-based compensation plans, refer to Part III, Item 11. Executive Compensation Plan Disclosurein this Annual Report on Form 10-K.

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STOCK PERFORMANCE GRAPH
The following Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report onForm 10-K into any filing under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act, except to the extent that First BanCorp specifically incorporates this information by reference, and shall not otherwise be deemed filed under these Acts.
     The following summarizes equity compensation plans approved by security holdersgraph below compares the cumulative total stockholder return of First BanCorp during the measurement period with the cumulative total return, assuming reinvestment of dividends, of the S&P 500 Index and equity compensation plansthe S&P Supercom Banks Index (the “Peer Group”). The Performance Graph assumes that were not approved by security holders as of$100 was invested on December 31, 2005:2002 in each of First BanCorp’s common stock, the S&P 500 Index and the Peer Group. The comparison in this table are set forth in response to SEC disclosure requirements, and are therefore not intended to forecast or be indicative of future performance of First BanCorp’s common stock.
             
  (A)  (B)  (C) 
          Number of Securities 
          Remaining Available for 
  Number of Securities      Future Issuance Under 
  to be Issued Upon  Weighted-Average  Equity Compensation 
  Exercise of Outstanding  Exercise Price of  Plans (Excluding Securities 
Plan category Options  Outstanding Options  Reflected in Column (A)) 
Equity compensation plans approved by stockholders:            
Stock Option Plans  5,316,410  $13.28   2,031,013 
          
Sub-total  5,316,410  $13.28   2,031,013 
          
Equity compensation plans not approved by stockholders  N/A   N/A   N/A 
          
Total  5,316,410  $13.28   2,031,013 
          
     The cumulative total stockholder return was obtained by dividing (i) the cumulative amount of dividends per share, assuming dividend reinvestment since the measurement point, December 31, 2002, plus (ii) the change in the per share price since the measurement date, by the share price at the measurement date.

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ItemITEM 6. Selected Financial DataSELECTED FINANCIAL DATA
     The following table presentssets forth certain selected consolidated financial and operating informationdata for the Corporation aseach of the dates indicated.five years in the period ended December 31, 2007. This information should be read in conjunction with the audited consolidated financial statements and the related notes thereto.

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SELECTED FINANCIAL DATA
(Dollars in thousands except for per share data and financial ratios results)
                     
  2005  2004  2003  2002  2001 
Condensed Income Statements: Year ended                    
Total interest income $1,067,590  $690,334  $549,466  $550,107  $526,841 
Total interest expense (1)  635,271   292,853   297,528   235,575   292,067 
Net interest income  432,319   397,481   251,938   314,532   234,774 
Provision for loan losses  50,644   52,800   55,915   62,302   61,030 
Other income  63,077   59,624   106,798   48,785   40,773 
Other operating expenses  315,132   180,480   164,630   132,811   120,522 
Income before income tax provision and cumulative effect of accounting change  129,620   223,825   138,191   168,204   93,995 
Provision for income tax  15,016   46,500   18,297   35,342   15,002 
Income before cumulative effect of accounting change  114,604   177,325   119,894   132,862   78,993 
Cumulative effect of accounting change              (1,015)
Net income  114,604   177,325   119,894   132,862   77,978 
Per Common Share Results (2): Year ended                    
Income before cumulative effect of accounting change diluted $0.90  $1.65  $1.09  $1.32  $0.78 
Cumulative effect of accounting change              (0.01)
Net income per common share diluted $0.90  $1.65  $1.09  $1.32  $0.77 
Net income per common share basic $0.92  $1.70  $1.12  $1.34  $0.77 
Cash dividends declared $0.28  $0.24  $0.22  $0.20  $0.18 
Average shares outstanding  80,847   80,418   79,988   79,802   79,702 
Average shares outstanding diluted  82,771   83,010   81,966   81,106   80,288 
Balance Sheet Data: End of year                    
Loans and loans held for sale $12,685,929  $9,697,994  $7,041,056  $5,635,023  $4,306,963 
Allowance for possible loan losses  147,999   141,036   126,378   111,911   91,060 
Investments  6,702,892   5,699,201   5,368,123   3,728,669   3,827,481 
Total assets  19,917,651   15,637,045   12,679,042   9,625,110   8,331,382 
Deposits  12,463,752   7,912,322   6,771,869   5,445,714   4,100,233 
Borrowings  5,750,197   6,300,573   4,634,237   3,238,369   3,414,236 
Total common equity  647,741   654,233   523,722   455,522   326,379 
Total equity  1,197,841   1,204,333   1,073,822   816,022   594,879 
Book value per common share  8.01   8.10   6.54   5.70   6.14 
Selected Financial Ratios (In Percent): Year ended                    
Net income to average total assets  0.64   1.30   1.15   1.51   1.16 
Net income to average total equity  8.98   15.73   13.31   18.63   14.80 
Net income to average common equity  10.23   23.75   18.21   29.49   19.83 
Average total equity to average total assets  7.09   8.28   8.64   8.11   7.84 
Dividend payout ratio  30.46   14.10   19.66   15.00   22.51 
Efficiency ratio (3)  63.61   39.48   45.89   36.56   43.74 
Common Stock Price: End of year $12.41  $31.76  $19.78  $11.30  $9.50 
Offices:                    
Number of full service branches  68   57   54   54   48 
                     
  Year ended December 31,
  2007 2006 2005 2004 2003
Condensed Income Statements:
                    
Total interest income $1,189,247  $1,288,813  $1,067,590  $690,334  $549,466 
Total interest expense  738,231   845,119   635,271   292,853   297,528 
Net interest income  451,016   443,694   432,319   397,481   251,938 
Provision for loan and lease losses  120,610   74,991   50,644   52,800   55,915 
Non-interest income  67,156   31,336   63,077   59,624   106,798 
Non-interest expenses  307,843   287,963   315,132   180,480   164,630 
Income before income taxes  89,719   112,076   129,620   223,825   138,191 
Income tax expense  21,583   27,442   15,016   46,500   18,297 
Net income  68,136   84,634   114,604   177,325   119,894 
Net income attributable to common stockholders  27,860   44,358   74,328   137,049   89,535 
Per Common Share Results (1):
                    
Net income per common share diluted $0.32  $0.53  $0.90  $1.65  $1.09 
Net income per common share basic $0.32  $0.54  $0.92  $1.70  $1.12 
Cash dividends declared $0.28  $0.28  $0.28  $0.24  $0.22 
Average shares outstanding  86,549   82,835   80,847   80,419   79,988 
Average shares outstanding diluted  86,866   83,138   82,771   83,010   81,966 
Book value per common share $9.42  $8.16  $8.01  $8.10  $6.54 
Balance Sheet Data:
                    
Loans and loans held for sale $11,799,746  $11,263,980  $12,685,929  $9,697,994  $7,041,055 
Allowance for loan and lease losses  190,168   158,296   147,999   141,036   126,378 
Money market and investment securities  4,811,413   5,544,183   6,653,924   5,699,201   5,368,123 
Total assets  17,186,931   17,390,256   19,917,651   15,637,045   12,679,042 
Deposits  11,034,521   11,004,287   12,463,752   7,912,322   6,771,869 
Borrowings  4,460,006   4,662,271   5,750,197   6,300,573   4,634,237 
Total common equity  871,546   679,453   647,741   654,233   523,722 
Total equity  1,421,646   1,229,553   1,197,841   1,204,333   1,073,822 
Selected Financial Ratios (In Percent):
                    
Profitability:
                    
Return on Average Assets  0.40   0.44   0.64   1.30   1.15 
Return on Average Total Equity  5.14   7.06   8.98   15.73   13.31 
Return on Average Common Equity  3.59   6.85   10.23   23.75   18.21 
Average Total Equity to Average Total Assets  7.70   6.25   7.09   8.28   8.64 
Dividend payout ratio  88.32   52.50   30.46   14.10   19.66 
Efficiency ratio (2)  59.41   60.62   63.61   39.48   45.89 
Asset Quality:
                    
Allowance for loan and lease losses to loans receivable  1.61   1.41   1.17   1.46   1.80 
Net charge-offs to average loans  0.79   0.55   0.39   0.48   0.66 
Provision for loan and lease losses to net charge-offs  1.36x  1.16x  1.12x  1.38x  1.35x
Other Information:
                    
Common Stock Price $7.29  $9.53  $12.41  $31.76  $19.78 
 
1-Includes the changes in fair value of interest rate swaps that hedge brokered certificates of deposit.
2-(1) Amounts presented were recalculated, when applicable, to retroactively consider the effect of the June 30, 2005 two-for-one common stock split.
 
3-(2) Other operating expensesNon-interest expense to the sum of net interest income and othernon-interest income. The denominator includes non- recurring income and changes in the fair value of derivative instruments and financial instruments measured at fair value under SFAS 159.

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ItemITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the accompanying consolidated audited financial statements of First BanCorp.BanCorp (“the Corporation” or “First BanCorp”) and should be read in conjunction with the audited financial statements and the notes thereto.
Description of BusinessDESCRIPTION OF BUSINESS
     First BanCorp and subsidiaries (“the Corporation”) is a diversified financial holding company headquartered in San Juan, Puerto Rico offering a full range of financial products to consumers and commercial customers.customers through various subsidiaries. First BanCorp is the holding company of FirstBank Puerto Rico (“FirstBank” or the “Bank”), Ponce General Corporation (the holding company of FirstBank Florida), Grupo Empresas de Servicios Financieros (d/b/a “PR Finance Group”) and FirstBank Insurance Agency. Through its wholly-owned subsidiaries, the Corporation operates offices in Puerto Rico, the United States and British Virgin Islands and in the stateState of Florida (USA) specializing in commercial banking, residential mortgage loan originations, finance leases, personal loans, small loans, vehicle rental, insurance agency services and international banking.
     On March 31, 2005, the Corporation completed the acquisition of 100% of the outstanding common shares of Ponce General Corporation, the holding company of Unibank a thrift subsidiary, and Ponce Realty, with a total of eleven financial service facilities in the state of Florida. The purpose of the acquisition was for First BanCorp to build a platform in Florida to consider further expansion into the United States. The Corporation subsequently changed the name of Unibank to FirstBank Florida.
     The Corporation’s results of operations are sensitive to fluctuations in interest rates. Changes in interest rates can materially affect key earnings drivers such as the volume of loan originations, net interest income earned, and gains/losses on investment security holdings. The Corporation manages interest rate risk on an ongoing basis through asset/liability management strategies, which have included the use of various derivative instruments. The Corporation also manages credit risk inherent in its loan portfolios through its underwriting, loan review and collection functions. The Corporation’s business activities and credit exposures are mainly concentrated in Puerto Rico. Consequently, its financial condition and results of operations are dependent on the economic conditions as well as changes in legislation on the Island.
Forward Looking Statements
          This Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-K or future filings by First BanCorp with the Securities and Exchange Commission, in the Corporation’s press releases or in other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the word or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “should,” “anticipate” and similar expressions are meant to identify “forward-looking statements.”
          First BanCorp wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and represent First BanCorp’s expectations of

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future conditions or results and are not guarantees of future performance. First BanCorp advises readers that various factors could cause actual results to differ materially from those contained in any “forward-looking statement.” Such factors include, but are not limited to, the following:
risks arising from material weaknesses in the Corporation’s internal control over financial reporting;
risks associated with the Corporation’s inability to prepare and timely submit regulatory filings;
the Corporation’s ability to attract new clients and retain existing ones;
general economic conditions, including prevailing interest rates and the performance of the financial markets, which may affect demand for the Corporation’s products and services and the value of the Corporation’s assets, including the value of all of the interest rate swaps that hedge the interest rate risk mainly relating to brokered certificates of deposit, medium-term notes, and commercial loans and the ineffectiveness of such hedges or the undesignated portion of such interest rate swaps;
credit and other risks of lending and investment activities;
changes in the Corporation’s expenses associated with acquisitions and dispositions;
developments in technology;
risks associated with changing the Corporation’s business strategy to no longer acquire mortgage loans in bulk;
risks associated with the ongoing shareholder litigation against the Corporation;
risks associated with the ongoing SEC investigation;
risks associated with being subject to the cease and desist order;
potential further downgrades in the credit ratings of the Corporation’s securities;
general competitive factors and industry consolidation; and
risks associated with regulatory and legislative changes for financial services companies in Puerto Rico, the United States, and the U.S. and British Virgin Islands.
          The Corporation does not undertake, and specifically disclaims any obligation, to update any “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.
Internal Control over Financial Reporting
     The Corporation has taken a number of significant actions to remedy the material weaknesses in its internal controls during 2005, First BanCorp’s management concluded that its internal control over financial reporting remained ineffective as of December 31, 2005 based on the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). A description of the material weaknesses existing as of December 31, 2005 is included in Part II, Item 9A. Controls and Procedures of this Annual Report on Form 10-K.
     The Corporation developed and is implementing a plan for remedying all of the identified material weaknesses, and the work continues in 2007. As part of this remediation program, the Corporation has added skilled resources to improve controls and increase the reliability of the financial closing process.

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Overview of Management’s Discussion and Analysis of Financial Condition and Results of OperationsOVERVIEW OF RESULTS OF OPERATIONS
     Total assets atNet income for the year ended December 31, 20052007 amounted to $68.1 million or $0.32 per diluted common share, compared to $84.6 million or $0.53 per diluted common share for 2006 and 2004 were $19.9 billion$114.6 million or $0.90 per diluted common share for 2005.
     The Corporation’s financial performance for the year ended December 31, 2007, as compared to the year ended December 31, 2006, was principally impacted by the following factors: (1) a higher provision for loan and $15.6 billion, respectively. The growth was mainlylease losses, which increased by $45.6 million to $120.6 million for year 2007 from $75.0 million a year ago, driven by increases in the provisions related to the construction loan portfolio of the Corporation’s loan agency in Florida (the “Miami Agency”) and investment portfolios. increases in the general reserves allocated to the consumer loan portfolio, (2) a decrease in core net interest income, which on an adjusted tax equivalent basis (for definition and reconciliation of this non-GAAP measure, refer to theNet loans increased 31% to $12.5 billion, whenInterest Income”discussion below) decreased 10% for 2007 as compared to the previous year from $529.9 million to $475.4 million as a result of the continued pressure of the flattening of the yield curve and the decrease in the average volume of interest earning assets, and (3) higher non-interest expenses, which increased by $19.9 million from $288.0 million for 2006 to $307.8 million for the year ended December 31, 2007, resulting primarily from strong commercial loan originations in Puerto Rico, increases in construction loans disbursed by the Corporation’s Florida loan agency, residential mortgagesemployees’ compensation and consumer loans originationsbenefits expense and the acquisition of FirstBank Florida, which loan portfolio is mainly composed of residential and commercial mortgages. The increasesdeposit insurance premium expense. These factors were partially offset by decreaseslower non-cash losses resulting from the valuation of derivative instruments and financial instruments, in secured loansparticular the negative impact in 2006 financial results of the $69.7 million unrealized loss related to local financial institutions. Total investments increased $1 billion from 2004, mainly attributable to purchases of money-market investments government agency securities and mortgage-backed securities during 2005. Deposits at December 31, 2005 and 2004 were $12.5 billion and $7.9 billion, respectively, the increase is mainly attributed to issuances of brokered certificates of deposit which were used mainly to fund loan originations.
     Net income was $114.6 million or $0.92 per common share (basic) and $0.90 per common share (diluted) for 2005, compared to $177.3 million or $1.70 per common share (basic) and $1.65 per common share (diluted) for 2004 and $119.9 million or $1.12 per common share (basic) and $1.09 per common share (diluted) for 2003. Even though the Corporation’s interest income increased significantly as compared to 2004, net income was significantly impacted by negative changes in the fair value of derivative instruments prior to the flatimplementation of the long-haul method of accounting on April 3, 2006. Furthermore, financial results for 2007 were positively impacted by: (1) income of approximately $15.1 million recognized during 2007 from an agreement reached with insurance carriers and former executives for indemnity of expenses related to inverted interest rate yield curve, the increasesettlement of the class action lawsuit brought against the Corporation (2) a decrease of $9.3 million in operatingother-than-temporary impairment charges, as compared to 2006, related to equity securities (3) the fluctuation resulting from gains and losses recorded on partial repayments of certain secured commercial loans extended to local financial institutions, and (4) lower professional fees expenses including those legal, accounting and consulting fees associated withdue to the conclusion during 2006 of the Audit Committee’s internal review conducted by the Corporation’s Audit Committee,investigation that led to the restatement process of the 2004 financial statements. The following table summarizes the effect of the aforementioned factors and other related legal liabilities, such as those related to the class action litigation and the SEC investigation, and afactors that significantly higher current provision for income taxes mainly due to both an increaseimpacted financial results in taxable assets and an unfavorable impact resulting from a change in the Puerto Rico statutory tax rate. For 2005 as compared to 2004,previous years on net income decreased by $62.7 million or $0.75attributable to common stockholders and earnings per common share (diluted), and for 2004 as compared to 2003, net income increased by $57.4 million or $0.56 per common share (diluted). The earnings volatility for the reported years is mainly attributable to the non-cash valuation through earnings of interest rate swaps that economically hedge brokered certificates of deposit that were not designated under hedge accounting in 2005, 2004 and 2003, and to the class action and SEC related accruals recorded in 2005. The Corporation obtained a return on average assets of 0.64% compared to 1.30% for 2004 and 1.15% for 2003 and a return on common equity of 10.23% for 2005 compared to 23.75% for 2004 and 18.21% for 2003.
     While the yield on earning assets increased as compared to 2004, the cost of interest bearing liabilities increased as well, thereby decreasing the net interest margin as compared to 2004. Total yield on earning assets on a taxable equivalent basis, excluding the impact of changes in the fair value of derivatives, was 6.45% for 2005 as compared to 5.68% for 2004. The increase is mainly attributed to the re-pricing and origination of commercial loans at higher rates. The average cost of funds rate, excluding the impact of the change in the fair value of derivatives, for 2005 was 3.58% compared to 2.62% for 2004. The increase in cost of funds as compared to 2005 is the result of increases in rates, given the re-pricing of variable rate liabilities and the origination of new debt at higher rates, as well as a reduction in the benefit realized from interest exchanged on interest rate swaps that economically hedge brokered certificates of deposit.
     The interest earned on earning assets is computed on a tax equivalent basis; both the yield on earning assets and cost of funds rate exclude the impact of the change in the fair value of derivatives. When adjusted on a taxable equivalent basis and excluding valuation changes, yields on taxable and exempt assets are comparable. The excluded changes in the fair value of derivative instruments, mainly interest rate swaps, are non-cash temporary adjustments that do not affect economically the Corporation’s yield on earnings assets and funding cost, but that affected materially the reported net interest income.last three years:

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The changes in the fair value of derivatives are mainly composed of changes in the fair value of interest rate swaps economically hedging brokered certificates of deposit. Refer to the “Net Interest Income” section of this Management’s Discussion and Analysis for further information.
                         
  Year ended December 31, 
  2007  2006  2005 
In thousands, except per common share amounts Dollars  Per share  Dollars  Per share  Dollars  Per share 
Net income attributable to common stockholders for prior year $44,358  $0.53  $74,328  $0.90  $137,049  $1.65 
Increase (decrease) from changes in:                        
Net interest income  7,322   0.09   11,375   0.14   34,838   0.42 
Provision for loan losses  (45,619)  (0.55)  (24,347)  (0.29)  2,156   0.03 
Net gain (loss) on investments and impairments  5,468   0.06   (20,533)  (0.25)  2,882   0.03 
Gain (loss) on partial extinguishment and recharacterization of secured commercial loans to local financial institutions  13,137   0.16   (10,640)  (0.13)      
Gain on sale of credit card portfolio  2,319   0.03   500   0.01   (5,533)  (0.07)
Insurance reimbursement and other agreements related to a contingency settlement  15,075   0.18             
Other non-interest income  (179)  (0.00)  (1,068)  (0.01)  6,104   0.08 
Employees’ compensation and benefits  (12,840)  (0.15)  (25,445)  (0.31)  (19,638)  (0.24)
Professional fees  11,344   0.13   (18,708)  (0.23)  (9,222)  (0.11)
Deposit insurance premium  (5,073)  (0.06)  (366)  (0.00)  (269)  (0.00)
Provision for contingencies        82,750   1.00   (82,750)  (1.00)
All other operating expenses  (13,311)  (0.16)  (11,062)  (0.14)  (22,773)  (0.27)
Income tax provision  5,859   0.07   (12,426)  (0.15)  31,484   0.38 
                   
Net income before preferred stock dividends and change in average common shares  27,860   0.33   44,358   0.54   74,328   0.90 
Change in average common shares     (0.01)     (0.01)      
                   
Net income attributable to common stockholders $27,860  $0.32  $44,358  $0.53  $74,328  $0.90 
                   
     The provision for loan losses decreased by $2.2 million to $50.6 million in 2005, when compared to the prior year. The net charge offs as a percentage of average loans decreased to 0.39% from 0.48%
Net income for the year ended December 31, 2007 was $68.1 million compared to $84.6 million and $114.6 million for the years ended December 31, 2006 and 2005, respectively.
Diluted earnings per common share for the year ended December 31, 2007 amounted to $0.32 compared to $0.53 and $0.90 for the years ended December 31, 2006 and 2005, respectively.
Net interest income for the year ended December 31, 2007 was $451.0 million compared to $443.7 million and $432.3 million for the years ended December 31, 2006 and 2005, respectively. The increase in 2007 was principally due to the effect in the financial results of years 2006 and 2005 of unrealized losses related to changes in the fair value of derivative instruments prior to the implementation of the long-haul method of accounting on April 3, 2006. Previous to the second quarter of 2006, the Corporation recorded changes in the fair value of derivative instruments as non-hedging instruments through operations as part of interest expense. The adoption of fair value hedge accounting in the second quarter of 2006 and the adoption of SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” in 2007 reduced the accounting volatility that previously resulted from the accounting asymmetry created by accounting for the financial liabilities at amortized cost and the derivatives at fair value. The mark-to-market valuation changes for the year ended December 31, 2007 amounted to a net non-cash loss of $9.1 million, compared to net non-cash losses of $58.2 million and $73.4 million for 2006 and 2005, respectively.
Net interest income on an adjusted tax equivalent basis (for definition and reconciliation of this non-GAAP measure, refer to the“Net Interest Income”discussion below) decreased 10% for 2007, as compared to 2006, (from $529.9 million in 2006 to $475.4 million in 2007) and 7% for 2006, as compared to 2005 (from $566.9 million in 2005 to $529.9 million in 2006). Adjusted tax equivalent net interest income excludes the effect of mark-to-market valuation changes on derivative instruments and financial liabilities measured at fair value and includes an adjustment that 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. The decrease in adjusted tax equivalent net interest income in 2007, as compared to 2006, was mainly driven by the continued pressure of the flattening of the yield curve during most of 2007 and the decrease in the average volume of interest earning assets primarily attributed to the repayment of approximately $2.4 billion received from a local financial institution reducing the balance of its secured commercial loan with the Corporation during the latter part of the second quarter of 2006.
Notwithstanding the decrease in net interest income on an adjusted tax equivalent basis in absolute terms, the Corporation has been able to maintain its net interest margin at a relatively stable level. Net interest margin for the year ended December 31, 2007 was 2.83%, compared to 2.84% for the previous year reflecting the effect of

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the Corporation’s decision to deleverage its balance sheet primarily by the repayment of high-cost borrowings with the proceeds from the sale of lower yielding securities as well as the effect of the steepened yield curve during the last quarter of 2007. During the second half of 2007 the Corporation sold approximately $556 million and $400 million of low-yield mortgage-backed securities and U.S. Treasury investments, respectively, and used the proceeds in part to pay down high cost borrowings as they matured. The Corporation reinvested approximately $566 million in higher yielding U.S. Agency mortgage-backed securities. Also, the Corporation was able to mitigate in part the pressure of the sustained flatness of the yield curve during most of 2007 by the redemption of its $150 million medium-term note which carried a cost higher than the overall cost of funding.
The decrease in adjusted tax equivalent net interest income for 2006, as compared to 2005, was mainly driven by the reduction in the net interest margin, which on an adjusted tax equivalent basis decreased by 39 basis points due to the flattening of the yield curve, and fluctuations in net interest incurred on interest rate swaps. The decrease in net interest margin for 2006 as compared to 2005 was also attributable to the above noted payment of $2.4 billion received from a local financial institution during the second quarter of 2006 that significantly reduced its secured commercial loan with the Corporation. Proceeds from the repayment were invested temporarily in short-term investments, reducing the Corporation’s average yield on interest-earning assets. The decrease in the interest margin for 2006, as compared to 2005, was partially offset by the increase in the average volume of interest-earning assets of $1.1 billion attributable to the growth in the construction and residential loan portfolios as well as short-term investments.
The increase in short-term rates during 2007 and 2006 resulted in a change in net interest settlement payments included as part of interest expense. For 2007, the net settlement payments on interest rate swaps resulted in charges to interest expense of $12.3 million compared to $8.9 million for 2006 and net interest realized of $71.7 million recognized as a reduction to interest expense in 2005, as the rates paid under the variable leg of the swaps exceeded the rates received during 2007 and 2006.
The provision for loan and lease losses for the year 2007 was $120.6 million compared to $75.0 million and $50.6 million for the years 2006 and 2005, respectively. The increase in the Corporation’s provision for 2007 was due to a deterioration in the credit quality of the Corporation’s loan portfolio which is associated with the weakening economic conditions in Puerto Rico and the slowdown in the United States housing sector. These conditions resulted in higher net charge-offs relating to Puerto Rico consumer loans as well as commercial and construction loans, representing an increase of $6.9 million and $8.7 million, respectively, as compared to 2006 and higher provisions allocated to the Corporation’s construction loan portfolio originated by the Miami Agency. During the second half of 2007, the Corporation recorded a specific reserve of $8.1 million on four construction condominium-conversion loans (“condo conversion” loans) with an aggregate principal balance at the date of the evaluation of $60.5 million extended to a single borrower through the Miami Agency based on an updated impairment analysis that incorporated new appraisals. Refer to the discussion under the “Risk Management” section below for an analysis of the allowance for loan and lease losses and non-performing assets and related ratios.
The above mentioned troubled relationship in the Miami Agency comprised four condo conversion loans that the Corporation had placed in non-accrual status during the second and third quarters of 2007. For the third quarter of 2007, the Corporation updated the impairment analysis on the relationship and requested new appraisals that reflected collateral deficiency as compared to the Corporation’s recorded investment in the loans. The aggregate unpaid principal balance of the relationship classified as non-accrual decreased to $46.4 million as of December 31, 2007, net of a charge-off of $3.3 million recorded to this relationship in the fourth quarter of 2007. The charge-off was recorded at the time of sale of one of the loans in the relationship with an outstanding principal balance of $14.1 million at the time of sale. This sale was made at a price of $10.8 million, which exceeded the recorded investment in the loan (loan receivable less specific reserve) by approximately $1 million. The Corporation continues to work on different alternatives to decrease the recorded investment in the non-accruing relationship on the Miami Agency.
The Corporation maintains a constant monitoring of the Miami Agency portfolio. Recent loan reviews showed that the Miami Agency construction loan portfolio has an added susceptibility to current general market conditions and real estate trends in the U.S. market due to the oversupply of available property inventory and downward price pressures. Based on these factors and a detailed review of the portfolio, the Corporation determined it was prudent to increase general provisions allocated to this portfolio.

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     Other income for 2005 increased by $3.5 million as compared to 2004. The increase is mainly attributable to net gains realized in the year 2005 from investment activities. The net gains amounted $12.3 million and $9.5 million in 2005 and 2004, respectively. The increase is also in part attributable to increases in commission income from the Corporation’s insurance businesses and increases in other service charges on loans as a result of a larger volume of insurance and loans transactions during 2005, partially offset by decreases in other commissions and fees and no gain on the sale of credit card portfolio in 2005 as compared to 2004.
The increase in the provision during 2006, as compared to 2005, principally reflects growth in the Corporation’s commercial, excluding loans to local financial institutions, and consumer portfolios, and increasing trends in non-performing loans experienced during 2006 as compared to 2005. The Corporation’s net charge-offs and non-performing loans were affected by the fiscal and economic situation of Puerto Rico. According to the Puerto Rico Planning Board, Puerto Rico has been in the midst of a recession since the third quarter of 2005. The slowdown in activity is the result of, among other things, higher utility prices, higher taxes, governmental budget imbalances, the upward trend in short-term interest rates and the flattening of the yield curve, and higher levels of oil prices.
Non-interest income for the year ended December 31, 2007 was $67.2 million compared to $31.3 million and $63.1 million for the years ended December 31, 2006 and 2005, respectively. The increase in non-interest income in 2007, compared to 2006, was mainly attributable to the income recognition of approximately $15.1 million for indemnity of expenses, mainly from insurance carriers, related to the settlement of the class action lawsuit brought against the Corporation, a decrease of $9.3 million in other-than-temporary impairment charges related to the Corporation’s equity securities portfolio, the fluctuation resulting from gains and losses recorded on partial repayments of certain secured commercial loans extended to local financial institutions (a gain of $2.5 million recorded in 2007 compared to a loss of $10.6 million recorded in 2006), a higher gain on the sale of its credit card portfolio (a gain of $2.8 million recorded in 2007 compared to $0.5 million recorded in 2006) pursuant to a strategic alliance reached with a U.S. financial institution and higher income from service charges on loans (an increase of $0.9 million or 16% as compared to 2006) due to the increase in the loan portfolio volume driven by new originations.
The decrease in non-interest income in 2006, compared to 2005, was mainly attributable to the aforementioned $10.6 million loss recorded in 2006 on the partial extinguishment of a secured commercial loan extended to Doral Financial Corporation (“Doral”), an increase in other-than-temporary impairment charges of $6.9 million in the Corporation’s investment portfolio and lower gains on the sale of investments of $13.7 million. These negative variances were partially offset by increases of $1.8 million in commission income from the Corporation’s insurance business and $1.3 million in service charges on deposit accounts and loans.
Non-interest expense for 2007 was $307.8 million compared to $288.0 million and $315.1 million for the years 2006 and 2005, respectively. The increase in non-interest expenses for 2007, as compared to 2006, was mainly due to a $12.8 million increase in employees’ compensation and benefits expense primarily due to increases in the average compensation and related fringe benefits paid to employees, coupled with the accrual of approximately $3.3 million for a voluntary separation program established by the Corporation as part of its cost saving strategies, a $5.1 million increase in the deposit insurance premium expense resulting from changes in the premium calculation by the Federal Deposit Insurance Corporation (“FDIC”) effective in 2007, a $4.5 million increase in occupancy and equipment expenses mainly attributable to increases in costs associated with the expansion of the Corporation’s branch network and loan origination offices and an increase of $6.4 million in other operating expenses primarily attributable to a $3.3 million increase related to costs associated with capital raising efforts in 2007 not qualifying for capitalization coupled with increased costs associated with foreclosure actions on the aforementioned loan relationship at the Miami Agency. These factors were partially offset by an $11.3 million decrease in professional fees attributable to the conclusion during 2006 of the Audit Committee’s review and the restatement process.
The decrease in non-interest expense for 2006 compared to 2005 was mainly due to the accruals in 2005 of $74.25 million and $8.5 million recorded in connection with potential settlements of the class action lawsuits and Securities and Exchange Commission (“SEC”) investigation, respectively, as a result of the Corporation’s restatement. Excluding these accruals, non-interest expense during 2006 increased by $55.6 million compared to 2005 mainly due to increases of $25.4 million in employees’ compensation and benefits, $6.9 million in occupancy and equipment and $14.6 million in professional fees due to legal, accounting and consulting fees associated with the internal review conducted by the Corporation’s Audit Committee as a result of the restatement announcement and other related legal and regulatory matters.
Income tax expense for the year ended December 31, 2007 was $21.6 million (or 24% of pre-tax earnings) compared to $27.4 million (or 24% of pre-tax earnings) and $15.0 million (or 12% of pre-tax earnings) for the years ended December 31, 2006 and 2005, respectively. The decrease in income tax expense in 2007 as compared to 2006 was primarily due to a lower taxable income coupled with the effect of a lower statutory tax rate in Puerto Rico for 2007 (39% in 2007 compared to 43.5% in 2006).

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     On August 1, 2005, the Audit Committee
The increase in income tax expense in 2006 as compared to 2005 was primarily due to the recognition of deferred tax benefits of $28.5 million in 2005 related to the potential class action lawsuit settlement that was partially offset by a decrease in the current income tax provision due to lower taxable income. The decrease in current income tax provision for 2006 compared to 2005 was mainly due to a decrease in taxable income partially offset by a change in the Corporation’s proportion of exempt and taxable income coupled with an increase in non-qualifying income of the International Banking Entities that under current legislation were taxed at regular rates.
Total assets as of December 31, 2007 amounted to $17.2 billion, a reduction of $203.3 million compared to $17.4 billion as of the Corporation determined that the Committee should review the background and accounting for certain mortgage-related transactions that FirstBank had entered into between 1999 and 2005. Following the announcement of the Committee’s review, the Corporation and certain of its officers and directors were named as defendants in separate class actions filed late in 2005. The class actions were subsequently consolidated. The Corporation has been engaged in discussions with lead plaintiffs through private mediation proceedings. The Corporation accrued $74.25 million in its consolidated financial statements for the year ended December 31, 2005 in connection with a potential settlement on the class action suit. In addition, the Corporation has accrued $8.5 million in connection with a potential settlement of the SEC’s investigation of the Corporation related to matters identified on the Amended 2004 Form 10-K. There can be no assurance that the amounts accrued for the SEC investigation and the class action suit will be sufficient and the Corporation cannot predict at this time the timing or final terms of any settlement. In addition, the Corporation and certain of its former officers and directors were named as defendants in separate shareholder derivative actions which were subsequently consolidated into one case. These derivative actions were dismissed on November 30, 2006. The decline was driven from the sale of investment securities and prepayments and maturities of investment securities not reinvested as part of the Corporation’s strategy to deleverage its balance sheet and protect its net interest margin and the use of funds to pay down brokered certificates of deposit (“CDs”) and repurchase agreements as they matured. Furthermore, the Corporation’s deferred tax asset as of December 31, 2007 decreased by $72.0 million as compared to the balance as of December 31, 2006, mainly due to the effect of adoption of SFAS 159 on January 1, 2007 of approximately $58.7 million and a reversal related with the class action settlement paid in 2007.
Total liabilities as of December 31, 2007 were $15.8 billion, a reduction of $395.4 million compared to $16.2 billion as of December 31, 2006. The decrease is mainly attributable to decreases in federal funds purchased and securities sold under repurchase agreements consistent with the deleverage of the investment portfolio and to the redemption of the Corporation’s $150 million callable fixed-rate medium-term note during 2007. This was partially offset by an increase in the amount of advances from the FHLB.
The Corporation’s stockholders’ equity amounted to $1.4 billion as of December 31, 2007, an increase of $192.1 million compared to the balance as of December 31, 2006. The increase in stockholders’ equity as of December 31, 2007 mainly consists of after-tax adjustments to beginning retained earnings of approximately $91.8 million from the adoption of SFAS 159 and net proceeds of approximately $91.9 million from the issuance to the Bank of Nova Scotia (“Scotiabank”) of 9.250 million shares of common stock in August 2007.
Total loan production, including purchases, for the year ended December 31, 2007 was $4.1 billion compared to $4.9 billion and $6.5 billion for the years ended December 31, 2006 and 2005, respectively. The decrease in loan production was mainly due to decreases in the origination of residential real estate and commercial loans. The decrease in mortgage and commercial loan production for 2007 compared to 2006 and 2005 was attributable, among other things, to the slowdown in the Puerto Rico and U.S. housing market and to stricter underwriting standards.
Total non-performing loans as of December 31, 2007 was $413.1 million compared to $252.1 million as of December 31, 2006. The increase was mainly attributable to an increase of $94.2 million in our non-performing residential real estate loans (mostly in Puerto Rico), as compared to the balance as of December 31, 2006, and the previously described classification as non-accrual of one loan relationship in the Miami Agency, amounting to approximately $46.4 million as of December 31, 2007, net of a charge-off of $3.3 million recorded to this relationship in the fourth quarter of 2007 . Total non-performing loans of $413.1 million as of December 31, 2007 reflected an increase of only 2% as compared to the balance as of the end of the previous trailing quarter ended on September 30, 2007. The Corporation has already started foreclosure proceedings on the real estate collaterals of the impaired loans relationship from the Miami Agency. The common form of foreclosure in Puerto Rico is judicial foreclosure and in average foreclosure proceedings takes longer than in the United States (non-judicial). In average, foreclosure proceedings in Puerto Rico takes 14 to 20 months in comparison to an average of 5 months in the United States based on HUD’s foreclosure timeframes.
The Corporation may experience additional increases in the volume of its non-performing residential mortgage loan portfolio due to Puerto Rico’s current economic recession. The Corporation started during the third quarter of 2007 a loan loss mitigation program providing homeownership preservation assistance. The Corporation has completed approximately 183 loan modifications, related to residential mortgage loans with an outstanding principal balance of $26.0 million before the modification, that involves changes in one or more of the loan terms to bring a defaulted loan current and provide sustainable affordability.

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     Operating expenses increased by $134.6 million from $180.5 million in 2004 to $315.1 million in 2005. The increase as compared to 2004 is mainly attributable to $82.75 million of accruals recorded related to the class action litigation and the SEC investigation. In addition, operating expenses increased due to personnel and occupancy costs to support the Corporation’s growth, increases related to the acquisition of FirstBank Florida, increases in professional fees and strong advertising and business promotion costs to support new products and services.
Critical Accounting Policies and PracticesCRITICAL 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 and to general practices within the banking industry. 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) investment securities classification and related values;values of investment securities; 5) valuation of financial instruments andinstruments; 6) derivative financial instruments.instruments; and 7) income recognition on loans. These critical accounting policies involve judgments, estimates and assumptions made by management that affect the recorded assets and liabilities and contingent assets and liabilities disclosed atas 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 have 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.
Allowance for Loan and Lease Losses
     The Corporation maintains the allowance for loan and lease losses at a level that management considers adequate to absorb losses inherent in the loanloans and leases portfolio. The allowance for loan losses is an accounting

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policy that requires the most significant judgments and estimates used in the preparation of the consolidated financial statements. The adequacy of the allowance for loan and lease losses is reviewed on a quarterly basis as part of the continuingCorporation’s continued evaluation of the quality of the assets. Groups of small balance and homogeneous loans are collectively evaluated for impairment.its asset quality. The portfolios of residential mortgage loans, consumer loans, auto loans and finance leases are individually considered homogeneous and each portfolio is evaluated collectively for impairment. In estimating the allowance for loan and lease losses, management uses historical information about loan and lease losses as well as other factors including the effects on the loan portfolio of current economic indicators and their probable impact on the borrowers, information andabout trends on charge-offs and non-accrual loans, changes in underwriting policies, risk characteristics relevant to the particular loan category and delinquencies. The Corporation measures impairment individually for those commercial and real estate loans with a principal balance exceeding $1 million.million in accordance with the provisions of SFAS 114, “Accounting by Creditors for Impairment of a Loan.” A loan is impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. An allowance for impaired loans is established based on the present value of expected future cash flows or the fair value of the collateral, if the loan is collateral dependent. Accordingly,If foreclosure is probable, the measurementcreditor is required to measure the impairment based on the fair value of impairment for loans evaluated individually involves assumptions by management as to the amount and timing of cash flows to be recovered and of appropriate discount rates. When the loans are collateral dependent, thecollateral. The fair value of the collateral is generally obtained from appraisals. Updated appraisals are obtained when the Corporation determines that loans are impaired and for certain loans on a spot basis selected by specific characteristics such as delinquency levels and loan-to-value ratios. Should the appraisal show a deficiency, the Corporation records a specific allowance for loan losses related to these loans.
     As a general procedure, the Corporation internally reviews appraisals on a spot basis as part of the underwriting and approval process. For construction loans in the Miami Agency, appraisals are reviewed by an outsourced contracted appraiser. Once a loan backed by real estate collateral deteriorates or is accounted for in non-accrual status, a full assessment of the value of the collateral is performed. If the Corporation commences litigation to collect an outstanding loan or commences foreclosure proceedings against a borrower (which includes the collateral), a new appraisal report is requested and the book value is adjusted accordingly, either by a corresponding reserve or a charge-off.
     The allowance for loan and lease losses requires significant judgments and estimates. The Corporation establishes the allowance for loan and lease losses based on whether it has classified the loans and leases as loss or probable loss currently inherent in the portfolio. The Corporation establishes an independent appraisalallowance to cover the total amount of any assets classified as a “loss,” the probable loss exposure of other classified assets, and the estimated losses of assets not classified. The adequacy of the allowance for loan and lease losses is based upon a number of factors including historical loan and leases loss experience that may also involve estimatesnot represent current conditions inherent in the portfolio. For example, factors affecting the Puerto Rico, Florida (USA), US Virgin Islands’ or British Virgin Islands’ economies may contribute to delinquencies and defaults above the Corporation’s historical loan and lease losses. The Corporation addresses this risk by actively monitoring the delinquency and default experience and by considering current economic and market conditions. Based on the assessments of future cash flows andcurrent conditions, the

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Corporation makes appropriate discount rates or adjustments to comparable properties.the historically developed assumptions when necessary to adjust historical factors to account for present conditions.
Other-than-temporary impairments
     The Corporation evaluates its investment securities for impairment on a quarterly basis or earlier if other factors indicative of potential impairment exist. An impairment charge in the consolidated statements of income is recognized when the decline in the fair value of investments below their cost basis is judged to be other-than-temporary. The Corporation considers various factors in determining whether it should recognize an impairment charge, including but not limited to, the length of time and extent to which the fair value has been less than its cost basis and the Corporation’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. For debt securities, the Corporation also considers, among other factors, the obligor’s repayment ability on its bond obligations and its cash and capital generation ability. Any change in the factors evaluated to determine the need for an impairment charge could have an impact on that decision.
Income Taxes
     The Corporation is required to estimate income taxes in preparing its consolidated financial statements. This involves the estimation of current income tax expense together with an assessment of temporary differences resulting betweenfrom the differences in the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Corporation to assume certain positions based on its interpretation of current tax regulations. Management assesses the relative benefits 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. Changes in assumptions affecting estimates may be required in the future and estimated tax liabilities may need to be increased or decreased accordingly. The accrual of tax contingencies is adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Corporation’s effective tax rate includes the impact of tax contingencies and changes to such accruals, as considered appropriate by management. When particular matters arise, a number of years may elapse before such matters are audited by the taxing authorities and finally resolved. Favorable resolution of such matters or the expiration of the statute of limitations may result in the release of tax contingencies which are recognized as a reduction to the Corporation’s effective rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective rate and may require the use of cash in the year of resolution. As of

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December 31, 2005,2007, there were no open income tax investigations. Information regarding income taxes is included in Note 2625 to the Corporation’s audited financial statements.
     The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Corporation’s net deferred tax assets assumes that the Corporation will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change, the Corporation may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of income. Management evaluates its deferred tax assets on a quarterly basis and assesses the need for a valuation allowance, if any. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in the Corporation’s tax provision in the period of change (see Note 2625 to the consolidated audited financial statements).
     SFAS No. 109, “Accounting for Income Taxes” (SFAS 109),Taxes,” requires companies to make adjustments to their financial statements in the quarter that new tax legislation is enacted. In the 2005 third quarter of 2005, the P.R.Puerto Rico legislature passed and the governor signed into law a temporary two-year additional surtax of 2.5% applicable to corporations. The surtax iswas applicable to taxable years after December 31, 2004 and increases the maximum marginal corporate income tax rate from 39% to 41.5% until December 31, 2006. On May 13, 2006, with an effective date of January 1, 2006, the Government of Puerto Rico signed Law No. 89 which imposes an additional 2.0% income tax on all companies covered by the Puerto Rico Banking Act which resulted in an additional tax provision of $1.7 million for 2006. For 2007 the maximum marginal corporate income tax rate was 39%.

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     Act 98 of May 16, 2006, amended the Puerto Rico Internal Revenue Code by imposing a tax of 5% over the 2005 taxable net income applicable to corporations with gross income over $10 million, which was required to be paid July 31, 2006. The Corporation can use the full payment as a tax credit in its income tax return for future years. The prepayment of tax resulted in a disbursement of $7.1 million. No net income tax expense was recorded since the prepayment will be used as a tax credit in future taxable years.
     The Corporation adopted Financial Accounting Standards Board Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The cumulative effect of adoption of FIN 48 resulted in an increase of $2.6 million to tax reserves with offsetting adjustments to retained earnings. Additionally, in connection with the adoption of FIN 48, the Corporation elected to classify interest and penalties related to unrecognized tax portions as components of income tax expense.
Investment Securities Classification and Related Values
     Management determines the appropriate classification of debt and equity securities at the time of purchase. Debt securities are classified as held-to-maturity when the Corporation has the intent and ability to hold the securities to maturity. Held-to-maturity (HTM)(“HTM”) securities are stated at amortized cost. Debt and equity securities are classified as trading when the Corporation has the intent to sell the securities in the near term. Debt and equity securities classified as trading securities are reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as HTM or trading, except for equity securities which do not have readily available fair values, are classified as available-for-sale (AFS)(“AFS”). Securities AFS securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes in accumulated other comprehensive income (a component of stockholders’ equity). Investments in equity securities that do not have publicly and readily determinable fair values are classified as other equity securities in the statement of financial condition and carried at the lower of cost or realizable value.
The assessment of fair value applies to certain of the Corporation’s assets and liabilities, including the investment portfolio. Fair values are volatile and are affected by factors such as market interest rates, prepayment speeds and discount rates.

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Valuation of Financial Instrumentsfinancial instruments
     The measurement of fair value is fundamental to the Corporation’s presentation of financial condition and results of operations. The Corporation holds fixed income and equity securities, derivatives, investments and other financial instruments.instruments at fair value. The Corporation holds its investments and liabilities on the statement of financial condition mainly to manage liquidity needs and interest rate risks.
A substantial part of these assets and liabilities areis reflected at fair value on the Corporation’s financial statement of condition. Fair values are determined
     Effective January 1, 2007, the Corporation elected to early adopt SFAS 157, “Fair Value Measurement.” SFAS 157 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. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; 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 3
Valuations are observed from unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
     The following ways:is a description of the valuation methodologies used for instruments measured at fair value:
Callable Brokered CDs (Level 2 inputs)
externally verified via comparison     The fair value of brokered CDs, 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 for the CDs with callable option components, an industry-standard approach for valuing instruments with interest rate call options. The model assumes that the embedded options are exercised economically. The fair value of the CDs is computed using the outstanding principal amount. The discount rates used are based on US dollar LIBOR and interest rate swap rates. At-the-money implied swaption volatility term structure (volatility by time to quotedmaturity) is used to calibrate the model to current market prices or third-party broker quotations;and value the cancellation option in the deposits. Effective January 1, 2007, the Corporation updated its methodology to calculate the impact of its own credit standing as required by SFAS 157.
Medium-Term Notes (Level 2 inputs)
     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 interest rate 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. Effective January 1, 2007, the Corporation updated its methodology to calculate the impact of its own credit standing as required by SFAS 157. For the medium-term notes, the credit risk is measured using the difference in yield curves between Swap rates and Treasury rates at a tenor comparable to the time to maturity of the note and option.

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by using models that are verified by comparison to third-party broker quotations or other third-party sources; or
by using alternative procedures such as comparison to comparable securities and/or subsequent liquidation prices.
     Changes

Investment Securities

     The fair value of investment securities is the market value based on quoted market prices, when available, (Level 1) or market prices obtained from third-party pricing services for identical or comparable assets (Level 2). If listed prices or quotes are not available, fair value is based upon externally developed models that are unobservable inputs due to the limited market activity of the instrument (Level 3), as is the case with certain private label mortgage-backed securities held by the Corporation. Unlike U.S. agency mortgage-backed securities, the fair value of these private label securities cannot be readily determined because they are not actively traded in securities markets. Significant information used for fair value determination is proprietary with regards to specific characteristics such as the prepayment model which follows the amortizing schedule of the underlying loans, which is an unobservable input.

     Private label mortgage-backed securities are collateralized by mortgages on single-family residential properties in the United States. The Corporation derived the fair value for these private label securities based on a market valuation received from a third party. The market valuation is calculated by discounting the estimated net cash flows over the projected life of the pool of underlying assets using prepayment, default and interest rate assumptions that market participants would commonly use for similar mortgage asset classes that are subject to prepayment, credit and interest rate risk.

Derivative Instruments

     The fair value of the derivative instruments is provided by valuation experts and counterparties (Level 2). Certain derivatives with limited market activity, as is the case with derivative instruments flow throughnamed as “reference caps”, are valued using externally developed models that consider unobservable market parameters (Level 3). Reference caps are used to mainly hedge interest rate risk inherent on private label mortgage-backed securities, thus are tied to the income statement. Changesnotional amount of the underlying mortgage loans originated in the United States. Significant information used for fair value determination is proprietary with regards to specific characteristics such as the prepayment model which follows the amortizing schedule of the underlying loans, which is an unobservable input.

     The Corporation derived the fair value of reference caps based on a market valuation of available-for-sale assets generally flow through other comprehensive income,received from a third party. The valuation model uses Black formula which is a componentbenchmark standard in financial industry. The Black formula uses as inputs the strike price of equitythe cap, forward LIBOR rates, volatility estimates and discount rates to estimate the option value. LIBOR rates and swap rates used in the model are obtained from Bloomberg L.P. (“Bloomberg”) every day and build zero coupon curve based on the balance sheet. A full descriptionBloomberg LIBOR/Swap curve. The discount factor is then calculated from the zero coupon curve. The cap is the sum of all caplets. For each caplet, the Corporation’s related policiesrate is reset at the beginning of each reporting period and procedures can be found in Notes 4, 5 and 31 topayments are made at the Consolidated Audited Financial Statements.

end of each period. The cash flow of caplet is then discounted from each payment date.
Derivative Financial Instruments
     TheAs part of the Corporation’s overall interest rate risk management, the Corporation entersutilizes derivative instruments, including interest rate swaps, interest rate caps and options to manage interest rate risk. In accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, all derivative instruments are measured and recognized on the Consolidated Statements of Financial Condition at their fair value. On the date the derivative instrument contract is entered into, derivatives instrumentsthe Corporation may designate the derivative as (1) a hedge of the fair value hedges or cash flow hedges of its assets or liabilities and into standalone derivatives economically hedging its assets or liabilities. Before entering into a derivative transaction, the Corporation analyzes the costs, risks, returns, accounting treatment and the impact on the Corporation’s financial statements.
     To qualify for hedge accounting, the Corporation makes sure all hedges meet all of the following criteria:
The derivatives used as hedges must be linked to a specificrecognized asset or liability that affects earnings andor of an unrecognized firm commitment (“fair value” hedge), (2) a hedge of a forecasted transaction or of the hedging relationship mustvariability of cash flows to be documented at inception as required by SFAS 133. The hedging relationship documentation must include which instrument is the hedging instrument and which specificreceived or paid related to a recognized asset or liability it is hedging, the nature of the risk being hedged, the Corporation’s risk management objective(“cash flow” hedge) or strategy, the method(3) as a “standalone” derivative instrument, including economic hedges that the Corporation will use to assess and measure effectiveness (prospectively and retrospectively), and the method the Corporation will use to measure hedge ineffectiveness.
Throughout the term of the hedge, the Corporation expects the hedging instrument to be highly effective in offsetting changes in thehas not formally documented as a fair value or cash flow hedge. Changes in the fair value of the hedged item.
The Corporation recognizes the ineffectiveness from mismatches in termsa derivative instrument that is highly effective and other factors on the Consolidated Statement of Income.
     For all hedging relationships, thethat is designated and qualifies as a fair-value hedge, along with changes in the fair value of the derivative instrument and the changes in fair value of thehedged asset or liability being hedged are recognized on the Consolidated Statement of Income, only remaining in the then-current-period earnings the gains and losses relatedthat is attributable to the ineffectiveness of the hedge.hedged risk (including gains or losses on firm commitments), are recorded in current-period earnings as interest income or interest expense depending upon whether an asset or liability is being hedged. Similarly, the changes in the fair value of standalone derivative instruments or derivatives not qualifying or designated for hedge accounting under SFAS 133 are reported in current-period earnings as interest income or interest expense depending upon wether an asset or liability is being economically hedged. Changes in the then-current-period earnings. At December 31, 2005,fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash-flow hedge, if any, are recorded in other comprehensive income in the stockholders’ equity section of the Consolidated Statements of Financial Condition until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). None of the Corporation’s derivative instruments qualified or has been designated as a cash flow hedge.
     Prior to entering into an accounting hedge transaction or designating a hedge, the Corporation has noformally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for undertaking the hedge transaction. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the statements of financial condition or to specific firm commitments or forecasted transactions along with a formal assessment at both inception of the hedge and on an ongoing basis as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. The Corporation discontinues hedge accounting prospectively when it determines that the derivative is not effective or will no longer be effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires, is sold, or terminated, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability as a yield adjustment.
     The Corporation recognizes unrealized gains and losses arising from any changes in fair value of derivative instruments and hedged items, as applicable, as interest income or interest expense depending upon whether an asset or liability is being hedged.

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     The Corporation occasionally purchases or originates financial instruments that contain embedded derivatives. At inception of the financial instrument, the Corporation assesses: (1) if the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the financial instrument (host contract), (2) if the financial instrument that embodies both the embedded derivative and the host contract is measured at fair value with changes in fair value reported in earnings, or (3) if a separate instrument with the same terms as the embedded instrument would not meet the definition of a derivative. If the embedded derivative does not meet any of these conditions, it is separated from the host contract and carried at fair value with changes recorded in current period earnings as part of net interest income. Information regarding derivative instruments is included in Note 30 to the Corporation’s audited financial statements.
     Effective January 1, 2007, the Corporation elected to early adopt SFAS 159. This Statement allows entities to choose to measure certain financial assets and liabilities at fair value with any changes in fair value reflected in earnings. The fair value option may be applied on an instrument-by-instrument basis. This statement is effective for periods after November 15, 2007, however, early adoption is permitted provided that the entity also elects to apply the provisions of SFAS 157, “Fair Value Measurement.” The Corporation decided to early adopt SFAS 159 for approximately $4.4 billion, of the callable brokered CDs and approximately $15.4 million of the callable fixed medium-term notes (“SFAS 159 liabilities”), both of which were hedged with interest rate swaps. First BanCorp had been following the long-haul method of accounting, which was adopted on April 3, 2006, under SFAS 133, for the portfolio of callable interest rate swaps, callable brokered CDs and callable notes. One of the main considerations in the determination to early adopt SFAS 159 for these instruments was to eliminate the operational procedures required by the long-haul method of accounting in terms of documentation, effectiveness assessment, and manual procedures followed by the Corporation to fulfill the requirements specified by SFAS 133.
     With the Corporation’s elimination of the use of the long-haul method in connection with the adoption of SFAS 159, the Corporation no longer amortizes or accretes the basis adjustment for the SFAS 159 liabilities. The basis adjustment amortization or accretion is the reversal of the basis differential between the market value and book value recognized at the inception of fair value hedge accounting.accounting as well as change in value of the hedged brokered CDs and medium-term notes recognized since the implementation of the long-haul method. Since the time the Corporation implemented the long-haul method, it has recognized the basis adjustment and the changes in the value of the hedged brokered CDs and medium-term notes based on the expected call date of the instruments. The adoption of SFAS 159 also requires the recognition, as part of the initial adoption adjustment to retained earnings, of all of the unamortized placement fees that were paid to broker counterparties upon the issuance of the elected brokered CDs and medium-term notes. The Corporation previously amortized those fees through earnings based on the expected call date of the instruments. SFAS 159 also establishes that the accrued interest should be reported as part of the fair value of the financial instruments elected to be measured at fair value. The impact of the derecognition of the basis adjustment and the unamortized placement fees as of January 1, 2007 resulted in a cumulative after-tax reduction to retained earnings of approximately $23.9 million. This negative charge was included in the total cumulative after-tax increase to retained earnings of $91.8 million that resulted with the adoption of SFAS 159. Refer to Note 27 to the audited consolidated financial statements for required disclosures and further information on the impact of adoption of this accounting pronouncement.
     Prior to the implementation of the long-haul method First BanCorp reflected changes in the fair value of those swaps as well as swaps related to certain loans as non-hedging instruments through operations as part of net interest income.
Income Recognition on Loans
     Loans are stated at the principal outstanding balance, net of unearned interest, unamortized deferred origination fees and costs and unamortized premiums and discounts. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method or a method which approximates the interest method over the term of the loan as an adjustment to interest yield. Unearned interest on certain personal, auto loans and finance leases is recognized as income under a method which approximates the interest method. When a loan is paid off or sold, any unamortized net deferred fee (cost) is credited (charged) to income.
     Loans on which the recognition of interest income has been discontinued are designated as non-accruing. When loans are placed on non-accruing status, any accrued but uncollected interest income is reversed and charged against

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interest income. Consumer, commercial and mortgage loans are classified as non-accruing when interest and principal have not been received for a period of 90 days or more. This policy is also applied to all impaired loans based upon an evaluation of the risk characteristics of said loans, loss experience, economic conditions and other pertinent factors. Loan and lease losses are charged and recoveries are credited to the allowance for loan and lease losses. Closed-end consumer loans and leases are charged-off when payments are 120 days in arrears. Open-end (revolving credit) consumer loans are charged-off when payments are 180 days in arrears.
     The Corporation may also classify loans in non-accruing status and recognize revenue only when cash payments are received because of the deterioration in the financial condition of the borrower and payment in full of principal or interest is not expected. In addition, the Corporation started during the third quarter of 2007 a loan loss mitigation program 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 accruing status.
Recent Accounting Pronouncements
     The Financial Accounting Standards Board (FASB), its Emerging Issues Task Force (EITF)(“FASB”) and the SEC have issued the following accounting pronouncements and Issue discussions relevant to the Corporation’s operations:
     On April 30, 2007, the FASB issued FASB Staff Position No. FIN 39-1 (“FSP FIN 39-1 ”), which amends FIN 39, “Offsetting of Amounts Related to Certain Contracts.” FSP FIN 39-1 impacts entities that enter into master netting arrangements as part of their derivative transactions by allowing net derivative positions to be offset in the financial statements against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral or the obligation to return cash collateral under those arrangements. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, although early application is permitted. The Corporation analyzed the impact of FSP FIN 39-1 on its financial statements considering its portfolio of derivative instruments. As of December 31, 2007, the Corporation has not been able to apply this pronouncement since FSP FIN 39-1 applies only to cash collateral and all of the collateral received or delivered to counterparties for derivative instruments are investment securities.
In September 2006,November 2007, the SEC issued Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108)(“SAB”) 109 “Written Loan Commitments That Are Accounted For At Fair Value Through Earnings Under Generally Accepted Accounting Principles”. This interpretation expresses the SEC staff’s views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. SAB 109 supersedes SAB 105, “Application of Accounting Principles to Loan Commitments,” which provided the processprior views of quantifying financial statement misstatementsthe staff regarding derivative loan commitments that could resultare accounted for at fair value through earnings pursuant to SFAS 133. SAB 109 expresses the current view of the staff that, consistent with the guidance in improper amountsSFAS 156, “Accounting for Servicing of assets or liabilities. While a misstatement may notFinancial Assets”, and SFAS 159, the expected net future cash flows related to the associated servicing of the loan should be considered materialincluded in the measurement of all written loan commitments that are accounted for the period in which it occurred, it may be considered material in a subsequent year if the corporation where to correct the misstatementat fair value through current period earnings. SAB 108 requires a materiality evaluation based on all relevant quantitative and qualitative factors and the quantification of the misstatement using a balance sheet and income statement approach to determine materiality. SAB 108109 is effective for periods ending after November 15, 2006. The Corporation does not expect a material effect on its financial condition and results of operations upon adoption of SAB 108.
          In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements” (SFAS 157). This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement is effective for periodsfiscal quarters beginning after NovemberDecember 15, 2007. The Corporation is currently evaluating the effects,effect, if any, thatof the proposed statement may haveadoption of this interpretation on its future financial condition and results of operations.Financial Statements, commencing on January 1, 2008.
     In June 2006,December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial InterpretationStatements—an amendment of ARB No. 48 – “Accounting for Uncertainty in Income Taxes – an interpretation of FASB51.” This Statement No. 109” (FIN 48). This interpretation clarifies theamends ARB 51 to establish accounting for uncertainty in income taxes recognized in accordance with SFAS 109. This interpretation provided a recognition threshold and measurement attributereporting standards for the financial statement recognitionnoncontrolling interest in a subsidiary and measurementfor the deconsolidation of a tax position taken or expectedsubsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. It requires consolidated net income to be taken in a tax return.reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretationStatement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2006.2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The Corporation is currently evaluating the effects thateffect, if any, of the proposedadoption of this statement may have on its future financial condition and results of operations.
     In March 2006, the FASB issued SFAS 156 “Accounting for Servicing of Financial Assets,” an amendment of SFAS No. 140. This Statement requires that servicing assets and servicing liabilities be initially measured at fair value along with any derivative instruments used to mitigate inherent risks. This Statement is effective for periods beginning after September 15, 2006. TheStatements, commencing on January 1, 2009.

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Corporation does not expect to have a material effect on its future financial condition and results of operations upon adoption of this Statement.
     In February 2006,December 2007, the FASB issued SFAS 155 “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140”.141R, “Business Combinations.” This Statement allows fair value measurementretains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for any hybrid financial instrument that containsall business combinations and for an embedded derivative requiring bifurcation. It also establishes a requirementacquirer to evaluate interests in securitized financial assets to establish whether the interests are freestanding derivatives or hybrid financial instruments that contain an embedded derivative requiring bifurcation.be identified for each business combination. This Statement is effective for all financial instruments acquireddefines the acquirer as the entity that obtains control of one or issued after September 15, 2006. The Corporation does not expect to have a material effect on its future financial conditionmore businesses in the business combination and results of operations upon adoption of this Statement.
     In May 2005,establishes the FASB issued SFAS 154 “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3”. This Statement changesacquisition date as the requirements fordate that the accounting for and reporting of a voluntary change in accounting principle.acquirer achieves control. This Statement requires retrospective applicationan acquirer to prior periods’ financial statementsrecognize the assets acquired, the liabilities assumed, including contingent liabilities and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of a changethat date, with limited exceptions specified in accounting principle unless it is impracticablethe Statement. This Statement applies prospectively to do so; in which case the earliest periodbusiness combinations for which retrospective applicationthe acquisition date is practicable should be applied. If it is impracticable to calculateon or after the cumulative effect of a change in accounting principle, the Statement requires prospective application asbeginning of the earliest date practicable. This Statement does not change the guidance in APB Opinion No. 20 with regard to thefirst annual reporting of the correction of an error,period beginning on or a change in accounting estimate. The Statement’s purpose is to improve the comparability of financial information among periods. FAS No. 154 is effective for fiscal years beginning after December 15, 2005.
     SFAS 123 (Revised) (SFAS 123R) -This Statement is a revision of SFAS 123, “Accounting for Stock-Based Compensation”. This Statement, issued in December 2004, supersedes APB 25, and its related implementation guidance.
     This Statement requires a public2008. An entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award-the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees domay not render the requisite service.
     SFAS 123R eliminates the alternative to use APB 25’s intrinsic value method of accountingapply it before that was provided in SFAS 123 as originally issued. Under APB 25, issuing stock options to employees generally resulted in recognition of no compensation cost. SFAS 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions).
          The effective date of this standard is the first annual period that begins after June 15, 2005.date. The Corporation implemented SFAS 123R for stock option grants subsequent to December 31, 2005. The adoptionis currently evaluating the effect, if any, of the statement had similar effects to those presented in the proforma information for years 2003 through 2005 presented in Note 1 to the corporation’s audited financial statements.
     EITF Issue No. 03-01 -“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” — In this Issue the Task Force reached a consensus on guidance that should be used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The guidance also includes accounting

50


considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In September 2004, the FASB issued proposed FSP EITF Issue 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1”, which provides guidance for the application of paragraph 16 of EITF Issue 03-1 to debt securities that are impaired because of interest rate and/or sector spread increases. Also, in September 2004, the FASB issued FSP EITF Issue 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue 03-1”, which delayed the effective date of paragraph 10-20 of Issue 03-1. Paragraphs 10-20 of Issue 03-1 provide guidance on the impairment model to be used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. EITF Issue 03-1-1 expands the scope of the deferral to include all securities covered by EITF 03-1 rather than limiting the deferral to only certain debt securities that are impaired solely because of interest rate and/or sector spread increases.
     In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the staff to issue proposed FSP EITF 03-1-a, as final. The final FSP superseded EITF Issue No. 03-1 and EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.”
     The final FSP, retitled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” replaced the guidance set forth in paragraphs 10-18 of EITF Issue 03-1 with references to existing other than temporary impairment guidance, such as SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” SEC Staff Accounting Bulletin No. 59, “Accounting for Noncurrent Marketable Equity Securities,” and Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” FSP FAS 115-1 codifies the guidance set forth in EITF Topic D-44 and clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made, and is effective for other-than-temporary impairment analyses conducted in periods beginning after September 15, 2005. The adoption of this statement did not have a material effect to the Corporation’s financial condition and results of operations.on its Financial Statements.
Results of OperationsRESULTS OF OPERATIONS
     The Corporation’sFirst BanCorp’s results of operations depend primarily onupon its net interest income, which is the difference between the interest income earned on interest earningits interest-earning assets, including investment securities and loans, and the interest expense on interest bearingits 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 earninginterest-earning assets and interest bearinginterest-bearing liabilities; and the re-pricing characteristicsand/or maturity mismatch of these assets and liabilities. Refer to “Risk Management — Interest Rate Risk Management” below for additional information on the Corporation’s exposure to interest rate risk. The Corporation’s results of operations are also affected bydepend on the provision for loan and lease losses, operatingnon-interest expenses (such as personnel, occupancy and other costs), othernon-interest income (mainly service charges and fees on loans)loans and deposit accounts), the resultresults of derivativesits hedging activities, gains (losses) on investments and gains (losses) on sale of investments and loans, and income taxes.
Net Interest Income
     Net interest income increasedis 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 year ended December 31, 2007 was $451.0 million, compared to $443.7 million and $432.3 million for 2006 and 2005, respectively. On a tax equivalent basis and excluding the changes in the fair value of derivative instruments, the ineffective portion resulting from $397.5 millionfair value hedge accounting in 20042006, the basis adjustment amortization or accretion and $251.9 million in 2003. The increase inunrealized gains and losses on SFAS 159 liabilities, net interest income for the year ended December 31, 2007 was $475.4 million, compared to $529.9 million and $566.9 million for 2006 and 2005, was mainly driven by the increase in the average volume of interest earnings assets of $4.3 billion attributable primarily to the growth in the Corporation’s loan and investment portfolios, especially commercial loan and residential real estate loan portfolios and government agency securities. In addition to volume increases, higher yield on loans favorably impacted net interest income. These positive factors were partially offset by higher cost of funds and negative changes in

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the valuation of derivative instruments, mainly interest rate swaps that economically hedge brokered certificates of deposit.respectively.
     The following table includestables include a detailed analysis of net interest income. Part I presents average volumes and rates on aan adjusted tax equivalent basis excluding the impact of changes in the fair value of derivatives, (please refer to explanation below regarding changes in the fair value of derivative instruments).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. The analysis is also on a tax equivalent basis and excluding changes in the fair value of derivatives. For each category of earninginterest-earning assets and interest bearinginterest-bearing liabilities, information is provided on changes attributable to changes in volume (changes in volume multiplied by old rates), and changes in rate (changes in rate multiplied by old volumes). Rate-volume variances (changes in rate multiplied by changes in volume) have been allocated to the changes in volume and changes in rate based upon their respective percentage of the combined totals. Changes

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     For periods after the adoption of fair value hedge accounting and SFAS 159, the net interest income is computed on an adjusted tax equivalent basis by excluding: (1) the change in the fair value of derivative instruments, recorded as part(2) the ineffective portion of designated hedges, (3) the basis adjustment amortization or accretion and (4) unrealized gains or losses on SFAS 159 liabilities. For periods prior to the adoption of hedge accounting, the net interest income and interest expenses are excluded fromis computed on an adjusted tax equivalent basis by excluding the analysisimpact of the change in the fair value of derivatives (refer to explanation below regarding changes in the fair value of derivative instruments, mainly interest rate swaps)instruments).

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Part I
                                    
                                     Average volume Interest Income (1) / expense Average rate (1) 
Year ended December 31, Average volume Interest Income (1) / expense Average rate (1)  2007 2006 2005 2007 2006 2005 2007 2006 2005 
 2005 2004 2003 2005 2004 2003 2005 2004 2003 
 (Dollars in thousands)  (Dollars in thousands) 
Earning assets:  
Money market investments $636,114 $308,962 455,242 $22,191 $3,736 $4,707  3.49%  1.21%  1.03% $440,598 $1,444,533 $636,114 $22,155 $72,755 $22,191  5.03%  5.04%  3.49%
Government obligations (2) 2,493,725 2,061,280 851,140 166,724 132,324 47,873  6.69%  6.42%  5.62% 2,687,013 2,827,196 2,493,725 159,572 170,088 166,724  5.94%  6.02%  6.69%
Mortgage-backed securities 2,738,388 2,729,125 2,256,790 152,813 154,233 114,750  5.58%  5.65%  5.08% 2,296,855 2,540,394 2,738,388 117,383 128,096 152,813  5.11%  5.04%  5.58%
Corporate bonds 48,311 57,462 181,063 2,487  (425) 6,795  5.15%  -0.74%  3.75% 7,711 8,347 48,311 510 574 2,487  6.61%  6.88%  5.15%
FHLB stock 71,588 56,698 40,447 3,286 974 1,206  4.59%  1.72%  2.98% 46,291 26,914 71,588 2,861 2,009 3,286  6.18%  7.46%  4.59%
Equity securities 50,784 43,876 34,158 1,686 511 703  3.32%  1.16%  2.06% 8,133 27,155 50,784 3 350 1,686  0.04%  1.29%  3.32%
                          
Total investments (3) 6,038,910 5,257,403 3,818,840 349,187 291,353 176,034  5.78%  5.54%  4.61% 5,486,601 6,874,539 6,038,910 302,484 373,872 349,187  5.51%  5.44%  5.78%
                          
Residential real estate loans 1,813,506 1,127,525 947,450 121,066 78,889 71,065  6.68%  7.00%  7.50% 2,914,626 2,606,664 1,813,506 188,294 171,333 121,066  6.46%  6.57%  6.68%
Construction loans 710,753 379,356 314,588 52,300 19,396 14,824  7.36%  5.11%  4.71% 1,467,621 1,462,239 710,753 121,917 126,592 52,300  8.31%  8.66%  7.36%
Commercial loans 7,171,366 5,079,832 3,688,419 395,280 188,330 140,626  5.51%  3.71%  3.81% 4,797,440 5,593,018 7,171,366 362,714 401,027 395,280  7.56%  7.17%  5.51%
Finance leases 243,384 183,924 149,539 22,263 17,822 15,387  9.15%  9.69%  10.29% 379,510 322,431 243,384 33,153 28,934 22,263  8.74%  8.97%  9.15%
Consumer loans 1,570,468 1,244,386 1,188,730 191,071 157,465 161,145  12.17%  12.65%  13.56% 1,729,548 1,783,384 1,570,468 202,616 214,967 191,071  11.71%  12.05%  12.17%
                          
Total loans (4)(5) 11,509,477 8,015,023 6,288,726 781,980 461,902 403,047  6.79%  5.76%  6.41% 11,288,745 11,767,736 11,509,477 908,694 942,853 781,980  8.05%  8.01%  6.79%
                          
Total earning assets $17,548,387 $13,272,426 $10,107,566 $1,131,167 $753,255 $579,081  6.45%  5.68%  5.73% $16,775,346 $18,642,275 $17,548,387 $1,211,178 $1,316,725 $1,131,167  7.22%  7.06%  6.45%
                          
  
Interest-bearing liabilities:  
Interest bearing checking accounts $376,360 $317,634 $259,438 $4,730 $3,688 $3,426  1.26%  1.16%  1.32%
Interest-bearing checking accounts $443,420 $371,422 $376,360 $11,365 $5,919 $4,730  2.56%  1.59%  1.26%
Savings accounts 1,092,938 1,020,228 922,875 12,572 10,938 11,849  1.15%  1.07%  1.28% 1,020,399 1,022,686 1,092,938 15,037 12,970 12,572  1.47%  1.27%  1.15%
Certificates of deposit 8,386,463 5,065,390 4,133,919 306,687 118,626 107,336  3.66%  2.34%  2.60% 9,291,900 10,479,500 8,386,463 498,048 531,188 306,687  5.36%  5.07%  3.66%
                          
Interest bearing deposits 9,855,761 6,403,252 5,316,232 323,989 133,252 122,611  3.29%  2.08%  2.31% 10,755,719 11,873,608 9,855,761 524,450 550,077 323,989  4.88%  4.63%  3.29%
Other borrowed funds 5,001,384 4,235,215 2,964,417 207,503 144,924 112,984  4.15%  3.42%  3.81% 3,449,492 4,543,262 5,001,384 172,890 223,069 207,503  5.01%  4.91%  4.15%
FHLB advances 890,680 1,056,325 633,693 32,756 27,668 19,418  3.68%  2.62%  3.06% 723,596 273,395 890,680 38,464 13,704 32,756  5.32%  5.01%  3.68%
                          
Total interest bearing liabilities $15,747,825 $11,694,792 $8,914,342 $564,248 $305,844 $255,013  3.58%  2.62%  2.86%
Total interest-bearing liabilities (6) $14,928,807 $16,690,265 $15,747,825 $735,804 $786,850 $564,248  4.93%  4.71%  3.58%
                          
Net interest income $566,919 $447,411 $324,068  $475,374 $529,875 $566,919 
              
Interest rate spread  2.87%  3.06%  2.87%  2.29%  2.35%  2.87%
Net interest margin  3.23%  3.37%  3.21%  2.83%  2.84%  3.23%
 
(1) On aan adjusted tax equivalent basis. The adjusted tax equivalent yield was computedestimated by dividing the interest rate spread on exempt assets by (1-(1 less Puerto Rico statutory tax rate of(39% for 2007 and 43.5% for the Corporation’s Puerto Rico banking subsidiary in 2006, 41.5% for all other subsidiaries in 2006 and 41.5% for all subsidiaries in 2005)) and adding to it the cost of interest bearinginterest-bearing liabilities. When adjusted to a tax equivalent basis, yields on taxable and exempt assets are comparative.comparable. Changes in the fair value of derivative instruments (including the ineffective portion after the adoption of hedge accounting in the second quarter of 2006), unrealized gains or losses on SFAS 159 liabilities, and basis adjustment amortization or accretion are excluded from interest income and interest expense for average rate calculation purposes because the changes in valuation do not affect interest paid or received.
 
(2) Government obligations include debt issued by government sponsored agencies.
 
(3) ValuationUnrealized gains and losses in investments available-for-sale issecurities are excluded from the average volumes.
 
(4) Non-accruing loans are included inAverage loan balances include the average balances, however, uncollectedof non-accruing loans, on which interest income is recognized when collected.
(5)Interest income on these loans isincludes $11.1 million, $14.9 million, and $11.0 million for 2007, 2006 and 2005, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio.
(6)Unrealized gains and losses on SFAS 159 liabilities are excluded from this analysis.the average volumes.

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51


Part II
                                                
 2005 compared to 2004 2004 compared to 2003  2007 compared to 2006 2006 compared to 2005 
 Increase (decrease) Increase (decrease)  Increase (decrease) Increase (decrease) 
 Due to: Due to:  Due to: Due to: 
 Volume Rate Total Volume Rate Total  Volume Rate Total Volume Rate Total 
 (Dollars in thousands)  (Dollars in thousands) 
Interest income on earning assets: 
Interest income on interest-earning assets: 
Money market investments $6,638 $11,817 $18,455 $(1,641) $670 $(971) $(50,485) $(115) $(50,600) $37,480 $13,084 $50,564 
Government obligations 28,722 5,678 34,400 76,815 7,636 84,451   (8,259)  (2,257)  (10,516) 21,179  (17,815) 3,364 
Mortgage-backed securities 521  (1,941)  (1,420) 25,764 13,719 39,483   (12,367) 1,654  (10,713)  (10,593)  (14,124)  (24,717)
Corporate bonds (400) 3,312 2,912  (2,622)  (4,598)  (7,220)  (41)  (23)  (64)  (2,403) 490  (1,913)
FHLB stock 314 1,998 2,312 382  (614)  (232) 1,323  (471) 852  (2,693) 1,416  (1,277)
Equity Securities 93 1,082 1,175 157  (349)  (192)
Equity securities  (145)  (202)  (347)  (578)  (758)  (1,336)
                          
Total investments 35,888 21,946 57,834 98,855 16,464 115,319   (69,974)  (1,414)  (71,388) 42,392  (17,707) 24,685 
                          
Residential real estate loans 46,896  (4,719) 42,177 13,053  (5,229) 7,824  20,070  (3,109) 16,961 52,540  (2,273) 50,267 
Construction loans 21,896 11,008 32,904 3,235 1,337 4,572  457  (5,132)  (4,675) 63,662 10,630 74,292 
Commercial loans(1) 94,838 112,112 206,950 52,318  (4,614) 47,704   (58,602) 20,289  (38,313)  (100,083) 105,830 5,747 
Finance leases 5,601  (1,160) 4,441 3,434  (999) 2,435  5,054  (835) 4,219 7,162  (491) 6,671 
Consumer loans 40,468  (6,862) 33,606 7,294  (10,974)  (3,680)  (6,396)  (5,955)  (12,351) 25,785  (1,889) 23,896 
                          
Total loans 209,699 110,379 320,078 79,334  (20,479) 58,855   (39,417) 5,258  (34,159) 49,066 111,807 160,873 
                          
Total interest income 245,587 132,325 377,912 178,189  (4,015) 174,174   (109,391) 3,844  (105,547) 91,458 94,100 185,558 
                          
Interest expense on interest bearing liabilities: 
Interest expense on interest-bearing liabilities: 
Deposits 91,917 98,820 190,737 23,846  (13,205) 10,641   (53,151) 27,524  (25,627) 75,385 150,703 226,088 
Other borrowed funds 28,779 33,800 62,579 45,960  (14,020) 31,940   (54,261) 4,082  (50,179)  (20,751) 36,317 15,566 
FHLB advances  (5,215) 10,303 5,088 12,011  (3,761) 8,250  23,883 877 24,760  (26,822) 7,770  (19,052)
                          
Total interest expense 115,481 142,923 258,404 81,817  (30,986) 50,831   (83,529) 32,483  (51,046) 27,812 194,790 222,602 
                          
Change in net interest income $130,106 $(10,598) $119,508 $96,372 $26,971 $123,343  $(25,862) $(28,639) $(54,501) $63,646 $(100,690) $(37,044)
                          
(1)Significant decrease in volume substantially relates to the payment received of $2.4 billion from a local financial institution to partially extinguish a secured commercial loan during the second quarter of 2006.
     A portion of the Corporation’s interest earninginterest-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 sale of investments held by the Corporation’s international banking entities are tax-exempt under the Puerto Rico tax law. To facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis, usingbasis. The tax equivalent yield was estimated by dividing the interest rate spread on exempt assets by (1 less the Puerto Rico statutory income tax rate.rate (39% for 2007, 43.5% for the Corporation’s Puerto Rico banking subsidiary in 2006, 41.5% for all other subsidiaries in 2006 and 41.5% for all subsidiaries in 2005)) and adding to it the average cost of interest-bearing liabilities. The computation considers the interest expense disallowance required by Puerto Rico tax law. Total
     The presentation of net interest income excluding the effects of the changes in the fair value of derivatives includes tax equivalent adjustments of $61.2 million, $64.3 million and $31.0 million for 2005, 2004 and 2003, respectively. Refer to explanation below onthe derivative instruments, valuations.
          On a tax equivalent basis, net interest income, excluding changes inincluding the ineffective portion for designated hedges after the adoption of fair value of derivative instruments, increased to $566.9 million for 2005 from $447.4 million for 2004,accounting, the basis adjustment amortization or accretion, and $324.1 million for 2003. The interest rate spread and net interest margin amounted to 2.87% and 3.23%, respectively, for 2005, as compared to 3.06% and 3.37%, respectively, for 2004 and to 2.87% and 3.21%, respectively, for 2003.
     The exclusion of unrealized changes in the fair value of derivative instruments (mainly changes in the fair value of interest rate swaps) from the detailed analysis of net interest incomegains or losses on SFAS 159 liabilities provides additional information about the Corporation’s net interest income and facilitates comparability and analysis. The changes in the fair value of the financial instrumentderivative instruments, the basis adjustment amortization or accretion, and unrealized gains or losses on SFAS 159 liabilities have no effect on interest due or interest earned on interest bearinginterest-bearing assets or interest bearinginterest-bearing liabilities, respectively, or on interest payments exchanged with swap counterparties. In addition, since the Corporation intends to hold the interest rate swaps until they mature because, economically, the interest rate swaps are satisfying their intended results, the unrealized changes in fair value will reverse over the remaining lives of the swaps.
     The following table reconciles the interest income on aan adjusted tax equivalent basis set forth in TablePart I above to interest income set forth in the Consolidated Statements of Income:
             
  Year ended December 31, 
  2007  2006  2005 
  (Dollars in thousands) 
Interest income on an adjusted tax equivalent basis $1,211,178  $1,316,725  $1,131,167 
Less: tax equivalent adjustments  (15,293)  (27,987)  (61,166)
Plus: net unrealized (loss) gain on derivatives (economic undesignated hedges)  (6,638)  75   (2,411)
          
Total interest income $1,189,247  $1,288,813  $1,067,590 
          

5352


The following table summarizes the components of interest income:
             
  Year ended December 31, 
  2005  2004  2003 
  (Dollars in thousands) 
Interest income on a tax equivalent basis $1,131,167  $753,255  $579,081 
Less: tax equivalent adjustments  (61,166)  (64,258)  (30,994)
Plus: net unrealized (loss) gain on derivatives (economic hedges)  (2,411)  1,337   1,379 
          
Total interest income $1,067,590  $690,334  $549,466 
          
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.income:
                        
 2005 2004 2003  Year ended December 31, 
 (Dollars in thousands)  2007 2006 2005 
Unrealized gain (loss) on derivatives (economic hedges): 
 (Dollars in thousands) 
Unrealized (loss) gain on derivatives (economic undesignated hedges): 
Interest rate caps $(4,039) $16 $  $(3,985) $(472) $(4,039)
Interest rate swaps on corporate bonds 823 2,858 1,591   27 823 
Interest rate swaps on loans 805  (1,537)  (212)  (2,653) 520 805 
              
Net unrealized (loss) gain on valuations (economic hedges) $(2,411) $1,337 $1,379 
Net unrealized (loss) gain on derivatives (economic undesignated hedges) $(6,638) $75 $(2,411)
              
     The following table summarizes the components of interest expense for the years ended December 31, 2005, 20042007, 2006 and 2003.2005. As mentioned before, the net interest margin analysis excludes the changes in the fair value of interest rate swaps.derivatives, unrealized gains or losses on SFAS 159 liabilities, the ineffective portion of derivative instruments designated as fair value hedges under SFAS 133, and the basis adjustment:
The following table summarizes the components of interest expense:
             
  Year ended December 31, 
  2007  2006  2005 
  (Dollars in thousands) 
Interest expense on interest-bearing liabilities $713,918  $757,969  $620,774 
Net interest incurred (realized) on interest rate swaps  12,323   8,926   (71,650)
Amortization of placement fees on brokered certificates of deposit  9,056   19,896   15,096 
Amortization of placement fees on medium-term notes  507   59   28 
          
Interest expense excluding net unrealized and realized (gain) loss on derivatives (designated and economic undesignated hedges), net unrealized loss on SFAS 159 liabilities and accretion of basis adjustments  735,804   786,850   564,248 
Net unrealized and realized loss on derivatives (designated and economic undesignated hedges) and SFAS 159 liabilities  4,488   61,895   71,023 
Accretion of basis adjustment  (2,061)  (3,626)   
          
Total interest expense $738,231  $845,119  $635,271 
          
             
  Year ended December 31, 
  2005  2004  2003 
  (Dollars in thousands) 
Interest expense on interest bearing liabilities $620,774  $416,852  $324,489 
Net interest realized on interest rate swaps  (71,650)  (124,883)  (82,343)
Amortization of broker placement fees  15,096   12,942   12,867 
Amortization of medium-term notes placement fees  28   933    
          
Interest expense excluding unrealized loss (gain) on derivatives (economic hedges)  564,248   305,844   255,013 
Net unrealized loss (gain) on derivatives (economic hedges)  71,023   (12,991)  42,515 
          
Total interest expense $635,271  $292,853  $297,528 
          
The following table summarizes the components of the net unrealized and realized gain and loss on derivatives (designated and economic undesignated hedges) and net unrealized loss (gain) on derivatives (economic hedges)SFAS 159 liabilities which are included in interest expense:
                        
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (Dollars in thousands) 
Unrealized loss (gain) on derivatives (economic hedges): 
Unrealized (gain) loss on derivatives (designated hedges — ineffective portion): 
Interest rate swaps on brokered certificates of deposit $69,163 $(13,408) $42,515  $ $(3,989) $ 
Interest rate swaps on medium-term notes 1,860 417     (720)  
              
Net unrealized loss (gain) on derivatives (economic hedges) $71,023 $(12,991) $42,515 
Net unrealized (gain) loss on derivatives (designated hedges — ineffective portion)   (4,709)  
              
 
Unrealized and realized (gain) loss on derivatives (economic undesignated hedges): 
Interest rate swaps and other derivatives on brokered certificates of deposit  (66,826) 62,521 69,163 
Interest rate swaps and other derivatives on medium-term notes 692 4,083 1,860 
       
Net unrealized (gain) loss on derivatives (economic undesignated hedges)  (66,134) 66,604 71,023 
       
 
Unrealized loss (gain) on SFAS 159 liabilities: 
Unrealized loss on brokered certificates of deposit 71,116   
Unrealized gain on medium-term notes  (494)   
       
Net unrealized loss on SFAS 159 liabilities 70,622   
       
 
Net unrealized loss on derivatives (designated and economic undesignated hedges) and SFAS 159 liabilities $4,488 $61,895 $71,023 
       

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     The following table summarizes the components of the accretion of basis adjustment which are included in interest expense:
             
  Year ended December 31, 
  2007  2006  2005 
  (Dollars in thousands) 
Accretion of basis adjustments on fair value hedges:            
Interest rate swaps on brokered certificates of deposit $  $(3,576) $ 
Interest rate swaps on medium-term notes  (2,061)  (50)   
          
Accretion of basis adjustments on fair value hedges $(2,061) $(3,626) $ 
          
     Interest income on interest earninginterest-earning assets primarily represents interest earned on loan receivablesloans receivable and investment securities.
     Interest expense on interest bearinginterest-bearing liabilities primarily represents interest duepaid on brokered CDs, branch-based deposits, repurchase agreements and notes payable.

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     Net interest incurred or realized on interest rate swaps primarily represents net interest exchanged on pay-float swaps that economically hedge (economically or under fair value hedge accounting) brokered CDs and medium-term notes.
     The amortization of broker placement fees represents the amortization of fees paid to brokers upon issuance to brokers selling theof related financial instruments (i.e., brokered CDs). For 2007, the amortization of broker placement fees includes the derecognition of the unamortized balance of placement fees related to the $150 million note redeemed prior to its contractual maturity during the second quarter as well as the amortization of placement fees for brokered CDs not elected for fair value option under SFAS 159.
     Unrealized gains or losses on derivatives (economic hedges) mainly representrepresent: (1) for economic or undesignated hedges, including derivative instruments economically hedging SFAS 159 liabilities — changes in the fair value of derivatives, primarily interest rate swaps, that economically hedge assets (i.e., loans and corporate bonds) or liabilities (i.e., brokered CDs and medium-term notes) or assets (i.e., loans and corporate bonds), and (2) for designated hedges — the ineffectiveness represented by the difference between the changes in the fair value of the derivative instrument (i.e., interest rate swaps) and changes in fair value of the hedged item (i.e., brokered CDs and medium-term notes).
     For 2007, the Corporation recognized a realized loss of approximately $10.7 million related to the termination of interest rate swaps that were no longer economically hedging brokered CDs as their notional amounts exceeded the balances of the brokered CDs. Also during 2007, the Corporation recorded a realized loss of $5.4 million related to the termination of an interest rate swap that economically hedged the $150 million medium-term note that was redeemed prior to its stated contractual maturity. The realized losses were substantially offset by the reversal of the cumulative mark-to-market valuation of the swaps as of the date of the transactions, resulting in a net reduction of earnings of approximately $0.9 million for 2007.
     Unrealized gains or losses on SFAS 159 liabilities represent the change in the fair value of liabilities (medium-term notes and brokered CDs), other than the accrual of interests, for which the Corporation elected the fair value option under SFAS 159.
     For 2007, the basis adjustment, which represents the basis differential between the market value and the book value of the $150 million medium-term note recognized at the inception of fair value hedge accounting on April 3, 2006, as well as changes in fair value recognized after the inception until the discontinuance of fair value hedge accounting on January 1, 2007, was amortized or accreted based on the expected maturity of the liability as a yield adjustment. The unamortized balance of the basis adjustment was derecognized as part of the redemption of the $150 million note resulting in an adjustment to earnings of $1.9 million recognized as an accretion of basis adjustment, during the second quarter of 2007. For 2006, the basis adjustment represents the amortization or accretion of the basis differential between the market value and the book value of the hedged liabilities recognized at the inception of fair value hedge accounting, which was amortized or accreted to interest expense based on the expected maturity of the hedged liabilities as changes in value after the inception of the long-haul method.

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     As shown on the tables above, the results of operations for the year2007, 2006, and 2005 were significantly impacted mainly by negative changes in the valuation of interest rate swapsderivative instruments that hedge economically hedgeor under fair value designation the Corporation’s brokered certificates of depositCDs and medium-term notes;notes and by unrealized gains and losses on SFAS 159 liabilities. The adoption of fair value hedge accounting during the changesecond quarter of 2006 and SFAS 159, effective January 1, 2007, reduced the earnings volatility caused by the fluctuation in the valuation of interest rate swaps recorded as part of interest expense was negative $71.0 million (2004- positive $12.9 million, 2003- negative $42.5 million). These are non-cash changes in the value of these derivatives that the Corporation intends to hold to their maturity, therefore, the unrealized changes will reverse as the instruments approach maturity.derivative instruments.
     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. The Corporation’s derivatives are mainly composed of interest rate swaps that are used to economically hedgeconvert the fixed interest payment on its brokered certificates of deposit and medium-term notes.notes to variable payments (receive fixed/pay floating). Refer to the “Derivative Activities” section of this“Risk Management — Derivative” discussion below for a detail offurther details concerning the notional amounts of derivative instruments and otheradditional information. As is the case with cashinvestment 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 as well as the level of interest rates.
20052007 compared to 20042006
     Net interest income increased to $451.0 million for 2007 from $443.7 million in 2006. The increase in net interest income for the year 2007, as compared to 2006, was mainly driven by the effect in 2006 earnings of unrealized non-cash losses related to changes in the fair value of derivative instruments prior to the implementation of fair value hedge accounting using the long-haul method on April 3, 2006. During the first quarter of 2006, the Corporation recorded changes in the fair value of derivative instruments as non-hedging instruments through operations recording unrealized losses of $69.7 million for non-hedge derivatives as part of interest expense. The adoption of fair value hedge accounting in the second quarter of 2006 and the adoption of SFAS 159 in 2007 reduced the accounting volatility that previously resulted from the accounting asymmetry created by accounting for the financial liabilities at amortized cost and the derivatives at fair value. The change in the valuation of derivative instruments, the net unrealized loss on SFAS 159 liabilities, the basis adjustment and the ineffective portion on designated hedges recorded as part of net interest income (“the valuation changes”) resulted in a net non-cash loss of $9.1 million for 2007, compared to a net unrealized loss of $58.2 million for 2006.
     For the year ended December 31, 2007, net interest income on an adjusted tax equivalent basis decreased 10% as compared to the previous year from $529.9 million to $475.4 million. Net interest income on an adjusted tax equivalent basis excludes the valuation changes. The decrease in net interest income on an adjusted tax equivalent basis was mainly driven by the continued pressure of the flattening of the yield curve during most of 2007 and the decrease in the average volume of interest-earning assets primarily due to the repayment of approximately $2.4 billion received from a local financial institution reducing the balance of its secured commercial loan with the Corporation during the latter part of the second quarter of 2006. This partially extinguished secured commercial loan yielded 150 basis points over 3-month LIBOR. The repayment caused a reduction in net interest income of approximately $15.0 million when comparing results for the year ended December 31, 2007 to previous year results. Furthermore, the adjusted tax equivalent basis includes an adjustment that 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. The tax equivalent adjustment declined to $15.3 million for 2007 from $28.0 million for 2006 mainly due to the decrease in the interest rate spread on tax-exempt assets resulting from the sustained flatness of the yield curve as well as changes in the proportion of tax-exempt assets to total assets and changes in the statutory income tax rate in Puerto Rico.
     Notwithstanding the decrease in adjusted tax equivalent net interest income in absolute terms, the Corporation has been able to maintain its net interest margin on an adjusted tax equivalent basis at a relatively stable level. Net interest margin for the year ended December 31, 2007 was 2.83%, compared to 2.84% for the previous year reflecting the effect of the Corporation’s decision to deleverage its balance sheet as well as the effect of the steepened yield curve during the last quarter of 2007. During the second half of 2007 the Corporation sold approximately $556 million and $400 million of low-yield mortgage-backed securities and U.S. Treasury investments, respectively, and used the proceeds in part to pay down high cost borrowings as they matured. The Corporation re-invested approximately $566 million in higher-yielding U.S. Agency mortgage-backed securities.

55


The Corporation was able to mitigate the pressure of the sustained flatness of the yield curve during most of 2007 by the redemption of its $150 million medium-term notes which carried a cost higher than the overall cost of funding and by the increase in the amount of structured repos entered into by the Corporation which price below LIBOR or are structured to lock-in interest rates that are lower than yields on the securities serving as collateral for an extended period.
     Total interest income on an adjusted tax equivalent basis decreased by $105.5 million, mainly due to a decrease in average interest-earning assets. The Corporation’s average interest-earning assets decreased by $1.9 billion or 10% for 2007 compared to 2006. For the investment portfolio, the decrease in average volume was mainly driven by the use of short-term investments to repay short-term brokered CDs as these matured and the sale of low-yield mortgage-backed securities and U.S. government obligations representing a decrease of approximately $70.0 million in interest income on investments. After receiving the repayment of $2.4 billion from a local financial institution, the Corporation invested the proceeds in money market investments. During the second half of 2006, the Corporation used a part of the proceeds to repay short-term brokered certificates of deposit, mainly issued in 2006, as these matured. For the loan portfolio, the decrease in average volume, was mainly driven by the aforementioned payment of $2.4 billion received in 2006 from a local financial institution reducing the balance of a secured commercial loan, partially offset by loan originations that resulted in increases in the average balance of the residential, construction and consumer loan portfolios. Declining loan yields on the Corporation’s residential, construction and consumer loan portfolios attributed to the increase in the balance of non-performing loans also adversely affected interest income during 2007.
     The Corporation’s total interest expense, excluding changes in the fair value of derivatives and the ineffective portion and basis adjustment amortization or accretion, decreased by $51.0 million or 6% in 2007 compared to 2006. The decrease in interest expense was due to the deleverage of the Corporation’s balance sheet by selling low-yielding investment securities and using part of the proceeds to pay down high cost borrowings as they matured. This was partially offset by a higher average cost of borrowings due to higher short-term interest rates experienced during most of 2007 as compared to 2006. During 2007, as compared to 2006, the average volume of deposits decreased by $1.1 billion and the related average rate increased by 25 basis points, the average volume of other borrowed funds decreased by $1.1 billion and the related average rate increased by 10 basis points and the average volume of FHLB advances increased by $450.2 million and the related average rate increased by 31 basis points. The decrease in the average volume of interest-bearing liabilities resulted in a decrease in total interest expense due to volume of $83.5 million that was partially offset by the increase in the average cost of funds which resulted in an increase in interest expense due to rate of $32.5 million. The increase in short-term rates also resulted in a change in net payments on interest rate swaps included as part of interest expense. For the year ended December 31, 2007, the net settlement payments on such interest rate swaps resulted in charges of $12.3 million to total interest expense, compared to charges of $8.9 million for 2006, as the rates paid under the variable leg of the swaps exceeded the rates received.
2006 compared to 2005
     Net interest income increased to $443.7 million for 2006 from $432.3 million in 2005. The increase in net interest income for the year 2006 as compared to 2005 was mainly driven by a lower net unrealized loss on the valuation changes coupled with the increase in the average volume of interest-earnings assets of $1.1 billion attributable primarily to the growth in the Corporation’s loan and investment portfolios, in particular the construction and residential real estate loan portfolios as well as short-term investments, partially offset by a decrease in net interest margin. Non-cash losses due to the valuation changes amounting to $58.2 million were recorded in 2006, compared to a net non-cash loss of $73.4 million in 2005. The reduction in net interest margin on an adjusted tax equivalent basis during 2006 as compared to 2005 was due primarily to increases in short-term interest rates coupled with the mismatch between the re-pricing profile of the Corporation’s assets and liabilities. On average, the Corporation’s liabilities re-price and/or mature earlier than its assets. Thus, increases in short-term interest rates reduce net interest income, which is an important part of the Corporation’s earnings. The decrease in the Corporation’s net interest margin was particularly significant with respect to the Corporation’s portfolio of

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investment securities, excluding money market instruments. Assuming a funding cost equal to the weighted-average cost of the Corporation’s other borrowed funds, the interest rate spread on the Corporation’s portfolio of investment securities, excluding money market instruments, was approximately 0.64% for the year ended December 31, 2006 compared to 1.90% for the year ended December 31, 2005. For further details on the Corporation’s interest rate risk profile, refer to “Risk Management – Interest Rate Risk Management” section of this discussion. The increase in short-term rates also resulted in a change in net payments on interest rate swaps included as part of interest expense. For the year ended December 31, 2006, the net settlement payments on such interest rate swaps resulted in charges of $8.9 million to interest expense, compared to benefits of $71.7 million for the year ended December 31, 2005. In addition, net interest income was also affected by the repayment of $2.4 billion received from a local financial institution during the second quarter of 2006. Proceeds from the repayment were invested temporarily in short-term investments, reducing the Corporation’s average yield on interest-earning assets.
     On aan adjusted tax equivalent basis, net interest income excluding the changes in the fair valuesvalue of derivative instruments and the ineffective portion and basis adjustment amortization or accretion, decreased by $37.0 million for 2006 compared to 2005. The decrease in the net interest income for 2006 excluding the changes in the fair value of derivatives, the ineffective portion and basis adjustment, was primarily due to a reduction in the Corporation’s net interest margin on an adjusted tax equivalent basis offset in part by increases in the Corporation’s average balance of interest-earning assets. The decrease in net interest rate margin during 2006 was due primarily to the upward trend of short-term interest rates, the flattening of the yield curve, and the re-pricing mismatch of the Corporation’s assets and liabilities. On average, the Corporation’s liabilities re-price and/or mature earlier than its assets. Thus, increases in short-term interest rates reduce net interest income, which is an important part of the Corporation’s earnings. The average rate paid by the Corporation on its interest-bearing liabilities increased by $377.9 million for 2005 as compared113 basis points during 2006, from 3.58% to 2004.4.71%, mainly due to re-pricing of the Corporation’s interest-bearing deposits, mainly from the issuance of brokered CDs at higher rates and from net interest incurred on the interest rate swaps that hedge these instruments, and increases in rates paid on FHLB advances, and other borrowed funds tied to 3-month LIBOR. The tax equivalentaverage yield earned on interest earningthe Corporation’s interest-earning assets increased by 7761 basis points during 2006, from 6.45% for 2005 as compared to 5.68% for 2004. The tax equivalent yield on the loan portfolio increased 103 basis points to 6.79% for 2005 as compared to 5.76% for 2004,7.06%, mainly due to the re-pricing of variable rate commercial loans and the origination of new commercial loans at higher rates, and therates.
     The decrease in net interest margin on an adjusted tax equivalent basis for 2006 was also attributable to the payment of $2.4 billion received from a local financial institution during the second quarter of 2006 that significantly reduced the Corporation’s outstanding secured commercial loan with a local financial institution. Proceeds from the aforementioned repayment were invested temporarily in short-term investment, reducing the Corporation’s average yield on interest-earning assets. During the investment portfoliosecond half of 2006, the Corporation used a substantial amount of the proceeds of the loan repayments to repay higher rate outstanding brokered CDs that matured during the third and fourth quarter of 2006.
     The Corporation’s average interest-earning assets increased 24 basis points to 5.78% asby $1.1 billion or 6% for 2006 compared to 5.54% for 2004,2005. The increase in average earnings asset was principally due to the re-investment of proceeds from prepayments on mortgage-backed securities and larger volume of new investments in higher yielding long-term securities.
          Significant volume increases in the Corporation’s loan portfolio, mainly in the commercialconstruction and residential real estate portfolios, and significant rate increases in the commercial loans portfolio contributed significantly to interest income for 2005. As shown in Part I, the Corporation experienced continuous growth in the loan portfolios. Average loans increased by $3.5 billion compared to 2004. Commercialmoney market investments. Residential real estate loans and construction loans accounted for the largest growth in the portfolio with average volumes rising $2.1 billionby $793.2 million and $331.4$751.5 million, respectively, and residential real estate loans followedduring 2006 compared to 2005. The Corporation’s average volume of the commercial loan portfolio decreased by $1.6 billion in 2006 compared to 2005. The decrease in the Corporation’s commercial loan portfolio was mainly due to the payment from a local financial institution of $2.4 billion to partially pay down its secured commercial loan with $686.0 million.the Corporation. The payment significantly reduced the Corporation’s loans-to-one borrower exposure.
     For the loan portfolio, the growth in average volume, mainly driven by loan originations, represented a positive increase of $209.7$49.1 million in interest income on loans. The increases due to rate of $110.4$111.8 million are primarily attributable to the origination of new loans at higher rates and to the re-pricing of variable rate loans. The majority of totalthe Corporation’s commercial loans and construction loans yieldare variable rate loans tied to short-term rates to the Bank. The rising trend in interest rates byindexes. During 2006, the Federal Reserve Bank has contributed to higher interest

55


income; theincreased its targeted federal funds rate increased 200by 108 basis points, during the year, theand correspondingly LIBOR and Prime and LIBOR rates also increased during the year, both of whichincreased. Both indexes are indexes used by the Corporation to re-price the majority of its floating rate loans including the secured loans to local financial institutions (refer to the Financial Condition- Loans Receivable“Financial Condition-Loans Receivable” section of this discussion). At, contributing to higher interest income. As of December 31, 2005, 93%2006, 82% of the commercial and 96%95% of the construction loan portfolios had floating rates.was variable rate loans.

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     Average volume increases in the Corporation’s investment portfolio and positivecontributed to increases in total interest income for 2006. This increase was partially offset by negative rate variances, mainly in thegovernment obligations and mortgage-backed portfolios. Average money market investments increased by $808.4 million. After receiving the repayment of $2.4 billion from a local financial institution, the Corporation invested the proceeds in money market investments. During the second half of 2006, the Corporation used a part of the proceeds to repay short-term brokered certificates of deposit, mainly issued in 2006, as these matured. The average yield received on money market investments also increased from 3.49% in 2005 to 5.04% in 2006. The increase in yields was due to increases in short-term rates during 2005 and 2006. Average government obligations portfolio, also contributed to interest income for 2005. Average investment securities increased by $781.5 million. With$333.5 million, while the average yield decreased by 67 basis points. The increase in long-term rates during 2004average volume and the continuing trenddecrease in 2005, the Corporation re-entered the long-term investment market which contributedaverage yield was due to the increasere-investment of proceeds from prepayments on securities and larger volume of new investments at lower rates. The average volume and average yield earned on the Corporation’s mortgage-backed securities portfolio decreased by $198.0 million and 54 basis points, respectively, in interest income. These purchases accounted for most2006 compared to 2005. The decrease in the average volume of the positive variances in interest income from investmentsmortgage-backed securities was due to volumethe Corporation’s decision not to reinvest maturities and dueprepayments received from mortgage-backed securities. Proceeds from prepayments and maturities of mortgage-backed securities were utilized to rate.fund growth in higher yielding loans. The growth in the average balance of investments represented a positive increase in interest income on investments due to volume of $35.9$42.4 million and a negative variance due to rate of $21.9$17.7 million.
     The Corporation’s total interest expense, excluding changes in the fair value of interest rate swaps and the ineffective portion and basis adjustment amortization or accretion, increased by $222.6 million mainly attributableor 39% in 2006 compared to a2005. The increase in interest expense was due to higher volume of higher yielding government agency securities.
          On therates paid on liabilities side, the Corporation’s suffered fromdue to the re-pricing of short-term (i.e., deposits and repurchase agreements) and long-term (i.e., long-term repurchase agreements and other advances) liabilities, at higher rates, after considering net interest realizedincurred on economic hedges. Interest expense, excluding changesinterest rate swap instruments, and increases in the fair valueaverage volume of interest rate swaps, increased by 84%, $258.4 million for 2005 as compared to 2004, due in part to volume increases in interest bearinginterest-bearing deposits at higher yields to support the Corporation’s loansloan and investment portfolio growth, and other borrowed funds.growth. The average volume of deposits increased by $3.5$2.0 billion and the average rate increased by 121134 basis points. Thepoints during 2006 compared to 2005, while the average volume of other borrowed funds increasedand FHLB advances decreased by $766.2$458.1 million and $617.3 million, respectively, and the average rate increased by 7376 basis points.points and 133 basis points, respectively. The increase in the average volume of interest bearinginterest-bearing liabilities to fund the loans and investment portfolios growth alongcoupled with the increase in rates given the re-pricing and origination of interest bearing liabilities at higher rates and decreases in net interest realized on interest rate swap instruments, resulted in an increase in interest expense due to volume of $115.5$27.8 million and due to rate of $143.0$194.8 million. While the LIBOR rate has increased since December 2004 approximately 197 basis points, the Corporation’s cost of interest bearing liabilities, excluding the changesThe increase in the fair value ofshort-term rates also resulted in a change in net payments on interest rate swaps have increased 96 basis points from 2.62% for 2004 to 3.58% for 2005. The increases inincluded as part of interest expense. For the three-month LIBOR ratesyear ended December 31, 2006, the net settlement payments on such interest rate swaps resulted in charges of $8.9 million to interest expense, or a compressionnet increase of interest exchanged on received fixed pay-floating interest rate swaps. The net interest realized on these economic hedges of brokered certificates of deposit decreased from $125$80.6 million in 2004 to $72 million in 2005 negatively impacting interest expense and costcompared to the previous year, as the rates paid under the variable leg of funds when comparing both periods.the swaps exceeded the rates received.
     In summary, positive volume variances resulting from an increase in average earninginterest-earning assets were offset by negative rate variances derived from a higher cost of funds, despite higher yields on the loans and investment portfolio.loans. The net impact on net interest income and earnings was positive on a rate/volume basis. The Corporation’s net interest income (on a tax equivalent basis and excluding changes in the fair value of derivative instruments) increased by $119.5 million, the net result of a positive volume variance of $130.1 million and a negative rate variance of $10.6 million. The net interest margin decreased from 3.37% for the year 2004 to 3.23% for 2005. The contraction is primarily due to the flat to inverted yield curve.
2004 compared to 2003
          On a tax equivalent basis, interest income, excluding the changes in the fair values of derivative instruments, increased by $174.2 million for 2004 as compared to 2003. The tax equivalent yield on interest earning assets was 5.68% for 2004 as compared to 5.73% for 2003. While the tax equivalent yield on the investment portfolio increased to 5.54% as compared to 4.61% for 2003, due to the re-investment of proceeds from prepayments on mortgage-backed securities and to new investments in higher yielding long-term securities, the tax equivalent yield on the loan portfolio decreased to 5.76% for 2004 as

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compared to 6.41% for 2003, due to the re-pricing of variable rate loans and to the purchase and origination of loans at lower rates.
          Significant volume increases in the Corporation’s total loan portfolio partially offset by negative variances due to rate, mainly in the residential real estate and consumer portfolios, contributed significantly to interest income for 2004. As shown in Part I, the Corporation experienced continuous growth of its loan portfolios. Average loans increased by $1.7 billion compared to 2003. Commercial loans, which include the secured loans to local financial institutions, accounted for the largest growth in the portfolio with average volumes rising $1.4 billion. For the loan portfolio, the growth in average volume mainly driven by loan originations represented a positive increase of $79.3 million in interest income on loans due to volume. The $20.5 million decrease in interest income on loans due to rate, mentioned earlier, is mainly attributable to the floating rate characteristics of a substantial portion of the Corporation’s portfolio and to the origination of new loans at lower rates. At December 31, 2004, 91% of the commercial and 95% of the construction loan portfolios had floating rates.
          Significant volume increases in the Corporation’s investment portfolio and positive rate variances, mainly in the mortgage-backed securities and government obligations portfolio, contributed significantly to interest income for 2004. Average investment securities increased by $1.4 billion. During the first quarter of 2004, the Corporation maintained a portion of its investment portfolio, mostly the proceeds of prepayments on mortgage-backed securities, in short-term instruments, awaiting an opportunity to re-enter the longer-term investment market. With the increase in long-term rates during the latter part of the first quarter of 2004, the Corporation re-entered the long-term investment market by purchasing $1.6 billion in higher yielding 15 to 25 year callable agency securities, of which $306.8 million were called during the fourth quarter of 2004. Most of the purchases were made during the second quarter of 2004. As a result of the purchases of these higher yielding securities, interest income increased significantly. These purchases accounted for most of the positive variances in interest income from investments due to volume and due to rate. The growth in the average balance of investments represented a positive increase in interest income on investments due to volume of $98.9 million. The positive variance in interest income on investments due to rate, mainly due to higher yielding mortgage-backed securities and government agency securities, amounted to $16.5 million.
          On the liabilities side, the Corporation benefited from the re-pricing of short-term liabilities and by the origination of new short-term (i.e., deposits and repurchase agreements) and long-term (i.e., long-term repurchase agreements and other advances) liabilities at lower rates, after considering net interest realized on economic hedges. Interest expense, excluding changes in the fair value of interest rate swaps, increased by $50.8 million for 2004 as compared to 2003, mainly due to volume increases in interest bearing liabilities to support the Corporation’s investment and loan portfolio growth. The increase in the average volume of interest bearing liabilities to fund the investment and loan portfolios growth resulted in an increase in interest expense due to volume of $81.8 million. The increase in interest expense due to volume variance was partially offset by decreases resulting from rate decreases given the re-pricing and origination of interest bearing liabilities at lower rates, as explained above, which resulted in a decrease in interest expense due to rate of $31.0 million. The cost of interest bearing liabilities, excluding changes in the fair value of interest rate swaps, decreased from 2.86% for 2003 to 2.62% for 2004.
          In summary, positive variances resulting from an increase in average earning assets, higher yields on the investment’s portfolio and lower cost of funds were partially offset by a decrease in the loan portfolio interest yields. The net impact on net interest income and earnings was positive, on a rate/volume basis. The Corporation’s net interest income (on a tax equivalent basis and excluding changes in the fair value of derivative instruments, increasedthe ineffective portion on designated hedges and basis adjustments) decreased by $123.3$37.0 million, as athe net result of a positive volume and rate variancesvariance of $96.4$63.6 million and $27.0 million, respectively.a negative rate variance of $100.7 million. The net interest margin increaseddecreased from 3.21%3.23% for the year 20032005 to 3.37%2.84% for 2004.2006. The contraction is primarily due to the flat to inverted yield curve and has been particularly significant with respect to the Corporation’s portfolio of investment securities, excluding money market instruments.

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     Net interest income on an adjusted tax equivalent basis for 2006 includes a tax equivalent adjustment of $28.0 million, compared to an adjustment of $61.2 million for 2005. The decrease in tax equivalent adjustments was mainly due to a lower interest rate spread on tax-exempt assets.


Provision for Loan and Lease Losses
         During 2005, the Corporation provided $50.6 million for loan losses, as compared to $52.8 million in 2004 and $55.9 million in 2003. The decrease in the provision since 2003 is primarily attributed to the seasoning of the corporate commercial loans portfolio and in 2005 to a decrease in the specific reserve allocated to a commercial loan based on new facts that satisfied the Corporation as to the ultimate recoverability of the loan. The Corporation has not incurred significant losses as a percentage of its commercial loans receivable since it started emphasizing the corporate commercial lending activities in the late 1990s, therefore, the provision for inherent losses in this portfolio has decreased. The provision for 2005 is mainly attributable to the consumer loans portfolio and to a lesser extent to the construction loans portfolio which increased significantly in 2005 from loans disbursed by the Corporation’s loan agency in Coral Gables, Florida. Net charge-offs to average loans outstanding during the period were 0.39% as compared to 0.48% in 2004 and 0.66% in 2003. Net charge-offs amounted to $45.0 million for 2005, $38.1 million for 2004, and $41.4 million for 2003.
     The provision for loan and lease losses totaled 112% of net charge-offs for 2005, compared with 138% of net charge-offs, for 2004 and 135% for 2003. The increase of $6.9 million in net charge-offs in the 2005 year, compared with the previous year, was mainly composed of $5 million of higher charge-offs in consumer loans primarily auto loans, given higher delinquencies during 2005. Auto loans are collateralized by the underlying automobile units. Commercial loans, including construction loans, that were charged-off amountedis charged to $8.6 million for 2005, an increase of $2.4 million when comparedearnings to $6.2 million in 2004; total charged-off for 2003 amounted to $6.5 million. The commercial loans portfolio includes the secured loans to local financial institutions; these institutions have always paid the loans in accordance with the terms and conditions. Further, these commercial loans are mainly secured by residential real estate collateral. Due to the trend of increasing home values, losses in the residential mortgage portfolio have been minimal; therefore, reserves allocated to the loans to local financial institutions secured by residential mortgages and to the Corporation’s residential real estate portfolios are not significant. Recoveries made from previously written-off accounts were $6.9 million in 2005 compared to $5.9 million in 2004 and $6.7 million in 2003.
         The allowance for loan losses at December 31, 2005 totaled $148.0 million as compared to $141.0 million at December 31, 2004. Non-accruing loans increased $42.7 million during 2005 (refer to the Financial Condition — Non Performing Assets section of this discussion); however, $23.2 million of such increase represented residential real estate loans for which historical losses have been minimal and, as such, reserves allocated to this portfolio are not significant.
          The allowance activity for 2005, and previous four years was as follows:
                     
Year ended December 31, 2005  2004  2003  2002  2001 
  (Dollars in thousands) 
Allowance for loan losses, beginning of year $141,036  $126,378  $111,911  $91,060  $76,919 
Provision for loan losses  50,644   52,799   55,916   62,302   61,030 
                
Loans charged off:                    
Residential real estate  (945)  (254)  (475)  (555)  (192)
Commercial and construction  (8,558)  (6,190)  (6,488)  (4,643)  (9,523)
Finance leases  (2,748)  (2,894)  (2,424)  (2,532)  (2,316)
Consumer  (39,669)  (34,704)  (38,745)  (41,261)  (42,349)
Recoveries  6,876   5,901   6,683   7,540   7,391 
                
Net charge-offs  (45,044)  (38,141)  (41,449)  (41,451)  (46,989)
                
Other adjustments(1)
  1,363            100 
                
Allowance for loan losses, end of year $147,999  $141,036  $126,378  $111,911  $91,060 
                
Allowance for loan losses to year end total loans  1.17%  1.49%  1.80%  1.99%  2.12%
Net charge offs to average loans outstanding during the period  0.39%  0.48%  0.66%  0.87%  1.22%
(1)Represents allowance for loan losses from the acquisition of FirstBank Florida in 2005.
     The Corporation maintainsmaintain the allowance for loan and lease losses at a level that is based upon estimates ofthe Corporation considers adequate to absorb probable losses currently inherent losses in the loan portfolio. The amount of actual losses can vary significantly from estimated amounts. The adequacy of the allowance for loan and lease losses is reviewed on a quarterly basis as part of the continuing evaluation of the quality of the assets. The methodology used includes several features intended to diminish differences between estimated losses and actual losses. Historical loss factors may be adjusted for significant factors that

58


based on management’s judgment, reflect the impact of any current condition on loss recognition. The Corporation’s evaluation isalso based upon a number of additional factors including the following: historical loan and lease loss experience, projected loan losses, loan portfolio composition, current economic conditions, changes in underwriting process,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 management.

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          The
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 (principally the state of Florida), the U.S. Virgin Islands and the British Virgin Islands may contribute to delinquencies and defaults, thus necessitating additional reserves.
     During 2007, the Corporation provided $120.6 million for loan and lease losses, as compared to $75.0 million in 2006 and $50.6 million in 2005.
     Refer to the discussions under “Risk Management – Credit Risk Management – Allowance for Loan and Lease Losses and Non-performing Assets” below for analysis of the allowance for loan and lease losses and non-performing assets and related ratios.
2007 compared to 2006
     First BanCorp’s provision for loan and lease losses for the year ended December 31, 2007 increased by $45.6 million, or 61%, compared to year 2006. The increase in the provision was primarily due to deterioration in the credit quality of the Corporation’s loan portfolio associated with the weakening economic conditions in Puerto Rico and the slowdown in the United States housing sector. In particular, the increase was mainly related to specific and general provisions related to the Miami Agency construction loan portfolio and increases in the general reserves allocated to the consumer loan portfolio.
     During the third quarter of 2007, the Corporation recorded an impairment of $8.1 million on commercialfour condo conversion loans, with an aggregate principal balance of $60.5 million at the time of the impairment evaluation, extended to a single borrower through the Miami Agency based on an updated impairment analysis that incorporated new appraisals. The increase in non-accrual loans and charge-offs during 2007, other than the aforementioned loan relationship in the Miami Agency, as compared to 2006, was attributable to weak economic conditions in Puerto Rico. Puerto Rico is in the midst of a recession caused by, among other things, higher utilities prices, higher taxes, government budgetary imbalances, the upward trend in short-term interest rates and the flat-to-inverted yield curve, and higher levels of oil prices.
     The above-mentioned troubled relationship in the Miami Agency comprised four condo conversion loans that the Corporation had placed in non-accrual status during the second and third quarters of 2007. For the third quarter of 2007, the Corporation updated the impairment analysis on the relationship and requested new appraisals that reflected collateral deficiency as compared to the Corporation’s recorded investment in the loans. The aggregate unpaid principal balance of the relationship classified as non-accrual decreased to $46.4 million as of December 31, 2007, net of a charge-off of $3.3 million recorded to this relationship in the fourth quarter of 2007. The charge-off was recorded at the time of sale of one of the loans in the relationship with an outstanding principal balance of $14.1 million at the time of sale. This sale was made at a price of $10.8 million, which exceeded the recorded investment in the loan (loan receivable less specific reserve) by approximately $1 million. The Corporation continues to work on different alternatives to decrease the recorded investment in the non-accruing relationship on the Miami Agency.
     The Corporation maintains a constant monitoring of the Miami Agency portfolio. Recent loan reviews showed that the Miami Agency construction loan portfolio has an added susceptibility to current general market conditions and real estate loans over $1 million is determined basedtrends in the U.S. market due to the oversupply of available property inventory and downward price pressures. Based on the present value of expected future cash flows or the fair valuethese factors and a detailed review of the collateral, ifportfolio, the Corporation determined it was prudent to increase general provisions allocated to this portfolio.
     Refer to the discussion under “Risk Management – Credit Risk Management – Allowance for Loan and Lease Losses and Non-performing Assets” below for additional information concerning the economy on geographic areas where the Corporation does business and the Corporation’s outlook for the performance of its loan portfolio.
     Net charge-offs for 2007 were $88.7 million (0.79% of average loans), compared to $64.7 million (0.55% of average loans) for 2006. The increase in net charge-offs for the year 2007, compared to 2006, was mainly associated with the Corporation’s commercial and construction loan portfolio, as well as its finance lease and consumer loan portfolios due to higher delinquency levels experienced during 2007 and to significantly higher

59


recoveries on loans during 2006. Included in 2007 is collateral dependent.a charge-off of $3.3 million associated with one of the loans of the previously mentioned impaired condo conversion loan relationship in the Miami Agency. The increase in net charge-offs is primarily the result of the aforementioned deteriorating economic conditions in Puerto Rico and the slowdown in the U.S. housing market. Recoveries made from previously written-off accounts were $6.1 million and $12.5 million for 2007 and 2006, respectively.
Other2006 compared to 2005
     The Corporation’s provision for loan and lease losses increased by $24.4 million or 48% during 2006 compared to 2005. The increase in the provision principally reflected growth in the Corporation’s commercial, excluding loans to local financial institutions, and consumer portfolios, and increasing trends in non-performing loans experienced during 2006 as compared to 2005. The Corporation’s net charge-offs and non-performing loans were affected by the fiscal and economic situation of Puerto Rico. According to the Puerto Rico Planning Board, Puerto Rico has been in a midst of a recession. The slowdown in activity has been the result of, among other things, higher utilities prices, higher taxes, government budgetary imbalances, the upward trend in short-term interest rates and the flattening of the yield curve, and higher levels of oil prices.
     Net charge-offs to average loans outstanding during 2006 were 0.55% as compared to 0.39% in 2005. The provision for loan and lease losses totaled 116% of net charge-offs for 2006, compared with 112% of net charge-offs, for 2005. The increase of $19.7 million in net charge-offs in 2006, compared with the previous year, was mainly composed of $24.8 million of higher charge-offs in consumer loans. The increase in net charge-offs in consumer and commercial portfolio was due to the economic situation of the island.

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Non-Interest Income
The following table presents the composition of other income.non-interest income:
                        
Year ended December 31, 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (Dollars in thousands) 
Other service charges on loans $5,431 $3,910 $6,522  $6,893 $5,945 $5,431 
Service charges on deposit accounts 11,796 10,938 9,527  12,769 12,591 11,796 
Mortgage banking activities 3,798 3,921 3,014  2,819 2,259 3,798 
Rental income 3,463 3,071 2,224  2,538 3,264 3,463 
Insurance income 9,443 6,439 4,258  10,877 11,284 9,443 
Other commissions and fees 911 1,983 1,386  273 1,470 911 
Other operating income 15,896 14,372 11,892 
Other non-interest income 13,322 12,857 15,896 
              
Other income before net gain on sale of investments and gain on sale of credit card portfolio 50,738 44,634 38,823 
Non-interest income before net (loss) gain on investments, insurance reimbursement and other agreements related to a contingency settlement, net gain (loss) on partial extinguishment and recharacterization of secured commercial loans to local financial institutions and gain on sale of credit card portfolio 49,491 49,670 50,738 
              
Net gain on sale of investments 20,713 12,156 41,351 
 
Net gain on sale of investment 3,184 7,057 20,713 
Impairment on investments  (8,374)  (2,699)  (5,761)  (5,910)  (15,251)  (8,374)
              
Gain on investments, net 12,339 9,457 35,590 
Net (loss) gain on investment  (2,726)  (8,194) 12,339 
              
Gain on sale of credit card portfolio  5,533 32,385 
Insurance reimbursement and other agreements related to a contingency settlement 15,075   
Gain (loss) on partial extinguishment and recharacterization of secured commercial loans to local financial institutions 2,497  (10,640)  
Gain on sale of credit cards portfolio 2,819 500  
              
Total $63,077 $59,624 $106,798  $67,156 $31,336 $63,077 
              
     OtherNon-interest income primarily consists of other service charges on loans,loans; service charges on deposit accounts,accounts; commissions derived from various banking, activities, securities and insurance activitiesactivities; gains and losses on mortgage banking activities; and net gain on investments. Other income, excluding the net gains and losses on investments and a gain on sale of credit card loans portfolio, increased $6.1 million for 2005 as compared to 2004 and increased $5.8 million for 2004 as compared to 2003. The increase is mainly attributable to increases in commission income from the Corporation’s insurance businesses, other service charges on loans and service charges on deposit accounts, partially offset by decreases in other commissions and fees when comparing 2005 to 2004.
           The gain on the sale of credit card portfolio in 2004 and 2003 results from portfolios sold pursuant to a strategic alliance agreement reached with MBNA Corporation in 2003.impairments.
     Other service charges on loans consist mainly of service charges on credit card related activities which increased for 2005 when compared to 2004. Furthermore, the increase was driven by the acquisition of FirstBank Florida.card-related activities.

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     Service charges on deposit accounts include monthly fees and other fees on deposit accounts. This source of income has continuously increased due to a larger volume of accounts and transactions during 2005 and 2004.
     MortgageIncome from mortgage banking activities income includes gains on the salesales of residential mortgage loans and the feesrevenues earned for administering residential mortgage loans originated by the Corporation and subsequently sold with servicing retained. Gains on sale of loans amountedIn addition, lower-of-cost-or-market valuation adjustments to $3.6 million in 2005 (2004-$3.6 million, 2003-$2.9 million). During the first quarter of 2005, the Corporation entered into an arrangement with another unrelated financial institution (the “Counterparty”) in which, in substance, the parties agreed to sell and purchase similar mortgage loan portfolios. Pursuant to this arrangement, the Corporation purchasedCorporation’s residential mortgage loans with an aggregate unpaid principal balance of $87.2 millionheld for $88.9 million in March 2005. In April and May of 2005, the Corporation sold to the Counterparty mortgage loans with aggregate unpaid principal balances of $60.0 million and $29.7 million, for $61.1 million and $30.3 million, respectively, resulting in gains on the sales of $1.3 million and $0.6 million, respectively. Since the Corporation retained the servicing on the mortgage loans sold to the Counterparty, it also recognized a servicing asset of $1.2 million. The Corporation entered into these transactions because, among other reasons, they were consistent with its business objectives of developing a mortgage-banking business that would provide its liquiditysale portfolio are recorded as well as new sources for its acquisitionpart of mortgage loans. Notwithstanding that the transactions were in substance the purchase and sale of similar mortgage loan portfolios, generally accepted accounting principles require that the transactions be treated as a separate purchase and a separate sale.banking activities.
     TheRental income represents income generated by the Corporation’s subsidiary, First Leasing and Rental Corporation, generates income on the rental of various types of motor vehicles. Rental income amounted to $3.5 million for 2005 as compared to $3.1 million for 2004 and $2.2 million for 2003, respectively. The increase when comparing 2005 to 2004 and 2004 to 2003, is attributed to a higher number of rental units and a higher number of rental locations.
     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.V.I., FirstU.S. Virgin Islands, FirstBank Insurance Agency,V.I., Inc. These subsidiaries offer a wide variety of insurance related products and have increased business through cross selling strategies, marketing efforts and the strategic locations of sales offices. The Corporation maintains an allowance to cover the commissions which management estimates will be returned upon cancellation of a policy.business.
     Other commissions and fees income is the result of an agreement with a major investment banking firm to participate in bond issues by the Government Development Bank for Puerto Rico, and an agreement with an international brokerage firm doing business in Puerto Rico to offer brokerage services in selected branches.branches of the Corporation.
     The other operatingnon-interest income category is composed of miscellaneous fees such as checkdebit and credit card interchange fees and rental of safe deposit boxes.check fees.

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     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 and strategy as well as other-than-temporary impairment charges on portfolio securities. Net gainsthe Corporation’s investment portfolio.
2007 compared to 2006
          First BanCorp’s non-interest income for 2007 amounted to $67.2 million, compared to $31.3 million for 2006. The increase in non-interest income was mainly attributable to income recognition of approximately $15.1 million for agreements reached with insurance carriers and former executives for reimbursement of expenses related to the settlement of the class action lawsuit brought against the Corporation coupled with lower other-than-temporary impairment charges on investments, excluding other-than-temporary impairments, resulted mainly from the sale of a substantial portioncertain of the Corporation’s equity securities portfolio, held at oneas compared to 2006. For 2007, other-than-temporary impairment charges on equity securities decreased by $9.3 million, as compared to impairment charges recognized for 2006. Also, a net change of the international banking entities at$13.1 million in net gains and losses related to partial repayments of approximately $21 million. The proceeds fromcertain secured commercial loans extended to local financial institutions (2007-net gain of $2.5 million; 2006—net loss of $10.6 million), a higher gain on the sale of equity securitiesits credit card portfolio and other funds available athigher income from service charges on loans contributed to the Corporation’s holding company were usedincrease in non-interest income during 2007 as compared to make a $110 million capital contribution to FirstBank Puerto Rico at the end of 2005.2006.
     During 2005,2006, the Corporation recorded a net loss of $10.6 million on the partial extinguishment of a secured commercial loan extended to a local financial institution as a result of a series of credit agreements reached with Doral Financial Corporation (“Doral”) to formally document as secured borrowings the loan transfers between the parties that previously had been accounted for erroneously as sales. The terms of the credit agreements specified: (1) a floating interest payment based on a spread over 90-day LIBOR subject to a cap; (2) an amortization schedule tied to the scheduled amortization of the underlying mortgage loans subject to a maximum maturity of 10 years; (3) mandatory prepayments as a result of actual prepayments from the underlying mortgages; and (4) an option to Doral to prepay the loan without penalty at any time.
     On May 31, 2006, First BanCorp received a cash payment from Doral, substantially reducing the balance of approximately $2.9 billion in secured commercial loans to approximately $450 million as of that date. In connection with the repayment, the Corporation and Doral entered into a sharing agreement on May 25, 2006 with respect to certain profits or losses that Doral would incur as part of the sales of the mortgages that previously collateralized the commercial loans. First BanCorp agreed to reimburse Doral for 40% of the net losses incurred by Doral as a result of sales or securitization of the mortgages, subject to certain conditions and subject to a maximum reimbursement of $9.5 million, which would be reduced proportionately to the extent that Doral did not sell the mortgages. As a result of the loss sharing agreement and the extinguishment of the secured commercial loans by Doral, the Corporation recorded a net loss of $10.6 million, composed of losses realized as part of the loss sharing agreement and the difference between the carrying value of the loans and the net payment received from Doral.
     In connection with the repayment, Doral and First BanCorp also agreed to share the profits, if any, received from any subsequent sales or securitization of the mortgage loans, in the same proportion that the Corporation shared in the losses, subject to a maximum of $9.5 million.
     During the first quarter of 2007, the Corporation entered into various agreements with R&G Financial relating to prior transactions accounted for as commercial loans secured by mortgage loans and pass-through trust certificates from R&G Financial subsidiaries. First, through a mortgage payment agreement, R&G Financial paid the Corporation approximately $50 million to reduce the commercial loan that R&G Premier Bank, R&G Financial’s banking subsidiary, had outstanding with the Corporation. In addition, the remaining balance of the loans secured by mortgage loans of approximately $271 million was re-documented as a secured loan from the Corporation to R&G Financial. The terms of the credit agreement specified: (1) a floating interest payment based on a spread over 90-day LIBOR; (2) loan should be payable in arrears in sixty equal consecutive monthly installment of principal (scheduled amortization plus any unscheduled principal recoveries) and interest maturing on February 22, 2012; (3) R&G Financial shall deliver to the Corporation and maintain at all times a first priority security interest with a collateral value as a percentage of loans of 103% for FHA/VA mortgage loans, 105% for conventional conforming mortgage loans and 111% of conventional non-conforming mortgage loans; and (4) R&G Financial may, at its option, prepay the loan without premium or penalty. Second, R&G Financial and the Corporation

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amended various agreements involving, as of the date of the transaction, approximately $183.8 million of securities collateralized by loans that were originally sold through five grantor trusts. The modifications to the original agreements allow the Corporation to treat these transactions as “true sales” for accounting and legal purposes and recharacterize the loans as securities collateralized by loans. As a result of the agreements and the partial extinguishment of the secured commercial loan, the Corporation recorded a net gain of $2.5 million related to the difference between the carrying value of the loans, the net payment received and the fair value of the securities received from R&G Financial.
     For the year 2007, the Corporation recorded a gain of $2.8 million on the sale of the credit card portfolio pursuant to a strategic alliance reached with a U.S. financial institution, compared to a gain of $0.5 million recorded in 2006.
     Higher income from service charges on loans, which increased by $0.9 million or 16% as compared to 2006, was due to the increase in the loan portfolio volume driven by new originations. Loan originations for 2007 amounted to $4.1 billion.
2006 compared to 2005
     For 2006, non-interest income decreased by $31.7 million as compared to 2005. The decrease in non-interest income for 2006, compared to 2005, was mainly attributable to the above noted net loss of $10.6 million on the partial extinguishment of a secured commercial loan to a local financial institution, an increase in other-than-temporary impairment charges of $6.9 million in the Corporation’s investment portfolio and lower gains on investments of $13.7 million. These negative variances were partially offset by increases of $1.8 million in commission income from the Corporation’s insurance business and $1.3 million in service charges on deposit accounts and loans.
     Mortgage banking activities income decreased by $1.5 million for 2006 compared to 2005. The decrease in 2006 was principally due to a $1.0 million lower-of-cost-or-market negative valuation adjustment to the Corporation’s loans held for sale portfolio as a result of increases in long-term interest rates coupled with a lower volume of mortgage loan sales.
     Insurance income for 2006 increased by $1.8 million or 19% compared to the same period in 2005. The increase for 2006 was due to an increase in the volume of business through cross-selling strategies, marketing efforts and the strategic locations of the Corporation’s insurance offices.
     Service charges on deposit accounts and other service charges on loans increased by $0.8 million and $0.5 million, respectively, during 2006 compared to 2005. The increase for 2006 primarily reflects a larger volume of accounts and transactions during 2006.
     Net loss on investments for 2006 amounted to $8.2 million compared to a net gain of $12.3 million for the same period in 2005. The decrease in 2006 was principally due to a lower volume of sales coupled with a net increase of $6.9 million in other-than-temporary impairments on threein the Corporation’s investment portfolio related to certain equity securities held in portfolio amounting to $8.4 million.securities. Management concluded that the declines in value of the securities were other-than-temporary, as suchand wrote down the cost basis of these securities was written down to the market value atas of the date of the analyses.analysis. Management evaluates investment securities for impairment on a quarterly basis or earlier if other factors indicative of potential impairment exist. The decrease in net gains on investments for 2004 compared to 2003 results mainly from significant sales of mortgage-backed securities during 2003 that were sold at substantial gains when the 10-year Treasury note reached low levels at 3.56% during the first quarter of such year.

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Other Operating ExpensesNon-Interest Expense
     Other operating expenses amounted to $315.1 million for 2005 as compared to $180.5 million for 2004 and $164.6 million for 2003.     The following table presents the components of other operating expenses.non-interest expenses:
                        
Year ended December 31, 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (Dollars in thousands) 
Salaries and benefits $102,078 $82,440 $74,488 
Employees’ compensation and benefits $140,363 $127,523 $102,078 
Occupancy and equipment 47,582 39,430 36,363  58,894 54,440 47,582 
Deposit insurance premium 1,248 979 806  6,687 1,614 1,248 
Other taxes, insurance and supervisory fees 14,071 11,615 10,329  21,293 17,881 14,071 
Professional fees 13,387 4,165 2,992 
Professional fees — recurring 13,480 11,455 7,317 
Professional fees — non-recurring 7,271 20,640 6,070 
Servicing and processing fees 6,573 2,727 6,410  6,574 7,297 6,573 
Business promotion 18,718 16,349 12,415  18,029 17,672 18,718 
Communications 8,642 7,274 6,959  8,562 9,165 8,642 
Provision for contingencies 82,750      82,750 
Other 20,083 15,501 13,868  26,690 20,276 20,083 
              
Total $315,132 $180,480 $164,630  $307,843 $287,963 $315,132 
              
     Salaries2007 compared to 2006
     The Corporation’s non-interest expenses for 2007 increased by $19.9 million, or 7%, compared to 2006. The increase in non-interest expenses was mainly due to increases in employees’ compensation and benefits as well as deposit insurance premium expenses, occupancy and equipment expenses, other taxes and insurance fees, and other expenses associated with legal contingencies partially offset by a decrease in professional fees.
     Employees’ compensation and benefits expenses for 2007 increased by $12.8 million, or 10%, compared to 2006. The increase in employees’ compensation and benefits expenses was primarily due to increases in the average compensation and related fringe benefits paid to employees coupled with the accrual of approximately $3.3 million for a voluntary separation program established by the Corporation as part of its cost saving strategies.
     For the year ended December 31, 2007, the deposit insurance premium expense increased by $5.1 million, as compared to 2006. The increase in the deposit insurance premium expense was due to changes in the premium calculation adopted by the FDIC during 2007.
     Occupancy and equipment expenses for 2007 increased by $4.5 million, or 8%, compared to 2006. The increase in occupancy and equipment expenses in 2007 is mainly attributable to increases in costs associated with the expansion of the Corporation’s branch network and loan origination offices.
     Other taxes, insurance and supervisory fees increased by $3.4 million, or 19%, compared to 2006 due to a higher expense related to prepaid municipal and property taxes recorded during 2007.
     For 2007, other expenses increased by $6.4 million, or 32%, compared to 2006. The increase in other expenses for 2007 was mainly due to a $3.3 million increase related to costs associated with capital raising efforts in 2007 not qualifying for capitalization coupled with increased costs associated with foreclosure actions on the aforementioned loan relationship at the Miami Agency.
     Professional fees decreased during 2007 by $11.3 million, or 35%, compared to 2006. The decrease was primarily attributable to lower legal, accounting and consulting fees due to the conclusion during the third quarter of 2006 of the internal review conducted by the Corporation’s Audit Committee and the restatement process. Further reductions in non-recurring professional service expenses are expected as the Corporation continues to move forward with its business strategies without the distraction of restatement-related matters and legal issues.
2006 compared to 2005
     Non-interest expense for 2006 decreased by $27.2 million compared to 2005. Non-interest expense for 2005 includes accruals of $74.25 million and $8.5 million for the possible settlement of class action lawsuits and the SEC

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investigation, respectively, relating to the Corporation’s restatement. Excluding these accruals, non-interest expense during 2006 increased by $55.6 million compared to 2005. The increase was mainly due to increases in employees’ compensation and benefits, occupancy and equipment and professional fees.
     Employees’ compensation and benefits increased in 20052006 by $25.4 million or 25% as compared to 2004 and 2003.2005. The increase is mainly attributable to increases in average salary and employee benefits and headcount from approximately 2,100 persons at December 31, 2003, to approximately 2,300 persons at December 31, 2004 and to approximately 2,700 persons atemployees as of December 31, 2005, mainly to supportapproximately 3,000 employees as of December 31, 2006. The increase in headcount was mostly attributable to increases associated with the growthCorporation’s loan origination and deposit gathering efforts, in operations and from the acquisition ofparticular at FirstBank Puerto Rico, FirstBank Florida, FirstMortgage, and the Corporation’s small loan company as well as increases in 2005.support areas, in particular audit and compliance, credit risk management, finance and accounting and information technology and banking operations. The increase was also attributable to the implementation of SFAS 123R and the expensing of the fair value of stock options given to employees. During 2006, the Corporation recorded $5.4 million in stock-based compensation expense.
     Occupancy and equipment expenses increased during 2006 by $6.9 million or 14% compared to 2005. The increase in occupancy and equipment expenses in 20052006 as compared to 2004 and in 2004 as compared to 20032005 is mainly attributedprimarily attributable to increases in costs associated with the expansion of the Corporation’s branch network and loan origination offices. The increase in 2005 also includesreflects higher electricity costs and the additional operating costs from the acquisition of FirstBank Florida.
     Other taxes, insurance and supervisory fees increased during 2006 by $3.8 million or 27% compared to 2005. During 2006, the Corporation experienced increased insurance costs mainly related to increases in rate and coverage of directors’ and officers’ liability insurance and expensed a higher amount of municipal and property taxes, as compared to 2005.
Professional fees for 2005expenses increased during 2006 by approximately $9.2$18.7 million when compared to 2004.2005. The increase for 20052006 was primarily due to legal, accounting and consulting fees associated with the internal review conducted by the Corporation’s Audit Committee as a result of the restatement processannouncement and other related legal and regulatory proceedings which amounted to approximately $6.0 million. The increase$20.6 million in 2004 as2006 compared to 2003 is attributed to the Corporation’s general growth.$6.1 million in 2005.
     Following the announcement of the Corporation’s Audit Committee review, the Corporation and certain of its officers and directorscurrent and former officers and directors were named as defendants in separate class action suits filed late in 2005. The securities class actions were consolidated. First BanCorp has been engaged inBased on available evidence and discussions with the lead plaintiff, the Corporation accrued $74.25 million in the 2005 financial statements for a possible settlement of the class action. Subsequently, in 2007, the Corporation resolved the securities class action and has accrued $74.25 million in its consolidated financial statementslawsuit with the approval of the stipulation of settlement filed with the United States District Court for the year ended December 31, 2005District of Puerto Rico in connection with a potential settlement. There can be no assurance that the amount accrued will be sufficient andof $74.25 million. The monetary payment was made during the Corporation cannot predict at this time the timing or final termssecond half of any settlement.2007.
     In addition, the Corporation has been engaged inheld discussions with the staff of the SEC regarding a possible resolution to its investigation of the Corporation’s restatement, and has accrued $8.5 million in its consolidated financial statements for the year ended December 31, 2005 in connection with a potential settlement of the SEC’s investigation of the Corporation. AnyOn August 7, 2007, First BanCorp announced that the SEC approved a final settlement is subjectwith the Corporation, which resolved the SEC investigation. Under the settlement with the SEC, the Corporation agreed, without admitting or denying any wrongdoing, to be enjoined from future violations of certain provisions of the securities laws. The Corporation also agreed to the approvalpayment of an $8.5 million civil penalty and the disgorgement of $1 to the SEC. In connection with the settlement, the Corporation consented to the entry of a final judgment to implement the terms of the SEC. There can be no assurance thatagreement. The United States District Court for the Corporation’s efforts to resolve the SEC’s investigation with respectSouthern District of New York must consent to the Corporation will be successful, or thatentry of the amount accrued will be sufficient, andfinal judgment in order to consummate the Corporation cannot predict at this time the timing or final terms of any settlement. Both the SEC and class action contingencies are presented in the Statement of Income as Provision for contingencies.The monetary payment was made on October 15, 2007.

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Income Tax ExpenseProvision
     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 (“VI”) taxes on its income from sources within the VI jurisdiction. Any such tax paid is 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 (“PR Code”), First BanCorp is subject to a maximum statutory tax rate of 39%, except that in years 2005 and 2006 an additional transitory tax rate of 2.5% was signed into law by the Governor of Puerto Rico. In August 2005, the Government of Puerto Rico approved a transitory tax rate of 2.5% that increased the maximum statutory tax rate from 39.0% to 41.5% for a two-year period. On May 13, 2006, with an effective date of January 1, 2006, the Governor of Puerto Rico approved an additional transitory tax rate of 2.0% applicable only to companies covered by the Puerto Rico Banking Act, as amended, such as FirstBank, which raised the maximum statutory tax rate to 43.5% for taxable years commenced during calendar year 2006. 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 of 41.5% (39% plus a 2.5% transitory tax) mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income tax combined with gains on sale of investments heldtaxes and by thedoing business through international banking divisions (IBEs)entities (“IBEs”) of the Corporation and the Bank and bythrough the Bank’s subsidiary FirstBank Overseas Corporation.Corporation, in which the interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation. The IBEs and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by the IBEs operating in Puerto Rico. Since 2004, IBEs that operate as a unit of a bank are imposedpay income taxtaxes at normal rates to the extent that the IBEs’ net income exceeds predetermined percentages of the bank’s total net taxable income; such limitations were 30% of total net taxable income for a taxable year commencing between July 1, 2004 and July 1, 2005, andthe percentage is 20% of such total net taxable income for taxable years commencing thereafter. On August 2005, the Governor of Puerto Rico signed into law a transitory additional surtax of 2.5% over net taxable income, effectively increasing the maximum statutory regular rate to 41.5%. This transitory additional tax is in effect for taxable years 2005 and 2006 and had a retroactive effect to Januaryafter July 1, 2005.
     For additional information relating to income taxes, see Note 25 to the Corporation’s audited financial statements.
2007 compared to 2006
     For the year ended December 31, 2007, the Corporation recognized an income tax expense of $21.6 million, compared to $27.4 million in 2006. The decrease in income tax expense was mainly due to lower taxable income coupled with the effect of a lower statutory tax rate in Puerto Rico for 2007 (39% in 2007 compared to 43.5% in 2006). As of December 31, 2007, the Corporation evaluated its ability to realize the deferred tax asset and concluded, based on the evidence available, that it is more likely than not that some of the deferred tax asset will not be realized and thus, established a valuation allowance of $4.9 million, compared to a valuation allowance amounting to $6.1 million as of December 31, 2006. As of December 31, 2007, the deferred tax asset, net of the valuation allowance of $4.9 million, amounted to approximately $90.1 million compared to $162.1 million as of December 31, 2006. The significant decrease in the deferred tax asset is due to the reversal during the third quarter of 2007 of the deferred tax asset related to the class action lawsuit contingency of $74.25 million recorded as of December 31, 2005 and due to the tax impact of the adoption of SFAS 159, on January 1, 2007, of approximately $58.7 million.  The Corporation reached an agreement with the lead class action plaintiff during 2007 and payments totaling the previously reserve amount of $74.25 million were made.

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2006 compared to 2005
     The income tax provision for income tax amounted2006 increased by $12.4 million compared to $15.0 million (or 12% of pre-tax earnings) for 20052005. The increase in 2006 as compared to $46.5 million (or 21% of pre-tax earnings) in 2004, and $18.3 million (or 13% of pre-tax earnings) in 2003. The decrease in 2005 as compared to 2004 iswas mainly due to totala decrease in deferred tax benefits of $60.2$28.5 million recognized duringmainly due to deferred tax benefits recorded in 2005 related to the yearpossible class action lawsuit settlement that was partially offset by a decrease in the current tax provision due to lower taxable income.
     The Corporation evaluated its ability to realize the deferred tax asset and concluded, based on available evidence, that it is more likely than not that some of the deferred tax assets will not be realized and thus, established a valuation allowance of $6.1 million. As of December 31, 2006, the deferred tax asset, net of the valuation allowance, amounted to approximately $162.1 million compared to $130.1 million as of December 31, 2005, including a valuation allowance of $3.2 million.
     The current income tax provision of $59.2 million in 2006 decreased by $16.1 million compared to 2005. The decrease in 2006 as compared to 2005 was mainly composeddue to a decrease in taxable income partly offset by a change in the proportion of $30.1 millionexempt and taxable income as a result of unrealized losses on derivative instruments, $29.0 million as a result of accrued amount for class action settlement and $3.7 million as a result of increases in the allowance for loan losses, net of increases in the current tax provision. The increase in 2004 as compared to 2003 is mainly due to a higher current tax provision and lower positive changes in temporary differences.
     The current provision for income taxes amounted to $75.2 million, compared to $53.0 million in 2004, and $45.0 million in 2003. The increase in the current provision for 2005, when compared to 2004, is attributed to significant increases in the Corporation’s taxable income generated from the Corporation’s loan portfolios.portfolios and decreases in tax exempt income mainly from the Corporation’s investment portfolios and by an increase in non-qualifying IBE income that under current legislation were taxed at regular rates. As discussed above, income from IBEs that operate as a unit of a bank that exceed certain thresholds are taxed at regular income tax rates. The change in the proportion of exempt and taxablecurrent income resulted in a higher current tax. In addition, the currenttax provision was also impacted by the transitorytemporary surtax of 2.5%2.0% over FirstBank’s net taxable income, explained above, which resulted in an additional income tax provision of $3.6$1.7 million.
     DeferredThe income taxes reflect primarily the effect of “temporary” differences between amounts of assets and liabilities for financial reporting purposes and their respective tax bases. The provision for income taxes includeincludes total deferred income tax benefits of $31.7 million and $60.2 million $6.5 millionfor 2006 and $26.7 million for 2005, 2004 and 2003 respectively, which are mainly attributedattributable to temporary differences related to the above referred allowance for loan losses, unrealized losses on derivative instruments and class action lawsuit settlement.
OPERATING SEGMENTS
     Based upon the Corporation’s organizational structure and the information provided to the class action related liability recorded atChief Operating Decision Maker and to a lesser extent to the Board of Directors, the operating segments are driven primarily by the Corporation’s legal entities. As of December 31, 2005.
2007, the Corporation had four reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; and Treasury and Investments, as well as an Other category reflecting other legal entities reported separately on an aggregate basis. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Corporation’s organizational chart, nature of the products, distribution channels and the economic characteristics of the products were also considered in the determination of the reportable segments. For additional information relatingregarding First BanCorp’s reportable segments, please refer to income taxes, see Note 2631 “Segment Information” to the Corporation’s financial statements.statements for the year ended December 31, 2007 included in Item 8 of this Form 10-K.
     The accounting policies of the segments are the same as those described in Note 1 — “Nature of Business and Summary of Significant Accounting Policies” to the Corporation’s audited financial statements for the year ended December 31, 2007 included in Item 8 of this Form 10-K. The Corporation evaluates the performance of the segments based on net interest income after the estimated provision for loan and lease losses, non-interest income and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-earning assets less the allowance for loan and lease losses.

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     The Treasury and Investment segment loans funds to the Consumer (Retail) Banking, Mortgage Banking and Commercial and Corporate Banking segments to finance their lending activities and borrows funds from those segments. The Consumer (Retail) Banking segment also loans funds to other segments. The interest rates charged or credited by Treasury and Investment and the Consumer (Retail) Banking segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment.
Consumer (Retail) Banking
     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. Loans to consumers include auto, credit card and personal loans. Deposit products include checking and savings accounts, Individual Retirement Accounts (IRA) and retail certificates of deposit. Retail deposits gathered through each branch of FirstBank’s retail network serve as one of the funding sources for the lending and investment activities.
     Consumer lending growth has been mainly driven by auto loan originations. The growth of these portfolios has been achieved through a strategy of providing outstanding service to selected auto dealers that provide the channel for the bulk of the Corporation’s auto loan originations. This strategy is directly linked to our commercial lending activities as the Corporation maintains strong and stable auto floor plan relationships, which are the foundation of a successful auto loan generation operation. The Corporation continues to strengthen the commercial relations with floor plan dealers, which directly benefit the Corporation’s consumer lending operation and are managed as part of the consumer banking activities.
     Personal loans and, to a lesser extent, marine financing and a small credit card portfolio also contribute to interest income generated on consumer lending. Management plans to continue to be active in the consumer loans market, applying the Corporation’s strict underwriting standards.
     The highlights of the Consumer (Retail) Banking segment financial results for the year ended December 31, 2007 include the following:
Segment income before taxes for the year ended December 31, 2007 was $82.9 million compared to $139.6 million and $112.5 million for the years ended December 31, 2006 and 2005, respectively.
Net interest income for the year ended December 31, 2007 was $205.3 million compared to $238.5 million and $200.8 million for the years ended December 31, 2006 and 2005, respectively. The decrease in net interest income for the year 2007 as compared to 2006 was primarily attributable to a decrease in the average of interest-earning assets due to principal repayments and charge-offs relating to the auto and personal loans portfolio coupled with the sale of approximately $15.6 million during 2007 of the Corporation’s credit card portfolio. The increase for 2006 compared to 2005 was mainly driven by the increase in the average volume of interest-earning assets primarily due to new loan originations, in particular increases in the auto and personal loans portfolio.
The provision for loan and lease losses for the year 2007 increased by $20.2 million compared to the same period in 2006 and $1.5 million when comparing 2006 with the same period in 2005. The increase in the provision for loan and lease losses was mainly due to a higher general reserve for the Puerto Rico consumer loan portfolio, particularly auto loans, as a result of weak economic conditions in Puerto Rico. Increasing trends in non-performing loans and charge-offs experienced during 2007 and 2006 were affected by the fiscal and economic situation of Puerto Rico. According to the Puerto Rico Planning Board, Puerto Rico has been in a midst of a recession since the third quarter of 2005. The slowdown in activity is the result of, among other things, higher utilities prices, higher taxes, government budgetary imbalances, the upward trend in short-term interest rates and the flattening of the yield curve, and higher levels of oil prices.
Non-interest income for the year ended December 31, 2007 was $27.3 million compared to $23.5 million and $23.1 million for the years ended December 31, 2006 and 2005, respectively. The

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increase in non-interest income for 2007, as compared to 2006, was driven by a gain on sale of a credit card portfolio of $2.8 million resulted from a portfolio sold pursuant to a strategic alliance agreement reached with a U.S. financial institution.
Direct non-interest expenses for the year ended December 31, 2007 were $94.1 million compared to $86.9 million and $77.3 million for the years ended December 31, 2006 and 2005, respectively. The increase in direct operating expense for 2007 and 2006 was mainly due to increases in employees’ compensation and benefits and occupancy and equipment. The increase in employees’ compensation and benefits was mainly from increases in the headcount in the Corporation’s retail bank branch network coupled with increases in average salary and employee benefits to support the growth of the segment.
Commercial and Corporate Banking
     The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for the public sector and specialized industries such as healthcare, tourism, financial institutions, food and beverage, shopping centers and middle-market clients. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, and other products such as cash management and business management services. A substantial portion of this portfolio is secured by commercial real estate. Although commercial loans involve greater credit risk because they are larger in size and more risk is concentrated in a single borrower, the Corporation has and maintains an effective credit risk management infrastructure designed to mitigate potential losses associated with commercial lending, including strong underwriting and loan review functions, sales of loan participations and continuous monitoring of concentrations within portfolios.
     For this segment, the Corporation follows a strategy aimed to cater to customer needs in the commercial loans middle market segment by building strong relationships and offering financial solutions that meet customers’ unique needs. Starting in 2005, the Corporation expanded its distribution network and participation in the commercial loans middle market segment by focusing on customers with financing needs up to $5 million. The Corporation established 5 regional offices that provide coverage throughout Puerto Rico. The offices are staffed with sales, marketing and credit officers able to provide a high level of personalized service and prompt decision-making.
     The highlights of the Commercial and Corporate Banking segment financial results for the year ended December 31, 2007 include the following:
Segment income before taxes for the year ended December 31, 2007 was $77.8 million compared to $123.8 million and $145.9 million for the years ended December 31, 2006 and 2005, respectively.
Net interest income for the year ended December 31, 2007 was $135.9 million compared to $154.7 million and $153.5 million for the years ended December 31, 2006 and 2005, respectively. The decrease in net interest income for the year 2007 was mainly driven by a decrease in the average volume of interest-earning assets. The decrease in the segment’s average volume of interest-earning assets was mainly due to the substantial partial repayment of $2.4 billion received from Doral in May 2006 that reduced the segment’s outstanding secured commercial loan from local financial institutions. The repayment also reduced the Corporation’s loans-to-one borrower exposure. The slight increase in net interest income in 2006 as compared to 2005 is mainly attributable to an increase in net interest margin due to the increase in short-term rates. The majority of the Corporation’s commercial and construction loans are variable rate loans tied to short-term indexes. During 2006, the Federal Reserve Bank increased its targeted federal funds rate by 108 basis points, and, correspondingly, LIBOR and Prime rates also increased.
The provision for loan and lease losses for the year 2007 was $41.2 million compared to $7.9 million and $2.7 million for the years 2006 and 2005, respectively. The increase in the provision for loan and lease losses for 2007, compared to 2006, was mainly driven by higher general and specific reserves relating to the Miami Agency construction loan portfolio due to the slowdown of the U.S. housing market, an $8.1 million charge due to the collateral impairment on the previously discussed troubled loan relationship in the Miami Agency, and to the increase in the loan portfolio. The increase for

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2006, compared to 2005, was primarily attributable to the growth in the Corporation’s commercial portfolio coupled with increasing trends in non-performing loans and charge-offs experienced during 2006.
Total non-interest income for the year ended December 31, 2007 amounted to $6.3 million compared to a non-interest loss of $6.1 million and non-interest income of $5.6 million for the years ended December 31, 2006 and 2005 respectively. The fluctuation in non-interest income for 2007, as compared to 2006, and 2006 as compared to 2005, was mainly attributable to the net loss of $10.6 million on the partial extinguishment of a secured commercial loan to a local financial institution, recorded in 2006.
Direct non-interest expenses for 2007 were $23.2 million compared to $16.9 million and $10.5 million for 2006 and 2005, respectively. The increase in direct operating expense for 2007, as compared to 2006, was mainly from increases in employees’ compensation due to increases in average salary and employee benefits and increases in foreclosure related expenses associated with the impaired loans in the Miami Agency coupled with the expense allocated to this segment related to the FDIC insurance premium expense . The increase for 2006, as compared to 2005, was driven by increases in employees’ compensation and benefits primarily due to the full deployment of the Corporation’s middle-market business strategy and increases in average salary and employee benefits to support the growth of the segment. The staffing of the middle market regional offices was done during 2005 with the full year salary expense effect in 2006.
Mortgage Banking
     The Mortgage Banking segment conducts its operations mainly through FirstBank and its mortgage origination subsidiary, FirstMortgage. These operations consist of the origination, sale and servicing of a variety of residential mortgage loans products. Originations are sourced through different channels such as branches, mortgage brokers, real estate brokers, and in association with new project developers. FirstMortgage focuses on originating residential real estate loans, some of which conform to Federal Housing Administration (“FHA”), Veterans Administration (“VA”) and Rural Development (“RD”) standards. Loans originated that meet FHA standards qualify for the federal agency’s insurance program whereas loans that meet VA and RD standards are guaranteed by their respective federal agencies. Mortgage loans that do not qualify under these programs are commonly referred to as conventional loans. Conventional real estate loans could be conforming and non-conforming. Conforming loans are residential real estate loans that meet the standards for sale under the Fannie Mae and Freddie Mac programs whereas loans that do not meet the standards are referred to as non-conforming residential real estate loans. The Corporation’s strategy is to penetrate markets by providing customers with a variety of high quality mortgage products to serve their financial needs faster, simpler and at competitive prices.
     The Mortgage Banking segment also acquires and sells mortgages in the secondary markets. From time to time, residential real estate conventional conforming loans are directly sold to Fannie Mae and Freddie Mac, or are grouped into pools of $1 million or more in aggregate principal balance and exchanged for Fannie Mae or Freddie Mac-issued mortgage-backed securities, which the Corporation sells to investors.
     The highlights of the Mortgage Banking segment financial results for the year ended December 31, 2007 include the following:
Segment income before taxes for the year ended December 31, 2007 was $18.6 million compared to $24.4 million and $25.5 million for the years ended December 31, 2006 and 2005, respectively.
Net interest income for the year ended December 31, 2007 was $39.0 million compared to $43.4 million and $39.0 million for the years ended December 31, 2006 and 2005, respectively. The decrease in net interest income for 2007, as compared to 2006, was principally due to declining loan yields on the residential mortgage loan portfolio resulting from the increase in non-performing loans. The increase in net interest income for the year 2006, as compared to 2005, was mainly driven by the increase in the average outstanding balance of mortgage loans, partially offset by a reduction in net

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interest margin due to the flattening of the yield curve and by a significantly higher balance of non-accruing loans.
The provision for loan and lease losses for the year 2007 was $1.6 million compared to $4.0 million and $2.1 million for the years ended December 31, 2006 and 2005, respectively. The decrease in 2007, as compared to 2006, was due to the fact that in 2006 after a detailed review of the residential mortgage loan portfolio the Corporation determined that it was needed to increase its allowance for loan and lease losses based on the deterioration of the economic conditions in Puerto Rico and the increase in the home price index in Puerto Rico. The Corporation continues to update the analysis on a yearly basis, the latest being in March 2007 when the Corporation obtained similar results. As a consequence, the Corporation determines that the allowance for loan losses for the residential mortgage loan portfolio is maintained at an adequate level. The increase in the provision for loan and lease losses for 2006, as compared to 2005, was mainly due to growth in the segment’s portfolio coupled with increasing trends in non-performing loans and revisions to the allowance based on deteriorating economic conditions.
Non-interest income for the year ended December 31, 2007 was $3.0 million compared to $2.5 million and $3.9 million for the years ended December 31, 2006 and 2005, respectively. The increase for 2007 was driven by higher service charges on loans associated with the growth in the residential mortgage loans portfolio coupled with a negative lower-of-cost-or-market adjustment of $1.0 million recorded in 2006 to the loans-held-for-sale portfolio. This negative adjustment, resulting from increases in long-term rates, was the main reason for the decrease in non-interest income for 2006 as compared to 2005.
Direct non-interest expenses for 2007 were $21.8 million compared to $17.5 million and $15.4 million for the years 2006 and 2005, respectively. The increase in direct operating expense for 2007 was mainly due to increases in employees’ average salary compensation and higher employer benefits. The Corporation continued to commit substantial resources to this segment with the goal of becoming a leading institution in the highly competitive residential mortgage loans market.
Treasury and Investments
     The Treasury and Investments segment is responsible for the Corporation’s investment portfolio and treasury functions designed to manage and enhance liquidity. This segment sells funds to the Commercial and Corporate Banking, Mortgage Banking, and Consumer (Retail) Banking segments to finance their lending activities and also purchases funds gathered by those segments. The interest rates charged or credited by Treasury and Investments are based on market rates.
     The highlights of the Treasury and Investments segment financial results for the year ended December 31, 2007 include the following:
Segment loss before taxes for the year ended December 31, 2007 amounted to $14.5 million compared to a loss of $79.2 million and a loss of $12.8 million for the years ended December 31, 2006 and 2005, respectively.
Net interest loss for the year ended December 31, 2007 was $4.5 million compared to a loss of $63.2 million and a loss of $20.7 million for the years ended December 31, 2006 and 2005, respectively. The lower net interest loss for 2007 was caused by the effect in 2006 earnings of non-cash losses from changes in the fair value of derivative instruments prior to the implementation of the long-haul method of accounting on April 3, 2006. During the first quarter of 2006, the Corporation recorded unrealized losses of $69.7 million for non-hedge derivatives as part of interest expense. The adoption of fair value hedge accounting in the second quarter of 2006 and the adoption of SFAS 159 in 2007 reduced the accounting volatility that previously resulted from the accounting asymmetry created by accounting for the financial liabilities at amortized cost and the derivatives at fair value. The increase in net interest loss for the year 2006, as compared to 2005, was mainly driven by negative changes in the valuation of derivative instruments, mainly interest rate swaps that hedge designated and undesignated brokered CDs in 2006, changes in

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net payments on interest rate swaps included as part of interest expense, and a reduction in net interest margin due to the flattening of the yield curve. The decrease in net interest margin for 2006 was also attributable to the payment of $2.4 billion received from a local financial institution. Proceeds from the repayment were invested temporarily in short-term investments at zero or negative margin, reducing the segment’s net interest margin. During the second half of 2006, the Corporation used a part of the repayment proceeds to repay higher rate outstanding brokered CDs that matured.
Non-interest loss for the year ended December 31, 2007 amounted to $2.2 million compared to a loss of $8.3 million and non-interest income of $12.9 million for the years ended December 31, 2006 and 2005, respectively. The decrease in non-interest loss for 2007 was driven by lower other-than-temporary impairment charges in the Corporation’s equity securities portfolio, which decreased by $9.3 million as compared to 2006. The decrease in non-interest income for 2006 was mainly attributable to an increase in other-than-temporary impairment charges of $6.9 million in the Corporation’s investment portfolio when compared to 2005.
Direct non-interest expenses for 2007 were $7.8 million compared to $7.7 million and $5.0 million for the years 2006 and 2005, respectively. The increase in direct operating expense for 2007 and 2006 was mainly due to increases in employees’ compensation and benefits.

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FINANCIAL CONDITION AND OPERATING DATA ANALYSIS
Financial Condition
     The following table presents an average balance sheet of the Corporation for the following years:
                        
December 31, 2005 2004 2003  2007 2006 2005 
(Dollars in thousands) 
 (Dollars in thousands) 
Assets
  
Interest earning assets: 
Interest-earning assets: 
Money market investments $636,114 $308,962 $455,242  $440,598 $1,444,533 $636,114 
Government obligations 2,493,725 2,061,280 851,140  2,687,013 2,827,196 2,493,725 
Mortgage-backed securities 2,738,388 2,729,125 2,256,790  2,296,855 2,540,394 2,738,388 
Corporate bonds 48,311 57,462 181,063  7,711 8,347 48,311 
FHLB stock 71,588 56,698 40,447  46,291 26,914 71,588 
Equity securities 50,784 43,876 34,158  8,133 27,155 50,784 
              
Total investments 6,038,910 5,257,403 3,818,840  5,486,601 6,874,539 6,038,910 
              
Residential real estate loans 1,813,506 1,127,525 947,450  2,914,626 2,606,664 1,813,506 
Construction loans 710,753 379,356 314,588  1,467,621 1,462,239 710,753 
Commercial loans 7,171,366 5,079,832 3,688,419  4,797,440 5,593,018 7,171,366 
Finance leases 243,384 183,924 149,539  379,510 322,431 243,384 
Consumer loans 1,570,468 1,244,386 1,188,730  1,729,548 1,783,384 1,570,468 
              
Total loans 11,509,477 8,015,023 6,288,726  11,288,745 11,767,736 11,509,477 
              
Total interest earning assets 17,548,387 13,272,426 10,107,566 
Total non-earning assets (1) 452,652 348,712 314,857 
Total interest-earning assets 16,775,346 18,642,275 17,548,387 
Total non-interest-earning assets (1) 438,861 540,636 452,652 
              
Total assets $18,001,039 $13,621,138 $10,422,423  $17,214,207 $19,182,911 $18,001,039 
              
Liabilities and stockholders’ equity
  
Interest bearing liabilities: 
Interest bearing checking accounts $376,360 $317,634 $259,438 
Interest-bearing liabilities: 
Interest-bearing checking accounts $443,420 $371,422 $376,360 
Savings accounts 1,092,938 1,020,228 922,875  1,020,399 1,022,686 1,092,938 
Certificates of deposit 8,386,463 5,065,390 4,133,919  9,291,900 10,479,500 8,386,463 
              
Interest bearing deposits 9,855,761 6,403,252 5,316,232  10,755,719 11,873,608 9,855,761 
Other borrowed funds 5,001,384 4,235,215 2,964,417  3,449,492 4,543,262 5,001,384 
FHLB advances 890,680 1,056,325 633,693  723,596 273,395 890,680 
              
Total interest bearing liabilities 15,747,825 11,694,792 8,914,342 
Total non-interest bearing liabilities 976,705 799,114 607,557 
Total interest-bearing liabilities 14,928,807 16,690,265 15,747,825 
Total non-interest-bearing liabilities (2) 959,361 1,294,563 976,705 
              
Total liabilities 16,724,530 12,493,906 9,521,899  15,888,168 17,984,828 16,724,530 
Stockholders’ equity:  
Preferred stock 550,100 550,100 408,809  550,100 550,100 550,100 
Common stockholders’ equity 726,409 577,132 491,715  775,939 647,983 726,409 
              
Stockholders’ equity 1,276,509 1,127,232 900,524  1,326,039 1,198,083 1,276,509 
              
Total liabilities and stockholders’ equity $18,001,039 $13,621,138 $10,422,423  $17,214,207 $19,182,911 $18,001,039 
              
 
(1) Includes the allowance for loan losses and the valuation on investment securities available-for-sale.
(2)Includes changes in fair value on liabilities elected to be measured at fair value under SFAS 159.
     The Corporation’s total average assets were $17.2 billion and $19.2 billion as of December 31, 2007 and 2006, respectively; a decrease for 2007 of $2.0 billion or 10% as compared to 2006. The decrease in average assets was due to deleveraging of the balance sheet. In particular, the Corporation made use of short-term money market investments to pay down brokered certificates deposits and repurchase agreements as they matured and sold lower yielding U.S. Treasury and mortgage-backed securities. The average balance of the commercial loan portfolio decreased by $795.6 million due to the repayment of $2.4 billion received from a local financial institution in May 2006 and the partial extinguishment of $50 million and the recharacterization of approximately $183.8 million of secured commercial loans extended to R&G Financial in February 2007. As of December 31, 2006, the increase in average assets compared to 2005 was mainly due to: (1) an increase of $808.4 million in money market instruments due to the repayment of $2.4 billion received from a local financial institution that was temporarily invested in short-term investments; (2) an increase of $793.2 million in residential real estate loans; (3) an increase of $751.5 million in construction loans; and (4) an increase of $212.9 million in consumer loans. These positive variances were

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partially offset by a decrease of $1.6 billion in commercial loans mainly due to the repayment of $2.4 billion received from a local financial institution in May 2006.
     The Corporation’s total average liabilities were $15.9 billion and $18.0 billion as of December 31, 2007 and 2006, respectively, a decrease of $2.1 billion or 12% as compared to 2006. The decrease in average liabilities for 2007, as compared to 2006, was driven by a lower average balance of brokered CDs and repurchase agreements due to the deleveraging of the Corporation’s balance sheet. In addition, the redemption of the Corporation’s $150 million medium-term notes during the second quarter of 2007, which carried a cost higher than the overall cost of funding, contributed to the decrease in average liabilities in 2007. These reductions were partially offset by a higher average volume of advances from FHLB.
     As of December 31, 2006, the increase in average liabilities compared to 2005 was mainly due to increases in brokered CDs partially offset by decreases in other borrowed funds and FHLB advances. The increase in brokered CDs and decrease in FHLB advances was partly due to the Corporation’s decision to replace FHLB advances as these matured since the collateral was under evaluation. During 2005, the FHLB evaluated the eligibility of collateral that secured the commercial loans to local financial institutions and concluded that such collateral was not eligible to secure advances from the FHLB.
Assets
     The Corporation’s total assets atas of December 31, 20052007 amounted to $19.9$17.2 billion $4.3as compared to $17.4 billion over the $15.6 billion atas of December 31, 2004; the increase is mainly attributable2006, a decrease of $203.3 million. The decrease in total assets as of December 31, 2007, compared to significant increasestotal assets as of December 31, 2006, resulted from an overall decrease in the Corporation’s loan portfolios and to the leveraged growth of the Corporation’s investment portfolio.
securities. As previously discussed on March 31, 2005noted, the Corporation, completed the acquisition of Ponce General, the holding company of First Bank Florida. Total assets acquired amounted to approximately $546.2 million. Loans amounted to approximately $476.0 million and deposits $439.1 million. The purchase price resulted in a premium of approximately $36 million. The Corporation recognized goodwill of $19 million and core deposit intangibles of $17 million as part of its strategy, has deleveraged its balance sheet by selling lower yield investments securities to pay down and retire higher cost brokered CDs and repurchase agreements as they matured. For the purchase price allocation.year 2007 approximately $956 million of lower yielding U.S. Treasury bonds and mortgage-backed securities were sold, of which approximately $566 million were opportunistically re-invested in higher yielding U.S. Agency mortgage-backed securities. Furthermore, the Corporation’s deferred tax asset decreased by $72.0 million in 2007 due to the effect of the adoption of SFAS 159 on January 1, 2007 in the amount of approximately $58.7 million and a reversal related to the class action settlement paid in 2007.

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Loans Receivable
     The following table presents the composition of the loan portfolio including loans held for sale atas of year-end for each of the last five years.
                                        
 % of % of % of % of % of                     
December 31, 2005 Total 2004 Total 2003 Total 2002 Total 2001 Total  2007 2006 2005 2004 2003 
 (Dollars in thousands)  (Dollars in thousands)
Residential real estate loans $2,346,945  18% $1,322,650  14% $1,023,188  15% $896,252  16% $542,679  13%
Residential real estate loans, including loans held for sale $3,164,421 $2,772,630 $2,346,945 $1,322,650 $1,023,188 
                                
Commercial real estate loans 1,090,193  9% 690,900  7% 683,766  10% 651,798  11% 602,922  14%
Commercial mortgage 1,279,251 1,215,040 1,090,193 690,900 683,766 
Construction loans 1,137,118  9% 398,453  4% 328,175  5% 259,052  5% 219,396  5% 1,454,644 1,511,608 1,137,118 398,453 328,175 
Commercial loans 2,421,219  19% 1,871,851  19% 1,623,964  23% 1,427,086  25% 1,245,443  29% 3,231,126 2,698,141 2,421,219 1,871,851 1,623,964 
Commercial loans to local financial institutions collateralized by real estate mortgages and pass-through trust certificates 3,676,314  29% 3,841,908  40% 2,061,437  29% 1,119,532  20% 555,228  13% 624,597 932,013 3,676,314 3,841,908 2,061,437 
                                
Total commercial 8,324,844  66% 6,803,112  70% 4,697,342  67% 3,457,468  61% 2,622,989  61%
Total commercial loans 6,589,618 6,356,802 8,324,844 6,803,112 4,697,342 
Finance leases 280,571  2% 212,234  2% 159,696  2% 142,421  3% 127,494  3% 378,556 361,631 280,571 212,234 159,696 
Consumer loans 1,733,569  14% 1,359,998  14% 1,160,829  16% 1,138,882  20% 1,013,801  23% 1,667,151 1,772,917 1,733,569 1,359,998 1,160,829 
                                
Total $12,685,929  100% $9,697,994  100% $7,041,055  100% $5,635,023  100% $4,306,963  100%
Total loans, gross 11,799,746 11,263,980 12,685,929 9,697,994 7,041,055 
                                
Less: 
Allowance for loan and lease losses  (190,168)  (158,296)  (147,999)  (141,036)  (126,378)
           
Total loans, net $11,609,578 $11,105,684 $12,537,930 $9,556,958 $6,914,677 
           

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Lending Activities
     TotalGross total loans receivable increased by $3.0 billion$535.8 million in 20052007, or 5%, when compared to 2004.2006 due to an increase in the Corporation’s commercial loan portfolio (other than secured loans to local financial institutions) and the increase in the residential mortgage loan portfolio driven by new originations. As shown in the table above, the 2005 loan2007 loans portfolio was comprised of commercial (66%(56%), residential real estate (18%(27%), and consumer and finance leases (16%(17%). Of the total gross loans of $12.7$11.8 billion for 2005,2007, approximately 84%80% have credit risk concentration in Puerto Rico, 10%12% in Florida (USA)the United States and 6%8% in the Virgin Islands.Islands, as shown in the following table.
                 
  Puerto  Virgin       
As of December 31, 2007 Rico  Islands  United States  Total 
      (Dollars in thousands)     
Residential real estate loans, including loans held for sale $2,373,601  $430,169  $360,651  $3,164,421 
             
Commercial mortgage  837,097   65,952   376,202   1,279,251 
Construction loans  668,134   143,561   642,949   1,454,644 
Commercial loans  3,071,060   133,376   26,690   3,231,126 
Commercial loans to local financial institutions collateralized by real estate mortgages and pass-through trust certificates  624,597         624,597 
             
Total commercial loans  5,200,888   342,889   1,045,841   6,589,618 
Finance leases  378,556         378,556 
Consumer loans  1,482,497   142,531   42,123   1,667,151 
             
Total loans, gross $9,435,542  $915,589  $1,448,615  $11,799,746 
             
     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 release purchases from small mortgage bankers. For purpose of the following presentation, the Corporation separately presented commercial loans to local financial institutions because it believes this approach provides a better representation of the Corporation’s commercial production capacity.
     The following table sets forth certain additional data (including loan production) related to the Corporation’s loan portfolio net of the allowance for loan and lease losses for the dates indicated:
                     
  For the year ended December 31,
  2007  2006  2005  2004  2003 
  (Dollars in thousands)
Beginning balance $11,105,684  $12,537,930  $9,556,958  $6,914,677  $5,523,111 
Residential real estate loans originated and purchased  715,203   908,846   1,372,490   765,486   546,703 
Construction loans originated and purchased  678,004   961,746   1,061,773   309,053   259,684 
Commercial loans originated and purchased  1,898,157   2,031,629   2,258,558   1,014,946   924,712 
Secured commercial loans disbursed to local financial institutions        681,407   2,228,056   1,258,782 
Finance leases originated  139,599   177,390   145,808   116,200   67,332 
Consumer loans originated and purchased  653,180   807,979   992,942   746,113   583,083 
                
Total loans originated and purchased  4,084,143   4,887,590   6,512,978   5,179,854   3,640,296 
Sales and securitizations of loans  (147,044)  (167,381)  (118,527)  (180,818)  (228,824)
Repayments and prepayments  (3,084,530)  (6,022,633)  (3,803,804)  (2,263,043)  (1,938,301)
Other (decreases) increases(1)(2)
  (348,675)  (129,822)  390,325   (93,712)  (81,605)
                
Net increase (decrease)  503,894   (1,432,246)  2,980,972   2,642,281   1,391,566 
                
 
Ending balance $11,609,578  $11,105,684  $12,537,930  $9,556,958  $6,914,677 
                
 
Percentage increase (decrease)  4.54%  -11.42%  31.19%  38.21%  25.20%
(1)Includes the change in the allowance for loan and lease losses and cancellation of loans due to the repossession of the collateral.
(2)For 2007, includes the recharacterization of securities collateralized by loans of approximately $183.8 million previously accounted for as a secured commercial loan with R&G Financial. For 2005, includes $470 million of loans acquired as part of the Ponce General acquisition.

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Residential Real Estate Loans
     During 2005,Residential real estate loan production and purchases for the year ended December 31, 2007 decreased by $193.6 million, compared to the same period in 2006 and decreased by $463.6 million, compared to the same period in 2005. The decrease in mortgage loan production was attributable to deteriorating economic conditions in Puerto Rico, the slowdown in the United States housing market and stricter underwriting standards. The Corporation decided to make certain adjustments to its underwriting standards designed to enhance the credit quality of its mortgage loan portfolio, in light of worsening macroeconomic conditions in Puerto Rico. The Corporation’s residential real estate loan portfolio is primarily composed of fully amortizing fixed-rate loans. In accordance with the Corporation’s underwriting guidelines, residential real estate loans are fully documented loans and the Corporation is not actively involved in the origination of negative amortization loans or option adjustable rate mortgage loans.
     Residential real estate loans represent 18% of total loans originated and purchased for 2007, with the residential mortgage loans balance increasing by $391.8 million, from $2.8 billion in 2006 to $3.2 billion in 2007. The Corporation’s strategy is to penetrate markets by providing customers with a variety of high quality mortgage products. The Corporation’s residential mortgage loansloan originations continued to be driven by FirstMortgage, the mortgage loan origination subsidiary.FirstMortgage. The Corporation continued to commit substantial resources to this operation with the goal of becoming a leading institution in the highly competitive residential mortgage loans market. The Corporation established FirstMortgage as a stand-alone subsidiary in 2003. As of December 31, 2007, FirstMortgage had a result, residentialdistribution network of 26 mortgage centers, including stand-alone centers and offices located within FirstBank Puerto Rico branches. FirstMortgage supplements its internal direct originations through its retail network with an indirect business strategy. The Corporation’s Partners in Business, a division of FirstMortgage, partners with mortgage brokers in Puerto Rico to purchase ongoing mortgage loan production. FirstMortgage Realty Group, launched in 2005, focuses on building relationships with realtors by providing resources, office amenities and personnel, to assist real estate loans represent 21% of total loans originatedbrokers in building their individual businesses and purchased for 2005, with the residential mortgage loans balance increasing $1.0 billion, from $1.3 billionclosing transactions. FirstMortgage’s multi-channel strategy has proven to be effective in 2004 to $2.3 billion in 2005. At December 31, 2005, residential real estate loans include $256 million from FirstBank Florida. The Corporation’s strategy is to penetrate markets by providing customers with a variety of high quality mortgage products.capturing business.
     Commercial and Construction Loans
     In recent years, the Corporation has emphasized commercial lending activities and continues to penetrate this market. A substantial portion of this portfolio is collateralized by real estate. As a result, totalTotal commercial loans originated and purchased amounted to $4.0$2.6 billion for 2005,2007, a decrease of $417.2 million when compared to originations during 2006, for total commercial loans portfolio of $8.3$6.6 billion at December 31, 2005. The Corporation’s subsidiary bank loan agency in Coral Gables accounted for2007. As a substantial portionresult of new originations net of prepayments and maturities, the constructioncommercial loans increase during 2005. The totalbalance, excluding secured commercial loans receivableto local financial institutions, increased by the agency increased$0.5 billion, from $13.4 million at$5.4 billion as of December 31, 20042006 to $671.6 million at$6.0 billion as of December 31, 2005.2007.
     The majority ofdecrease in commercial and construction loan production for 2007, compared to 2006, was mainly due to adverse economic conditions in Puerto Rico and in the loans held by the agency are construction loans collateralized byU.S. real estate collateral. Commercialmarket (principally in the state of Florida) and the implementation of stricter underwriting standards. According to the Puerto Rico Planning Board, Puerto Rico has been in a midst of a recession, causing a slowdown in the commercial business activity. The U.S. mainland real estate market also has slowed, influenced, among other things, by declining home prices and an oversupply of available property inventory. Increases in property insurance premiums along with rising gas prices are also affecting the areas in which the Corporation does business in the U.S. mainland. Also, since the third quarter of 2006, the Corporation decided to limit the origination and reduce the exposure of condo conversion loans atin the U.S. mainland. As a result, the condo conversion loan portfolio decreased from its peak in May 2006 of approximately $653 million to approximately $305 million as of December 31, 2005 include $320 million from FirstBank Florida, composed primarily of $288 million of commercial mortgage loans.2007.
     Although commercial loans involve greater credit risk because they are larger in size and more risk is concentrated in a single borrower, the Corporation has and continues to develop an effective credit risk management

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infrastructure that mitigates potential losses associated with commercial lending,

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including strong underwriting and loan review functions, sales of loan participations, and continuous monitoring of concentrations within portfolios.
     The Corporation’s commercial loans are primarily variable and adjustable rate loans. Commercial loan originations come from existing customers as well as through referrals and direct solicitations. The Corporation follows a strategy aimed to cater to customer needs in the commercial loans middle-market segment by building strong relationships and offering financial solutions that meet customers’ unique needs. Starting in 2005, the Corporation expanded its distribution network and participation in the commercial loans middle market segment.segment by focusing on customers with financing needs in amounts up to $5 million. The Corporation established 5 regional offices that provide coverage throughout Puerto Rico. The offices are staffed with sales, marketing and credit officers able to provide a high level of personalized service and prompt decision-making.
     The Corporation has a significant lending concentration of $3.1 billion$382.6 million in one mortgage originator in Puerto Rico, Doral, Financial Corporation, atas of December 31, 2005.2007. The Corporation has outstanding $596.7$242.0 million with another mortgage originator in Puerto Rico, R&G Financial, Corporation, for total loans to mortgage originators amounting to $3.7 billion at$624.6 million as of December 31, 2005.2007. These commercial loans are secured by 41,038 individual mortgage loans on residential and commercial real estate with an average principal balance of $89,776 each. The mortgage originators have always paid the loans in accordance with their terms and conditions.estate. In December 2005, the Corporation obtained a waiver from the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico with respect to the statutory limit for individual borrowers (loan to one borrower limit). In May 2006, FirstBank Puerto Rico received a cash payment from Doral Financial Corporation of approximately $2.4 billion, substantially reducing the balance of the secured commercial loan extended to that institution. In addition, during the fourth quarter of 2005, FirstBank Puerto Rico received a partial payment from R&G Financial Corporation of $137 million for its secured commercial loans. As part of the Cease and Desist Order imposed on the Corporation by its regulators theThe Corporation has continued working on the reduction of these exposures with both financial institutions.
     As previously discussed, the execution of the agreements entered into with R&G Financial during 2007 enabled First BanCorp to fulfill the remaining requirement of the consent order signed with banking regulators relating to the mortgage-related transactions with R&G Financial that First BanCorp previously accounted for as commercial loans secured by mortgage loans and pass-through trust certificates.
Consumer Loans
     Consumer lending has increased by $373.6loan originations and purchases are principally driven through the Corporation’s retail network. For the year ended December 31, 2007, consumer loan originations amounted to $653.2 million, a decrease of $154.8 million or 19% compared to the same period in 2006. The decrease in consumer loan originations was attributable to a lower volume of business resulting from adverse economic conditions of Puerto Rico coupled with stricter underwriting standards put in place to improve the credit quality of the portfolio. The decrease of $105.8 million in 2005 whenthe consumer loan balance as of December 31, 2007, compared to 2004, mainlythe balance as of December 31, 2006, was due to principal repayments, higher charge-offs and the sale of approximately $15.6 million of the Corporation’s credit card portfolio pursuant to a strategic alliance agreement reached with a U.S. financial institution. Consumer loan originations are driven by auto loan originations. Management finds the auto market attractive; the growth of this portfolio has been achievedoriginations through a strategy of providing outstanding service to selected auto dealers who provide the channel for the bulk of the Corporation’s auto loan originations.
     The above mentioned This strategy is directly linked to our commercial lending activities as the Corporation maintains strong and stable auto floor plan relationships, which isare the foundation of a successful auto loan generation operation. The Corporation will continue to strengthen the commercial relations with floor plan dealers, which directly benefit the Corporation’s consumer lending operation.
     Personal loans, and to a lesser extent marine financing and a small credit card portfolio also contribute to interest income generated from consumer lending. Management plans to continue to be active in the consumer loan market applying the Corporation’s strict underwriting standards.
Finance Leases
     FinanceOriginations of finance leases, which are mostly composed of loans to individuals to finance the acquisition of an auto,motor vehicles, decreased by $37.8 million or 21% to $139.6 million during 2007 compared to 2006. Driven by new originations the portfolio balance increased by $68.3$16.9 million in 2005.2007. These leases typically have five-year terms and are collateralized by a security interest in the underlying assets. The Corporation exposure to operating leases is minimal.

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     The following table sets forth certain additional data related to the Corporation’s loan portfolio net of the allowance for loan losses for the dates indicated:
                     
  For the year ended December 31, 
  2005  2004  2003  2002  2001 
  (Dollars in thousands) 
Beginning balance $9,556,958  $6,914,677  $5,523,111  $4,215,903  $3,419,520 
Residential real estate loans originated and purchased  1,372,490   765,486   546,703   265,599   271,062 
Construction loans originated and purchased  1,061,773   309,053   259,684   161,933   110,929 
Commercial loans originated and purchased  2,289,148   1,020,753   924,712   581,302   747,300 
Commercial loans disbursed to local financial institutions  681,407   2,228,056   1,258,782   726,250   376,042 
Finance leases originated  145,808   116,200   67,332   54,750   45,094 
Consumer loans originated and purchased  992,942   746,113   583,083   443,154   363,170 
                
Total loans originated and purchased(1)
  6,543,568   5,185,661   3,640,296   2,232,988   1,913,597 
Sales and securitizations of loans  (118,527)  (180,818)  (228,824)  (80,446)  (41,060)
Repayments and prepayments  (3,810,346)  (2,258,180)  (1,928,726)  (747,986)  (985,500)
Other increases (decreases)(2)(3)
  366,277   (104,382)  (91,180)  (97,348)  (90,654)
                
Net increase  2,980,972   2,642,281   1,391,566   1,307,208   796,383 
                
                     
Ending balance $12,537,930  $9,556,958  $6,914,677  $5,523,111  $4,215,903 
                
                     
Percentage increase  31.19%  38.21%  25.20%  31.01%  23.29%
(1)Loan origination for 2002 includes $435 million acquired from JPMorgan Chase VI.
(2)Includes the change in the allowance for loan losses and cancellation of loans due to the repossession of the collateral.
(3)Includes $470 million of loans acquired from Ponce General.
Investment Activities
     The Corporation’s investment portfolio atas of December 31, 20052007 amounted to $6.7$4.8 billion, an increasea decrease of $1.1 billion$732.8 million when compared with the investment portfolio of $5.6$5.5 billion atas of December 31, 2004.2006. The increasedecrease in investment securities resulted mainly from prepayments and maturities received from the purchaseCorporation’s investment portfolio coupled with the sale of government agency,low-yield U.S. Treasury securities and mortgage-backed securities at higher yields. These purchases contributed to increases induring 2007 consistent with the Corporation’s decision to deleverage the balance sheet. For the year 2007, approximately $956 million of lower yielding U.S. Treasury bonds and mortgage-backed securities were sold, of which approximately $566 million were opportunistically re-invested in higher yielding U.S. Agency mortgage-backed securities. The Corporation’s decision to deleverage its balance sheet was influenced, among other things, by the flat to inverted yield curve and to protect net interest income both because ofmargin. As a result, the Corporation decided to repay higher average balancesrate maturing liabilities, in 2005particular brokered CDs, and repurchase agreements as compared to 2004 and higher coupon rates.they matured.
     Total purchases of investmentsinvestment securities, excluding those invested on a short-term basis (money market investments), during 20052007 amounted to approximately $3.0$1.1 billion and were composed mainly of mortgage-backed securities in the amount of $793.4$566 million with a weighted average coupon of 5.13%5.76% and government agency securities and U.S. Treasury securities in the amount of $2.2 billion and$521 million with a weighted average coupon of 5.53%4.46%. Total investment securities called during 2005 amounted to $1.5 billion, these were mainly agency securities.

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The following table presents the carrying value of investments atas of December 31, 20052007 and 2004:2006:
                
 2005 2004  2007 2006 
 (Dollars in thousands)  (Dollars in thousands) 
Money market investments $1,273,759 $920,764  $183,136 $456,470 
  
Investment securities held-to-maturity:  
U.S. Government and agencies obligations 2,190,714 1,822,262  2,365,147 2,258,040 
Puerto Rico Government obligations 14,163 13,643  31,222 31,716 
Mortgage-backed securities 1,233,711 1,541,662  878,714 1,055,375 
Corporate bonds 2,000 2,000 
          
 3,438,588 3,377,567  3,277,083 3,347,131 
          
  
Investment securities available-for-sale:  
U.S. Government and agencies obligations 389,650 197,219  16,032 403,592 
Puerto Rico Government obligations 25,006 24,961  24,521 25,302 
Mortgage-backed securities 1,478,720 995,035  1,239,169 1,253,853 
Corporate bonds 25,381 44,288  4,448 4,961 
Equity securities 29,421 58,092  2,116 12,715 
          
 1,948,178 1,319,595  1,286,286 1,700,423 
          
 
Other equity securities 42,368 81,275  64,908 40,159 
          
Total investments $6,702,893 $5,699,201  $4,811,413 $5,544,183 
          

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Mortgage-backed securities atas of December 31, 20052007 and 2004,2006, consist of:
        
         2007 2006 
 2005 2004   
 (Dollars in thousands)  (Dollars in thousands)
Held-to-maturity:  
FHLMC certificates $20,211 $26,579  $11,274 $15,438 
FNMA certificates 1,213,500 1,515,083  867,440 1,039,937 
          
 1,233,711 1,541,662  878,714 1,055,375 
          
  
Available-for-sale:  
FHLMC certificates 9,962 7,917  158,953 7,575 
GNMA certificates 438,881 103,576  44,340 374,368 
FNMA certificates 1,029,474 883,020  902,198 871,540 
Mortgage pass-through certificates 403 522  133,678 370 
          
 1,478,720 995,035  1,239,169 1,253,853 
          
Total mortgage-backed securities $2,712,431 $2,536,697  $2,117,883 $2,309,228 
          
The carrying amountamounts of investment securities classified as available-for-sale and held-to-maturity atas of December 31, 2005,2007 by contractual maturity (excluding mortgage-backed securities and money market investments) are shown below:
        
         Carrying amount Weighted average yield % 
 Carrying amount Weighted average yield %      
 (Dollars in thousands)  (Dollars in thousands)
U.S. Government and agencies obligations  
Due within one year $150,156 3.98  $254,882 4.14 
Due after five years through ten years 388,650 4.27  7,001 6.05 
Due after ten years 2,041,558 5.83  2,119,296 5.82 
          
 2,580,364 5.49  2,381,179 5.64 
          
  
Puerto Rico Government obligations  
Due after one year through five years 9,817 5.57  13,741 4.99 
Due after five years through ten years 14,789 4.84  24,695 5.80 
Due after ten years 14,563 5.92  17,307 5.53 
          
 39,169 5.42  55,743 5.52 
          
  
Corporate bonds  
Due after one year through five years 2,566 7.75 
Due after five years through ten years 1,882 8.09  1,102 7.70 
Due after ten years 20,933 7.44  5,346 7.16 
          
 25,381 7.52  6,448 7.25 
          
  
Total 2,644,914 5.51  2,443,370 
  
     
Mortgage-backed securities 2,712,431 4.77  2,117,883 
Equity securities 29,421 3.70  2,116 
        
Total investment securities $5,386,766 5.13 
Total investment securities available-for-sale and held-to-maturity $4,563,369 
        

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     Total proceeds from the sale of securities during the year ended December 31, 20052007 amounted to $252.7$960.8 million (2004-$131.6(2006 —$232.5 million).
     In 2005,2007, the Corporation realized gross gains of $21.4$5.1 million (2004(2006$12.2$7.3 million, 2003 - $44.52005 — $21.4 million), and realized gross losses of $711 thousand (2004$1.9 million (2006$15 thousand, 2003$0.2 million, 2005$3.1$0.7 million).
     During the year ended December 31, 2005,2007, the Corporation recognized through earnings approximately $8.4$5.9 million (2004(2006$2.7$15.3 million, 20032005$5.8$8.4 million) of losses in the investment securities available-for-sale portfolio that management considered to be other-than-temporarily impaired.impaired; as such, the cost basis of these securities was written down to the market value as of the date of the analyses and reflected in earnings as a realized loss. The impairment losses were related to equity securities.

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     Net interest income of future periods may be affected by the acceleration in prepayments of mortgage-backed securities. Acceleration in the prepayments of mortgage-backed securities would lower yields on these securities purchased at a premium, 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. Also, net interest income in future periods might be affected given substantial investmentsby the Corporation’s investment in callable securities. The book valuerecent drop in rates in the long end of the callableyield curve had the effect of increasing the probability of the exercise of embedded calls in the approximately $2.1 billion U.S. Agency securities mainly agency securities, amounted to $2.0 billion at December 31, 2005.portfolio during 2008. Lower reinvestment rates and a time lag between calls, prepayments and/or the maturity of investments and actual reinvestment of proceeds into new investments, might also affect net interest income. Increases in short-term interest rates may reduce net interest income, when rates rise the Corporation must pay more in interest on its liabilities while the interest earned on its assets, including investments does not rise as quickly. These risks are directly linked to future period’s market interest rate fluctuations. Refer to the “Quantitative and Qualitative Disclosures about Market Risk”“Risk Management — Interest Rate Risk Management” section of this Management’s Discussion and Analysis for further analysis of the effects of changing interest rates on the Corporation’s net interest income and for the interest rate risk management strategies followed by the Corporation.

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Investment Securities and Loans Receivable Maturities
     The following table presents the maturities or repricing of the loan and investment portfolio atas of December 31, 2005:2007:
                         
  As of December 31, 2005 
  Maturities 
      After one year through five years  After five years    
  One year  Fixed interest  Variable  Fixed interest  Variable    
  or less  rates  interest rates  rates  interest rates  Total 
          (Dollars in thousands)         
Money market investments $1,273,759                  $1,273,759 
                       
Investment securities (1)  347,552  $626,284  $783  $4,451,313  $3,202   5,429,134 
                   
                         
Loans (2):                        
Residential real estate  98,317   205,797   15,849   1,872,688   154,294   2,346,945 
Construction  16,194   18,546   1,014,850   28,061   59,467   1,137,118 
Commercial and commercial real estate  584,453   101,339   607,158   330,411   5,564,365   7,187,726 
Lease financing  63,634   216,937            280,571 
Consumer  397,954   1,231,200   8,270   50,851   45,294   1,733,569 
                   
Total Loans  1,160,552   1,773,819   1,646,127   2,282,011   5,823,420   12,685,929 
                   
Total $2,781,863  $2,400,103  $1,646,910  $6,733,324  $5,826,622  $19,388,822 
                   
(Dollars in thousands)
                         
      2-5 Years  Over 5 Years    
      Fixed  Variable  Fixed  Variable    
  One Year  Interest  Interest  Interest  Interest    
  or Less  Rates  Rates  Rates  Rates  Total 
Money market investments $183,136  $  $  $  $  $183,136 
                         
Mortgage-backed securities  247,297   476,049   298   1,394,239      2,117,883 
                         
Other securities(1)
  321,890   13,948      2,174,556      2,510,394 
           
                         
Total investments  752,323   489,997   298   3,568,795      4,811,413 
           
                         
Loans(2)
                        
                         
Residential real estate  497,693   365,391      2,301,337      3,164,421 
                         
Commercial and commercial mortgage  4,094,929   602,295   192,583   192,929   52,238   5,134,974 
                         
Construction  1,396,257   26,129      32,258      1,454,644 
                         
Finance leases  96,621   281,935            378,556 
                         
Consumer  655,853   944,658      13,088   53,552   1,667,151 
           
                         
Total loans  6,741,353   2,220,408   192,583   2,539,612   105,790   11,799,746 
           
                         
Total earning assets $7,493,676  $2,710,405  $192,881  $6,108,407  $105,790  $16,611,159 
           
 
(1) Equity securities available-for-sale and other equity securities were included under the “one year or less category”.
 
(2) Non-accruing loans were included under the “one year or less category”.

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Non-performing Assets
     Total non-performing assets are the sum of non-accruing loans and investments, other real estate owned and other repossessed properties. Non-accruing loans and investments are loans and investments as to which interest is no longer being recognized. When loans and investments fall into non-accruing status, all previously accrued and uncollected interest is charged against interest income.
     At December 31, 2005, total non-performing assets amounted to approximately $149.0 million (0.75% of total assets) as compared to $108.2 million (0.69% of total assets) at December 31, 2004 and $100.8 million (0.79% of total assets) at December 31, 2003. The Corporation’s allowance for loan losses to non-performing loans was 110.18 % at December 31, 2005 as compared to 153.86% and 147.77% at December 31, 2004 and 2003, respectively.
     The following table presents non-performing assets at the dates indicated.
                     
December 31, 2005  2004  2003  2002  2001 
  (Dollars in thousands) 
Non-accruing loans:                    
Residential real estate $54,777  $31,577  $26,327  $23,018  $18,540 
Commercial, commercial real estate and construction  35,814   32,454   38,304   47,705   29,378 
Finance leases  3,272   2,212   3,181   2,049   2,469 
Consumer  40,459   25,422   17,713   18,993   22,611 
                
   134,322   91,665   85,525   91,765   72,998 
                
                     
Other real estate owned  5,019   9,256   4,617   2,938   1,456 
Other repossessed property  9,631   7,291   6,879   6,222   4,596 
Investment securities        3,750   3,750    
                
Total non-performing assets $148,972  $108,212  $100,771  $104,675  $79,050 
                
Past due loans $27,501  $18,359  $23,493  $24,435  $27,497 
Non-performing assets to total assets  0.75%  0.69%  0.79%  1.09%  0.95%
Non-performing loans to total loans  1.06%  0.95%  1.21%  1.63%  1.69%
Allowance for loan losses $147,999  $141,036  $126,378  $111,911  $91,060 
Allowance to total non-performing loans  110.18%  153.86%  147.77%  121.95%  124.74%
Allowance to total non-performing loans excluding residential real estate loans  186.06%  234.72%  213.48%  162.79%  167.21%
Non-accruing Loans
     At December 31, 2005, loans in which the accrual of interest income had been discontinued amounted to $134.3 million (2004 — $91.7 million; 2003 — $85.5 million). If these loans had been accruing interest, the additional interest income realized would have been $7.0 million (2004 - $5.9 million; 2003 — $6.6 million). There are no material commitments to lend additional funds to borrowers whose loans were in non-accruing status at these dates.
Residential Real Estate Loans– The Corporation classifies real estate loans in non-accruing status when interest and principal have not been received for a period of 90 days or more. Even though these loans are in non-accruing status, management considers, based on the value of the underlying collateral, the loan to value ratios and historical experience, that no material losses will be incurred in this portfolio, therefore, provisions for this portfolio are minimal as no material losses have been incurred historically. Non-accruing residential real estate loans amounted to $54.8 million (2.33% of total residential real estate loans) at December 31, 2005, as compared to $31.6 million (2.39% of total residential real estate loans) and $26.3 million (2.57% of total residential real estate loans) at December 31, 2004 and 2003, respectively. The increase as compared to

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2004 is mainly attributable to the general growth of this portfolio. At December 31, 2005 there was one non-accruing residential mortgage loans in an amount over $1 million.
Commercial Loans– The Corporation places commercial loans (including commercial real estate and construction loans) in non-accruing status when interest and principal have not been received for a period of 90 days or more. 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. Non-accruing commercial loans amounted to $35.8 million (0.43% of total commercial loans) at December 31, 2004 as compared to $32.5 million (0.48% of total commercial loans) and $38.3 million (0.82% of total commercial loans) at December 31, 2004 and 2003, respectively. At December 31, 2005 there were 10 non-accruing commercial loans in amounts over $1 million, for a total of $21.2 million.
Finance Leases –Finance leases are classified in non-accruing status when interest and principal have not been received for a period of 90 days or more. Non-accruing finance leases amounted to $3.3 million (1.17% of total finance leases) at December 31, 2005 as compared to $2.2 million (1.04% of total finance leases) and $3.2 million (1.99% of total finance leases) at December 31, 2004 and 2003, respectively.
Consumer Loans– Consumer loans are classified in non-accruing status when interest and principal have not been received for a period of 90 days or more. Non-accruing consumer loans amounted to $40.5 million (2.33% of the total consumer loan portfolio) at December 31, 2005, $25.4 million (1.87% of the total consumer loan portfolio) at December 31, 2004 and $17.7 million (1.53% of the total consumer loan portfolio) at December 31, 2003. The increase as compared to 2004 and 2003 is mainly attributable to the general growth of this portfolio.
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 (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-accruing status, at their carrying amount.
Past Due Loans
     Past due loans are mainly accruing commercial loans, which are contractually delinquent for 90 days or more. Past due commercial loans are current as to interest but delinquent in the payment of principal.
Sources of Funds
     The Corporation’s principal funding sources are branch-based deposits, retail brokered CDs, institutional deposits, federal funds purchased, securities sold under agreements to repurchase, notes payable and FHLB advances.
     As of December 31, 2007, total liabilities amounted to $15.8 billion, a decrease of $395.4 million as compared to $16.2 billion as of December 31, 2006. The decrease in total liabilities was attributable to less federal funds purchased and securities sold under repurchase agreements consistent with the deleveraging of the investment portfolio and the redemption of the Corporation’s $150 million callable fixed-rate medium-term note during 2007. This was offset by an increase in the amount of advances from the FHLB.

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     As of December 31, 2005, total liabilities amounted to $18.7 billion, an increase of $4.3 billion as compared to $14.4 billion as of December 31, 2004. The net increase in total liabilities was mainly due to a $4.6 billion increase in total deposits, including a $4.2 billion increase in brokered CDs offset by a decrease of $550.4 million in total borrowings.
The Corporation maintains unsecured standbyuncommitted lines of credit with other banks. AtAs of December 31, 2005,2007, the Corporation’s total unused lines of credit with these banks amounted to $370.0$128.7 million. AtAs of December 31, 2005,2007, the Corporation had an available line of credit with the FHLB, guaranteed with excess collateral pledged to the FHLB in the amount of $597.9$543.7 million.
Deposits
     Total deposits amounted to $11.0 billion as of December 31, 2007, $11.0 billion as of December 31, 2006 and $12.5 billion atas of December 31, 2005, as compared to $7.9 billion and $6.8 billion at December 31, 2004 and 2003, respectively.2005.
     The following table presents the composition of total deposits.deposits:
                 
  Weighted           
  average rates      December 31,    
  at December 31, 2005  2005  2004  2003 
          (Dollars in thousands)     
Savings accounts  1.29% $1,034,047  $1,077,002  $985,062 
Interest bearing checking accounts  1.36%  375,305   385,078   286,584 
Certificates of deposit  4.35%  10,243,394   5,750,660   4,953,132 
              
Interest bearing deposits  3.89%  11,652,746   7,212,740   6,224,778 
Non-interest bearing deposits      811,006   699,582   547,091 
             
Total     $12,463,752  $7,912,322  $6,771,869 
              
                 
Interest bearing deposits:                
Average balance outstanding     $9,855,761  $6,403,252  $5,316,232 
Non-interest bearing deposits:                
Average balance outstanding     $791,815  $645,512  $520,902 
Weighted average rate during the period on interest bearing deposits(1)      3.29%  2.08%  2.31%
                 
      December 31, 
  Weighted average rates  2007  2006  2005 
  as of December 31, 2007  (Dollars in thousands) 
Savings accounts  1.93%  $1,036,662  $984,332  $1,034,047 
Interest-bearing checking accounts  2.15%   518,570   433,278   375,305 
Certificates of deposit  5.09%   8,857,405   8,795,692   10,243,394 
              
Interest-bearing deposits  4.63%   10,412,637   10,213,302   11,652,746 
Non-interest-bearing deposits      621,884   790,985   811,006 
              
Total     $11,034,521  $11,004,287  $12,463,752 
              
                 
Interest-bearing deposits:                
Average balance outstanding     $10,755,719  $11,873,608  $9,855,761 
Non-interest-bearing deposits:                
Average balance outstanding     $563,990  $771,343  $791,815 
Weighted average rate during the period on interest-bearing
deposits (1)
      4.88%  4.63%  3.29%
 
(1) Excludes changes in the fair value of interest rate swaps.callable brokered CDs elected to be measured at fair value under SFAS 159 and changes in the fair value of derivatives that hedge (economically or under fair value hedge accounting) brokered CDs and the basis adjustment.
     Total deposits are composed of branch-based deposits, brokered CDs and, to a lesser extent, of institutional deposits. Institutional deposits include, among others, certificates issued to agencies of the Government of Puerto Rico and to Government agencies in the Virgin Islands.
     Total deposits slightly increased by $4.6 billion atas of December 31, 20052007, when compared to December 31, 2004 mainly due2006, driven by an increase in interest-bearing checking accounts as the Corporation added new products to anexpand its client base, coupled with a slight increase in brokered CDs. Brokered CDs, which are certificates sold through brokers, amounted to $8.6$7.2 billion atas of December 31, 2005. The total U.S. market for this source2007 compared to $7.1 billion as of funding approximates $480 billion.December 31, 2006. The use of brokered CDs has been particularly important to the growth of the Corporation. The Corporation encounters intense competition in attracting and retaining deposits as financial institutions are at a competitive disadvantage since the income generated on other investment products available to investors in Puerto Rico is taxed at lower rates than tax rates for income generated on deposit products.Rico. The brokered CDs market is a very competitive and liquid market in which the Corporation has been able to obtain substantial amounts of funding in short periods of time. This strategy enhanced the Corporation’s liquidity position, since the brokered CDs are unsecured and can be obtained at substantially longer maturities than other regular retail deposits. Also, the Corporation has the ability to convert the fixed ratefixed-rate brokered CDs to short-term adjustable rate liabilities using interest rate swap agreements. For the year ended December 31, 2007, the Corporation issued $4.3 billion in brokered CDs (including rollover of short-term brokered CDs) compared to $4.9 billion for the year ended December 31, 2006. Refer to the

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“Derivative Activities” “Risk Management – Interest Rate Risk Management” section of this Management’s Discussion and Analysis for further discussion on interest rate risk management strategies followed by the Corporation.
     AtAs of December 31, 2005, 54%2007, 61% of the value of retail brokered CDs held by the Corporation werewas in the form of long-term fixed callable certificates, but only atin which the Corporation’s option. AtCorporation retains the option to cancel the certificates before maturity. As of December 31, 2005,2007, the average remaining maturity ofon the long-term callable brokered certificates of depositCDs approximated 11.609.31 years (2004(200613.4410.60 years) and ofon the short-term fixed brokered certificates of deposits

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approximated 0.390.52 years (2004(20061.270.45 years). When using interest rate swaps, the Corporation mainly economically hedges those brokered CDs with long-term maturities.
     During 2005, the Corporation’s brokered CDs increased significantly. Significant amounts of short-term brokered CDs were issued to fund the Corporation’s growth and to replace advances from the Federal Home Loan Bank as these matured since the collateral for these funds was under evaluation by the FHLB. During 2005, the FHLB evaluated the eligibility of collateral that secured the commercial loans to local financial institutions and concluded that such collateral was not eligible to secure advances from the FHLB. The rate of the short-term brokered CDs approximated long-term rates given the flat to inverted yield curve. During 2006, the funds received from the paydown of approximately $2.4 billion from Doral Financial in May 2006 were used to paydown substantial amounts of short-term brokered CDs entered in 2005 as these matured in 2006.
     The following table presents a maturity summary of certificates of deposit with balances of $100,000 or more, atincluding brokered CDs, as of December 31, 2005:2007. As of December 31, 2007, brokered CDs over 100,000 amounted to $7.2 billion. Brokered CDs are sold by third-party intermediaries in denominations of $100,000 or less.
        
 (Dollars in thousands)  (Dollars in thousands) 
Three months or less $1,985,583  $1,582,362 
Over three months to six months 1,306,047  700,000 
Over six months to one year 1,387,890  1,038,033 
Over one year 4,869,384  4,740,528 
      
Total $9,548,904  $8,060,923 
      
Borrowings
     AtAs of December 31, 20052007, total borrowings amounted to $5.8$4.5 billion as compared to $6.3$4.7 billion and $4.6$5.8 billion atas of December 31, 20042006 and 2003,2005, respectively.
                 
  Weighted averagerates  December 31, 
  at December 31, 2005  2005  2004  2003 
         (Dollars in thousands)     
Federal funds purchased and securities sold under agreements to repurchase  4.31% $4,833,882  $4,165,361  $3,639,472 
Advances from FHLB  4.45%  506,000   1,598,000   913,000 
Notes payable  4.43%  178,693   178,240    
Other borrowings  7.11%  231,622   276,692    
Subordinated notes         82,280   81,765 
              
Total  4.44% $5,750,197  $6,300,573  $4,634,237 
              
                 
Weighted average rate during the period      4.08%  3.26%  3.68%
     The following table presents the composition of total borrowings as of the dates indicated:
                 
      As of December 31, 
  Weighted average rates  2007  2006  2005 
  as of December 31, 2007  (Dollars in thousands) 
Federal funds purchased and securities sold under agreements to repurchase  4.47% $3,094,646  $3,687,724  $4,833,882 
Advances from FHLB  4.73%  1,103,000   560,000   506,000 
Notes payable  4.76%  30,543   182,828   178,693 
Other borrowings  7.57%  231,817   231,719   231,622 
              
Total (1)  4.70% $4,460,006  $4,662,271  $5,750,197 
              
                 
Weighted average rate during the period      5.06%  4.99%  4.08%
(1)Includes $2.6 billion as of December 31, 2007 which are tied to variable rates or matured within a year.
     The Corporation uses federal funds purchased, repurchase agreements, advances from the Federal Home Loan Bank (FHLB), notes payable and other borrowings, such as trust preferred securities, as additional funding sources.

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     The leveraged growth of the Corporation’s investment portfolio is substantially funded with repurchase agreements. One of the Corporation’s most important interest rate risk protection strategies is the use of structured repurchase agreements, which are generally used to fund purchases of mortgage-backed and governmental agency securities.agreements. Under these agreements, the Corporation attempts to reduce exposure to interest rate risk by lengthening the final maturities of its liabilities while keeping funding cost low. AsDuring 2007, the Corporation increased the amount of its structured repos to $2.3 billion from $1.4 billion as of December 31, 2005,2006. Some of the outstanding balancenew repos entered in the period were structured as “flipper repos” which price below LIBOR for an extended period with a floor and a cap and other repos were structured to lock-in, for an extended period, interest rates lower than yields of structured repurchase agreements was $3.2 billion.the securities pledged.
     FirstBank 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 minimum qualifying mortgages as collateral for advances taken. As of December 31, 2007, the outstanding balance of FHLB advances was $1.1 billion.
     During 2004,In the past, the Corporation undertook several financing transactions to diversify its funding sources. FirstBank, the Corporation’s bank subsidiary, issuedAmong its funding sources are notes payable thatwith an outstanding balance of $30.5 million as of December 31, 2005 had an outstanding2007. During 2007, the Corporation redeemed a $150 million medium-term note which carried a cost higher than the overall cost of funding. The derecognition of the unamortized balance of $178.7 million.the basis adjustment, placement fees and debt issue

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costs resulted in adjustments to earnings of approximately $1.3 million, increasing the Corporation’s net interest income.
     In the second quarter of 2004, FBP Statutory Trust I, a statutory trust that is wholly owned by the Corporation and not consolidated in the Corporation’s financial statements, 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.
     In the third quarter ofAlso in 2004, FBP Statutory Trust II, a statutory trust that is wholly-owned by the Corporation and not consolidated in the Corporation’s financial statements, 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 Preferredtrust 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 (which 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 compositionOff-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 estimated weighted average interest rates of interest bearing liabilities at December 31, 2005, were as follows:
         
  Amount  Weighted 
  (Dollars in thousands)  Average Rate 
Interest bearing deposits $11,652,746   3.89%
Borrowed funds  5,750,197   4.44%
        
  $17,402,943   4.07%
        
     The weighted average interest rate on interest bearing deposits excludes the changes in the fair value of interest rate swaps.(4) optimize capital.

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Derivative Activities
     First BanCorp uses derivative     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 commitments 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 and other strategiesinvolve, to manage its exposure tovarying degrees, elements of credit and interest rate risk caused by changes in interest rates beyond management’s control. The Corporation’s asset liability management program includesexcess of the use of derivatives instruments, which have worked effectively to date, and that management believes will continue to be effectiveamount recognized in the future.
     The following summarizes major strategies, including derivatives activities, used by the Corporation in managing interest rate risk:
     Interest rate swaps — Under interest rate swap agreements, the Corporation agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest rate amounts calculated by reference to an agreed notional principal amount. Since a substantial portionstatement of the Corporation’s loans, mainly commercial loans, yield variable rates, the interest rate swaps are utilized to convert fixed-rate brokered certificates of deposit (liabilities), mainly those with long-term maturities, to a variable rate to better match the variable rate nature of these loans.
     Interest rate cap agreements — In order to hedge risk inherent on certain commercial loans to other financial institutions, as the yield is a variable rate limited to the weighted-average coupon of the referenced residential mortgage collateral, less a contractual servicing fee, the Corporation enters into referenced interest rate cap agreements that provide protection against rising interest rates. In managing this risk, the Corporation determines the need of derivatives, including cap agreements, based on different rising interest rate scenario projections and the weighted-average coupon of the referenced residential mortgage loan pools.
     Structured repurchase agreements — The Corporation uses structured repurchase agreements, with embedded call options, with the intention of reducing the Corporation’s exposure to interest rate risk by lengthening the contractual maturities of its liabilities, while keeping funding costs low. Another type of structured repurchase agreement includes repurchased agreements with embedded cap corridors; these instruments also provide protection for a rising rate scenario.
     The following table summarizes the notional amount of all derivative instruments asposition. As of December 31, 20052007, commitments to extend credit and 2004:
         
  Notional Amount 
  December 31, 
  2005  2004 
  (Dollars in thousands) 
Interest rate swap agreements:        
Pay fixed versus receive floating $109,320  $113,165 
Receive fixed versus pay floating  5,751,128   4,118,615 
Embedded written options  13,515   13,515 
Purchased options  13,515   13,515 
Written interest rate cap agreements  150,200   25,000 
Purchased interest rate cap agreements  386,750   250,043 
       
  $6,424,428  $4,533,853 
       
     The majoritycommercial and financial standby letters of credit amounted to approximately $1.7 billion and $112.7 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 derivatives representmortgage banking activities do not enter into interest rate swaps used mainly to convert long-term fixed-rate brokered CDs to a variable rate. A summary of the types at December 31, 2005 and 2004 follows:

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  December 31,
  2005 2004
  (Dollars in thousands)
Pay fixed/receive floating:        
Notional amount $109,320  $113,165 
Weighted average receive rate at year end  6.41%  4.39%
Weighted average pay rate at year end  6.60%  6.97%
Floating rates range from 175 to 252 basis points over LIBOR rate        
lock agreements with its prospective borrowers.
         
  December 31,
  2005 2004
  (Dollars in thousands)
Receive fixed/pay floating:        
Notional amount $5,751,128  $4,118,615 
Weighted average receive rate at year end  4.90%  5.17%
Weighted average pay rate at year end  4.37%  2.33%
Floating rates range from minus 5 basis points to 20 basis points over LIBOR rate        
     The changes in notional amount of interest rate swaps outstanding during the years ended December 31, 2005 and 2004 follows:
     
  Notional amount 
  (Dollars in thousands) 
Pay-fixed and receive-floating swaps:    
Balance at December 31, 2003
 $118,165 
Canceled and matured contracts  (5,000)
    
Balance at December 31, 2004
  113,165 
Canceled and matured contracts  (44,565)
New contracts  40,720 
    
Balance at December 31, 2005
 $109,320 
    
     
Receive-fixed and pay floating swaps:    
Balance at December 31, 2003
 $2,872,372 
Canceled and matured contracts  (849,473)
New contracts  2,095,716 
    
Balance at December 31, 2004
  4,118,615 
Canceled and matured contracts  (549,302)
New contracts  2,181,815 
    
Balance at December 31, 2005
 $5,751,128 
    
     The cumulative valuation of interest rate swaps at December 31, 2005 and 2004 was $(153.1) million and $(68.3) million, respectively. None of these instruments were qualified for hedge accounting in 2005 and 2004. Effective April 2006, the Corporation designated the majority of interest rate swap instruments (98% of the interest rate swaps outstanding) under the long-haul method of hedge accounting. Going forward, the Corporation will be able to offset changes in the fair value of the interest rate swaps with changes in the fair value of hedged brokered CDs, therefore, earnings volatility will be reduced.

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Contractual Obligations and Commitments
     The following table presents a detail of the maturities of the Corporation’s contractual obligations and commitments, which consistsconsist of certificates of deposits, long-term contractual debt obligations, operating leases, other contractual obligations, commitments to purchasesell mortgage loans and commitments to extend credit:
                                        
 Contractual Obligations and Commitments  Contractual Obligations and Commitments 
 (Dollars in thousands)  (As of December 31, 2007) 
 Total Less than 1 year 1-3 years 4-5 years After 5 years  (Dollars in thousands) 
Contractual obligations: 
 Total Less than 1 year 1-3 years 3-5 years After 5 years 
Contractual obligations (1): 
Certificates of deposit $10,243,394 $5,173,408 $852,718 $276,860 $3,940,408  $8,857,405 $3,933,539 $1,218,259 $344,840 $3,360,767 
Federal funds purchased and securities sold under agreements to repurchase 4,833,882 1,677,922 900,000 387,500 1,868,460  3,094,646 807,146 387,500 700,000 1,200,000 
Advances from FHLB 506,000 223,000 39,000  244,000  1,103,000 922,000 97,000 74,000 10,000 
Notes payable 178,693    178,693  30,543   16,237 14,306 
Other borrowings 231,622    231,622  231,817    231,817 
Operating leases 51,378 8,077 19,051 3,857 20,393  63,184 10,168 15,802 10,418 26,796 
Other contractual obligations 9,201 3,423 4,375 744 659  17,954 4,051 7,808 6,095  
                      
Total contractual obligations $16,054,170 $7,085,830 $1,815,144 $668,961 $6,484,235  $13,398,549 $5,676,904 $1,726,369 $1,151,590 $4,843,686 
                      
Commitments to purchase mortgage loans $1,650,000 $1,650,000(1) 
      
Commitments to sell mortgage loans $50,000 $50,000  $11,801 $11,801 
          
 
Standby letters of credit $136,502 $136,502  $112,690 $112,690 
     
 
Other commitments $5,000 $5,000 
          
  
Commitments to extend credit:  
Lines of credit $1,192,855 $1,192,855  $1,171,411 $1,171,411 
Letters of credit 77,122 77,122  41,478 41,478 
Commitments to originate loans 619,943 619,943  455,136 455,136 
          
Total commercial commitments $1,889,920 $1,889,920  $1,668,025 $1,668,025 
          
 
(1) Represents Commitments$30.7 million of tax liability, including accrued interest of $8.6 million, associated with unrecognized tax benefits under FIN 48 has been excluded due to Purchase Mortgage Loans from Doral which were subsequently cancelled in 2006.the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations.
     The Corporation has obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under other commitments to purchasesell mortgage loans at fair value and sell loans andcommitments 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 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. ForIn the case of credit cards and personal lines of credit, the Corporation can at any time and without cause cancel the unused credit facility.

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     On March 31, 2005, the Corporation completed the acquisition of 100% of the outstanding common shares of Ponce General Corporation, the holding company of Unibank (later renamed FirstBank Florida) and Ponce Realty, both of which were based in Miami, Florida. At December 31, 2005, obligations transferred upon the closing of the acquisition are presented on the contractual obligations.
Capital
     The Corporation’s capitalstockholders’ equity amounted to $1.4 billion as of December 31, 2007, compared to $1.2 billion atas of December 31, 2005 and 2004. Total capital decreased by $6.52006, an increase of $192.1 million. The changeincrease in capitalstockholders’ equity for 20052007 is due to the sale of 9.250 million shares of First BanCorp’s common stock to Scotiabank in a private placement. Scotiabank paid a purchase price of $10.25 per First BanCorp’s common share, for a total purchase price of approximately $94.8 million. The net proceeds to First BanCorp after discounts and expenses were approximately $91.9 million. Scotiabank acquired 10% of First BanCorp’s outstanding common shares as of the close of the transaction. As of December 31, 2007, First BanCorp had 92,504,506 common shares outstanding.
     Additional increases in stockholders’ equity were mainly composed of increases dueafter-tax adjustments to beginning retained earnings of $114.6approximately $91.8 million from the adoption of SFAS 159 and the issuancenet income of 76,373 shares of common stock through the exercise of stock options with proceeds of $2.1$68.1 million which werefor 2007, partially offset by cash dividends declared of $62.9$64.9 million and by a negative non-cash valuation of securities available-for-sale of $59.3 million.during 2007.
     As of December 31, 2005,2007, First BanCorp, FirstBank Puerto Rico and FirstBank Florida were in compliance with regulatory capital requirements that were applicable to them as a financial holding company, a state non-member bank and a thrift, respectively (i.e., total capital and Tier 1 capital to risk-weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to average assets of at least 4%). Set forth below are First BanCorp,

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FirstBank Puerto Rico and FirstBank Florida’s regulatory capital ratios as of December 31, 2005,2007 and December 31, 2006, based on existing Federal Reserve, Federal Deposit Insurance Corporation and FDIC guidelinesthe Office of Thrift Supervision guidelines.
                                
 First BanCorp Banking Subsidiary   Banking Subsidiaries
 Well- Well-
 FirstBank Capitalized FirstBank Capitalized
 First BanCorp FirstBank Florida Minimum First BanCorp FirstBank Florida Minimum
As of December 31, 2007
 
Total capital (Total capital to risk-weighted assets)  10.72%  10.89%  10.97%  10.00%  13.86%  13.23%  10.92%  10.00%
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)  9.71%  9.85%  10.65%  6.00%  12.61%  11.98%  10.42%  6.00%
Leverage ratio  6.72%  6.78%  7.99%  5.00%
Leverage ratio (1)  9.29%  8.85%  7.79%  5.00%
 
As of December 31, 2006
 
Total capital (Total capital to risk-weighted assets)  12.25%  12.25%  11.35%  10.00%
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)  11.06%  11.02%  10.96%  6.00%
Leverage ratio (1)  7.82%  7.78%  7.91%  5.00%
(1)Tier 1 capital to average assets in the case of First BanCorp and FirstBank and Tier 1 Capital to adjusted total assets in the case of FirstBank Florida.
     As of December 31, 2005,2007, FirstBank wasand FirstBank Florida were considered a well-capitalized bankbanks for purposes of the prompt corrective action regulations adopted by the FDIC.
     The regulatory To be considered a well-capitalized institution under the FDIC’s regulations, an institution must maintain a Leverage Ratio of at least 5%, a Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10%, and not be subject to any written agreement or directive to meet a specific capital ratios for 2005 were significantly impacted by decreases in net income from legal contingencies accrued and from the negative impact of changes in the fair value of interest rate swaps for the period. The capital ratios improved significantly subsequent to December 31, 2005 as a result of the $2.4 billion paydown received from Doral Financial during 2006 on the loans receivable which as commercial loans carry a 100% regulatory capital risk weight when calculating capital ratios.ratio.
Dividends
     InFor each of the years ended on December 31, 2007, 2006 and 2005, 2004 and 2003 the Corporation declared four quarterlyin aggregate cash dividends of $0.07, $0.06 and $0.06$0.28 per common share outstanding, respectively, for an annual dividend of $0.28, $0.24 and $0.22, respectively.share. Total cash dividends paid on common shares amounted to $24.6 million for 2007 (or an 88% dividend payout ratio), $23.3 million for 2006 (or a 53% dividend payout ratio) and $22.6 million for 2005 (or a 30.46% dividend payout ratio), $19.3 million for 2004 (or a 14.10% dividend payout ratio) and $17.6 million for 2003 (or a 19.66%30% dividend payout ratio). Dividends declared on preferred stock amounted to $40.3 million in 20052007, 2006 and 2004, and $30.4 million in 2003. The increase in preferred stock dividends in 2004 is attributable to the issuance of 7,584,000 shares of the Corporation’s Preferred Stock Series E at the end of the third quarter of 2003.2005.

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QuantitativeRISK MANAGEMENT
Background
     During the first quarter of 2006, the Board reviewed the Corporation’s risk management program with the assistance of outside consultants and Qualitative Disclosures about counsel. This effort resulted in the realignment of the Corporation’s risk management functions and the adoption of an enterprise-wide risk management process. The Board appointed a senior management officer as Chief Risk Officer (“CRO”) and appointed this officer to the Risk Management Council (“RMC”) with reporting responsibilities to the CEO and the Audit Committee. In addition, the Board established an Asset/Liability Risk Committee of the Board, with oversight responsibilities for risk management, including asset quality, portfolio performance, interest rate and market sensitivity, and portfolio diversification. In addition, the Asset/Liability Risk Committee has authority to examine the Corporation’s assets and liabilities, such as its brokered CDs, to facilitate appropriate oversight by the Board. Finally, management is required to bring to the attention of the Asset/Liability Risk Committee new forms of transactions or variants of forms of transactions that the Asset/Liability Risk Committee has not yet reviewed to enable the Asset/Liability Risk Committee to fully evaluate the consequences of such transactions to the Corporation. In addition, management is required to bring to the attention of the Audit Committee new forms of transactions or variants of forms of transactions for which the Corporation has not determined the appropriate accounting treatment to enable the Audit Committee to fully evaluate the accounting treatment of such transactions.
     During 2006 and 2007, management continued to refine and enhance its risk management policies, processes and procedures to maintain effective risk management and governance, including identifying, measuring, monitoring, controlling, mitigating and reporting of all material risks.
General
     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 shareholder 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) interest rate risk, (2) market risk, (3) credit risk, (4) liquidity risk, (5) operational risk, (6) legal and compliance risk, (7) reputation risk, and (8) contingency risk.
Risk Definition
Interest Rate Risk
     Interest rate risk is the risk to earnings or capital arising from adverse movements in interest rates.
Market Risk
     Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or equity prices. The Corporation evaluates market risk together with interest rate risk, refer to “—Interest Rate Risk Management” section below for further details.
Credit Risk
     Credit risk is the risk to earnings or capital arising from a borrower’s or a counterparty’s failure to meet the terms of a contract with the Corporation or otherwise to perform as agreed. Refer to “—Credit Risk Management” section below for further details.

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Liquidity Risk
     Liquidity risk is the risk to earnings or capital arising from the possibility that the Corporation will not have sufficient cash to meet the short term liquidity demands such as from deposit redemptions or loan commitments. Refer to “—Liquidity Risk Management” section below for further details.
Operational Risk
     Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This risk is inherent across all functions, products and services of the Corporation.
Legal and Compliance Risk
     Legal and compliance risk is the risk of negative impact to business activities, earnings or capital, regulatory relationships or reputation as a result of failure to adhere to or comply with regulations, laws, industry codes or rules, regulatory expectations or ethical standards.
Reputational Risk
     Reputational risk is the risk to earnings and capital arising from any adverse impact on the Corporation’s market value, capital or earnings of negative public opinion, whether true or not. This risk affects the Corporation’s ability to establish new relationships or services, or to continue servicing existing relationships.
Contingency Risk
     Contingency risk is the risk to earnings and capital associated with the Corporation’s preparedness for the occurrence of an unforeseen event.
Risk Governance
     The following discussion highlights the roles and responsibilities of the key participants in the Corporation’s risk management framework:
Board of Directors
     The Board of Directors provides oversight and establishes the objectives and limits of the Corporation’s risk management activities. The Asset/Liability Risk Committee and the Audit Committee assist the Board of Directors in executing this responsibility.
Asset/Liability Risk Committee
     The Asset/Liability Risk Committee of the Corporation is appointed by the Board of Directors to assist the Board of Directors in its oversight of risk management, including asset quality, portfolio performance, interest rate and market sensitivity, and portfolio diversification. In addition, the Asset/Liability Risk Committee has the authority to examine the Corporation’s assets and liabilities. In so doing, the Committee’s primary general functions involve:
The establishment of a process to enable the recognition, assessment, and management of risks that could affect the Corporation’s assets and liabilities;
The identification of the Corporation’s risk tolerance levels relating to its assets and liabilities;
The evaluation of the adequacy and effectiveness of the Corporation’s risk management process relating to the Corporation’s assets and liabilities, including management’s role in that process;

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The evaluation of the Corporation’s compliance with its risk management process relating to the Corporation’s assets and liabilities; and
The approval of loans and other business matters following the lending authorities approved by the Board.
Audit Committee
     The Audit Committee of First BanCorp is appointed by the Board of Directors to assist the Board of Directors in its oversight of risk management processes related to compliance, operations, the Corporation’s internal audit function, and the Corporation’s external financial reporting and internal control over financial reporting process. In performing this function, the Audit Committee is assisted by the CRO, the RMC, and other members of senior management.
Risk Management Council
     The RMC is responsible for supporting the CRO in measuring and managing the Corporation’s aggregate risk profile. The RMC executes management’s oversight role regarding risk management. This committee is designed to ensure that the appropriate authorities, resources, responsibilities and reporting are in place to support an effective risk management program. The RMC Council consists of various senior executives throughout the Corporation and meets on a monthly basis. The RMC is responsible for ensuring that the Corporation’s overall risk profile is consistent with the Corporation’s objectives and risk tolerance levels. The RMC is also responsible for ensuring that there are appropriate and effective risk management processes to identify, measure and manage risks on an aggregate basis. Refer to “Interest Rate Risk, Credit Risk, Liquidity, Operational, Legal and Regulatory Risk Management - Operational Risk” discussion below for further details of matters discussed in the RMC.
Other Management Committees
     As part of its governance framework, the Corporation has various risk management related-committees. These committees are jointly responsible for ensuring adequate risk measurement and management in their respective areas of authority. At the management level, these committees include:
(1)Management’s Investment and Asset Liability Committee – oversees interest rate and market risk, liquidity management and other related matters. Refer to “—Interest Rate Risk Management” discussion below for further details.
(2)Information Technology Steering Committee – is responsible for the oversight of and counsel on matters related to information technology including the development of information management policies and procedures throughout the Corporation.
(3)Bank Secrecy Act Committee – is responsible for oversight, monitoring and reporting of the Corporation’s compliance with Bank Secrecy Act.
(4)Credit Committees (Delinquency and Credit Management Committee) – oversee and establish standards for credit risk management processes within the Corporation. The Credit Management Committee is responsible for the approval of loans above an established size threshold. The Delinquency Committee is responsible for the periodic reviews of (1) past due loans, (2) overdrafts, (3) non-accrual loans, (4) OREO assets, and (5) the bank’s watch list and non-performing loans.
Executive Officers
     As part of its governance framework, the following officers play a key role in the Corporation’s risk management process:
(1)Chief Executive Officer and Chief Operating Officer – responsible for the overall risk governance structure.
(2)Chief Risk Officer – responsible for the oversight of the risk management organization as well as risk governance processes. In addition, the CRO manages the operational risk program.

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(3)Chief Credit Officer – manages the Corporation’s credit risk program.
(4)Chief Financial Officer – in combination with the Corporation’s Treasurer, manages the Corporation’s interest rate and market and liquidity risks programs and in combination with the Corporation’s Chief Accounting Officer is responsible for the implementation of accounting policies and practices in accordance with generally accepted accounting principles in the United States and applicable regulatory requirements.
(5)Chief Accounting Officer – responsible for the development and implementation of the Corporation’s accounting policies and practices and the review and monitoring of critical accounts and transactions to ensure that they are managed in accordance with generally accepted accounting principles in the United States and applicable regulatory requirements.
Other Officers
     In addition to the centralized Enterprise Risk Management function, certain lines of business and corporate functions have their own Risk Managers and support staff. The Risk Managers, while reporting directly within their respective line of business or function, facilitate communications with the Corporation’s risk functions and works in partnership with the CRO to ensure alignment with sound risk management practices and expedite the implementation of the enterprise risk management framework and policies.
Interest Rate Risk, Credit Risk, Liquidity, Operational, Legal and Regulatory Risk Management
     The following discussion highlights First BanCorp’s adopted policies and procedures for interest rate risk, credit risk, liquidity risk, operational risk, legal and regulatory risk.
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, subject to other goals of managementincome. The Management’s Investment and within guidelines set forth by the ALCO Committee and approved by the Board of Directors.
     The Asset Liability Management and Investment Committee of FirstBank (ALCO)the Corporation (“MIALCO”) oversees interest rate risk, liquidity management and other related matters. The ALCOMIALCO, which reports to the Investment Sub-committee of the Board of Directors’ Asset/Liability Risk Committee, is composed of senior management officers, including the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, the Chief Risk Officer, the Whole-Sale Banking Executive, the Risk Manager of the Treasury and Investment Department, the Financial Risk Manager and the Treasurer. An Investment Committee for First BanCorp also monitors the investment portfolio of the Holding Company. During 2005, this Committee generally met weekly and had the same members as the ALCO Committee described previously.
     Committee meetings focusedfocus on, among other things, current and expected conditions in world financial markets, competition and prevailing rates in the local deposit market, reviews of liquidity, unrealized gains and losses in securities, recent or proposed changes to the investment portfolio, alternative funding sources and their 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 ALCOMIALCO approves funding decisions in light of the Corporation’s overall growth strategies and objectives. On a quarterly basis, the ALCOMIALCO performs a comprehensive asset/liability review, examining interest rate risk as described below together with other issues such as liquidity and capital.
     The Corporation uses scenarioperforms on a quarterly basis a net interest income simulation analysis on a consolidated basis to measureestimate the effects ofpotential change in future earnings from projected changes in interest rates on net interest income.rates. These simulations are carried out over a one-year and a five-year time horizon, assuming gradual upward and downward interest rate movements of 200 basis points.points, achieved during a twelve-month period. Simulations are carried out in two ways:
(1)using the same     (1) using a static balance sheet as the Corporation had on the simulation date, and
(2)using a growing balance sheet based on recent growth patterns and strategies.
     (2) using a growing balance sheet based on recent growth patterns and strategies.
The balance sheet is divided into groups of assets and liabilities in order to simplify the projections.detailed by maturity or re-pricing 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 cost, the possible exercise of options, changes in

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prepayment rates, deposits decay and other factors which may be important in determiningprojecting the future growth of net interest income. These projections are carried out for First BanCorp on a fully consolidated basis.
     The Corporation uses an asset-liability management software to project future movements in the Corporation’s balance sheet.sheet and income statement. The starting point of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations. InterestFor the December 31, 2007 simulation and based on the significant downward shift in rates usedexperienced at the beginning of 2008, the Corporation’s MIALCO decided to update the rates as of the end of January 2008 and use these as the starting point for the simulations also correspond to actual rates at the start of the projection period.projections.
     These simulations are highly complex, and they use many simplifying assumptions that are intended to reflect the general behavior of the Corporation over the period in question. However, thereThere can be no assurance that actual events will match these assumptions in all cases. For this reason, the results of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. During 2007, the Corporation began a process of refining and enhancing interest rate risk measurement and analysis. The Corporation is in the process of implementing a more sophisticated software to measure the Corporation’s interest rate risk profile.
     The following table presents the results of the simulations as of December 31, 2007 and 2006. Consistent with prior years, these exclude non-cash changes in the fair value of derivatives and SFAS 159 liabilities:
                                 
  December 31, 2007 December 31, 2006
  Net Interest Income Risk (projected for 2008) Net Interest Income Risk (projected for 2007)
  Static Simulation Growing Balance Sheet Static Simulation Growing Balance Sheet
(Dollars in millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
+200 bps ramp ($8.1)  (1.64%) ($8.4)  (1.66%) ($34.6)  (6.86%) ($36.9)  (7.1%)
-200 bps ramp ($13.2)  (2.68%) ($13.2)  (2.60%)  50.7   10.1%  20.4   3.9%
     Future net interest income could be affected by the Corporation’s investments in callable securities. The recent drop in the long end of the yield curve has the effect of increasing the probability of the exercise of embedded calls in the approximately $2.1 billion U.S. Agency securities portfolio during 2008.
     The decrease in net interest income risk from 2006 to 2007, on growing balance sheet scenario, primarily relates to the change in the mix of floating and fixed rate assets and liabilities. As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of the Corporation’s assets and liabilities, the maturity and the repricing frequency of the liabilities has been extended to longer terms. Also, the concentration of long-term fixed rate securities has been reduced.
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:
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 principal. Since a substantial portion of the Corporation’s loans, mainly commercial loans, yield variable rates, the interest rate swaps are utilized to convert fixed-rate brokered certificates of deposit (liabilities), mainly those with long-term maturities, to a variable rate to better match the variable rate nature of these loans.
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 to protect against rising interest rates. Specifically, the interest rate 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. The Corporation utilizes interest rate cap agreements to protect against rising interest rates.

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Structured repurchase agreements — The Corporation uses structured repurchase agreements, with embedded call options, to reduce the Corporation’s exposure to interest rate risk by lengthening the contractual maturities of its liabilities, while keeping funding costs low. Another type of structured repurchase agreement includes repurchased agreements with embedded cap corridors; these instruments also provide protection for a rising rate scenario.

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     Assuming a no growth balance sheetThe following table summarizes the notional amount of all derivative instruments as of December 31, 2005, net2007 and 2006:
         
  Notional Amount 
  As of December 31, 
  2007  2006 
  (Dollars in thousands) 
Interest rate swap agreements:        
Pay fixed versus receive floating $80,212  $80,720 
Receive fixed versus pay floating  4,164,261   4,802,370 
Embedded written options  53,515   13,515 
Purchased options  53,515   13,515 
Written interest rate cap agreements  128,075   125,200 
Purchased interest rate cap agreements  294,982   330,607 
       
  $4,774,560  $5,365,927 
       
The following table summarizes the notional amount of all derivatives by the Corporation’s designation as of December 31, 2007 and 2006:
         
  Notional Amount 
  December 31, 
  2007  2006 
  (Dollars in thousands) 
Economic undesignated hedges:        
Interest rate swaps used to hedge fixed rate certificates of deposit, notes payable and loans $4,244,473  $336,473 
Embedded options on stock index deposits  53,515   13,515 
Purchased options used to manage exposure to the stock market on embedded stock index options  53,515   13,515 
Written interest rate cap agreements  128,075   125,200 
Purchased interest rate cap agreements  294,982   330,607 
       
Total derivatives not designated as hedge  4,774,560   819,310 
       
         
Designated hedges:        
Fair value hedge:        
Interest rate swaps used to hedge fixed rate certificates of deposit $  $4,381,175 
Interest rate swaps used to hedge fixed and step rate notes payable     165,442 
       
Total fair value hedges     4,546,617 
       
         
Total $4,774,560  $5,365,927 
       

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     The majority of the Corporation’s derivatives represent interest income projected forrate swaps used mainly to convert long-term fixed-rate brokered CDs to a variable rate. A summary of these interest rate swaps as of December 31, 2007 and 2006 would fall by $25.9 million (4.70%) under a risingfollows:
         
  As of December 31,
  2007 2006
  (Dollars in thousands)
Pay fixed/receive floating (generally used to economically hedge variable rate loans):        
Notional amount $80,212  $80,720 
Weighted average receive rate at year end  7.09%  7.38%
Weighted average pay rate at year end  6.75%  6.37%
Floating rates range from 167 to 252 basis points over LIBOR rate        
         
Receive fixed/pay floating (generally used to economically hedge fixed-rate brokered CDs and notes payable):        
Notional amount $4,164,261  $4,802,370 
Weighted average receive rate at year end  5.26%  5.16%
Weighted average pay rate at year end  5.07%  5.42%
Floating rates range from minus 5 basis points to 11 basis points over 3- month LIBOR rate        
     The changes in notional amount of interest rate scenarioswaps outstanding during the years ended December 31, 2007 and would rise by $7.2 million (1.31%) under falling rates.2006 follows:
     
  Notional amount 
  (Dollars in thousands) 
Pay-fixed and receive-floating swaps:    
Balance at December 31, 2005
 $109,320 
Canceled and matured contracts  (28,600)
New contracts   
    
Balance at December 31, 2006
  80,720 
Canceled and matured contracts  (508)
New contracts   
    
Balance at December 31, 2007
 $80,212 
    
     
Receive-fixed and pay floating swaps:    
Balance at December 31, 2005
 $5,751,128 
Canceled and matured contracts  (948,758)
New contracts   
    
Balance at December 31, 2006
  4,802,370 
Canceled and matured contracts  (638,109)
New contracts   
    
Balance at December 31, 2007
 $4,164,261 
    
     As of December 31, 2005,2007, derivatives not designated or not qualifying for hedge accounting with a positive fair value of $14.7 million (December 31, 2006 — $15.0 million) and a negative fair value of $67.2 million (December 31, 2006 — $16.3 million) were recorded as part of “Other Assets” and “Accounts payable and other liabilities,” respectively, in the same simulations were also carried out assuming a growing balance sheet, as described above. The growing balance sheet simulations indicate that net interest income projected for 2006 would fall by $21.4 million (3.84%) under a rising rate scenario and would rise by $0.4 million (0.08%) with falling rates.
     To evaluate these simulations it is helpful to compare current exposures with those for the previous year. The simulation for the year 2005 assuming a no growth balance sheet, asConsolidated Statements of December 31, 2004, concluded that under a gradual 200 basis point rising rate scenario, net interest income would have fallen by $4.85 million (1.01%) and that under a gradual 200 basis point falling rate scenario would have increased by $10.1 million (2.11%).
Financial Condition. As of December 31, 2004,2006, derivatives qualifying for fair value hedge accounting with a negative fair value of $126.7 million were recorded as part of “Accounts payable and other liabilities” in the same simulations were also carried assuming a growing balance sheet. This scenario showed that net interest income for 2005 would have fallen by $16.0 million (3.14%) under a gradual 200 basis point risingConsolidated Statement of Financial Condition.
     Derivative instruments, such as interest rate scenario. Net interest income would have increased by $12.5 million (2.46%) with rates gradually falling by 200 basis points.
     The Corporation compared actual 2005 results with projections made one year before, at the end of 2004. In the growth scenario, which is more realistic, the Bank projected taxable equivalent net interest income of $493.6 million under rising rates (+200bp) for 2005. Short-term rates actually increased by 225bp during that year, and First Bancorp actually earned taxable equivalent net interest income of $566.9 million. The most important reason for this difference was that the projections did not include purchases of tax-exempt Treasury and Agency securities which occurred during 2005.
swaps, are subject to market risk. The Corporation’s financial instrumentsderivatives are mainly composed of interest rate swaps that are sensitiveused to interest rate risk are mainlyconvert the fixed rate loans, fixedinterest payment on its brokered certificates of deposit and medium-term notes to variable payments (receive fixed/pay floating). As is the case with investment securities, andthe market value of derivative instruments tois largely a function of the extent to which those assets were funded by variable rate liabilities. The following table showsfinancial market’s expectations regarding the Corporation’s Investments and Loans Receivable portfolios by repricing date asfuture direction of December 31, 2005.interest rates. Accordingly, current market values are not necessarily

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LOAN & INVESTMENT MATURITIES OR REPRICINGS AS OF DECEMBER 31, 2005
                         
      2-5 Years  Over 5 Years    
      Fixed  Variable  Fixed  Variable    
  One Year  Interest  Interest  Interest  Interest    
  or Less  Rates  Rates  Rates  Rates  Total 
Money Market Investments $1,273,759  $  $  $  $  $1,273,759 
Mortgage-Backed Securities  132,722   616,567      1,963,142      2,712,431 
Other Securities  218,813   9,717      2,488,173      2,716,703 
                    
Total Investments  1,625,294   626,284      4,451,315      6,702,893 
 
Loans :                        
Commercial and Commercial Real Estate  6,478,808   101,339   234,456   314,111   59,012   7,187,726 
Construction  1,090,511   18,546      28,061      1,137,118 
Finance Leases  63,634   216,937            280,571 
Consumer  462,327   1,231,200      40,042      1,733,569 
Residential Real Estate  161,629   205,797   106,831   1,872,688      2,346,945 
                    
Total Loans  8,256,909   1,773,819   341,287   2,254,902   59,012   12,685,929 
                    
Total Earning Assets $9,882,203  $2,400,103  $341,287  $6,706,217  $59,012  $19,388,822 
                   
     This table shows that $6.7 billionindicative of the Corporation’s $19.4 billionfuture impact of earning assets had fixed rates with maturitiesderivative instruments on earnings. This will depend, for the most part, on the shape of five years or more. Of these assets, investments including mortgage-backed securities and government and agency bonds account for $4.5 billion and residential mortgages make up an additional $1.9 billion. Sincethe yield curve as well as the level of interest rates. In addition, effective January 1, 2007 the Corporation also hasadopted SFAS 159 for a substantial amount of variable rate liabilities, this pattern of asset holdings helps to explain the Corporation’s exposure to rising interest rates.
     The derivative instruments held at December 31, 2005 were not qualified for hedge accounting in 2005, therefore, changes in the market value of these instruments for the year ended December 31, 2005 were charged to current earnings. The Corporation designated the majorityportion of its derivatives,brokered certificates of deposit portfolio and certain medium-term notes for which are mainly interest rate swaps, under hedge accounting effective in April 2006. The majority of interest rate swaps were designated under the long-haul method to hedge the changes in fair value of brokered certificates of deposit. Prospectively, the effective portion of the changesare also recorded in value of the brokered certificates of deposit (the “hedge” item) are recorded as an adjustment to income that offsets or partially offsets the fair value adjustment of the related interest rate swaps.current period earnings.
     The following tables summarize the fair value changes of the Corporation’s derivatives as well as the source of the fair values:
Fair Value ChangesChange
    
     Year Ended 
(Dollars in thousands) December 31, 2005  December 31, 2007 
Fair value of contracts outstanding at the beginning of the year $(59,920) $(127,978)
Contracts realized or otherwise settled during the year 1,854  15,062 
Fair value of new contracts entered into during the year  (36,423)
Changes in fair value during the year  (47,858) 60,466 
   
Fair value of contracts outstanding at the end of the year $(142,347) $(52,450)
   
Source of Fair Value
                     
(Dollars in thousands) Payments Due by Period 
  Maturity          Maturity    
  Less Than  Maturity  Maturity  In Excess  Total 
As of December 31, 2007 One Year  1-3 Years  3-5 Years  of 5 Years  Fair Value 
Prices provided by external sources $(122) $(743) $(680) $(52,450) $(52,450)
                
     Prior to April 2006, none of the derivative instruments held by the Corporation qualified for hedge accounting. Effective April 3, 2006, the Corporation adopted the long-haul method of effectiveness testing under SFAS 133 for substantially all of the interest rate swaps that hedge its callable brokered CDs and medium-term notes. The long-haul method requires periodic assessment of hedge effectiveness and measurement of ineffectiveness. The ineffectiveness results to the extent the changes in the fair value of the derivative do not offset the changes in fair value of the hedged liability. Prior to the implementation of fair value hedge accounting, the Corporation recorded, as part of interest expense, unrealized losses in the valuation of interest rate swaps of approximately $69.7 million during the first quarter of 2006.
     Effective January 1, 2007, the Corporation decided to early adopt SFAS 159 for its callable brokered CDs and certain fixed medium-term notes (“Notes”) that were hedged with interest rate swaps. One of the main considerations to early adopt SFAS 159 for these instruments was to eliminate the operational procedures required by the long-haul method of accounting in terms of documentation, effectiveness assessment, and manual procedures followed by the Corporation to fulfill the requirements specified by SFAS 133. Upon adoption of SFAS 159, First BanCorp selected the fair value measurement for approximately $4.4 billion, or 63%, of the brokered CDs portfolio and for approximately $15.4 million, or 9%, of the Notes. The CDs and Notes chosen for the fair value measurement option were hedged at January 1, 2007 by callable interest rate swaps with the same terms and conditions. The adoption of SFAS 159 resulted in a positive after-tax impact to retained earnings of approximately $91.8 million. Under SFAS 159, this one-time credit was recognized as an adjustment to beginning retained earnings.
          As a result of the implementation of SFAS 159 and the discontinuance of hedge accounting, all of the derivative instruments held by the Corporation as of December 31, 2007 were considered economic undesignated hedges.
     The decrease in the notional amount of derivative instruments during 2007 is partially due to: (1) the termination of certain interest rate swaps that were no longer economically hedging brokered CDs as the notional balances exceeded those of the brokered CDs, and (2) the termination of an interest rate swap that economically hedged the $150 million medium-term note redeemed during the second quarter of 2007. The notional amount of the interest rate swaps previously held to economically hedge brokered CDs that were cancelled during 2007 amounted to $142.2 million with a weighted-average pay-rate of 5.38% and a weighted-average receive-rate of 5.22%. The interest rate swap previously held to economically hedge the $150 million medium-term note had a notional amount of $150.0 million with a pay-rate of 6.00% and a receive-rate of 5.54% at the time of cancellation.

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     Source of Fair Value
                     
(Dollars in thousands) Payments Due by Period
  Maturity         Maturity  
  Less Than Maturity Maturity In Excess Total
As of December 31, 2005 One Year 1-3 Years 3-5 Years of 5 Years Fair Value
 
Prices provided by external sources  (3,905)  (4,690)  (5,203)  (128,549)  (142,347)
     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 derivativesderivative contracts based on changes in interest rates.
The credit risk of derivatives arises from the potential of a counterparty’s default on its contractual obligations.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.
Derivative Counterparty Credit Exposure
                     
(Dollars in thousands) December 31, 2005 
          Total       
  Number of      Exposure at  Negative  Total 
Rating (1) Counterparties (2)  Notional  Fair Value (3)  Fair Values  Fair Value 
AA+  1  $241,505  $  $(5,646) $(5,646)
AA-  4   2,356,778      (72,440)  (72,440)
A+  6   3,342,410   3,406   (74,003)  (70,597)
A  1   80,750   1,580   (2,069)  (489)
BBB-  1   236,550   9,560      9,560 
                
Subtotal  13  $6,257,993  $14,546  $(154,158) $(139,612)
                
Other derivatives:                    
Caps (4)      150,200      (866)  (866)
Equity indexed options (4)      13,515      (3,098)  (3,098)
Loans (4)      2,720   29      29 
Warrants      N/A   1,200      1,200  
      $6,424,428  $15,775  $(158,122) $(142,347)
(Dollars in thousands)
                                        
(Dollars in thousands) December 31, 2004  December 31, 2007 
 Total      Total     
 Number of Exposure at Negative Total  Number of Exposure at Negative Total 
Rating (1) Counterparties (2) Notional Fair Value (3) Fair Values Fair Value  Counterparties (2) Notional Fair Value (3) Fair Values Fair Value 
AA+ 1 $251,873 $79 $(2,881) $(2,802)
AA 1 $90,016 $ $(929) $(929)
AA- 2 853,446 166  (10,774)  (10,608) 5 2,411,575 7,057  (32,161)  (25,104)
A+ 7 3,083,822 2,148  (54,443)  (52,295) 5 2,010,491 5,079  (24,091)  (19,012)
A 2 81,154 1,500  (918) 582  1 74,400 2,305  (875) 1,430 
BBB 1 225,043 7,155  7,155 
CCC 1 3,768 72  72 
               
Subtotal 13 $4,495,338 $11,048 $(69,016) $(57,968) 13 $4,590,250 $14,513 $(58,056) $(43,543)
               
Other derivatives : 
Other derivatives: 
Caps (4) 25,000  (79) (79) 128,075   (47)  (47)
Equity indexed options (4)  13,515    (3,073)  (3,073)
Warrants  N/A  1,200    1,200 
Equity-indexed options (4) 53,515   (9,048)  (9,048)
Loans (4) 2,720 188  188 
 $4,533,853 $12,248 $(72,168) $(59,920)  
 $4,774,560 $14,701 $(67,151) $(52,450)
  
                     
(Dollars in thousands) December 31, 2006 
          Total       
  Number of      Exposure at  Negative  Total 
Rating (1) Counterparties (2)  Notional  Fair Value (3)  Fair Values  Fair Value 
AA+  1  $240,772  $  $(6,553) $(6,553)
AA-  7   3,088,244   3,082   (87,046)  (83,964)
A+  4   1,690,069   2,843   (44,637)  (41,794)
BBB-  1   205,407   9,088      9,088 
      
Subtotal  13  $5,224,492  $15,013  $(138,236) $(123,223)
      
Other derivatives:                    
Caps (4)      125,200      (390)  (390)
Equity-indexed options (4)      13,515      (4,347)  (4,347)
Loans (4)      2,720      (18)  (18)
       
      $5,365,927  $15,013  $(142,991) $(127,978)
       
 
(1) Based on the S&P and Fitch Long Term Issuer Credit Ratings
 
(2) Based on legal entities. Affiliated legal entities are reported separately.separetely.
 
(3) For each counterparty, this amount includes derivatives with a positive fair value excluding the related accruedaccured interest receivable/payable.
 
(4) These derivatives represent transactions sold to local companies or institutions for which a credit rating is not readily available. The credit
exposure is mitigated because a transactiontransactions with the same terms and conditions was bought with a rated counterparty.
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

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derivatives arises from the potential of 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, quality control and an established delinquency committee. The Corporation also employs proactive collection and loss mitigation efforts.
     The Corporation may also encounter risk of default in relation to its securities portfolio. The securities held by the Corporation are principally mortgage-backed securities and U.S. Treasury and agency securities. Thus, a substantial portion of these instruments are guaranteed by mortgages, a U.S. government-sponsored entity or the full faith and credit of the U.S. government and are deemed to be of the highest credit quality.
     Management’s Credit Committee, comprised of the Corporation’s Chief Credit Risk Officer and other senior executives, has 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 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 Corporation establishes the allowance for loan and lease losses based on its asset classification report to cover the total amount of any assets classified as a “loss,” the probable loss exposure of other classified assets, and the estimated probable losses of assets not classified. The adequacy of the allowance for loan and lease losses is also based upon a number of additional factors including historical loan and lease loss experience, 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 management 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 (principally the state of Florida), the U.S.VI or British VI may contribute to delinquencies and defaults, thus necessitating additional reserves.

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     For small, homogeneous loans, including residential mortgage loans, auto loans, consumer loans, finance lease loans, and commercial and construction loans in amounts under $1.0 million, the Corporation evaluates a specific allowance based on average historical loss experience for each corresponding type of loans and market conditions. The methodology of accounting for all probable losses is made in accordance with the guidance provided by SFAS 5, “Accounting for Contingencies.”
     Commercial and construction loans in amounts over $1.0 million are individually evaluated on a quarterly basis for impairment in accordance with the provisions of SFAS 114, “Accounting by Creditors for Impairment of a Loan.” A loan is impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. The impairment loss, if any, on each individual loan identified as impaired is generally measured based on the present value of expected cash flows discounted at the loan’s effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent. If foreclosure is probable, the creditor is required to measure the impairment based on the fair value of the collateral. The fair value of the collateral is generally obtained from appraisals. Updated appraisals are obtained when the Corporation determines that loans are impaired, as it did recently with respect to loan relationships in the Miami Agency and in Puerto Rico, which are discussed below, and for certain loans on a spot basis selected by specific characteristics such as delinquency levels and loan-to-value ratios. Should the appraisal show a deficiency, the Corporation records an allowance for loan losses related to these loans.
     As a general procedure, the Corporation internally reviews appraisals on a spot basis as part of the underwriting and approval process. For construction loans in the Miami Agency, appraisals are reviewed by an outsourced contracted appraiser.  Once a loan backed by real estate collateral deteriorates or is accounted for in non-accrual status, a full assessment of the value of the collateral is performed. If the Corporation commences litigation to collect an outstanding loan or commences foreclosure proceedings against a borrower (which includes the collateral), a new appraisal report is requested and the book value is adjusted accordingly, either by a corresponding reserve or a charge-off.
     In 2006, the Corporation hired an independent consulting firm to perform an assessment of the residential real estate loan portfolio in Puerto Rico. This review included, among other things, the purchase of realtors’ data to confirm recent property values and purchase of appraisers’ databases for the same reason. The independent assessment determined that, based on the deterioration of the economic conditions in Puerto Rico and the increase in the home price index in Puerto Rico, the Corporation needed to increase its allowance for loan and lease losses.
     The Corporation continues to update the analysis on a yearly basis, the latest being in March 2007 when the Corporation obtained similar results. Historically, the residential real estate portfolio losses have not been significant. More than 90% of the residential loan portfolio is fixed rate, thus there is no re-pricing risk.
     The Credit Risk area requests new collateral appraisals for impaired collateral dependent loans. In order to determine present market conditions in Puerto Rico and the Virgin Islands, and to gauge property appreciation rates, opinions of value are requested for a sample of delinquent residential real estate loans. The valuation information gathered through these appraisals is considered in the Corporation’s allowance model assumptions.
     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. Virgin Islands or the U.S. mainland, the performance of the Corporation’s loan portfolio and the value of the collateral backing the transactions are dependent upon the performance of and conditions within each specific area real estate market. Recent economic reports related to the real estate market in Puerto Rico indicate that certain pockets of the real estate market are subject to readjustments in value driven not by demand but more by the purchasing power of the consumers and general economic conditions. However, the outlook is for a stable real estate market with values not growing in certain areas due to the self-inflicted wounds associated with the governmental and political environment in Puerto Rico. The Corporation is protected by healthy loan to value ratios set upon original approval and driven by the Corporation’s regulatory and credit policy standards. The real estate market for the U.S. Virgin Islands remains fairly strong.

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     The following table sets forth an analysis of the activity in the allowance for loan and lease losses during the periods indicated:
                     
Year ended December 31, 2007  2006  2005  2004  2003 
      (Dollars in thousands)     
Allowance for loan and lease losses, beginning of year $158,296  $147,999  $141,036  $126,378  $111,911 
Provision for loan and lease losses  120,610   74,991   50,644   52,799   55,916 
                
Loans charged-off:                    
Residential real estate  (985)  (997)  (945)  (254)  (475)
Commercial and Construction  (15,170)  (6,036)  (8,558)  (6,190)  (6,488)
Finance leases  (10,393)  (5,721)  (2,748)  (2,894)  (2,424)
Consumer  (68,282)  (64,455)  (39,669)  (34,704)  (38,745)
Recoveries  6,092   12,515   6,876   5,901   6,683 
                
Net charge-offs  (88,738)  (64,694)  (45,044)  (38,141)  (41,449)
                
Other adjustments(1)
        1,363       
                
Allowance for loan and lease losses, end of year $190,168  $158,296  $147,999  $141,036  $126,378 
                
Allowance for loan and lease losses to year end total loans receivable  1.61%  1.41%  1.17%  1.46%  1.80%
Net charge-offs to average loans outstanding during the year  0.79%  0.55%  0.39%  0.48%  0.66%
                     
Provision for loan and lease losses to net charge-offs during the year  1.36x  1.16x  1.12x  1.38x  1.35x
(1)Represents allowance for loan losses from the acquisition of First Bank Florida.

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     The following table sets forth information concerning the allocation of the Corporation’s allowance for loan losses by loan category and the percentage of loans in each category to total loans as of the dates indicated:
Allocation of Allowance for Loan and Lease Losses
                                         
As of December 31, 2007  2006  2005  2004  2003 
  Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent 
Residential real estate loans $8,240   27% $6,488   25% $3,409   18% $1,595   14% $4,298   15%
 
Commercial mortgage loans  13,699   11%  13,706   11%  9,827   9%  8,958   7%  11,746   10%
 
Construction loans  38,108   12%  18,438   13%  12,623   9%  5,077   4%  3,710   5%
 
Commercial loans (including loans to local financial institutions)  63,030   33%  53,929   32%  58,117   48%  70,906   59%  58,084   52%
 
Finance leases  6,445   3%  6,194   3%  4,684   2%  4,043   2%  4,310   2%
 
Consumer loans  60,646   14%  59,541   16%  59,339   14%  50,457   14%  44,230   16%
 
                               
Total Allowance for Loan and Lease Losses $190,168   100% $158,296   100% $147,999   100% $141,036   100% $126,378   100%
                               
     First BanCorp’s allowance for loan and lease losses was $190.2 million as of December 31, 2007, compared to $158.3 million as of December 31, 2006 and $148.0 million as of December 31, 2005. First BanCorp’s ratio of the allowance for loan and lease losses to period end total loans was 1.61% as of December 31, 2007, compared to 1.41% as of December 31, 2006 and 1.17% as of December 31, 2005. The provision for loan and lease losses for the year ended December 31, 2007 amounted to $120.6 million, compared to $75.0 million and $50.6 million for 2006 and 2005, respectively. The increase in the provision was primarily due to deterioration in the credit quality of the Corporation’s loan portfolio, which is associated with the weakening economic conditions in Puerto Rico and the slowdown in the United States housing sector. In particular, the increase is mainly related to specific and general provisions related to the Miami Agency construction loan portfolio and increases in the general reserves allocated to the consumer loan portfolio.
     The provision for loan losses totaled 136% of net charge-offs for the year ended December 31, 2007, compared with 116% of net charge-offs for the same period in 2006 and 112% for the same period in 2005. Net charge-offs for 2007 increased by $24.0 million compared to the 2006. The increase in net charge-offs during 2007 was mainly composed of higher charge-offs in commercial and construction loans, finance leases and consumer loans of approximately $9.1 million, $4.7 million and $3.8 million, respectively. The increase in charge-offs was impacted by weak economic conditions in Puerto Rico and the slowdown in the U.S. housing sector. The market in Puerto Rico has been affected and may continue to be affected by issues related to the Puerto Rico economy associated with Government budgetary matters and political issues.
     The U.S. mainland real estate market also has slowed, influenced, among other things, by decreases in property values, increases in property taxes and insurance premiums, the tightening of credit origination standards, overbuilding in certain areas and general market economic conditions that may threaten the performance of the Corporation’s loan portfolio in the U.S. mainland, principally the Corporation’s construction loan portfolio in the Miami Agency. Approximately 44% of the Corporation’s exposure in the U.S. mainland is comprised of construction loans, including condo-conversion loans. However, the Corporation expects a stable performance on its construction loan portfolio in the U.S. mainland due to the overall comfortable loan-to-value ratios coupled with a group of strong developers.
     The Corporation also does business in the Eastern Caribbean Region, where the Corporation’s loan portfolio is stable. Growth has been fueled by a recent Government change and an expansion in the construction, residential mortgage and small loan business sectors. The Corporation expects a stable performance on its loan portfolio in the Eastern Caribbean region.
     Prior to the $8.1 million specific loan loss reserve recognized during the third quarter of 2007, the Corporation’s specific allowance remained relatively unchanged from the 2006 year-end because of the timing of the identification of the impaired loans and the nature of the loans. Most of First BanCorp’s loan portfolios have real estate collateral (excluding the consumer loan portfolio). Further, most of its impaired loans have real estate collateral. Given that the real estate market in Puerto Rico has not experienced significant declines in market values, the market value of

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the real estate collateral of impaired loans in Puerto Rico (after deducting the estimated cost to sell and other necessary adjustments, etc.) has been sufficient to cover the recorded investment.
     There are two main factors that accounted for the net increase in impaired loans during 2007: (i) the aforementioned troubled loan relationship in the Miami Agency totaling $46.4 million as of December 31, 2007 after the sale of one loan in the relationship, with a principal balance of approximately $14.1 million, during the fourth quarter of 2007 and (ii) one loan relationship in Puerto Rico related to several credit facilities totaling $36.3 million as of December 31, 2007. At the same time, the Corporation’s impaired loans decreased by approximately $30.6 million during 2007 (other than the sale of the impaired loan in the Miami Agency) as a result of loans paid in full, loans no longer considered impaired and loans charged-off, which had a related impairment reserve of $6.2 million. In addition, the Corporation increased its impaired loans by approximately $28.2 million associated with several individual loans, most of them residential mortgage loans or loans secured by real estate, of which $1.3 million had a related impairment reserve of approximately $0.2 million.
     The loan relationship in the Miami Agency noted above is the only relationship from the Corporation’s Miami Agency that has been placed in non-accrual status as of the date of the filing of this Annual Report on Form 10-K. Since the Corporation determined that foreclosure was the only alternative to collect on the loan, the Corporation determined the four loans in the relationship to be impaired as of June 30, 2007 and evaluated the fair value of the collateral. Based on an analysis performed at the time at which the loans were classified as impaired, no impairment was necessary because the loans were fully collateralized and secured with real estate. The impairment analysis performed at the time incorporated appraisals used in the granting of the loans. During the latter part of the third quarter and the beginning of the fourth quarter, the Corporation performed an impairment analysis of all four loans. This analysis was performed by the Credit Risk area after an analysis of key factors such as selling expenses, estimated time to sell and a detailed review of new appraisals received. The Corporation determined that there was a collateral deficiency of approximately $8.1 million, thus, an additional provision to the Corporation’s loan loss reserves was necessary due to the impairment of the collateral on the loan relationship.
     The Corporation recorded a charge-off of $3.3 million in connection with the sale of one loan in the above noted relationship in the Miami Agency during the fourth quarter of 2007. Such sale was made at a price that exceeded the recorded investment in the loan (loan receivable less specific reserve) by approximately $1 million.
     The Corporation has been working with authorized representatives of the borrower to mitigate the ultimate loss from this relationship. To date, the Corporation has hired an external legal counsel to support the loan collection effort; in addition, the Corporation entered into a “Management Agreement” with a specialized realty company that will manage, lease, operate, maintain and repair three of the projects for and on behalf of the Corporation. The Corporation has incurred out-of pocket expenditures, including legal fees, in connection with the resolution of the relationship described above, amounting to approximately $1.5 million. First BanCorp’s expenditures ultimately will depend on the length of time, the amount of professional assistance required, the nature of the proceedings in which the loans are finally foreclosed and the amount of proceeds upon the disposition of the collateral and other factors not susceptible to current estimation.
     The troubled loan relationship in Puerto Rico became impaired in the second quarter of 2007. A total of $36.3 million was deemed impaired as of December 31, 2007. Although the loan continues to be impaired as of December 31, 2007, due to a moratorium of principal payments and decline in cash flows of the borrower’s business, the Corporation will continue to analyze on a quarterly basis the available collateral to determine if there is any collateral deficiency.

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Non-accruing and Non-performing Assets
     Total non-performing assets are the sum of non-accruing loans, foreclosed real estate, other repossessed properties and non-accruing investment securities. Non-accruing loans and investments are loans and investments as to which interest is no longer being recognized. When loans and investments fall into non-accruing status, all previously accrued and uncollected interest is reversed and charged against interest income.
Non-accruing Loans Policy
Residential Real Estate Loans- The Corporation classifies real estate loans in non-accruing status when interest and principal have not been received for a period of 90 days or more.
Commercial Loans- The Corporation places commercial loans (including commercial real estate and construction loans) in non-accruing status when interest and principal have not been received for a period of 90 days or more. 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.
Finance Leases– Finance leases are classified in non-accruing 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 accruing status when interest and principal have not been received for a period of 90 days or more.
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-accruing status, at their carrying amount.
Past Due Loans
     Past due loans are accruing commercial loans which are contractually delinquent 90 days or more. Past due commercial loans are current as to interest but delinquent in the payment of principal.
     The Corporation may also classify loans in non-accruing status and recognize revenue only when cash payments are received because of the deterioration in the financial condition of the borrower and payment in full of principal or interest is not expected. The Corporation started during the third quarter of 2007 a loan loss mitigation program 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 accruing status.

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     The following table presents non-performing assets as of the dates indicated:
                     
As of December 31, 2007  2006  2005  2004  2003 
      (Dollars in thousands)     
Non-accruing loans:                    
Residential real estate $209,077  $114,828  $54,777  $31,577  $26,327 
Commercial, commercial real estate and construction  148,939   82,713   35,814   32,454   38,304 
Finance leases  6,250   8,045   3,272   2,212   3,181 
Consumer  48,784   46,501   40,459   25,422   17,713 
                
   413,050   252,087   134,322   91,665   85,525 
                
                     
Other real estate owned  16,116   2,870   5,019   9,256   4,617 
Other repossessed property  10,154   12,103   9,631   7,291   6,879 
Investment securities              3,750 
                
Total non-performing assets $439,320  $267,060  $148,972  $108,212  $100,771 
                
Past due loans $75,456  $31,645  $27,501  $18,359  $23,493 
Non-performing assets to total assets  2.56%  1.54%  0.75%  0.69%  0.79%
Non-accruing loans to total loans  3.50%  2.24%  1.06%  0.95%  1.21%
Allowance for loan and lease losses $190,168  $158,296  $147,999  $141,036  $126,378 
Allowance to total non-accruing loans  46.04%  62.79%  110.18%  153.86%  147.77%
Allowance to total non-accruing loans excluding residential real estate loans  93.23%  115.33%  186.06%  234.72%  213.48%
     As a result of the increase in delinquencies, the Corporation’s non-accruing loans to total loans ratio increased 126 basis points from 2.24% as of December 31, 2006 to 3.50% as of December 31, 2007 and total non-accruing loans increased by $161.0 million, or 64%, from $252.1 million as of December 31, 2006 to $413.1 million as of December 31, 2007. The increase in non-performing loans as of December 31, 2007, compared to December 31, 2006, was mainly attributable to two factors: (i) continued increase in non-performing loans in residential real estate of approximately $94.2 million, or 82%, mostly in Puerto Rico, and (ii) classification as non-accrual of one loan relationship in the Corporation’s Miami Agency of approximately $46.4 million, net of charge-offs recorded to this relationship in the fourth quarter of 2007. Since the third quarter of 2006, the Corporation decided to limit the origination of, and thereby reduce the exposure to, condo conversion loans in the U.S. mainland. As a result, the condo conversion loan portfolio decreased from its peak in May 2006 of approximately $653 million to approximately $305 million as of December 31, 2007, including the $46.4 million in non-accrual loans. In view of current conditions, the Corporation may experience further deterioration in this portfolio as the market attempts to absorb an oversupply of available property inventory in the face of the deteriorating real estate market.
     With respect to the increasing trends in non-performing residential mortgage loans, during the third quarter of 2007, the Corporation established a loan loss mitigation program providing homeownership preservation assistance. First BanCorp has completed approximately 183 loan modifications, related to residential mortgage loans with an outstanding balance of $26.0 million before the modification, that involves changes in one or more of the loan terms to 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 loans maturity and modifications to the loan rate. 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 accruing status.
     The Corporation’s residential mortgage loan portfolio amounted to $3.2 billion or approximately 27% of the total loan portfolio as of December 31, 2007. More than 90% of the Corporation’s residential mortgage loan portfolio consists of fixed-rate, fully amortizing, full documentation loans that have a lower risk than the typical sub-prime loans that have already affected the U.S. real estate market. The Corporation has not been active in negative amortization loans or option adjustable rate mortgage loans (ARMs) with teaser rates.

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     As of December 31, 2007, the ratio of allowance for loan and lease losses to total non-accruing loans was 46.04%, compared to 62.79% as of December 31, 2006. The decrease mainly reflects a higher proportion of loans collateralized by real estate to total non-accruing loans. Historically, the Corporation has experienced the lowest rate of losses on its residential real estate portfolio as the real estate market in Puerto Rico has not shown significant declines in the market value of properties and the overall comfortable loan-to-value ratios. As a consequence, the provision and allowance for loans and lease losses did not increase proportionately with the increase in non-accruing loans. The annualized ratio of residential mortgage loans net charge-offs to average mortgage loans was 0.03% for the year ended December 31, 2007.
Liquidity Risk
     Liquidity refers to the level of cash and eligible loans and investments to meet loan and investment commitments, potential deposit outflows and debt repayments. ALCO,MIALCO, using measures of liquidity developed by management, which involves the use of several assumptions, reviews the Corporation’s liquidity position on a monthly basis. The Treasury and Investments Division reviews the measures on a weekly basis.
     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 as it protects the Corporation’s liquidity from market disruptions. The principal sources of short-term funds are deposits, securities sold under agreements to repurchase, and lines of credit with the FHLB and other unsecured lines established with financial institutions. ALCOMIALCO reviews credit availability on a regular basis. In the past, the Corporation has securitized and sold auto and mortgage loans as supplementary sources of funding. Commercial paper has also provided additional funding as well as long-term funding through the issuance of notes and long-term brokered certificates of deposit. The cost of these different alternatives, among other things, is taken into consideration. The Corporation’s principal uses of funds are the origination of loans and the repayment of maturing deposit accounts and borrowings.
     Over the last four years, the Corporation has committed substantial resources to its mortgage banking subsidiary, FirstMortgage Inc., with the goal of becoming a leading institution in the highly competitive residential mortgage loans market. As a result, residential real estate loans as a percentage of total loans receivable have increased over time from 14% at December 31, 2004 to 27% at December 31, 2007. 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 it allows the Corporation to derive, if needed, liquidity from the sale of mortgage loans in the secondary market. Recent disruptions in the credit markets and a reduced investors’ demand for mortgage debt have adversely affected the liquidity of the secondary mortgage markets. The U.S. (including Puerto Rico) secondary mortgage market is still highly liquid in large part because of the sale or guarantee programs maintained by FHA, VA, HUD, FNMA and FHLMC.
A large portion of the Corporation’s funding is retail brokered CDs issued by the Bank subsidiary. In the event that the Corporation’s Bank subsidiary falls under the ratios of a well-capitalized institution, it faces the risk of not being able to replace this source of funding. The Bank currently complies with the minimum requirements of ratios for a “well-capitalized” institution and does not foresee falling below required levels to issue brokered deposits. In addition, the average lifeterm to maturity of the retail brokered CDs was approximately 6 years atas of December 31, 2005.2007. Approximately 54%61% of the value of these certificates areis callable but only at the Bank’s option.
     Certificates of deposit with denominations of $100,000 or higher amounted to $9.5$8.1 billion atas of December 31, 20052007 of which $8.6$7.2 billion were brokered CDs.
     The following table presents a maturity summary of brokered CDs atwith denominations of $100,000 or higher as of December 31, 2005:2007:

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  Total 
  (In thousands) 
Less than one year $2,570,956 
Over one year to five years  1,282,738 
Over five years to ten years  1,009,044 
Over ten years  2,314,323 
    
Total $7,177,061 
    
     
  Total 
  (Dollars in thousands) 
Less than one year $3,854,890 
Over one year to five years  793,963 
Over five years to ten years  1,153,269 
Over ten years  2,776,829 
    
Total $8,578,951 
    
The Corporation’s liquidity plan contemplates alternative sources of funding that could provide significant amounts of funding at a reasonable cost. The alternative sources of fundingliquidity include among others, salesthe sale of assets; including commercial loan participations and theresidential mortgage loans, securitization of auto loans, and commercial paper.the Federal Reserve Borrowings in Custody program.
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, 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. All these matters are discussed in the RMC.
Legal and Regulatory Risk
     Legal and regulatory 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 it 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 reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. In 2006 as part of the implementation of the enterprise risk management framework, the Corporation revised and implemented a new corporate compliance function, headed by a newly designated Compliance Director. The Corporation’s Compliance Director reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and implementation an enterprise-wide compliance risk assessment process. The Compliance Officers roles were also established in each major business areas with direct reporting relationships to the Corporate Compliance Group.
Impact of Inflation and Changing Prices
     The financial statements and related data presented herein have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

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     Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a greater impact on a financial institution’s performance than the

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effects of general levels of inflation. Interest rate movements are not necessarily correlated with changes in the prices of goods and services.
Concentration Risk
     The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. However, the Corporation continues diversifying its geographical risk as evidenced by its operations in the Virgin Islands and entrance into new markets. For example, on March 31, 2005, the Corporation completed the acquisition of 100% of the outstanding common shares of Ponce General Corporation, the holding company ofthrough FirstBank Florida based in Miami, Florida. The purpose of the acquisition was to build a platform in Florida from which to initiate further expansion into the United States.
     The Corporation has a significant lending concentration of $3.1 billion$382.6 million in one mortgage originator in Puerto Rico, atDoral, as of December 31, 2005, but received in May 2006 a cash payment of approximately $2.4 billion, substantially reducing the balance in secured commercial loans.2007. The Corporation has outstanding $596.7$242.0 million with another mortgage originator in Puerto Rico, R&G Financial, for total loans granted to mortgage originators amounting to $3.7 billion at$624.6 million as of December 31, 2005.2007. These commercial loans are secured by 41,038 individual mortgage loans on residential and commercial real estate with an average principal balance of $89,776 each. The mortgage originators have always paid the loans in accordance with their terms and conditions. Onestate. In December 6, 2005, the Corporation obtained a waiver from the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico with respect to the statutory limit for individual borrowers (loan to one borrower limit). Of the total gross loans of $12.7$11.8 billion for 2005,2007, approximately 84%80% have credit risk concentration in Puerto Rico, 10%12% in Florida (USA)the United States and 6%8% in the Virgin Islands.
Selected Quarterly Financial Data
     Financial data showing results of the 20052007 and 20042006 quarters is presented below. In the opinion of management, all adjustments necessary for a fair presentation have been included. ThisThese results are unaudited.
                 
  2007  
  March 31 June 30 September 30 December 31
      (Dollars in thousands, except for per share results)
Interest income $298,585  $305,871  $295,931  $288,860 
Net interest income  117,435   117,215   105,029   111,337 
Provision for loan losses  24,914   24,628   34,260   36,808 
Net income  22,832   23,795   14,142   7,367 
Net income (loss) attributable to common stockholders  12,763   13,726   4,073   (2,702)
Earnings (loss) per common share-basic $0.15  $0.16  $0.05  $(0.03)
Earnings (loss) per common share-diluted $0.15  $0.16  $0.05  $(0.03)
                 
  2006  
  March 31 June 30 September 30 December 31
      (Dollars in thousands, except for per share results)
Interest income $327,705  $344,443  $317,711  $298,954 
Net interest income  72,819   126,238   122,702   121,935 
Provision for loan and lease losses  19,376   9,354   20,560   25,701 
Net income  3,863   31,803   26,682   22,286 
Net (loss) income attributable to common stockholders  (6,206)  21,734   16,613   12,217 
(Loss) earnings per common share-basic $(0.08) $0.26  $0.20  $0.16 
(Loss) earnings per common share-diluted $(0.08) $0.26  $0.20  $0.15 
Fourth Quarter Financial Summary
     The financial data has not been reviewedresults for the fourth quarter of 2007, as compared to the same period in 2006, were principally impacted by the Corporation’s independent registered public accounting firm.following items on a pre-tax basis:
-An increase in the provision for loan and lease losses of $11.1 million for fourth quarter of 2007, as compared to the fourth quarter of 2006, due to higher provisions for the commercial and construction loan portfolios, particularly to the Miami Agency construction loan portfolio, attributed to the slowdown in the United States housing market.

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  2005
  (As Restated)      
  March 31 June 30 September 30 December 31
  (Dollars in thousands, except for per share results)
Interest income $212,377  $249,157  $292,263  $313,793 
Net interest income  65,276   193,071   66,743   107,229 
Provision for loan losses  10,954   11,075   12,861   15,754 
Net income (loss)  25,215   97,406   17,305   (25,322)
Earnings per common share-basic $0.19  $1.08  $0.09  $(0.44)
Earnings per common share-diluted $0.18  $1.05  $0.09  $(0.42)
                 
  2004
  March 31 June 30 September 30 December 31
  (Dollars in thousands, except for per share results)
Interest income $150,550  $160,869  $186,664  $192,251 
Net interest income  128,519   5,251   170,606   93,105 
Provision for loan losses  13,200   13,200   13,200   13,200 
Net income (loss)  65,430   (18,192)  88,393   41,694 
Earnings per common share-basic $0.69  $(0.35) $0.97  $0.39 
Earnings per common share-diluted $0.67  $(0.34) $0.94  $0.38 
Market Prices and Stock Data
-A decrease in net interest income of $10.6 million for the fourth quarter of 2007, as compared to the same period in 2006. During 2007 and 2006, net interest income was impacted by the valuation changes and hedging activities. The Corporation recorded a net unrealized loss in valuation changes of $3.3 million for the fourth quarter of 2007, compared to a net unrealized gain of $6.3 million for the same period in 2006. The negative fluctuation is principally attributable to the fair value of certain derivative instruments, known as “referenced interest rate caps” that the Corporation bought in 2004 to mainly hedge interest rate risk inherent in certain mortgage-backed securities. While rates rose through mid-2006 the caps appreciated in value. As the economic cycle turned and rates began to fall along with expectations of further drops, the value of the caps diminished. The value of the caps is related to current rates as well as to forward rate expectations. The unrealized loss on the referenced interest rate caps for the fourth quarter of 2007 amounted to $3.7 million compared to an unrealized loss of $0.9 million for the fourth quarter of 2006. Furthermore, the Corporation recorded lower net non-cash gains ($0.5 million for the fourth quarter of 2007 compared to $7.2 million for the fourth quarter of 2006) related to changes in the fair value of other derivative instruments and financial liabilities that were elected to be measured at fair value upon adoption of SFAS 159, in 2007.
-An increase in non-interest expenses of $7.8 million for the fourth quarter of 2007, as compared to the same period in 2006, in particular increases in employees’ compensation and benefits, including the voluntary separation program charge of $3.3 million recognized during the fourth quarter, the deposit insurance premium expense resulting from changes in the premium calculation by the Federal Deposit Insurance Corporation (“FDIC”) and increases in occupancy and equipment expenses mainly attributable to increases in costs associated with the expansion of the Corporation’s branch network and loan origination offices. Increases in foreclosure-related expenses were also experienced during the fourth quarter of 2007 relating to the previously reported impaired loan relationship in the Miami Agency.
-An increase of $5.6 million in non-interest income for the fourth quarter of 2007, as compared to the same period in 2006. This increase is due to aggregate realized gains of $4.7 million on the sale of approximately $443 million of FNMA and GNMA mortgage-backed securities, $100 million of U.S. Treasury investment securities and certain equity securities, compared to a realized gain of $1.6 million for the same quarter a year ago coupled with lower other-than-temporary impairment charges related to the Corporation’s investment securities portfolio.
     Notwithstanding the decrease in net interest income for the fourth quarter of 2007, as compared to the fourth quarter of 2006, the Corporation’s net interest income showed signs of improvement during the fourth quarter of 2007. Net interest income for the fourth quarter of 2007 rose 6% to $111.3 million from $105.0 million for the previous trailing quarter ended on September 30, 2007. The Corporation’s common stockincrease in net interest income is tradedattributable to: (1) an improved net interest margin due to reductions in short-term rates coupled with the New York Stock Exchange (NYSE) under the symbol FBP. At December 31, 2006 and 2005, there were 566 and 589, respectively, holders of recordfurther deleverage of the Corporation’s common stock.
     The following table sets forthbalance sheet by the highsale of lower yielding investment securities and low pricesuse of the Corporation’s common stock forproceeds to pay down high cost borrowings, and (2) a lower non-cash net loss resulting from the periods indicated as reported byvaluation of derivatives and the NYSE. This table reflectsvaluation of financial liabilities elected to be measured at fair value under the effectprovisions of the June 2005 two-for-one stock split on the Corporation’s outstanding shares of common stock at June 15, 2005.

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Quarter ended High Low Last
2006:
            
December $10.79  $9.39  $9.53 
September  11.15   8.66   11.06 
June  12.22   8.90   9.30 
March  13.15   12.20   12.36 
             
2005:
            
December $15.56  $10.61  $12.41 
September  26.07   16.50   16.92 
June  21.31   17.31   20.08 
March  32.26   20.78   21.13 
 
2004:
            
December $32.43  $23.65  $31.76 
September  24.93   19.81   24.15 
June  21.34   17.57   20.38 
March  21.66   19.50   20.80 
             
2003:
            
December $20.16  $15.62  $19.78 
September  15.99   14.18   15.38 
June  15.84   13.73   13.73 
March  14.00   11.36   13.49 
SFAS 159.
Changes in Internal Controls over Financial Reporting
Refer to Item 9A9A.
CEO and CFO Certifications
     First Bancorp's Chief Executive Officer and Chief Financial Officer have filed with the Securities and Exchange Commission the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibit 31.1 and 31.2 to this Annual Report on Form 10-K.
     In addition, in 2007, First Bancorp's Chief Executive Officer certified to the New York Stock Exchange that he was not aware of any violation by the Corporation of the NYSE corporate governance listing standards.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
     The information required herein is incorporated by reference to the information included under the sub caption “Quantitative and Qualitative Disclosures about Market Risk”“Interest Rate Risk Management” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in this Form 10K.10-K.

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Item 8. Financial Statements and Supplementary Data
     The information requiredconsolidated financial statements of First BanCorp, together with the report thereon of PricewaterhouseCoopers LLP, First BanCorp’s independent registered public accounting firm, are included herein is incorporated by reference from pages 93 through 161beginning on page F-1 of the annual report to security holders for the year ended December 31, 2005.this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
     None.

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Item 9A. Controls and Procedures
Disclosure Controls and Procedures
First BanCorp’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of First BanCorp’s disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our CEO and CFO concluded that, as of December 31, 2005. Disclosure2007, the Corporation’s disclosure controls and procedures are defined under SEC rules as controls and other procedures that are designedwere effective to ensure that information required to be disclosed by a companythe Corporation in the reports that itthe Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within requiredthe time periods. Disclosure controlsperiods specified in SEC rules and procedures include controlsforms and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicatedreported to the issuer’sCorporation’s management, including its principal executivethe CEO and principal financial officers, or persons performing similar functions,CFO, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the
Management’s Report on Internal Control over Financial Reporting
     Our management’s report on Internal Control over Financial Reporting is set forth in Item 8 and incorporated herein by reference.
     The effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based on the Corporation’s identification of the material weaknesses in the Corporation’s internal control over financial reporting described within Management’s Report on Internal Control Over Financial Reporting, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were not effective as of December 31, 2005.2007, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report as set forth in Item 8.
Changes in Internal Control over Financial Reporting
     There have been no changes to the Corporation’s internal control over financial reporting during our most recent quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Item 9B. Other Information
     None.

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PART III
Item 10. Directors, Executive Officers and Corporate Governance
     Information in response to this Item is incorporated herein by reference to the sections entitled “Information with Respect to Nominees for Director of First BanCorp, Directors whose Terms Continue and Executive Officers of the Corporation” and “Corporate Governance and Related Matters” contained in Corporation’s definitive Proxy Statement for its 2008 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed with the Securities and Exchange Commission within 120 days of the close of First BanCorp’s 2007 fiscal year.
Item 11. Executive Compensation
     Information in response to this Item is incorporated herein by reference to the sections entitled “Compensation Discussion and Analysis,” “Tabular Executive Compensation,” “Compensation of Directors,” and “Compensation Committee Report” in First BanCorp’s Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
     Information in response to this Item is incorporated herein by reference to the section entitled “Beneficial Ownership of Securities” in First BanCorp’s Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
     Information in response to this Item is incorporated herein by reference to the sections entitled “Certain Relationships and Related Person Transactions” and “Corporate Governance and Related Matters” of First BanCorp’s Proxy Statement.
Item 14. Principal Accountant Fees and Services
     Information in response to this Item is incorporated herein by reference to the section entitled “Audit Fees” of First BanCorp’s Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) List of documents filed as part of this report.
     (1) Financial Statements.
     The following consolidated financial statements of First BanCorp, together with the report thereon of First BanCorp’s independent registered public accounting firm, PricewaterhouseCoopers LLP, dated February 29, 2008, are included herein beginning on page F-1:
-Report of Independent Registered Public Accounting Firm.
-Consolidated Statements of Financial Condition as of December 31, 2007 and 2006.
-Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 2007.

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-Consolidated Statements of Changes in Stockholders’ Equity for Each of the Three Years in the Period Ended December 31, 2007.
-Consolidated Statements of Comprehensive Income for Each of the Three Years in the Period Ended December 31, 2007.
-Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2007.
-Notes to the Consolidated Financial Statements.
     (2) Financial statement schedules.
     All financial schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
     (3) Exhibits listed below are filed herewith as part of this Form 10-K or are incorporated herein by reference.
Index to Exhibits:
No.Exhibit
3.1Certificate of Incorporation(1)
3.2By-Laws of First BanCorp, as amended effective August 28, 2007
3.3Certificate of Designation creating the 7.125% non-cumulative perpetual monthly income preferred stock, Series A (2)
3.4Certificate of Designation creating the 8.35% non-cumulative perpetual monthly income preferred stock, Series B (3)
3.5Certificate of Designation creating the 7.40% non-cumulative perpetual monthly income preferred stock, Series C (4)
3.6Certificate of Designation creating the 7.25% non-cumulative perpetual monthly income preferred stock, Series D (5)
3.7Certificate of Designation creating the 7.00% non-cumulative perpetual monthly income preferred stock, Series E (6)
4.0Form of Common Stock Certificate(1)
4.1Form of Stock Certificate for 7.125% non-cumulative perpetual monthly income preferred stock, Series A (2)
4.2Form of Stock Certificate for 8.35% non-cumulative perpetual monthly income preferred stock, Series B (3)
4.3Form of Stock Certificate for 7.40% non-cumulative perpetual monthly income preferred stock, Series C (4)
4.4Form of Stock Certificate for 7.25% non-cumulative perpetual monthly income preferred stock, Series D (5)
4.5Form of Stock Certificate for 7.00% non-cumulative perpetual monthly income preferred stock, Series E (7)
10.1FirstBank’s 1987 Stock Option Plan(8)
10.2FirstBank’s 1997 Stock Option Plan(8)
10.3Investment agreement between The Bank of Nova Scotia and First BanCorp dated as of February 15, 2007(9)
14.1Code of Ethics for Senior Financial Officers(10)
14.2Code of Ethics applicable to all employees(10)
14.3Policy Statement and Standards of Conduct for Members of Board of Directors, Executive Officers and Principal Shareholders(10)
14.4Independence Principles for Directors of First BanCorp, as amended effective August 28, 2007
21.1List of First BanCorp’s subsidiaries
31.1Section 302 Certification of the CEO
31.2Section 302 Certification of the CFO
32.1Section 906 Certification of the CEO
32.2Section 906 Certification of the CFO
(1)Incorporated by reference from Registration statement on Form S-4 filed by the Corporation on April 15, 1998.
(2)Incorporated by reference to First BanCorp’s registration statement on Form S-3 filed by the Corporation on March 30, 1999.
(3)Incorporated by reference to First BanCorp’s registration statement on Form S-3 filed by the Corporation on September 8, 2000.
(4)Incorporated by reference to First BanCorp’s registration statement on Form S-3 filed by the Corporation on May 18, 2001.
(5)Incorporated by reference to First BanCorp’s registration statement on Form S-3/A filed by the Corporation on January 16, 2002.
(6)Incorporated by reference to Form 8-A filed by the Corporation on September 26, 2003.
(7)Incorporated by reference to Exhibit 4.1 from the Form 8-K filed by the Corporation on September 5, 2003.
(8)Incorporated by reference from the Form 10-K for the year ended December 31, 1998 filed by the Corporation on March 26, 1999.
(9)Incorporated by reference to Exhibit 10.01 from the Form 8-K filed by the Corporation on February 22, 2007.
(10)Incorporated by reference from the Form 10-K for the year ended December 31, 2003 filed by the Corporation on March 15, 2004.

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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.
By:/s/ Luis M. BeauchampDate: 2/29/08
Luis M. Beauchamp Chairman
President and Chief Executive Officer
     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Luis M. BeauchampDate: 2/29/08
Luis M. Beauchamp
Chairman
President and Chief Executive Officer
/s/ Aurelio AlemánDate: 2/29/08
Aurelio Alemán
Senior Executive Vice President and
Chief Operating Officer
/s/ Fernando ScherrerDate: 2/29/08
Fernando Scherrer, CPA
Executive Vice President and
Chief Financial Officer
/s/ Fernando Rodríguez-AmaroDate: 2/29/08
Fernando Rodríguez Amaro,
Director
/s/ Jorge L. DíazDate: 2/29/08
Jorge L. Díaz,
Director
/s/ Sharee Ann Umpierre-CatinchiDate: 2/29/08
Sharee Ann Umpierre-Catinchi,
Director
/s/ José TeixidorDate: 2/29/08
José Teixidor, Director
/s/ José L. Ferrer-CanalsDate: 2/29/08
José L. Ferrer-Canals, Director
/s/ José Menéndez-CortadaDate: 2/29/08
José Menéndez-Cortada, Lead
Director
/s/ Frank KolodziejDate: 2/29/08
Frank Kolodziej, Director
/s/ Héctor M. NevaresDate: 2/29/08
Héctor M. Nevares, Director

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/s/ José F. RodríguezDate: 2/29/08
José F. Rodríguez, Director
/s/ Pedro RomeroDate: 2/29/08
Pedro Romero, CPA
Senior Vice President and
Chief Accounting Officer

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TABLE OF CONTENTS


Management’s Report on Internal Control Over Financial Reporting
To the Board of Directors and Stockholders of First BanCorp:
The Corporation’s management of First BanCorp (the Corporation) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and for theour assessment of the effectiveness of internal control over financial reporting. The Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted accounting principlesin the United States of America (“GAAP”) and includes controls over the preparation of financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of FDICIA.the Federal Deposit Insurance Corporation Improvement Act (FDICIA).
A company’s internalInternal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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In making its assessment,The management includingof First BanCorp has assessed the Chief Executive Officer and Chief Financial Officer, used the criteria set forth inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizationseffectiveness of the Treadway Commission (“COSO”).
Management has excluded FirstBank Florida (formerly Ponce General Corporation) from its assessment ofCorporation’s internal control over financial reporting as of December 31, 2005 because it was acquired2007. In making this assessment, the Corporation used the criteria set forth by the Company in a purchase business combination during 2005. FirstBank Florida, a wholly-owned subsidiary, represents approximately 4%Committee of the Corporation’s total assets as of December 31, 2005 and approximately 3%Sponsoring Organizations of the Corporation’s total revenues for the year ended December 31, 2005.Treadway Commission (COSO) in Internal Control-Integrated Framework.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2005, First BanCorp’sBased on our assessment, management has identified the following material weaknesses in the Corporation’s internal control over financial reporting.
1.Ineffective Control Environment.The Corporation did not maintain an effective control environment. Specifically the Corporation did not maintain effective controls with respect to the review, supervision and monitoring of its accounting operations, including with respect to the accounting of purchases in bulk of mortgage loans and pass-through trust certificates (the “mortgage-related transactions”). This ineffective control environment enabled certain former members of management to override the Corporation’s internal control over financial reporting thereby precluding other members of management, the Board of Directors, the Audit Committee and the Corporation’s independent registered public accounting firm from having access to certain information relevant to the Corporation’s accounting for the variable interest rate features associated with certain of its mortgage-related transactions.
2.Ineffective controls over the documentation and communication of relevant terms of certain mortgage loans bulk purchase transactions.The Corporation did not maintain effective controls over the documentation and communication of all of the relevant terms and conditions of certain mortgage loans bulk purchase transactions, including the existence of oral and emails agreements and extended recourse.
3.Ineffective controls over communications to the Audit Committee.The Corporation did not maintain effective controls to ensure that management provided the Audit Committee complete information regarding certain mortgage-related transactions in an organized manner so as to enable the Audit Committee to properly oversee those transactions and their associated external financial reporting.
4.Ineffective controls over communications to the Corporation’s independent registered public accounting firm.The Corporation did not maintain effective controls to ensure complete and adequate communication to the Corporation’s registered public accounting firm.
5.Ineffective anti-fraud controls and procedures.The Corporation did not maintain effective anti-fraud controls and procedures to ensure the effective assignment of authority and monitoring of its external financial reporting process.
6.Insufficient accounting resources and expertise.The Corporation did not maintain a sufficient complement of accounting and financial personnel with sufficient knowledge, experience, and training to meet the Corporation’s external financial reporting responsibilities.
The material weaknesses described above in numbered paragraphs 1 through 6 contributed to the existence of the material weaknesses discussed below in numbered paragraphs 7 through 9.

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Additionally, these material weaknesses resulted in the restatement of the consolidated financial statements for the first quarter of 2005 and could result in misstatements of any of the Corporation’s financial statement accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
7.Ineffective controls over the accounting for mortgage-related transactions.The Corporation did not maintain effective controls over the accounting for its mortgage-related transactions with certain counterparties. Specifically, the Corporation did not have effective controls in place to ensure the identification of recourse provisions that precluded the recognition of such transactions as purchases of loans or collaterized mortgage securities in written agreements relating to the mortgage-related transactions. This control deficiency resulted in the restatement of the consolidated financial statements for the first quarter of 2005 and could result in a misstatement in the classification of investment securities, loans receivable and interest income accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.
8.Ineffective controls over the accounting for derivative financial instruments.The Corporation did not maintain effective controls over the accounting for its derivative financial instruments. Specifically, the Corporation’s internal controls were not properly designed to identify derivatives embedded within its mortgage purchases and other loan contracts. Additionally, the Corporation did not maintain effective controls over the identification and valuation of hedge ineffectiveness as required by generally accepted accounting principles. This control deficiency resulted in the restatement of the consolidated financial statements for the first quarter of 2005 and could result in a misstatement of the Corporation’s derivative financial instruments and related accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.
9.Ineffective controls over the valuation of premiums and discounts on mortgage-backed securities. The Corporation did not maintain effective controls over the valuation of premiums and discounts on mortgage-backed securities. Specifically, the Corporation amortized premium and discounts on mortgage-backed securities using a straight-line pro rata method rather than the effective interest method, as required by generally accepted accounting principles. This control deficiency resulted in the restatement of the consolidated financial statements for the first quarter of 2005 and could result in a misstatement in the deferred premiums and discounts amortization accounts that would result in a material misstatement to annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.
As a result of the existence of the material weaknesses discussed above, the Corporation did not maintainmaintained effective control over financial reporting as of December 31, 2005, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO.
First BanCorp’s assessment of the effectiveness of its internal control over financial reporting as of December 31, 20052007.
The effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2007, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears under Item 8 of this Annual Report on Form 10-K along with the Corporation’s consolidated financial statements.

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Plan for Remediation of Material Weaknesses that Existed as of December 31, 2005herein.
First BanCorp has implemented a number of remedial measures designed to address the material weaknesses identified in the Corporation’s internal control over financial reporting as of December 31, 2005 and to enhance the Corporation’s overall corporate governance.
Although the material weaknesses disclosed in the 2004 Annual Report on Form 10K/A have not been remediated as of December 31, 2005, the Company continues its remedial activities as described in its remediation plan included in the 2004 10K/A and further described below.
1. First BanCorp has significantly improved its control environment, including the following:
*Changes in Management and Clarification of the Role, Responsibilities and Authority of Management. The former CEO and former CFO resigned from the Corporation, after the Audit Committee recommended this action to the Board and the Board requested their resignation. Also the Board appointed a new CEO and a new CFO and created the new position of COO, to which it appointed an executive. In addition, the Board appointed a new General Counsel, who reports to the CEO. The roles, responsibilities and authority of the persons in each of these positions have been clarified to better inhibit any override of the Corporation’s internal control over financial reporting. In addition, in 2006 the Corporation has implemented detection controls to improve the identification and response to any instances of undue control by an unauthorized person of the financial reporting process.
*Risk Management Program and Enhancement of the Communication of Information to the Audit Committee. During the first quarter of 2006, the Board reviewed the Corporation’s risk management program with the assistance of outside consultants and legal counsel. This effort has resulted in a realignment of risk management functions and the adoption of an enterprise-wide risk management process. The Board appointed a senior management officer as Chief Risk Officer and appointed this officer to the Risk Management Council with reporting responsibilities to the CEO and the Audit Committee. In addition, the Board has formed an Asset/Liability Risk Committee of the Board which will be responsible for the oversight of risk management, including asset quality, portfolio performance, interest rate and market sensitivity, and portfolio diversification. In addition, the Asset/Liability Risk Committee will have the authority to examine the Corporation’s investment activities and liabilities, such as its brokered CDs, to facilitate appropriate oversight by the Board. Finally, management will be required to bring to the attention of the Asset/Liability Risk Committee new forms of transactions or variants of forms of transactions that the Asset/Liability Risk Committee has not yet reviewed to enable the Asset/Liability Risk Committee to fully evaluate the consequences of such transactions to the Corporation. In addition, management will be required to bring to the attention of the Audit Committee new forms of transactions or variants of forms of transactions for which the Corporation has not determined the appropriate accounting treatment to enable the Audit Committee to fully evaluate the accounting treatment of such transactions. The enhancements of the risk management program are expected to result in a control environment that ensures the discussion and analysis of the legal and accounting implications of new forms of transactions or variants of transactions that may have a significant impact on the Corporation’s financial condition or on the accuracy and completeness of the financial reporting process.

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*Transaction Documentation. In August 2006, the Corporation adopted a specific policy that requires that all transactions be completely and fully documented, thereby prohibiting any oral or undisclosed side agreements, and that such documentation be contemporaneously prepared and executed and centrally maintained and organized.
*Board Membership Changes. The Board appointed the new CEO and new COO to the Board. In addition, in November 2005, the Board elected Fernando Rodríguez-Amaro as a new independent director to serve as an additional audit committee financial expert, and thereafter appointed him /s/ Luis Beauchamp
Luis Beauchamp
Chairman of the Audit Committee as of January 1, 2006. Also, in the first quarter of 2006, the Board appointed Jose Menéndez Cortada as the Lead Independent Director of the Board.
*Corporate Governance Review. During the first quarter of 2006, with the assistance of outside consultants and outside counsel, the Corporate Governance Committee of the Board re-evaluated the Corporation’s corporate governance and made recommendations to the full Board for changes. This effort is expected to result in a clearer understanding of the responsibilities and duties of the Board and its committees and in an alignment of those responsibilities with the industry’s best practices.
*Ethical Training of Employees and Directors. In 2006, the Corporation has designed and offered enhanced corporate compliance seminars to every employee and director. Through the corporate compliance training program, the Corporation is emphasizing the importance of compliance with the Corporation’s policies and procedures and control systems, including the new policy regarding full and complete documentation of agreements and prohibiting oral and side agreements, the Corporation’s Code of Ethics and Code of Conduct, the Corporation’s various legal compliance programs, and the availability of mechanisms to report possible unethical behavior, such as the Audit Committee’s whistleblower hotline.
*Procedures Relating to Concerns About Senior Management’s Conduct. During 2006, the Board and the Audit Committee revised their respective procedures to emphasize more clearly the requirement that the Board or the Audit Committee be notified whenever any concerns arise regarding the conduct of senior management, including allegations of possible fraud, self-dealing or any other inappropriate conduct. In addition, when the Corporation appointed a new General Counsel, it specified that the General Counsel will report to the CEO in contrast to the former General Counsel who reported to the former CFO.
2. Accounting for Mortgage-Related Transactions. The Corporation’s management believes that, as of June 30, 2006, the Corporation has fully remediated the material weakness in its internal control over financial reporting with respect to purchases of mortgages in bulk and the purchases of mortgages where the seller of the mortgages retains the servicing responsibilities. The Corporation has controls that specify that the terms of any recourse provisions or retained servicing arrangements must be reviewed by the General Counsel before they are included in purchase agreements. In addition, the Board, has reviewed the Corporation’s risk management program, enhanced the communication to the Audit Committee President
and adopted a specific policy for transactions documentation as further described in item 1 above.Chief Executive Officer
3.Accounting for Derivative Financial Instruments.The Corporation’s management believes that, as of June 30, 2006, the Corporation has fully remediated the material weakness in its internal control over financial reporting with respect to the identification of derivatives and the measurement of hedge effectiveness. With respect to the identification of derivatives, the Corporation has implemented the following changes:
the legal and accounting departments must review any new forms of transactions or any variants of forms of transactions for which the Corporation has not determined the

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accounting in order to identify any derivatives resulting from the structure of such transactions; and
periodic testing of this review process is required to make sure that it is operating effectively to ensure compliance with SFAS 133.
education of personnel on derivative financial instruments and involvement of outside experts, as necessary.
     With respect to the measurement of hedge effectiveness, the Corporation has revised its controls accounting procedures to state that the receipt of an upfront payment from an interest rate swap counterparty precludes the use of the short-cut method of accounting under SFAS 133.
4. Accounting for the Amortization of Premiums and Discounts on Mortgage-Backed Securities. The Corporation’s management believes that, as of January 1, 2006, the Corporation has fully remediated the material weakness in its internal control over financial reporting with respect to the accounting for the amortization of premiums and discounts on mortgage-backed securities. Management adjusted the balances to reflect the use of the effective interest method. In addition, the Corporation has reviewed the accounting policy to require the use of the interest method for the amortization of premiums and discounts on mortgage-backed securities. As a result of such review, effective January 1, 2006 the Corporation implemented the interest method for the amortization of premiums and discounts on mortgage-backed securities.
5. Overall Accounting Resources and Expertise.The Corporation has recruited additional staff to strengthen its accounting, internal control, financial reporting, legal, regulatory compliance, and internal audit functions. Further, the Corporation has appointed a senior management executive as the Chief Accounting Officer with primary responsibility for the development and implementation of the Corporation’s accounting policies and practices and to review and monitor critical accounts and transactions to ensure that they are managed in accordance with such policies and practices, generally accepted accounting principles in the United States and applicable regulatory requirements.
First BanCorp’s remediation efforts have continued into 2007. During 2006, First BanCorp concentrated its remediation efforts on those areas that had the most pervasive effects on First BanCorp’s internal control over financial reporting. Specifically, with respect to the material weaknesses described within Management’s Report on Internal Control Over Financial Reporting , First BanCorp took significant actions to (i)improve its control environment, including its “tone at the top”, (ii) remediate the material weakness related to purchases of mortgages in bulk and purchases of mortgages where the seller of the mortgages retains the servicing responsibilities, (iii) remediate the material weakness with respect to the identification of derivatives and measurement of hedge effectiveness, and (iv) remediate the material weakness related to the accounting for the amortization of premiums and discounts on mortgage backed securities. First BanCorp’s Audit Committee has provided and will continue to provide oversight and review of the Company’s initiatives to remediate material weaknesses in First BanCorp’s internal control over financial reporting.
Other Enhancements to Internal Control Over Financial Reporting
The following describes other enhancements that are being undertaken by First BanCorp, in addition to the measures described above, to address the material weaknesses in the Corporation’s internal control over financial reporting:

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1.The Corporation has created the position of Corporate Controller that reports directly to the CFO. The Corporate Controller oversees the corporate financial records of the Corporation. The controllers of the Corporation’s subsidiaries now report directly to the Corporate Controller.
2.The Corporation has segregated the investment accounting department from the treasury department. The investment accounting department reports now directly to the Corporate Controller.
3.The Corporation has created the corporate reporting department reporting directly to the Chief Accounting Officer. The corporate reporting department has the responsibility of SEC filings and financial reporting to the Corporation’s Board of Directors.
First BanCorp believes that the remediation and other efforts described above have significantly improved and will continue to improve First BanCorp’s internal control over financial reporting and its disclosure controls and procedures. First BanCorp’s management, with the oversight of the Audit Committee, will continue to take steps to remedy the identified material weaknesses in the Corporation’s internal control over financial reporting as expeditiously as possible.
Changes in Internal Control Over Financial Reporting
There were the following changes to the Corporation’s internal control over financial reporting during the last quarter of year 2005: the appointment of a new CEO, new COO and hiring of a new independent director to serve as an additional audit committee financial expert on the Audit Committee.
Item 9B. Other Information
On April 28, 2005, FirstBank and/s/ Fernando Batlle entered into a Separation Agreement, pursuant to which Mr. Batlle’s employment as an Scherrer
Fernando Scherrer
Executive Vice President was terminated. Pursuant to the terms of the Separation Agreement as consideration for entering into the Agreement, providing a release
and settling all claims Mr. Batlle or his wife had or may have had in the future against FirstBank, the Corporation and its affiliates, Mr. Batlle and his wife received an aggregate lump sum payment of $1,800,000, 12 months of COBRA coverage, the company car he utilized, and the computer and printer he utilized.
On April 28, 2005, FirstBank also entered into Contract for Consulting Service with Mr. Batlle. Pursuant to the Contract for Consulting Service, Mr. Batlle was entitled to receive a monthly fee of $4,166 during the one-year term of the contract for providing to FirstBank, for up to 22 hours per month, consulting services with respect to financial and banking matters as well as providing it with assistance and cooperation with respect to any lawsuit, claim, dispute or investigation regarding issues to which Mr. Batlle had knowledge or which were his responsibility while he was employed by FirstBank. Pursuant to the termination clause of the Contract, on June 10, 2005, Mr. Batlle notified FirstBank of his decision to terminate the Contract. Upon such termination, Mr. Batlle was entitled to receive in Full the fees allocable to the remaining portion of the Contract. In this regard, FirstBank delivered a payment to Mr. Batlle in the amount of $50,000 less a 7% withholding tax applicable to such payment.Chief Financial Officer

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PricewaterhouseCoopers LLP
254 Muñoz Rivera Avenue
BBVA Tower, 9th Floor
Hato Rey, PR 00918
Telephone (787) 754-9090
Facsimile (787) 766-1094
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders
of First BanCorp
We have completed integrated audits of First BanCorp’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of First BanCorp and its subsidiaries (the “Corporation”) at December 31, 20052007 and 2004,2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20052007 in conformity with accounting principles generally accepted in the United States of America. TheseAlso in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Corporation’s management.effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinionopinions on these financial statements and on the Corporation’s internal control over financial reporting based on our integrated audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
Internal control overAs discussed in Note 1 to the consolidated financial reporting
Also, we have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, thatstatements, the Corporation did not maintain effective internal control over financial reporting ashas adopted in 2007 FIN 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of December 31, 2005, becauseFASB Statement No. 109”, SFAS No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities”. In addition, the Corporation did not maintain (1) an effective control environment, (2) effective controls overchanged the documentation and communication of relevant terms of certain mortgage loans bulk purchase transactions, (3) effective controls over communications to the Audit Committee, (4) effective controls over communications to the Corporation’s independent registered public accounting firm, (5) effective anti-fraud controls and procedures, (6) sufficient accounting resources and expertise, (7) effective controls over the accountingmanner in which it accounts for its mortgage-related transactions with certain counterparties, (8) effective controls over the accounting for its derivative financial instruments, and (9) effective controls over the valuation of premiums and discounts on mortgage- backed securities, based on criteria establishedshare-based compensation inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for maintaining

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effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Corporation’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. 2006.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of First BanCorp’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance

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regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses as of December 31, 2005 have been identified and included in management’s assessment:
1.Ineffective Control Environment.The Corporation did not maintain an effective control environment. Specifically, the Corporation did not maintain effective controls with respect to the review, supervision and monitoring of its accounting operations, including with respect to the accounting of purchases in bulk of mortgage loans and pass-through trust certificates (the “mortgage-related transactions”). This ineffective control environment enabled certain former members of management to override the Corporation’s internal control over financial reporting thereby precluding other members of management, the Board of Directors, the Audit Committee and the Corporation’s independent registered public accounting firm from having access to certain information relevant to the Corporation’s accounting for the variable interest rate features associated with certain of its mortgage-related transactions.
2.Ineffective controls over the documentation and communication of relevant terms of certain mortgage loans bulk purchase transactions.The Corporation did not maintain effective controls over the documentation and communication of all of the relevant terms and conditions of certain mortgage loans bulk purchase transactions, including the existence of oral and emails agreements and extended recourse.
3.Ineffective controls over communications to the Audit Committee.The Corporation did not maintain effective controls to ensure that management provided the Audit Committee complete

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information regarding certain mortgage-related transactions in an organized manner so as to enable the Audit Committee to properly oversee those transactions and their associated external financial reporting.
4.Ineffective controls over communications to the Corporation’s independent registered public accounting firm.The Corporation did not maintain effective controls to ensure complete and adequate communication to the Corporation’s registered public accounting firm.
5.Ineffective anti-fraud controls and procedures.The Corporation did not maintain effective anti-fraud controls and procedures to ensure the effective assignment of authority and monitoring of its external financial reporting process.
6.Insufficient accounting resources and expertise.The Corporation did not maintain a sufficient complement of accounting and financial personnel with sufficient knowledge, experience, and training to meet the Corporation’s external financial reporting responsibilities.
The material weaknesses described above in numbered paragraphs 1 through 6 contributed to the existence of the material weaknesses discussed below in numbered paragraphs 7 through 9. Additionally, these material weaknesses resulted in the restatement of the consolidated financial statements for the first quarter of 2005 and could result in misstatements of any of the Corporation’s financial statement accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
7.Ineffective controls over the accounting for mortgage-related transactions.The Corporation did not maintain effective controls over the accounting for its mortgage-related transactions with certain counterparties. Specifically, the Corporation did not have effective controls in place to ensure the identification of recourse provisions that precluded the recognition of such transactions as purchases of loans or collateralized mortgage securities in written agreements relating to the mortgage-related transactions. This control deficiency resulted in the restatement of the consolidated financial statements for the first quarter of 2005 and could result in a misstatement in the classification of investment securities, loans receivable and interest income accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.
8.Ineffective controls over the accounting for derivative financial instruments.The Corporation did not maintain effective controls over the accounting for its derivative financial instruments. Specifically, the Corporation’s internal controls were not properly designed to identify derivatives embedded within its mortgage purchases and other loan contracts. Additionally, the Corporation did not maintain effective controls over the identification and valuation of hedge ineffectiveness as required by generally accepted accounting principles. This control deficiency resulted in the restatement of the consolidated financial statements for the first quarter of 2005 and could result in a misstatement of the Corporation’s derivative financial instruments and related accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.
9.Ineffective controls over the valuation of premiums and discounts on mortgage-backed securities. The Corporation did not maintain effective controls over the valuation of premiums and discounts on mortgage-backed securities. Specifically, the Corporation amortized premium and discounts on mortgage-backed securities using a straight-line pro rata method rather than the effective interest method, as required by generally accepted accounting principles. This control deficiency resulted in the restatement of the consolidated financial statements for the first quarter of 2005 and could result in a misstatement in the deferred premiums and discounts amortization

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accounts that would result in a material misstatement to annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.
The material weaknesses referred to above were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2005 consolidated financial statements, and our opinion regarding the effectiveness of the Corporation’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded FirstBank Florida (formerly Ponce General Corporation) from its assessment of internal control over financial reporting as of December 31, 2005 because it was acquired by the Company in a purchase business combination during 2005. We have also excluded FirstBank Florida from our audit of internal control over financial reporting. FirstBank Florida, a wholly-owned subsidiary, represents approximately 4% of the Corporation’s total assets as of December 31, 2005 and approximately 3% of the Corporation’s total revenues for the year ended December 31, 2005.
In our opinion, management’s assessment that the Corporation did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated,in all material respects, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, the Corporation has not maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Juan, Puerto Rico
February 6, 200729, 2008
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 20072010
Stamp 21281032287582 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report

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FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
        
(In thousands, except for share information) December 31, 2007 December 31, 2006 
Assets
 
Cash and due from banks $195,809 $112,341 
             
 December 31, 2005 December 31, 2004  
Assets
 
Money market instruments 148,579 377,296 
  
Cash and due from banks $106,881,335 $6,211,372 
Money market instruments, including $381,848,364 pledged that can be repledged for 2005 (2004 - $404,748,972) 715,823,907 702,163,791 
Federal funds sold and securities purchased under agreements to resell 508,967,369 118,000,000 
Federal funds sold 7,957 42,051 
Time deposits with other financial institutions 48,967,475 100,600,000  26,600 37,123 
          
Total money market investments 1,273,758,751 920,763,791  183,136 456,470 
          
Investment securities available-for-sale, at fair value: 
Investment securities available for sale, at fair value: 
Securities pledged that can be repledged 1,744,846,054 1,072,058,479  789,271 1,373,467 
Other investment securities 203,331,449 247,536,295  497,015 326,956 
          
Total investment securities available-for-sale 1,948,177,503 1,319,594,774 
Total investment securities available for sale 1,286,286 1,700,423 
          
Investment securities held-to-maturity, at amortized cost: 
Investment securities held to maturity, at amortized cost: 
Securities pledged that can be repledged 3,115,260,660 2,996,930,801  2,522,509 2,661,088 
Other investment securities 323,327,297 380,636,249  754,574 686,043 
          
Total investment securities held-to-maturity 3,438,587,957 3,377,567,050 
Total investment securities held to maturity, fair value of $3,261,934 (2006 - $3,256,966) 3,277,083 3,347,131 
          
Other equity securities 42,367,500 81,275,000  64,908 40,159 
          
  
Loans, net of allowance for loan losses of $147,998,733 (2004 - $141,035,841) 12,436,257,993 9,547,054,561 
Loans, net of allowance for loan and lease losses of $190,168 (2006 - $158,296) 11,588,654 11,070,446 
Loans held for sale, at lower of cost or market 101,672,531 9,903,189  20,924 35,238 
          
Total loans, net 12,537,930,524 9,556,957,750  11,609,578 11,105,684 
          
Premises and equipment, net 116,947,772 95,813,545  162,635 155,662 
Other real estate owned 5,019,106 9,255,973  16,116 2,870 
Accrued interest receivable 103,692,478 56,936,934 
Accrued interest receivable on loans and investments 107,979 112,505 
Due from customers on acceptances 353,864 407,625  747 150 
Other assets 343,933,937 212,261,455  282,654 356,861 
          
Total assets $19,917,650,727 $15,637,045,269  $17,186,931 $17,390,256 
          
 
Liabilities & Stockholders’ Equity
  
 
Liabilities:  
Non-interest bearing deposits $811,006,126 $699,581,764 
Interest bearing deposits 11,652,746,080 7,212,740,444 
Non-interest-bearing deposits $621,884 $790,985 
Interest-bearing deposits (2007 - includes $4,186,563 measured at fair value) 10,412,637 10,213,302 
Federal funds purchased and securities sold under agreements to repurchase 4,833,882,000 4,165,360,913  3,094,646 3,687,724 
Advances from the Federal Home Loan Bank (FHLB) 506,000,000 1,598,000,000  1,103,000 560,000 
Notes payable 178,693,249 178,239,975 
Notes payable (2007 - includes $14,306 measured at fair value) 30,543 182,828 
Other borrowings 231,622,020 276,692,251  231,817 231,719 
Subordinated notes  82,280,418 
Bank acceptances outstanding 353,864 407,625  747 150 
Accounts payable and other liabilities 505,506,453 219,408,593  270,011 493,995 
          
Total liabilities 15,765,285 16,160,703 
 18,719,809,792 14,432,711,983      
      
Commitments and contingencies (Note 30 and 33) 
     
Commitments and contingencies (Notes 26, 29 and 32) 
  
Stockholders’ equity:  
Preferred stock, authorized 50,000,000 shares; issued and outstanding 22,004,000 shares at $25 liquidation value per share 550,100,000 550,100,000 
Common stock, $1 par value, authorized 250,000,000 shares; issued 90,772,856 shares (2004 - 45,310,055 shares) 90,772,856 45,310,055 
Less: Treasury Stock (at par value)  (9,897,800)  (4,920,900)
Preferred stock, authorized 50,000,000 shares: issued and outstanding 22,004,000 shares at $25 liquidation value per share 550,100 550,100 
     
Common stock, $1 par value, authorized 250,000,000 shares; 102,402,306 shares issued (2006 - 93,151,856 shares) 102,402 93,152 
Less: Treasury stock (at par value)  (9,898)  (9,898)
          
Common stock outstanding 80,875,056 40,389,155  92,504 83,254 
          
Additional paid-in capital  4,863,299  108,279 22,757 
Capital reserve  82,825,000 
Legal surplus 265,844,192 183,019,192  286,049 276,848 
Retained earnings 316,696,971 299,501,016  409,978 326,761 
Accumulated other comprehensive (loss) income, net of tax of $16,259 (2004 - ($894,396))  (15,675,284) 43,635,624 
Accumulated other comprehensive loss, net of tax benefit of $227 ( 2006 - $221)  (25,264)  (30,167)
          
 1,197,840,935 1,204,333,286 
Total stockholders’ equity 1,421,646 1,229,553 
          
Total liabilities and stockholders’ equity $19,917,650,727 $15,637,045,269  $17,186,931 $17,390,256 
          
The accompanying notes are an integral part of these statements.

97F-4


FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
                        
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003 
(In thousands, except per share data) 2007 2006 2005 
Interest income:
  
Loans $772,099,930 $458,180,082 $400,908,876  $901,941 $936,052 $772,100 
Investment securities 273,603,902 228,417,189 143,850,531  265,275 281,847 273,604 
Money market investments 21,886,150 3,736,452 4,707,054  22,031 70,914 21,886 
              
Total interest income 1,067,589,982 690,333,723 549,466,461  1,189,247 1,288,813 1,067,590 
       
        
Interest expense:
  
Deposits 393,151,942 119,843,691 165,126,334  528,740 605,033 393,152 
Federal funds purchased and repurchase agreements 179,124,075 129,572,722 105,705,205  148,309 195,328 179,124 
Advances from FHLB 32,756,084 27,668,471 19,418,432  38,464 13,704 32,756 
Notes payable and other borrowings 30,238,672 15,767,897 7,278,384  22,718 31,054 30,239 
              
Total interest expense 635,270,773 292,852,781 297,528,355  738,231 845,119 635,271 
              
Net interest income 432,319,209 397,480,942 251,938,106  451,016 443,694 432,319 
              
Provision for loan losses
 50,644,344 52,799,550 55,915,598 
        
Net interest income after provision for loan losses 381,674,865 344,681,392 196,022,508 
Provision for loan and lease losses
 120,610 74,991 50,644 
              
Other income:
 
 
Net interest income after provision for loan and lease losses 330,406 368,703 381,675 
       
 
Non-interest income:
 
Other service charges on loans 5,430,713 3,910,483 6,522,276  6,893 5,945 5,431 
Service charges on deposit accounts 11,796,185 10,937,998 9,526,946  12,769 12,591 11,796 
Mortgage banking activities 3,798,145 3,921,135 3,013,840  2,819 2,259 3,798 
Net gain on investments 12,338,969 9,457,190 35,590,260 
Net (loss) gain on investments and impairments  (2,726)  (8,194) 12,339 
Net gain (loss) on partial extinguishment and recharacterization of secured commercial loans to local financial institutions 2,497  (10,640)  
Rental income 3,462,504 3,070,697 2,223,734  2,538 3,264 3,463 
Gain on sale of credit card portfolio  5,532,684 32,385,353  2,819 500  
Other operating income 26,250,063 22,793,769 17,535,927 
Insurance reimbursements and other agreements related to a contingency settlement 15,075   
Other non-interest income 24,472 25,611 26,250 
              
Total other income 63,076,579 59,623,956 106,798,336 
Total non-interest income 67,156 31,336 63,077 
              
Other operating expenses:
 
 
Non-interest expenses:
 
Employees’ compensation and benefits 102,077,927 82,439,613 74,488,194  140,363 127,523 102,078 
Occupancy and equipment 47,582,007 39,430,288 36,363,434  58,894 54,440 47,582 
Business promotion 18,717,468 16,348,849 12,414,820  18,029 17,672 18,718 
Professional fees 13,387,333 4,165,093 2,991,839  20,751 32,095 13,387 
Taxes, other than income taxes 9,809,320 8,467,962 7,404,729  15,364 12,428 9,809 
Insurance and supervisory fees 5,509,429 4,125,835 3,729,860  12,616 7,067 5,510 
Provision for contingencies 82,750,000   
Other operating expenses 35,298,372 25,502,068 27,236,805 
Provision for contigencies   82,750 
Other non-interest expenses 41,826 36,738 35,298 
              
Total other operating expenses 315,131,856 180,479,708 164,629,681 
Total non-interest expenses 307,843 287,963 315,132 
       
        
Income before income tax provision 129,619,588 223,825,640 138,191,163  89,719 112,076 129,620 
Income tax provision
 15,015,504 46,500,247 18,297,490  21,583 27,442 15,016 
       
        
Net income
 $114,604,084 $177,325,393 $119,893,673  $68,136 $84,634 $114,604 
              
Dividends to preferred stockholders
 40,275,996 40,275,996 30,358,863  40,276 40,276 40,276 
              
Net income available to common stockholders
 $74,328,088 $137,049,397 $89,534,810 
Net income attributable to common stockholders
 $27,860 $44,358 $74,328 
              
Net income per common share basic:
 
Earnings per common share basic $0.92 $1.70 $1.12 
Net income per common share:
 
Basic $0.32 $0.54 $0.92 
              
Net income per common share diluted:
 
Earnings per common share diluted $0.90 $1.65 $1.09 
Diluted $0.32 $0.53 $0.90 
              
Dividends declared per common share
 $0.28 $0.24 $0.22  $0.28 $0.28 $0.28 
              
The accompanying notes are an integral part of these statements.

98F-5


FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
             
  Year ended December 31, 
  2005  2004  2003 
Cash flows from operating activities:
            
Net income $114,604,084  $177,325,393  $119,893,673 
          
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation  15,412,284   13,939,369   13,761,331 
Amortization of core deposit intangibles  3,709,074   2,396,620   2,396,620 
Provision for loan losses  50,644,344   52,799,550   55,915,598 
Deferred income tax benefit  (60,222,881)  (6,508,814)  (26,744,079)
Gain on sale of investments, net  (20,712,604)  (12,156,182)  (41,350,820)
Other-than-temporary impairments on available-for-sale securities  8,373,635   2,698,992   5,760,560 
Unrealized derivative loss (gain)  73,442,943   (15,528,996)  41,136,523 
Net gain on sale of loans  (3,635,744)  (3,594,875)  (2,917,364)
Amortization of deferred net loan (fees) cost  389,049   (1,511,254)  (2,639,188)
Amortization of broker placement fees  15,123,382   13,874,998   12,866,952 
Amortization of premium and (discount) on investment securities  14,520,096   15,090,031   17,305,088 
Amortization of discount on subordinated notes  544,582   515,029   474,618 
Gain on sale of credit card portfolio     (5,532,684)  (32,385,353)
Increase (decrease) in accrued income tax payable  28,362,574   (4,766,394)  8,353,011 
Increase in accrued interest receivable  (43,996,026)  (15,400,487)  (982,130)
Increase in accrued interest payable  77,493,499   14,587,835   12,518,654 
Decrease in other assets  5,661,362   7,375,482   1,657,323 
Increase (decrease) in other liabilities  87,254,869   4,869,117   (2,765,265)
          
Total adjustments  252,364,438   63,147,337   62,362,079 
          
Net cash provided by operating activities
  366,968,522   240,472,730   182,255,752 
          
             
Cash flows from investing activities:
            
Principal collected on loans  3,823,228,343   2,266,859,637   1,938,300,698 
Loans originated  (6,088,694,602)  (4,985,689,733)  (3,507,655,892)
Purchases of loans  (454,873,010)  (199,970,917)  (132,639,610)
Proceeds from sale of loans  122,163,134   138,838,749   264,126,724 
Proceeds from sale of available-for-sale investment securities  252,745,618   131,571,934   1,439,718,183 
Purchases of securities held-to-maturity  (4,757,903,632)  (5,996,237,666)  (11,580,703,043)
Purchases of securities available-for-sale  (1,227,796,001)  (508,236,946)  (1,480,586,968)
Principal repayments and maturities of securities held-to-maturity  4,690,680,465   5,744,069,157   9,144,728,663 
Principal repayments of securities available-for-sale  325,987,310   341,102,094   1,550,033,956 
Additions to premises and equipment  (28,920,984)  (24,483,512)  (11,435,164)
Increases (decreases) in other equity securities  41,690,600   (35,250,000)  (8,997,500)
Cash paid for net assets acquired on acquisition of businesses  (78,404,803)      
          
Net cash used in investing activities
  (3,380,097,562)  (3,127,427,203)  (2,385,109,953)
          
             
Cash flows from financing activities:
            
Net increase in deposits  4,120,051,019   1,149,976,606   1,341,442,350 
Net increase in federal funds purchased and securities sold under repurchase agreements  668,521,087   525,888,563   855,394,414 
FHLB advances taken (payments)  (1,132,000,000)  685,000,000   540,000,000 
Net proceeds from the issuance of notes payable and other borrowings     595,778,616    
Repayments of notes payable and other borrowings  (127,992,616)  (140,185,000)   
Dividends  (62,914,802)  (59,593,300)  (47,958,718)
Exercise of stock options  2,094,354   4,956,314   1,119,957 
Issuance of preferred stock, net of cost        182,998,539 
Treasury stock acquired  (965,079)      
          
Net cash provided by financing activities
  3,466,793,963   2,761,821,799   2,872,996,542 
          
Net increase (decrease) in cash and cash equivalents  453,664,923   (125,132,674)  670,142,341 
Cash and cash equivalents at beginning of period  926,975,163   1,052,107,837   381,965,496 
          
Cash and cash equivalents at end of period
 $1,380,640,086  $926,975,163  $1,052,107,837 
          
Cash and cash equivalents include:            
Cash and due from banks $106,881,335  $6,211,372  $86,161,347 
Money market investments  1,273,758,751   920,763,791   965,946,490 
          
Total Cash and cash equivalents
 $1,380,640,086  $926,975,163  $1,052,107,837 
          
             
  Year Ended December 31, 
(In thousands) 2007  2006  2005 
Cash flows from operating activities:
            
Net income $68,136  $84,634  $114,604 
          
 
Adjustment to reconcile net income to net cash provided by operating activities:            
             
Depreciation  17,669   16,810   15,412 
Amortization of core deposit intangible  3,294   3,385   3,709 
Provision for loan and lease losses  120,610   74,991   50,644 
Deferred income tax provision (benefit)  13,658   (31,715)  (60,223)
Stock-based compensation recognized  2,848   5,380    
Gain on sale of investments, net  (3,184)  (7,057)  (20,713)
Other-than-temporary impairments on available-for-sale securities  5,910   15,251   8,374 
Derivative instruments and hedging activities loss  6,134   61,820   73,443 
Net gain on sale of loans and impairments  (2,246)  (1,690)  (3,270)
Net (gain) loss on partial extinguishment and recharacterization of secured commercial loans to local financial institutions  (2,497)  10,640    
Net amortization on premiums and discounts and deferred loan fees and costs  (663)  (2,568)  (1,725)
Amortization of broker placement fees  9,563   19,955   15,124 
Accretion of basis adjustments on fair value hedges  (2,061)  (3,626)   
Net accretion of premium and discounts on investment securities  (42,026)  (35,933)  (30,014)
Amortization of discount on subordinated notes        544 
Gain on sale of credit cards portfolio  (2,819)  (500)   
(Decrease) increase in accrued income tax payable  (3,419)  (39,702)  28,363 
Decrease (increase) in accrued interest receivable  4,397   (8,813)  (43,996)
(Decrease) increase in accrued interest payable  (13,808)  33,910   58,800 
Decrease (increase) in other assets  4,408   12,089   (33,206)
(Decrease) increase in other liabilities  (123,611)  14,451   103,543 
          
Total adjustments  (7,843)  137,078   164,809 
          
Net cash provided by operating activities
  60,293   221,712   279,413 
          
Cash flows from investing activities:
            
Principal collected on loans  3,084,530   6,022,633   3,803,804 
Loans originated  (3,813,644)  (4,718,928)  (6,058,105)
Purchase of loans  (270,499)  (168,662)  (454,873)
Proceeds from sale of loans  150,707   169,422   120,682 
Proceeds from sale of repossessed assets  52,768   50,896   33,337 
Purchase of servicing assets  (1,851)  (1,156)   
Proceeds from sale of available-for-sale securities  959,212   232,483   252,746 
Purchase of securities held to maturity  (511,274)  (447,483)  (2,540,827)
Purchase of securities available-for-sale  (576,100)  (225,373)  (1,221,389)
Principal repayments and maturities of securities held to maturity  623,374   574,797   2,511,738 
Principal repayments of securities available for sale  214,218   217,828   325,981 
Additions to premises and equipment  (24,642)  (55,524)  (28,921)
(Increase) decrease in other equity securities  (23,422)  2,208   41,691 
Cash received for net liabilities assumed on acquisition of business        (78,405)
          
Net cash (used in) provided by investing activities
  (136,623)  1,653,141   (3,292,541)
          
             
Cash flows from financing activities:
            
Net increase (decrease) in deposits  59,499   (1,550,714)  4,120,051 
Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements  (593,078)  (1,146,158)  668,521 
Net FHLB advances taken (paid)  543,000   54,000   (1,132,000)
Repayments of notes payable and other borrowings  (150,000)     (127,993)
Dividends paid  (64,881)  (63,566)  (62,915)
Exercise of stock options     19,756   2,094 
Issuance of common stock  91,924       
Treasury stock acquired        (965)
          
Net cash (used in) provided by financing activities
  (113,536)  (2,686,682)  3,466,793 
          
Net (decrease) increase in cash and cash equivalents  (189,866)  (811,829)  453,665 
Cash and cash equivalents at beginning of period  568,811   1,380,640   926,975 
          
Cash and cash equivalents at end of period
 $378,945  $568,811  $1,380,640 
          
Cash and cash equivalents include:            
Cash and due from banks $195,809  $112,341  $155,849 
Money market instruments  183,136   456,470   1,224,791 
          
Total Cash and cash equivalents
 $378,945  $568,811  $1,380,640 
          
The accompanying notes are an integral part of these statements.

99F-6


FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
                        
 Year ended December 31,  Year Ended December 31, 
(In thousands) 2007 2006 2005 
Preferred Stock
 $550,100 $550,100 $550,100 
 2005 2004 2003        
Preferred Stock:
 
 
Common Stock Outstanding:
 
Balance at beginning of year $550,100,000 $550,100,000 $360,500,000  83,254 80,875 40,389 
Shares issued (7.00% Non-cumulative non convertible, Series E)   189,600,000 
       
Issuance of common stock 9,250   
Common stock issued under stock option plan  2,379 76 
Treasury stock acquired before June 30, 2005 stock split    (28)
Shares issued as a result of stock split on June 30, 2005   40,438 
        
Balance at end of year $550,100,000 $550,100,000 $550,100,000  92,504 83,254 80,875 
              
  
Common stock:
 
Additional Paid-In-Capital:
 
Balance at beginning of year 40,389,155 40,027,285 39,954,535  22,757  4,863 
Common stock issued under stock option plan before stock split 76,373 361,870 72,750 
Treasury stock acquired before June 30, 2005 stock split  (28,000)   
Shares issued as a result of stock split on June 30, 2005 40,437,528   
       
 
Balance at end of year $80,875,056 $40,389,155 $40,027,285 
       
 
Additional paid-in capital:
 
Balance at beginning of year 4,863,299 268,855  
Issuance of common stock 82,674   
Treasury stock acquired  (937,079)       (937)
Issuance cost of preferred stock    (778,352)
Shares issued under stock option plan 2,017,981 4,594,444 1,047,207   17,377 2,018 
Stock-based compensation recognized 2,848 5,380  
Adjustment for stock split on June 30, 2005  (5,944,201)       (5,944)
       
        
Balance at end of year $ $4,863,299 $268,855  108,279 22,757  
              
  
Capital Reserve:
  
Balance at beginning of year 82,825,000 80,000,000 70,000,000    82,825 
Transfer from retained earnings  2,825,000 10,000,000 
Transfer to legal surplus  (82,825,000)       (82,825)
       
        
Balance at end of year $ $82,825,000 $80,000,000     
              
  
Legal surplus:
 
Legal Surplus:
 
Balance at beginning of year 183,019,192 165,709,122 155,192,258  276,848 265,844 183,019 
Transfer from retained earnings  17,310,070 10,516,864  9,201 11,004  
Transfer from capital reserve 82,825,000      82,825 
              
  286,049 276,848 265,844 
Balance at end of year $265,844,192 $183,019,192 $165,709,122 
              
  
Retained earnings:
 
Retained Earnings:
 
Balance at beginning of year 299,501,016 201,903,993 156,309,011  326,761 316,697 299,501 
Net income 114,604,084 177,325,393 119,893,673  68,136 84,634 114,604 
Cash dividend declared on common stock  (22,638,806)  (19,317,304)  (17,599,855)
Cash dividend declared on preferred stock  (40,275,996)  (40,275,996)  (30,358,863)
Issuance cost of preferred stock    (5,823,109)
Cash dividends declared on common stock  (24,605)  (23,290)  (22,639)
Cash dividends declared on preferred stock  (40,276)  (40,276)  (40,276)
Cumulative adjustment for accounting change (adoption of FIN 48)  (2,615)   
Cumulative adjustment for accounting change (adoption of SFAS No. 159) 91,778   
Adjustment for stock split on June 30, 2005  (34,493,327)       (34,493)
Transfer to capital reserve   (2,825,000)  (10,000,000)
Transfer to legal surplus   (17,310,070)  (10,516,864)  (9,201)  (11,004)  
       
        
Balance at end of year $316,696,971 $299,501,016 $201,903,993  409,978 326,761 316,697 
              
  
Accumulated other comprehensive (loss) income, net of tax:
 
Accumulated Other Comprehensive (Loss) Income, Net of Tax:
 
Balance at beginning of year 43,635,624 35,812,500 34,066,622   (30,167)  (15,675) 43,636 
Other comprehensive (loss) income, net of deferred tax  (59,310,908) 7,823,124 1,745,878 
       
Other comprehensive income (loss), net of tax 4,903  (14,492)  (59,311)
        
Balance at end of year $(15,675,284) $43,635,624 $35,812,500   (25,264)  (30,167)  (15,675)
              
  
Total stockholders’ equity
 $1,197,840,935 $1,204,333,286 $1,073,821,755 
Total Stockholders’ Equity
 $1,421,646 $1,229,553 $1,197,841 
              
The accompanying notes are an integral part of these statements.

100F-7


FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
             
  Year ended December 31, 
  2005  2004  2003 
Net income $114,604,084  $177,325,393  $119,893,673 
             
Other comprehensive income:            
 
Unrealized (losses) gains on securities:            
Unrealized holding (losses) gains arising during the period  (47,839,301)  17,561,629   26,822,165 
Less: Reclassification adjustment for net gains and other-than-temporary impairments included in net income  (12,382,262)  (9,457,190)  (35,590,260)
Income tax benefit (expense) related to items of other comprehensive income  910,655   (281,315)  10,513,973 
          
Other comprehensive (loss) income for the period, net of tax  (59,310,908)  7,823,124   1,745,878 
          
             
Total comprehensive income $55,293,176  $185,148,517  $121,639,551 
          
             
  Year ended December 31, 
(In thousands) 2007  2006  2005 
Net income $68,136  $84,634  $114,604 
          
             
Other comprehensive income (loss):            
             
Unrealized gains (losses) on securities:            
Unrealized holding gains (losses) arising during the period  2,171   (22,891)  (47,839)
Less: Reclassification adjustment for net loss (gain) and other-than-temporary impairments included in net income  2,726   8,194   (12,383)
Income tax benefit related to items of other comprehensive income  6   205   911 
          
Other comprehensive income (loss) for the period, net of tax  4,903   (14,492)  (59,311)
          
             
Total comprehensive income $73,039  $70,142  $55,293 
          
The accompanying notes are an integral part of these statements.

101F-8


FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature of Business and Summary of Significant Accounting Policies
     The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with prevailing practices within the financial services industry. The following is a description of First BanCorp’s (“First BanCorp” or “the Corporation”) most significant policies:
     Nature of business
     First BanCorp is a publicly-owned, Puerto Rico-chartered bank holding company that is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System. The Corporation is a full service provider of financial services and products with operations in Puerto Rico, the United States and the USU.S. and British Virgin Islands.
     The Corporation provides a wide range of financial services for retail, commercial and institutional clients. AtAs of December 31, 2005,2007, the Corporation controlled four wholly-owned subsidiaries: FirstBank Puerto Rico (“FirstBank” or the “Bank”), FirstBank Insurance Agency, Inc.(“FirstBank Insurance Agency”), Grupo Empresas de Servicios Financieros (d/b/a “PR Finance Group”) and Ponce General Corporation, Inc. (“Ponce General”). FirstBank is a Puerto Rico-chartered commercial bank, FirstBank Insurance Agency is a Puerto Rico-chartered insurance agency, PR Finance Group is a domestic corporation and Ponce General is the holding company of a federally chartered stock savings association in Florida (USA), FirstBank Florida. FirstBank is subject to the supervision, examination and regulation of both the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) and the Federal Deposit Insurance Corporation (the “FDIC”). Deposits are insured through the FDIC Deposit Insurance Fund. Within FirstBank, there are two separately regulated businesses: (1) the Virgin Islands operations; and (2) the Miami loan agency.agency (the “Miami Agency”). The U.S. Virgin Islands operations of FirstBank are subject to regulation and examination by the United States Virgin Islands Banking Board, and the British Virgin Islands operations are subject to regulation by the British Virgin Islands Financial Services Commission. FirstBank’s loan agency in the stateState of Florida is regulated by the Office of Financial Regulation of the stateState of Florida, the Federal Reserve Bank of Atlanta and the Federal Reserve Bank of New York. As of December 31, 2005, the Corporation had total assets of $19.9 billion, total deposits of $12.4 billion and total stockholders’ equity of $1.2 billion.
     FirstBank Insurance Agency is subject to the supervision, examination and regulation by the Office of the Insurance Commissioner of the Commonwealth of Puerto Rico. PR Finance Group is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico.OCIF. FirstBank Florida is subject to the supervision, examination and regulation of the Office of Thrift Supervision (the “OTS”).
     AtAs of December 31, 2005,2007, FirstBank conducted its business through its main officesoffice located in San Juan, Puerto Rico, forty-sixforty-eight full service banking branches in Puerto Rico, fourteentwenty-two branches in the United States Virgin Islands (USVI) and British Virgin Islands (BVI) and a loan agency in Coral Gables,Miami, Florida (USA). FirstBank had four wholly-owned subsidiaries with operations in Puerto Rico;Rico: First Leasing and Rental Corporation, a vehicle leasing and daily rental company with nineseven offices in Puerto Rico; First Federal Finance Corp. (d/b/a Money Express La Financiera), a finance company with thirty-seventhirty-nine offices in Puerto Rico; First Mortgage, Inc. (“First Mortgage”), a residential mortgage loan origination company with thirtytwenty-six offices in FirstBank branches and at stand alone sites;sites and FirstBank Overseas Corporation, an international banking entity (“IBE”) organized under the International Banking Entity Act of Puerto Rico. FirstBank had three subsidiaries with operations outside of Puerto Rico;Rico: First Insurance Agency VI, Inc., an insurance agency with threetwo offices that sellsells insurance products in the USVI; First Express, a finance company specializing in the origination of small loans with three offices in the USVI; and First Trade, Inc., which provides foreign sales corporation management services with an officeservices.
     The Corporation also operates in the USVI and an office in Barbados; and First Express, a small loans company with three offices in the USVI.

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Business combinations
          On March 31, 2005, the Corporation completed the acquisition of 100% of the outstanding common shares of Ponce General Corporation, the holding company of Unibank, a thrift subsidiary, and Ponce Realty, with a total of eleven financial service facilities in the state of Florida. The purpose of the acquisition was to build a platform in Florida from which to initiate further expansion into the United States. As of the acquisition date, excluding the effect of purchase accounting entries, Ponce General had approximately $546.2 million in assets, $476.0 million in loans composed mainly of residential and commercial mortgage loans amounting to approximately $425.8 million, commercial and construction loans amounting to approximately $28.2 million and consumer loans amounting to approximately $22.1 million and $439.1 million in deposits. The consideration consisted mainly of payments made to principal and minority shareholders of Ponce General’s outstanding common stock at acquisition date. This consideration along with other direct acquisition costs and liabilities incurred led to a total acquisition cost of approximately $101.9 million. The purchase price resulted in a premium of approximately $36 million that was mainly allocated to core deposit intangibles and goodwill. The Corporation subsequently changed the name of Unibank to FirstBank Florida.
          FirstBank Florida is aStates mainland through its federally chartered stock savings association which is headquartered in Miami, Florida (USA) and currently is the only operating subsidiary of Ponce General.First Bank Florida. FirstBank Florida provides a wide range of banking services to individual and corporate customers through its eightnine branches in Florida (USA).the U.S. mainland.

F-9


     Principles of consolidation
     The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
     Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust preferred securities are not consolidated in the Corporation’s consolidated financial statements in accordance with the provisions of Financial Interpretation No. (“FIN”) 46R, (“FIN 46R”). “Consolidation of Variable Interest Entities an Interpretation of ARB No. 51”.
     Reclassifications
     For purposes of comparability, certain prior period amounts have been reclassified to conform to the 20052007 presentation.
     Use of estimates in the preparation of financial statements
     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
     Stock split
     All references to the numbers of common shares and per share amounts in the financial statements and notes to the financial statements except for the number of shares issued, outstanding and held in

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treasury at December 31, 2004 and 2003 presented in the consolidated statements of changes in stockholders’ equity, have been restatedadjusted to reflect the June 30, 2005 two-for-one common stock split.
     Cash and cash equivalents
     For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and short-term money market instruments with original maturities of three months or less.
     Securities purchased under agreements to resell
     The Corporation purchases securities under agreements to resell the same securities. The counterparty retains control over the securities acquired. Accordingly, amounts advanced under these agreements represent short-term loans and are reflected as assets in the statements of financial condition. The Corporation monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral when deemed appropriate.
     Investment securities
The Corporation classifies its investments in debt and equity securities into one of four categories:
     Held-to-maturity- Securities which the entity has the intent and ability to hold-to-maturity. These securities are carried at amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred.
  ��  Trading- Securities that are bought and held principally for the purpose of selling them in the near term. These securities are carried at fair value, with unrealized gains and losses reported in earnings. AtAs of December 31, 20052007 and 20042006, the Corporation did not hold investment securities for trading purposes.
     Available-for-sale- Securities not classified as held-to-maturity or trading. These securities are carried at fair value, with unrealized holding gains and losses, net of deferred tax, reported in other comprehensive income as a separate component of stockholders’ equity.
     Other equity securities- Equity securities that do not have readily available fair values are classified as other equity securities in the consolidated statements of financial condition. These securities are stated at the lower of cost or realizable value. This category is principally composed of stock that is owned by the Corporation to comply with Federal Home Loan Bank (FHLB) regulatory requirements. Their realizable value equals their cost.

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     Premiums and discounts on investment securities are amortized as an adjustment to interest income on investments over the life of the related securities under the interest method. Net realized gains and losses and valuation adjustments considered other-than-temporary, if any, related to investment securities are determined using the specific identification method and are reported in Other IncomeNon-interest income as net (loss) gain on sale of investments.investments and impairments. Purchases and sales of securities are recognized on a trade-date basis.
     Evaluation of other-than-temporary impairment on held-to-maturity and available-for-sale securities
     The Corporation evaluates for impairment its debt and equity securities when their fair market value has remained below cost for six consecutive months or more, or earlier if other factors indicative of potential impairment exist. Investments are considered to be impaired when their cost exceeds fair market value.

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The Corporation evaluates if the impairment is other-than-temporary depending upon whether the portfolio is of fixed income securities or equity securities as further described below. The Corporation employs a systematic methodology that considers all available evidence in evaluating a potential impairment of its investments.
     The impairment analysis of the fixed income investments places special emphasis on the analysis of the cash position of the issuer, its cash and capital generation capacity, which could increase or diminish the issuer’s ability to repay its bond obligations. The Corporation also considers its intent and ability to hold the fixed income securities until recovery. If management believes, based on the analysis, that the issuer will not be able to service its debt and pay its obligations in a timely manner, the security is written down to management’s estimate of net realizable value. For securities written down to itstheir estimated net realizable value, any accrued and uncollected interest is also reversed. Interest income is then recognized when collected.
     The impairment analysis of equity securities is performed and reviewed on an ongoing basis based on the latest financial information and any supporting research report made by a major brokerage firm. This analysis is very subjective and based, among other things, on relevant financial data such as capitalization, cash flow, liquidity, systematic risk, and debt outstanding of the issuer. Management also considers the issuer’s industry trends, the historical performance of the stock, as well as the Corporation’s intent to hold the security for an extended period. If management believes there is a low probability of recovering book value in a reasonable time frame, then an impairment will be recorded by writing the security down to market value. As previously mentioned, equity securities are monitored on an ongoing basis but special attention is given to those securities that have experienced a decline in fair value for six months or more. An impairment charge is generally recognized when the fair value of an equity security has remained significantly below cost for a period of twelve consecutive months or more.
     Loans
     Loans are stated at the principal outstanding balance, net of unearned interest, unamortized deferred origination fees and costs and unamortized premiums and discounts. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method or a method which approximates the interest method over the term of the loan as an adjustment to interest yield. Unearned interest on certain personal, auto loans and finance leases is recognized as income under a method which approximates the interest method. When a loan is paid off or sold, any unamortized net deferred fee (cost) is credited (charged) to income.
     Loans on which the recognition of interest income has been discontinued are designated as non-accruing. When loans are placed on non-accruing status, any accrued but uncollected interest income is reversed and charged against interest income. Consumer, commercial and mortgage loans are classified as non-accruing when interest and principal have not been received for a period of 90 days or more. This policy is also applied to all impaired loans based upon an evaluation of the risk characteristics of said loans, loss experience, economic conditions and other pertinent factors. Loan and lease losses are charged and recoveries are credited to the allowance for loan and lease losses. Closed-end consumer loans and leases are charged-off when payments are 120 days in arrears. Open-end (revolving credit) consumer loans are charged-off when payments are 180 days in arrears.
     The Corporation may also classify loans in non-accruing status and recognize revenue only when cash payments are received because of the deterioration in the financial condition of the borrower and payment in full of

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principal or interest is not expected. In addition, the Corporation started during the third quarter of 2007 a loan loss mitigation program 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 accruing status.
Loans held for sale
     Loans held for sale are stated at the lower of cost or market.lower-of-cost-or-market. The amount by which cost exceeds market value in the aggregate portfolio of loans held for sale, if any, is accounted for as a valuation allowance with changes therein included in the determination of net income. AtAs of December 31, 2005, the aggregate

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cost exceeds the fair value of loans held for sale2007 and therefore loans held for sale were adjusted down to reflect their fair value. At December 31, 2004,2006, the aggregate fair value of loans held for sale exceeded their cost.
     Allowance for loan and lease losses
     The Corporation follows a systematic methodology to establish and evaluate the adequacy ofmaintains the allowance for loan and lease losses at a level that management considers adequate to provide forabsorb losses currently inherent losses in the loanloans and leases portfolio. This methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on such methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses.
The methodology used to establish the allowance for loan and lease losses is based on SFASStatement of Financial Accounting Standard No. (“SFAS”) 114, “Accounting by Creditors for Impairment of a Loan” (as amended by SFAS No. 118), and SFAS No. 5, “Accounting for Contingencies.” Under SFAS No. 114, commercial loans over a predefined amount are identified for impairment evaluation on an individual basis.
     The adequacy of 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. The portfolios of residential mortgage loans, consumer loans, auto loans and finance leases are individually considered homogeneous and each portfolio is evaluated collectively for impairment. In estimating the allowance for loan and lease losses, management uses historical information about loan and lease losses as well as other factors including the effects on the loan portfolio of current economic indicators and their probable impact on the borrowers, information about trends on charge-offs and non-accrual loans, changes in underwriting policies, risk characteristics relevant to the particular loan category and delinquencies. The Corporation has defined impaired loans asmeasures impairment individually for those commercial and real estate loans with interest and/ora principal past due 90 days or more and other specific loans for which,balance exceeding $1 million in accordance with the provisions of SFAS 114. A loan is impaired when, based on current information and events, it is probable that the debtorCorporation will be unable to paycollect all amounts due according to the contractual terms of the loan agreement. The Corporation measures impairment individually for those commercial, real estate and construction loans with a principal balance exceeding $1 million. An allowance for impaired loans is established based on the present value of expected future cash flows or the fair value of the collateral, if the loan is collateral dependent. GroupsIf foreclosure is probable, the creditor is required to measure the impairment based on the fair value of small balance, homogeneousthe collateral. The fair value of the collateral is generally obtained from appraisals. Updated appraisals are obtained when the Corporation determines that loans are collectively evaluatedimpaired and for impairment considering among other factors, historical charge-off experience, existing economic conditionscertain loans on a spot basis selected by specific characteristics such as delinquency levels and risk characteristics relevantloan-to-value ratios. Should the appraisal show a deficiency, the Corporation records a specific allowance for loan losses related to the particular loan category. The portfolios of residential mortgage loans, consumer loans, auto loans and finance leases are individually considered homogeneous and each portfolio is evaluated collectively for impairment.these loans.
     Under SFAS No. 5,As a general procedure, the Corporation internally reviews appraisals on a spot basis as part of the underwriting and approval process. For construction loans in the Miami Agency, appraisals are reviewed by an outsourced contracted appraiser. Once a loan backed by real estate collateral deteriorates or is accounted for in non-accrual status, a full assessment of the value of the collateral is performed. If the Corporation commences litigation to collect an outstanding loan or commences foreclosure proceedings against a borrower (which includes the collateral), a new appraisal report is requested and the book value is adjusted accordingly, either by a corresponding reserve or a charge-off.
     The allowance for loan and lease losses requires significant judgments and estimates. The Corporation establishes the allowance for loan and lease losses calculationbased on whether it has classified the loans and leases as loss or probable loss currently inherent in the portfolio. The Corporation establishes an allowance to cover the total amount of any assets classified as a “loss,” the probable loss exposure of other classified assets, and the estimated losses of assets not classified. The adequacy of the allowance for loan and lease losses is based upon a number of factors including historical loan and leases loss experience that may not represent current conditions inherent in the portfolio. For example, factors affecting the Puerto Rico, Florida (USA), US Virgin Islands’ or British Virgin Islands’ economies may contribute to delinquencies and defaults above the Corporation’s historical loan and lease

F-12


losses. The Corporation addresses this risk by actively monitoring the delinquency and default experience and by considering current economic and market conditions. Based on the assessments of current conditions, the Corporation is mainly based onmakes appropriate adjustments to the historically developed assumptions when necessary to adjust historical net charge-off experience by loan type as adjustedfactors to account for economicpresent conditions.
     Cash payments received on impaired loans are recorded in accordance with the contractual terms of the loan. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized as interest income. However, when management believes the ultimate collectibility of principal is in doubt, the interest portion is applied to principal.
Transfers and servicing of financial assets and extinguishment of liabilities
     After a transfer of financial assets that qualifies for sale accounting, the Corporation recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.
     The transfer of financial assets in which the Corporation surrenders control over the assets is accounted for as a sale to the extent that consideration other than beneficial interests is received in exchange. SFAS No. 140, “Accounting for Transfer and Servicing of Financial Assets and Liabilities — a Replacement of SFAS No. 125”125,” sets forth the criteria that must be met for control over transferred assets to be considered to have been surrendered, which includes: (1) the assets must be isolated from creditors of the transferor, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot

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maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 criteria, the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing.
     Premises and equipment
     Premises and equipment are carried at cost, net of accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the leases (contractual term plus lease renewals that are “reasonably assured”) or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs, which do not improve or extend the life of the respective assets, are expensed as incurred. Costs of renewals and betterments are capitalized. When assets are sold or disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings.
     The Corporation has operating lease agreements primarily associated with the rental of premises to support the branch network or for general office space. Certain of these arrangements are non-cancelable and provide for rent escalation and renewal options. Rent expense on non-cancelable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term.
     Other real estate owned (OREO)
     Other real estate owned, which areconsists of real estate acquired in settlement of loans, is recorded at the lower of cost (carrying value of the loan) or fair value minus estimated cost to sell the real estate acquired. Subsequent to foreclosure, gains or losses resulting from the sale of these properties and losses recognized on the periodic reevaluations of these properties are credited or charged to income. The cost of maintaining and operating these properties is expensed as incurred.
Servicing assets
     The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased. The total cost of the loans to be sold with servicing assets retained is allocated to the servicing assets and the loans (without the servicing asset), based on their relative fair values. Servicing assets are amortized in proportion to and over the period of estimated net servicing income. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected.
     To estimate the fair value of servicing assets, the Corporation considers the present value of expected future cash flows associated with the servicing assets. For purposes of measuring impairment of servicing assets, the Corporation stratifies such assets based on predominant risk characteristics of the underlying loans such as region, terms and coupon. Temporary impairment is recognized through a valuation allowance with changes included in net income for the period in which the change occurs. If it is later determined that all or a portion of the temporary impairment has been recovered for a particular tranche, the valuation allowance is reduced through a recovery of income. Any fair value increase in excess of the cost basis of the servicing asset for a given stratum is not recognized.
          Servicing rights are also reviewed for other-than-temporary impairment. When the recoverability of an impaired servicing asset is determined to be remote, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the servicing rights, precluding subsequent recoveries.

107F-13


     Goodwill and other intangible assets
     Business combinations are accounted for using the purchase method of accounting. Assets acquired and liabilities assumed are recorded at estimated fair values atvalue as of the date of acquisition. After initial recognition, any resulting intangible assets are accounted for as follows:
 Definite life intangibles, mainly core deposits, are amortized over their estimated life, generally on a straight-line basis, and are reviewed periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.
 
 Goodwill and other indefinite life intangibles are not amortized but are reviewed periodically for impairment at least annually.
The Corporation performed impairment tests for the years ended December 31, 2005, 20042007, 2006 and 20032005 and determined that thereno impairment was no impairmentneeded to be recognized for those periods for goodwill and other intangible assets. For further disclosures, refer to Note 11 to the consolidated financial statements.
     Securities sold under agreements to repurchase
     The Corporation sells securities under agreements to repurchase the same or similar securities. Generally, similar securities are securities from the same issuer, with identical form and type, similar maturity, identical contractual interest rates, similar assets as collateral and the same aggregate unpaid principal amount. The Corporation retains control over the securities sold under these agreements. Accordingly, these agreements are considered financing transactions and the securities underlying the agreements remain in the asset accounts. The counterparty to certain agreements may have the right to repledge the collateral by contract or custom. Such assets are presented separately in the statements of financial condition as securities pledged to creditors that can be repledged.
     Income taxes
     The Corporation uses the asset and liability method for the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. 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.
     The Corporation adopted Financial Accounting Standards Board Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 reduced the beginning balance of retained earnings as of January 1, 2007 by $2.6 million. Additionally, in connection with the adoption of FIN 48, the Corporation elected to classify interest and penalties, if any, related to unrecognized tax portions as components of income tax expense. Refer to Note 25 for required disclosures and further information on the impact of the adoption of this accounting pronouncement.

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Treasury stock
     The Corporation accounts for treasury stock at par value. Under this method, the treasury stock account is increased by the par value of each share of common stock reacquired. Any excess paid per share over the par value is debited to additional paid-in capital for the amount per share that it was originally credited. Any remaining excess is charged to retained earnings.

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     Stock basedStock-based compensation
     TheBetween 1997 and 2007, the Corporation hashad a stock-basedstock option plan covering certain employees. On January 1, 2006, the Corporation adopted SFAS 123 (Revised),Accounting for Stock-Based Compensation,using the “modified prospective” method. Under this method and since all previously issued stock options were fully vested at the time of adoption, the Corporation expenses the fair value of all employee compensation plan, whichstock options granted after January 1, 2006 (which is described more fully in Note 21. Thethe same as under the prospective method). Prior to adoption, the Corporation accountsaccounted for the plan under the recognition and measurement principles of Accounting Principles Board Opinion No. (“APB”) 25,Accounting for Stock Issued to Employees(“APB 25”), and related Interpretations. NoInterpretations where no stock-based employee compensation cost iswas reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. Options granted are not subject to vesting requirements. The table below illustratescompensation expense associated with expensing stock options for 2007 and 2006 was approximately $2.8 million and $5.4 million, respectively. The proforma effect information for the effect on net income and earnings per share ifyear 2005 is presented in Note 20 to the Corporation had applied the fair value recognition provisions of SFAS 123,Accounting for Stock Based Compensationto stock-based employee compensation granted in years 2005, 2004 and 2003.consolidated financial statements. The Corporation adopted SFAS 123(R) for new stock option grants effective January 1, 2006.
Proformanet incomeplan expired in the first quarter of 2007 and earnings per common share
             
  Year ended December 31, 
  2005  2004  2003 
  (Dollars in thousands, except per share data) 
Net income
            
As reported $114,604  $177,325  $119,894 
Deduct: Stock-based employee compensation expense determined under fair value method, net of tax  6,118   4,963   2,883 
          
Pro forma $108,486  $172,362  $117,011 
          
             
Earnings per common share-basic:
            
As reported $0.92  $1.70  $1.12 
Pro forma $0.84  $1.64  $1.08 
             
Earnings per common share-diluted:
            
As reported $0.90  $1.65  $1.09 
Pro forma $0.82  $1.59  $1.06 
     Management uses the Black-Scholes option pricing model for the computation of the estimated fair value of each option granted to buy shares of the Corporation’s common stock. The fair value of each option granted during 2005, 2004 and 2003 was estimated using the following assumptions: expected weighted dividend yield of 1.00% (2005), 1.00% (2004) and 1.60% (2003); weighted expected life of 4.25 years (2005), 4.13 years (2004) and 4.14 years (2003); weighted expected volatility of 28.00% (2005), 28.00% (2004) and 39.01% (2003); and weighted risk-free interest rate of 4.20% (2005), 3.10% (2004) and 2.79% (2003). The weighted estimated fair value of the options granted was $6.40 (2005), $5.33 (2004) and $3.95 (2003) per option.there is no other plan in place.
     Comprehensive income
     Comprehensive income includes net income and the unrealized gain (loss) on securities available-for-sale, net of estimated tax effect.
Derivative financial instruments
     As part of the Corporation’s overall interest rate risk management, the Corporation uses financialutilizes derivative instruments, (derivatives), including interest rate swaps, interest rate caps and options.options to manage interest rate risk. In accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), all derivative instruments are measured and recognized on the Consolidated Statements of Financial Condition at their fair value. On the date the derivative instrument contract is entered into, the

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Corporation may designate the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge) or (3) as a “standalone” derivative instrument.instrument, including economic hedges that the Corporation has not formally documented as a fair value or cash flow hedge. Changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a fair-value hedge, along with changes in the gain or loss onfair value of the hedged asset or liability that is attributable to the hedged risk (including gains or losses on firm commitments), are recorded in current-period earnings as interest income or interest expense depending upon whether an asset or liability is being hedged. Similarly, the then-current-period earnings.changes in the fair value of standalone derivative instruments or derivatives not qualifying or designated for hedge accounting under SFAS 133 are reported in current-period earnings as interest income or interest expense depending upon whether an asset or liability is being economically hedged . Changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash-flow hedge, if any, are recorded in other comprehensive income in the shareholders’stockholders’ equity section of the Consolidated Statements of Financial Condition until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). For all hedging relationships, derivative gains and losses that are not effective in hedging the changes in fair value or expected cash flowsNone of the hedged item are recognized immediately in current earnings during the period of the change. Similarly, the changes in the fair value of standaloneCorporation’s derivative instruments qualified or derivatives not qualifying orhas been designated for hedge accounting under SFAS 133 are reported in the then-current-period earnings.as a cash flow hedge.
     Prior to entering into an accounting hedge transaction or designating a hedge, transaction, the Corporation formally documents the relationship between the hedging instrumentsinstrument and the hedged items,item, as well as the risk management objective and strategy for undertaking variousthe hedge transactions.transaction. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the statementstatements of financial condition or to specific firm commitments or forecasted transactions along with a formal assessment at both

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inception of the hedge and on an ongoing basis as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. The Corporation discontinues hedge accounting prospectively when it is determineddetermines that the derivative is not effective or will no longer be effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires, is sold, or terminated, or management determines that designation of the derivative as a hedging instrument is no longer appropriate.
     The Corporation recognizes the future gains and losses arising from any change in fair value as interest income or interest expense depending upon whether an asset or liability is being economically hedged. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability.liability as a yield adjustment.
     The Corporation uses interest rate swaps as economic hedges. These swaps either do not qualify for hedge accounting treatment or have not currently been qualifiedrecognizes unrealized gains and losses arising from any changes in 2005 by the Corporation for hedge accounting treatment. These economic hedge swaps mainly convert the fixed interest rate payments on certain of its deposits and debt obligations to a floating rate. Interest is exchanged periodically on the notional value, with the Corporation receiving the fixed rate and paying various LIBOR-based floating rates. Changes in the fair value of these derivativesderivative instruments and the interest exchanged are recognized in earnings in thehedged items, as applicable, as interest income or interest expense caption of the Consolidated Statements of Income depending upon whether an asset or liability is being economically hedged. The fair values of these derivatives are included in either the Other Assets or Other Liabilities caption. At December 31, 2005, 2004 and 2003, all derivative instruments held by the Corporation are considered economic hedges as these did not qualify for hedge accounting under SFAS 133. In April 2006, the Corporation implemented the “long haul method” of hedge accounting for the majority of interest rate swaps (98% of the interest rate swap portfolio outstanding) that economically hedge brokered certificates of deposit and medium-term notes payable.
     The Corporation occasionally purchases or originates financial instruments that contain an embedded derivative.derivatives. At inception of the financial instrument, the Corporation assessesassesses: (1) if the economic

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characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the financial instrument (host contract), (2) if the financial instrument that embodies both the embedded derivative and the host contract is measured at fair value with changes in fair value reported in earnings, or (3) if a separate instrument with the same terms as the embedded instrument would not meet the definition of a derivative. If the embedded derivative does not meet any of these conditions, it is separated from the host contract and carried at fair value with changes recorded in current period earnings.earnings as part of net interest income. Information regarding derivativesderivative instruments is included in Note 3130 to the Corporation’s audited financial statements.
     Effective January 1, 2007, the Corporation elected to early adopt SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statement allows entities to choose to measure certain financial assets and liabilities at fair value with any changes in fair value reflected in earnings. The fair value option may be applied on an instrument-by-instrument basis. This statement is effective for periods after November 15, 2007, however, early adoption is permitted provided that the entity also elects to apply the provisions of SFAS 157, “Fair Value Measurement.” The Corporation decided to early adopt SFAS 159 for approximately $4.4 billion, of the callable brokered CDs and approximately $15.4 million of the callable fixed medium-term notes (“SFAS 159 liabilities”), both of which were hedged with interest rate swaps. First BanCorp had been following the long-haul method of accounting, which was adopted on April 3, 2006, under SFAS 133, for the portfolio of callable interest rate swaps, callable brokered CDs and callable notes. One of the main considerations in the determination to early adopt SFAS 159 for these instruments was to eliminate the operational procedures required by the long-haul method of accounting in terms of documentation, effectiveness assessment, and manual procedures followed by the Corporation to fulfill the requirements specified by SFAS 133.
     With the Corporation’s elimination of the use of the long-haul method in connection with the adoption of SFAS 159, the Corporation no longer amortizes or accretes the basis adjustment for the SFAS 159 liabilities. The basis adjustment amortization or accretion is the reversal of the basis differential between the market value and book value recognized at the inception of fair value hedge accounting as well as the change in value of the hedged brokered CDs and medium-term notes recognized since the implementation of the long-haul method. Since the time the Corporation implemented the long-haul method, it has recognized changes in the value of the hedged brokered CDs and medium-term notes based on the expected call date of the instruments. The adoption of SFAS 159 also requires the recognition, as part of the initial adoption adjustment to retained earnings, of all of the unamortized placement fees that were paid to broker counterparties upon the issuance of the elected brokered CDs and medium-term notes. The Corporation previously amortized those fees through earnings based on the expected call date of the instruments. SFAS 159 also establishes that the accrued interest should be reported as part of the fair value of the financial instruments elected to be measured at fair value. The impact of the derecognition of the basis adjustment and the unamortized placement fees as of January 1, 2007 resulted in a cumulative after-tax reduction to retained earnings of approximately $23.9 million. This negative charge was included in the total cumulative after-tax increase to retained earnings of $91.8 million that resulted with the adoption of SFAS 159. Refer to Note 27 to the audited consolidated financial statements for required disclosures and further information on the impact of adoption of this accounting pronouncement.

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     Prior to the implementation of the long-haul method First BanCorp reflected changes in the fair value of those swaps as well as swaps related to certain loans as non-hedging instruments through operations as part of net interest income.
Valuation of financial instruments
     The measurement of fair value is fundamental to the Corporation’s presentation of financial condition and results of operations. The Corporation holds fixed income and equity securities, derivatives, investments and other financial instruments at fair value. The Corporation holds its investments and liabilities on the statement of financial condition mainly to manage liquidity needs and interest rate risks. A substantial part of these assets and liabilities is reflected at fair value on the Corporation’s financial statement of condition.
     Effective January 1, 2007, the Corporation elected to early adopt SFAS 157. This Statement 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. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; 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 3
Valuations are observed from unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
     The following is a description of the valuation methodologies used for instruments measured at fair value:
Callable Brokered CDs (Level 2 inputs)
     The fair value of brokered CDs, 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 for the CDs with callable option components, an industry-standard approach for valuing instruments with interest rate call options. The model assumes that the embedded options are exercised economically. 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 and value the cancellation option in the deposits. Effective January 1, 2007, the Corporation updated its methodology to calculate the impact of its own credit standing as required by SFAS 157.
Medium-Term Notes (Level 2 inputs)
     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. Effective January 1, 2007, the Corporation updated its methodology to calculate the impact of its own credit standing as required by SFAS 157. For the medium-term notes, the credit risk is measured using the difference in yield curves between Swap rates and Treasury rates at a tenor comparable to the time to maturity of the note and option.

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Investment Securities

     The fair value of investment securities is the market value based on quoted market prices, when available, (Level 1) or market prices obtained from third-party pricing services for identical or comparable assets (Level 2). If listed prices or quotes are not available, fair value is based upon externally developed models that are unobservable inputs due to the limited market activity of the instrument (Level 3), as is the case with certain private label mortgage-backed securities held by the Corporation. Unlike U.S. agency mortgage-backed securities, the fair value of these private label securities cannot be readily determined because they are not actively traded in securities markets. Significant information used for fair value determination is proprietary with regards to specific characteristics such as the prepayment model which follows the amortizing schedule of the underlying loans, which is an unobservable input.

     Private label mortgage-backed securities are collateralized by mortgages on single-family residential properties in the United States. The Corporation derived the fair value for these private label securities based on a market valuation received from a third party. The market valuation is calculated by discounting the estimated net cash flows over the projected life of the pool of underlying assets using prepayment, default and interest rate assumptions that market participants would commonly use for similar mortgage asset classes that are subject to prepayment, credit and interest rate risk.

Derivative Instruments

     The fair value of the derivative instruments is provided by valuation experts and counterparties (Level 2). Certain derivatives with limited market activity, as is the case with derivative instruments named as “reference caps”, are valued using externally developed models that consider unobservable market parameters (Level 3). Reference caps are used to mainly hedge interest rate risk inherent on private label mortgage-backed securities, thus are tied to the notional amount of the underlying mortgage loans originated in the United States. Significant information used for fair value determination is proprietary with regards to specific characteristics such as the prepayment model which follows the amortizing schedule of the underlying loans, which is an unobservable input.

     The Corporation derived the fair value of reference caps based on a market valuation received from a third party. The valuation model uses Black formula which is a benchmark standard in financial industry. The Black formula uses as inputs the strike price of the cap, forward LIBOR rates, volatility estimates and discount rates to estimate the option value. LIBOR rates and swap rates used in the model are obtained from Bloomberg L.P. (“Bloomberg”) every day and build zero coupon curve based on the Bloomberg LIBOR/Swap curve. The discount factor is then calculated from the zero coupon curve. The cap is the sum of all caplets. For each caplet, the rate is reset at the beginning of each reporting period and payments are made at the end of each period. The cash flow of caplet is then discounted from each payment date.

     Income recognition Insurance agencies business
     Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. The Corporation also receives contingent commissions from insurance companies as additional incentive for achieving specified premium volume goals and/or the loss experience of the insurance placed by the Corporation. Contingent commissions from insurance companies are recognized when determinable, which is generally when such commissions are received or when the Corporation receives data from the insurance companies that allows the reasonable estimation of these amounts. The Corporation maintains an allowance to cover the commissions whichthat management estimates will be returned upon the cancellation of a policy.
     Advertising costs
     Advertising costs for all reporting periods are expensed as incurred.
     Earnings per common share
     Earnings per share-basic is calculated by dividing income availableattributable to common stockholders by the weighted average number of outstanding common shares. The computation of earnings per share-diluted is similar to the computation of earnings per share-basic except that the number of weighted average common shares areis increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Potential common shares consist of common stock issuable under the assumed exercise of stock options using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options outstandingthat result in lower potential shares issued than shares purchased under the Corporation’s stock option plan are considered in earnings per share-diluted by the application of the treasury stock method which assumes that the proceeds for the exercise of options are used to repurchase common stocknot included in the open market. Anti-dilutive stock options are excluded from the computation.computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. The computation of earnings per share considers any stock splits or stock dividends and these are retroactively recognized in all periods presented in the financial statements.
Recently issued accounting pronouncements
     The Financial Accounting Standards Board (FASB), its Emerging Issues Task Force (EITF)(“FASB”) and the SECSecurities Exchange Commission (“SEC”) have issued the following accounting pronouncements and Issue discussions relevant to the Corporation’s operations:
     On April 30, 2007, the FASB issued FASB Staff Position No. FIN 39-1 (“FSP FIN 39-1”), which amends FIN 39, “Offsetting of Amounts Related to Certain Contracts.” FSP FIN 39-1 impacts entities that enter into master netting arrangements as part of their derivative transactions by allowing net derivative positions to be offset in the financial statements against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral or the obligation to return cash collateral under those arrangements. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, although early application is permitted. The Corporation analyzed the impact of FSP FIN 39-1 on its financial statements considering its portfolio of derivative instruments. As of December 31, 2007, the Corporation has not been able to apply this pronouncement

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since FSP FIN 39-1 applies only to cash collateral and all of the collateral received or delivered to counterparties for derivative instruments are investment securities.
In September 2006,November 2007, the SEC issued Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108).(“SAB”) 109 “Written Loan Commitments That Are Accounted For At Fair Value Through Earnings Under Generally Accepted Accounting Principles.” This interpretation expresses the SEC staff’s views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. SAB 109 supersedes SAB 105, “Application of Accounting Principles to Loan Commitments,” which provided the processprior views of quantifying financial statement misstatementsthe staff regarding derivative loan commitments that could resultare accounted for at fair value through earnings pursuant to SFAS 133. SAB 109 expresses the current view of the staff that, consistent with the guidance in improper amountsSFAS 156, “Accounting for Servicing of assets or liabilities. While a misstatement may notFinancial Assets”, and SFAS 159, the expected net future cash flows related to the associated servicing of the loan should be considered materialincluded in the measurement of all written loan commitments that are accounted for the period in which it occurred, it may be considered material in a subsequent year if the corporation where to correct the misstatementat fair value through current period earnings. SAB 108 requires a materiality evaluation based on all relevant quantitative and qualitative

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factors and the quantification of the misstatement using a balance sheet and income statement approach to determine materiality. SAB 108109 is effective for periods ending after November 15, 2006. The Corporation does not expect a material effect on its financial condition and results of operations upon adoption of SAB 108.
          In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements” (SFAS 157). This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement is effective for periodsfiscal quarters beginning after NovemberDecember 15, 2007. The Corporation is currently evaluating the effects,effect, if any, thatof the proposed statement may haveadoption of this interpretation on its future financial condition and results of operations.Financial Statements, commencing on January 1, 2008.
     In June 2006,December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial InterpretationStatements—an amendment of ARB No. 48 – “Accounting for Uncertainty in Income Taxes – an interpretation of FASB51.” This Statement No. 109” (FIN 48). This interpretation clarifies theamends ARB 51 to establish accounting for uncertainty in income taxes recognized in accordance with SFAS 109. This interpretation provided a recognition threshold and measurement attributereporting standards for the financial statement recognitionnoncontrolling interest in a subsidiary and measurementfor the deconsolidation of a tax position taken or expectedsubsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. It requires consolidated net income to be taken in a tax return.reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretationStatement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2006.2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The Corporation is currently evaluating the effects thateffect, if any, of the proposedadoption of this statement may have on its future financial condition and results of operations.Financial Statements, commencing on January 1, 2009.
     ��        In March 2006,December 2007, the FASB issued SFAS 156 “Accounting141R, “Business Combinations.” This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for Servicingall business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of Financial Assets,” an amendment of SFAS No. 140.one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This Statement requires that servicingan acquirer to recognize the assets acquired, the liabilities assumed, including contingent liabilities and servicing liabilities be initiallyany noncontrolling interest in the acquiree at the acquisition date, measured at their fair value alongvalues as of that date, with any derivative instruments used to mitigate inherent risks.limited exceptions specified in the Statement. This Statement applies prospectively to business combinations for which the acquisition date is effective for periodson or after the beginning of the first annual reporting period beginning on or after SeptemberDecember 15, 2006.2008. An entity may not apply it before that date. The Corporation does not expect to have a materialis currently evaluating the effect, on its future financial condition and resultsif any, of operations uponthe adoption of this Statement.
          In February 2006, the FASB issued SFAS 155 “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140”. This Statement allows fair value measurement for any hybrid financial instrument that contains an embedded derivative requiring bifurcation. It also establishes a requirement to evaluate interests in securitized financial assets to establish whether the interests are freestanding derivatives or hybrid financial instruments that contain an embedded derivative requiring bifurcation. This Statement is effective for all financial instruments acquired or issued after September 15, 2006. The Corporation does not expect to have a material effectstatement on its future financial condition and results of operations upon adoption of this Statement.
          In May 2005, the FASB issued SFAS 154 “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3”. This Statement changes the requirements for the accounting for and reporting of a voluntary change in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of a change in accounting principle unless it is impracticable to do so; in which case the earliest period for which retrospective application is practicable should be applied. If it is impracticable to calculate the cumulative effect of a change in accounting principle, the Statement requires prospective application as of the earliest date practicable. This Statement does not change the guidance in APB Opinion No. 20 with regard to the reporting of the correction of an error, or a change in accounting estimate. The Statement’s purpose is to improve the comparability of financial information among periods. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005.Financial Statements.

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          SFAS 123 (Revised) (SFAS 123R) -This Statement is a revision of SFAS 123, “Accounting for Stock-Based Compensation”. This Statement, issued in December 2004, supersedes APB 25, and its related implementation guidance.
          This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award-the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.
          SFAS 123R eliminates the alternative to use APB 25’s intrinsic value method of accounting that was provided in SFAS 123 as originally issued. Under APB 25, issuing stock options to employees generally resulted in recognition of no compensation cost. SFAS 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions).
          The effective date of this standard is the first annual period that begins after June 15, 2005. The Corporation implemented SFAS 123R for stock option grants subsequent to December 31, 2005. The adoption of the statement had similar effects to those presented in the proforma information for years 2003 through 2005 presented in this note on the Proforma net income and earnings per common share table above.
     EITF Issue No. 03-01 -“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” — In this Issue the Task Force reached a consensus on guidance that should be used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In September 2004, the FASB issued proposed FSP EITF Issue 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1”, which provides guidance for the application of paragraph 16 of EITF Issue 03-1 to debt securities that are impaired because of interest rate and/or sector spread increases. Also, in September 2004, the FASB issued FSP EITF Issue 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue 03-1”, which delayed the effective date of paragraph 10-20 of Issue 03-1. Paragraphs 10-20 of Issue 03-1 provide guidance on the impairment model to be used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. EITF Issue 03-1-1 expands the scope of the deferral to include all securities covered by EITF 03-1 rather than limiting the deferral to only certain debt securities that are impaired solely because of interest rate and/or sector spread increases.
     In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the staff to issue proposed FSP EITF 03-1-a, as final. The final FSP superseded EITF Issue No. 03-1 and EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.”
     The final FSP, retitled FSP SFAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” replaced the guidance set forth in paragraphs 10-18 of EITF Issue 03-1 with references to existing other-than-temporary impairment guidance, such as SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” SEC Staff Accounting Bulletin No. 59, “Accounting for Noncurrent Marketable Equity Securities,” and Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” FSP

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SFAS 115-1 codifies the guidance set forth in EITF Topic D-44 and clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made, and is effective for other-than-temporary impairment analyses conducted in periods beginning after September 15, 2005. The adoption of this statement did not have a material effect to the Corporation’s financial condition and results of operations.
Note 2 — Restrictions on Cash and Due from Banks
     The Corporation’s Bankbank subsidiary is required by law, as enforced by the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico,OCIF, to maintain minimum average weekly reserve balances.balances to cover demand deposits. The amount of those minimum average reserve balances for the week ended December 31, 20052007 was $161$220 million (2004(2006$134$165 million). As of December 31, 20052007 and 2004,2006, the Bank complied with the requirement. Cash and due from banks as well as other short-term, highly liquid securities are used to cover the required average reserve balances.
     AtAs of December 31, 20052007 and 20042006, and as required by the Puerto Rico International Banking Law, the Corporation maintained separately for two of its international banking entities (IBEs), $600,000 in time deposits, which were considered restricted assets equally split between the two IBEs which were considered restricted assets.IBEs.
Note 3 — Money Market Investments
     Money market investments are composed of money market instruments, federal funds securities purchased under agreements to resellsold, and time deposits with other financial institutions.
     The securities purchased underlying the agreements to resell were delivered to, and are held by, the Corporation. The counterparties to such agreements maintain effective control over such securities. The Corporation is permitted by contract to repledge the securities, and has agreed to resell to the counterparties the same or substantially similar securities at the maturityMoney market investments as of the agreements.
     The fair value of the collateral securities held by the Corporation on these transactions at December 31, 20052007 and 20042006 were as follows:
                 
  2005  2004 
  (Dollars in thousands) 
      Market      Market 
      Value of      Value of 
  Balance  Collateral  Balance  Collateral 
Money market instruments $715,824   N/A  $702,164   N/A 
Federal funds sold, interest 4.09% (2004 - 2.125%)  8,967   N/A   118,000   N/A 
Securities purchased under agreements to resell not repledged, interest 3.25%  500,000   510,011       
Time deposits with other financial institutions, interest 4.10% (2004-2.52%)  48,968   N/A   100,600   N/A 
             
Total $1,273,759  $510,011  $920,764  $ 
             
         
  2007  2006 
  (Dollars in thousands) 
       
  Balance  Balance 
Money market instruments, interest ranging from 2.47% to 4.40% (2006 -4.87% to 5.29%) $148,579  $377,296 
Federal funds sold, interest 4.05% (2006 - 5.15%)  7,957   42,051 
Time deposits with other financial institutions, interest ranging from 3.90% to 4.72% (2006 - 5.14% to 5.38%)  26,600   37,123 
       
Total $183,136  $456,470 
       
As of December 31, 2007 and 2006, none of the Corporation’s money market investments were pledged.

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Note 4 — Investment Securities
     Investment Securities Available-for-Sale

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     The amortized cost, gross unrealized gains and losses, approximate fair value, and weighted averageweighted-average yield byand contractual maturities of investment securities available-for-sale atas of December 31, 20052007 and 20042006 were as follows:
                                                                                
 December 31, 2005 December 31, 2004  December 31, 2007 December 31, 2006 
 Gross Weighted Gross Weighted  Gross Weighted Gross Weighted 
 Amortized Unrealized Fair average Amortized Unrealized Fair average  Amortized Unrealized Fair average Amortized Unrealized Fair average 
 cost gains losses value yield% cost gains losses value yield%  cost gains losses value yield% cost gains losses value yield% 
 (Dollars in thousands)  (Dollars in thousands)
Obligations of U.S. government sponsored agencies:  
Within 1 year $1,000 $ $ $1,000 6.00 
After 5 to 10 years 392,939  4,289 388,650 4.27 $190,928 $6,291 $ $197,219 4.61  $6,975 $26 $ $7,001 6.05 $402,542 $6 $11,820 $390,728 4.31 
After 10 years 8,984 47  9,031 6.21 12,984  120 12,864 6.16 
Puerto Rico government obligations:  
After 1 to 5 years 4,594 223  4,817 6.17 4,456 253  4,709 6.16  13,947 141 347 13,741 4.99 4,635 126  4,761 6.18 
After 5 to 10 years 15,271 196 678 14,789 4.84 12,756 247 722 12,281 4.59  7,245 247 99 7,393 5.67 15,534 219 508 15,245 4.86 
After 10 years 5,311 131 42 5,400 5.88 7,617 444 90 7,971 5.94  3,416 37 66 3,387 5.64 5,376 98 178 5,296 5.88 
                                      
United States and Puerto Rico government obligations $419,115 $550 $5,009 $414,656 4.34 $215,757 $7,235 $812 $222,180 4.69  40,567 498 512 40,553 5.62 441,071 449 12,626 428,894 4.43 
                                      
Mortgage-backed securities:  
FHLMC certificates:  
Within 1 year $2 $ $ $2 4.26  98 1  99 5.50 82   82 5.99 
After 1 to 5 years 1,762 30  1,792 6.43 $2,517 $105 $ $2,622 6.41  640 20  660 7.01 1,666 36  1,702 6.98 
After 5 to 10 years 1,336 82  1,418 7.98 2,135 126  2,261 8.13 
After 10 years 6,839 77 166 6,750 5.55 2,871 163  3,034 6.89  158,070 235 111 158,194 5.60 5,846 55 110 5,791 5.61 
                                          
 9,939 189 166 9,962 6.03 7,523 394  7,917 7.08  158,808 256 111 158,953 5.61 7,594 91 110 7,575 5.92 
                                      
GNMA certificates:  
After 1 to 5 years 939 14  953 6.39 861 40  901 5.91  496 8  504 6.48 866 10  876 6.44 
After 5 to 10 years 291 10  301 6.64 919 56  975 6.91  708 6 5 709 6.01 795 3 3 795 5.53 
After 10 years 438,565 1,021 1,959 437,627 5.19 99,574 2,126  101,700 4.93  42,665 582 120 43,127 5.93 379,363 470 7,136 372,697 5.26 
                                          
 439,795 1,045 1,959 438,881 5.20 101,354 2,222  103,576 4.95  43,869 596 125 44,340 5.94 381,024 483 7,139 374,368 5.26 
                                      
FNMA certificates:  
After 1 to 5 years 187 3  190 7.55 152 10  162 7.54  34 1  35 7.08 90   90 7.34 
After 5 to 10 years 124 11  135 11.40 222 21  243 9.01  289,125 138 750 288,513 4.93 18,040 10 305 17,745 4.87 
After 10 years 1,038,126 1,054 10,031 1,029,149 5.14 866,731 15,885 1 882,615 4.98  608,942 5,290 582 613,650 5.65 864,507 674 11,476 853,705 5.18 
                                          
 1,038,437 1,068 10,031 1,029,474 5.14 867,105 15,916 1 883,020 4.98  898,101 5,429 1,332 902,198 5.42 882,637 684 11,781 871,540 5.17 
                                      
Mortgage pass-through certificates:  
After 10 years 400 3  403 7.29 518 4  522 7.29  162,082 3 28,407 133,678 6.14 367 3  370 7.28 
                                      
Mortgage-backed securities $1,488,571 $2,305 $12,156 $1,478,720 5.16 $976,500 $18,536 $1 $995,035 5.00  1,262,860 6,284 29,975 1,239,169 5.55 1,271,622 1,261 19,030 1,253,853 5.21 
                              
Corporate bonds:  
Within 1 year $ $ $ $  $40,000 $170 $ $40,170 4.94 
After 1 to 5 years 2,483 84 1 2,566 7.75 875 1,972  2,847 6.29 
After 5 to 10 years 1,912 12 42 1,882 8.09 375 896  1,271 7.73  1,300  198 1,102 7.70 1,300  83 1,217 7.70 
After 10 years 21,857 909 1,833 20,933 7.44       4,412  1,066 3,346 7.97 4,412  668 3,744 7.97 
                                          
Corporate bonds $26,252 $1,005 $1,876 $25,381 7.52 $41,250 $3,038 $ $44,288 4.99  5,712  1,264 4,448 7.91 5,712  751 4,961 7.91 
                                      
Equity securities (without contractual maturity) $29,931 $1,131 $1,641 $29,421 3.70 $41,557 $17,355 $820 $58,092 1.39  2,638  522 2,116  12,406 452 143 12,715 3.70 
                                      
Total investment securities available-for-sale $1,963,869 $4,991 $20,682 $1,948,178 5.00 $1,275,064 $46,164 $1,633 $1,319,595 4.82  $1,311,777 $6,782 $32,273 $1,286,286 5.55 $1,730,811 $2,162 $32,550 $1,700,423 5.01 
                                          

F-21


     Maturities forof mortgage-backed securities are based uponon contractual terms assuming no repayments/prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted averageweighted-average yield on investment securities available-for-sale is based on amortized cost;cost and, therefore, it does not give effect to changes in fair value. The net unrealized gainsgain or lossesloss on investment securities available-for-sale areis presented as part of accumulated other comprehensive income.
     The aggregate amortized cost and approximate market value of investment securities available-for-sale atas of December 31, 2005,2007, by contractual maturity are shown below:
         
  Amortized Cost  Fair Value 
  (Dollars in thousands) 
Within 1 year $98  $99 
After 1 to 5 years  15,117   14,940 
After 5 to 10 years  305,353   304,718 
After 10 years  988,571   964,413 
       
Total  1,309,139   1,284,170 
Equity securities  2,638   2,116 
       
Total investment securities available-for-sale $1,311,777  $1,286,286 
       

115F-22


         
(Dollars in thousands) Amortized Cost  Fair Value 
 
Within 1 year $1,002  $1,002 
After 1 to 5 years  9,965   10,318 
After 5 to 10 years  411,873   407,175 
After 10 years  1,511,098   1,500,262 
       
Total  1,933,938   1,918,757 
Equity securities  29,931   29,421 
       
Total Investment securities available-for-sale $1,963,869  $1,948,178 
       
     The following table shows 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, atas of December 31, 20052007 and 2004:2006:
                                                
 December 31, 2005    As of December 31, 2007   
 Less than 12 months 12 months or more Total  Less than 12 months 12 months or more Total 
 Unrealized Unrealized Unrealized  Unrealized Unrealized Unrealized 
 Fair Value Losses Fair Value Losses Fair Value Losses  Fair Value Losses Fair Value Losses Fair Value Losses 
 (Dollars in thousands)  (In thousands) 
Debt securities
  
U.S. Treasury notes $388,650 $4,289 $ $ $388,650 $4,289 
 
Debt securities
 
Puerto Rico government obligations   13,440 720 13,440 720  $ $ $13,648 $512 $13,648 $512 
  
Mortgage backed securities
 
Mortgage-backed securities
 
FHLMC 4,440 166   4,440 166  48,202 40 3,436 71 51,638 111 
GNMA 369,231 1,959   369,231 1,959  625 11 26,887 114 27,512 125 
FNMA 939,197 10,031   939,197 10,031  285,973 274 221,902 1,058 507,875 1,332 
Mortgage pass-through certificates 133,337 28,407   133,337 28,407 
  
Corporate Bonds
    4,448 1,264 4,448 1,264 
Corporate Bonds 8,711 1,876   8,711 1,876 
 
Equity securities
 
Equity securities 16,229 1,641   16,229 1,641  1,384 522   1,384 522 
                          
 $1,726,458 $19,962 $13,440 $720 $1,739,898 $20,682  $469,521 $29,254 $270,321 $3,019 $739,842 $32,273 
                          
                                                
 December 31, 2004    As of December 31, 2006   
 Less than 12 months 12 months or more Total  Less than 12 months 12 months or more Total 
 Unrealized Unrealized Unrealized  Unrealized Unrealized Unrealized 
 Fair Value Losses Fair Value Losses Fair Value Losses  Fair Value Losses Fair Value Losses Fair Value Losses 
 (Dollars in thousands)  (In thousands) 
Debt securities
  
U.S. Treasury notes $13,348 $812 $ $ $13,348 $812 
 
Debt securities
 
Obligations of U.S. Government sponsored agencies $21,802 $146 $381,790 $11,794 $403,592 $11,940 
Puerto Rico government obligations 42 1   42 1    13,474 686 13,474 686 
  
Mortgage-backed securities
 
FHLMC 30  3,903 110 3,933 110 
GNMA 354,073 7,139   354,073 7,139 
FNMA 376,813 4,719 465,606 7,062 842,419 11,781 
 
Corporate Bonds
   4,961 751 4,961 751 
Equity securities
 1,879 820   1,879 820  1,629 143   1,629 143 
                          
Equity securities $15,269 $1,633 $ $ $15,269 $1,633 
              $754,347 $12,147 $869,734 $20,403 $1,624,081 $32,550 
             
     The Corporation’s investment securities portfolio is comprised principally of (i) mortgage-backed securities issued or guaranteed by FNMA, GNMA or FHLMC and other securities secured by mortgage loans and (ii) U.S. Treasury and agencies securities and obligations of the Puerto Rico Government. Thus, payment of a substantial portion of these instruments is either guaranteed or secured by mortgages together with a U.S. government sponsored entity or is backed by the full faith and credit of the U.S. or Puerto Rico Government. Principal and interest on these securities are therefore deemed recoverable. The unrealized losses in the available-for-sale portfolio as of December 31, 2007 are substantially related to market interest rate fluctuations and not deterioration in the creditworthiness of the issuers. The Corporation’s policy is to review its investment portfolio is structured primarily with highly liquid securities which have historically possessed a large and efficient secondary market. Valuations are performedfor possible other-than-temporary impairment, at least on a quarterly basis using third party providers and dealer quotes. Managementquarterly. As of December 31, 2007, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments,investments; as a result, the impairment isimpairments are considered temporary.
     During the year ended December 31, 2007, the Corporation recorded other-than-temporary impairments of approximately $5.9 million (2006 — $15.3 million, 2005 — $8.4 million) on certain equity securities held in its available-for-sale portfolio. Management concluded that the declines in value of the securities were other-than-

116F-23


temporary; as such, the cost basis of these securities was written down to the market value as of the date of the analyses and reflected in earnings as a realized loss.
     Total proceeds from the sale of securities during the year ended December 31, 20052007 amounted to $252.7$960.8 million (2004 - $131.6(2006 — $232.5 million, 2005 — $252.7 million). The Corporation realized gross gains of $21.4$5.1 million (2004(2006$12.2$7.3 million, 20032005$44.5$21.4 million), and realized gross losses of $711 thousand (2004$1.9 million (2006$15 thousand, 2003$0.2 million, 2005$3.1$0.7 million).
     During the year ended December 31, 2005, the Corporation recognized through earnings approximately $8.4 million (2004 — $2.7 million, 2003 — $5.8 million) in losses in the investment securities available-for-sale portfolio that management considered to be other-than-temporarily impaired. The impairment losses were related to equity securities.
Investments Held-to-Maturity
     The amortized cost, gross unrealized gains and losses, approximate fair value, weighted averageweighted-average yield and contractual maturities of investment securities held-to-maturity atas of December 31, 20052007 and 20042006 were as follows:
                                                                                
 December 31, 2005 December 31, 2004    December 31, 2007 December 31, 2006 
 Gross Weighted Gross Weighted  Gross Weighted Gross Weighted 
 Amortized Unrealized Fair average Amortized Unrealized Fair average  Amortized Unrealized Fair average Amortized Unrealized Fair average 
 cost gains losses value yield % cost gains losses value yield %  cost gains losses value yield % cost gains losses value yield % 
 (Dollars in thousands)  (Dollars in thousands)
U.S. Treasury securities:  
Due within 1 year $149,156 $48 $ $149,204 3.97 $140,925 $25 $ $140,950 2.12  $254,882 $369 $24 $255,227 4.14 $158,402 $44 $ $158,446 4.97 
  
Obligations of other U.S. 
Government sponsored agencies: 
Obligations of other U.S. Government sponsored agencies: 
Due within 1 year      24,695 5  24,700 5.25 
After 10 years 2,041,558  65,799 1,975,759 5.83 1,681,337 47  20,753 1,660,631 5.45  2,110,265 1,486 2,160 2,109,591 5.82 2,074,943  53,668 2,021,275 5.83 
Puerto Rico government obligations:  
After 1 to 5 years 5,000 20  5,020 5.00 5,000 87  5,087 5.00 
After 5 to 10 years 17,302 541 107 17,736 5.85 16,716 553 115 17,154 5.84 
After 10 years 9,163 502 143 9,522 5.94 8,643 799  9,442 5.93  13,920  256 13,664 5.50 15,000 53  15,053 5.50 
                                        
United States and Puerto Rico government obligations $2,204,877 $570 $65,942 $2,139,505 5.70 $1,835,905 $958 $20,753 $1,816,110 5.19  2,396,369 2,396 2,547 2,396,218 5.64 2,289,756 655 53,783 2,236,628 5.76 
                                      
  
Mortgage-backed securities:  
 
FHLMC certificates  
After 5 to 10 years $20,211 $ $778 $19,433 3.63 $26,579 $ $540 $26,039 3.60  11,274  116 11,158 3.65 15,438  577 14,861 3.61 
FNMA certificates:  
After 5 to 10 years 18,418  602 17,816 3.79 23,507 184 23,323 3.80  69,553  1,067 68,486 4.30 14,234  484 13,750 3.80 
After 10 years 1,195,082  35,277 1,159,805 4.32 1,491,576  33 8,452 1,483,157 4.29  797,887 61 13,785 784,163 4.42 1,025,703 48 36,064 989,687 4.40 
                                        
Mortgage-backed securities: $1,233,711 $ $36,657 $1,197,054 4.30 $1,541,662 $33 $9,176 $1,532,519 3.94  878,714 61 14,968 863,807 4.40 1,055,375 48 37,125 1,018,298 4.38 
                                        
  
Corporate Bonds: 
After 10 years 2,000  91 1,909 5.80 2,000 40  2,040 5.80 
                     
 
Total investment securities held-to-maturity $3,438,588 $570 $102,599 $3,336,559 5.20 $3,377,567 $991 $29,929 $3,348,629 4.77  $3,277,083 $2,457 $17,606 $3,261,934 5.31 $3,347,131 $743 $90,908 $3,256,966 5.33 
                                        
     Maturities forof mortgage-backed securities are based uponon contractual terms assuming no repayments/prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options.
     The aggregate amortized cost and approximate market value of investment securities held-to-maturity atas of December 31, 2005,2007, by contractual maturity are shown below:
                
(Dollars in thousands) Amortized Cost Fair Value 
 Amortized Cost Fair Value 
 (Dollars in thousands) 
Within 1 year $149,156 $149,204  $254,882 $255,227 
After 1 to 5 years 5,000 5,020 
After 5 to 10 years 38,629 37,249  98,129 97,380 
After 10 years 3,245,803 3,145,086  2,924,072 2,909,327 
          
Total Investment securities held-to-maturity $3,438,588 $3,336,559  $3,277,083 $3,261,934 
          

F-24


     The Corporation has securities held-to-maturity that are considered cash and cash equivalents and are classified as money market investments on the Consolidated Statements of Financial Condition:Condition as follows:

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 December 31, 2005 December 31, 2004    December 31, 2007 December 31, 2006 
 Gross Gross    Gross Gross   
 Amortized Unrealized Fair Amortized Unrealized Fair  Amortized Unrealized Fair Amortized Unrealized Fair 
 Cost Gains Losses Value Cost Gains Losses Value  cost gains losses value cost gains losses value 
 (Dollars in thousands)  (Dollars in thousands) 
U.S. government and U.S. government sponsored agencies  
Due within 30 days $171,842 $22 $ $171,864 $584,680 $8 $3,523 $581,165  $45,994 $3 $ $45,997 $199,973 $27 $ $200,000 
After 30 days up to 60 days 31,148 7  31,155 15,763 1  15,764  21,932 1 10 21,923     
After 60 days up to 90 days 462,453 37  462,490      79,191 41  79,232 175,885 78  175,963 
                                  
 $665,443 $66 $ $665,509 $600,443 $9 $3,523 $596,929  $147,117 $45 $10 $147,152 $375,858 $105 $ $375,963 
                                  
     The following table shows 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, atas of December 31, 20052007 and 2004:2006:
                                                
 December 31, 2005    As of December 31, 2007 
 Less than 12 months 12 months or more Total  Less than 12 months 12 months or more Total 
 Unrealized Unrealized Unrealized  Unrealized Unrealized Unrealized 
 Fair Value Losses Fair Value Losses Fair Value Losses  Fair Value Losses Fair Value Losses Fair Value Losses 
(Dollars in thousands) 
  (In thousands) 
Debt securities
  
U.S. government sponsored agencies $1,585,810 $40,379 $389,949 $25,420 $1,975,759 $65,799 
 
Puerto Rico government 3,746 143   3,746 143 
Other U.S. government sponsored agencies $616,572 $1,568 $24,469 $592 $641,041 $2,160 
U.S. Treasury notes 24,697 24   24,697 24 
Puerto Rico government obligations 13,664 256 4,200 107 17,864 363 
  
Mortgage-backed securities
  
FHLMC   19,433 778 19,433 778    11,158 116 11,158 116 
FNMA 11,771 339 1,165,849 35,540 1,177,620 35,879  849,341 14,852 849,341 14,852 
Corporate Bonds
 1,909 91   1,909 91 
                          
 $1,601,327 $40,861 $1,575,231 $61,738 $3,176,558 $102,599  $656,842 $1,939 $889,168 $15,667 $1,546,010 $17,606 
                          
                                                
 December 31, 2004    As of December 31, 2006 
 Less than 12 months 12 months or more Total  Less than 12 months 12 months or more Total 
 Unrealized Unrealized Unrealized  Unrealized Unrealized Unrealized 
(Dollars in thousands) Fair Value Losses Fair Value Losses Fair Value Losses 
 Fair Value Losses Fair Value Losses Fair Value Losses 
 (In thousands) 
Debt securities
  
U.S. government $516,425 $3,523 $ $ $516,425 $3,523 
U.S. government sponsored agencies 1,109,041 18,284 389,982 2,469 1,499,023 20,753 
Other U.S. government sponsored agencies $ $ $2,021,275 $53,668 $2,021,275 $53,668 
Puerto Rico government obligations  �� 3,978 115 3,978 115 
  
Mortgage-backed securities
  
FHLMC 1,475,211 8,637   1,475,211 8,637    14,861 577 14,861 577 
FNMA 693 4 25,346 535 26,039 539  24,589 1,020 975,510 35,528 1,000,099 36,548 
                          
 $3,101,370 $30,448 $415,328 $3,004 $3,516,698 $33,452  $24,589 $1,020 $3,015,624 $89,888 $3,040,213 $90,908 
                          

F-25


     Held-to-maturity securities in an unrealized loss position atas of December 31, 20052007 are primarily mortgage-backed securities and U.S. agencyAgency securities. The vast majority of them are rated the equivalent of AAA by the major rating agencies. Management believes that theThe unrealized losses in the held-to-maturity portfolio atas of December 31, 20052007 are substantially related to market interest rate fluctuations and not deterioration in the creditworthiness of the issuers,issuers; as a result, the impairment is considered temporary. At this time, the Corporation has the intent and ability to hold these investments until maturity.
     The following table states the name of issuers, and the aggregate amortized cost and market value of the securities of such issuerissuers (includes available-for-sale and held-to-maturity securities), when the

118


aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. and P.R. Government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies whichthat are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer and include debt and mortgage-backed securities.
                                
 2005 2004 2007 2006
 Amortized Amortized Fair Amortized   Amortized  
 Cost Fair Value Cost Value Cost Fair Value Cost Fair Value
 (Dollars in thousands) (In thousands)
FHLMC $991,304 $953,630 $928,682 $912,262  $1,203,395 $1,201,817 $1,012,864 $991,142 
GNMA 439,795 438,881 101,354 103,576  43,869 44,340 381,024 374,368 
FNMA 3,175,673 3,107,843 2,407,189 2,414,436  2,700,600 2,691,192 2,839,631 2,763,872 
FHLB 328,510 322,640 1,216,431 1,209,363  283,035 282,800 428,160 423,819 
RG Crown Mortgage Loan Trust 161,744 133,337   
Note 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. Both stock and cash dividends may be received on FHLB stock. As of December 31, 2005, 20042007, 2006 and 2003,2005, the Corporation received $3.3$2.9 million, $1.0$2.0 million and $1.2$3.3 million, respectively, in dividends from FHLB stock.
     AtAs of December 31, 20052007 and 2004,2006, there were investments in FHLB stock with a book value of $40.9$63.4 million and $79.9$38.4 million, respectively. The estimated market value of such investments is its redemption value determined by the ultimate recoverability of its par value.
     The Corporation has other equity securities that do nonot have a readily available fair value. The amount of such securities atas of December 31, 20052007 and 20042006 was $1.4$1.6 million and $1.4$1.7 million, respectively.

F-26


Note 6 — Interest and Dividend on Investments
     A detail of interest on investments and FHLB dividend income follows:

119


                        
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (In thousands) 
Interest on money market investments:  
Taxable $2,974 $92 $283  $4,805 $21,816 $2,974 
Exempt 18,912 3,644 4,424  17,226 49,098 18,912 
              
 21,886 3,736 4,707  22,031 70,914 21,886 
              
 
Mortgage-backed securities:  
Taxable 3,391 3,521 1,301  2,044 3,121 3,391 
Exempt 127,377 119,237 94,186  110,816 121,687 127,377 
              
 130,768 122,758 95,487  112,860 124,808 130,768 
              
 
PR Government obligations and US Government agencies: 
PR Government obligations, U.S. Treasury securities and U.S. Government agencies: 
Taxable        
Exempt 134,614 101,742 38,699  148,986 154,079 134,614 
       
 134,614 101,742 38,699        
        148,986 154,079 134,614 
        
Equity securities:  
Taxable 588  82   274 588 
Exempt 1,038 511 621  3 76 1,038 
              
 1,626 511 703  3 350 1,626 
              
 
Other investment securities: 
Other investment securities (including FHLB dividends): 
Taxable 5,668 974 1,206  3,426 2,579 5,668 
Exempt 928 2,433 7,756   31 928 
              
 6,596 3,407 8,962  3,426 2,610 6,596 
              
  
       
Total interest and dividends on investments $295,490 $232,154 $148,558  $287,306 $352,761 $295,490 
              
The following table summarizes the components of interest and dividend income on investments:
                        
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (In thousands) 
Interest income on investment securities and money market investments $291,859 $230,243 $145,761  $287,990 $350,750 $291,859 
Dividends on FHLB stock 3,286 974 1,206  2,861 2,009 3,286 
Net interest realized on interest rate swaps  (478)  (1,921)  
Net interest settlement on interest rate swaps   (25)  (478)
              
Interest income excluding unrealized gain (loss) on derivatives (economic hedges) 294,667 229,296 146,967 
Unrealized gain (loss) on derivatives (economic hedges) from interest rate swaps on corporate bonds 823 2,858 1,591 
Interest income excluding unrealized (loss) gain on derivatives (economic hedges) 290,851 352,734 294,667 
Unrealized (loss) gain on derivatives (economic hedges) from interest rate caps and interest rate swaps on corporate bonds  (3,545) 27 823 
              
Total interest income and dividends on investments $295,490 $232,154 $148,558  $287,306 $352,761 $295,490 
              

120F-27


Note 7 — Loans Receivable
     The following is a detail of the loan portfolio:
                
 December 31, December 31,  December 31, December 31, 
 2005 2004  2007 2006 
 (Dollars in thousands)  (In thousands) 
Residential real estate loans, mainly secured by first mortgages $2,245,272 $1,312,747  $3,143,497 $2,737,392 
      
Commercial loans:  
Construction loans 1,137,118 398,453  1,454,644 1,511,608 
Commercial mortgage loans 1,090,193 690,900  1,279,251 1,215,040 
Commercial loans 2,421,219 1,871,851  3,231,126 2,698,141 
Loans to local financial institutions collateralized by real estate mortgages and pass-through trust certificates 3,676,314 3,841,908  624,597 932,013 
          
Commercial loans 8,324,844 6,803,112  6,589,618 6,356,802 
          
  
Finance leases 280,571 212,234  378,556 361,631 
          
  
Consumer loans 1,733,569 1,359,998  1,667,151 1,772,917 
          
 
Loans receivable 12,584,256 9,688,091  11,778,822 11,228,742 
Allowance for loan losses  (147,999)  (141,036)
Allowance for loan and lease losses  (190,168)  (158,296)
          
Loans receivable, net 12,436,257 9,547,055  11,588,654 11,070,446 
Loans held for sale 101,673 9,903  20,924 35,238 
          
Total loans $12,537,930 $9,556,958  $11,609,578 $11,105,684 
          
     AtAs of December 31, 2005,2007 and 2006, the Corporation had a net deferred origination fee on its loan portfolio amounting to $5.9 million and $3.8 million, respectively. Total loan portfolio is net of an unearned income of $70.4 million and $72.3 million as of December 31, 2007 and 2006, respectively.
     As of December 31, 2007, loans in which the accrual of interest income had been discontinued amounted to $134.3$413.1 million (2004(2006$91.7$252.1 million). If these loans had been accruing interest, the additional interest income realized would have been $22.7 million (2006 — $14.1 million; 2005 — $7.0 million). Past due and still accruing loans, which are contractually delinquent 90 days or more, amounted to $75.5 million (2004as of December 31, 2007 (2006$5.9 million; 2003 — $6.6$31.6 million).
     AtAs of December 31, 2005,2007, the Corporation was servicing residential mortgage loans owned by others aggregating $444.4$759.2 million (2004(2006$398.8$592.0 million) and construction loans owned by others aggregating $15.5 million (2006 — $39.7 million).
     AtAs of December 31, 2005,2007, the Corporation was servicing commercial loan participations owned by others aggregating to $138.4$176.3 million (2004 - $144.3(2006 — $167.8 million).
     Various loans secured by first mortgages were assigned as collateral for certificates of deposit, individual retirement accounts and advances from the Federal Home Loan Bank. The mortgagemortgages pledged as collateral amounted to $1.9 billion and $2.2 billion atas of December 31, 2005 and 2004, respectively.2007 (2006 — $1.9 billion).
     The Corporation’s primary lending area is Puerto Rico. The Corporation’s Puerto Rico banking subsidiary, First Bank, also lends in the U.S. and British Virgin Islands markets and in the United States (principally in the state of Florida (USA)Florida). The Corporation has a significant lending concentration of $3.1 billion$382.6 million in one mortgage originator in Puerto Rico, atDoral Financial Corporation (“Doral”), as of December 31, 2005.2007. The Corporation has outstanding $596.7$242.0 million with another mortgage originator in Puerto Rico, R&G Financial Corporation (“R&G Financial”) for a total loans granted to mortgage originators amounting to $3.7 billion at$624.6 million as of December 31, 2005.2007. These commercial loans wereare secured by 41,038 individual mortgage loans on residential and commercial real estate with an average principal balance of $89,776 each. The mortgage originators have always paid the loans in accordance with their terms and conditions.estate.

F-28


     Of the total net loans receivable of $12.5$11.6 billion for 2005,2007, approximately 84%80% have credit risk concentration in Puerto Rico, 10%12% in Florida (USA)the United States and 6%8% in the Virgin IslandsIslands.
     In February 2007, the Corporation entered into various agreements with R&G Financial relating to prior transactions accounted for as commercial loans secured by mortgage loans and pass-through trust certificates from R&G Financial subsidiaries. First, through a mortgage payment agreement, R&G Financial paid the Corporation approximately $50 million to reduce the commercial loan that R&G Premier Bank, R&G Financial’s Puerto Rico banking subsidiary, had outstanding with the Corporation. In addition, the remaining balance of the loans secured by mortgage loans of approximately $271 million was re-documented as a secured loan from the Corporation to R&G Financial. The terms of the credit agreement specified: (1) a floating interest payment based on a spread over 90-day LIBOR; (2) loan should be payable in arrears in sixty equal consecutive monthly installment of principal (scheduled amortization plus any unscheduled principal recoveries) and interest maturing on February 22, 2012; (3) R&G Financial shall deliver to the Corporation and maintain at all times a first priority security interest with a collateral value as a percentage of loans of 103% for FHA/VA mortgage loans, 105% for conventional conforming mortgage loans and 111% of conventional non-conforming mortgage loans; and (4) R&G Financial may, at its option, prepay the loan without premium or penalty. Second, R&G Financial and the Corporation amended various agreements involving, as of the date of the transaction, approximately $183.8 million of securities collateralized by loans that were originally sold through five grantor trusts. The modifications to the original agreements allowed the Corporation to treat these transactions as “true sales” for accounting and legal purposes and the recharacterization of certain secured commercial loans as securities collateralized by loans. The agreements enabled the Corporation to fulfill the remaining requirement of the consent order signed with banking regulators relating to the mortgage-related transactions with R&G Financial that First BanCorp accounted for as commercial loans secured by the mortgage loans and pass-through trust certificates.
     As part of the agreements entered into with R&G Financial, the Corporation recognized a net gain of $2.5 million in 2007 as a result of the differential between the carrying value of the loans, the net payment received and the fair value of securities obtained from R&G Financial.

121F-29


     On December 6, 2005, the Corporation obtained a waiver from the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico with respect to the statutory limit for individual borrowers (loan to one borrower limit).
Note 8 — Allowance for Loan Lossesloan and lease losses
     The changes in the allowance for loan and lease losses were as follows:
                        
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (In thousands) 
Balance at beginning of year $141,036 $126,378 $111,911  $158,296 $147,999 $141,036 
Provision charged to income 50,644 52,799 55,916  120,610 74,991 50,644 
Losses charged against the allowance  (51,920)  (44,042)  (48,132)  (94,830)  (77,209)  (51,920)
Recoveries credited to the allowance 6,876 5,901 6,683  6,092 12,515 6,876 
Other adjustments(1)
 1,363      1,363 
              
Balance at end of year $147,999 $141,036 $126,378  $190,168 $158,296 $147,999 
              
 
(1) Represents allowance for loan losses from the acquisition of FirstBank Florida.
     The allowance for impaired loans is part of the allowance for loan and lease losses. TheseThe allowance for impaired loans representcovers those loans for which management has determined that it is probable that the debtor will be unable to pay all the amounts due, according to the contractual terms of the loan agreement, and dodoes not necessarily represent loans for which the Corporation will incur a substantial loss. AtAs of December 31, 2005, all2007, impaired loans and their related allowance were as follows:
             
  2007 2006 2005
      (In thousands)    
Impaired loans $151,818  $63,022  $59,801 
Impaired loans with valuation allowance  66,941   63,022   59,801 
Allowance for impaired loans  7,523   9,989   9,219 
During the year:            
Average balance of impaired loans  116,362   54,083   59,681 
Interest income recognized on impaired loans  6,588   3,239   4,584 
     The Corporation recognized an impairment of $8.1 million during the third quarter of 2007 on four individual condominium-conversion loans, with an aggregate principal balance of $60.5 million, extended to a single borrower through the Corporation’s Miami Agency based on an updated impairment analysis that incorporated new appraisals. During the fourth quarter of 2007, the Corporation charged-off approximately $3.3 million associated with the sale of one of the four loans previously reported as impaired.
     There are two main factors that accounted for the net increase in impaired loans during 2007: (i) the aforementioned troubled loan relationship in the Miami Agency totaling $46.4 million as of December 31, 2007 after the sale of one loan in the relationship, with a principal balance of approximately $14.1 million, during the fourth quarter of 2007 and (ii) one loan relationship in Puerto Rico related to several credit facilities totaling $36.3 million as of December 31, 2007. At the same time, the Corporation’s impaired loans decreased by approximately $30.6 million during 2007 (other than the sale of the impaired loan in the Miami Agency) as a result of loans paid in full, loans no longer considered impaired and loans charged-off, which had a related allowance andimpairment reserve of $6.2 million. In addition, the components were as follows:Corporation increased its impaired loans by approximately $28.2 million associated with several individual loans, most of them residential mortgage loans or loans secured by real estate, of which $1.3 million had a related impairment reserve of approximately $0.2 million.
             
  Year ended December 31,
  2005 2004 2003
  (Dollars in thousands)
Impaired loans with a related allowance $59,801  $59,215  $76,438 
Allowance for impaired loans  9,219   17,521   14,811 
During the year:            
Average balance of impaired loans  59,681   65,520   45,460 
Interest income recognized on impaired loans  4,584   2,267   2,922 
 F-30 


Note 9 – Related Party Transactions
     The Corporation granted loans to its directors, executive officers and to certain related individuals or entities in the ordinary course of business. The movement and balance of these loans were as follows:

122


        
 Amount  Amount 
 (Dollars in thousands)  (In thousands) 
Balance at December 31, 2003
 $54,287 
Balance at December 31, 2005
 $79,403 
New loans 17,711  57,622 
Payments  (9,698)  (15,800)
Other changes  (698)  (2,372)
      
Balance at December 31, 2004
 $61,602 
Balance at December 31, 2006
 118,853 
   
New loans 25,130  82,611 
Payments  (7,662)  (20,934)
Other changes 333  2,043 
      
Balance at December 31, 2005
 $79,403 
Balance at December 31, 2007
 $182,573 
      
     These loans do not involve more than normal risk of collectibility and management considers that they present terms that are no more favorable than those that would have been obtained if transactions had been with unrelated parties. The amounts reported as other changes include changes in the status of those who are considered related parties, mainly due to new directors whose terms have expired.and executive officers. None of the loans extended to related parties were delinquent as of December 31, 2007.
     From time to time, the Corporation, in the ordinary course of its business, obtains services from related parties or makes contributions to non-profit organizations that have some association with the Corporation. Management believes the terms of such arrangements are consistent with arrangements entered into with independent third parties.
Note 10 — Premises and Equipment
     Premises and equipment is comprised of:
                        
 Useful life December 31,  Useful life Year ended December 31, 
 in years 2005 2004  in years 2007 2006 
 (Dollars in thousands)  (Dollars in thousands) 
Buildings and improvements 10-40 $57,500 $53,295  10-40 $80,044 $75,516 
Leasehold improvements 1-15 33,114 27,054  1-15 41,328 37,573 
Furniture and equipment 3-10 86,786 71,754  3-10 107,373 98,393 
          
 177,400 152,103  228,745 211,482 
Accumulated depreciation  (88,844)  (78,234)  (116,213)  (100,039)
          
 88,556 73,869  112,532 111,443 
Land 12,623 11,866  21,867 21,824 
Projects in progress 15,769 10,079  28,236 22,395 
          
Total premises and equipment, net $116,948 $95,814  $162,635 $155,662 
          
     Depreciation and amortization expense amounted to $17.7 million, $16.8 million and $15.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.
 F-31 


Note 11 – Goodwill and Other Intangibles
     Goodwill atas of December 31, 20052007 amounted to $28.1 million (December 31, 2006 — $28.7 million and resultedmillion), recognized as part of “Other Assets,” resulting primarily from the acquisition of Ponce General Corporation.Corporation in 2005. No goodwill impairment was written downrecognized during 20052007 and 2004.2006 and 2005.
     AtAs of December 31, 2005,2007, the gross carrying amount and accumulated amortization of core deposit intangibles was $41.2 million and $11.6$18.3 million, respectively, recognized as part of “Other Assets” in the Consolidated Statements of Financial Condition (December 31, 20042006$23.9$41.2 million and $7.9$15.0 million, respectively). During the year ended December 31, 2005,2007, the amortization expense of core

123


deposit intangibles amounted to $3.7$3.3 million (2004(2006$2.4$3.4 million; 2003 $2.42005 — $3.7 million).
     The following table presents the estimated aggregate annual amortization expense of the core deposit intangible for each of the following five fiscal years:intangible:
        
 (Dollars in thousands) (Dollars in thousands)
2006 $3,728 
2007 3,728 
2008 3,728  $3,269 
2009 3,574  3,061 
2010 2,809  2,325 
2011 2,325 
2012 and thereafter 11,956 
Note 12 — Deposits and Related Interest
     Deposits and related interest consist of the following:
         
  December 31, 
  2005  2004 
  (Dollars in thousands) 
Type of account and interest rate:        
Non-interest bearing checking accounts $811,006  $699,582 
Savings accounts – 1.00% to 1.81% (2004 – 0.80% to 1.50%)  1,034,047   1,077,002 
Interest bearing checking accounts – 1.01% to 2.16% (2004 – 0.80% to 1.35%)  375,305   385,078 
Certificates of deposit – 0.75% to 7.25% (2004 – 0.75% to 7.85%)  1,664,379   1,334,427 
Brokered certificates of deposit – 2.50% to 6.13% (2004 – 1.60% to 6.70%)  8,579,015   4,416,233 
       
  $12,463,752  $7,912,322 
       
         
  December 31, 
  2007  2006 
  (In thousands) 
Type of account and interest rate:        
Non-interest bearing checking accounts $621,884  $790,985 
Savings accounts – 0.60% to 5.00% (2006 - 1.00% to 5.00%)  1,036,662   984,332 
Interest bearing checking accounts – 0.40% to 5.00% (2006 - 1.01% to 5.00%)  518,570   433,278 
Certificates of deposit – 0.75% to 7.00% (2006 – 0.75% to 7.25%)  1,680,344   1,696,213 
Brokered certificates of deposit (1)– 3.20% to 6.50% (2006 – 3.00% to 6.13%)  7,177,061   7,099,479 
       
  $11,034,521  $11,004,287 
       
(1)Includes $4,186,563 measured at fair value as of December 31, 2007.
     The weighted average interest rate on total deposits atas of December 31, 20052007 and 20042006 was 3.89%4.73% and 2.46%4.92%, respectively.
     AtAs of December 31, 2005,2007, the aggregate amount of overdrafts in demand deposits that were reclassified as loans amounted to $17.4$13.6 million (2004(2006$9.2$22.2 million).
 F-32 


     The following table presents a summary of certificates of deposit, including brokered certificates of deposits, with a remaining term of more than one year atas of December 31, 2005:2007:
        
 Total  Total 
 (Dollars in thousands)  (In thousands) 
Over one year to two years $285,328  $855,415 
Over two years to three years 332,924  362,844 
Over three years to four years 234,467  179,014 
Over four years to five years 276,860  165,826 
Over five years 3,940,408  3,360,767 
      
Total $5,069,987  $4,923,866 
      

124


     AtAs of December 31, 2005,2007, certificates of deposit (CD’s)(CDs) in denominations of $100,000 or higher amounted to $9.5$8.1 billion (2004(2006$5.3$8.0 billion) including brokered certificatesCDs of deposit of $8.6$7.2 billion (2004(2006$4.4$7.0 billion) at a weighted average rate of 4.54% (20045.20% (2006 — 5.06%). AtAs of December 31, 2005,2007, unamortized broker placement fees amounted to $50.0$4.4 million (2004(2006$40.6$41.3 million), which are amortized over the expectedcontractual maturity of the brokered certificates of depositCDs under the interest method. For further information regarding the impact of the adoption of SFAS 159 with respect to broker placement fees amortization refer to Note 1.
     AtAs of December 31, 2005,2007, deposit accounts issued to government agencies with a carrying value of $302.7$347.8 million (2004(2006$370.8$334.1 million) were collateralized by securities with a carrying valuean amortized cost of $330.4$356.4 million (2004(2006$422.3$401.3 million) and estimated market value of $329.9$356.8 million (2004 — $424.9(2006 - $399.1 million), and by municipal obligations with a carrying value and estimated market value of $32.4$30.5 million (2004(2006$31.9$31.5 million).
     A table showing interest expense on deposits follows:
                        
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (In thousands)
Interest bearing checking accounts $4,730 $3,688 $3,426  $11,365 $5,919 $4,730 
Savings 12,572 10,938 11,849  15,037 12,970 12,572 
Certificates of deposit 52,769 28,954 32,468  82,767 80,284 52,769 
Brokered certificates of deposit 323,081 76,264 117,383  419,571 505,860 323,081 
              
Total $393,152 $119,844 $165,126  $528,740 $605,033 $393,152 
              
     The interest expense on certificates of depositdeposits includes the valuation to market of interest rate swaps that economically hedge brokered certificates of deposit,CDs (economically or under fair value hedge accounting), the related interest exchanged, and the amortization of broker placement fees.fees, the amortization of basis adjustment and changes in fair value of callable brokered CDs elected for the fair value option under SFAS 159 (“SFAS 159 brokered CDs”).
 F-33 


     The following are the components of interest expense on brokered certificates of deposit:deposits:
             
  Year ended December 31, 
  2005  2004  2003 
  (Dollars in thousands) 
Interest expense on brokered certificates of deposit $246,158  $78,456  $64,798 
Amortization of broker placement fees  7,760   11,216   10,070 
          
Interest expense on certificates of deposit excluding unrealized loss (gain) on derivatives (economic hedges)  253,918   89,672   74,868 
Unrealized loss (gain) on derivatives (economic hedges)  69,163   (13,408)  42,515 
          
Total interest expense on brokered certificates of deposit $323,081  $76,264  $117,383 
          
             
  2007  2006  2005 
      (In thousands)     
Interest expense on deposits $515,394  $530,181  $308,893 
Amortization of broker placement fees (1)  9,056   19,896   15,096 
          
             
Interest expense on deposits excluding net unrealized loss on derivatives ( undesignated and designated hedges), SFAS 159 brokered CDs and accretion of basis adjustment on fair value hedges  524,450   550,077   323,989 
Net unrealized loss on derivatives (undesignated and designated hedges) and SFAS 159 brokered CDs  4,290   58,532   69,163 
Accretion of basis adjustment on fair value hedges     (3,576)   
          
Total interest expense on deposits $528,740  $605,033  $393,152 
          
(1)For 2007 the amortization of broker placement fees is related to brokered CDs not elected for the fair value option under SFAS 159.
     Total interest expense on brokered certificates of depositdeposits includes interest exchanged on interest rate swaps that economically hedge (economically or under fair value hedge accounting) brokered certificates of deposit of $71.7 millionCDs that for the year ended December 31, 2007 amounted to net interest incurred of $12.3 million (2006 — net interest incurred of $8.9 million; 2005 (2004 $124.9 million; 2003 — $82.3net interest realized of $71.7 million).
Note 13 — Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
     Federal funds purchased and securities sold under agreements to repurchase (repurchase agreements) consist of the following:

125


         
  December 31, 
  2005  2004 
  (Dollars in thousands) 
Federal funds purchased, interest ranging from 2.38% to 2.40% $  $75,000 
Repurchase agreements, interest ranging from 3.26% to 5.39% (2004 - 1.60% to 5.39%)  4,833,882   4,090,361 
       
Total $4,833,882  $4,165,361 
       
         
  December 31, 
  2007  2006 
  (In thousands) 
Federal funds purchased, interest ranging from 4.50% to 5.12% $161,256  $ 
Repurchase agreements, interest ranging from 3.26% to 5.67% (2006 - 3.26% to 5.84%)  2,933,390   3,687,724 
       
Total $3,094,646  $3,687,724 
       
     The weighted average interest rates ofon federal funds purchased and repurchase agreements atas of December 31, 20052007 and 2004 was 4.31%2006 were 4.47% and 3.55%4.87%, respectively.
     Federal funds purchased and repurchase agreements mature as follows:
        
 December 31,     
 2005 2004  December 31, 2007 
 (Dollars in thousands)  (In thousands) 
One to thirty days $988,556 $1,105,426  $807,146 
Over thirty to ninety days 689,366 541,475   
Over ninety days to one year  
Over one year 3,155,960 2,518,460  2,287,500 
        
Total $4,833,882 $4,165,361  $3,094,646 
        

126F-34


     The following securities were sold under agreements to repurchase:
                
 December 31, 2005 
 Amortized Approximate Weighted                 
 cost of fair value average  December 31, 2007 
 underlying Balance of of underlying interest  Amortized Approximate Weighted 
 securities borrowing securites rate of security  cost of fair value average 
 (Dollars in thousands)  underlying Balance of of underlying interest 
Underlying securities  securities borrowing securities rate of security 
U.S. Treasury securities and obligations of other U.S. Government Agencies $2,797,781 $2,573,025 $2,729,253  5.35%
PR Government securities 351 323 374  6.48%
 (Dollars in thousands) 
U.S. Treasury securities and obligations of other U.S. Government Sponsored Agencies $1,984,596 $1,759,948 $1,984,356  5.83%
Mortgage-backed securities 2,457,992 2,260,534 2,415,351  4.78% 1,323,226 1,173,442 1,317,523  5.06%
              
Total $5,256,124 $4,833,882 $5,144,978  $3,307,822 $2,933,390 $3,301,879 
              
  
Accrued interest receivable $36,894  $28,253 
      
                
 December 31, 2004 
 Amortized Approximate Weighted                 
 cost of fair value average  December 31, 2006 
 underlying Balance of of underlying interest  Amortized Approximate Weighted 
 securities borrowing securites rate of security  cost of fair value average 
 (Dollars in thousands)  underlying Balance of of underlying interest 
Underlying securities  securities borrowing securities rate of security 
U.S. Treasury securities and obligations of other U.S. Government Agencies $2,185,930 $2,008,434 $2,169,317  4.80%
 (Dollars in thousands) 
U.S. Treasury securities and obligations of other U.S. Government Sponsored Agencies $2,459,976 $2,233,290 $2,394,924  5.58%
PR Government securities 329 302 366  6.48% 374 340 393  6.48%
Mortgage-backed securities 2,245,590 2,063,249 2,252,392  4.51% 1,601,689 1,454,094 1,564,739  4.88%
Corporate bonds 20,000 18,376 20,170  6.36%
              
Total $4,451,849 $4,090,361 $4,442,245  $4,062,039 $3,687,724 $3,960,056 
              
  
Accrued interest receivable $15,932  $38,412 
      
     The maximum aggregate balance outstanding at any month-end during 20052007 was $5.0$3.7 billion (June) (2004(2006$4.5 billion (July))$4.8 billion). The average balance during 20052007 was $4.6$3.1 billion (2004(2006$4.0$4.1 billion). The weighted average interest rate during 2007 and 2006 was 4.74% and 4.72%, respectively.
     AtAs of December 31, 20052007 and 2004,2006, the securities underlying such agreements were delivered to, and are being held by the dealers with which the repurchase agreements were transacted.

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     Repurchase agreements as of December 31, 2007, grouped by counterparty, were as follows:
         
      Weighted-average 
Counterparty Amount  maturity (in months) 
  (Dollars in thousands)     
Barclays Capital $428,690   1 
Citigroup Global Markets  400,000   84 
Credit Suisse First Boston  884,500   64 
Morgan Stanley  260,200   48 
JP Morgan  860,000   83 
UBS Financial Services Inc.  100,000   61 
        
  $2,933,390     
        

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Note 14 — Advances from the Federal Home Loan Bank (FHLB)
     Following is a detail of the advances from the FHLB:
             
      December 31, 
Maturity Interest rate  2005  2004 
      (Dollars in thousands) 
January 3, 2005  2.46%     $50,000 
January 3, 2005  2.36%      50,000 
January 5, 2005  2.38%      75,000 
January 13, 2005  2.50%      150,000 
January 18, 2005  2.51%      125,000 
January 18, 2005  2.50%      200,000 
January 27, 2005  2.52%      525,000 
August 16, 2005  6.30%      50,000 
January 1, 2006  4.44% $105,000    
January 3, 2006  4.19%  18,000    
September 18, 2006  4.37%  100,000   100,000 
January 25, 2008  3.81%  10,000    
October 9, 2008  5.10%  14,000   14,000 
October 16, 2008  5.09%  15,000   15,000 
February 28, 2011  4.50%  79,000   79,000 
March 21, 2011  4.42%  165,000   165,000 
           
      $506,000  $1,598,000 
           
             
      December 31,
Maturity Interest rate 2007 2006
      (Dollars in thousands)
December 19, 2007  5.60% $  $20,000 
January 2, 2008  4.56%  100,000   
January 2, 2008  4.11%  90,000   
January 2, 2008  4.40%  30,000   
January 4, 2008  4.28%  200,000   
January 7, 2008  4.28%  48,000   
January 25, 2008  3.81%  10,000   10,000 
June 19, 2008  5.61%  15,000   15,000 
October 9, 2008  5.10%  14,000   14,000 
October 16, 2008  5.09%  15,000   15,000 
November 17, 2008 tied to 3-month LIBOR (4.94% and 5.41% at
December 31, 2007 and December 31, 2006, respectively)
  200,000   200,000 
December 15, 2008 tied to 3-month LIBOR (5.03% and 5.40% at
December 31, 2007 and December 31, 2006, respectively)
  200,000   200,000 
January 15, 2009  5.69%  20,000   20,000 
June 19, 2009  5.60%  15,000   15,000 
July 21, 2009  5.44%  20,000   20,000 
October 24, 2009  4.38%  10,000   
December 14, 2009  4.96%  7,000   7,000 
March 15, 2010  4.84%  8,000   
May 21, 2010  5.16%  10,000   
December 14, 2010  4.97%  7,000   7,000 
March 14, 2011  4.86%  8,000   
May 21, 2011  5.19%  10,000   
October 19, 2011  5.22%  10,000   10,000 
December 14, 2011  4.99%  7,000   7,000 
March 14, 2012  4.88%  9,000   
May 21, 2012  5.22%  10,000   
September 26, 2012  4.95%  10,000   
October 24, 2012  4.65%  10,000   
May 21, 2013  5.26%  10,000   
             
      $1,103,000  $560,000 
             
     Advances are received from the FHLB under an Advances, Collateral Pledge and Security Agreement (the Collateral Agreement). Under the Collateral Agreement, the Corporation is required to maintain a minimum amount of qualifying mortgage collateral with a market value of generally 110%125% or higher ofthan the outstanding advances. AtAs of December 31, 2005,2007, the estimated value of specific mortgage loans with an estimated value of $1.1pledged as collateral amounted to $1.5 billion (2004(2006$1.7$1.2 billion), as computed by Federal Home Loan Bankthe FHLB for collateral purposes, were pledged to the FHLB as part of the Collateral Agreement.purposes. The carrying value of such loans atas of December 31, 20052007 amounted to $1.9$2.2 billion (2004(2006$2.2$1.9 billion). In addition, securities with an approximate market value of $1.2$0.8 million (2004(2006$1.5$1.0 million) and a carrying value of $1.2$0.8 million (2004(2006$1.6$1.0 million) were pledged to the FHLB.

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Note 15 — Notes Payable
     Notes payable consist of:
                
 December 31,  December 31, 
 2005 2004  2007 2006 
 (Dollars in thousands)  (Dollars in thousands) 
Callable fixed-rate notes, bearing interest at 6.00%, maturing on October 1, 2024(1) $149,456 $149,441  $ $151,554 
Callable step-rate notes, bearing step increasing interest from 5.00% to 7.00%, maturing on October 18, 2019 15,245 15,232 
Callable step-rate notes, bearing step increasing interest from 5.00% to 7.00% (5.50% as of December 31, 2007 and 5.00% as of December 31, 2006), maturing on October 18, 2019, measured at fair value under SFAS 159 as of December 31, 2007. 14,306 15,616 
Dow Jones Industrial Average (DJIA) linked principal protected notes:  
Series A, maturing on February 28, 2012 6,752 6,624  7,845 7,525 
Series B, maturing on May 27, 2011 7,240 6,943  8,392 8,133 
          
 $30,543 $182,828 
 $178,693 $178,240      
     
(1)During 2007, the Corporation redeemed the $150 million medium-term note. The derecognition of the unamortized balances of the basis adjustment, placement fees and debt issue costs resulted in adjustments to earnings of approximately $1.3 million, increasing the Corporation’s net interest income.
Note 16 — Other Borrowings
     Other borrowings consist of:
         
  December 31, 
  2005  2004 
  (Dollars in thousands) 
Junior subordinated debentures due in 2034, interest bearing at a floating rate of 2.75% over three-month LIBOR (2005 - 7.25%, 2004 - 5.25%) $102,756  $102,659 
 
Junior subordinated debentures due in 2034, interest bearing at a floating rate of 2.50% over three-month LIBOR (2005 - 7.00%, 2004 - 5.02%)  128,866   128,866 
 
Loan payable to RG due in 2005, interest bearing at 2.67%     45,167 
       
  $231,622  $276,692 
       
         
  December 31, 
  2007  2006 
  (Dollars in thousands) 
Junior subordinated debentures due in 2034, interest bearing at a floating rate of 2.75% over three-month LIBOR (2007 - 7.74%, 2006 - 8.11%) $102,951  $102,853 
         
Junior subordinated debentures due in 2034, interest bearing at a floating rate of 2.50% over three-month LIBOR (2007 - 7.43%, 2006 - 7.87%)  128,866   128,866 
       
         
  $231,817  $231,719 
       

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Note 17 — Subordinated Notes
          On December 20, 1995, the Corporation issued 7.63% subordinated capital notes in the amount of $100 million maturing on December 20, 2005. The notes were issued at a discount. At December 31, 2005, there was no outstanding balance as the notes payable were paid at their maturity date of December 20, 2005 (2004 — $82.3 million was outstanding). Interest on the notes was paid semiannually and at maturity. The notes represented unsecured obligations of the Corporation ranking subordinate in right of payment to all existing and future senior debt including the claims of depositors and other general creditors. The notes could not be redeemed prior to their maturity.
Note 18 — Unused Lines of Credit
     The Corporation maintains unsecured standbyuncommitted lines of credit with other banks. AtAs of December 31, 2005,2007, the Corporation’s total unused lines of credit with these banks amounted to $370$129 million (2004(2006$225$255 million). AtAs of December 31, 2005,2007, the Corporation has an available line of credit with the FHLB guaranteed with excess collateral already pledged, in the amount of $597.9$543.7 million (2004 - $94.7(2006 — $687.7 million).
Note 1918 — Earnings per Common Share
     The calculations of earnings per common share for the years ended December 31, 2005, 20042007, 2006 and 20032005 follow:
             
  Year ended December 31, 
  2005  2004  2003 
  (Dollars in thousands, except per share data) 
Net income $114,604  $177,325  $119,894 
Less: Dividends on preferred stock  (40,276)  (40,276)  (30,359)
          
Net income available to common stockholders $74,328  $137,049  $89,535 
          
             
Earnings per common share-basic:            
             
Net income available to common stockholders $74,328  $137,049  $89,535 
          
Weighted average common shares outstanding  80,847   80,419   79,989 
          
Earnings per common share-basic $0.92  $1.70  $1.12 
          
             
Earnings per common share-diluted:            
             
Net income available to common stockholders $74,328  $137,049  $89,535 
          
Weighted average common shares and share equivalents:            
Average common shares outstanding  80,847   80,419   79,989 
Common stock equivalents — stock options  1,924   2,591   1,977 
          
Total  82,771   83,010   81,966 
          
Earnings per common share-diluted $0.90  $1.65  $1.09 
          
             
  Year ended December 31, 
  2007  2006  2005 
  (In thousands, except per share data) 
Net income:
            
Net income $68,136  $84,634  $114,604 
Less: Preferred stock dividend  (40,276)  (40,276)  (40,276)
          
Net income attributable to common stockholders $27,860  $44,358  $74,328 
          
             
Weighted-Average Shares:
            
Basic weighted average common shares outstanding  86,549   82,835   80,847 
Average potential common shares  317   303   1,924 
          
Diluted weighted average number of common shares outstanding  86,866   83,138   82,771 
          
             
Earnings per common share:
            
Basic $0.32  $0.54  $0.92 
          
Diluted $0.32  $0.53  $0.90 
          
     Stock options outstanding,Potential common shares consist of common stock issuable under the Corporation’sassumed exercise of stock option plan for officers, are common stock equivalents and, therefore, considered in the computation of earnings per common share diluted. Common stock equivalents were computedoptions using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the yearyears ended December 31, 2007, a total of 2,020,600 (2006 – 2,054,600; 2005 1,706,600– 1,706,600) stock options were not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. For the year ended December 31, 2007, there were 2,046,562 (2006 – 2,346,494; 2005 – 1,632,470) weighted average outstanding sharesstock options, respectively, which were excluded from the computation of dilutive earnings per share because they were antidilutive. For the years ended December 31, 2004 and 2003, all options outstanding were included in the computation of outstanding shares.

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Note 2019 — Regulatory Capital Requirements
     The Corporation is subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can initiateresult 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

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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 of Tier 1 capital to total average assets (leverage ratio) and ratios of Tier 1 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 vary from 0% to 100% depending on the nature of the asset.
     As of December 31, 2005,2007, the Corporation was in compliance with the minimum regulatory capital requirements.
     AtAs of December 31, 20052007 and 2004,2006, the most recent notification from the FDICCorporation and each of its subsidiary banks were categorized the Corporation’s bank subsidiary as a well-capitalized institution“well-capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since December 31, 2007 that management believes have changed any subsidiary bank’s capital category.
     The Corporation’s and its banking subsidiary’s regulatory capital positions were as follows:

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 Regulatory requirement Regulatory requirement
 For capital To be For capital To be
 Actual adequacy purposes well capitalized Actual adequacy purposes well capitalized
   Amount Ratio Amount Ratio Amount Ratio
 Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) 
  
 (Dollars in thousands)
At December 31, 2005
 
Total Capital (to Risk Weighted Assets) 
At December 31, 2007
 
Total Capital (to Risk-Weighted Assets) 
First BanCorp $1,454,862  10.72% $1,086,155  8% N/A N/A  $1,735,644  13.86% $1,001,582  8% N/A N/A 
FirstBank $1,419,996  10.89% $1,042,918  8% $1,303,648  10% $1,570,982  13.23% $949,858  8% $1,187,323  10%
FirstBank Florida $53,502  10.97% $39,030  8% $48,787  10% $69,446  10.92% $50,878  8% $63,598  10%
  
Tier I Capital (to Risk Weighted Assets) 
Tier I Capital (to Risk-Weighted Assets) 
First BanCorp $1,317,841  9.71% $543,078  4% N/A N/A  $1,578,998  12.61% $500,791  4% N/A N/A 
FirstBank $1,284,693  9.85% $521,459  4% $782,189  6% $1,422,375  11.98% $474,929  4% $712,394  6%
FirstBank Florida $51,951  10.65% $19,515  4% $29,272  6% $66,240  10.42% $25,439  4% $38,159  6%
  
Tier I Capital (to Average Assets) 
Leverage ratio (1) 
First BanCorp $1,317,841  6.72% $784,185  4%(1) N/A N/A  $1,578,998  9.29% $679,516  4% N/A N/A 
FirstBank $1,284,693  6.78% $758,109  4%(1) $947,637  5% $1,422,375  8.85% $643,065  4% $803,831  5%
FirstBank Florida $51,951  7.99% $26,015  4%(1) $32,519  5% $66,240  7.79% $33,999  4% $42,499  5%
  
At December 31, 2004
 
Total Capital (to Risk Weighted Assets) 
At December 31, 2006
 
Total Capital (to Risk-Weighted Assets) 
First BanCorp $1,479,342  12.83% $922,605  8% N/A N/A  $1,471,949  12.25% $961,299  8% N/A N/A 
FirstBank $1,211,491  10.60% $914,708  8% $1,143,385  10% $1,398,527  12.25% $913,141  8% $1,141,427  10%
FirstBank Florida $63,970  11.35% $45,086  8% $56,357  10%
  
Tier I Capital (to Risk Weighted Assets) 
Tier I Capital (to Risk-Weighted Assets) 
First BanCorp $1,339,943  11.62% $461,303  4% N/A N/A  $1,329,058  11.06% $480,649  4% N/A N/A 
FirstBank $1,079,355  9.44% $457,354  4% $686,031  6% $1,258,074  11.02% $456,571  4% $684,856  6%
FirstBank Florida $61,770  10.96% $22,543  4% $33,814  6%
  
Tier I Capital (to Average Assets) 
Leverage ratio (1) 
First BanCorp $1,339,943  9.26% $578,892  4%(1) N/A N/A  $1,329,058  7.82% $679,716  4% N/A N/A 
FirstBank $1,079,355  7.51% $575,167  4%(1) $718,959  5% $1,258,074  7.78% $647,238  4% $809,048  5%
FirstBank Florida $61,770  7.91% $31,253  4% $39,066  5%
 
(1) The minimum leverage capital requirement consists of a ratio of Tier 1 capitalCapital to average assets in the case of First BanCorp and First Bank and Tier 1 Capital to adjusted total assets in the case of not less than 4% for banking organizations that do not anticipate or are experiencing significant growth and have well-diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and in general are considered a strong banking organization.First Bank Florida.

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Note 2120 — Stock Option Plan
     TheBetween 1997 and 2007, the Corporation hashad a stock option plan (“the 1997 stock option plan”) covering certain employees. This plan allowed for the granting of up to 8,696,112 purchase options on shares of the Corporation’s common stock to certain employees. The options granted under the plan cannotcould 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 iswas granted. Stock options are fully vested upon issuance. The maximum term to exercise the options is ten years. The stock option plan provides for a proportionate adjustment in the exercise price and the number of shares that can be purchased in the event of a stock dividend, stock split, reclassification of stock, merger or reorganization and certain other issuances and distributions such as stock appreciation rights.
     Under the Corporation’s1997 stock option plan, the Compensation Committee mayhad the authority to grant stock appreciation rights at any time subsequent to the grant of an option. Pursuant to the stock appreciation rights, the Optionee surrenders the right to exercise an option granted under the plan in consideration for

132


payment by the Corporation of an amount equal to the excess of the fair market value of the shares of common stock subject to such option surrendered over the total option price of such shares. Any option surrendered shall be cancelled by the Corporation and the shares subject to the option shall not be eligible for further grants under the option plan. During 2005,The 1997 stock option plan expired in the first quarter of 2007 and there is no other plan in place.
     Prior to the adoption of SFAS 123R on January 1, 2006, the Corporation cancelled 87,746accounted for the plan under the recognition and measurement principles of APB 25, and related Interpretations. No stock-based employee compensation cost was reflected in net income, as all options (175,492 after 2 for 1 stock split adjustment effected June 30, 2005) in consideration for 39,894 shares of common stock.
Following is a summarygranted under the plan had an exercise price equal to the market value of the activity related tounderlying common stock options:
         
  Number Weighted Average
  of Options Exercise Price per Option
At December 31, 2002
  3,998,500  $7.72 
Granted  730,000  $12.84 
Exercised  (145,500) $7.72 
         
At December 31, 2003
  4,583,000  $8.54 
Granted  931,800  $21.45 
Exercised  (723,740) $6.85 
Canceled  (3,000) $21.45 
         
At December 31, 2004
  4,788,060  $11.30 
Granted  955,800  $23.92 
Exercised  (72,958) $8.11 
Canceled  (354,492) $16.13 
         
At December 31, 2005
  5,316,410  $13.28 
         
          The exercise priceon the date of the grant. Options granted are not subject to vesting requirements. The table below illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation granted in 2005.
Pro formanet income and earnings per common share
     
  December 31, 2005 
  (Dollars in thousands, except 
  per share data) 
Net income
    
As reported $114,604 
Deduct: Stock-based employee compensation expense determined under fair value method  6,118 
    
Pro forma $108,486 
    
Earnings per common share-basic:
    
As reported $0.92 
Pro forma $0.84 
Earnings per common share-diluted:
    
As reported $0.90 
Pro forma $0.82 
     On January 1, 2006, the Corporation adopted SFAS 123R,“Share-Based Payment”using the “modified prospective” method. Under this method and since all previously issued stock options outstandingwere fully vested at the time of the adoption, the Corporation expenses the fair value of all employee stock options granted after January 1, 2006 (same as the prospective method). The compensation expense associated with stock options for the year ended December 31, 2005, ranges from $5.21 to $23.922007 and the weighted average remaining contractual life is2006 was approximately six years.
          Following is additional information concerning the$2.8 million and $5.4 million, respectively. All employee stock options outstandinggranted during 2007 and 2006 were fully vested at December 31, 2005.
          
 Numbers of Exercise Price Contractual
 Options per Option Maturity
  312,000  $5.21  November 2007
  120,000  $9.03  May 2008
  36,000  $8.85  June 2008
  453,000  $8.67  November 2008
  415,500  $6.54  November 2009
  735,610  $7.44  December 2010
  877,700  $9.35  February 2012
  20,000  $13.00  October 2012
  627,000  $12.82  February 2013
  10,000  $14.78  May 2013
  840,800  $21.45  February 2014
  868,800  $23.92  February 2015
          
  5,316,410       
          
the time of grant.

133F-41


     The activity of stock options during the year ended December 31, 2007 is set forth below:
                 
  For the year ended December 31, 2007 
          Weighted-Average    
          Remaining    
      Weighted-Average  Contractual Term  Aggregate Intrisic 
  Number of options  Exercise Price  (Years)  Value (in thousands) 
Beginning of year  3,024,410  $13.95         
Options granted  1,170,000   9.20         
Options cancelled  (57,500)  14.42         
               
End of period outstanding and exercisable  4,136,910  $12.60   6.8  $45 
             
     The fair value of options granted in 2007, 2006 and 2005, that was estimated using the Black-Scholes option pricing, and the assumptions used are as follows:
             
  2007 2006 2005
Weighted-average stock price at grant date and exercise price $9.20  $12.21  $23.92 
Stock option estimated fair value $2.40-$2.45  $2.89-$4.60  $6.40-$6.41 
Weighted-average estimated fair value $2.43  $4.36  $6.40 
Expected stock option term (years)  4.31-4.59   4.22-4.31   4.25-4.27 
Expected volatility  32%  39%-46%  28%
Weighted-average expected volatility  32%  45%  28%
Expected dividend yield  3.0%  2.2%-3.2%  1.0%
Weighted-average expected dividend yield  3.0%  2.3%  1.0%
Risk-free interest rate  5.1%  4.7%-5.6%  4.2%
     The Corporation uses empirical research data to estimate option exercises and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected volatility is based on the historical implied volatility of the Corporation’s common stock at each grant date otherwise, historical volatilities based upon 260 observations (working days) were obtained from Bloomberg L.P. and used as inputs in the model. The dividend yield is based on the historical 12-month dividend yield observable at each grant date. The risk-free rate for the period is based on historical zero coupon curves obtained from Bloomberg L. P. at the time of grant based on the option’s expected term.
     For 2007, no stock options were exercised. Cash proceeds from options exercised during 2006 and 2005 amounted to $19.8 million and $2.1 million, respectively. The total intrinsic value of options exercised during 2006 and 2005 was approximately $10.0 million and $0.8 million, respectively.
Note 2221 — Stockholders’ Equity
Common stock
     On May 24,The Corporation has 250,000,000 authorized shares of common stock with a par value of $1 per share. As of December 31, 2007, there were 102,402,306 (2006 – 93,151,856) shares issued and 92,504,506 (2006 – 83,254,056) shares outstanding. During 2005, the Corporation declared a two-for-one or 100% stock split on its 40,437,528 outstanding shares of common stock atas of June 15, 2005. As a result, a total of 45,386,428 additional shares of common stock were issued on June 30, 2005, of which 4,948,900 shares were recorded as treasury stock.
     On August 24, 2007, First BanCorp entered into a Stockholder Agreement relating to its sale in a private placement of 9,250,450 shares or 10% of the Corporation’s common stock (“Common Stock”) to The Bank of Nova Scotia (“Scotiabank”), a large financial institution with operations around the world, at a price of $10.25 per share pursuant to the terms of an Investment Agreement, dated February 15, 2007 (the “Investment Agreement”). The net proceeds to First

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BanCorp after discounts and expenses were $91.9 million. The securities sold to Scotiabank were issued pursuant to the exemption from registration in Section 4(2) of the Securities Act of 1933, as amended. Pursuant to the Investment Agreement, Scotiabank has the right to require the Corporation to register the Common Stock for resale by Scotiabank, or successor owners of the Common Stock.
     First BanCorp has agreed to give Scotiabank notice if any decision to commence a process involving the sale of First BanCorp during the 18 months after Scotiabank’s investment is made, and to negotiate with Scotiabank exclusively for 30 days thereafter if Scotiabank so requests. In addition, during the 18-month period Scotiabank may give notice to First BanCorp providing its offer to acquire the Corporation. First BanCorp has agreed to negotiate the offer received on an exclusive basis for a period of 30 days. Also, First BanCorp has agreed to give Scotiabank notice of the term of any proposed acquisition received from a third party during the 18-month period and to allow Scotiabank five business days to indicate whether it will present a counteroffer. Finally, Scotiabank is entitled to an observer at meetings of the Board of Directors of First BanCorp, including any committee meetings of the Board of Directors of First BanCorp subject to certain limitations. The observer has no voting rights.
     The Corporation has 250,000,000 authorizedissued 2,379,000 shares of common stock with a par value of $1 per share. At December 31, 2005, there were 90,772,856 (2004during 2006 (200545,310,055) shares issued and 80,875,056 (2004 – 40,389,155) shares outstanding.
          During 2005, the Corporation issued 76,373 (152,746152,746) as adjusted for the June 2005 stock split) shares of common stock as a result of the exercise of 36,479 stock options and 39,894 shares granted pursuant to stock appreciation rights before the June 2005 stock split, both under the Corporation’s stock based compensation plan. During 2004 and 2003, the Corporation issued 361,870 and 72,750 shares of common stock, respectively, as a resultpart of the exercise of stock options or pursuant to stock appreciation rights granted under the Corporation’s stock basedstock-based compensation plan. No shares of common stock were issued during 2007 under the Corporation’s stock-based compensation plan. The 2005 number of shares issued have been adjusted to reflect the effect of the June 30, 2005 two-for-one stock split.
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. Under this program, the Corporation purchased a total of 28,000 (56,000 shares as adjusted for the June 2005 stock split) shares of common stock at a cost of $965,079 during the second quarter of 2005. No shares of common stock were repurchased during 20042007 and 20032006 by the Corporation. FromAs of December 31, 2007 and 2006, from the total amount of common stock repurchased, 9,897,800 shares as adjusted for the June 30, 2005 stock split, were held as treasury stock at December 31, 2005 (2004 – 4,920,900) and were available for general corporate purposes.
Preferred stock
     The Corporation has 50,000,000 authorized shares of non-cumulative and non-convertible preferred stock with a par value of $25, 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. During 20052007 and 2004,2006, the Corporation did not issue preferred stock. During 2003,The Corporation has five outstanding series of non convertible 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, which trade on the Corporation issued 7,584,000 shares of the Corporation’s “Series E Preferred Stock”, (3,680,000 Series D shares in 2002; 4,140,000 Series C shares in 2001; 3,000,000 Series B shares in 2000 and 3,600,000 Series A shares in 1999).NYSE. The liquidation value per share is $25. Annual dividends of $1.75 per share (issuance of 2003)(Series E), $1.8125 per share (issuance of 2002)(Series D), $1.85 per share (issuance of 2001)(Series C), $2.0875 per share (issuance of 2000)(Series B) and $1.78125 per share (issuance of 1999)(Series A) are payable monthly, if declared by the Board of Directors. Dividends declared on preferred stock for each of the years 2007, 2006 and 2005 amounted to $40.3 million (2004 — $40.3 million; 2003 — $30.4 million).million.
Capital reserve
     The capital reserve account was established to comply with certain regulatory requirements of the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto RicoOCIF related to the issuance of subordinated notes by FirstBank in 1995. An amount equal to 10% of the principal of the notes was set aside each year from retained earnings until the reserve equaled the total principal amount. The subordinated notes were repaid on December 20, 2005, the notes’ maturity date; the balance in capital reserve was transferred to the legal surplus account in accordance with the approval of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico.OCIF.

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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. During December 2005, the Bank transferred $82.8 million from the Capitalcapital reserve account to Legallegal surplus upon the maturity of the subordinated notes on December 20, 2005 and with prior approval from the Office of the Commissioner of Financial Institutions.OCIF. The amount transferred exceeded 10% of FirstBank’s net income for the year ended December 31, 2005.
Dividends
     On March 17, 2006, the Corporation announced that it had agreed with the Board of Governors of the Federal Reserve System to a cease and desist order issued with the consent of the Corporation (the “Consent Order”). The Consent Order addresses certain concerns of banking regulators relating to the incorrect accounting for and documentation of mortgage-related transactions with Doral and R&G. The Corporation had initially reported those transactions as purchases of mortgage loans when they should have been accounted for as secured loans to the financial institutions because, as a legal and accounting matter, they did not constitute “true sales” but rather financing arrangements.
     The Consent Order requires the Corporation to take various affirmative actions, including engaging an independent consultant to review the mortgage portfolios and prepare a report including findings and recommendations, submitting capital and liquidity contingency plans, providing notice prior to the incurring of additional debt or the restructuring or repurchasing of debt, obtaining approval prior to purchasing or redeeming stock, filing amended regulatory reports upon completion of the restatement of financial statements, and obtaining regulatory approval prior to paying dividends after those payable in March 2006. The requirements of the Consent Order have been substantially completed and reported to the regulators as required by the Consent Order.
     Subsequent to the effectiveness of the Consent Orders, the Corporation have requested and obtained written approval from the Federal Reserve Board for the payment of dividends by the Corporation to the holders of its preferred stock, common stock and trust preferred stock. The written approvals have been obtained in accordance with requirements of the Consent Order.
Note 2322 — Employees’ Benefit Plan
     FirstBank provides contributory retirement plans pursuant to Section 1165(e) of the Puerto Rico Internal Revenue Code for Puerto Rico employees and Section 401(K)401(k) of the U.S. Internal Revenue Code for U.S.V.I. and U.S. employees (the “Plans”). All employees are eligible to participate in the Plans after completion of three months of service for purposes of making elective deferral contributions and one year of service.service for purposes of sharing in the Bank’s matching, qualified matching and qualified nonelective contributions. Under the provisions of the Plans, the Bank contributes a quarter25% of the first 4% of the participant’s compensation contributed to the Plans. Participants are permitted to contribute up to 10% of their annual compensation, limited to $8,000 per year ($14,00015,500 for U.S.V.I. and U.S. employees). Additional contributions to the Plans are voluntarily made by the Bank as determined by its Board of Directors. The Bank had a total plan expense of $1.4 million for each of the years ended December 31, 2007 and 2006, and $1.3 million $1.2 million and $1.2 million for 2005, 2004 and 2003 respectively.the year ended December 31, 2005.
     FirstBank Florida provides a contributory retirement plan pursuant to Section 401(K)401(k) of the U.S. Internal Revenue Code for its U.S. employees (the Plan)“Plan”). All employees are eligible to participate in the Plan after six months of service. Under the provisions of the Plan, FirstBank Florida contributes 50% of the participant’s contribution up to a maximum of 3% of the participant’s compensation. Participants are permitted to contribute up to 18% of their annual compensation, limited to $14,000$15,500 per year (participants over 50 years of age are permitted an additional $4,000$5,000 contribution). FirstBank Florida had total plan expenses of $53,139 duringapproximately $114,000 for the nine monthsfull year 2007, approximately $87,000 for the year ended December 31, 2006 and approximately $53,000 for the year ended December 31, 2005.

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Note 2423 — Other OperatingNon-interest Income
     A detail of other operatingnon-interest income follows:
                        
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (In thousands) 
Other commissions and fees $911 $1,983 $1,386  $273 $1,470 $911 
Insurance income 9,443 6,439 4,258  10,877 11,284 9,443 
Other 15,896 14,372 11,892  13,322 12,857 15,896 
              
Total $26,250 $22,794 $17,536  $24,472 $25,611 $26,250 
              
Note 2524 — Other OperatingNon-interest Expenses
     A detail of other operatingnon-interest expenses follows:

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 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (In thousands) 
Servicing and processing fees $6,573 $2,727 $6,410  $6,574 $7,297 $6,573 
Communications 8,642 7,274 6,959  8,562 9,165 8,642 
Revenue earning equipment 2,225 1,943 1,642 
Depreciation and expenses on revenue — earning equipment 2,144 2,455 2,225 
Supplies and printing 3,094 3,045 2,034  3,402 3,494 3,094 
Other 14,764 10,513 10,192  21,144 14,327 14,764 
              
Total $35,298 $25,502 $27,237  $41,826 $36,738 $35,298 
              
Note 2625 — 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. For United States income tax purposes, the CorporationAs a Puerto Rico corporation, First BanCorp is treated as a foreign corporation. Accordingly, itcorporation 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 United States incomesuch tax paid by the Corporation is creditable, within certain conditions and limitations, as a foreign tax credit against itsthe Corporation’s Puerto Rico tax liability. In addition, certain interest including interest on U.S. Treasury and agency securities is not taxable in the U.S. under a portfolio interest exception applicable to certain foreign corporations. The Corporation is also subject to U.S.V.I.U.S.Virgin Islands taxes on its income from sources within this jurisdiction. However, anyAny such tax paid is creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions and limitations, is creditable as a foreign tax credit against its P.R. tax liabilities.limitations.
     Under the Puerto Rico Internal Revenue Code of 1994, as amended (“PR Code”), the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns.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.
     OnUnder the PR Code, First BanCorp is subject to a maximum statutory tax rate of 39%, except that in years 2005 and 2006, an additional transitory tax rate of 2.5% was signed into law by the Governor of Puerto Rico. In August 1, 2005, the Government of Puerto Rico approved a legislation that imposed a special transitory income tax of 2.5% to corporations subject to the additional tax. The actual statutory income tax rate of 39%2.5% that increased the maximum statutory

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tax rate from 39.0% to 41.5%. for a two-year period. This law iswas effective for taxable years beginning after December 31, 2004 and ending on or before December 31, 2006. Accordingly, the CompanyCorporation recorded an additional current income tax provision of $2.8 million and $3.6 million during the yearyears ended December 31, 2005.2006 and 2005, respectively. Deferred tax amounts have been adjusted for the effect of the change in the income tax rate considering the enacted tax rate expected to apply to taxable income in the period in which the deferred tax asset or liability is expected to be settled or realized.

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     In addition, on May 13, 2006, with an effective date of January 1, 2006, the Governor of Puerto Rico approved an additional transitory tax rate of 2.0% applicable only to companies covered by the Puerto Rico Banking Act as amended, such as First Bank, which raised the maximum statutory tax rate to 43.5% for taxable years commenced during calendar year 2006. This law was effective for taxable years beginning after December 31, 2005 and ending on or before December 31, 2006. Accordingly, the Corporation recorded an additional current income tax provision of $1.7 million during the year ended December 31, 2006. 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.


     Act 98 of May 16, 2006 amended the PR Code by imposing a tax of 5% over the 2005 taxable net income applicable to corporations with gross income over $10 million, which was required to be paid July 31, 2006. The Corporation can use the full payment as a tax credit in its income tax return for future years. The prepayment of tax resulted in a disbursement of $7.1 million. No income tax expense was recorded since the prepayment will be used as a tax credit in future taxable years.
     The components of income tax expense for the years ended December 31 are summarized below:
                        
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (In thousands) 
Current income tax expense $75,239 $53,009 $45,041  $7,925 $59,157 $75,239 
Deferred income tax benefit  (60,223)  (6,509)  (26,744)
Deferred income tax expense (benefit) 13,658  (31,715)  (60,223)
              
Total income tax expense $15,016 $46,500 $18,297  $21,583 $27,442 $15,016 
              
     The differences between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico were as follows:
                                                
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 % of % of % of  % of % of % of 
 pre-tax pre-tax pre-tax  pre-tax pre-tax pre-tax 
 Amount income Amount income Amount income  Amount income Amount income Amount income 
 (Dollars in thousands)  (In thousands) 
Computed income tax at statutory rate $53,792  41.50% $87,292  39.00% $53,894  39.00% $34,990  39.0% $46,512  41.5% $53,792  41.5%
Federal and state taxes 4,996  3.85%    227  0.3% 1,657  1.5% 4,996  3.9%
Non-tax deductible expenses 3,528  2.72%    1,111  1.2% 2,232  2.0% 3,528  2.7%
Benefit of net exempt income  (57,522)  -44.38%  (49,071)  -21.92%  (37,950)  -27.46%  (23,974)  -26.7%  (34,601)  -30.9%  (57,522)  -44.4%
Deferred tax valuation allowance 2,847  2.20%     (1,250)  -1.4% 3,209  2.9% 2,847  2.2%
2% temporary tax applicable to banks   1,704  1.5%    
Net operating loss carry forward 7,003  7.8%     
Other-net 7,375  5.69% 8,279  3.70% 2,353  1.70% 3,476  3.9% 6,729  6.0% 7,375  5.7%
                    
Total income tax provision $15,016  11.58% $46,500  20.78% $18,297  13.24% $21,583  24.1% $27,442  24.5% $15,016  11.6%
                    

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     Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Significant components of the Corporation’s deferred tax assets and liabilities atas of December 31, 2007 and 2006 were as follows:
                
 December 31,  December 31, 
 2005 2004  2007 2006 
 (Dollars in thousands)  (In thousands) 
Deferred tax asset:  
Allowance for loan losses $58,696 $55,004 
Allowance for loan and lease losses $74,118 $61,705 
Unrealized losses on derivative activities 59,712 26,627  4,358 82,223 
Deferred compensation 8,183 7,949  1,301 2,312 
Legal reserve 28,997 312  123 29,198 
Reserve for insurance premium cancellations 685 616  711 703 
Net operating loss and donation carryforward available 7,198 2,552 
Impairment on investments 1,719   4,205 4,425 
Tax credits available for carryforward 7,117 7,117 
Unrealized net loss on available-for-sale securities 333  
Other reserves and allowances 1,861 852  3,490 1,690 
          
Deferred tax asset 159,853 91,360  102,954 191,925 
     
 
Deferred tax liability:  
Unrealized gain on available-for-sale securities  894   145 
Broker placement fees costs 18,372 15,389 
Broker placement fees  15,222 
Differences between the assigned values and tax bases of assets and liabilities recognized in purchase business combinations 5,429   4,885 5,056 
Unrealized gain on other investments 582 468 
Other 2,682   2,446 2,881 
          
Deferred tax liability 26,483 16,283  7,913 23,772 
     
 
Valuation allowance  (3,230)    (4,911)  (6,057)
 
          
Deferred income taxes, net $130,140 $75,077  $90,130 $162,096 
          
     In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. A valuation allowance of $3.2$4.9 million and $6.1 million is reflected in 20052007 and 2006, respectively, related to deferred tax assets arising from temporary differences for which the Corporation could not determine the likelihood of its realization. Based on the information available, including projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Corporation expects to fullywill realize all other items comprising the net deferred tax asset as of December 31, 2005.2007 and 2006. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Deferred tax assets and liabilities are presented net in the statement of financial condition under Other Assets.
     The tax effect of the unrealized holding gain or loss on securities available-for-sale, excluding the Corporation’s international banking entities, was computed based on a 25%20% capital gain tax rate, and is included in accumulated other comprehensive income as part of stockholders’ equity.
     The Corporation adopted FIN 48 as of January 1, 2007. FIN 48 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. The adoption of FIN 48 reduced the beginning balance of retained earnings as of January 1, 2007 by $2.6 million. Under FIN 48, 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 FIN 48 and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit (“UTB”).

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     As of January 1, 2007 (the date of adoption), the balance of the Corporation’s UTBs amounted to $22.1 million, excluding accrued interest. No additions or reductions to these UTBs, nor new UTBs have been recorded, since the adoption date. As of December 31, 2007, the balance of the Corporation’s UTBs including accrued interest amounted to $30.7 million, all of which would, if recognized, affect the Corporation’s effective tax rate. The Corporation classifies all interest and penalties, if any, related to tax uncertainties as income tax expense. As of December 31, 2007, the Corporation’s accrual for interest that relate to tax uncertainties amounted to $8.6 million. As of December 31, 2007 there is no need to accrue for the payment of penalties. For the year ended December 31, 2007, the total amount of interest recognized by the Corporation as part of income tax expense related with tax uncertainties was $2.3 million. The amount of UTBs may increase or decrease in the future for various reasons, including changes in the amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitations, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. The Corporation does not anticipate any significant changes to its UTBs within the next 12 months.
     The Corporation’s liability for income taxes includes the liability for UTBs, and interest which relates to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed. The statute of limitations under the PR Code is 4 years; and for Virgin Islands and U.S. income tax purposes is 3 years after a tax return is due or filed, whichever is later. The completion of an audit by the taxing authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Corporation’s liability for income taxes. Any such adjustment could be material to results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. All tax years subsequent to 2002 remain open to examination under the PR Code and taxable years subsequent to 2003 remain open to examination for Virgin Islands and U.S. income tax purpose.
Note 2726 Lease Commitments
     AtAs of December 31, 2005,2007, certain premises are leased with terms expiring through the year 2022. The Corporation has the option to renew or extend certain leases from two to ten years beyond the original term. Some of these leases require the payment of insurance, increases in property taxes and other incidental costs. AtAs of December 31, 2005,2007, the obligation under various leases follows:
        
Year Amount  Amount 
 (Dollars in thousands)  (Dollars in thousands) 
2006 $8,077 
2007 7,495 
2008 6,318  $10,168 
2009 5,238  8,571 
2010 3,857  7,231 
2011 and later years 20,393 
2011 5,651 
2012 4,767 
2013 and later years 26,796 
      
Total $51,378  $63,184 
      

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     Rental expense included in occupancy and equipment expense was $8.9$11.2 million in 2007 (2006 - $10.2 million; 2005 (2004 - - $6.7 million; 2003 $5.4$8.9 million).
Note 27 – FAIR VALUE
     As discussed in Note 1 — “Nature of Business and Summary of Significant Accounting Policies”, effective January 1, 2007, the Corporation adopted SFAS 157, which provides a framework for measuring fair value under GAAP.
     The Corporation also adopted SFAS 159 effective January 1, 2007. SFAS 159 generally permits the measurement of selected eligible financial instruments at fair value at specified election dates. The Corporation elected to adopt the fair value option for certain of its brokered CDs and medium-term notes on the adoption date. SFAS 159 requires that the difference between the carrying value before the election of the fair value option and the fair value of these instruments be recorded as an adjustment to beginning retained earnings in the period of adoption.
     The following table summarizes the impact of adopting the fair value option for certain brokered CDs and medium-term notes on January 1, 2007. Amounts shown represent the carrying value of the affected instruments before and after the changes in accounting resulting from the adoption of SFAS 159.
             
Transition Impact
  Ending Statement of  Net  Opening Statement of 
  Financial Condition  Increase  Financial Condition 
  as of December 31, 2006  in Retained Earnings  as of January 1, 2007 
(In thousands) (Prior to Adoption) (1)  upon Adoption  (After Adoption of Fair Value Option) 
Callable brokered CDs $(4,513,020) $149,621  $(4,363,399)
Medium-term notes  (15,637)  840   (14,797)
            
Cumulative-effect adjustment (pre-tax)      150,461     
Tax impact      (58,683)    
            
Cumulative-effect adjustment (net of tax), increase to retained earnings     $91,778     
            
(1)Net of debt issue costs, placement fees and basis adjustment as of December 31, 2006.
Fair Value Option
Callable Brokered CDs and Certain Medium-Term Notes
     The Corporation elected to account at fair value for certain financial liabilities that were hedged with interest rate swaps that were designated for fair value hedge accounting in accordance with SFAS 133. As of December 31, 2007, these liabilities included callable brokered CDs with an aggregate fair value of $4.19 billion and principal balance of $4.20 billion recorded in interest-bearing deposits; and certain medium-term notes with a fair value of $14.31 million and principal balance of $15.44 million recorded in notes payable. Interest paid on these instruments continues to be recorded in interest expense and the accrued interest is part of the fair value of the SFAS 159 liabilities. Electing the fair value option allows the Corporation to eliminate the burden of complying with the requirements for hedge accounting under SFAS 133 (e.g., documentation and effectiveness assessment) without introducing earnings volatility. Interest rate risk on the callable brokered CDs and medium-term notes measured at fair value under SFAS 159 continues to be economically hedged with callable interest rate swaps with the same terms and conditions. The Corporation did not elect the fair value option for the vast majority of other brokered CDs because these are not hedged by derivatives that qualified or designated for hedge accounting in accordance with SFAS 133. Effective January 1, 2007, the Corporation discontinued the use of fair value hedge accounting for interest rate swaps that hedged the $150 million medium-term note since the interest rate swaps were no longer effective in offsetting the changes in the fair value of the $150 million medium-term note and, as a consequence, the Corporation did not elect the fair value option for this note either. The Corporation redeemed the $150 million medium-term note during the second quarter of 2007.
     Callable brokered CDs and medium-term notes for which the Corporation has elected the fair value option are priced by valuation experts using observable market data in the institutional markets.

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Note 28 — Fair Value Measurement
     SFAS 157 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. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of Financial Instrumentsobservable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
Level 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 that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; 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 valuations obtained from third-party pricing services for 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., callable brokered CDs and medium-term notes elected for fair value option under SFAS 159) 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
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.
Estimated Fair Value
     The information about the estimated fair value of financial instruments required by accounting principles generally accepted in the United States of AmericaGAAP is presented hereunder. The disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the aggregate fair value amounts presented do not represent management’s estimate of the underlying value of the Corporation. A summary table of estimated fair value and carrying value of financial instruments at December 31, 2005 and 2004 follows:
                 
  December 31,
  2005 2004
  Estimated Carrying Estimated Carrying
  fair value value fair value value
  (Dollars in thousands)
Assets:                
Cash and due from banks and money market investments $1,380,706  $1,380,640  $923,452  $926,975 
Investment securities  5,284,737   5,386,765   4,669,599   4,698,537 
Other investment securities  42,368   42,368   79,900   79,900 
Loans receivable, including loans held for sale (1)  12,659,957   12,685,929   9,697,893   9,697,994 
Derivatives fair value, included in other assets  15,776   15,776   12,265   12,265 
Liabilities:                
Deposits  12,243,248   12,463,752   7,895,725   7,912,322 
Federal funds purchased and securities sold under agreements to repurchase  4,740,815   4,833,882   4,263,578   4,165,361 
Advances from FHLB  497,639   506,000   1,612,933   1,598,000 
Notes payable  161,911   178,693   173,084   178,240 
Other borrowings  231,622   231,622   276,692   276,692 
Subordinated notes        86,390   82,280 
Derivatives fair value, included in other liabilities  158,123   158,123   72,168   72,168 
(1) Excludes allowance for loan losses.
     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. Therefore, the estimated fair value may materially differ from the value that could actually be realized on a sale.
     The following table presents the estimated fair value and carrying value of financial instruments as of December 31, 2007 and 2006 as well as assets and liabilities measured at fair value on a recurring basis, including financial liabilities for which the Corporation has elected the fair value option.

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                      December 31, 2007
                      Fair Value Measurements Using
          Total Carrying            
  Total Carrying     Amount in     Assets/Liabilities      
  Amount in   Statement of     Measured at Fair      
  Statement of Fair Value Financial   Value on a      
  Financial Condition Estimate Condition Fair Value Estimate recurring basis      
(In thousands) 12/31/2007 (1) 12/31/2007 (2) 12/31/2006 (1) 12/31/2006 (2) 12/31/07 Level 1 Level 2 Level 3
Assets:
                                
Cash and due from banks and money market investments $378,945  $378,980  $568,811  $568,916  $  $  $  $ 
Investment securities available for sale (3)  1,286,286   1,286,286   1,700,423   1,700,423   1,286,286   22,596   1,130,012   133,678 
Investment securities held to maturity  3,277,083   3,261,934   3,347,131   3,256,966             
Other equity securities  64,908   64,908   40,159   40,159             
Loans receivable, including loans held for sale  11,609,578   11,513,064   11,105,684   10,977,486             
Derivatives, included in assets (3)  14,701   14,701   15,013   15,013   14,701      9,598   5,103 
Liabilities:
                                
Deposits (4)  11,034,521   11,030,229   11,004,287   10,673,249   4,186,563      4,186,563    
Federal funds purchased and securities sold under agreements to repurchase  3,094,646   3,137,094   3,687,724   3,679,535             
Advances from FHLB  1,103,000   1,107,347   560,000   560,416             
Notes Payable (5)  30,543   30,043   182,828   177,555   14,306      14,306    
Other borrowings  231,817   217,908   231,719   231,719             
Derivatives, included in liabilities (3)  67,151   67,151   142,991   142,991   67,151      67,151    
(1)This column discloses carrying amount, information required annually by SFAS 107.
(2)This column discloses fair value estimates required annually by SFAS 107.
(3)Carried at fair value prior to the adoption of SFAS 159.
(4)Amounts include Callable Brokered CDs for which the Corporation has elected the fair value option under SFAS 159.
(5)Amounts include Medium-term notes for which the Corporation has elected the fair value option under SFAS 159.
             
  Changes in Fair Value for the Year Ended 
  December 31, 2007, for items Measured at Fair Value Pursuant 
  to Election of the Fair Value Option 
          Total 
          Changes in 
          Fair Value 
  Changes in Fair Value included in  Changes in Fair Value included in  Included in 
  Interest Expense  Interest Expense  Current-Period 
(In thousands) on Deposits (1)  on Notes Payable (1)  Earnings (1) 
Callable brokered CDs $298,641  $  $298,641 
Medium-term notes     294   294 
          
  $298,641  $294  $298,935 
          
(1)Changes in fair value for the year ended December 31, 2007 include interest expense on callable brokered CDs of $227.5 million, and interest expense on medium-term notes of $0.8 million. Interest expense on callable brokered CDs and medium-term notes that the Corporation has elected to carry at fair value under the provisions of SFAS 159 are recorded in interest expense in the Consolidated Statements of Income based on their contractual coupons.

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     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 year ended December 31, 2007.
Level 3 Instruments Only
         
  Total Fair Value Measurements (Year ended December 31, 2007) 
(In thousands) Derivatives (1)  Securities Available For Sale (2) 
Beginning balance $9,088  $370 
Total losses (realized/unrealized):       
Included in earnings  (3,985)   
Included in other comprehensive income     (28,407)
New instruments acquired     182,376 
Principal repayments and amortization     (20,661)
Transfers in and/or out of Level 3      
       
Ending balance $5,103  $133,678 
       
(1)Amounts related to the valuation of interest rate cap agreements which were carried at fair value prior to the adoption of SFAS 159.
(2)Amounts mostly related to certain available for sale securities collateralized by loans acquired in the first quarter of 2007 as part of the recharacterization of certain secured commercial loans.

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     The table below summarizes changes in unrealized losses recorded in earnings for the year ended December 31, 2007 for Level 3 assets and liabilities that are still held as of December 31, 2007.
Level 3 Instruments Only
     
  Changes in Unrealized Losses
(Year ended December 31, 2007)
(In thousands) Derivatives (1)
Changes in unrealized losses relating to assets still held at reporting date(2):
    
 
Interest income on loans $440 
Interest income on investment securities  3,545 
   
  $3,985 
    
(1)Amount represents valuation of interest rate cap agreements which were carried at fair value prior to the adoption of SFAS 159.
(2)Unrealized losses of $28.4 million on Level 3 available for sale securities were recognized as part of other comprehensive income.
     During 2007, the Corporation did not recognized any realized gain or loss for Level 3 financial instruments.
     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 December 31, 2007 no impairment or valuation adjustment was recognized for assets recognized at fair value on a non-recurring basis, except for certain loans as shown in the following table:
             
          Year ended
  Carrying value as of December 31, 2007 December 31, 2007
(In thousands) Level 1 Level 2 Level 3 Total Losses
Loans (1) $— $59,418  $— $5,187 
(1)Relates to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of SFAS 114 .
     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 that 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, as follows:instrument.
Cash and due from banks and money market investments
     The carrying amount of cash and due from banks and money market investments are reasonable estimates of their fair value. Money market investments include held-to-maturity U.S. Government obligations which have a contractual maturity of three months or less. The fair value of these securities is based on market prices provided by recognizedreputable broker dealers.
Investment securities available for sale and held to maturity
     The fair value of investment securities is the market value based on quoted market prices, andwhen available, or market prices provided by recognized broker dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use unobservable inputs due to the limited market activity of the instrument.

140F-53


Other Equity Securities
     Equity or other securities that do not have a readily available fair value are stated at the lower of cost ornet realizable value. This category is principally composed of stock that is owned by the Corporation to comply with Federal Home Loan Bank (FHLB) regulatory requirements. Their realizable value equals their cost.
Loans receivable, including loans held for sale
     The fair value of all loans was estimated using discounted present values. Loans were classified by type such as commercial, residential mortgage, credit cards and automobile. These asset categories were further segmented into fixed- and adjustable-rate categories and by accruing and non-accruing groups. Performing floating-ratecategories. Floating-rate loans were valued at book value if they reprice at least once every three months, as were performing credit lines. The fair value of fixed-rate performing loans was calculated by discounting expected cash flows through the estimated maturity date. Recent prepayment experience was assumed to continue for fixed-rate non-residential loans. For residential mortgage loans, auto loansprepayment estimates were based on prepayment experiences of generic U.S. mortgage-backed securities pools with similar characteristics (eg. coupon and personal loans. Other loans assumed little or no prepayment. Prepayment estimates wereseasonality) and adjusted based on the Corporation’s historical data for similar loans.data. Discount rates were based on the Treasury Yield Curve at the date of the analysis, with an adjustment, which reflects the risk and other costs inherent in the loan category.
     Non-accruingFor impaired collateral dependent loans, covered by a specific loan loss allowance were viewed as immediate losses and were valued at zero. Other non-accruing loans were assumed to be repaid after one year. Presumably this would occur either because the loanimpairment was measured based on the fair value of the collateral, which is repaid, collateral has been sold to satisfyderived from appraisals that take into consideration prices in observable transactions involving similar assets in similar locations, in accordance with the loan or because general reserves are applied to it. The principalprovisions of non-accruing loans not covered by specific reserves was discounted for one year at the going rate for similar new loans.SFAS 114.
     Deposits
     The estimated fair value of demand deposits and savings accounts, which are the deposits with no defined maturities, equalequals the amount payable on demand at the reporting date. For deposits with stated maturities, but that reprice at least quarterly, the fair value is also estimated to be the recorded amounts at the reporting date.
     The fair valuevalues of fixed-rate retail 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 are based on contractual maturities; no early repayments are assumed. Discount rates are 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, 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 for the CDs with callable option components, a well-acceptedan industry-standard approach for valuing instruments with interest rate call options. The model assumes that the embedded options are exercised economically. 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 and value the cancellation option in the deposits. Effective January 1, 2007, the Corporation updated its methodology to calculate the impact of its own credit standing.
     Federal funds purchased and securities sold under agreements to repurchase

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     Federal funds purchased and 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 from brokers of the cost of unwinding the transactions as of December 31, 2005.2007. Securities sold under agreements to repurchase are collateralized by investment securities.

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     Advances from FHLB
     The fair value of advances from FHLB with fixed maturities areis determined using discounted cash flow analyses over the full term of the borrowings, or using indications from brokers of the fair value of similar transactions. The cash flows assumed 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 collateralized by mortgage loans and to a lesser extent investment securities.
     Interest rate swapsDerivative instruments
     The fair value of the interest rate swaps werederivative instruments was provided by valuation experts and counterparties. Certain derivatives with limited market activity are valued using externally developed models that consider unobservable market parameters.
     Term notes payable and subordinated notes
     The fair value of term notes is determined using a discounted cash flow analysis over the full term of the borrowings. TheThis valuation also uses athe “Hull-White Interest Rate Tree” approach forto value the option components of the term notes, a well accepted methodology for valuing interest rate options.notes. The model assumes that the embedded options are exercised economically. The fair value of medium-term notes is computed using the notional amount of outstanding notional.outstanding. The discountingdiscount rates used in valuationthe 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.
Effective January 1, 2007, the Corporation updated its methodology to calculate the impact of its own credit standing. The net gain from fair value of subordinatedchanges attributable to the Corporation’s own credit to the medium-term notes was determinedfor which the Corporation has elected the fair value option amounted to $1.6 million for year ended December 31, 2007. For the medium-term notes the credit risk is measured using discounted cash flow analyses over the full termdifference in yield curves between Swap rates and Treasury rates at a tenor comparable to the time to maturity of the borrowings.note and option.
     Other borrowings
     Other borrowings consist of junior subordinated debentures and a loan payable. These instruments reprice quarterlydebentures. The market value was based on three-month LIBOR, therefore, outstanding balances were assumed to be their fair values.market prices provided by reputable broker dealers.

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Note 2928 — Supplemental Cash Flow Information
     Supplemental cash flow information follows:

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 Year Ended December 31, Year Ended December 31,
 2005 2004 2003 2007 2006 2005
 (Dollars in thousands) (In thousands)
Cash paid for:  
Interest $555,870 $278,596 $231,953 
Interest on borrowings $721,545 $720,439 $559,642 
Income tax 44,536 51,480 23,027  10,142 91,779 44,536 
  
Non-cash investing and financing activities:  
Additions to other real estate owned 3,904 8,089 3,473  17,108 2,989 3,904 
Additions to auto repossessions 48,967 43,787 34,849  104,728 113,609 72,891 
Mortgage loans securitized and transferred to securities available-for-sale  51,107  
Capitalization of servicing assets 1,285 1,121 1,481 
Recharacterization of secured commercial loans as securities collateralized by loans 183,830   
Note 3029 — Commitments to Extend Credit, Standby Letters of Credit and Commitments to Purchase and Sell LoansContingencies
     The following table presents a detail of commitments to extend credit, standby letters of credit and commitments to purchase and sell loans and other commitments:loans:
                
 December 31, December 31,
 2005 2004 2007 2006
 (Dollars in thousands) (In thousands)
Financial instruments whose contract amounts represent credit risk:  
Commitments to extend credit:  
To originate loans $619,943 $359,144  $455,136 $539,267 
Unused credit card lines 144,066 105,719  19 21,474 
Unused personal lines of credit 36,240 25,270  61,731 50,279 
Commercial lines of credit 1,012,549 807,852  1,109,661 1,331,823 
Commercial letters of credit 77,122 71,945  41,478 40,915 
Standby letters of credit 136,502 99,134  112,690 97,319 
Commitments to purchase loans 1,650,000 2,200,000 
Commitments to sell loans 50,000 71,128  11,801 55,238 
Other commitments 5,000  
     The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Management uses the same credit policies in makingentering into commitments and conditional obligations as it does for on-balance sheet instruments.
     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. These commitments generally expire within one year. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. 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. The amount of collateral, obtained if deemed necessary by the Corporation upon extension of credit, is based on Management’smanagement’s credit evaluation of the borrower. Rates

F-56


charged on the loans that are finally disbursed are the rates being offered at the time the loans are closed; therefore, no fee is charged on these commitments. The fee is the amount that is used as the estimate of the fair value of commitments.
     In general, commercial and standby letters of credit are issued to facilitate foreign and domestic trade transactions. Normally, commercial and standby letters of credit are short-term commitments used to

143


finance commercial contracts for the shipment of goods. The collateral for these letters of credit includes cash or available commercial lines of credit. The fair value of commercial and standby letters of credit is based on the fees currently charged for such agreements, which atas of December 31, 20052007 and 20042006 was not significant.
     Commitments to purchase loans represent the outstanding commitments for the purchase of mortgage loans from local financial institutions. Previous and subsequent purchases related to these commitments were recharacterized as secured loans to local financial institutions collateralized by real estate mortgages and pass-through trust certificates. The remaining outstanding balances on these commitments were cancelled in 2006.
     Commitments to sell loans represent commitments entered into under agreements with FNMA and FHLMC for the sale, at fair value, of residential mortgage loans originated by the Corporation.
Note 3130 — Derivative Instruments and Hedging Activities
     The primary market risk facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of its assets or liabilities and the risk that net interest income from its loan and investment portfolios will change in response to changes in interest rates. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.
     The Corporation uses various financial instruments, including derivatives, to manage the interest rate risk related primarily to the values of its brokered CDs and medium-term notes.
     The Corporation designates a derivative as held for hedgingeither a fair value hedge, cash flow hedge or non hedging purposesas an economic undesignated hedge when it enters into the derivative contract. Derivatives utilizedAs part of the interest rate risk management, the Corporation has entered into a series of interest rate swap agreements. Under the interest rate swaps, the Corporation agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. Net interest settlements on interest rate swaps and unrealized gains and losses arising from changes in fair value are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being hedged. As of December 31, 2007, all derivatives held by the Corporation include, among others,were considered economic undesignated hedges.
     Effective January 1, 2007, the Corporation adopted SFAS 159 for its callable brokered CDs and a portion of its callable fixed medium-term notes that were hedged with interest rate swaps index options,following fair value hedge accounting under SFAS 133. Interest rate risk on the callable brokered CDs and medium-term notes elected for the fair value option under SFAS 159 continues to be economically hedged with callable interest rate cap agreements.
swaps. Prior to the implementation of SFAS 159, the Corporation had been following the long-haul method of accounting under SFAS 133, which was adopted on April 3, 2006, for its portfolio of callable interest rate swaps, callable brokered CDs and callable notes. The long-haul method requires periodic assessment of hedge effectiveness and measurement of ineffectiveness. The ineffectiveness results to the extent that changes in the fair value of a derivative do not offset changes in the fair value of the hedged item. The Corporation uses derivative instrumentsrecognized, as a reduction to interest expense, approximately $4.7 million for the year ended December 31, 2006, representing ineffectiveness on derivatives that qualified as fair value hedges under SFAS 133.
     In addition, effective on January 1, 2007, the Corporation discontinued the use of fair value hedge accounting under SFAS 133 for an interest rate swap that hedged a $150 million medium-term note. The Corporation’s decision was based on the determination that the interest rate swap was no longer effective in offsetting the changes in the normal coursefair value of businessthe $150 million medium-term note. After the discontinuance of hedge accounting, the basis adjustment, which represents the basis differential between the market value and the book value of the $150 million medium-term note recognized at the inception of fair value hedge accounting on April 3, 2006, as well as changes in fair value recognized after the inception until the discontinuance of fair value hedge accounting on January 1, 2007, was being amortized or accreted over the remaining life of the liability as a yield adjustment. The $150 million medium-term note was redeemed prior to reduce its own exposure to fluctuations in interest rates.maturity during the second quarter of 2007.

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     The following table summarizes the notional amount of all derivative instruments as of December 31, 20052007 and 2004.2006:
                
 Notional Amount  Notional Amount 
 December 31,  December 31, 
 2005 2004  2007 2006 
 (Dollars in thousands)  (In thousands) 
Interest rate swap agreements:  
Pay fixed versus receive floating $109,320 $113,165  $80,212 $80,720 
Receive fixed versus pay floating 5,751,128 4,118,615  4,164,261 4,802,370 
Embedded written options 13,515 13,515  53,515 13,515 
Purchased options 13,515 13,515  53,515 13,515 
Written interest rate cap agreements 150,200 25,000  128,075 125,200 
Purchased interest rate cap agreements 386,750 250,043  294,982 330,607 
          
 $6,424,428 $4,533,853  $4,774,560 $5,365,927 
          
          AtThe following table summarizes the notional amount of all derivatives by the Corporation’s designation as of December 31, 2005, the fair value2007 and 2006:
         
  Notional amounts 
  As of  As of 
  December 31,  December 31, 
  2007  2006 
  (In thousands) 
Economic undesignated hedges:        
Interest rate swaps used to hedge fixed rate certificates of deposit, notes payable and loans $4,244,473  $336,473 
Embedded options on stock index deposits  53,515   13,515 
Purchased options used to manage exposure to the stock market on embedded stock index options  53,515   13,515 
Written interest rate cap agreements  128,075   125,200 
Purchased interest rate cap agreements  294,982   330,607 
       
Total derivatives not designated as hedges  4,774,560   819,310 
       
         
Designated hedges:        
Fair value hedge:        
Interest rate swaps used to hedge fixed-rate certificates of deposit $  $4,381,175 
Interest rate swaps used to hedge fixed- and step-rate notes payable     165,442 
       
Total fair value hedges     4,546,617 
       
         
Total $4,774,560  $5,365,927 
       
     As of December 31, 2007, derivatives not designated or not qualifying as a hedge representedwith a positive fair value of $15.8$14.7 million (2004(2006$12.2$15.0 million) and a negative fair value of $158.1$67.2 million (2004(2006$72.2$16.3 million) were recorded as “Other Assets” and “Other Liabilities”“Accounts payable and other liabilities”, respectively, in the Consolidated Statements of Financial Condition with fluctuations inCondition. As of December 31, 2006, derivatives qualifying for fair value hedge accounting with a negative fair value of $126.7 million were recorded as “Accounts payable and other liabilities” in earnings.the Consolidated Statements of Financial Condition.

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     Interest rate swaps generally involve the exchange of fixed- and variable-rate interest payments between two parties, based on a common notional amount and maturity date. The Corporation usesDerivative instruments, such as interest rate swaps, primarily as economic hedges. At December 31, 2005, theseare subject to market risk. The Corporation’s derivatives are mainly composed of interest rate swaps were not qualified by the Corporation for hedge accounting treatment. The majority of the swapsthat are used as economic hedgesto convert the fixed interest rate paymentspayment on certain of its debt obligations (i.e., mainly brokered certificates of deposit and medium-term notes)notes to variable payments (receive fixed/pay floating). As is the case with investment securities, the market value of derivative instruments is largely a floating rate. The Corporation receivesfunction of the fixed and pays various LIBOR-based floatingfinancial market’s expectations regarding the future direction of interest rates. Also,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 as well as the level of interest rates. In addition, effective January 1, 2007 the Corporation receivesadopted SFAS 159 for a fixed-rate onsubstantial portion of its brokered certificates of deposit portfolio and certain assets (i.e., loans and corporate bonds) and converts the cash flows to a floating rate. Changesmedium-term notes for which changes in the fair value of these derivatives and the interest payments exchanged are recognizedalso recorded in earnings as interest income or interest expense depending upon whether an asset or liability is being economically hedged.current period earnings.

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     A summary of the typesinterest rate swaps as of swaps used at December 31, 20052007 and 20042006 follows:
                
 December 31, December 31,
 2005 2004 2007 2006
 (Dollars in thousands) (Dollars in thousands)
Pay fixed/receive floating: 
Pay fixed/receive floating (generally used to economically hedge variable rate loans): 
Notional amount $109,320 $113,165  $80,212 $80,720 
Weighted average receive rate at year end  6.41%  4.39%  7.09%  7.38%
Weighted average pay rate at year end  6.60%  6.97%  6.75%  6.37%
Floating rates range from 175 to 252 basis points over LIBOR rate 
Floating rates range from 167 to 252 basis points over 3-month LIBOR rate 
                
 December 31, December 31,
 2005 2004 2007 2006
 (Dollars in thousands) (Dollars in thousands)
Receive fixed/pay floating: 
Receive fixed/pay floating (generally used to economically hedge fixed-rate brokered CDs and notes payable): 
Notional amount $5,751,128 $4,118,615  $4,164,261 $4,802,370 
Weighted average receive rate at year end  4.90%  5.17%  5.26%  5.16%
Weighted average pay rate at year end  4.37%  2.33%  5.07%  5.42%
Floating rates range from minus 5 basis points to 20 basis points over LIBOR rate 
Floating rates range from minus 5 basis points to 11 basis points over 3-month LIBOR rate 
     The changes in notional amount of interest rate swaps outstanding during the years ended December 31, 20052007 and 20042006 follows:
        
 Notional amount  Notional amount 
 (Dollars in thousands)  (Dollars in thousands) 
Pay-fixed and receive-floating swaps:  
Balance at December 31, 2003
 $118,165 
Canceled and matured contracts  (5,000)
   
Balance at December 31, 2004
 113,165 
Balance at December 31, 2005
 $109,320 
Canceled and matured contracts  (44,565)  (28,600)
New contracts 40,720   
      
Balance at December 31, 2005
 $109,320 
Balance at December 31, 2006
 80,720 
Canceled and matured contracts  (508)
New contracts  
   
Balance at December 31, 2007
 $80,212 
      
  
Receive-fixed and pay floating swaps:  
Balance at December 31, 2003
 $2,872,372 
Balance at December 31, 2005
 $5,751,128 
Canceled and matured contracts  (849,473)  (948,758)
New contracts 2,095,716   
      
Balance at December 31, 2004
 4,118,615 
Balance at December 31, 2006
 4,802,370 
Canceled and matured contracts  (549,302)  (638,109)
New contracts 2,181,815   
      
Balance at December 31, 2005
 $5,751,128 
Balance at December 31, 2007
 $4,164,261 
      

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     The decrease in the notional amount of derivative instruments during 2007 is partially due to: (1) the termination of certain interest rate swaps that were no longer economically hedging brokered CDs as the notional balances exceeded those of the brokered CDs, and (2) the termination of an interest rate swap that economically hedged the $150 million medium-term note redeemed during the second quarter of 2007. The notional amount of the interest rate swaps previously held to economically hedge brokered CDs that were cancelled during 2007 amounted to $142.2 million with a weighted-average pay-rate of 5.38% and a weighted-average receive-rate of 5.22%. The interest rate swap previously held to economically hedge the $150 million medium-term note had a notional amount of $150.0 million with a pay-rate of 6.00% and a receive-rate of 5.54% at the time of cancellation.
     Indexed options are generally over-the-counter (OTC) contracts that the Corporation enters into in order to receive the appreciation of a specified Stock Index (i.e.(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.

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     Interest rate caps are option-like contracts that require the writer, (“seller”)i.e., the seller, to pay the purchaser at specified future dates the amount, if any, by which a specified market interest rate exceeds the fixed cap rate, applied to a notional principal amount.
     To satisfy the needneeds of its customers, the Corporation may enter into non-hedging transactions. TheseOn these transactions, are structured with the same terms and conditions andgenerally, the Corporation participates as a buyer in one of the agreements and as the seller in the other agreements.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.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 Corporation views its derivative strategy as a prudent management of interest-rate sensitivity, by reducing the risk on earnings presented by changes in interest rates.
Interest-Rate Credit and Market Risk
     The Corporation uses derivative instruments to manage interest rate risk. By using derivative instruments, the Corporation is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the Corporation’s fair value gain in the derivative. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty owes the Corporation and, therefore, creates a credit risk for the Corporation. When the fair value of a derivative instrument contract is negative, the Corporation owes the counterparty and, therefore, it has no credit risk. The Corporation minimizes the credit risk in derivative instruments by entering into transactions with recognizedreputable broker dealers that are reviewed periodically by the Corporation’s Management’s Investment Committee.and Asset Liability Committee (MIALCO) and by the Board of Directors. The Corporation also maintains a policy of requiring that all derivative instrument contracts be governed by an International Swaps and Derivatives Association Master Agreement, which includes a provision for netting; most of the Corporation’s agreements with derivative counterparties include bilateral collateral arrangements. The bilateral collateral arrangement permits the counterparties to perform margin calls in the form of cash or securities in the event that the fair market value of the derivative favors either counterparty. The book value and aggregate market value of securities pledged as collateral for interest rate swaps atas of December 31, 20052007 was $215$255 million and $212$253 million, respectively (2004(2006$168$345 million and $168$355 million, respectively). The Corporation has a policy of diversifying derivatives counterparties to reduce the risk that any counterparty will default.
     At December 31, 2005, interest rate swap agreements used as economic hedges were substantially matched. The Corporation has credit risk of $15.8$14.7 million (2004(2006$12.2$15.0 million) related to derivative instruments with positive fair values. The credit risk does not consider the value of any collateral and the effects of legally enforceable master netting agreements. There were no credit losses associated with derivative instruments classified as non-hedgingdesignated hedges or undesignated economic hedges for the years ended December 31, 2005, 20042007 and 2003. At both2006. As of December 31, 20052007 and 2004,2006, there were no derivative counterparties in default. AtAs of December 31, 2005,2007, the Corporation’sCorporation had a total net receivable of $19,560,791 (2004$8.4 million (2006$20,713,350)$5.4 million) related to the swap transactions with no receivablesand a total net receivable related to other derivative instruments.instruments of $0.4 million (2006 — $0.6 million). The net

F-60


settlements receivable and net settlements payable on interest rate swaps are included as part of “Other Assets” and “Other Liabilities”“Accounts payable and other liabilities”, respectively, on the Consolidated Statements of Financial Condition.
     Market risk is the adverse effect that a change in interest rates or implied volatility rates has on the value of a financial instrument. The Corporation manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken.

146


     The Corporation’s derivative activities are monitored by the Asset/Liability and Investment CommitteeMIALCO as part of its risk-management oversight of the Corporation’s treasury functions.
Note 3231 — Segment Information
     Based upon the Corporation’s organizational structure and the information provided to the Chief Operating Decision Maker and to a lesser extent the Board of Directors, the operating segments are driven primarily by the Corporation’s legal entities. AtAs of December 31, 2005,2007, the Corporation had four reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; and Treasury and Investments, as well as an Other category reflecting other legal entities reported separately.separately on aggregate basis. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Corporation’s organizational chart, nature of the products, distribution channels and the economic characteristics of the products were also considered in the determination of the reportable segments.
     The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers represented by the public sector and specialized and middle-market clients. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, and other products such as cash management and business management services. The Mortgage Banking segment’s 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 are purchased from other local banks or mortgage brokers. 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 Investment segment is responsible for the Corporation’s investment portfolio and treasury functions executed to manage and enhance liquidity. This segment loans funds to the Commercial and Corporate Banking;Banking, Mortgage Banking;Banking and Consumer (Retail) Banking segments to finance their lending activities and borrows from those segments.
The Consumer (Retail) Banking segment also loans funds to other segments. The interest rates charged or credited by Treasury and Investments and the Consumer (Retail) Banking segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The Other category is mainly composed of insurance, finance leases and other products.
     The accounting policies of the segments are the same as those described in Note 1 “Nature of Business and Summary of Significant Accounting Policies.”Policies”.
     The Corporation evaluates the performance of the segments based on net interest income after the estimated provision for loan and lease losses, othernon-interest income and direct operatingnon-interest expenses. The segments are also evaluated based on the average volume of their earninginterest-earning assets less the allowance for loan and lease losses.

F-61


     The only intersegment transaction is the net transfer of funds by the Treasury and Investment segment to other segments. The Treasury and Investment segment loans funds to the Consumer; Mortgage Banking and Commercial and Corporate Banking segments to finance their lending activities and borrows funds from those segments. The interest rates charged or credited by Investment and Treasury are based on market rates.
     The following table presents information about the reportable segments:

147


                                                
 Mortgage Commercial and Treasury and      Mortgage Consumer Commercial and Treasury and     
 Banking Consumer Corporate Investments Other Total  Banking (Retail) Banking Corporate Investments Other Total 
 (Dollars in thousands)  (In thousands) 
For the year ended December 31, 2005
 
For the year ended December 31, 2007
 
Interest income $107,364 $176,007 $406,433 $293,437 $84,349 $1,067,590  $165,159 $184,353 $425,109 $284,165 $130,461 $1,189,247 
Net (charge) credit for transfer of funds  (68,328) 78,029  (252,982) 255,955  (12,674)    (126,145) 101,391  (289,201) 336,150  (22,195)  
Interest expense   (53,253)   (570,056)  (11,962)  (635,271)   (80,404)   (624,840)  (32,987)  (738,231)
                          
Net interest income 39,036 200,783 153,451  (20,664) 59,713 432,319  39,014 205,340 135,908  (4,525) 75,279 451,016 
                          
Provision for loan losses (2,060)  (34,002)  (2,699)   (11,883)  (50,644)
Other income 3,948 23,055 5,649 12,875 17,549 63,076 
Direct operating expenses  (15,431)  (77,317)  (10,498)  (5,017)  (32,693)  (140,956)
Provision for loan and lease losses  (1,645)  (55,633)  (41,176)   (22,156)  (120,610)
Non-interest income (loss) 3,019 27,314 3,778  (2,161) 17,634 49,584 
              
Segment income $25,493 $112,519 $145,903 $(12,806) $32,686 $303,795 
Net gain on partial extinguishment and recharacterization of secured commercial loans to a local financial institution   2,497   2,497 
Direct non-interest expenses  (21,816)  (94,122)  (23,161)  (7,842)  (45,409)  (192,350)
             
Segment income (loss) $18,572 $82,899 $77,846 $(14,528) $25,348 $190,137 
                          
Average earning assets $1,634,845 $1,706,647 $7,299,878 $6,027,745  $785,325 $17,454,440  $2,558,779 $1,824,661 $5,471,097 $5,401,148 $1,312,669 $16,568,354 
                          
  
For the year ended December 31, 2004
 
For the year ended December 31, 2006
 
Interest income $77,513 $138,046 $195,634 $232,154 $46,987 $690,334  $148,811 $201,609 $472,179 $350,038 $116,176 $1,288,813 
Net (charge) credit for transfer of funds  (49,781) 54,289  (88,760) 92,153  (7,901)    (105,431) 108,979  (317,446) 334,149  (20,251)  
Interest expense   (40,344)   (252,509)   (292,853)   (72,128)   (747,402)  (25,589)  (845,119)
                          
Net interest income 27,732 151,991 106,874 71,798 39,086 397,481  43,380 238,460 154,733  (63,215) 70,336 443,694 
                          
Provision for loan losses  (648)  (27,443)  (14,147)   (10,562)  (52,800)
Other income 4,045 24,597 6,915 11,140 12,927 59,624 
Direct operating expenses  (12,437)  (66,793)  (8,112)  (3,205)  (18,182)  (108,729)
Provision for loan and lease losses  (3,988)  (35,482)  (7,936)   (27,585)  (74,991)
Non-interest income (loss) 2,471 23,543 4,590  (8,313) 19,685 41,976 
Net loss on partial extinguishment of secured commercial loans to a local financial institution    (10,640)    (10,640)
Direct non-interest expenses  (17,450)  (86,905)  (16,917)  (7,677)  (43,890)  (172,839)
                          
Segment income $18,692 $82,352 $91,530 $79,733 $23,269 $295,576 
Segment income (loss) $24,413 $139,616 $123,830 $(79,205) $18,546 $227,200 
                          
Average earning assets $1,120,554 $1,327,165 $5,141,144 $5,294,065 $288,167 $13,171,095  $2,283,683 $1,919,083 $6,298,326 $6,787,581 $1,156,712 $18,445,385 
                          
  
For the year ended December 31, 2003
 
For the year ended December 31, 2005
 
Interest income $69,687 $143,786 $147,250 $148,558 $40,185 $549,466  $107,364 $176,007 $406,433 $293,437 $84,349 $1,067,590 
Net (charge) credit for transfer of funds  (45,234) 17,399  (51,113) 87,209  (8,261)    (68,328) 78,029  (252,982) 255,955  (12,674)  
Interest expenses   (46,287)   (251,391) 150  (297,528)   (53,253)   (570,056)  (11,962)  (635,271)
                          
Net interest income 24,453 114,898 96,137  (15,624) 32,074 251,938  39,036 200,783 153,451  (20,664) 59,713 432,319 
                          
Provision for loan losses  (319)  (18,997)  (24,677)   (11,923)  (55,916)
Other income 3,246 52,128 7,053 36,014  8,357 106,798 
Direct operating expenses  (6,540)  (67,470)  (7,388)  (2,452)  (15,589)  (99,439)
Provision for loan and lease losses  (2,060)  (34,002)  (2,699)   (11,883)  (50,644)
Non-interest income (loss) 3,948 23,055 5,649 12,875 17,549 63,076 
Direct non-interest expenses  (15,431)  (77,317)  (10,498)  (5,017)  (32,693)  (140,956)
                          
Segment income $20,840 $80,559 $71,125 $17,938 $12,919 $203,381  $25,493 $112,519 $145,903 $(12,806) $32,686 $303,795 
                          
Average earning assets $943,225 $1,045,507 $3,942,226 $3,860,227 $234,119 $10,025,304  $1,634,845 $1,706,647 $7,299,878 $6,027,745 $785,325 $17,454,440 
                          
     The following table presents a reconciliation of the reportable segment financial information to the consolidated totals:
                        
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (In thousands) 
Net Income:  
Total income for segments and other $303,795 $295,576 $203,381  $190,137 $227,200 $303,795 
Other non-interest income 15,075   
Other operating expenses  (174,175)  (71,751)  (65,190)  (115,493)  (115,124)  (174,175)
              
Income before income taxes 129,620 223,825 138,191  89,719 112,076 129,620 
Income taxes  (15,016)  (46,500)  (18,297)  (21,583)  (27,442)  (15,016)
              
Total consolidated net income $114,604 $177,325 $119,894  $68,136 $84,634 $114,604 
              
  
Average assets:  
Total average earning assets for segments $17,454,440 $13,171,095 $10,025,304  $16,568,354 $18,445,385 $17,454,440 
Average non earning assets 546,599 450,043 397,119  645,853 737,526 546,599 
              
Total consolidated average assets $18,001,039 $13,621,138 $10,422,423  $17,214,207 $19,182,911 $18,001,039 
              

148F-62


     The following table presents revenues and selected balance sheet data by geography based on the location in which the transaction is originated:
                        
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands (Dollars in thousands) 
Revenues:  
Puerto Rico $1,015,641 $714,237 $605,557  $1,045,523 $1,107,451 $1,015,641 
United States 52,384 48   123,064 133,083 52,384 
Other 62,642 35,673 50,708  87,816 79,615 62,642 
              
Total consolidated revenues $1,130,667 $749,958 $656,265  $1,256,403 $1,320,149 $1,130,667 
              
  
Selected Balance Sheet Information:  
  
Total assets:  
Puerto Rico $18,351,381 $15,239,658 $12,049,460  $14,633,217 $14,688,754 $17,697,563 
United States 728,265 3,999   1,540,808 1,742,243 1,382,083 
Other 838,005 393,388 629,582  1,012,906 959,259 838,005 
  
Loans:  
Puerto Rico $10,634,545 $9,336,121 $6,459,843  $9,413,118 $8,777,267 $10,634,545 
United States 1,271,698 13,379   1,448,613 1,594,141 1,271,698 
Other 779,686 348,494 581,212  938,015 892,572 779,686 
  
Deposits:  
Puerto Rico $10,998,192 $6,904,047 $5,932,764 
Puerto Rico (1) $9,484,103 $9,318,931 $10,998,192 
United States 476,166    532,684 580,917 476,166 
Other 989,394 1,008,275 839,105  1,017,734 1,104,439 989,394 

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(1)Includes brokered certificates of deposit used to fund activities conducted in Puerto Rico and in the United States.
Note 33 — Litigation32 —Litigations
     On August 25, 2005, the Corporation announced the receiptAs of a letter from the SEC in which the SEC indicated that it was conducting an informal inquiry into the Corporation. On October 21, 2005, the Corporation announced that the SEC had issued a formal order of investigation into the accounting for the mortgage–related transactions with Doral Financial Corporation and R&G Financial. The Corporation has fully cooperated with the SEC’s investigation.
December 31, 2007, First BanCorp has been engaged in discussions with the staff of the SEC regarding a possible resolution toand its investigation relating to the Corporation’s restatement of its financial statements, and has accrued $8.5 million in its consolidated financial statements for the year ended December 31, 2005 in connection with a potential settlement of the SEC staff’s investigation of the Corporation. Any settlement is subject to the approval of the Commission of the SEC by the Commission. There can be no assurance that the Corporation’s efforts to resolve the SEC’s investigation with respect to the Corporation will be successful, or that the amount accrued will be sufficient, and the Corporation cannot predict at this time the timing or final terms of any settlement. This contingency is included in the Statement of Income as Provision for contingencies.
     Following the announcement of the Audit Committee’s review, the Corporation and certain of its officers and directors and former officers and directorssubsidiaries were named as defendants in five separate securities class actions filed between October 31, 2005 and December 5, 2005, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. At present, all securities class actions have been consolidated into one case named “In Re: First BanCorp Securities Litigations” currently pending before the U.S. District Court for the District of Puerto Rico. The Corporation has been engaged in discussions with lead plaintiffs through private mediation proceedings. The Corporation accrued $74.25 million in its consolidated financial statements for the year ended December 31, 2005 in connection with a potential settlement. This contingency is included in the Statement of Income as Provision for contingencies.
     Between November 8, 2005 and March 7, 2006 several shareholders of the Corporation commenced five separate derivative actions against certain current and former executive officers and directors of the Corporation. In these actions, the Corporation was included as a nominal defendant. These actions were filed pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and alleged, among other things, a breach of fiduciary duty on behalf of the defendants. All shareholder derivative actions were consolidated into one case named “In Re: First BanCorp Derivative Litigation” which was dismissed on November 30, 2006 before the U.S. District Court for the District of Puerto Rico.
     In addition, the Corporation is a defendant in a number ofvarious legal proceedings arising in the normalordinary course of business. Management believes based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.operations, except as described below.
     On August 7, 2007, First BanCorp announced that the SEC approved a final settlement with the Corporation, which resolved the previously disclosed SEC investigation of the Corporation’s accounting for the mortgage-related transactions with Doral and R&G Financial. The Corporation had announced on December 13, 2005 that management, with the concurrence of the Board of Directors, had determined to restate its previously reported financial statements to correct its accounting for the mortgage-related transactions. In August 2006, the Audit Committee completed its review and the Corporation filed the Amended 2004 Form 10-K with the SEC on September 26, 2006, the 2005 Form 10-K on February 9, 2007 and the 2006 Form 10-K on July 9, 2007.
     Under the settlement with the SEC, the Corporation agreed, without admitting or denying any wrongdoing, to the issuance of a Federal Court Order enjoining it from committing future violations of the federal securities laws. The Corporation also agreed to the payment of an $8.5 million civil penalty and the disgorgement of $1 to the SEC. The SEC may request that the civil penalty be subject to distribution pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. The monetary payment had no impact on the Corporation’s earnings or capital in 2007. As reflected in First BanCorp’s previously filed audited Consolidated Financial Statements for 2005, the Corporation accrued $8.5 million in 2005 for the potential settlement with the SEC. In connection with the settlement, the Corporation consented to the entry of a final judgment to implement the terms of the agreement.

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     The United States District Court for the Southern District of New York consented to the entry of the final judgment in order to consummate the settlement. The monetary payment was made on October 15, 2007.
     On November 28, 2007, the United States District Court for the District of Puerto Rico approved the settlement of all claims in the consolidated securities class action relating to the accounting for mortgage-related transactions named “In Re: First BanCorp Securities Litigation”.
     Under the terms of the settlement the Corporation paid an aggregate of $74.25 million. The monetary payment had no impact on the Corporation’s earnings or capital in 2007. As reflected in First BanCorp’s audited Consolidated Financial Statements, included in the Corporation’s 2005 Annual Report on Form 10-K, the Corporation accrued $74.25 million in 2005 for the potential settlement of the class action lawsuit. In 2007, the Corporation recognized income of approximately $15.1 million from an agreement reached with insurance companies and former executives of the Corporation for indemnity of expenses which were accounted for as “Insurance Reimbursements and Other Agreements Related to a Contingency Settlement” on the Consolidated Statement of Income, of which approximately $3.1 million had not been collected as of December 31, 2007 and are accounted for as Accounts Receivable included as part of “Other Assets” on the Consolidated Statement of Financial Condition.
Note 3433 — First BanCorp (Holding Company Only) Financial Information
     The following condensed financial information presents the financial position of the Holding Company only atas of December 31, 20052007 and 2004,2006, and the results of its operations and its cash flows for the years ended on December 31, 2005, 20042007, 2006 and 2003.2005.

150F-64


Statements of Financial Condition
                
 Year ended December 31,  Year ended December 31, 
 2005 2004  2007 2006 
 (Dollars in thousands)  (Dollars in thousands) 
Assets
  
 
Cash and due from banks $2,772 $18,050  $43,519 $14,584 
Money market instruments 300 196,200  46,293 300 
Investment securities available-for-sale, at market:  
Mortgage-backed securities 41,234  
Equity investments 29,421 55,197  2,117 12,715 
Other investment securities 1,425 1,375  1,550 1,425 
Loans receivable 74,914 95,146  2,597 65,161 
Investment in FirstBank Puerto Rico, at equity 1,316,380 1,149,551  1,457,899 1,338,023 
Investment in FirstBank Insurance Agency, at equity 5,953 2,799  4,632 2,982 
Investment in Ponce General, at equity 105,907   106,120 103,274 
Investment in PR Finance, at equity 3,005   2,979 2,623 
Accrued interest receivable 363 309  376 401 
Investment in FBP Statutory Trust I 3,093 3,093  3,093 3,093 
Investment in FBP Statutory Trust II 3,866 3,866  3,866 3,866 
Other assets 29,758 1,235  1,503 55,707 
          
Total assets $1,577,157 $1,526,821  $1,717,778 $1,604,154 
          
  
Liabilities & Stockholders’ Equity
  
  
Liabilities:  
Other borrowings $295,446 $321,692  $282,567 $288,269 
Accounts payable and other liabilities 83,870 796  13,565 86,332 
          
Total liabilities 379,316 322,488  296,132 374,601 
          
Commitments and contingencies 
     
Stockholders’ equity 1,197,841 1,204,333  1,421,646 1,229,553 
          
Total liabilities and stockholders’ equity $1,577,157 $1,526,821  $1,717,778 $1,604,154 
          

151F-65


Statements of Income
             
      Year ended December 31,    
  2005  2004  2003 
      (Dollars in thousands)     
Income:            
Interest income on investment securities $756  $395  $703 
Interest income on other investments  2,972   1,530   335 
Interest income on loans  4,188   2,159   274 
Dividends from FirstBank Puerto Rico  67,880   62,398   48,640 
Dividends from other subsidiaries  240   3,070    
Other income  417   138    
          
   76,453   69,690   49,952 
          
Expense:            
Federal funds purchased and repurchase agreements     2    
Notes payable and other borrowings  16,516   5,809   17 
Provision for loan losses  169       
Other operating expenses  83,904   825   641 
          
   100,589   6,636   658 
          
             
Gain on sale of investments, net  2,589   4,275   12,406 
          
             
Income (loss) before income tax provision and equity in undistributed earnings of subsidiaries  (21,547)  67,329   61,700 
             
Income tax provision  (29,011)  104   472 
             
Equity in undistributed earnings of subsidiaries  107,140   110,100   58,666 
          
             
Net income  114,604   177,325   119,894 
             
Other comprehensive income (loss), net of tax  (59,311)  7,823   1,746 
          
             
Comprehensive income $55,293  $185,148  $121,640 
          
The principal source of income for the Holding Company consists of the earning of FirstBank.
             
  Year ended December 31, 
  2007  2006  2005 
  (Dollars in thousands) 
Income:            
Interest income on investment securities $3,029  $349  $756 
Interest income on other investments  1,289   175   2,972 
Interest income on loans  631   3,987   4,188 
Dividends from FirstBank Puerto Rico  79,135   107,302   67,880 
Dividends from other subsidiaries  1,000   14,500   240 
Other income  565   543   417 
          
   85,649   126,856   76,453 
          
             
Expense:            
Notes payable and other borrowings  22,261   22,375   16,516 
Provision (recovery) for loan losses  1,300   (71)  169 
Other operating expenses  2,844   5,390   9,654 
          
   26,405   27,694   26,339 
          
Net (loss) gain on investments and impairments  (6,643)  (12,525)  2,589 
          
             
Net loss on partial extinguishment and recharacterization of secured commercial loans to a local financial institution  (1,207)      
          
Income before taxes and equity in undistributed earnings (losses) of subsidiaries  51,394   86,637   52,703 
Income tax (provision) benefit  (1,714)  1,381   53 
Equity in undistributed earnings (losses) of subsidiaries  18,456   (3,384)  61,848 
          
Net income  68,136   84,634   114,604 
Other comprehensive income (loss), net of tax  4,903   (14,492)  (59,311)
          
Comprehensive income $73,039  $70,142  $55,293 
          

152F-66


StatementStatements of Cash Flows
                        
 Year ended December 31,  Year ended December 31, 
 2005 2004 2003  2007 2006 2005 
 (Dollars in thousands)  (In thousands) 
Cash flows from operating activities:  
  
Net Income $114,604 $177,325 $119,894  $68,136 $84,634 $114,604 
              
  
Adjustments to reconcile net income to net cash provided by operating activities:  
Provision for loan losses 169   
Provision for deferred income taxes  (29,028)   
Equity in undistributed earnings of subsidiaries  (106,859)  (110,100)  (58,666)
Net gain on sale of investment securities  (10,963)  (6,974)  (18,066)
Provision (recovery) for loan losses 1,300  (71) 169 
Deferred income tax provision (benefit) 1,714  (2,572)  (70)
Equity in undistributed (earnings) losses of subsidiaries  (18,456) 3,384  (61,848)
Net loss (gain) on sale of investment securities 733  (2,726)  (10,963)
Loss on impairment of investment securities 8,374 2,699 5,660  5,910 15,251 8,374 
Net (increase) decrease in other assets  (276)  (7,629) 333 
Net increase (decrease) in other liabilities 82,872 461  (2,149)
Net loss on partial extinguishment and recharacterization of secured commercial loans to a local financial institution 1,207   
Accretion of discount on investment securities  (197)   
Net decrease (increase) in other assets 52,515  (52,372)  (276)
Net (decrease) increase in other liabilities  (72,639) 2,544 8,903 
              
Total adjustments  (55,711)  (121,543)  (72,888)  (27,913)  (36,562)  (55,711)
              
  
Net cash provided by operating activities 58,893 55,782 47,006  40,223 48,072 58,893 
              
  
Cash flows from investing activities:  
  
Capital contribution to subsidiaries  (110,000)  (100,000)  (150,000)    (110,000)
Principal collected on loans 9,002 9,052   1,622 9,824 9,002 
Loans originated   (99,343)  
Purchases of securities available-for-sale  (34,582)  (15,421)  (33,137)   (460)  (34,582)
Sales of available-for-sale investment securities and maturity of securities held-to-maturity 56,621 27,314 36,417 
Sales, pricipal repayments and maturity of available-for-sale and held-to-maturity securities 11,403 5,461 56,621 
Cash paid on acquisitions (103,670)       (103,670)
Other investing activities 687 687 458  437  687 
              
Net cash used by investing activities  (181,942)  (177,711)  (146,262)
Net cash provided by (used in) investing activities 13,462 14,825  (181,942)
              
  
Cash flows from financing activities:  
  
Proceeds from purchased funds and other short-term borrowings 944,374 681,444    123,247 944,374 
Repayments of purchased funds and other short-term borrowings  (970,717)  (591,276)    (5,800)  (130,522)  (970,717)
Proceeds from issuance of long-term debt  231,469  
Proceeds from issuance on preferred stock   182,999 
Issuance of common stock 91,924   
Payment to repurchase common stock  (965)       (965)
Exercise of stock options 2,094 4,956 1,120   19,756 2,094 
Cash dividends paid  (62,915)  (59,593)  (47,959)  (64,881)  (63,566)  (62,915)
              
Net cash (used) provided by financing activities  (88,129) 267,000 136,160 
Net cash provided by (used in) financing activities 21,243  (51,085)  (88,129)
              
  
Net (decrease) increase in cash and cash equivalents  (211,178) 145,071 36,904 
Net increase (decrease) in cash and cash equivalents 74,928 11,812  (211,178)
Cash and cash equivalents at the beginning of the year 214,250 69,179 32,275  14,884 3,072 214,250 
              
Cash and cash equivalents at end of the year $3,072 $214,250 $69,179  $89,812 $14,884 $3,072 
              
Cash and cash equivalents include:  
Cash and due from banks $2,772 $18,050 $17,808  $43,519 $14,584 $2,772 
Money market instruments 300 196,200 51,371  46,293 300 300 
              
 $3,072 $214,250 $69,179  $89,812 $14,884 $3,072 
              

153F-67


Note 3534Recent SignificantSubsequent Events
Audit Committee Review
     As previously announced on August 1, 2005, the Audit Committee (the “Committee”) of the Corporation determined that it should review the background and accounting for certain mortgage-related transactions that FirstBank had entered into between 1999 and 2005. The Committee retained the law firms of Clifford Chance U.S. LLP and Martínez Odell & Calabria and forensic accountants FTI Consulting Inc. to assist the Committee in its review. Subsequent to the announcement of the review, a number of significant events occurred, including the announcement of the restatement and other events described below. In August 2006, the Committee completed its review and the Amended 2004 Form 10-K for the fiscal year ended December 31, 2004 was filed with the SEC on September 26, 2006.
Governmental Action
SEC
On August 23, 2005, the Corporation received a letter from the SEC in which the SEC indicated that it was conducting an informal inquiry into the Corporation. The inquiry pertains to, among other things, the accounting for mortgage-related transactions with Doral and R&G during the calendar years 1999 through 2005.
On October 21, 2005, the Corporation announced that the SEC issued a formal order of investigation in its ongoing inquiry of the Corporation. The Corporation has cooperated with the SEC in connection with this investigation.
On September 26, 2006, the Corporation filed with the SEC the Amended 2004 Form 10-K which included restated financial information for the fiscal years 2000 through 2004.
First BanCorp has been engaged in discussions with the staff of the SEC regarding a possible resolution to its investigation of the Corporation’s restatement, and has accrued $8.5 million in its consolidated financial statements for the year ended December 31, 2005 in connection with a potential settlement of the SEC’s investigation of the Corporation. Any settlement is subject to the approval of the Commissioners of the SEC. There can be no assurance that the Corporation’s efforts to resolve the SEC’s investigation with respect to the Corporation will be successful, or that the amount accrued will be sufficient, and the Corporation cannot predict at this time the timing or final terms of any settlement.
Banking Regulators
Beginning in the Fall of 2005, the Corporation received inquiries from federal banking regulators regarding the status and impact of the restatement and related safety and soundness concerns.

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On December 6, 2005, the Commonwealth of Puerto Rico Commissioner of Financial Institutions (“Commissioner”) determined that the Corporation had exceeded the lending limit requirements of Section 17(a) of the Puerto Rico Banking Law which governs the amount a bank may lend to a single person, group or related entity. The Puerto Rico Banking Law also authorizes OCIF to determine other components which may be considered as part of a bank’s capital for purposes of establishing its lending limit. After consideration of other components, OCIF authorized the Corporation to retain the secured loans of Doral and R&G as it believed that these loans are secured by sufficient collateral to diversify, disperse and significantly diffuse the risks connected to such loans thereby satisfying the safety and soundness considerations mandated by Section 28 of the Puerto Rico Banking Law.
On December 7, 2005, the Corporation was advised by the FDIC that the revised classification of the mortgage-related transactions for accounting purposes resulted in such transactions being viewed for regulatory capital purposes as commercial loans to mortgage companies rather than mortgage loans secured by one-to-four family residential properties. FirstBank then advised the FDIC that pursuant to regulatory requirements, the revised classification of the mortgage transactions and the correction of the accounting for the interest rate swaps would cause FirstBank to be slightly below the well-capitalized level, within the meaning established by the FDIC. On March 17, 2006, the Corporation announced that FirstBank had returned to the well-capitalized level. The partial payment made by R&G (described below under Business Developments) contributed to return to the well-capitalized level.
In reaction to these earlier events, in February 2006, the OTS imposed restrictions on FirstBank Florida. Under these restrictions, FirstBank Florida cannot make any payments to the Corporation or its affiliates pursuant to a tax-sharing agreement nor can FirstBank Florida employ or receive consultative services from an executive officer of the Corporation or its affiliates without the prior written approval of the OTS’ Regional Director. Additionally, FirstBank Florida cannot enter into any agreement to sell loans or any portions of any loans to the Corporation or its affiliates nor can FirstBank Florida make any payment to the Corporation or its affiliates via an intercompany account or arrangement unless pursuant to a pre-existing contractual agreement for services rendered in the normal course of business. Also, FirstBank Florida can not pay dividends to its parent, First BanCorp, without prior approval from the OTS.
On March 17, 2006, the Corporation announced that it had agreed with the Board of Governors of the Federal Reserve System to a cease and desist order issued with the consent of the Corporation (the “Consent Order”). The Consent Order addresses certain concerns of banking regulators relating to the incorrect accounting for and documentation of mortgage-related transactions with Doral and R&G. The Corporation had initially reported those transactions as purchases of mortgage loans when they should have been accounted for as secured loans to the financial institutions because as a legal matter, they did not constitute “true sales” but rather financing arrangements. The Corporation also announced that FirstBank had entered into a similar agreement with the FDIC and the Commissioner (referred to together with the Consent Orders as the “Consent Orders”). The agreements, signed by all parties involved, did not impose any restrictions on the Corporation’s or FirstBank’s day-to-day banking and lending activities.
The Consent Orders with banking regulators imposed certain restrictions and reporting requirements on the Corporation and FirstBank. Under the Consent Order, FirstBank may not directly or indirectly enter into, participate in, or in any other manner engage certain transactions with any affiliate without the prior written approval of the FDIC. The Consent Orders require the Corporation and FirstBank to take various affirmative actions, including engaging an independent consultant to review the mortgage portfolios and prepare a report including findings and

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recommendations, submitting capital and liquidity contingency plans, providing notice prior to the incurring of additional debt or the restructuring or repurchasing of debt, obtaining approval prior to purchasing or redeeming stock, filing amended regulatory reports upon completion of the restatement of financial statements, and obtaining regulatory approval prior to paying dividends after those payable in March 2006. The Cease and Desist Order requirements have been substantially completed and submitted to the Regulators as required by the Consent Orders.
FirstBank received a letter dated May 24, 2006 from the FDIC regarding FirstBank’s failure to file with the FDIC its Part 363 annual report for the fiscal year ended December 31, 2005. On June 12, 2006, FirstBank notified the FDIC that it intended to file an amended 2004 Part 363 annual report and its 2005 Part 363 annual report after the Corporation filed this 2005 Form 10-K with the SEC.
Subsequent to the effectiveness of the Consent Orders, the Corporation and FirstBank have requested and obtained written approval from the Federal Reserve Board and the FDIC for the payment of dividends by FirstBank to its holding company, and for the payment of dividends by the Corporation to the holders of its preferred stock, common stock and trust preferred stock. The written approvals have been obtained in accordance with the Consent Order requirements.
On August 29, 2006, the Corporation announced that its subsidiary, FirstBank, consented and agreed to the issuance of a Cease and Desist Order by the FDIC (the “Order”) relating to the Bank’s compliance with certain provisions of the Bank Secrecy Act (the “BSA Consent Order”). The BSA Consent Order requires FirstBank to take various affirmative actions, including that FirstBank operate with adequate management supervision and Board of Directors’ oversight to prevent any future unsafe or unsound banking practices or violations of law or regulation, on BSA related matters; implementing systems of internal controls, independent testing and training programs to ensure full compliance with BSA and laws and regulations enforced by the Office of Foreign Assets Control (“OFAC”); designating a BSA and OFAC Officer, and amending existing policies, procedures and processes relating to internal and external audits to review compliance with BSA and OFAC provisions as part of routine auditing; engaging independent consultants to review account and transaction activity from June 1, 2005 to the effective date of the Order and to conduct a comprehensive review of FirstBank’s actions to implement the consent Order in order to assess the effectiveness of the policies, procedures and processes adopted by FirstBank; and appointing a compliance committee of the Board of Directors.
Since the beginning of 2006, FirstBank has been refining core areas of its risk management and compliance systems, and prior to this BSA Order has instituted a significant number of measures required by the BSA consent Order. The BSA consent Order did not impose any civil or monetary penalties, and does not restrict FirstBank’s current day-to-day banking operations.
New York Stock Exchange Listing
On April 13, 2006, the Corporation notified the NYSE that, given the delay in the filing of the Corporation’s 2005 Form 10-K, which required the postponement of the 2006 Annual Meeting of Stockholders, the Corporation was not going to distribute its annual report to shareholders by April 30, 2006. As a result, the Corporation is not in compliance with Section Rule 203.01,Annual Report Requirement, of the NYSE Listed Company Manual, which requires a listed company to distribute its annual report within 120 days after its fiscal year end.
The NYSE’s Section 802.01E procedures apply to the Corporation given its failure to file the Form 10-K for the fiscal year ended December 31, 2005, which the NYSE explained in a letter dated April 3, 2006. These procedures contemplate that the NYSE will monitor a company that has not timely filed a Form 10-K. If the company does not file its annual report within six months of the filing due date, the NYSE may, in its sole discretion, allow the company’s securities to be

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traded for up to an additional six months depending on the company’s specific circumstances. If the NYSE determines that an additional trading period of up to six months is not appropriate, suspension and delisting procedures will be commenced. If the NYSE determines that an additional trading period of up to six months is appropriate and the company fails to file its annual report by the end of that additional period, suspension and delisting procedures will generally commence. The procedures provide that the NYSE may commence delisting proceedings at any time. On October 3, 2006, the Corporation announced that the New York Stock Exchange (NYSE) granted an extension for continued listing and trading on the NYSE through April 3, 2007, subject to the NYSE’s ongoing monitoring of the Corporation’s 2005 10-K filing efforts. With the filing of this 2005 Annual Report on Form 10-K on or prior to April 3, 2007, the Corporation will have complied with the extension granted by the NYSE.
Recent Legislation
Puerto Rico Internal Revenue Code Act 41 of August 1, 2005 imposed a transitory additional tax of 2.5% on taxable income for all corporations. This transitory tax effectively increased the statutory tax rate from 39% to 41.5%. Act 41 is effective for taxable years commencing after December 31, 2004 and ending on or before December 31, 2006, and therefore is effective for the 2005 and 2006 taxable years with a retroactive effect to January 1, 2005.
Puerto Rico Internal Revenue Code Act 89 of May 13, 2006 imposed a 2% additional income tax on income subject to regular taxes of all corporations operating pursuant to Act 55 of 1933. Act 89 will be effective for the taxable year commencing after December 31, 2005 and on or before December 31, 2006 and therefore, increased the statutory tax for the 2006 taxable year to 43.5%. The statutory tax will revert to 39% for taxable years commencing after December 31, 2006.
Puerto Rico Internal Revenue Code Act 98 of May 16, 2006 imposed an extraordinary 5% tax on the taxable income reported in the corporate tax return of corporations whose gross income exceeded $10 million for the taxable year ended on or before December 31, 2005. Covered taxpayers were required to file a special return and pay the tax no later than July 31, 2006. The extraordinary tax paid will be taken as a credit against the income tax of the entity determined for taxable years commencing after July 31, 2006, subject to certain limitations. Any unused credit may be carried forward to subsequent taxable years, subject to certain limitations.
Private Litigation
Following the announcement of the Audit Committee’s review, the Corporation and certain of its officers and directors and former officers and directors were named as defendants in five (5) separate securities class actions filed between October 31, 2005 and December 5, 2005, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. At present, all securities class actions have been consolidated into one case named “In Re: First BanCorp Securities Litigations” currently pending before the U.S. District Court for the District of Puerto Rico. The Corporation has been engaged in discussions with lead plaintiffs through private mediation proceedings. In connection with a potential settlement, the Corporation accrued $74.2 million in its consolidated financial statements for the year ended December 31, 2005. There can be no assurance that the amount accrued will be sufficient and the Corporation cannot predict at this time the timing or final terms of any settlement.
Between November 8, 2005 and March 7, 2006 several shareholders of the Corporation commenced five separate derivative actions against certain current and former executive officers

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and directors of the Corporation. In these actions, the Corporation was included as a nominal defendant. These actions were filed pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and alleged, among other things, a breach of fiduciary duty on behalf of the defendants. All shareholder derivative actions were consolidated into one case named “In Re: First BanCorp Derivative Litigation” which was dismissed on November 30, 2006 before the U.S. District Court for the District of Puerto Rico.
Restatement
On October 21, 2005, December 13, 2005, and March 17, 2006, the Corporation announced that it had concluded that the mortgage-related transactions that FirstBank entered into with Doral and R&G since 1999 did not qualify as “true sales” for accounting purposes. As a consequence, the Corporation announced on December 13, 2005 that management, with the concurrence of the Board of Directors, determined to restate its previously reported financial statements to correct its accounting for the mortgage-related transactions. In addition, the Corporation announced that it would also restate its financial statements to correct the accounting treatment used for certain interest rate swaps it accounted for as hedges using the short-cut method.
On September 26, 2006, the Corporation filed with the SEC the Amended 2004 Form 10-K for the fiscal year ended December 31, 2004, which includes restated financial information for the fiscal years 2000 through 2004.
The Corporation has taken a number of significant actions to remedy the material weaknesses in its internal controls during 2005 and has remedied some of the most pervasive weaknesses existing as of December 31, 2004. These steps have primarily taken place since December 31, 2005. Accordingly, First BanCorp’s management concluded that its internal control over financial reporting remained ineffective as of December 31, 2005 based on the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). A description of the material weaknesses existing as of December 31, 2005 is included in Part II, Item 9A. Controls and Procedures of this Annual Report on Form 10-K.
The Corporation developed and is implementing a plan for remedying all of the identified material weaknesses, and the work continues in 2007. As part of this remediation program, the Corporation has added skilled resources to improve controls and increase the reliability of the financial closing process.
Corporate Governance Changes
Changes in Senior Management
In September 2005, following the announcement of the Audit Committee’s review, the Corporation implemented changes to its senior management. Specifically, the Board of Directors asked that Angel Alvarez-Pérez, then President, Chief Executive Officer and Chairman of the Board (the “Former CEO”), Annie Astor-Carbonell, then Chief Financial Officer and Director of the Board (the “Former CFO”), and Carmen Szendrey-Ramos, then General Counsel and Secretary of the Board (the “Former GC”), resign. On September 30, 2005, the Corporation announced that the Former CEO had resigned from his management positions and that the Former CFO had resigned from her position as CFO. In October 2005, the Corporation terminated the Former GC.

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On September 30, 2005, the Board of Directors made the following appointments: Luis M. Beauchamp to serve as President and CEO of the Corporation; Aurelio Alemán to serve as Chief Operating Officer (“COO”) and Senior Executive Vice President; and Luis Cabrera-Marín to serve, on an interim basis, as CFO of the Corporation.
On February 22, 2006, the Corporation announced the retention of Lawrence Odell as Executive Vice President and General Counsel of the Corporation and its subsidiary, FirstBank.
On July 18, 2006, the Company’s Board of Directors appointed Fernando Scherrer as Executive Vice President and Chief Financial Officer of the Company, effective July 24, 2006. Mr. Scherrer had been working with the Corporation since October 2005 as a consultant in its reassessment of accounting issues and preparation of restated financial statements and other consulting matters.
Changes in Board Structure
On September 30, 2005, the Corporation announced that the Former CEO retired from his positions as Chairman of the Board of Directors and as Director of the Corporation, effective December 31, 2005. Additionally, effective September 30, 2005, the Former CFO resigned from her position as Director of the Corporation.
On September 30, 2005, the Board of Directors of the Corporation elected Luis Beauchamp and Aurelio Alemán as Directors.
On November 28, 2005, the Corporation announced that the Board of Directors elected Fernando Rodríguez-Amaro as a Director and as an additional financial expert to serve in the Audit Committee. Thereafter, he was appointed Chairman of the Audit Committee effective January 1, 2006. In addition, the Board of Directors appointed José Menéndez-Cortada as Independent Lead Director effective February 15, 2006.
On March 28, 2006, José Julián Alvarez, 72, informed the Corporation that he would resign from his position as director of the Corporation, effective March 31, 2006. Mr. Alvarez’s term as a director would have expired at the 2006 Annual Meeting of Stockholders and, given the Company’s retirement policy for the Board of Directors, Mr. Alvarez would not have been eligible for reelection.
Change in By-Laws
On March 14, 2006, the Board of Directors of the Corporation approved an amendment to the Corporation’s By-Laws. As amended, Section 2 of Article I of the By-Laws provides that the Board of Directors will set a date and time for the annual meeting of stockholders in circumstances that do not permit the meeting to occur within 120 days after the Corporation’s fiscal year end due to the Corporation’s inability to issue its annual report with audited financial statements. In such event, the Board will set such date and time within a reasonable period after the Corporation submits an annual report with audited financial statements to stockholders. Prior to adoption of this amendment, Section 2 of Article I did not provide that the Board of Directors could set the date and time of the annual meeting. The amendment was effective upon approval by the Board.
Business Developments
On March 13, 2005, the Corporation announced the closing of its acquisition of Ponce General

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Corporation, a Delaware corporation, and its subsidiaries, Unibank, a federal savings and loan association, and Ponce Realty Corporation, a Delaware corporation with real estate holdings in Florida. Unibank, headquartered in Miami, Florida, had 11 financial service facilities located in the Miami/Dade, Broward, Orange and Osceola counties of Florida. The Corporation subsequently changed the name of Unibank to FirstBank Florida.
Following the Corporation’s October 21, 2005 announcement that the SEC had issued a formal order of investigation, the major rating agencies downgraded the Corporation’s and FirstBank’s ratings in a series of actions. Fitch Ratings, Ltd., a subsidiary of Fimalac, S.A. lowered the Corporation’s long-term senior debt rating from BBB- to BB and placed the rating on Rating Watch Negative. Standard & Poors, a division of the McGraw Hill Companies, Inc. lowered the long-term senior debt and counterparty rating of FirstBank, from BBB- to BB+ and placed the rating on Credit Watch Negative. Moody’s Investor Service lowered FirstBank’s long-term senior debt rating from Baa3 to Ba1 and placed the rating on negative outlook.
On March 17, 2006, the Corporation announced that in the fourth quarter of 2005, R&G made a partial payment of $137 million, which released capital allocated to the loans secured by the mortgage loans to R&G and that First BanCorp made a capital contribution to FirstBank of $110 million at the end of 2005.
On May 31, 2006, the Corporation announced that its subsidiary, FirstBank, received a cash payment from Doral of approximately $2.4 billion, substantially reducing the balance in secured commercial loans resulting from the Corporation’s previously-announced revised classification of several mortgage-related transactions with Doral. In addition, FirstBank and Doral entered into a sharing agreement with respect to certain profits or losses that Doral incurs as part of the sales of the mortgages that previously collateralized the commercial loans, subject to a maximum reimbursement of $9.5 million, which will be reduced proportionately to the extent that Doral does not sell the mortgages.

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Stockholders’ Information
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Telephone(787) 729-8200
Internethttp://www.firstbankpr.com
Additional Information and Form 10-K:
     Additional financial information about First BanCorp may be requested to Mr. Pedro Romero, Senior Vice President and Chief Accounting Officer, PO Box 9146, Santurce, Puerto Rico 00908. First BanCorp’s filings with the Securities and Exchange Commission (SEC) may be accessed in the website maintained by the SEC at http://www.sec.gov. and at our web sitehttp://www.firstbankpr.com, First BanCorp section, Company Filings link.
Transfer Agent and Registrar:
The Bank of New York
1-800-524-4458
1-888-269-5221 (Hearing Impaired-TDD Phone)
Address Shareholder Inquiries To:
Shareholder Relations Department
PO Box 11258
Church Street Station
New York, NY 10286
E-mail Address: shareowners@bankofny.com
The Bank of New York’s Stock Transfer Website:
http://www.stockbny.com
Send Certificates for Transfer and Address Changes To:
Receive and Deliver Department
PO Box 11002
Church Street Station
New York, NY 10286
Common Stock:
Listed on New York Stock Exchange
Stock Symbol FBP
The Corporation filed on May 12, 2005, the certification of the Chief Executive Officer required
under Section 303A.12 (a) of the New York Stock Exchange’s Listed Company Manual.

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PART III
Item 10.Directors and Executive Officers of the Registrant.
DIRECTORS
     The current directors of the Corporation are listed below. They have provided the following information about their principal, occupation, business experience and other matters.
Luis M. Beauchamp, 64
Chairman, Chief Executive Officer and President
Chairman from January 2006 to present. President & Chief Executive Officer from October 2005 to present. Senior Executive Vice President, wholesale banking, from March 1997 to October 2005. Executive Vice President, Chief Lending Officer from 1990 to March 1997. General Manager — New York banking operations, Banco de Ponce from 1988 to 1990. He had the following responsibilities at the Chase Manhattan Bank, N.A.: Regional Manager for the Ecuador and Colombia operations and corporate finance for the Central American operations, in 1988; Country Manager for Mexico from 1986 to 1988; Manager, wholesale banking in Puerto Rico from 1984 to 1986. Chairman of First Leasing and Rental Corporation, First Federal Finance Corporation d/b/a Money Express, FirstBank Insurance Agency, Inc., First Insurance Agency, Inc., FirstExpress, Inc., FirstMortgage, Inc., Ponce General Corporation, FirstBank Florida and FirstBank Overseas Corp.1 Joined the Corporation in 1990. Director since September 30, 2005.
Aurelio Alemán, 48
Senior Executive Vice President and Chief Operating Officer
Chief Operating Officer and Senior Executive Vice President from October 2005 to present. Executive Vice President, consumer banking, FirstBank, from 1998 to October 2005. President of First Federal Finance Corporation d/b/a Money Express from 2000 to 2005. President of FirstBank Insurance Agency, Inc from 2001 to 2005. From 1996 to 1998, Vice President, CitiBank, N.A., responsible for wholesale and retail automobile financing and retail mortgage business. Vice President, Chase Manhattan Bank, N.A., banking operations and technology for corporate capital markets from 1994 to 1996. Director of First Leasing and Rental Corporation, First Federal Finance Corporation d/b/a Money Express, FirstBank Insurance Agency, Inc., First Insurance Agency, Inc., FirstExpress, Inc., FirstMortgage, Inc., Ponce General Corporation, FirstBank Florida, Grupo Empresas Servicios Financieros, Inc. d/b/a PR Finance2, FirstBank Overseas Corp., and First Trade, Inc. Joined the Corporation in 1998. Director since September 30, 2005.
José Teixidor, 53
Chief Executive Officer and President, B. Fernández & Hnos., Inc.; Chairman of the Board, Pan Pepín Inc.; Chairman of the Board, Baguettes, Inc.; President, Eagle Investment Fund, Inc.; President, Swiss Chalet Inc.; Chairman of the Board, Marvel International; Member of the Puerto Rico Chamber of Commerce and of the Industry and Food Distribution Chamber of Commerce. President of the Distributors and Manufacturers Association; Member of the Wholesalers Chamber of Puerto Rico. Director since January 1994.
Jorge L. Díaz, 52
Executive Vice President and member of the Board of Directors of Empresas Díaz, Inc., general contractors; and Executive Vice President and Director of Betteroads Asphalt Corporation, asphalt pavement manufacturers; Betterecycling Corporation, recycled asphalt manufacturers; and Coco Beach Development Corporation, a real estate development company, and its subsidiaries. Member of the Chamber of Commerce of Puerto Rico, the Association of General Contractors of Puerto Rico and of the U.S. National Association of General Contractors. Member of the Board of Trustees of Baldwin School of Puerto Rico. Director since 1998.
José L. Ferrer-Canals, 47
Doctor of Medicine in private urology practice. Commissioned as Captain in the United States Air Force in March 1991 and appointed Chief of Aeromedical Service of the 482nd Medical Squadron, December 1992. Member of the American Association of Clinical Urologists, Alpha Omega Alpha Medical Honor Society since 1986. Member of the Hospital Pavía Peer Group Review Committee, Hospital Pavía, San Juan, Puerto Rico, from 1995 to present. Medical Faculty Representative to Hospital Pavía from 1996 to 1998. Professor of Flight Physiology and Aerospace Medicine, InterAmerican University of Puerto Rico. Member of the Board of Directors of American Cancer Society, Puerto Rico Chapter, 1999 to present. Director since 2001.
1First Leasing and Rental Corporation, First Federal Finance Corporation d/b/a Money Express, First Insurance Agency, Inc., FirstExpress, Inc., FirstMortgage, Inc., and FirstBank Overseas Corp, are wholly owned subsidiaries of FirstBank. FirstBank Insurance Agency, Inc., and Ponce General Corporation are wholly owned subsidiary of the Corporation. FirstBank Florida is a wholly-owned subsidiary of Ponce General Corporation.
2Grupo Empresas Servicios Financieros, Inc. d/b/a PR Finance is a wholly-owned subsidiary of the Corporation.

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Richard Reiss-Huyke, 59
Financial and management consultant specializing in crisis intervention, financial planning, negotiations, valuations and litigation support since 1979. Director of Banco Santander Puerto Rico from February 1979 to February 2003, and Director of Santander BanCorp. from May 2000 to February 2003. Employed by Bacardi Corporation in a number of different capacities, including Chief Financial Officer, Chief Operating Officer, Vice President and Director from 1973 to 1979. Member of the Board of Directors and the audit committee of Pepsi Cola Puerto Rico Bottling Company, from February 1996 to July 1998, President of the Board of Directors of the State Insurance Fund of Puerto Rico. Director since 2003.
Sharee Ann Umpierre-Catinchi, 47
Doctor of Medicine. Assistant Professor at the University of Puerto Rico’s Department of Obstetrics and Gynecology from 1993 to present. Director of the Division of Gynecologic Oncology of the University of Puerto Rico’s School of Medicine from 1993 to present. Board Certified by the National Board of Medical Examiners, American Board of Obstetrics and Gynecology and the American Board of Obstetrics and Gynecology, Division of Gynecologic Oncology. Director since 2003.
José Menéndez-Cortada, 59
Attorney at law. Partner in charge of the corporate and tax divisions of Martínez-Alvarez, Menéndez-Cortada & Lefranc Romero, PSC. General Counsel to the Board of Bermudez & Longo, S.E. from 1985 to present. Director of Tasis Dorado School since 2002. Director of the Homebuilders Association of Puerto Rico since 2002. Director of The Luis A. Ferre Foundation, Inc., since 2002. Director since April 2004.
Fernando Rodríguez-Amaro, 58
Certified Public Accountant, Certified Fraud Examiner and Certified Valuation Analyst. Managing Partner and Partner in Charge of the Audit and Accounting Division of RSM ROC & Company. Has been with RSM ROC & Company for twenty-six years and prior thereto served as Audit Manager with Arthur Andersen for over nine years. Director since November 21, 2005.
     The Corporation’s By-laws provide that each director holds office for the term to which he or she was elected and until his or her successor is chosen and qualified or until his or her resignation, retirement or removal from office. The Corporation’s By-laws also provide that the directors will be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a three year term and only one class shall be elected by ballot annually. The Corporation’s By-laws further provide that any directors elected by an affirmative vote of the majority of the Board of Directors to fill a vacancy shall serve until the next election of directors by stockholders. As the Corporation did not hold a stockholders’ meeting last year due to the inability to timely file this Form 10-K, and as certain directors were appointed to fill vacancies, seven of the nine member of the Board of Directors shall be up for election at the next stockholders’ meeting.
EXECUTIVE OFFICERS
     The executive officers of the Corporation, FirstBank and FirstBank Florida who are not directors are listed below. They have provided the following information about their principal occupation, business experience and other matters.
Fernando Scherrer, 38
Executive Vice President and Chief Financial Officer
Chief Financial Officer and Executive Vice President since July 24, 2006. Co-Founder, Managing Partner and Head of Audit and Consulting Practices at Scherrer Hernández & Co., from 2000 to 2006. Prior to founding Scherrer Hernández & Co., he was a CPA with PricewaterhouseCoopers LLP for 10 years where he audited financial institutions and insurance companies. He has over 15 years of financial and accounting experience in the financial services, insurance, retail and education industries. Director of First Leasing and Rental Corporation, First Federal Finance Corporation d/b/a Money Express, FirstBank Insurance Agency, Inc., FirstMortgage, Inc., Ponce General Corporation. Joined the Corporation in 2006.
Lawrence Odell, 58
Executive Vice President, General Counsel and Secretary
General Counsel, Secretary and Executive Vice President since February 2006. Senior Partner at Martínez Odell & Calabria. Has over 25 years of experience in specialized legal issues related to banking, corporate finance and international corporate transactions. Joined the Corporation in February 2006.

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Dacio A. Pasarell, 58
Executive Vice President — Operations And Technology And Florida Region Executive
Held the following position at Citibank N.A. in Puerto Rico: Vice President, Retail Bank Manager, from 2000 to 2002; Vice President and Chief Financial Officer, 1996 to 1998; Vice President, Head of Operations — Caribbean Countries, 1994 to 1996; Vice President Mortgage and Automobile Financing; Product Manager, Latin America, 1986 to 1994; Vice President, Mortgage and Automobile Financing Product Manager for Puerto Rico. President of Citiseguros PR, Inc., 1998 to 2001. Chairman of Ponce General Corporation. Director of FirstBank Florida. Joined the Corporation in 2002.
Randolfo Rivera, 53
Executive Vice President — Wholesale Banking Executive
Executive Vice President in charge of corporate banking, middle market, international, government and institutional, structure finance and cash management areas of FirstBank. Vice President and component executive for local companies, public sector and institutional markets for Chase Manhattan Bank, N.A. in Puerto Rico from April 1990 to December 1996. Corporate Finance Executive in charge of the Caribbean and Central American region for Chase Manhattan Bank in Puerto Rico from January 1997 to May 1998. Joined the Corporation in 1998.
Emilio Martinó, 56
Executive Vice President and Chief Lending Officer — Credit Risk Management Executive
Chief Lending Officer and Executive Vice President since October 25, 2005. Senior Vice President and Credit Risk Management for the Corporation from June 2002 to October 25, 2005. Staff Credit Executive for the Corporate and Commercial Banking Business components since November 2004. First Senior Vice President of Banco Santander Puerto Rico; Director for Credit Administration, Workout and Loan Review, from 1997 to 2002. Senior Vice President for Risk Area in charge of Workout, Credit Administration, and Portfolio Assessment for Banco Santander Puerto Rico from 1996 to 1997. Deputy Country Senior Credit Officer for Chase Manhattan Bank Puerto Rico from 1986 to 1991. Director of FirstBank Florida since August 2006. Joined the Corporation in 2002.
Cassan Pancham, 46
Executive Vice President — Eastern Caribbean Region Executive
Executive Vice President since October 25, 2005. First Senior Vice President, Eastern Caribbean Region Executive from October 12, 2002 until October 25, 2005. Director and President of FirstExpress, Inc., First Trade, Inc., and First Insurance Agency, Inc. Held the following positions at JP Morgan Chase Bank Eastern Caribbean Region Banking Group: Vice President and General Manager, December 1999 to October 2002; Vice President, Business, Professional and Consumer Executive, from July 1998 to December 1999; Deputy General Manager, March 1999; Vice President, Consumer Executive, from December 1997 to 1998. Joined the Corporation in 2002.
José B. Valle, 59
President — FirstBank Florida
President of FirstBank Florida since January 19, 2006. Over thirty years of experience in the financial industry, including the following senior management positions: Market President at Bank Atlantic from 2000 to 2005; Senior Vice President and Retail Executive at Bank of America from 1997 to 2000; President and CEO at Bank Atlantic from 1991 to 1997; Senior Vice President and CEO at AmeriFirst Bank from 1989-1991; Executive Vice President and CEO at Lincoln Federal Savings & Loan from 1983 to 1991; First Vice President and Comptroller at Viscayne Federal Savings from 1981 to 1983; and Senior Vice President/Finance at Pan American Bank, Inc. Joined FirstBank Florida on January 19, 2006.
     The Corporation’s By-laws provide that each officer shall be elected annually at the first meeting of the Board of Directors after the annual meeting of stockholders and that each officer shall hold office until his or her successor has been duly elected and qualified or until his or her death, resignation or removal from office.
CERTAIN SIGNIFICANT EMPLOYEES
Víctor M. Barreras-Pellegrini, 38
Senior Vice President and Treasurer
Treasurer and Executive Vice President since July 6, 2006. Various positions with Banco Popular de Puerto Rico from January 1992 to June 2006, including, Fixed-Income Portfolio Manager of the Popular Assets Management division from 1998 to 2006 and

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Investment Officer in the Treasury division from 1995 to 1998. Director of FirstBank Overseas Corp. Joined the Corporation in 2006.
Nayda Rivera-Batista, 33
Senior Vice President and Chief Risk Officer
Certified Public Accountant and Certified Internal Auditor. Appointed Chief Risk Officer in April 2006. Senior Vice President and General Auditor from July 2002 to April 2006. Audit Manager at PricewaterhouseCoopers LLP, from September 1996 to July 2002. Serving as member of the Board of Trustees of the Bayamon Central University from January 2005 to January 2006. Joined the Corporation in 2002.
Pedro Romero, 33
Senior Vice President and Chief Accounting Officer
Chief Accounting Officer since August 3, 2006. Senior Vice President since May 2005. Comptroller from May 16, 2005 to August 3, 2006. Vice President and Assistant Comptroller from December 2002 to May 2005. He has technical expertise in accounting, management reporting, financial analysis, corporate tax, internal controls and compliance with US GAAP, SEC rules and Sarbanes Oxley. He has more than ten years of experience including, big four public accounting company, banking and financial services. Joined the Corporation in December 2002.
Sheila Ocasio, 31
Senior Vice President and General Auditor
Senior Vice President and General Auditor since 2006. She is a Certified Public Accountant and Certified Internal Auditor. Eight years of experience, six of which have been in financial services. Vice President and General Auditor at Eurobancshare, Inc. from 2001 to 2006. Senior Auditor at Arthur Andersen, LLP from 1998 to 2001. Joined the Corporation in 2006.
María Medina, 39
Senior Vice President and Corporate Controller
Senior Vice President and Corporate Controller since 2007. She is a Certified Public Accountant. Contracted as a consultant by FirstBank in 2006. She has over fifteen years of experience at managerial and executive level positions in the private and public sectors including, Senior Vice President and Comptroller at Oriental Financial Group, Inc. from 2004 to 2006, Comptroller and Executive Vice President of Administration, Operation and Controllership at Government Development Bank from 2001 to 2002 and 2002 to 2004, Executive Director of Finance and Vice President for Management, Finance and Systemic Services at the InterAmerican University of Puerto Rico from 1997 to 1998 and 2001 to 2002, Comptroller at Caribe Fragrance, Inc. from 1995 to 1997 and Senior Auditor Supervisor at KPMG Peat Marwick, LLP from 1991 to 1995. Joined the Corporation in 2007.
Miguel A. Babilonia, 40
Senior Vice President and Chief Credit Risk Officer
Senior Vice President and Chief Credit Risk Officer since 1999. Vice President and Consumer Credit Policy & Portfolio Manager from 1998 to 1999. He has sixteen years of experience including, Consumer Scorecard Manager at Citibank, N.A. from 1997 to 1998; Assistant Vice President/Risk Manager at First Union National Bank from 1996-1997; Assistant Vice President/Segmentation Manager at First Union National Bank from 1993 to 1996; Portfolio Risk Senior Analyst at National City Bank from 1991 to 1993. Chairman of the Consumer Credit Committee of the Puerto Rico Bankers Association. Joined the Corporation in 1998.
James J. Partridge, 52
Senior Vice President
Senior Vice President of FirstBank Miami Agency since 2004. He has over twenty-five years of experience in the financial industry, including, Senior Vice President and head of Real Estate at Eastern National Bank from 1992 to 2004, Vice President of Credit Administration at Consolidated Bank, N.A. from 1988 to 1992, Assistant Vice President and Loan Officer at Southeast Bank, N.A. from 1987 to 1988, Assistant Vice President of Commercial Loan at the Bank of Miami from 1983 to 1987 and Management Trainee at Banco Popular de Puerto Rico from 1981 to 1983. Director of FirstBank Florida. Joined FirstBank Miami Agency in 2004.
INDEPENDENCE OF THE BOARD OF DIRECTORS
The Board of Directors conducted a self-assessment regarding the independence of its members on December 28, 2006. The criteria for determining independence are as defined by the New York Stock Exchange, the Securities and Exchange Act of 1934, as amended,

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and the Corporation’s Independence Principles for Directors. According to the Corporation’s Corporate Governance Standards adopted by the Board of Directors on December 2003 and amended on December 2004, a substantial majority of the Board shall be composed of directors who meet the requirements for independence established in the Corporation’s Independence Principles of Directors which shall incorporate, at a minimum, those established by the New York Stock Exchange and the Securities and Exchange Commission. The Board shall make a determination at least annually as to the independence of each director, in accordance with standards that are disclosed to the stockholders. The Corporation’s Independence Principles for Directors and Corporate Governance Standards are included as Exhibits I and II to the Proxy Statement filed on March 24, 2005, are available on the Corporation’s web page, www.firstbancorppr.com and available in print to any stockholder who requests it through a written communication sent to Lawrence Odell, Secretary, First BanCorp, 1519 Ponce de León Avenue, Santurce, Puerto Rico 00908. The Board of Directors determined that Messrs. José Teixidor, José L. Ferrer-Canals, Jorge L. Díaz, Fernando Rodríguez-Amaro, Richard Reiss-Huyke, José Menéndez-Cortada and Ms. Sharee Ann Umpierre-Catinchi are independent under such criteria. Messrs. Luis M. Beauchamp and Aurelio Alemán are not considered to be independent. Mr. Luis M. Beauchamp is not independent because he is the Chief Executive Officer of the Corporation. Mr. Aurelio Alemán is not independent because he is the Chief Operating Officer of the Corporation. Non-management directors met six (6) times during 2005 with José Teixidor serving as chairman during the meetings and two (2) times during 2006 with José Menéndez-Cortada serving as chairman during the meetings.
AUDIT COMMITTEE
     The Audit Committee is composed of three outside directors who meet the independence criteria established by the New York Stock Exchange, the Securities Exchange Act of 1934, as amended, and the Corporation’s Independence Principles for Directors. Each member of the Corporation’s Audit Committee is financially literate, knowledgeable and qualified to review financial statements. The “audit committee financial experts” designated by the Corporation’s Board of Directors are Richard Reiss-Huyke and Fernando Rodríguez-Amaro.
     Under the terms of its charter, which was last reviewed and approved by the Board of Directors on November 28, 2006, the Audit Committee represents and assists the Board of Directors in fulfilling its oversight responsibility relating to the integrity of the Corporation’s financial statements and the financial reporting process, the systems of internal accounting and financial controls, the internal audit function, the annual independent audit of the Corporation’s financial statements, the Corporation’s compliance with legal and regulatory requirements, the independent auditors’ qualifications and independence, the performance of the Corporation’s internal audit function and the performance of its independent auditors. The Audit Committee also monitors the quality of the Corporation’s assets in order to provide for early identification of possible problem assets. The Audit Committee Charter is included as an Exhibit to this Form 10-K, is published at the Corporation’s web page, www.firstbancorppr.com and available in print to any stockholder who requests it through a written communication sent to Lawrence Odell, Secretary, First BanCorp, 1519 Ponce de León Avenue, Santurce, Puerto Rico 00908. The Audit Committee met a total of 24 times during fiscal year 2005 and a total of 23 times during fiscal year 2006.
STOCKHOLDER COMMUNICATIONS WITH THE BOARD
     Any stockholder who desires to communicate with the Corporation’s Board of Directors may do so by writing to the Chairman of the Board or to the non-management directors as a group in care of the Office of the Corporate Secretary at the Corporation’s headquarters, 1519 Ponce de León Avenue, Santurce, Puerto Rico 00908 or by email to directors@firstbankpr.com or thenetwork@firstbankpr.com. Communications may also be made by calling the following toll-free hotline telephone number, 1-877-888-0002. Any concern related to accounting, internal accounting controls or auditing matters will be referred to the Chair of the Audit Committee, communications regarding other matters will be directed to the General Counsel for their proper referral.
SECTION 16(A) COMPLIANCE
     Based on reports filed with the Securities and Exchange Commission and information obtained from officers and directors of the Corporation, the Corporation is not aware of any failure by its executive officers, directors or beneficial owners of more than ten percent, to file on a timely basis any reports required to be filed by Section 16(a) of the Securities Exchange Act of 1934 with respect to beneficial ownership of shares of the Corporation during fiscal year 2005, except for the following instances: (A) Director Sharee Ann Umpierre-Catinchi filed one late Form 4 which corresponded to additional acquisitions of shares; (B) Mr. Dacio Pasarell filed one late Form 4 corresponding to the additional acquisition of shares; (C) Mr. Randolfo Rivera filed two late Forms 4 corresponding to the additional acquisition of shares; (D) Mr. Emilio Martinó failed to file a Form 5 with respect to the purchase of 58 shares pursuant to the Employee Stock Purchase Program; (E) Mr. Pedro Romero failed to file a Form 5 with respect to the purchase of 1 share pursuant to the Employee Stock Purchase Program; and (F) Mr. Cassan Pancham failed to file a Form 5 with respect to the purchase of 560 shares pursuant to the Employee Stock Purchase Program. The transactions by Director Sharee Ann Umpierre-

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Catinchi and Messrs. Dacio Pasarell and Randolfo Rivera have been notified in their corresponding Forms 4. The remaining transactions are in the process of being notified in their corresponding Forms 5.
CODE OF ETHICS
     On November 25, 2003, the Corporation adopted a CodeJanuary 28, 2008, First Bank acquired Virgin Island Community Bank (VICB) in St.Croix, U.S. Virgin Islands. VICB has three branches on St. Croix and deposits of Ethics for Senior Financial Officers (the “Code”). The Code states the principles to which senior financial officers must adhere in order to act in a manner consistent with the highest moral and ethical standards. The Code imposes a duty to avoid conflicts of interest, comply with the laws and regulations that apply to the Corporation and its subsidiaries specifically making reference to those regarding transactions in the Corporation’s securities. Neither the Audit Committee nor the General Counsel received any requests for waivers under the Code. The Code is included as an Exhibit on the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 15, 2004, is available at the Corporation’s website, www.firstbancorppr.com, and is also available in print to any stockholder who requests it through a written communication sent to Lawrence Odell, Secretary, First BanCorp, 1519 Ponce de León Avenue, Santurce, Puerto Rico 00908.
     The Corporation has also adopted a Code of Ethics that is applicable to all employees of the Corporation and all of its subsidiaries which purports to strengthen the ethical culture that prevails in the Corporation. The Code of Ethics addresses among other matters conflicts of interest, operational norms and confidentiality of the Corporation’s and its customer’s information. The Code of Ethics is included as an Exhibit on the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 15, 2004, is available at the Corporation’s website, www.firstbancorppr.com, and is also available in print to any stockholder who requests it through a written communication sent to Lawrence Odell, Secretary, First BanCorp, 1519 Ponce de León Avenue, Santurce, Puerto Rico 00908.
Item 11.Executive Compensation.
COMPENSATION OF EXECUTIVE OFFICERS
     The summary compensation table set forth below discloses compensation for the Chief Executive Officer and the most highly paid executive officers of the Corporation, FirstBank or its subsidiaries who worked with the Corporation, the Bank or such subsidiaries during any period of such fiscal year and whose total cash compensation for fiscal year 2005 exceeded $100,000 (the “Named Executives”). The table includes bonus payments granted during a meeting of the Compensation Committee held on January 24, 2006 and the regular meeting of the Board of Directors held on January 24, 2006, which were meant as compensation for performance of the Named Executives during fiscal year 2005.
Summary Compensation Table
                     
                  Long-Term 
  Annual Compensation  Compensation 
                  Stock Options 
Name & Position Year  Salary ($)  Bonus ($)  Other ($)3  Granted4 
Angel Alvarez-Pérez5
  2005   1,213,846   0   5,122   360,000 
Former Chairman, President and  2004   1,189,904   1,000,000   11,880   360,000 
Chief Executive Officer  2003   882,909   800,000   10,480   300,000 
Luis M. Beauchamp  2005   680,535   850,000   8,470   76,800 
Chairman, President and  2004   571,497   410,000   11,880   56,800 
Chief Executive Officer  2003   481,594   350,000   9,745   64,000 
Aurelio Alemán  2005   522,904   600,000   9,019   72,000 
Chief Operating Officer and  2004   444,343   400,000   11,663   72,000 
Senior Executive Vice President  2003   374,575   300,000   9,849   60,000 
Annie Astor-Carbonell6
  2005   517,090   0   4,753   72,000 
Former Chief Financial Officer  2004   507,230   360,000   11,613   72,000 
and Senior Executive Vice President  2003   428,077   300,00   9,994   60,000 
3Represents the Corporation’s pro-rata contribution to the executive’s participation in the Defined Contribution Retirement Plan and the contribution to the executive’s life insurance policy premium in excess of the contribution applicable to all other employees
4On June 30, 2005, the Corporation completed a 2 for 1 forward stock split. Accordingly, the amount set forth for stock options granted in 2004 and 2003 have doubled from what was previously set forth in Proxy Statements and SEC filings prior to June 30, 2005.
5Mr. Alvarez-Pérez resigned as President and Chief Executive Officer on September 30, 2005 and he resigned as Chairman on December 31, 2005.
6Ms. Astor-Carbonell resigned as Senior Executive Vice President and Chief Financial Officer on September 30, 2005.

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Luis M. Cabrera7
  2005   317,539   300,000   596   24,000 
Former Chief Investment Officer, Executive Vice  2004   222,692   140,000   4,032   24,000 
President and Interim Chief Financial Officer  2003   208,842   130,000   4,032   20,000 
Dacio Pasarell  2005   379,212   200,000   4,032   20,000 
Executive Vice President and  2004   350,000   150,000   5,880   24,000 
Operations and Technology Executive  2003   313,462   100,000   4,150   0 
Randolfo Rivera  2005   471,987   400,000   9,277   60,000 
Executive Vice President and  2004   444,343   300,000   11,880   60,000 
Wholesale Banking Executive  2003   374,575   250,000   10,387   50,000 
Option/Grants In Last Fiscal Year
     The table set forth below discloses the information regarding the stock options granted to the Corporation’s Chief Executive Officer and the most highly paid executives during 2005. The information reflected in the table set forth below takes into account the stock split which occurred on June 30, 2005.
           
  Shares        
  underlying        
  options/SARs        
  Granted in % Granted in      
  Fiscal Year Fiscal Year Exercise/Base   Value Grant Date
Name 2005 2005 Price ($) Expiration Date Present Value*
Angel Alvarez-Pérez 360,000 37.66% $23.92 2/22/20158 $2,304,000
Luis M. Beauchamp 76,800 8.04% $23.92 2/22/2015 $491,520
Aurelio Alemán 72,000 7.53% $23.92 2/22/2015 $460,800
Annie Astor-Carbonell 72,000 7.53% $23.92 2/22/20159 $460,800
Luis Cabrera 24,000 2.51% $23.92 2/22/2015 $153,600
Dacio Pasarell 20,000 2.09% $23.92 2/22/2015 $128,000
Randolfo Rivera 60,000 6.28% $23.92 2/22/2015 $384,000
     *As permitted by SEC rules the Black/Scholes pricing model was used to value these stock options. It should be noted that this model is only one method of valuing options and the Corporation’s use of the model is not an endorsement of its accuracy. The actual value of the options may be significantly different, and the value actually realized, if any, will depend upon the excess of the market value of the common stock over the option exercise price and the time of exercise. Options granted on February 22, 2005, were granted at $23.92 ($46.38 prior to split). All options were granted at the market price of the Corporation’s common stock on the day of the grant. All options were granted for a term of ten years and, except to the extent limited by law, are exercisable at any time during the term of the option. In calculating the value of such option, the following assumptions were made:
 The weighted estimated time until exercise of 4.36 years for all options granted during fiscal year 2005.
 The weighted risk-free rate, which was obtained from U.S. Federal Government obligations maturing close to the estimated time until exercise of the option is 4.31% for options granted on February 22, 2005.
 The weighted volatility assumption is the historical price volatility of the Corporation’s closing stock price as measured by standard deviation of day-to-day logarithmic price changes. The volatility for the options granted on February 22, 2005 is 28.72%.
 Based on the above assumptions, the theoretical value of the stock options granted on February 22, 2005 is $6.40. These valuations do not take into account the non-transferability provisions of the Stock Option Plan.
7Mr. Cabrera resigned as Chief Investment Officer and Executive Vice President on August 11, 2006. He ceased being Interim Chief Financial Officer on July 18, 2006.
8The stock options issued to Mr. Alvarez-Pérez have expired as he is no longer with the Corporation.
9The stock options issued to Ms. Astor-Carbonell have expired as she is no longer with the Corporation.

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Aggregated Option Exercises In Last Fiscal Year
And Fiscal Year-End Option Values
     The table set forth below discloses the aggregated options/SAR exercises and value realized and the number of unexercised options and the value thereof with regards to the Named Executives as of December 31, 2005, under the Stock Option Plan. All presently unexercised options are exercisable at this time, except to the extent limited by the Puerto Rico Internal Revenue Code of 1994, as amended.
         
      Number of  
  Shares   Unexercised Value of Unexercised In-
  Acquired On Value Options at The-Money Options at
Name Exercise Realized 12/31/05 12/31/05*
Angel Alvarez-Pérez   2,832,000 8,748,041
Luis Beauchamp   457,600 944,072
Aurelio Alemán   444,000 1,009,880
Annie Astor-Carbonell   471,000 1,140,140
Luis Cabrera   134,000 221,136
Dacio Pasarell   48,000 
Randolfo Rivera 13,450 191,158 352,110 599,941
* The value of unexercised in-the-money options in the table above represents the difference between the grant price of the option and the market price as of December 31, 2005, multiplied by the number of in-the-money options outstanding as of that date. At the close of business on December 31, 2005, the closing price of the Corporation’s common stock was $12.41. The average price at which the Named Executives could have exercised their outstanding options as of such date was $5.209 for options granted on 11/25/97; $9.031 for options granted on 5/26/98; $8.854 for options granted on 6/23/1998; $8.667 for options granted on 11/17/98; $6.542 for options granted on 11/23/99; $7.438 for options granted on 12/13/00; $9.343 for options granted on 2/26/02; $12.995 for options granted on 10/29/02; $12.813 for options granted on 2/25/03; $21.45 for options granted on 02/20/04 and $23.92 for options granted on 2/22/05. As of 12/31/05, the Named Executives held unexercised options to purchase shares as follows: Angel Alvarez-Pérez: 312,000 granted on 11/25/97, 300,000 granted on 11/17/98, 300,000 granted on 11/23/99, 450,000 granted on 12/13/00; 450,000 granted on 02/26/02, 300,000 granted on 2/25/03, 360,000 granted on 2/20/04 and 360,000 granted on 2/22/05. Luis M. Beauchamp: 54,000 granted on 11/17/98, 90,000 granted on 12/13/00, 96,000 granted on 02/26/02, 64,000 granted on 2/25/03, 76,800 granted on 2/20/04 and 76,800 granted on 2/22/05. Aurelio Alemán: 36,000 granted on 11/17/98, 36,000 granted on 11/23/99, 78,000 granted on 12/13/00, 90,000 granted on 02/26/02, 60,000 granted on 2/25/03, 72,000 granted on 2/20/04 and 72,000 granted on 2/22/05. Annie Astor-Carbonell: 48,000 granted on 11/17/98, 48,000 granted on 11/23/99, 81,000 granted on 12/13/00, 90,000 granted on 02/26/02, 60,000 granted on 2/25/03, 72,000 granted on 2/20/04 and 72,000 granted on 2/22/05. Randolfo Rivera: 120,000 granted on 5/26/1998, 2,110 granted on 12/13/00, 60,000 granted on 02/26/02, 50,000 granted on 2/25/03, 60,000 granted on 2/20/04 and 60,000 granted on 2/22/05. Dacio Pasarell: 24,000 granted on 2/20/04 and 24,000 granted on 2/22/05. Luis Cabrera: 30,000 granted on 6/23/98, 6,000 granted on 11/17/98, 30,000 granted on 2/26/02, 20,000 granted on 2/25/03, 24,000 granted on 2/20/04 and 24,000 granted on 2/22/05. All options were granted at an exercise price equal to the market price of the Corporation’s common stock on the date of grant. The Stock Option Plan provides for automatic adjustments in the number and price of options due to changes in capitalization resulting from stock dividends or splits.
Employment Agreements
     The following table discloses information regarding the employment agreements of the Named Executives.
       
Name Effective Date Current Base Salary Term of Years
Luis M. Beauchamp 5/14/98 $1,000,000 4
Aurelio Alemán 2/24/98 $700,000 4
Randolfo Rivera 5/26/98 $550,000 4
     The agreements, a form of which is included as an Exhibit to this Form 10-K, provide that on each anniversary of the date of commencement of each agreement the term of such agreement shall be automatically extended for an additional one (1) year period beyond the then-effective expiration date, unless either party receives written notice that the agreement shall not be further extended. Notwithstanding such contract, the Board of Directors may terminate the contracting officer at any time; however, unless such termination is for cause, the contracting officer will be entitled to a severance payment of four years base salary (less all required deductions and withholdings) which payment shall be made semi-monthly over a period of one year. “Cause” is defined to include

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personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty, intentional failure to perform stated duties, material violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order or any material breach of any provision of the employment agreement.approximately $56 million.
     In the event of a “change in control” of the Corporation during the term of the employment agreements, the executive shall be entitled to receive a lump sum severance payment equal to his or her then current base annual salary plus (i) the highest cash performance bonus received by the executive in any of the four (4) fiscal years prior to the date of the change in control and (ii) the value of any other benefits provided to the executive during the year in which the change in control occurs, multiplied by four (4). The severance payment that each of the contracting officers would have received if his or her agreement had, been terminated as of December 31, 2005, pursuant to a change in control was: Luis M. Beauchamp, $6,122,140; Aurelio Aleman, $4,491,616; Randolfo Rivera, $3,487,948.
     Pursuant to the employment agreements, a “change in control” shall be deemed to have taken place if a third person, including a group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes the beneficial owner of shares of the Corporation having 25% or more of the total number of votes which may be cast for the election of directors of the Corporation, or which, by cumulative voting, if permitted by the Corporation’s Charter or By-laws, would enable such third person to elect 25% or more of the directors of the Corporation; or if, as a result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sales of assets or contested election, or any combination of the foregoing transactions, the persons who were directors of the Corporation before such transactions shall cease to constitute a majority of the Board of the Corporation or any successor institution.
Defined Contribution Retirement Plan
     The Corporation has a Defined Contribution Retirement Plan under Section 165(e) of Puerto Rico’s Internal Revenue Act10 that provides participating employees with retirement, death, disability and termination of employment benefits in accordance with their participation. The Defined Contribution Retirement Plan complies with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Retirement Equity Act of 1984, as amended (“REA”). The Corporation’s employees are eligible to participate in the Defined Contribution Retirement Plan after completing one year of service, and there is no age requirement. An individual account is maintained for each participant and benefits are paid based solely on the amount of each participant’s account.
     Participating employees may defer from 1% to 10% of their annual salary, up to a maximum of $8,000, into the Defined Contribution Retirement Plan on a pre-tax basis as employee salary savings contributions. Each year the Corporation will make a contribution equal to 25% of each participating employee’s salary savings contribution; however, no match is provided for salary savings contributions in excess of 4% of compensation. At the end of the fiscal year, the Corporation may, but is not obligated to make, additional contributions in an amount determined by the Board of Directors; however, the maximum of any additional contribution in any year may not exceed 15% of the total compensation of all eligible employees participating in the Defined Contribution Retirement Plan and no basic monthly or additional annual matches need be made on years during which the Corporation incurs a loss.
     In fiscal year 2005, the total contribution to the Defined Contribution Retirement Plan by the Corporation amounted to $852,518.71 which funds were distributed on a pro rata basis among all participating employees. The table below sets forth the total of the Corporation’s contribution during fiscal year 2005 to the Named Executives of the Corporation who participate in the Defined Contribution Retirement Plan.
     
Aurelio Alemán $5,600 
Angel Alvarez-Pérez $2,000 
Luis M. Beauchamp $1,617 
Randolfo Rivera $5,699 
Deferred Compensation Plan
     The Corporation has a Deferred Compensation Plan available to Executive Officers whereby the executives may defer a portion of their salary. These deferred amounts, if any, are included in the amounts disclosed in the summary compensation table. The Corporation does not match any of the deferred amounts. The deferred amounts are deposited in a Trust that is administered by FirstBank. The Corporation does not guarantee a return on the investment of these funds.
10Section 165 of Puerto Rico’s Internal Revenue Act is similar to Section 401(k) of the Federal Internal Revenue Code.

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Report Of The Compensation And Benefits Committee
     The Executive Compensation Program is administered by the Compensation and Benefits Committee (the “Compensation Committee”), which is composed of at least three (3) independent directors selected by the Board of Directors. The current members of the Corporation’s Compensation Committee are Jorge L. Díaz, José Teixidor, José Ferrer-Canals and Sharee Anne Umpierre- Catinchi. Sharee Anne Umpierre-Catinchi is the current chairman of the Compensation Committee. During fiscal year 2005, the members of the Corporation’s Compensation Committee were Jorge L. Díaz, José Teixidor and José Ferrer-Canals.
Executive Compensation Policy
     The Corporation operates in a highly competitive industry where the quality, creativity and professionalism of its executives are of utmost importance to the success, profitability and growth of the institution. The underlying philosophy of any effective compensation program must be to retain and recruit top executives who will make significant contributions to the promotion and achievement of the institutional goals, which will ultimately result in enhanced stockholder value. Accordingly, the Corporation has put in place a compensation policy that is designed to recruit, retain and reward key executives who demonstrate the capacity to lead the Corporation in achieving its business objectives.
Objectives
Stimulate behavior that will lead to the attainment of the Corporation’s goals.
Provide additional short-term and long-term variable compensation to enable implementation of a pay-for-performance package.
     In making their determinations for fiscal year 2005, the Compensation Committee, in accordance with its charter, reviewed the Corporation’s performance as a whole and the performance of the Named Executives in relation to the performance goals that have been set forth. The Compensation Committee also took into consideration the performance of the Corporation in comparison with the performance of other Corporations in the community, as well as the performance of the Corporation in relation to other institutions of similar size and complexity of loan portfolio and other assets. On the basis of their review, the Compensation Committee took the following actions with regard to the Named Executives:
Performance Bonus
     The Executive Compensation Program provides for a performance bonus plan whose purpose is to maximize the efficiency and effectiveness of the operation of the Corporation. The Compensation Committee has designated the CEO and the Executive Vice Presidents of the Corporation as plan participants. The performance bonus is linked to the performance of the Corporation as a whole as well as the achievement of individual goals by each of the Named Executives. Based on the Corporation’s performance and the performance of each of the Named Executives in fiscal year 2005, the Compensation Committee recommended, and on January 24, 2006, the Board of Directors granted, the following performance bonuses to the following Named Executives: Luis M. Beauchamp, Chairman, President and Chief Executive Officer, $850,000; Aurelio Alemán, Chief Operating Officer and Senior Executive Vice President, $600,000; Luis M. Cabrera, Former Chief Investment Officer, Interim Chief Executive Officer and Executive Vice President, $300,000; Dacio Pasarell, Executive Vice President, $175,000; and Randolfo Rivera, Executive Vice President, $400,000.
Long-Term Compensation
     The Executive Compensation Plan also contemplates long-term incentive compensation in the form of stock options under the Corporation’s Stock Option Plan. The Compensation Committee has discretion to select which of the eligible persons will be granted stock options, whether stock appreciation rights will be granted with such options, and generally to determine the terms and conditions of such options in accordance with the provisions of the Stock Option Plan. During fiscal year 2005 the following 10-year options were granted to the Named Executives: Luis M. Beauchamp, Chairman, President and Chief Executive Officer, 76,800; Aurelio Alemán, Chief Operating Officer and Senior Executive Vice President, 72,000; Luis M. Cabrera, Former Chief Investment Officer, Interim Chief Executive Officer and Executive Vice President, 24,000; Dacio Pasarell, Executive Vice President, 20,000; Randolfo Rivera, Executive Vice President, 60,000; Angel Alvarez-Pérez, Former Chairman, Chief Executive Officer and President, 360,000; and Annie Astor-Carbonell, Former Chief Financial Officer and Senior Executive Vice President, 72,000.
Compensation Of Chief Executive Officer
     Mr. Angel Alvarez-Pérez had served as President and Chief Executive Officer of FirstBank since September 1990 and as Chairman, President and CEO of the Corporation since November 1998. During fiscal year 2005, the annual salary of Mr. Alvarez-Pérez was $1,500,000. During fiscal year 2005, Mr. Alvarez-Pérez received 360,000 stock options. Mr. Luis M. Beauchamp has served as President and Chief Executive officer of the Corporation and FirstBank since October 1, 2005. During fiscal year 2005, the

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annual salary of Mr. Beauchamp was $598,400. On January 24, 2006, the Compensation Committee granted Mr. Beauchamp a cash bonus of $850,000 corresponding to performance in fiscal year 2005. During fiscal year 2005, Mr. Beauchamp received 76,800 stock options. The compensation granted to both Messrs. Alvarez-Pérez and Beauchamp was determined in accordance with the Corporation’s compensation policy described above. In making such determination, the Compensation Committee took into consideration the Corporation’s performance during 2005, including the performance of each CEO and the role of each in the Corporation’s performance, the achievement of goals set for the Corporation, the bonuses historically given to each and the rank of each in relation to his peers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
     None of the current members, nor the members during fiscal year 2005, has served as an officer of, or been an employee of, the Corporation, FirstBank or a subsidiary of the Corporation or of FirstBank.
COMPENSATION OF DIRECTORS
     Outside directors of the Corporation do not receive compensation for service to the Board of Directors of the Corporation; however, they receive compensation for their service to the Board of Directors of FirstBank and its committees and the committee of the Corporation. Outside directors received, for each meeting of the Board of Directors of FirstBank attended during fiscal year 2005, $1,300 from January 1, 2005 until May 24, 2005 and $1,400 after May 24, 2005. Outside directors also received during fiscal year 2005 for attendance at the meetings of (A) the Audit Committee, $950 from January 1, 2005 until May 24, 2005 and $1,050 after May 24, 2005 and, (B) the Credit Committee, Compensation Committee and Nominating Committee, $550 from January 1, 2005 until May 24, 2005 and $650 after May 24, 2005. As part of the Audit Committee’s investigation, certain independent directors of Board of Directors actively engaged in activities related to said investigation. As a result, the Compensation Committee, on September 2, 2005, approved the payment of additional fees in an amount equal to $250 per hour for these independent directors in order to compensate them for the additional work and time incurred by them in said investigation.
     Officers of the Corporation, the Bank or the subsidiaries do not receive fees or other compensation for service on the Board of Directors of the Corporation, the Bank, the subsidiaries or any of their committees.
     The following table sets forth fees paid to outside directors for their attendance at meetings of the Board of Directors of FirstBank and committees during fiscal year 2005, as well as the additional fees paid to the certain independent directors for the additional work and time incurred by them in said investigation:
Board & Committee Meetings and Investigation Fees In 2005
                             
  Board of  Audit  Credit  Compensation      Nominating  Total 
Name Directors  Committee  Committee  Committee  Investigation  Committee  Fees 
José Julián Alvarez $30,050  $22,100          $11,625     $63,775 
Jorge L. Díaz $30,300      $7,162  $1,850         $39,312 
José L. Ferrer-Canals $28,900  $25,990      $1,850  $2,498     $80,688 
José Menéndez-Cortada $30,300      $6,650      $4,185     $41,135 
Richard Reiss-Huyke $29,000  $25,850          $54,566     $109,406 
Fernando Rodríguez- Amaro $2,800  $2,100                 $4,900 
José Teixidor $30,300      $5,955  $1,850         $38,105 
Sharee Ann Umpierre-Catinchi $26,200      $6,650             $32,850 
TOTAL: $207,850  $76,040  $26,417  $5,550         $315,857 
PERFORMANCE OF FIRST BANCORP COMMON STOCK
     The stock performance graph set forth below compares the cumulative total stockholder return of the Corporation’s common stock from December 31, 2000, to December 31, 2005, with cumulative total return of the S&P 500 Market Index. The S&P 500 Market Index is a broad index that includes a wide variety of issuers and industries representative of a cross section of the market. The S&P Supercomposite Banks Index is a capitalization-weighted index that is composed of 96 members.

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  12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05
First BanCorp $100 $123 $149 $264 $429 $170
S&P500 $100 $88 $69 $88 $98 $103
S&P Supercom Bank Index $100 $99 $99 $126 $145 $143
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
BENEFICIAL OWNERSHIP OF SECURITIES
     The following sets forth information known to the Corporation as to the persons or entities, which as of January 31, 2007, by themselves or as a group, as the term is defined by section 13(d)(3) of the Securities Exchange Act of 1934, are the beneficial owners of 5% or more of the issued and outstanding common stock of the Corporation in circulation. All information concerning persons who may be beneficial owners of 5% or more of the stock is derived from Schedule 13(D) or 13(G) statements filed and notified to the Corporation.
Beneficial Owners Of 5% Or More
Name and AddressNumber of SharesPercentage
FMR Corp.
82 Devonshire Street
Boston, MA 02109
8,072,400118.67%
Angel Alvarez-Pérez
Condominio Plaza Stella Apt.1504
Avenida Magdalena 1362
San Juan, Puerto Rico 00907
7,308,918127.85%
11Includes 7,994,600 shares beneficially owned by Fidelity Management & Research Company, a wholly-owned subsidiary of FMR Corp., as a result of its acting as investment adviser to various investment companies, including, Fidelity Low Priced Stock Fund which owns 7,936,000 of said shares. Also includes 77,800 shares beneficially owned by Fidelity Management Trust Company, a wholly-owned subsidiary of FMR Corp.
12Includes 21,300 shares owned by his spouse.

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Beneficial Ownership By Directors Or Nominees
     The following table sets forth information with regard to the total number of shares of the Corporation’s common stock beneficially owned, as of January 31, 2007, by (i) each current member of the Board of Directors, (ii) each nominee to the Board of Directors, (iii) each current executive officer, and (iv) all current directors and executive officers as a group. Information regarding the beneficial ownership by executive officers and directors is derived from information submitted by such executive officers and directors.
     
Name Number of Shares13 Percentage
     
Directors:
    
Luis M. Beauchamp, Chairman, President & CEO 2,231,67214 2.37%
Aurelio Alemán, COO & Senior Executive VP 794,00015 *
José Teixidor 120,740 *
Jorge L. Díaz 23,66016 *
José Ferrer-Canals 500 *
Richard Reiss-Huyke 0 0%
Sharee Ann Umpierre-Catinchi 75,50017 *
José Menéndez- Cortada 15,36918 *
Fernando Rodríguez-Amaro 5,250 *
Executive Officers:
    
Fernando Scherrer, CFO & Executive VP 175,00019 *
Lawrence Odell, General Counsel, Secretary & Executive VP 175,00020 *
Dacio Pasarell, Executive VP 102,00021 *
Randolfo Rivera, Executive VP 518,45022 *
Emilio Martinó, Chief Credit Officer & Executive VP 68,32323 *
Cassan Pancham, Executive VP 113,18824 *
Víctor M. Barreras-Pellegrini, Treasurer & Senior VP 70,00025 *
Nayda Rivera-Batista, Chief Risk Officer & Senior VP 70,31426 *
Pedro Romero, Chief Accounting Officer and Senior VP 35,09127 *
James J. Partridge, SVP 21,03728 *
Current Directors and Executive Officers as a group 4,614,863 4.79%
*Represents less than 1%
13The options to purchase shares held by the Directors and Executive Officers cannot be exercised until the Corporation is up to date with all of its securities filings, including the 2006 Form 10-K.
14Includes options, which are exercisable upon grant, to purchase 1,157,600 shares.
15Includes options, which are exercisable upon grant, to purchase 744,000 shares.
16Includes 22,460 shares owned by the spouse of Mr. Díaz to which Mr. Díaz disclaims beneficial ownership.
17Includes 9,000 shares owned jointly with her spouse. Excludes 2,091,070 shares owned by Ms. Umpierre-Catinchi’s father and former director, Angel L. Umpierre, to which Ms. Umpierre-Catinchi disclaims ownership.
18Includes 550 shares owned by Martínez-Alvarez, Menéndez-Cortada & Lefranc Romero, PSC of which Mr. Menéndez-Cortada is an indirect beneficial owner.
19These are options, which are exercisable upon grant, to purchase 175,000 shares.
20These are options, which are exercisable upon grant, to purchase 175,000 shares.
21Includes options, which are exercisable upon grant, to purchase 72,000 shares.
22Includes options, which are exercisable upon grant, to purchase 502,110 shares.
23Includes options, which are exercisable upon grant, to purchase 68,000 shares.
24Includes options, which are exercisable upon grant, to purchase 110,000 shares.
25These are options, which are exercisable upon grant, to purchase 70,000 shares.
26Includes options, which are exercisable upon grant, to purchase 70,000 shares.
27Includes options, which are exercisable upon grant, to purchase 35,000 shares.
28Includes options, which are exercisable upon grant, to purchase 20,000 shares.

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Equity Compensation Plan Information
     The following table represents the Equity Compensation Plans approved by security holders as of December 31, 2005:
       
  Number of Weighted average Number of
  securities to be exercise price of securities
  issued upon outstanding remaining available
  exercise of options, warrants for future issuance
  outstanding and rights (excluding
  options, warrants   securities
  and rights   reflected in column (a))
Plan Category (a) (b) (c)
 
       
Equity compensation plan approved by security holders 5,316,410 $13.28 2,031,013
       
Equity compensation plan not approved by security holders N/A N/A N/A
       
Total:
 5,316,410 $13.28 2,031,013
Item 13.Certain Relationships and Related Transactions.
BUSINESS TRANSACTIONS BETWEEN FIRSTBANK OR ITS SUBSIDIARIES
AND EXECUTIVE OFFICERS OR DIRECTORS
     During fiscal years 2005 and 2006, directors and officers and persons or entities related to such directors and officers were customers of and had transactions with the Corporation and/or its subsidiaries. All such transactions, except for the ones set forth below, were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time they were made for comparable transactions with other persons who are not insiders, and did not either involve more than the normal risk of uncollectibility or present other unfavorable features:
Lawrence Odell is a partner at Martínez Odell & Calabria (“MOC”) andFebruary 2008, the Corporation entered into a Service Agreement, a copyan agreement with the Puerto Rico Department of which is included asTreasury that establishes an Exhibit to this Form 10-K, with MOC effective as of February 15, 2006 and amended on February 24, 2006 pursuant to which it agreed to pay to MOC $60,000 per month, exceptallocation schedule for the payment to be made in February 2006 which was for $30,000, as consideration for the services rendered to the Corporation by Lawrence Odell. The Service Agreement has a term of four years unless earlier terminated. The Corporation has also hired MOC to be the corporate and regulatory counsel to it and FirstBank. In 2006, the Corporation paid $1,043,023 to MOC for its legal services and $630,000 to MOC in accordance with the termsdeductibility of the Service Agreement.
Fernando Rodríguez-Amaro is a Managing Partner of RSM ROC & Company (“RSM”). During fiscal year 2005, RSM provided consulting services to the Corporation in the aggregate amount of approximately $93,000. Mr. Rodríguez-Amaro was not involved in the performance of these services and RSM ceased providing services to the Corporation prior to Mr. Rodríguez-Amaro’s appointment as a director in November 2005.
Fernando Scherrer was the Managing Partner and Head of Audit and Consulting Practices of Scherrer Hernández & Co. (“Scherrer Hernández”) until July 23, 2006. During fiscal year 2006 up until July 24, Scherrer Hernández provided accounting services to the Corporation in the aggregate amount of $502,972.
Item 14.Principal Accountant Fees and Services.
     Total fees paid to the external auditors for the years ended December 31, 2004 and 2005, were $851,850 and $7,035,605, respectively, distributed as follows:
Audit fees: $828,650 in 2004 for the audit of financial statements and internal control over financial reporting and $7,011,83529 in 2005 for the audit of financial statements, internal control over financial reporting, and internal investigation and restatement of 2004 financial statement.
29$5,361,404 of the $7,011,835 were fees paid with respect to the internal investigation and restatement of the 2004 financial statements. This amount was paid by the Corporation during fiscal years 2005 and 2006.

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Audit-related fees: $21,500 in 2004 and $21,500 in 2005 audit-related fees, which consisted mainly of the audits of employee benefit plans.
Other fees: $1,700 in 2004 and $2,270 in 2005 related to fees paid for access to an accounting and auditing electronic library.
Tax fees: none in 2004 and none in 2005.
     The Audit Committee has established controls and procedures that require the pre-approval of all audit, audit-related and permissible non-audit services provided by the independent auditor in order to ensure that the rendering of such services does not impair the auditor’s independence. The Audit Committee may delegate to one or more of its members the authority to pre-approve any audit, audit-related or permissible non-audit services, and the member to whom such delegation wasClass Action payment made must report any pre-approval decisions at the next scheduled meeting of the Audit Committee. Under the pre-approval policy, audit services for the Corporation are negotiated annually. In the event that any additional audit services not included in the annual negotiation, audit-related or permissible non-audit services are required by the Corporation an amendment toduring 2007. As a result of such agreement, the existing engagement letter or an additional proposed engagement letter should be obtained fromCorporation’s deferred income tax benefit will increase by approximately $5.4 million during the auditor and evaluated by the Audit Committee or the member(s)first quarter of the Audit Committee with authority to pre-approve auditor services. During 2005 all auditors’ fees were pre-approved by the Audit Committee.2008.

176F-68


PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) The following financial statements are included in Item 8:
- Report of Independent Registered Public Accounting Firm
- Consolidated Statements of Financial Condition at December 31, 2005 and 2004.
- Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 2005.
- Consolidated Statements of Changes in Stockholders’ Equity for Each of the Three Years in the Period Ended December 31, 2005.
- Consolidated Statements of Comprehensive Income for each of the Three Years in the Period Ended December 31, 2005.
- Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2005.
- Notes to the Consolidated Financial Statements.
(a)(2) Financial statement schedules.
     None.
(a)(3) Exhibits listed below are filed herewith as part of this Form 10-K or are incorporated herein by reference.
Index to Exhibits:
No.Exhibit
3.1Certificate of Incorporation(1)
3.2By-Laws(1)
4.0Form of Common Stock Certificate(1)
10.1FirstBank’s 1987 Stock Option Plan(2)
10.2FirstBank’s 1997 Stock Option Plan(2)
10.3Employment Agreements(2)
10.4Employment agreement Lawrence Odell
10.5Amendment to employment agreement Lawrence Odell
10.6Employment agreement Fernando Scherrer
10.7Services agreement Martinez Odell & Calabria
10.8Amendment to services agreement Martinez Odell & Calabria
10.9Separation agreement Fernando Batlle
10.10Consulting agreement Fernando Batlle
10.11Contract for purchase of building on Munoz Rivera Avenue
10.12Employment agreement form
14.1Code of Ethics for Senior Financial Officers(3)
14.2Code of Ethics applicable to all employees(3)
14.3Policy Statement and Standards of Conduct for Members of Board of Directors, Executive Officers and Principal Shareholders(3)
31.1Section 302 Certification of the CEO
31.2Section 302 Certification of the CFO
32.1Section 906 Certification of the CEO
32.2Section 906 Certification of the CFO
99.1Audit Committee Charter
(1)Incorporated by reference from Registration statement on Form S-4 filed by the Corporation on April 15, 1998.
(2)Incorporated by reference from the Form 10-K for the year ended December 31, 1998 filed by the Corporation on March 26, 1999.
(3)Incorporated by reference from the Form 10-K for the year ended December 31, 2003 filed by the Corporation on March 15, 2004.

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SIGNATURES
     Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST BANCORP.
By:/s/ Luis M. BeauchampDate:02/08/07
Luis M. Beauchamp
Chairman
President and Chief Executive Officer
     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Luis M. BeauchampDate:02/08/07
Luis M. Beauchamp
Chairman
President and Chief Executive Officer
/s/ Aurelio AlemánDate:02/08/07
Aurelio Alemán
Senior Executive Vice President and
Chief Operating Officer
/s/ Fernando ScherrerDate:02/08/07
Fernando Scherrer, CPA
Executive Vice President and
Chief Financial Officer
/s/ Fernando Rodríguez-AmaroDate:02/08/07
Fernando Rodríguez Amaro, Director
/s/ Richard Reiss-HuykeDate:02/08/07
Richard Reiss-Huyke, Director

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/s/ Jorge L. DíazDate:02/08/07
Jorge L. Díaz, Director
/s/ Sharee Ann Umpierre-CatinchiDate:02/08/07
Sharee Ann Umpierre-Catinchi, Director
/s/ José TeixidorDate:02/08/07
José Teixidor, Director
/s/ José L. Ferrer-CanalsDate:02/08/07
José L. Ferrer-Canals, Director
/s/ José Menéndez-CortadaDate:02/08/07
José Menéndez-Cortada, Lead Director
/s/ Pedro RomeroDate:02/08/07
Pedro Romero, CPA
Senior Vice President and
Chief Accounting Officer

179