First BanCorp. Annual Report 2001

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FY2001 Annual Report · First BanCorp.

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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

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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

$1.98

$2.21

$2.60

24.68

27.81

22.13

$185.7

$190.8

$236.1

$204.9

$269.5

$334.4

Puerto Rico

26.

25.

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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

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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

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One

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.

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Angel Alvarez-Pérez, President

Growth,
diversification,
cost control and
service have laid
the foundations
for these
achievements.

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One Message

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

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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.

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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

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One Set of Numbers - Achievements in 2001

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

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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.

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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.

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One Economy

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.

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One team1

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Juan Acosta Reboyras
Francisco D. Fernández
José Teixidor

Board of Directors

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Jorge L. Díaz Irizarry
José Julián Alvarez
Rafael Bouet

Annie Astor-Carbonell
Angel Alvarez-Pérez, Chairman
Germán E. Malaret

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José L. Ferrer Canals
Héctor M. Nevares

Angel Alvarez-Pérez

Fernando L. Batlle

Luis M. Beauchamp

Ricardo N. Ramos

Annie Astor-Carbonell

Aurelio Alemán

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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

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>. 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

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Financial Review

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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.

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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

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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

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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.

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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.

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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

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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-

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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 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.

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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.

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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

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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.

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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

$ 746,792

$ 473,563

$ 303,011

$ 292,604

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.

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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%

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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.

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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.

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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

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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

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

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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.

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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.

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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

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Financial Statements

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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)

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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

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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

$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.

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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

)

(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
)

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$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.

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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.

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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1,958

1,996

8.70

2,286

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)

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:

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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

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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).

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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

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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

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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

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i
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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

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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

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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).

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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

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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)

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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

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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

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