UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

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

For the transition period from                      to                     

FIRST BANCORP.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

(787) 729-8200
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in rule 12b-2 of the Exchange Act).

Large accelerated filer þ       Accelerated filer o      Non-accelerated filer o

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

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

Common stock: 92,504,506 outstanding as of October 31, 2007.

 

 

FIRST BANCORP.
INDEX PAGE

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2007 and December 31, 2006			4
Consolidated Statements of Income (Unaudited) – Quarters ended September 30, 2007 and September 30, 2006 and Nine-months ended September 30, 2007 and September 30, 2006			5
Consolidated Statements of Cash Flows (Unaudited) – Nine-months ended September 30, 2007 and September 30, 2006			6
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Nine-months ended September 30, 2007 and September 30, 2006			7
Consolidated Statements of Comprehensive Income (Unaudited) – Quarters ended September 30, 2007 and September 30, 2006 and Nine-months ended September 30, 2007 and September 30, 2006			8
Notes to Consolidated Financial Statements (Unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
Item 3. Quantitative and Qualitative Disclosures About Market Risk			84
Item 4. Controls and Procedures			84
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			85
Item 1A. Risk Factors			85
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			85
Item 3. Defaults Upon Senior Securities			85
Item 4. Submission of Matters to a Vote of Security Holders			86
Item 5. Other Information			86
Item 6. Exhibits			86
SIGNATURES			87
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

FORWARD LOOKING STATEMENTS

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

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

	•		an adverse change in the Corporation’s ability to attract new clients and retain existing ones;
	•		general economic conditions, including prevailing interest rates and the performance of the financial markets, which may affect demand for the Corporation’s products and services and the value of the Corporation’s assets, including the value of the interest rate swaps that economically hedge the interest rate risk mainly relating to brokered certificates of deposit and medium-term notes as well as other derivative instruments used for protection from interest rate fluctuations;
	•		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, including the condo conversion loans in its Miami Agency;
	•		developments in technology;
	•		risks associated with changes to the Corporation’s business strategy to no longer acquire mortgage loans in bulk;
	•		the impact of Doral Financial Corporation and R&G Financial Corporation’s financial condition on the repayment of their outstanding secured loan to the Corporation;
	•		risks associated with being subject to the cease and desist orders;
	•		the Corporation’s ability to issue brokered certificates of deposit and the ability to 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 of the “forward-looking statements” to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal securities laws.

          Investors should carefully consider these factors and the risk factors outlined under Item 1A, Risk Factors, in First BanCorp’s 2006 Annual Report on Form 10-K and under Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q.

        

FIRST BANCORP

(Unaudited)

(In thousands, except for share information)		September 30, 2007				December 31, 2006
Assets
Cash and due from banks		$	138,037			$	112,341
Money market instruments			409,859				377,296
Federal funds sold and securities purchased under agreements to resell			4,501				42,051
Time deposits with other financial institutions			59,097				37,123
Total money market investments			473,457				456,470
Investment securities available for sale, at fair value:
Securities pledged that can be repledged			496,797				1,373,467
Other investment securities			795,389				326,956
Total investment securities available for sale			1,292,186				1,700,423
Investment securities held to maturity, at amortized cost:
Securities pledged that can be repledged			2,336,796				2,661,088
Other investment securities			1,064,700				686,043
Total investment securities held to maturity, fair value of $3,334,661 (2006 - $3,256,966)			3,401,496				3,347,131
Other equity securities			60,679				40,159
Loans, net of allowance for loan and lease losses of $177,486 (December 31, 2006 - $158,296)			11,124,036				11,070,446
Loans held for sale, at lower of cost or market			24,954				35,238
Total loans, net			11,148,990				11,105,684
Premises and equipment, net			161,717				155,662
Other real estate owned			7,297				2,870
Accrued interest receivable on loans and investments			106,287				112,505
Due from customers on acceptances			697				150
Other assets			296,237				356,861
Total assets		$	17,087,080			$	17,390,256
Liabilities & Stockholders’ Equity
Liabilities:
Non-interest-bearing deposits		$	613,868			$	790,985
Interest-bearing deposits (includes $4,314,141 measured at fair value as of September 30, 2007)			10,921,279				10,213,302
Federal funds purchased and securities sold under agreements to repurchase			2,519,026				3,687,724
Advances from the Federal Home Loan Bank (FHLB)			1,005,000				560,000
Notes payable (includes $14,184 measured at fair value as of September 30, 2007)			32,526				182,828
Other borrowings			231,792				231,719
Bank acceptances outstanding			697				150
Accounts payable and other liabilities			348,706				493,995
Total liabilities			15,672,894				16,160,703
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, authorized 50,000,000 shares: issued and outstanding 22,004,000 shares at $25 liquidation value per share			550,100				550,100
Common stock, $1 par value, authorized 250,000,000 shares; issued 102,402,306 shares as of September 30, 2007 (2006 - 93,151,856 shares)			102,402				93,152
Less: Treasury stock (at par value)			(9,898	)			(9,898	)
Common stock outstanding			92,504				83,254
Additional paid-in capital			108,322				22,757
Legal surplus			276,848				276,848
Retained earnings			428,355				326,761
Accumulated other comprehensive loss, net of tax benefit of $253 (December 31, 2006 - $221)			(41,943	)			(30,167	)
Total stockholders’ equity			1,414,186				1,229,553
Total liabilities and stockholders’ equity		$	17,087,080			$	17,390,256

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Quarter Ended								Nine-Month Period Ended
		September 30,				September 30,				September 30,				September 30,
(In thousands, except per share data)		2007				2006				2007				2006
Interest income:
Loans		$	223,738			$	216,953			$	678,288			$	710,646
Investment securities			62,794				70,490				202,138				214,171
Money market investments			9,399				30,268				19,961				65,042
Total interest income			295,931				317,711				900,387				989,859
Interest expense:
Deposits			143,188				135,647				401,160				479,639
Federal funds purchased and repurchase agreements			34,300				49,413				115,460				154,111
Advances from FHLB			9,172				2,876				26,370				9,921
Notes payable and other borrowings			4,242				7,073				17,718				24,429
Total interest expense			190,902				195,009				560,708				668,100
Net interest income			105,029				122,702				339,679				321,759
Provision for loan and lease losses			34,260				20,560				83,802				49,290
Net interest income after provision for loan and lease losses			70,769				102,142				255,877				272,469
Non-interest income:
Other service charges on loans			1,290				1,228				5,499				4,181
Service charges on deposit accounts			3,160				3,025				9,536				9,580
Mortgage banking activities gain			1,125				1,595				2,238				1,447
Net loss on investments and impairments			(3,119	)			(6,083	)			(6,714	)			(6,658	)
Net gain (loss) on partial extinguishment and recharacterization of secured commercial loans to local financial institutions			—				1,000				2,497				(10,640	)
Rental income			620				847				1,953				2,458
Gain on sale of credit card portfolio			—				—				2,819				—
Insurance reimbursements and other agreements related to a contingency settlement			15,075				—				15,075				—
Other operating income			5,769				6,433				17,742				20,048
Total non-interest income			23,920				8,045				50,645				20,416
Non-interest expenses:
Employees’ compensation and benefits			33,995				32,881				103,719				96,876
Occupancy and equipment			14,970				13,731				43,848				40,060
Business promotion			2,973				4,512				12,767				12,611
Professional fees			4,473				7,408				16,478				24,944
Taxes, other than income taxes			4,015				3,578				11,249				8,691
Insurance and supervisory fees			5,282				1,862				8,773				5,473
Other operating expenses			9,244				8,968				30,936				27,063
Total non-interest expenses			74,952				72,940				227,770				215,718
Income before income taxes			19,737				37,247				78,752				77,167
Income tax provision			(5,595	)			(10,565	)			(17,983	)			(14,819	)
Net income		$	14,142			$	26,682			$	60,769			$	62,348
Net income attributable to common stockholders		$	4,073			$	16,613			$	30,562			$	32,141
Net income per common share:
Basic		$	0.05			$	0.20			$	0.36			$	0.39
Diluted		$	0.05			$	0.20			$	0.36			$	0.39
Dividends declared per common share		$	0.07			$	0.07			$	0.21			$	0.21

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Nine-Month Period Ended
		September 30,				September 30,
(In thousands)		2007				2006
Cash flows from operating activities:
Net income		$	60,769			$	62,348
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			13,239				12,567
Amortization of core deposit intangible			2,477				2,582
Provision for loan and lease losses			83,802				49,290
Deferred income tax provision (benefit)			12,511				(35,606	)
Stock-based compensation recognized			2,848				5,380
Loss (gain) on sale of investments, net			1,482				(5,431	)
Other-than-temporary impairments on available-for-sale securities			5,232				12,089
Derivative instruments and hedging activities loss			6,481				64,026
Net gain on sale of loans and impairments			(1,485	)			(1,064	)
Net (gain) loss on partial extinguishment and recharacterization of secured commercial loans to local financial institutions			(2,497	)			10,640
Net amortization of premiums and discounts and deferred loan fees and costs			(936	)			(2,046	)
Amortization of broker placement fees			7,426				15,228
(Accretion) amortization of basis adjustments on fair value hedges			(2,061	)			458
Net accretion of discount and premiums on investment securities			(29,550	)			(26,243	)
Gain on sale of credit card portfolio			(2,819	)			—
Decrease in accrued income tax payable			(4,791	)			(42,621	)
Decrease in accrued interest receivable			6,088				2,543
(Decrease) increase in accrued interest payable			(26,374	)			26,564
Decrease in other assets			2,279				4,923
(Decrease) increase in other liabilities			(97,550	)			17,353
Total adjustments			(24,198	)			110,632
Net cash provided by operating activities			36,571				172,980
Cash flows from investing activities:
Principal collected on loans			2,330,949				5,209,573
Loans originated			(2,619,987	)			(3,491,295	)
Purchase of loans			(147,848	)			(134,310	)
Proceeds from sale of loans			97,500				116,215
Proceeds from sale of repossessed assets			43,756				32,989
Purchase of servicing assets			(1,614	)			(724	)
Proceeds from sale of available-for-sale securities			408,285				228,123
Purchase of securities held to maturity			(417,450	)			(402,607	)
Purchase of securities available for sale			—				(225,373	)
Principal repayments and maturities of securities held to maturity			392,480				509,567
Principal repayments of securities available for sale			163,959				168,697
Additions to premises and equipment			(19,294	)			(47,699	)
(Increase) decrease in other equity securities			(20,520	)			21,378
Net cash provided by investing activities			210,216				1,984,534
Cash flows from financing activities:
Net increase (decrease) in deposits			622,608				(651,589	)
Net decrease in federal funds purchased and securities sold under repurchase agreements			(1,168,698	)			(1,605,447	)
Net FHLB advances taken (paid)			445,000				(372,000	)
Repayments of notes payable and other borrowings			(150,000	)			—
Dividends paid			(44,981	)			(47,669	)
Issuance of common stock			91,967				—
Exercise of stock options			—				19,756
Net cash used in financing activities			(204,104	)			(2,656,949	)
Net increase (decrease) in cash and cash equivalents			42,683				(499,435	)
Cash and cash equivalents at beginning of period			568,811				1,380,640
Cash and cash equivalents at end of period		$	611,494			$	881,205
Cash and cash equivalents include:
Cash and due from banks		$	138,037			$	81,984
Money market instruments			473,457				799,221
		$	611,494			$	881,205
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on borrowings		$	565,286			$	559,114
Income taxes			9,738				91,126
Non-cash investing and financing activities:
Additions to other real estate owned		$	7,334			$	2,466
Additions to auto repossessions			84,225				86,021
Capitalization of servicing assets			913				852
Recharacterization of secured commercial loans as securities collateralized by loans			183,830				—

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Nine-Month Period Ended
(In thousands)		September 30, 2007				September 30, 2006
Preferred Stock		$	550,100			$	550,100
Common Stock Outstanding:
Balance at beginning of period			83,254				80,875
Issuance of common stock			9,250				—
Common stock issued under stock option plan			—				2,379
Balance at end of period			92,504				83,254
Additional Paid-In-Capital:
Balance at beginning of period			22,757				—
Issuance of common stock			82,717				—
Shares issued under stock option plan			—				17,377
Stock-based compensation recognized			2,848				5,380
Balance at end of period			108,322				22,757
Legal Surplus			276,848				265,844
Retained Earnings:
Balance at beginning of period			326,761				316,697
Net income			60,769				62,348
Cash dividends declared on common stock			(18,131	)			(17,462	)
Cash dividends declared on preferred stock			(30,207	)			(30,207	)
Cumulative adjustment for accounting change (adoption of FIN 48)			(2,615	)			—
Cumulative adjustment for accounting change (adoption of SFAS No. 159)			91,778				—
Balance at end of period			428,355				331,376
Accumulated Other Comprehensive Loss, Net of Tax:
Balance at beginning of period			(30,167	)			(15,675	)
Other comprehensive loss, net of tax			(11,776	)			(13,141	)
Balance at end of period			(41,943	)			(28,816	)
Total stockholders’ equity		$	1,414,186			$	1,224,515

The accompanying notes are an integral part of these statements.

FIRST BANCORP

		Quarter Ended								Nine-Month Period Ended
		September 30,				September 30,				September 30,				September 30,
(In thousands)		2007				2006				2007				2006
Net income		$	14,142			$	26,682			$	60,769			$	62,348
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during the period			15,364				48,412				(18,522	)			(20,017	)
Less: Reclassification adjustments for net loss and other-than-temporary impairments included in net income			3,119				6,083				6,714				6,658
Income tax (expense) benefit related to items of other comprehensive income			(173	)			(676	)			32				218
Other comprehensive income (loss) for the period, net of tax			18,310				53,819				(11,776	)			(13,141	)
Total comprehensive income		$	32,452			$	80,501			$	48,993			$	49,207

The accompanying notes are an integral part of these statements.

FIRST BANCORP

PART I — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

     The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Corporation’s Annual Audited Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the SEC and, accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2006, included in the Corporation’s 2006 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.

     The results of operations for the quarter and nine-month period ended September 30, 2007, are not necessarily indicative of the results to be expected for the entire year.

Recently issued accounting pronouncements

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. (“SFAS”) 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115”. This Statement allows entities to choose to measure certain financial assets and liabilities at fair value with changes in fair value reflected in earnings. The fair value option may be applied on an instrument-by-instrument basis. This Statement is effective for periods after November 15, 2007, however, early adoption is permitted provided that the entity also elects to apply the provisions of SFAS 157, “Fair Value Measurements”. The Corporation adopted SFAS 159 and SFAS 157 effective January 1, 2007. The Corporation decided to early adopt SFAS 159 for the callable brokered certificates of deposit (“brokered CDs”) and a portion 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, “Accounting for Derivative Instruments and Hedging Activities”, for the portfolio of callable interest rate swaps, callable brokered CDs and callable notes. One of the main considerations in determining to early adopt SFAS 159 for these instruments was to eliminate the operational procedures required by the long-haul method of accounting in terms of documentation, effectiveness assessment, and manual procedures followed by the Corporation to fulfill the requirements specified by SFAS 133.

     Upon adoption of SFAS 159, the Corporation selected the fair value measurement for approximately $4.4 billion, or 63%, of the brokered CDs portfolio and approximately $15.4 million, or 9%, of the medium-term notes portfolio (“SFAS 159 liabilities”). Interest rate risk on the brokered CDs and medium-term notes chosen for the fair value measurement option will continue to be economically hedged through callable interest rate swaps with the same terms and conditions. The cumulative after-tax effect on the opening balance of retained earnings from adopting these standards was an approximate increase of $91.8 million. Under SFAS 159, this one-time credit was not recognized in current earnings.

     With the Corporation’s elimination of the use of the long-haul method in connection with the adoption of SFAS 159, the Corporation will no longer amortize or accrete the basis adjustment for the SFAS 159 liabilities. The basis adjustment amortization or accretion is the reversal of 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 results 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 157 and SFAS 159. Refer to Note 14 to these interim unaudited consolidated financial statements for required disclosures and further information on the impact of adoption of this accounting pronouncement.

     In September 2006, the FASB issued SFAS 157, “Fair Value Measurement”. This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement is effective for periods beginning after November 15, 2007. Effective January 1, 2007, the Corporation elected to early adopt this Statement. For further details and for the effect on the Corporation’s financial condition and results of operations upon adoption of SFAS 157 and SFAS 159, refer to Note 14 to these interim unaudited consolidated financial statements.

     In June 2006, the FASB issued Financial Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”. This interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS 109, “Accounting for Income Taxes”. This interpretation provides a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for periods beginning after December 15, 2006. The Corporation adopted FIN 48 effective January 1, 2007. Refer to Note 13 for required disclosures and further information on the impact of the adoption of this accounting pronouncement.

     In March 2006, the FASB issued SFAS 156, “Accounting for Servicing of Financial Assets,” an amendment of SFAS 140. This Statement allows servicing assets and servicing liabilities to be initially measured at fair value along with any derivative instruments used to mitigate inherent risks. This Statement is effective for fiscal years beginning after September 15, 2006. The adoption of this Statement in 2007 did not have a material effect on the Corporation’s financial condition and results of operations as the Corporation continues to utilize the amortization method.

     On April 30, 2007, the FASB issued FASB Staff Position No. FIN 39-1 (“FSP FIN 39-1”), which amends FASB interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts (FIN 39)”. 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 is currently evaluating the effect, if any, of the adoption of FSP FIN 39-1 on its Financial Statements, commencing on January 1, 2008.

2 — EARNINGS PER COMMON SHARE

     The calculations of earnings per common share for the quarters and nine-month periods ended on September 30, 2007 and 2006 are as follows:

		Quarter Ended								Nine-Month Period Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(In thousands, except per share data)
Net Income:
Net income		$	14,142			$	26,682			$	60,769			$	62,348
Less: Preferred stock dividend			(10,069	)			(10,069	)			(30,207	)			(30,207	)
Net income available to common stockholders		$	4,073			$	16,613			$	30,562			$	32,141
Weighted-Average Shares:
Basic weighted average common shares outstanding			87,075				83,254				84,542				82,694
Average potential common shares			242				83				416				360
Diluted weighted average number of common shares outstanding			87,317				83,337				84,958				83,054
Earnings per common share:
Basic		$	0.05			$	0.20			$	0.36			$	0.39
Diluted		$	0.05			$	0.20			$	0.36			$	0.39

     Potential common shares consist of common stock issuable under the assumed exercise of stock options using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the quarter and nine-month period ended September 30, 2007, a total of 2,054,600 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 quarter and nine-month period ended September 30, 2006, there were 2,179,796 and 2,438,791 weighted average outstanding stock options, respectively, which were excluded from the computation of dilutive earnings per share because they were antidilutive.

3 – STOCK OPTION PLAN

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

       Under the Corporation’s stock option plan, the Compensation Committee had 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 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. The 1997 stock option plan expired in the first quarter of 2007 and there is no other plan in place.

     On January 1, 2006, the Corporation adopted SFAS 123R, “Share-Based Payment” using the “modified prospective” method. Using this method, and since all previously issued stock options were fully vested at the time of the adoption, the Corporation expenses the fair value of all employee stock options granted after January 1, 2006 (same as the prospective method). The compensation expense associated with stock options for the nine-month periods ended September 30, 2007 and 2006 was approximately $2.8 million and $5.4 million, respectively. The Corporation recognized compensation expense associated with stock options of $0.5 million for the third quarter of 2006, no stock options were granted during the third quarter of 2007. All employee stock options granted during 2007 and 2006 were fully vested at the time of grant.

     The activity of stock options during the first nine months of 2007 is set forth below:

Nine-Month Period Ended

September 30, 2007

Weighted-

Average

Remaining

Aggregate

Number of

Weighted-Average

Contractual

Intrinsic Value

Options

Exercise Price

Term (Years)

(In thousands)

Beginning of period

3,024,410

$

13.95

Options granted

1,170,000

9.20

End of period outstanding and exercisable

4,194,410

$

12.63

7.1

$

1,221

     The fair value of options granted in 2007 and 2006, that was estimated using the Black-Scholes option pricing, and the assumptions used are as follows:

		2007				2006
Weighted-average stock price at grant date and exercise price		$	9.20			$	12.68
Stock option estimated fair value		$	2.40-$2.45			$	4.56-$4.60
Weighted-average estimated fair value		$	2.43			$	4.57
Expected stock option term (years)			4.31-4.59				4.22-4.31
Expected volatility			32	%			46	%
Expected dividend yield			3.0	%			2.2	%
Risk-free interest rate			5.1	%			4.7% - 5.0	%

     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. 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.

     No stock options were exercised during the first nine-months of 2007. The total intrinsic value of options exercised during the first nine months of 2006 was approximately $10.0 million. Cash proceeds from options exercised during the first nine months of 2006 amounted to approximately $19.8 million.

4 – INVESTMENT SECURITIES

     Investment Securities Available for Sale

     The amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of investment securities available for sale as of September 30, 2007 and December 31, 2006 were as follows:

		September 30, 2007																				December 31, 2006
						Gross												Weighted								Gross												Weighted
		Amortized				Unrealized								Fair				average				Amortized				Unrealized								Fair				average
		cost				gains				losses				value				yield%				cost				gains				losses				value				yield%
														(Dollars in thousands)
Obligations of U.S. Government sponsored agencies:
After 1 to 5 years		$	500			$	—			$	—			$	500				5.70			$	—			$	—			$	—			$	—				—
After 5 to 10 years			107,595				39				2,247				105,387				4.23				402,542				6				11,820				390,728				4.31
After 10 years			12,984				23				6				13,001				6.16				12,984				—				120				12,864				6.16
Puerto Rico Government obligations:
After 1 to 5 years			13,924				134				336				13,722				4.99				4,635				126				—				4,761				6.18
After 5 to 10 years			7,174				199				99				7,274				5.66				15,534				219				508				15,245				4.86
After 10 years			4,738				23				213				4,548				5.81				5,376				98				178				5,296				5.88
United States and Puerto Rico Government obligations			146,915				418				2,901				144,432				4.60				441,071				449				12,626				428,894				4.43
Mortgage-backed securities:
FHLMC certificates:
Within 1 year			97				—				—				97				5.47				82				—				—				82				5.99
After 1 to 5 years			846				23				—				869				6.96				1,666				36				—				1,702				6.98
After 10 years			5,325				55				153				5,227				5.63				5,846				55				110				5,791				5.61
			6,268				78				153				6,193				5.63				7,594				91				110				7,575				5.92
GNMA certificates:
After 1 to 5 years			612				8				—				620				6.47				866				10				—				876				6.44
After 5 to 10 years			760				4				7				757				6.03				795				3				3				795				5.53
After 10 years			337,883				405				7,757				330,531				5.26				379,363				470				7,136				372,697				5.26
			339,255				417				7,764				331,908				5.26				381,024				483				7,139				374,368				5.26
FNMA certificates:
After 1 to 5 years			43				1				—				44				7.11				90				—				—				90				7.34
After 5 to 10 years			40,166				10				725				39,451				4.83				18,040				10				305				17,745				4.87
After 10 years			626,892				665				12,196				615,361				5.18				864,508				673				11,476				853,705				5.18
			667,101				676				12,921				654,856				5.16				882,638				683				11,781				871,540				5.17
Mortgage pass-through certificates:
After 10 years			165,817				3				19,059				146,761				6.13				367				3				—				370				7.28
Mortgage-backed securities			1,178,441				1,174				39,897				1,139,718				5.33				1,271,623				1,260				19,030				1,253,853				5.21
Corporate bonds:
After 5 to 10 years			1,300				—				137				1,163				7.70				1,300				—				83				1,217				7.70
After 10 years			4,411				—				784				3,627				7.97				4,412				—				668				3,744				7.97
Corporate bonds			5,711				—				921				4,790				7.91				5,712				—				751				4,961				7.91
Equity securities (without contractual maturity)			3,316				—				70				3,246				—				12,406				452				143				12,715				3.70
Total investment securities available for sale		$	1,334,383			$	1,592			$	43,789			$	1,292,186				5.25			$	1,730,812			$	2,161			$	32,550			$	1,700,423				5.01

     Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted-average yield on investment securities held for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gains or losses on available for sale securities are presented as part of accumulated other comprehensive income.

     The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2007 and December 31, 2006:

		As of September 30, 2007
		Less than 12 months								12 months or more								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
										(In thousands)
Debt securities
Obligations of U.S. Government sponsored agencies		$	—			$	—			$	97,891			$	2,253			$	97,891			$	2,253
Puerto Rico Government obligations			1,320				8				13,520				640				14,840				648
Mortgage-backed securities
FHLMC			—				—				3,447				153				3,447				153
GNMA			1,158				16				313,829				7,748				314,987				7,764
FNMA			1,666				11				628,791				12,910				630,457				12,921
Mortgage pass-through trust certificates			146,415				19,059				—				—				146,415				19,059
Corporate bonds			—				—				4,790				921				4,790				921
Equity securities			933				70				—				—				933				70
		$	151,492			$	19,164			$	1,062,268			$	24,625			$	1,213,760			$	43,789

		As of December 31, 2006
		Less than 12 months								12 months or more								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
										(In thousands)
Debt securities
Obligations of U.S. Government sponsored agencies		$	21,802			$	146			$	381,790			$	11,794			$	403,592			$	11,940
Puerto Rico Government obligations			—				—				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			1,629				143				—				—				1,629				143
		$	754,347			$	12,147			$	869,734			$	20,403			$	1,624,081			$	32,550