First BanCorp.
Annual Report 2001

Plain-text annual report

The power of 1 2001 annual report >. This annual report is dedicated to the strength of our identity and individuality. The power of being number one in the mind of consumers; of being a first choice for banking. As First BanCorp we are single in kind and excellence; we have One clear focus, being singular in every way. We represent the power of Oneness: one bank; one institution; one name that stands for the best in financial services and products: First BanCorp. At First BanCorp we are one –exceptional, unmatched and unparalleled. One is a powerful number. It has the quality of standing alone. It represents us and our most important symbol: 1. Table of contents >. >. >. >. >. >. >. >. >. >. Financial Highlights Offices One Business Profile One Message One Set of Numbers One Economy One Team Financial Review Financial Statements Stockholders’ Information 002 004 005 007 011 015 017 023 045 083 2002 . 1 0 0 2 > p r o C n a B t s r i F Financial Highlights In thousands (except for per share results) 2001 2000 >. >. >. Operating results: Net interest income Provision for loan losses Other income Other operating expenses Income tax provision Cumulative effect of accounting change Net income Per common share: Net income – basic Net income – diluted $236,055 61,030 52,980 120,855 20,134 (1,015 86,001 ) 2.61 2.60 $190,773 45,718 50,032 113,050 14,761 67,276 2.22 2.21 Weighted average common shares: Basic Diluted 26,567 26,762 26,943 27,145 At year end: Assets Loans Allowance for loan losses Investments Deposits Borrowings Capital $8,197,518 4,308,780 91,060 3,715,999 4,098,554 3,425,235 602,919 $5,919,657 3,498,198 76,919 2,233,216 3,345,984 2,069,484 434,461 Market price per common share (End of year) Return on assets (Percentage) Diluted earnings per common share Return on common equity (Percentage) Net interest income (In millions) Common stockholders’ equity (In millions) { { { { { { 1999 2000 2001 1999 2000 2001 1999 2000 2001 1999 2000 2001 1999 2000 2001 1999 2000 2001 $20.75 $23.63 $28.50 1.49 1.28 1.28 $1.98 $2.21 $2.60 24.68 27.81 22.13 $185.7 $190.8 $236.1 $204.9 $269.5 $334.4 3 Puerto Rico $ 2. 1. $ 3. 4. 26. $ 25. 4004 4 . 1 0 0 2 > p r o C n a B t s r i F $ $ 5. $ $ $ 6. 7. $ 8. 9. $ $ $ 12. $ $ $ $ $ $ 22. 23. 10. 11. 18. 17. 19. 21. 20. 14. 13. 16. $ $ 15. $ $ $ $ $ $ U.S.Virgin Islands 27. 28. Offices 24. $ 001. Aguada 002. Aguadilla 003. Isabela 004. San Sebastián 005. Arecibo 006. Manatí 007. Vega Baja 008. Dorado 009. Toa Baja 010. Bayamón 011. Guaynabo 012. San Juan 013. Carolina 014. Río Grande 015. Fajardo 016. Humacao 017. Caguas 018. Aguas Buenas 019. Cidra 020. Guayama 021. Cayey 022. Barranquitas 023. Ponce 024. Yauco 025. Cabo Rojo 026. Mayagüez 027. Saint Thomas 028. Saint Croix Branch Money Express $ First Leasing & Rental Corp. Auto Loan Center Mortgage Loan Center FirstBank Insurance 48 27 7 2 7 5 total.> 96 .< i n v e s t m e n t .< r e s i d e n t i a l m o r t g a g e s d e p o s i t s .< .< c o n s t r u c t i o n l o a n s < . l e a s e s >. i n s u r a n c e >. c o n s u m e r l o a n s >.c o m m e r c i a l l o a n s 005 5 . 1 0 0 2 > p r o C n a B t s r i F One 1 Business Profile First BanCorp (“the Corporation”), incorporated in Puerto Rico, is the holding company for FirstBank (“the Bank”), the second largest commercial bank in Puerto Rico. First BanCorp also owns an insurance subsidiary, the FirstBank Insurance Agency. First BanCorp had total assets of $8.2 bil- lion as of December 31, 2001. The Corporation, a Financial Holding Company, operates primarily in the Puerto Rico bank- ing market, offering a wide selection of financial services to a growing number of consumer and commercial customers. Commercial loans, consumer loans, mortgage loans and investment securities are the most important areas of its busi- ness. The Corporation has a $2.1 billion portfolio of commercial loans, commercial mortgages, construction loans and other related commercial products. Its commercial clients include businesses of all sizes covering a wide range of economic activities. First BanCorp has a $1.0 billion portfolio of resi- dential mortgages.The institution also has $1.15 billion in con- sumer loans, concentrated in auto loans and leases, personal loans and credit cards. Its $3.7 billion investment portfolio consists mostly of U.S. Treasury and agency securities and mortgage backed securities. A strategic alliance with a major national brokerage firm allows FirstBank to offer brokerage First BanCorp has distinguished itself by providing innovative marketing strategies and novel products to attract clients. services in its largest branches, and the FirstBank Insurance Agency sells insurance from some FirstBank branches as well. Approximately 1,700 professionals and a sophisticated comput- er system support the business activities of the Corporation. First chartered in 1948, First BanCorp was the first savings bank established in Puerto Rico, under the name of “First Federal Savings and Loan Association”. It has been a stockhold- er owned institution since 1987. In October, 1994 it became a Puerto Rico chartered commercial bank and assumed the name of “FirstBank”. Effective October 1, 1998 the Bank reorganized, making FirstBank a subsidiary of the holding company First BanCorp. The Corporation, which is a well-capitalized institution under federal standards, operates 48 full service branches including four offices in the U.S.Virgin Islands. The Corporation also has two auto loan centers and seven mortgage loan centers in Puerto Rico. In addition, the FirstBank Insurance Agency oper- ates five sales offices. A second tier subsidiary of First BanCorp, Money Express, operates 27 small loan offices throughout Puerto Rico. First BanCorp also includes a second tier subsidiary known as First Leasing and Rental Corp. which rents and leases motor vehicles from its seven offices in Puerto Rico. First BanCorp has distinguished itself by providing innovative marketing strategies and novel products to attract clients. Besides its main branches and specialized lending offices, the Corporation has offered a telephone information service called “Telebanco” since 1983. This was the first telebanking service offered in Puerto Rico. First BanCorp clients have access to an extensive ATM network with access to the U.S. Virgin Islands, the U.S. mainland and all over the world.The Corporation was also the first in Puerto Rico to open on weekends and the first to offer in-store branches to its clients. First BanCorp was also the first banking institution in Puerto Rico with a presence on the internet.The Corporation now offers a wide menu of inter- net banking services to its clients. First BanCorp and its subsidiaries are subject to supervision, examination and regulation by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Commissioner of Financial Institutions of Puerto Rico.The FirstBank Insurance Agency Insurance Commissioner. The Virgin Islands operations of FirstBank are regulated by the Virgin Islands Banking Board. the Puerto Rico is regulated by First BanCorp is committed to providing the most efficient and cost effective banking services possible. Management’s goal is to be the premier financial institution in Puerto Rico and the Virgin Islands, recognized for consistently exceeding the expectations of its clients, employees and stockholders. 006 . 1 0 0 2 > p r o C n a B t s r i F Angel Alvarez-Pérez, President Growth, diversification, cost control and service have laid the foundations for these achievements. 007 7 . 1 0 0 2 > p r o C n a B t s r i F One Message 1 >. To our stockholders: On behalf of the Board of Directors and staff of First BanCorp I am pleased to submit our annual report for 2001, another record year. In 2001 First BanCorp earned $86.0 million, rep- resenting $2.61 per common share (basic) or $2.60 per com- mon share (diluted). These earnings compare favorably with 2000, when the Corporation earned $67.3 million, which came to $2.22 per common share (basic) or $2.21 per common share (diluted). Net income increased 27.8% and diluted earnings per share rose 17.6% in 2001. The Corporation achieved a 22.13% return on common equity in 2001, while the return on aver- age assets was 1.28%.The efficiency ratio improved to an out- standing 41.81%. Growth, diversification, cost control and service have laid the foundations for these achievements. I will emphasize those four themes in this letter. >. New Initiatives and Growth Our business grew substantially last year. Assets rose 38.5% from $5.9 billion at year-end 2000 to $8.2 billion at the end of 2001. Loans increased 23.2% to $4.3 billion, due mainly to an $822 million increase in residential mortgage and commercial lending. Deposits increased 22.5% to $4.1 billion. During 2001 First BanCorp created a new subsidiary, the FirstBank Insurance Agency. The Gramm Leach Bliley Act and related changes in local laws now permit Financial Holding Companies to enter the insurance business. The FirstBank Insurance Agency will not underwrite insurance or cover risks. It will sell third party insurance from FirstBank branches using its own licensed representatives. The new company will initiate operations in five branches during 2002 and we expect it to grow steadily in coming years. The FirstBank Insurance Agency moves us one step closer to “one stop shopping” for financial services. At the beginning of 2002 we announced plans to acquire the operations of JP Morgan Chase & Co. in the Virgin Islands.This transaction is subject to regulatory approval and to a formal agreement concerning its details. Chase’s Virgin Islands opera- tions include over $500 million of assets, including eight branches and 14 ATM locations on four islands. This acquisi- tion also includes an insurance agency, Chase Agency Services, Inc. and an export service company, Chase Trade, Inc. This acquisition shows our commitment to the Virgin Islands, where we currently have four offices. FirstBank has been serv- ing the U.S.Virgin Islands since 1962. >. Strategic Relationships with Other Firms FirstBank has an agreement with a major national brokerage house to provide financial and investment services in our branches. They have opened offices in twelve FirstBank facili- ties, while serving our remaining branches by telephone. On December 31 that firm had accounts totaling approximately $115 million in the Corporation’s offices. During 2001 FirstBank also provided consulting services to Goldman Sachs for seven Puerto Rico bond issues totaling $6.3 billion. During 2001 FirstBank also entered new relationships with other firms.The Bank began providing a credit card for clients of a local furniture chain, with approximately 35 outlets and 900 employees, which is currently expanding its operations on the Island.The Bank already offers credit cards for Texaco and Western Auto in Puerto Rico. Second, First BanCorp purchased an eight percent share of Southern Security Bank, a small Florida institution that is changing its name to Pan American Bank. First BanCorp also owns approximately two percent share in a new Florida bank- ing institution, American Premier Bank. Both institutions are small, community banks that emphasize service. Management remains interested in the Florida banking market. Expansion there remains a possibility, depending on business opportuni- ties and market conditions. In coming years we will continue working to develop strategic arrangements with established firms. Such alliances allow both 008 . 1 0 0 2 > p r o C n a B t s r i F parties to contribute their own specialized knowledge, expe- rience and customer relationships to each specific venture. >. Funding and Liability Management We have also been adding new sources of funding. In March 2001 the Corporation opened a new branch in Plaza Guaynabo, a local shopping center in a high income area.This facilities. During 2002 the branch has drive-through Corporation plans to open another office in a new shopping center in the San Juan metropolitan area.These expansions are part of a long-term effort to improve and modernize the Corporation’s branch network. First BanCorp also introduced a CD whose yield is indexed to the S&P 500 stock index.This product complements the exist- ing Dow Jones indexed CD. Both will help the Corporation compete for savings and retirement funds by offering higher long term returns than conventional savings accounts and CD’s. First BanCorp has traditionally had a special place in the minds of consumers... During 2001 First BanCorp also issued $103.5 million of pre- ferred stock, successfully completing the largest Puerto Rico preferred stock offering ever. At the end of 2001 the Corporation’s core capital ratio was 7.49% and the risk-based ratio was 14.50%. We closed an additional $92 million pre- ferred stock issue at the beginning of 2002, ensuring a com- fortable margin the Corporation has restructured its balance sheet to reduce interest rate risk. future growth. In addition, for >. Client Service and Corporate Image First Bancorp has traditionally had a special place in the minds of consumers in Puerto Rico. Our institution began operations in 1948 as “First Federal Savings Bank” and for many years was the leading Savings and Loan institution on the island. Even after converting to a commercial bank in 1994 the Corporation specialized in consumer lending for many years. While we have diversified into commercial lending during the past four years, our base of 600,000 to 700,000 local clients remains, along with our roots in the Puerto Rican community. As a community service project we have been running a series of advertising campaigns to promote awareness and encour- age membership in the Puerto Rico Conservation Trust, a foundation which conserves historic landmarks on the Island. The program featured an “Isla Viva” bank account for children, which included a membership in the same organization. In addition, the program introduced an “Isla Viva” credit card which contributes to the Conservation Trust. This program won the 2001 Excel prize, an award given by the Association of Public Relations Professionals of Puerto Rico for the best public relations program of the year. 009 . 1 0 0 2 > p r o C n a B t s r i F In response to the economic slowdown on the Island, Management also began a campaign to encourage Puerto Ricans to visit local stores and restaurants, to travel through- out the Island, and to invest in Puerto Rico.The local business community reacted favorably. Finally, Management launched a three-year effort to further improve service in all areas of our operations. Our continuing efforts to automate branch operations will form part of this process. Beyond this, quality teams composed of bank officers and employees will evaluate, design and implement improved procedures throughout the organization. The goal of this effort is to fully satisfy the banking needs of all our consumer and corporate clients. >. Enhancing Shareholder Value The efforts of our Management and employees have paid off in strong earnings growth in 2001. The Corporation experi- enced a return on common equity of 22.13% compared with 27.81% last year. Our stock price has reflected these strong results, and our shareholders experienced a return of 22.86% on their investment during 2001. Investors who held First BanCorp stock over the ten year period from year-end 1991 to year-end 2001 received a cumulative total return of 3,397%. Officers and directors of First BanCorp own approximately 16 percent of its shares. This shows their confidence in First BanCorp’s future and their commitment to keep its funda- mentals sound. As First BanCorp begins another year of growth and service to the Puerto Rican and Virgin Islands community, we are con- fident that our Corporation is stronger and better positioned than ever. We have a truly outstanding group of employees, officers and directors. I am confident that we can meet the challenges ahead, and that we will provide better service than ever to our clients, while benefiting employees and stockhold- ers in the years to come. Angel Alvarez-Pérez Chairman President Chief Executive Officer 010 . 1 0 0 2 > p r o C n a B t s r i F 2001 y r a u n a J y r a u r b e F h c r a M l i r p A y a M e n u J y l u J t s u g u A r e b m e t p e S r e b o t c O r e b m e v o N r e b m e c e D 011 11 . 1 0 0 2 > p r o C n a B t s r i F One Set of Numbers - Achievements in 2001 1 Record profits made 2001 a successful year as First BanCorp earned $86.0 million, which comes to $2.61 per common share (basic) or $2.60 per common share (diluted). In 2000 the Corporation earned $67.3 million, the equivalent of $2.22 (basic) or $2.21 (diluted) per common share. Net income increased by 27.8% in 2001, or 17.6% per share on a diluted basis. Net interest income was the key factor in this out- standing performance, and it grew 23.7% to $236.1 million during 2001. Loans increased by $810.6 million or 23.2% for the year, as residential mortgage and commercial loans grew $822 million. The investment portfolio grew by $1.5 billion. During 2001 deposits grew from $3.3 billion to $4.1 billion, an increase of $1.0 billion, or 22.5%. >. Diversification of the Balance Sheet Management has been pursuing a consistent strategy of shift- ing the lending portfolio towards commercial lending without sacrificing the consumer area. During the latter part of the 1990’s Management supported this expansion by recruiting experienced executives and other personnel, by adding new computer programs and capacity, and by offering new prod- ucts tailored to commercial clients. During 2001 the Corporation continued this transition as commercial loans grew $557 million to $2.1 billion while con- sumer lending remained roughly constant at $1.15 billion. In the five years between the end of 1996 and the end of 2001 consumer loans declined from 61.0% to 26.7% of the Corporation’s loan portfolio, while commercial loans increased from 23.3% to 49.8%. Residential mortgage loans increased from 15.7% to 23.5%. In absolute terms, commercial loans grew from $0.4 billion in 1996 to $2.1 billion in 2001. The inauguration of the FirstBank Insurance Agency in 2001 will lead to further diversification. It will lay the groundwork for greater fee income in the future, and complement the First Securities operation in providing a greater variety of services for clients.These changes are transforming First BanCorp into a full service financial holding company which emphasizes both commercial and consumer lending. >. Cost Control and Restructuring During 2001 First BanCorp continued its outstanding record in cost control. The Corporation had an efficiency ratio of 41.81%, considerably better than the 46.95% of 2000. These results compare favorably with others in the industry. Operating expenses rose by 6.9% in 2001, from $113.0 million to $120.9 million. Improvements in data processing technology continued to move forward in 2001. Having introduced internet banking in 2000, the Corporation will be advancing the process of branch automation by mechanizing clerical functions such as opening accounts and handling documents.Teller functions were previ- ously streamlined in 2000. During 2002 the Corporation will also add a larger, more modern mainframe computer which will triple previous computing capacity. These changes will allow the Corporation to continue growing and improving customer service. The Corporation opened one strategically important branch in 2001 and plans another opening during 2002. Both these branches are located in shopping centers in the San Juan met- ropolitan area. In addition, First BanCorp is beginning a three year total quality campaign to improve service quality in all areas of the institution. These changes will make the branch network more efficient and serve clients better. >. Asset Quality Despite economic growth on the island slowing, Management has mostly maintained the hard-won gains in asset quality 012 . 1 0 0 2 > p r o C n a B t s r i F achieved since 1998, when the Corporation improved its underwriting, introduced tighter approval procedures and improved computer systems.The quality of the Corporation’s assets contributed importantly to the record profits last year. During 2001 First BanCorp wrote off $47.0 million of loans on a net basis, compared with $42.0 million in 2000, $44.6 mil- lion in 1999 and $66.2 million in 1998.The amounts provided for loan losses have followed a similar trend.They were $61.0 million in 2001, $45.7 million in 2000, $48.0 million in 1999 and $76.0 million in 1998. On December 31, 2001 non-per- forming loans totaled $73.0 million, compared to $67.7 million on the same date in 2000, and $53.8 million at the end of 1999. These trends took place as the overall loan portfolio more than doubled to $4.3 billion at the end of 2001 from $2.1 bil- lion at the end of 1998.The Corporation has built its loan loss reserves in line with this growth. Loan loss reserves reached $91.1 million at the end of 2001, compared with $76.9 million for 2000, $71.8 million for 1999 and $67.9 million for 1998. As a result, the reserve coverage ratio (allowance for loan losses as a percentage of non-performing loans) has remained above100% in the recent past. It was 124.7% at the end of 2001, 113.6% at the end of 2000, 133.4% at year-end 1999 and 119.1% at the end of 1998. Overall, loan quality has been improving even as the size of the loan portfolio has grown. At the end of 2001 the ratio of non- performing loans to total loans had fallen to 1.69%, compared with 1.94% at the end of 2000, 1.96% at the end of 1999 and 2.69% at year-end 1998. Maintaining good asset quality has been an achievement, in view of the recessionary environment which prevailed during 2001. Maintaining good asset quality has been an achievement, in view of the recessionary environment which prevailed during 2001. 013 . 1 0 0 2 > p r o C n a B t s r i F >. Restructuring Liabilities and Capital Management also restructured the Corporation’s liabilities during 2001, adding fixed rate borrowings and deposits with terms ranging from two to five years. These changes have reduced the Corporation’s exposure to interest rate risk in the future. During 2001 Management also strengthened the capital struc- ture of First BanCorp by issuing $103.5 million in preferred stock, the largest issue of its type ever undertaken in Puerto Rico. Management closed an additional $92 million issue of preferred stock in early 2002. Although assets grew substan- tially during 2001 these transactions helped the Corporation to maintain a solid and prudent capital structure. As of December 31, 2001 the core capital ratio was 7.49% and the risk based capital ratio was 14.50%. >. Increasing Shareholder Value The financial results reported here continue a pattern of growth and improving asset quality that has been consistent for several years. The results have been very beneficial to shareholders. First BanCorp’s return on common equity was 22.13% in 2001, while the return on average assets was 1.28%. Dividends were increased in 2001, but the payout ratio remained a conservative 19.91% compared with 19.72% in 2000. First BanCorp shareholders experienced a total return of 22.86% on their investment during 2001. Investors who held First BanCorp stock over the ten year period from year-end 1991 to year-end 2001 received a cumulative total return of 3,397%. Management is optimistic about the future of First BanCorp. The range of services it offers, its effective network of offices and branches supplemented by new sales methods, its dedicat- ed staff and its reputation with clients will all contribute to future earnings growth. Management will continue its efforts to improve First BanCorp’s excellent performance in 2002 and in the years to come. 014 . 1 0 0 2 > p r o C n a B t s r i F 015 . 1 0 0 2 > p r o C n a B t s r i F One Economy 1 The Island of Puerto Rico is a U.S. Commonwealth with a pop- ulation of 3.8 million, located in the Caribbean approximately 1,600 miles southeast of New York. Puerto Rico enjoyed solid economic growth over most of the 1990’s. Real GNP grew by 3.1% in the 2000 fiscal year, according to the most recent offi- cial data available. Economists project a slowdown to less than 2% during fiscal 2001 and a small decline in fiscal 2002 due to the U.S. recession. Puerto Rico’s economic performance is a natural result of its increasing integration into the U.S. economy. Puerto Ricans are U.S. citizens and serve in the United States armed forces, and the Island has several large U.S. military bases. The Island uses U.S. currency and forms part of the U.S. financial system. Federal courts enforce U.S. laws here. Since Puerto Rico falls within the U.S. for purposes of customs and migration, there is full mobility of funds, people and goods between Puerto Rico and the U.S. mainland. Puerto Rico banks are subject to the same Federal laws, regulations and supervision as other financial institutions in the rest of the U.S.The Federal Deposit Insurance Corporation insures the deposits of Puerto Rico chartered commercial banks, including FirstBank, the banking subsidiary of First BanCorp. Puerto Rico made a rapid transition from poverty in the immediate postwar period to prosperity today. Throughout this process the Island has attracted industry using tax exemp- tion. Many multinational corporations have substantial opera- tions here. During 1996 Congress repealed Section 936 of the Internal Revenue Code, which provided Federal tax exemp- tion for companies operating in Puerto Rico. However, Congress also provided a ten year grandfather clause for com- panies already operating here.The reduction of tax incentives has combined with intense wage competition in other areas and the U.S. recession to reduce manufacturing employment. Still, Puerto Rico is becoming somewhat less dependent on manufacturing than it was in the early postwar period. While manufacturing is still an important part of its economy, Puerto Rico has been diversifying to include tourism, services and transportation. During the recent slowdown construction activity has held up well, but manufacturing and consumption have weakened somewhat. Tourism has been affected along with the rest of the Caribbean region, though new hotels have mitigated this effect. Economists expect a decrease of less than 1% in real GNP during fiscal 2002 followed by recovery and growth in future years. 016 . 1 0 0 2 > p r o C n a B t s r i F 1 . > . > One team1 017 7 . 1 0 0 2 > p r o C n a B t s r i F Juan Acosta Reboyras Francisco D. Fernández José Teixidor >. Board of Directors 018 . 1 0 0 2 > p r o C n a B t s r i F Jorge L. Díaz Irizarry José Julián Alvarez Rafael Bouet >. Annie Astor-Carbonell Angel Alvarez-Pérez, Chairman Germán E. Malaret >. 019 . 1 0 0 2 > p r o C n a B t s r i F José L. Ferrer Canals Héctor M. Nevares >. Angel Alvarez-Pérez Fernando L. Batlle Luis M. Beauchamp Ricardo N. Ramos Annie Astor-Carbonell Aurelio Alemán 2 020 . 1 0 0 2 > p r o C n a B t s r i F First BanCorp Officers President >. Angel Alvarez-Pérez Chief Executive Officer Senior Executive Vice Presidents >. Annie Astor-Carbonell Chief Financial Officer Luis M. Beauchamp Chief Lending Officer Executive Vice Presidents >. Aurelio Alemán Retail Banking Fernando L. Batlle Branch Banking, Mortgages Ricardo N. Ramos First Securities Randolfo Rivera Commercial Wholesale Senior Vice Presidents >. José H. Aponte Commercial Mortgage Miguel Babilonia Credit Policy & Portfolio Management Luis Cabrera Treasury & Investments Eva Candelario Corporate Business Development James E. Crites Sales & Distribution Virgin Islands Aida M. García Human Resources Michael García Consumer Collection Fernando Iglesias Special Loans Roger Lay Internal Audit Miguel Mejías Information Systems Carmen Nigaglioni Middle Market John Ortiz Remote Banking Haydeé Rivera Branch Banking Operations Julio Rivera Construction Lending Carmen Rocafort Structured Financing Josianne M. Rosselló Marketing & Public Relations Demetrio Santiago Auto Wholesale Héctor Santiago Auto Business & Operations Denisse Segarra Sales & Distribution Laura Villarino Controller Randolfo Rivera Josianne M. Rosselló Aida M. García Miguel Mejías Luis Cabrera Laura Villarino Vice Presidents >. Alexis Aguiar Structured Financing William Alvarez Indirect Business & Merchants José Alvelo Information Systems Marga Avilés Consumer Loans Operations Beverly Bachetti Private Banking María Benabe Consumer Collections Ana Colón Centralized Accounting Wanda Cooper Customer Care Center Lenitzia Delgado Corporate Services Mayra Gascot Information Systems David González Corporate Business Development Nelson González Structured Financing Gilberto López Middle Market Marcelo López Sales & Distribution Juanita Marrero First Mortgage José Negrón Auto Lot José Nevárez Information Systems Luis Orengo Commercial Wholesale Eduardo Ortiz Auto Wholesale María Cristina Oruña Customer Relationship Management Osvaldo Padilla Corporate Services Reynaldo Padilla Auto Finance Miguel Pimentel Corporate Business Development Dionisio Ramírez Construction Lending Jorge Rendón Operational Support Migdalia Rivera Middle Market Sandra Rivera Consumer Collections Belinda Rodríguez Remote Sale José L. Rodríguez Information Systems Elizabeth Sánchez Marine Financing Roberto Sánchez Consumer Loans Credit Risk José J. Santiago Commercial Wholesale Ramón Santiago Asset Based Unit Miguel Santín Corporate Banking Carmen Szendrey Legal Counsel Carmen Torres Branch Manager Raphael Torres Sales & Distribution 021 . 1 0 0 2 > p r o C n a B t s r i F >. First Federal Finance Corporation DBA Money Express “La Financiera” Angel Alvarez-Pérez Chief Executive Officer Aurelio Alemán President and Chief Operating Officer Carlos Power Senior Vice President and General Manager >. First Leasing and Rental Corporation Angel Alvarez-Pérez Chief Executive Officer Aurelio Alemán President and Chief Operating Officer Agustín Dávila General Manager >. FirstBank Insurance Agency, Inc. Angel Alvarez-Pérez Chief Executive Officer Aurelio Alemán President and Chief Operating Officer Víctor Santiago Product Development Manager One Corporation 1 022 . 1 0 0 2 > p r o C n a B t s r i F <. <. >. >. Financial Review 023 . 1 0 0 2 > p r o C n a B t s r i F >. The table on the following pages shows the Corporation’s history in numbers. From 1991 to 2001, the Corporation reported consistent growth without restating earnings. Over this period, asset size increased more than fourfold from $1.9 billion to $8.2 billion, while book value per common share grew ninefold from $1.35 to $12.59. Earnings also increased as net income grew more than eight times from $10 million to $86 mil- lion. The efficiency ratio improved dra- matically from 63.69% to 41.81%, and diluted per share earnings grew tenfold from $0.22 to $2.60. Since 1991 First BanCorp has transformed itself from First Federal Savings Bank, a small Savings and Loan Institution, into First BanCorp, a diversified financial services organization. 025 . 1 0 0 2 > p r o C n a B t s r i F Selected Financial Data (In thousands except for per share results) 2001 2000 1999 1998 >. Condensed Income Statements: Total interest income Total interest expense Net interest income Provision for loan losses Other income Other operating expenses Unusual item - SAIF assessment Income before income tax provision, extraordinary item and cumulative effect of accounting change Provision for income tax Income before extraordinary item and cumulative effect of accounting change Extraordinary item Cumulative effect of accounting change Net income >. Per Common Share Results (1): Income before extraordinary item and $516,256 280,201 236,055 61,030 52,980 120,855 107,150 20,134 87,016 ) (1,015 86,001 $463,388 272,615 190,773 45,719 50,032 113,049 82,037 14,761 67,276 $369,063 183,330 185,733 47,961 32,862 101,271 69,363 7,288 62,075 $321,298 155,130 166,168 76,000 58,240 91,798 56,610 4,798 51,812 67,276 62,075 51,812 cumulative effect of accounting change diluted $2.64 $2.21 $1.98 $1.74 Extraordinary item Cumulative effect of accounting change Net income per common share diluted Net income per common share basic Cash dividends declared Average shares outstanding Average shares outstanding diluted 026 >. . 1 0 0 2 > p r o C n a B t s r i F Balance Sheet Data: End of year Loans and loans held for sale Allowance for possible loan losses Investments Total assets Deposits Borrowings Total common equity Total equity Book value per common share (0.04 ) $2.60 $2.61 $0.52 26,567 26,762 $2.21 $2.22 $0.44 26,943 27,145 $1.98 $2.00 $0.36 28,941 29,199 $1.74 $1.75 $0.30 29,586 29,858 $4,308,780 91,060 3,715,999 8,197,518 4,098,554 3,425,236 334,419 602,919 12.59 $3,498,198 76,919 2,233,216 5,919,657 3,345,984 2,069,484 269,461 434,461 10.20 $2,745,368 71,784 1,811,164 4,721,568 2,565,422 1,803,729 204,902 294,902 7.30 $2,120,054 67,854 1,800,489 4,017,352 1,775,045 1,930,488 270,368 270,368 9.17 >. >. >. Regulatory Capital Ratios (In Percent): End of year Total capital to risk weighted assets Tier 1 capital to risk weighted assets Tier 1 capital to average assets Selected Financial Ratios (In Percent):Year ended Net income to average total assets Interest rate spread (2) Net interest income to average earning assets (2) Yield on average earning assets (2) Cost on average interest bearing liabilities Net income to average total equity Net income to average common equity Average total equity to average total assets Dividend payout ratio Efficiency ratio (3) Offices: 14.50 12.16 7.49 1.28 3.64 4.08 8.42 4.78 16.20 22.13 7.92 19.91 41.81 14.43 11.23 7.28 1.28 3.38 3.91 9.21 5.83 21.21 27.81 6.05 19.72 46.95 Number of full service branches Loan origination offices Amounts presented were recalculated, when applicable, to retroactively consider the effect of common stock splits. Ratios for 1993 and thereafter were computed on a taxable equivalent basis. -1 -2 -3 Other operating expenses to the sum of net interest income and other income. 48 43 48 38 16.16 11.64 7.47 1.49 4.29 4.85 9.29 5.00 21.06 24.68 7.07 17.96 46.33 48 41 17.39 11.55 6.59 1.48 4.76 5.27 9.83 5.07 20.54 20.54 7.22 17.12 40.91 40 45 1997 1996 1995 1994 1993 1992 1991 $285,160 130,429 154,731 55,676 39,866 83,268 55,653 8,125 47,528 $256,523 113,027 143,496 31,582 29,614 82,498 9,115 49,915 12,281 37,634 $208,488 96,838 111,650 30,894 48,268 65,628 63,396 14,295 49,101 47,528 37,634 49,101 $1.58 $1.22 $1.58 $1.58 $1.58 $0.24 30,036 30,204 $1,959,301 57,712 1,276,900 3,327,436 1,594,635 1,461,581 236,379 236,379 7.93 $1.22 $1.22 $0.20 30,794 30,952 $1,896,074 55,254 830,980 2,822,147 1,703,926 889,668 191,142 191,142 6.32 $1.58 $1.61 $0.08 30,592 31,118 $1,556,606 55,009 785,747 2,432,816 1,518,367 700,609 171,202 171,202 5.51 17.26 11.07 7.44 1.63 5.30 5.83 10.45 5.15 22.30 22.30 7.32 15.14 42.79 36 44 15.25 9.32 6.65 1.48 5.46 6.03 10.63 5.17 20.49 20.49 7.23 16.32 47.66 36 47 16.17 9.93 6.82 2.22 5.07 5.59 10.12 5.05 33.19 33.19 6.68 5.06 41.04 36 43 $180,309 76,674 103,635 17,674 18,169 60,760 $159,433 72,413 87,020 18,669 17,123 56,994 43,370 12,385 30,985 (429 ) 30,556 $1.01 (0.02 ) $0.99 $1.02 N/A 29,977 30,859 28,480 6,525 21,955 6,840 28,795 $0.63 0.21 $0.84 $0.94 N/A 29,322 32,946 $158,993 85,986 73,007 13,596 13,563 54,745 18,229 2,879 15,350 (870 ) $171,789 109,942 61,847 16,444 18,895 51,423 12,875 1,420 11,455 (1,400 ) 14,480 10,055 $0.37 (0.03 ) $0.34 $0.41 N/A 28,584 34,065 $0.26 (0.04 ) $0.22 $0.25 N/A 28,584 33,237 $1,501,273 37,413 595,555 2,174,692 1,493,445 538,080 120,015 120,015 3.99 $1,237,928 30,453 603,373 1,913,902 1,398,247 400,977 92,785 92,785 3.14 $1,182,409 30,474 636,781 1,888,754 1,359,448 415,257 50,194 88,622 1.75 $1,264,380 29,001 564,431 1,898,399 1,396,066 408,414 38,410 74,146 1.35 9.76 8.50 5.74 1.53 5.23 5.65 9.63 4.40 29.07 29.07 5.27 N/A 49.88 32 23 9.05 7.79 4.70 1.53 4.73 5.10 9.10 4.37 30.36 39.68 5.05 N/A 54.73 33 9 9.32 8.06 4.60 0.78 3.66 4.04 8.80 5.14 17.70 26.37 4.38 N/A 63.24 33 4 7.08 5.75 3.74 0.53 3.19 3.39 9.41 6.22 14.38 20.20 3.67 N/A 63.69 33 1 027 . 1 0 0 2 > p r o C n a B t s r i F Management’s Discussion and Analysis of Financial Condition and Results of Operations >. FINANCIAL REVIEW SUMMARY For the year 2001, First BanCorp (the Corporation) recorded earnings of $86,001,444 or $2.61 per common share basic and $2.60 per common share diluted, compared to $67,275,609 or $2.22 per common share basic and $2.21 per common share diluted for 2000, and $62,074,949 or $2.00 per common share basic and $1.98 per common share diluted for 1999. The increase in the Corporation’s earnings is attributed to the net interest income earned on the growing portfolio of average earning assets, net of increases in operating expenses, a higher provision for loan losses and income taxes. For 2001 as compared to 2000, net income increased by $18,725,835 or $0.39 per common share diluted, and for 2000 as com- pared to 1999, by $5,200,660 or $0.23 per common share diluted. Return on average assets was 1.28% for 2001 and 2000 and 1.49% for 1999. Return on average equity was 16.20% for 2001, 21.21% for 2000 and 21.06% for 1999. Return on average common equity was 22.13% for 2001, 27.81% for 2000 and 24.68% for 1999. >. >. RESULTS OF OPERATIONS The Corporation’s results of operations depend primarily on its net inter- est income, which is the difference between the interest income earned on interest earning assets, including investment securities and loans, and the interest expense paid on interest bearing liabilities, including deposits and borrowings. Also, the results of operations depend on the provision for loan losses, operating expenses (such as personnel, occupancy and other costs), other income (mainly service charges and fees on loans), gains on sale of investments and income taxes. Net Interest Income Net interest income increased to $236 million for 2001 from $191 million in 2000 and $186 million in 1999. The increase in net interest income for the year 2001 is the result of volume increases of $1,307 million in the Corporation’s average loan and investment portfolios, and the improve- ment in the net interest margin. The following table includes a detailed analysis of net interest income, excluding dividend income on equity securities. Part I presents average vol- umes and rates on a tax equivalent basis and Part II presents the extent to which changes in interest rates and changes in volume of interest related assets and liabilities have affected the Corporation’s net interest income. For each category of earning assets and interest bearing liabilities, informa- tion is provided on changes attributable to changes in volume (changes in volume multiplied by old rates), and changes in rate (changes in rate multi- plied 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. 028 . 1 0 0 2 > p r o C n a B t s r i F Part I Year ended December 31, Average volume 2001 2000 1999 Interest income (1) / expense 1999 2000 2001 Average rate (1) 2001 2000 1999 (Dollars in thousands) Earning assets: Money market instruments Government obligations Mortgage backed securities Corporate bonds FHLB stock Total investments Consumer loans Residential real estate loans Construction loans Commercial loans Finance leases Total loans (2) Total earning assets Interest bearing liabilities: Interest bearing checking accounts Savings accounts Certificate accounts Interest bearing deposits Other borrowed funds FHLB advances Total interest bearing $ 46,517 $ 9,293 $ 27,344 $ 1,476 35,955 126,098 21,230 1,289 186,048 140,050 65,496 17,323 119,867 14,661 357,397 415,742 528,903 1,294,195 1,457,044 18,646 51,508 16,170 18,008 1,772,097 2,064,756 1,013,782 1,026,044 327,700 573,866 94,940 169,257 847,917 1,210,783 68,577 103,114 2,352,916 3,083,064 $6,455,047 $5,147,820 $4,125,013 $ 450 $ 527 24,997 36,043 92,157 100,415 1,598 4,366 1,101 1,249 120,303 142,600 138,130 140,635 30,754 49,115 9,216 18,251 75,879 110,808 9,080 12,499 263,059 331,308 $543,445 $473,908 $383,362 588,932 1,711,980 247,094 21,841 2,616,364 1,036,637 869,374 219,890 1,584,910 127,872 3,838,683 5.67% 1.65% 3.17% 6.81% 6.01% 6.11% 6.89% 7.12% 7.37% 8.48% 8.57% 8.59% 6.94% 6.81% 5.90% 7.11% 6.91% 6.79% 13.51% 13.71% 13.63% 7.53% 8.56% 9.38% 7.88% 10.78% 9.71% 7.56% 9.15% 8.95% 11.47% 12.12% 13.24% 9.31% 10.75% 11.18% 9.21% 9.29% 8.42% $ 186,111 $ 162,456 $ 140,690 413,662 1,373,263 1,927,615 1,728,913 8,451 433,937 2,173,244 2,769,637 1,851,524 51,053 436,595 2,859,181 3,481,887 2,125,022 256,354 $ 5,926 $ 5,546 $ 4,931 12,381 12,792 73,177 134,945 90,489 153,283 92,370 116,130 471 3,201 12,954 141,878 160,758 106,858 12,585 3.18% 2.97% 4.96% 4.62% 5.03% 4.91% 3.41% 3.50% 2.94% 2.99% 6.20% 5.33% 5.53% 4.69% 6.27% 5.34% 6.27% 5.57% liabilities $5,863,263 $4,672,214 $3,664,979 $280,201 $272,614 $183,330 4.78% 5.83% 5.00% Net interest income Interest rate spread Net interest margin $263,244 $201,294 $200,032 3.64% 4.08% 3.38% 4.29% 3.91% 4.85% (1) On a tax equivalent basis. The tax equivalent yield was computed dividing the interest rate spread on exempt assets by (1- statutory tax rate) and adding to it the cost of interest bearing liabilities. When adjusted to a tax equivalent basis, yields on taxable and exempt assets are comparative. (2) Non-accruing loans are included in the average balances. 029 . 1 0 0 2 > p r o C n a B t s r i F Part II 2001 compared to 2000 Increase (decrease) Due to: Rate Volume Total 2000 compared to 1999 Increase (decrease) Due to: Rate Total Volume Earning assets: Money market instruments Government obligations Mortgage backed securities Corporate bonds FHLB stock Total investments Consumer loans Residential real estate loans Construction loans Commercial loans Finance leases Total loans Total interest income Interest bearing liabilities: Deposits Other borrowed funds FHLB advances Total interest expense Change in net interest income $ 1,646 3,878 18,437 16,803 246 41,010 1,505 23,778 4,729 30,796 2,920 63,728 104,738 36,152 15,454 11,476 63,082 $41,656 (In thousands) ) ) ) ) ) ) ) ) ) ) ) ) ) ) $ (697 (3,966 7,246 61 (206 2,438 (2,090 (7,397 (5,657 (21,737 (758 (37,639 (35,201 (28,677 (24,726 (2,092 (55,495 $20,294 ) ) ) $ 949 (88 25,683 16,864 40 43,448 (585 16,381 (928 9,059 2,162 26,089 69,537 ) 7,475 (9,272 9,384 7,587 $61,950 ) $ (661 7,413 11,410 2,742 128 21,032 1,678 22,085 7,915 33,172 4,380 69,230 90,262 44,546 6,881 2,664 54,091 $36,171 $ 738 3,633 (3,152 26 20 1,265 827 (3,724 1,120 1,757 (961 (981 284 ) ) ) ) 18,248 16,879 66 35,193 $(34,909 ) $ 77 11,046 8,258 2,768 148 22,297 2,505 18,361 9,035 34,929 3,419 68,249 90,546 62,794 23,760 2,730 89,284 $ 1,262 030 . 1 0 0 2 > p r o C n a B t s r i F Total interest income includes tax equivalent adjustments of $27 million, $11 million and $14 million for 2001, 2000, and 1999, respectively. On a tax equivalent basis, net interest income increased to $263 million for 2001 from $201 million for 2000, and $200 million for 1999. The interest rate spread and net interest margin amounted to 3.64% and 4.08%, respective- ly, for 2001, as compared to 3.38% and 3.91%, respectively, for 2000 and to 4.29% and 4.85%, respectively, for 1999. 2001 compared to 2000 On a tax equivalent basis interest income increased by $70 million for 2001 as compared to 2000. On a tax equivalent basis the yield on earning assets was 8.42% for 2001 as compared to 9.21% for 2000. The increase in inter- est income results from the growth in the average volume of interest earn- ing assets of $1,307 million in 2001, partially offset by a lower yield due to lower market rates. On a rate/volume basis, the increase of $62 million in net interest income (on a tax equivalent basis) is the result of a positive volume variance of $42 million, plus a positive rate variance of $20 million. During the year 2001 short term rates fell 475 basis points due to repeat- ed interest rate cuts by the Federal Reserve Bank. Long term rates fell by less than 50 basis points, increasing the spread between short and long yields and increasing the Corporation’s interest rate spread and net inter- est margin. For the loan portfolio, the growth in 2001 of $374 million in the average volume of commercial loans (including commercial real estate loans) rep- resented an increase of $31 million in interest income due to volume, and a decrease of $22 million in interest income due to rate. The average port- folio of construction loans increased by $51 million for 2001, representing a positive volume variance of $5 million and a negative rate variance of $6 million. The average portfolio of residential mortgage loans increased by $296 million for 2001, representing a positive volume variance of $24 mil- lion and a negative rate variance of $7 million. The average finance lease portfolio (mostly composed of consumer loans) increased by $25 million in 2001, representing a positive volume variance of $3 million. The increase of $11 million in the average volume of consumer loans in 2001, repre- sented a positive variance in interest income due to volume of $2 million and a negative rate variance of $2 million.The increase in the commercial and construction loans portfolio resulted from the Corporation’s strategy to diversify its asset base. For the investment portfolio, the average volume of mortgage backed secu- rities increased by $255 million in 2001. The tax equivalent yield on mort- gage backed securities was 7.37% in 2001 and 6.89% in 2000. The portfo- lio of mortgage backed securities contributed $18 million in interest income due to volume and $7 million in interest income due to rate. The average volume of corporate bonds increased by $196 million for 2001 as compared to 2000, causing an increase in interest income of $17 million totally due to volume. Interest expense increased by $8 million for 2001 as compared to 2000. This was the result of the increase in the average volume of interest bear- ing liabilities of $1,191 million for 2001 as compared to 2000 which gener- ated a negative volume variance of $63 million, partially offset by the decrease in the cost of interest bearing liabilities due to lower market rates, causing a positive rate variance of $55 million. The cost of interest bearing liabilities decreased from 5.83% for 2000 to 4.78% for 2001. 2000 compared to 1999 On a tax equivalent basis interest income increased by $91 million for 2000 as compared to 1999. On a tax equivalent basis the yield on earning assets was 9.21% for 2000 as compared to 9.29% for 1999. The increase in inter- est income results from the growth in the average volume of interest earn- ing assets of $1,023 million in 2000. On a rate/volume basis, the increase of $1 million in net interest income (on a tax equivalent basis) is the result of a positive volume variance of $36 million, net of a negative rate variance of $35 million. During 2000 the Federal Reserve Bank tightened the mon- etary policy, raising the federal fund rate by approximately 100 basis points. At the same time, long term rates fell during the latter part of the year as markets began to anticipate a slowdown (the ten year note fell 104 basis points from December, 1999 to December, 2000). These trends inverted the yield curve during the latter part of 2000, reducing the Corporation’s interest rate spread and net interest margin. For the loan portfolio, the growth in 2000 of $363 million in the average volume of commercial loans (including commercial real estate loans) rep- resented an increase of $33 million in interest income due to volume, and an increase of $2 million in interest income due to rate. The average port- folio of construction loans increased by $74 million for 2000, representing a positive volume variance of $8 million and a positive rate variance of $1 million. The average portfolio of residential mortgage loans increased by $246 million for 2000, representing a positive volume variance of $22 mil- lion. The average finance lease portfolio (mostly composed of consumer loans) increased by $35 million in 2000, representing a positive volume variance of $4 million. The increase of $12 million in the average volume of consumer loans in 2000, represented a positive variance in interest income due to volume of $2 million. The increase in the commercial real estate, construction and commercial loans portfolio resulted from the Corporation’s strategy to diversify its asset base, which was concentrated in higher risk consumer loans. For the investment portfolio, the average volume of mortgage backed secu- rities increased by $163 million in 2000. The tax equivalent yield on mort- gage backed securities was 6.89% in 2000 and 7.12% in 1999. The portfo- lio of mortgage backed securities contributed $11 million in interest income due to volume net of $3 million decrease in interest income due to rate. The average volume of government obligations increased by $113 million for 2000 as compared to 1999, causing a total increase in interest income of $11 million. Interest expense increased by $89 million for 2000 as compared to 1999. This was the result of the increase in the average volume of interest bear- 031 . 1 0 0 2 > p r o C n a B t s r i F ing liabilities of $1,007 million for 2000 as compared to 1999 which gener- ated a volume variance of $54 million, together with an increase in the cost of interest bearing liabilities from 5.00% for 1999 to 5.83% for 2000 which caused a rate variance of $35 million for 2000 as compared to 1999. >. Provision for Loan Losses During 2001, the Corporation provided $61 million for loan losses, as compared to $46 million in 2000 and $48 million in 1999. The increase in the provision for loan losses was due to the growth of the total loan port- folio, to the increase in net charge offs of $5 million, and to current eco- nomic conditions. Net charge offs for 2001 amounted to $47 million, as compared to net charge offs for 2000 of $42 million, and of $45 million for 1999. The absolute dollar increase is attributable to a commercial loan written off during the first quarter of 2001. Net charge offs to average loans outstanding has improved to 1.22% as compared to 1.36% and 1.90% for 2000 and 1999, respectively. The allowance activity for 2001, and previous four years was as follows: Year ended December 31, Allowance for loan losses, beginning of year Provision for loan losses Loans charged off: Residential real state Commercial Finance leases Consumer Recoveries Net charge offs Other adjustments Allowance for loan losses, end of year Allowance for loan losses to year end total loans and loans held for sale Net charge offs to average loans outstanding during the period 2001 $76,919 61,030 ) ) ) ) ) (192 (9,523 (2,316 (42,349 7,391 (46,989 100 $91,060 2.11% 1.22% 2000 1999 (Dollars in thousands) 1998 $71,784 45,719 $67,854 47,960 $57,712 76,000 ) ) ) ) (3,463 (2,145 (46,223 9,807 (42,024 1,440 $76,919 2.20% 1.36% ) ) ) ) (825 (793 (52,047 9,048 (44,617 587 $71,784 2.61% 1.90% ) ) ) ) (880 (3,438 (67,906 6,034 (66,190 332 $67,854 3.20% 3.31% 1997 $55,254 55,675 ) (881 ) (1,399 ) (57,311 6,374 (53,217 ) $57,712 2.95% 2.79% The Corporation maintains the allowance for loan losses at a level that Management considers adequate to absorb losses inherent in the loan portfolio. The adequacy of the allowance for loan losses is reviewed on a quarterly basis as part of the continuing evaluation of the quality of the assets.This evaluation is based upon a number of factors, including the fol- lowing: historical loan loss experience, projected loan losses, loan portfolio composition, current economic conditions, fair value of the underlying col- lateral, financial condition of the borrowers, and, as such, includes amounts based on judgments and estimates made by Management. The allowance for loan losses on commercial and real estate loans over $1 million is determined based on the present value of expected future cash flows or the fair value of the collateral, if the loan is collateral depend- ent. 032 . 1 0 0 2 > p r o C n a B t s r i F >. Other Income The following table presents the composition of other income. Year ended December 31, Other fees on loans Service charges on deposit accounts Mortgage banking activities Rental income Other commissions Other operating income Other income before gain on sale of investments, trading and dividend on equity securities Gain on sale of investments Trading income (loss) Dividend on equity securities Total 2001 $19,632 9,213 1,585 2,293 1,511 8,471 42,705 9,606 669 $52,980 2000 (In thousands) $19,913 8,898 521 2,434 1,340 7,959 41,065 7,850 419 698 $50,032 1999 $ 12,887 8,540 870 2,610 6,584 31,491 1,377 (8 ) 2 $32,862 Other income primarily consists of fees on loans, service charges on deposit accounts, commissions derived from various banking activities, and gains on sale of investments. Other fees on loans consist mainly of credit card fees and late charges col- lected on loans. The increase in this source of income to $20 million in 2001 and 2000, from $13 million in 1999 was mainly due to fees generat- ed on the increased portfolio of loans, and to the elimination on the pro- hibition of late charges on credit card fees in Puerto Rico during 2000. Service charges on deposit accounts represent an important and stable source of other income for the Corporation. This source of income has averaged $9 million for the last three years. Mortgage banking activities income reflect the servicing fees on residential mortgage loans originated by the Corporation and subsequently securi- tized or sold, and gain on sale of loans. The increase for 2001 results from the gain of $1.3 million on the sale of $42.3 million of mortgage loans to Fannie Mae, with servicing retained. There were no sales of loans in 2000, and only $1.3 million sold in 1999. The Corporation’s subsidiary, First Leasing and Rental Corporation, gener- ates income on the rental of various types of motor vehicles. This source of income has averaged approximately $2 million in the past three years. As a result of an agreement with Goldman, Sachs, to participate in bond issues by the Government of Puerto Rico, and an agreement with a nation- al brokerage house in Puerto Rico to offer brokerage services in selected branches, the Corporation earned $1.5 million and $1.3 million in other commissions in 2001 and 2000, respectively. The other operating income category is composed of various types of service fee such as check fees and rental of safe deposit boxes. Other operating income also includes earned discounts on tax credits purchased and utilized against income tax payments, and other fees generated on the increased portfolio of commercial loans. In addition, other income includes the commissions earned by the new subsidiary FirstBank Insurance Agency, Inc., during 2001, which accounted for the increase in this caption from 2000 to 2001. Gains on sale of investment securities amounted to $9.6 million in 2001, $7.9 million in 2000, and $1.4 million in 1999. These gains reflect market opportunities that arose and that are in consonance to the Corporation’s investment policies. 033 . 1 0 0 2 > p r o C n a B t s r i F >. Other Operating Expense Other operating expenses amounted to $121 million for 2001 as com- pared to $113 million for 2000 and $101 million for 1999. The following table presents the components of other operating expenses. Year ended December 31, Salaries and benefits Occupancy and equipment Deposit insurance premium Other taxes and insurance Professional and service fees Business promotion Communications Real estate owned operations cost (gain) Expense of rental equipment Other Total 2001 $54,703 24,992 645 7,804 7,931 7,506 5,395 352 1,578 9,948 $120,854 2000 1999 (In thousands) $ 50,014 22,792 547 6,355 8,740 8,468 5,573 79 1,525 8,957 $113,050 $ 48,546 20,137 1,096 5,683 6,672 5,896 4,667 (303 1,478 7,400 $101,272 ) 034 . 1 0 0 2 > p r o C n a B t s r i F Management’s goal is to limit expenditures to those that directly con- tribute to increase the efficiency and profitability of the Corporation. This control over other operating expenses has been an important factor con- tributing to the increase in earnings in recent years. The Corporation’s effi- ciency ratio, which is the ratio of other operating expenses to the sum of net interest income and other income, improved to 41.81% for 2001 as compared to 46.95% and 46.33% for 2000 and 1999, respectively. The increase in operating expenses for 2001 is mainly the result of the investments made in new technology and infrastructure to provide the lat- est in delivery channels for its commercial and consumer lending business, and to support the significant growth in earning assets.The occupancy and equipment category consists of expenses associated with premises, office and computer equipment, and other automated banking equipment. The increase in the past three years results also from the enhancement of hard- ware and software through system conversions, which have enabled the Corporation to offer new products, and improve customer service and portfolio servicing. The salary and benefits category was affected by annual increases in salary and fringe benefits and an increase of 3% in the number of employees. >. Income Tax Expense The provision for income tax amounted to $20 million (or 19% of pre-tax earnings) for 2001 as compared to $15 million (or 18% of pre-tax earnings) in 2000, and $7 million (or 11% of pre-tax earnings) in 1999. The increase in the effective tax rate results from the growth in the residential real estate and commercial line of business. The Corporation has maintained an effective tax rate lower than the statutory rate of 39% mainly by invest- ing in obligations exempt from federal and Puerto Rico income tax. For additional information relating to income taxes, see Note 25 of the Corporation’s financial statements - “Income Taxes.” >. FINANCIAL CONDITION The following table presents an average balance sheet for the following years: December 31, Assets Interest earning assets: Money market instruments Government obligations Mortgage backed securities Corporate bonds FHLB stock Total investments Commercial loans Consumer loans Residential real estate loans Construction loans Finance leases Total loans Total interest earning assets Equity securities Total non-earning assets (1) Total assets Liabilities and stockholders’ equity Interest bearing liabilities: Interest bearing checking accounts Savings accounts Certificate accounts Interest bearing deposits Other borrowed funds FHLB advances Total interest bearing liabilities Total non-interest bearing liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity 2001 2000 (In thousands) 1999 $ 46,517 588,932 1,711,980 247,094 21,841 2,616,364 1,584,910 1,036,637 869,374 219,890 127,872 3,838,683 6,455,047 48,122 198,233 $6,701,402 $ 186,111 436,595 2,859,181 3,481,887 2,125,022 256,354 5,863,263 307,237 6,170,500 530,902 $6,701,402 $ 9,293 528,903 1,457,044 51,508 18,008 2,064,756 1,210,783 1,026,044 573,866 169,257 103,114 3,083,064 5,147,820 29,254 62,302 $5,239,376 $ 162,456 433,937 2,173,244 2,769,637 1,851,524 51,053 4,672,214 250,135 4,922,349 317,027 $5,239,376 $ 27,344 415,742 1,294,195 18,646 16,170 1,772,097 847,917 1,013,782 327,700 94,940 68,577 2,352,916 4,125,013 702 47,066 $4,172,781 $ 140,690 413,662 1,373,263 1,927,615 1,728,913 8,451 3,664,979 212,993 3,877,972 294,809 $4,172,781 (1) Net of the allowance for loan losses and the valuation on investments securities available for sale. 035 . 1 0 0 2 > p r o C n a B t s r i F >. Assets The Corporation’s total assets at December 31, 2001 amounted to $8,198 million, $2,278 million over the $5,920 million at December 31, 2000. The following table presents the composition of the loan portfolio at year- end for each of the last five years. December 31, Residential real estate loans Commercial real estate loans Construction loans Commercial loans Total commercial Finance leases Consumer loans Total % of 2001 Total % of Total 2000 % of Total 1999 1998 % of Total 1997 % of Total (Dollars in thousands) $1,011,908 23 $ 746,792 21 $ 473,563 17 $ 303,011 14 $ 292,604 15 688,922 219,396 1,238,173 2,146,491 127,935 1,022,445 16 5 29 50 3 24 $4,308,779 100 438,321 203,955 947,709 1,589,985 122,883 1,038,538 13 6 27 46 3 30 $3,498,198 100 371,643 132,068 655,417 1,159,128 85,692 1,026,985 $2,745,368 14 5 24 43 3 37 100 332,219 62,963 368,549 763,731 52,214 1,001,098 $2,120,054 16 3 17 36 3 47 100 306,734 9,279 235,571 551,584 42,500 1,072,613 15 1 12 28 2 55 $1,959,301 100 Total loans receivable increased by $811 million in 2001 when compared with 2000. During 2001 the Corporation continued its strategy of diver- sifying its loan portfolio composition through the origination and purchase of commercial loans and residential real estate loans, while maintaining its investment in consumer loans at approximately $1.0 billion.This resulted in a significant increase of $557 million in the commercial loan portfolio and of $265 million in residential real estate loans. Finance leases, which are mostly composed of loans to individuals to finance the acquisition of an auto, increased by $5 million, and consumer loans decreased by $16 million in 2001. The Corporation’s investment portfolio at December 31, 2001 amounted to $3,716 million, an increase of $1,483 million when compared with the investment portfolio of $2,233 million at December 31, 2000. 036 . 1 0 0 2 > p r o C n a B t s r i F The composition and estimated tax equivalent weighted average interest and dividend yields of the Corporation’s earning assets at December 31, 2001 were as follows: Money market instruments Government obligations Mortgage backed securities FHLB of N.Y. stock Corporate bonds Equity securities Total investments Consumer loans Residential real estate loans Construction loans Commercial and commercial real estate loans Finance leases Total loans(1) Total earning assets (1) Excludes the reserve for loan losses. Amount (In thousands) $ 34,565 732,679 2,558,689 22,891 333,348 33,827 3,715,999 1,022,445 1,011,908 219,396 1,927,095 127,935 4,308,779 $ 8,024,778 Weighted Average Rate 3.20% 4.29% 8.14% 4.39% 7.92% 1.43% 7.23% 13.35% 6.51% 5.94% 6.22% 11.15% 8.11% 7.70% >. Non-performing Assets Total non-performing assets are the sum of non-accruing loans, other real estate owned and other repossessed properties. Non-accruing loans are loans as to which interest is no longer being recognized. When loans fall into non-accruing status, all previously accrued and uncollected interest is charged against interest income. At December 31, 2001, total non-performing assets amounted to $79 mil- lion (0.96% of total assets) as compared to $74 million (1.25% of total assets) at December 31, 2000 and $57 million (1.22% of total assets) at December 31, 1999. The Corporation’s allowance for loan losses to non- performing loans was 124.7% at December 31, 2001 as compared to 113.6% and 133.4% at December 31, 2000 and 1999, respectively. The following table presents non-performing assets at the dates indicated. December 31, Non-accruing loans: Residential real estate Commercial and commercial real estate Finance leases Consumer Other real estate owned Other repossessed property Total non-performing assets Past due loans Non-performing assets to total assets Non-performing loans to total loans Allowance for loan losses Allowance to total non-performing loans 2001 2000 1999 1998 1997 (Dollars in thousands) $18,540 29,378 2,469 22,611 72,998 1,456 4,596 $79,050 $27,497 0.96% 1.69% $91,060 124.74% $15,977 31,913 2,032 17,794 67,716 2,981 3,374 $74,071 $16,358 1.25% 1.94% $76,919 113.59% $ 8,633 17,975 2,482 24,726 53,816 517 3,112 $57,445 $13,781 1.22% 1.96% $71,784 133.39% $ 9,151 19,355 1,716 26,736 56,958 3,642 2,277 $62,877 $15,110 1.57% 2.69% $67,854 119.13% $ 6,963 16,869 4,560 24,547 52,939 1,132 8,702 $62,773 $11,544 1.89% 2.70% $57,712 109.02% 037 . 1 0 0 2 > p r o C n a B t s r i F Non-accruing Loans Residential Real Estate Loans - The Corporation classifies all real estate loans delinquent 90 days or more in non-accruing status. Even though these loans are in non-accruing status, Management considers based on the value of the underlying collateral and the loan to value ratios, that no material losses will be incurred in this portfolio. Management’s estimate is based on the historical experience of the Corporation. Non- accruing real estate loans amounted to $19 million (1.83% of total resi- dential real estate loans) at December 31, 2001, as compared to $16 mil- lion (2.14% of total residential real estate loans) and $9 million (1.82% of total residential real estate loans) at December 31, 2000 and 1999, respec- tively. Commercial Loans - The Corporation places all commercial loans (including commercial real estate and construction loans) 90 days delin- quent as to principal and interest in non-accruing status. The risk exposure of this portfolio is diversified. Non-accruing commercial loans amounted to $29 million (1.37% of total commercial loans) at December 31, 2001 as compared to $32 million (2.01% of total commercial loans) and $18 mil- lion (1.55% of total commercial loans) at December 31, 2000 and 1999, respectively. At December 31, 2001, there was only one non-accruing com- mercial loan of over $1 million (of $3.6 million). Finance Leases - Finance leases are classified as non-accruing when they are delinquent 90 days or more. Non-accruing finance leases amounted to $2 million (1.93% of total finance leases) at December 31, 2001, compared to $2 million (1.65% of total finance leases) at December 31, 2000, and $2 million (2.90% of total finance leases) at December 31, 1999. Consumer Loans - Consumer loans are classified as non-accruing when they are delinquent 90 days in auto, boat and home equity reserve loans, 120 days in personal loans (including small loans) and 180 days in credit cards and personal lines of credit. Non-accruing consumer loans amounted to $23 million (2.21% of the total consumer loan portfolio) at December 31, 2001, $18 million (or 1.71% of the total consumer loan portfolio) at December 31, 2000 and $25 million (or 2.41% of the total consumer loan portfolio) at December 31, 1999. Other Real Estate Owned Other real estate owned acquired in settlement of loans is carried at the lower of cost (carrying value of the loan) or fair value less estimated cost to sell off the real estate at the date of acquisition. Repossessed Property The Repossessed Property category includes repossessed boats and autos acquired in settlement of loans. Repossessed boats are recorded at the lower of cost or estimated fair value. Repossessed autos are recorded at the principal balance of the loans less an estimated loss on the disposition. Past Due Loans Past due loans are accruing commercial and consumer 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. Past due consumer loans include personal lines of credit and credit card loans delin- quent 90 days up to 179 days and personal loans (including small loans) delinquent 90 days up to 119 days. >. Sources of Funds The Corporation’s principal funding sources are branch-based deposits, institutional deposit, federal funds purchased, retail brokered deposits, securities sold under agreements to repurchase, and FHLB advances. 038 . 1 0 0 2 > p r o C n a B t s r i F >. Deposits Total deposits amounted to $4,099 million at December 31, 2001, as com- pared to $3,346 million and $2,565 million at December 31, 2000 and 1999, respectively. The following table presents the composition of total deposits. December 31, Savings accounts Interest bearing checking accounts Certificates of deposit Interest bearing deposits Non-interest bearing deposits Total Weighted average rate during the period on interest bearing deposit Interest bearing deposits: Average balance outstanding Non-interest bearing deposits: Average balance outstanding 2001 2000 (Dollars in thousands) $ 469,452 205,760 3,183,491 3,858,703 239,851 $4,098,554 $ 430,298 170,631 2,512,891 3,113,820 232,164 $3,345,984 1999 $ 447,946 162,601 1,742,978 2,353,525 211,896 $2,565,421 4.62% 5.53% 4.69% $3,481,887 $2,769,637 $1,927,614 233,254 213,728 179,478 Total deposits are composed of branch-based deposits, brokered deposits Institutional deposits and to a lesser extent of institutional deposits. include certificates issued to agencies of the Government of Puerto Rico. Total interest bearing deposits increased by $745 million at December 31, 2001 when compared to December 31, 2000. This fluctuation was mainly due to: (1) an increase in branch-based deposits of $92 million; (2) an increase of $691 million in brokered certificates of deposits; net of (3) a decrease of $38 million in certificates issued to the agencies of the Government of Puerto Rico. Non-interest bearing deposits increased by $8 million in 2001. >. Borrowings At December 31, 2001 total borrowings amounted to $3,425 million as compared to $2,069 million and $1,804 million at December 31, 2000 and 1999, respectively. The increase in borrowings of $1,356 million was nec- essary to finance the growth in the investment portfolio of $1,483 million. The following table presents the composition of borrowings. 039 . 1 0 0 2 > p r o C n a B t s r i F December 31, 2001 2000 (Dollars in thousands) 1999 Federal funds purchased and securities sold under agreements to repurchase Advances from FHLB Subordinated notes Notes payable Other short term borrowings Total $2,997,174 343,700 84,362 $1,856,436 67,000 90,548 55,500 $3,425,236 $2,069,484 $1,452,151 50,000 93,594 55,500 152,484 $1,803,729 Weighted average rate during the period 5.02% 6.27% 5.34% The Corporation uses federal funds purchased, repurchase agreements, advances from FHLB and notes payable as additional funding sources. The borrowings of the Corporation consist primarily of federal funds pur- chased and securities sold under agreements to repurchase (repurchase agreements) which at December 31, 2001 amounted to $2,997 million or 88% of total borrowings. Repurchase agreements had a total weighted average cost of 4.90% during the year ended December 31, 2001. For more information on borrowings please refer to Notes 19 through 21 of the Corporation’s financial statements. The composition and estimated weighted average interest rates of interest bearing liabilities at December 31, 2001, were as follows: Interest bearing deposits Borrowed funds Amount (In thousands) $ 3,858,703 3,425,236 $ 7,283,939 Weighted Average rate 3.82% 4.23% 4.01% >. Contractual Obligations and Commitments The following table presents a detail of the maturities of contractual debt obligations, operational leases and commitments to extend credit: Payments Due/Commitments Expiration by Period (In thousands) 1-3 years Less than 1 year 4-5 years After 5 years Total $2,986,174 343,700 84,362 19,069 $3,433,305 $1,011,214 20,700 4,414 $1,036,328 $156,500 50,000 84,362 7,999 $298,861 $550,000 $1,268,460 273,000 2,804 $552,804 3,852 $1,545,312 040 . 1 0 0 2 > p r o C n a B t s r i F Contractual Obligations: Federal funds purchased and securities sold under agreements to repurchase Advances from FHLB Subordinated Notes Operational Leases Total Contractual Cash Obligations Other Commitments: Lines of Credit Standby Letters of Credit Other Commercial Commitments Total Commercial Commitments $304,600 24,172 436,251 $765,023 $304,600 24,172 436,251 $765,023 The Corporation has obligations and commitments to make future pay- ments under contracts, such as debt and lease agreements, and under other commitments to extend credit. Commitments to extend credit are agree- ments to lend to a customer as long as there is no violation of any condi- tion established in the contract. 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. >. Capital During 2001, the Corporation increased its total capital from $435 million at December 31, 2000 to $603 million at December 31, 2001. Total capi- tal increased by $168 million due to earnings of $86 million, the issuance of 4,140,000 shares of preferred stock at $100 million, the issuance of 234,000 shares of common stock through the exercise of stock options with proceeds of $1 million, a positive fluctuation in the valuation of secu- rities available for sale of $13 million, reduced by the repurchased shares of common stock at a total cost of $2 million, and cash dividends of $30 million. The Corporation’s objective is to maintain a solid capital position above the “well capitalized” classification under the federal banking regulations. The Corporation continues to exceed the well capitalized guidelines. To be in a “well capitalized” position, an institution should have: (i) a leverage ratio of 5% or greater; (ii) a total risk based capital ratio of 10% or greater; and (iii) a Tier 1 risk-based capital ratio of 6% or greater. At December 31, 2001 the Corporation had a leverage ratio of 7.49%; a total risk based cap- ital ratio of 14.50%; and a Tier 1 risk-based capital ratio of 12.16%. >. >. Dividends In 2001, 2000 and 1999 the Corporation declared four quarterly cash div- idends of $0.13, $0.11 and $0.09 per common share, respectively, for an annual dividend of $0.52, $0.44 and $0.36, respectively. Total cash dividends paid on common shares amounted to $14 million for 2001 (or a 19.91% dividend payout ratio), $12 million for 2000 (or a 19.72% dividend payout ratio) and $10 million for 1999 (or a 17.96% dividend payout ratio). Dividends declared on preferred stock amounted to $17 million in 2001 and $7 million in 2000, and $4 million in 1999. Quantitative and Qualitative Disclosures about Market Risk 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 Management and within guidelines set forth by the Board of Directors. The day-to-day management of interest rate risk, as well as liquidity man- agement and other related matters, is assigned to the Asset Liability Management and Investment Committee of FirstBank (ALCO). The ALCO is composed of the following officers: President and CEO, the Senior Executive Vice President and Chief Financial Officer, the Senior Executive Vice President and Chief Lending Officer, the Executive Vice Presidents, the Senior Vice President of Investments and Treasury, and the Economist.The ALCO meets on a weekly basis. The Economist also acts as secretary, keeping minutes of all meetings. An Investment Committee for First BanCorp also monitors the investment portfolio of the Holding Company, including a stock portfolio which amounted to $34 million at December 31, 2001.This Committee meets weekly and has the same membership as the ALCO Committee described previously. Committee meetings focus 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, alter- native 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 ALCO approves funding deci- sions in the light of the Corporation’s overall growth strategies and objec- tives. On a quarterly basis the ALCO performs a comprehensive asset/lia- bility review, examining the measures of interest rate risk described below together with other matters such as liquidity and capital. The Corporation uses simulations to measure the effects of changing inter- est rates on net interest income. These measures are carried out over a 041 . 1 0 0 2 > p r o C n a B t s r i F two year time horizon, assuming gradual upward and downward interest rate movements of 200 basis points in the first year, followed by constant rates (at the new higher or lower levels) in the second year. Simulations are carried out in two ways: (1) (2) using a balance sheet which is assumed to be at the same levels existing on the simulation date, and using a balance sheet which has growth patterns and strategies similar to those which have occurred in the recent past. Assuming a no growth balance sheet as of December 31, 2001, tax equiv- alent net interest income for 2002, the first year of the projection, would decline by $6.2 million (1.7%) under a rising rate scenario and would increase by $1.9 million (0.5%) under falling rates. For 2003, the second year of the projection, the no growth balance sheet simulations showed that tax equivalent net interest income would have declined by $24.5 mil- lion (6.4%) under a rising rate scenario and would have increased by $6.2 million (1.6%) under falling rates, compared to a similar simulation with no change in rates. The same simulations were also carried out assuming that the Corporation would grow. As of December 31, 2001 the growing balance sheet simula- tions indicate that tax equivalent net interest income for 2002, the first year of the projection, would fall by $8.8 million (2.4%) under a rising rate scenario and would increase by $3.8 million (1.0%) with falling rates. For 2003, the second year of the projection, the growing balance sheet simula- tions showed that tax equivalent net interest income would have declined by $20.6 million (5.1%) assuming rising rates and would have increased by $1.9 million (0.5%) with falling rates, compared to a similar simulation with no change in rates. These simulations assume gradual upward or downward movements of interest rates over the first year, with the change totaling 200 basis points at the end of the twelve month period. Rates are then assumed to remain constant at their new year-end levels during the second year of the pro- jection. The balance sheet is divided into groups of similar assets and lia- bilities in order to simplify the process of carrying out these projections. 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 prepayment rates, and other fac- tors which may be important in determining the future growth of net inter- est income. All computations are done on a tax equivalent basis, including the effects of the changing cost of funds on the tax-exempt spreads of cer- tain investments. The projections are carried out for First BanCorp on a fully consolidated basis. These simulations are highly complex, and they use many simplifying assumptions which are intended to reflect the general behavior of the Corporation over the period in question, but there can be no assurance that actual events will parallel these assumptions in all cases. For this rea- son, the results of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. Management also uses one year GAP analysis as a secondary technique for evaluating interest rate risk. The Corporation’s one year GAP fluctuated between a negative 16% and a positive 16% of assets during 2001. Management considers that the ranges of the GAP ratio achieved during 2001 are adequate, considering the Corporation’s net interest margin and capital ratios. 042 . 1 0 0 2 > p r o C n a B t s r i F Use of Derivatives As of December 31, 2001 the Corporation had borrowings totaling $2.5 billion which included embedded call options. The primary purpose of these transactions was to reduce the Corporation’s exposure to interest rate risk by lengthening the maturities of its liabilities, while keeping its funding costs low. In addition, the Corporation had, at year ended 2001, $600 million of inter- est rate caps. The Corporation also held $1,553 million of interest rate swap contracts, of which $1,495 million are used to convert wholesale funds obtained at fixed rates to low cost variable rate funding tied to LIBOR. This funding has repricing characteristics similar to various parts of the Corporation’s loan portfolio, and therefore, tends to provide a closer match between the repricing of assets and liabilities. >. Critical Accounting Policies and Practices The accounting and reporting policies of the Corporation and its sub- sidiaries conform with generally accepted accounting principles. A sum- mary of accounting policies and recently issued accounting pronounce- ments is included in Note 2 of the Corporation’s financial statements - “Summary of Significant Accounting Policies”. The reported amounts are based on judgments, estimates and assumptions made by Management that affect the recorded assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of rev- enues and expenses during the reporting periods. Actual results could dif- fer from those estimates, if different assumptions or conditions prevail. The Corporation classifies its investments in debt and equity securities into trading, held to maturity and available for sale securities. The available for sale securities are carried at fair value. The fair values of these securities were calculated based on quoted market prices and dealer quotes. Changes in the assumptions used in calculating the fair values, could affect the reported valuations. The Corporation maintains the allowance for loan losses at a level that Management considers adequate to absorb losses inherent in the loan portfolio. The adequacy of the allowance for loan losses is reviewed on a quarterly basis as part of the continuing evaluation of the quality of the assets. Groups of small balance, homogeneous loans are collectively evalu- ated for impairment. The portfolios of consumer loans, auto loans and finance leases are considered homogeneous and are evaluated collectively for impairment. In determining probable losses for each category of homo- geneous pools of loans, Management uses historical information about loan losses over several periods of time that reflect varying economic condi- tions and adjusts such historical data based on the current conditions, con- sidering information and trends on charge-offs, non-accrual loans and delin- quencies. The Corporation measures impairment individually for those commercial and real estate loans with a principal balance exceeding $1 mil- lion. An allowance 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, the measurement of impairment for loans evalu- ated individually involves assumptions by Management as to the amount and timing of cash flows to be recovered and of appropriate discount rates. Where the loans are collateral dependent, Management generally obtains an independent appraisal.Those appraisals also involve estimates of future cash flows and appropriate discount rates or adjustments to comparable properties in determining fair values. The assumptions, judgments and estimates made by Management affect the reported amounts in the Corporation’s financial statements. Different amounts may result if reported under different conditions or using differ- ent assumptions. 043 . 1 0 0 2 > p r o C n a B t s r i F >. Liquidity Liquidity refers to the level of cash and eligible investments to meet loan and investment commitments, potential deposit outflows and debt repay- ments. The Asset Liability Management and Investment Committee, using measures of liquidity developed by Management, reviews the Corporation’s liquidity position on a weekly basis. The principal sources of short-term funds are loan repayments, deposits, securities sold under agreements to repurchase, and lines of credit with the FHLB and other financial institutions. The Investment Committee reviews credit availability on a regular basis. In the past, the Corporation has secu- ritized and sold auto and mortgage loans as supplementary sources of funding. Commercial paper had also provided additional funding. The Corporation has obtained long-term funding through the issuance of notes and long-term institutional certificates of deposit. The Corporation’s prin- cipal uses of funds are the origination of loans and the repayment of matur- ing deposit accounts and borrowings. >. Impact of Inflation and Changing Prices The financial statements and related data presented herein have been pre- pared in conformity with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative pur- chasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabili- ties 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 effects of general levels of inflation. Interest rate movements are not nec- essarily correlated with changes in the prices of goods and services. >. Market Prices and Stock Data The Corporation’s common stock is traded in the New York Stock Exchange (NYSE) under the symbol FBP. On December 31, 2001, there were 683 holders of record of the Corporation’s common stock. The following table sets forth the high and low prices of the Corporation’s common stock for the periods indicated as reported by the NYSE. Quarter ended 2001: December September June March 2000: December September June March 1999: December September June March High $30.00 30.00 26.99 26.13 $24.69 24.50 18.75 21.00 $22.81 24.75 28.50 30.38 Low $25.60 24.00 22.98 19.50 $20.50 18.00 16.69 16.25 $19.25 19.75 22.00 22.69 044 . 1 0 0 2 > p r o C n a B t s r i F Financial Statements 045 . 1 0 0 2 > p r o C n a B t s r i F First BanCorp Consolidated Statements of Financial Condition Assets Cash and due from banks Money market instruments Investment securities available for sale, at market: Securities pledged that can be repledged Other investment securities Total investment securities available for sale Investment securities held to maturity, at cost: Securities pledged that can be repledged Other investment securities Total investment securities held to maturity Federal Home Loan Bank (FHLB) stock Loans held for sale Loans receivable Total loans Allowance for loan losses Total loans - net Other real estate owned Premises and equipment - net Accrued interest receivable Due from customers on acceptances Other assets Total assets Liabilities and Stockholders’ Equity Liabilities: Non-interest bearing deposits Interest bearing deposits Federal funds purchased and securities sold under agreements to repurchase Advances from FHLB Notes payable Bank acceptances outstanding Accounts payable and other liabilities Subordinated notes Stockholders’ equity: Preferred stock Common stock Less:Treasury stock (at par value) Common stock outstanding Additional paid-in capital Capital reserve Legal surplus Retained earnings Accumulated other comprehensive income - unrealized loss on securities available for sale, net of tax of $2,097,785 (2000-$6,532,928) 048 . 1 0 0 2 > p r o C n a B t s r i F December 31, 2001 2000 $ 59,898,550 34,564,568 $ 63,372,591 2,020,348 2,988,828,088 385,419,989 3,374,248,077 171,152,930 113,142,662 284,295,592 22,890,600 4,629,562 4,304,150,143 4,308,779,705 (91,060,307 4,217,719,398 1,455,577 76,155,620 37,630,883 262,153 88,396,770 $8,197,517,788 ) 1,621,457,451 280,205,723 1,901,663,174 268,432,581 42,562,921 310,995,502 18,536,500 ) 3,498,198,207 3,498,198,207 (76,918,973 3,421,279,234 2,981,472 72,087,346 27,969,551 2,177,043 96,573,820 $5,919,656,581 $ 239,850,816 3,858,703,322 $ 232,164,469 3,113,819,927 2,997,173,944 343,700,000 262,153 70,547,126 7,510,237,361 84,361,525 ) 268,500,000 29,852,552 (3,280,600 26,571,952 14,214,877 60,000,000 136,792,514 103,132,913 (6,293,354 602,918,902 ) 1,856,436,127 67,000,000 55,500,000 2,177,043 67,550,152 5,394,647,718 90,548,314 ) 165,000,000 29,618,552 (3,194,400 26,424,152 16,567,516 50,000,000 126,792,514 69,275,152 (19,598,785 434,460,549 ) Contingencies and commitments Total liabilities and stockholders’ equity $ 8,197,517,788 $ 5,919,656,581 The accompanying notes are an integral part of these statements. First BanCorp Consolidated Statements of Income Year ended December 31, 2001 2000 1999 Interest income: Loans Investment securities Short-term investments Dividends on FHLB stock Total interest income Interest expense: Deposits Short-term borrowings Notes payable Advances from FHLB Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other income: Other fees on loans Service charges on deposit accounts Trading income (loss) Gain on sale of investments Rental income Other operating income Total other income Other operating expenses: Employees’ compensation and benefits Occupancy and equipment Taxes Insurance Net cost (gain) of operations and disposition of other real estate owned Amortization of debt issuance costs Other Total other operating expenses Income before income tax provision and cumulative effect of accounting change Income tax provision Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax $353,777,585 159,713,664 1,475,521 1,289,125 516,255,895 160,758,451 97,952,979 8,904,611 12,585,108 280,201,149 236,054,746 61,030,000 175,024,746 19,631,741 9,213,436 9,606,314 2,292,541 12,235,791 52,979,823 54,702,977 24,991,540 5,973,897 2,475,411 352,075 107,354 32,251,124 120,854,378 107,150,191 20,133,858 87,016,333 (1,014,889 ) $329,007,974 132,603,596 527,155 1,248,755 463,387,480 153,283,358 105,326,693 10,803,634 3,200,940 272,614,625 190,772,855 45,718,500 145,054,355 19,913,340 8,898,170 419,367 7,850,472 2,433,664 10,517,047 50,032,060 50,014,110 22,791,863 5,054,748 1,846,984 78,509 319,899 32,943,391 113,049,504 82,036,911 14,761,302 67,275,609 $260,741,177 106,770,856 450,248 1,100,823 369,063,104 90,489,121 79,455,499 12,914,538 470,590 183,329,748 185,733,356 47,960,500 137,772,856 12,886,541 8,540,291 ) (7,946 1,376,672 2,609,657 7,457,218 32,862,433 48,545,839 20,137,354 4,696,937 2,081,417 ) (303,359 612,404 25,501,303 101,271,895 69,363,394 7,288,445 62,074,949 049 . 1 0 0 2 > p r o C n a B t s r i F Net income $ 86,001,444 $ 67,275,609 $ 62,074,949 Net income available to common stockholders $ 69,493,246 $ 59,868,067 $ 57,799,949 Net income per common share basic: Income before cumulative effect of accounting change Cumulative effect of accounting change Earnings per common share basic Net income per common share diluted: Income before cumulative effect of accounting change Cumulative effect of accounting change Earnings per common share diluted Dividends declared per common share $ 2.65 $2.22 (0.04 ) $ 2.61 $2.22 $ 2.64 $2.21 ) (0.04 $ 2.60 $ 0.52 $2.21 $0.44 The accompanying notes are an integral part of these statements. $2.00 $2.00 $1.98 $1.98 $0.36 First BanCorp Consolidated Statements of Cash Flows Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for loan losses Amortization of deferred loan costs (fees) Net gain on sale of investments securities Origination of loans held for sale Net gain on sale of loans Increase (decrease) in taxes payable Increase in deferred tax asset Increase in accrued interest receivable Increase in accrued interest payable Decrease in other assets (Decrease) increase in other liabilities Total adjustments Net cash provided by operating activities Cash flows for investing activities: Principal collected on loans Loans originated Purchase of loans Proceeds from sales of loans Proceeds from sales of investment securities Purchase of securities held to maturity Purchase of securities available for sale Principal repayments and maturities of securities held to maturity Principal repayments of securities available for sale Additions to premises and equipment Purchase of FHLB stock Net cash used in investing activities Cash flows from financing activities: Net increase in deposits Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements Net (decrease) increase in other short-term borrowings FHLB advances taken Payments of notes payable Dividends Issuance of preferred stock Treasury stock acquired Exercise of stock options Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash and cash equivalents include: Cash and due from banks Money market instruments 2001 Year ended December 31, 2000 1999 $ 86,001,444 $ 67,275,609 $ 62,074,949 10,763,543 61,030,000 522,685 (9,606,314 (4,629,562 (1,282,845 11,306,695 (5,840,872 (9,661,332 4,841,187 23,332,778 (9,395,151 71,380,812 157,382,256 ) ) ) ) ) ) 897,831,839 (1,334,581,873 (481,200,701 42,343,060 847,716,293 (254,818,754 (12,462,323,482 ) ) ) ) 74,529,997 10,377,705,993 (13,912,556 (4,354,100 (2,311,064,284 ) ) ) ) ) ) ) ) 9,880,398 45,718,500 (144,768 (7,850,472 (19,474,679 (3,917,506 (10,052,025 11,677,924 4,218,642 20,740,407 50,796,421 118,072,030 646,581,300 (1,222,590,263 (238,055,000 ) ) 58,452,236 (6,949,462 (5,125,184,351 ) ) 4,692,427,578 (19,153,597 (710,000 (1,215,181,559 ) ) ) 7,752,616 47,960,500 (680,735) (1,376,672) (18,222,990) (5,753) 2,345,647 (6,702,849) (7,179,454) 10,056,988 12,843,340 5,012,928 51,803,566 113,878,515 719,964,127 (1,270,442,873) (118,603,000) 1,272,540 9,630,866 (277,624,203) (6,069,805,410) 500,000 6,267,048,544 (18,055,660) (7,555,900) (763,670,969) 764,012,251 780,840,486 791,686,207 1,134,888,478 403,553,556 (172,898,023) ) ) ) 276,700,000 (62,000,000 (30,343,298 100,069,250 (1,929,685 1,355,211 2,182,752,207 29,070,179 65,392,939 $ 94,463,118 ) ) ) ) ) (152,484,084 17,000,000 (3,125,000 (19,212,141 72,437,500 (30,086,592 93,750 1,069,017,475 (28,092,054 93,484,993 $ 65,392,939 65,889,375 47,400,000 (68,600,000 ) (14,657,797 ) 86,850,217 (32,510,611 ) 176,313 703,335,681 53,543,227 39,941,766 $ 93,484,993 $ 59,898,550 34,564,568 $ 94,463,118 $ 63,372,591 2,020,348 $ 65,392,939 $ 58,267,929 35,217,064 $ 93,484,993 The accompanying notes are integral part of these statements. 050 . 1 0 0 2 > p r o C n a B t s r i F First BanCorp Consolidated Statements of Changes in Stockholders’ Equity Preferred stock Common stock Additional paid-in capital Capital reserve Legal surplus Retained earnings Unrealized gain (loss) on securities available for sale December 31, 1998 90,000,000 $29,499,552 $23,575,936 $30,000,000 $53,454,469 $125,088,180 $8,749,931 Net income Other comprehensive income Issuance of preferred stock Addition to legal surplus Addition to capital reserve Treasury stock acquired Stock options exercised Cash dividends: Common stock Preferred stock December 31, 1999 Net income Other comprehensive income Issuance of preferred stock Addition to capital reserve Treasury stock acquired Stock options exercised Cash dividends: Common stock Preferred stock December 31, 2000 Net income Other comprehensive income Issuance of preferred stock Addition to legal surplus Addition to capital reserve Treasury stock acquired Stock options exercised Cash dividends: Common stock Preferred stock December 31, 2001 $90,000,000 (3,149,783 ) (1,452,000 13,000 ) (726,000 163,313 ) 73,338,045 10,000,000 (73,338,045 ) (10,000,000 ) (30,332,611 ) 62,074,949 (77,398,890 ) 90,000,000 28,060,552 19,863,466 40,000,000 126,792,514 (10,382,797 (4,275,000 ) 58,834,676 (68,648,959 ) ) 67,275,609 49,050,174 75,000,000 (2,562,500 ) (1,642,400 6,000 ) ) (821,200 87,750 10,000,000 (10,000,000 (27,622,992 ) ) 165,000,000 26,424,152 16,567,516 50,000,000 126,792,514 103,500,000 (3,430,750 ) 10,000,000 10,000,000 ) (86,200 234,000 (43,100 1,121,211 ) (11,804,599 ) (7,407,542 ) 69,275,152 (19,598,785 ) 86,001,444 13,305,431 (10,000,000 (10,000,000 (1,800,385 ) ) ) ) (13,835,100 (16,508,198 ) 051 . 1 0 0 2 > p r o C n a B t s r i F $268,500,000 $26,571,952 $14,214,877 $60,000,000 $136,792,514 $103,132,913 $(6,293,354 ) The accompanying notes are an integral part of these statements. First BanCorp Consolidated Statements of Comprehensive Income Net income Other comprehensive income net of tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period Less: Reclassification adjustment for gains included in net income net of tax benefit of $2,401,578 (2000-$1,962,618; 1999-$344,168) Cumulative effect of accounting change, net of tax benefit of $331,500 Total other comprehensive income (loss) 2001 $86,001,444 Year ended December 31, 2000 $67,275,609 1999 $62,074,949 19,515,667 54,938,028 (76,366,386 ) (7,204,736 ) (5,887,854 ) (1,032,504 ) 994,500 13,305,431 49,050,174 (77,398,890 ) Comprehensive income (loss) $99,306,875 $116,325,783 $(15,323,941 ) The accompanying notes are an integral part of these statements. 052 . 1 0 0 2 > p r o C n a B t s r i F First BanCorp Notes to Consolidated Financial Statements >. Note 1 - Nature of Business First BanCorp (the Corporation) is a financial holding company offering a full range of financial services. First BanCorp is subject to the Federal Bank Holding Company Act and to the regulations, supervision, and examination of the Federal Reserve Board. FirstBank Puerto Rico (FirstBank), the Corporation’s wholly owned bank subsidiary, is a commercial bank chartered under the laws of the Its main office is located in San Juan, Commonwealth of Puerto Rico. Puerto Rico, and it has 44 full-service banking branches in Puerto Rico and It also has loan origination offices in Puerto four in the U.S.Virgin Islands. Rico focusing on consumer loans and residential mortgage loans. In addi- tion, through its wholly-owned subsidiaries, FirstBank operates other offices in Puerto Rico specializing in small personal loans, finance leases and vehicle rental. Early in the year 2000, the Bank began offering brokerage services in selected branches through an alliance with a national brokerage house in Puerto Rico. The Bank is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of Puerto Rico and the Federal Deposit Insurance Corporation (FDIC), which insures its deposits through the Savings Association Insurance Fund (SAIF). Effective August 2001, the Corporation entered into the insurance business through a wholly owned subsidiary, FirstBank Insurance Agency. This sub- sidiary is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico. >. Note 2 - Summary of Significant Accounting Policies The accounting and reporting policies of the Corporation and its sub- sidiaries conform with generally accepted accounting principles, and, as such, include amounts based on judgments, estimates and assumptions made by Management that affect the reported amounts of assets and lia- bilities and contingent assets and liabilities at the date of the financial state- ments and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Following is a description of the more significant accounting policies fol- lowed by the Corporation: 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. Statement of cash flows 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 90 days or less. Investment securities The Corporation classifies its investments in debt and equity securities into one of three categories: Held to maturity - Securities which the entity has the positive intent and abil- ity to hold to maturity. These securities are carried at amortized cost. 053 . 1 0 0 2 > p r o C n a B t s r i F 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. Available for sale - Securities not classified as trading or as held to maturity. These securities are carried at fair value, with unrealized holding gains and losses, net of deferred tax effects, reported in other comprehensive income as a separate component of stockholders’ equity. Premiums and discounts are amortized as an adjustment to interest income over the life of the related securities using a method that approx- imates the interest method. Realized gains or losses on securities are reported in earnings. When computing realized gains or losses, the cost of securities is determined on the specific identification method. Loans held for sale Loans held for sale are stated at the 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 included in the determination of net income. Loans and allowance for loan losses Loans are stated at their outstanding balance less unearned interest and net deferred loan origination fees and costs. Unearned interest on install- ment loans (i.e., personal and auto) is recognized as income under a method which approximates the interest method. 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 loans are classified as non- accruing when they are delinquent: 90 days or more for auto, boat and home equity reserve loans, 120 days or more for personal loans, and 180 days or more for credit cards and personal lines of credit. Commercial and mortgage loans are classified as non-accruing when they are delinquent 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, eco- nomic conditions and other pertinent factors. Loan losses are charged and recoveries are credited to the allowance for loan losses. The Corporation has defined impaired loans as loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. The Corporation measures impairment individually for those commercial and real estate loans with a principal balance exceeding $1 million. Groups of small balance, homogeneous loans are collectively evaluated for impairment. The portfolios of consumer loans, auto loans and finance leases are considered homogeneous and are evaluated collectively for impairment. An allowance 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. Loan fees and costs Loan fees and costs incurred in the origination of loans are deferred and amortized using the interest method or under a method that approximates the interest method over the life of the loans as an adjustment to interest income. When a loan is paid off or sold, any unamortized net deferred fee (cost) is credited (charged) to income. 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 allocat- ed to the servicing assets and the loans (without the servicing asset), based 054 . 1 0 0 2 > p r o C n a B t s r i F 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 characteris- tics of underlying loans. The amount of impairment recognized, if any, is the amount by which the servicing asset exceeds its estimated fair value. Impairment, if any, is charged against servicing income. Other real estate owned Other real estate owned, 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. 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 net cost (gain) of operations and dis- position of other real estate owned. The cost of maintaining and operat- ing these properties is expensed as incurred. Premises and equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the individual assets. Depreciation of leasehold improve- ments is computed on the straight-line method over the terms of the leas- es or 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. 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 con- tractual interest rates, similar assets as collateral and the same aggregate unpaid principal amount. The Corporation retains control over the secu- rities sold under these agreements, accordingly, these agreements are con- sidered 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 securi- ties pledged to creditors that can be repledged. Accounting for income taxes Deferred taxes arise because certain transactions affect the determination of taxable income for financial reporting purposes in periods different from the period in which the transactions affect taxable income. Deferred taxes have been recorded based upon the Puerto Rico enacted tax rates. Current tax expense has been provided based upon the estimated tax lia- bility to be incurred for tax return purposes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Amortization of debt issuance costs Costs related to the issuance of debt are amortized under a method which approximates the interest method. 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 055 . 1 0 0 2 > p r o C n a B t s r i F 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. Stock option plan The cost associated with the stock option plan under which certain employees receive options to buy shares of stock of the Corporation must be recognized either by the fair value method or the intrinsic value method. The Corporation uses the intrinsic value method of accounting. Under the intrinsic value method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measure- ment date over the amount an employee must pay to acquire the stock. Entities using the intrinsic value method on awards granted to employees must make pro forma disclosures of net income and earnings per share, as if the fair value method of accounting had been applied. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Earnings per common share Earnings per share-basic is calculated by dividing income available to com- mon stockholders by the weighted average number of outstanding com- mon shares. The computation of earnings per share-diluted is similar to the computation of earnings per share-basic except that the weighted aver- age common shares are increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Stock options outstanding under the Corporation’s stock option plan are considered in the earnings per share- diluted by application of the treasury stock method, which assumes that proceeds for the exercise of options are used to repurchase common stock in the open market. Any stock splits or stock dividends are retroac- tively recognized in all periods presented in financial statements. Comprehensive income Comprehensive income includes net income and several other items that current accounting standards require to be recognized outside of net income, primarily the unrealized gain (loss) on securities available for sale and the change in fair value attributable to credit risk on securities hedged with interest rate swaps, net of taxes. Recently issued accounting pronouncements On January 1, 2001, the Corporation adopted the Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement establishes accounting and reporting standards for derivative instruments, including derivative instruments that are embedded in other contracts, and for hedging activi- ties. SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, amended SFAS No. 133. SFAS No. 133, as amended, standardizes accounting for derivative instru- ments by requiring the recognition of all derivatives (both assets and liabil- ities) in the statement of financial position at fair value. Under SFAS No. 133, changes in the fair value of derivative instruments are accounted for as current income or other comprehensive income, depending on their intended use and designation. For transactions that qualify for hedge accounting, SFAS No. 133 provides for a matching of the timing of gain or loss recognition on the hedging instrument with the recognition in earn- ings of (a) the changes in the fair value of the hedged asset, liability, or a firm commitment that are attributable to the hedged risk or (b) the effect of the exposure to the variability of cash flows from the hedged asset, lia- bility, or forecasted transaction. SFAS No. 133 also provided that at the date of the initial application, a corporation may transfer any held to matu- rity security into the available for sale category or the trading category. 056 . 1 0 0 2 > p r o C n a B t s r i F The Corporation also adopted SFAS No. 140,“Accounting for Transfer and Servicing of Financial Assets and Liabilities - A Replacement of SFAS 125” which revises the standards of accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS 125 without reconsid- eration. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It was effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. This state- ment also required recognition and reclassification of collateral and disclo- sures relating to securitization transactions and collateral at December 31, 2000. The Corporation fully adopted this statement effective April 1, 2001. Effective December 31, 2000 the required disclosures for collateral and securitization transactions were incorporated in the financial statements. During 2001 the Financial Accounting Standards Board issued the follow- ing statements: SFAS No. 141, “Business Combinations” - This statement addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. This statement requires all busi- ness combinations to be accounted for using the purchase method of accounting. The provisions of this statement apply to all business combi- nations initiated after June 30, 2001. There have been no business combi- nations since that date. SFAS No. 142,“Goodwill and Other Intangible Assets” - This statement address- es financial accounting and reporting for intangible assets acquired individ- ually or with a group of other assets (but not those acquired in a business combination) at acquisition or subsequent to their acquisition. Specifically, under this statement, goodwill and other indefinite life intangibles will no longer be amortized but will be periodically evaluated for impairment. The standard also provides a methodology for evaluating impairment of good- will and other intangibles based on the fair value. The provisions of this statement apply to fiscal years beginning after December 15, 2001. Retroactive application is not permitted. Management has reviewed the core deposit intangible assets in order to recognize any impairment loss and/or changes in the useful lives. As of January 1, 2002, no impairment of the intangible assets is necessary and the useful life of ten years used to amortize them is the best estimate of the economic benefit period. SFAS No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets” - The objectives of this statement are to establish accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. The provi- sions of this statement will be effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. Management expects that the adoption of SFAS No. 143 will not have a sig- nificant impact on the Corporation’s financial position and the results of operations. SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”- The scope of this statement is to develop a single accounting model for long-lived assets that are to be disposed of by sale, whether previously held and used or newly acquired.The provisions of this statement will be effec- tive for financial statements issued for fiscal years beginning after December 15, 2001. Management expects that the adoption of SFAS No. 144 will not have a significant impact on the Corporation’s financial posi- tion and the results of operations. >. Note 3 - Stockholders’ Equity Common stock The Corporation has 250,000,000 shares of authorized common stock with a par value of $1 per share. At December 31, 2001, there were 057 . 1 0 0 2 > p r o C n a B t s r i F 29,852,552 (2000 - 29,618,552) shares issued and 26,571,952 (2000 - 26,424,152) shares outstanding. The Corporation issued 234,000, 6,000 and 13,000 shares of common stock during 2001, 2000 and 1999, respectively, as part of the exercise of stock options under the Corporation’s stock option plan. During the year, the Corporation declared cash dividends on its common stock outstand- ing of $0.52 per share (2000 - $0.44; 1999 - $0.36) amounting to $13,835,100 (2000 - $11,804,599; 1999 - $10,382,797). Stock repurchase plan and treasury stock In 1996 a stock repurchase program was established (the 1996 Program) where the Corporation is authorized to repurchase in the open market, and retire from circulation or hold as treasury stock, up to ten percent of the 31,083,502 issued and outstanding shares of common stock at the time the program was approved by the stockholders. In 1997 an additional stock repurchase program was established whereby the Corporation may repur- chase in the open market shares of common stock, which amount repre- sents 10% of the 28,067,652 issued and outstanding shares after all shares authorized under the 1996 Program were repurchased. Under these pro- grams, the Corporation repurchased a total of 86,200 shares of common stock at a cost of $1,929,685 during 2001, 1,642,400 shares of common stock at a cost of $30,086,592 during 2000, and 1,452,000 shares of com- mon stock at a cost of $32,510,611 during 1999. From the total amount of common stock repurchased, 3,280,600 shares were held as treasury stock at December 31, 2001 (2000 - 3,194,400 shares) and were available for general corporate purposes. Preferred stock The Corporation has 50,000,000 shares of authorized non-cumulative and non-convertible preferred stock with a par value of $1, redeemable at the Corporation’s option subject to certain terms. This stock may be issued in series and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. During 2001, the Corporation issued 4,140,000 shares of preferred stock (3,000,000 shares-2000; 3,600,000 shares-1999). The liquidation value per share is $25. Annual dividends of $1.85 per share (issuance of 2001), $2.0875 per share (issuance of 2000) and of $1.78125 per share (issuance of 1999), are payable monthly, if declared by the Board of Directors. During the year, dividends declared on preferred stock amounted to $16,508,198 (2000 - $7,407,542; 1999 - $4,275,000). Capital reserve The capital reserve account was established to comply with certain regu- latory requirements of the Office of the Commissioner of Financial Institutions of Puerto Rico related to the issuance of subordinated notes by FirstBank in 1995. An amount equal to 10% of the principal of the notes is set aside each year from retained earnings until the reserve equals the total principal amount. At the notes repayment date the balance in capital reserve is to be transferred to the legal surplus account or retained earn- ings after the approval of the Commissioner of Financial Institutions of Puerto Rico. Legal surplus The Banking Act of the Commonwealth of Puerto Rico requires that a min- imum 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. Dividend restrictions The Corporation is subject to certain restrictions generally imposed on Puerto Rico corporations (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 058 . 1 0 0 2 > p r o C n a B t s r i F 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. >. Note 4 - 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 initiate certain mandatory and possibly additional discre- tionary actions by regulators that, if undertaken, could have a direct mate- rial effect on the Corporation’s financial statements. Under capital ade- quacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off- balance sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings and other factors. Capital standards established by regulations require the Corporation to maintain minimum amounts and ratios of Tier 1 capital to total average assets (leverage ratio) and ratios of Tier 1 and total capital to risk-weight- ed 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, which vary from 0% to 100% depending on the nature of the asset. At December 31, 2001 and 2000, the most recent notification from FDIC, categorized the Corporation as a well capitalized institution under the reg- ulatory framework for prompt corrective action. To be categorized as well capitalized the Corporation must maintain minimum total risk based, Tier 1 risk based and Tier 1 leverage ratios as set forth in the following table. Management believes that there are no conditions or events since that date that have changed that classification. The Corporation’s and its banking subsidiary’s regulatory capital positions were as follows: Regulatory requirements Actual Ratio Amount For capital adequacy purposes Amount Ratio To be well capitalized Amount Ratio (Dollars in thousands) $678,679 590,652 14.50% 12.75% $569,255 481,850 12.16% 10.41% $569,255 481,850 7.49% 6.40% $536,402 469,774 14.43% 12.76% $417,203 351,001 11.23% 9.53% $417,203 351,001 7.28% 6.18% $374,498 370,472 $187,249 185,236 $228,074 225,738 $297,280 294,516 $148,640 147,258 $172,042 170,307 8% 8% 4% 4% 3% 3% 8% 8% 4% 4% 3% 3% $468,123 463,090 10% 10% $280,874 277,854 6% 6% $380,124 376,231 5% 5% $371,600 368,145 10% 10% $222,960 220,887 $286,736 283,846 6% 6% 5% 5% At December 31, 2001 Total Capital (to Risk-Weighted Assets): First BanCorp FirstBank Tier I Capital (to Risk-Weighted Assets): First BanCorp FirstBank Tier I Capital (to Average Assets): First BanCorp FirstBank At December 31, 2000 Total Capital (to Risk-Weighted Assets): First BanCorp FirstBank Tier I Capital (to Risk-Weighted Assets): First BanCorp FirstBank Tier I Capital (to Average Assets): First BanCorp FirstBank 059 . 1 0 0 2 > p r o C n a B t s r i F >. Note 5 - Stock Option Plan The Corporation has a stock option plan covering certain employees. The options granted under the plan cannot exceed 20% of the number of com- mon 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 exer- cise price and the number of shares that can be purchased in the event of a stock dividend, stock split, reclassification of stock, merger or reorgani- zation and certain other issuance and distributions. Following is a summary of the activity related to stock options: Number of Options Weighted Average Exercise Price per Option At December 31, 1998 Granted Exercised At December 31, 1999 Granted Exercised Canceled At December 31, 2000 Exercised Canceled At December 31, 2001 756,500 223,000 (13,000 966,500 318,000 (6,000 (7,000 1,271,500 (234,000 (2,000 1,035,500 ) ) ) ) ) $16.16 $19.99 $13.56 $17.07 $22.31 $15.63 $26.00 $18.36 $ 5.79 $28.38 $21.18 The options outstanding at December 31, 2001 have an original expiration term of ten years and all of them are exercisable. The exercise price of the options outstanding at December 31, 2001 ranges from $15.63 to $28.38 and the weighted average remaining contractual life is approximately seven years. Following is additional information concerning the stock options outstand- ing at December 31, 2001. Number of Options Exercise Price per Option Contractual Maturity 207,500 60,000 5,000 40,000 12,000 175,000 2,000 3,500 10,000 202,500 318,000 1,035,500 $15.63 $19.19 $28.38 $27.09 $26.56 $26.00 $25.94 $26.44 $22.56 $19.63 $22.31 November 2007 February 2008 April 2008 May 2008 June 2008 November 2008 February 2009 April 2009 August 2009 November 2009 December 2010 060 . 1 0 0 2 > p r o C n a B t s r i F >. Note 6 - Earnings Per Common Share The calculations of earnings per common share for the years ended December 31, 2001, 2000 and 1999 follow: Net income Less: Preferred stock dividend Net income-attributable to common stockholders Earnings per common share-basic: Net income - available to common stockholders Weighted average common shares outstanding Earnings per common share-basic Earnings per common share-diluted: Net income - available to common stockholders Weighted average common shares and share equivalents: Average common shares outstanding Common stock equivalents - Options Total Earnings per common share-diluted Year ended December 31, 2000 (In thousands, except per share data) $67,276 (7,408 $59,868 ) ) $62,075 (4,275 $57,800 ) 1999 2001 $86,001 (16,508 $69,493 $ 69,493 26,567 $ 2.61 $69,493 26,567 195 26,762 $ 2.60 $59,868 26,943 $ 2.22 $ 57,800 28,941 $ 2.00 $59,868 $57,800 26,943 202 27,145 $ 2.21 28,941 258 29,199 $ 1.98 Had compensation cost for the stock options granted during 2000 and 1999 been determined based on the fair value at the grant date (as a result of the requirement explained in Note 2 - Stock option plan), the Corporation’s net income and earnings per common share would have been reduced to the pro forma amounts indicated, as follow: Pro forma information: Employees’ compensation and benefits Net income-available to common stockholders Earnings per common share-basic Earnings per common share-diluted Year ended December 31, 2000 1999 (In thousands, except per share data) $51,763 $58,119 $ 2.16 $ 2.14 $50,005 $56,341 $ 1.95 $ 1.93 061 . 1 0 0 2 > p r o C n a B t s r i F Management uses the binomial model for the computation of the fair value of each option granted to buy shares of the Corporation’s common stock. The fair value of each option granted during 2000 and 1999 was estimated using the following assumptions: weighted dividend growth of 0% (2000) and 22.38% (1999); expected life of 3.11 years (2000) and 10 years (1999); weighted expected volatility of 31.74% (2000) and 29.46% (1999); and weighted risk-free interest rate of 5.36% (2000) and 6.04% (1999). The weighted estimated fair value of the options granted was $5.50 (2000) and $6.54 (1999) per option. >. >. Note 7 - Cash and Due from Banks The Corporation is required by law to maintain minimum average reserve balances. The amount of those reserve average balances was approximate- ly $46,078,200 at December 31, 2001 (2000 - $45,107,600). Note 8 - Investment Securities Held For Trading At December 31, 2001 and 2000, there were no securities held for trading purposes or options on such securities. All trading instruments are subject to market risk, the risk that future changes in market conditions, such as fluctuations in market prices or interest rates, may make an instrument less valuable or more onerous. The instruments are accounted for at market value, and their changes are reported directly in earnings. The Corporation may write options on trad- ing securities as part of its trading activities. Also the Corporation may enter in transactions of securities sold not yet purchased for trading pur- poses. These transactions are carried at market value. Net gains and loss- es resulting from these transactions are recorded in the trading income or loss account. The net gain from the sale of trading securities amounted to $419,367 for the year ended December 31, 2000 (a loss of $7,946 for 1999), and were included in earnings as trading income. No net revenue from the sale of trading securities was recorded during the year 2001. >. Note 9 - Investment Securities Held To Maturity The amortized cost, gross unrealized gains and losses, approximate market value, weighted average yield and maturities of investment securities held to maturity at December 31, 2001 and 2000 were as follows: December 31, 2001 December 31, 2000 062 . 1 0 0 2 > p r o C n a B t s r i F Amortized cost Unrealized gains (losses) Market value Weighted average Amortized yield% cost (Dollars in thousands) Unrealized Market value (losses) gains Weighted average yield% Obligations of U.S. Government Agencies: After 1 to 5 years After 10 years Puerto Rico Government Obligations: $211,194 $ 3 $(6,466 $204,731 ) 7.39 90,176 $1,412 $ 10,000 $ (12) $ 9,988 86,397 (5,191) 7.04 7.53 After 1 to 5 years After 10 years 5,000 4,084 228 5,000 4,312 5.00 6.50 3,831 (56) 3,775 6.50 United States and Puerto Rico Government obligations Mortgage backed securities: GNMA certificates After 10 years Corporate bonds: $220,278 $231 $(6,466 $214,043 ) 7.32 $104,007 $1,412 $(5,259) $100,160 7.44 $206,989 $1,465 $ (139) $208,315 6.94 After 1 to 5 years $ 64,018 $ (277 $ 63,741 ) 3.49 Total Investment Securities Held to Maturity $284,296 $231 $(6,743 $277,784 ) 6.46 $310,996 $2,877 $(5,398) $308,475 7.11 Expected maturities of mortgage backed securities and certain other secu- rities might differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At January 1, 2001, in connection with the adoption of SFAS No. 133, the Corporation transferred a portfolio of $207 million of GNMA cer- tificates held to maturity into the available for sale category. The unrealized gain of $994,500, net of taxes, was reflected in other comprehensive income as a cumulative effect of the change in accounting principle. The Corporation does not expect reclassification of the transition adjustment included in other comprehensive income within the next twelve months. >. Note 10 - Investment Securities Available For Sale The amortized cost, gross unrealized gains and losses, approximate market value, weighted average yield and maturities of investment securities held for sale at December 31, 2001 and 2000 were as follows: December 31, 2001 December 31, 2000 Amortized cost Unrealized gains (losses) Market value Weighted average yield% Amortized cost Unrealized gains (losses) Market value Weighted average yield% (Dollars in thousands) $ 7,726 $ 30 $ 7,756 3.18 407,324 $(32) 407,292 1.72 500 87,519 1 469 (1,805) 501 86,183 5.59 7.55 $ 499 2,630 39,624 67,555 240,341 31,705 29,988 53,593 $ 2 33 1,124 48 144 217 322 $ 501 2,663 38,906 67,100 $ (718) (1,579) (2) (3,302) 240,387 31,849 30,205 50,613 4,458 5,932 128 151 4,586 6,083 6.19 6.34 20,000 429 8,840 3 105 (14) (320) 20,000 418 8,625 6.04 6.49 4.89 5.50 6.76 7.86 7.81 7.66 7.41 6.65 6.51 $513,459 $779 $(1,837) $512,401 2.83 $495,204 $ 1,998 $(5,935) $ 491,267 6.69 $ 8 112 13,211 8,030 21,361 $ 4 576 172 752 $ 8 5.85 7.63 116 7.29 6.95 7.16 13,787 8,196 22,107 $ (6) (6) $ 834 8,088 18,829 27,751 $ 7 40 335 382 $ (1) $ 840 8,115 19,111 28,066 (13) (53) (67) 4,605 2,515,953 2,520,558 101 12,672 12,773 (6,539) (6,539) 4,706 2,522,086 2,526,792 158 124 7,095 7,377 4 5 408 417 162 129 7,503 7,794 6.39 6.52 6.52 6.92 7.32 7.96 7.93 4,484 1,291,460 1,295,944 37 8,713 8,750 (118) (21,349) (21,467) 4,403 1,278,824 1,283,227 375 125 9,402 9,902 2 1 270 273 377 126 9,658 10,161 (14) (14) 7.02 6.22 7.00 6.77 6.22 6.50 6.50 7.29 6.84 8.16 8.11 063 . 1 0 0 2 > p r o C n a B t s r i F 1,958 38 1,996 8.70 2,286 66 2,352 8.96 $2,551,254 $13,980 $ (6,545) $2,558,689 6.53 $1,335,883 $9,471 $(21,548) $1,323,806 6.52 $ 19,246 118,919 114,855 18,531 $ 271,551 $ 410 1,770 $ (2,899) (1,906) 77 328 $ 2,585 $ (4,805) $ 19,656 117,790 113,026 18,859 $ 269,33 1 7.70 $ 19,645 27,416 6.68 10,522 7.34 7.35 3,211 7.08 $ 60,794 $ 84 295 98 $ $ 477 $ $ 19,729 27,606 (105) 10,598 (22) (60) 3,151 (187) $ 61,084 7.29 7.97 7.21 6.31 7.53 $ 45,115 $ 4,901 $(16,189) $ 33,827 1.43 $ 35,914 $2,134 $(12,542) $ 25,506 1.91 U.S.Treasury Securities: Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Obligations of other U.S. Government Agencies: Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Puerto Rico Government Obligations: After 1 to 5 years After 5 to 10 years After 10 years United States and Puerto Rico Government Obligations Mortgage backed securities: FHLMC certificates: Within 1 year After 1 to 5 years After 5 to 10 years After 10 years GNMA certificates: After 5 to 10 years After 10 years FNMA certificates: After 1 to 5 years After 5 to 10 years After 10 years Mortgage pass through certificates: After 10 years Mortgage backed securities Corporate bonds: Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Corporate bonds Equity securities (without contractual maturity) Total Investments Securities Available for Sale $3,381,379 $22,245 $(29,376) $3,374,248 5.95 $1,927,795 $14,080 $(40,212) $1,901,663 6.51 Maturities for mortgage backed securities are based upon contractual terms assuming no repayments. The weighted average yield on investment securities held for sale is based on amortized cost, therefore it does not give effect to changes in fair value. At December 31, 2001, the net unrealized loss of $6,293,354 (2000 - net unrealized loss of $19,598,785) on securities available for sale, net of the deferred income tax of $2,097,785 (2000 - $6,532,928), was reported in accumulated other comprehensive income. For 2001, the change in the net unrealized holding gain on the available for sale securities amounted to $17,740,575 (2000 - a gain of $65,400,232) before deferred income taxes. For 2001, proceeds from the sale of securities amounted to $847.7 million (2000 - $58.5 million, 1999 - $9.6 million) resulting in gross realized gains of $13.6 million (2000 - $7.9 million, 1999 -$1.4 million), and gross realized losses of $4.0 million (1999-$46,000). No losses were realized during 2000. Note 11 - Federal Home Loan Bank (FHLB) Stock At December 31, 2001 and 2000, there were investments in FHLB stock with book value of $22,890,600 and $18,536,500 respectively. The esti- mated market value of such investments is its redemption value. Note 12 - Interest and Dividend on Investments A detail of interest and dividend income on investments follows: >. >. 064 . 1 0 0 2 > p r o C n a B t s r i F Mortgage-backed securities: Taxable Exempt Other investment securities: Taxable Exempt 2001 $ 2,666 106,571 $109,237 $ 2,639 50,602 $ 53,241 Year ended December 31, 2000 (In thousands) 1999 $ 3,325 91,416 $94,741 $ 1,577 38,060 $39,637 $ 4,137 77,900 $82,037 $ 1,528 24,758 $26,286 >. Note 13 - Loans Receivable The following is a detail of the loan portfolio: Residential real estate loans: Secured by first mortgages: Conventional Insured by government agencies: Federal Housing Administration and Veterans Administration Puerto Rico Housing Bank and Finance Agency Secured by second mortgages Deferred net loan fees Residential real estate loans Commercial loans: Construction loans Commercial loans Commercial mortgage Commercial loans Finance leases Consumer and other loans: Personal Personal lines of credit Auto Boat Credit card Home equity reserve loans Unearned interest Consumer and other loans Loans receivable Loans held for sale Total loans Allowance for loan losses Total loans-net December 31, 2001 December 31, 2000 (In thousands) $ 955,573 $ 695,344 25,211 23,513 8,088 1,012,385 (5,107 1,007,278 ) 219,396 1,238,173 688,922 2,146,491 127,935 362,490 11,216 502,902 39,570 176,226 1,851 (71,810 1,022,445 4,304,149 4,630 4,308,779 (91,060 $4,217,719 ) ) 20,004 28,037 8,964 752,349 ) (5,557 746,792 203,955 947,709 438,321 1,589,985 122,883 388,696 12,852 530,534 33,954 174,797 2,134 ) (104,429 1,038,538 3,498,198 3,498,198 ) (76,919 $3,421,279 065 . 1 0 0 2 > p r o C n a B t s r i F The Corporation’s primary lending area is Puerto Rico. At December 31, 2001 and 2000 there is no significant concentration of credit risk in any specific industry on the loan portfolio. At December 31, 2001, loans in which the accrual of interest income had been discontinued amounted to $72,998,000 (2000 - $67,716,000; 1999 - $53,816,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $5,735,000 (2000 - $5,937,000; 1999 - $4,544,000). There are no material commitments to lend additional funds to borrowers whose loans were in non-accruing sta- tus at these dates. At December 31, 2001 mortgage loans held for sale amounted to $4.6 million. All mortgage loans were sold at market values, which exceeded the carrying value of the loans. At December 31, 2001, the Corporation was servicing mortgage loans owned by others aggregating approximately $160,583,000 (2000 - $144,805,000; 1999 - $134,348,000). Various loans secured by first mortgages were assigned as collateral for term notes, certificates of deposit, advances from the Federal Home Loan Bank, and unused lines of credit. The mortgage loans pledged as collateral amounted to $195,267,091 and $104,739,882 at December 31, 2001 and 2000, respectively. >. Note 14 - Allowance for Loan Losses The changes in the allowance for loan losses were as follows: Balance at beginning of period Provision charged to income Losses charged against the allowance Recoveries credited to the allowance Other adjustments Balance at end of period 2001 ) $76,919 61,030 (54,380 7,391 100 $91,060 1999 Year ended December 31, 2000 (In thousands) $71,784 45,719 (51,831 9,807 1,440 $76,919 ) $67,854 47,961 (53,665 ) 9,048 586 $71,784 At December 31, 2001, $10.7 million ($13.1 million at December 31, 2000) in commercial and real estate loans over $1,000,000 was considered impaired with an allowance of $3.7 million ($7.8 million at December 31, 2000), of which $2 million was established based on the fair value of the collateral (2000-$392,000) and $1.7 million was established based on the present value of expected future cash flows (2000-$7.4 million). There were no consumer loans over $1,000,000 considered impaired at December 31, 2001 and 2000. The average recorded investment in impaired loans amounted to $11.9 million for 2001 (2000 - $8.8 million). Interest income in the amount of approximately $376,900 was recognized on impaired loans in 2001 (2000 - approximately $227,000; 1999 - approx- imately $428,000). 066 . 1 0 0 2 > p r o C n a B t s r i F >. Note 15 - 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: Balance at December 31, 1999 New loans Payments Balance at December 31, 2000 New loans Payments Balance at December 31, 2001 Amount (In thousands) $ 23,093 279 (3,198 20,174 14,659 (170 $ 34,663 ) ) >. Note 16 - Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation as follows: Useful life in years December 31, 2001 2000 (In thousands) Land Buildings and improvements Leasehold improvements Furniture and equipment Accumulated depreciation 10-40 1-15 3-10 Projects in progress Total premises and equipment - net $ 7,357 39,809 14,753 62,466 124,385 ) (55,001 69,384 6,772 $76,156 $ 7,378 35,038 12,344 55,654 110,414 (52,086 58,328 13,759 $72,087 ) >. Note 17 - Other Assets Following is a detail of other assets: Deferred tax asset Accounts receivable Prepaid expenses Revenue earning vehicles Other Total December 31, 2001 2000 (In thousands) $43,618 4,844 12,242 6,526 21,167 $88,397 $42,651 9,531 9,293 6,572 28,527 $96,574 067 . 1 0 0 2 > p r o C n a B t s r i F >. Note 18 - Deposits and Related Interest Deposits and related interest consist of the following: Type of account and interest rate: Savings accounts - 2.25% to 3.50% (2000 - 2.75% to 4.00%) Interest bearing checking accounts - 2.25% to 3.05% (2000 - 2.75% to 4.50%) Non-interest bearing checking accounts Certificate accounts - 2.00% to 7.50% (2000 - 4.15% to 7.60%) December 31, 2001 2000 (In thousands) $ 469,452 $ 430,298 205,760 239,851 170,631 232,164 3,183,491 $4,098,554 2,512,891 $3,345,984 The weighted average interest rate on total deposits at December 31, 2001 and 2000 was 3.82% and 5.83%, respectively. At December 31, 2001, the aggregate amount of overdraft in demand deposits that were reclassified as loans amounted to $7,807,724 (2000 - $4,106,412). The following table presents a summary of certificates of deposits with remaining term of more than one year at December 31, 2001: Over one year to two years Over two years to three years Over three years to four years Over four years to five years Over five years Total Total (In thousands) $207,402 211,183 128,122 356,040 1,431,373 $2,334,120 At December 31, 2001 certificates of deposit (CD’s) in denominations of $100,000 or higher amounted to $2,669,536,603 (2000 - $1,995,730,680) including brokered certificates of deposit of $2,189,687,222 (2000 - $1,499,104,222) at a weighted average rate of 4.0% (2000 - 6.60%). At December 31, 2001, deposit accounts issued to government agencies with a carrying value of $63,639,152 (2000 - $101,661,753) were collater- alized by securities with a carrying value of $75,126,925 (2000 - $106,917,690) and estimated market value of $71,979,923 (2000 - $104,868,113) and by specific mortgage loans with a carrying value of $2,895,723 (2000 - $3,539,882) and estimated market value of $3,370,043 (2000 - $3,882,189). A table showing interest expense on deposits follows: Year ended December 31, 2000 (In thousands) $ 12,792 5,546 134,945 $153,283 2001 $ 12,954 5,296 142,508 $160,758 $12,381 4,931 73,177 $90,489 1999 068 . 1 0 0 2 > p r o C n a B t s r i F Savings Interest bearing checking accounts Certificates of deposit Total >. Note 19 - Federal Funds Purchased and Securities Sold Under Agreements to Repurchase Federal funds purchased and securities sold under agreements to repur- chase (repurchase agreements) consist of the following: Federal funds purchased, interest rate 1.80% Repurchase agreements, interest ranging from 1.25% to 6.09% (2000 - 4.97% to 6.63%) Accrued interest payable Total December 31, 2001 2000 (In thousands) $ 10,000 2,976,174 11,000 $2,997,174 $1,851,286 5,150 $1,856,436 Federal funds purchased and repurchase agreements mature as follows: One to thirty days Over thirty to ninety days Over ninety days to one year Over one year Total December 31, 2001 2000 (In thousands) $ 723,010 14,062 274,142 1,974,960 $2,986,174 $1,368,944 208,200 274,142 $1,851,286 The following securities were sold under agreements to repurchase: Underlying securities U.S.Treasury Securities and obligations of other U.S. Government Agencies Mortgage backed securities Corporate bonds Total Accrued interest receivable Underlying securities U.S.Treasury Securities and obligations of other U.S. Government Agencies Mortgage backed securities Total Accrued interest receivable December 31, 2001 Balance of borrowing Approximate market value of underlying securities Weighted average interest rate (In thousands) $ 392,081 2,380,851 203,242 $2,976,174 $ 515,447 2,389,645 260,542 $3,165,634 3.80% 6.70% 7.17% December 31, 2000 Balance of borrowing Approximate market value of underlying securities Weighted average interest rate (In thousands) $ 395,027 1,456,259 $1,851,286 $ 400,253 1,485,816 $1,886,069 6.53% 6.35% Amortized cost of underlying securities $ 506,685 2,441,777 262,648 $3,211,110 $ 15,715 Amortized cost of underlying securities $ 406,106 1,497,102 $1,903,208 $ 4,124 069 . 1 0 0 2 > p r o C n a B t s r i F Maturity January 2, 2001 January 5, 2001 January 2, 2002 August 16, 2005 October 9, 2008 October 16, 2008 February 28, 2011 March 21, 2011 070 . 1 0 0 2 > p r o C n a B t s r i F The weighted average interest rates of federal funds purchased and repur- chase agreements at December 31, 2001 and 2000 was 4.05% and 6.32%, respectively. At December 31, 2001 and 2000, the securities underlying such agree- ments were delivered to, and are being held by the dealers with which the repurchase agreements were transacted, except for transactions where the Corporation has agreed to repurchase similar but not identical securities. The maximum aggregate balance outstanding at any month-end during 2001 was $2,986,174,065 (2000 - $1,851,285,585). The average balance during 2001 was approximately $1,997,705,000 (2000 - $1,687,880,000). >. Note 20 - Advances From The Federal Home Loan Bank (FHLB) Following is a detail of the advances from the FHLB: Interest rate 2001 2000 December 31, (In thousands) 6.35% 6.41% 1.85% 6.30% 5.10% 5.09% 4.50% 4.42% $ 20,700 50,000 14,000 15,000 79,000 165,000 $343,700 $ 1,000 16,000 50,000 $67,000 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 at least 110% of the out- standing advances. At December 31, 2001, specific mortgage loans with an estimated market value of $197,506,039 (2000 - $76,485,860) were pledged to the FHLB as part of the Collateral Agreement. The carrying value of such loans at December 31, 2001 amounted to $192,371,368 (2000 - $73,700,000). In addition, securities with an approximated market value of $145,140,574 (2000 - $5,704,606) and a carrying value of $158,117,351 (2000 - $5,675,689) were pledged to the FHLB. >. >. Note 21- Subordinated Notes On December 20, 1995, the Corporation issued 7.63% subordinated capi- tal notes in the amount of $100,000,000 maturing in 2005. The notes were issued at a discount. At December 31, 2001 the outstanding balance net of the unamortized discount and notes repurchased was $84,361,525 (2000 - $90,548,314). Interest on the notes is payable semiannually and at maturi- ty. The notes represent unsecured obligations of the Corporation ranking subordinate in right of payment to all existing and future senior debt includ- ing the claims of depositors and other general creditors. The notes may not be redeemed prior to their maturity. At December 31, 2001, the Corporation has transferred to capital reserves from the retained earnings account $60,000,000, as a result of the requirement explained in Note 3 - “Stockholders’ Equity.” Note 22 - Unused Lines Of Credit The Corporation maintains unsecured standby lines of credit with other banks. At December 31, 2001, the Corporation’s total unused lines of cred- it with these banks amounted to approximately $180,000,000 (2000 - $133,500,000). At December 31, 2000, the Corporation has an available line of credit with the FHLB guaranteed with excess collateral, in the amount of $66,841,562. >. Note 23- Employees’ Benefit Plan FirstBank has a defined contribution retirement plan (the Plan) qualified under the provisions of the Puerto Rico Internal Revenue Code Section 1165(e). All employees are eligible to participate in the Plan after one year of service. Under the provisions of the Plan, the Bank contributes a quar- ter of the first 4% of each participant’s compensation. Participants are per- mitted to contribute up to 10% of their annual compensation, limited to $8,000 per year. Additional contributions to the Plan are voluntarily made by the Bank as determined by its Board of Directors. The Bank made a total contribution of $845,227, $699,060 and $625,375 during 2001, 2000 and 1999, respectively, to the Plan. >. Note 24 - Other Expenses A detail of other expenses follows: Professional and service fees Advertising and business promotion Communications Revenue earning equipment Supplies and printing Other Total Year ended December 31, 2001 $ 7,931 7,506 5,395 1,578 1,282 8,559 $32,251 2000 (In thousands) $ 8,740 8,468 5,573 1,525 1,214 7,423 $32,943 1999 $ 6,672 5,896 4,667 1,479 1,361 5,426 $25,501 >. Note 25 - Income Taxes The Corporation is subject to Puerto Rico income tax on its income from all sources. For United States income tax purposes, the Corporation is treated as a foreign corporation. Accordingly, it 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 income tax paid by the Corporation is creditable, within certain conditions and limitations, as a foreign tax credit against its Puerto Rico tax liability. The provision for income taxes was as follows: Current Deferred Total 2001 Year ended December 31, 2000 (In thousands) 1999 $25,536 (5,402 $20,134 ) $19,117 (4,356 $14,761 ) $13,991 (6,703 $ 7,288 ) Income tax expense applicable to income before provision for income tax differs from the amount computed by applying the Puerto Rico statutory rate of 39% as follows: Year ended December 31, 2001 2000 1999 071 . 1 0 0 2 > p r o C n a B t s r i F Computed income tax at statutory rate Benefit of net exempt income Other-net Total income tax provision % of pre-tax income ) 39 (23 3 19 Amount $41,789 (24,442 2,787 $20,134 ) % of pre-tax income Amount (Dollars in thousands) 39 (15 (6 18 $31,994 (12,707 (4,526 $14,761 ) ) ) ) % of pre-tax income 39 (20 (8 11 ) ) Amount $27,052 (13,959 (5,805 $ 7,288 ) ) The components of the deferred tax asset and liability were as follows: Deferred tax asset: Allowance for loan losses Unrealized loss on available for sale securities Other Deferred tax asset December 31, 2001 2000 (In thousands) $34,732 2,098 7,110 $43,940 $29,998 6,533 6,445 $42,976 Deferred tax liability $ (322 ) $ (325 ) No valuation allowance was considered necessary for the deferred tax asset. The tax effect of the unrealized holding gain or loss for securities available for sale was computed based on a 25% capital gain tax rate, and is includ- ed in accumulated other comprehensive income as a part of stockholders’ equity. >. Note 26 - Commitments At December 31, 2001 certain premises are leased with terms expiring through the year 2021. 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 prop- erty taxes and other incidental costs. At December 31, 2001, the obligation under various leases follows: Year 2002 2003 2004 2005 2006 2007 and later years Total Amount (In thousands) $ 4,414 3,391 2,645 1,963 1,539 5,117 $19,069 Rental expense included in occupancy and equipment expense was $4,240,437 in 2001 (2000 - $4,042,069; 1999 - $3,390,786). 072 . 1 0 0 2 > p r o C n a B t s r i F >. Note 27 - Fair Value of Financial Instruments The information about the estimated fair values of financial instruments as required by generally accepted accounting principles, is presented hereun- der. 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 values and carrying values of financial instruments at December 31, 2001 and 2000 follows: Assets: Cash and due from banks and money market instruments Investment securities FHLB stock Loans receivable, including loans held for sale - net Liabilities: Deposits Federal funds, securities sold under agreements to repurchase Advances from FHLB Notes payable and subordinated notes Interest rate swaps December 31, 2001 2000 Estimated fair value Carrying value Estimated fair value Carrying value (In thousands) $ 94,463 3,652,031 22,891 $ 94,463 3,658,544 22,891 $ 65,393 2,210,138 18,537 $ 65,393 2,212,659 18,537 4,226,033 4,217,719 3,396,324 3,421,279 4,121,145 4,098,554 3,351,069 3,345,984 3,005,466 348,733 83,729 15,053 2,997,174 343,700 84,362 15,053 1,857,651 68,607 144,853 1,856,436 67,000 146,048 073 . 1 0 0 2 > p r o C n a B t s r i F The estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the underlying assumptions used in calculating the fair values could significantly affect the results. In addition, the fair value estimates are based on outstanding balances without attempting to esti- mate the value of anticipated future business. Therefore, the estimated fair values may materially differ from the values that could actually be realized on a sale. The estimated fair values were calculated using certain facts and assump- tions which vary depending on the specific financial instrument, as follows: Cash and due from banks and money market instruments The carrying amounts of cash and due from banks and money market instruments are reasonable estimates of their fair values. Investment securities The fair values of investment securities are the market values based on quoted market prices and dealer quotes. FHLB stock Investments in FHLB stock are valued at their redemption values. Loans receivable, including loans held for sale - net The fair value of all loans was estimated by the discounted present values of loans with similar financial characteristics. Loans were classified by type such as commercial, residential mortgage, credit card and automobile. These asset categories were further segmented into fixed and adjustable rate categories and by accruing and non-accruing groups. Performing float- ing rate loans were valued at book if they reprice at least once every three months. The fair value of fixed rate performing loans was calculated by dis- counting expected cash flows through the estimated maturity date. Recent prepayment experience was assumed to continue for mortgage loans, cred- it cards, auto loans and personal loans. Other loans assumed little or no prepayment. Prepayment estimates were based on the Corporation’s his- torical data for similar loans. Discount rates were based on the Treasury Yield Curve at the date of the analysis, with an adjustment which reflects In certain cases, the risk and other costs inherent in the loan category. where recent experience was available regarding the sale of loans, this information was also incorporated into the fair value estimates. Non-accruing loans covered by a specific loan loss allowance were viewed as immediate losses and were valued at zero. Other non-accruing loans were arbitrarily assumed to be repaid after one year. Presumably this would occur either because loan is repaid, collateral has been sold to sat- isfy the loan or because general reserves are applied to it. The principal of non-accruing loans not covered by specific reserves was discounted for one year at the going rate for similar new loans. Deposits The estimated fair values of demand deposits and savings accounts, which are the deposits with no defined maturities, equal the amount payable on demand at the reporting date. For deposits with stated maturities, but that reprice at least quarterly, the fair values are also estimated to be the amount payable at the reporting date. The fair values of fixed rate deposits with stated maturities, are based on the present value of the future cash flows expected to be paid on deposits. The cash flows are based on contractual maturities; no early repayments are assumed. Discount rates are based on the LIBOR yield curve. The esti- mated fair values of total deposits exclude the fair value of core deposits intangible, which represent the value of the customer relationship meas- ured by the values 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. Substantially all swaps currently held by the Corporation form part of structured broker CD’s. In these instruments a fixed rate CD is matched with a swap of the same rate and maturity, thereby converting the fixed rate broker CD to a floating rate instrument which reprices quarterly based on a fixed differential to three month LIBOR. The swaps are record- ed at fair value with a corresponding adjustment to CD’s, therefore, for purposes of fair value analysis, these structured broker CD’s are valued at book. Federal funds, securities sold under agreements to repurchase and other short-term borrowings Federal funds purchased, repurchase agreements and other short-term borrowings are mostly borrowed funds, which reprice at least quarterly, and their outstanding balances are estimated to be their fair values. Where longer commitments are involved, fair values are estimated in the same way as fixed terms deposits. Advances from FHLB, notes payable and subordinated notes The fair value of notes payable and subordinated notes with fixed maturi- ties was determined using discounted cash flow analysis over the full term of the borrowings. The cash flows assumed no early repayment of the bor- rowings. Discount rates were based on the LIBOR yield curve. Variable rate debt securities reprice at intervals of three months or less, therefore, their outstanding balances are estimated to be their fair values. Interest rate swaps The fair value of the interest rate swaps were provided by the brokers who created them. 074 . 1 0 0 2 > p r o C n a B t s r i F >. Note 28 - Supplemental Cash Flow Information Supplemental cash flow information follows: Cash paid for: Interest Income tax Non cash investing and financing activities: Additions to other real estate owned 2001 Year ended December 31, 2000 (In thousands) 1999 $275,360 12,535 $260,937 30,477 $173,273 6,271 1,797 3,121 639 >. Note 29 - Financial Instruments With Off-Balance Sheet Risk, Commitments to Extend Credit and Standby Letters of Credit The following table presents a detail of commitments to extend credit and standby letters of credit: December 31, 2001 2000 (In thousands) Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: To originate loans Unused credit card lines Unused personal lines of credit Commercial lines of credit Commercial letters of credit Standby letters of credit $194,363 291,120 13,480 222,821 19,067 24,172 $281,030 267,104 14,467 331,785 12,387 22,914 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 making commitments and conditional obligations as it does for on-bal- ance 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 com- mitments are expected to expire without being drawn upon, the total com- mitment 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’s credit evaluation of the bor- rower. Rates charged on the loans that are finally disbursed is the rate being offered at the time the loans are closed, therefore, no fee is charged on these commitments. The fee is the amount which is used as the esti- mate 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 stand- by letters of credit are short-term commitments used to finance commer- cial contracts for the shipment of goods. The collateral for these letters of credit include 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 at December 31, 2001 is not signifi- cant. 075 . 1 0 0 2 > p r o C n a B t s r i F Interest rate risk management The operations of the Corporation are subject to interest rate fluctuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in different amounts. As 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 calcu- lated by reference to an agreed notional principal amount. Net interest settlements on interest rate swaps are recorded as an adjustment to inter- est expense on deposit accounts or interest income on investment accounts. The following table indicates the types of swaps used: Pay-fixed swaps: Balance at December 31, 1999 Expired contracts Balance at December 31, 2000 New contracts Balance at December 31, 2001 Receive-fixed swaps: Balance at December 31, 1999 Expired contracts New contracts Balance at December 31, 2000 Expired contracts New contracts Balance at December 31, 2001 Notional amount (In thousands) ) $ 50,000 (50,000 0 58,165 $ 58,165 $ 185,000 (25,000 991,000 1,151,000 (1,116,000 1,460,000 ) ) $1,495,000 Interest rate swap agreements under which the Corporation agrees to pay variable-rates of interest are considered to be a hedge against changes in the fair value of the Corporation fixed-rate certificates of deposit. The interest rate swap agreements are reflected at fair value in the Corporation’s consolidated statement of financial condition and the relat- ed portion of fixed-rate debt being hedged is reflected at an amount equal to the sum of its carrying value plus an adjustment representing the change in fair value of the debt obligations attributable to the interest rate risk being hedged.The hedge relationship is estimated to be 100 percent effec- tive; therefore, there is no impact on the statement of income nor on com- prehensive income, because the gain or loss on the swap agreements will completely offset the loss or gain on the certificates of deposit. The net effect of this accounting is that the interest expense on the hedged certifi- cates of deposit generally reflects variable interest rates. Interest rate swap agreements under which the Corporation agrees to pay fixed-rates of interest are considered to be a hedge against changes in the fair value attributable to market interest rates of fixed rate available for sale corporate bonds. Accordingly, the interest rate swap agreements and the securities being hedged are reflected at fair value in the Corporation’s con- solidated statement of financial condition. The adjustment of the hedged item’s carrying amount attributable to the hedged risk is recorded in earn- ings in order to offset the gain or loss on the hedging instrument. The change in the fair value of the security attributable to credit risk is record- ed in other comprehensive income. The hedge relationship is estimated to be 100 percent effective; therefore, there is no impact on the statement of income, because the gain or loss on the interest rate swap reflects the full amount of the gain or loss on the hedged item attributable to the hedged risk. The net effect of this accounting is that the interest of the fixed-rate securities being hedged generally reflects variable interest rates. 076 . 1 0 0 2 > p r o C n a B t s r i F Interest rate swaps with an aggregate notional principal balance of $1,553,665,000 ($58,165,000 fixed to floating and $1,495,000,000 floating to fixed), had an unrealized loss of approximately $15,053,000 at December 31, 2001. Pay-fixed swaps at December 31, 2001 had a fixed weighted average rate payment of 7.14% and a floating weighted average rate receiving of 4.20%. At December 31, 2000, there are no pay-fixed swaps outstanding. Receive- fixed swaps at December 31, 2001, have a floating weighted average rate payment of 2.16% (2000 - 6.64%) and a fixed weighted average rate receiv- ing of 6.32% (2000 - 7.54%). Floating rates are based on a 83% to 100% of the average of the last three months LIBOR rate. For swap transactions, the amounts potentially subject to credit loss are the net streams of payments under the agreements and not the notional principal amounts used to express the volume of the swaps. At December 31, 2001, the Corporation had total net receivable of $12,755,949 (2000 - $5,527,697) related to the swap transactions. The Corporation controls the credit risk of its interest rate swap agreements through approvals, lim- its, and monitoring procedures. The Corporation does not anticipate non- performance by the counterparties. As part of the swap transactions, the Corporation is required to pledge collateral in the form of deposits in banks or securities. The book value and aggregate market value of securi- ties pledged as collateral for interest rate swaps at December 31, 2001 was approximately $48.1 million and $47.9 million, respectively (2000 - $15.8 million and $15.9 million, respectively). The period to maturity of the swaps at December 31, 2001 ranged from one year through twenty years (2000 - from one year through fifteen years). Interest rate protection agreements (Caps) The Corporation also issues interest rate protection agreements (Caps) to limit its exposure to rising interest rates on its deposits. Under these agreements, the Corporation pays an up front premium or fee for the right to receive cash flow payments in excess of the predetermined cap rate; thus, effectively capping its interest rate cost for the duration of the agree- ment. The following table indicates the agreements outstanding at December 31, 2001 (dollars in thousands): Cap agreements notional amount (In thousands) $200,000 200,000 200,000 Cap Rate Current 90 day LIBOR Maturity 7.50% 7.25% 7.00% 1.88% 1.88% 1.88% August 17, 2002 August 17, 2002 August 17, 2002 Management designated these caps as cash-flow hedges. For a qualifying cash flow hedge, an interest rate cap is carried on the statement of finan- cial condition at fair value with the time value change reflected through the current statement of income.Any intrinsic value is reflected through com- prehensive income and will be reflected in future statements of income when payments are received from the counter party. On January 1, 2001 a loss of approximately $1.3 million was recognized in the statement of income as a cumulative effect of the adoption of SFAS No. 133, as a result of unamortized premium paid for caps of $1.5 million less an estimated fair market value of $200,000. Prior to the implementation of SFAS No. 133, the premium was amortized as an adjustment to interest expense on bor- rowings. The amortization of premium in 2000 and 1999 amounted to approximately $352,000, and $252,000, respectively. The fair value of these caps at December 31, 2001 is zero. 077 . 1 0 0 2 > p r o C n a B t s r i F >. Note 30 - Segment Information The Corporation has three reportable segments: Retail business, Treasury and Investments, and Commercial Corporate business. 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 prod- ucts, distribution channels and the economic characteristics of the prod- ucts were also considered in the determination of the reportable seg- ments. The Retail business segment is composed of the Corporation’s branches and loan centers together with the retail products of deposits and con- sumer loans. Consumer loans include loans such as personal, residential real estate, auto, credit card and small loans. Finance leases are also includ- ed in Retail business. The Commercial Corporate segment is composed of commercial loans including commercial real estate and construction loans. Certain small commercial loans originated by the branches are included in the Retail business for the years 1999 and 2000. The Treasury and Investment segment is responsible for the Corporation investment portfo- lio and treasury functions. The accounting policies of the segments are the same as those described in Note 2 - “Summary of Significant Accounting Policies.” The Corporation evaluates the performance of the segments based on net interest income after the estimated provision for loan losses. The seg- ments are also evaluated based on the average volume of its earning assets less the allowance for loan losses. The only intersegment transaction is the net transfer of funds between the Treasury and Investment segment and other segments. The Treasury and Investment segment sells funds to the Retail and Commercial Corporate segments to finance their lending activities and purchases funds gathered by those segments. The interest rates charged or credited by Investment and Treasury is based on market rates. 078 . 1 0 0 2 > p r o C n a B t s r i F The following table presents information about the reportable segments: For the year ended December 31, 2001: Interest income Net (charge) credit for transfer of funds Interest expense Net interest income Provision for loan losses Segment income Average earning assets For the year ended December 31, 2000: Interest income Net (charge) credit for transfer of funds Interest expense Net interest income Provision for loan losses Segment income Average earning assets For the year ended December 31, 1999: Interest income Net (charge) credit for transfer of funds Interest expense Net interest income Provision for loan losses Segment income Average earning assets Retail Treasury and Investments Commercial Corporate Total (In thousands) $ 217,021 (21,043 (71,410 124,568 (44,541 80,027 $1,970,768 ) ) ) $ 222,950 (12,582 (74,093 136,275 (28,084 108,191 $1,893,699 ) ) ) $ 186,224 (4,018 (58,665 123,541 (46,802 76,739 $1,462,311 ) ) ) $ 162,478 102,123 (208,791 55,810 ) 55,810 $2,627,205 $ 134,328 85,013 (198,522 20,819 ) 20,819 $1,985,580 $ 108,332 48,737 (124,665 32,404 ) 32,404 $1,726,719 $ 136,757 (81,081 ) 55,676 (16,489 39,187 $1,781,314 ) $ 106,110 (72,431 ) 33,679 (17,635 16,044 $1,110,608 ) $ 74,508 ) (44,719 29,789 (1,159 28,630 $815,569 ) $ 516,256 ) ) (280,201 236,055 (61,030 175,025 $6,379,287 $ 463,388 ) ) (272,615 190,773 (45,719 145,054 $4,989,887 $ 369,063 ) ) (183,330 185,733 (47,960 137,773 $4,004,599 The following table presents a reconciliation of the reportable segment financial information to the consolidated totals: Net income: Total income for segments Other income Operating expenses Income taxes Income before cumulative effect of accounting change Cumulative effect of accounting change Total consolidated net income Average assets: Total average earning assets for segments Average assets not assigned to segments Total consolidated average assets 2001 Year ended December 31, 2000 (In thousands) 1999 $ 175,025 52,980 (120,855 (20,134 ) ) 87,016 (1,015 $ 86,001 ) $6,379,287 322,115 $6,701,402 $ 145,054 50,032 (113,049 (14,761 ) ) $ 137,773 32,862 (101,272 (7,288 ) ) 67,276 62,075 $ 67,276 $ 62,075 $4,989,887 249,489 $5,239,376 $4,004,599 168,182 $4,172,781 079 . 1 0 0 2 > p r o C n a B t s r i F >. Note 31 - Litigation The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opin- ion 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. >. Note 32 - Selected Quarterly Financial Data (Unaudited) Financial data showing results of the 2001 and 2000 quarters is presented In the opinion of Management, all below. These results are unaudited. adjustments necessary for a fair presentation have been included: March 31 June 30 Sept. 30 Dec. 31 (In thousands, except for per share results) 2001 Interest income Net interest income Provision for loan losses Net income Earnings per common share-basic Earnings per common share-diluted $128,750 52,474 15,000 18,786 $0.59 $0.59 $126,178 58,101 17,800 20,172 $0.64 $0.64 $127,527 61,989 12,790 23,019 $0.67 $0.67 $133,801 63,491 15,440 24,024 $0.71 $0.71 March 31 June 30 Sept. 30 Dec. 31 (In thousands, except for per share results) 2000 Interest income Net interest income Provision for loan losses Net income Earnings per common share-basic Earnings per common share-diluted $105,181 48,320 12,020 16,351 $0.53 $0.53 $112,447 48,337 11,158 16,477 $0.55 $0.55 $120,384 47,038 11,566 16,699 $0.56 $0.56 $125,375 47,078 10,975 17,748 $0.57 $0.57 >. Note 33 - First BanCorp (Holding Company Only) Financial Information The following condensed financial information presents the financial posi- tion of the Holding Company only at December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended on December 31, 2001, 2000 and 1999. 080 . 1 0 0 2 > p r o C n a B t s r i F Statements of Financial Condition Assets: Cash and due from banks Money market instruments Investment securities available for sale, at market value: United States Government obligations Other investments Total investment securities available for sale Loans receivable Investment in FirstBank Puerto Rico, at equity Investment in FirstBank Insurance Agency, at equity Other assets Total assets Liabilities and Stockholders’ Equity: Accounts payable and other liabilities Stockholders’ equity Contingencies and commitments Total liabilities and stockholders’ equity December 31, 2001 December 31, 2000 (In thousands) $ 17,422 300 24,802 35,507 60,309 5,682 515,623 371 3,383 $603,090 $ 171 602,919 $603,090 $ 17,026 300 18,951 27,347 46,298 368,338 2,856 $434,818 $ 357 434,461 $434,818 Statements of Income Income: Interest income on investment securities Interest income on other investments Interest income on loans Dividend from FirstBank Other income Expenses: Interest expense Other operating expenses Income before income taxes and equity in undistributed earnings of subsidiaries Income taxes Equity in undistributed earnings of subsidiaries Net income Other comprehensive income (loss), net of tax Comprehensive income (loss) 081 81 . 1 0 0 2 > p r o C n a B t s r i F Year ended December 31, 2000 2001 1999 (In thousands) $ 658 250 306 24,000 1,761 26,975 559 559 26,416 170 59,755 86,001 13,306 $ 99,307 $ 776 289 $ 1,537 1,141 24,000 8,251 33,316 25 487 512 32,804 209 34,681 67,276 49,050 $116,326 10,000 61 12,739 243 243 12,496 374 49,953 62,075 (77,399 $(15,324 ) ) The principal source of income for the Holding Company consists of the earnings of FirstBank. Statements of Cash Flows Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries Net gain on sale of investments securities Net (increase) decrease in other assets Net (decrease) increase in other liabilities Total adjustments Net cash provided by operating activities Cash flows from investing activities: Capital contribution to subsidiaries Loans originated Purchases of securities available for sale Sales of securities available for sale Other investing activities Net cash used in investing activities Cash flows from financing activities: Net (decrease) increase in other borrowings Proceeds from issuance on preferred stock Exercise of stock options Cash dividends paid Treasury stock acquired Net cash provided by financing activities Net increase in cash Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents include: Cash and due from banks Money market instruments Year ended December 31, 2000 2001 1999 (In thousands) $86,001 $67,276 $62,075 ) ) ) ) ) (59,755 (1,093 (75 (186 (61,109 24,892 (80,305 (5,682 (24,203 10,227 6,316 (93,647 ) ) ) ) ) ) 100,069 1,355 (30,343 (1,930 69,151 396 17,326 $17,722 $17,422 300 $17,722 (34,681 ) (7,134 ) 120 (527 ) ) (42,222 25,054 (40,000 ) (50,119 44,807 278 (45,034 ) ) ) (865 72,438 94 ) (19,212 ) (30,087 22,368 2,388 14,938 $17,326 $17,026 300 $17,326 (49,953 ) ) ) (130 883 (49,200 12,875 (44,361 ) (44,361 ) ) ) 865 86,850 176 (14,658 (32,511 40,722 9,236 5,702 $14,938 $13,160 1,778 $14,938 82 . 1 0 0 2 > p r o C n a B t s r i F First Bancorp Consolidated Statements of Changes in Stockholders’ Equity Stockholders’ Information Independent Certified Public Accountants >. PricewaterhouseCoopers LLP Annual Meeting >. The annual meeting of stockholders will be held on April 30, 2002, at 2:00 p.m., at the main office of the Corporation located at 1519 Ponce de León Avenue, Santurce, Puerto Rico. Telephone >. 787.729.8200 Internet >. http://www.firstbankpr.com Additional Information and Form 10-K >. Additional financial information about First BanCorp may be requested to Mrs. Laura Villarino, Senior Vice President and Controller, PO Box 9146, Santurce, Puerto Rico 00908. Copies of First BanCorp’s Form 10-K filed with the Securities and Exchange Commission (SEC) will be provided to stockholders upon written request to Mrs. Laura Villarino at the same mailing address. First BanCorp’s filings may be accessed in the web site maintained by the SEC at http://www.sec.gov. Transfer Agent and Registrar >. The Bank of New York, 101 Barclay Street 12W, New York, NY 10286 083 83 . 1 0 0 2 > p r o C n a B t s r i F 

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