Press Release Details

SAN JUAN, Puerto Rico--(BUSINESS WIRE)-- First BanCorp (the “Corporation”) (NYSE: FBP), the bank holding company for FirstBank Puerto Rico (“FirstBank” or “the Bank”), today reported a net loss for the third quarter of 2011 of $24.0 million, or $1.46 per diluted share, compared to a net loss of $14.9 million for the second quarter of 2011 and a net loss of $75.2 million for the third quarter of 2010. The results for the third quarter of 2011 included a provision for loan and lease losses of $46.4 million, down from $59.2 million for the second quarter of 2011 and from $120.5 million for the third quarter of 2010. While results show an increase in net interest income and a decrease in non-interest expenses, they were offset by lower gains on sales of investment securities and mortgage loans and by a $4.4 million loss from the Bank’s investment in an unconsolidated entity for the third quarter of 2011. The net loss for the nine-month period ended September 30, 2011 was $67.4 million, or $4.17 per diluted share, compared to a net loss of $272.9 million for the same period in 2010. Except for ratios identified as pro-forma, all per share data included in this press release has been computed without giving effect to the issuance of 150 million shares of the Corporation’s common stock in connection with the recently completed capital raise.

Completion of Capital Raise:

• On October 7, 2011, the Corporation completed the previously announced private placement of $525 million of common stock to institutional investors and converted the 424,174 shares of its Fixed Rate Cumulative Mandatorily Convertible Series G Preferred Stock (“Series G Preferred Stock”) held by the U.S. Treasury into 32.9 million shares of common stock. Following the issuance of common stock in the capital raise and the conversion of the Series G Preferred Stock, the Corporation has 204.2 million common shares outstanding.
• Pro-forma regulatory Total capital, Tier 1 capital and Leverage ratios as of September 30, 2011 for the Corporation of 16.84%, 15.51% and 11.41%, respectively, reflecting the $525 million capital raise (net of offering costs and the payment of cumulative dividends on the Series G Preferred Stock).
• Pro-forma Tangible Common Equity and Tier 1 common equity to risk-weighted assets ratios as of September 30, 2011 for the Corporation of 9.69% and 12.76%, respectively, reflecting the $525 million capital raise (net of offering costs and the payment of cumulative dividends on the Series G Preferred Stock) and the conversion of the Series G Preferred Stock.
• Pro-forma regulatory Total capital, Tier 1 capital and Leverage ratios as of September 30, 2011 for the Corporation’s wholly owned banking subsidiary, FirstBank, of 16.33%, 15.01% and 11.06%, respectively, reflecting $435 million of the capital raise contributed to the Bank. All ratios substantially in excess of the minimum requirements under the Consent Order with the FDIC.

2011 Third Quarter Highlights Compared with 2011 Second Quarter:

• Credit quality trends continued to improve:

• Provision for loan and lease losses decreased $12.7 million to $46.4 million.
• The level of non-performing loans decreased for the sixth consecutive quarter, the decline from the second quarter of 2011 was $24.7 million to $1.19 billion.
• Net charge-offs declined $12.4 million to $67.6 million, or 2.50% of average loans.

• Net interest income, excluding fair value adjustments, increased $1.2 million and net interest margin increased 18 basis points to 2.82%, mainly reflecting the use of proceeds from sales, calls and maturities of low-yielding investment securities and liquidity obtained from the growth in core deposits to pay down borrowings at higher interest rates. By selling low-yielding investments and increasing the proportion of loans to total earning assets, the Corporation enhanced the overall yield of its interest-earnings assets.
• Non-interest expenses decreased $3.5 million to $82.9 million, reflecting decreases in almost all major categories including marketing, losses related to real estate owned (REO) operations and a decline in the provision for unfunded loan commitments.
• Non-interest income decreased $24.9 million to $14.0 million:

• Previous quarter included a gain of $20.2 million realized on the sale of $290 million of U.S. agency mortgage-backed securities (“MBS”) and a $6.8 million gain on the bulk sale of $282 million of performing residential mortgage loans, both in connection with deleveraging strategies contemplated in the Corporation’s capital plan.
• Sale of $500 million of low-yielding U.S. Treasury notes as part of the Corporation’s balance sheet restructuring strategies, realizing a gain of $9.0 million, which was offset by a $9.0 million loss on the early termination of $200 million high-cost repurchase agreements.
• Gain of $3.5 million recorded in connection with a tender offer of the Puerto Rico Housing Finance Authority.
• Non-cash charges in the third quarter of $4.4 million related to FirstBank’s investment in the unconsolidated entity to which FirstBank sold loans in February 2011, or $2.8 million higher than the loss recorded in the second quarter.

• Balance sheet and capital position:

• Decrease in total assets by $638.4 million, or 4%, to $13.5 billion primarily related to sales, calls and maturities of investment securities resulting in proceeds used in part to pay down brokered CDs and for the early termination of repurchase agreements.
• Increase in core deposits of $259.5 million, or 4%, while brokered CDs decreased by $713.7 million, or 14%.
• Total capital, Tier 1 capital and Leverage ratios of the Corporation were 12.39%, 11.07% and 8.41%, respectively, compared to 12.40%, 11.08% and 8.04%, respectively, for the previous quarter.
• Regulatory Total capital, Tier 1 capital and Leverage ratios of the Corporation’s wholly owned banking subsidiary, FirstBank were 12.15%, 10.84% and 8.24%, respectively, compared to 12.15%, 10.83%, and 7.87%, respectively, for the previous quarter. All of the capital ratios as of September 30, 2011 are above the minimum required under the Consent Order with the FDIC.
• 4.79% Tier 1 common risk-based capital ratio, down from 4.93%.
• 3.84% tangible common equity ratio, same as previous quarter.

Aurelio Alemán, President and Chief Executive Officer of First BanCorp, commented “We are pleased with the successful completion of the capital raise efforts and the achievement of very strong capital levels. For the past several quarters we have focused our strategies and efforts on improving our capital position, reducing risk in the loan portfolio and positioning ourselves to return to a path of sustained profitability. Now that we have completed the capital raise, our priorities will focus on rebuilding top line revenues while continuing to improve asset quality by achieving targeted reductions in non-performing loans. However, economy and market conditions continue to pose challenges to our industry”.

Mr. Aleman continued, “Through this recapitalization process, our franchise has remained strong, loan origination for the third quarter, including renewals and refinancings, reached $768 million across all business segments, and core deposits increased $259.5 million, or 4%, coupled with the launching of new deposit products.”

“Through the commitment of our Board of Directors, management and employees, we are determined to continue delivering tailored banking products and the personal service that will best serve our clients and enhance shareholder value,” concluded Mr. Alemán.

The following table provides details with respect to the calculation of (loss) earnings per common share for the quarters ended September 30, 2011, June 30, 2011 and September 30, 2010 and for the nine-month periods ended September 30, 2011 and 2010:

This press release should be read in conjunction with the accompanying tables (Exhibit A), which are an integral part of this press release.

Capital Plan Update

On October 7, 2011, the Corporation successfully completed a $525 million capital raise. New capital investment proceeds amounted to approximately $490.4 million (net of offering costs), of which $435 million have been contributed to the Corporation’s wholly owned banking subsidiary, FirstBank. As previously announced, lead investors include funds affiliated with Thomas H. Lee Partners, L.P. (“THL”) and Oaktree Capital Management, L.P. (“Oaktree”) purchased an aggregate of $348.2 million ($174.1 million each investor) of common stock of the Corporation.

In connection with the closing, the Corporation issued 150 million shares of common stock at $3.50 per share to institutional investors. Upon the time of completion of the transaction and the conversion into common stock of the Series G Preferred Stock held by the U.S. Treasury, each of THL and Oaktree became owners of 24.36% of the Corporation’s 204.2 million shares of common stock outstanding. Subsequent to the closing, in a related transaction, on October 12, 2011, THL purchased in the aggregate 937,493 shares of common stock from certain of the institutional investors who participated in the capital raise transaction. At the date of issuance of this press release, THL and Oaktree own 24.82% and 24.36%, respectively, of the total shares of common stock outstanding. As part of the capital raise a representative from each of these two new investors has been appointed to the Bank’s Board of Directors. The new Bank’s Board members include Thomas M. Hagerty, a Managing Director at THL and Michael P. Harmon, a Managing Director with the Principal Group of Oaktree. In addition, Mr. RobertoR. Herencia was appointed as the new non-executive chairman of the Bank and the Corporation’s Board of Directors.

The completion of the capital raise allowed the conversion of the 424,174 shares of the Corporation’s Series G Preferred Stock, held by the U.S. Treasury, into 32.9 million shares of common stock at a conversion price of $9.66. This conversion required for completion the payment of $26.4 million for past due undeclared cumulative dividends on the Series G Preferred Stock. The book value of the Series G Preferred Stock was approximately $277 million greater than the $89.6 million fair value of the common stock issued to the U.S. Treasury in the exchange. Although the excess book value of approximately $277 million will be treated as a non-cash increase in income available to common shareholders in the fourth quarter of 2011, it has no effect on the Corporation’s overall equity or its regulatory capital.

With the $525 million capital infusion and the conversion to common stock of the Series G Preferred Stock held by the U.S. Treasury (after deducting estimated offering expenses and the $26.4 million payment of cumulative dividends on the Series G Preferred Stock), the Corporation increased its total common equity by approximately $830 million.

The following depicts the pro forma impact of the issuance of shares in the capital raise and in the conversion of the Series G Preferred Stock on the capital ratios of the Bank and the Corporation at September 30, 2011 (giving effect to $435 million being downstreamed to the Bank).

On October 25, 2011, the Corporation commenced a rights offering to sell 10,651,835 shares of common stock to stockholders who owned common stock at the close of business on September 6, 2011 (the “Record Date”). Stockholders who owned shares of common stock of the Corporation as of the Record Date received at no charge a transferable right to purchase newly-issued shares of common stock in the rights offering at the same $3.50 price per share paid by investors in the capital raise. Each right will entitle stockholders to purchase one newly-issued share for every two shares of common stock owned on the Record Date.

Earnings Highlights

The higher net loss for the quarter ended September 30, 2011, compared to the second quarter of 2011, was mainly driven by higher gains on sales of investment securities and residential mortgage loans completed in the previous quarter as part of deleveraging strategies contemplated in the Corporation’s capital plan. Non-cash charges of $4.4 million related to the Bank’s equity investment in the unconsolidated entity that acquired certain of the Corporation’s loans in the first quarter of 2011, and negative adjustments of $2.6 million related to changes in the fair value of derivative instruments and certain medium-term notes also contributed to a higher net loss during the third quarter. The latter was primarily a result of a significant reduction in market interest rates, as well as the expectation for a sustained low interest rate environment. The reduction in rates is reflected in the discount factors of the instruments’ projected cash flows. These variances were partially offset by a $12.7 million reduction in the provision for loan and lease losses, a $3.5 million reduction in non-interest expenses and improvements in the net interest margin.

Adjusted Pre-Tax, Pre-Provision Income Trends

One metric that Management believes is useful in analyzing performance is the level of earnings adjusted to exclude tax expense, the expense for the provision for loan and lease losses and certain significant items (See “Adjusted Pre-Tax, Pre-Provision Income” in “Basis of Presentation” for a full discussion.)

The following table shows adjusted pre-tax, pre-provision income of $29.1 million in the 2011 third quarter, down from $30.0 million in the prior quarter:

As discussed in the sections that follow, the decrease in pre-tax, pre-provision income from the 2011 second quarter primarily reflected a decrease of $5.7 million in revenues from mortgage banking activities mainly due to a lower volume of sales of residential mortgage loans. This was partially offset by an increase of $1.2 million in net interest income, excluding fair value adjustments, and a $3.5 million decrease in operating expenses, reflecting reductions in almost all major non-interest expense categories.

Net Interest Income

Net interest income, excluding fair value adjustments on derivatives and financial liabilities measured at fair value (“valuations”) and net interest income on a tax-equivalent basis are non-GAAP measures. (See “Basis of Presentation” below for additional information.) The following table reconciles net interest income in accordance with GAAP to net interest income, excluding valuations, and net interest income on a tax-equivalent basis. The table also reconciles net interest spread and net interest margin on a GAAP basis to these items excluding valuations and on a tax-equivalent basis.

Net interest income (excluding valuations) increased $1.2 million compared to the 2011 second quarter. The net interest margin (excluding valuations) reflected an 18 basis points improvement to 2.82% as the Corporation used proceeds from sales of low-yielding U.S. Treasury securities, matured U.S. Treasury Bills and FHLB Notes called prior to maturity to pay down borrowings at higher interest rates. By selling low-yielding investments and increasing the proportion of loans to total earning assets, the Corporation enhanced the overall yield of its interest-earnings assets. An improved deposit mix with the planned reduction in brokered CDs and the restructuring of certain repurchase agreements reduced the overall cost of funding and also contributed to the increase in net interest income and margin.

As part of the Corporation’s balance sheet restructuring strategies, the average volume of investment securities decreased by $763.0 million, primarily related to the sale of an aggregate $500 million of 2, 3 and 5-Years U.S. Treasury Notes with an average yield of 1.40%, sales and maturities of an aggregate $300 million of U.S. Treasury Bills with an average yield of 0.06% and calls prior to maturity of $240 million of FHLB Notes with an average yield of 1.03%. Proceeds from sales, calls and maturities of investment securities were used, in part, to paydown approximately $814 million of brokered CDs with an average cost of 2.18% and for the early cancellation of $200 million of repurchase agreements with an average rate of 4.43%. In addition, during the third quarter of 2011, the Corporation restructured $600 million of repurchase agreements through amendments that have been effective for $200 million of such agreements since July 2011 and that resulted in a $0.7 million decrease in interest expense during the third quarter. The amendments for the remaining $400 million restructured repurchase agreements will become effective in the fourth quarter of 2011 and are expected to result in additional reductions in the average cost of funding.

In addition to the positive impact of the aforementioned sales of low-yielding investments and use of liquidity to pay borrowings at higher rates, the net interest margin benefited from an improved deposit mix. The average balance of brokered CDs decreased $662.9 million to $4.9 billion in the third quarter of 2011 from $5.6 billion in the second quarter of 2011, while the average balance of non-brokered deposits increased by $136.1 million. The growth in non-brokered deposits was driven primarily by money market accounts and certificates of deposit. The average rate paid on interest-bearing core deposit accounts was lower than the average rate on matured brokered CDs, thus contributing to a 5 basis points decrease in the overall average cost of interest-bearing deposits during the third quarter of 2011 to 1.80%.

Partially offsetting the improvements from the aforementioned actions was a decrease of $164.9 million in the average volume of loans and lower yields in residential mortgage loans, primarily reflecting:

• A $64.8 million decline in average residential mortgage loans, primarily reflecting the full effect of the $282 million bulk sale completed in the previous quarter combined with foreclosures and pay downs, partially offset by an increased mortgage lending activity.
• A $42.2 million decline in average consumer loans (including finance leases), primarily related to principal repayments and charge-offs that offset loan originations.
• A 12 basis points decrease in the average yield on residential mortgage loans adversely affected by a combination of factors including the full effect of high-yielding mortgage loans sold in the previous quarter, lower income earned for non-performing loans accounted for on a cash basis and new originations at lower rates.

The average balance of the commercial (“C&I”) and commercial mortgage portfolio increased by $75.7 million driven by approximately $233.5 million of loans granted to government entities during the third quarter.

Provision for Loan and Lease Losses

The provision for loan and lease losses for the third quarter of 2011 was $46.4 million, down $12.7 million from the second quarter 2011 provision. The decline in the provision reflected lower charges to specific reserves as the volume of adversely classified commercial and construction loans declined during the third quarter. The current quarter’s provision for loan and lease losses was $21.2 million less than total net charge-offs, reflecting the adequacy of previously established reserves (see “Credit Quality” section below for a full discussion.)

Non-Interest Income

Non-interest income decreased $24.9 million from the 2011 second quarter primarily due to:

• The impact in the previous quarter of a gain of $20.2 million realized on the sale of $290 million of MBS and the gain of $6.8 on the bulk sale of $282 million of residential mortgage loans to another financial institution, both transactions completed as part of deleveraging strategies included in the Corporation’s capital plan.
• Equity in losses of unconsolidated entities of $4.4 million recorded in the third quarter compared to $1.5 million in the second quarter. This non-cash charge mainly relates to the Bank’s investment in CPG/GS PR NPL, LLC (“CPG/GS”), the entity that purchased $269.2 million of loans from FirstBank during the first quarter of 2011. The Bank held a 35% subordinated ownership interest in CPG/GS as of September 30, 2011.
• A $0.6 million decrease in fees from the broker-dealer subsidiary mainly due to lower underwriting fees as fewer deals were closed during the third quarter.

Partially offset by:

• A $3.5 million gain attributable to a tender offer by the Puerto Rico Housing Finance Authority to purchase certain of its outstanding Bonds. Bonds held by the Corporation with a book value of $19.8 million was exchanged for cash as part of the tender offer and the difference between the cash received and the book value of such instruments was recorded as part of “Gain on sale of investments” in the table above.
• An increase of $0.8 million in gains associated with the Corporation’s residential mortgage loan securitizations, included as part of “Mortgage banking activities” in the table above.
• A $0.4 million gain on the sale of a portfolio of dwelling insurance policies to another financial institution, included as part of “Other operating income” in the table above.

As part of its balance sheet restructuring strategies, the Corporation sold during the third quarter $500 million of low-yielding U.S. Treasury Notes and used the proceeds to prepay $200 million of repurchase agreements that carried an average rate of 4.43% and to pay down maturing brokered CDs. The Corporation offset prepayment penalties of $9.0 million for the early termination of the repurchase agreements with gains of $9.0 million from the sale of U.S. Treasury Notes. This transaction, combined with the aforementioned restructuring of repurchase agreements, contributed immediately to improvements in the net interest margin.

Non-Interest Expenses

Non-interest expenses decreased $3.5 million to $82.9 million in the third quarter of 2011, compared to the second quarter of 2011, reflecting reductions in almost all major categories including:

• A $1.1 million reduction in business promotion expenses due to lower expenses incurred in advertising campaigns and sponsoring activities.
• A $1.0 million decrease in losses from REO operations as the previous quarter included a $1.4 million loss on the disposition of a repossessed construction project in Puerto Rico.
• A $0.5 million decrease in the deposit premium insurance assessment due to the decline in average total assets.
• A $1.9 million decrease in “Other” expenses, spread through several items including a decline of $1.1 million in the provision for off-balance sheet exposures, mainly for unfunded loan commitments, and a decrease of $0.2 million in losses on repossessed boats. Decreases in mailing, EDP data lines, traveling and collections expenses also contributed to the decline in other expenses.

Income Taxes

The income tax expense for the third quarter of 2011 amounted to $2.9 million compared to an income tax expense of $2.6 million for the second quarter of 2011. As of September 30, 2011, the deferred tax asset, net of a valuation allowance of $365.8 million, amounted to $5.5 million compared to $6.4 million as of June 30, 2011. The Corporation continued to increase the valuation allowance related to deferred tax assets created in connection with the operations of its banking subsidiary FirstBank.

CREDIT QUALITY

Credit quality performance in the 2011 third quarter reflected continued improvement in delinquency trends. Key credit quality metrics that showed improvement include, a $24.7 million reduction in non-performing loans, a $12.3 million decline in total non-performing assets and a $35.8 million decline in the level of adversely classified commercial and construction loans compared to the prior quarter. Total adversely classified commercial and construction loans held for investment decreased to $1.185 billion as of September 30, 2011 ($547.9 million - C&I loans; $324.1 million – commercial mortgage loans; $312.6 million – construction loans) from $1.220 billion as of June 30, 2011 ($581.1 million – C&I loans; $305.4 million commercial mortgage loans; $334.0 million – construction loans). Also, new non-performing loans inflows for construction, commercial mortgage and residential mortgage loans decreased compared to the prior quarter.

Non-Performing Loans and Non-Performing Assets

Total non-performing loans were $1.19 billion, down $24.7 million from $1.21 billion at June 30, 2011. The decrease from the first quarter of 2011 primarily reflected declines in non-performing residential, construction and commercial mortgage loans, partially offset by increases in C&I and consumer non-performing loans.

Non-performing residential mortgage loans decreased $15.6 million, or 4%, from June 30, 2011. The decrease was associated with several factors, including: (i) loans modified that successfully completed a trial period prior to be restored to accrual status, (ii) charge-offs, and (iii) foreclosures that contributed, in part, to the $12.9 million increase in the REO portfolio. Also, the level of inflows of non-performing residential mortgage loans decreased 3% compared to inflows in the second quarter, however, the level of inflows was higher than the volume of loans brought current and restored to accrual status during the third quarter. Non-performing residential mortgage loans decreased by $16.1 million and $2.7 million in Puerto Rico and the United States, respectively, while non-performing residential mortgage loans in the Virgin Islands increased by $3.2 million. Approximately $248.8 million, or 68% of total non-performing residential mortgage loans, have been written down to their net realizable value.

Non-performing construction loans decreased by $9.9 million, or 4%, from the end of the second quarter of 2011 mainly reflecting charge-offs and payments. Construction loans net charge-offs amounted to $16.8 million in the third quarter, including three relationships with charge-offs in excess of $3 million. Non-performing construction loans in Puerto Rico decreased $9.3 million, or 6%, mainly due to net charge-offs of $12.4 million in the third quarter, including two relationships with aggregate charge-offs amounting to $10.2 million. In the United States, non-performing construction loans decreased by $1.5 million driven by a $2.3 million loan paid-off during the third quarter, while non-performing construction loans in the Virgin Islands region increased by $0.9 million. The increase in the Virgin Islands mainly reflects two construction loans to individuals amounting to $1.1 million placed in non-accruing status during the current quarter. The inflows of non-performing construction loans declined 64% as compared to the second quarter. The largest loan entering into non-accrual during the current quarter amounted to $5.2 million and relates to a mid-rise residential project in Puerto Rico.

Non-performing commercial mortgage loans decreased by $7.7 million, or 4%, from the end of the second quarter of 2011. The decrease was spread through the Corporation’s geographic segments, reflecting a $3.7 million decrease in Puerto Rico driven by loans brought current during the quarter and foreclosures. Non-performing commercial mortgage loans in the United States decreased by $1.7 million mainly related to a trouble debt restructuring (“TDR”) restored to accrual status after a sustained period of performance and for which the Corporation expects to fully collect principal and interest amounts according to modified terms. In the Virgin Islands, non-performing commercial mortgage loans decreased by $2.3 million also in connection with a TDR restored to accrual status after a sustained period of performance. The level of inflows during the third quarter decreased by 88% compared to the second quarter.

C&I non-performing loans increased by $5.5 million, or 2%, on a sequential quarter basis, reflecting an increase of $28.4 million in the level of new non-performing loans compared to the prior quarter level. The increased level of inflows was primarily centered in seven large relationships in Puerto Rico that in aggregate amounted to approximately $38 million. Most of these loans reflects current delinquencies under 90 days but placed in non-accruing status due to financial difficulties of the borrowers. Partially offsetting the inflows of non-performing C&I loans in Puerto Rico were charge-offs of $22.4 million, including three relationships with charge-offs in excess of $3 million, a $6.3 million TDR restored to accrual status after a sustained performance period and foreclosures. Also, a $3.6 million loan was paid-off during the third quarter in Puerto Rico. Non-performing C&I loans outside of Puerto Rico remained almost unchanged with a decrease of $0.5 million in the United States and a $0.4 million increase in the Virgin Islands region.

The levels of non-performing consumer loans, including finance leases, showed a $3.0 million increase during the third quarter. The increase was mainly related to auto and boat financings in Puerto Rico.

As of September 30, 2011, approximately $386.0 million, or 33%, of total non-performing loans held for investment have been charged-off to their net realizable value. (See Allowance for Loan and Lease Losses discussion below for additional information.)

The REO portfolio, which is part of non-performing assets, increased by $12.9 million, mainly reflecting increases in both residential and commercial properties foreclosures in Puerto Rico, partially offset by sales. Consistent with the Corporation’s assessment of the value of properties and current and future market conditions, management continues to execute strategies to dispose of real estate acquired in satisfaction of debt. During the third quarter of 2011, the Corporation sold approximately $8.8 million of REO properties ($6.7 million in Puerto Rico, $2.0 million in Florida, and $0.1 million in the Virgin Islands), compared to $16.9 million in the previous quarter.

The over 90-day delinquent, but still accruing, loans, excluding loans guaranteed by the U.S. Government, decreased during the third quarter of 2011 by $3.9 million to $70.1 million, or 0.66% of total loans held for investment, at September 30, 2011. Loans 30 to 89 days delinquent also decreased by $34.6 million, or 9%, to $331.5 million as of September 30, 2011.

Allowance for Loan and Lease Losses

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

Provision for Loan and Lease Losses

The provision for loan and lease losses of $46.4 million decreased by $12.7 million, compared to the provision recorded for the second quarter of 2011. The decrease in the provision was principally related to the construction and C&I loan portfolio in Puerto Rico. These variances were partially offset by an increase in the provision for consumer and residential mortgage portfolio in Puerto Rico and an increase in the provision for construction loans in the Virgin Islands.

The Corporation recorded a $32.1 million provision for loan and lease losses in Puerto Rico in the third quarter of 2011, compared to a provision of $58.3 million for the second quarter of 2011. The overall decrease in Puerto Rico was mainly related to a decrease of $27.2 million in the provision for construction loans in Puerto Rico, driven by lower charges to specific reserves, as the previous quarter includes significant increased reserves for certain land loans participations. Also the volume of adversely classified construction loans continued to decrease and approximately 95% of the construction charge-offs in Puerto Rico recorded in the third quarter relates to loans with previously established adequate reserves. In addition, the provision for C&I loans in Puerto Rico decreased by $13.9 million also related to lower charges to specific reserves; approximately 78% of the C&I charge-offs in Puerto Rico recorded in the third quarter relates to loans with previously established adequate reserves. These decreases were partially offset by higher provisions for consumer and residential mortgage loans. The provision for consumer loans in Puerto Rico increased by $10.0 million, reflecting a combination of factors that includes increases in loss ratios for boats financing loans, small loans and personal loans and, to a lesser extent, the increase in non-performing loans. The provision for residential mortgage loans in Puerto Rico increased by $5.1 million, mainly reflecting increased charge-offs.

The Virgin Islands recorded an increase of $10.2 million in the provision for loan losses mainly related to additional charges to the specific reserve assigned to the previously reported $100 million construction loan relationship placed in non-accrual status in the first quarter of 2011. A charge-off amounting to $3.7 million was recorded for this relationship in the third quarter.

With respect to the United States loan portfolio, the Corporation recorded a $5.4 million provision for the third quarter of 2011, compared to $2.2 million for the second quarter of 2011, an increase of $3.2 million. The change was mainly attributable to increases in the provision for certain collateral dependent C&I and commercial mortgage loans. This was partially offset by a $3.6 million decrease in the provision for construction loans due to improvements in historical loss ratios and the overall decrease of this portfolio.

The following table sets forth information concerning the ratio of the allowance to non-performing loans held for investment as of September 30, 2011 and June 30, 2011 by loan category:

The following table sets forth information concerning the composition of the Corporation’s allowance for loan and lease losses as of September 30, 2011 and June 30, 2011, respectively, by loan category and by whether the allowance and related provisions were calculated individually for impairment purposes or through a general valuation allowance.

Net Charge-Offs

Total net charge-offs for the third quarter of 2011 were $67.6 million, or 2.50% of average loans on an annualized basis, compared to $80.0 million, or an annualized 2.91%, for the second quarter of 2011. The net charge-offs level for the third quarter was the lowest since the first quarter of 2009. Declines in net charge-offs were reflected in the Virgin Islands, as a $27.4 million charge-off was recorded in the previous quarter for one large relationship, and, in the United States, with a $5.6 million decrease. The Puerto Rico portfolio reflected an increase of $23.2 million. Approximately 75% of the construction and commercial charge-offs recorded in the third quarter relates to loans with previously established adequate reserves.

Construction loans net charge-offs in the third quarter of 2011 were $16.8 million, or an annualized 12.78% of related average loans, down from $47.2 million, or an annualized 28.62% of related loans, in the second quarter of 2011. Approximately 73%, or $12.4 million, of the construction loan net charge-offs in the third quarter of 2011 were in Puerto Rico, including two relationships with aggregate charge-offs amounting to $10.2 million. In the Virgin Islands, construction loans net charge-offs of $3.7 million in the third quarter were substantially related to the previously reported $100 million commercial project placed in non-accrual status early in 2011. Construction loans net charge-offs in the United States portfolio amounted to $0.7 million compared to net charge-offs of $5.6 million in the previous quarter. The construction portfolio in Florida has been considerably reduced over the past three years to $27.1 million as of September 30, 2011.

C&I loans net charge-offs in the third quarter of 2011 were $22.5 million, or an annualized 2.09% of related average loans, up from $10.8 million, or an annualized 1.01% of related loans, in the second quarter of 2011. Substantially all of the charge-offs recorded in the third quarter were in Puerto Rico spread through several industries. Approximately 65%, or $14.3 million, of net charge-offs in the third quarter of 2011 were related to three relationships in excess of $3 million.

Commercial mortgage loans net charge-offs in the third quarter of 2011 were $3.3 million, or an annualized 0.84% of related average loans, compared to $3.2 million, or an annualized 0.81% of related loans, in the second quarter of 2011. Approximately 78%, or $2.6 million, of the commercial mortgage loan net charge-offs in the third quarter of 2011 were in Puerto Rico; none in excess of $1 million. Commercial mortgage loan net charge-offs in the United States amounted to $0.7 million for the third quarter of 2011.

Residential mortgage loans net charge-offs in the third quarter of 2011 were $15.8 million, or an annualized 2.24% of related average loans. This represents an increase of $6.9 million from $8.9 million, or an annualized 1.24% of related average balances in the second quarter of 2011. Approximately $11.4 million in charge-offs for the third quarter of 2011 ($9.6 million in Puerto Rico, $1.7 million in Florida and $0.1 million in the Virgin Islands) resulted from valuations for impairment purposes of residential mortgage loan portfolios considered homogeneous given high delinquency and loan-to-value levels, compared to $5.2 million recorded in the second quarter of 2011, an increase related to updated appraisals. Net charge-offs on residential mortgage loans also include $3.0 million related to the foreclosure of loans during the third quarter of 2011, up from $2.6 million recorded for foreclosures in the second quarter.

The total amount of the residential mortgage loan portfolio that has been charged-off to its net realizable value as of September 30, 2011 amounted to $248.8 million. This represents approximately 68% of the total non-performing residential mortgage loan portfolio outstanding as of September 30, 2011. Loss rates in the Corporation’s Puerto Rico operations continue to be lower than loss rates in the Florida market.

Net charge-offs on consumer loans and finance leases in the third quarter of 2011 were $9.2 million, or an annualized 2.30% of related average loans, compared to $9.9 million, or an annualized 2.43% of average loans for the second quarter. The decrease was mainly related to auto financings.

The following table presents annualized net charge-offs to average loans held-in-portfolio:

The ratios above are based on annualized net charge-offs and are not necessarily indicative of the results expected for the entire year, or expected in subsequent periods.

The following table presents annualized net charge-offs to average loans by geographic segment:

Balance Sheet

Total assets were approximately $13.5 billion as of September 30, 2011, down $638.4 million from approximately $14.1 billion as of June 30, 2011. The Corporation continued to deleverage its balance sheet and used proceeds from sales and calls of securities and excess liquidity to pay down maturing brokered CDs and for the early termination of repurchase agreements, as described above. In addition, total loans decreased $118.4 million, reflecting pay downs, charge-offs and recurrent sales of residential mortgage loans in the secondary market.

The Corporation is experiencing continued loan demand and has continued with its targeted originations strategies. During the third quarter of 2011, total loan originations, including refinancings and draws from existing commitments, amounted to approximately $768 million, including $233 million of loans to government entities. Originations of residential mortgage loans and consumer loans (including auto financings), amounted to $147.8 million and $148.7 million, respectively, for the third quarter of 2011 compared to $140.0 million and $139.1 million, respectively, for the second quarter.

As of September 30, 2011, liabilities totaled $12.5 billion, a decrease of approximately $615.6 million from June 30, 2011. The decrease in total liabilities is mainly attributable to a decrease of $713.7 million in brokered CDs. In addition, the Corporation repaid $200 million of repurchase agreements prior to their maturity dates, as part of its balance sheet restructuring strategies, and $11.0 million of maturing FHLB advances. The Corporation continued to grow its core deposit base and reduce its reliance on brokered CDs by: promoting initiatives to increase local deposits by attracting customers seeking to diversify their banking relationships, and realigning FirstBank’s sales force to increase its presence in the commercial and transaction banking market. Savings accounts (including money market accounts) and core certificates of deposit increased by $248.9 million and $58.0 million since the end of the previous quarter.

The Corporation’s stockholders’ equity amounted to $986.8 million as of September 30, 2011, a decrease of $22.7 million from June 30, 2011, driven by the net loss of $24.0 million for the third quarter, partially offset by an increase of $1.3 million in other comprehensive income due to higher unrealized gains on available for sale securities.

The Corporation’s total capital, Tier 1 capital, and leverage ratios as of September 30, 2011 were 12.39%, 11.07% and 8.41%, respectively, compared to 12.40%, 11.08% and 8.04%, respectively, at the end of the prior quarter. Meanwhile, the total capital, Tier 1 capital, and leverage ratios as of September 30, 2011 for its banking subsidiary, FirstBank Puerto Rico, were 12.15%, 10.84% and 8.24%, respectively, compared to 12.15%, 10.83% and 7.87%, respectively, at the end of the prior quarter. The improvement in the leverage ratio, which is based on total average assets, reflects the full effect of the execution of deleverage strategies completed in the prior quarter. The total capital and Tier 1 capital ratios are based on end of period risk-weighted assets; thus, these ratios remained almost unchanged as most of the decrease in assets during the third quarter relates to low-risk investment securities. All of the regulatory capital ratios for the Bank are above the minimum required under the Consent Order with the FDIC. Refer to “Capital Plan Update” section above for information about pro-forma capital ratios giving effect to the $525 million capital raise completed on October 7, 2011.

Tangible Common Equity

The Corporation’s tangible common equity ratio of 3.84% as of September 30, 2011 remained unchanged compared to June 30, 2011, and the Tier 1 common equity to risk-weighted assets ratio as of September 30, 2011 decreased to 4.79% from 4.93% as of June 30, 2011.

The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets over the last five quarters to the comparable GAAP items:

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

Liquidity

The Corporation manages its liquidity in a proactive manner, and maintains a sound liquidity position. Multiple measures are utilized to monitor the Corporation’s liquidity position, including basic surplus and volatile liabilities measures. The Corporation has maintained basic surplus (cash, short-term assets minus short-term liabilities, and secured lines of credit) well in excess of the self-imposed minimum limit of 5% of total assets. As of September 30, 2011, the estimated basic surplus ratio was approximately 9.8%, including un-pledged investment securities, FHLB lines of credit, and cash. At the end of the quarter, the Corporation had $487 million available for additional credit on FHLB lines of credit. Unpledged liquid securities as of September 30, 2011 mainly consisted of fixed-rate MBS and U.S. agency debentures totaling approximately $47.1 million. The Corporation does not rely on uncommitted inter-bank lines of credit (federal funds lines) to fund its operations and does not include them in the basic surplus computation.

Basis of Presentation

Use of Non-GAAP Financial Measures

This press release contains GAAP financial measures and non-GAAP financial measures. Non-GAAP financial measures are set forth when management believes they will be helpful to an understanding of the Corporation’s results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the text or in the attached tables to this earnings release.

Tangible Common Equity Ratio and Tangible Book Value per Common Share

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

Tier 1 Common Equity to Risk-Weighted Assets Ratio

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

Adjusted Pre-Tax, Pre-Provision Income

One non-GAAP performance metric that management believes is useful in analyzing underlying performance trends, particularly in times of economic stress, is adjusted pre-tax, pre-provision income. Adjusted pre-tax, pre-provision income, as defined by management, represents net (loss) income excluding income tax expense (benefit), the provision for loan and lease losses, gains on sale and other-than-temporary impairments (“OTTI”) of investment securities, as well as certain items identified as unusual, non-recurring or non-operating.

From time to time, revenue and expenses are impacted by items judged by management to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that management believes that a complete analysis of its Corporation’s performance requires consideration also of results that exclude such amounts. These items result from factors originating outside the Corporation such as regulatory actions/assessments, and may result from unusual management decisions, such as the early extinguishment of debt.

Net Interest Income, Excluding Valuations and on a Tax-Equivalent Basis

Net interest income, interest rate spread and net interest margin are reported excluding the unrealized changes in the fair value of derivative instruments and financial liabilities elected to be measured at fair value on a tax equivalent basis. The presentation of net interest income excluding valuations provides additional information about the Corporation’s net interest income and facilitates comparability and analysis. The changes in the fair value of derivative instruments and unrealized gains and losses on liabilities measured at fair value have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a marginal income tax rate. Income from tax-exempt earning assets is increased by an amount equivalent to the taxes that would have been paid if this income had been taxable at statutory rates. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax equivalent basis. This adjustment puts all earning assets, most notably tax-exempt securities and certain loans, on a common basis that facilitates comparison of results to results of peers.