First BanCorp. Annual Report 2002

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FY2002 Annual Report · First BanCorp.

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L e a d e r s h i p

Leadership is Power. Vision.

And setting standards. It provides us

with the opportunity to open

new markets, develop new

products and set the groundwork

toward the future.

Experience is knowledge.

Skill. And Wisdom. It gives us

the ability to influence,

achieve our goals

and face new challenges.

At First BanCorp we are, and have

been, a leading institution

in the banking industry for over

54 years. Experience is what has

taken us, and continues to guide us,

to higher levels of quality, growth

and value.

E x p e r i e n c e

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Table of Contents

Financial Highlights

Highlights of Growth

Selected Financial Data

Offices and Corporate Structure

Business Profile

President’s Letter

Economy

Board of Directors

First BanCorp Officers

Financial Review

Financial Statements

Stockholders’ Information

Market Price Per Common Share
(end of year)

Return on Assets
(percentage)

Diluted Earnings
Per Common Share

$20.13

$13.83

1.48

1.49

$15.75

$19.00

1.28

$1.32

$1.47

$1.73

$1.16

$22.60

1.23

$2.01

1998

1999

2000

2001

2002

Financial Highlights

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In thousands
(except for per share results)

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

Weighted average common shares:
Basic
Diluted

At year end:
Assets
Loans
Allowance for loan losses
Investments
Deposits
Borrowings
Capital

2002

2001

266,850
62,302
58,492
132,756
22,327

107,956

$ 2.04
2.01

39,901
40,553

$ 9,643,852
5,637,851
111,911
3,728,669
5,482,918
3,249,355
798,424

236,055
61,030
52,980
120,855
20,134
(1,015)
86,001

$ 1.74
1.73

39,851
40,144

$ 8,197,518
4,308,780
91,060
3,715,999
4,098,554
3,425,235
602,919

Return on common equity
(percentage)

20.54

22.13

21.90

27.81

24.68

Net interest income
(In millions)

$166.2

$185.7

$190.8

$236.1

$266.9

Common stockholders’ equity
(In millions)

$270.4

$269.5

$204.9

$334.4

$437.9

1998

1999

2000

2001

2002

Highlights of Growth

This history begins in 1991, shortly after a new Management team headed by Angel Alvarez

Pérez took over the operations of the oldest Savings and Loan institution in Puerto Rico.

At that time the Bank had less than $2 billion in total assets and approximately 900 employees,

compared with $9.6 billion in assets and 2,000 employees today.

In the 1991 Annual Report, Mr. Alvarez stated:

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“Net income for {1991} was $10.1 million or $1.77 per share {the equivalent of $0.15 per share

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today after allowing for subsequent stock splits}. This . . . is the most clear and tangible

indication that First Federal {the Bank’s name at that time} is on the road to a healthy recovery.”

The accompanying table shows the course of this “healthy recovery” over the following

eleven years. Over that period the Corporation has reported consistent growth in assets

and earnings without earnings restatements. Asset size increased more than five times from

$1.9 billion to $9.6 billion. Net income grew more than ten times from $10.1 million to $108

million and earnings per common share diluted increased more than 13 times from $0.15

to $2.01.

A milestone along this road came in 1994, with the conversion to a Commercial Bank charter.

In that year’s Annual Report, Mr. Alvarez said:

“Our previous thrift charter contained significant limitations on lending which could have

sidelined management’s strategy of emphasizing growth in non-mortgage areas.

With a commercial charter we are free to pursue our preferred business strategy.”

During the next few years Management laid the groundwork for later growth of the

consumer side of the Bank’s business. Mr. Alvarez described two important advances in the

1995 Annual Report:

“In May we opened our small loan subsidiary, Money Express. Small loans are an important

source of consumer credit in Puerto Rico, where many creditworthy families do not have the

financial resources or the credit history required to obtain loans through regular banking channels

. . .Starting in January {of 1996} we will be combining our auto leasing area with the car and

truck rental operations of our existing subsidiary . . . under the name of First Leasing

and Rental Corp.”

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The accompanying table shows that FirstBank increased its branch network from 32 to 48

in the five years between 1994 and 1999. The new facilities included a modern “Superbranch”

in Hato Rey with ample parking and drive through facilities. The consumer banking operations

were centralized in this facility in 1996. In 1999 FirstBank acquired the Puerto Rico operations

of the Royal Bank of Canada together with four Citibank branches in Puerto Rico and the

U.S. Virgin Islands. Mr. Alvarez summarized the guiding philosophy of this consumer banking

expansion as follows in the 1996 Annual Report:

“FirstBank’s Management has long recognized the importance of new data processing

technologies that are revolutionizing the Banking industry. We strongly believe that face-to-face

communication is at the heart of our customer relationships. Our goal is to find the appropriate

balance between these two approaches to meet the needs of our clients in a cost-effective

manner. Locally based management gives FirstBank a strong competitive advantage

in doing this.”

Although the Bank grew rapidly, Management never lost sight of the need to maintain

strict cost controls. The accompanying table shows the efficiency ratio improved dramatically

from 63.69% to 40.81% over the period covered in the accompanying table. In the 1998

Annual Report Mr. Alvarez reiterated Management’s commitment to cost control as follows:

“In 1998 Management began a comprehensive re-design plan to streamline all corporate

operations. The Corporation named the project ‘The Next Fifty’ because Management launched

it in the Corporation’s fiftieth anniversary year as a way to initiate the second fifty years of growth.

Management has invested most of the savings from this project in new technology.”

In the late 1990’s the Bank began moving to diversify operations and strengthen its

management team as it expanded more into commercial and mortgage lending. In 1998

the Corporation converted to a bank holding company structure. In that year’s Annual

Report Mr. Alvarez reported:

“. . .we have enhanced our management team by bringing in senior executives with extensive

experience in consumer, mortgage and commercial lending. We have also initiated active

lending programs in construction lending and auto leasing, led by talented and experienced

executives whom we have recently recruited. Over the next few years we expect our strengthened

management team to improve efficiency and contribute new ideas that will help us to

increase our market share.”

The Bank also began introducing more sophisticated products to grow in a highly competitive

market with increasingly sophisticated clients. Besides adding state of the art business

services such as cash management accounts, the Bank also added sophisticated deposit

products. In 1999 it introduced the “Bonus Account”, which rewards clients who have

additional relationships with FirstBank. Deposits in this account have since grown to $173.7

million.

The Bank was also expanding in other areas. In the Annual Report for 2000 Mr. Alvarez

summarized recent developments as follows:

“Management has been taking steps to diversify the Corporation’s revenues by moving

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toward fee based activities in some areas. In 2000 FirstBank began offering brokerage services

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in selected branches through a new alliance {with a major international brokerage firm}. . . .

Early in 2000 Management entered an agreement {with another large firm} to participate

in bond issues by the Government Development Bank of Puerto Rico. Finally, First BanCorp

reorganized as a financial holding company in 2000, opening the way for the Corporation

to enter new lines of business permitted by the Gramm Leach Bliley Act.”

In 2001 First BanCorp followed up on this change by organizing an insurance subsidiary, the

FirstBank Insurance Agency, which sells insurance in FirstBank branches. Also in 2001

Management embarked on a three-year project to improve service quality and efficiency

in all of the Corporation’s operations.

To summarize our story, the table shows the broad outlines of how our institution has

transformed itself from First Federal Savings Bank, a small Savings and Loan Institution, into

First BanCorp, a diversified financial services organization. This transformation has increased

net income tenfold over the 1991-2002 period, and has benefited shareholders, employees

and clients of the Corporation.

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Offices

PUERTO RICO

1. Aguada

2. Aguadilla

Isabela

4. San Sebastián

5. Arecibo

6. Manatí

7. Vega Baja

8. Dorado

9. Toa Baja

10. Bayamón

11. Guaynabo

12. San Juan

13. Carolina

14. Río Grande

15. Fajardo

16. Humacao

17. Caguas

18. Aguas Buenas

19. Cidra

20. Guayama

21.Cayey

22. Barranquitas

23. Ponce

24. Yauco

25. Cabo Rojo

26. Mayagüez

54 Branch

27 Money Express

First Leasing

& Rental Corp.

Auto Loan Center

9 Mortgage

Loan Center

FirstBank Insurance

FirstBank

Insurance V.I.

First Trade Inc.

U.S., BRITISH VIRGIN ISLANDS & BARBADOS

St Thomas

Tortola

St Croix

St John

Barbados

Corporate Structure

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Virgin Islands • Barbados

& RENTAL CORPORATION

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Business Profile

First BanCorp (“the Corporation”), incorporated in Puerto Rico, is the financial holding

company for FirstBank (“the Bank”), the second largest commercial bank in Puerto Rico.

First BanCorp also owns an insurance subsidiary, FirstBank Insurance Agency. First BanCorp

had total assets of $9.6 billion as of December 31, 2002. The Corporation operates in the

Puerto Rico and Virgin Islands banking markets, offering a wide selection of financial services

to a growing number of consumer and commercial customers. Commercial, consumer and

mortgage loans and investment securities are the most important areas of its business.

The Corporation has a $2.5 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 $1.8

billion portfolio of residential mortgages. The institution also has $1.3 billion in consumer

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 international firm allows FirstBank to

offer brokerage services in its largest branches. Approximately 2,000 professionals and a

sophisticated computer 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 stockholder

owned institution since 1987. In October, 1994 it became a Puerto Rico chartered commercial

bank and assumed the name of “FirstBank Puerto Rico”. Effective October 1, 1998 the Bank

reorganized, making FirstBank Puerto Rico a subsidiary of the holding company First BanCorp.

FirstBank, which is a well-capitalized institution under federal standards, operates 54 full-

service branches including 11 offices in the U.S. and British Virgin Islands. In addition, the

FirstBank Insurance Agency operates six sales offices within FirstBank branches. A subsidiary

of FirstBank, Money Express, operates 27 small loan offices throughout Puerto Rico. FirstBank

also operates First Leasing and Rental Corp., a subsidiary which rents and leases motor

vehicles from six offices in Puerto Rico. Another FirstBank subsidiary, FirstBank Insurance

Agency V.I., Inc., operates one office which sells insurance in the US Virgin Islands. Finally,

FirstBank owns a trade financing subsidiary, First Trade Inc., which operates two offices: one

in the U.S. Virgin Islands and one in Barbados.

First BanCorp has distinguished itself by providing innovative marketing strategies and novel

products to attract clients. Besides its 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 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 internet 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 is regulated by the

Puerto Rico Insurance Commissioner. The Virgin Islands operations of FirstBank are regulated

by the Virgin Islands Banking Board (for the USVI) and by the British Virgin Islands Financial

Services Commission (for the BVI).

First BanCorp is committed to providing the most efficient and cost effective banking services

possible. Management’s goal is to make the Corporation 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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President’s Letter

To our stockholders:

On behalf of the Board of Directors and Officers of First BanCorp I am pleased to submit

our annual report for 2002, another excellent year. In 2002 First BanCorp earned $108

million, representing $2.04 per common share (basic) or $2.01 per common share (diluted).

Earnings increased 25.5% compared with 2001, when the Corporation earned $86 million,

equivalent to $1.74 per common share (basic) or $1.73 per common share (diluted). Net

interest income was a key factor in this outstanding performance, expanding by 13% or

$30.8 million to $266.8 million during 2002. These results are outstanding when we consider

the difficult economic and financial environment which prevailed last year.

Growth in 2002

First BanCorp grew substantially in spite of last year’s economic slowdown, which affected

Puerto Rico as well as the rest of the U.S. Assets rose 17% from $8.2 billion at year-end 2001

to $9.6 billion at the end of 2002. Net loans increased 31% to $5.5 billion, mostly due to

increases of $345 million in commercial loans and $842 million in residential real estate

loans. Consumer loans and finance leases grew by $142 million. Deposits increased 34% to

$5.5 billion. During 2002 First BanCorp consolidated its position as the second largest

commercial bank in Puerto Rico.

FirstBank also expanded outside Puerto Rico. In October 2002, the Bank completed the

acquisition of the operations of JP Morgan Chase Eastern Caribbean Region business in the

Virgin Islands with $590 million in total assets. The purchase included several branch offices,

a trade finance operation and an insurance agency. FirstBank is now one of the largest

commercial banks in the U.S. and British Virgin Islands. Cassan Pancham, a seasoned executive

with over 22 years of experience in Chase’s Caribbean operations, heads up these operations.

Our expanded presence in the Virgin Islands will increase geographic diversification and

allow us to better serve our clients in that part of the Caribbean.

Key Competitive Advantages

Our branch network has been one important factor in our successful growth. FirstBank has

43 branch offices in Puerto Rico, including 20 with drive up services, 16 in shopping centers

and 7 in supermarkets. We are working to diversify our larger branches to give our clients

superior service. A major international brokerage firm maintains offices in 13 FirstBank

branches, while nine branches have specialized mortgage offices and six have offices of the

FirstBank Insurance Agency.

We are constantly improving the banking facilities. During 2002 we relocated the branch

in Rexville Plaza, Bayamon and upgraded facilities in three other branches. Our purchase

of the Chase operation in the Virgin Islands also strengthened our branch network in that

region. FirstBank now has 11 branches on four islands in the U.S. and British Virgin Islands.

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Another key to our success is careful, prudent control of costs. For several years we have

been investing in state of the art technology to improve service to our clients and increase

efficiency. Operating expenses rose relatively little, from $120.9 million in 2001 to $132.8

million in 2002, in spite of the expansion we experienced. During 2002 the Corporation’s

efficiency ratio improved by one percent to 40.81%.

The quality of our loan portfolio was another factor which contributed importantly to the

Corporation’s record profits last year. Starting in 1998 we have been improving loan

underwriting, introducing tighter approval procedures and improving computer systems.

These efforts have brought hard-won gains in asset quality.

The year 2002 provided a severe test for these enhanced processes, and they have been

performing well. In spite of large increases in the loan portfolio and a deteriorating economy,

charge offs did not increase. During 2002 First BanCorp’s loans net charge offs amounted

to $41.5 million of loans on a net basis, compared with $46.9 million in 2001, $42.0 million

in 2000, and $44.6 million in 1999.

We have also increased reserves in line with the loan portfolio, which more than doubled

from $2.7 billion at the end of 1999 to $5.6 billion at year-end 2002. The Bank provided $62

million for losses in 2002, $61 million in 2001, $46 million in 2000, and $48 million in 1999.

This has allowed loan loss reserves to reach $111.9 million at the end of 2002 compared

with $91.1 million for 2001, $76.9 million for 2000, and $71.8 million for 1999.

As a result, asset quality has remained constant or improved. The reserve coverage ratio

(allowance for loan losses as a percentage of non-performing loans) has remained above100%

for the last five years. At the end of 2002 the ratio of non-performing loans to total loans

had fallen to 1.63%, compared with 1.69% at the end of 2001, 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 one of the most important ingredients of our success during the recent economic

slowdown.

Finally, we rely heavily on our employees and the quality of service they provide to our

clients. We are in the middle of a three-year effort to improve service quality in all areas

of our operations. Quality teams composed of bank officers and employees are evaluating,

redesigning and improving procedures throughout the organization. The goal of this project

is to satisfy fully the banking needs of our consumer and corporate clients.

Community Service and Corporate Image

First BanCorp 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 Bank specialized in consumer lending for many years and still

maintains strong ties with the Puerto Rican community, helping a number of charitable

organizations.

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In response to the recent economic slowdown on the Island, we have been running a

publicity campaign with the slogan “Puerto Rico stays ahead.” The campaign encourages

Puerto Ricans to think positively and improve their quality of life. Management is also

encouraging employees to get involved in community activities. In addition, FirstBank has

begun providing special benefits for senior citizens, including coupons in participating

businesses and discounts on some of our services.

FirstBank also made a $70 million loan for the construction of a medical office building in

the southern city of Ponce. This project will include 93 medical offices, a 32,472 square foot

shopping area and parking space for 600 cars. Finally, we are participating in a massive

urban renewal project in Santurce, where our home offices are located. Bank officials have

taken a leading role in organizing this project, which involves five local banks supported

by a $50 million credit line from the Puerto Rico Housing Finance Authority.

Enhancing Shareholder Value

The efforts of Management and employees have paid off in strong earnings growth in 2002.

The Corporation experienced a return on common equity of 21.90% compared with 22.13%

in the previous year. The return on assets was 1.23%, not very different from the 1.28% of

2001. Our stock price has reflected these strong results, and our shareholders experienced

a return of 21.05% on their investment during 2002. Investors who held First BanCorp stock

over the ten year period from year-end 1992 to year-end 2002 received a cumulative total

return of 1,549%, equivalent to an annualized return of 32.33%. On September 30, 2002

the Bank also distributed a three for two stock split.

The Corporation has traditionally followed a conservative dividend policy, in the belief that

we can better serve our shareholders by reinvesting most of our profits in our growing

business. In 2002 the dividend payout ratio was 19.58%. Officers and directors of First

BanCorp own approximately eleven percent of its shares. This shows their confidence in

First BanCorp’s future and their commitment to keep its fundamentals sound.

As First BanCorp begins another year of growth and service to Puerto Rico and the Virgin

Islands, we are confident 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 stockholders in the years to come.

Angel Alvarez-Pérez

Chairman

President

Chief Executive Officer

Economy

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The island of Puerto Rico is a U.S. Commonwealth with a population of 3.8 million, located
in the Caribbean approximately 1,600 miles southeast of New York. Puerto Rico grew
moderately over most of the 1990’s, but its growth has paused recently due to the U.S.
recession. Real GNP fell by 0.2% in the 2002 fiscal year according to the Puerto Rico Planning
Board.

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.

Manufacturing is the backbone of Puerto Rico’s economy, and many multinational corporations
have substantial operations here. The island’s pharmaceutical industry is especially strong.
In recent years, however, a reduction of tax incentives combined with intense wage
competition from other areas and the U.S. recession have been reducing island manufacturing
employment. Still, Puerto Rico is becoming somewhat less dependent on manufacturing
than it was in the early postwar period, as its economy has been diversifying with substantial
investments in tourism, retail trade, services, banking and transportation.

During the recent slowdown construction, manufacturing and consumption have weakened
somewhat. Tourism has been affected along with the rest of the Caribbean region, though
new hotels and some economic recovery have mitigated this effect. Island economists
project real GNP growth in the 1% to 2% range during fiscal 2003, which is currently in
progress.

Board of Directors

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Angel Alvarez-Pérez
Chairman

Angel L. Umpirre, C.P.A.
Annie Astor-Carbonell

José Teixidor

José Julián Alvarez-Bracero

Juan Acosta-Reboyras

Jorge L. Díaz

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Rafael Bouet-Souffront

José L. Ferrer-Canals

Héctor M. Nevares

First BanCorp Officers

Fernando L. Batlle, Luis M. Beauchamp, Aurelio Alemán, Annie Astor-Carbonell, Angel Alvarez-Pérez

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Randolfo Rivera, Josianne M. Rosselló, Miguel Mejías, Carmen G. Szendrey-Ramos, Cassan Pancham

Aida M. García, Luis M. Cabrera, Laura Villarino, Dacio A. Pasarell

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PRESIDENT

Angel Alvarez-Pérez
Chief Executive Officer

SENIOR EXECUTIVE VICE PRESIDENTS

Annie Astor-Carbonell
Chief Financial Officer
Luis M. Beauchamp
Wholesale Banking Executive and
Chief Lending Officer

EXECUTIVE VICE PRESIDENTS

Aurelio Alemán
Consumer Banking Executive
Fernando L. Batlle
Retail and Mortgage Banking Executive
Dacio A. Pasarell
Operations and Technology Executive
Randolfo Rivera
Commercial Banking Executive

FIRST SENIOR VICE PRESIDENT

Cassan Pancham
Eastern Caribbean Region Executive

SENIOR VICE PRESIDENTS

José H. Aponte
Commercial Mortgage Lending
Miguel Babilonia
Consumer Risk Management
Luis M. Cabrera
Treasury and Investments
Salvador Calaf
Government and Institutional
James E. Crites
Regional Credit Officer Eastern
Caribbean Region
Aida M. García
Human Resources
Michael García
Consumer Collection
Fernando Iglesias
Special Loans
Roger Lay
Internal Audit
Emilio Martinó
Credit Risk Management
Miguel Mejías
Information Systems
Carmen Nigaglioni
Middle Market and Asset Based Financing
John Ortiz
Consumer Products and Credit Cards
Jorge Rendón
Facilities Management
Haydeé Rivera
Sales & Distribution Operations
Julio Rivera
Construction Lending
Nayda Rivera
General Auditor

Carmen Rocafort
Corporate and Structured Finance
Josianne M. Rosselló
Marketing and Public Relations
Demetrio Santiago
Auto Wholesale
Héctor Santiago
Auto Business and Operations
Denise Segarra
Branch Banking
Luis Sueiro
Commercial Wholesale Operations
Carmen Gabriela Szendrey-Ramos
General Counsel and Secretary
of the Board of Directors
Laura Villarino
Controller

VICE PRESIDENTS

Alexis Aguiar
Structured Finance
William Alvarez
Indirect Business and Merchants
José Alvelo
Information Systems
Vivian Arteaga
Commercial Department
Marga Avilés
Consumer Loans Operations
Beverly Bachetti
VIP Customer Group
María Benabe
Consumer Collections
Ana Colón
Centralized Accounting
María Conor-Freeman
Lending and Client Group Eastern Caribbean Region
Wanda Cooper
FirstLine Customer Center
Lenitzia Delgado
Corporate Services
Deidre Elias
Compliance Manager Eastern
Caribbean Region
Laura Escalante
Compliance Officer
Mayra Gascot
Information Systems
José Gómez
Mortgage Servicing and Operations
David González
Corporate Business Development
Nelson González
Structured Finance
Paul Gourieux
Consumer Credit Manager Eastern Caribbean Region
Rahamet Hosein
Territory Manager British Virgin Islands
Tessa Hugh
Finance and Risk Manager Eastern Caribbean Region
Carol Jackson
Human Resources Manager Eastern Caribbean Region
Ariane Lewis
Branch Banking Manager Eastern Caribbean Region
John E. Lewis
System & Programming Manager Eastern Caribbean

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
Vice President and General Manager

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FIRSTBANK INSURANCE AGENCY V.I., INC.

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Angel Alvarez-Pérez
Chief Executive Officer
Fernando L. Batlle
President and Chief Operating Officer
Walter Hauck
Vice President and General Manager
Cassan A. Pancham
First Senior Vice President

FIRST TRADE INC.

Angel Alvarez-Pérez
Chief Executive Officer
Fernando L. Batlle
President and Chief Operating Officer
Pamela Clarke
Manager
Cassan A. Pancham
First Senior Vice President

Gilberto López
Middle Market
Marcelo López
Regional Manager Sales & Distribution
Juanita Marrero
Mortgage Banking
John McDonald
Commercial Department Eastern
Caribbean Region
José Negrón
Auto Lot
Ricardo Negrón
Mortgage Banking
José Nevárez
Information Systems
Luis Orengo
Commercial Wholesale
Eduardo Ortiz
Auto Wholesale
María Cristina Oruña
Customer Relationship Management
& Service Quality
Osvaldo Padilla
Corporate Services
Reynaldo Padilla
Auto Finance
Dionisio Ramírez
Construction Lending
Migdalia Rivera
Middle Market
Sandra Rivera
Consumer Collections
Belinda Rodríguez
Remote Sales
José L. Rodríguez
Information Systems
Pedro Romero
Assistant Controller
Elizabeth Sánchez
Marine Finance
Roberto Sánchez
Consumer Loans Credit Risk
José J. Santiago
Commercial Wholesale
Ramón Santiago
Asset Based Unit
Miguel Santin
Structured Finance
Carmen Torres
Branch Manager
Ralph Torres
Regional Manager Sales & Distribution

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

Financial Review

Financial Statements

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This discussion and analysis relates to the accompanying consolidated financial statements of First BanCorp
(the Corporation) and should be read in conjunction with the financial statements and the notes thereto.
Information in the notes referred to in this discussion and analysis is hereby incorporated by reference
herein. The use of terms such as “see”, “refer to”, “included in” or “explained in” shall be deemed to
incorporate by reference into this discussion and analysis the information to which reference is made.

Forward Looking Statements

When used in this report and in other filings by First BanCorp with the Securities and Exchange
Commission, in the Corporation’s press releases or other public or shareholder communication, or in oral
statements made with the approval of an authorized executive officer, the words or phrases “would be”,
“will be”, “will determine”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”,
“is anticipated”, “estimated”, “project”, “believe”, or similar expressions are intended to identify
“forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

The future results of the Corporation could be affected by subsequent events and could differ materially
from those expressed in forward-looking statements. If future events and actual performance differ from
the Corporation’s assumptions, the actual results could vary significantly from the performance projected in
the forward-looking statements.

The Corporation wishes to caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that various factors, including
regional and national conditions, substantial changes in levels of market interest rates, credit and other risks
of lending and investment activities, competitive and regulatory factors and legislative changes, could affect
the Corporation’s financial performance and could cause the Corporation’s actual results for future periods
to differ materially from those anticipated or projected. The Corporation does not undertake, and
specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.

OVERVIEW

The year 2002 was a challenging year for all business sectors. It followed a year, 2001, where the Federal
Reserve Bank cut interest rates by a total of 475 basis points in an effort to stimulate the economy. The Fed
monetary policy resulted in an additional cut of 50 basis points during 2002 to 1.25%, the lowest level in
more than 40 years. During the economic slowdown, construction, manufacturing and consumption
have weakened somewhat.

First BanCorp grew substantially and improved its financial performance last year in spite of the
economic slowdown. For the year 2002, First BanCorp recorded earnings of $107,956,351 or $2.04 per
common share basic and $2.01 per common share diluted, compared to $86,001,444 or $1.74 per common
share basic and $1.73 per common share diluted for 2001, and $67,275,609 or $1.48 per common share basic
and $1.47 per common share diluted for 2000. For 2002 as compared to 2001, net income increased by
$21,954,907 or $0.28 per common share diluted, and for 2001 as compared to 2000, by $18,725,835 or $0.26
per common share diluted.

The increase in the Corporation’s earnings is mainly attributed to the net interest income earned on the
growing portfolio of average earning assets and other income, net of increases in operating expenses.
Assets rose 17% from $8.2 billion at year-end 2001 to $9.6 billion at the end of 2002. Deposits increased 34%
to $5.5 billion. Net loans increased 31% to $5.5 billion, mostly due to increases of $345 million in
commercial loans and $842 million in residential real estate loans. Consumer loans and finance leases grew
by $142 million. In spite of increases in the loan portfolio and a deteriorating economy, charge offs have
not been increasing, mainly attributed to prior years efforts that improved loan underwriting and
implemented tighter approval procedures. During 2002, the Corporation restructured its portfolio of
mortgage backed securities in order to shorten its duration and reduce its prepayment risk under current
economic environment; this restructuring resulted in gains of approximately $40.1 million. Total gains on
sales of $48.9 million were partially offset by impairment losses of $36.9 million recognized during the year.

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Another important factor in the Corporation’s strategy is prudent control of costs. For several years the
Corporation has been investing in state of the art technology to improve service to its clients and increase
efficiency. Operating expenses rose relatively little, from $120.9 million in 2001 to $132.8 million in 2002.
During 2002 the Corporation’s efficiency ratio improved by one percent to 40.81%.

Return on average assets was 1.23% for 2002, and 1.28% for 2001 and 2000. Return on average equity was
14.90% for 2002, 16.20% for 2001 and 21.22% for 2000. Return on average common equity was 21.90% for
2002, 22.13% for 2001 and 27.81% for 2000.

First BanCorp has also been expanding outside Puerto Rico. In October 2002 the Corporation completed a
$590 million acquisition of the operations of JP Morgan Chase in the Virgin Islands. The expanded presence
in the Virgin Islands will give the Corporation the opportunity to better serve its clients in that part of the
Caribbean and provides with certain geographic diversification.

CRITICAL ACCOUNTING POLICIES AND PRACTICES

The accounting and reporting policies of the Corporation and its subsidiaries conform with accounting
principles generally accepted in the United States of America. A summary of accounting policies and
recently issued accounting pronouncements is included in Note 2 of the Corporation’s financial statements.
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 revenues and expenses during the reporting periods. Actual results
could differ from those estimates, if different assumptions or conditions prevail.

Investments

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, with unrealized
holding gains and losses, net of deferred tax effects, reported in other comprehensive income as a separate
component of stockholders’ equity. 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.

Evaluation for Other-than-temporary Impairments on Available for Sale
and Held to Maturity Securities

The Corporation evaluates its investment’s securities for impairment. An impairment charge in the
Consolidated Statements of Income is recognized when the decline in the fair value of investments below
their cost basis is judged to be other-than-temporary. The Corporation considers various factors in
determining whether it should recognize an impairment charge, including, but no limited to the length of
time and extent to which the fair value has been less than its cost basis, and the Corporation’s intent and
ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market
value. For debt securities, the Corporation also considers, among other factors, the investees repayment
ability on its bond obligations and its cash and capital generation’s ability. At December 31, 2002 the
Corporation did not hold any investment securities with significant unrealized losses sustained for more than
one year. The Corporation’s accounting policy for other-than-temporary impairments is included in Note 2
of the Corporation’s financial statements. During 2002, the Corporation experienced significant volatility in
the market prices of its publicly traded equity investments and in addition two bonds in the Corporation’s
portfolio were downgraded to non investment grade quality by two credit rating agencies. See Note 10 of
the Corporation’s financial statements, which gives details as to impairments charges recognized during 2002.

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Allowance for Loan Losses

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 evaluated 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 homogeneous pools of loans, Management uses historical
information about loan losses over several periods of time that reflect varying economic conditions and
adjusts such historical data based on the current conditions, considering information and trends on
charge offs, non-accrual loans and delinquencies. The Corporation measures impairment individually for
those commercial and real estate loans with a principal balance exceeding $1 million. 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 evaluated
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 Corporation’s primary lending area is Puerto Rico. At December 31, 2002, there is no significant
concentration of credit risk in any specific industry.

Income Taxes

The Corporation is routinely subject to examinations from governmental taxing authorities. Such
examinations may result in challenges to the tax return treatment applied by the Corporation to specific
transactions. Management believes that the assumptions and judgment used to record tax-related assets or
liabilities have been appropriate. Should tax laws change or the tax authorities determine that
Management’s assumptions were inappropriate, the result and adjustments required could have a material
effect on the Corporation’s results of operation. Information regarding income taxes is included in Note 25
of the Corporation’s financial statements.

Impact of Recent Accounting Pronouncements

During 2002, the Financial Accounting Standards Board (FASB) issued several accounting pronouncements,
namely SFAS (Statement of Financial Accounting Standard) No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of SFAS No. 13, and Technical Corrections, SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, SFAS No. 147, Acquisitions of Certain Financial Institutions, SFAS
No. 148, Accounting for Stock-Based Compensation, and FASB Interpretation No. 45, Guarantor’s Accounting
and Disclosure Requirements for Guarantees. Management estimated that the adoption of these
pronouncements did not have or will not have, as applicable depending on adoption date, a
significant impact on the Corporation’s financial statements. Refer to Note 2 of the Corporation’s financial
statements for a summary of the major provisions of these pronouncements.

RESULTS OF OPERATIONS

The Corporation’s results of operations depend primarily on its net interest income, which is the difference
between the interest income earned on interest earning assets, including investment securities and loans,
and the interest expense 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 $267 million for 2002 from $236 million in 2001 and $191 million in 2000.
The increase in net interest income for the year 2002 is the result of volume increases of $2,052 million in
the Corporation’s average loan and investment portfolios.

The following table includes a detailed analysis of net interest income. Part I presents average volumes 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, information is provided on changes
attributable to changes in volume (changes in volume multiplied by old rates), and changes in rate (changes
in rate multiplied by old volumes). Rate-volume variances (changes in rate multiplied by changes in volume)
have been allocated to the changes in volume and changes in rate based upon their respective percentage
of the combined totals.

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Part I
Year ended December 31,

Average volume
2001

2002

2000

Interest income (1) / expense
2001

2002
(Dollars in thousands)

2002

2000

Average rate (1)
2001

2000

60,522 $

46,517 $

9,293 $

999 $

1,476 $

Earning assets:
Money market instruments $
Government obligations
1,236,281
Mortgage backed securities 2,144,236
259,840
Corporate bonds
32,586
FHLB stock
3,733,465
1,048,283
Consumer loans
Residential real estate loans 1,283,710
223,627
Construction loans
2,080,892
Commercial loans
136,851
Finance leases
4,773,363

Total investments

Total loans (2)
Total earning assets

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

528,903
1,457,044
51,508
18,008
2,064,756
1,026,044
573,866
169,257
1,210,783
103,114
3,083,064

56,130
147,779
15,493
1,635
222,036
142,612
74,411
11,726
110,315
14,659
353,723

35,955
126,098
21,230
1,289
186,048
140,050
65,496
17,323
119,867
14,661
357,397

1.65% 3.17% 5.67%
527
4.54% 6.11% 6.81%
36,043
6.89% 7.37% 6.89%
100,415
5.96% 8.59% 8.48%
4,366
5.02% 5.90% 6.94%
1,249
142,600
5.95% 7.11% 6.91%
140,635 13.60% 13.51% 13.71%
5.80% 7.53% 8.56%
5.24% 7.88% 10.78%
110,808 5.30% 7.56% 9.15%
12,499 10.71% 11.47% 12.12%
7.41% 9.31% 10.75%
6.77% 8.42% 9.21%

49,115
18,251

331,308
$8,506,828 $6,455,047 $5,147,820 $ 575,759 $543,445 $473,908

Interest bearing liabilities:
Interest bearing checking
accounts
Savings accounts
Certificate accounts
Interest bearing deposits
Other borrowed funds
FHLB advances
Total interest bearing
liabilities

Net interest income
Interest rate spread
Net interest margin

$ 215,462 $ 186,111 $ 162,456 $
436,595
2,859,181
3,481,887
2,125,022
256,354

609,324
3,622,918
4,447,704
2,868,212
339,477

433,937
2,173,244
2,769,637
1,851,524
51,053

5,146 $

14,603
113,486
133,235
123,925
16,024

5,926 $ 5,546
12,792
134,945
153,283
116,130
3,201

12,954
141,878
160,758
106,858
12,585

2.39% 3.18% 3.41%
2.40% 2.97% 2.94%
3.13% 4.96% 6.20%
3.00% 4.62% 5.53%
4.32% 5.03% 6.27%
4.72% 4.91% 6.27%

$7,655,393 $5,863,263 $4,672,214 $ 273,184 $280,201 $272,614

3.57% 4.78% 5.83%

$ 302,575 $263,244 $201,294

3.20% 3.64% 3.38%
3.56% 4.08% 3.91%

(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 of 39%) 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

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

2002 compared to 2001
Increase (decrease)
Due to:
Rate

2001 compared to 2000
Increase (decrease)
Due to:
Rate

Total

Volume

Total

Volume

338
34,457
30,815
928
587
67,125
1,580
27,616
245
31,903
993
62,337
129,462

(815) $

(14,282)
(9,134)
(6,665)
(241)
(31,137)
982
(18,701)
(5,842)
(41,455)
(995)
(66,011)
(97,148)

(In thousands)

(477)
20,175
21,681
(5,737)
346
35,988
2,562
8,915
(5,597)
(9,552)
(2)
(3,674)
32,314

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

(697)
(3,966)
7,246
61
(206)
2,438
(2,090)
(7,397)
(5,657)
(21,737)
(758)
(37,639)
(35,201)

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

Total interest expense
Change in net interest income

36,762
34,742
4,002
75,506
53,956

(64,285)
(17,675)
(563)
(82,523)

(27,523)
17,067
3,439
(7,017)
$ (14,625) $ 39,331

36,152
15,454
11,476
63,082
41,656

(28,677)
(24,726)
(2,092)
(55,495)
$ 20,294

Total interest income includes tax equivalent adjustments of $36 million, $27 million and $11 million for
2002, 2001, and 2000, respectively. On a tax equivalent basis, net interest income increased to $303 million
for 2002 from $263 million for 2001, and $201 million for 2000. The interest rate spread and net interest
margin amounted to 3.20% and 3.56%, respectively, for 2002, as compared to 3.64% and 4.08%,
respectively, for 2001 and to 3.38% and 3.91%, respectively, for 2000.

2002 compared to 2001

On a tax equivalent basis interest income increased by $32 million for 2002 as compared to 2001. On a tax
equivalent basis the yield on earning assets was 6.77% for 2002 as compared to 8.42% for 2001. The increase
in interest income resulted from the growth in the average volume of interest earning assets of $2,052
million in 2002, partially offset by lower yields due to lower market rates. The current economic slowdown
has led the Federal Reserve Bank to cut the federal funds rate several times during the last two years to
1.25%, which has resulted in a lower average cost of fund (3.57% for the year ended 2002 versus 4.78% for
the year ended 2001). On a rate/volume basis, the increase of $39 million in net interest income (on a tax
equivalent basis) is the result of a positive volume variance of $54 million, net of a negative rate variance of
$15 million. The negative rate variance was mainly due to the high level of variable rate assets, and the
acceleration of prepayments on the Corporation’s mortgage backed securities.

As shown in Part I, the Corporation continued to experience growth in its loan portfolio during 2002. Total
loans average volume increased by $935 million as compared to 2001. Residential real estate loans and
commercial loans, accounted for the largest growth in the portfolio, with average volumes rising $414
million and $496 million, respectively. The growth in the commercial and residential real estate portfolios
resulted mainly from the Corporation’s ongoing strategy of maintaining a diversified asset base. For the
loan portfolio, the growth in average volume represented an increase of $62 million in interest income due
to volume. The $66 million decrease in interest income due to rate is mainly attributed to the floating rate
characteristics of a portion of the Corporation’s portfolio and to the origination of new loans in a lower rate
environment. At December 31, 2002, approximately 75% of the commercial, 49% of the residential
mortgage and 88% of the construction portfolios have floating rates.

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Average investment securities increased by $1,117 million. The average yield on investment securities was
5.95% in 2002 and 7.11% in 2001, on a tax equivalent basis. The portfolio of investment securities
contributed $67 million on the interest income increase due to volume partially offset by a decrease of $31
million in interest income due to rate. The yield on government obligations had a negative variance of 157
basis points declining from 6.11% in 2001 to 4.54% in 2002. The yield on mortgage backed securities also
had a negative variance as it decreased 48 basis points from 7.37% in 2001 to 6.89% in 2002.

Interest expense decreased by $7 million for 2002 as compared to 2001. This was the result of the decrease
in the average rates of interest bearing liabilities which generated a positive rate variance of $83 million,
that was partially offset by increases in the average volume of liabilities to support the Corporation’s growth.

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 interest income results from the growth in the average volume of interest earning 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, the Federal Reserve Bank cut
short term rates by a total of 475 basis points to 1.75%. 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 interest margin.

For the loan portfolio, the growth in 2001 of $374 million in the average volume of commercial loans
(including commercial real estate loans) represented 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 portfolio 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. Management has been pursuing a consistent strategy of shifting the
lending portfolio towards commercial lending without sacrificing the consumer area. The average portfolio
of residential mortgage loans increased by $296 million for 2001, representing a positive volume variance of
$24 million 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, represented a positive variance
in interest income due to volume of $2 million and a negative rate variance of $2 million.

For the investment portfolio, the average volume of mortgage backed securities increased by $255 million
in 2001. The tax equivalent yield on mortgage backed securities was 7.37% in 2001 and 6.89% in 2000. The
portfolio 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 bearing liabilities of $1,191 million for 2001 as compared to 2000 which
generated 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.

Provision for Loan Losses

During 2002, the Corporation provided $62 million for loan losses, as compared to $61 million in 2001 and
$46 million in 2000. Charge offs were stable despite weakened economic conditions. Net charge offs for
2002 amounted to $41.5 million, as compared to net charge offs for 2001 of $46.9 million, and of $42.0
million for 2000. Net charge offs to average loans outstanding has improved to 0.87% as compared to 1.22%
and 1.36% for 2001 and 2000, respectively.

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The allowance activity for 2002, and previous four years was as follows:

Year ended December 31,

2002

2001

2000
(Dollars in thousands)

1999

1998

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 (1)
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

91,060
62,302

76,919 $
61,030

71,784 $
45,719

67,854
47,960

57,712
76,000

(555)
(4,643)
(2,532)
(41,261)
7,540
(41,451)

$ 111,911

(192)
(9,523)
(2,316)
(42,349)
7,391
(46,989)
100
91,060 $

(3,463)
(2,145)
(46,223)
9,807
(42,024)
1,440
76,919 $

(825)
(793)
(52,047)
9,048
(44,617)
587
71,784

(880)
(3,438)
(67,906)
6,034
(66,190)
332
67,854

1.99%

2.11%

2.20%

2.61%

3.20%

0.87%

1.22%

1.36%

1.90%

3.31%

(1) Other adjustments mainly consist of the carrying allowance of the loan portfolios acquired each year.

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
dependent.

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
Insurance income
Dividend on equity securities
Other operating income
Other income before net gain on
sale of investments, derivatives loss
and trading income
Net gain on sale of investments
Impairment on investments
Net gain on sale of investments, and impairment
Derivatives loss
Trading income
Total

2002

$ 21,441
9,200
3,540
2,285
1,081
2,269
705
10,032

50,553
48,873
(36,872)
12,001
(4,062)

2001
(In thousands)

19,632
9,213
1,562
2,293
1,511
700
669
7,794

43,374
9,606

9,606

$ 58,492

52,980

2000

$ 19,913
8,898
409
2,434
1,340

698
8,071

41,763
7,850

7,850

419
$ 50,032

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Other income primarily consists of fees on loans, service charges on deposit accounts, commissions derived
from various banking activities, securities and insurance activities, and the net gain of investments, net of
derivatives losses. Other fees on loans consist mainly of credit card fees and late charges collected on loans.

Service charges on deposit accounts represent an important and stable source of other income for the
Corporation.

Mortgage banking activities income includes gain on sale of loans and the servicing fees on residential
mortgage loans originated by the Corporation and subsequently securitized or sold. Gains on sale of loans
amounted to approximately $3.4 million in 2002 (2001-$1.2 million). No sales were made in 2000.

The Corporation’s subsidiary, First Leasing and Rental Corporation, generates income on the rental of
various types of motor vehicles. This source of income has averaged approximately $2 million in the past
three years.

Insurance income consists of commissions earned by the new subsidiary FirstBank Insurance Agency, Inc.,
which started operations in May 2001.

Other commissions income is the result of an agreement with Goldman, Sachs & Co. to participate in bond
issues by the Government Development Bank of Puerto Rico, and an agreement with a national brokerage
house in Puerto Rico to offer brokerage services in selected branches.

The other operating income category is composed of miscellaneous fees 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 portfolio of commercial loans.

The gain on sale of investment securities reflects gains that resulted from sales that are in consonance to the
Corporation’s investment policies. A substantial portion earned in 2002 represents gains of $40.1 million on
the sale of mortgage backed securities, realized as part of the restructuring of the investment portfolio, as
explained in the Corporation’s financial statements, see Note 10. In addition, during the year ended on
December 31, 2002 losses of $37 million on other-than-temporary impairment of certain securities were
recognized, as explained in the Corporation’s financial statements, refer to Notes 2 and 10.

As explained in Note 29 of the Corporation’s financial statements, the derivatives loss consists mainly of an
unrealized loss of $4.5 million due to the valuation to fair value of a portfolio of swaps that does not
qualify for hedge accounting.

Other Operating Expense

Other operating expenses amounted to $133 million for 2002 as compared to $121 million for 2001 and $113
million for 2000. 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
Expense of rental equipment
Other
Total

2002

$ 59,432
29,015
746
8,915
7,685
9,304
5,865
1,588
10,206
$ 132,756

2001
(In thousands)

54,703
24,992
645
7,804
7,931
7,506
5,395
1,578
10,300
$ 120,854

2000

$ 50,014
22,792
547
6,355
8,740
8,468
5,573
1,525
9,036
$ 113,050

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Management’s goal is to limit expenditures to those that directly contribute to increase the efficiency,
service quality and profitability of the Corporation. This control over other operating expenses has been an
important factor contributing to the increase in earnings in recent years. The Corporation’s efficiency ratio,
which is the ratio of other operating expenses to the sum of net interest income and other income, improved
to 40.81% for 2002 as compared to 41.81% and 46.95% for 2001 and 2000, respectively. The Corporation
has maintained a better than average efficiency ratio, while it has provided the latest in delivery channels
for its commercial and consumer financial products and services.

The increase in operating expenses for 2002 is mainly the result of the Corporation’s continuous
investment in technology to provide the latest in delivery channels to its commercial and consumer lending
business and to the general growth in the subsidiary Bank’s operations. Operating expenses have also
increased due to higher expenditures on advertising campaigns, which support the Corporation’s growth
and image.

The salary and benefits category was affected by annual increases in salary and fringe benefits and an
increase in the number of employees to support the Corporation’s growth.

Income Tax Expense

The provision for income tax amounted to $22 million (or 17% of pre-tax earnings) for 2002 as compared to
$20 million (or 19% of pre-tax earnings) in 2001, and $15 million (or 18% of pre-tax earnings) in 2000. The
Corporation has maintained an effective tax rate lower than the statutory rate of 39% mainly by investing
in government obligations and mortgage backed securities exempt from U.S. and Puerto Rico income tax
combined with gains on sale of investments held by the international banking division of the Corporation
and the Bank. These divisions were created under the International Banking Entity Act of P. R., which
provides for total P. R. tax exemption on its interest income, other income and gain on sale of investments.
The decrease in the effective tax rate is mainly due to an increase in the portfolio of exempt investments and
investments held in the Corporation’s international banking divisions. For additional information relating
to income taxes, see Note 25 of the Corporation’s financial statements.

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FINANCIAL CONDITION

The following table presents an average balance sheet for the following years:

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

2002

60,522
1,236,281
2,144,236
259,840
32,586
3,733,465
2,080,892
1,048,283
1,283,710
223,627
136,851
4,773,363
8,506,828
52,703
188,691
$8,748,222

215,462
609,324
3,622,918
4,447,704
2,868,212
339,477
7,655,393
368,315
8,023,708
724,514
$ 8,748,222

December 31,
2001
(In thousands)

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

2000

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

(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, 2002 amounted to $9,644 million, $1,446 million over the $8,198
million at December 31, 2001, mainly due to the growth in the loan portfolio.

The following table presents the composition of the loan portfolio at year-end for each of the last five years:

December 31,

2002

% of
Total

2001

% of
Total

% of
Total
(Dollars in thousands)

2000

1999

% of
Total

1998

% of
Total

Residential real
estate loans
Commercial real
estate loans

Construction loans
Commercial loans
Total commercial
Finance leases
Consumer loans
Total

$ 1,854,068

$ 1,011,908

746,792

473,563

303,011

813,513
259,053
1,418,792
2,491,358
143,412
1,149,012

14
5
25
44
3
20
$ 5,637,850 100

688,922
219,396
1,238,173
2,146,491
127,935
1,022,445
$ 4,308,779

16
5
29
50
3
24
100

438,321
203,955
947,709
1,589,985
122,883
1,038,538
$ 3,498,198

13
6
27
46
3
30
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

Total loans receivable increased by $1,329 million in 2002 when compared with 2001. During 2002 the
Corporation continued its strategy of diversifying its loan portfolio composition through the origination and
purchase of commercial loans and residential real estate loans, while maintaining its investment in
consumer loans. In addition, the Corporation acquired a banking operation in the U.S. and British Virgin
Islands with $291 million in residential real estate loans, $40 million in commercial loans and $105 million in
consumer loans. This acquisition provides the Corporation with a geographic diversification. The
Corporation’s strategy and the acquisition resulted in a significant increase of $345 million in the
commercial loan portfolio and of $842 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 $15 million, and
consumer loans increased by $127 million in 2002.

The Corporation’s investment portfolio at December 31, 2002 amounted to $3,729 million, an increase of $13
million when compared with the investment portfolio of $3,716 million at December 31, 2001. Mortgage
backed securities represent a substantial balance of the Corporation’s portfolio. These securities are subject
to prepayment risk. As described in Note 10 of the Corporation’s financial statements, during 2002, the
Corporation restructured its portfolio to shorten maturities and reduce the existing prepayment risk under
current interest rate scenario. Government obligations included approximately $644 million and $1.3 million
in zero coupon bonds and government agency securities, respectively, that are callable. At December 31,
2002 money market instruments included approximately $237 million of FHLB discount notes maturing in
less than ninety days, which collateralized repurchase agreements. Management of the Corporation will
determine during 2003 how prepayments on the mortgage backed securities and repayments on the callable
securities will be reinvested, considering, among other factors, the interest rate outlook.

The composition and estimated tax equivalent weighted average interest and dividend yields of the
Corporation’s earning assets at December 31, 2002 were as follows:

Money market instruments
Government obligations
Mortgage backed securities
FHLB 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.

Non-performing Assets

Amount
(In thousands)
$

273,660
666,946
2,512,606
35,629
198,174
41,654
3,728,669
1,149,012
1,854,068
259,053
2,232,305
143,412
5,637,850
9,366,519

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Tax Equivalent
Weighted
Average Rate
1.66%
10.84%
6.26%
5.58%
6.93%
1.72%
6.72%
13.13%
5.43%
5.13%
5.03%
10.14%
6.95%
6.86%

Total non-performing assets are the sum of non-accruing loans and investments, other real estate owned
and other repossessed properties. Non-accruing loans and investments are loans and investments as to which
interest is no longer being recognized. When loans and investments fall into non-accruing status, all
previously accrued and uncollected interest is charged against interest income.

At December 31, 2002, total non-performing assets amounted to $105 million (1.09% of total assets) as
compared to $79 million (0.96% of total assets) at December 31, 2001 and $74 million (1.25% of total assets)
at December 31, 2000. Approximately $9.1 million of the increase in non-performing assets when compared
to the amount at December 31, 2001 is attributed to a construction loan fully secured with finished homes,
where the Corporation stopped accruing interest due to a slow down in the selling process of the homes.
More than half of the project houses have been either sold or optioned and are in the process of closing.
The remaining increase in non performing assets is attributed to a corporate bond of approximately $3.8
million, which was reclassified to non-accruing status during 2002, to non-performing assets acquired in the
Virgin Islands and to the general growth in the Corporation’s commercial loan portfolio. The Corporation’s
allowance for loan losses to non-performing loans was 121.95% at December 31, 2002 as compared to
124.74% and 113.59% at December 31, 2001 and 2000, respectively.

The following table presents non-performing assets at the dates indicated:

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Non-accruing loans:
Residential real estate
Commercial and commercial real estate
Finance leases
Consumer

Other real estate owned
Other repossessed property
Investment securities
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

Non-accruing Loans

2001

December 31,
2000
(Dollars in thousands)

1999

1998

18,540 $
29,378
2,469
22,611
72,998
1,456
4,596

15,977 $
31,913
2,032
17,794
67,716
2,981
3,374

8,633 $

17,975
2,482
24,726
53,816
517
3,112

9,151
19,355
1,716
26,736
56,958
3,642
2,277

2002

23,018 $
47,705
2,049
18,993
91,765
2,938
6,222
3,750

$ 104,675 $
$ 24,435 $
1.09%
1.63%
$ 111,911 $

62,877
15,110
1.57%
2.69%
67,854
121.95% 124.74% 113.59% 133.39% 119.13%

74,071 $
16,358 $
1.25%
1.94%
76,919 $

57,445 $
13,781 $
1.22%
1.96%
71,784 $

79,050 $
27,497 $
0.96%
1.69%
91,060 $

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, the loan to value ratios and historical experience, that no
material losses will be incurred in this portfolio. Non-accruing real estate loans amounted to $23 million
(1.24% of total residential real estate loans) at December 31, 2002, as compared to $19 million (1.83% of
total residential real estate loans) and $16 million (2.14% of total residential real estate loans) at December
31, 2001 and 2000, respectively. The increase as compared to 2001 is mainly attributed to non performing
loans of approximately $4 million acquired in the Virgin Islands.

Commercial Loans - The Corporation places commercial loans (including commercial real estate and
construction loans) 90 days delinquent as to principal and interest in non-accruing status. The risk exposure
of this portfolio is diversified. Non-accruing commercial loans amounted to $48 million (1.91% of total
commercial loans) at December 31, 2002 as compared to $29 million (1.37% of total commercial loans) and
$32 million (2.01% of total commercial loans) at December 31, 2001 and 2000, respectively. At December 31,
2002 there were five non-accruing commercial loans of over $1 million, for a total of $17.7 million including
the afore mentioned non-accruing construction loan of $9.1 million.

Finance Leases – Finance leases are classified as non-accruing when they are delinquent 90 days or
more. Non-accruing finance leases amounted to approximately $2 million at December 31, 2002, 2001 and
2000, representing 1.43%, 1.93% and 1.65%, respectively, of total finance leases.

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 $19 million (1.65% of the total consumer loan portfolio) at
December 31, 2002, $23 million (or 2.21% of the total consumer loan portfolio) at December 31, 2001 and
$18 million (or 1.71% of the total consumer loan portfolio) at December 31, 2000.

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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 the real estate at the date of acquisition.

Other Repossessed Property

The other 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.

Investment securities

This category presents the carrying amount of $3.8 million of the Corporation’s investment in WorldCom
Corporation bonds, which was reclassified to non-accruing status during the year, as more fully explained in
Note 10 of the Corporation’s financial statements. Management’s impairment analysis on the investment in
WorldCom Corporation bonds concluded that an other-than-temporary impairment of approximately $11.7
million had occurred. As aforementioned, the remaining $3.8 million were reclassified to non-accruing status.

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 delinquent 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, retail brokered deposits,
institutional deposit, federal funds purchased, securities sold under agreements to repurchase, and FHLB
advances.

Deposits

Total deposits amounted to $5,483 million at December 31, 2002, as compared to $4,099 million and $3,346
million at December 31, 2001 and 2000, respectively.

The following table presents the composition of total deposits:

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 deposits

Interest bearing deposits:

Average balance outstanding
Non-interest bearing deposits:
Average balance outstanding

2002

921,103
230,743
3,883,996
5,035,842
447,076
5,482,918

3.00%

December 31,
2001
(Dollars in thousands)

469,452
205,760
3,183,491
3,858,703
239,851
4,098,554

4.62%

2000

430,298
170,631
2,512,891
3,113,820
232,164
3,345,984

5.53%

4,447,704

3,481,887

2,769,637

257,454

233,254

213,728

Total deposits are composed of branch-based deposits, brokered deposits and to a lesser extent of
institutional deposits. Institutional deposits include certificates issued to agencies of the Government of
Puerto Rico and to Governments in the Virgin Islands.

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Total deposits increased by approximately $1,384 million at December 31, 2002 when compared to
December 31, 2001. This fluctuation was mainly due to: (1) an increase in branch-based deposits of $813 mil-
lion and to (2) an increase of $456 million in brokered certificates of deposit. The increase in branch-based
deposits reflects the acquisition of approximately $557 million in deposits in the Virgin Islands.

Retail brokered certificates of deposits, which are certificates sold through brokers, represent a large
portion of the Corporation’s deposits. The total U.S. market for this source of funding approximates
$280,000 million.

At December 31, 2002, approximately 73% of retail brokered certificates of deposit held by the
Corporation are callable, but only at Corporation’s option. At December 31, 2002, the average life of
callable and fixed term brokered certificates approximated 12 years and 2.54 years, respectively.

As more fully explained in Note 29 to the Corporation’s financial statements, the Corporation enters into
interest rate swap agreements where it agrees to pay variable-rates of interest as a hedge against changes
in the fair value of fixed-rate brokered certificates of deposit. The effect of this agreements is that interest
expense of retail brokered certificates of deposits is generally variable interest rate. The interest rate
swap agreements are not callable.

Borrowings

At December 31, 2002 total borrowings amounted to $3,249 million as compared to $3,425 million and
$2,069 million at December 31, 2001 and 2000, respectively.

2002

December 31,
2001
(Dollars in thousands)

2000

Federal funds purchased and securities

sold under agreements to repurchase $

Advances from FHLB
Subordinated notes
Notes payable
Total

2,793,540
373,000
82,815

2,997,174
343,700
84,362

3,249,355

3,425,236

1,856,436
67,000
90,548
55,500
2,069,484

Weighted average rate during the period

4.36%

5.02%

6.27%

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
purchased and securities sold under agreements to repurchase (repurchase agreements) which at December
31, 2002 amounted to $2,794 million or 86% of total borrowings. Repurchase agreements had a total
weighted average cost of 3.82% during the year ended December 31, 2002. For more information on
borrowings please refer to Notes 18 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)
$

5,035,842
3,249,355
$ 8,285,197

Weighted
Average Rate

2.58%
3.98%
3.13%

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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)

Total

Less than 1 year

1-3 years

4-5 years

After 5 years

Contractual Obligations:
Federal funds purchased and
securities sold under agreements
to repurchase
Advances from FHLB
Subordinated Notes
Total Contractual Cash Obligations $ 3,249,355 $
Other Commitments:

$ 2,793,540 $
373,000
82,815

Lines of Credit
Standby Letters of Credit
Other Commercial Commitments
Operating Leases

Total Commercial Commitments

322,351 $
30,313
729,369
22,897

718,580 $
50,000

768,580 $

156,500 $
50,000
82,815
289,315

100,000 $ 1,818,460
273,000

100,000 $ 2,091,460

322,351
30,313
729,369

4,894 $
$ 1,104,930 $ 1,086,927 $

6,905 $
6,905 $

3,765 $
3,765 $

7,333
7,333

The Corporation has obligations and commitments to make future payments under contracts, such as debt
and lease agreements, and under other commitments to extend credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in the
contract. 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 2002, the Corporation increased its total capital from $603 million at December 31, 2001 to $798
million at December 31, 2002. Total capital increased by $195 million mainly due to earnings of $108
million, the issuance of 3,680,000 shares of preferred stock with a net proceed of $89 million, the issuance
of 96,750 (as adjusted for 2002 stock split) shares of common stock through the exercise of stock options with
proceeds of $1.3 million, a positive fluctuation in the valuation of securities available for sale, net of a
negative valuation of fair value hedges of $40 million, and cash dividends of $42 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, 2002 the Corporation had a leverage ratio of 7.35%; a total risk based capital ratio of 13.75%;
and a Tier 1 risk-based capital ratio of 11.90%.

Dividends

In 2002, 2001 and 2000 the Corporation declared four quarterly cash dividends of $0.10, $0.09 and $0.07 per
common share, respectively, for an annual dividend of $0.40, $0.35 and $0.29, respectively. Total cash
dividends paid on common shares amounted to $16 million for 2002 (or a 19.58% dividend payout ratio),
$14 million for 2001 (or a 19.91% dividend payout ratio) and $12 million for 2000 (or a 19.72% dividend
payout ratio). Dividends declared on preferred stock amounted to $26 million in 2002, $17 million in 2001,
and $7 million in 2000. Increase in dividends on preferred stocks resulted from the issuance of preferred
stock of $92 million in 2002, $103.5 million in 2001 and $75 million in 2000.

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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 management 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 Executive Vice President for Retail and Mortgage Banking, the Senior Vice President of
Treasury and Investments 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 $42 million at
December 31, 2002. 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, alternative funding sources
and their costs, hedging and the possible purchase of derivatives such as swaps and caps, and any tax or
regulatory issues which may be pertinent to these areas. The ALCO approves funding decisions in light of
the Corporation’s overall growth strategies and objectives. On a quarterly basis the ALCO performs a
comprehensive asset/liability 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 interest rates on net interest income.
These measures are carried out over a one year time horizon, assuming gradual upward and downward
interest rate movements of 200 basis points. Simulations are carried out in two ways:

(1) using a balance sheet which is assumed to be at the same levels existing on the simulation date, and
(2) using a balance sheet which has growth patterns and strategies similar to those which have occurred in
the recent past.

These simulations assume gradual upward or downward movements of interest rates over the year of
projection, with the change totaling 200 basis points at the end of the twelve month period. The balance
sheet is divided into groups of similar assets and liabilities 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 factors which may be important in determining the future growth of net interest 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 certain 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 that 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 reason, the results of these simulations
are only approximations of the true sensitivity of net interest income to changes in market interest rates.

Assuming a no growth balance sheet as of December 31, 2002, tax equivalent net interest income projected
for 2003, would rise by $27.8 million (8.23%) under a rising rate scenario and would decrease by $1.5
million (0.5%) under falling rates.

The same simulations were also carried out assuming that the Corporation would grow. As of December 31,
2002 the growing balance sheet simulations indicate that tax equivalent net interest income projected for
2003, would rise by $27.0 million (7.70%) under a rising rate scenario and would decrease by $0.8 million
(0.2%) with falling rates.

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The simulation for the year 2002 assuming a no growth balance sheet as of December 31, 2001,
concluded that under a rising rate scenario net interest income would have declined by $6.2 million (1.7%)
and that under a falling rate scenario would have increased by $1.9 million (0.5%).

The same simulations were also carried assuming that Corporation was going to grow. As of December 31,
2001, the growing balance sheet simulation indicated that the tax equivalent net interest income for 2002
would have fallen by $8.8 million (2.4%) under a rising interest rate scenario and increased by $3.8 million
(1.0%) with falling rates.

The Corporation compared 2002 projections with actual results. In the growth scenario, which is more
realistic, the Bank projected taxable equivalent net interest income of $369.7 million under flat rates and
$373.5 million under falling rates for 2002. In reality, taxable equivalent net interest income was $302.6 million.
The most important reason for this difference was that FirstBank restructured its investment portfolio to
reduce the Bank’s exposure to rising rates. Some corporate bonds were sold and most 30 year MBS were
replaced with 15 year securities at lower tax equivalent spreads. While these changes were going on, the
Bank also had substantial investments in discount notes for short periods of time. These changes all led to
smaller spreads than anticipated in the initial projection. Partially offsetting the effect of smaller spreads was
a more rapid growth of the balance sheet. The consolidated balance sheet actually reached $9.64 billion at
the end of 2002, compared with a projected figure of $8.68 billion in the baseline scenario. Part of this
growth was due to the unanticipated purchase of a $590 million banking operation in the Virgin Islands,
which closed in October, 2002. Substantial unanticipated growth also occurred in average commercial loans,
which reached $2.30 billion by the end of 2002, compared with a projected figure of $2.00 billion in the
baseline scenario.

Liquidity

Liquidity refers to the level of cash and eligible investments to meet loan and investment commitments,
potential deposit outflows and debt repayments. 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 securitized 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 principal uses of funds are the origination of loans and the
repayment of maturing deposit accounts and borrowings.

A large portion of the Corporation’s funding represent retail brokered certificates of deposit. In the event
that the Corporation falls under the ratios of a well-capitalized institution, it faces the risk of not being able
to replace this source of funding. It is Management’s believe that this possibility is remote. In addition, the
average life of the retail brokered certificates of deposit was 9.54 years at December 31, 2002.
Approximately 73% of these certificates are callable, but only at the Corporation’s option.

The Corporation’s liquidity plan contemplates alternative sources of funding that could provide significant
amounts of funding at reasonable cost. The alternative sources of funding include, among others, FHLB
advances, lines of credits from other banks, sale of commercial loans participations, securitization of auto
loans and commercial paper.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared 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 purchasing power of money over
time due to inflation.

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Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a greater impact on a financial institution’s performance
than the effects of general levels of inflation. Interest rate movements are not necessarily correlated with
changes in the prices of goods and services.

Concentration Risk

The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto
Rico. However, the Corporation continues diversifying its geographical risk as evidenced by recent
acquisitions in the Virgin Islands. Puerto Rico’s economy is generally similar to U.S. economy and its
economic performance is a natural result of its increasing integration into the U.S. economy. At December
31, 2002, there is no significant concentration of credit risk in any specific industry.

Selected Quarterly Financial Data

Financial data showing results of the 2002 and 2001 quarters is presented below. In the opinion of
Management, all adjustments necessary for a fair presentation have been included:

March 31

June 30

Sept. 30

Dec. 31

2002

(In thousands, except for per share results)
$

Interest income
Net interest income
Provision for loan losses
Net income
Earnings per common share-basic
Earnings per common share-diluted

$
$

136,716
69,271
19,801
25,650
0.49
0.49

128,750
52,474
15,000
18,786
0.39
0.39

March 31

June 30

Sept. 30

Dec. 31

2001

(In thousands, except for per share results)
$

136,348
68,523
14,501
26,979
0.51
0.50

126,178
58,101
17,800
20,172
0.43
0.43

$
$

129,606
60,338
14,000
27,357
0.52
0.51

127,527
61,989
12,790
23,019
0.45
0.45

$
$

137,364
68,717
14,001
27,971
0.53
0.52

133,801
63,491
15,440
24,024
0.47
0.47

$
$

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, 2002, there were 640 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

High

Low

Last

2002:
December
September
June
March

2001:
December
September
June
March

2000:
December
September
June
March

26.38
27.61
25.13
19.80

20.00
20.00
17.99
17.42

16.46
16.33
12.50
14.00

22.08
22.82
19.13
18.43

17.07
16.00
15.32
13.00

13.67
12.00
11.13
10.83

$ 22.60
25.41
25.13
19.27

$ 19.00
17.24
17.99
17.27

$ 15.75
16.29
12.37
11.75

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Report of Independent Accountants

To the Board of Directors
and Stockholders of First BanCorp.

In our opinion, the accompanying consolidated statements of financial condition and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash
flows present fairly, in all material respects, the financial position of First BanCorp. and its subsidiaries
at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the responsibility
of the Company’s management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

As discussed in Notes 2, 9 and 29 to the accompanying consolidated financial statements, in 2001 the
Company adopted the Statement of Financial Accounting Standards No. 133, “Accounting for Certain
Derivative Instruments and Certain Hedging Activities,” as amended, which effect was accounted for
as a cumulative effect of a change in accounting principle.

March 7, 2003

CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2004
Stamp 1838396 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report

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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, net of allowance for loan losses of $111,911,470
(2001 - $91,060,307)
Loans held for sale, at lower of cost or market
Total loans
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
Bank acceptances outstanding
Accounts payable and other liabilities

Subordinated notes
Stockholders’ equity:
Preferred stock, authorized 50,000,000 shares; issued

and outstanding 14,420,000 shares at $25 liquidation
value per share (2001 - 10,740,000)

Common stock, $1 par value, authorized 250,000,000

shares; issued 44,875,435 shares, including 14,958,383
shares issued on September 30, 2002 from
a stock split (2001-29,852,552)

Less: Treasury stock, including 1,640,300 shares issued on

September 30, 2002 from a stock split (at par value)

Common stock outstanding
Additional paid-in capital
Capital reserve
Legal surplus
Retained earnings
Accumulated other comprehensive income (loss),
net of tax of $11,127,054 (2001-$2,097,785)

December 31,

2002

2001

108,305,943
273,659,553

59,898,550
34,564,568

2,379,786,252

336,987,292

2,716,773,544

541,047,654
161,558,730
702,606,384

35,629,500

5,515,185,610

10,753,585

5,525,939,195
2,938,249
87,595,569
39,282,010
304,346

150,818,003

$ 9,643,852,296

2,988,828,088

385,419,989

3,374,248,077

171,152,930
113,142,662
284,295,592

22,890,600

4,213,089,836

4,629,562

4,217,719,398
1,455,577
76,155,620
37,630,883
262,153
88,396,770

$ 8,197,517,788

447,076,347
5,035,841,381

239,850,816
3,858,703,322

2,793,539,832
373,000,000
304,346
112,851,285
8,762,613,191
82,815,105

2,997,173,944
343,700,000
262,153
70,547,126
7,510,237,361

84,361,525

360,500,000

268,500,000

44,875,435

(4,920,900)
39,954,535

70,000,000
149,345,178
145,243,124

33,381,163
798,424,000

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

Contingencies and commitments
Total liabilities and stockholders’ equity

$ 9,643,852,296

$ 8,197,517,788

The accompanying notes are an integral part of these statements.

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CONSOLIDATED STATEMENTS
OF INCOME

Interest income:
Loans
Investment securities
Short-term investments
Dividends on FHLB stock
Total interest income

Year ended December 31,

2002

2001

2000

351,838,718
185,561,056
998,710
1,634,899
540,033,383

$ 353,777,585
159,713,664
1,475,521
1,289,125
516,255,895

329,007,974
132,603,596
527,155
1,248,755
463,387,480

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
Mortgage banking activities
Trading income
Gain on sale of investments, net
Rental income
Derivatives loss, net
Other operating income
Total other income

Other operating expenses:
Employees’ compensation and benefits
Occupancy and equipment
Business promotion
Other taxes
Insurance
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
Net income

Net income available to common stockholders
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

133,234,567
117,127,270
6,797,889
16,023,967
273,183,693
266,849,690

160,758,451
97,952,979
8,904,611
12,585,108
280,201,149
236,054,746

153,283,358
105,326,693

10,803,634
3,200,940
272,614,625
190,772,855

62,301,996

61,030,000

45,718,500

204,547,694

175,024,746

145,054,355

21,440,852
9,200,327
3,540,034

12,000,487
2,285,021
(4,061,988)
14,087,218
58,491,951

59,432,111
29,015,200
9,304,277
6,857,010
2,803,905
25,343,669
132,756,172

19,631,741
9,213,436
1,562,158

9,606,314
2,292,541

10,673,633
52,979,823

54,702,977
24,991,540
7,506,040
5,973,897
2,475,411
25,204,513
120,854,378

19,913,340
8,898,170
409,011
419,367
7,850,472
2,433,664

10,108,036
50,032,060

50,014,110
22,791,863
8,468,916
5,054,748
1,846,984
24,872,883
113,049,504

130,283,473
22,327,122

107,150,191
20,133,858

82,036,911
14,761,302

107,956,351

87,016,333

67,275,609

$
$

107,956,351
81,550,077

$
$

2.04

2.01

2.01
0.40

(1,014,889)
86,001,444
69,493,246

$
$

1.77
(0.03)
1.74

1.76
(0.03)
1.73
0.35

$
$

67,275,609
59,868,067

$
$

1.48

1.47

1.47
0.29

The accompanying notes are an integral part of these statements.

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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
Core deposit intangible amortization
Provision for loan losses
Deferred income tax benefit
Gain on sale of investments, net
Derivative loss
Net gain on sale of loans
Increase (decrease) in accrued income tax payable
Increase in accrued interest receivable
(Decrease) increase in accrued interest payable
Amortization of deferred loan (fees) costs
Net origination of loans held for sale
Decrease in other assets
Increase (decrease) 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
Net liabilities assumed on acquisition of business
Purchase of FHLB stock

Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Net (decrease) increase in federal funds purchased

Year ended December 31,

2002

2001

2000

107,956,351

86,001,444

67,275,609

11,710,016
1,165,488
62,301,996
(8,610,812)
(12,000,487)
4,522,925
(3,416,222)
3,434,149
(141,451)
(1,364,672)
(1,544,375)
(40,264,215)
39,671,318
27,974,273
83,437,931
191,394,282

9,844,282
919,261
61,030,000
(5,402,000)
(9,606,314)

(1,282,845)
11,306,695
(9,661,332)
4,841,187
522,685
(4,629,562)
22,893,906
(9,395,151)
71,380,812
157,382,256

9,014,068
866,330
45,718,500
(4,356,000)
(7,850,472)

(19,474,679)
(10,052,025)
11,677,924
(144,768)

4,657,136
20,740,407
50,796,421
118,072,030

635,765,469
(903,166,444)
(734,531,121)
83,862,533
2,242,654,071
(17,031,372,741)
(10,336,516,102)

16,613,061,948
8,816,493,581
(14,412,317)
73,357,625
(12,738,900)
(567,542,398)

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)

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)

(4,354,100)
(2,311,064,284)

(710,000)
(1,215,181,559)

790,122,398

764,012,251

780,840,486

and securities sold under agreements to repurchase

(202,096,134)

1,134,888,478

Decrease 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

29,300,000
(1,550,000)
(42,372,613)
88,906,000

1,340,843
663,650,494
287,502,378
94,463,118
381,965,496

108,305,943
273,659,553
381,965,496

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

59,898,550
34,564,568
94,463,118

403,553,556
(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

63,372,591
2,020,348
65,392,939

The accompanying notes are integral part of these statements.

CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY

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Preferred
stock

Common
stock

Additional
paid-in
capital

Capital
reserve

Legal
surplus

Retained
earnings

Accumulated
other
comprehensive
income (loss)

December 31, 1999

$ 90,000,000 $ 28,060,552 $ 19,863,466 $ 40,000,000 $ 126,792,514 $ 58,834,676 $ (68,648,959)

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

Net income
Other comprehensive income
Issuance of preferred stock
Addition to legal surplus
Addition to capital reserve
Stock options exercised
Common stock split on
September 30, 2002

Cash dividends:
Common stock
Preferred stock
December 31, 2002

75,000,000

(2,562,500)

(1,642,400)
6,000

(821,200)
87,750

10,000,000

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

268,500,000

26,571,952

14,214,877

60,000,000

136,792,514

67,275,609

(10,000,000)
(27,622,992)

(11,804,599)
(7,407,542)
69,275,152

86,001,444

(10,000,000)
(10,000,000)
(1,800,385)

(13,835,100)
(16,508,198)
103,132,913

107,956,351

49,050,174

(19,598,785)

13,305,431

(6,293,354)

39,674,517

92,000,000

(3,094,000)

10,000,000

12,552,664

(12,552,664)
(10,000,000)

64,500

1,276,343

13,318,083

(12,397,220)

(920,863)

(15,966,339)
(26,406,274)

$360,500,000 $ 39,954,535 $ –

$ 70,000,000 $ 149,345,178 $145,243,124 $ 33,381,163

The accompanying notes are an integral part of these statements.

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CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME

Net income

$107,956,351

$86,001,444

$67,275,609

Year ended December 31,

2002

2001

2000

Other comprehensive income, net of tax:

Unrealized gains on securities:
Unrealized holding gains
arising during the period, net of tax of
$16,289,254 (2001-$6,820,246;
2000-$18,312,676)
Less: Reclassification adjustment
for gains included in net income,
net of tax of $3,000,122
(2001-$2,401,578; 2000-$1,962,618)

Cumulative effect of accounting change,
net of tax benefit of $331,500

Unrealized gains on securities

Unrealized loss on fair value hedge
attributable to credit risk, net of tax
of $64,294 (2001-$315,024)
Total other comprehensive income

48,867,763

20,460,738

54,938,028

(9,000,365)

(7,204,736)

(5,887,854)

39,867,398

994,500
14,250,502

49,050,174

(192,881)
39,674,517

(945,071)

13,305,431

49,050,174

Comprehensive income

$147,630,868

$99,306,875

$116,325,783

The accompanying notes are an integral part of these statements.

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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 also offers insurance services through its wholly-owned insurance subsidiary, the FirstBank Insurance
Agency. First BanCorp is subject to the Federal Bank Holding Company Act and its insurance subsidiary is subject
to the supervision, examination and regulation of the Commissioner of Insurance of Puerto Rico.

FirstBank Puerto Rico (FirstBank or the Bank), the Corporation’s wholly-owned bank subsidiary, is a commercial
bank chartered under the laws of the Commonwealth of Puerto Rico. Its main office is located in San Juan, Puerto
Rico, and it has 43 full-service banking branches in Puerto Rico and 11 in the U.S. and British Virgin Islands. It has
11 loan origination offices in Puerto Rico focusing on consumer loans and residential mortgage loans. The Bank,
through wholly-owned subsidiaries, operates 33 offices in Puerto Rico specializing in small personal loans, finance
leases, and vehicle rental. The Bank offers 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).

In October 2002, the Corporation acquired JPMorgan Chase’s Eastern Caribbean Region business in the U.S. Virgin
Islands, British Virgin Islands and Barbados. In addition to branches acquired, this transaction included the
acquisition of the assets of the former Chase Trade, Inc., now First Trade, Inc., and of all outstanding shares of the
former Chase Agency Services, Inc., now FirstBank Insurance Agency V.I., Inc. Total assets acquired in this
transaction amounted to aproximately $590 million, including aproximately $435 million in loans receivable, and
total deposits amounted to aproximately $557 million.

Note 2 - Summary of Significant Accounting Policies

The accounting and reporting policies of the Corporation and its subsidiaries conform with accounting principles
generally accepted in the United States of America, and, as such, include amounts based on judgments, estimates
and assumptions made by Management that affect the reported amounts of assets and liabilities and contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.

Following is a description of the more significant accounting policies followed 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.

Statements 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 ability to hold to maturity. These
securities are carried at amortized cost.

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 approximates 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.

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Other-than-temporary impairments

The Corporation evaluates for impairment its debt and equity securities when their market value has remained
below cost for six months or more or earlier if other factors indicative of potential impairment exist. Investments
are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The Corporation
employs a systematic methodology that considers available evidence in evaluating potential impairment of its
investments.

The impairment analysis on the fixed income investments is done placing special emphasis on the analysis of the
cash position of the company, its cash and capital generation capacity, which could increase or diminish the
company’s ability to repay its bond obligations. The Corporation also considers its intent and ability to hold the
fixed income securities. If Management believes, based on the analysis, that the company will not be able to
service its debt and pay its obligations on a timely manner, the security is written down to Management’s estimate
of net realizable value.

The equity securities impairment analyses are performed and reviewed quarterly based on the latest financial
information and any supporting research report made by a major brokerage house. These analyses are very
subjective and based, among other things, on relevant financial data such as capitalization, cash flow, liquidity,
systematic risk, and debt outstanding. Management also considers the industry trends, the historical performance
of the stock, as well as the Corporation’s intent to hold the security for an extended period. If Management
believes there is a low probability of achieving book value in a reasonable time frame, then an impairment will be
recorded by writing the security down to market value.

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 installment 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, economic 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 residential mortgage loans, 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.

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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 allocated to the
servicing assets and the loans (without the servicing asset), based on their relative fair values. Servicing assets are
amortized in proportion to and over the period of estimated net servicing income. Loan servicing fees, which are
based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are
collected.

To estimate the fair value of servicing assets the Corporation considers the present value of expected future cash
flows associated with the servicing assets. For purposes of measuring impairment of servicing assets, the
Corporation stratifies such assets based on predominant risk characteristics of 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 disposition of other real estate owned. The cost of maintaining and operating 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
improvements is computed on the straight-line method over the terms of the leases 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 contractual
interest rates, similar assets as collateral and the same aggregate unpaid principal amount. The Corporation
retains control over the securities sold under these agreements, accordingly, these agreements are considered
financing transactions and the securities underlying the agreements remain in the asset accounts. The counter
party to certain agreements may have the right to repledge the collateral by contract or custom. Such assets are
presented separately in the statements of financial condition as securities pledged to creditors that can be
repledged.

Accounting for income taxes

Deferred taxes arise because certain transactions affect the determination of 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 liability incurred for tax return purposes. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.

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Treasury stock

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

Stock option plan

The Corporation has a stock-based employee compensation plan, which is described more fully in Note 5. The
Corporation accounts for the plan under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock based
employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price
equal to the market value of the underlying common stock on the date of the grant. The table below illustrates
the effect on net income and earnings per share if the Corporation had applied the fair value recognition
provisions of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock Based
Compensation, to stock-based employee compensation granted in year 2002 and 2000 (no options were granted
during 2001).

Pro forma information

Year ended December 31,

2002

2000

(In thousands, except per share data)

Employees’ compensation and benefits
Net income-available to common stockholders
Earnings per common share-basic
Earnings per common share-diluted

$
$
$
$

61,647
79,335
1.99
1.96

$
$
$
$

51,763
58,119
1.44
1.43

Earnings per common share

Earnings per share-basic is calculated by dividing income available to common stockholders by the weighted
average number of outstanding common shares. The computation of earnings per share-diluted is similar to the
computation of earnings per share-basic except that the weighted average 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 retroactively 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 estimated tax
effect.

Derivative instruments

On January 1, 2001, the Corporation adopted the Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. All derivatives are recognized in the
statement of financial position at fair value. 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 earnings of (a) the changes in the fair value of the
hedged asset or liability, that are attributable to the hedged risk (fair value hedges) or (b) the effect of the
exposure to the variability of cash flows from the hedged asset or liability (cash flows hedges). Note 29 describes
in more detail the hedging transactions entered into by the Corporation.

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Acquisition of business

Business combinations are accounted using the purchase method of accounting, as required by SFAS No. 141,
Business Combinations. Assets acquired and liabilities assumed are recorded at estimated fair values at the date of
acquisition. After initial recognition, any resulting intangible assets are accounted under the provisions of SFAS
No. 142, Goodwill and Other Intangible Assets.

Recently issued accounting pronouncements

SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical
Corrections - In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4 and amends SFAS No. 13. This
amendment became effective for transactions occurring after May 15, 2002. The adoption of this statement did
not have a significant impact on the Corporation’s financial statements.

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities - In June 2002, the FASB issued SFAS
No. 146, which requires that a liability for a cost associated with an exit or disposal activity be recognized when
the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002. Management expects that the adoption of this statement will not have a
significant impact on the Corporation’s financial statements.

SFAS No. 147, Acquisitions of Certain Financial Institutions - In October 2002, effective immediately, the FASB issued
SFAS No. 147, which requires financial acquisitions of financial institutions to be accounted for in accordance with
FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition,
SFAS No. 147 amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to
include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor and
borrower relationship intangible assets and credit cardholder intangible assets. The adoption of SFAS No. 147 did not
have an impact on the Corporation’s financial statements.

SFAS No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure an amendment of FASB
Statement No. 123- In December 2002, the FASB issued SFAS No. 148, which provides alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. All required disclosures under SFAS No. 123, as amended by SFAS No. 148, are included in these
financial statements. The Corporation has not adopted the fair value method for recognition of stock based
compensation.

FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees - In November
2002, the FASB issued this interpretation, which requires a guarantor of certain types of guarantees to recognize,
at the inception of guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.
These provisions for initial recognition are effective for guarantees that are issued or modified after December 31,
2002. In the case of the Corporation, these provisions apply for the standby letters of credit. See Note 29 for
details of the letters of credit outstanding as of December 31, 2002. The adoption of this interpretation will not
have a significant effect in the Corporation’s financial statements.

Note 3 - Stockholders’ Equity

Common stock

On August 27, 2002, the Corporation declared a three for two (or 50%) stock split on its 26,636,452 outstanding
shares of common stock at September 13, 2002. As a result, a total of 14,958,383 additional shares of common
stock were issued on September 30, 2002, of which 1,640,300 shares were recorded as treasury stock. All per share
amounts have been adjusted for the effect of the stock split in the third quarter of 2002.

Stock repurchase plan and treasury stock

The Corporation has a stock repurchase program under which from time to time it repurchases shares of common
stock in the open market and hold them as treasury stock. Under this program, the Corporation repurchased a total
of 86,200 shares of common stock at a cost of $1,929,685 during 2001, and 1,642,400 shares of common stock at a
cost of $30,086,592 during 2000. No shares of common stock were repurchased during 2002. From the total amount
of common stock repurchased, 4,920,900 shares, as adjusted for September 30, 2002 stock split, were held as treasury stock
at December 31, 2002 (2001 - 3,280,600 shares) and were available for general corporate purposes.

Preferred stock

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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 2002, the Corporation issued 3,680,000 shares of
preferred stock (2001-4,140,000 shares; 2000-3,000,000 shares; 1999-3,600,000 shares). The liquidation value per
share is $25. Annual dividends of $1.8125 per share (issuance of 2002), $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 $26,406,274 (2001 -
$16,508,198; 2000 - $7,407,542).

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Capital reserve

The capital reserve account was established to comply with certain regulatory 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 earnings 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 minimum of 10% of FirstBank’s net income
for the year be transferred to legal surplus, until such surplus equals the total of paid in capital on common and
preferred stock. Amounts transferred to the legal surplus account from the retained earnings account are not
available for distribution to the stockholders.

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 discretionary
actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The
Corporation’s capital amounts and classification are also subject to qualitative judgment by the regulators about
components, risk weightings and other factors.

Capital standards established by regulations require the Corporation to maintain minimum amounts and ratios of
Tier 1 capital to total average assets (leverage ratio) and ratios of Tier 1 and total capital to risk-weighted assets,
as defined in the regulations. The total amount of risk-weighted assets is computed by applying risk-weighting
factors to the Corporation’s assets and certain off-balance sheet items, which vary from 0% to 100% depending on
the nature of the asset.

At December 31, 2002 and 2001, the most recent notification from FDIC, categorized the Corporation as a
well-capitalized institution under the regulatory 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.

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The Corporation’s and its banking subsidiary’s regulatory capital positions were as follows:

Actual
Amount Ratio

Regulatory Requirements
For capital
adequacy purposes
Amount
Ratio
(Dollars in thousands)

To be well
capitalized
Ratio

Amount

$816,946
739,996

13.75%
12.50%

$475,155
473,617

$707,083
632,487

11.90%
10.68%

$237,578
236,809

$707,083
632,487

7.35%
6.62%

$288,628
286,801

$678,679
590,652

14.50%
12.75%

$374,498
370,472

$569,255
481,850

12.16%
10.41%

$187,249
185,236

$569,255
481,850

7.49%
6.40%

$228,074
225,738

8%
8%

4%
4%

3%
3%

8%
8%

4%
4%

3%
3%

$593,944
592,022

10%
10%

$356,366
355,213

$481,046
478,002

6%
6%

5%
5%

$468,123
463,090

10%
10%

$280,874
277,854

6%
6%

$380,124
376,231

5%
5%

At December 31, 2002
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, 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

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 common shares outstanding. Each option provides for the purchase of one share of
common stock at a price not less than the fair market value of the stock on the date the option is granted. Stock
options are fully vested upon issuance. The maximum term to exercise the options is ten years. The stock option plan
provides for a proportionate adjustment in the exercise price and the number of shares that can be purchased in the
event of a stock dividend, stock split, reclassification of stock, merger or reorganization and certain other issuance
and distributions.

Management uses the Black-Scholes option pricing model for the computation of the estimated fair value of each
option granted to buy shares of the Corporation’s common stock (refer to Note 2 for accounting policy). The fair
value of each option granted during 2002 and 2000 (no options were granted during 2001) was estimated using the
following assumptions: weighted dividend growth of 20% (2002) and 0% (2000); expected life of 3.29 years (2002)
and 3.11 years (2000); weighted expected volatility of 31.76% (2002) and 31.74% (2000); and weighted risk-free
interest rate of 3.66% (2002) and 5.36% (2000). The weighted estimated fair value of the options granted was $4.08
(2002) and $3.67 (2000) per option, as adjusted for the September 2002 stock split.

Following is a summary of the activity related to stock options, adjusted to reflect the stock split of September 30,
2002:

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At December 31, 1999
Granted
Exercised
Canceled
At December 31, 2000
Exercised
Canceled
At December 31, 2001
Granted
Exercised
At December 31, 2002

Number
of Options

1,449,750
477,000
(9,000)
(10,500)
1,907,250
(351,000)
(3,000)
1,553,250
542,750
(96,750)
1,999,250

Weighted Average
Exercise Price per Option

$ 11.38
$ 14.87
$ 10.42
$ 17.33
$ 12.24
$ 3.86
$ 18.92
$ 14.12
$ 18.96
$ 13.86
$ 15.44

The exercise price of the options outstanding at December 31, 2002, as adjusted for September 2002 stock split,
ranges from $10.42 to $25.99 and the weighted average remaining contractual life is approximately seven years.

Following is additional information concerning the stock options outstanding at December 31, 2002.

Number of
Options

Exercise Price
per Option

300,000
75,000
60,000
18,000
261,000
3,000
5,250
270,750
465,000
521,250
20,000
1,999,250

$ 10.42
$ 12.79
$ 18.06
$ 17.71
$ 17.33
$ 17.29
$ 17.63
$ 13.08
$ 14.88
$ 18.69
$ 25.99

Contractual
Maturity

November 2007
2008
February
May
2008
2008
June
November 2008
2009
February
April
2009
November 2009
December 2010
2012
February
2012
October

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Note 6 - Earnings Per Common Share

The calculations of earnings per common share for the years ended December 31, 2002, 2001
and 2000 follow:

Year ended December 31,

2002

2001
(In thousands, except per share data)

2000

Net income
Less: Preferred stock dividend
Net income-attributable to common stockholders

$ 107,956
(26,406)
$ 81,550

Earnings per common share-basic:

Net income - available to common stockholders
Weighted average common shares outstanding
Earnings per common share-basic

$ 81,550
39,901
2.04

86,001
(16,508)
69,493

$ 67,276
(7,408)
$ 59,868

69,493
39,851
1.74

$ 59,868
40,415
1.48

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:

$ 81,550

69,493

$ 59,868

39,901
652
40,553
2.01

39,851
293
40,144
1.73

40,415
303
40,718
1.47

The earnings per share for prior years have been restated to reflect the effect of the stock split in the third
quarter of 2002. The 2001 earnings per common share basic and diluted are net of cumulative effect of change in
accounting principle.

Stock options outstanding, under the Corporation’s stock option plan for officers, are common stock equivalents
and, therefore, considered in the computation of earnings per common share diluted. Common stock equivalents
were computed using the treasury stock method. In 2002, 20,000 stock options (2001-10,500, 2000-858,750) were
not included in the computation of outstanding shares because they were antidilutive. These amounts have been
adjusted for 2002 stock split.

Note 7 - Cash and Due from Banks

The Corporation is required by law to maintain minimum average reserve balances. The amount of those average
reserve balances was approximately $93,263,632 at December 31, 2002 (2001 - $46,078,200).

Note 8 - Investment Securities Held For Trading

At December 31, 2002 and 2001, 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 trading securities as part of its trading activities. Also the Corporation may enter
in transactions of securities sold not yet purchased for trading purposes. These transactions are carried at market
value. Net gains and losses 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, and
was included in earnings as trading income. No trading activities were recorded during 2002 and 2001.

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Note 9 - Investment Securities Held To Maturity

The amortized cost, gross unrealized gains and losses, approximate market value, weighted average yield and final
maturities of investment securities held to maturity at December 31, 2002 and 2001 were as follows:

December 31, 2002

December 31, 2001

Amortized
cost

Gross
Unrealized

gains

losses

Market
value

Weighted
average Amortized
yield%

cost

Gross
Unrealized
losses

gains

Weighted
Market average
yield%
value

(Dollars in thousands)

Obligations of
other U.S.
Government
Agencies:
After 10 years
Puerto Rico Government

Obligations:
After 1 to 5 years
After 10 years
United States and Puerto
Rico Government obligations

Corporate bonds:
Due within 1 year
After 1 to 5 years
Corporate bonds

Total Investment Securities

Held to Maturity

$ 628,820 $3,307

$59

$632,068

7.85

$ 211,194

$ 6,466 $204,731

7.39

5,000
4,354

113
586

5,113
4,940

5.00
6.50

5,000
4,084

228

5,000
4,312

5.00
6.50

$ 638,174 $4,006

$59

$642,121

7.82

$ 220,278

$231

$ 6,466 $214,043

7.32

$ 25,000
39,432
$ 64,432

$ 25,000
38,823
$ 63,823

$609
$609

3.05
2.95
2.98

$ 64,018
$ 64,018

63,741
$ 277
$ 277 $ 63,741

3.49
3.49

$ 702,606 $4,006

$668

$705,944

7.38

$ 284,296

$231

$ 6,743 $277,784

6.46

Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and / or
call options. At January 1, 2001, in connection with the adoption of SFAS No. 133, the Corporation transferred a portfolio of $207
million of GNMA certificates 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.

Note 10 - Investment Securities Available For Sale

The amortized cost, gross unrealized gains and losses, approximate market value, weighted average yield and final maturities of
investment securities available for sale at December 31, 2002 and 2001 were as follows:

December 31, 2002
Gross
Unrealized

gains

losses

Amortized
cost

Market
value

Weighted
average Amortized
yield%

cost

(Dollars in thousands)

December 31, 2001
Gross
Unrealized

gains

losses

Market
value

Weighted
average
yield%

7,726 $

7,756

3.18

500 $
750
15,568

4,999
5,679

3
17
480

375
401

407,324

407,292

1.72

503
767
16,048

3.87
5.60
7.69

500
87,519

5,374
6,080

6.27
6.30

4,458
5,932

1
469

128
151

1,805

501
86,183

5.59
7.55

4,586
6,083

6.19
6.34

27,496 $

1,276

28,772

7.02 $

513,459 $

779 $ 1,837 $ 512,401

2.83

U.S. Treasury Securities:
Within 1 year
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 5 to 10 years
After 10 years
United States and
Puerto Rico Government
Obligations

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Mortgage Backed Securities:
FHLMC certificates:
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

1,458 $
8,211
6,347
16,016

GNMA certificates:
After 5 to 10 years
After 10 years

3,608
524,278
527,886

82
613
358
1,053

170
9,439
9,609

53
39,523
39,576

1,540
8,824
6,705
17,069

3,778
533,717
537,495

29
5
817
1,955,983
1,956,834

6.47
7.42
6.86
7.11

6.41
5.11
5.12

6.33
7.68
7.66
4.93
4.93

8
112 $

13,211
8,030
21,361

4
576
172 $
752

6
6

116

8 5.85
7.63
7.29
6.95
7.16

13,787
8,196
22,107

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

29
5
764
1,916,460
1,917,258

1,175

1,207

7.23

1,958

1,996

8.70

$ 2,462,335 $ 50,270

$2,512,605

4.99 $ 2,551,254 $13,980 $6,545

$ 2,558,689

6.53

979 $

85,711
57,276

1,244 $ 10,865
1,084

445

1,015
76,090
56,637

7.87 $
6.16
6.94

143,966 $

1,725 $ 11,949 $ 133,742

6.48 $

19,246 $

410

19,656

118,919
114,855
18,531

1,770 $ 2,899
1,906

117,790
113,026
18,859
271,551 $ 2,585 $ 4,805 $ 269,331

77
328

7.70
6.68
7.34
7.35
7.08

36,951 $ 10,006 $ 5,302 $

41,655

1.72 $

45,115 $ 4,901 $16,189 $

33,827

1.43

$ 2,670,748 $ 63,277 $ 17,251 $2,716,774

5.04 $ 3,381,379 $22,245 $29,376 $ 3,374,248

5.95

FNMA certificates:
Within 1 year

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

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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.

During 2002, the Corporation’s bank subsidiary restructured its portfolio of mortgage backed securities available
for sale in order to shorten its duration and reduce its prepayment risk. As a result, in late June and early July of
2002, approximately $1 billion of 30-year mortgage backed securities were sold. The sales derived a gain of $14
million. The securities sold were substantially substituted with $900 million of 15-year mortgage backed securities,
which have a lower average life and yield, and which value is less sensitive to increases in interest rates. In
addition, in September and October, the Corporation sold its 7% GNMA portfolio of approximately $964 million
to substitute with lower coupons. The sales derived a gain of $26.1 million. These securities were substituted in
November with $1 billion FNMA’s 15 years.

It is the Corporation’s policy to invest in corporate bonds, which at the time of the purchase, are of an investment
grade quality. The total carrying amount of the corporate bonds portfolio is $198 million, or approximately 5% of
total investments of the Corporation as of December 31, 2002. In 2002, two of the bonds in FirstBank’s portfolio
were downgraded, to non-investment grade quality by two credit rating agencies. These were, WorldCom
Corporation, $15.5 million outstanding at the time of the downgrade and Nortel Networks Corporation, $23.5
million outstanding at the time of the downgrade. Management’s impairment analysis on these securities
concluded that an other-than-temporary impairment of approximately $11.7 million had occurred in the case of
the WorldCom Corporation bonds. The estimated impairment amount of this security was recognized as a loss in
the statement of income. In addition, Management reclassified to non-accruing status the remaining carrying
amount of $3.8 million. Management’s impairment analysis concluded that no other-than-temporary impairment
existed on Nortel’s bonds. The unrealized loss of the Nortel’s bonds at December 31, 2002 approximated $8.5
million.

At December 31, 2002, the Corporation’s equity securities portfolio carrying amount is $41.7 million, and its
adjusted cost is $37 million. The Corporation’s current policy guidelines limit investments in equity securities to $60
million, which is 1.6% of the Corporation’s total investments as of December 31, 2002. The Corporation invests in
equity securities that have long-term appreciation prospects. During the year ended on December 31, 2002, the
Corporation recognized a loss of $25.2 million for other-than-temporary impairment on equity securities. At
December 31, 2002, these securities have not been sold.

Management determined that except for the impairments on the bonds and stocks mentioned above, there are no
other-than-temporary impairments on the rest of the bonds and equity securities portfolio. Management will
continue its ongoing monitoring of the Corporation’s investment on individual corporate bonds and equity
securities to identify any other-than-temporary impairment.

At December 31, 2002, the net unrealized gain of $34,519,114 (2001 - net unrealized loss of $5,348,283) on
securities available for sale, net of the deferred income tax of $11,506,371 (2001 - $1,782,761), was reported as part
of accumulated other comprehensive income. For 2002, the change in the net unrealized holding gain on the
available for sale securities amounted to $53,156,531 (2001 - a gain of $19,000,669) before deferred income taxes.

For 2002, proceeds from the sale of securities amounted to $2,243 million (2001 - $847.7 million, 2000 - $58.5
million) resulting in gross realized gains of $49.7 million (2001 - $13.6 million, 2000 -$7.9 million), and gross
realized losses on sale of investments and impairments of $37.7 million (2001 - $4 million). No losses were realized
during 2000.

Note 11 - Federal Home Loan Bank (FHLB) Stock

At December 31, 2002 and 2001, there were investments in FHLB stock with book value of $35,629,500 and
$22,890,600 respectively. The estimated 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:

Mortgage Backed Securities:
Taxable
Exempt

Other Investment Securities:
Taxable
Exempt

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
Allowance for loan losses
Loans receivable, net
Loans held for sale
Total loans

2002

Year ended December 31,

2001
(In thousands)

2000

3,765
117,338
$ 121,103

3,079
64,013
$ 67,092

2,666
106,571
$ 109,237

2,639
50,602
53,241

3,325
91,416
$ 94,741

1,577
38,060
$ 39,637

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2002

December 31,

2001

(In thousands)

$1,778,046

$955,573

41,805
19,060
7,650
1,846,561
(3,247)
1,843,314

259,053
1,418,792
813,513
2,491,358

143,412

413,931
10,401
565,478
53,017
164,172
4,566
(62,553)
1,149,012
5,627,096
(111,911)
5,515,185
10,754
$5,525,939

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
(91,060)
4,213,089
4,630
$4,217,719

The Corporation’s primary lending area is Puerto Rico. At December 31, 2002 and 2001 there is no significant
concentration of credit risk in any specific industry on the loan portfolio.

At December 31, 2002, loans in which the accrual of interest income had been discontinued amounted to
$91,765,000 (2001 - $72,998,000; 2000 - $67,716,000). If these loans had been accruing interest, the additional
interest income realized would have been approximately $5,833,000 (2001 - $5,735,000; 2000 - $5,937,000). There
are no material commitments to lend additional funds to borrowers whose loans were in non-accruing status at
these dates.

At December 31, 2002 mortgage loans held for sale amounted to $10.8 million (2001-$4.6 million).

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At December 31, 2002, the Corporation was servicing residential mortgage loans owned by others aggregating
approximately $196,748,000 (2001 - $160,583,000; 2000 - $144,805,000).

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 $778,829,294 and $195,267,091 at December 31, 2002 and 2001, 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

Year ended December 31,

2002

$ 91,060
62,302
(48,991)
7,540

$ 111,911

2001
(In thousands)

76,919
61,030
(54,380)
7,391
100
$ 91,060

2000

$ 71,784
45,719
(51,831)
9,807
1,440
$ 76,919

At December 31, 2002, $27 million ($10.7 million at December 31, 2001) in commercial and real estate loans over
$1,000,000 were considered impaired with an allowance of $5.9 million ($3.7 million at December 31, 2001), which
was established based on the fair value of the collateral. For 2001, $2 million of the allowance on impaired loans
was established based on the fair value of the collateral and $1.7 million was established based on the present
value of expected future cash flows. The average recorded investment in impaired loans amounted to $18.9
million for 2002 (2001 - $11.9 million). Interest income in the amount of approximately $803,000 was recognized
on impaired loans in 2002 (2001 -$377,000; 2000 - $227,000).

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, 2000
New loans
Payments
Balance at December 31, 2001
New loans
Payments
Balance at December 31, 2002

Amount
(In thousands)

$ 20,174
14,659
(170)
$ 34,663
48,784
(1,943)
$ 81,504

Note 16 - Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation as follows:

Land
Buildings and improvements
Leasehold improvements
Furniture and equipment

Accumulated depreciation

Projects in progress
Total premises and equipment, net

Note 17 - Intangible Assets

Useful life
in years

10-40
1-15
3-10

December 31,
2002
(In thousands)

8,203
41,918
20,436
94,675
165,232
(87,083)
78,149
9,447
87,596

December 31,
2001

$ 7,357
39,809
14,753
62,466
124,385
(55,001)
69,384
6,772
$ 76,156

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At December 31, 2002, the Corporation has a core deposit intangible with a carrying amount of $20,807,539
(2001-$7,199,439) included in the Other Assets category. Increase in this category represents the recognition of an
intangible asset as part of the acquisition of the JP Morgan Chase’s Eastern Caribbean Region business. The
straight-line amortization expense for the year ended December 31, 2002 amounted to approximately
$1,165,000. The estimated aggregate amortization expense for each of the five succeeding fiscal years will be
approximately $2,400,000. Management has reviewed the core deposits intangible assets concluding that no
impairment is necessary and that the useful life of ten years used to amortize them is the best estimate of the economic
benefit period.

Note 18 - Deposits and Related Interest

Deposits and related interest consist of the following:

December 31,

2002

2001

(In thousands)

Type of account and interest rate:
Savings accounts - 1.25% to 2.25%

(2001 - 2.25% to 3.50%)

Interest bearing checking accounts - 1.15%to 2.00%

(2001 - 2.25% to 3.05%)

Non-interest bearing checking accounts
Certificate accounts - 1.00% to 7.50%

(2001 - 2.00% to 7.50%)

921,103

230,743
447,076

3,883,996
$ 5,482,918

469,452

205,760
239,851

3,183,491
$ 4,098,554

The weighted average interest rate on total deposits at December 31, 2002 and 2001 was 2.58% and 3.82%,
respectively.

At December 31, 2002, the aggregate amount of overdraft in demand deposits that were reclassified as loans
amounted to $7,281,895 (2001 - $7,807,724).

The following table presents a summary of certificates of deposits with remaining term of more than one year at
December 31, 2002:

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)

258,698
162,066
341,276
199,752
1,814,983
$ 2,776,775

At December 31, 2002 certificates of deposit (CD’s) in denominations of $100,000 or higher amounted to
$3,379,748,775 (2001 - $2,669,536,603) including brokered certificates of deposit of $2,645,909,222 (2001 -
$2,189,687,222) at a weighted average rate of 2.64%, after hedging (2001 - 4.0%). See Note 29 for a description
of the program used to hedge the fair value of the brokered certificates of deposit.

At December 31, 2002, deposit accounts issued to government agencies with a carrying value of $220,869,357 (2001
- $63,639,152) were collateralized by securities with a carrying value of $259,433,606 (2001 - $75,126,925) and
estimated market value of $263,467,485 (2001 - $71,979,923), by specific mortgage loans with a carrying value of
$2,416,677 (2001 - $2,895,723) and estimated market value of $3,010,938 (2001 - $3,370,043) and by municipal
obligations with a carrying value and estimated market value of $27,810,000.

A table showing interest expense on deposits follows:

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Savings
Interest bearing checking accounts
Certificates of deposit
Total

Year ended December 31,

2002

$ 15,096
4,763
113,376
$ 133,235

2001
(In thousands)

12,954
5,296
142,508
$ 160,758

2000

$ 12,792
5,546
134,945
$ 153,283

Note 19 - Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

Federal funds purchased and securities sold under agreements to repurchase (repurchase agreements)
consist of the following:

Federal funds purchased,
interest rate 1.80%
Repurchase agreements, interest
ranging from 1% to 5.37%
(2001 - 1.25% to 6.09%)
Accrued interest payable
Total

2002

December 31,

2001

(In thousands)

$ 2,784,078
9,462
$ 2,793,540

10,000

2,976,174
11,000
$ 2,997,174

The weighted average interest rates of federal funds purchased and repurchase agreements at December 31, 2002
and 2001 was 3.82% and 4.05%, respectively.

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,

2002

2001

(In thousands)

708,924
194

2,074,960
$ 2,784,078

723,010
14,062
274,142
1,974,960
2,986,174

The following securities were sold under agreements to repurchase:

Underlying securities

U.S. Treasury Securities and
obligations of other U.S.
Government Agencies
P.R. Government Securities
Mortgage backed securities
Corporate bonds
Total

December 31, 2002

Amortized
cost of
underlying
securities

Balance of
borrowing

Approximate
market value
of underlying
securities

Weighted
average
interest
rate

(In thousands)

718,886
290
2,248,037
130,525
$ 3,097,738

646,095
260
2,020,414
117,309
$ 2,784,078

721,216
324
2,293,031
130,523
$ 3,145,094

5.70%
6.48%
5.67%
5.20%

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Accrued interest receivable

$ 12,257

Underlying securities

U.S. Treasury Securities and
obligations of other U.S.
Government Agencies
Mortgage backed securities
Corporate bonds
Total

Amortized
cost of
underlying
securities

December 31, 2001

Balance of
borrowing

Approximate
market value
of underlying
securities

Weighted
average
interest
rate

(In thousands)

506,685
2,441,777
262,648
$ 3,211,110

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%

Accrued interest receivable

15,715

The maximum aggregate balance outstanding at any month-end during 2002 was $3,342,284,753 (2001 -
$2,986,174,065). The average balance during 2002 was approximately $2,784,701,323 (2001 - $1,997,705,000).

At December 31, 2002 and 2001, the securities underlying such agreements 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.

Note 20 - Advances From The Federal Home Loan Bank (FHLB)

Following is a detail of the advances from the FHLB:

Maturity

January 2, 2002
January 13, 2003
August 16, 2005
October 9, 2008
October 16, 2008
February 28, 2011
March 21, 2011

Interest rate

December 31,

2002
(In thousands)

1.85%
1.44%
6.30%
5.10%
5.09%
4.50%
4.42%

50,000
50,000
14,000
15,000
79,000
165,000
$ 373,000

2001

$ 20,700

50,000
14,000
15,000
79,000
165,000
$ 343,700

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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 outstanding advances. At December 31,
2002, specific mortgage loans with an estimated value of $553,144,554 (2001 - $197,506,039), as computed by
Federal Home Loan Bank for collateral purposes, were pledged to the FHLB as part of the Collateral Agreement.
The carrying value of such loans at December 31, 2002 amounted to $776,412,617 (2001 - $192,371,368). In
addition, securities with an approximated market value of $26,587,830 (2001 - $145,140,574) and a carrying value
of $29,149,623 (2001 - $158,117,351) were pledged to the FHLB.

Note 21 - Subordinated Notes

On December 20, 1995, the Corporation issued 7.63% subordinated capital notes in the amount of $100,000,000
maturing in 2005. The notes were issued at a discount. At December 31, 2002 the outstanding balance net of the
unamortized discount and notes repurchased was $82,815,105 (2001 - $84,361,525). Interest on the notes is
payable semiannually and at maturity. The notes represent unsecured obligations of the Corporation ranking
subordinate in right of payment to all existing and future senior debt including the claims of depositors and other
general creditors. The notes may not be redeemed prior to their maturity. At December 31, 2002, the Corporation
has transferred to capital reserves from the retained earnings account $70,000,000 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, 2002 and 2001,
the Corporation’s total unused lines of credit with these banks amounted to approximately $180,000,000. At
December 31, 2002, the Corporation has an available line of credit with the FHLB guaranteed with excess
collateral, in the amount of $206,732,384.

Note 23 - Employees’ Benefit Plan

FirstBank provides contributory retirement plans pursuant to Section 1165(e) of the Puerto Rico Internal Revenue
Code for Puerto Rico employees and Section 401(K) of the U.S. Internal Revenue Code for U.S.V.I. employees. All
employees are eligible to participate in the Plan after one year of service. Under the provisions of the Plan, the
Bank contributes a quarter of the first 4% of each participant’s compensation. Participants are permitted to
contribute up to 10% of their annual compensation, limited to $8,000 per year ($11,000 for U.S.V.I. employees).
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 $861,478, $845,227 and $699,060 during 2002, 2001 and 2000 respectively, to
the Plan.

Note 24 - Other Expenses

A detail of other expenses follows:

Professional and service fees
Communications
Revenue earning equipment
Supplies and printing
Other
Total

2002

$ 7,685
5,865
1,588
1,963
8,243
$ 25,344

Year ended December 31,
2001
(In thousands)
$ 7,461
5,395
1,578
1,282
9,489
$ 25,205

2000

$ 8,406
5,573
1,525
1,214
8,155
$ 24,873

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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

2002

$ 30,938
(8,611)
$ 22,327

Year ended December 31,
2001
(In thousands)
$ 25,536
(5,402)
$ 20,134

2000

$ 19,117
(4,356)
$ 14,761

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:

2002
% of
pre-tax

Amount

Income

Year ended December 31,
2001
% of
pre-tax

Amount
(Dollars in thousands)

Income

2000
% of
pre-tax

Amount

Income

50,811
(31,819)
3,335
22,327

39
(24)
2
17

41,789
(24,442)
2,787
20,134

39
(23)
3
19

31,994
(12,707)
(4,526)
14,761

39
(15)
(6)
18

Computed income tax
at statutory rate
Benefit of net exempt income
Other-net
Total income tax provision

The components of the deferred tax asset and liability were as follows:

December 31,

2002

2001

(In thousands)

Deferred tax asset:
Allowance for loan losses
Unrealized loss on available for sale securities
Unrealized loss on fair value hedges attributable
to credit risk
Other
Deferred tax asset

Deferred tax liability:
Unrealized gain on available for sale securities
Other
Deferred tax liability

$ 43,645

379
6,584
$ 50,608

$(11,506)
(98)
$(11,604)

$ 34,732
1,783

315
7,110
$ 43,940

$
$

(322)
(322)

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 included in accumulated other comprehensive income as a part of stockholders’ equity.

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The Puerto Rico Treasury Department is conducting an investigation of the Bank’s income tax returns for the
years 1995, 1997, 1998 and 1999. Management has prepared these tax returns in accordance with the Puerto Rico
Internal Revenue Code and its regulations. Therefore, Management believes that a deficiency, if any, resulting
from this investigation, will not have a material effect on the Corporation’s financial statements.

Note 26 - Commitments

At December 31, 2002 certain premises are leased with terms expiring through the year 2022. The Corporation has
the option to renew or extend certain leases from two to ten years beyond the original term. Some of these
leases require the payment of insurance, increases in property taxes and other incidental costs. At December 31,
2002, the obligation under various leases follows:

Year

Amount

(In thousands)

2003
2004
2005
2006
2007
2008 and later years
Total

$ 4,894
4,079
2,826
2,039
1,726
7,333
$ 22,897

Rental expense included in occupancy and equipment expense was $4,509,798 in 2002 (2001 - $4,240,437; 2000 -
$4,042,069).

Note 27 - Fair Value of Financial Instruments

The information about the estimated fair values of financial instruments as required by accounting principles
generally accepted in the United States of America, is presented hereunder. The disclosure requirements exclude
certain financial instruments and all non - financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent Management’s estimate of the underlying value of the Corporation. A summary
table of estimated fair values and carrying values of financial instruments at December 31, 2002 and 2001 follows:

December 31,

2002

2001

Estimated
fair value

Carrying
value

Estimated
fair value

Carrying

value

(In thousands)

381,965
3,422,718
35,630

381,965
3,419,380
35,630

94,463
3,652,031
22,891

94,463

3,658,544
22,891

5,527,122
27,022

5,525,939
27,022

4,226,033

4,217,719

5,499,998

5,482,918

4,121,145

4,098,554

2,966,580
399,941
89,084
9,739

2,793,540
373,000
82,815
9,739

3,005,466
348,733
83,729
15,053

2,997,174
343,700
84,362
15,053

Assets:
Cash and due from banks and
money market instruments
Investment securities
FHLB stock
Loans receivable, including loans
held for sale - net
Interest rate swaps
Liabilities:
Deposits
Federal funds, securities sold
under agreements to repurchase
Advances from FHLB
Subordinated notes
Interest rate swaps

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 estimate 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 assumptions, 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.

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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 floating rate loans were valued at book if they reprice at least once
every three months, as were performing credit lines. The fair value of fixed rate performing loans was calculated
by discounting expected cash flows through the estimated maturity date. Recent prepayment experience was
assumed to continue for mortgage loans, auto loans and personal loans. Other loans assumed little or no
prepayment. Prepayment estimates were based on the Corporation’s historical data for similar loans. Discount
rates were based on the Treasury Yield Curve at the date of the analysis, with an adjustment, which reflects the
risk and other costs inherent in the loan category.

Non-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 satisfy 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 estimated fair values of total deposits exclude
the fair value of core deposits intangible, which represent the value of the customer relationship measured 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 recorded 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 and securities sold under agreements to repurchase

Federal funds purchased and some repurchase agreements 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 term deposits.

Advances from FHLB and subordinated notes

The fair value of advances from FHLB with fixed maturities was determined using discounted cash flow analysis
over the full term of the borrowings. The cash flows assumed no early repayment of the borrowings. Discount
rates were based on the LIBOR yield curve. The fair value of subordinated notes was based on indications of
market prices.

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Interest rate swaps

The fair values of the interest rate swaps were provided by the counter party.

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

Year ended December 31,

2002

$274,548
15,799

2001
(In thousands)

$275,360
12,535

2000

$260,937
30,477

3,338

1,797

3,121

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:

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

December 31,

2002

2001

(In thousands)

$208,925
307,492
14,859
439,996
80,448
30,313

$194,363
291,120
13,480
222,821
19,067
24,172

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-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. These commitments generally expire within one year. Since certain commitments are
expected to expire without being drawn upon, the total commitment amount does not necessarily represent
future cash requirements. In the case of credit cards and personal lines of credit, the Corporation can at any time

and without cause, cancel the unused credit facility. The amount of collateral, obtained if deemed necessary by
the Corporation upon extension of credit, is based on Management’s credit evaluation of the borrower. 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 estimate of the fair value of
commitments.

In general, commercial and standby letters of credit are issued to facilitate foreign and domestic trade transactions.
Normally, commercial and standby letters of credit are short-term commitments used to finance commercial
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, 2002 is not significant.

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 calculated by reference to an agreed notional principal
amount. Net interest settlements on interest rate swaps are recorded as an adjustment to interest expense on
deposit accounts or interest income on investment accounts.

The following table indicates the types of swaps used:

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Pay-fixed and receive-variable swaps:

Balance at December 31, 2000
New Contracts
Balance at December 31, 2001
New contracts
Balance at December 31, 2002

Receive-fixed and pay variable swaps:

Balance at December 31, 2000
Expired contracts
New contracts
Balance at December 31, 2001
Expired contracts
New contracts
Balance at December 31, 2002

Notional amount
(In thousands)

58,165
58,165
20,000
78,165

$ 1,151,000
(1,116,000)
1,460,000
$ 1,495,000
(1,193,681)
1,656,590
$ 1,957,909

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 brokered certificates of deposit. The
interest rate swap agreements are reflected at fair value in the Corporation’s consolidated statement of financial
condition and the related 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 effective; therefore,
there is no impact on the statement of income nor on comprehensive income, because the gain or loss on the swap
agreements will completely offset the loss or gain on the certificates of deposit. The Corporation, in order to
achieve 100% effectiveness, incorporates in the hedge of fixed-rate brokered CD’s the right to lower the notional
amount for a stated period of time, in the case of cancellations prior to maturity. The net effect of this accounting
is that the interest expense on the hedged certificates 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

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fair value in the Corporation’s consolidated statement of financial condition. The adjustment of the hedged item’s
carrying amount attributable to the hedged risk is recorded in earnings 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 recorded 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. During the year ended
on December 31, 2002, the Corporation sold certain corporate bonds to which interest rate swap agreements with
an aggregate notional principal balance of $53.2 million were attributable. Therefore, these swaps no longer
qualify for hedge accounting, and an unrealized loss of $4.5 million was recorded to reflect changes in the fair
value of these derivatives as part of derivative loss in the Other Income section of the statement of income.

Interest rate swaps with an aggregate notional principal balance of $25 million had an unrealized loss of
$1,517,268 (2001 - $1,260,094 unrealized loss), attributable to credit risk, which was recorded in accumulated
comprehensive income net of income tax.

Pay-fixed swaps at December 31, 2002 had a fixed weighted average rate payment of 6.53% (2001 - 7.14%) and a
floating weighted average rate receiving of 3.53% (2001 - 4.20%). Receive-fixed swaps at December 31, 2002, have
a floating weighted average rate payment of 1.58% (2001 - 2.16%) and a fixed weighted average rate receiving
of 5.60% (2001 - 6.32%). Floating rates on pay fixed swaps range from 175 to 240 basis points over LIBOR and from
minus 25 basis points to 7 over LIBOR rate on receive fixed swaps.

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,
2002, the Corporation had total net receivable of $12,147,354 (2001 - $12,755,949) related to the swap
transactions. The Corporation controls the credit risk of its interest rate swap agreements through approvals,
limits, and monitoring procedures. The Corporation does not anticipate non-performance by the counter parties.
The Corporation has a policy of diversifying swap counter parties to reduce the risk that any counter party will fail.
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 securities pledged as collateral for interest rate swaps
at December 31, 2002 was approximately $42.1 million and $42.9 million, respectively (2001 - $48.1 million and
$47.9 million, respectively). The final maturity of the swaps at December 31, 2002 ranged from one month through
nineteen years (2001 - from one year through twenty years).

Interest rate swaps with an aggregate notional principal balance of $2,036,074,000 had a gross unrealized gain of
approximately $27,021,907 and gross unrealized loss of $9,738,638 at December 31, 2002, which are included in
the Other Assets category and Other Liabilities category, respectively.

Interest rate protection agreements (Caps)

From time to time the Corporation also uses 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 agreement. There were no caps agreements outstanding at December
31, 2002

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 borrowings.

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 products, distribution channels and the economic characteristics of the products
were also considered in the determination of the reportable segments.

The Retail business segment is composed of the Corporation’s branches and loan centers together with the retail
products of deposits and consumer loans. Consumer loans include loans such as personal, residential real estate,
auto, credit card and small loans. Finance leases are also included in Retail business. The Commercial Corporate
segment is composed of commercial loans including commercial real estate and construction loans. The Treasury
and Investment segment is responsible for the Corporation investment portfolio and treasury functions. The Other
Income segment is mainly composed of insurance and other commission’s income.

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 pro-
vision for loan losses, other income and direct operating expenses. The segments 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 by 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.

The following table presents information about the reportable segments:

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For the year ended
December 31, 2002:
Interest income
Net (charge) credit
for transfer of funds
Interest expense
Net interest income
Provision for loan losses
Other income
Direct Operating Expenses
Segment income
Average earning assets

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
Other income
Direct Operating Expenses
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
Other income
Direct Operating Expenses
Segment income
Average earning assets

Retail

Treasury and
Investments

Commercial
Corporate
(In thousands)

Other

Total

$ 230,141

$ 188,194

$ 121,698

$ 540,033

(46,552)
(58,835)
124,754
(43,090)
39,352
(74,357)
46,659
$2,410,548

97,360
(214,349)
71,205

8,643
(2,227)
77,621
$3,746,245

(50,808)

70,890
(19,212)
5,080
(6,439)
50,319
$2,258,025

(273,184)
266,850
(62,302)
58,492
(83,721)
179,319
$ 8,414,818

$5,417
(697)
4,720

$ 217,021

$ 162,478

$ 136,757

$ 516,256

(21,043)
(71,410)
124,568
(44,541)
35,384
(69,198)
46,213
$1,970,768

102,123
(208,791)
55,810

10,211
(1,844)
64,177
$2,627,205

(81,081)

55,676
(16,489)
4,440
(5,664)
37,963
$1,781,314

(280,201)
236,055
(61,030)
52,980
(77,069)
150,936
$6,379,287

$2,945
(362)
2,583

$ 222,950

$ 134,328

$ 106,110

$ 463,388

(12,582)
(74,093)
136,275
(28,084)
34,556
(69,369)
73,378
$1,893,699

85,013
(198,522)
20,819

8,968
(1,922)
27,865
$1,985,580

(72,431)

33,679
(17,635)
4,221
(5,010)
15,255
$1,110,608

(272,615)
190,773
(45,719)
50,032
(76,619)
118,467
$4,989,887

$2,287
(318)
1,969

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The following table presents a reconciliation of the reportable segment financial information to the consolidated
totals:

Year ended December 31,

Net income:
Total income for segments
Other 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

2002

179,319
(49,036)
(22,327)

107,956

2001
(In thousands)

150,936
(43,786)
(20,134)

87,016
(1,015)
86,001

2000

118,467
(36,430)
(14,761)

67,276

$ 8,414,818
333,404

$ 6,379,287
322,115

$ 4,989,887
249,489

Total consolidated average assets

$ 8,748,222

$ 6,701,402

$ 5,239,376

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 opinion of legal counsel, that the final disposition of these matters will not
have a material adverse effect on the Corporation’s financial position or results of operations.

Note 32 - First BanCorp (Holding Company Only) Financial Information

The following condensed financial information presents the financial position of the Holding Company only at
December 31, 2002 and 2001, and the results of its operations and its cash flows for the years ended on December
31, 2002, 2001 and 2000.

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

Investment securities held
to maturity, at cost:
United States Government obligations

Total investment securities held to maturity

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, 2002

December 31, 2001

(In thousands)

26,276
300

42,674

5,700
5,700
6,000
718,480
1,445
726
$ 801,601

3,177
798,424

$ 801,601

17,422
300

24,802
35,507

60,309

5,682
515,623
371
3,383
$ 603,090

171
602,919

$ 603,090

Statements of Income

Year ended December 31,

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

Gain (loss) on sale of investments, net
Income before income taxes and equity in
undistributed earnings of subsidiaries
Income taxes
Equity in undistributed earnings
of subsidiaries
Net income
Other comprehensive income, net of tax
Comprehensive income

2002

351
248
5,269
28,000
705
34,573

2
709
711
(22,321)

11,541
2,250

98,665
107,956
39,675
$ 147,631

2001
(In thousands)

658
250
306
24,000
668
25,882

559
559
1,093

26,416
170

59,755
86,001
13,306
$ 99,307

2000

776
289

24,000
1,117
26,182

25
487
512
7,134

32,804
209

34,681
67,276
49,050
$ 116,326

The principal source of income for the Holding Company consists of the earnings of FirstBank.

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Statement of Cash Flows

Cash flows from operating activities:

Year ended December 31,

2002

2001
(In thousands)

2000

Net income

107,956

86,001

67,276

Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings
of subsidiaries
Net loss (gain) on sale of
investments securities
Net (increase) decrease in other assets
Net increase (decrease) 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 and maturity of securities held to
maturity and available for sale
Other investing activities
Net cash used in investing activities

Cash flows from financing activities:
Net decrease 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

(98,662)

22,321
(175)
2,069

(74,447)

33,509

(88,000)
(88,000)
(1,235,145)

1,240,079
98,537
(72,529)

88,906
1,341
(42,373)

47,874

8,854

17,722

26,576

26,276
300
26,576

(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

Stockholders’ information

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

PricewaterhouseCoopers LLP

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ANNUAL MEETING:The annual meeting of stockholders will be held on April 29, 2003, at 2:00 p.m., at the main
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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.

First BanCorp’s filings with the Securities and Exchange Commission (SEC) may be accessed

in the web site maintained by the SEC at http://www.sec.gov and at our web site

http://firstbankpr.com, First BanCorp section, Company Filings link.

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TRANSFER AGENT AND REGISTRAR:

The Bank of New York

1-800-524-4458

ADDRESS SHAREHOLDER INQUIRIES TO:

Shareholder Relations Department

PO Box 11258

Church Street Station

New York, NY 10286

E-MAIL ADDRESS:

shareowner-svcs@bankofny.com

THE BANK OF NEW YORK’S STOCK TRANSFER WEB SITE:

http://www.stockbny.com

SEND CERTIFICATES FOR TRANSFER AND ADDRESS CHANGES TO:

Receive and Deliver Department

PO Box 11002

Church Street Station

New York, NY 10286